McCormick & Company, Incorporated

Good morning. This is Casey Jenkins, Senior Vice President of Corporate Strategy and Investor Relations. Thank you for joining today's first quarter earnings call. To accompany this call, we've posted a set of slides at ir.mccormick.com. We will begin with remarks from Lauren Perzias, 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. The nature of those non-GAAP financial measures and the related reconciliation 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. Please refer to our forward-looking statement on slide two for more information. I will now turn the discussion over to Lauren.

Good morning, everyone. Thanks for joining us. Before I go to business, it is with great sadness that I mention the passing of Buzz McCormick, who is one of the most beloved and admired leaders in McCormick's history. Buzz's career at McCormick spanned 50 years, rising through the ranks across many functions becoming president and CEO in 1987 and serving as chairman of the board for a total of 11 years until his retirement for the third time in 1999. As CEO, Buzz focused McCormick on flavor by divesting non-core businesses and driving category leadership in spices and seasonings, setting the course for McCormick to be the global leader in flavor. Notably, McCormick's market cap grew by four times under his leadership. Buzz will not only be remembered for his enduring legacy of performance, but just as importantly for his deep commitment to the well-being of all McCormick employees. He truly made McCormick a great place to work, believing his biggest accomplishment as a CEO was helping all McCormick employees have a better life. Today, as we reflect on his life and his contributions, we know that his legacy will live on. He has inspired many generations of McCormick leaders with his passion for people, focus on flavor, and commitment to delivering shareholder value. Next, I'd like to comment on the situation in Ukraine. First and foremost, we extend our deepest sympathies to the people of Ukraine and hope for an immediate end to the conflict and the suffering of innocent people. As we previously announced, we suspended our operations in Russia in mid-March. Our operations in Ukraine have been paused to focus on the safety of our employees and their families. Our thoughts are with the people impacted by these tragic events, particularly our employees who we continue to support. To aid in humanitarian efforts, we're donating to the Polish Center for International Aid and the World Central Kitchen. I would also like to express my sincere appreciation to our EMEA employees, especially those in Poland, for their many personal efforts in aiding their Ukrainian neighbors in need. Their actions epitomize our Power of People principles. Now, moving to slide four and our business results, we delivered solid financial results in the first quarter in line with our expectations, driven by the successful execution of our strategies and the engagement of employees. We are confident our strong year-to-date momentum will continue to drive strong performance throughout 2022. In the first quarter, we grew sales 3% or 4% in constant currency on top of our 20% constant currency growth in the first quarter of last year. demonstrating again the strength of our product offering and broad global portfolio, which drives differentiated growth and consistency in our performance. Consumer segment sales, while lapping high year-ago demand, continue to reflect the sustained shift in higher at-home consumption compared to pre-pandemic levels. Our flavor solution segment growth was driven by outstanding growth with our packaged food and beverage customers, as well as robust demand from restaurant and other food service customers, due in part to recovery from curtailed away-from-home dining in the year-ago period. Through the breadth and reach of our balanced flavor portfolio, we are meeting the global demand for flavor and delivering flavor experiences for every meal occasion to our product and our customers' products. We are end-to-end flavor. Adjusted operating income was down 14% or 12% in constant currency, and adjusted earnings per share was down 13%. as anticipated, the profit driven by our sales growth was more than offset by the well-known and anticipated headwinds of higher inflation and broad-based supply chain challenges. We have a demonstrated history of successfully navigating through volatile environments, and we expect to do the same through this high current inflationary period using pricing and other levers to offset cost pressures, which is reflected in our 2022 profit outlook. Now for more on our first quarter segment performance. Starting with the consumer segment on slide 5, growth in the Americas was more than offset by lower sales in the EMEA and APZ regions. Total consumer segment sales declined 2% against 35% consumer growth in the first quarter of 2021. Given the difficult year-over-year comparison, volume declines were reflected in each region. On a two-year basis, however, compared to the first quarter of 2020, each region grew