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.

Great. Thanks very much. Good morning, everybody.

Good morning, Andrew.

I guess first off, as you talked about, organic sales came in below where the street was looking for it, though you raised the outlook for organic for the full year. And I appreciate some of the items in 2Q you highlighted were discreet, but maybe you could talk a little bit about what gives you the confidence in raising the organic guidance for the full year. Are you expecting headwinds in 2Q to become tailwinds in the second half or better momentum in the underlying business? The scanner data has not necessarily showed any meaningful inflection yet that I can see, at least on a year-over-year basis. I appreciate the multi-year, you know, CAGR of organic sales. So I'm trying to get a better sense for the underlying confidence in raising the full-year organic to start with.

Well, sure, Andrew. Well, first of all, our plan as we shared previous calls and conferences has always been back half-loaded. and is stronger in the second half than in the first half. And one of the factors driving that is the cadence of our pricing actions. There is twice as much effective pricing in the second half of the year as in the first half of the year. And as you can see, right now, for the quarter, our pricing contribution The sales was about 7%, and it's significantly higher going into the second half of the year. And that is a big driver of total sales. And it will build third quarter, fourth quarter. And that's a driver of sales. It's also a driver on the operating profit and EPS as we go through. The second thing is that we did not expect the disruption that we had in China in the second quarter. The extent of the lockdowns was a surprise to us and I think to everybody. China is a big contributor to us and we expect a normalization of business in China as we go through the second half. Particularly, we really expect it to be normal by the time we get to the fourth quarter. Just our experience with the initial COVID lockdown a couple of years ago tells us that we get normalization. There's a significant surge in restocking by both the consumer and by our trade channels. And so we would expect a strong contribution from China in the second half of the year. And then finally, U.S. and EMEA have less difficult comparisons going into the second half than they did in the first half of the year, not lacking inventory replenishment that we talked about last year, and also not lacking some of the COVID lockdowns that were still in effect in EMEA, particularly in the second quarter. And finally, we expect continued strong underlying demand from our consumers and our customers that we're continuing to see. Mike, do you have anything you want to add to that? Yeah, I think I'd add that we see a lot of strength in our flavor solutions business. We saw that in the second quarter, and we know that will continue in the second half. So we certainly think that's going to support, I think, really our outlook for the second half overall. But also we're seeing a lot of new business come through in the back half of the year in both segments. And so we see a lot of strength coming through on that, too. So the growth momentum does look even stronger as we move towards the back half.

Great. And then just a quick follow-up. I don't think you mentioned it. I know you did last quarter when you were talking about in the core segment. consumer business, private label had not yet really had much of a move one way or the other. I don't think you mentioned it this time around. I'm just curious what you're seeing there, anything of note that we should be aware of. Thanks so much.

I don't think that there's anything of special note there. We are seeing some trade down by consumers, not just in our category but in other categories that we track. It's no surprise that, say, consumers at the lower end of the income scale particularly are feeling a bit of pressure from inflation, not ours, but inflation across everything. Gas prices are $5 or $6 a gallon, depending on where you live, and that puts pressure on consumers' pocketbooks. But I would say that it's still at a pretty low level, particularly when we look at our brands and the elasticity that we're experiencing. It's still significantly below historical levels, and it's not a particular concern. Great.

Thanks so much.

I would say also I'll add that our sales of private label products are part of our business, but not particularly surging. Thank you.

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

Hi, thanks so much. I just wanted to make sure I heard your commentary about pricing correctly and that I'm doing some basic math, right? You did about, I think 6% pricing in the first half. You're saying that'll double in the second half. And you also, I think are implying that you need around 10% organic sales growth in the second half to hit your guide. Sorry to do the math on the call. I apologize for putting you on the spot. But are you effectively saying that it's reasonable for us to model maybe, you know, 12% pricing overall in the second half with volume down around 2%? Is that kind of what we're going at here?

Yeah, Ken, let me start with that. I'm going to let Mike point in on that. But I think you're in the right neighborhood with those numbers. You know, we took, you know... First, when I think about the cadence of our increases and the timing of their effectiveness, you're in the right neighborhood when you think about going from 6 to 12. In the second half, I would add that, again, our next pricing action in the Americas, our largest region, is in August. And so if you're thinking about phasing that out, You should have that in mind as well. I'd also just add you're going to see it across both consumer and flavor solutions pretty much at the same level.

