Hunt Valley / MD. (mcc) McCormick + Company Inc., a global leader in flavour, reported financial results for the fourth quarter and fiscal year ended November 30, 2019. The company also provided its outlook for 2020.
- For fiscal year 2019, sales rose 1 percent from the prior year. In constant currency, the company grew sales 3 percent, driven by both the consumer and flavor solutions segments. Earnings per share decreased to USD 5.24 from USD 7.00, which in 2018 included a USD 2.26 net non-recurring benefit of the U.S. Tax Act. Adjusted earnings per share rose 8 percent to USD 5.35 from USD 4.97 in 2018.
- For the fourth quarter of 2019, sales rose 1 percent from the year-ago period. In constant currency, the company grew sales 2 percent. Earnings per share decreased to USD 1.59 from USD 1.60 in the year-ago period. Adjusted earnings per share decreased to USD 1.61 from USD 1.67, driven by a higher adjusted income tax rate versus the fourth quarter of 2018.
- Cash flow from operations grew 15 percent to a record USD 947 million in 2019. In November, a 9 percent increase to the quarterly dividend was authorized, marking the 34th consecutive year of dividend increases.
- For fiscal year 2020, McCormick expects to increase sales year-on-year by 2 percent to 4 percent. The company expects strong underlying business performance to drive operating income and earnings per share growth, offset by a significant incremental investment associated with business transformation and a higher projected effective tax rate.
Chairman, President + CEO’s Remarks
Lawrence E. Kurzius, Chairman, President and CEO, stated, «The breadth and reach of our global flavor portfolio continues to meet the demand for flavor around the world and creates a balanced portfolio to drive differentiated growth. In 2019, our performance was in line with our objectives and driven by the successful execution of our strategies and the engagement of our employees around the world.
«We delivered solid performance with growth in sales, adjusted operating income and adjusted earnings per share in 2019. Our sales growth and focus on profit realization drove strong results across both our consumer and flavor solutions segments. We continued to fuel our growth investments through our strong cash flow and CCI program. Led by this program, we achieved USD 119 million in cost savings in 2019 and expanded our adjusted operating margin by 80 basis points. We have realized USD 463 million in cost savings since 2016, which exceeded our four-year USD 400 million goal. Fiscal year 2019 marks the eighth consecutive year of record cash flow from operations, as well as the 34th consecutive year of dividend increases. Along with these accomplishments, we are also making measurable progress towards our 2025 sustainability goals. During 2019, we were recognized for the third consecutive year as a DiversityInc Top 50 Company in 2019, and Corporate Knights recently ranked McCormick in their 2020 Global 100 Most Sustainable Corporations Index as No. 1 in the food products industry for the fourth year in a row.
«The solid financial performance we delivered in 2019 was driven by our branded base business and new product growth in both of our segments, providing us with solid momentum heading into 2020. We are continuing to capitalize on the global and growing consumer interests in healthy, flavorful eating, the source and quality of ingredients, and sustainable practices. We deliver flavor across all markets and through all channels, while responding readily to changes in the fast-evolving food and beverage industry with new ideas, innovation and purpose. Our focus on profitable growth and strengthening our organization is the foundation of our future. In 2020, we expect to deliver another strong year of underlying business performance while making a significant investment in business transformation to fuel our growth and build the McCormick of the future.
«I want to recognize McCormick employees around the world for their dedicated efforts. The collective power of our people drives our momentum and our success. With our vision to bring the joy of flavor to life and our relentless focus on growth, performance, and people, we are confident our strategies will enable us to become even better positioned to drive future growth while we invest for the future and build value for our shareholders in 2020.»
Fourth Quarter 2019 Results
McCormick reported a 1 percent sales increase in the fourth quarter from the year-ago period, including a 1 percent unfavorable impact from currency. The company grew sales, driven by new products and growth in the base business through brand marketing support and expanded distribution, with particular strength across our U.S. branded portfolio. Both segments contributed to the sales increase. In constant currency, the company grew sales 2 percent.
Gross profit margin increased 120 basis points versus the year-ago period, driven by cost savings which were led by the Comprehensive Continuous Improvement (CCI) program. Operating income was USD 299 million in the fourth quarter compared to USD 292 million in the year-ago period. This increase was driven by higher sales and gross margin expansion, offset partially by higher planned brand marketing investments and additional incentive compensation expense driven in part by favorable non-operating income results. The company recorded USD 4 million of special charges in the fourth quarter of 2019 versus USD 2 million in the fourth quarter of 2018. Excluding special charges, adjusted operating income grew 3 percent to USD 303 million compared to USD 294 million in the year-ago period, or a 4 percent increase in constant currency.
Earnings per share was USD 1.59 in the fourth quarter of 2019 compared to USD 1.60 in the year-ago period. Special charges lowered earnings per share by USD 0.02 in the fourth quarter of 2019. Special charges as well as an adjustment associated with the non-recurring impact of the U.S. tax legislation (U.S. Tax Act), lowered earnings per share by USD 0.07 in the fourth quarter of 2018. Excluding these impacts, adjusted earnings per share was USD 1.61 in the fourth quarter of 2019 compared to USD 1.67 in the year-ago period. The decrease in adjusted earnings per share was driven by an unfavorable adjusted income tax rate which more than offset the increase in adjusted operating profit. The unfavorable adjusted income tax rate was due to lower favorable discrete tax items recognized, including the impact of the exercise of stock options, in the fourth quarter of 2019 versus the corresponding 2018 period.
