|SPARKS, Md., Jan. 24, 2013 /PRNewswire/ — McCormick & Company, Incorporated (NYSE: MKC), a global leader in flavor, today reported financial results for the fourth quarter and fiscal year 2012. In addition, the company provided a 2013 outlook for strong sales growth and earnings per share of $3.15 to $3.23.
Alan D. Wilson, Chairman, President and CEO, commented, “Employees throughout McCormick made strong progress in 2012 with our initiatives to grow sales, improve productivity and generate cash. We met our objectives for both sales growth and earnings per share in 2012, despite a challenging economic environment.
“Sales grew 9%, reaching $4 billion for the first time in our history, up from $2 billion 10 years ago and $1 billion 25 years ago. We had a number of noteworthy accomplishments in 2012. We launched more than 250 new branded items globally and expanded our innovation facilities and capabilities in five countries. We invested nearly $200 million in brand marketing support, twice what we spent in 2005. Including the impact of acquisitions completed in 2011, we took our percentage of sales in emerging markets to 14% in 2012, up from 10% in 2011. Cost savings from our Comprehensive Continuous Improvement program – CCI – reached $56 million. Higher sales and our CCI program led to a 7% increase in operating income and a 9% increase in earnings per share, which also included the benefit of a lower tax rate. With higher profits, as well as improved working capital we generated a record cash flow in 2012. We returned $297 million of cash to shareholders through dividends and share repurchases, bringing the cumulative five-year total to nearly $1 billion. In November 2012, McCormick’s Board approved a 10% increase in the dividend, our 27th consecutive annual increase.
“In the fourth quarter, we had strong sales growth in our Europe, Middle East and Africa region, and a double-digit increase in sales of our consumer products in China. We also had a significant increase in profit from our joint ventures and a favorable tax rate. These areas of strength were offset in part by the unfavorable impact of retailer buying patterns and temporary supply chain disruptions in the Americas region, and lower demand from industrial customers in the Asia/Pacific region. In the Americas, we do not expect any further impact from the fourth quarter supply chain disruptions, and expect the fluctuations in retailer buying patterns, which related largely to past pricing actions, to ease as we head into a period of more moderate material cost inflation.
“Consumer demand for flavor continues to grow. The spice and seasoning category is growing at rates from 3% to 8% in our major markets, and our brand leadership, product innovation and marketing programs have us well-positioned to meet this demand. As we look ahead to 2013, our growth initiatives are expected to drive a strong increase in sales. While we expect higher sales and CCI cost savings to drive underlying profit growth at a double-digit rate, we expect this growth to be impacted by year-on-year increases in our retirement benefit costs and tax rate. Importantly, we do not regard the headwinds from these increases as an impediment to achieving our long-term growth outlook in 2014 and beyond.”
Fiscal Year 2012 Results
The company grew sales 9% for the full year. In local currency the increase was 10%, which was in line with the company’s 2012 objective of 9% to 11% sales growth in local currency. This increase was led by higher pricing and from acquisitions completed in 2011, as well as growth in volume and product mix.
Operating income rose 7% to $578 million in 2012, largely as a result of higher sales. During 2012, the company was able to offset the dollar impact of increased material costs with both pricing and CCI cost savings. CCI cost savings reached $56 million, significantly exceeding an initial target of “at least $40 million.” The company continued to invest in brand marketing support with an increase of $11 million, supplemented with higher spending behind price promotions and coupons. The increase in operating income was also impacted by a $9 million increase in 2012 retirement benefit expenses, as well as the favorable impact of $11 million of acquisition related transaction costs recorded in 2011. The 2012 increase in operating income of 7% was below the company’s initial expectation to grow 9% to 11%, largely due to the mix of sales across businesses, particularly in the fourth quarter.
Earnings per share for the fiscal year was $3.04, within the company’s target range for 2012. Earnings per share rose $0.25 from $2.79 in 2011, with $0.20 from higher operating income and $0.10 from a favorable tax rate, offset by $0.03 in lower income from unconsolidated operations and $0.02 from higher interest expense. The favorable tax rate was primarily the result of a repatriation of cash from foreign subsidiaries, which led to increased foreign tax credits in the U.S.
The Company reported $455 million in net cash flow from operating activities in 2012, a significant increase from $340 million in 2011. Factors behind this increase included higher net income and a minimal increase in inventory compared to a significant increase in 2011, when inventory rose mainly due to higher costs, strategic inventory purchases and acquisitions. The Company returned to its target debt level with an $80 million reduction during 2012. In addition, the Company returned $297 million of cash to shareholders through dividends and share repurchases, a 25% increase from $238 million in 2011.
