Note: More details to come; changes are highlighted. Except where noted, and highlighted, no other section of this report has been updated.
Reason for Report:Flash Update 2QFY13 Earnings Update
Previous Ed.: June 05, 2013; 1Q13 Earnings Update
Flash Update
McCormick Earnings In Line, Revises View – June 27, 2013
McCormick delivered second quarter 2013 earnings of $0.61 per share, in line with the Zacks Consensus Estimate. Earnings were ahead of both the company’s expectation and the prior-year quarter earnings of $0.60 by a penny. The results were driven by top-line growth and higher income from unconsolidated operations.
Revenue and Profits
Total revenue in the quarter grew 2% year over year to $1.003 billion. However, it lagged the Zacks Consensus Estimate of $1.005 billion. On a local currency basis, sales increased 3%, at the lower end of the company guided range of 3% to 5%. We believe that sluggish demand from quick service restaurants in the industrial segment is pressurizing sales even though McCormick’s consumer business segment is doing well.
Consolidated operating income declined 4.1% to $116 million as top-line growth and cost savings from McCormick's Comprehensive Continuous Improvement (‘CCI’) program were more than offset by transaction costs related to the completion of the Wuhan Asia-Pacific Condiments Co. Ltd. (“WAPC”) acquisition, retirement benefit costs, increase in brand marketing support, and material cost inflation.
Acquisition Update
In early-Jun 2013, this global leader in spices completed the acquisition of the assets of Chinese broth maker Wuhan Asia-Pacific Condiments Co. Ltd, a privately-held company which manufactures and markets brands like DaQiao and ChuShiLe.
The addition of these brands will enhance McCormick’s product portfolio with new flavors. The deal will also help McCormick to expand its presence in the central regions of China through WAPC’s strong positioning in the country.
The acquisition is expected to accelerate McCormick’s earnings in 2014 and will be fully accretive to earnings in 2015. In 2013, the company anticipates the deal to be slightly dilutive to earnings per share due to integration and financing costs of $4 million, related to the acquisition.
Segment Details
Consumer Business: Segment revenues increased 4% to $591 million. On a local currency basis, segment revenues surged 5% year over year, mainly driven by improved volume and increased product mix. Sales on a constant currency basis grew in all three geographic regions of Americas, Europe, Middle East and Africa (EMEA) and Asia/Pacific.
Operating income of the segment declined 1% to $88 million in the quarter as the favorable impact of higher sales and CCI cost savings were more than offset by acquisition costs, higher retirement benefit costs, increased material costs and increase in brand marketing support.
Industrial Business: Segment revenues declined 1% year over year to $411.6 million in the second quarter of 2013, in line with management expectations of posting weak results in the quarter. However, sales improved slightly on a local currency basis on the back of improved pricing offset by lower volumes and product mix. The segment is witnessing poor demand from quick service restaurants in the U.S. and China due to concerns of bird flu among consumers.
Operating income of this McCormick segment declined 15.2% to $28.0 million, primarily due to lower sales, an unfavorable business mix, higher input costs and the impact of increased retirement benefit expenses partly offset by cost savings.
Guidance
McCormick has re-visited its sales guidance for 2013 to include the impact of WAPC. McCormick has raised its sales projection by one percentage point to a range of 4% to 6%, compared with the prior expectation of 3% to 5%.
However, transaction costs related to the WAPC acquisition, along with a sluggish industrial business will lower operating income growth in 2013. The company expects its operating income to increase in the range of 5% to 7%, compared with the previous expectation of a 6% to 8% increase.
Based on this outlook for operating income growth, McCormick lowered its projecting earnings guidance to the range of $3.13 to $3.19 per share compared with $3.15 to $3.23 per share expected earlier.
McCormick expects earnings of $0.78 per share, flat year over year, for the third quarter of 2013. In addition, the company expects increased retirement benefit expense, higher tax rate and increase in its brand marketing investments to impact the third quarter, which will offset the favorable impact of higher sales and cost savings.