sales by double digits. This growth highlights the strength of our categories and, importantly, our products. As consumers continue to cook more at home, demand for flavor continues to grow. The pricing actions we've taken were also reflected in each region's results, and the elasticity impact we experienced has been lower than historical levels. As we look ahead and our additional pricing actions are phased in, The elasticity we experienced may change, and this could be a cumulative effect, but we still expect the impact to be lower than historical level. Turning to highlights by region, starting with the Americas, our total U.S. branded portfolio consumption, as indicated by our IRI consumption data and combined with unmeasured channels, grew 2%, which follows a 15% consumption increase in the first quarter of 2021. This is the eighth consecutive quarter of double-digit consumption growth versus the two-year-ago period. Demand has remained high, and we continue to realize the benefit of the manufacturing capacity we added, as well as our increased resilience. Our first quarter shipments were in line with consumption, however some products remained stretched by sustained high demand. Shelf conditions continue to improve, as does our share performance, with another sequential improvement in the first quarter as we expected. Versus last year, we are beginning to grow our spices and seasoning share, and in recipe mixes, we had another quarter of considerable share gain, over four share points. We continue to see further improvement as we begin the second quarter, and we are confident in our continued momentum. In EMEA during the first quarter, we lapped high prior year demand, partially due to restrictions resulting from COVID resurgences last year. while continuing our momentum with strong consumption growth in key categories compared to the first quarter of 2020. Our market share performance was stronger this quarter. We maintained our total EMEA region herb, spices, and seasoning share on top of strong gains in the first quarters of the last two years. Of note, Frank's Red Hot has grown consumption 60% and gained significant share versus the two-year-ago period. And in the Asia-Pacific region, first-floor growth was tempered by scaled-down Chinese New Year celebrations due to several cities in China imposing restrictions as a result of new COVID outbreaks. These restrictions impacted our branded food service demand that is included in the consumer segment in China. Turning to slide six, our flavor solution segment grew 12% or 14% in constant currency. driven by base business growth, new products, and one month of incremental sales for our acquisition of Fona in December 2020. All three regions contributed to our growth, each with higher volume and product mix, as well as the pricing actions to partially offset costs. Our first quarter flavor solutions results reflect similar market conditions across the region. As a reminder, our customer base in the Americas skewed more to packaged food and beverage customers and an EMEA and APZ to quick service restaurant for QSR customers. Our differentiated customer engagement and technical capabilities continue to drive outstanding growth, both in base business and with new products, whether packaged food and beverage customers or at-home customer base. Our performance with these customers led our first quarter flavor solutions results with double-digit growth in flavors for performance nutrition and health and market applications, as well as savory snacks. And our momentum with flavors for alcoholic beverages also continues. Our QSR momentum has been strong with core menu items and limited time offers driving first quarter growth. And other restaurant business continues to rebound. Our first quarter results also reflect the lapping of crew tailed away from home dining last year. Restaurants are benefiting from the shift to takeaway and delivery that was amplified by the pandemic. there's been a blurring between channels and most of the restaurant food being consumed off-premise. For instance, one in four dinners consumed at home is supplemented with a restaurant or other food service item. For our other institutional food service customers in our branded food service product category, we expected some recovery coming into 2022, and we saw that demand strengthen in our first quarter and drove growth in the Americas and EMEA regions. Now I'd like to share some comments on our momentum and the growth initiatives we have underway. Turning to slide seven, global demand for flavor remains the foundation of our sales growth, and we've intentionally focused on great, fast-growing categories that will continue to differentiate our performance. We are capitalizing on the long-term consumer trends that accelerated during the pandemic, healthy and flavorful cooking, increased digital engagement, trusted brands, and purpose-minded practices. These long-term trends and the rising global demand for great taste are as relevant today as ever, with the younger generations fueling them at a greater rate. Our alignment with