McCormick (MKC +2.06%) has blazed its own path through the challenges facing the consumer foods industry. The spices and flavorings giant took on billions in new debt last year and suspended its stock buybacks -- all to fund a huge acquisition that management hoped would lay the groundwork for sustainable sales and profitability gains.
In its recently released fiscal third-quarter results, the company announced positive operating trends that met those broader goals. And in a conference call with investors following the report, CEO Lawrence Kurzius and his team explained why they have such a bright outlook for McCormick's portfolio of spices, flavorings, and condiments. Below are a few highlights from that discussion.
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Big-picture progress
Our momentum has continued into the third quarter and our core business sales growth has accelerated as planned.
-- CFO Mike Smith
Just as it has in each of the last few quarters, McCormick announced positive results across its three main growth avenues: its core brands, its acquired franchises, and its new product releases. The biggest contributor was the addition of the French's and Frank's condiment brands, which were responsible for 10 percentage points of the company's 14% increase in revenue. Yet executives were even happier to see that sales growth sped up in the core brands and in the U.S market, in particular.
Making effective moves
We drove growth in the [North American region], and we continued our momentum in China. In our flavor solutions segment, we continued winning with customers, driving base business and new product growth.
-- Kurzius
McCormick had a busy quarter full of initiatives aimed at faster growth, higher profitability, and increased market share. These moves included aggressive cost cuts, negotiations with retailing partners to allocate more shelf space to its products, and the introduction of new product sizes. Not every project was a runaway success, but together the initiatives boosted profit margin and sped up McCormick's expansion pace. "Our base business and new product growth accelerated from our first-half sales growth," Kurzius explained, "as we said we would in our June [conference] call."
Acquiring strong brands
Just a few weeks ago, we celebrated the one-year anniversary of the Frank's and French's brands joining our global flavor portfolio, and are thrilled with the impact we've had on these brands. We've created value, achieved synergies, and are obtaining results according to our acquisition plan. Importantly, we have achieved our year-one sales and earnings per share accretion expectations.
-- Kurzius
Investors had good reasons to be cautious about the $4 billion acquisition that McCormick closed just over a year ago. Such large mergers often come with surprising complications that get in the way of delivering the ambitious goals that management originally laid out.
However, this buyout is tracking better than executives had hoped. The hot sauce and mustard condiment products are helping push overall profit margins toward new highs, and the franchises are also benefiting from McCormick's larger distribution footprint. These successes suggest there's plenty of room for management to squeeze more synergies out of the pairing they've made by bringing condiments into their spice and flavoring empire.
Looking ahead
We're balancing our resources and efforts to drive sales with our work to lower costs to build fuel for growth and higher margins. We're differentiated by our growth platform and the results we've achieved. We have confidence in our updated 2018 outlook and are well-positioned to deliver another strong and differentiated year in 2018.
-- Kurzius
McCormick affirmed a full-year outlook that calls for sales to rise by about 13% while profits expand at a slightly faster pace. Initiatives for the coming quarters include new product releases, deeper distribution for both its core brands and the newly acquired franchises, and the company's first national advertising campaign in seven years.
These projects should help deliver healthy cash flow that the company can direct toward paying down its debt. In fact, management believes it can get its debt leverage down to three times adjusted earnings by 2020, compared to the five times multiple at the start of the year. Investors can expect McCormick to reinstate its stock buyback spending as it approaches that debt leverage target.
