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Winning Flavor

2016 Annual Report

Intro

McCormick brings the joy of flavor to every day.

We come together to celebrate food and flavor. All over the world, people are seeking authentic flavors, bold taste and healthy ingredients. McCormick is meeting this demand with high quality products, and expanding the breadth of its business by channel and by market. Our success led to record financial results in 2016 and set the stage for our continued growth.

Letter to our Shareholders

CEO

Lawrence E. Kurzius

President and Chief Executive Officer

Fellow Shareholders,

It is an honor to send you my first shareholder letter as CEO. 2016 was an excellent year for McCormick. We delivered breakthrough innovation, cutting-edge digital marketing campaigns, value-enhancing acquisitions and substantial cost savings. Importantly, actions like non-GMO labeling and a transition to more organic products are keeping our brands on-trend and top of mind for consumers. Simply put, McCormick is winning flavor. I am also proud to let you know that this year marked our 31st consecutive year of increased quarterly dividends. Looking ahead, our steadfast focus on growth, performance and people will continue to drive McCormick’s strategy and momentum forward.

We Are Delivering Record Financial Results

McCormick achieved record financial results in 2016, meeting each of our key financial targets. We delivered strong growth in sales and profit, and saw a fifth consecutive year of record cash flow. Highlights include:

  • Net Sales 3%

    Net sales rose 3%, driven by increases in our base business, new products, expanded distribution and acquisitions. Excluding the impact of unfavorable currency rates, the growth rate was nearly 6%. Our consumer segment led this increase with sales up 4%, while industrial segment sales were comparable to 2015. Excluding the impact of unfavorable currency rates, we grew consumer segment sales 6% and industrial segment sales 4%, with increases in each of our three regions.

  • Operating income $641 million

    Operating income of $641 million compared to $548 million in 2015 due in part to higher sales and a favorable business mix. In addition, we achieved $109 million of cost savings and used a portion of these cost savings as fuel for a $12 million increase in brand marketing and a $7 million increase in acquisition-related transaction expenses. Special charges lowered operating income by $16 million in 2016 and $66 million in 2015. Excluding the impact of special charges and unfavorable currency rates, we grew adjusted operating income by 9%.

  • Earnings Per Share $3.69

    Our earnings per share increased to $3.69, compared to $3.11 in 2015. This result exceeded our initial 2016 goal due in part to the strong operating income performance and a favorable tax rate. Excluding a $0.09 impact from special charges in 2016 and a $0.37 impact in 2015, we grew adjusted earnings per share 9% to $3.78. This increase includes the impact of unfavorable currency rates.

  • operational cash flow high of $658 million

    We continue to generate strong cash flow from our operations and reached a new high of $658 million in 2016.

  • dividend increases!

    With our teams on-track to meet our growth targets, we were able to return $461 million of cash flow to our shareholders through dividends and share repurchases, finance two acquisitions and expand our manufacturing capacity to accommodate our growth. At the end of the year, our Board of Directors authorized a 9% increase in the quarterly dividend, making 2016 the 31st consecutive year of dividend increases!

Long-term, our goals in constant currency are to grow:

  • sales
    4% to 6%
  • operating income
    7% to 9%
  • earnings per share
    9% to 11%

We performed well and achieved sales and adjusted operating income growth toward the top end of these goals in 2016. We are executing against strategies to continue this strong performance in 2017 and beyond. For those invested in McCormick stock, total shareholder return exceeded the broader market in 2016 and in the past 5-, 10- and 20-year periods.

Focus on Flavor.

McCormick Is Driving Growth in 2017 and Beyond

At McCormick, our focus is on flavor. In an environment where consumers are seeking simple ingredients, fresh food and new tastes, flavor is an advantaged category. In the U.S., while convenience, health and price are all important, when consumers choose what to eat, taste ranks #1. Globally, retail sales of packaged spices and seasoning are $11 billion and projected to grow at a 5% compound annual growth rate for the next five years. We are well-positioned for growth with a leading share in this market of approximately 20%; nearly four times the size of our next largest competitor.

pie chart

2016 Global Category Share

  • McCormick
  • Competitor A
  • Competitor B
  • Competitor C
  • All others

Total Annual Shareholder Return:

Total annual shareholder return has risen 8% or more for the past 1-, 5-, 10- and 20-year periods.

chart of shareholder returns

Dividends Declared

McCormick has increased its dividend in each of the past 31 years. We have paid a dividend for 91 consecutive years.