these trends, in combination with the breadth and reach of our global portfolio and the successful execution of our strategies, sustainably positions us for future growth. In this current dynamic global environment, we remain focused on long-term sustainable growth. We continue to experience cost pressures from higher inflation and broad-based supply chain challenges. To partially offset rising costs, we raised prices where appropriate late last year, are currently facing an additional pricing action, and as costs have continued to accelerate, we will raise prices again this year where appropriate. We appreciate our customers working with us to navigate this environment. Additionally, our plans to mitigate cost pressures include our CCI-led cost savings, revenue management initiatives, and taking prudent steps to reduce discretionary spend where possible. Throughout our history, we have successfully grown and compounded our growth, regardless of the environment, and plan to do so again in 2022 as we continue to accelerate our momentum and drive growth from a position of strength. In our consumer segment, across our major measured markets, We have gained millions of households over the last two years and had double-digit buy rate growth. Our brands have gained new consumers and we have driven increased usage at the same time. This performance, combined with billions of additional at-home eating occasions from consumers cooking more at home, has created a new baseline for growth. We are continuing to drive our consumer segment momentum by accelerating flavor usage, including delivering on the demand for heat. building confidence in the kitchen, and inspiring flavor exploration. We're also strengthening our consumer relationships at every point of purchase and creating a delicious, healthy, and sustainable future. We're fueling growth through our brand marketing investments, category management initiatives, and new products. Our brand marketing is resonating with consumers, particularly as we connect with them online. And as we expand the capabilities of our marketing excellence organization globally, you're gaining efficiencies, executing with greater speed, and shifting our investments to working dollars to drive greater effectiveness. Our U.S. Spice Isle reinvention is further driving our category leadership with growth for McCormick and our customers. This initiative is continuing this year with additional stores being implemented, and we're also starting to build momentum with similar initiatives in Canada, the U.K., and France. Our consumer new product innovation differentiates our brand and strengthens our relevance with our consumers. Our new products are focused on what's important to consumers, such as freshness, modern packaging, convenience, and flavor exploration, as well as affordability and value. 75% of global consumers find it more economical to cook at home, and in the current inflationary environment, it resonates even more now. Our products are already part of the consumer solution to manage inflation across their whole grocery basket. For instance, inflation is hitting the meat case hard, and a little bit of our flavor can make lesser cuts of meat more palatable and make the consumer's whole meal both more affordable and flavorful. We have products at all price points that attract many types of consumers and households, as well as different income levels. we continue to focus on ensuring we're launching new products that appeal to all types of consumers, such as additional entry-level price points for affordability, as well as value offerings, including larger sizes to meet the needs of price-conscious consumers. And with our new products and recipes tailored to popular new appliances, such as air fryers and Instant Pots, we're providing consumers flavor inspiration and greater convenience when using our products. In our flavor solution segment, we plan to continue migrating our portfolio to more value-added products and technically insulated products, particularly our flavors product category. We're targeting opportunities to grow with our customers in attractive, high-growth end markets, such as alcoholic beverages, savory snacks, and performance nutrition. We've been outpacing the market growth in these categories, They all contributed to strong growth in our first quarter results and further migrated our portfolio. Following a record year of new product growth last year, we're excited about a robust 2022 pipeline of culinary-inspired innovation. We're leveraging our broad technology platform to develop clean label, organic, and better-for-you solutions to solve our customers' issues without compromising on taste. We're using SAGE, our AI-enabled product development tool, to develop consumer-preferred flavors at an increased speed that have a track record for lasting longer in the market for our customers. And we're building a pipeline of opportunities to accelerate our global seasonings growth by expanding our mid-tier customer base, being added to core supplier lists, and strengthening our leadership in heat. We plan to