McCormick & Company, Incorporated

Good morning. This is Casey Jenkins, Vice President of McCormick Investor Relations. Thank you for joining today's second quarter earnings call. To accompany this call, we posted a set of slides at ir.mccormick.com. We will begin with remarks from Lawrence Kurzias, Chairman, President, and CEO, and Mike Smith, Executive Vice President and CFO, and we'll close with a question and answer session. During this call, we will refer to certain non-GAAP financial measures. These include information in constant currency, as well as adjusted gross profit margins, adjusted operating income, adjusted income tax rate, adjusted income from unconsolidated operations, and adjusted earnings per share that exclude the impact of special charges, transaction and integration expenses related to the acquisition of Cholula and Sona, and a gain realized upon the sale of our unconsolidated operations. 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 for complete information. In addition, 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 statements, whether because of new information, future events, or other factors. As seen on slide two, our forward-looking statement also provides information on risk factors that could affect our financial results. I will now turn the discussion over to Lawrence.

Thank you, Casey. Good morning, everyone. Thanks for joining us. Throughout the pandemic, we remained steadfast in our focus on our growth, performance, and people strategies while ensuring the health and safety of our employees and positioning McCormick to emerge stronger from the crisis. We continue to execute from a position of strength through the combination of our business model, the strategic investments we've made, and the capabilities we've built as an organization, our broad and advantaged global flavor portfolio, the acceleration of consumer trends that our strategies capitalize on, and the effective execution of those strategies, as well as our recent acquisitions of two fantastic businesses, and importantly, the engagement of our employees have positioned us well to drive differentiated growth despite challenging comparisons, as we lacked very strong growth last year. Our second quarter results were strong, on top of our exceptional second quarter performance last year, and also reflect our robust growth momentum on a two-year basis, as seen on slide four. We delivered significant double-digit two-year growth rates for sales, adjusted operating income, and adjusted earnings per share, and expanded adjusted gross profit and adjusted operating margins, even considering increased COVID-19 and inflation costs, as well as planned brand marketing investments. We are driving growth through executing on our long-term strategies, actively responding to changing consumer behaviors, and capitalizing on new opportunities. We are emerging stronger. As we enter the second half of the year, we continue to be confident in the effectiveness of our strategies, our growth trajectory, and that we are well-positioned to deliver another year of differentiated growth in 2021 with an even stronger outlook. As seen on slide five, We have a broad and advantaged global flavor portfolio with compelling offerings for every retail and customer strategy across all channels. The breadth and reach of our portfolio across segments, geographies, channels, customers, and product offerings creates a balanced and diversified portfolio to drive consistency in our performance in a volatile environment, as evidenced again by our second quarter results. During last year's second quarter, the onset of the pandemic drove a surge in consumers cooking and eating more at home, at-home consumption, resulting in a substantial increase in our consumer segment demand, as well as increases with our packaged food company customers and our flavor solution segment. Last year, we also experienced a sharp decline in demand from our restaurant and other food service customers for the away-from-home products in our portfolio. Our second quarter results reflect the lapping of these year-ago comparisons, as well as the sustained shift to consumer at-home consumption higher than pre-pandemic levels and the robust recovery from away-from-home customers. Our second quarter results also include strong contributions from our Cholula and Fona acquisitions, which further extended the breadth and reach of our portfolio with new product offerings, channels, and customers. Taken together, these impacts continue to demonstrate the strength and diversity of our offering, and we are confident in our balanced portfolio that will continue to differentiate McCormick and sustainably position us for growth. Now let me cover the highlights of our second quarter results. Turning to slide six, total second quarter sales grew 11% from the year-ago period, and constant currency sales grew 8%, attributable to substantial growth in our flavor solution segment partially offset by a decline in our consumer segment, both impacted by the factors I mentioned a few moments ago. The considerable shift in sales between segments resulted in an adjusted operating income decline 1% or 4% in concept currency. At the bottom line, our second quarter adjusted earnings per share was 69 cents, compared to 74 cents in the year-ago period, driven lower primarily by a higher tax rate. As we stated in our March earnings call, We expect growth to vary by quarter in 2021, given 2020's level of demand volatility and the pace of COVID-19 recovery. Importantly, though, we've started the first half of the year with outstanding performance. Year-to-date, we've grown sales and adjusted operating income 16% and 14% year-over-year, respectively, both of which include 3% favorable impact from currency. And we've grown adjusted earnings per share 10%. While Mike will provide more details in a few moments, I'd like to comment on our outlook. With our first half results and our robust operating momentum, we are increasing our 2021 outlook for sales, adjusted operating income, and adjusted earnings per share. We are operating in a dynamic cost environment, and we're certainly not unique in experiencing cost pressures. We're seeing broad-based inflation across our various commodities, packaging materials, and transportation costs. To offset rising costs, we are raising prices where appropriate, but usually there is a lag time associated with pricing, particularly with how quickly costs are escalating. Therefore, most of our actions won't go into effect until late 2021. As pricing discussions are ongoing, we can't provide further specifics. We have a demonstrated history of managing through inflationary periods with a combination of pricing and cost savings. Now let's turn to our second quarter segment business performance, which will include comparisons to 2019 pre-pandemic levels, as we believe these to be more meaningful than the comparisons to 2020, given the dramatic shifts in consumer consumption between at home and away from home experienced in the year-ago period. Starting on slide seven, with our consumer segment comparing to the highly elevated demand levels in the second quarter of last year, sales declined by 2%. or in constant currency, 5%. Our consumer segment organic sales momentum on a two-year basis was up double digits, highlighting how the sustained shift in consumer consumption continues to drive increased demand for our product and, importantly, outpaces pre-pandemic levels. Our America's constant currency sales declined 7% in the second quarter, with incremental sales from our Cholula acquisition contributing 3% growth. Our total McCormick U.S. branded portfolio consumption, as indicated in our IRI consumption data