Hunt Valley / MD. (mcc) McCormick + Company Inc., a global leader in flavour, reported financial results for the third quarter ended August 31, 2023 and reaffirmed fiscal 2023 sales and operating profit outlook.
- Sales increased 6 percent in the third quarter from the year-ago period. In constant currency, sales also grew 6 percent. Both comparisons include a 1 percent unfavorable impact attributable to a slower economic recovery in China.
- Operating income was USD 245 million in the third quarter compared to USD 235 million in the year-ago period. Adjusted operating income was USD 251 million, a 5 percent increase from USD 239 million in the year-ago period.
- Earnings per share was USD 0.63 in the third quarter as compared to USD 0.82 in the year-ago period. Adjusted earnings per share was USD 0.65 compared to USD 0.69 in the year-ago period.
- Cash flow from operations through the third quarter of 2023 was USD 660 million compared to USD 250 million in the year-ago period.
- For fiscal year 2023, McCormick reaffirmed its sales and operating profit outlook and increased its adjusted earnings per share outlook.
President and CEO’s Remarks
Brendan M. Foley, President and CEO: «We drove another quarter of strong performance, reflecting sustained demand and effective execution of our growth strategies across our Consumer and Flavor Solutions segments, reinforcing the confidence that we have in our competitive advantages and differentiation. Our results reflect strong underlying business trends that were in line with our expectations across our business, notwithstanding our Consumer segment in APAC, where the pace of China’s economic recovery has been slower than anticipated. We remain confident in our ability to deliver on our outlook and in the sustained trajectory of our business.
«We drove 6 percent sales growth in the third quarter, reflecting continued effective price realization and an improvement in our underlying business volume trends. Our performance underscores the strength of our brands and categories, as well as the power of our marketing, category management, differentiated customer engagement, and new products. In our Consumer segment, sales growth in the Americas and EMEA regions was partially offset by an unfavorable China impact. In Flavor Solutions, our exceptional performance continued, we delivered our tenth consecutive quarter of constant currency double-digit sales growth. Across our broad portfolio, we are continuing to capitalize on strong demand and deliver on our growth plans.
«We drove significant improvement in our third quarter gross margin performance relative to last year. This improvement reflects the continued recovery of the cost inflation that our pricing lagged last year as well as cost savings from our CCI and GOE programs. Our focus on increasing our profit realization is driving results.
«As we look ahead, we remain committed to our long-term financial algorithm and driving sustained value creation through top line growth and margin expansion. We are excited about the opportunities for future growth in both segments to advance our leadership position and differentiation. We will continue to innovate and renovate and drive industry-leading brand marketing, customer engagement and category management. We will also diligently optimize our cost structure to drive long-term profitable growth.
«Importantly, we will continue to leverage the strength of our culture and the power of people to build the next generation of leaders and capabilities. This is one of our most important commitments, as our teams around the world drive our momentum and success, and I am grateful for and energized by both their ongoing contributions and the results that they are driving. Our business fundamentals remain strong, and we are confident we will continue to not only deliver strong sales growth, but also drive total shareholder return at an industry-leading pace.»
Third Quarter 2023 Results
McCormick reported 6 percent sales growth in the third quarter from the year-ago period, with minimal currency impact. Constant currency sales growth reflected an 8 percent increase from pricing actions, partially offset by a 2 percent volume and mix decline attributable to the impact of a slower than expected economic recovery in China, the Kitchen Basics divestiture, the exit of the Consumer business in Russia, and the Company’s strategic decisions to discontinue low margin business. All other volume and product mix was flat to the third quarter of the prior year.
Gross profit margin expanded 150 basis points versus the third quarter of last year. This expansion was driven by pricing actions and cost savings led by the Company’s Comprehensive Continuous Improvement (CCI) and Global Operating Effectiveness (GOE) programs partially offset by cost inflation. Selling, general, and administrative expenses increased from the year-ago period driven by an increase in employee incentive compensation expense as well as higher distribution and brand marketing costs partially offset by CCI-led and GOE cost savings.
