McCormick & Co. Inc.MKC delivered mixed results in the third quarter of fiscal 2015. While earnings lagged the Zacks Consensus Estimate, revenues smoothly exceeded the consensus mark, possibly due to strong sales momentum.
Moreover, the company raised the constant currency sales growth rate guidance and expects fiscal 2015 adjusted earnings per share to be at the lower end of the company's previously guided range.
Adjusted earnings of 85 cents per share missed the Zacks Consensus Estimate of 87 cents by 2.3%. Earnings declined 10.5% from 95 cents per share earned a year ago, primarily due to a higher tax rate, which was anticipated by the company. Tax rate in the current quarter was 30% while it was 21% last year. For the fourth quarter of 2015, the company continues to expect a tax rate of approximately 29%.
Other than a higher tax rate, a decline in adjusted operating income also impacted the results. Adjusted earnings were unfavorably impacted by a decline in profit from the Kohinoor business and the effect of a recent decline in Mexican peso on the company's income from unconsolidated operations.
The company acquired Kohinoor business in 2011. But in the third quarter of fiscal 2015, the company approved a plan for this business to discontinue the sale of certain lower margin basmati rice product lines and focus on higher-margin items.
Revenues and Profits
The global leader in flavors and spices delivered third-quarter revenues of $1.060 billion, which exceeded the Zacks Consensus Estimate of $1.055 billion by 0.5% and grew about 2% from the prior-year quarter. Excluding currency headwinds, revenues grew 7%, driven by increased volume and product mix in both business segments.
Despite a positive sales environment, the company's adjusted operating income declined 3.6% to $154 million in the third quarter due to unfavorable currency rates, higher material input costs and increased benefit expenses, as well as a $3 million decline in profits from the Kohinoor business from the year-ago period. However, on a constant currency basis, adjusted operating income grew 1%, driven by sales growth and cost savings.
Consumer Business: Segment revenues grew 7% on a constant currency basis, driven by increased volume and a better product mix. In addition, acquisitions completed in 2015 added 3 percentage points of year-on-year growth in the third quarter. Sales increased on a constant currency basis in all the regions of Americas, Europe, Middle East and Africa (EMEA) and the Asia/Pacific.
Adjusted operating income of the segment was $115 million, slightly lower than $112 million in the prior-year quarter. On a constant currency basis, adjusted operating income declined 3% as the favorable impact of sales growth and cost savings was more than offset by unfavorable impact of higher material costs and employee benefit expense, and a decline in Kohinoor adjusted operating income from the year-ago period.
Industrial Business: Segment revenues increased 8% year over year on a constant currency basis in the third quarter, driven by higher volume, higher pricing and improved product mix. In addition, acquisitions completed in 2015 added 2 percentage points of year-on-year growth in the third quarter.
Sales increased on a constant currency basis in all the regions of Americas, Europe, Middle East and Africa (EMEA) and the Asia/Pacific.
Adjusted operating income of this segment increased marginally to $39 million from $38 million in the prior-year quarter. On a constant currency basis, adjusted operating income increased in double-digits year over year, as the favorable impact of higher sales and cost savings more than offset the unfavorable impact of increases in material costs and employee benefit expense.
Fiscal 2015 Guidance
Based on McCormick's strong sales momentum, solid acquisitions and optimistic view on the fourth quarter, McCormick anticipates fiscal year 2015 sales to grow at the upper end of its 4% to 6% guidance range in constant currency. The company anticipates that currency will lower fiscal year sales growth range by 5 percentage points based on prevailing rates.
In constant currency, the company now expects 2015 adjusted operating income to grow at the lower end of its 6% to 7% guidance range, from adjusted operating income of $608 million in 2014, partly due to weak profits from Kohinoor business.
The company has increased its 2015 cost savings target to at least $95 million and also raised its planned brand marketing support to a high single-digit year-on-year increase.
Despite higher sales and increased cost savings target, the company expects 2015 adjusted earnings per share to be at the lower end of the company's previously guided range of $3.47 to $3.54 due to the current projection of operating income and the impact of the recent decline in Mexico peso on McCormick's income from unconsolidated operations.
This translates to a growth rate of at least 7% from 2014 adjusted earnings per share of $3.37 on a constant currency basis. The Zacks Consensus Estimate for fiscal 2015 stands at $3.52 per share.
McCormick has been witnessing rising demand for spices, herbs and seasonings over the last few years. Further, its focus on building sales through brand marketing investments and acquisitions has been driving its earnings. So far this year, the company has acquired Austin, TX - based One World Foods, Inc., the seller of Stubb's barbeque sauces (Stubb's) in August, Drogheria & Alimentari (D&A) in May and Brand Aromatics in March . Further, McCormick has also been regularly launching new products in order to remain competitive. Its increasing focus on higher pricing and cost savings is also encouraging.
However, continued slowdown in demand from quick service restaurants in the Americas region remain a concern. Unfavorable currency and higher input costs also remain headwinds.
Currently, McCormick has a Zacks Rank #3 (Hold). Better-ranked stocks in the space include Cal-Maine Foods, Inc. CALM , Omega Protein Corp. OME and Flower Foods, Inc. FLO . While Cal-Maine Foods and Omega Protein sport a Zacks Rank #1 (Strong Buy), Flower Foods carries a Zacks Rank #2 (Buy).
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