CAG ConAgra Brands Inc

McCormick & Co. Inc. (MKC) posted results for the fourth quarter and fiscal year 2011 with operating earnings of $1.03 per share and $2.79 per share, respectively. The results surpassed the Zacks Consensus Estimate of 97 cents per share and $2.78 per share, respectively.

Earnings in the fourth quarter of 2011 excluded an unfavorable impact from transaction costs of 5 cents related to the completion of the Kamis acquisition and Kohinoor joint venture.

Higher operating income, robust sales, as well as cost savings benefited the earnings. Further, new product innovation, progress with Comprehensive Continuous Improvement (CCI) and increased investment in brand marketing also led to the growth. Earnings also exceeded the prior-year quarter's 99 cents and prior-year’s $2.65 per share. The 2010 earnings exclude the reversal on account of a significant tax accrual of 10 cents per share.

For fiscal year 2012, management expects earnings per share to grow 8% to 10% in the range of $3.01 to $3.06, which includes the anticipated benefit of higher sales and CCI cost savings in 2012, along with a favorable comparison to 2011 when acquisition-related transaction costs were recorded.

McCormick also expects its earnings per share for the first quarter of 2012 to be in the range of 51 to 54 cents per share, down from the first quarter of 2011. In addition, higher material costs are also expected to adversely affect income from unconsolidated operations in the first quarter of 2012, along with unfavorable currency exchange rates. During the first quarter of 2012, the company also plans to increase brand marketing support by more than $5 million.

Sales and Margin Details

Total revenue in the fourth quarter grew 13% year-over-year to $1.11 billion from the year-ago quarter, benefiting from McCormick’s favorable volume, product mix, pricing actions and favorable currency rates translation. Revenue also exceeded the Zacks Consensus Estimate of $1.09 billion.

Operating income increased 4% in the fourth quarter 2011 to $192 million. However, this increase included a $7 million unfavorable impact of transaction costs related to completed acquisitions.

In fiscal 2011, total revenue climbed 11% year-over-year to $3.70 billion from the year-ago period, benefiting from McCormick’s favorable volume, product mix, pricing actions and favorable currency rates translation. Acquisitions, new products, distribution gains and increased brand marketing support benefited the sales.

In addition, McCormick took steps to control the double-digit increase in material costs by way of price increases. Revenues, however, lagged the Zacks Consensus Estimate of $3.71 billion.

Operating income in fiscal 2011 climbed 6% to $540 million, although the increase included an $11 million unfavorable impact of transaction costs related to acquisitions completed in 2011. Further, the higher sales and CCI cost savings of $65 million more than offset the unfavorable impact of increased material costs.

Cost savings in 2011 from CCI amounted to $65 million. These savings, along with the pricing actions, provided an offset to increased material costs and also helped fuel a $20 million increase in brand marketing support.

Segments and Margins

Consumer Business

Segment revenue for the consumer business surged 13% year-over-year to $724.7 million in the reported quarter, owing to favorable currency exchange rates. Revenue for McCormick‘s segment also increased due to increased pricing, favorable volume and product mix. Segment revenue for the segment increased 10% to $2.20 billion in the fiscal 2011.

Operating income for the segment increased 3% to $164.1 million in the quarter, while it climbed 6.0% to $428.4 million in fiscal 2011.

Industrial Business

Segment revenue for the industrial business surged up 13% year-over-year to $386.0 million in the fourth quarter of 2011 attributable to increased pricing, favorable volume and product mix. However, the foreign currency rate had minimal impact on the segment sales. In fiscal 2011, segment sales increased 12% to $1.50 billion.

In addition, operating income for the McCormick’s segment climbed 5% to $28 million mainly from increased sales growth. During the quarter, pricing actions and CCI cost savings more than offset increased material costs and a $1 million in increase in marketing support for branded foodservice products. Operating income climbed 4% to $111.9 million in fiscal 2011.

For fiscal 2012, McCormick forecasts a difficult global economy and volatility in material costs. However, the company expects to grow sales, generate CCI cost savings, invest in brand marketing support and deliver solid profit growth.

McCormick expects sales to grow 9% to 11% in local currency, which includes an expected 4% increase from acquisitions completed in 2011 and the favorable impact of pricing actions. Further, the company estimates a 2% reduction in sales from the impact of foreign currency exchange rates.

While higher prices may impact sales volume in 2012, the company plans to offset this by driving volume with new products, increased brand marketing support and expanded distribution. Material costs are projected to rise at a high single digit rate in 2012. In addition to pricing actions, McCormick expects to offset a portion of this increase with CCI cost savings and has set a target to achieve at least $40 million.

Capital Structure

McCormick posted cash flows from continuing operations of $340.0 million in 2011, down from $388 million in 2010, largely as a result of increases in inventory. Inventory levels increased due to higher cost of materials, as well as strategic inventory positions of certain spices and herbs. McCormick remains on track to implement a new inventory management process in order to improve inventory levels.

During the year, the company used $441 million of cash and increased borrowings to fund acquisitions and a joint venture. In addition, McCormick returned cash to shareholders through $149 million of dividends and $89 million of share repurchases.

Recently, McCormick has raised its dividend by 3 cents to 31 cents a share in order to return value to its shareholders. The new dividend was paid on January 13, 2012, to shareholders of record at the close of business on December 30, 2011. McCormick, a global leader in flavor, has successively increased its dividend 26 times.

For 2012, the company expects to increase net cash provided from operations as a result of higher income and a reduction in inventory.

Acquisition

Acquisitions and joint ventures have remained a top priority for McCormick. In 2011, the company completed three acquisitions, and the integration of these businesses has gone well.

In September, McCormick consummated its joint venture with Kohinoor Foods Ltd., India to market and sell basmati rice and food products in India. McCormick also sealed the deal to acquire Kamis S.A., which is a leader of spices, seasonings and mustard in Poland.

In 2012, the company expects at least 13% of sales to come from emerging markets, up from 6% in 2006. Also, the company will make new products like the ones which were launched in the past three years and added 9% to sales in 2011.

Though the company has completed multiple acquisitions that have expanded its product portfolio, we believe that such a strategy has inherent risks. Additionally, the competitive nature of McCormick’s market is a matter of concern.

McCormick which competes with ConAgra Foods, Inc. (CAG) and Kraft Foods Inc. (KFT) currently holds a Zacks #4 Rank translating into a short term Sell rating. Over the long term, we provide a Neutral recommendation on the stock.

 
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