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McCormick Reports Third Quarter Results and Provides Latest 2015 Financial Outlook

SPARKS, Md., Oct. 1, 2015 /PRNewswire/ -- McCormick & Company, Incorporated (NYSE: MKC), a global leader in flavor, today reported financial results for the third quarter ended August 31, 2015 and provided its latest outlook for fiscal year 2015.

  • Sales rose 2% in the third quarter of 2015 from the year-ago period. Excluding the unfavorable impact of foreign currency, the company grew sales 7% in constant currency with strong increases in both business segments.
  • Earnings per share was $0.76 in the third quarter of 2015. Excluding the impact of special charges, adjusted earnings per share was $0.85. As anticipated by the company, this was a decline from the year-ago period due primarily to a lower tax rate in the third quarter of 2014. In the third quarter of 2015, adjusted earnings per share was also unfavorably impacted by a decline in profit from the Kohinoor business and the effect of a recent decline in the Mexican peso on the company's income from unconsolidated operations.
  • Based on strong year-to-date sales growth and momentum heading into the fourth quarter, the company guided to the upper end of its 4% to 6% projected constant currency sales growth range for fiscal year 2015. Based largely on the third quarter profit result and expected currency impact, the company projects adjusted earnings per share at the lower end of its $3.47 to $3.54 guidance range.

Chairman's Remarks

Alan D. Wilson, Chairman and CEO, commented, 'McCormick's third quarter and year-to-date 2015 financial results reflect the effectiveness of our growth strategies and engagement of our employees. Through the third quarter we have grown sales 6% in constant currency. Both our consumer and industrial businesses are delivering mid-single digit constant currency sales increases, driven by innovation, effective brand marketing support, expanded distribution and customer intimacy. In addition to this strong growth in our base business, we have completed three acquisitions that are excellent additions to our global portfolio of flavors.

'Our year-to-date sales performance and momentum have us tracking toward the upper end of our 2015 constant currency sales target. However, we have a more conservative view of our 2015 profit outlook mainly as a result of declines in the Mexican peso and in profit from our Kohinoor business in India, where actions are underway to exit certain low margin product lines and focus on current and new higher margin products. Excluding these factors, strength in our underlying business is being driven not only by higher sales, but also with significant cost savings. We stepped-up our cost reduction activity this year and with employee engagement across functions and around the world, we now expect to achieve $95 million in cost savings, ahead of our initial goal and up more than a third from the record level set in 2014. We are using a portion of these funds as our fuel for growth and we now plan to increase our 2015 brand marketing at a high single digit rate from a year-ago. Our business also generates strong cash flow and we have a balanced use of cash year-to-date, with similar amounts invested in the business through acquisitions and returned to shareholders through dividends and share repurchases.'

Third Quarter 2015 Results

McCormick reported a 2% sales increase in the third quarter from the year-ago period, and in constant currency, grew sales 7%. In constant currency, consumer business sales rose 7% due to increased volume and product mix driven by product innovation, brand marketing support and expanded distribution, as well as the impact of acquisitions completed in 2015. The increase was broad-based with growth in each region, including the U.S. market where actions have been underway to improve performance. In constant currency, industrial business sales grew 8% both from higher volume and product mix, pricing actions to offset higher material costs and an acquisition completed in 2015. The rate of constant currency sales growth continues to be particularly strong in the Europe, Middle East and Africa (EMEA) region, driven by innovation, increased distribution and geographic expansion. Also, improved demand from quick service restaurants in China has continued in 2015, following weak results in the second half of 2014.

Operating income was $139 million in the third quarter compared to $157 million in the year-ago period. Excluding special charges, adjusted operating income was $154 million compared to $160 million of adjusted operating income in the year-ago period. In constant currency, adjusted operating income rose 1%, with the favorable impact of higher sales and cost savings more than offsetting higher material input costs and increased benefit expenses, as well as a $3 million decline in profit from the Kohinoor business from the year-ago period.

