McCormick turns in improved results, but faces several challenges

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While McCormick & Co. reported higher fourth-quarter and yearly earnings yesterday, it also reported disappointing industrial sales, higher prices for raw materials and escalating employee pension costs.The spice and seasoning maker unveiled its latest quarterly results during a morning conference call from its Sparks headquarters.McCormick’s fourth-quarter earnings were 61 cents a share, compared to 52 cents a share for the same quarter the previous year — a 17 percent increase. Net income was $84.4 million, compared to $77.2 million for the fourth quarter of 2002. For the year, the spice maker’s earnings reached $1.40 a share compared to 1.22 a share for the previous year. The increases were due in part to brisk U.S. consumer sales generated by new distribution agreements made last year with Dollar Stores and Food Lion, according to Robert J. Lawless, McCormick’s chairman, president and chief executive.Moreover, McCormick’s May acquisition of Zatarain, a Louisiana-based maker of flavored rice, also helped to increase sales, said Lawless. “As we look ahead to 2004, we will benefit from a full year of the Zatarain’s business and expect to grow sales 7 to 9 percent,” he added. Despite the report being mostly upbeat, there were a few areas of concern. The high prices of vanilla beans and soybean oil have negatively impacted McCormick’s profit margins, according to Francis A. Contino, McCormick’s chief financial officer.The possibility of shortages and further price escalation caused McCormick to buy $54 million worth of vanilla beans last year, which made the company miss one of its important goals. “Due to our strategic purchase of vanilla beans, we will not reach our objective to generate more than $100 million in cash from our operations,” said CEO Lawless. McCormick’s fourth-quarter industrial sales were also disappointing, he added, increasing only 4 percent compared with a 9 percent increase the same period in 2002.Finally, McCormick officials noted that employee pension costs will increase by about $10 million in 2004.Ending the conference call on more positive note, Lawless said the increases in expenses would be offset by $70 million in savings realized over the next three years. The savings will be generated by the implementation of a sophisticated supply-chain management system that will cut the company’s freight and warehouse costs. The price tag for the new technology exceeded $100 million.“The heavy spending is behind us,” said Lawless. McCormick’s stock closed at $29.83 a share, down 77 cents or 2.5 percent. Its 52-week high is $30.75; it’s 52-week low is $21.71. Broader markets were also sharply down.