continue to drive flavor solutions growth Through a differentiated customer engagement, we have a strong passion for creating a flawless customer experience. Across both segments, our strong sales and growth plans bolster our confidence in continuing our growth trajectory. We also recognize we're operating in a challenging global environment. Before Mike reiterates our guidance in a few moments, I'd like to comment on some current conditions. We will continue to monitor the situation in Russia and Ukraine very closely and adapt accordingly. Cost inflation has remained persistent with recent escalation in some areas, such as transportation costs. And as such, we have raised our cost inflation guidance. It is now amid the high teen increase. And in regard to COVID, as I mentioned earlier, there are new COVID restrictions being imposed in several cities in China. We are continually assessing the dynamics of these conditions as they evolve. We recognize there will be some near-term impact, which we expect to mitigate later in the year, in part with additional pricing action. We are well positioned to deliver another strong year of growth and performance in 2022 through the effective execution of our strategies and with a robust operating momentum. In addition to delivering top-tier financial results, we are also committed to doing what's right for people, communities, and the planet. we recently released our 2021 Purpose-Led Performance Progress Report, which highlights our key initiatives and the progress we are making, including our recent announcements on the update of our science-based targets to reduce greenhouse gas emissions by 2030, aligning with the United Nations 1.5 degrees Celsius target, as well as our commitment to net zero by 2050. As we move forward in 2022, we're excited to continue to share our progress and success on all our purpose-led performance goals. Now for some summary comments on slide 11 before turning it over to Mike. The combination of our strong business model, the investments we have made, the capabilities we have built, and the power of our people position us well to continue our robust growth momentum. We are in attractive categories and are capitalizing on long-term consumer trends that are in our favor. We are actively responding to changing market conditions, consumer behaviors, and customer needs, while remaining forward-looking in an ever-changing environment. We have a strong foundation and are well-equipped to navigate today's environment, responding with agility to volatility and disruption, while remaining focused on the long-term objectives, strategies, and values that have made us so successful. Through the execution of our strategies that are designed to drive long-term value, we have grown and compounded that growth successfully over the years, regardless of the environment. Our fundamentals that drove that performance and our momentum and outlook are stronger than ever. McCormick employees continue to do a great job navigating a dynamic environment. Their agility and teamwork drive our momentum and success, and I want to thank them for their dedicated efforts and engagement. Now, I'll turn it over to Mike. Thanks, Lawrence, and good morning, everyone. Starting on slide 13, our top-line growth continues to be strong. During the first quarter, we grew constant currency sales 4%, driven by pricing actions across both segments and incremental sales from our FONA acquisition. Consumer segment sales declined 2% in constant currency due to lapping high demand in all three regions last year, with a partial offset from pricing. On a two-year basis, compared to the first quarter of 2020, constant currency sales grew 30% with double-digit growth in all three regions, reflecting the sustained shift to at-home consumption, higher than pre-pandemic levels. On slide 14, consumer sales in the Americas increased 2% in constant currency, driven by pricing actions, partially offset by lower volume and product mix due to lapping last year's elevated demand. Branded products led the growth, with strength in McCormick, Vatarans, Stubbs, Old Day, Simply Asia, Frank's Red Hot, and French's, partially offset by a decline in private labels. In EMEA, constant currency consumer sales declined 9% from a year ago, driven by lower volume in product mix, most significantly in Vahine homemade dessert products, due to lapping last year's high demand across the region. This decline was partially offset by pricing actions. Constant currency consumer sales in the Asia-Pacific region declined 6%, driven by the exit of some lower margin business in India. China's consumer and branded food service demand, partially related to the Chinese New Year impacts Lawrence mentioned earlier, also contributed to the decline. These declines are partially offset by pricing actions. Turning to our flavor solutions segment and slide 17, we grew first quarter constant currency sales 14%, including a 2% contribution from incremental FONA sales in December. As a reminder, we acquired Phona on December 30, 2020. The remaining increase was driven by higher volume