and combined with unmeasured channels, declined 26%, following a 55% consumption increase in the second quarter of 2020. The difference between year-over-year shipment and consumption changes is attributable to two factors. First, we undershift consumption in the second quarter of last year. Second, we continue to replenish retailer and consumer pantry inventories that were completed throughout last year. Demand has remained high, and we continue to realize the benefits of our U.S. manufacturing capacity expansion. Throughout our first half of the year, we restored products which had been suspended at the end of last year and continued to see service levels improve, and we're refilling the inventory pipelines. As we have said previously, inventory replenishment will progress throughout the year. Through working with our customers on improving shelf conditions, we estimate approximately 90% of suspended products are now back on shelf. We know in the categories most impacted by supply constraints, spices and seasonings, and dry recipe mix, there is a high correlation between our share performance and the shelf conditions resulting from product suspension or allocation. Products that had strong supply and remained on shelf performed well, and as suspended products are restocked on shelf, we are seeing improved performance. This improvement is somewhat masked due to the lapping of significant overall share gains in the second quarter of last year. Importantly, we continue to anticipate regaining share as conditions continue to improve. Focusing further on our U.S.-branded portfolio, our IRI consumption data combined with unmeasured channels, indicates consumption of the portfolio grew 18% versus the second quarter of 2019, led by significant growth in spices and seasonings and hot sauces, and also includes triple-digit pure play growth in e-commerce, with McCormick-branded consumption outpacing all major categories. This is the third consecutive quarter a U.S.-branded portfolio consumption grew double digits in the mid-to-high teens versus the two-year-ago period, which reflects the continuation of consumers cooking and using flavor more at home and the strength of our categories. Our key categories continue to outpace the center of store growth rates, favorably impacting not only the McCormick brand, but smaller brands as well. Household penetration and repeat buy rates have also grown versus 2019. And when our consumers shop, they are buying more of our products than they were pre-pandemic. And finally, for the Americas, Our initiative to reinvent the in-store experiences for spices and seasonings consumers with new merchandising elements to improve navigation and drive inspiration is yielding great early results. Where implemented, the category and McCormick branded growth is outpacing the rest of market, and we plan to implement this in thousands of additional stores in the third quarter. Now, turning to EMEA, which has continued its outstanding momentum. We had strong market share performance in the second quarter versus last year, maintaining or gaining share in our core brands and markets following the strong gains in the second quarter last year. Notably, both Schwartz and Ducro Spices and Seasonings, as well as Frank's Red Hot, grew consumption during the second quarter against a strong comparison to double-digit growth last year. And not only are we retaining new households we gained last year, but we are also continuing to increase household penetration for the fifth consecutive quarter. Our investments in brand marketing in EMEA, which significantly increased in the second quarter compared to last year, are proven to be effective as evidenced by the metrics I just discussed, as well as are achieving above benchmark rates for reach, engagement, and click-through, for instance, in our digital marketing. Additionally, the creativity of our Bahane Happy Birthday campaign received national media attention in France, as well as a prestigious award for its excellence in advertising and design. On a two-year basis, compared to the second quarter of 2019, we drove double-digit consumption growth and market share gains in our core categories and markets, including total EMEA region spices and seasonings, bahane homemade desserts in France, and both Schwartz recipe mixes and Frank's Red Hot in the UK. Since the beginning of the pandemic, our EMEA supply chain has been very well positioned to meet the elevated demand and has contributed to our ability to grow share across the region. In the Asia-Pacific region, second quarter sales growth was strong. During this time last year, China's Hubei province, where our Wuhan operations are located, remained in lockdown through part of the second quarter. and our results reflect the recovery from that, as well as the recovery of branded food service sales in China. China's food service has almost fully returned to pre-pandemic levels, with restaurant home delivery increasing in popularity. Our consumer product demand declined due to lapping significant growth last year. In Australia, we continue to see elevated consumption and share gains versus the second quarter of 2019, with Frank's Red Hot and Stubbs Consumption growing triple digits and gaining share Gourmet Garden, McCormick, and Keene's spice and seasonings outpacing the category with double-digit consumption growth. Across all our regions, our new products continue to be integral to our growth and we're gaining significant momentum with our recent launches. For instance, our Grillmates all-purpose seasoning and our Frank's frozen appetizers are driving growth in the Americas as consumers have shifted their thinking about convenience from no cooking to cooking easily. And in EMEA, the rollout of our first choice glass bottle into the Eastern European market is going very well, increasing our relevance with consumers and driving share gains as they perceive the glass bottle as a premium to sachets. Moving forward, while we know we will be lapping challenging year-over-year consumption comparisons in our second half of the year, we are confident that we continue to capture the momentum in our consumer segment. We have more consumers than pre-pandemic, They've come into our brands, are having a good experience, and are buying our products again. We're excited about our growth trajectory and expect continued and long-lasting growth from the sustained shift to consumers cooking more at home, fueled by our brand marketing, new products, and category management initiatives, as well as growth from our Cholula acquisitions. Turning to slide eight, our flavor solutions second quarter results include not only recovering from the significant curtailment of away-from-home dining during last year's second quarter, but also the growth momentum we are gaining with our restaurant and other food service customers, as well as the continued strong momentum with our packaged food and beverage customers. In the second quarter, our sales rose 39% or 34% in constant currency, with double-digit growth in all three regions. And on a two-year basis, our sales also increased double digits in all three regions. In the Americas, our Kona and Cholula acquisitions made a strong contribution to our significant growth in the second quarter, and we are executing on our strategy to shift our portfolio to more value-added and technically insulated products. We continue to see strong growth in our consumer packaged food customers while executing on our portfolio migration through new products and based business strengths. Compared to last year's second quarter, snack seasonings grew double digits with strong growth in core iconic products as well as new products, and the innovation