McCormick & Co. Inc., the world's largest maker of spices and food flavorings, reported yesterday record first-quarter sales, net income and earnings per share, but a 50 percent drop in profits from joint ventures kept results below Wall Street forecasts.
The Sparks-based company said net income grew 4 percent to $35.1 million, or 25 cents per diluted share, compared with $33.8 million, or 24 cents, in last year's first quarter. Nine analysts polled by Thomson Financial First Call had expected the company to post 26 cents per diluted share for the quarter.
Sales in the quarter, which ended Feb. 28, rose to $555 million - a 7 percent increase over sales of $518.9 million in the comparable period last year.
McCormick, which sells products to consumers, institutional food service clients and food manufacturers, said that favorable foreign exchange rates accounted for more than half of the total sales increase.
Excluding the impact of foreign exchange, sales rose 4 percent at the company's consumer division, stayed even in its industrial division, and climbed 14 percent in its packaging division, the company said.
The company's bottom line was hurt by a drop in profit at the company's joint venture in Mexico. Its partnership with Grupo Herdez - known as McMex - saw profits erode in the quarter due to aggressive competition, higher raw materials costs and a devalued Mexican peso compared with the U.S. dollar, said Robert J. Lawless, McCormick's chairman, president and chief executive officer.
McCormick has been partnered with Herdez in Mexico since 1947, he said.
"Those who have been on the journey with us the past few years know that we have encountered challenges before," Lawless told analysts during a conference call yesterday. "It appears that ... our joint venture in Mexico is our challenge for 2003."
In a separate interview yesterday, Lawless said it was "incumbent" upon the company to get the Mexican joint venture back to the level of profitability it saw last year.
"It was profitable; we didn't lose money" in the quarter, Lawless said. "We just didn't make our expectations."
The company's profit from unconsolidated operations, including the McMex joint venture, fell 50 percent to $2.8 million, compared with $5.7 million in the year-earlier period, according to a company statement yesterday. The company isn't required to report sales results for its joint ventures, Lawless said.
One of the ways that McCormick fuels steady sales growth is through securing new distribution venues for its products, particularly for its consumer business. Yesterday, Lawless said the company had entered a new niche: the dollar store category.
Lawless said the company will distribute its top 50 items through Dollar General, one of the leading dollar-store competitors with more than 6,000 stores across the country. The company will sell both private label and McCormick-branded products at Dollar General, which already sells spice products from other competitors, Lawless said.
"It's a significantly growing key channel of distribution," Lawless said.
Overall, McCormick's quarterly results were slightly below expectations, but the company always does better in the second half of the year, said Mitchell B. Pinheiro, an equity analyst with Janney Montgomery Scott LLC in Philadelphia.
"The good news in the quarter is the packaging business, which looks like it's recovering. The negative is the joint venture in Mexico."
"It's an interesting company," Pinheiro added. "They have a multichannel strategy that allows the company to increase earnings consistently, despite challenges from time to time in each of their businesses."
Shares of McCormick fell 46 cents to close yesterday at $24.99.