McCormick: Reports Preliminary Q3-2022 Performance

Hunt Valley / MD. (mcc) McCormick + Company Inc., a global leader in flavour, announced preliminary financial results for the third quarter ended August 31, 2022 and updated its financial outlook for fiscal year 2022. Preliminary Third Quarter 2022 Results:

• Sales are expected to increase by approximately 3 percent in the third quarter from the year-ago period. In constant currency, sales are expected to increase by approximately 6 percent driven by growth in both the Consumer and Flavor Solutions segments. Both comparisons include an estimated 1 percent unfavorable impact from the divestiture of the Company’s Kitchen Basics business.
• Operating income is expected to be approximately USD 223 million in the third quarter compared to USD 265 million in the year-ago period. Adjusted operating income is expected to be approximately USD 226 million compared to USD 272 million in the third quarter of 2021.
• Earnings per share is expected to be approximately USD 0.79 in the third quarter, comparable to the year-ago period. Adjusted earnings per share is expected to be approximately USD 0.65 as compared to USD 0.80 in the year-ago period.
• For fiscal year 2022, McCormick updated its sales, operating income, and earnings per share outlook.

Chairman and CEO’s Remarks

Lawrence E. Kurzius, Chairman and CEO, stated, «Our third quarter sales were a record and while strong fell short of our own expectations. Our results were led by the continued growth momentum of our Flavor Solutions segment. We divested our Kitchen Basics business during the quarter which impacted our Consumer segment growth. Growth in the Consumer segment was also tempered by the moderation of elevated consumption trends that we anticipated in the second half of the year, which occurred earlier than expected. Broad pressure on consumers’ cost of living from inflation has resulted in higher price elasticity than expected, although still below historical levels. We are increasing our brand marketing investments in our updated outlook and are focusing its messaging on value, which we are confident, combined with our innovation behind price pack architecture and category management initiatives, will continue to drive growth. Cooking at home remains higher than pre-pandemic levels, reinforcing our expectation that the shift in consumer demand to at-home-consumption will be sustained.

«During the third quarter, supply chain challenges continued, and supply recovery of certain constrained materials has taken longer than expected. We also continued to incur elevated costs to meet high demand in some parts of our business, while in other parts of our business, where demand has moderated, we are experiencing lower operating leverage. Across the supply chain, managing inventory levels and eliminating inefficiencies have been a focus. Overall, the normalization of our supply chain costs is taking longer than expected, pressuring gross margin. Over the coming months, we will be aggressively driving the elimination of supply chain inefficiencies.

«We remain confident that we are well positioned for the long term and will successfully navigate this dynamic global environment with our strong global portfolio and proven track record of execution.»

Preliminary Third Quarter 2022 Results

Third quarter sales are expected to increase approximately 3 percent from the year-ago period, including an expected approximate 3 percent unfavorable impact from currency. Sales growth is expected to be driven by pricing actions the Company has realized, partially offset by a decline in volume and product mix, including the impact of the Kitchen Basics divestiture.

Third quarter sales are expected to grow at a constant currency three-year compounded annual growth rate of approximately 7 percent for the total Company off of a pre-pandemic baseline of 2019 showing the sustained momentum in the business across both the Consumer and Flavor Solutions segments.

Operating income is expected to be approximately USD 223 million in the third quarter of 2022 compared to USD 265 million in the third quarter of 2021. Excluding special charges, as well as transaction and integration expenses, adjusted operating income is expected to be approximately USD 226 million compared to USD 272 million in the year-ago period. This decline is a result of gross margin compression, primarily in our Flavor Solutions segment, with higher brand marketing investments also contributing.

Earnings per share is expected to be approximately USD 0.79 in the third quarter of 2022, which is comparable to the third quarter of 2021. The net favorable impact of the gain on the sale of the Kitchen Basics business, special charges and transaction and integration expenses is expected to increase earnings per share by approximately USD 0.14 in the third quarter of 2022. Special charges and transaction and integration expenses lowered earnings per share by approximately USD 0.01 in the third quarter of 2021. Excluding these impacts, adjusted earnings per share is expected to be approximately USD 0.65 in the third quarter of 2022 compared to USD 0.80 in the year-ago period. This expected decrease is projected to primarily be driven by lower adjusted operating income.

