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McCormick divests broth business as Q3 earnings dip

October 8, 2022
Consumer Packaged Goods

As McCormick & Co. worked to steady its footing in the third quarter, earnings dipped despite aggressive pricing actions and the divestiture of its Kitchen Basics line of ready-to-use stocks and broths. Last quarter, the food and flavor company’s earnings took a hit amid COVID-19 related lockdowns in China.

McCormick executives discussed third-quarter financial results on Oct. 6 in a conference call with industry analysts. Lawrence Kurzius, chief executive officer of McCormick, said the company’s pricing measures have matched pace with inflation and now the focus is on increasing capacity in the United States and UK for the Flavor Solutions segment.

“Inflation is a reality, and our pricing has caught up with it,” Mr. Kurzius said. “We’re seeing that come through in the margins now.

“And from a cost perspective, as we responded to demand volatility over the past several years, we have incurred additional costs above inflation to service our customers and have seen inefficiencies develop in our supply chain.

“These are costs we have absorbed. We have not passed on to customers on our pricing actions. We are targeting to eliminate at least $100 million of these costs with a significant benefit in 2023.”

Net income in the quarter ended Aug. 31 was $222.9 million, up 5% from $212.4 million in the third quarter of 2021. Adjusted net income was $187.6 million, down 14% from $216.9 million in the year-ago quarter.

Earnings per share were 82¢ in the third quarter, up 4% from 79¢ in the year-ago period. Adjusted earnings per share were 69¢ in the third quarter, down 14% from 80¢ in the year-ago period. The decrease in adjusted earnings was driven by lower adjusted operating income, McCormick said. The net favorable impact of the gain on the sale of the Kitchen Basics business and special charges increased earnings per share by 13¢ in the quarter.

Third-quarter net sales for the company overall reached $1.6 billion, up 3% from $1.55 billion in the year-ago quarter. Adjusting for inflation, sales increased 6%, including a 1% unfavorable impact from the divestiture of the Kitchen Basics business.

Mr. Kurzius said McCormick is “moving aggressively” to eliminate inefficiencies and to normalize inventory levels.

“Some of our actions include investing to increase both manufacturing capacity and reliability in bottleneck areas to enable better customer service and repatriation of production from excessive use of co-packers,” he said. “We’re returning to more normal ship schedules and reducing our spend on expensive surge capacity. We are already seeing the benefit of lower overtime and temporary labor reductions.”

In the Consumer segment, net sales in the third quarter were nearly flat at $927.9 million, compared with $921.9 million a year ago. Segment results included a 1% unfavorable impact from the Kitchen Basics divestiture. Growth was driven by the Americas and Asia/Pacific regions with pricing actions increasing sales in all three regions, the company said.

In the Flavor Solutions segment net sales were $667.7 million, up 6% from $627.5 million in the year-ago quarter. Sales were driven by pricing actions, according to the company.

Mr. Kurzius said some of the challenges in the Flavor Solutions segment were related to capacity constraints.

“We could have sold more,” he said. “We could have had higher volumes … more capacity will help, but the demand is very strong.”

McCormick is investing in additional Flavor Solutions seasoning capacity, which is expected to be online in early 2023, Mr. Kurzius said.

“We’re expanding our footprint to support our flavor growth,” he said. “We recently opened our new U.K. Peterborough Flavor Solutions manufacturing facility to support our strong growth momentum with quick-service restaurants. And just earlier this week, the first pallet was shipped from our new Maryland logistics center.”

Updating guidance for the fiscal year, the company said it projects 2022 adjusted earnings per share to be in the range of $2.63 to $2.68 compared with adjusted earnings per share of $3.05 in 2021. This projection includes a 2¢ unfavorable impact from the divestiture of the Kitchen Basics business.

By Lisa Berry


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