McCormick & Company, Incorporated

Good morning. This is Casey Jenkins, Chief Strategy Officer and Senior Vice President, Investor Relations. Thank you for joining today's fourth quarter's earnings call. 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, Brennan Foley, President and COO, 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 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. 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 Lawrence.

Good morning, everyone. Thanks for joining us. Our fourth quarter concluded a challenging and volatile year that impacted our ability to deliver on our expectations and our financial performance. At the same time, we ended the year with positive momentum, with consumer consumption trends and flavor solutions demand, stabilized service levels and supply, and meaningful progress in starting to reshape our cost structure. While more work remains to be done, our confidence and our outlook for 2023 and beyond is strong. Our organization is focused squarely on executing on the priorities I just mentioned, all of which are important drivers in the successful execution of our strategies and the delivery of stronger results. Turning to slide five, in our fourth quarter results, our sales declined 2% from the year-ago period, including a 4% unfavorable impact from currency. In constant currency, sales grew 2% within our implied fourth quarter guidance range, but below our expectations. Greater-than-expected COVID-related disruptions in China unfavorably impacted our expected sales growth for both Total McCormick and the consumer segment by approximately 2%. Fourth-quarter sales would have grown in the range of 4% in constant currency, excluding the impact of China on our results. We had anticipated even higher growth, but fourth-quarter restocking comparisons in the America's consumer segment further tempered our growth. As compared to last year, our fourth quarter constant currency sales growth of 2% reflected a 9% contribution from pricing actions, partially offset by a 4% decline in underlying volume and product mix, an expected 2% volume decline from the kitchen basics divestiture and the exits of low-margin business in India and the consumer business in Russia, and a 1% year-over-year volume decline from the China COVID-related disruptions. Despite tempered fourth quarter sales performance, our underlying sales strength positions us well to accelerate sales growth in 2023. In our consumer segment, excluding China, consumption trends strengthened, particularly in the U.S., where our fourth quarter total branded consumption grew 6%. In our flavor solution segment, our sales growth was outstanding with continued momentum across all regions. Consumers increasing demand for flavor whether through our products or our customers' products, is both reflected in this performance and in our most recent proprietary consumer insights research. Our alignment with the long-term consumer trends of cooking at home, clean and flavorful eating, and valuing trusted brands continues to deliver results. This alignment, combined with our broad and advantaged portfolio, plus the fundamental strength of our categories, continues to underscore McCormick's positioning for long-term differentiated growth in flavor. Moving to profit, our adjusted operating income decline of 10%, or 9% in constant currency, and adjusted earnings per share decline of 13% fell short of our expectations. Let me spend a moment on the differences to our expectations. Unfavorable product fix was a driving factor, particularly in our consumer segments. This was primarily due to lower U.S. bison seasoning sales, stemming from fourth quarter inventory restocking comparison in both 2021 and 2022, which I'll discuss in a moment. Our results also reflected lower than anticipated sales in China and an unfavorable product mix related to the sales mix between segments. In addition, with two COVID-related plant shutdowns in China, we realized lower operating leverage. During the quarter, we made meaningful progress to lower our run rate costs in flavor solutions with the reduction of elevated costs that we've been incurring to meet high demand in parts of our business. The impact of that progress was offset in the fourth quarter by unexpected, discrete, one-time issues. However, we expect to see positive benefits in our results going forward. Turning to slide seven, we're committed to increasing our profit realization in 2023. In our last earnings call, we discussed normalizing our supply chain costs and increasing efficiencies, also strengthening our ability to service customers. To that end, we have targeted the elimination of $100 million of supply chain costs over the next two years. We are also now taking streamlining actions across our entire organization, targeting an incremental $25 million of cost savings. The combination of these actions, which is our global operating effectiveness program, is incremental to our Comprehensive Continuous Improvement, or CCI, savings. Our CCI program has a well-established track record of success, and we're leveraging its proven program discipline to drive results. We expect our Global Operating Effectiveness program to drive annual cost savings of approximately $125 million, of which we expect to realize $75 million through the P&L in 2023, enabling increased profit