Get ready for some flavor-filled fun, my spice-savvy friends! McCormick & Company, a leading producer of spices, herbs, and flavorings, recently held its Q4 2022 earnings call. The earnings call was packed with exciting insights about the flavor giant’s performance.
From surprising sales growth to unexpected challenges, So sit back, grab a pinch of your favorite seasoning, and get ready to discover the top 6 most notable takeaways from the McCormick Q4 2022 earnings call.
Performance
- For the fourth quarter, sales declined 2% from the year-ago period and, in constant currency, sales increased 2%.
- Earnings per share was $0.69 in the fourth quarter as compared to $0.73 in the year-ago period. Adjusted earnings per share was $0.73 as compared to $0.84 in the year-ago period.
- For fiscal year 2022, sales increased 1% from the prior year and, in constant currency, sales grew 3%. Earnings per share was $2.52 as compared to $2.80 in 2021. Adjusted earnings per share was $2.53 as compared to $3.05 in 2021.
- For fiscal year 2023, McCormick expects to increase year-on-year sales by 5% to 7%. The Company expects to grow operating income by 10% to 12%. Adjusted operating income is expected to increase 9% to 11%.
The performance of the Consumer segment showed mixed results in the past quarter
A combination of factors impacted sales performance, such as exits from certain businesses and disruptions caused by COVID-19 in China. However, the company boasts a 5% CAGR growth in annual sales over the past three years, primarily driven by the Americas region.
In the Americas, higher shipments during the fourth quarter of 2022 due to restocking impacted the sales growth rate, which was estimated to have been unfavorably affected by 6%. Excluding this impact, the underlying volume performance was stronger in the fourth quarter compared to the second and third quarters. The company reported a 6% growth in the consumption of its branded portfolio in the US, driven by strong consumer spending during the holiday season. Furthermore, the company performed the strongest in the fourth quarter of the year in spices and seasonings and gained market share in recipe mixes, hot sauce, and mustard.
In the EMEA region, the fourth quarter of the year saw the strongest sales growth, driven by effective pricing, new product launches, and strong consumer momentum. The company also gained market share in the UK and Eastern Europe for herbs, spices, and seasonings but saw a weaker performance in France.
In the Asia/Pacific region, growth was hindered by the exit of low-margin businesses in India and COVID-related disruptions in China. Although the company expects continued disruptions in the first quarter of 2023, a recovery is expected after the Chinese New Year. Despite the short-term pressure, the company remains optimistic about its long-term growth trajectory in China.
Management predicts robust growth in their Flavor Solutions segment for 2023, primarily due to increased pricing.
Management will implement a significant portion of these price changes in this segment, as certain contract windows have opened up, and they see an opportunity to adjust prices.
It’s worth noting that inflation in the Flavor Solutions segment is higher compared to the Consumer segment, meaning that the pricing changes will be heavily skewed towards this division. The Flavor Solutions portfolio is quite diverse and includes branded food service, where they have reportedly gained a substantial market share in North America. The unit growth in this area has been robust throughout the pandemic and continues through 2022 with no end in sight. However, they have been facing capacity constraints and have some significant new capacity coming online in the second quarter, providing additional space for their flavor production.
Question and Answer
Alexia Howard with Bernstein asked about the share dynamics in the U.S. for the herbs and spices market based on Nielsen data. The data showed that the company is still losing market share, which is believed to be due to smaller brands. Alexia asked when the company expects to turn the corner and the dynamics behind the market share loss.
McCormick COO Brendan Foley responded by remarking on the company’s fourth-quarter performance. He said the company saw sequential improvement across the McCormick portfolio and Consumers in the U.S., including herbs and spices. The fourth quarter was their best quarter of the year, with sequential sales, unit, and volume improvement. Despite this positive momentum, Brendan acknowledged that they had seen a market share decline, but they expect to improve it in 2023. However, he mentioned that they do not project what their market share will be in the future. Brendan also said they would provide more information about their plans and opportunities at CAGNY.
CEO Lawrence Kurzius added that they gained a share in hot sauce and mustard during the fourth quarter and had strong share growth in recipe mixes for the fifth consecutive quarter. In international markets, they also gained a share in herbs and spices. He said that the share loss in the U.S. is due to TDP losses earlier in the year and that they expect to win some of those TDPs back in 2023.
Andrew Lazar with Barclays asked about the operating profit guidance for the fiscal year 2023, which is 9% to 11%, and is concerned about whether the guidance is aggressive, given the dynamic operating environment.
Lawrence Kurzius responded by saying that the guidance is balanced, not aggressive and that they have a high degree of confidence in it. The strong consumer demand is the foundation of the operating profit, and they have strong growth programs in herbs and spices that they will share at the CAGNY conference. Lawrence also mentioned that they have confidence in their ability to realize cost savings, which more than offset the cost of incentive comp. They also expect to cover this year’s cost inflation and recover all the costs from the past two years of their pricing actions early in the year.
Kenneth Goldman with JPMorgan asked if sales growth in 2023 will be driven primarily by pricing and if the company expects volumes to be positive.
Lawrence responded by saying that the company is aware of the moderation of elasticity as they have gone through the year and expects a similar environment to carry forward in 2023. He mentioned that consumers would be under pressure in 2023 due to economic conditions, but the company is considering this in its marketing programs and innovation launches. Sales growth will be driven primarily by pricing in 2023, but volumes are expected to be pretty much flat, although there will be variation by region. Some of the overall volume growth is expected to come from a recovery in China after the impact of COVID-19.