McCormick: Reports Q2-2022 Financial Results

Hunt Valley / MD. (mcc) McCormick + Company Inc., a global leader in flavour, reported financial results for the third quarter ended August 31, 2022 and reaffirmed its financial outlook for fiscal year 2022.

• Sales increased 3 percent in the third quarter from the year-ago period. In constant currency, sales increased 6 percent driven by growth in both the Consumer and Flavor Solutions segments. Both comparisons include a 1 percent unfavorable impact from the divestiture of the Company’s Kitchen Basics business.
• Operating income was USD 235 million in the third quarter compared to USD 265 million in the year-ago period. Adjusted operating income was USD 239 million compared to USD 272 million in the third quarter of 2021.
• Earnings per share was USD 0.82 in the third quarter as compared to USD 0.79 in the year-ago period. Adjusted earnings per share was USD 0.69 as compared to USD 0.80 in the year-ago period.
• For fiscal year 2022, McCormick reaffirmed its sales, operating income, and earnings per share outlook.

Chairman, President and CEO’s Remarks

Lawrence E. Kurzius, Chairman, President and CEO, stated, «Our record third quarter sales performance reflects the strength of our broad global portfolio and the effective execution of our strategies against the backdrop of a volatile operating environment. Our 6 percent constant currency sales growth was led by continued momentum in our Flavor Solutions segment across all three regions. The performance of our Consumer segment reflects strong underlying growth tempered by the impacts of divesting our Kitchen Basics business, exiting a low margin business in India, and exiting our Consumer business in Russia. We continue to actively respond to changes in consumer behavior that are a result of broad pressure on the cost of living from inflation. We are confident our brand marketing investments, innovation and category management initiatives will continue to drive growth.

«During the third quarter, supply chain challenges continued, and recovery of certain constrained materials has taken longer than expected. We 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, we remain focused on managing inventory levels and eliminating inefficiencies, though the normalization of our supply chain costs is taking longer than expected, pressuring gross margin. Over the coming months, we will be aggressively eliminating supply chain inefficiencies. Importantly, as we had expected in the third quarter, we began to recover the cost inflation that had been outpacing our pricing actions and other levers. We expect this will continue into next year as we plan to fully offset inflation over time.

«We remain confident that the strength of our business model and the value of our products and capabilities position us well for the long-term and will allow us to successfully navigate this dynamic global environment. We continue to capitalize on the long-term consumer trends that have accelerated since the beginning of the pandemic, including the sustained shift to cooking more at home, increased digital engagement, clean and flavorful eating, and trusted brands. Our alignment with these trends, in combination with the breadth and reach of our portfolio and our strategic investments provide a strong foundation for sustainable growth. McCormick’s long-term performance, including through the pandemic and other periods of volatility, has been industry-leading. The long-term fundamentals that have driven our historical performance remain strong and our experienced leaders are executing on our proven strategies while adapting to challenges accordingly.

«I want to recognize McCormick employees around the world as they drive our momentum and success. With our vision to stand together for flavor and our relentless focus on growth, performance, and people, we are confident we will drive future sustainable growth and build long-term value for our shareholders.»

Third Quarter 2022 Results

McCormick reported a 3 percent sales increase in the third quarter from the year-ago period. In constant currency, sales grew 6 percent, reflecting 10 percent growth from pricing actions partially offset by a 1 percent decline from the Kitchen Basics divestiture, a 1 percent decline attributable to the exits of a low margin business in India and the Consumer business in Russia, and a 2 percent decline in all other volume and product mix.

Third quarter sales grew at a constant currency three-year compounded annual growth rate (CAGR) of 7 percent for the total Company off of a pre-pandemic baseline of 2019. The three-year constant currency CAGR’s for the Consumer segment and the Flavor Solutions segment were 6 percent and 8 percent, respectively, showing sustained momentum in the business in both segments.

Higher cost inflation and other supply chain costs, partially offset by pricing actions and cost savings led by the Company’s Comprehensive Continuous Improvement (CCI) program, resulted in a decline in gross profit margin of 320 basis points. Operating income was USD 235 million in the third quarter of 2022 compared to USD 265 million in the third quarter of 2021. This decline was driven by gross margin compression, primarily in the Company’s Flavor Solutions segment. Selling, general and administrative expenses were comparable to the third quarter of last year with higher distribution costs and brand marketing investments offset by lower employee benefit expenses. Excluding special charges, as well as transaction and integration expenses, adjusted operating income was USD 239 million compared to USD 272 million in the year-ago period.

Earnings per share was USD 0.82 in the third quarter of 2022 compared to USD 0.79 in the third quarter of 2021. The net favorable impact of the gain on the sale of the Kitchen Basics business and special charges increased earnings per share by USD 0.13 in the third quarter of 2022. Special charges and transaction and integration expenses lowered earnings per share by USD 0.01 in the third quarter of 2021. Excluding these impacts, adjusted earnings per share was USD 0.69 in the third quarter of 2022 compared to USD 0.80 in the year-ago period. This decrease was driven by lower adjusted operating income.

Year-to-date net cash provided by operating activities was USD 250 million compared to USD 373 million through the third quarter of 2021. The decrease was primarily due to lower net income and higher inventory levels.

Fiscal Year 2022 Financial Outlook

For fiscal year 2022, McCormick reaffirmed its financial outlook which was previously issued with the Company’s preliminary third quarter 2022 results on September 7, 2022.

The Company continues to expect foreign currency rates in 2022 to unfavorably impact net sales by 3 percent and unfavorably impact adjusted operating income and adjusted earnings per share by 2 percent.

McCormick 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. McCormick expects sales growth to be driven by pricing actions, which, in conjunction with cost savings, are expected to offset inflationary pressures over time. McCormick also plans to drive continued growth through the strength of its brands, as well as brand marketing, new products, category management, and differentiated customer engagement.

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, or 11 percent to 9 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 adjusted earnings per share of USD 3.05 in 2021. This projection includes a USD 0.02 unfavorable impact from the divestiture of the Kitchen Basics business.