pipeline continues to be robust. Consumers' rising global demand for hot and spicy flavors is driving growth for our customer snacks and for our seasonings that flavor them. And with the flavored hard seltzer trend accelerating, we are winning new business and growing our flavor sales for beverages considerably. up triple digits in the second quarter. Demand from our Americas away-from-home customer base for branded food service and restaurant customers increased significantly due to the recovery I mentioned a few moments ago. Our away-from-home rebound in this region is at a slower pace as our customer base is more skewed to branded food service. We anticipate our demand from this channel will strengthen as the year progresses and more dining options reopen. In EMEA, as we cycled a significant decline in last year's second quarter from region-wide shutdowns, our growth was substantial. Our sales to quick service restaurants, or QSRs, more than doubled from the second quarter of last year and increased double digits from the same period in 2019, with particular strength in the UK. Turning to our consumer packaged food and beverage customers, we had strong second quarter performance on top of last year's strong growth. with growth in flavors for sweet beverages and the hot and spicy trend fueling both base and new product growth in snack seasonings. Our sales growth in the Asia-Pacific region was partially due to the recovery from lockdowns, closures, and curfews in countries outside of China during the second quarter of last year, as well as continued momentum in Australia from QSR customers' limited-time offers. Additionally, China, where QSRs were open in the second quarter of last year, delivered double-digit growth due to significant momentum and limited time offers, as well as strength in the core business. Across all regions, we recognize a large part of our second quarter flavor solutions results were due to the comparison to abnormally low away-from-home demand last year. Importantly, though, our growth also includes contributions from Fona and Cholula, strong growth with packaged food and beverage customers, both in the base business and in new product wins driven by our differentiated customer engagement and continuing momentum with QSRs, partially from their limited-time offers and promotional activities. While we know a portion of our second-half growth will still be impacted by recovery, our second-quarter results and our effective growth strategies bolster our confidence in returning to our robust pre-pandemic growth trajectory in our flavor solution segments. Now for a brief update on how we're driving growth with Cholula and Fona, starting with Cholula on slide nine. In our consumer segment, Cholula continues to outpace category growth and gain share, growing consumption 54% since the second quarter of 2019. We're using our category management expertise to expand distribution points, including with a two ounce bottle size and expansion into new channels. optimize shelf assortment and placement, and gain momentum in e-commerce where Cholula has been under-penetrated. We are increasing awareness through brand partnerships such as with HelloFresh and DoorDash, as well as through brand marketing investments and by leveraging promotional scale across McCormick brands, including Cholula's best ever Cinco de Mayo promotion with double the merchandising as 2019 and scale with McCormick's taco seasoning. Our initiatives are yielding results We have grown total distribution points 11% and household penetration 5% since the second quarter of 2020. We recently launched Cholula wing sauces and also relaunched the green pepper and chipotle flavors with cleaner formulas. And in our flavor solutions segment, we're using our culinary foundation and insights on menu trends to grow our back of house food service penetration by increasing Cholula's menu participation. Since the beginning of the year, We've driven a 63% increase in U.S. national chain restaurant locations, activating a Cholula-branded limited-time offer. We are winning in food service. Now moving to FONA. We're excited by year-to-date double-digit sales growth compared to last year. Beverages with particular strength in the fast-growing performance nutrition category continue to drive significant growth for FONA, 14% on a year-to-date basis. We're driving growth with our global footprint. For example, by leveraging GIATI's infrastructure, we're expanding flavors for our top FONA customer into the EMEA region, with the first order being manufactured this month. We're also leveraging McCormick's sustainability leadership to create new opportunities with FONA customers. Combination of our capabilities has created new opportunities to bid on customer briefs that capitalize on core strengths across McCormick and FONA. including McCormick's culinary focus and Phona's speed to market. Phona's year-to-date new product wins and its pipeline potential have hit record highs, fueling future growth. We have also identified longer-term opportunities to optimize our combined assets and technologies across the network to expand our capacity and drive further solutions for our customers. Customer reaction has been extremely positive. They are impressed with our early collaboration and excitement about our increased customer value proposition continues to build. Our enthusiasm for Cholula and Thona and our confidence we'll deliver on our acquisition plans accelerate growth of these portfolios and drive shareholder value continue to strengthen. In fact, we're now projecting the incremental sales contribution of these acquisitions to be at the high end of our 3.5% to 4% guidance range. Now I'd like to share some of our insight on long-term consumer trends, as seen on slides 11 and 12. Global demand for flavor remains the foundation for our sales growth. We're capitalizing on the growing consumer interest in healthy, flavorful cooking, trusted brands, as well as digital engagement and purpose-minded practices. These long-term trends and the rising global demand for great taste are as relevant today as they have been in the past, with the younger generations continuing to fuel the demand for flavor at a greater rate. As we shared previously, our proprietary consumer survey data, supported by external research, tells us that consumers are enjoying the cooking experience. It provides a creative outlet, makes them feel adventurous, reduces stress, and connects the family, and they feel home-cooked meals are healthier. In our recent consumer survey from May, 68% of U.S. consumers surveyed state they are cooking more today than pre-pandemic, and 78% claim they would maintain or increase their level of cooking at home if things return to normal next week, with no meaningful difference between those vaccinated and those not. Research indicates a continued increased level of cooking in other countries as well. Consumers have formed new habits. They invested in new kitchen appliances and want to try new things. They want to cook versus have to cook. But the majority of food from restaurants being consumed at home, and over 70% of U.S. consumers are adding their own spices, seasonings, and condiments to further flavor their takeaway or delivered food, channels have become blurred. And lunch is the new meal to prepare at home. With hybrid workplace models more common post-pandemic, allowing employees to split time between the office and home, research indicates at-home lunch occasions increasing up to 30%. We believe consumer behavior and sentiment driving accelerated and sustained preference for cooking at home will continue globally and persist beyond the pandemic and combined with the effective execution