McCormick: Reports Strong Q2-2023 Results, Raises Outlook

Hunt Valley / MD. (mcc) McCormick + Company Inc., a global leader in flavour, reported financial results for the second quarter ended May 31, 2023 and raised fiscal 2023 profit outlook.

Chairman and CEO’s Remarks

Lawrence E. Kurzius, Chairman and CEO, stated, «We delivered strong second quarter results reflecting sustained demand across our business and the effective execution of our growth strategies. We drove meaningful year-over-year margin expansion in both the Consumer and Flavor Solutions segments underscoring our focus on profit realization. Our year-to-date results, the continued strong demand across our portfolio, and our diligent approach to optimizing our cost structure bolster our confidence in our growth trajectory.

«We drove 10 percent constant currency sales growth in the second quarter with strong underlying business performance in both segments across all regions. Our Consumer segment sales growth reflects continued effective price realization and a sequential improvement in volume performance. Our exceptional performance in Flavor Solutions continued with our ninth consecutive quarter of constant currency double-digit sales growth. Total sales growth was in line with our expectations, notwithstanding a slower recovery in China, and reflects the strength of our broad global portfolio.

«We drove significant improvement in our gross margin performance in the second quarter reflecting the continued recovery of the cost inflation that our pricing lagged last year as well as cost savings from our CCI and GOE programs. Our year-to-date profit realization combined with the actions we continue to have underway give us the confidence to increase our 2023 profit outlook.

«As we look ahead to the back half of the year, we will continue to focus on capitalizing on strong demand, optimizing our cost structure, and positioning McCormick to deliver sustainable growth and long-term shareholder value. We have compelling growth plans in place, including building momentum with our new products and heat platform, and are delivering on our commitment to increasing our profit realization. We expect the successful execution of our proven strategies will continue to drive profitable growth in 2023.

«I want to recognize McCormick employees around the world as they drive our momentum and success. Our fundamentals remain strong, and we are confident we will continue to not only deliver strong sales growth, but also drive total shareholder return at an industry-leading pace.»

Second Quarter 2023 Results

McCormick reported 8 percent sales growth in the second quarter from the year-ago period, or 10 percent in constant currency. Constant currency sales growth reflected an 11 percent increase from pricing actions partially offset by a 1 percent volume and mix decline. Included in the volume decline is a net 1 percent increase from lapping prior year Covid-related disruption in China, the Kitchen Basics divestiture, and the exit of the Consumer business in Russia. It also includes a 1 percent volume decline from the Company’s strategic decisions to discontinue low margin business.

Gross profit margin expanded 310 basis points versus the second quarter of last year. This expansion was driven by pricing actions, favorable product mix, and cost savings led by the Company’s Comprehensive Continuous Improvement (CCI) and Global Operating Effectiveness (GOE) programs partially offset by cost inflation. Selling, general, and administrative expenses increased from the year-ago period driven by an increase in employee incentive compensation expense as well as higher distribution costs partially offset by CCI-led and GOE cost savings.

Operating income increased to USD 222 million in the second quarter of 2023 compared to USD 157 million in the second quarter of 2022. Excluding special charges, as well as integration expenses in 2022, adjusted operating income increased 35 percent to USD 235 million in the second quarter of 2023 compared to USD 174 million in the year-ago period. In constant currency, adjusted operating income increased 36 percent from the year-ago period driven by the favorable impact of higher sales and gross margin expansion partially offset by higher selling, general, and administrative expenses.

Earnings per share was USD 0.56 in the second quarter of 2023 compared to USD 0.44 in the year-ago period. Special charges, as well as integration expenses in 2022, lowered earnings per share by USD 0.04 in both the second quarter of 2023 and 2022. Excluding these impacts, adjusted earnings per share was USD 0.60 in the second quarter of 2023 compared to USD 0.48 in the year-ago period. This 25 percent increase was driven by higher adjusted operating income partially offset by higher interest expense and a higher adjusted effective tax rate.

Net cash provided by operating activities through the second quarter of 2023 was USD 394 million compared to USD 154 million through the second quarter of 2022. The increase was primarily driven by higher net income and working capital improvements, including lower inventory, as well as lower incentive compensation payments.

Fiscal Year 2023 Financial Outlook

For fiscal year 2023, McCormick reaffirmed its sales outlook and raised its operating income and adjusted earnings per share outlook, driven by the strength of its year-to-date performance.

McCormick’s broad and advantaged global flavor portfolio enables the Company to meet the rising demand for flavor around the world. The Company is capitalizing on the growing consumer interests in healthy and flavorful cooking, digital engagement, valuing trusted brands, and purpose-minded practices. This, coupled with the breadth and reach of McCormick’s portfolio and its proven strategies, positions the Company to sustainably continue its growth trajectory.

McCormick expects strong underlying business performance in 2023 driven by sales growth. The Company also expects a favorable impact to operating income from its GOE program and the lapping of the negative impact of the Covid-related disruptions in China in 2022, partially offset by the Kitchen Basics divestiture and an expected increase in employee incentive compensation expenses given the anticipated improvement in underlying business performance. In addition, the Company expects earnings per share growth will be tempered by higher interest expense and a higher projected effective tax rate compared to 2022. Excluding this interest and tax headwind, McCormick’s operating performance growth is expected to be strong. The Company expects minimal impact on net sales, operating income, and earnings per share from currency rates in 2023.

In 2023, McCormick expects to grow sales by 5 percent to 7 percent compared to 2022. The Company expects sales growth to be driven primarily by pricing actions which, in conjunction with cost savings, are expected to offset inflationary pressures. McCormick also expects to drive continued growth through the strength of its brands, as well as brand marketing, new products, category management, and differentiated customer engagement plans.

Operating income in 2023 is expected to grow by 11 percent to 13 percent from USD 864 million in 2022. The Company anticipates approximately USD 55 million of special charges in 2023 that relate to previously announced organizational and streamlining actions. Excluding the impact of special charges and integration expenses in 2023 and 2022, adjusted operating income is expected to increase 10 percent to 12 percent. The Company previously expected adjusted operating income to increase 9 percent to 11 percent.

McCormick projects 2023 earnings per share to be in the range of USD 2.44 to USD 2.49, compared to USD 2.52 of earnings per share in 2022. The Company expects special charges to lower earnings per share by USD 0.16 in 2023. Excluding special charges, the Company projects 2023 adjusted earnings per share to be in the range of USD 2.60 to USD 2.65, as compared to previously reported guidance of USD 2.56 to USD 2.61 and adjusted earnings per share of USD 2.53 in 2022. The year-over-year expected increase of 3 percent to 5 percent reflects strong operating performance, partially offset by an 8 percent headwind from higher interest expense due to the higher interest-rate environment and lapping the impact of an optimization of the Company’s debt portfolio last year, as well as a 1 percent headwind from an anticipated increase in the Company’s projected adjusted effective tax rate. For fiscal 2023, the Company expects strong cash flow driven by profit and working capital initiatives and anticipates returning a significant portion of cash flow to shareholders through dividends.