Investors got their first look at McCormick's (NYSE:MKC) 2019 outlook this past week -- and they reacted by sending shares lower on concerns that growth is slowing. The spice and flavorings specialist did, after all, see its expansion pace decline between the third and fourth quarters.
CEO Lawrence Kurzius and his team aren't worried about broader demand trends, though, and they see the next year of results meeting their ambitious long-term targets on both the top and bottom lines. In a conference call with investors, the executives explained their rationale for that enduring optimism.
Let's take a look at the highlights from that chat.
Wrapping up a good year
In 2018, we delivered double-digit sales, operating profit and earnings-per-share growth. We expanded operating margin while also making significant investments to drive continued growth. We delivered substantial cost savings in our seventh consecutive year of record cash flow. -- Kurzius
The fiscal year included major operating and financial wins, powered mainly by the integration of the French's and Frank's condiment franchises. That $4 billion acquisition met management's first-year sales and profit goals and helped significantly lift sales, earnings, and profitability. McCormick's core spice and flavorings portfolio also expanded, rising 3% to outpace the broader packaged foods industry.
The company achieved important successes behind the scenes, too, by cutting costs and improving efficiency so that margins and cash flow both hit record highs.
About that shortfall
We're seeing accelerated consumption trends driven by strong marketing and merchandising as well as new distribution. -- Kurzius
The fourth quarter was by far McCormick's weakest of the year, with sales growth slowing to just 2% from 4% in prior quarters. And those gains were entirely driven by price increases as volume held flat. Gross profit margin inched higher, but at a slower pace.
Executives said the problem came from a major U.S. retailer's decision to pare back on inventory in the period, which pressured shipment volumes and also drove out-of-stock situations on some holiday-season spices and flavorings. The customer could be Wal-Mart, which accounted for 11% of McCormick's sales last year. In any case, management said they're working with that customer to get inventory levels back up.
In the meantime, wider demand trends are still healthy. Customer sell-through rose about 3% in the fourth quarter, they estimate, compared to the 2% sales growth McCormick actually posted.
Looking to 2019 and beyond
We are well-positioned for another year of solid performance with our broad and advantaged flavor portfolio, effective growth strategies and focus on profit realization. -- CFO Mike Smith
Investors seemed surprised by McCormick's 2019 outlook, which called for sales growth to fall to 2% from 13% last year and for earnings gains to worsen. Nothing in the latest update constitutes a downgrade in the company's operating trends, though, management explained. Sales growth after accounting for currency exchange shifts and the impact of acquisitions should hold up at about the same 3% as last year. Profitability is expected to rise again, too, even though one-time events like tax expense shifts will temporarily crimp results in 2019.
On an apples-to-apples basis, executives say 2019's results should fit right within management's long-term target of achieving annual sales growth of between 4% and 6% as earnings expand by around 10%.
McCormick might trail its sales target slightly in 2019 as it outperforms that profit goal. The record cash flow it expects should allow it to quickly pay down debt, just as it did last year, so that it can reach its leverage target by 2020. At that time, the company will have more flexibility to look for other major acquisitions while also resuming the stock repurchase plan it halted after the French's and Frank's buyout.