of our growth strategies will further drive consumer demand for our products in 2021 and beyond. Moving to slide 13, we are making transformative investments which will enable us to sustainably meet increasing demand both for our products and our customers' products. We're investing in our supply chain to expand our capacity and capabilities, as well as increase our resiliency. For example, we are increasing our condiment and seasoning capacity. We plan to optimize our distribution network for their new northeast U.S. distribution center, our largest in the world. And we're in the final stages of building a new U.K. flavor solutions manufacturing facility, which is on track to become McCormick's first net zero carbon building. These investments will enable us to remain agile and scalable and deliver the future growth that we expect. Now for some summary comments. First, I'm pleased to share an important milestone for McCormick. With our overarching focus on growth and the successful execution of our strategies, we have consistently driven industry-leading revenue growth, resulting in McCormick being named the latest Fortune 500 list of companies by Fortune magazine. We are proud of our sustained performance and being included on this prestigious list. We take pride in delivering our industry-leading financial performance while doing the right thing with a responsibility to the long-term vitality of people, communities, and the planet we share. In May, we were named a Diversity, Inc. Top 50 company for the fifth consecutive year. This recognition is a testament to our emphasis on embracing and leveraging diversity and inclusion globally as well as our broader ESG efforts. In summary, our fundamentals, momentum, and growth outlook continue to be stronger than ever. Our alignment with long-term consumer trends, the breadth and reach of our portfolio, and a robust operating momentum combined with the successful execution of our strategies bolsters our confidence in delivering another strong year of growth and performance in 2021. Following an extraordinary year in 2020, our 2021 outlook reflects both our strong underlying base business performance and acquisitions driving significant sales growth, as well as strong operating income growth, even considering extraordinary COVID-19 costs and our business transformation investments. Our top-tier long-term growth objectives remain unchanged, and we are sustainably positioned for growth. I would like to recognize and thank McCormick employees around the world for their dedicated efforts and engagement. They've done a tremendous job navigating this past year's volatile environment and ensuring we emerge stronger. With their agility, teamwork, and passion for flavor and winning, they drive our momentum and success. Now, I'll turn it over to Mike. Mike? Thanks, Lawrence, and good morning, everyone. For the reasons Lawrence mentioned, my comments will also include comparisons to 2019. Our second quarter performance was very strong. Starting with our top line growth, as seen on slide 17, we grew constant currency sales 8% during the second quarter compared to last year, with incremental sales from our Cholula and Fona acquisitions contributing 5% across both segments. Higher volume and mix drove the 3% increase in organic sales, with flavor solutions growth offsetting a decline in the consumer segment. Versus the second quarter of 2019, we grew sales 18% in constant currency. During the second quarter, our consumer segment left exceptionally high demand for our products, driven by the surge in consumers cooking more at home at the onset of the pandemic. As such, versus last year, our second quarter consumer segment sales declined 5% in constant currency, which includes a 2% increase from the Cholula acquisition. Compared to the second quarter of 2019, consumer segment sales grew 22% in constant currency. On slide 18, consumer segment sales in the Americas, lapping the demand surge in the year-ago period, declined 7% in constant currency, including a 3% increase from the acquisition of Cholula. Compared to the second quarter of 2019, sales increased 26% in constant currency, with significant broad-based growth across the McCormick-branded portfolio. In the EMEA, constant currency consumer sales declined 4% from a year ago, also due to lapping the high demand across the region last year. Notably, this decline includes growth in our UK and Eastern European markets on top of their significant growth last year, which was more than offset by declines in the region's other markets. On a two-year basis, sales increased 21% in constant currency versus 2019 pre-pandemic levels, with double-digit growth in all markets across the regions. Consumer sales in the Asia-Pacific region increased 15% in constant currency due to the recovery of branded food service sales, as well as recovery from the extended disruption in Wuhan last year, with a partial offset from the decline in consumer demand as compared to the elevated levels in the year-ago period. Sales were comparable to the second quarter of 2019, including a sales decline in India resulting from a slower COVID-19 recovery. Turning to our flavor solution segment in slide 21, We grew second quarter constant currency sales 34%, including a 9% increase from our FONA and Cholula acquisitions. The year-over-year increase was primarily due to a higher sales of away-from-home products in our portfolio across all regions. Compared to the second quarter of 2019, flavor solution segment sales grew 13% in constant currency. In the Americas, flavor solutions constant currency sales grew 30% year-over-year, with Fona and Cholula contributing 13%. Volume and product mix increased, driven by significantly higher sales to branded food service customers, as well as growth to packaged food and beverage companies, with particular strength in snack seasonings and beverages. On a two-year basis, sales increased 12% in concert currency versus 2019, with higher sales from acquisitions and packaged food and beverage companies, partially offset by the exit of some lower-margin business. In EMEA, Constant currency sales grew 65% compared to last year due to increased sales to QSRs and branded food service customers, as well as continued growth momentum with packaged food and beverage companies. Constant currency sales increased 16% versus the second quarter of 2019, driven by strong sales growth with packaged food companies and QSR customers. In the Asia-Pacific region, flavor solution sales rose 23% in constant currency versus last year, led by growth with QSRs in China and Australia, partially due to new products and our customers' limited time offers and promotional activities, as well as the recovery from COVID-19 lockdowns in countries outside of China in the year-ago period. Sales grew 15% in constant currency versus the second quarter of 2019. As seen on slide 25, adjusted operating income, which excludes transaction and integration costs related to the Cholula and Fono acquisitions, as well as special charges, declined 1%, or in constant currency, 4%, in the second quarter versus the year-ago period. Adjusted operating income in the consumer segment declined 24% to $177 million, or in constant currency, 26%, driven primarily by lower sales. In the flavor solution segment, adjusted operating income rose 183% to $81 million. or 175% in constant currency, driven primarily by higher sales. Both segments were favorably impacted by product mix and CCI-led cost savings with a partial offset from cost inflation, including transportation costs. COVID-19-related costs were comparable to the year-ago period. Additionally, in the consumer segment, brand marketing expenses increased 15% from