Fiscal Year 2019 Results
McCormick reported a 1 percent sales increase in 2019 compared to 2018, which included a 2 percent unfavorable impact from currency. New products and growth in the base business across both the consumer and flavor solutions segments drove the increase. In constant currency, the company grew sales 3 percent.
Gross profit margin increased 60 basis points versus the year-ago period. This expansion was driven by CCI-led cost savings. Operating income was USD 958 million in 2019 compared to USD 891 million in the prior year. This increase was driven by higher sales and gross margin expansion as well as lapping prior year transaction and integration expenses from the acquisition of the Frank’s and French’s brands. Partially offsetting this increase was higher incentive compensation expense driven in part by favorable non-operating income results. Operating income margin increased 110 basis points versus the year-ago period. In fiscal 2018, the company recognized USD 23 million of transaction and integration expenses in operating income, related to the acquisition of our Frank’s and French’s brands. The company recorded USD 21 million of special charges in 2019 related to organization and streamlining actions versus USD 16 million in 2018. Excluding transaction and integration expenses as well as special charges, adjusted operating income grew 5 percent to USD 979 million compared to USD 930 million in the year-ago period, or 7 percent in constant currency. The company expanded adjusted operating margin 80 basis points versus the year ago period.
Earnings per share was USD 5.24 in 2019 compared to USD 7.00 in the prior year. Special charges, partially offset by an adjustment associated with the non-recurring impact of the U.S. Tax Act, lowered earnings per share by USD 0.11 in 2019. The net favorable non-recurring impact of the U.S. Tax Act, partially offset by transaction and integration expenses as well as special charges, increased earnings per share by USD 2.03 in 2018. Excluding these impacts, adjusted earnings per share grew to USD 5.35 in 2019 compared to USD 4.97 in 2018, driven primarily by higher adjusted operating income, lower interest expense and higher income from unconsolidated operations. This resulted in an 8 percent increase in adjusted earnings per share, which includes an unfavorable impact of foreign currency rates.
The company continues to generate strong cash flow. Net cash provided by operating activities reached a record USD 947 million in 2019, an increase from USD 821 million in 2018. The strong operating cash flow was mainly driven by higher operating income and working capital improvements. As the company continues to focus on paying down debt, a portion of this cash was used to pay down USD 436 million of acquisition debt. The company ended the year with a net debt-to-adjusted EBITDA ratio of 3.4x.
Fiscal Year 2020 Financial Outlook
McCormick expects continued global growth in consumer demand for great taste and healthy eating. McCormick is aligned with consumers’ increased interest in bolder flavors, demand for convenience, focus on fresh, natural ingredients and transparency around the sourcing and quality of food as well as the need to know about the environmental and social impacts behind the brands they buy. Through its growth strategies, the company is well-positioned to meet this increased consumer demand and drive sales of its broad flavor portfolio through brand marketing, new products and expanded distribution. The company is continuing to drive sales growth balanced with its focus on lowering costs to sustainably realize long-term earnings growth.
The company expects minimal impact from currency rates in 2020 on net sales, adjusted operating income and adjusted earnings per share.
In 2020, the company expects to grow sales compared to 2019 by 2 percent to 4 percent. This increase consists entirely of organic growth as the company has no incremental sales impact from acquisitions in 2020. The company expects to drive sales growth with new products, brand marketing and expanded distribution. Sales growth is also expected to include the impact of pricing, which in conjunction with cost savings, is expected to offset anticipated mid-single digit inflationary pressures. The company has plans to achieve approximately USD 105 million of cost savings and intends to use these savings to improve margins, fund investments to drive continued growth, and as a further offset to increased costs.
The company expects strong underlying business performance driven by sales growth will continue in 2020, which will be more than offset by a significant incremental investment associated with business transformation and a higher projected effective tax rate. Excluding this investment and tax headwind, McCormick’s growth from the underlying operating performance is expected to be strong and in line with its long-term organic growth objectives.
Operating income in 2020 is expected to range from comparable to an increase of 2 percent from USD 958 million of operating income in 2019. The company projects that the incremental expenses in 2020 associated with its business transformation investment will reduce growth in operating income by approximately 6 percent. In addition, approximately USD 8 million of special charges are currently projected for 2020 that relate to previously announced organization and streamlining actions. Excluding the impact of special charges in 2020 and 2019, adjusted operating income is projected to be comparable to adjusted operating income of USD 979 million in 2019, within an expected range from a 1 percent decline to a 1 percent increase. This expected range includes projected strong underlying base business growth of 5 percent to 7 percent, substantially offset by the 6 percent business transformation investment impact.
McCormick projects 2020 earnings per share to be in the range of USD 5.15 to USD 5.25, compared to USD 5.24 of earnings per share in 2019. The company’s projected earnings per share growth from its strong underlying business performance is more than offset by 2020 incremental business transformation expenses, estimated to be a 7 percent reduction in growth, and a 3 percent headwind from an expected increase in the projected effective tax rate to approximately 22 percent. Excluding an estimated USD 0.05 impact of special charges in 2020, the company projects 2020 adjusted earnings per share to be in the range of USD 5.20 to USD 5.30 which is an expected decline of 3 percent to a decline of 1 percent. For fiscal year 2020, the company projects another year of strong cash flow, with plans to return a significant portion to McCormick’s shareholders through dividends and to pay down debt.