Operating income increased to USD 245 million in the third quarter of 2023 compared to USD 235 million in the third quarter of 2022. Excluding special charges, adjusted operating income was USD 251 million in the third quarter of 2023 compared to USD 239 million in the year-ago period. In constant currency, adjusted operating income increased 5 percent from the year-ago period driven by the favorable impact of higher sales and gross margin expansion partially offset by higher selling, general, and administrative expenses.
Earnings per share was USD 0.63 in the third quarter of 2023 compared to USD 0.82 in the year-ago period. Special charges lowered earnings per share by USD 0.02 in the third quarter of 2023. The net favorable impact of the gain on the sale of the Kitchen Basics business and special charges increased earnings per share by USD 0.13 in 2022. Excluding these impacts, adjusted earnings per share was USD 0.65 in the third quarter of 2023 compared to USD 0.69 in the year-ago period. This decrease was driven by the net impact of lapping the benefit of an optimization of the Company’s debt portfolio in the third quarter of last year and the increase in income from unconsolidated operations driven by strong performance in our largest joint venture, McCormick de Mexico.
Net cash provided by operating activities through the third quarter of 2023 was USD 660 million compared to USD 250 million through the third quarter of 2022. The increase was primarily driven by higher operating income and working capital improvements, including lower inventory.
Fiscal Year 2023 Financial Outlook
For fiscal year 2023, McCormick reaffirmed its sales and operating income outlook, despite a lower than previously expected benefit from lapping the COVID-related disruptions in China. The Company increased its adjusted earnings per share outlook, driven by the strong year-to-date and projected performance of its joint venture, McCormick de Mexico.
McCormick’s broad and advantaged global flavor portfolio enables the Company to meet the rising demand for flavor around the world. The Company is capitalizing on the growing consumer interests in healthy and flavorful cooking, digital engagement, valuing trusted brands, and purpose-minded practices. This, coupled with the breadth and reach of McCormick’s portfolio and its proven strategies, positions the Company to sustainably continue its growth trajectory.
McCormick continues to expect strong underlying business performance in 2023 driven by sales growth. The Company also expects a favorable impact to operating income from its GOE program and the lapping of the negative impact of the COVID-related disruptions in China in 2022, partially offset by the Kitchen Basics divestiture and an expected increase in employee incentive compensation expenses given the anticipated improvement in underlying business performance. In addition, the Company expects earnings per share growth will be tempered by higher interest expense and a higher projected effective tax rate compared to 2022. Excluding this interest and tax headwind, McCormick’s operating performance growth is expected to be strong. The Company expects minimal impact on net sales, operating income, and earnings per share from currency rates in 2023.
In 2023, McCormick expects to grow sales by 5 percent to 7 percent compared to 2022. The Company expects sales growth to be driven primarily by pricing actions which, in conjunction with cost savings, are expected to offset inflationary pressures. McCormick also expects to drive continued growth through the strength of its brands, as well as brand marketing, new products, category management, and differentiated customer engagement plans.
Operating income in 2023 is expected to grow by 11 percent to 13 percent from USD 864 million in 2022. The Company anticipates approximately USD 55 million of special charges in 2023 that relate to previously announced organizational and streamlining actions. Excluding the impact of special charges and integration expenses in 2023 and 2022, adjusted operating income is expected to increase 10 percent to 12 percent.
McCormick projects 2023 earnings per share to be in the range of USD 2.46 to USD 2.51, compared to USD 2.52 of earnings per share in 2022. The Company expects special charges to lower earnings per share by USD 0.16 in 2023. Excluding special charges, the Company projects 2023 adjusted earnings per share to be in the range of USD 2.62 to USD 2.67, as compared to previously reported guidance of USD 2.60 to USD 2.65 and adjusted earnings per share of USD 2.53 in 2022. The increase from previous guidance reflects an updated expectation of the contribution from the Company’s joint venture, McCormick de Mexico. The year-over-year expected increase of 4 percent to 6 percent reflects strong operating performance, partially offset by an 8 percent headwind from higher interest expense due to the higher interest-rate environment and lapping the impact of an optimization of the Company’s debt portfolio last year, as well as a 1 percent headwind from an anticipated increase in the Company’s projected adjusted effective tax rate. For fiscal 2023, the Company expects strong cash flow driven by profit and working capital initiatives and anticipates returning a significant portion of cash flow to shareholders through dividends.