The company recorded $15 million of special charges in the third quarter of 2015. Related to previously announced streamlining actions in North America and EMEA, the company recorded $2 million of special charges. The remaining special charges related to the company's majority owned Kohinoor business, purchased in 2011. In the third quarter of 2015, the company approved a plan for this business to discontinue the sale of certain lower margin basmati rice product lines and focus on higher-margin items. This led to the determination of a $10 million non-cash impairment charge to reduce the value of the Kohinoor brand name. In addition, a $3 million special charge was recorded in cost of goods sold, which represents an inventory write-down directly related to the decision to discontinue the sale of those lower margin basmati rice product lines. The $3 million special charge included in cost of good sold, along with a $2 million year-on-year decline in gross profit prior to that special charge, lowered gross profit margin by 0.5 percentage points in the third quarter.

Earnings per share was $0.76 in the third quarter compared to $0.94 in the year-ago period. Excluding the $0.09 impact of special charges in the third quarter of 2015, adjusted earnings per share was $0.85 compared to $0.95 adjusted earnings per share in the third quarter of 2014, which excluded $0.01 of special charges. Third quarter 2015 adjusted earnings per share declined $0.10 from the year ago period, mainly due to a higher tax rate and the decline in adjusted operating income. This rate of decline was consistent with the guidance previously provided by McCormick. The most significant impact on earnings per share was the tax rate, which was 30% in the third quarter of 2015 compared to 21% in the third quarter of 2014, when the rate was favorably impacted by discrete tax items. For the fourth quarter of 2015, the company continues to expect a tax rate of approximately 29%.

The company continues to generate strong cash flow and net cash provided by operating activities for the first three quarters of the fiscal year was $317 million in 2015 compared to $276 million in 2014.

2015 Financial Outlook

Based on McCormick's strong year-to-date sales growth, the completion of three acquisitions and a positive fourth quarter outlook, fiscal year 2015 sales are expected to grow at the upper end of its 4% to 6% guidance range in constant currency. The company anticipates that currency will lower this fiscal year sales growth range by 5 percentage points based on prevailing rates.

In constant currency, the company now expects to increase 2015 adjusted operating income at the lower end of its 6% to 7% guidance range, from adjusted operating income of $608 million in 2014. This more conservative view is due in part to weak Kohinoor results. The company has increased its expected 2015 cost savings to at least $95 million and has also raised its planned brand marketing support to a high single-digit year-on-year increase. On a reported basis, operating income is expected to decline at the lower end of a 7% to 8% range, from operating income of $603 million in 2014. This range includes the impact of an estimated $65 million of special charges and an estimated 4 percentage point impact from currency.

Based on this current projection for operating income and the impact of the recent decline in the Mexico peso on McCormick's income from unconsolidated operations, the company now expects to report earnings per share at the lower end of its $3.11 to $3.18 guidance range. Excluding the estimated impact of $0.36 from special charges, adjusted earnings per share is expected to be at the lower end of the company's $3.47 to $3.54 guidance range. On a constant currency basis, this is a growth rate of at least 7% from 2014 adjusted earnings per share of $3.37. Another year of strong cash flow is anticipated in 2015, with a portion returned to McCormick's shareholders through dividends and share repurchases.

Business Segment Results


Consumer Business


(in millions)


Three months ended


Nine months ended



8/31/2015


8/31/2014


8/31/2015


8/31/2014

Net sales


$

630.5



$

621.9



$

1,850.6



$

1,852.2


Operating income


99.9



121.1



237.3



301.3


Operating income, excluding special
charges


114.6



122.1



286.9



302.3


Consumer business sales rose 1% when compared to the third quarter of 2014. In constant currency, the company grew sales 7%, due in part to increased volume and product mix. In addition, acquisitions completed in 2015 added 3 percentage points of the year-on-year growth in the third quarter.

  • Consumer sales in the Americas rose 2%. In constant currency, the increase was 3% and due to higher volume and product mix, and pricing actions taken to offset the impact of higher material costs. The higher volume and product mix this period included increased U.S. sales of McCormick recipe mixes and Grill Mates, as well as Kitchen Basics stock products and Zatarain's items. The company is also having success in Latin America with the regional expansion of McCormick brand products.
  • Consumer sales in EMEA declined 1%, although in constant currency the company grew sales 18%. Sales from Drogheria & Alimentari, acquired mid-2015, added 11 percentage points of the increase. Also contributing to sales growth this quarter were increased volume and product mix in Poland, France, U.K. and Russia, driven in part by a significant increase in brand marketing support...

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