McCormick Reports Strong Third Quarter Results

9/29/20

McCormick & Company, Incorporated (NYSE:MKC), a global leader in flavor, today reported financial results for the third quarter ended August 31, 2020.

  • Sales rose 8% in the third quarter from the year-ago period. In constant currency, the company grew sales 9% with significant consumer segment growth partially offset by a low single digit sales decline in the flavor solutions segment.
  • Operating income was $273 million in the third quarter compared to $254 million in the year-ago period, an increase of 8%. Adjusted operating income was also $273 million, an increase of 5% from $261 million in the third quarter of 2019, and a 6% increase in constant currency.
  • Earnings per share was $1.53 in the third quarter as compared to $1.43 in the year-ago period. Adjusted earnings per share rose 5% to $1.53 from $1.46 in the year-ago period.
  • For fiscal year 2020, McCormick resumed its guidance. The company's financial outlook reflects strong business performance driven by expected sales growth at the upper end of a 4% to 5% range, which in constant currency is 5% to 6%.
  • McCormick's Board of Directors approved a 2-for-1 stock split of the company's common and common non-voting shares for shareholders of record on November 20, 2020.

Chairman, President & CEO's Remarks

Lawrence E. Kurzius, Chairman, President and CEO, stated, "The last few months have been an extraordinary period and the COVID-19 situation continues to evolve daily. I am incredibly proud of the way McCormick has performed in an unprecedented operating environment.

"Our results for the third quarter continued to be significantly impacted by the sustained consumer preference for cooking more at home. Our outstanding consumer segment growth was driven by the substantial increase in demand reflecting the change in consumer behavior and fueled by our brand marketing, strong consumer digital connections and new products. In our flavor solutions segment, lower demand from our restaurant and other foodservice customers improved sequentially from the second quarter and were almost fully offset by increased sales to packaged food companies. Taken together, these impacts continue to demonstrate the strength and diversity of our offering.

"Our third quarter and year to date results speak to the value of our products and to our capabilities as a company. Year to date we have delivered robust sales, operating profit, and earnings per share growth, as well as significant cash flow, all driven by the engagement of our employees and the successful execution of our strategies. Our updated 2020 outlook reflects the strength of these year-to-date results and our confidence in the sustainability of higher at home consumption trends. We expect to deliver strong sales growth and underlying operating performance while ensuring the health and safety of our employees making investments to meet the growth we expect in 2021, recognizing the exceptional performance of our people throughout the COVID-19 crisis and supporting our communities through relief efforts. As we enter the fourth quarter, we believe the continued momentum we are seeing in our business positions us well to achieve the high-end of our full year sales guidance, recognizing there remains a degree of uncertainty in the operating environment. We have a strong foundation and are focused on the long-term goals, strategies and values that have made us so successful.

"I am pleased to announce a 2 for 1 stock split reflecting our sustained positive performance and outlook for continued growth. The company last completed a stock split in April 2002.

"McCormick is a global leader in flavor. We are differentiated with a broad and advantaged global flavor portfolio which continues to drive growth and position us to fully meet the demand for flavor around the world. We deliver flavor across all markets and through all channels, while responding readily to changes in the ever-evolving food and beverage industry, as well as in the global environment, with new ideas, innovation and purpose. We are continuing to capitalize on the global and growing consumer interests in healthy, flavorful cooking, heritage brands and digital engagement. These long-term trends have not only remained intact during this crisis, they have accelerated. Our focus on long-term sustainable growth and strengthening our organization is the foundation of our future. We are confident we will continue to successfully navigate through the current volatility, deliver another strong year of profitable growth in 2020 and continue on our long-term growth trajectory.

"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 flavor 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 2020 Results

McCormick reported an 8% sales increase in the third quarter from the year-ago period, including a 1% unfavorable impact from currency. In constant currency total sales grew 9%. Consumer segment sales increased 15%, with minimal impact from currency driven by an increase in demand resulting from consumers cooking more at home. The consumer segment sales growth was led by the Americas and Europe, Middle East and Africa (EMEA) regions, with a partial offset from a decline in the Asia/Pacific region related to away from home products included in its consumer portfolio. Flavor solutions segment sales were lower by 3%, including a 2% unfavorable impact from currency. This decline was attributable to lower demand from restaurant and foodservice customers, primarily in the Americas and EMEA regions, driven by the decline in away from home consumption which was partially offset by growth in the Asia/Pacific region.

