McCormick & Co. (MKC) Q2 2012 Earnings Call June 27, 2012 8:00 am ET Executives Joyce L. Brooks - Vice President of Investor Relations and Member of Investment Committee Alan D. Wilson - Chairman, Chief Executive Officer and President Gordon M. Stetz - Director and Chairman of Investment Committee Analysts Kenneth Goldman - JP Morgan Chase & Co, Research Division Thilo Wrede - Jefferies & Company, Inc., Research Division Gretchen Guo Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division Eric R. Katzman - Deutsche Bank AG, Research Division Robert Moskow - Crédit Suisse AG, Research Division Ann H. Gurkin - Davenport & Company, LLC, Research Division Mitchell B. Pinheiro - Janney Montgomery Scott LLC, Research Division Andrew Lazar - Barclays Capital, Research Division Presentation Joyce L. Brooks
As a reminder, today's presentation contains projections and other forward-looking statements. 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. As seen on Slide 2, our forward-looking statement also provides information on risk factors that could affect our financial results.It's now my pleasure to turn the discussion over to Alan. Alan D. Wilson Thanks, Joyce. Good morning, everyone, and thanks for joining us. I'm pleased to report we achieved a fifth consecutive quarter of double-digit sales growth and delivered a solid profit performance for the second quarter of fiscal 2012. These results demonstrated our progress with a number of key growth initiatives: product innovation, brand marketing, customer intimacy and expanded distribution as well as acquisitions. Through the first half of 2012, we generated $144 million of cash flow from operations. Importantly, we have turned the corner on our gross profit and material costs. After posting decreases in gross profit margin for the past 4 quarters that ranged from 120 basis points to 270 basis points, gross profit margin in the second quarter was down just 20 basis points. This was right in line with our expectation, and we expect to maintain this leveling out for the next 2 quarters as we're now lapping these deep material cost increases that began to impact us in the second quarter of 2011. By no means are we predicting an end to the volatility in material costs. However, we believe that we're now better positioned for the benefits of our Comprehensive Continuous Improvement program and our long-term shift in business mix to positively impact not only our gross profit dollars but our percentage margins. While the second quarter produced solid results, we continue to operate in a challenging environment with customers and consumers under pressure in many of our markets. The macroeconomic situation is also having an impact on our business and was most pronounced this period in our income from unconsolidated results, which is being impacted by the exchange rate between the U.S. dollar and the Mexican peso.
We continue to manage through these challenges, adapting our growth initiatives and resources to maintain our momentum and effectiveness. In that regard, I'd like to share with you our latest activity in each of our 3 regions.In the Americas, we have grown Consumer business sales in a 6% to 7% range for the first 2 quarters of 2012. As you recall in the first quarter, our sales growth came mainly from pricing and our acquisition of Kitchen Basics in mid-2011. First quarter volume and product mix were down a bit on the heels of our fourth quarter 2011 pricing action. In the second quarter of 2012, as consumers adjusted to higher pricing, we have seen an improvement in volume and product mix, which was more on par with the year-ago period. We're helping consumers adjust and driving sales with value programs and driving category interest with new products. We have seen early signs of success with a number of items, including Zatarain's Frozen Meals for Two, Grill Mates blends, marinades and barbecue sauces as well as new McCormick Gourmet and McCormick Recipe mixes that allow consumers to easily prepare wholesome traditional meals for their families. In Canada, we've gained great retail acceptance for over 35 new products. As for the latest category growth, 52-week sales of spices and seasoning at grocery were up 3% in dollars. While our branded sales trailed this rate of growth in the grocery channel, our retail takeaway is up 5% across all channels for the latest 52-week period. We believe that this reflects some consumer channel migration as well as our own success in expanding our distribution in warehouse clubs, dollar stores and other alternate channels. Read the rest of this transcript for free on seekingalpha.com