HUNT VALLEY, Md- McCormick & Company, Incorporated (NYSE:MKC), a global leader in flavor, today reported financial results for the second quarter ended May 31, 2022.

Sales declined 1% in the second quarter from the year-ago period and, in constant currency, sales were comparable to the year-ago period. Both comparisons reflect strong underlying sales growth offset by the impact of discrete items, including the impact of COVID-related lockdowns in China and the conflict in Ukraine.

Operating income was $157 million in the second quarter compared to $237 million in the year-ago period. Adjusted operating income was $174 million compared to $258 million in the second quarter of 2021.

Earnings per share was $0.44 in the second quarter as compared to $0.68 in the year-ago period. Adjusted earnings per share was $0.48 as compared to $0.69 in the year-ago period.

For fiscal year 2022, McCormick updated its sales, operating income, and earnings per share outlook.

Chairman and CEO's Remarks

Lawrence E. Kurzius, Chairman and CEO, stated, 'McCormick's long-term performance, including through the pandemic and other volatility, has been industry-leading and met or exceeded our financial objectives. We are currently navigating a challenging global environment including persistently high cost inflation and supply chain challenges, significant disruption in China from COVID-related lockdowns and the conflict in Ukraine. All these items intensified as our second quarter progressed and impacted our results. In addition, lapping trade inventory replenishments during last year's second quarter and the exit of low margin business impacted the comparisons to year-ago performance. The combination of these discrete items unfavorably impacted our sales comparison by 4%, with an impact on profit as well. Excluding these items, our sales performance reflects the strength of our broad global portfolio and the effective execution of our strategies, as well as our pricing actions.

'We anticipated the profit driven by sales growth in the second quarter would be more than offset by higher inflation and broad-based supply chain challenges, and the impact was greater than expected due to continuing cost escalation. We expect our pricing actions and other levers to begin to outpace cost pressures in the second half of this year and to fully offset the cost pressures over time. The strength of our business model, the value of our products and capabilities, and the successful execution of our long-term strategies give us confidence in our robust sales growth momentum and in our ability to successfully navigate the challenging dynamic global environment.

'We continue to capitalize on the long-term consumer trends that accelerated during the pandemic, including the sustained shift to cooking more at home, increased digital engagement, clean and flavorful eating, and trusted brands. Our alignment with these trends, in combination with the breadth and reach of our portfolio and our strategic investments provide a strong foundation for sustainable growth. The long-term fundamentals that drove our industry-leading historical performance remain strong and our experienced leaders are executing on our proven strategies while adapting to changes accordingly.

'I want to recognize McCormick employees around the world as they drive our momentum and success. With our vision to stand together for flavor and our relentless focus on growth, performance, and people, we are confident we are well positioned to deliver strong performance in 2022 and beyond while driving sustainable long-term value for our shareholders.'

Second Quarter 2022 Results

McCormick reported a 1% sales decline in the second quarter from the year-ago period, including a 1% unfavorable impact from currency. Constant currency sales were comparable to last year, reflecting 7% growth from pricing actions offset by a 7% decline in volume and product mix. The volume and product mix decline included a negative 4% impact related to discrete items including lapping last year's second quarter U.S. trade inventory replenishments, a disruption to China's consumer consumption this year due to COVID-related restrictions, the exit of low margin business in India and the conflict in Ukraine.

Comparisons to prior years remain difficult due to the dramatic shifts in consumer consumption between at-home and away-from-home experienced in the second quarter of the last two years. Using 2019 as a pre-pandemic baseline, second quarter sales have grown at a constant currency compounded annual growth rate (CAGR) of 6% for the total Company, reflecting 4% growth in the Consumer segment and 8% growth in the Flavor Solutions segment.

