Image source: The Motley Fool.
McCormick (NYSE:MKC) Q1 2019 Earnings Conference CallMarch 26, 2019 8:00 a.m. ET
Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:Kasey Jenkins -- Vice President of Investor Relations
Good morning. This is Kasey Jenkins, vice president of McCormick investor relations. Thank you for joining today's first-quarter earnings call. To accompany this call, we posted a set of slides at ir.mccormick.com.
[Operator instructions] We'll begin with remarks from Lawrence Kurzius, chairman, president, and CEO; and Mike Smith, executive vice president, and CFO. During our remarks, we will refer to certain non-GAAP financial measures. These include information in constant currency as well as adjusted operating income, adjusted income tax rate and adjusted earnings per share that exclude the impact of special charges and for 2018, transaction and integration expenses related to the acquisition of our Frank's and French's brands as well as the net nonrecurring income tax benefit associated with the December 2017 U.S. tax reform legislation.
Reconciliations to the GAAP results are included in this morning's press release and slides. In our comments, certain percentages are rounded. Please refer to our presentation, which includes the complete information. In addition, please note that all comparisons discussed today, both for results and outlook, are calculated from a 2018 date that had been recast for the two accounting standard updates we adopted on a retrospective basis in the first quarter of 2019 as well as for certain other reclassifications noted in this morning's first-quarter results press release.
Please refer to the recast 2018 financials section of the press release and the Form 8-K we furnished on March 11 for further detail as well as the filing of our Form 10-Q later today, which reflects all the changes to our previously reported 2018 results and the historical financial information that has been recast. 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 statement, whether because 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 is now my pleasure to turn the discussion over to Lawrence.
Lawrence Kurzius -- Chairman, President, and Chief Executive Officer
Thank you, Kasey. Good morning, everyone. Thanks for joining us. Our first-quarter results were a great start to the year, delivering sales, operating income and adjusted earnings-per-share growth as well as margin expansion.
Our successful execution of our strategies and engagement of employees around the world has driven strong performance across both of our segments, and we're confident they will continue to drive our momentum and success as we go through the year. Starting on Slide 4. Our broad and advantaged global flavor portfolio continues to position us to meet the demand for flavor around the world and grow our business. Among our first-quarter highlights across our portfolio, we drove growth on our consumer segment with the strength particularly in the U.S.
spices and seasonings, recipe mixes and new Frank's and Zatarain's frozen products as well as in China sauces and chicken bouillon. In our flavor solutions segment, our Americas and EMEA regions drove significant growth in flavors, branded foodservice and condiments with strong contributions from both new products and the base business. We are confident our breadth and reach will continue to differentiate McCormick and be the foundation of our sales growth as consumer demand for flavor continues to rise. No matter where or what you choose to eat or drink, you will probably enjoy something flavored by McCormick every day.
Now let me go into more detail on our first-quarter performance, as seen on Slide 5, as well as provide some business comments before turning it over to Mike, who will go more in depth on the quarter-end results and the details of our 2019 outlook. As we said on our year-end earnings call in January and at CAGNY in February, we had confidence in our strategies and are well-positioned to deliver strong results in 2019. You can see this beginning with our first-quarter performance with the strong sales growth, operating profit growth, margin growth and EPS growth. Starting with our top line for the first quarter.
Versus the year-ago period, we grew sales 1%, and in constant currency, sales grew 4% for the total company with strength in both segments. This growth was due to higher volume and product mix and was entirely organic, driven by the base business and new products as we have no acquisition impact in the quarter. In our consumer segment, sales were flat, including an unfavorable impact from currency, and grew 3% in constant currency. In our flavor solutions segment, sales grew 3%, and in constant currency, grew 6%.
In addition to our top-line growth, we grew adjusted operating income and expanded our adjusted operating margin. With our higher sales and cost savings led by our Comprehensive Continuous Improvement Program, or CCI, we grew the first quarter's adjusted operating income 4%, or 6% in constant currency, and expanded our adjusted operating margin 40 basis points. At the bottom line, our first-quarter adjusted earnings per share of $1.12 was 12% higher than $1 in the first-quarter of 2018, driven primarily by our adjusted operating income growth and the lower adjusted tax rate. And this 12% adjusted earnings-per-share growth includes an unfavorable impact from currency.
