McCormick & Company, Incorporated

To accompany this call, we've posted a set of slides at ir.mccormick.com. With me this morning are Lawrence Curzius, Chairman and CEO, Brendan Foley, President and Chief Operating Officer, and Mike Smith, Executive Vice President and CFO. During this call, we will refer to certain non-GAAP financial measures. The nature of those non-GAAP financial measures and the related 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. Today's presentation contains projections and other forward-looking statements. Actual results could differ materially from those projected. The company undertakes no obligation to update or revise publicly any forward-looking statement, whether because of new information, future events, or other factors. Please refer to our forward-looking statement on slide two for more information. I will now turn the discussion over to Lawrence.

Good morning, everyone. Thanks for joining us. I'd like to start by welcoming Brendan to this morning's call. In addition to his continuing role as president of our global consumer business, Brendan now has responsibility for our business worldwide in his newly appointed role of president and COO. At the end of our prepared remarks, I may ask him to weigh in on some of your questions. McCormick's long-term performance, including through the pandemic and other volatility, has been industry-leading and met or exceeded our financial objectives. Broadly, our results in the second quarter were in line with our sales and profit expectations, despite certain global challenges, including a greater-than-expected level of high-cost inflation and supply chain challenges, significant disruption in China from COVID-related lockdowns, and the conflict in Ukraine. As our second quarter progressed, the dynamics of these conditions intensified and negatively impacted our sales and profit results. Before discussing our second quarter results in more detail, I'd like to comment on each of these, starting on page five. Consistent with the rest of the industry, high-cost inflation and supply chain are continuing challenges. To partially offset cost pressures, we've taken multiple pricing actions, and as planned, we are raising prices again. Inflation continued to escalate, and we've adjusted our upcoming pricing actions accordingly. 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 reducing discretionary spend where possible. We expect our pricing actions and other levers to begin to outpace cost pressures late in the third quarter with higher costs and higher offsetting pricing actions than we expected on our last call, which further weights our 2022 profit to the second half of the year. We plan to fully offset cost pressures over time. In China during the second quarter, there was significant unanticipated disruption in consumption due to severe COVID-related lockdowns in Shanghai and other cities throughout China. China is our second biggest sales country, with operations in Shanghai, Guangzhou, and Wuhan. Our Shanghai operation produces approximately 40% of our total China sales, which are distributed throughout the country and supports both of our segments. And as a reminder, our branded food service demand is included in our consumer segment in China. The lockdowns lasted roughly 75 days, with our Shanghai plant forced to close for two weeks at the onset, with employees living in the facility. Once we were able to reopen, we were impacted by lockdown-related labor shortages due to workers being quarantined. During April and May, we incurred significant incremental manufacturing and transportation costs to supply our customers. In addition, with restaurants largely closed and consumers unable to shop for extended periods in our strongest geographies, we experienced significant demand softness as well. Market conditions in China have also allowed very little opportunity to increase prices. While we're currently experiencing this short-term pressure, we continue to believe in the long-term growth trajectory of our business in China, but we will not be able to recover the sales and profit impact we experienced in this fiscal year. Finally, regarding the conflict in Ukraine, in mid-March, we suspended operations in Russia, and our operations in Ukraine were paused. These countries account for less than 1% of our overall business, we have recently decided to exit our consumer business in Russia. Now, for more detail on our second quarter results, starting with sales on slide seven. Sales declined 1% from the second quarter of last year, including an unfavorable impact from currency. Our constant currency sales were comparable to last year, with growth from pricing actions offset by a decline in volume and product mix. The volume decline was impacted unfavorably by several discrete items, including a 1% impact from the China consumption disruption and the conflict in Ukraine I just mentioned, a 1% impact from the exit of low-margin business in India, and a 2% impact from lapping the U.S. trade inventory replenishment during last year's second quarter. Excluding these items, our sales performance would have been 4% growth for second strength of our broad global portfolio and effective execution of our strategies and pricing actions. While growth in both segments was impacted by the discrete items, they were more impactful to our consumer segments. Notably, our growth in flavor solutions was outstanding. Comparisons to 2021 and 2020 remain difficult due to the dramatic shifts in consumer consumption between at-home and away-from-home experience in the second quarter of the last two years. Using 2019 as a pre-pandemic baseline, second quarter sales have grown at a constant currency compounded annual growth rate, or CAGR, of 6%. Moving to profit, adjusted operating income was down 33%, or 32% in constant currency, and adjusted earnings per share was down 30%. The adjusted operating