McCormick Reports Strong Third Quarter Performance

McCormick & Company, Incorporated (NYSE:MKC), a global leader in flavor, today reported financial results for the third quarter ended August 31, 2023 and reaffirmed fiscal 2023 sales and operating profit outlook.

• Sales increased 6% in the third quarter from the year-ago period. In constant currency, sales also grew 6%. Both comparisons include a 1% unfavorable impact attributable to a slower economic recovery in China.
• Operating income was $245 million in the third quarter compared to $235 million in the year-ago period. Adjusted operating income was $251 million, a 5% increase from $239 million in the year-ago period.
• Earnings per share was $0.63 in the third quarter as compared to $0.82 in the year-ago period. Adjusted earnings per share was $0.65 compared to $0.69 in the year-ago period.
• Cash flow from operations through the third quarter of 2023 was $660 million compared to $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, stated, “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% 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% sales growth in the third quarter from the year-ago period, with minimal currency impact. Constant currency sales growth reflected an 8% increase from pricing actions, partially offset by a 2% 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 $245 million in the third quarter of 2023 compared to $235 million in the third quarter of 2022. Excluding special charges, adjusted operating income was $251 million in the third quarter of 2023 compared to $239 million in the year-ago period. In constant currency, adjusted operating income increased 5% 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 $0.63 in the third quarter of 2023 compared to $0.82 in the year-ago period. Special charges lowered earnings per share by $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 $0.13 in 2022. Excluding these impacts, adjusted earnings per share was $0.65 in the third quarter of 2023 compared to $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 $660 million compared to $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% to 7% 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% to 13% from $864 million in 2022. The Company anticipates approximately $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% to 12%.

McCormick projects 2023 earnings per share to be in the range of $2.46 to $2.51, compared to $2.52 of earnings per share in 2022. The Company expects special charges to lower earnings per share by $0.16 in 2023. Excluding special charges, the Company projects 2023 adjusted earnings per share to be in the range of $2.62 to $2.67, as compared to previously reported guidance of $2.60 to $2.65 and adjusted earnings per share of $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% to 6% reflects strong operating performance, partially offset by an 8% 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% 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.

Business Segment Results

Consumer Segment

Consumer segment sales increased 1% from the third quarter of 2022, with minimal currency impact, reflecting a 5% increase from pricing actions partially offset by lower volume of 4%. The lower volume includes a 2% decline attributable to slower than expected recovery in the China Consumer business as well as a 2% decline attributable to the Kitchen Basics divestiture, the exit of the Consumer business in Russia and the Company’s strategic decisions to discontinue low margin business.

• Consumer sales in the Americas increased 1% from the third quarter of 2023, or 2% in constant currency. The increase was driven by pricing actions partially offset by lower volume and product mix, including a 2% decline related to the Kitchen Basics divestiture and the discontinuation of business to drive margin improvement.
• Consumer sales in Europe, Middle East and Africa (EMEA) increased 15% compared to the year-ago period. In constant currency, sales grew 10% driven by pricing actions partially offset by lower volume and product mix. The sales increase included a 2% unfavorable impact from the exit of the Consumer business in Russia.
• Consumer sales in the Asia-Pacific region (APAC) decreased 16% compared to the year-ago period. In constant currency, sales declined 11% with a 15% volume decline partially offset by a 4% increase from pricing actions. The volume decline was driven by a 15% unfavorable impact from China due primarily to lower consumption in the current period related to a slower than anticipated economic recovery as well as lapping strong demand in the prior year.

Consumer segment operating income, excluding special charges, decreased 6% in the third quarter of 2023 compared to the year-ago period. In constant currency, operating income decreased 5%. Pricing actions and cost savings were more than offset by lower volume, attributable primarily to China, higher inflation, distribution and brand marketing costs as well as an increase in employee incentive compensation.

Flavor Solutions Segment

Flavor Solutions segment sales increased 12% from the third quarter of 2022. In constant currency, sales increased 11% reflecting a 10% increase from pricing actions and 1% from volume. Volume growth was partially impacted by the Company’s strategic decisions to discontinue low margin business. Flavor Solutions segment sales growth was strong across all regions.

• In the Americas, Flavor Solutions sales rose 11% compared to the third quarter of 2022. In constant currency, sales increased 10%, reflecting a 9% increase from pricing actions and 1% growth in volume and product mix.
• The EMEA region’s Flavor Solutions sales grew 17% compared to the third quarter of 2022. In constant currency, sales increased 15% with pricing actions partially offset by lower volume and product mix. Included in this increase is a 1% decline related to the pruning of low margin business.
• The APAC region’s Flavor Solutions sales increased 7% compared to the third quarter of 2022. In constant currency, 13% sales growth reflects a 7% increase from pricing actions and 6% growth in volume and product mix.

Flavor Solutions segment operating income, excluding special charges, grew 42% in the third quarter of 2023 compared to the year-ago period, or 41% in constant currency. Pricing actions, higher volume, and cost savings more than offset the impact of higher cost inflation and higher distribution costs as well as an increase in employee incentive compensation.

About McCormick

McCormick & Company, Incorporated is a global leader in flavor. With over $6 billion in annual sales across 170 countries and territories, we manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products to the entire food industry including e-commerce channels, grocery, food manufacturers and foodservice businesses. Our most popular brands with trademark registrations include McCormick, French’s, Frank’s RedHot, Stubb’s, OLD BAY, Lawry’s, Zatarain’s, Ducros, Vahiné, Cholula, Schwartz, Kamis, 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.