Seasoning and mixes manufacturer McCormick (MKC 126.42,
-3.47, -2.7%) pares opening losses on Thursday after the company lowered its
2018 revenue outlook due to a less favorable impact from currency.
All told, the third quarter results didn’t blow anyone away either. McCormick reported a modest beat on earnings of $1.28 with revenues which increased 13.5% to $1.35 bln but didn’t expand enough to satisfy high expectations.
Adjusted gross profit margin increased 280 basis points versus the year-ago period to 44.2%, while the company also made significant brand marketing investments during the quarter. This expansion was driven by CCI-led cost savings and McCormick’s shift in the portfolio to more value-added products, including the impact of Frank's and French's portfolios.
Incremental sales through mid-August from the acquired Frank's and French's brands added 10% to the sales increase. Consumer segment sales grew by 14% with minimal impact from currency. The incremental impact of Frank's and French's added 10% to the consumer segment with the remaining increase driven by the Americas and Asia/Pacific regions. Flavor solutions segment sales grew by 14%, with minimal impact from currency and 9% from the incremental impact Frank's and French's. The remaining sales increase was driven by the Americas and EMEA regions. In constant currency, the company grew sales 14%.
Q3 operating income increased about 38% to $233 mln driven by higher sales and gross margin expansion as well as decreases in special charges and in transaction and integration expenses from the RB Foods acquisition. Partially offsetting this increase was higher brand marketing and distribution expense. Brand marketing increased 36%, or $21 mln, in Q3 versus the year-ago period.
As to the guidance, McCormick updated its 2018 sales, operating income, and EPS outlook to reflect the strength of its year-to-date performance and growth momentum as well as a less favorable impact from foreign currency exchange rates on sales, adjusted operating profit, income from unconsolidated operations and adjusted EPS. The update also included a lower effective income tax rate and a higher impact from the net favorable non-recurring impact of the recent U.S. Tax Act.
Specifically, in 2018, McCormick expects to grow sales 12-14% compared to 2017, including only a one percentage point favorable impact from currency rates. This is a decrease from previous guidance of 13-15% which included a two percentage point favorable impact from currency rates.
Sales growth also includes the incremental impact of pricing from 2017 in addition to the expected impact of actions taken in 2018 to offset an anticipated low single digit increase in costs. The company has plans to achieve at least $105 million of cost savings and intends to use these savings to improve margins, fund an increase in brand marketing, and as a further offset to increased costs.
Additionally, excluding an anticipated favorable per share impact in 2018 of $2.08, consisting of the estimated net favorable non-recurring impact of the U.S. Tax Act, partially offset by the estimated effects of transaction and integration expenses related to RB Foods and of special charges, McCormick projects 2018 adjusted EPS to be in the range of $4.95-5.00. This is an increase from the previous guidance of $4.85-4.95 and reflects a reduction of the company's expected adjusted effective tax rate to approximately 21% for 2018, due to the year-to-date favorable impact of discrete items, principally a higher level of stock option exercises.
The updated guidance also reflects a lower favorable impact from currency. Year-to-date currency has been favorable with an unfavorable impact in the third quarter and the remainder of the year is also expected to be unfavorable.
MKC made six-week lows this morning following the results and guidance but has since found some support in the 50-day simple moving average (124.48). Even with today's losses, the stock is still up about 25% YTD vs the approximate 9.0% gains in the S&P 500.
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