income comparison includes 7% unfavorable impact from the disruption to China's consumption and the conflict in Ukraine. Although we anticipated the profit driven by sales growth in the second quarter would be more than offset by higher inflation and broad-based supply chain challenges, the impact was greater than expected due to continuing cost escalation. While this pressured second quarter profit, we expect to mitigate this impact later this year. Now, moving to second quarter business updates for each of our segments. Starting with our consumer segment on slide 9, our second quarter sales reflect the impact of our pricing actions in all three regions. In the Americas, our first wave of pricing was phased in during our fourth quarter of last year, the second wave during the second quarter in April, and the third wave will go into effect at the end of the third quarter. With the first wave, we saw a very low level of elasticity. With the second wave, we're seeing more price elasticity, although still below historical levels. While consumer spending has remained strong, consumers are now under significant pressure from broad-based inflation, notably fuel prices and other macro factors. As we look ahead and our additional pricing actions are phased in, the elasticity we experience may change, but we still expect the impact to be lower than historical levels. Overall, our pricing actions in EMEA and APZ are on track, and our elasticity impacts are similar to the Americas. In EMEA and APZ, pricing timing varies by market within each region. In some markets, particularly in EMEA, there are regulatory guidelines on when we take pricing, which generally creates a lag in the timing of pricing compared to the Americas. In this unprecedented environment, however, we are taking additional action in markets across the EMEA. Now, for some further 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 1%. And over the last three years, since 2019, consumption has grown at a three-year CAGR of 7%, which highlights how the sustained shift in consumer consumption continues to drive increased demand for our products and outpace pre-pandemic levels. In the Americas, a sales decline in the second quarter included the impact of lapping a 4% overshipment of consumption to replenish retailer inventories in the second quarter of last year. Our second quarter shipments this year were in line with our consumption change. Demand has remained high, and we are realizing the benefit of the manufacturing capacity we added, as well as our increased resilience. However, some products remain stretched by sustained high demand. Shelf conditions continue to improve, as seen in our recipe mix share performance of another quarter of share gain. Our spices and seasoning share was pressured during the quarter by the shortage of certain packaging materials, as well as certain organic spices. Some of these have been resolved, and some will remain ongoing. We continue to use our category and revenue management capabilities to strengthen our spices and seasoning portfolio and optimize the category performance for both McCormick and our retailers. The strength of our brand and our category leadership has recently won us new distribution, which we will begin to realize later this year. In EMEA, we continue to have strong share performance in most categories and markets. During the second quarter, we lapped strong year-ago consumption, partially due to last year's COVID-related restrictions throughout EMEA, where restrictions extended longer than other regions. Our Vannay brand of homemade dessert products in France A product line unique to our EMEA region was most impacted as recently we've seen baking return to a more pre-pandemic baseline level. In other categories in the region, we believe there's been a step up in consumption. And in the Asia-Pacific region, in addition to the consumption disruption in China, second quarter growth was impacted by the exit of low-margin business in India. At the end of last year, we decided to exit our rice business, the Kui Nor brand, to enable the region to focus on our higher margin core category. Turning to flavor solutions on slide 10, our sales performance for the quarter was outstanding, with both pricing and volume growth contributing. We grew a double-digit growth in both the at-home and away-from-home parts of our portfolio. Looking at our flavor solutions growth over the past three years, since the COVID-19 restrictions caused dramatic second quarter comparisons in 2020 and 2021, Our sales taker is 8%, largely driven by volume. Our pricing actions increase sales in all three regions. Broadly, pricing actions in the branded food service part of our portfolio follow the same cadence as those in each region's consumer business. In the rest of our flavor solutions business, pricing is based on contractual windows with automatic price adjusters in many contracts, and the timing is going to vary based on those windows. In this dynamic environment, though, with costs escalating so quickly, we are having discussions outside of those windows and passing costs through faster than usual. Higher volume also contributed to growth in the Americas and EMEA regions. Demand has remained strong for certain parts of our business in these regions. Our supply chain is being pressured to meet this demand, and we are still taking on some extraordinary costs to service our customers. We appreciate our customers working with us through this pressure. In the Americas, where our customer base is skewed more to packaged food and beverage customers, our at-home customers, strong growth was driven by flavors for savory snacks, as well as performance nutrition and health applications with these customers. In the EMEA, our customer base is more skewed to quick service restaurants, or QSRs, and our strong QSR momentum contributed to growth in all markets, partially