Our solid first-quarter results were in line with our expectations and our outlook for our 2019 performance, which we shared on our January earnings call, continues to be strong. I'd like to turn now to a business update with a focus this morning on highlights from our consumer and flavor solutions segments, our exciting new products for the first half of 2019, and finally, touch on some of our recent announcements. Turning on Slide 6 with our consumer segment. As I just mentioned, we grew constant currency sales 3% with increases in each of our three regions.
In the Americas, we grew constant currency sales 3%, driven by higher volume and product mix. In the U.S., the unusual impacts we had in the fourth quarter, as we previously indicated on our January earnings call and at CAGNY, are behind us. Our IRI data indicates U.S. spice and seasonings scanner scales through multi-outlets grew 4% for the category and 5% for McCormick branded, reflecting a continuation of the strong consumption and share trend improvement realized in the fourth quarter.
In fact, we grew spice and seasoning share in the first quarter. Our performance on the market is being driven by new products and expanded distribution, together with our strong marketing programs and merchandising execution. Additionally, we again had strong growth in unmeasured channels, including club, e-commerce and Hispanic retail chains. Overall, combining strong consumption growth in other parts of our U.S.
branded portfolio with spices and seasonings, we continue to see an acceleration in our consumption trend, which shows we're winning with consumers across our portfolio. McCormick branded dry recipe mixes continued their momentum of consumption and share growth, and Stubb's barbecue sauce consumption growth again outpaced its category. Frank's RedHot sauce, Grill Mates and Lawry's marinades all grew consumption, partially driven by leveraging Super Bowl marketing and promotional programs across our condiment portfolio. New products, including Frank's RedHot frozen wings and Zatarain's frozen items, are also gaining momentum and contributed to first-quarter growth.
As I mentioned, our strong marketing programs contributed to driving our growth. We've also increased our effectiveness and are getting more value out of each marketing dollar. In the first quarter, we funded increases in our working media with decreases in our nonworking spend. Our newly formed marketing excellence organization, which I discussed at CAGNY, is optimizing our brand marketing spend and driving greater speed and effectiveness.
For instance, with our innovative approach for Frank's brand support, we had a big win on Super Bowl Sunday. We spent significantly less than the cost of a Super Bowl commercial and leveraged the power of social media with a strong creative idea. With our playful splat, Frank's garnered over 250 million consumer impressions and was awarded Twitter's brand interception award for driving the highest percentage of branded conversations during the big game without a national television ad. Not only did we win the award, we won with significant Frank's consumption growth.
Now turning to the Europe, Middle East and Africa, the EMEA region. Constant currency growth was driven by new products as well as expanded distribution and successful promotional activity. New product launches in the U.K. in the second half of the year, first choice, our brand renovation initiative, and Street Food Seasonings, which are adventurous flavors for millennials, continue to do well and we're excited to build on strong early results with continued expansion to additional markets in 2019.
In the Asia Pacific region, our constant currency growth was led by China, driven by new products as well as the base business growth due to successful merchandising execution and expanded distribution. We're also excited about the momentum we're gaining on Frank's and French's. At the end of the first quarter, products with localized Chinese labels are beginning to be listed in retail stores, and we expect distribution to build over the year. Turning now to Slide 7.
In our flavor solutions segment, our sales performance was excellent. Our constant currency sales growth was 6%, driven by higher volume and product mix on base business as well as new products in the Americas and EMEA regions. We're continuing to win with our customers through new products, expanded distribution and promotional activities. In the Americas, we drove constant currency sales growth of 7%.
We had strong sales growth to quick service restaurants as well as in our flavor product category. Our flavor sales were driven by snack seasonings, particularly due to new products and our customers' promotions, and by products that deliver the clean label and better-for-you attributes our customers are seeking. We also had strong branded food-service growth, driven by an increased distribution with national and regional customers, promotional activity with operators and expansion in emerging channels. In branded foodservice, we continue to realize the benefit of leveraging our full portfolio of McCormick spices and seasonings and Frank's, French's and Cattlemen's products across operators.
Our sales growth in EMEA was outstanding, 9% in constant currency. It was broad based across the portfolio, both from a product category and customer perspective. The momentum we built in this region last year carried into the first quarter. We drove sales growth to quick service restaurants, partially due to their strong promotional activities, and to packaged food companies with new products being a key driver.
