McCormick & Company Inc. (MKC - Free Report) posted solid second-quarter fiscal 2018 results, with earnings and revenues outpacing the Zacks Consensus Estimate, and improving year over year. The quarterly performance gained from the company’s effective product strategies leading to growth in the consumer business and flavor solutions segments.
The company’s shares are up 2.4% in the pre-market trading session. However, the Zacks Rank #4 (Sell) stock has declined almost 0.4% in the past three months against the industry’s growth of 2.3%.
Coming back to results, adjusted earnings of $1.02 per share beat the Zacks Consensus Estimate of 93 cents. Adjusted earnings were 24% higher year over year, owing to increased adjusted operating income and favorable impacts of currency rates.
Revenues & Profits
In the quarter under review, McCormick, the global leader in flavors and spices, generated revenues of approximately $1,327.3 million, exceeding the Zacks Consensus Estimate of $1,315 million. Revenues grew about 19% from the prior-year quarter, including a favorable 3% impact from currency. Encouragingly, the acquisition of Frank’s and French’s brand drove sales by 13%. On a constant currency basis, sales grew 16%.
Gross profits in the second quarter surged 29.4% to $575.2 million. Gross margin came at 43.3%, expanding 340 basis points (bps) from the prior- year quarter’s figure, primarily gaining from the company’s shift to more value-added products, including Frank’s and French’s portfolio and savings from the CCI program.
Adjusted operating income grew 51.8% to $208 million in the quarter under review. On a constant currency basis, operating income increased 48%.
McCormick & Company, Incorporated Price, Consensus and EPS Surprise
Consumer Business: Revenues grew 20% to $785.4 million. On a constant currency basis, sales improved almost 16%, primarily driven by growth in the Americas, the EMEA and the Asia/Pacific regions.
Sales in the Americas, on a constant currency basis, was mainly driven by strong pricing actions and favorable impacts of volume/mix. On a constant currency basis, sales in the EMEA region also gained from growth in Frank's and French's, while sales in the Asia/Pacific region were driven by growth in China.
Adjusted operating income in the consumer business segment grew 39.6% at constant currency, buoyed by increased sales, cost savings and favorable mix, which more than offset the negative impact of higher freight and brand marketing expenses.
Flavor Solutions: Sales in the segment grew 18% from the prior-year quarter to $541.9 million. On a constant currency basis, sales increased 15% on improved performance in the Americas and the EMEA regions.
Sales in the Americas on a constant currency basis gained from higher sales of flavors and continued growth momentum in branded foodservice. Sales in the EMEA region were partly driven by Frank's and French's brands. It was also backed by the impact from a global realignment of a major customer's sales from the Americas, partially offset by lower pricing. Sales in the Asia/Pacific region declined, due to the exit of lower margin business and lower pricing.
Adjusted operating income at the flavor solutions segment surged 64% year over year on a constant currency basis, driven by favorable impact of higher sales, product mix and savings initiatives.
McCormick exited the quarter with cash and cash equivalent of $202.6 million, long-term debt of $4,456.2 million and shareholders’ equity of $3,040.3 million.
During the quarter, net cash provided by operating activities were $234.9 million, up 32.6% from $177.2 million in the prior-year quarter. The rise stemmed from net income growth.
Fiscal 2018 Guidance
Management is pleased with the company’s second-quarter performance with strong results in the company’s consumer business and flavor solutions segments. Acquisitions as well as enhanced sales of the company’s seasonings and flavor brands aided performance across geographical regions. Moreover, the company is on track with its cost-savings initiatives under its CCI program and plans to achieve a target of $105 million in fiscal 2018.
That said, the company expects sales to grow approximately 13-15% in fiscal 2018 from the previous projection of an increase of 12-14%. The raised view takes into consideration favorable impacts of 2 percentage points from currency fluctuations. Further, management expects sales during the fiscal year to gain from acquisitions, new products, expanded distribution network and brand marketing.
Earnings for fiscal 2018 are expected in the range of $4.85-$4.95, reflecting considerable growth from the previous band of $4.80-$4.90 per share. The revised guidance depicts a growth of 14-16% from the prior-year quarter’s adjusted earnings of $4.26. This includes an expected positive impact of nearly one percentage point from currency fluctuations. Favorable currency impacts are projected during the first half of the fiscal. Also, the company anticipates strong cash flow for 2018.
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