The Company has not yet completed its quarterly financial close process for the third fiscal quarter of 2022. This update does not present all necessary information for an understanding of McCormick’s financial condition as of the date of this release, or its results of operations for the third quarter. As McCormick completes its quarterly financial close process and finalizes its financial statements for the quarter, it will be required to make significant judgments in a number of areas. It is possible that the Company may identify items that require adjustments to the preliminary financial information set forth above and those changes could be material. The Company intends to provide its full financial results for the third quarter on October 6, 2022. Until that time, the preliminary results described in this press release are estimates and remain subject to change based on management’s ongoing review of results of the quarter and completion of its quarterly financial close process.

Fiscal Year 2022 Financial Outlook

For fiscal year 2022, McCormick updated its financial outlook to reflect its preliminary third quarter results, moderation of consumption trends earlier than expected, slower supply chain cost normalization, the divestiture of the Kitchen Basics business, and a more unfavorable impact of foreign currency rates.

The Company expects foreign currency rates in 2022 to unfavorably impact net sales by 3 percent, as compared to 2 percent in its previous financial outlook, and continues to expect adjusted operating income and adjusted earnings per share to be impacted unfavorably by 2 percent.

The Company expects 2022 sales to range from comparable to 2021 to an increase of 2 percent, which in constant currency is sales growth of 3 percent to 5 percent. These comparisons include an unfavorable impact from the divestiture of the Company’s Kitchen Basics business. The Company previously expected to grow sales 3 percent to 5 percent, or 5 percent to 7 percent in constant currency.

McCormick is projecting 2022 gross profit margin to be 330 to 280 basis points lower than 2021. In 2021, USD 11 million of special charges and transaction and integration expenses lowered the Company’s gross margin. Excluding this impact, the Company is projecting 2022 gross profit margin to be 350 to 300 basis points lower than 2021, primarily driven by the Company’s Flavor Solutions segment. This projection includes the Company’s reaffirmation of its previous expectation of an increase in cost inflation in the high teens.

Operating income in 2022 is expected to decline 10 percent to 8 percent from USD 1.02 billion in 2021. The Company expects approximately USD 46 million of special charges in 2022 that relate to previously approved organization and streamlining actions as well as integration expenses related to the FONA acquisition of approximately USD 2 million in 2022. Excluding the impact of special charges and transaction and integration expenses in 2022 and 2021, the Company projects adjusted operating income to decline 13 percent to 11 percent, which in constant currency is 11 percent to 9 percent. The revised guidance is driven by the updated sales and adjusted gross margin outlooks as well as a higher level of brand marketing investments, which is now projected to be a low single digit increase compared to 2021. The Company’s projection also includes reaffirmation of its previous expectation of approximately USD 85 million of cost savings led by the Company’s Comprehensive Continuous Improvement (CCI) program. The Company previously expected adjusted operating income to range from comparable to an increase of 2 percent, or 2 percent to 4 percent in constant currency.

McCormick projects earnings per share to be in the range of USD 2.64 to USD 2.69, compared to USD 2.80 in 2021. The Company expects the net favorable impact of the gain on the sale of the Kitchen Basics business, special charges and transaction and integration expenses to increase earnings per share by approximately USD 0.01 in 2022. Excluding these impacts, the Company projects 2022 adjusted earnings per share to be in the range of USD 2.63 to USD 2.68, as compared to previously reported guidance of USD 3.03 to USD 3.08 and adjusted earnings per share of USD 3.05 in 2021. The revised guidance is driven by the updated adjusted operating income outlook and includes an approximate USD 0.02 unfavorable impact from the divestiture of the Kitchen Basics business.