driven by expanded distribution. Branded food service growth was strong in both the Americas and EMEA regions, driven by restaurant and institutional food service customers. Demand continues to strengthen in this channel, particularly as travel accelerates and restaurants benefit from consumers shifting to takeaway and delivery. Overall, our flavor solutions, sales demand, and growth momentum continues to be strong, Now let me expand on our growth platform and positioning in the current environment. Turning to slide 11, 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 trend 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. McCormick is uniquely positioned to capitalize on this demand for great taste. With the breadth and reach of our global flavor portfolio, we are delivering flavor experiences for every meal occasion through our products and our customers' products. We are end-to-end flavors. we continue to make investments to sustainably meet the growing demand and to fuel further growth. In our global supply chain, we increased our capacity for the recently opened UK Peterborough Flavor Solutions manufacturing facility and have begun our expansion of bonus footprint to support future flavor growth. We are also increasing our capacity in the fast-growing hot sauce category, and investing in seasoning capacity to support increased demand and strengthen resiliency. As we've said, with the sustained level of high consumer demand, we're benefiting from the manufacturing capacity we've added. While we still experience disruptions in the supply chain, they are much more specific, mainly from a transportation and packaging supply standpoint. We experienced the peak disruption in the third quarter of last year, And when every month the supply chain continues to get better, we feel good about the progress we're making. We are strategically investing behind our brands to drive growth, including in brand marketing, as we did throughout the pandemic with our three-year brand marketing taker approximating our consumer segment sales takers for the same period. We're pivoting our messaging to emphasize to consumers how our products help them stretch their grocery dollars For instance, we're launching digital messaging, highlighting the value of our product by making a great flavorful meal economically. We add flavor for only pennies per serving, and recipes like our 30-minute taco casserole are family and budget-friendly answers to what's for dinner. We continue to invest in new products. In our consumer segment, we are responding to new consumer behaviors, like increased at-home lunches. For instance, our new patent-pending French's Creamy Mustard is off to a great start. We're sensitive to the needs of price-conscious consumers, not just in these challenging economic times, but every day. Our portfolio includes branded items to accommodate consumers' needs and provide solutions for everyone at every price point, as well as private label products. Our new product launches include additional entry-level price point products for affordability and larger sizes of key high-usage items for better value. While we are still seeing strong consumer spending, we know that inflation is a significant concern for consumers, more so than COVID. We're leveraging our proprietary research, which served us well during the pandemic, to monitor for any signals of changing behavior. Our research continues to indicate consumers are going to cook as much at home or more than they did during the pandemic for many reasons. One of them is that they find it more economical. To the extent there is a recession, it further reinforces cooking at home, and we know from our past sales performance that our categories and brands perform well during recessionary periods. Now, some summary comments on slide 13 before turning it over to Mike. We remain focused on the long-term goals, strategies, and values that have made us so successful. We have grown and compounded that growth over the years regardless of the environment. The long-term fundamentals that drove our industry-leading historical performance remain strong. The strength of our business model, the value of our products and capabilities, and the execution of our proven strategies by our experienced leaders while adapting to changes accordingly gives us confidence in our growth momentum and in our ability to navigate the challenging global environment. Despite the pressures we experienced in the second quarter, we are well-positioned and confident in delivering strong performance in 2022 and beyond, while driving sustainable long-term value for our shareholders. McCormick employees continue to do a great job navigating dynamic environments. Their agility and their teamwork drive our momentum and success and I want to thank them for their dedicated efforts and engagement. And now I'll turn it over to Mike. Thanks, Lawrence, and good morning, everyone. Starting on slide 15, our top-lying constant currency sales were comparable to the second quarter of last year, reflecting 7% growth from pricing actions, all set by a 7% decline in volume and product mix. Excluding the 4% impact of the discrete items Lawrence mentioned earlier, our sales performance would have reflected 4% growth, Consumer segment sales declined 7% in constant currency. The impacts from lapping the U.S. trade inventory replenishment, the consumption disruption in China, the exit of low-margin business in India, and the conflict in the Ukraine contributed 6% to that decline. The remaining 1% decline was due to lower volume partially offset by pricing actions. On a three-year basis, our second quarter constant currency sales caper was 4%. On slide 16, consumer sales in the Americas declined 4% in constant currency, driven by lower volume than mixed, partially offset by pricing actions. This decline is attributable to lapping trade inventory replenishments in the