McCormick (MKC -1.11%) recently treated investors to some good news about its operating trends. The spice and flavorings giant returned to faster growth in the first quarter of its new fiscal year, while profitability continued to expand.
The results kept McCormick right on pace to meet management's broad 2019 financial targets. These include more robust sales growth and profitability gains, two trends that are rare in the consumer foods industry these days.
CEO Lawrence Kurzius and his executive team explained in a conference call why they think they can continue outpacing peers in 2019 and beyond. Below are a few important slides that went along with that presentation to Wall Street analysts.
McCormick's 4% organic sales boost, compared to 2% in the prior quarter, was entirely driven by higher sales volumes and the shift toward pricier products like the newly purchased Frank's hot sauce line. The company saw market-share trends improve in its core spices and seasonings division, too, which supports the comments they made back in January describing healthy demand trends.
Operating income expanded at a faster pace than sales for two main reasons. The biggest was the impact of the move toward higher-margin products thanks to recent acquisitions and new introductions in the French's, McCormick, Zatarain's, and Frank's franchises. The bottom line also benefited from cost cuts so that adjusted operating margin inched up to 16.2% of sales from 15.8% last year.
Computers with taste
McCormick's partnership with artificial intelligence giant IBM might sound like mainly a marketing win at first blush, but management was clear about the many benefits they see for applying AI to their development process. Their new "one" platform, a set of single-dish meal recipe flavorings, is an early outgrowth of that technology, but there's plenty more to come.
"Our product developers are now able to explore flavor territories across the globe more quickly and efficiently," Kurzius told investors, "utilizing technology to extract key insights from millions of data points across sensory science, consumer preference, and flavor palette." Ideally, this process will help deliver more hits than misses within McCormick's aggressive product release calendar.
Staying on track
McCormick's results gave management the confidence to conclude that they're on the right track in predicting above-market growth rates in one of the consumer foods industry's most attractive niches. They still expect sales to rise by between 3% and 5% for the year, or just a touch below the long-term annual growth rate they've targeted of between 4% and 6%.
Earnings will continue rising at a faster pace thanks to the same factors that made McCormick more profitable this past quarter. In fact, new product introductions, cost cuts, and a shift toward acquired brands should combine to push adjusted operating income higher by 10% at the midpoint of guidance.
The positive implications of that outlook include market-share growth and plenty of cash flow that McCormick can direct toward paying down its debt. And, with those liabilities set to fall quickly over the next two years, the spice giant will be free to send more cash directly to shareholders through stock repurchases and higher dividends, while continuing to hunt for the next potentially game-changing acquisition.