Higher material and transportation cost inflation, as well as unfavorable product mix, partially offset by pricing actions and cost savings led by the Company's Comprehensive Continuous Improvement (CCI) program, resulted in a decline in gross profit margin of 550 basis points. Operating income was $157 million in the second quarter of 2022 compared to $237 million in the second quarter of 2021. This decline was driven by gross margin compression and higher distribution expenses partially offset by the favorable impact of CCI-led cost savings and lower transaction and integration expenses. In the second quarter of 2022, the Company recognized $15 million of special charges versus $14 million in 2021 and $2 million of transaction and integration expenses related to the acquisitions of Cholula and FONA versus $7 million in 2021. Excluding special charges, as well as transaction and integration expenses, adjusted operating income was $174 million compared to $258 million in the year-ago period.

Earnings per share was $0.44 in the second quarter of 2022 compared to $0.68 in the second quarter of 2021. Special charges and integration expenses lowered earnings per share by $0.04 in the second quarter of 2022. The net impact of the gain on the sale of the Company's minority stake in Eastern Condiments Private Ltd (Eastern), transaction and integration expenses, and special charges lowered earnings per share by $0.01 in the second quarter of 2021. Excluding these impacts, adjusted earnings per share was $0.48 in the second quarter of 2022 compared to $0.69 in the year-ago period. This decrease was driven by lower adjusted operating income.

Year-to-date net cash provided by operating activities was $154 million compared to $229 million through the second quarter of 2021. The decrease was primarily due to lower net income.

Fiscal Year 2022 Financial Outlook

McCormick's broad and advantaged global flavor portfolio enables the Company to meet the rising demand for flavor around the world. The Company is capitalizing on the growing consumer interests in healthy and flavorful cooking, digital engagement, trusted brands, and purpose-minded practices. This, coupled with the breadth and reach of McCormick's portfolio and its effective strategies, sustainably position the Company to continue on its growth trajectory.

For fiscal year 2022, McCormick updated its financial outlook to reflect a more unfavorable impact of foreign currency rates, the impact of higher cost pressures and the related pricing actions, the unfavorable impact of significant disruption in China from COVID-related lockdowns, the conflict in Ukraine and the Company's growth momentum. In addition, the Company now expects a favorable impact from the optimization of its debt portfolio.

The Company expects foreign currency rates in 2022 to unfavorably impact net sales, adjusted operating income and adjusted earnings per share by two-percentage points. This compares to the Company's previous guidance of an unfavorable one-percentage point impact.

In 2022, the Company expects to grow sales 3% to 5% compared to 2021, which in constant currency is expected to be 5% to 7%. This compares to the Company's previous projection of 3% to 5%, or 4% to 6% in constant currency. McCormick expects sales growth to be driven by pricing actions, which, in conjunction with cost savings, are expected to offset inflationary pressures over time. McCormick also plans to drive continued growth through the strength of its brands, as well as brand marketing, new products, category management, and differentiated customer engagement.

Operating income in 2022 is expected to grow 4% to 6% from $1.02 billion in 2021. The Company anticipates integration expenses related to the FONA acquisition of approximately $3 million in 2022. In addition, McCormick expects approximately $46 million of special charges in 2022 that relate to previously approved organization and streamlining actions. Excluding the impact of integration expenses and special charges in 2022 and 2021, adjusted operating income is expected to range from comparable to an increase of 2%, which in constant currency is 2% to 4%. This compares to the Company's previous projection of 7% to 9%, or 8% to 10% in constant currency.

McCormick projects 2022 earnings per share to be in the range of $2.89 to $2.94, compared to $2.80 in 2021. The Company expects integration expenses, as well as special charges, to lower earnings per share by $0.14 in 2022. Excluding these impacts, the Company projects 2022 adjusted earnings per share to be in the range of $3.03 to $3.08, as compared to previously reported guidance of $3.17 to $3.22 and adjusted earnings per share of $3.05 in 2021. The revised guidance is driven by the updated adjusted operating income outlook and an optimization of the Company's debt portfolio. The Company's updated adjusted earnings per share outlook represents an expected decline of 1% to an increase of 1%, or in constant currency, growth of 1% to 3%. For fiscal 2022, the Company expects strong cash flow and anticipates returning a significant portion to shareholders through dividends and to pay down debt.

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