McCormick & Co. (MKC) Warns for Q3

McCormick & Company, Incorporated (NYSE: MKC), a global leader in flavor, today announced preliminary financial results for the third quarter ended August 31, 2022 and updated its financial outlook for fiscal year 2022.

Preliminary Third Quarter 2022 Results

• Sales are expected to increase by approximately 3% in the third quarter from the year-ago period. In constant currency, sales are expected to increase by approximately 6% driven by growth in both the Consumer and Flavor Solutions segments. Both comparisons include an estimated 1% unfavorable impact from the divestiture of the Company's Kitchen Basics business.
• Operating income is expected to be approximately $223 million in the third quarter compared to $265 million in the year-ago period. Adjusted operating income is expected to be approximately $226 million compared to $272 million in the third quarter of 2021.
• Earnings per share is expected to be approximately $0.79 in the third quarter, comparable to the year-ago period. Adjusted earnings per share is expected to be approximately $0.65 as compared to $0.80 in the year-ago period. (*** consensus is $0.83)
• For fiscal year 2022, McCormick updated its sales, operating income, and earnings per share outlook.

Chairman and CEO's Remarks

Lawrence E. Kurzius, Chairman and CEO, stated, "Our third quarter sales were a record and while strong fell short of our own expectations. Our results were led by the continued growth momentum of our Flavor Solutions segment. We divested our Kitchen Basics business during the quarter which impacted our Consumer segment growth. Growth in the Consumer segment was also tempered by the moderation of elevated consumption trends that we anticipated in the second half of the year, which occurred earlier than expected. Broad pressure on consumers' cost of living from inflation has resulted in higher price elasticity than expected, although still below historical levels. We are increasing our brand marketing investments in our updated outlook and are focusing its messaging on value, which we are confident, combined with our innovation behind price pack architecture and category management initiatives, will continue to drive growth. Cooking at home remains higher than pre-pandemic levels, reinforcing our expectation that the shift in consumer demand to at-home-consumption will be sustained.

"During the third quarter, supply chain challenges continued, and supply recovery of certain constrained materials has taken longer than expected. We also continued to incur elevated costs to meet high demand in some parts of our business, while in other parts of our business, where demand has moderated, we are experiencing lower operating leverage. Across the supply chain, managing inventory levels and eliminating inefficiencies have been a focus. Overall, the normalization of our supply chain costs is taking longer than expected, pressuring gross margin. Over the coming months, we will be aggressively driving the elimination of supply chain inefficiencies.

"We remain confident that we are well positioned for the long term and will successfully navigate this dynamic global environment with our strong global portfolio and proven track record of execution."

Preliminary Third Quarter 2022 Results

Third quarter sales are expected to increase approximately 3% from the year-ago period, including an expected approximate 3% unfavorable impact from currency. Sales growth is expected to be driven by pricing actions the Company has realized, partially offset by a decline in volume and product mix, including the impact of the Kitchen Basics divestiture.

Third quarter sales are expected to grow at a constant currency three-year compounded annual growth rate of approximately 7% for the total Company off of a pre-pandemic baseline of 2019 showing the sustained momentum in the business across both the Consumer and Flavor Solutions segments.

Operating income is expected to be approximately $223 million in the third quarter of 2022 compared to $265 million in the third quarter of 2021. Excluding special charges, as well as transaction and integration expenses, adjusted operating income is expected to be approximately $226 million compared to $272 million in the year-ago period. This decline is a result of gross margin compression, primarily in our Flavor Solutions segment, with higher brand marketing investments also contributing.

Earnings per share is expected to be approximately $0.79 in the third quarter of 2022, which is comparable to the third quarter of 2021. The net favorable impact of the gain on the sale of the Kitchen Basics business, special charges and transaction and integration expenses is expected to increase earnings per share by approximately $0.14 in the third quarter of 2022. Special charges and transaction and integration expenses lowered earnings per share by approximately $0.01 in the third quarter of 2021. Excluding these impacts, adjusted earnings per share is expected to be approximately $0.65 in the third quarter of 2022 compared to $0.80 in the year-ago period. This expected decrease is projected to primarily be driven by lower adjusted operating income.