the second quarter of last year. As seen on slide 26, our selling general and administrative expense as a percentage of sales increased 10 basis points, with the increase in brand marketing partially offset by leverage from sales growth. Adjusted gross profit margin declined 190 basis points, and adjusted operating margin declined by 200 basis points. In addition to the factors I just mentioned, the sales shift between segments unfavorably impacted both margins. Importantly, versus the second quarter of 2019, we expanded adjusted gross profit margin 40 basis points and adjusted operating margin 10 basis points, even considering incremental COVID-19 costs, cost inflation, and higher brand marketing investments. Turning to income taxes, our second quarter adjusted effective tax rate of 22.2% compared to 18% in the year-ago period. Both periods were favorably impacted by discrete tax items, with a more significant impact last year due to a discrete tax item related to the refinement of our entity structure. Adjusted income from unconsolidated operations declined 2% in the second quarter of 2021. At the end of March, we completed the sale of our minority stake in Eastern Condiments, one of our joint ventures in India. For 2021, we now expect a low single-digit decline in our adjusted income from unconsolidated operations. partially due to the elimination of ongoing income from Easter. Previously, we were projecting a low single-digit increase. At the bottom line, as shown on slide 29, second quarter 2021 adjusted earnings per share was 69 cents compared to 74 cents for the year-ago period. The decline was primarily driven by a higher adjusted income tax rate. As compared to the second quarter of 2019, our sales growth drove a 19 percent increase in adjusted earnings per share. On slide 30, we summarize highlights for cash flow and the quarter end balance sheet. Our cash flow from operations was $229 million to the second quarter of 2021, compared to $355 million in the second quarter of 2020. This change primarily resulted from a lower level of cash generated from working capital associated with increased sales, higher incentive compensation payments, and the payment of transaction and integration costs related to our recent acquisitions. We returned $182 million of this cash to our shareholders through dividends and used $113 million for capital expenditures through the second quarter. We expect 2021 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, funding investments to drive growth, returning a significant portion to our shareholders through dividends, and paying down debt. Now turning to our 2021 financial outlook on slides 31 and 32. With our broad and advantage labor portfolio, our robust operating momentum and effective growth strategies, we are well positioned for another year of differentiated growth and performance. For 2021, we are projecting top line and earnings growth from our strong base business and acquisition contribution. With earnings growth partially offset by incremental COVID-19 costs and ERP investment, as well as higher projected adjusted effective tax rates. We expect there will be an estimated 3 percentage point favorable impact of currency rate on sales, an increase from 2% previously. And for the adjusted operating income and adjusted earnings per share, we continue to estimate a 2 percentage point favorable impact of currency rates. At the top line, due to our strong year-to-date results and robust operating momentum, we are increasing our expected constant currency sales growth to 8% to 10% compared to 6% to 8% previously. This includes the incremental impact of the Cholula and Stoner acquisitions projected to be at the high end of the 3.5% to 4% range. We anticipate our organic growth will be led by higher volume and product mix driven by our category management, brand marketing, new products, and our customer engagement growth plans. Pricing taken to partially offset cost inflation is also expected to contribute to sales growth. We are now projecting our 2021 adjusted gross profit margin to be 80 to 100 basis points lower than 2020. Our previous projection was comparable to 2020. We are increasing our inflation expectation for the year to a mid single digit increase as compared to a low single digit increase previously. Overall, Our projected adjusted gross margin compression reflects unfavorable impacts from sales mix between segments, COVID-19 costs and cost inflation, partially offset by pricing, as well as margin accretion from the Cholula and Sona acquisitions. As a reminder, we price to offset cost increases. We do not margin up. Our estimate for COVID-19 costs remains unchanged at $60 million in 2021 versus $50 million in 2020, and weighted to the first half of the year. Reflecting the changes in our sales and gross profit margin outlooks, we are increasing our expected constant currency adjusted operating income growth. Our adjusted operating income growth rate reflects expected strong underlying performance from our base business and acquisitions, projected to be 12% to 14% constant currency growth, partially offset by a 1% reduction from increased COVID-19 costs compared to 2020, and a 3% reduction from the estimated incremental ERP investment. This results in a total projected adjusted offering income growth rate of 8% to 10% in constant currency. This projection includes the inflationary pressure I just mentioned, as well as our CCI-led cost savings target of approximately $110 million. It also includes an expected low single-digit increase in brand marketing investments. We also reaffirm our 2021 adjusted effective income tax rate projected to be approximately 23%. This outlook versus our 2020 adjusted effective tax rate is expected to be a headwind to our 2021 adjusted earnings per share growth of approximately 4%. We are also increasing our 2021 adjusted earnings per share expectations to 6% to 8% growth, which includes a favorable impact from currency. This increase reflects our higher adjusted operating profit outlook and lower adjusted income from unconsolidated operations, as I mentioned earlier. Our guidance range for adjusted earnings per share in 2021 is now $3 to $3.05 compared to $2.97 to $3.02 previously. This compares to $2.83 of adjusted earnings per share in 2020. This growth reflects strong-based business and acquisition performance growth of 12% to 14% in constant currency. Partially offset by the impact I just mentioned related to COVID-19 costs are incremental ERP investment and the tax headwinds. I'll now turn it back to Lawrence. Now that Mike has shared our financial results and outlook in more detail, I would like to recap the key takeaways as seen on slide 33. In the second quarter, we drove exceptional growth, despite a challenging year-over-year comparison. We delivered significant double-digit year-to-date and two-year growth rates for sales and profit, reflecting our robust growth momentum. We have a strong foundation and a balanced portfolio, which drives consistency in our performance. We expect higher at-home consumption will persist beyond the pandemic, and we are well-positioned to capitalize on long-term consumer trends, which accelerated during the pandemic while continuing the momentum we are gaining and away from home consumption. Our enthusiasm for Cholula and Fona and our confidence we'll deliver on our plants has only strengthened. Our 2021 outlook reflects another year of differentiated growth and performance while also investing for the future growth we expect. We are confident we will continue on our growth trajectory in 2021 and beyond. And now let's turn to your questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Good morning, everybody.

