McCormick spices up sales by 11 percent in Q2

McCormick spices up sales by 11 percent in Q2

Acquisitions, new products, marketing programs and expanded distribution drove sales growth in each geographic region, with particular strength in emerging markets.

McCormick & Co. Inc. (NYSE:MKC), a global leader in flavor, reported strong sales and profit growth in the second quarter of fiscal year 2012 and reaffirmed its 2012 outlook.

  • Grew second quarter net sales 11 percent with contributions from acquisitions, pricing actions and increased volume and product mix.
  • Reported earnings per share of $0.60 for the second quarter, a 9 percent increase from the year-ago period.
  • Generated cash flow from operations of $144 million through the first half of fiscal year 2012.
  • Reaffirmed projected 2012 earnings per share of $3.01 to $3.06.

Alan D. Wilson, chairman, president and CEO, commented, “We achieved a double-digit increase in sales and strong profit growth in our second quarter. In a difficult economic environment, McCormick is delivering financial results that demonstrate the strength of our brands and our customer relationships in markets around the world. Acquisitions, new products, marketing programs and expanded distribution are driving sales growth in each geographic region, with particular strength in emerging markets which accounted for 14 percent of second quarter sales.

“Across all of our businesses, we continue to face volatile material costs. As reflected in our gross profit margin, which was comparable with the second quarter of 2011, our pricing actions and cost savings from our Comprehensive Continuous Improvement (CCI) program are effectively offsetting the impact of higher material costs. CCI is also helping to fuel our growth and through the first half of 2012, we increased our brand marketing support by 15 percent. This increase, along with product innovation and other initiatives to grow sales, have created momentum as we head into the second half of 2012.”

McCormick’s second quarter sales rose 11 percent, and in local currency the increase was 13 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 and volume and product mix also contributed to the increase. Operating income rose 11 percent to $121 million from $109 million in the second quarter of 2011. The favorable impact of higher sales and cost savings from McCormick’s CCI program more than offset increased material costs and a $4 million increase in brand marketing support. Income from unconsolidated operations declined $2 million due largely to the impact of unfavorable foreign currency exchange rates on McCormick’s joint venture in Mexico.

Second quarter earnings per share rose to $0.60 from $0.55 in the year ago quarter, driven mainly by the increase in operating income, as well as a favorable tax rate. These increases were offset in part by the lower income from unconsolidated operations and higher interest expense.

Through the first half of 2012, the Company generated cash flow from operations of $144 million compared to $36 million in the first half of 2011. This improvement in cash flow from operations was largely a result of a much lower increase in inventory in the first half of 2012. At May 31, 2012, inventory remained above historical levels due primarily to higher material costs and acquisitions, but declined from inventory on the balance sheet at the end of the first quarter of 2012. Due to the seasonality of McCormick’s business, cash flow from operations typically increases significantly in the second half of the fiscal year.

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 approximately $15 million of incremental brand marketing support. The range of earnings per share projected for fiscal year 2012 remained $3.01 to $3.06, reflecting the higher operating income offset in part by lower income from unconsolidated operations.

The Company expects the growth rate in earnings per share to be greater in the fourth quarter of 2012 than in the third quarter of 2012 due in part to a projected further decline in income from unconsolidated operations for the third quarter of 2012. In addition, the 2011 results were affected by transaction costs related to the completion of acquisitions, which lowered earnings per share in the fourth quarter of 2011 by $0.05, as well as a shift in sales from the fourth quarter into the third quarter due to customer purchases in advance of a price increase.

Business segment results

Consumer business
Consumer business sales grew 14 percent when compared to the second quarter of 2011. In local currency, sales grew 15 percent with acquisitions completed in 2011 accounting for two thirds of the increase. The remaining third was due to pricing actions, taken primarily in 2011 to offset the impact of higher material costs, as well as favorable volume and product mix.

  • Consumer sales in the Americas rose 6 percent, and in local currency, grew 7 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 was comparable to the year-ago period, even with higher pricing. This was achieved, in part, through effective brand marketing support and new product introductions.
  • In the Europe, Middle East and Africa (EMEA) region, consumer sales grew 27 percent, and in local currency increased 32 percent. A large portion of the increase resulted from McCormick’s 2011 acquisition of Kamis, a Poland-based leading brand of spices, seasonings and mustards. The base business grew 5 percent this period, led by higher volume and product mix in France and the U.K., as well as some smaller markets in the EMEA region.
  • Consumer sales in the Asia/Pacific region rose 66 percent, and in local currency grew 64 percent. McCormick’s 2011 acquisition of Kohinoor, based in India, added the majority of this increase. Excluding this impact, the Company grew its base business 5 percent, which was driven primarily by pricing actions. The Asia/Pacific region tends to have more quarter to quarter variability from holiday seasons and customer purchase patterns as demonstrated by the 13 percent sales increase in the first half of 2012, also measured in local currency, excluding the impact of acquisitions.
  • For the second quarter, operating income for the consumer business rose 15 percent to $89 million from the second quarter of 2011. This increase included the effect of a $4 million increase in marketing, which reflects McCormick’s commitment to support its brands. The growth in operating income in the second quarter of 2012 was a significant improvement from a decline in the first quarter when the consumer business was significantly impacted by year over year material cost increases. Through the first half of 2012, the Company has increased operating income for this business segment by 4 percent.

International business

     
  • Industrial business sales grew 8 percent when compared to the second quarter of 2011. In local currency, sales grew 10 percent of which pricing actions, taken in response to increased material costs, contributed 6 percent and higher volume and product mix added 4 percent.
  • Industrial sales in the Americas grew 9 percent, and in local currency grew 10 percent of which 7 percent came from pricing actions. Increased volume and product mix contributed 3 percent, largely driven by product innovation and growing demand for customized seasoning blends in the U.S., Canada and Mexico.
  • In EMEA, industrial sales rose 6 percent, and in local currency grew 12 percent. This growth was led by increased demand from quick service restaurants in this region which has been particularly strong in recent quarters. Higher prices contributed 3 percent to sales growth in this region.
  • In the Asia/Pacific region, industrial sales rose 3 percent, and in local currency increased 1 percent. The impact of pricing actions was offset by a moderate decline in volume and product mix in the second quarter. As with the consumer business, industrial business sales in the Asia/Pacific region tend to have more variability quarter to quarter as demonstrated by the 10 percent sales increase for the first half of the year, measured in local currency.

For the second quarter, operating income for the industrial business was $33 million compared to $32 million in the second quarter of 2011. Factors that adversely affected operating income this period included sales mix and higher benefit costs. Through the first half of 2012 the Company has grown operating income for the industrial business by 14 percent.

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