second quarter of last year. Over the past three years, constant currency sales in the Americas grew at a CAGR of 7%. In EMEA, constant currency consumer sales declined 11%. primarily due to lapping high year-ago demand driven by COVID-related lockdowns, the most significant impact of which was lower sales of volume A homemade dessert products. A 1% unfavorable impact from lower sales in Russia and Ukraine also contributed to the decline. Pricing actions in all markets partially offset the lower volume. Over the past three years, BMEA's constant currency sales grew at a 3% taker, Constant currency consumer sales in the Asia-Pacific region declined 18%, including a 20% unfavorable impact from the consumption disruption in China, as well as the exit of low-margin business in India. Pricing actions in all markets across the region partially offset this unfavorable impact. On a three-year basis, APZ's second quarter constant currency sales figure was a 7% decline, driven by the China and India impacts I just mentioned. Excluding those impacts, sales grew at a 5% CAGR over the past three years. Turning to our flavor solutions segment in slide 19, we grew second quarter constant currency sales 11% due to pricing actions as well as higher volume and mix. This growth was partially offset by a 1% decline in sales related to the combined impact of the China disruption and the conflict in Ukraine. Second quarter constant currency sales for the last three years grew at an 8% CAGR. In the Americas, flavor solutions constant currency sales grew 12%, driven by both pricing and the combination of volume and mix. Higher sales to packaged food and beverage companies with particular strength in snack seasonings led to growth, with higher demand from branded food service customers also contributing to growth. Over the past three years, constant currency sales in the Americas grew at a CAGR of 8%. In EMEA, we drove 19% constant currency sales growth, with a 14% increase in volume and mix and 5% related to pricing actions. EMEA's flavor solutions growth, excluding a 1% decline related to the conflict in Ukraine, was broad-based across its portfolio, led by strong growth with QSR and branded food service customers. Over the past three years, EMEA's constant currency sales grew at a 10% CAGR. In the Asia-Pacific region, flavor solutions sales declined 6% in constant currency. The decline was driven by a 7% impact from lower volume in China due to the COVID-related restrictions, partially offset by pricing actions in all markets across the region. APZ grew constant currency sales at a 3% CAGR over the past three years. As seen on slide 23, adjusted gross profit margin declined 550 basis points in the second quarter versus the year-ago period. Realizing this is a sizable compression, I will spend a moment on the significant drivers. Let me start with the drivers we anticipated. First, nearly half of this declined. Approximately 250 basis points is due to the diluted impact of pricing to offset our dollar cost increases. We focus on gross profit dollars. This impact was more significant than in the first quarter because of the higher level of pricing in the second quarter. Product mix was unfavorable as compared to the second quarter of last year. In our consumer segment, as we mentioned earlier, we are lapping strong U.S. spices and seasonings related to the inventory replenishment. In our flavor solution segment, sales growth in our away-from-home products was higher than our at-home products, and we are lapping strong sales of beverage flavors last year. A sales shift between our consumer and flavor solution segments also contributed to the unfavorable product mix. In our flavor solution segment, as we mentioned in our last earnings call, gross margin was unfavorably impacted by startup and dual running costs as we transition production to our new UK Peterborough manufacturing facility. Of note, CCIE-led cost savings partially offset the impacts I just walked through, and we are on track to deliver our expected savings of $85 million for the full year. In addition to the net impact of the anticipated items I just detailed, gross margin was also unfavorably impacted by the following items. As Lawrence discussed, Cost inflation and supply chain pressures escalated during the second quarter, impacting our results more than expected, primarily related to transportation costs and faster-turning materials. While we have adjusted our upcoming pricing actions to reflect that escalation, and we plan to fully offset cost pressures over time, our second quarter gross margin compression reflects the usual lag associated with pricing. We expect pricing to begin outpacing the cost pressures later this year and continue into next year, Our cost recovery will vary by region and segment. Currently, our pricing lag is more significant in our flavor solutions segment. Lawrence previously mentioned we have incremental costs to meet strong demand for certain parts of our flavor solutions business, thus impacting our gross margin. And finally, as already mentioned, significant costs due to the COVID-related restrictions in China had an unfavorable impact to profit. Moving to slide 24. Selling, general, and administrative expenses were lower than the second quarter of last year, and as a percentage of net sales declined 20 basis points. The decline was driven by lower employee benefit and brand marketing expenses, as well as discretionary spending reductions, partially offset by higher distribution costs. The decline in brand marketing investments was driven by China and Russia reductions. Importantly, across our other markets, we invested in brand marketing at a comparable level to last year. The net impact of the factors I just mentioned resulted in a decline in adjusted operating income, which excludes special charges, of 33% compared to the second quarter of 2021. In the consumer