and product mix, as well as pricing actions. Compared to the first quarter of 2020, constant currency sales grew 18%, with double-digit growth in all three regions. In the Americas, Flavor Solutions' constant currency sales grew 12%, with Phona contributing 2% and the remaining growth due to both pricing and the combination of volume and product mix. Higher sales to packaged food and beverage companies, with particular strength in snack seasonings, led to growth, with the recovery of demand from branded food service customers also contributing. In the EMEA, we drove 24% constant currency sales growth with a 17% increase in volume and product mix, and 7% related to pricing actions. EMEA's growth was led by the robust recovery of demand from QSRs and branded food service customers. In the Asia-Pacific region, flavor solution sales rose 5% in constant currency, driven by pricing actions and growth from higher volume and product mix. This growth was driven by our QSR customers, both in their core menu items, as well as their limited time offers and promotional activities. As seen on slide 21, adjusted operating income, which excludes transaction and integration costs related to the Chulula and Thona acquisitions, as well as special charges, declined 14%. were in constant currency 12% in the first quarter versus the year-ago period. Adjusted operating income declined 12% in the consumer segment with minimal impact from currency. And in the flavor solutions segment, it declined 17% or 11% in constant currency. Both segments were unfavorably impacted by higher inflation and distribution costs, both of which accelerated in the second half of last year as well as incremental investment spending on our ERP program, which we expected to be higher earlier in 2022 versus 2021. PCI-led cost savings favorably impacted both segments. In the consumer segment, lower sales, partially offset by a reduction in COVID-19-related costs, also contributed to the decline. In the flavor solution segment, higher sales were more than offset by the unfavorable drivers I just mentioned, as well as costs related to supply chain investments, which will continue in the second quarter. As seen on slide 22, adjusted gross profit margin declined 260 basis points in the first quarter versus the year ago period. This was driven by the net impact of cost pressures we are experiencing and the pricing actions we have taken. We estimate the diluted impact of pricing to offset this dollar inflation increase was approximately 200 basis points in the first quarter. Additionally, a sales shift between segments also contributed to the margin decline. Our selling general and administrative expense, as a percentage of net sales, increased 20 basis points from the first quarter of last year due to higher distribution costs and a higher level of investment in our ERP program. This, combined with the adjusted gross margin compression, resulted in an adjusted margin decline of 280 basis points in line with our expectations. Turning to income taxes on slide 23, our first quarter adjusted effective tax rate was 19.7%, compared to 22.7% in the year-ago period, driven by a higher level of discrete tax items this year. Adjusted income from unconsolidated operations declined 30% versus the first quarter of 2021, due to the elimination of higher earnings associated with minority interest, as well as higher inflation costs impacting our McCormick, New Mexico joint venture. At the bottom line, as shown on slide 25, first quarter 2022 adjusted earnings per share was 63 cents as compared to 72 cents for the year-ago period. The decrease was driven by our lower adjusted operating income. On slide 26, we've summarized highlights for cash flow and the year-end balance sheet. Our cash flow from operations was an inflow of $18 million in the first quarter of 2022 compared to an outflow of $32 million in the first quarter of 2021. This increase was primarily driven by working capital improvements and lower payments for transaction and integration costs related to our Cholula and Sona acquisitions. We returned $99 million of cash to our shareholders through dividends and used $44 million for capital expenditures this quarter. We expect 2022 to be a 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. Turning to our 2022 financial outlook on slide 27. First, I would like to provide some additional perspective on some of the current conditions Lawrence mentioned earlier. As we have said, we are currently not operating in Russia and Ukraine. And while the impact is not fully known, our business in these markets is small. with the combined sales across both segments totaling less than 1% of total company sales last year. Additionally, we have no manufacturing in either country. Any operating profit impact would include those related to the impact on sales, as well as potential expenses stemming from the current situation. Regarding cost inflation, we are revising our outlook and are now projecting inflationary pressure in the mid to high teens, as compared to mid teens increase in our previous guidance. We expect cost