Hi, Andrew.

Morning. Morning. One question to start off with. I know that the last couple of quarters you've talked about how in some markets that have recovered more fully, so let's say, you know, in China or in Australia, you've had still elevated consumption trends for the at-home business, even as the away-from-home business has, you know, essentially fully recovered. And I just wanted to get a sense of Do you still believe or do you believe that that represents a reasonably good gauge for how we should expect trends to play out here in the U.S.? Or maybe are there some discrete differences between these markets in that regard that you would want to highlight? And then I've just got a quick follow-up.

Yeah, sure, Andrew. Well, first of all, we do continue to expect consumer demand for at-home cooking products to remain elevated, you know, coming out of the pandemic. We're certainly seeing that all over the world. Our research and survey data with consumers that we commented on just a few minutes ago, all points in that direction and the behavior seems to be bearing it out. Of course, in this quarter, many developed markets were lapping the extraordinary consumption when lockdowns were heavily put in place for the first time. But even in this time, if you look at the stack two-year, you can see consumption is still up very dramatically versus then. And just all indications are that that's going to be the case. We are seeing food service recover, and it is a bit of a paradox that consumer consumption at home seems to be remaining high and food service is

recovering we don't believe that people are eating more but we do believe that they're cooking more and that benefits are more ingredient based flavor products thanks for that and then just focusing in I guess specifically on the part of your flavor solution segment that is you know that are sales to other CPG companies I guess I'm curious if if we think towards the the back half of the year Would you anticipate that part of your business to be up year over year, just based on the elevated consumption levels that we're continuing to see for some other CPG names in the packaged food and beverage space?

Sure. Well, without trying to dissect flavor solutions too much, yes, first of all, that part of the business had largely returned to its normal growth rate towards the end of last year. It has been strong through this year. But within our portfolio, you can't miss the fact that we've done a big acquisition in that flavor solutions space. We're seeing a different mix of products as well, tremendous growth on beverages and innovation around hard seltzers and things like that. With Kona in particular, we tapped into a whole new addressable market around nutrition and health products. So the portfolio migration is a big driver of our ongoing results in that part of the portfolio as well. It's really part of our long-term strategy to migrate the flavor solution portfolio to its high-growth categories like beverages. Great.

Thank you.

Thank you. Our next question comes from the line of Ken Goldman with JP Morgan. Please proceed with your question.

Hi, and good morning. I wanted to ask about the status of inventories in U.S. consumer. I think you talked about them being relatively high or low, rather, last quarter, and the rest of the year there'll be a little bit of a build there. I'm just curious where you think those inventories stand now, Did the rebuild help a lot in 2Q? I didn't necessarily hear you quantify that, so I just wanted a little bit of an update there, if possible.

Sure, Ken, and I'm glad to do that, and I'll try to quantify it as well here in Q2. First of all, this is an America's consumer issue. We're shipping to consumption and have been in the rest of the world. Our flavor solutions isn't impacted by this. America's consumer, we weren't able to keep up with the sustained demand. And so trade inventories, in fact, the consumer pantries have been depleted. And so there has been a need to do a rebuild. You all saw on the shelf that, especially as we came through the end of last year, that the shelf looked pretty rough. A number of you on the call, and Ken, I think maybe you also have written about TDPs and so on, but we're about 90% of the way to restoring the shelf. We ended suspensions. We still have a few products on allocation, and demand has continued to be really strong. In some cases, very much hand-to-mouth on some products. Old Bay is a product that requires a lot of blending capacity, and so we're a bit hand-to-mouth on that one, believe it or not. But in terms of restocking the shelf, honestly, I wish we had done a little bit more in the second quarter. I said we're at 90%. We would have really hoped to have it all done. And there is still more work to do because the demand has just continued to remain high through this period. If you just do the math, there's a lot of noise in the year-ago numbers. So if you take it back to 20 – and then the year ago, consumption was up tremendously, but we couldn't shift to that. Our shipments flagged it a lot. So if we compare back to 2019, our consumption is up in second quarter 18% versus 2019. Our organic sales, stripping out acquisitions, are up 22%. I would suggest there's about a 4% inventory rebuilding impact in the second quarter on our America's consumer business. So as a factor, it's not as big as I think a lot of people have in their mind.

Perfect. Thank you for that. And then I wanted to ask, that is helpful, I wanted to ask on flavor solutions. You know, the margin did improve nicely year on year, but still down over 100 basis points versus 2019, even though your organic sales are up over that time. I realize we're a little bit apples to oranges here. You've added some businesses. But just curiously, how are you thinking about, I guess, the drivers of the margin recovery from here and maybe the pace of margin recovery over the next couple quarters?

