Innovation brewing at McCormick

by Monica Watrous
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Craft beer's popularity inspired a new seasoning blend from McCormick.

SPARKS, MD. — What goes better with a burger than beer? Ahead of grilling season, new launches from McCormick & Co. include a seasoning blend inspired by Blue Moon Belgian-style ale. The item, created to leverage the popularity of craft beer, is among a pipeline of products developed to regain share in the spices and seasonings category.

“In the U.S. we continue to gain share of recipe mixes, while in spices and seasonings we still see robust category growth, but we still have some work to do in this market,” said Alan Wilson, chairman and chief executive officer, during a March 24 earnings call with financial analysts. “Our key initiatives in North America are innovation, building brand equity and category leadership at retail.”

For the first quarter ended Feb. 28, McCormick’s net income slipped 15% to $70.5 million, equal to 55c per share on the common stock, from $82.5 million, or 62c per share, in the prior-year period. Excluding special charges, adjusted earnings per share increased 13% to 70c from 62c in the first quarter of fiscal 2014.

Net sales increased 1.7% to $1,010.4 million from $993.4 million in the comparable quarter. Excluding the impact of unfavorable currency rates, sales grew 6% in constant currency.

“Our first-quarter results have us off to a great start in 2015,” Mr. Wilson said. “I am encouraged by our strong innovation pipeline, our brand building activity and aggressive cost reduction efforts.”

Also slated to debut this year from McCormick are new varieties of Old Bay and Lawry’s marinades, gluten-free recipe mixes and Zatarain’s rice mixes. Additionally, the company is introducing its restaged Gourmet line of seasoning mixes, now with flavor-seal technology and updated packaging.

Operating income for the company’s consumer business segment fell 23% to $72.3 million for the quarter. Excluding special charges, operating income dipped to $92 million from $94 million in the year-ago period, as sales growth and cost savings offset higher material costs, increased retirement benefit expense and product mix. The first quarter included a $1 million increase in brand marketing expense and $1 million in acquisition-related transaction costs.

Consumer business sales rose 1% to $620.3 million. In the Americas region, sales climbed 4% driven by higher volume of recipe mixes and Grill Mates brand products.

In the industrial business segment, operating income dropped 29% to $21.4 million but remained flat excluding special charges. Adjusted operating income in constant currency rose 5%, benefitting from higher sales and cost savings that more than offset higher material costs and increased retirement benefit expense.

Industrial sales increased 3% to $390.1 million, driven by higher volume and product mix as well as pricing actions taken in response to higher material costs. In the Americas, industrial sales increased 3% on strong customer demand and innovation for snack seasonings as well as higher sales of branded food service products in the United States.

“These increases more than offset weak sales to quick-service restaurants that has extended into 2015 in the Americas,” Mr. Wilson said.

Looking ahead, McCormick has reaffirmed its fiscal 2015 targets for sales growth in constant currency of 4% to 6%, adjusted operating income growth of 6% to 7%, and adjusted earnings per share of $3.44 to $3.51, up 6% to 8% on a constant currency basis from 2014 adjusted earnings per share of $3.37. The company anticipates further currency volatility and has increased its estimate of special charges. Additionally, McCormick expects to generate cost reduction savings of at least $85 million for the year, which, along with pricing actions, is expected to help offset higher material costs.

In February, McCormick acquired Drogheria & Alimentari (D&A), a privately held spices and seasonings company based in Italy, for approximately €85 million ($97 million). The purchase price consists of a cash payment of approximately €50 million and a potential earn out payment in 2018 of up to €35 million based upon the performance of the business.

“As a supplier of both brand and private label products this business is a spice and seasoning leader in Italy with approximately one-third of the category share,” Mr. Wilson said. “In addition, its products are exported to 60 other countries. We anticipate strong growth of this premium brand, particularly in the U.S. and key international markets where consumers are seeking unique and authentic ethnic flavors.”

In early March, McCormick acquired flavor supplier Brand Aromatics for $63 million.

“With Brand Aromatics we expand our breadth of flavor solutions to value-added natural savory flavors, marinades and broth and stock concentrates,” Mr. Wilson said. “Beyond these recent announcements we're actively pursuing a strong pipeline of other acquisition opportunities. We have added resources across our business to support this activity.”
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