A more expanded account of analyst opinions will follow in the next update of MKC.
Portfolio Manager Executive Summary
McCormick & Company, Incorporated (MKC) is a global leader in the manufacture, marketing and distribution of spices, seasonings, specialty foods, and flavors for the entire food industry – retail outlets, food manufacturers, and food service businesses.
Of the 13 analysts covering McCormick, 76.9% assigned neutral ratings and 23.1% rendered positive ratings. None of the firms provided a negative rating on the stock.
Neutral or equivalent outlook (10/13 firms or 76.9%): The firms are apprehensive about the weakening economic environment. Also, they believe the coming quarters will be negatively impacted by the rising input costs, which may hinder the company’s growth going forward. Though McCormick remains on track to implement a new inventory management process in order to improve inventory levels, the difficult global economy ahead and material cost pressure keeps us on the sidelines.
Buy or equivalent outlook (5/13firms or 38.5%): The firms remain positive on the company’s solid long-term outlook, its cost savings program, and new product innovation. McCormick’s dominant position in both branded and private label domestic spices provides the company with superior control over pricing amid difficult input cost environment. The company also makes efforts to enhance its brand portfolio through increased investment in brand marketing. The company is cash rich and maintains strong international presence through acquisitions and investments in emerging markets. The acquisition of Wuhan Asia-Pacific Condiments Co. Ltd. will not only add broth to its new flavors, WAPC’s brands will also enhance McCormick’s product portfolio in the central regions of China.
December 19, 2012
Overview
Founded in 1889 and based in Sparks, Md,McCormick & Company, Inc. is a leading manufacturer, marketer and distributor of spices, seasonings, specialty foods and flavors to the entire food industry, across the globe. The company’s key sales, distribution and production facilities are located in North America and Europe.
Furthermore, the company has facilities in China, Australia, Mexico, India, Singapore, Central America, Thailand and South Africa. McCormick conducts its business through two segments – Consumer and Industrial.
The analysts have identified the following issues as critical to evaluate the investment merits of McCormick:
Key Positive Arguments / Key Negative ArgumentsStrong Brand Portfolio: McCormick has an established brand portfolio and the company continues to improve its brands through increased brand marketing, which fuels sales growth. / Rising Commodity Costs:The increase in price of raw materials is adversely impacting the company’s gross margins.
Product Innovation: McCormick introduced more than 250 products in the consumer business, and a string of new products in the industrial business segment in fiscal 2012. Going forward, the company expects at least 10% of annual sales to come from new products by 2015. / Rising Inventory: The company has high level of inventory, which automatically increases the cost of maintaining it.
Acquisitions in Emerging Markets: McCormick has increased its presence in the emerging markets through acquisitions, which has also increased the company’s sales. Emerging markets are expected to support 20% of company’s total sales by 2015.
Cost Reduction Initiative: The company is focused on saving costs and enhancing productivity through its ongoing Comprehensive Continuous Improvement (‘CCI’) program, which is expected to further increase its investments leading to growth in sales, operating income, and earnings.
NOTE: McCormick’s fiscal year ends on Nov 30.
December 19, 2012
Long-Term Growth
The company expects sales to grow in the range of 4% – 6%, operating income in the range of 7% –9% and earnings per share to grow in the range of 9% – 11% over the longterm. The company’s long-term positive outlook is based on its focus on enhancement of brands, cost savings, product innovation, improving core platforms globally, understanding customer sentiments and expansion in emerging markets.
McCormick, through acquisitions, has been focusing on increasing its global presence to meet the growing demand for spices. McCormick expects to continue to capitalize on the growing interest of the middle class of fast growing emerging markets in the quality of branded packaged spices and seasonings. McCormick thus expects emerging markets to contribute 20% of company’s total sales by 2015.
The company has a good track record of investing in product innovation to grow consumer sales. McCormick introduced more than 250 consumer products and also launched new products in the industrial business segment in 2012. The company expects to further improve its portfolio of spices going forward, expecting at least 10% of annual sales to come from new products by 2015.
