Hunt Valley / MD. (mcc) McCormick + Company Inc., a global leader in flavour, reported financial results for the third quarter ended August 31, 2021.
- Sales rose 8 percent in the third quarter from the year-ago period. In constant currency, the Company grew sales 5 percent.
- Operating income was USD 265 million in the third quarter compared to USD 273 million in the year-ago period. Adjusted operating income was USD 272 million compared to USD 273 million in the third quarter of 2020.
- Earnings per share was USD 0.79 in the third quarter as compared to USD 0.76 in the year-ago period. Adjusted earnings per share rose 5 percent to USD 0.80 from USD 0.76 in the year-ago period.
- For fiscal year 2021, McCormick updated its sales outlook to expected growth of 12 percent to 13 percent, or 9 percent to 10 percent in constant currency.
Chairman, President and CEO’s Remarks
Lawrence E. Kurzius, Chairman, President and CEO, stated, «Our third quarter results continue to demonstrate the strength and breadth of McCormick’s offering. We grew sales 8 percent in the third quarter and, notably, on a two-year basis, grew sales 17 percent, which reflects our robust growth momentum in both segments and strong contributions from our Cholula and FONA acquisitions. Our Consumer segment results reflect the sustained shift to consumer at-home consumption, higher than pre-pandemic levels, as well as lapping the year-ago elevated demand in the lockdown days of the pandemic. In our Flavour Solutions segment, growth was driven equally from packaged food and beverage companies as well as our restaurant and other foodservice customers, many of which were lapping the curtailment in away-from-home dining in the year-ago period.
We are currently operating in a dynamic cost environment and like the rest of the industry, experiencing cost pressures. While the profit driven by our strong third quarter sales growth was tempered by higher inflation and industry-wide logistics challenges, we expect to manage through this inflationary environment as we have successfully done in the past, including through pricing, and fully offset cost pressures over time. Importantly, our strong growth trajectory supports our confidence in our long-term financial algorithm to drive continuous value creation through top line growth and margin expansion. Remarkably, year-to-date versus 2019, we have driven sales, adjusted operating income and adjusted earnings per share growth of nearly 20 percent across all three metrics. The combination of our broad and advantaged portfolio, the execution of our strategies to capitalize on accelerating consumer trends and the engagement of our employees have positioned us well to continue to drive differentiated growth.
«We are capitalizing on the sustained shift to cooking more at home, increased digital engagement, clean and flavourful eating, and trusted brands, which we are confident will persist beyond the pandemic. The strategic investments we have made, including in our supply chain resiliency and brand marketing, provide a foundation for long-term, sustainable growth while enhancing our agility and our relevance with our consumers and customers. As we enter the fourth quarter, we are narrowing our full year sales outlook to the high-end of our previous range and, recognizing there remains a degree of uncertainty in the cost environment, we are lowering our adjusted operating income outlook. We are confident in our robust sales growth momentum and our ability to successfully navigate through the transitory broad-based supply chain challenges the world is currently experiencing. We have a strong foundation and remain focused on the long-term goals, strategies and values that have made us so successful.
«I want to recognize McCormick employees around the world as the collective power of our people drives our momentum and our success. With our vision to stand together for flavour 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 and build long-term value for our shareholders.»
Third Quarter 2021 Results
McCormick reported an 8 percent sales increase in the third quarter from the year-ago period, including a 3 percent favourable impact from currency. Sales from Cholula and FONA, acquired in November 2020 and December 2020, respectively, added 4 percent to the sales increase. Flavour Solutions segment sales increased 21 percent, or 17 percent in constant currency, driven by incremental sales from acquisitions, growth with packaged food and beverage companies as well as higher sales of away-from-home products. Consumer segment sales grew 1 percent, including a 2 percent favourable impact from currency, on top of 15 percent growth in the third quarter of 2020. Despite the difficult year-over-year comparison, Consumer segment sales reflect the sustained shift to consumers cooking more at home, fuelled by the Company’s brand marketing, strong digital engagement, new products, and acquisition growth.
Gross profit margin declined 260 basis points versus the year-ago period driven by higher cost inflation and unfavourable product mix, partially offset by cost savings led by the Company’s Comprehensive Continuous Improvement (CCI) program. Operating income was USD 265 million in the third quarter of 2021 compared to USD 273 million in the year-ago period. This decline included USD 1 million of transaction and integration expenses related to the acquisitions of Cholula and FONA as well as USD 6 million of special charges. Excluding transaction and integration expenses as well as special charges, adjusted operating income of USD 272 million in the third quarter was comparable to USD 273 million in the year-ago period. In constant currency, adjusted operating income declined 3 percent. The favourable impact of higher sales and CCI-led cost savings was more than offset by gross margin compression and higher brand marketing investments.