The Company has not yet completed its quarterly financial close process for the third fiscal quarter of 2022. This update does not present all necessary information for an understanding of McCormick's financial condition as of the date of this release, or its results of operations for the third quarter. As McCormick completes its quarterly financial close process and finalizes its financial statements for the quarter, it will be required to make significant judgments in a number of areas. It is possible that the Company may identify items that require adjustments to the preliminary financial information set forth above and those changes could be material. The Company intends to provide its full financial results for the third quarter on October 6, 2022. Until that time, the preliminary results described in this press release are estimates and remain subject to change based on management's ongoing review of results of the quarter and completion of its quarterly financial close process.

Fiscal Year 2022 Financial Outlook

For fiscal year 2022, McCormick updated its financial outlook to reflect its preliminary third quarter results, moderation of consumption trends earlier than expected, slower supply chain cost normalization, the divestiture of the Kitchen Basics business, and a more unfavorable impact of foreign currency rates.

The Company expects foreign currency rates in 2022 to unfavorably impact net sales by 3%, as compared to 2% in its previous financial outlook, and continues to expect adjusted operating income and adjusted earnings per share to be impacted unfavorably by 2%.

The Company expects 2022 sales to range from comparable to 2021 to an increase of 2%, which in constant currency is sales growth of 3% to 5%. These comparisons include an unfavorable impact from the divestiture of the Company's Kitchen Basics business. The Company previously expected to grow sales 3% to 5%, or 5% to 7% in constant currency.

McCormick is projecting 2022 gross profit margin to be 330 to 280 basis points lower than 2021. In 2021, $11 million of special charges and transaction and integration expenses lowered the Company's gross margin. Excluding this impact, the Company is projecting 2022 gross profit margin to be 350 to 300 basis points lower than 2021, primarily driven by the Company's Flavor Solutions segment. This projection includes the Company's reaffirmation of its previous expectation of an increase in cost inflation in the high teens.

Operating income in 2022 is expected to decline 10% to 8% from $1.02 billion in 2021. The Company expects approximately $46 million of special charges in 2022 that relate to previously approved organization and streamlining actions as well as integration expenses related to the FONA acquisition of approximately $2 million in 2022. Excluding the impact of special charges and transaction and integration expenses in 2022 and 2021, the Company projects adjusted operating income to decline 13% to 11%, which in constant currency is 11% to 9%. The revised guidance is driven by the updated sales and adjusted gross margin outlooks as well as a higher level of brand marketing investments, which is now projected to be a low single digit increase compared to 2021. The Company's projection also includes reaffirmation of its previous expectation of approximately $85 million of cost savings led by the Company's Comprehensive Continuous Improvement (CCI) program. The Company previously expected adjusted operating income to range from comparable to an increase of 2%, or 2% to 4% in constant currency.

McCormick projects earnings per share to be in the range of $2.64 to $2.69, compared to $2.80 in 2021. The Company expects the net favorable impact of the gain on the sale of the Kitchen Basics business, special charges and transaction and integration expenses to increase earnings per share by approximately $0.01 in 2022. Excluding these impacts, the Company projects 2022 adjusted earnings per share to be in the range of $2.63 to $2.68, as compared to previously reported guidance of $3.03 to $3.08 and adjusted earnings per share of $3.05 in 2021. The revised guidance is driven by the updated adjusted operating income outlook and includes an approximate $0.02 unfavorable impact from the divestiture of the Kitchen Basics business.

McCormick will report its full third quarter 2022 financial results and conduct a related conference call and webcast on Thursday, October 6, 2022, at 8:00 a.m. Eastern Time.

Non-GAAP Financial Measures

The tables below include financial measures of adjusted operating income, adjusted operating income margin, and adjusted diluted earnings per share. These represent non-GAAP financial measures which are prepared as a complement to our financial results prepared in accordance with United States generally accepted accounting principles. These financial measures exclude the impact, as applicable, of the following:

Special charges – In our consolidated income statement, we include a separate line item captioned "Special charges" in arriving at our consolidated operating income. Special charges consist of expenses associated with certain actions undertaken by the Company to reduce fixed costs, simplify or improve processes, and improve our competitiveness and are of such significance in terms of both up-front costs and organizational/structural impact to require advance approval by our Management Committee. Upon presentation of any such proposed action (including details with respect to estimated costs, which generally consist principally of employee severance and related benefits, together with ancillary costs associated with the action that may include a non-cash component or a component which relates to inventory adjustments that are included in cost of goods sold; impacted employees or operations; expected timing; and expected savings) to the Management Committee and the Committee's advance approval, expenses associated with the approved action are classified as special charges upon recognition and monitored on an ongoing basis through completion.