December 19, 2012
Target Price/Valuation
Provided below is a summary of valuations and ratings as compiled by Zacks Research Digest:
Rating DistributionPositive / 23.1%↓
Neutral / 76.9%↑
Negative / 0.0%
Avg. Target Price / $69.29↑
Digest High / $80.00↑
Digest Low / $58.00↑
Analysts with Target Price/Total No. / 7/13
Risks related to the achievement of the target price are hinged on the following: swings in commodity prices impacting company's margins and profits; potential product recalls, and adverse currency swings.
Recent Events
McCormick’s 1Q Earnings & Rev Beat – Apr 2, 2013
McCormick delivered first quarter fiscal 2013 earnings of $0.57 per share, ahead of the prior-year quarter earnings of $0.55 by 3.6%. The results were driven by a favorable tax rate, higher income from unconsolidated operations and a lower share count. Earnings also beat the Zacks Consensus Estimate by a penny.
Total revenue in the quarter grew 3% year over year to $934 million, beating the Zacks Consensus Estimate of $918 million. The sales were driven by positive volume and product mix and pricing actions in response to high input costs, especially in the consumer business segment. Product innovation and brand marketing investments led to the increase in sales of the consumer business. However, McCormick witnessed sluggish demand from quick service restaurants in the industrial segment.
Operating income was almost flat at $112 million. Top-line growth and cost savings from McCormick's Comprehensive Continuous Improvement (‘CCI’) program were offset by higher material costs and an increase in retirement benefit expense.
Guidance
McCormick expects earnings of $0.60 per share, flat year over year for the second quarter of fiscal 2013. In addition, the company expects higher material costs, increased retirement benefit expense and increase in its brand marketing investments to continue in the second quarter.
McCormick has re-affirmed its earnings and sales guidance for fiscal 2013. McCormick expects sales growth in the range of 3% to 5% in local currency, driven by higher volume and product mix coupled with minimal pricing and currency impact. The company reiterates its operating income growth in the range of 6% to 8%.
McCormick expects earnings in the range of $3.15 to $3.23, driven by higher sales and at least $45 million in CCI cost savings, offset by retirement benefit expenses.
Revenues
Total revenue in 1Q13 grew 3% y/y to $934 million driven by positive volume and product mix and pricing actions in response to high input costs, especially in the consumer business segment. Product innovation and brand marketing investments in each of the three geographic regions of the Americas, Europe, Middle East and Africa (EMEA) and Asia/Pacific led to the increase in sales of the consumer business.However, McCormick witnessed decline in volume and product mix in the industrial segment due to sluggish demand from quick service restaurants and a stronger growth rate of the first quarter of 2012.The Zacks Digest average revenues were in-line with the company’s results.
Segmental Revenues are as follows:
McCormick conducts its business through two segments – Consumer and Industrial.
Consumer
The consumer segment offers spices, herbs, extracts, seasoning blends, sauces, marinades, and specialty foods to the consumer food market. This segment primarily caters to retail outlets like grocery, mass merchandise, warehouse clubs and discount and drug stores. The division markets its products under various brand names. They include McCormick, Lawry’s, Zatarain’s, Thai Kitchen, Simply Asia and Club House in U.S.; and Ducros, Vahine, Schwartz and Kamis in Europe, the Middle East and Africa (EMEA). In Asia-Pacific, the primary brand is McCormick. In India, the company has a joint venture with the Kohinoor brand.
Segment revenues surged 7% y/y to $569.8 million in 1Q13. Improved volume, increased product mix, innovation in spices and seasonings and higher pricing led to the growth. Sales grew in all three geographic regions of Americas, Europe, Middle East and Africa (EMEA) and Asia/Pacific, with particularly strong performance in emerging markets where consumer business sales grew 14%. The Zacks Digest average was in line with the company’s results.
