McCormick Annual Report

Introduction

DEAR FELLOW SHAREHOLDERS

Alan D. Wilson, Chairman & Chief Executive Officer, and Lawrence E. Kurzius, President & Chief Operating Officer, in McCormick’s new U.S. Consumer Product Development Lab. At McCormick, our products are well-aligned with these trends, which contributed to strong sales growth in 2015 along with three acquisitions, product innovation and increased brand marketing. We are fueling our growth investments with cost-savings programs that delivered a record $98 million this year. As we look to the future, we see continued momentum and business growth.

Consumers around the world are exploring new flavors— and also becoming increasingly interested in the source and quality of their food.

PERFORMANCE

In 2015, we were pleased with our underlying financial performance. We had strong sales growth on a constant currency basis, a significant increase in cost savings and another year of substantial cash flow. Net sales rose 1%. Excluding the impact of unfavorable currency rates, we grew net sales 6% through product innovation, brand marketing and expanded distribution. We completed three acquisitions that also contributed to this growth, along with pricing actions. Both our consumer and industrial segments achieved a strong rate of sales growth in constant currency. On this basis, consumer sales rose 5% with broad-based growth across each region. We grew industrial sales in constant currency 8%, including a strong increase in international markets. We reported operating income of $548 million. Excluding the impact of special charges, operating income was $614 million in 2015 compared to $608 million in 2014. A record $98 million in costs savings achieved this year provided fuel for a 6% increase in brand marketing and helped offset increased costs in materials and employee benefits. In 2015, our earnings per share was $3.11. Excluding the impact of special charges, adjusted earnings per share rose 3% to $3.48 from $3.37 in 2014.

Forecast Logo

The McCormick Flavor Forecast inspires culinary exploration by capturing the leading trends, insights and ingredients in food and flavor.

GROWTH

Higher operating income contributed to this increase, as well as another year of excellent performance by our joint venture in Mexico and our share repurchase activity. These gains were offset in part by the unfavorable impact of currency rates on earnings per share. We have a long history of strong cash flow and returning cash to shareholders. In 2015, we reached $590 million of cash flow and returned $351 million to our shareholders through dividends and share repurchases.Our focus on performance, growth and people is driving strong long-term results and shareholder return that has exceeded both the broader market and food group in the past 5-, 10- and 20-year periods. For more than a decade, we have delivered strong and steady financial performance with an effective growth model. We invest in the business to drive sales and profit, and fuel this growth with cost savings. Our growth model begins with growing sales and we are delivering strong results. Since 2010, we grew sales at a compound annual growth rate of 5%, which is right in line with our long-term objective of 4% to 6%. We expect to drive this growth through our base business, innovation and acquisitions. Across all of our markets, we increased brand marketing support by 6% in 2015.

Increasingly, we are shifting toward digital marketing, which comprised 38% of our advertising, up from 11% in 2011. Digital marketing creates a direct connection to consumers, including Millennials, who view the McCormick brand positively. As an example, our mccormick.com site has become a top 50 most visited food/ lifestyle site. Our leadership in this area was recognized once again in 2015 with a Top 5 ranking among over 100 food brands by L2, a business intelligence service, in its Digital IQ Index. This ranking included our work in e-commerce and our advances in this rapidly growing channel have also earned us recognition from our customers.

5%

Since 2010, we grew sales at a compound annual growth rate of 5%.

8%

Around the world, 8% of our 2015 sales came from new products launched in the past three years.

$98M

In 2015, we stepped up our CCI program and organization and streamlining actions, achieving $98 million in cost savings, a 42% increase from the previous record.

As part of this relaunch, we...

  • Changed the label to show more of the product.
  • Introduced FlavorSealed technology to keep the product fresher longer.
  • Added hot new items such as Sriracha seasonings and chipotle pepper flakes.