Gross profit margin increased 70 basis points versus the year-ago period. This expansion was driven by favorable product mix and cost savings led by our Comprehensive Continuous Improvement (CCI) program, partially offset by COVID-19 related costs. Operating income increased to $273 million in the third quarter of 2020 compared to $254 million in the year-ago period. This increase was primarily driven by the impact of higher sales and gross margin expansion, offset partially by an increase in incentive compensation expenses as a result of the company's strong year-to-date operating performance. The company recorded $8 million of special charges in the third quarter of 2019. Excluding these charges adjusted operating income increased 5% to $273 million in the third quarter of 2020 compared to $261 million in the year-ago period, or a 6% increase in constant currency.

Earnings per share was $1.53 in the third quarter of 2020 compared to $1.43 in the third 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 $0.03 in the third quarter of 2019. Excluding this impact, adjusted earnings per share was $1.53 in the third quarter of 2020 compared to $1.46 in the year-ago period. The increase in adjusted earnings per share was driven primarily by higher adjusted operating income with lower interest expense offsetting the impact of a higher adjusted income tax rate. Adjusted earnings per share of $1.53, which includes an unfavorable impact from foreign currency rates, increased by 5% over the prior year.

The company continues to generate strong cash flow. Year-to-date net cash provided by operating activities was $627 million compared to $495 million through the third quarter of 2019. The strong operating cash flow was partially driven by higher net income. As the company continues to focus on reducing net leverage, a portion of this cash was used to fully pay off the term notes related to the acquisition of our Frank's RedHot and French's brands. The company ended the third quarter with a net debt-to-adjusted EBITDA ratio of 3.1x.

Fiscal Year 2020 Financial Outlook

McCormick previously withdrew its fiscal 2020 guidance on March 31, 2020. While recognizing the operating environment continues to evolve and there remains a degree of uncertainty about the pace and shape of the COVID-19 recovery, the company believes the shift in consumer demand to at home consumption will continue. The company expects it will drive growth in this dynamic environment as evidenced by its strong year-to-date fiscal 2020 performance and its momentum entering its fourth quarter. With McCormick's increased visibility to the balance of its fiscal year, the company is resuming guidance.

In 2020, the company expects to grow sales compared to 2019 at the upper end of a 4% to 5% range, which in constant currency is a 5% to 6% projected growth rate. This increase consists entirely of organic growth and reflects growth driven by new products, brand marketing and expanded distribution as well the net impact of the consumer shift in demand as a result of COVID-19 and the consumer's sustained preference for cooking at home. Sales growth is also expected to include the impact of pricing at the beginning of the year, which in conjunction with cost savings, is expected to offset an anticipated mid-single digit inflationary pressure.

Operating income in 2020 is expected to grow from 6% to 7% from $958 million of operating income in 2019. The company projects COVID-19 related costs as well as a higher level of incentive compensation consistent with the company's commitment to a pay-for-performance philosophy across the organization will reduce growth in operating income. Special charges of approximately $7 million 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 expected to increase from 4% to 5%, which in constant currency is 5% to 6%, from adjusted operating income of $979 million in 2019.

McCormick projects 2020 earnings per share to be in the range of $5.60 to $5.68 compared to $5.24 of earnings per share in 2019. Excluding an estimated $0.04 impact of special charges in 2020, the company projects 2020 adjusted earnings per share to be in the range of $5.64 to $5.72 which is an expected increase of 5% to 7%, or in constant currency 6% to 8%.

Stock Split

The company announced a 2-for-1 stock split of the company's common stock and common stock non-voting shares. The additional shares will be distributed on November 30, 2020 to stockholders of record as of November 20, 2020. The split will double the number of outstanding common and common non-voting shares. Common and common non-voting shares and per-share data in this press release have not been adjusted for the impact of the split. We expect trading will begin on a split-adjusted basis on December 1, 2020.