Oh, great. That's helpful. Thanks. And then quick follow-up. It sounds like you mentioned pricing will kind of phase in a little bit over the second half. In this context, and given some of the other factors you've talked about, how do we think about the cadence of the gross margin improvement in the back half? Should we expect a substantial improvement in 3Q? Is it more 4Q weighted? Maybe any color you could provide there would be helpful as we think about modeling.

Okay, this is Mike. Great question. Yeah, we see, you know, actually the cost peak year on year we see is third quarter and a little bit of moderation in the fourth quarter. We see the pricing obviously growing, you know, second to third to fourth. So I think what you'll see is, you know, still some gross margin challenges in the third quarter, but in the fourth quarter the combination impact of that pricing and full benefit there and the cost. And also think about the fourth quarter as our strongest quarter overall from a volume perspective there. And as Lauren said before, things like China, which we make a really good margin on, as that recovers from third into fourth too, that should be a positive for 4Q.

Great. Thank you so much.

Thank you. Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.

Yes. Hey, thank you. And good morning. So you gave a good deal of bottoms up color on the incremental headwinds facing the business. So I think, I think I'm clear on that, but I just want to play it back from the top down. Cause your overall sales outlook hasn't really changed despite the more adverse currency. You're now expecting a marginally lower tax rate, a marginally lower share count, slightly less brand marketing, And while the expected cost inflation is higher at the high teens level, it's not outside the bounds of the prior outlook. So I guess just want to isolate and see if you could better define what is exactly driving the reduced operating profit and EPS outlook. It feels like it's the updated outlook on China, Russia, Ukraine, and supply conditions above and beyond the normal cost inflation. But I just want to confirm that. And if there's a way to quantify or rank order those factors, that'd be great.

Hey Steve, this is Lawrence, and I think that you, some of the little things, I think we're going to want to come back and talk about some of those marginal changes that you talked about. But on the big picture item, you've got it exactly right. And in fact, this was part of what we were trying to message at your recent conference. The big change here are the things that were external factors that surprised us, and that is what's going through. I'll let Mike walk through the actual bridge on that. If you think about our guidance, we're coming down 14 cents. If you think about from a China, Russia, Ukraine perspective, that's 11 cents right there. And then FX, as you said, we're going up 1%, that's 3 cents there. So there's your 14. Now, we're recognizing that the cost inflation, which you mentioned, we had mid to high double digit. We actually moved that to high double digit. So 1% to 2% more cost during the year driven by transportation, packaging, things like that. So that did hurt us in the second quarter. And we're dropping a bit of that through the rest of the year, but we have pricing to help mitigate that. And then below the lines, some of the things you talked about, taxes, a little bit of help, some of the interest expense things are going to help offset that. But the big drivers are the external factors. The one thing I wanted to just correct you on, Brent, or just give you insight, brand marketing is now flat. However, that is really driven by the reduction in China, Russia, Ukraine, and FX. So we're still spending up in our big markets to drive growth.

Okay, that's helpful. Yeah, that's perfect. That's perfect. Just a quick follow-up. To follow up on, I think, Ken's question, just the cadence of gross margin recovery, is there anything that you would call out in the second quarter as truly transitory? So is there anything, any headwind that you experienced in the second quarter that is kind of unique and discreet to the second quarter that doesn't carry over, at least directionally? I'm trying to get a sense if there's anything behind you.

