Spice maker's net passes forecast

McCormick's costs of restructuring reduce earnings

January 25, 2007|By Allison Connolly | Allison Connolly,Sun reporter

Sparks-based McCormick & Co. Inc. reported higher fourth-quarter and year-end sales yesterday, boosted by improved pricing and marketing, but was hurt by charges related to the company's continuing reorganization.

For the fourth quarter, the world's largest spice maker earned a profit of $83 million, or 62 cents per diluted share, on sales of $803.7 million, compared with net income of $88 million, or 65 cents a share, on sales of $737 million for the corresponding period in 2005.

Excluding restructuring charges, McCormick beat Wall Street's expectations with earnings of 72 cents per share, compared with 70 cents a year ago. A group of analysts polled by Thomson Financial First Call had predicted 70 cents a share.

For its fiscal year that ended Nov. 30, net income was $202.2 million, or $1.50 a share, compared with $214.9 million, or $1.56 a share, in 2005. This beat the company's own earnings forecast of between $1.45 and $1.48 a share. Excluding restructuring charges, McCormick would have posted earnings of $1.72 a share, compared with $1.61 a share in 2005.

During and after a conference call yesterday with analysts, Chairman and Chief Executive Officer Robert J. Lawless stressed it was difficult to make a year-over-year comparison based on yesterday's results. For 2006, restructuring costs reduced earnings by 22 cents per share, compared with 5 cents a share in 2005. Also in 2006, the company began reporting stock compensation expenses, which reduced earnings by 11 cents per share. These expenses were partially offset by higher volume and margins.

"The changes we've made have created a more robust and profitable business," Lawless said.

Excluding the charges, net income grew last year to $232.5 million, compared with $222.5 million for 2005.

Sales for the fiscal year rose 4.8 percent to $2.72 billion, from $2.59 billion a year ago, buoyed by the third-quarter acquisition of the Simply Asia and Thai Kitchen brands. Sales of Hispanic products rose 15 percent.

The company also benefited from price increases and the elimination of its less profitable products and customers.

During the fourth quarter, its New Orleans-based brand Zatarain's rebounded from a sales falloff after Hurricane Katrina, with a 17 percent spike in sales compared to fourth quarter 2005.

McCormick nearly doubled spending on advertising during the fourth quarter, which Lawless said paid off in higher sales during the all-important holiday season, mostly of gravy mixtures and gourmet products. This year, the company plans to spend more on Internet advertising, though he declined to specify how much.

Also yesterday, the company announced it would establish a McCormick Science Institute to sponsor research on the health benefits of spices and herbs. Lawless declined to say how much money will be spent on it.

Meanwhile, he said the company's reorganization is on track. Between 2005 and 2008, the company embarked on a plan to trim 1,000 jobs at a cost of between $110 million and $130 million. So far, about 700 employees have been notified that their jobs are being eliminated, he said. The plan should save the company $50 million annually.

Analyst Mitchell Pinheiro, of Janney Montgomery Scott LLC in Philadelphia, said the company has chartered a course for "attractive, sustainable growth."

"They had significant restructuring and product initiatives in '06 that bode well" for 2007, said Pinheiro, who does not own shares or do business with McCormick.

George Askew, a senior analyst with Stifel Nicolaus & Co. in Manassas, Va., called 2006 a "rebounding year" in his report. He said the momentum should carry through 2007.

And like the other two analysts, Patrick Schumann of St. Louis-based Edward Jones rates McCormick stock a "buy" as a long-term investment.

For 2007, Lawless expects sales to grow between 4 percent and 6 percent and earnings to increase by 8 percent to 10 percent. He estimates restructuring costs will be about $36 million, or 18 cents a share, putting earnings in the range of $1.67 to $1.71 a share. The company will roll out its new shelving program to 6,000 stores, after installing them in 2,000 stores last year.

Lawless said the company will continue to explore potential acquisitions this year, but declined to talk about specifics.

He said the company is paying particular attention to India, where late last year a newspaper reported that McCormick is in talks to buy a manufacturer of ready-to-eat meals. McCormick ended the year with $311 million in cash.

On a side note, Lawless warned that prices of black pepper products would increase this year by an average of 3 percent because of weather conditions that made harvesting more difficult.

"It's not vanilla," Lawless said, referring to the debacle two years ago when the company locked in a price for vanilla beans right before prices dropped substantially. "It's not related to the futures market."

Also yesterday, the company announced the addition of George A. Roche, former chairman and president of Baltimore-based T. Rowe Price Group Inc., to its board of directors. Lawless said the appointment was in line with his goal of creating a more independent board.

McCormick stock closed down a quarter yesterday at $38.49 a share.

allison.connolly@baltsun.com

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