In 2015, we had efforts underway to improve performance in our consumer segment in the United States, where consumer interest in flavor is driving mid-single digit category growth for spices and seasonings. We made significant progress with these efforts and, in each quarter of 2015, achieved sequential increases in retail consumption of our brands. During the 2015 holiday season, we launched a purity campaign to emphasize the quality of our products with the tagline “pure tastes better.” We also committed to labeling over 70% of our spices, herbs and extracts as not containing genetically modified organisms (non-GMO) by the end of 2016. In China, now our second largest market, we grew sales 9%. In 2015, McCormick gained share in our top three categories for our consumer business and the addition of Wuhan Asia Pacific Condiments in 2013 continues to accelerate our growth. The multinational quick service restaurants we supply continue to expand in this market with new locations, driving sales for our industrial business. To support growth across both businesses, we are expanding our manufacturing capacity in China and opened a new headquarter facility in 2015. Around the world, 8% of our 2015 sales came from new products launched in the past three years. In the Americas consumer business, our latest additions included flavored sea salt grinders, slow cooker sauces and stock cubes. We have also expanded our grilling products across Europe with strong results not only in developed markets like the U.K. and France, but also in Poland and other parts of Eastern Europe. Building on the success of our ketchup pouch in China, we are introducing a Thai chili sauce pouch. For our industrial business, health and wellness are important product attributes for our customers, accounting for approximately 40% of our new product projects in 2015. We have a robust pipeline of innovation for both segments of our business heading into 2016. We are also working to keep our core business relevant to consumers, especially Millennial consumers. Based on consumer insights, we re-launched our entire premium gourmet line in the U.S. Since this re-launch, retail sales have increased 5%. By the end of 2016, we will convert 80% of these U.S. gourmet items to organic, up from the recent level of 10%.

Our innovation spans eating occasions from snacking to special meals and is based on consumer insights.

In 2015, we expanded our portfolio of leading products with three new acquisitions...

  • Brand Aromatics : expanded the range and authenticity of savory products that we develop for industrial customers, and includes organic products.
  • Drogheria and Alimentari : established a leading postition for McCormick in Italy with a premium spice and seasoning line that is exported to 60 countries.
  • Stubb’s : complements our ever-growing line of popular grilling products with the leading premium barbecue sauce in the U.S.

We expect about one-third of our long-term sales growth to come from acquisitions, as it has over the last five years. We look forward to accelerating the growth for each of these businesses with our capabilities in innovation and brand marketing and our customer relationships. In addition to acquisitions, we are expanding our core business into new geographies. In the last 12 months, construction began in Dubai to support the growth of industrial segment customers in the Middle East and we cut the ribbon on a new product development center in Brazil to develop local flavors as our customers move into South America. In addition, we are expanding distribution in our consumer segment in Russia, new markets across Central America and in China. As we advance these growth strategies, we have added momentum from the rising demand for flavor. Consumer purchases for our largest category, spices and seasonings, are projected to grow 4% annually in developed markets through 2020. In emerging markets, the projected growth rate is even higher at 8%, as these consumers trade up from bulk purchase to spices and seasonings as branded, packaged product. We are well-positioned to fully participate in this growth in both developed and emerging markets. We are fueling this growth through Comprehensive Continuous Improvement (CCI), our productivity improvement program. In 2015, we stepped up CCI and organization and streamlining actions, achieving $98 million in cost savings, a 42% increase from the previous record of $69 million in 2014. We have added resources to this activity and intend to maintain this higher level of cost savings going forward.

2012 Management Committee: pictured from left to right: Mark Timbie, Lawrence Kurzius, Gordon Stetz, Alan Wilson, Cile Perich, Chuck Langmead

PEOPLE

McCormick employees throughout the company are delivering high performance and growth. We engage our employees through Multiple Management, a philosophy of participation and inclusion that has been our foundation for more than 80 years. Together we are driving growth opportunities, addressing business challenges, and developing careers and future business leaders. We want to recognize all of our employees for their accomplishments and thank them for their efforts behind our success. McCormick’s Board of Directors and company leaders have been shaping our strategy, business and resources to maintain our momentum. Our engaged employees, effective growth strategies and a business aligned with today’s consumers have us well-positioned for the future, and we are committed to building the value of your investment in McCormick.

McCormick’s Board of Directors and company leaders have been shaping our strategy, business and resources to maintain our momentum...