Yeah, I mean, as you say, I think, Ken, this is Mike. I mean, we had a large recovery on the margin last year, but it pretty much lapped what we did in the second quarter of the prior year. Yeah, I think the reality of this as some costs go up as we pass through pricing, you're going to have a natural compression in the flavor solutions business, which we've seen in the past as we pass through penny costs, as we've said. COVID costs obviously hit us in the second quarter, although we were comparable to last year overall, but there was some segment mix there. We do feel that within the flavor solutions category, though, one with Sona, that's you know, a nice margin bump. But even within the product portfolio, we see some margin positives as we migrate the business. So, you know, as we grow sales more and get more leverage the rest of the year, you know, we're lapping a pretty soft second six last year. You know, we're hopeful that will improve too.

Thanks, Mike.

Thank you. Our next question comes from the line of Robert Moscow with Credit Suisse. Please proceed with your question.

Hi. Thanks for the question. Hi. I wanted to know, in the Americas, we've heard through any industry that it's a little bit more difficult to negotiate with retailers on merchandising and pricing if you've had continued supply problems. Maybe your category is different, and because of your leadership, it's different. But what have the conversations been regarding that with your retailer customers? Has it compromised you at all in getting done what you need to get done?

Well, I don't want to get too specific about our conversations with customers on pricing. There is always an amount of commercial tension involved. in our pricing discussions, but we're really confident that we're going to be able to get through the pricing that we need. We take a long-term perspective with our customers. They know that we are fair, that we are transparent in our costs. There is broad-based inflation that's recognized by everybody. It's not just us that's going up in isolation. The whole industry is moving. We're pretty confident that we're going to be able to take the pricing that we need. We're going to use all of the levers that we have to address costs. So pricing certainly has to be part of the solution. But cost savings and revenue management are going to factor into dealing with the inflation issue. And I think we have pretty strong confidence that these discussions are going to I think, too, we're continuing to invest in our brand. Most of the share of voice in the category, which our customers know that, and you saw year-to-date, we're up nicely on AMP. And again, into the third quarter, so that is supporting their business, too.

Okay. And a follow-up question, maybe just for modeling, Mike. Can third quarter profits still be up year-over-year? because you mentioned that there's going to be a lag effect on inflation. I just want to make sure we're getting the phasing right. And then I would imagine fourth quarter, do you have a very easy comparison to a year ago because of the inventory, because of the supply chain shortages a year ago?

You know, you're right, we're lapping a strong third quarter last year. We had about 8% total growth, 9% constant currency. The consumer business was stronger compared to flavor last year. So from a segment mix perspective, it's a little bit of a headwind in the third quarter. And you're right, the lagging of pricing does help the fourth quarter. We're also, as I just mentioned, higher brand marketing in the third. Because if you remember last year in the fourth quarter, we had I think it was around a 20% A&P increase, which we've continued in Q1 and Q2. So it would be an easier fourth quarter comparison from an A&P perspective. And a little bit from the sales. The sales in the fourth quarter for the company were below that 9% cost of currency I mentioned before. I think Mike is talking about kind of the shape, because you try to avoid giving too specific guidance about any particular quarter. These are our biggest quarters of the year coming up, and so that's part of our thinking as we set guidance for the year. Okay.

Well, thank you.

Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.

Good morning, everyone.

Hello, Alexia. Morning.

Hi there. So I guess picking up on some earlier questions, are you able to sort of quantify what your input cost inflation outlook looks like at the moment? Are we talking about mid-single-digit COGS inflation, perhaps including the freight component as well? I just want to get a sense of the order of magnitude there, and then I have a follow-up.

Sure, Alexia. Our previous guidance was low single-digit. We've moved that to mid-single-digit. And as we said on the call, maybe three components. Obviously, the ocean freight we've talked about, which is hitting everyone. We source a lot of our products from the Asian market, so those rates are up. But also packaging due to resin costs and things like that going up. And then thirdly, commodities. But yeah, low single digit to mid single digit output this year.

Great. And then I'm just curious about the market share trends that we're seeing in the U.S. Nielsen data. It looks as though there's some share loss happening on the core herbs and spices area. Am I right in that? And do you expect that to correct going forward? Or is it just because of strange comparisons from the year-ago period at this point?

It's a little bit of both. So first, yes, we do expect that to turn positive. In the year-ago period, we had heavy supply. Through second quarter, we were in a great stock position. We were building inventory for an ERP pilot, and so we had unusually high stock levels of finished goods ourselves. When the crisis hit, which enabled us to have extraordinary supply in the early weeks of the pandemic, I will say by the end of second quarter, it was a very different situation. But going into the quarter, it was strong. And so our shelf position was really advantaged. And then, of course, we went through a long period where we weren't able to meet the demand. And our shelf position deteriorated. We had to suspend items. put them on allocation, stop promotion, and so on. And our total distribution points declined as a result. And so we're comparing against a period of unusual strength at retail. And in the year-ago period and in this period, we've got a time when we're rebuilding that shelf position Pretty much everywhere where we've been able to have good supply and good service to our customers, our share has grown, not declined. That's the case across our markets in Europe. That's the case in some categories here in the U.S. The real pressure point has been herbs and spices and recipe mixes. where just the extraordinary demand ran down the shelf. And as we restore it, we're confident that our share position is going to improve.

Great. Thank you very much. I'll pass it on.

Thank you. Our next question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.

