McCormick (MKC +1.99%) just wrapped up the first half of its fiscal 2019 in strong fashion. The spice and flavorings giant notched higher profitability and sales growth that, while modest, still outpaced the broader packaged foods industry.
In a conference call with Wall Street analysts, and in a presentation to investors in conjunction with that call, CEO Lawrence Kurzius and his team went into more detail about the latest results and the reasons for their optimism regarding improving trends through the next six months. Below, we'll look at some highlights from those comments by McCormick's management.
1. Meeting expectations
Image source: McCormick investor presentation.
Sales grew 3% for the total company, with both [consumer and flavor solutions] segments growing sales in each of our three regions. This growth was attributable to higher volume and product mix as well as pricing and was entirely organic driven.
-- Kurzius
McCormick's expansion pace fell slightly when compared to the prior quarter and landed at the low end of management's target range for the year. Its 3% boost was held back by a slow start to grilling season, executives explained, which led to market share losses in some key niches, tempered by strong product launches elsewhere in the portfolio.
Looking deeper into the results reveals healthy demand trends, with volume rising 2.1% overall and pricing inching higher by 0.7%. That balanced growth is a key reason management is still confident that the company will hit its full-year targets.
2. Higher profits
bps = basis points. Image source: McCormick investor presentation.
We increased gross profit margin 30 basis points year-on-year driven by cost savings. Our selling, general and administrative expense as a percentage of net sales decreased by 50 basis points from the second quarter of 2018.
-- CFO Mike Smith
It has been more than a year since McCormick added the higher-margin French's and Frank's condiment brands to its portfolio. So the company isn't seeing nearly the same profit boost from the acquisition as in past quarters. Gross profit margin inched up by less than half of a percent compared to a 2.2-percentage-point boost in 2018. Adjusted operating margin rose by 0.8 percentage points to 16.5% of sales, thanks mainly to cost cuts.
Investors can expect profitability gains to be even more muted in the second half of the year because McCormick is planning to ramp up its marketing and advertising spending around the key fall and holiday selling seasons.
3. A tale of two halves
1H = first half (of fiscal 2019). 2H = second half. Image source: McCormick.
As we enter the second and most significant half of our year, we are confident in our growth trajectory and that we are well positioned to deliver strong results in 2019.
-- Kurzius
McCormick affirmed its sales outlook, which implies that revenue gains will speed up over the next six months. That expected rebound is courtesy of a few timing choices that executives made that should combine to make the second half of fiscal 2019 look much stronger than the first half did. These include tilting marketing spending and product releases toward the back half of the year around key holiday cooking periods.
As a result, the spice giant says the factors that pressured results this past quarter should turn into positives in fiscal Q3 and fiscal Q4. Investors can judge the accuracy of that prediction mainly by following organic sales growth in the months to come. Ideally, that metric will land at around 4% and include both volume and pricing gains to set McCormick up to return to its long-term 5% sales growth target by fiscal 2020.