chart of dividends declareds

We Are Enhancing Our Global Brand Marketing Efforts

In markets around the world, we are building our brand equity, and in 2016 our brand marketing surpassed $250 million. We are connecting directly with consumers and achieving some of our highest returns on investment through our effective use of digital marketing, which now accounts for nearly half of our advertising. In its annual “Digital IQ” ranking, L2 Research listed McCormick fifth among approximately 100 U.S. food brands for three consecutive years—a great accomplishment. This ranking is based on the effectiveness of our social media, mobile, digital marketing and e-commerce investments. We highlight here some of our most effective digital marketing programs that are driving sales.

  • vanilla extract in usa

    United States

    As the U.S. social footprint expands, unique website visits reached 35 million in 2016, with greater emphasis on millennials through compelling content and increased digital investment.

  • Newly acquired Kamis brand in Poland

    Poland

    A breakthrough television partnership extends content opportunities, reach and engagement via digital channels for our Kamis® brand.

  • Vahine brand in France

    France

    Total reach through social media platforms grew 46% in this market, increasing impressions to 33 million for our Vahiné® and Ducros® brands.

  • Mccormick Thai ketchup in China

    China

    Further development of e-Content and interactive social games has led to stronger conversion rates on new products.

  • aeroplane jelly in Australia

    Australia

    Higher reach and engagement rates for Aeroplane® Jelly puts us in a strong position to capitalize on the iconic brand’s 90th anniversary in 2017.

gourmet garden herb tubes

2016 Acquisition

Gourmet Garden® is a global market leader in chilled packaged herbs, a convenient alternative to fresh herbs. Based in Australia, these unique products reach 16 countries, with the U.S. being the largest market.

We anticipate strong growth for these products, particularly among consumers that appreciate the value and accessibility of cooking with a more convenient flavoring alternative. In 2016, we began to expand distribution in the U.S. and gained the brand’s first direct distribution in Canada, and in 2017, we plan to introduce Gourmet Garden in China.

We are driving sales through increases in our base business, product innovation and acquisitions. This has led to a 5-year average sales growth rate that is at the upper end of our long-term, constant currency goal of 4% to 6%. In 2016, we made great progress with each of our three avenues for growth:

  • expanding our base business,
  • innovating new products
  • and making value-enhancing acquisitions.

Our Board and management team continue to be closely aligned on our go-forward plan, and we are diligently executing our strategy to continue this progress in the coming years.

We are growing McCormick’s base business and increasing the appeal of our brands.

In particular:

→ Consumers are seeking transparency in their food. This past year we added “non-GMO” to the label for approximately 70% of our everyday spices and seasonings in the U.S., making us the largest brand of spices and seasonings bearing the non-GMO label in this market.

→ We are the #1 organic brand of spices and seasonings in the U.S., following the conversion of 75% of our premium gourmet line to organic. This has been a welcomed move with consumers and retail customers—four of the top ten U.S. retailers expanded their range of our gourmet products.

→ Also in the U.S., we introduced organic versions of our most popular recipe mixes and new organic Kitchen Basics® stocks.

→ In 2017, we are planning to move toward “clean label” on all of our Zatarain’s® rice mixes, with no artificial flavors or dyes and no MSG added.

Enhanced brand marketing is a key growth driver of our base business. We measured our returns on this investment and they are exceeding benchmarks for the food industry.

As a result:

→ We have increased our brand marketing by 35% in the past five years and plan to increase further in 2017.

→ In 2016, we introduced a new marketing campaign in North America that emphasizes the flavor and quality of McCormick’s spices and seasonings. In the U.S., we increased millennial household penetration 2 percentage points with this powerful message.

→ Globally, we are shifting toward more digital marketing which ended 2016 at 46% of our total advertising, double the percentage from five years ago. We are targeting millennial audiences in particular through a variety of digital media, social platforms and new content approaches, such as “how to” cooking videos.

Continued distribution expansion is another important aspect of our base business growth strategy.

→ For our industrial segment, we excel in customer intimacy and as a trusted partner are supporting the geographic growth of multi-national packaged food companies and quick service restaurants.

→ We are reaching an increasing network of restaurants with our branded foodservice products, and in 2016, had particularly strong sales growth in the U.S. and China.

