Some good old-fashioned home cooking was the recipe for success at McCormick (NYSE:MKC) during the second quarter. The global seasonings maker reported strong second-quarter results this morning driven by strength in its consumer segment as a hearty appetite for home meal preparation outweighed decreased demand from sheltered restaurants.
Sales were up 8% compared to the same period a year ago and 10% on a constant currency basis. Adjusted earnings per share climbed 27% to $1.47 supported by a 2.4% operating margin expansion. McCormick continues to generate cost savings from its Comprehensive Continuous Improvement (CCI) program that was launched in 2009 to improve productivity.
The higher profit level helped drive the continuation of strong cash flow generation. Net cash from operating activities through the first half of fiscal 2020 increased by 13% to $356 million.
Pandemic Drives Shift in Consumer Demand
It was a tale of two segments for McCormick with strong consumer demand for spices, condiments, and ready-to-cook meals offsetting lower demand from restaurants, schools, and other institutional customers.
Closed restaurants and stay-at-home restrictions led people to depend more on home-cooked meals during the three-month period ended May 31st. Consumer segment sales increased 26%. The growth was seen in all geographies except the Asia-Pacific region where an extended COVID-19 lockdown in China's key Hubei province weighed on performance.
Consumer sales growth was particularly strong in the Americas region at 36% led by McCormick's own branded products. The stockpiling of foods and other home essentials spilled over to seasoning and sauces as jittery shoppers replenished their pantries with whatever came to mind. A taste for spices, seasonings, dry recipe mixes, and home dessert products drove 22% sales growth in Europe, Middle East, & Africa (EMEA) region.
Conversely, demand from restaurants was rather bland with these customers limited to take-out and delivery service. Sales in the Flavor Solutions segment fell 18% due to disruptions across all regions. Sales were down 15% in the Americas because of lower demand from foodservice and quick service restaurant (QSR) customers. The decline in the EMEA region was sharper at 34%.
The vastly different results highlighted the importance of McCormick's well-diversified business model. The larger consumer side of the business sells spices, seasonings, recipe mixes, condiments, and sauces to grocery stores, online, and other outlets. The Flavor Solutions group makes ingredients, coatings, flavors, and custom condiments geared towards foodservice businesses.
The second-quarter performance also demonstrated the company's ability to meet the heightened consumer demand by making supply chain adjustments and through increased cooperation from suppliers.
A Gradual Recovery in Restaurant Demand Expected
The company anticipates the recent shift in consumer demand to persist for the remainder of the year but said it is unable to gauge the level of future consumption at home or away from home especially amid concern around a possible resurgence of COVID-19 cases. While it expects demand from packaged food companies to be consistent with levels seen prior to the pandemic, demand from restaurant and foodservice customers is expected to remain below pre-pandemic levels for the rest of the year.
Like many U.S. companies, uncertainty around the current economic environment led McCormick to withdraw its full-year guidance on March 31st.
Management did, however, reaffirm its long-term financial objectives and capital allocation priorities. It is targeting a balanced use of cash to drive growth, provide dividends to shareholders, and pay down debt. Given the company’s track record of sales and profit growth, it appears to be in a strong position to deliver on these goals.
CEO Lawrence E. Kurzius commented, "The recovery from COVID-19 continues to evolve daily and while conditions remain uncertain, we remain committed to ensuring the health and safety of our employees, maintaining the quality and integrity of our products and keeping our brands and our customers' brands in supply".
What's Cooking for Q3?
With the economy in the early stages of recovery, it is hard to stay what lies ahead for McCormick. Consumer demand will have to continue to drive growth while the restaurant industry regains its footing. A slow shift from cooking at home to dining at restaurants may unfold in the months ahead as people warm back up to revisiting their favorite local meal spots. Quick service restaurants are likely to recover faster than other foodservice businesses because they generally have more drive-through and delivery service flexibility. Meanwhile, restaurants must grapple with government restrictions and the adoption of costly new safety measures.
From McCormick's standpoint, it should equate to a gradual return to more balanced revenue growth. Fortunately, consumers and restaurants are always looking for new ways to cook healthy, flavorful meals. The company's portfolio of well-recognized global brands should continue to drive steady growth regardless of what economic challenges lie ahead.
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