McCormick & Company, Inc. (MKC)
F3Q10 (Qtr End 08/31/2010) Earnings Call
September 30, 2010 8:00 am ET
Joyce Brooks - VP, IR
Alan Wilson - President and CEO
Gordon Stetz - EVP and CFO
Paul Beard - SVP, Finance and Treasurer.
Alexia Howard - Sanford Bernstein
Alex Bisson - Northcoast Research
Ken Goldman - JPMorgan
Andrew Lazar - Barclays Capital
Robert Dickerson - Consumer Edge Research
Robert Moskow - Credit Suisse
Mitch Pinheiro - Janney Montgomery Scott
Eric Katzman - Deutsche Bank
Greetings and welcome to the McCormick's third quarter 2010 conference call. (Operator Instructions)
It is now my pleasure to introduce your host Joyce Brooks, Vice President, Investor Relations, for McCormick.
Previous Statements by MKC
» McCormick & Company, Inc. F2Q10 (05/31/2010) Earnings Call Transcript
» McCormick & Company, Inc. Q1 2010 Earnings Call Transcript
» McCormick & Company Inc. Q4 2009 Earnings Call Transcript
Good morning to everyone on today's call and to those joining us by webcast. The purpose of our call is to provide an update on our business, review McCormick's third quarter financial results, and share our latest 2010 outlook. We have posted a set of slides to accompany today's call at our Website, ir.mccormick.com.
In the room with me are Alan Wilson, Chairman, President and CEO; Gordon Stetz, Executive Vice President and CFO; and Paul Beard, Senior Vice President, Finance and Treasurer.
Alan will begin with the business update, followed by Gordon who will review our financial results and outlook. After that we look forward to discussing your questions.
As a reminder, our presentation today contains projections and other forward-looking statements, and actual results could differ materially from those projected. The company undertakes no obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events or other factors.
In addition, certain information that we will present today are not GAAP measures. This includes information which excludes the impact of a significant tax accrual reversal recorded in the third quarter of 2010 and restructuring charges recorded in 2009. We present this non-GAAP information for comparative purposes alongside the most directly comparable GAAP measures.
Reconciliations of GAAP to non-GAAP measures can be found in this latest press release and in the presentation slides for our call.
It is now my pleasure to turn the discussion over to Alan.
Thanks, Joyce. Good morning everyone, and thank you for joining us. We're pleased to report another quarter of strong financial performance at McCormick. While the economy continues to be challenging, and consumers in many of our markets remain cautious, we achieved solid sales growth, exceptional margin improvement and a strong increase in profits.
With the range of conditions across our major markets, our pace of sales growth vary by market. While the benefits of product innovation, incremental marketing and expanded distribution have been offset in part by certain areas of weakness, we consider our year-to-date sales result a solid performance in today's environment.
During the same period, gross profit margin improvement has been tracking well ahead of our 50 basis point objective, with gross profit margin up 130 basis points year-to-date. Our margin improvement has made its way to the bottom line, more than offsetting higher brand marketing support and increased pension cost, and as a result, we have increased EPS at a double digit pace through the first three quarters when items affecting comparability are excluded.
This margin performance is being driven both by Comprehensive Continuous Improvement, our CCI program and a more favorable mix of business. McCormick employees have made excellent progress in increasing productivity. Throughout our operations, we are buying more effectively, applying tools and technology and streamlining processes.
We expect to surpass our initial goal to reduce cost by $35 to $40 million in 2010, and now project at least $45 million in cost savings. We have CCI champions in place in all major locations, and they already have a list of projects ready for 2011.
We are also seeing a more favorable mix of business being achieved in two ways. First, consumer sales growth outpaced that of the industrial business. With the inherently higher margin of our consumer business relative to our industrial business, this shift in mix is accretive to gross profit margin for the total company.
The second aspect of favorable mix is within our industrial business. For a fifth consecutive quarter, we have improved both the gross profit and operating income margins for this business when measured on a comparable basis. At the operating income line, industrial business margins reached 8.9% for the third quarter and an 8.1% year-to-date for 2010.
This is a result of stronger growth with higher margin products as well as the benefits of CCI-led cost savings.
In summary, we are making excellent progress toward our longer term goal of 9% to 10% operating income margin for the industrial business.
Next, I'd like to share our perspective on conditions in each of our primary markets and provide an update on our growth initiatives beginning on slide 7. In the Americas, we believe consumers remain cautious in their purchase decisions and meal choices. As you would expect, we've had good success in the past quarters as we stepped up our coupon and other brand value messages. And you'll see more of that in the fourth quarter.
Well, we have a lot more underway for the holiday period. In the U.S. we've gained good traction with our latest product introductions. Backed by a significant ad campaign in the second quarter and the plans again to run again in the fourth quarter, all varieties of recipe inspiration have made it into the top 40% of McCormick blends.
In 2011 we'll introduce World Flavors, six additional items that offer consumers a low-risk way to prepare (Restaurant-Sauvé) ethnic foods at home. Some retailers have recipe inspiration secondary placement in the meat section, and others have already accepted all six World Flavors.