Transaction and integration expenses associated with the Cholula and FONA acquisitions – We exclude certain costs associated with our acquisitions of Cholula and FONA in November and December 2020, respectively, and their subsequent integration into the Company. Such costs, which we refer to as "Transaction and integration expenses", include transaction costs associated with each acquisition, as well as integration costs following the respective acquisition, including the impact of the acquisition date fair value adjustment for inventories, together with the impact of discrete tax items, if any, directly related to each acquisition.

Income from sale of unconsolidated operations – We exclude the gain realized upon our sale of an unconsolidated operation that occurred during the second quarter of fiscal 2021. The sale of our 26% interest in Eastern Condiments Private Ltd resulted in a gain of $13.4 million, net of tax of $5.7 million. The gain is included in Income from unconsolidated operations in our consolidated income statement for the year ended November 30, 2021.

Gain on sale of Kitchen Basics - We exclude the expected gain realized upon our sale of the Kitchen Basics business in August 2022. For the three months ended August 31, 2022, we expect a gain, after tax, associated with the sale of approximately $40 million.

We believe that these non-GAAP financial measures are important. The exclusion of the items noted above provides additional information that enables enhanced comparisons to prior periods and, accordingly, facilitates the development of future projections and earnings growth prospects. This information is also used by management to measure the profitability of our ongoing operations and analyze our business performance and trends.

These non-GAAP financial measures may be considered in addition to results prepared in accordance with GAAP, but they should not be considered a substitute for, or superior to, GAAP results. In addition, these non-GAAP financial measures may not be comparable to similarly titled measures of other companies because other companies may not calculate them in the same manner that we do. We intend to continue to provide these non-GAAP financial measures as part of our future earnings discussions and, therefore, the inclusion of these non-GAAP financial measures will provide consistency in our financial reporting. A reconciliation of these non-GAAP financial measures to the related GAAP financial measures is provided below (expected amounts for the three months ended August 31, 2022):

Because we are a multi-national company, we are subject to variability of our reported U.S. dollar results due to changes in foreign currency exchange rates. Those changes have been volatile over the past several years. The exclusion of the effects of foreign currency exchange, or what we refer to as amounts expressed "on a constant currency basis", is a non-GAAP measure. We believe that this non-GAAP measure provides additional information that enables enhanced comparison to prior periods excluding the translation effects of changes in rates of foreign currency exchange and provides additional insight into the underlying performance of our operations located outside of the U.S. It should be noted that our presentation herein of amounts and percentage changes on a constant currency basis does not exclude the impact of foreign currency transaction gains and losses (that is, the impact of transactions denominated in other than the local currency of any of our subsidiaries in their local currency reported results).

Percentage changes in sales expressed on a constant currency basis are presented excluding the impact of foreign currency exchange. To present this information for historical periods, current period results for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the corresponding period of the comparative year, rather than at the actual average exchange rates in effect during the current fiscal year. As a result, the foreign currency impact is equal to the expected current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current fiscal period and the corresponding period of the comparative year. The following provides our expected increase in sales for the third quarter of 2022.

To present "constant currency" information for the fiscal year 2022 projection, projected sales and adjusted operating income for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the company's budgeted exchange rates for 2022 and are compared to the 2021 results, translated into U.S. dollars using the same 2022 budgeted exchange rates, rather than at the average actual exchange rates in effect during fiscal year 2021.

The following provides a reconciliation of our estimated earnings per share to adjusted earnings per share for 2022 and actual results for 2021:

Live Webcast

As previously announced, McCormick will be participating in the Barclays Global Consumer Staples Conference on September 8, 2022, at 11:15 a.m. Eastern Time. Representing McCormick will be Lawrence Kurzius, Chairman & CEO; Brendan Foley, President & COO; and Mike Smith, Executive Vice President & CFO. A live audio webcast of the session will be available on the McCormick website ir.mccormick.com. If you are unable to listen to the live webcast, the event will be archived on ir.mccormick.com.

As a reminder, McCormick is scheduled to conduct a conference call and webcast of its third quarter 2022 financial results on October 6, 2022, at 8:00 a.m. Eastern Time. Lawrence Kurzius, Chairman & CEO; Mike Smith, Executive Vice President & CFO; Brendan Foley, President & COO; and Kasey Jenkins, Chief Strategy Officer & Senior Vice President, Investor Relations will be hosting the call.

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