Our new products are an important point to differentiate our brands and drive growth. Now I am happy to share with you our consumer segment's robust plans for new products in the first half of 2019 as seen on Slide 8. We're delivering against consumer demand for healthy options and transparency in the quality and source of ingredients. In the U.S., we have launched the Zatarain's Garden District Kitchen range.
These meal solutions, inspired by the rich culinary heritage of New Orleans, are plant based and high in both protein and fiber, and we continue to renovate our dry recipe mixes for simple and clean ingredient statements that still deliver delicious flavor. We are continually improving our portfolio to strengthen our relevance with consumers. In the U.S., we're expanding our McCormick Gourmet line with a range of premium salts and peppers. In France, we launched a range of Ducros, grown in France herbs for the French consumer who values provenance and local sourcing.
And in China, we are relaunching our packaging of new graphics that drive premium perception and better shelf visibility. With this inconvenience remaining a key driver of consumer trends, we are offering consumers convenience with flavor. In the U.S., we've launched new Grill Mates marinade flavors, which provide a convenient way to introduce bold flavors to grilling, and French's dipping sauces, which deliver fantastic taste with the convenience of ready to eat. We've also launched Zatarain's frozen entrees rice bowls, made with clean ingredients and leveraged the popularity of cilantro lime with shrimp and chicken.
And we'll be launching our ONE product platform, a set of one-dish recipe mix flavors to make dinners easy, which includes new flavors created using the combination of artificial intelligence and our consumer insights. And finally, we continue to introduce new flavors and varieties to drive flavor exploration and experimentation. In Canada, we're innovating our line of La Grille barbecue sauces with a new bottle and reformulated flavors. In the U.K., we're targeting the millennial consumer with the launch of a new range of rapid recipe mixes, which capitalize on the sandwich wraps trend at home and in restaurant menus.
And also targeting the millennial consumer, we're launching a new range of co-branded Tasty-McCormick recipe mix blends in the U.S., Canada and the U.K., which I will expand on further in a few minutes. Turning to flavor solutions on Slide 9. While we do not get specific with our product development in this segment, we're continuing to capitalize on our culinary foundation and customer collaboration, both of which differentiate us with customers. This unique combination allows us to continue our new product momentum as our customers continue to move their portfolios to on-trend flavors and more natural and better-for-you product, while ensuring that taste is not compromised.
We have a broad portfolio of product platforms and technologies to deliver a range of natural solutions for our customers. Along the natural flavor spectrum, clean flavor is the next emerging space. We're excited to have relaunched our new clean and natural platform, FlavorReal. McCormick is setting the benchmark for development of on-trend, organic, non-GMO and better-for-you products with our unparalleled natural ingredient supply chain and technologies enabling clean label transparency.
To support the consumer movement to healthier and more natural, our proprietary modulation technology called FlavorFull solves common flavor challenges, including masking bitter or sour notes and enhancing sweet, salt or fat. We can solve for any low or no challenge without sacrificing iconic flavor. And finally, our two flavor delivery technologies deliver optimal flavor experiences. Our patented FlavorCell is a controlled-release encapsulation technology designed to deliver flavor where and when and how you need it, while our FlavorSpice technology delivers flexible natural replacements for ground spices and herbs for increased concentration and solubility.
Our strategy to begin with understanding real food and beverage to create authentic flavors, combined with the breadth of our product platforms and technologies, is driving our new product wins with our customers with sales from product launches a key growth driver on our first-quarter results. Now I'd like to highlight some recent news on Slide 10. As announced in early February, McCormick has partnered with IBM to pioneer the application of artificial intelligence, or AI, for flavor and product development. We're entering in a new era of flavor innovation.
This proprietary cutting-edge technology, which we have previously discussed as computational creativity, sets McCormick apart across our consumer and flavor solutions segments. Our product developers are now able to explore flavor territories across the globe more quickly and efficiently, utilizing technology to extract key insights for millions of data points across sensory science, consumer preference and flavor palette. As we continue to expand the use of this system, we've launched our first AI-enabled consumer product platform, ONE, which I mentioned a few moments ago, in my new product comment. I also mentioned earlier a new range of co-branded Tasty products, which I'd like to expand on further.
During the first quarter, we launched a global partnership with BuzzFeed Tasty, the No. 1 cooking video website in the world for millennials and Gen Z with over 2 billion views a month. This partnership allows us to gain significant reach as we are now the official spice in the videos and recipes these generations use, while seeking recipe inspiration through social media. In the second quarter, we will be launching our Seasoning Blends range, which will be available both through the direct-to-consumer channel and retail.