Fourth Quarter 2012 Results
McCormick’s fourth quarter sales rose 3%, and in local currency the increase was 4% when compared to the year-ago period. Pricing actions taken in response to higher material costs contributed 3% to sales growth, while acquisitions completed late in 2011 added 1%. Volume and product mix was comparable to the fourth quarter of 2011, but varied by region. The increase in volume and product mix was strong in the Europe, Middle East and Africa (EMEA) region and in the Asia/Pacific consumer business, but offset by a modest decline in the Americas region and a reduction in the Asia/Pacific industrial business.
Operating income rose $8 million in the fourth quarter of 2012. In the fourth quarter of 2011, the company recorded $7 million in acquisition related transaction costs. Excluding this impact, operating income in the fourth quarter of 2012 increased slightly from the year ago period. Unfavorable mix of business affected this result as sales growth was strongest in markets with less scale and lower margin. In addition, the company recorded a $4 million charge due to a supplier product quality issue. In 2013, the company expects to recover a portion of this amount through insurance claims.
Fourth quarter earnings per share rose to $1.11 from $0.98 in the year ago quarter with $0.05 of the increase due to higher operating income, $0.06 from a favorable tax rate and $0.02 from an increase in income from unconsolidated operations. The favorable tax rate was the result of the geographic mix of earnings across businesses, as well as a repatriation of cash from foreign subsidiaries, which led to increased foreign tax credits in the U.S.
2013 Financial Outlook
With increased consumer demand for flavor and effective growth strategies, McCormick expects to grow sales, generate CCI cost savings, invest in brand marketing support and deliver solid profit results in 2013, even in a global economic environment that continues to be difficult.
Sales are projected to grow 3% to 5% in local currency, due primarily to higher volume and product mix. The company has a robust pipeline of new products for 2013, that includes new varieties of seasonings blends, grilling products, dessert items and authentic ethnic meals. Plans for increased digital marketing activity and other brand support are designed to build consumer awareness and drive volume. At this time, the impact of pricing and currency on 2013 sales are expected to be minimal, and there is no impact from acquisitions in the company’s guidance. The rate of sales growth in the first quarter of 2013 is likely to be below the expected growth rate for the fiscal year. This is largely due to a difficult year-ago comparison for the industrial business, which grew volume and product mix 10% in the first quarter of 2012.
As the company progresses through the year, material cost inflation is expected to moderate to about 3% in 2013, compared to a high single-digit increase in 2012. The company anticipates that this increase will be offset in part by at least $45 million of cost savings from its CCI program. However, a lower interest rate environment has led to an estimated increase of $22 million in 2013 retirement benefit expense. In total, operating income is expected to grow 6% to 8%. The tax rate in 2012 is expected to be 29.5%, a significant increase from 26.6% in 2012 which included the favorable impact of cash repatriation.
Earnings per share is expected to be in a range of $3.15 to $3.23, an increase of 4% to 6% from 2012 earnings per share of $3.04. Included in this projection is the year-on-year increase in the tax rate and retirement benefit expenses, which are expected to reduce earnings per share $0.23 and lower the growth rate by 8 percentage points. Excluding these factors, higher sales and CCI cost savings are expected to drive a double-digit underlying increase in earnings per share for the fiscal year. As a result of a difficult year-on-year sales comparison for the industrial business and greater pressure from material costs, earnings per share in the first quarter of 2013 is expected to be comparable to the year-ago period, when the company reported $0.55 earnings per share. In fiscal year 2013, the company expects higher profit to lead to another year of strong cash flow. The company plans to update its 2013 fiscal year financial outlook upon the completion of the previously announced agreement to acquire Wuhan Asia-Pacific Condiments Co. Ltd., which is expected to occur in mid-2013.
Fourth quarter consumer business sales grew 3% when compared to the fourth quarter of 2011. In local currency, sales grew 4% with acquisitions completed in 2011 accounting for about half of the increase. The remaining increase was due to pricing actions, taken primarily in 2011 to offset the impact of higher material costs. Higher volume and product mix in EMEA and the Asia/Pacific regions offset a decline in the Americas.
For the fourth quarter, operating income for the consumer business rose $13 million driven in part by the sales growth and CCI cost savings. Also, in the fourth quarter of 2011, the company recorded $7 million in acquisition related transaction costs.
Industrial business sales grew 4% when compared to the fourth quarter of 2011, as a result of pricing actions taken in response to increased material costs. The impact of currency was minimal.
While industrial business operating income rose 9% for the fiscal year, it declined $5 million in the fourth quarter, primarily due to a $4 million charge related to a supplier quality issue. In 2013, the company expects to recover a portion of this amount. Also, in the fourth quarter of 2012, the mix of business between regions had an unfavorable impact to operating income versus the year-ago period.