The good news is spice-and-seasonings business McCormick & Company (NYSE:MKC) is achieving most of its objectives in 2015. The bad news is currency effects continue to erode its reported sales and profit generation. With this in mind, let's take a closer look at what is actually going on with its sales trends and earnings. The company reported Q2 results on July 1 and gave an updated 2015 outlook.
McCormick's second quarter earnings
At the time of its fourth-quarter results in January it became clear that McCormick's operational challenges for 2015 would be the following:
- Hitting management's target of 4%-6% local currency sales growth in 2015.
- Continuing to achieve growth, within highly competitive markets, by using innovation and brand investment.
- Dealing with increased competition within the U.S. consumer market.
- Managing areas of weak demand in its industrial business sales, particularly with quick-service restaurants, or QSR, in Asia.
Fast-forward to the second-quarter results and McCormick's management is achieving most of these objectives. For example, local currency sales growth came in at 5% and management subsequently confirmed its full-year target for 4%-6% growth.
Unfortunately, foreign currency headwinds meant that reported sales decreased 1% on a year-on-year basis. It's a similar story with operating income, whereby management reaffirmed its expectations for 6%-7% growth in adjusted operating income in 2015. No matter, its growth in constant currency is being achieved.
In order to see how McCormick is dealing with the segment-specific challenges discussed above, it's useful to break out effects of currency movements (principally a stronger U.S. dollar) on its sales growth.
|Constant Currency Net Sales Growth||As Reported Net Sales Growth|
As you can see above, currency movements (principally a stronger U.S. dollar) significantly reduced sales growth in every single business segment by geography.
The consumer segment generated $80.8 million in adjusted operating income in the quarter -- a near-6% decline from the same period last year, but comparable to last year's figure if adjusted for currency movements. The segment produced roughly two times the adjusted operating income of the industrial segment in the quarter and is the key to future prospects at McCormick.
Overall consumer sales fell 3% year on year, but rose 3% on a constant currency basis. As alluded to earlier, McCormick has had difficulties in the U.S. consumer segment -- a somewhat disappointing development given that the spices-and-seasonings market is growing well in the U.S. For example, on the earnings call, President Lawrence Kurzius claimed:
Consumer interest in flavor, simple and healthy ingredients, and cooking with fresh products continues to drive strong category growth for spices and seasonings as seen in the latest consumption data with category sales up 5% in the quarter.
But he also disclosed that U.S. consumer sales of McCormick brand spices and seasonings rose 1% in the quarter -- marking a turnaround from the "1% decline in the past 52 weeks."
A key part of the recovery is due to product innovation, and Kurzius went on to discuss a host of renovations and new product launches -- including things like stock cubes, slow-cooker sauces, and gluten-free recipe mixes -- due in the second half of the calendar year. In other words, McCormick's product-innovation plans are about to bear fruit.
The industrial segment's sales rose 1%, but adjusting for currency reveals a much more impressive 7% growth rate. The standout region is definitely EMEA, where management highlighted McCormick's increase in market share with QSR. Meanwhile, sales in the Americas region "are benefiting from an increase in consumer snacking, developing seasonings for snack bars, crackers, and chips and similar products," according to Kurzius on the conference call.
There was even some better news for the QSR segment in China, with Kurzius predicting an "outlook for continued improvement in the second half of 2015" for its industrial business in China.
Management expects adjusted full-year 2015 EPS to be $3.47 to $3.52 -- a $0.03 increase from a previous estimate but largely reflective of a lower tax rate. In addition, the affirmation of the target for 4%-6% full-year local currency sales increase is a sign that management feels confident in its plans.
Moreover, most of the operational objectives outlined in the bullet points above appear to be on the pathway to success. Now all the company needs is a little help from currency movements.