Earnings per share was USD 0.79 in the third quarter of 2021 compared to USD 0.76 in the third quarter of 2020. Transaction and integration expenses and special charges lowered earnings per share by USD 0.01 in the third quarter of 2021. Excluding this impact, adjusted earnings per share was USD 0.80 in the third quarter of 2021 compared to USD 0.76 in the year-ago period. This 5 percent increase in adjusted earnings per share was driven by higher sales and a lower adjusted income tax rate, partially offset by higher cost inflation.
Year-to-date net cash provided by operating activities was USD 373 million compared to USD 627 million through the third quarter of 2020. The decrease was primarily due to the higher use of cash associated with working capital, including the impact of higher inventory levels to support increased demand and mitigate supply and service issues, and the payment of transaction and integration costs.
Fiscal Year 2021 Financial Outlook
McCormick is capitalizing on the sustained shift to cooking more at home and the growing consumer interests in clean and flavourful eating, increased digital engagement, trusted brands and purpose-minded practices. These long-term trends have accelerated during the Covid-19 pandemic and are expected to persist beyond the pandemic. The Company expects the shift in consumer behaviour to cooking and eating more at home to be sustained at higher than pre-pandemic levels, as well as a gradual recovery in the demand from restaurant and other foodservice customers which have been impacted by the curtailment of away-from-home dining. McCormick is well positioned for continued growth through the combination of its alignment with these consumer trends, the breadth and reach of its flavour portfolio and its effective growth strategies.
The Company reaffirms the three-percentage point favourable impact from currency rates on sales and the two-percentage point favourable impact from currency on adjusted operating income and adjusted earnings per share.
In 2021, the Company now expects to grow sales by 12 percent to 13 percent compared to 2020, which in constant currency is 9 percent to 10 percent and includes the incremental impact of the Cholula and FONA acquisitions. This is at the high-end of the Company’s previous projection of 11 percent to 13 percent, or 8 percent to 10 percent in constant currency. McCormick expects to drive organic sales growth in both its Consumer and Flavour Solutions segments in 2021 driven by brand marketing, new products, category management and differentiated customer engagement. The Company’s expected sales growth also includes the impact of pricing actions taken to partially offset an anticipated mid-single digit increase in costs.
Operating income in 2021 is expected to grow by 2 percent to 4 percent from USD 1.0 billion in 2020. The Company anticipates transaction and integration expenses related to the Cholula and FONA acquisitions of approximately USD 38 million in 2021. In addition, McCormick currently expects approximately USD 26 million of special charges in 2021 that relate to previously announced organization and streamlining actions. Excluding the impact of transaction and integration expenses as well as special charges in 2021 and 2020, adjusted operating income is expected to grow by 6 percent to 8 percent, which in constant currency is 4 percent to 6 percent. This compares to the Company’s previous projection of 10 percent to 12 percent, or 8 percent to 10 percent in constant currency and primarily reflects higher inflation and industry-wide logistics challenges. While the Company continues to project a mid-single digit increase in inflation, the rate is higher than previously anticipated due to recent acceleration. The expected adjusted operating income growth range includes strong base business growth and acquisition contribution partially offset by a 4 percent impact from incremental 2021 business transformation and first-half volume driven Covid-19 related expenses.
McCormick increased its projected 2021 earnings per share to be in the range of USD 2.80 to USD 2.85, compared to USD 2.78 of earnings per share in 2020. The Company expects the net impact of the transaction and integration expenses, including an unfavourable income tax expense impact from a discrete item related to the acquisition of FONA, as well as special charges and the gain on the sale of the Company’s minority stake in Eastern Condiments Private Ltd to lower earnings per share by USD 0.17 in 2021. Excluding these impacts, the Company projects 2021 adjusted earnings per share to be in the range of USD 2.97 to USD 3.02, as compared to previously reported guidance of USD 3.00 to USD 3.05. The decline is driven by the updated adjusted operating income outlook, partially offset by an expected mid-single digit increase in income from unconsolidated operations and a reduction of the Company’s 2021 projected adjusted effective tax rate to approximately 21 percent. The Company’s updated adjusted earnings per share outlook represents an expected increase of 5 percent to 7 percent, including a favourable impact from currency, as compared to USD 2.83 of adjusted earnings per share in 2020. This reflects strong base business growth and acquisition contribution, partially offset by a 4 percent impact from incremental 2021 business transformation and Covid-19 related expenses and a 1 percent headwind from an anticipated increase in the projected adjusted effective tax rate.