The spicings, flavorings, and condiments niche has been a good one for McCormick (NYSE:MKC) lately. While other sectors of consumer packaged foods are struggling with flat growth and falling profitability, the spice giant has avoided both of those negative trends.
Its fiscal third-quarter results contained more positive news on both fronts, although sales gains slowed to the point that management was forced to reduce its 2019 revenue outlook. In a presentation to investors, CEO Lawrence Kurzius broke down the biggest trends affecting revenue and why the company still sees profitability rising yet again this year. Here are four highlights from that investor slide show.
1. Mixed results this quarter
Investors were looking for organic sales gains to speed up slightly from the 3% increase McCormick booked in the prior quarter. But growth slowed to 2% instead.
The consumer division accelerated as management hoped it would, thanks to more favorable grilling weather in the U.S. and a flood of new product introductions in all of McCormick's markets. Yet the flavor solutions division, which caters to food manufacturers and food-service customers, was flat overall and fell 2% in the U.S.
Management said a warehouse inventory transition pressured results, as did the timing of purchases by a few major customers. But global demand is still strong, it said.
2. Margin updates
Investors saw plenty of good financial news in this report. Gross profit margin rose to 40.6% of sales from 39.6% a year ago. And selling expenses fell as a percentage of sales due to the combination of cost cuts and a continued sales tilt toward high-margin products like French's and Frank's condiments. Overall, adjusted operating margin jumped to nearly 20% of sales from 18% last year, and that improvement allowed earnings to rise 14% even though revenue only ticked higher by 2%.
3. Cash updates
The financial wins extended to cash flow, which has improved to $495 million over the last nine months versus $389 million in the year-ago period. That success has given management plenty of resources for growing the business, and investors can expect to see more of these initiatives in the fourth quarter, especially around marketing and advertising.
McCormick is also using excess cash to pay down the debt it took on when it purchased the French's and Frank's brands in 2017. This aggressive pay-back pace has reduced leverage to below four times adjusted annual earnings, which means investors might expect to see a resumption of the stock repurchase program -- or more game-changing acquisitions as early as 2020.
4. The bottom line
Management reduced its growth outlook slightly to call for sales gains between 3% and 4% rather than the 3% to 5% range it issued in July. On the other hand, McCormick sees earnings rising at a faster clip -- nearly 10% -- after adjusting for currency exchange rates.
Achieving those results through the seasonally important fourth quarter would put the consumer staples specialist in a good position to accelerate sales toward its 5% long-term goal in 2020. With earnings expanding at a faster clip, shareholders might see more cash returns in the upcoming quarters, too.