The one thing I'd say, and you're new to our business, but the China business to us is very material. It's our second biggest market. We have three large manufacturing facilities. And the shutdown really put a lot of pressure on our costs there, a lot of extra costs for transportation, loss absorption, things like that. So as that business recovers, obviously, that goes away. I think the other thing, too, is if you think about some of these costs that came up rapidly like transportation and packaging. I mean, fuel costs, if you get back to March, gasoline prices in the quarter versus March were up 25%. So that stuff rolls through the P&L very quickly. And, you know, pricing will catch up on that, but, you know, a one-month lag in pricing could be $30 to $40 million of impact, which is like 10 cents a share. So, You know, we're mitigating that as quickly as we can, but, you know, sometimes we see that as kind of stabilizing now. And going forward, like I told you, third and fourth quarter where we see our cost outlook. But I think that is, to your point about what is transitory and what is not, I think that gets most of it. And, Steve, I would really underscore that timing aspect. You know, one month difference on the effective date of our price increase would have, we'd we'd be having a different conversation. It would be 11 or 12 cents of EPS on the quarter. And, of course, those price increases are in effect. I'm just saying if it had been one month earlier, that's what the difference would have been. That's one reason why we're pretty confident that we're going to catch up with the costs.

Understood. I just want to play back just real quick Mike's point on China. I get it that China was uniquely detrimental to 2Q, but I don't think you're saying that that's 100% transitory. As of June 1st, that's not behind you. It gets better, but it's not... That's why I said that's going to really help us in the fourth quarter more.

It's still good enough. Yeah, there's different levels of openings that are happening now that will happen throughout the quarter. Understood. Okay, thank you very much.

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, Rob. Hi, Lawrence. You know, in your opening remarks, you said that your research shows that there's that consumers will continue to cook as much at home as they did during the pandemic, if not more. And just anecdotally, I find that this year that's not the case. You know, people are regaining mobility, returning to the workforce, what have you. And you can see it in your numbers too. So do you have any like kind of real-time insight into how consumers are behaving this year in light of the fact that, you know, your category in the U.S., you know, it's much weaker than other packaged foods categories have been tracking.

President, I'm going to let you take that one. Yeah, sure. Good morning, Rob. You know, I guess just to, you know, react to some of the thoughts you just shared there, we're seeing through a lot of our research also what we're seeing in the secondary research out there is that there's still a heavy level of sustained cooking at home in the data overall, whether we're researching it or we're getting it from some of our suppliers there. We definitely see a sustained level of eating at home. And overall, I would say that the consumer hasn't really changed that much. Now, You know, as it's performing in our categories, we're seeing it play out in a number of our categories, recipe mix, hot sauces. We still have a lot of strong, you know, sort of consumption growth there. And so we certainly still see it play out. You know, certainly there are categories like, you know, meat where you do see some decline, you know, going on there. That might affect an item or two here, but we definitely still have a very balanced portfolio where we're seeing still a lot of at-home consumption going on. And frankly, historically, you go back a long way with us. If a recession does occur, that will drive more people cooking at home. So that bodes well, I think, for our fraud portfolio. But our research, I would say, is as recent as the last 30 days is telling us that there is still a sustained level. And, you know, I mean, look at our flavor solutions business. I mean, clearly food service is strong. You know, restaurants, however you open, people are not forced to cook at home But there still seems to be a strong preference in that direction. And actually, as we went through the first half, we saw in the macro data that there was a return to dining away from home and a reduction in cooking at home. But in recent weeks, that has started to turn back the other way, probably driven by economic pressures on consumers. Cooking at home is more economical. I think for a variety of reasons, we're still pretty optimistic on the whole retention of cooking at home behaviors. There are some pockets that are different. Baking was really largely driven by kids being at home from school. We've seen baking-related items return to really pre-pandemic levels. That certainly is part of our European story where our violent brand is a big factor. But overall, the general cooking at home trend persists, and all of those new meal occasions that are food at home occasions now because of people working remotely continue to support that strong consumption.

Okay, and maybe a follow-up for Brendan. As you're talking to the trade about the holiday seasons and the price increases and consumer behavior, what's the reception been like? Is the price increase well understood for seasons, the reasons why? And are they eager to merchandise aggressively during the holiday season?