inflation to remain persistent, especially as it relates to transportation, and we are continuing actions to mitigate these costs, including pricing. Again, as Lawrence mentioned, we recognize these dynamics will have some impacts on our results, certainly in the second quarter. While we continue to monitor impacts on the broader economy and will adapt as necessary, we are reiterating our 2022 sales and profit outlook that we previously shared in our January earnings call. We are projecting strong top line growth in operating performance, with earnings growth partially offset by a higher projected effective tax rate. We also expect there will be an estimated one percentage point unfavorable impact currency rates on sales, adjusted operating income, and adjusted earnings per share. On the top line, we expect to grow constant currency sales 4% to 6%. We expect pricing to be a significant driver of our growth, with volume and product mix to be impacted by elasticities although at a lower level than we have experienced historically. We plan to drive growth through the strength of our brands, as well as our category management, brand marketing, new product, and customer engagement growth plans. Our volume and product mix will also continue to be impacted by the pruning of lower margin business from our portfolio. Our 2022 adjusted gross margin is projected to range between comparable to 2021 to 50 basis points lower than 2021. This adjusted gross margin compression reflects the anticipated impact of a mid to high team's increase in cost inflation, an unfavorable impact of sales mix between segments, a favorable impact from pricing, and CCI-led cost savings. As a reminder, we price to offset dollar cost increases. We do not margin up. This has a dilutive impact on our adjusted gross margin and is the primary driver of our projected compression. We expect to grow our adjusted operating income 8% to 10% in constant currency, which reflects our robust operating momentum, a reduction in COVID-19 related costs, and our continuing investment in ERP business transformation. This projection includes inflationary pressure in the mid to high teens, a low single-digit increase in brand marketing investments, and our CCI-led cost savings target of approximately $85 million. As we shared on our last earnings call, We expect our profit growth to be weighted to the second half of the year. During the second quarter, we are phasing in pricing actions, and with costs continuing to escalate, we'll raise prices again as appropriate. While we plan to cover the cost pressures, due to the recent acceleration of inflation, there will be a lag. And as a result, our profit will now be weighted to the second half of the year, even more than originally expected. And as a reminder, we expect our ERP investment to be higher earlier in the year versus 2021. Our 2022 adjusted effective income tax rate is projected to be 22% to 23%, based upon our estimated mix of earnings by geography, as well as factoring in a level of discrete impacts. This outlook versus our 2021 adjusted effective tax rate is expected to be a headwind to our 2022 adjusted earnings per share growth of approximately 3%. Our 2022 adjusted earnings per share expectations reflect strong operating growth of 8% to 10% in constant currency. partially offset by the tax headwind I just mentioned. This results in an increase of 4% to 6%, or 5% to 7% in constant currency. Our guidance range for adjusted earnings per share in 2022 is $3.17 to $3.22, compared to $3.05 of adjusted earnings per share in 2021. In summary, we are well positioned with a broad and advantaged labor portfolio and effective growth strategies to continue to accelerate our operating momentum and drive another year of strong growth and performance. Thank you, Mike. 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 28. We delivered solid first quarter results in line with our expectations, with strong sales growth on top of our 20% constant currency growth last year. We are confident that the hard work and dedication of our employees will continue to drive momentum. We recognize we're operating in a challenging global environment. Through the execution of our strategies, we've successfully grown long-term value over the years regardless of the environment. Our long-term fundamentals that drove our performance are stronger than ever. The strength of our business model, the value of our products and capabilities, our alignment with long-term consumer trends that are in our favor, and the attractive categories we're in provide a strong foundation for long-term sustainable growth. We're confident that our broad and advantaged labor portfolio, our robust operating momentum, and effective growth strategies will drive another year of strong growth in 2022 and build value for our shareholders. Now, let's turn to your questions.

Thank you. At this time, we'll now be conducting a question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. And our first question today will be coming from the line of Andrew Lazar with Barclays. Please proceed with your questions.