While the rising cost of pepper is nothing to sneeze at, McCormick & Co. said earnings for the second half of the year should be higher than previously forecast after reporting better-than-expected second-quarter results yesterday.
The Sparks-based spice maker said new products such as low-sodium Zatarain's rice dishes and expanded advertising in Europe and Asia should buoy sales in the third and fourth quarters, which are typically the company's strongest. McCormick should also benefit from a favorable currency exchange rate.
The cost of pepper has more than doubled since this time last year, Chairman and Chief Executive Officer Robert J. Lawless told analysts yesterday during a conference call. That increase should be partially offset by lower pepper volumes and a second round of price increases on some pepper products set to take effect in August, he said.
For the year, McCormick expects earnings per share of between $1.69 and $1.73, including restructuring charges of 18 cents per share. Previously, the company had forecast earnings of between $1.69 and $1.71 per share. Sales are projected to grow between 5 percent and 7 percent.
For the three months that ended May 31, revenue rose 7 percent to $687.2 million, from $639.9 million for the corresponding period a year ago. Net income fell 33 percent to $41.4 million, or 31 cents per share, from $61.6 million, or 46 cents per share, in the year-earlier period. This year's second quarter included restructuring costs that subtracted 4 cents a share, while last year's included a 14-cent boost from one-time benefits.
Excluding those impacts in both periods, per share earnings were 34 cents, a 9.4 percent increase, driven by higher sales and improved operating income margin, the company said. The results beat the 33 cents per share that analysts polled by Thomson Financial First Call had forecast.
Wall Street responded favorably, pushing McCormick stock up $2.88, or more than 8 percent, yesterday to $38.38 a share.
Last year's acquisition of Simply Asia Foods, which makes ready-to-eat Asian meals, contributed to consumer sales in the United States, as did new organic gourmet products. In Europe, the company saw improved sales of the Ducros brand in France and Schwartz in the United Kingdom after additional marketing and pricing actions.
Analyst Matthew Arnold, of Edward Jones in St. Louis, noted improvements in the industrial business and in Europe, which have been "head winds" for the company in the past. Overall, he said, the company improved operating margins after implementing cost reduction programs.
"They were very much in line with what I was looking for, on every front," said Arnold, who does not own stock in McCormick.
Lawless said the three-year restructuring program, which is scheduled to wrap up next year, is paying off. The program, which includes 1,000 job cuts and consolidation of several plants, is expected to save the company $50 million annually. Total cost of the program is expected to be $110 million to $130 million.
As for acquisitions, the company is conducting a test market in southern India and is evaluating opportunities there and elsewhere, Chief Operating Officer Alan D. Wilson said during the call.
Lawless said McCormick has begun funding research on the anti-oxidant and anti-inflammatory properties of spices and herbs through a research institute established by the company this year. He said an advisory board has been chosen for the institute, made up of experts from outside the company whom he declined to name.