→ In 2016, we began construction on a new, larger facility in Shanghai to accommodate our growth in China for both our consumer and industrial segments. In addition, we established a manufacturing facility in Dubai and acquired a construction site for a new regional manufacturing facility in Thailand to service Southeast Asia.

McCormick is driving growth through innovation

In addition to growing our base business, our strategy of accelerating scalable and differentiated new products has demonstrated its effectiveness. In our industrial segment, we have a particularly high rate of innovation. We are shifting our industrial segment portfolio toward more value-added products and, together with our greater scale and efficiency, we have increased adjusted operating income as a percentage of sales to 10.0% from 7.5% five years ago.

→ Recent product development wins include seasonings for snack chips and crackers, beverage flavors, sandwich sauces and burger seasonings. With our focus on flavorful, healthy eating, we are an ideal partner for industrial customers working to improve the health profile of their products with actions such as reducing sodium or eliminating artificial flavors and colors.

→ An increasing number of our new product briefs in the industrial segment have health and wellness attributes. In 2016, this percentage in the U.S. was approximately 50%, up from 40% in 2014.

→ We are developing advanced flavor delivery capabilities that include technology like FlavorCell®, a proprietary encapsulation system.

→ Our innovation and customer intimacy earned us global flavor supplier status with four large packaged food companies in the last two years. For our consumer segment, a great example of scalable and differentiated innovation is the expanding use of liquid pouch packaging, which provides consumers with another way to enjoy the flavor of fresh. We have introduced skillet sauces, slow cooker sauces and most recently, baking sauces across North America and squeeze pouch condiments in China.

In 2016, we expanded our popular Grill Mates® brand to single-use liquid marinade that exceeded our sales projections by nearly 20%. Our latest breakthrough innovation is herb grinders. Herb grinders are a unique product line that provides a convenient alternative to fresh herbs for use in cooking, serving and at the table. These products were awarded the top consumer product innovation of the year by the U.S. Grocery Manufacturer’s Association and recognized in France by consumers as a “new product of the year.” Our herb grinders are bringing in new consumers with approximately 30% of sales incremental to the dried herb category in the U.S.

→ We see broad appeal for these products and by the end of 2016 won distribution in six other countries, including Canada, U.K. and France.

Innovation for our consumer segment in 2016 also included:

→ In the U.S. we developed Lawry’s® Casero seasoning blends that deliver authentic Mexican and Latino flavors, as well as Kitchen Basics bone broth that provides a simple way to add flavor and protein.

→ Across Europe, we expanded our variety of recipe mixes and in France, added new ingredients and value-added packaging to our Vahiné brand dessert items.

→ We are expanding our recipe mix varieties in China and iconic Aeroplane brand dessert mixes in Australia. Overall, our innovation strategy has delivered results. In 2016, 9% of our sales came from new products launched in the past three years.

vahine marshmallows

Successfully integrating valuable acquisitions remains at the forefront of our strategy.

We expect acquisitions to account for about a third of our sales increase. We continue to seek businesses that expand our portfolio of flavors, build scale and make financial sense. Our acquisition pipeline includes both bolt-on and larger assets.

→ We were pleased to acquire Gourmet Garden this past year. Based in Australia and with exports to markets around the world, Gourmet Garden is a leader in chilled packaged herbs. Nearly two-thirds of sales are in the U.S. and this product is merchandised in the high-traffic produce aisle. Gourmet Garden is a great addition to our portfolio of flavors and we plan to grow this business globally through increased household penetration, expanded distribution in current and new markets and leveraging our marketing expertise.

→ Toward the end of the year, we announced an agreement to acquire Giotti, a leading flavor supplier in Europe. Based in Italy, Giotti expands our value-added flavor solutions across Europe and provides additional expertise in flavoring health and nutrition products.

Our Comprehensive Continuous Improvement program is driving margin improvement at McCormick.

Along with our strategies to grow sales, we are working to increase operating income margin by driving operating income growth at a faster rate than sales. In 2016, we increased adjusted operating income as a percentage of sales by 60 basis points from the year-ago period. Our Comprehensive Continuous Improvement (CCI) program, is driving margin improvement at McCormick. Since 2009, we have been improving productivity throughout the company and recently increased our resources to step-up our efforts. These efforts are paying off. Early in 2016, we set a goal to achieve $400 million of cost savings through greater productivity over the next four years. We are well on our way to achieving this goal with a record $109 million of cost savings delivered in the first year. In addition to driving margins, these cost savings are our fuel for growth, funding increases in brand marketing and additional sales initiatives.

