McCormick & Company, Inc.'s Quarterly Report (Form 10-Q)

Press release · 10/26 07:43
McCormick & Company, Inc.'s Quarterly Report (Form 10-Q)

McCormick & Company, Inc.'s Quarterly Report (Form 10-Q)

McCormick & Company, Inc. (MKC) reported its quarterly financial results for the period ended August 31, 2024. The company’s net sales increased by 4.5% to $1.43 billion, driven by growth in its consumer and industrial segments. Gross profit margin expanded by 130 basis points to 34.4%, while operating income rose by 10.5% to $243.8 million. Net income attributable to MKC increased by 12.1% to $173.9 million, resulting in diluted earnings per share of $0.83. The company’s cash and cash equivalents stood at $444.8 million, with a debt-to-equity ratio of 0.45. MKC’s shares outstanding as of August 31, 2024, were 16,165,577 for common stock and 252,191,469 for common stock non-voting. The company’s financial performance was driven by its strategic initiatives, including the expansion of its e-commerce capabilities and the introduction of new products.

Business Overview

McCormick is a global leader in flavor, manufacturing, marketing, and distributing spices, seasoning mixes, condiments, and other flavorful products to retailers, food manufacturers, and the foodservice industry. In fiscal year 2023, approximately 39% of their sales were outside the U.S. McCormick operates in two business segments: consumer and flavor solutions.

Executive Summary

In the third quarter of 2024, McCormick’s sales declined 0.3% from the prior year, primarily due to the impact of divestitures and unfavorable foreign currency exchange rates, which were partially offset by favorable volume and product mix. Operating income increased 16.9% due to improved gross profit margins and lower selling, general, and administrative expenses. Excluding special charges, adjusted operating income increased 14.9%.

Diluted earnings per share was $0.83 in Q3 2024, up from $0.63 in Q3 2023. The increase was driven by higher operating income, lower special charges, a lower effective tax rate, and increased income from unconsolidated operations. Excluding special charges, adjusted diluted EPS was $0.83 in Q3 2024, up 27.7% from $0.65 in Q3 2023.

For the full year 2024, McCormick expects net sales to range from a 1% decline to a 1% increase, with a minimal impact from currency. Gross profit margin is expected to increase 50-100 basis points from 2023. Operating income is projected to increase 9-11%, including a minimal currency impact, while adjusted operating income is expected to increase 4-6%. Diluted EPS is forecasted to range from $2.81 to $2.86, with adjusted diluted EPS projected between $2.85 and $2.90, up 5-7% from 2023.

Financial Performance

In the third quarter of 2024, McCormick’s sales declined 0.3% year-over-year, including a 0.6% favorable impact from volume and product mix, offset by a 0.2% unfavorable impact from pricing actions and a 0.3% decline from divestitures. Foreign currency exchange rates also unfavorably impacted sales by 0.4%.

For the nine months ended August 31, 2024, sales increased 0.3%, with a 0.8% favorable impact from pricing actions, partially offset by a 0.4% decline from unfavorable volume and product mix and a 0.3% decline from divestitures. Foreign currency had a 0.2% favorable impact.

Gross profit increased 4.4% in Q3 2024 and 3.8% in the first nine months of 2024, with gross profit margins improving 170 basis points and 120 basis points, respectively. The margin improvements were driven by favorable product and customer mix, cost savings from the company’s Comprehensive Continuous Improvement (CCI) program, and the net impact of pricing actions.

Selling, general, and administrative (SG&A) expenses decreased 2.7% in Q3 2024 due to lower performance-based compensation and CCI-led cost savings, resulting in a 60-basis-point decrease as a percentage of sales. For the first nine months, SG&A increased 1.7% due to higher advertising, promotional, and R&D spending, partially offset by lower compensation costs and CCI savings.

Special charges were $1.9 million in Q3 2024 and $7.9 million in the first nine months, primarily related to the company’s Global Operating Effectiveness (GOE) program and the transition of a manufacturing facility.

Interest expense increased slightly in both the quarter and nine-month periods, while other income increased due to higher interest income and lower foreign currency exchange losses.

The effective tax rate was 16.7% in Q3 2024, down from 21.4% in Q3 2023, due to $16.3 million in net discrete tax benefits. For the first nine months, the effective tax rate was 18.4%, down from 21.7% in the prior-year period, driven by $34.9 million in net discrete tax benefits.

Income from unconsolidated operations, primarily the McCormick de Mexico joint venture, increased $4.5 million in Q3 2024 and $18.3 million in the first nine months compared to the prior-year periods.

Segment Performance

In the Consumer segment, sales were flat in Q3 2024 and increased 0.2% for the first nine months. Favorable volume and product mix of 1.0% in Q3 and a 0.2% decline for the nine months were offset by unfavorable pricing actions and the impact of divestitures. Segment operating income increased 7.8% in Q3 and 2.4% in the first nine months, driven by lower SG&A expenses.

The Flavor Solutions segment saw a 0.7% sales decline in Q3 2024 and a 0.5% increase for the first nine months. Favorable pricing was offset by unfavorable volume and product mix, as well as the impact of divestitures. Segment operating income increased 30.6% in Q3 and 17.4% in the first nine months, due to improved gross profit margins from pricing, product mix, and cost savings.

Outlook and Key Initiatives

For the full year 2024, McCormick expects:

  • Net sales to range from a 1% decline to a 1% increase, with a minimal currency impact
  • Gross profit margin to increase 50-100 basis points from 2023
  • Operating income to increase 9-11%, including a minimal currency impact
  • Adjusted operating income to increase 4-6%
  • Effective tax rate, including discrete items, of 21% compared to 21.8% in 2023
  • Income from unconsolidated operations to increase by a mid-teens percentage
  • Diluted EPS of $2.81 to $2.86, with adjusted diluted EPS of $2.85 to $2.90, up 5-7% from 2023

Key initiatives driving the outlook include:

  • Pricing actions to offset inflation
  • Favorable product and customer mix
  • Cost savings from the CCI and GOE programs
  • Increased brand marketing investments
  • Pruning of low-margin businesses

Analysis and Outlook

McCormick delivered a solid third quarter, with improved profitability despite a slight sales decline. The company’s focus on pricing, product mix, and cost savings initiatives has helped offset inflationary pressures and drive margin expansion. The consumer segment remained stable, while the flavor solutions segment saw a rebound in profitability.

Looking ahead, McCormick’s guidance for 2024 reflects cautious optimism. The company expects modest sales growth, with pricing actions and favorable mix offsetting volume headwinds from divestitures and pruning of low-margin businesses. Gross margin improvement and continued cost savings should drive operating income growth, though the pace of earnings expansion is expected to moderate compared to the strong performance in 2023.

Key risks to monitor include the ability to fully offset inflation through pricing, the impact of any further divestitures or business pruning, and the potential for a slowdown in consumer demand. McCormick’s diversified portfolio, pricing power, and operational efficiency initiatives should help mitigate these risks to some degree.

Overall, McCormick appears well-positioned to navigate the current environment, with a focus on driving profitable growth through innovation, brand building, and disciplined cost management. The company’s strong cash flow and balance sheet provide flexibility to invest in the business, return capital to shareholders, and pursue strategic opportunities. If McCormick can execute on its initiatives and maintain its competitive edge, the outlook remains favorable for continued long-term value creation.