McCormick & Company Inc., a global leader in flavor, today reported strong growth in the third quarter of fiscal year 2012. To reflect a more favorable tax rate, the company increased its expected full year earnings per share to a range of $3.03 to $3.08.
- Grew third quarter net sales 9 percent in local currency and increased operating income 12 percent from the year-ago period.
- Reported third quarter earnings per share of $0.78 compared to $0.69 in the third quarter of 2011. Increased guidance for 2012 earnings per share to a range of $3.03 to $3.08 to reflect a more favorable tax rate.
- Generated cash flow from operations of $256 million through the first three quarters of fiscal year 2012. Cash flow is expected to exceed $400 million for the full year.
Alan D. Wilson, chairman, president and CEO, commented, "Our third quarter financial results demonstrate the effectiveness of McCormick's growth initiatives, even in a challenging economic environment. We reported a 9 percent increase in sales in local currency and strong profit growth with solid performance in both our consumer and industrial businesses. Acquisitions, new product innovation, brand marketing programs and expanded distribution are helping to drive sales growth in each geographic region. We had particular strength in emerging markets which accounted for 14 percent of third quarter sales. In mid-2013, we anticipate expanding our emerging market presence with the acquisition of Wuhan Asia-Pacific Condiments Co., Ltd., which will extend our geographic footprint and flavor portfolio in China.
"Across all of our businesses, we continue to face volatile material costs. However, we are effectively offsetting the impact of higher material costs with our pricing actions and cost savings from our Comprehensive Continuous Improvement (CCI) program. CCI is also helping to fund our growth and in 2012 we are on track to increase our brand marketing support by at least $15 million. Our employees have been doing outstanding work on CCI, and we now expect to exceed $50 million of cost savings in 2012. With these CCI costs savings, additional brand marketing support, product innovation and other sales growth initiatives, we have momentum as we head into the final quarter of 2012."
McCormick's third quarter sales rose 6 percent, and in local currency the increase was 9 percent when compared to the year-ago period. In local currency, acquisitions completed in 2011 added about half of this increase, while pricing actions taken in response to higher material costs also contributed to the increase. In addition, sales in the third quarter of 2011 were impacted favorably by customer purchases in advance of a price increase effective in the fourth quarter of 2011. In the third quarter of 2012, operating income rose 12 percent to $144 million from $128 million in the third quarter of 2011, with the favorable impact of higher sales and cost savings from CCI effectively offsetting increased material costs.
Third quarter earnings per share rose to $0.78 from $0.69 in the year ago quarter with $0.08 of the increase due to higher operating income and $0.02 due to a favorable tax rate, offset by a $0.01 reduction in income from unconsolidated operations. In the third quarter of 2012, the company repatriated cash from foreign subsidiaries which led to increased foreign tax credits in the U.S. This action is also expected to have a slightly favorable impact to net income in the fourth quarter of 2012.
Through the first three quarters of 2012, the company generated cash flow from operations of $256 million compared to $86 million in the first three quarters of 2011. This improvement in cash flow from operations was led by a much lower increase in inventory in the first three quarters of 2012 than the first three quarters of 2011. Due to the seasonality of McCormick's business, cash flow from operations is typically highest in the fourth quarter of the fiscal year, and the company expects cash flow from operations to exceed $400 million for fiscal year 2012.
For fiscal year 2012, the company reaffirmed its projected sales growth of 9 percent to 11 percent in local currency, which includes an estimated 4 percent contribution from acquisitions completed in 2011. Unfavorable foreign currency exchange rates are expected to have a 2 percent unfavorable impact. In addition, the company reaffirmed its outlook for operating income growth of 9 percent to 11 percent, which includes at least $15 million of incremental brand marketing support. The range of earnings per share projected for fiscal year 2012 was raised to $3.03 to $3.08, to reflect the more favorable tax rate.
Business segment results
Consumer business sales grew 9 percent when compared to the third quarter of 2011. In local currency, sales grew 12 percent with acquisitions completed in 2011 accounting for about two thirds of the growth for this segment. The remaining increase was due to pricing actions, taken primarily in 2011 to offset the impact of higher material costs.
Consumer sales in the Americas rose 4 percent, and in local currency, grew 5 percent. The increase was driven by pricing actions, as well as a 1 percent increase that resulted from the company's 2011 acquisition of Kitchen Basics, a leading brand of liquid stock. Volume and product mix were about even with the year-ago period, even with higher pricing. The company reported in third quarter of 2011 that sales rose approximately 3 percent as a result of customer purchases in advance of a price increase in the U.S., which created a more difficult comparison in the third quarter of 2012. In the third quarter of 2012, new product introductions, brand marketing support and distribution gains drove underlying sales growth in this region.
In the Europe, Middle East and Africa (EMEA) region, consumer sales grew 10 percent, and in local currency increased 22 percent. McCormick's 2011 acquisition of Kamis, a Poland-based leading brand of spices, seasonings and mustards, contributed 22 percent to the sales growth this quarter. For the base business, a moderate level of pricing offset a moderate decrease in volume and product mix during the quarter. While a difficult environment persists in much of Europe where consumers are under economic pressure, the company is driving incremental sales with new products and brand marketing support.
Consumer sales in the Asia/Pacific region rose 67 percent, and in local currency grew 69 percent. McCormick's 2011 acquisition of Kohinoor, based in India, added 55 percent of the sales growth. Excluding this impact, the company grew its base business 14 percent in local currency, which was driven primarily by a strong increase in volume and product mix in China. Year-to-date, consumer sales in China have grown 20 percent in local currency.
For the third quarter, operating income for the consumer business was $109 million, an 8 percent increase from the third quarter of 2011 driven primarily by the sales growth. Pricing actions together with cost savings from the company's CCI program continue to provide an offset to the impact of higher material costs.
Industrial business sales grew 3 percent when compared to the third quarter of 2011. In local currency, sales grew 6 percent primarily as a result of pricing actions taken in response to increased material costs.
Industrial sales in the Americas grew 5 percent, and in local currency grew 7 percent as a result of pricing actions. Increased volume and product mix of seasonings and flavors to food manufacturers and of branded items to foodservice distributors, were offset by lower demand from quick service restaurants in this region.
In EMEA, industrial sales rose 1 percent, and in local currency grew 11 percent. This growth was led by increased demand from quick service restaurants in this region which has been particularly strong in recent quarters. In addition, higher prices contributed 4 percent to sales growth this period.
In the Asia/Pacific region, industrial sales declined 6 percent, and in local currency decreased 4 percent. This compares to a year-on-year increase of 17 percent in local currency for the third quarter of 2011. In the third quarter of 2012, industrial business sales in this region continue to be impacted by a lower level of promotional activity behind certain menu items flavored by McCormick.
For the third quarter, operating income for the industrial business rose 27 percent from the year-ago period, to $35 million as a result of higher sales, CCI-related cost savings and operating expense leverage. In addition, customer pricing is better aligned with current material costs than in the third quarter of 2011 when price actions were still being implemented.