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McCormick Gets the Job Done in Q2

Demitrios Kalogeropoulos, The Motley Fool

McCormick's (NYSE: MKC) focus on the popular spices and flavorings niche has allowed it to grow at a healthy rate even as the consumer packaged goods industry stands still. Coming into its fiscal second-quarter announcement, investors were looking for more good news on this score, along with evidence that the spice giant's aggressive acquisition strategy is paying off.

McCormick delivered on those promises on Thursday in a quarterly report that kept it right on pace to meet management's full-year targets.

Here's a closer look at the second-quarter results: 

 Metric

Q2 2018

Q2 2017

Year-Over-Year Growth

Revenue

$1.3 billion

$1.1 billion

19%

Net income

$123 million

$100 million

23%

Earnings per share

$0.93

$0.79

18%

Data source: McCormick's financial filings. 

What happened this quarter?

Organic sales growth was modest, in keeping with recent trends. McCormick paired those slight gains with large revenue and profit increases tied to its 2017 acquisition of the RB Foods portfolio.

A man adds spices to a pan while cooking.

Image source: Getty Images.

The key highlights of the quarter:

  • Sales rose 16% after accounting for foreign currency shifts, which marked just a slight uptick from the prior quarter's 15% boost. Most of the increase came from the addition of the Frank's and French's condiment franchises. On an organic basis, McCormick managed 2% higher sales in its consumer segment and a 3% uptick in the flavorings division.
  • Gross profit margin jumped by 3.4 percentage points to 43.3% of sales. Profitability was aided by cost cuts and by the tilt in McCormick's sales trends toward those high-margin condiment sales.
  • The company booked an $8 million charge tied to integration efforts around its RB Foods acquisitions. Yet operating income still expanded at a nice clip, rising 44% to $192 million.
  • An increasing share count led to slightly slower growth in per-share earnings than in net income, but McCormick still expanded bottom-line profitability.
  • The company spent $389 million paying down its long-term debt, which now stands at $4.5 billion.

What management had to say

Executives were happy with the numbers, especially given the challenging sales environment. CEO Lawrence Kurzius said in a press release, "McCormick's strong second quarter and year-to-date results reflect the successful execution of our strategies."

"Both our consumer and flavor-solutions segments contributed to our sales growth of 16%," Kurzius said. "The solid growth from our core business and the performance of Frank's and French's were in line with our plans, and we are pleased with our momentum entering the second half of the year."

Looking forward

McCormick affirmed its full-year outlook, which calls for sales to rise between 11% and 13% after accounting for currency shifts. That prediction implies a significant slowdown for the second half of the year, given that revenue is up 19% over the past six months.

Cost-cutting should combine with benefits from the sales shift toward Frank's and French's branded condiments to deliver hefty profitability gains this year. That dynamic will be the main driver behind an expected 33% increase in operating income in 2018, up to about $934 million.

A significant portion of that extra income will be directed toward paying down the $4 billion in debt that McCormick took on to fund its RB Foods acquisition. Once debt declines to a more manageable level, investors can expect the company to resume its formerly aggressive pace of stock repurchasing.

 

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends McCormick. The Motley Fool has a disclosure policy.