Yeah, I think the way our conversations are unfolding with customers and looking at the holiday season is one where you're still looking at, I think, improvement in supply across the season. And that is, you know, I think one of the things that underpins really a lot of optimism and strength as we go into the back half, especially as we go into this holiday season. We are certainly communicating a strength in our ability to supply and drive, you know, the holiday promotions and, you know, displays and everything else. I would say the conversations with customers have been rather positive and strong and the outlook remains pretty healthy. Underpinned by supply, I would say, is one of the important factors there. Related to pricing, I think we work a lot with our customers in making sure that we're both driving category growth. That is a big part of our conversations as well and And, again, I think those conversations, and we appreciate the partnership and working with our customers on that, but the outlook, I think, remains very healthy. And, again, I'll just underscore that, well, we don't want to get too specific on discussions about pricing because there is customer and competitive considerations there, and there is always some natural tension in those discussions. Our customers know that we've taken a long-term perspective on our relationship with them, that we are transparent in the reasons for pricing. And they themselves are continuing to experience inflation that's very broad-based on some of the same factors that we are. And so those conversations continue to be quite constructive.

Very helpful. Thank you.

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

Good morning, everyone. Good morning, Alexia. Hi there. Can I ask about just the global supply chain dynamics? You obviously are sourcing ingredients from many different places around the world, probably more so than other large packaged food companies. I'd just be curious to hear sort of what you're seeing in terms of global supply chain, domestic supply chain. Where are the real pain points for you now and is there any light at the end of the tunnel?

Oh, sure, Alexia. This is actually a – I'd say our worst disruption on the supply chain really was third quarter of last year and has continued to get better incrementally every month. We're not out of the woods by a long shot in terms of normalization, but the really broad-scale disruptions that we were experiencing a year ago or more us and the disruptions are really much more discrete factors. I'd say our global sourcing of raw materials from points all around the world for our various markets around the world has been one of our strengths through the whole pandemic experience and the post-pandemic time and continues to be a strength. Our challenges have been more on either predominantly local packaging issues and specific packaged materials from very specific suppliers. Some of them continue to be sore points. And then in areas where we have, there's still some areas where even though we've added a lot of capacity, the demand is still extraordinary and we're pressed to meet the needs of our customers. And again, those would be in a few very specific areas.

Very helpful. And then just as a quick follow-up, there was a comment in the press release about unfavorable mix in flavor solutions. How important was that? Because obviously the profit decline was very marked this quarter. And what drove that? And then I'll pass it on.

Yeah, I mean, unfavorable mix was one of the factors. If you think on a quarter-to-quarter perspective, look back a year, really strong performance in some of the higher margin categories. This year, the strongest performance was in the away-from-home versus the at-home. So a little bit between those two categories, we mixed down a little bit, nothing to be concerned about. As we've talked about, flavor solutions can be lumpy based on the products we sell and things like that, but that's part of the reason.

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.

Thank you. Good morning, everyone. Hi, Adam. Hi. So I was hoping to just maybe try to understand the second half kind of framing maybe from a different light because it would seem like the full year guidance implies second half operating margins up about 250 basis points year over year. I get that there's incremental pricing actions that benefit in that price-cost balance. We'll probably flip positively presumably in the fourth quarter. But also that's a diluted impact to percent margins. Just trying to get a sense of what how do we not withstanding some of the street things in the May quarter specifically to the China impact in particular, but we've got volumes that demand elasticity that would suggest volumes aren't going to get better. You're between businesses, flavor solutions is probably growing faster than consumers. That's a mixed headwind at the corporate level. Um, and I, so I'm just trying to get us understand kind of how do we get to that magnitude of percent margin and improvement in the back half.

Adam, I'm going to start, and I'm going to let Mike pick it up. Again, I want to underscore that there's a big change in the relationship between pricing and cost as we go through the year. In the second half, price increases begin to overtake the cost increases, and rather than trailing, we're beginning to going to be a big factor between the continued strong demand and having twice as much effective pricing in the second half as the first half. That is going to be a really big factor. There's other factors too, Adam. We talk about pricing as a way to offset costs. We have other levers. We talk about revenue management or CCI-led cost savings. We continue to lean hard on driving additional cost savings in this inflationary environment And we see continued strong demand driving that, you know, high margin products helping us there. So there's a lot of reasons to believe. To your point, though, I mean, between third and fourth quarter, I mean, the fourth quarter is where a lot of this comes to fruition from, you know, getting to a positive margin change year on year. And I'll add, so we don't expect COVID lockdowns to repeat in China. That's a wild card. You know, we've been surprised there before that could happen again. We're not expecting that, but that was a big unfavorable in the first half, particularly in the second quarter, that we expect to correct and normalize as we go through the second half.