  • Following his promotion to President & COO early in 2015, Lawrence became a member of the Board in November and has been appointed President & CEO starting February 1, 2016.
  • Effective February 1, 2016, Alan will become Executive Chairman of McCormick.
  • We appreciate the many contributions of John P. Bilbrey, who joined the Board in 2005 and departed in 2015.
  • We welcomed two other new Board members: Maritza Montiel, former Deputy CEO and Vice Chairman of Deloitte LLP and Michael Conway, President, Global Channel Development for Starbucks Coffee Company. Their knowledge, insights and leadership will be valuable assets as we position the company for the future.
  • Retiring from the company after years of distinguished service and strong leadership were Cile Perich, Senior Vice President, Human Relations and Paul Beard, Senior Vice President, Finance.
  • During 2015, Brendan Foley, President, Global Consumer Segment and North America and Lisa Manzone, Senior Vice President, Human Relations joined the Management Committee.

OUR
MISSION

To save your world from boring food!

OUR
VISION

McCormick brings the joy of flavor to every day.

$10B

For our consumer segment, we have a leading share of the $10 billion global spices and seasonings category, 4x the size of the next largest competitor.

18%

For our industrial segment, we have achieved an 18% year-on-year increase in 2015 adjusted operating income driven by sales growth, cost savings and a shift toward more value- added products.

We have facilities in more
than 50 locations in 26 countries.
5

These five pillars are the foundation of our business and drive our success in markets around the world.

Passion for Flavor

Around the globe, home cooks and professional chefs alike turn to McCormick for flavor and culinary inspiration. We have substantial and sustained investment to support innovation with product development centers in 14 countries. Over the past five years, we have increased brand marketing support by 44% to better connect with consumers.

Power of People

Globally, more than 10,000 McCormick employees are engaged in McCormick’s participative culture and driving our success.

Taste You Trust

Product quality and transparency are increasingly important to today’s consumer. We are building on our legacy of corporate social responsibility and have set new goals to achieve by 2019. McCormick ranked 27th among U.S. companies in the 2015 Newsweek Green Ranking.

Inspiring Healthy Choices

Consumer interest in wellness continues to grow and we are working to help them achieve a healthier diet. We are pleased that the new 2015 Dietary Guidelines for Americans recommends using spices and herbs to help Americans reduce sodium in their diets.

Delivering High Performance

In the past 10 years, we grew sales 66%, increased cash flow from operations 74% and delivered 13% total annual shareholder return.

People

READY, TALENT, FULLY ENGAGED

As our company expands and grows globally, we are strengthening and aligning our talent to meet our business ambitions, ensuring that we have the organizational capacity to fuel growth. In 2015, our focus on talent and capacity led to an increase in resources for strategic business development, category management, an analytic center of excellence and improved productivity while, at the same time, creating functional capacity in North America and Europe. We are strengthening our talent at the individual level. Employees have the opportunity to build their skills on the job and through our Multiple Management Boards, employee ambassador groups or other networks. We are strengthening our talent at the individual level. Employees have the opportunity to build their skills on the job and through our Multiple Management Boards, employee ambassador groups or other networks. Multiple Management is the foundation of McCormick’s high performance culture and our leadership development philosophy. Now in its 83rd year, hundreds of employees in locations around the world have chosen to participate on one of 16 Multiple Management Boards, developing core leadership skills while working on projects that improve our business. “MySuccess,” a comprehensive management tool, supports employees taking charge of their performance feedback, development and career progression. Employees set specific goals, receive feedback from their supervisor, and then are measured and rewarded based on a pay-for- performance approach. Employees also enter their career experiences, skills and aspirations in a Personal Profile providing insights into our global talent review discussions. This tool strengthens our robust talent review process as we prepare our next generation of business leaders at McCormick. It also provides our leaders with better visibility to available talent for projects and assignments, while providing employees with new opportunities. We recognize that our global expansion requires diversity in our workforce and an inclusive environment aligned with our core values. Our work environment is designed to help us value and respect one another, through our employee ambassador groups and annual Diversity & Inclusion Day. In 2015, we introduced performance goals at the top levels of our organization to measure our progress in creating an even more diverse workforce. From locations around the world, employees have clear goals that are aligned with our growth strategies as part of the culture of participation that is driving growth. McCormick employees are the key ingredient to our success.

