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McCormick Beats on Q4 Earnings, Misses Revs

Zacks Equity Research

McCormick & Co. Inc. (MKC) delivered fourth quarter 2013 adjusted earnings of $1.20 per share, beating the Zacks Consensus Estimate by a penny. Earnings increased 8% from the year-ago earnings of $1.11 per share. Higher adjusted operating income, lower interest expense and lower share count contributed to earnings in the quarter.

Revenues and Profits

Total revenue in the quarter was $1.17 billion, which lagged the Zacks Consensus Estimate of $1.215 billion, due to weak demand from quick service restaurants in the Americas region. However, it grew 2% year over year from $1.146 billion, primarily driven by favorable pricing and sales of Wuhan Asia-Pacific Condiments Co. Ltd. (:WAPC) (acquired in May 2013). The acquisition of WAPC contributed 3% to net sales.

Both the consumer and industrial business segments witnessed positive results in the quarter. However, these increases were largely offset by a shift of $30 million of consumer business sales from the fourth quarter into the third quarter owing to a positive response to its U.S. holiday display program and early purchases apprehending a price increase. Net sales increased 3% on a local currency basis.

Adjusted operating income improved 7% to $214 million as top-line growth, cost savings from McCormick's Comprehensive Continuous Improvement (‘CCI’) program and a favorable mix of business more than offset retirement benefit costs, increased material costs and increase in brand marketing expenses.

Full Year 2013 Results

For 2013, McCormick posted adjusted earnings of $3.13 per share, in-line with the Zacks Consensus Estimate and the lower end of the company guided range of $3.13 to $3.19 per share. Earnings increased 3% from the year-ago figure of $3.04 per share attributable to higher adjusted operating income, increased income from unconsolidated operations and lower share count.

Total revenue missed the Zacks Consensus Estimate of $4.171 billion but increased 3% year over year to $4.123 billion in fiscal 2013. About half of the increase in sales in 2013 was driven by the WAPC acquisition.

The company also has a strong product innovation program, which along with favorable pricing contributes to higher sales. In 2013, the percentage of sales in emerging markets reached 15% compared with 10% in 2011. However, it did not meet the company’s expectation of sales growth at the lower end of the range of 4% to 6%.

Segment Details

Consumer Business: Segment revenues increased 3% to $764.9 million, driven by WAPC acquisition and positive pricing and offset by a shift in sales. Sales increased in all three geographic regions of Americas, Europe, Middle East and Africa (:EMEA) and Asia/Pacific, particularly in China.

Adjusted operating income of the segment was $178.4 million, slightly higher than $177.2 million in the prior-quarter, as the favorable impact of higher sales and CCI cost savings more than offset the higher retirement benefit costs and increased material costs.

Industrial Business: Segment revenues grew 1% year over year to $405.2 million in the fourth quarter of 2013. Sales increased 3% on a local currency basis owing to higher volumes and favorable product mix. In the industrial business, higher sales were led by the EMEA and Asia/Pacific regions.  A slight decline in the Americas could be attributed to a period of weak demand from quick service restaurants.

Adjusted operating income of this segment shot up 57% in the quarter, much higher than a decline of 15.9% in the third quarter of 2013. The upside was driven by higher sales, favorable business mix and CCI cost savings, offset in part by higher retirement benefit costs and increased material costs.

Fiscal 2014 Guidance

McCormick is very optimistic on its consumer business, as it expects growing demand for flavor in the coming years. As per Euromonitor International, global retail sales of herbs and spices and recipe mixes will increase at a compound annual growth rate of 2% to 3% through 2016.

The company expects to benefit from this growth through innovation, brand marketing and acquisitions. The company also expects to increase industrial sales through innovation and expanded distribution.

For full year 2014, McCormick expects its sales to increase in the range of 3% to 5%, driven by higher volume, pricing and the incremental impact of the WAPC acquisition in the first half of the year. The company expects to achieve at least $45 million in CCI cost savings during 2014. The company projected adjusted operating income growth rate in the range of 6% to 8%.

Based on this outlook for operating income growth, McCormick expects 2014 earnings in the range of $3.22 to $3.29, an increase of 3% to 5% from adjusted earnings per share of $3.13 in 2013.  This includes the unfavorable impact of a significant increase in 2014 tax rate when compared to 2013.

First Quarter 2014 Guidance

For the first quarter, the company expects earnings per share to be 57 cents, same as it was in the first quarter of 2013.

McCormick currently holds a Zacks Rank #4 (Sell). Better-ranked stocks in the consumer staples sector include Post Holdings Inc. (POST), J&J Snack Foods Corp. (JJSF) and Green Mountain Coffee Roasters Inc (GMCR). While Post Holdings and J&J Snack Foods hold a Zacks Rank #1 (Strong Buy), Green Mountain carries a Zacks Rank #2 (Buy).

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