Adjusted operating income margin is calculated as adjusted operating income as a percentage of net sales for each period presented.
Adjusted income tax rate is calculated as adjusted income tax expense as a percentage of income from consolidated operations before income taxes excluding special charges or $243.5 million and $637.9 million for the three and nine months ended August 31, 2020, respectively and $226.8 million and $568.0 million for the three and nine months ended August 31, 2019, respectively.
Because we are a multi-national company, we are subject to variability of our reported U.S. dollar results due to changes in foreign currency exchange rates. Those changes have been volatile over the past several years. The exclusion of the effects of foreign currency exchange, or what we refer to as amounts expressed "on a constant currency basis", is a non-GAAP measure. We believe that this non-GAAP measure provides additional information that enables enhanced comparison to prior periods excluding the translation effects of changes in rates of foreign currency exchange and provides additional insight into the underlying performance of our operations located outside of the U.S. It should be noted that our presentation herein of amounts and percentage changes on a constant currency basis does not exclude the impact of foreign currency transaction gains and losses (that is, the impact of transactions denominated in other than the local currency of any of our subsidiaries in their local currency reported results).Percentage changes in sales and adjusted operating income expressed in "constant currency" are presented excluding the impact of foreign currency exchange. To present this information for historical periods, current period results for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the corresponding period of the prior fiscal year, rather than at the actual average exchange rates in effect during the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year. Constant currency growth rates follow:
In addition to the preceding non-GAAP financial measures, we use a leverage ratio that is determined using non-GAAP measures. A leverage ratio is a widely-used measure of ability to repay outstanding debt obligations. We believe that our leverage ratio is a meaningful metric to investors in evaluating our financial leverage and may be different than the method used by other companies to calculate such a leverage ratio. We determine our leverage ratio as net debt (which we define as total debt, net of cash in excess of $75.0 million) to adjusted earnings before interest, income taxes, depreciation and amortization ("Adjusted EBITDA"). We define Adjusted EBITDA as net income plus expenses for interest, income taxes, depreciation and amortization, less interest income and as further adjusted for cash and non-cash acquisition-related expenses (which may include the effect of the fair value adjustment of acquired inventory on cost of goods sold), special charges, stock-based compensation expense, and certain gains or losses (which may include third party fees and expenses and integration costs). Adjusted EBITDA and our leverage ratio are both non-GAAP financial measures. Our determination of the leverage ratio is consistent with the terms of our $1.0 billion revolving credit facility which requires us to maintain our leverage ratio below certain levels. Under that agreement, the applicable leverage ratio is reduced annually on November 30th. As of August 31, 2020, our capacity under the revolving credit facility is not affected by these covenants. We do not expect that these covenants would limit our access to our revolving credit facility for the foreseeable future; however, the leverage ratio could restrict our ability to utilize this facility. We expect to comply with this financial covenant for the foreseeable future.The following table reconciles our net income to Adjusted EBITDA for the trailing twelve-month period ended August 31, 2020:
About McCormick

McCormick & Company, Incorporated is a global leader in flavor. With over $5 billion in annual sales across 150 countries and territories, we manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products to the entire food industry including ecommerce channels, grocery, food manufacturers and foodservice businesses. Our most popular brands include McCormick, French's, Frank's RedHot, Stubb's, OLD BAY, Lawry's, Zatarain's, Ducros, Vahiné, Schwartz, Kamis, Kohinoor, DaQiao, Club House, Aeroplane and Gourmet Garden. Every day, no matter where or what you eat or drink, you can enjoy food flavored by McCormick.

Founded in 1889 and headquartered in Hunt Valley, Maryland USA, McCormick is guided by our principles and committed to our Purpose – To Stand Together for the Future of Flavor. McCormick envisions A World United by Flavor where healthy, sustainable and delicious go hand in hand. To learn more, visit www.mccormickcorporation.com or follow McCormick & Company on Twitter, Instagram and LinkedIn.

For more information, visit www.mccormickcorporation.com.