Q3 2024 Earnings Summary
- Strong performance in the Flavors business in the Americas region, with good results across high innovator growth customers, outperforming the category in areas like performance nutrition beverages, alcoholic and nonalcoholic beverages.
- Expectations of sequential improvement in sales and gross margin from Q3 into Q4, with improvements in both the Consumer and Flavor Solutions segments.
- Growing share in spices and seasonings in the U.S., focusing on both unit and volume measures, and increasing total distribution points across core categories, indicating strong competitive positioning.
- Weaker-than-expected QSR traffic is negatively impacting McCormick's Flavor Solutions volumes, particularly in the EMEA and Asia Pacific regions.
- Increased SG&A expenses due to investments in digital transformation and IT are expected to pressure Q4 operating profit, which is projected to be only comparable to last year despite these investments.
- Growing competition from smaller brands in the U.S. spices and seasonings category may impact McCormick's market share and growth prospects.
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2025 Outlook and Growth Algorithm
Q: Any reason to think you won't be on algo in 2025?
A: Management isn't ready to discuss 2025 guidance but is confident in their plans and investments driving volume growth into next year. They acknowledge economic uncertainties but feel well-positioned and will share more at the upcoming Investor Day. -
China Market Challenges
Q: How is stimulus in China affecting consumer demand?
A: They expect China's environment to remain challenging, anticipating a slight decline in 2024. While unable to predict the impact of recent stimulus measures, past actions didn't materially affect their business consumption. -
Hot Sauce Category Competition
Q: Can you update on U.S. hot sauce challenges and plans?
A: The hot sauce category is attractive but faces increased competition. They're impacted by a competitor recovering from supply issues and by trial-sized offerings boosting unit volumes. Their own mini trial sizes launched in Q3 are performing well, and they expect sequential improvement. -
Gross Margin Outlook
Q: Why not raise gross margin guidance despite improvements?
A: Gross margin is improving sequentially, but factors like normalized product mix in Flavor Solutions, supply chain investments, and slight negative pricing in the consumer segment are impacting Q4 margins. -
Flavor Solutions Margin Sustainability
Q: Is there more runway for Flavor Solutions margin improvement?
A: Management is positive about Flavor Solutions margins, driven by shifts to higher-margin products like Branded Foodservice. They expect continued improvement through CCI initiatives and leveraging growth for operating efficiency. -
SG&A Increase in Q4
Q: What's driving the SG&A step-up in Q4?
A: SG&A investments shifted from Q3 to Q4, particularly in IT and digital transformation, including digital marketing, data analytics, and manufacturing efficiencies, affecting both segments. -
Pricing Power and Long-Term Strategy
Q: Is there room for additional pricing in 2025?
A: Pricing remains a lever in their long-term algorithm, though future inflation and pricing are challenging to predict. They emphasize their CCI program and holistic P&L management to fund growth investments. -
Working Capital and Cash Flow
Q: Will working capital be a source or use of cash this year?
A: They expect a strong cash flow year with the fourth quarter being the strongest. Year-to-date working capital was used to mitigate risks like the port strike, but they anticipate normalization. -
Spices & Seasonings Competition
Q: How is McCormick faring amid competition in spices and seasonings?
A: They're growing share in volume measures and expanding distribution points. While acknowledging competition from smaller brands, they feel confident in their broad offering and category performance. -
Impact of Dock Workers' Strike
Q: How could the dock workers' strike affect operations?
A: They've been contingency planning since April, coordinating with suppliers to mitigate risks. They believe they're broadly covered but are monitoring the situation daily. -
Brand Investment Levels
Q: Did brand investment increase high single digits in Q3 as guided?
A: Investments are discussed in halves rather than quarters. They confirm that investments are moving up in both Q3 and Q4 as planned. -
FX and Tax Benefit Impact
Q: Do FX and tax benefits account for the guidance raise?
A: Due to tax and FX factors, the guidance reflects these adjustments but they didn't quantify an exact benefit. -
Timing Shifts Between Quarters
Q: Should we model customer activity shifts reversing in Q4?
A: Positive impacts from timing shifts in Q3 will normalize in Q4, particularly affecting Flavor Solutions in the Americas. -
Prepared Foods and Customer Trends
Q: Are trends improving in sales to packaged food manufacturers?
A: They saw improvement in Flavor Solutions, with good results in high-growth customer categories and branded foodservice, despite weak QSR traffic. Sequential improvement is expected in Q4. -
Marketing and Advertising Ramp-Up
Q: Is the marketing ramp in Q4 focused on holidays or long-term ROI?
A: Increased investment in Q4 includes ongoing programs driving current results, strong holiday season plans, and everyday marketing initiatives like Frank's hot sauce. -
Unconsolidated Operations Earnings
Q: Any notable factors affecting earnings from unconsolidated operations?
A: Strong performance is noted, but they mention a tougher comparison in Q4 due to strong prior-year results and FX impacts, particularly with the peso.
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