McCormick & Co. Inc. (MKC) delivered third quarter fiscal 2013 earnings of 78 cents per share, in line with the Zacks Consensus Estimate. Earnings also met the company’s expectation and were flat year over year. Higher operating income and lower share count were largely offset by a tax rate increase in the quarter.
Revenues and Profits
Total revenue in the quarter lagged the Zacks Consensus Estimate of $1.042 billion. However, it grew 4% year over year to $1.016 billion, primarily driven by the sales of Wuhan Asia-Pacific Condiments Co. Ltd. (“WAPC”) (acquired in May 2013), which offset lower industrial sales in the Americas region.
The consumer business in the Americas region also suffered in the early part of the third quarter, but improved later during the quarter. Revenues benefited from the shift of sales from the fourth quarter into the third due to positive response to its U.S. holiday display program and early purchases apprehending a price increase.
McCormick’s sales industrial segment sales were pressurized due to the sluggish demand from quick service restaurants, primarily in U.S. and Asia. In the U.S., quick service restaurant demand was soft due to focus on menu items not flavored by McCormick, while in Asia demand was adversely impacted by bird flu concerns in China. However, sales of snack seasonings and other flavors grew in the quarter.
Consolidated operating income improved 3% to $148 million as top-line growth and cost savings from McCormick's Comprehensive Continuous Improvement (‘CCI’) program more than offset the retirement benefit costs and increase in brand marketing expenses.
Consumer Business: Segment revenues increased 8% to $612.4 million, driven by WAPC acquisition and shift in sales. Sales increased in all three geographic regions of Americas, Europe, Middle East and Africa (:EMEA) and Asia/Pacific. However, on an organic basis, segment revenues declined 3% year over year due to sluggish sales in the Americas region.
Operating income of the segment climbed 9% to $118.7 million in the quarter as the favorable impact of higher sales and CCI cost savings more than offset the higher retirement benefit costs, increased material costs and increase in brand marketing support.
Industrial Business: Segment revenues declined 1% year over year to $404.0 million in the third quarter of fiscal 2013. However, sales remained flat on a local currency basis as lower volumes and product mix offset the slight improvement in pricing. Industrial sales in Americas and the EMEA region declined in the quarter but improved 1% in the Asia-Pacific region owing to some recovery in demand from quick service restaurants.
Operating income of this McCormick segment declined 15.9% to $29.7 million, primarily due to lower sales, an unfavorable business mix, higher input costs and the impact of increased retirement benefit expenses, partly offset by cost savings.
Fourth Quarter Guidance
McCormick expects its sales and adjusted earnings to increase approximately 7% for the fourth quarter fiscal 2013. The company continues to expect weakness in the industrial products, while it expects improvement in the consumer business in the fourth quarter.
McCormick expects tax rate to be 29% for the fourth quarter compared with its previous expectation of 29.5%.
Fiscal 2013 Guidance
On the basis of third quarter results and fourth quarter expectations, the company now expects its sales to increase at the lower end of the range of 4% to 6%. This guidance includes the impact of the WAPC acquisition.
The company expects to achieve at least $55 million in CCI cost savings during fiscal 2013. The company has lowered its adjusted operating income growth rate expectation to a range of 3% to 5%, compared with the previous expectation of a 5% to 7% increase.
Based on this outlook for operating income growth, McCormick now expects its fiscal 2013 earnings at the lower end of the guided range of $3.13 to $3.19 per share due to the slowdown in demand from quick service restaurants, primarily in the U.S and Asia.
McCormick currently holds a Zacks Rank #4 (Sell). Other specialty food companies which are better positioned and warrant a look include Green Mountain Coffee Roasters, Inc (GMCR), Pinnacle Foods Inc (PF), Boulder Brands Inc (BDBD). While Green Mountain and Pinnacle Foods carry a Zacks Rank #1 (Strong Buy), Boulder Brands holds a Zacks Rank #2 (Buy).