We're thrilled with this new partnership, which will deliver substantial incremental impressions and reach to an audience primarily under 35 years of age and further accelerate our digital platform. In February, we were recognized on Barron's 2019 100 Most Sustainable Companies list for the second straight year. At McCormick, we're driven to do the right thing for people, communities and our planet and as such, we're recognized as a leader in sustainability. On a final note, I'd like to acknowledge Mike Fitzpatrick, who is retiring from our board of directors after serving as a director since 2001.
We sincerely appreciate Mike's contributions to our success over the last 18 years and thank him for his service. Now I'd like to provide a few summary comments, as seen on Slide 11, before turning it over to Mike. At the foundation of our sales growth is the rising consumer demand for flavor. We are aligned with the consumer's increased interest in bolder flavors, demand for convenience and focus on fresh, natural ingredients as well as with emerging purchase drivers such as greater transparency around the sourcing and quality of food.
With this increased interest, flavor continues to be an advantaged global category, which combined with our execution against effective strategies, will drive strong results. We have a solid foundation in an environment that continues to be dynamic and fast paced. We're ensuring we remain agile, relevant and focused on sustainable growth. Our experienced leaders and employees are executing against our strategies, which are designed to build long-term value for our shareholders.
Our first-quarter financial results across both our consumer and flavor solutions segments were a great start to the year. We delivered these results according to our plans and are excited by our momentum. Our fundamentals are strong and we're confident the initiatives we have under way position us to continue our growth trajectory. We're balancing our resources and efforts to drive sales with our work to lower cost to build fuel for growth and higher margins.
We have confidence in our fiscal-year outlook and are well-positioned to deliver another strong year in 2019. Around the world, McCormick employees are driving our momentum and our success, and I thank them for their efforts and engagement. Thank you for your attention, and it is now my pleasure to turn it over to Mike for additional remarks on our first-quarter financial results and 2019 outlook.
Mike Smith -- Executive Vice President and Chief Financial Officer
Thanks, Lawrence, and good morning, everyone. As Lawrence indicated, we delivered strong growth with our first-quarter results. I'll begin with a discussion of our results and then follow with details of our full-year 2019 financial outlook. Turning on Slide 13.
We grew sales 4% in constant currency. And as Lawrence mentioned earlier, this was entirely organic growth driven by the base business and new products as we had no acquisition impact in the quarter. Both our consumer and flavor solutions segments delivered strong top-line constant currency growth driven by volume and product mix. The consumer segment grew sales 3% in constant currency with growth in all three regions.
On Slide 14, consumer segment sales in the Americas rose 3% in constant currency versus the first quarter of 2018. As Lawrence described earlier, this increase was primarily driven by higher volume and product mix across several product lines, spices and seasonings, dry recipe mixes and frozen products. Pricing related to the incremental impact of 2018 actions also contributed to the increase. In EMEA, constant currency consumer sales were up 1% from a year ago.
Higher volume and product mix were driven by new products, distribution gains and promotional activities. This growth was partially offset by pricing actions, including those related to planned trade promotional activity for new products and the holiday season. We grew consumer sales in the Asia Pacific region 4% in constant currency, led by China growth, with strength in new World Flavor sauces and chicken bouillon as well as herbs and spices. Turning to our flavor solutions segment in Slide 17.
We grew first-quarter constant currency sales 6%, attributable to a strong growth in the EMEA and Americas regions. In the Americas, flavor solutions constant currency sales increased 7% with broad-based growth across the portfolio, driven by quick service restaurants and continued flavors momentum. New products, expanded distribution and our customers' promotional activities all contributed to the sales increase. In EMEA, we grew flavor solutions sales 9% in constant currency, driven by new products and volume growth on the base business.
Sales increased to both packaged food companies and quick service restaurants, partially due to their promotional activity and spend across all categories. In the Asia Pacific region, flavor solutions sales in constant currency were flat to the year-ago period due to the timing of our quick service restaurant customers' promotional activities. Across both segments, adjusted operating income, which excludes special charges, and for 2018 the transaction and integration cost related to the acquisition of our Frank's and French's brands, rose 4% in the first quarter versus the year-ago period. Excluding the impact of unfavorable currency, rose 6%.
