McCormick (MKC 3.47%) recently announced solid second-quarter results that bucked the negative trend that most peers in the packaged foods industry have endured. Sales growth trends accelerated from the prior quarter, and profitability jumped as the company reaped benefits from having a bigger condiment portfolio to match healthy demand for its core spice and flavorings products.
In a conference call with Wall Street analysts, executives offered details about that second-quarter performance while explaining why they're confident they'll hit their broader goals for the year. Below are a few highlights from that discussion.
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Grabbing market share
We are pleased with our progress so far and with the results from the Frank's and French's portfolio. With the acquisition integration complete, we are excited about the impact we're having on these brands and the growth plans we are continuing to successfully execute against. -- CEO Lawrence Kurzius
By logging higher pricing, increased sales volumes, and a shift toward more expensive products in its flavoring lineup, McCormick's robust sales trends allowed it to stand out against industry peers. By far the single biggest contributor to these gains was the addition of the Frank's and French's condiment portfolio. However, McCormick managed modest gains in its core spice and flavorings divisions. Its new hot sauce and mustard products, meanwhile, benefited from the company's greater distribution and marketing support. "We're excited about the impact we're having on these brands," Kurzius explained.
Boosting profitability
We're achieving the margin accretion we expected from the Frank's and French's portfolio. Equally as important, we're driving significant margin expansion in our core business led by [cost cuts] as well as the shift in our portfolio to more value-added product. -- Kurzius
Most consumer-packaged foods rivals are posting declining margins these days, but McCormick's profitability is headed in the other direction. Gross profitability expanded by 3 full percentage-points, in fact, mainly thanks to the shift toward higher-priced condiments in the newly acquired portfolio.
The company also held the line on expenses, with savings from its cost-cutting program fully offsetting a slight uptick in distribution costs. Overall, adjusted operating income spiked higher by 51% to $208 million.
MKC Operating Margin (TTM) data by YCharts.
Looking further out
Flavor continues to be an advantaged, global category, which, combined with our execution against effective strategies, will drive strong results as we go through the year. We are balancing our resources and efforts to drive sales with our work to lower costs to build fuel for growth and higher margins. -- Kurzius
Investors can expect the final two quarters of the fiscal year to look a lot like the first half that just closed. Specifically, McCormick is projecting sales growth of between 13% and 15%, with most of that gain coming from the new Frank's and French's business, while the core portfolio posts modestly higher sales volumes and prices.
McCormick boosted its outlook for cost savings but also projected slightly higher marketing spending to support its brands over the next six months. Altogether, these shifts leave the company right on track to increase adjusted earnings per share by between 14% and 16% this year to between $4.85 and $4.95.
In summarizing the latest results, CFO Mike Smith said, "the strength of both our core business and our Frank's and French's portfolio is evident." Contributions from these two areas should help McCormick reach its aggressive sales and profitability growth targets this year while giving executives the funds they need to quickly pay down the $4 billion of new debt that management took on with the condiment portfolio acquisition.