Yes, thanks. Good morning, everyone. Good morning. On a maybe think a little bit longer term and some of the kind of key takeaways and points you've been highlighting on the call have talked about the increases in at-home consumption could have some staying power and that uniquely benefits your portfolio. And I'm wondering how, if at all, that makes you think about the long-term organic sales potential of the business. I mean, you have a long-term 4% to 6% kind of sales growth algorithm that encompasses a little bit of M&A over time. So, two to four, two to 5% organic and embedded in that, um, to do the changes in consumption post pandemic, make you think that that longterm organic sales growth potential could be higher or, and if not, why?

Well, you know, I don't think we're going to raise our longterm guidance today, but, uh, but our confidence in that longterm guidance is, uh, is, is really reinforced by, by what we're, what we're seeing. I mean, You know, there's been a lot of talk about, you know, the changes in consumer behavior, but really there's an amplification of trends that were already in place that we believe are long-term secular trends that underlie our growth and that our strategies are designed to capitalize on. I mean, the global demand for flavor has been growing steadily for decades. I don't even know how long. It's a tremendous amount. Euromonitor projects global flavor demand to grow at a 6% rate going forward for the next five years. And that is really the foundation for our sales growth. I mean, if you just think about compared to 2019, underlying global demand for flavor growing in the absence of a pandemic, 6% CAGR. you would expect us to be up 12%. So I think that the performance that you're seeing is really more of a bleed through of what you're going to see in a post-pandemic world. Consumers were cooking at home more before the pandemic. We believe that that was accelerated, that a lot of lapsed cooks had the opportunity to cook. Everyone learned their grandma and their mother's secret recipes. and how to prepare them. Someone in every household has become a very proficient cook, and it's been a positive experience for people. It's been an outlet for creativity. It's brought families together, and we think that this is a behavior that's going to be sticky. Younger consumers in particular have leaned towards healthy, flavorful, more scratch cooking, and in particular among Gen Z, a return to trusted brands and brands with some nostalgia. we think that these are really long-term demographic trends that are going to benefit us for a long time. So our confidence in our long-term guidance is reinforced by what we're seeing happen right now. I think, too, it's another testament to our broad-based differentiated portfolio. But Adam, your question about your 4% to 6% constant currency long-term growth, of which a third of that is M&A. So you bolt on M&A. You take that out. You're kind of highlighting 2.5% to 4% as our long-term guidance. Last year, constant currency organic growth was 5%. This year, the midpoint of our guidance is around 5% too. So we're seeing, I think DeLarne said, the acceleration of those trends is reinforcing our belief on that organic growth of our long-term guidance.

Okay, that's helpful. And then a follow-up to some modeling questions. I'm trying to – Rob's question a little bit differently – Just remind us, the $30 or $70 million of ERP expenses headwind year-on-year, how much of that's been already incurred in the first half of the year, and the $50 million of COVID-related expenses that you expect in fiscal 21, how much has been already incurred year-to-date, just thinking about the first half?

Yeah, the ERP is mostly going to be in the second half headwind, and very little impact year-on-year in the first half. From a COVID perspective, you know, we had guided to 60 for this year versus 50 last year, and that's mostly been occurring in the first half.

Got it. Okay, that's really helpful. All right, thank you.

Thank you. Our next question comes from the line of Peter Galba with Bank of America. Please proceed with your question.

Hey, guys, good morning. Thank you for taking the question. Good morning, Peter. Good morning. Mike, you know that the gross margin just just wanted to go back there that commentary or the new guidance on, you know, kind of 80 to 100 bps lower. It sounded like in in your comments that actually, you know, mix or sales mix, moving back to flavor solutions might have been a bigger impact actually than cost inflation. So I wanted to clarify that comment. And yeah, there's a way to break out those two kind of how they impact between mix and then cost inflation.

Yeah, really, in the second quarter, it was mainly segment mix, as we said. I mean, the costs have been rising, but we have taken some pricing. But it's really around segment mix and Q2. It changed a little bit in the second six, as we've guided a gross margin probably between 90 and 120 basis points if you do the squeeze on the gross margin. Two-thirds of that is really where you're raising sales due to some pricing changes offsetting inflation, and the FX piece is not dropping through the profit. So that's about two-thirds of that compression. The other third is some of the lag in the pricing. You know, costs are coming through in the third quarter. You know, we've got pricing a little later. So it's a little bit of that. But it's basically two-thirds due to math and a third due to kind of the timing of the price.

Okay. Okay. No, that's helpful. Okay. And maybe just two more quick modeling questions. I didn't see in the guidance anything on capital spend for the year or interest expense as well.

Yeah, we don't. I mean, you'll see in the queue coming out today, capital hasn't changed from last quarter. We don't give interest guidance.

Okay. Thanks very much, guys.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Kerzius for any final comments.

Hey, thanks everyone for your questions and for participating on today's call. McCormick is differentiated by the breadth and reach of our balanced portfolio, which has sustainably positioned us for growth. We're very pleased with our outstanding year-to-date operating performance, which proves the strength of our business model, the value of our products, and our capabilities as a company. We expect to drive even further growth as we continue to execute on our long-term growth, performance, and people strategies, actively respond to changing consumer behavior, and capitalize on new opportunities. Our investments provide a new foundation for growth while enhancing our agility and our relevance with our consumers and customers, which, when combined with our dedicated and engaged employees, positions us well for continued success and long-term shareholder value creation. For everyone listening in the U.S., I hope your 4th of July plans include getting together around the grill with friends and family and enjoying some Montreal steak seasoning, French's mustard, and Stubbs barbecue sauce.

Thank you, Lawrence, and thank you to everyone for joining today's call. And for those of you that might be joining from Canada, happy Canada Day today. If you have any further questions regarding today's information, please feel free to contact me. This concludes this morning's call. Thank you.