Check out the latest McCormick earnings call transcript.
McCormick (MKC 0.65%) is famous for spicing up kitchens across the world, in millions of homes and in a large number of commercial food operations. Its flavorings dominate supermarket aisles because of its combination of well-known proprietary brands and the store-brand products it often provides to grocery chains.
Coming into Thursday's fourth-quarter financial report, McCormick investors wanted to see continued strong growth and good prospects for the coming year after a 2018 with extremely strong stock performance. The spice maker was able to deliver reasonably good financial results, but they fell short in a couple of areas, and the company's outlook for 2019 left some investors with a bad taste in their mouths.
Dealing with a spice slowdown
McCormick's fourth-quarter results closed a record year for the company, but they included slower growth rates than the spice maker enjoyed for most of the year. Sales climbed just 1% to $1.50 billion, and that was quite a bit below the $1.55 billion that most of those following the stock were expecting. Similarly, net income growth of 22%, to $214 million, was fairly strong. But after accounting for one-time items, adjusted earnings of $1.67 per share fell short of the consensus figure among investors for $1.70.
In explaining the numbers, McCormick mentioned a number of factors. Currency impacts hurt sales slightly, costing the company a percentage point of top-line growth. It also mentioned that retailers throughout the Americas region made trade inventory reductions, spurring sluggish sales performance. Moreover, the company finally lapped the acquisition of the Frank's and French's brands in the summer of 2017, taking away its incremental boost to sales.
McCormick's segments performed similarly to each other. The consumer segment saw revenue climb less than 1%, and adjusted operating income eased lower by 3% from the year-ago period. Flat sales performance in the Americas and Europe held back 4% growth in the Asia/Pacific region, and an unfavorable sales mix that included fewer high-margin holiday-related products weighed on operating profit. McCormick also cited higher marketing and freight costs that hurt its bottom line. Meanwhile, the flavor solutions segment also saw relatively flat sales and a nearly 3% drop in adjusted operating income, with quick-service restaurant customers driving modest revenue growth in the Americas, but weakness in Europe and the Asia/Pacific region hurting McCormick.
CEO Lawrence Kurzius focused his attention on strong full-year results for fiscal 2018. "In 2018, we delivered another year of record financial results," Kurzius said, "through the successful execution of our strategies, including the completion of the Frank's and French's integration, and the engagement of your employees around the world." The CEO noted that cost savings from its efficiency enhancement program have also been instrumental in boosting profits over the course of the year.
Why McCormick could keep slowing down
McCormick remains optimistic. As Kurzius put it, "In 2019, we expect to deliver another strong year while continuing to make targeted investments and fuel our growth to build the McCormick of the future."
However, investors will have to get used to the idea that growth rates will weaken markedly from what they've seen recently. McCormick projected that sales will grow at just a 1% to 3% rate in 2019, hurt by about two percentage points of unfavorable impacts from currency rates. The company did note that all of this will be organic growth, with no possible future acquisitions included in the projections. New products, marketing, distribution, and some price increases should help top-line growth, but guidance for fiscal 2019 adjusted earnings of $5.17 to $5.27 per share will represent gains of just 4% to 6%, versus 2018's final results. That fell short of the $5.40 per share forecast among investors.
Despite the company's expectations of using ample cash flow to reduce debt and pay dividends, McCormick investors weren't pleased with the downbeat forecasts, and the stock fell 9% in pre-market trading following the announcement. Some will argue that McCormick needs to look for more acquisitions to spice up its numbers for 2019, and that might prove essential in order to keep the disappointment among shareholders from lasting well into the new year.