Mccormick team

We Have the Right Team to Win Business

Employees throughout the company are the backbone of our success. On behalf of the executive team, I would like to thank them for their dedicated efforts and accomplishments. The foundation of our culture began with C.P. McCormick and I am proud to say we still engage all employees through our Multiple Management philosophy of encouraging participation and inclusion. Our people are the reason McCormick is a great place to work. In order to compete effectively and attract the best talent we are strengthening our winning ways of working with faster decision making, more personal accountability and actionable insights. In this regard, we have taken a number of steps that include developing tools to help achieve strategic goals that cascade to the individual employee and provide a direct link to compensation. We have also increased global resources behind innovation, analytics, digital marketing, our CCI program and business development.

We are devoting resources to heighten our diversity and inclusion, and now have seven employee ambassador groups underway. The largest of these is the Women’s International Network—it currently has three chapters spanning several countries. This past year we also saw a number of changes to our management structure and are confident that we have the right team in place to deliver sustained growth in 2017.

→ Alan Wilson, who served as CEO for eight years through February 1, 2016 and since then as Executive Chairman, will retire January 31, 2017. On this date, he will remain a member of McCormick’s Board of Directors, but will end his role as Chairman. We thank Alan for his outstanding leadership, an enviable track record of financial performance and delivering significant shareholder return. I was honored to have been named McCormick’s new Chairman of the Board.

→ Gordon Stetz stepped down from his roles of Executive Vice President & CFO and Board member and retired in December 2016. (Please see our tribute to Gordon on page 9.)

→ Mike Smith was named Executive Vice President & CFO effective September 1, 2016. Mike brings extensive experience in financial roles at the company that span both our consumer and industrial segments.

McCormick Is Poised for Success

I would like to express how proud I am of what we accomplished in 2016. Our business and products are on trend with today’s consumers and we are well-positioned for continued momentum. Our leaders and employees are executing on effective growth strategies—strategies designed to win with our customers and consumers. As part of this strategy we are stepping up our performance and I am confident McCormick is on track for a very successful 2017. As we enter the new year, I look forward to continued progress as we focus on growth, performance and people to build the value of your investment in McCormick.

Thank you for your interest in McCormick.

lawrence kurzius signature

Sincerely,
Lawrence E. Kurzius

President and Chief Executive Officer

Financial Highlights

For the year ended November 30 (millions except per share data) 20162015%Change
Net Sales $4,411.5 $4,296.3 2.7%
Gross Profit 1,831.7 1,737.3 5.4%
Gross Profit Margin41.5% 40.4%
Operating Income641.0 548.4 16.9%
Operating Income Margin14.5% 12.8%
Net income472.3401.617.6%
Earnings per share—diluted3.693.1118.6%
Cash flow from operations658.1590.011.5%
Dividends paid217.8204.96.3%
Dividends paid per share1.721.607.5%

We are providing below certain non-GAAP financial results excluding items affecting comparability. The details of these adjustments are provided in the Non-GAAP Financial Measures of the Management’s Discussion & Analysis on pages 36 to 39.

20162015% Change
Adjusted operating income$ 657.0$ 613.97.0%
Adjusted operating income margin14.9%14.3%
Adjusted net income483.4449.57.5%
Adjusted earnings per share — diluted3.783.488.6%

Net Sales by Segment and Region

chart of net sales

Cash Flow from Operations (millions)

Since 2012, we have increased cash flow from operations by more than $200 million.

chart of cash flow from operations

Cost Savings from CCI and Organization and Streamlining Actions (millions)

In the last five years, we have achieved nearly $400 million in cost savings.

chart of cash flow from operations

Segments at a Glance

Between our consumer and industrial segments, you are likely to enjoy food flavored by McCormick every day.

Consumer Segment

Products at every price point— premium gourmet items to valuepriced private label.

~150

We have brands in approximately 150 countries and territories.

Net Sales (billions)

bar chart of consumer net sales

Adjusted Operating Income (millions)

bar chart of consumer adjusted operating income

Industrial Segment

Globally, sell to nine of the top 10 food and beverage companies and nine of the top 10 foodservice restaurant chains.

48%

Grew sales 11% and adjusted operating income 48% since 2011.

Net Sales (billions)

bar chart of industry net sales

Adjusted Operating Income (millions)

bar chart of industry adjusted operating income