McCormick & Company Benefits From Strong End Markets

Woman helps child slice an orange pepper.

As ever, spices and seasonings company McCormick & Company 's(NYSE: MKC) earnings release and conference call this week were a mass of numbers. A combination of currency adjustments, acquisition effects, and special charges all helped to obscure the underlying picture at the company. Let's cut through the clutter to see what's going on.

McCormick & Company earnings: The raw numbers

Starting with the headline numbers:

  • Full-year 2016 reported sales increased 3%, while constant-currency sales increased 6%, at the top end of guidance for a 4% to 6% increase.
  • Full-year reported EPS increased 18.6% to $3.69, while adjusted EPS rose 8.6% to $3.78, a figure within the guidance range of $3.75 to $3.79.

In short, the full-year results were at the high end of company guidance, indicating McCormick finished the year on a strong note. Moreover, guidance for full-year 2017 implies revenue growth at a constant rate to 2016:

  • Full-year 2017 revenue is forecast to grow 3% to 5%, and 5% to 7% on a constant-currency basis.
  • Full-year 2017 reported EPS is expected to increase by 9%-11% to $4.02-$4.10, and adjusted EPS is expected to increase by 7%-9% to $4.05-$4.13, with an estimated 2% unfavorable currency impact.

(See what I mean by a mass of numbers?)

Margin and cost savings

In addition, management executed well on an operational basis in 2016.Cost savings of $109 million were ahead of its $100 million target, and the company is on track to reach its goal of goal of $400 million in cost savings by 2019 -- with $100 million planned for 2017. To put these figures in context, McCormick's net sales in 2016 were $4.41 billion and operating income was $641 million. As such, a combination of a gross margin increase and cost savings helped adjusted operating income margin rise to 14.9% in 2016 from 14.2% the previous year.

McCormick's segment performance

The company reports in two segments -- industrial and consumer -- with the consumer segment generating nearly 75% of its segment operating income in 2016. It also has a higher margin. For the full year, operating margin (excluding special charges) for the consumer segment came in at 17.8%, compared to 10% for the industrial segment.

Data source: McCormick & Company presentations. Data in millions of U.S. dollars. Operating income excluding special charges. Chart by author.

Overall net sales increased by 2.1% in McCormick's fourth quarter, with consumer net sales up 3.9% and more than offsetting a 1.4% decline in industrial net sales. However, if you think this means the consumer segment had a much stronger fourth quarter than the industrial segment, you would be mistaken. Breaking out the components of sales growth for each segment gives a better understanding of the quarter.

In fact, after stripping out acquisitions and currency effects, the consumer segment grew net sales by 2.4%, compared to a 2.1% increase at the industrial segment.

Performance by region

There was a marked difference in performance on a regional basis, with the Americas region contributing solid growth in both segments, but net sales in Europe, the Middle East, and Africa (EMEA) were helped into negative territory by the strong U.S. dollar.

Spices and seasonings remains a strong growth area in the U.S., and McCormick benefited with a 4.4% organic (excluding acquisitions and currency) increase in net sales. However, CEO Lawrence Kurzius took the time to explain why industry data shows McCormick's category growth in the U.S. at just 2% (compared to 5% for the industry): "We had very strong fourth quarter sales growth in certain unmeasured channels, including club, e-commerce and Hispanic retail chains. We estimate that these unmeasured channels added another 2 percentage points to McCormick's retail sales growth for spices and seasonings."

Meanwhile, performance in the Asia/Pacific region was mixed, with consumer net sales up 6.5% (3% on an organic basis) while industrial sales declined 0.3% (flat on an organic basis) as McCormick continues to suffer the effects of the decision by a customer in China to introduce a secondary supply source.

Looking ahead

All told, it was a pretty solid quarter and McCormick is continuing to execute well in favorable end markets. Investors will be hoping the company can increase its growth rate in the U.S. consumer segment while recovering from the impact on the industrial segment in China. There's not a lot McCormick can do about currency movements, but underlying growth of 5% to 7% in 2017 is pretty good in a moderately growing global economy.

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Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends McCormick. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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