Spice and seasonings company McCormick & Company (NYSE:MKC) is the very definition of a company buffeted by negative currency effects from a stronger U.S. dollar. As such, its fourth-quarter earnings, which were reported Thursday, need to be looked at in the context of currency conversion and judged on the basis of its underlying aims. In a nutshell, the results saw a return to form for the company and it appears on track with its long-term aims. Let's take a closer look.


McCormick & Company results: The raw numbers
Let's start by looking at the impact of currency on McCormick's sales figures by region. The consumer segment's higher sales and margin profile make it the key to McCormick's earnings. In fact, the segment generated 2.8 times the operating profit of McCormick's industrial operations in 2015.

As you can see below, McCormick's constant currency sales growth came in at 7.7%, ahead of the 7% recorded in the third quarter. To be fair, acquisitions played a part in both segments' revenue growth, but even excluding acquisition impact, total constant currency growth was 5%.


Constant Currency Sales Growth 

Currency Impact   As Reported Growth
Consumer Segment       
 Americas  3%  (1.6%) 1.4%
 EMEA 18.4%  (13%) 5.4%
 Asia-Pacific  1.2%  (7%) (5.8%)
Consumer Total 6% (4.5%) 1.5%
Industrial Segment      
 Americas  10.4%  (4.5%)  5.9%
 EMEA  14.3%  (12.8%)  1.5%
 Asia-Pacific  10.5%  (10.8%)  (0.3%)
 Industrial Total  11.2%  (7%)  4.2%
 Total net sales
 7.7%  (5.3%)  2.4%


Similarly, operating income was affected by currency movements. Reported adjusted operating income for the fourth quarter came in at $215 million, a 6% increase over the same period last year. However, on a constant currency basis it was ahead by 10%, despite increasing brand marketing by $9 million partly due to turning around ailing performance in its key U.S. consumer sales.

As such, management's guidance for full-year 2016 looks positive. Constant currency sales growth of 4% to 6% is expected with a combination of new products, pricing, and acquisitions contributing 1% to 2%. Sales are expected to grow 0% to 2% with unfavorable currency rates factored in. Moreover, adjusted operating income excluding foreign currency is expected to come in up 9% to 11%, compared to adjusted operating income growth of 5% to 7%

The underlying picture is clearly positive with decent sales growth and margin expansion.

What happened with McCormick this quarter
Highlights from the quarter:

  • There was continued progress turning around the previously underperforming U.S. consumer business.
  • Asia-Pacific consumer results were affected by a previously disclosed discontinuation of some lower-margin basmati rice products in India .
  • In the U.S., sales to quick-service restaurants showed "some improvement from prior periods."
  • China is the company's second-biggest market, with overall sales increasing 11% in local currency in 2015

 What management had to say
Incoming CEO Lawrence Kurzius lauded the turnaround in the U.S. consumer business in 2015 and highlighted the strong performance within McCormick's international consumer products. Kurzius also highlighted the 7% constant currency growth in  industrial sales.

Answering a question on the earnings call regarding the U.S. consumer business, outgoing CEO Alan Wilson claimed: "In many of the subcomponents of the category, we're clearly gaining share and with many of the individual customers, we're gaining share as well. So we think we turned the corner on the problem".

He went on to say that, after two years of addressing the "fundamental challenges" in the U.S. business, it was time to adjust pricing. "We've identified many areas where there are opportunities for us to adjust our pricing. The price increase that we've planned in our U.S. business has really been worked through at quite a granular level on an item-by-item basis."

Looking ahead
Moving into 2016, there are three key things McCormick will have to contend with: (1) the vagaries of currency movements, (2) successfully boosting prices in the U.S. consumer business, and (3) any impact on its business from macro-economic issues in China.