Consumer sales as per region
America: Consumer sales in the Americas increased 7% y/y in 1Q13, with no impact from currency. The increase was driven by pricing gains, higher volume and improved product mix. The company’s initiatives like increased marketing spending, promotional activity and in-store merchandising for spices, herbs and seasonings in both the U.S. and Canada led to the growth. The segment also witnessed the launch of new products to increase the sales of recipe mixes, as well as Grill Mates, Zatarain's and Simply Asia brand products.
Europe, the Middle East and Africa (EMEA): In EMEA, consumer sales increased 4% y/y in 1Q13. In local currency the y/y increase was 2%. The growth in the region was mainly driven by the company’s favorable volume, product mix and pricing gains. McCormick also achieved growth in Vahine and Ducros brand products in France, and its Schwartz brand in the U.K., and gained new distribution of Kamis brand items in Russia.
Asia/Pacific region:Sales increased 13% y/yin 4Q12. Excluding currency and acquisition impact, sales increased 15%, led by double-digit growth in China and India, owing to the acquisition of Kohinoor brand in 2011.
Industrial
The industrial segment sells seasoning blends, natural spices and herbs, wet flavors, coating systems, and compound flavors to food manufacturers and food service customers. The products are sold through distributors.
Segment revenues declined 2% y/y to $364.6 million in 1Q13, compared to a 13% increase in sales in 1Q12. The sales were in line with management expectations of weak results in the quarter. Decline in volume and product mix, poor demand from quick service restaurants in U.S. and China and strong year ago comparisons led to the sales miss. On a constant currency basis, sales declined 3% in the segment. The Zacks Digest average was in line with the company’s results.
Industrial sales as per region
America: Industrial sales in the Americas declined 3% y/y in 1Q13, with minimal currency impact. The decline was due to lower demand related to quick service restaurants which led to lower volumes and decline in product mix. The decline offset the pricing gains in the segment.
Europe, the Middle East and Africa (EMEA): Industrial sales in the EMEA increased 7% y/y in 1Q13, with minimal impact from currency. This increase was led by demand from quick service restaurants in this region. Positive pricing added 2% to sales growth in this region.
Asia/Pacific region:Industrial sales in the Asia/Pacific region declined 12% y/y in 1Q13, and 13% in local currency. Lower consumer traffic in quick service restaurants impacted industrial business sales in China. However, the company expects to improve sales in the upcoming quarters as a result of customers' plans for promotions, new products and additional restaurant locations in China.
Acquisition Update
On May 31, McCormick completed the acquisition of the assets of Chinese broth maker Wuhan Asia-Pacific Condiments Co. Ltd. (“WAPC”) for $147 million (RMB 900 million). The deal was announced in Aug 2012 and was funded with a combination of cash and debt.
WAPC, which is a privately-held company, manufactures and markets broth brands like DaQiao and ChuShiLe. The addition of these brands will enhance McCormick’s product portfolio with new flavors. The deal will also help McCormick to expand its brand presence in the central regions of China through WAPC’s strong positioning in China. It will also accelerate McCormick’s earnings in 2014 and will be fully accretive in 2015.
In 2013, the company anticipates the deal to be slightly dilutive to earnings per share due to integration and financing costs of $4 million, related to the acquisition. Excluding transaction costs, McCormick expects operating income margin from the WAPC business to be approximately 10%.
McCormick has been growing its business in both developed and emerging markets through acquisitions. The acquisition deals completed in 2011 (U.S.-based Kitchen Basics, Inc., Poland-based Kamis S.A. and joint venture with Kohinoor Foods Ltd in India) have contributed significantly to top-line growth. The expansion in emerging markets has increased with the rising consumer interest in new flavors and increasing demand for the convenience and quality of branded packaged foods.
Emerging markets are expected to contribute approximately 15% of McCormick’s sales in 2013, a significant increase from 10% in 2011, owing to the recent acquisitions including WAPC. The company is thus on track toward generating 20% of sales in emerging markets by 2015.