Growth

WIN SHARE WITH GLOBAL FOCUS

Consumers today are exploring new flavors; using fresh, simple ingredients; thinking more about the source and quality of their food; and making the connection between good and wellness. As a global leader in flavor, McCormick is well-aligned with these trends and keeping our product relevant to drive global growth for our consumer segment and demand from our industrial customers. Global consumption for our largest category, spices and seasonings, is projected to grow at a mid-single digit annual rate through 2020. Along with rising demand for flavors, we are working to build our brand equity. Our investment in brand marketing rose 6% in 2015 and is up 44% from 2010. Increasingly, we are shifting toward digital marketing and have established McCormick as a leader with customers and consumers. In 2015, McCormick ranked fifth out of 114 food brands in the U.S. market in a “Digital IQ Index,” which scores companies on factors such as digital marketing presence and social media community size, content and engagement. We also use marketing to distinguish us from the competition and, in the latest holiday period, launched our “purity” campaign to highlight the superior quality of our products.

In 2015, we completed three acquisitions...

  • Extending our footprint in Europe with Drogheria & Alimentari, a leading brand of spices and herbs in Italy
  • Complementing our products that add flavor at the grill with Stubb’s, the top U.S. premium barbecue sauce
  • Adding savory product capabilities, including organic, to our industrial segment flavor solutions with U.S.-based Brand Aromatics
  • Logo List 1
  • Logo List 2
  • Logo List 3

Banner 1

We are accelerating innovation that is scalable globally and refreshing core product lines for our consumer segment: We continue to build out our array of grilling seasoning, rubs and sauces, especially across markets in Europe. In the U.S. we re-launched our entire gourmet line of spices and seasonings, achieving a 5% increase in retail sales. Also in the U.S., we achieved a category share greater than 10% for our new liquid skillet sauces just one year after introduction and added slow cooker varieties in 2015. For industrial customers, approximately 40% of innovation is focused on products that feature health and wellness attributes. Our recent acquisition of Brand Aromatics advances our savory flavor capabilities for these customers. Through acquisitions, we are expand- ing the availability of our products and geographic footprint. Our newest market is Italy, where we have entered the market with a leading brand. We are also expand- ing facilities to support the global growth of our multi-national industrial customers in markets such as the Middle East, China and South America. With these growth strategies, we have created significant momentum that will spur continued innovation and carry us into the future. We continue to shape our product portfolio to align with the interests of today’s consumer. In 2015, we committed to a goal to label over 70% of McCormick brand spices, herbs and extracts in the U.S. as non-GMO in the next year.

Performance

SUPERIOR RESULTS, CONSISTENTLY DELIVERED

FINANCIAL HIGHLIGHTS

For the year ended November 30 (millions except per share data) 2015 2014 %Change
net sales $4,296.3 $4,243.2 1.3%
gross profit 1,737.3 1,730.2 0.4%
gross profit margin 40.4% 40.8% N/A
operating income 548.4 603.0 (9.1)%
operating income margin 12.8% 14.2% N/A
net income 401.6 437.9 (8.3)%
earnings per share—diluted 3.11 3.34 (6.9)%
cash flow from operations 590.0 503.6 17.2%
dividends paid 204.9 192.4 6.5%
dividends paid per share 1.60 1.48 8.1%
adjusted operating income $613.9 $608.2 0.9%
adjusted operating income margin 14.3% 14.3% N/A
adjusted net income 449.5 441.6 1.8%
adjusted earnings per share—diluted 3.48 3.37 3.3%

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 34 and 35.

OUR MOST POPULAR BRANDS

Scroll to the right to see all brands.

Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands Most Popular Brands

SEGMENTS AT A GLANCE

We sell leading brands of spices, seasonings and other flavor products to a variety of retail outlets that include grocery, mass merchandise, discount stores and e-commerce. Products at every price point—premium gourmet items to value-priced private label. Since 2010, we grew sales 32% and adjusted operating income 13%. 140 Consumers purchase our brands in more than 140 countries and territories.



INDUSTRIAL SEGMENT

Globally, sell to nine of top 10 food and beverage companies and each of the top 10 foodservice restaurant chains. Following growth of our customers, in 2015, opened product development lab in Brazil and broke ground on production facility in Dubai. One of the broadest ranges of flavor solutions in the industry; includes snack seasonings, sandwich sauces, branded food service products, premium gourmet items and value-priced private label.