segment, adjusted operating income declined 29%, and in the flavor solution segment, it declined 40%. A 1% unfavorable impact from currency is included in each of these declines. Turning to income taxes on slide 25, Our second quarter adjusted effective tax rate was 18.6%, compared to 22.2% in the year-ago period, driven by a higher level of discrete tax items this year. At the bottom line, as shown on slide 26, second quarter 2022 adjusted earnings per share was 48 cents, as compared to 69 cents for the year-ago period. The decrease was driven by our lower adjusted operating income. On slide 27, We've summarized highlights for cash flow in the quarter-end balance sheet. Our cash flow from operations was $154 million through the second quarter of 2022, compared to $229 million through the second quarter of 2021. This decrease was primarily driven by lower net income. Cash flow from operations will be weighted to the second half of the year, similar to our profit curve. We returned $198 million of cash to our shareholders through dividends, and used $102 million for capital expenditures through the second 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. Now turning to our 2022 financial outlook on slide 28. As a reminder, last quarter, the conditions in Russia, Ukraine, and China were just unfolding, and cost inflation and supply chain challenges remain dynamic and fast-moving. Today, we have a better view of the macro environment, and our guidance for the full year considers a greater impact from these items. In addition, and as noted previously, we have always expected our profit growth to be weighted to the second half of the year. We now expect it to be even more so. We are projecting strong top-line growth, with profit impacted by the global challenges I just mentioned. We also expect there will be an estimated two percentage point unfavorable impact of currency rates on sales, adjusted operating income, and the adjusted earnings per share, an increase from our previous estimate of one percentage point unfavorable. On the top line, we now expect to grow constant currency sales five to seven percent. We expect sales to be driven primarily by pricing, which will accelerate significantly in the second half versus the first half. While we anticipate volume and product mix to be impacted by increasing elasticities, we expect elasticities to remain at a lower rate than historical levels. Our volume and product mix will also continue to be impacted by the pruning of lower margin business from our portfolio, as well as the impact of demand disruptions in China and Ukraine. We plan to drive continued growth through the strength of our brands, as well as our category management, brand marketing, new product, and customer engagement growth plans. We are now projecting our 2022 adjusted gross profit margin to be 200 to 150 basis points lower than 2021. Given the rapidly escalating cost environment, cost pressures have outpaced our pricing, and future actions have been adjusted to reflect the higher cost level. This adjusted gross margin compression reflects the impact of a high team's increase in cost inflation. an unfavorable impact of sales mix between segments, and favorable impacts from pricing and CCI-led cost savings. As a reminder, we price offset dollar cost increases. We focus on gross profit dollars. This has a diluted impact on our adjusted gross margin and is the primary driver of our projected compression. We now expect to grow our adjusted operating income 2% to 4% in constant currency. In addition to the gross margin impacts I just mentioned, this projection also includes our CCI-led cost savings target of approximately $85 million and brand marketing investments comparable to 2021, which reflects reductions in China and Russia. Considering the year-to-date impact from discrete items as well as our estimated mix of earnings by geography, we now project our 2022 adjusted effective income tax rate to be approximately 22%. This outlook is expected to be a year-over-year headwind to our 2022 adjusted earnings per share of approximately 2%. We are lowering our 2022 adjusted earnings per share expectations to a range of $3.03 to $3.08. This compares to $3.05 of adjusted earnings per share in 2021 and represents a decline of 1% to an increase of 1%, or in constant currency, growth of 1% to 3%. This reflects our lower adjusted operating profit outlook and an expected $15 million benefit from the impact of optimizing our debt portfolio. In addition, we are well positioned with our broad and advantaged labor portfolio and effective growth strategies to continue our operating momentum and drive another year of strong performance. Thank you, Mike. Now that Mike has shared our financial results and outlook in more detail, I'd like to recap the key takeaways as seen on slide 29. Our long-term performance has been industry-leading and met and exceeded our objectives, including through volatile environments. The long-term fundamentals that drove this historical performance remain strong. Several discrete items unfavorably impact our sales comparison to the second quarter of last year. Excluding these impacts, our sales performance reflects the strength of our broad global portfolio, the effective execution of our strategies, and our pricing action. Our sales growth momentum is strong. Persistent high-cost inflation and supply chain challenges intensified as the second quarter progressed and unfavorably impacted our profits. Importantly, we expect to mitigate this impact in the second half of the year. We're confident that with a broad and advantaged labor portfolio, effective growth strategies, and our ability to navigate challenging environments, we will drive another year of strong performance in 2022 and build value for our shareholders. 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 keys. Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.