McCormick benefitting from acquisitions, innovation

by Monica Watrous
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McCormick's new skillet sauces have exceeded a 10% share in the category.

SPARKS, MD. — Special charges to operating income and unfavorable currency translation weighed on second-quarter results for McCormick & Co., Inc., but the flavor company is reaping benefits of recent acquisitions, innovation, marketing support and cost-savings initiatives.

For the second quarter ended May 31, McCormick had net income of $84.3 million, equal to 66c per share on the common stock, down 0.2% from $84.5 million, or 65c per share, in the prior-year period. Net sales for the quarter dipped to $1,024.1 million, down 0.9% from $1,033.4 million. In constant currency, the company achieved a 5% year-over-year increase in sales.

The company has announced three acquisitions this year, including the purchase of Drogheria & Alimentari completed in May and the acquisition of Brand Aromatics in February. In June, McCormick signed an agreement to acquire One World Foods, the maker of Stubb’s barbecue sauce, marinades, rubs and skillet sauces, for an anticipated purchase price of $100 million.

“Annual sales of this business are approximately $30 million and are growing at a double-digit rate,” said Alan Wilson, chairman and chief executive officer, during a July 1 earnings call with financial analysts. “Stubb’s is a perfect complement to our products, rounding out our range of grilling items under the Grill Mates, Lawry’s and McCormick brands.”

McCormick signed an agreement to acquire One World Foods, the maker of Stubb’s barbecue sauce, marinades, rubs and skillet sauces.

The company plans to keep the business headquarters in Austin, Texas, and expects to maintain a double-digit pace of sales growth near-term through expanded distribution, increased household penetration and innovative flavors. Additionally, McCormick anticipates significant cost synergies that will deliver at least $10 million of incremental earnings before interest, tax, depreciation and amortization by 2017.

During the second quarter, operating income for the consumer business segment declined to $65.1 million from $85.8 million in the comparable quarter. Excluding special charges, the segment had operating income of $80.8 million.

Net sales for the consumer business segment fell 3% to $599.8 million for the quarter, reflecting the negative impact of foreign currency translation. In constant currency, McCormick’s consumer business sales grew 3%, due to increased volume and product mix.

“Consumer interest in flavor, simple and healthy ingredients, and cooking with fresh product continues to drive strong category growth for spices and seasonings, as seen in the latest consumption data, with category sales up 5% in the quarter,” said Lawrence Kurzius, president and chief operating officer of McCormick. “This same data shows that sales of our McCormick brands spices and seasonings rose 1%. This is an improvement compared to a 1% decline in the past 52 weeks. We are definitely heading in the right direction.”

McCormick gained share in the recipe mixes and taco seasoning categories during the quarter, boosted by innovation and effective marketing for new products and core items. The company’s new skillet sauces have exceeded a 10% share in the category, driven by retail placement and marketing support.

In the coming months, McCormick will launch slow cooker sauces in such flavors as smoky barbecue pulled pork and pot roast with caramelized onion and cracked black pepper. The company also plans to add gluten-free recipe mixes, including beef stew and fajita, and kitchen basic stock cubes, with a vegetarian variety.

In the coming months, McCormick will launch slow cooker sauces in such flavors as smoky barbecue pulled pork and pot roast with caramelized onion and cracked black pepper.

“As the latest consumption data illustrated, we have reduced the category share decline for our brand, but we’re not yet where we want to be,” Mr. Kurzius said. “I believe we have the right actions and the right team in place to stabilize and then grow our share. In tandem with these actions, we are driving growth for our recipe mixes, as well as niche brands within our U.S. portfolio such as Lawry’s, Old Bay, Grill Mates, Zatarain’s, Thai Kitchen and now Drogheria & Alimentari.”

Industrial business operating income increased to $38.7 million from $35.9 million in the year-ago quarter. Excluding special charges, operating income was $42 million, reflecting the favorable impact of higher sales, cost savings and favorable product mix that offset the negative impact of higher input costs and increased retirement benefit expense.

Net sales for the industrial business segment advanced 1% to $424.3 million for the quarter. In constant currency, sales increased 7%, driven by pricing actions taken in response to higher input costs, and increased volume and product mix. Acquisitions contributed 1 percentage point of year-on-year growth in the quarter. McCormick grew its year-on-year sales to food manufacturers in the United States during the quarter and posted a solid performance with the sales of branded food service products. Offsetting these gains was continued weakness in the company’s sales to fast-food restaurants.

“In the Americas region we’re benefiting from an increase in consumer snacking, developing seasonings for snack bars, crackers, chips, and similar products,” Mr. Kurzius said. “At the same time, our customers are moving toward more simple ingredients, and our foundation in spices and herbs has us well positioned.”

For the first six months of the year, McCormick’s net income declined 7% to $154.8 million, or $1.21 per share, from $167 million, or $1.27 per share, for the year-ago period. Net sales rose slightly to $2,034.5 million from $2,026.8 million for the first half of the prior year.

In addition to success from innovation and acquisition, McCormick’s cost-savings initiatives are driving profit. The company is reaffirming its goal to achieve at least $85 million in cost savings this year, bringing cumulative annual cost savings to more than $400 million since 2009.

For the third quarter, McCormick expects adjusted earnings per share to decline from the comparable period as result of the projected tax rate, unfavorable currency translation and an increased investment in marketing.

Looking ahead to the full year, the company continues to expect sales growth of 4% to 6% in constant currency. On a reported basis, McCormick expects operating income to decline 4% to 5% from operating income of $603 million in 2014. Due to a reduction in the projected effective tax rate for the year, management has raised the outlook for earnings per share by 3c to a range of $3.18 to $3.25, which reflects a 29c impact from special charges.

“Our geographic presence and product portfolio are expanding and aligned with the move toward healthier eating, fresh ingredients, ethnic cuisine and bold taste,” Mr. Wilson said. “And we’re driving growth through innovation, marketing and acquisitions. In 2015 we're seeing the benefits of our stepped-up cost reduction activity and will continue to pursue ways to improve our productivity and profit as we grow the top line.”
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