Adjusted operating income in the consumer segment rose to $135 million. And in the flavor solutions segment, we rose to $64 million, both of which were a 4% increase. In constant currency, adjusted operating income increased 6% in the consumer segment and 7% in the flavor solutions segment. For each segment, the increase was driven by higher sales and CCI-led cost savings.
As seen on Slide 22, in the first quarter, we expanded adjusted operating margin 40 basis points. This expansion was driven by leverage from sales growth, CCI-led cost savings and lower brand marketing, partially offset by investments to drive future growth. Turning to income taxes on Slide 23. Our first-quarter adjusted effective income tax rate was 13.9% as compared to 18.9% in the year-ago period.
Our first-quarter adjusted rate was favorably impacted by discrete tax items, primarily one related to our entity structure as we mentioned in our January earnings call. We continue to project our full-year 2019 adjusted effective tax rate to approximate 22%. Income from unconsolidated operations was $10 million compared to $8 million in the first quarter of 2018 with the increase led by our joint venture in Mexico. For 2019, we continue to expect a low single-digit increase in our income from unconsolidated operations.
At the bottom line, as shown on Slide 25, first-quarter 2019 adjusted earnings per share was $1.12, up 12% from $1 for the year-ago period, mainly due to higher adjusted operating income and the lower adjusted income tax rate. And this increase included an unfavorable impact from currency. On Slide 26, we summarized highlights for cash flow and the quarter-end balance sheet. Our cash flow provided from operations was $104 million in the first quarter of 2019 compared to an outflow of $21 million in the first quarter of 2018.
This increase was driven by higher operating income and working capital improvements. As we execute against programs to achieve working capital reductions such as extending supplier payment terms and inventory management programs, we continue to see improvements in our cash conversion cycle, finishing the first quarter down four days versus our fiscal year-end. We returned $75 million of cash to shareholders through dividends and used $25 million for capital expenditures this period. We expect 2019 to be another year of strong cash flow driven by profit and working capital initiatives.
And our priority is to continue to have a balanced use of cash, making investments to drive growth, returning a significant portion to our shareholders through dividends and to pay down debt. Let's now move to our current financial outlook for 2019 on Slide 27. We are reaffirming our 2019 outlook for another year of strong performance with our broad and advantaged flavor portfolio, effective growth strategies and focus on profit realization. We continue to estimate, based on prevailing rates, a 2-percentage-point unfavorable impact from currency rates on net sales, adjusted operating income and adjusted earnings per share.
We expect unfavorable currency impact will be greater in the first half of the year than in the second half. At the top line, we reaffirm our guidance to grow sales 1% to 3%, which in constant currency is a 3% to 5% projected growth rate. As a reminder, this will be entirely organic growth-driven, primarily by higher volumes and product mix as well as the impact of pricing to offset any anticipated low single-digit cost increase. We continue to project our 2019 gross profit margin to be 25 to 75-basis-point higher than in 2018, in part driven by our CCI-led cost savings.
We reaffirm our adjusted operating income growth of 7% to 9% from $930 million in 2018, which in constant currency is a 9% to 11% projected growth rate and reflects our continued focus on profit realization. Our cost-savings target is approximately $110 million, and we expect brand marketing to be comparable to 2018. As I previously mentioned, we continue to expect our 2019 adjusted effective income tax rate to approximate 22% based upon our estimated mix of earnings by country, in addition to our state tax rates. This projection is lower than our underlying effective tax rate of 24% due to the favorable first-quarter discrete impact I mentioned a few moments ago.
Our full-year 22% outlook versus our 2018 adjusted effective tax rate of 19.6% is approximately a 300-basis-point headwind to our 2019 adjusted earnings-per-share growth. We reaffirm our guidance for the adjusted earnings per share in 2019 of $5.17 to $5.27. This compares to $4.97 of adjusted earnings per share in 2018 and represents a 4% to 6% increase, which in constant currency is a 6% to 8% increase. This increase includes the expected tax headwind I just mentioned.
In summary, we are projecting strong growth in our 2019 constant currency outlook for sales, adjusted operating profit and adjusted earnings per share following record double-digit performance across each objective in 2018. I'd like to now turn it back to Lawrence for some additional remarks before we move to your questions.
Lawrence Kurzius -- Chairman, President, and Chief Executive Officer
Thank you, Mike. Now that Mike has shared our financ