Okay. So maybe just to help clarify that, as we think about the year-to-date, second quarter or year-to-date kind of performance. What's been the realized CCI savings year-to-date relative to the 85 that you talked about for the full year? I don't think I heard a specific number in terms of what the realized cost inflation has been year-to-date just relative to that high teens number that you've targeted or you've expected for the full year. I guess just any way to help dimensionalize some of the... You gave the brand marketing piece, but Other SG&A, just where that magnitude of kind of tightening the belt strings there and how much that can contribute in the second half. This is weighted to the second half, Adam. That's all I'm going to say. Okay. All right. I appreciate that call. I'll pass it on.

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

Hey, guys. Good morning. Thank you for the question. Lawrence, I just wanted to circle back actually to Andrew's question around private label and going back to the slides. You do have a section here talking about more entry price points. And I'm just curious, is that a response to what you see as impending more share shifting to private label? And so you feel like you need more entry price points or is it something else? You talked about inflating cost baskets and maybe in other categories like proteins. And I notice here You're talking about entry price points on things like grill mates and lorries, which tend to be more tied to protein. So just curious to kind of get the thoughts around that.

That really doesn't have anything to do with private label. What it has to do with is our concern that consumers may be under pressure. As we were seeing some early times that consumers are maybe feeling some economic pressure. It's no secret that... like gas prices are up, our customers are talking, you know, retailer customers are talking about consumers, you know, feeling some pressure. And, you know, and, you know, we have some, you know, concern that between the inflationary environment and the high risk of inflation, sorry, that's a wrong word there, but the high risk of recession as we go, you know, into the second half and even into 2023, that we want to be able to, make sure that consumers, especially in the lower half of the income scale, are still being served and have access to our categories. Our goal is to have products that appeal to consumers at every price point across the whole category. And between our new product launches, our brand marketing and our brand marketing activity, We are taking a tone that tries to address that pressured consumer. I know we're kind of hitting time, and General Mills is probably talking right now, but Brendan's got a lot of color that he can add on this question, and I'd like to give him a chance to. Well, I think you hit it largely right. We're trying to make sure that our portfolio and our assortment is really geared towards what consumers are starting to face. And it could very well be price points that are lower in terms of smaller sizes. I would say, though, also there's another dynamic on the other end which is happening, which is we actually see even more consumers switching to larger sizes, looking for more value. And so it's playing out really on both ends. And so those are things that we're reacting to and making sure that we drive even more distribution and items in our assortment that serve those needs and those price points that consumers are looking for.

Got it. That's helpful. And maybe just a quick one. Lawrence, you did mention I think that packaging tightness was impacting a certain couple of categories in U.S. spices and seasonings. Just Any more color there? What specifically brands or categories we should be looking at just if that starts to improve?

I don't want to get too specific because I also don't really want to call out our suppliers with whom we're trying to have a constructive partnership or our private competitors either for that matter. But we had some trouble with glass for our organic spices in our gourmet range that I think we have resolved now and kind of packaging, and mostly in the U.S., frankly.

Got it. All right. Thanks very much, Chris. Thanks.

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

Thank you. McCormick's alignment with consumer trends and the rising demand for flavor, in combination with the breadth and reach of our global portfolio and our strategic investments, provide a strong foundation for sustainable growth. We're disciplined in our focus on the right opportunities and investing in our business. We're continuing to drive further growth as we successfully execute on our long-term strategy, actively respond to changing consumer behavior, and capitalize on opportunities from our relative strengths. We are well-positioned for continued success and remain committed to driving long-term value for our shareholders.

Thank you, Lawrence, and thank you to everybody joining today's call. Apologize for those that we didn't get to. If you have any further questions, please reach out to me today. And this concludes this morning's call. Thank you very much. And for those of you in the U.S., have a wonderful holiday weekend. Grill a lot. And for those of you in Canada, happy Canada Day. And everybody else, have a great weekend.