realization. We can see the results coming through, and we expect the impact to scale up as the year progresses. Now let me share more details on our actions. During last year, we transitioned to our global operating model, allowing us to more effectively leverage our scale and drive cost reduction. As we further advance that model and streamline our processes, strengthen our collaboration, and align our structure to work more efficiently, we are taking corresponding action streamline our workforce across the entire organization. We are making considerable progress on the streamlining actions we have underway. A large component of our streamlining actions is a U.S. voluntary retirement program, which is very far along, with a targeted separation date of February 1st. This will be followed by other actions, some of which will be involuntary. As always, we will care for employees in keeping with our shared values. Moving to the supply chain, our top supply chain priority remains keeping our customers in supply and supporting their growth. And while we expect continued volatility in global supply chain, we have strengthened our resiliency over the past few years to achieve this priority. As we responded to demand volatility over the past several years, we incurred additional costs above inflation to service our customers and have seen inefficiencies develop in our supply chain. Some of these costs were investments and decisions made to support continued growth for both our customers and McCormick, and some are the result of a buildup that can occur in periods of disruption. In 2022, with the service levels of focus, the normalization of our supply chain costs and inventory levels has taken longer than expected. As we stated on our third quarter call, during the fourth quarter, we began to implement initiatives to optimize our cost structure, increase our capacity, and reduce inventory levels while strengthening our supply chain resiliency and ability to service our customers. Now for some details on these initiatives. First and foremost, while we continue to resolve some outliers, we have rebuilt and stabilized our service back to strong levels and at a high level of finished goods inventory on hand. Operating from this position enables us to maximize our performance, reduce our labor costs, and pare back excessive use of co-packers within our operations. Starting with labor, as we expect it to be the most significant driver of our cost reductions, during the fourth quarter, we reinstated more normal shift schedules, with most locations now operating on a 24 by 5 pattern. This allows us to eliminate inefficient and unpopular difficulty staff shifts. Additionally, as we move away from the industry-wide labor issues seen during the pandemic, We have stabilized absenteeism and turnover rates in our workforce and returned to more standard staffing by line. During the quarter, we optimized our leadership structure throughout our facilities and upgraded the talent in key roles. Simultaneously, we're increasing the capability levels of our teams. We're also accelerating automation, ranging from individual pieces of equipment to a completely automated line for a high volume packaging format. We expect, through these initiatives, to reduce 10% of our American supply chain workforce. And over the past three months, we have already achieved half of the planned reduction. Next, turning to our capacity, we're supporting future growth and enabling better customer service by investing to increase both manufacturing capacity and reliability in constrained areas. These investments also enable the repatriation of the production we scaled up at Copackers while continuing to meet the elevated demand. In our flavor solution segment, our flavors volume, including seasonings and flavor encapsulation, has been growing at a mid-single digit rate for each of the past three years, and demand remains strong. Our investments in additional seasonings capacity, as well as spray dry capacity with the expansion of bonus footprint, are on track to be online during the second quarter. Meanwhile, in our consumer segment, we've been using co-packers for targeted high-demand packaging formats, such as some of our large value size items. Now, given the efficiencies gained and the investments already in flight, we have started to repatriate some of these formats. Overall, we are on track for COPAC spending in 2023 to be the lowest in the past five years. From an inventory perspective, we're executing on initiatives to return to historical safety stock levels, which has been disrupted and raised by the supply chain issues of the last few years. We reduced both raw material and finished good inventory during the fourth quarter, but we're aware we have further progress to make. We're confident and encouraged by the results our initiatives are delivering so far. As we progress to a more normalized environment, we will realize additional benefits from these changes. For example, we expect to see reductions in expedited freight and less than truckload shipping costs, and we'll streamline other transportation inefficiencies. but the recent opening of our new Maryland Logistics Center, we're able to eliminate expensive external warehouse costs before even fully realizing the inventory reduction, accelerating the expense savings. With more efficient manufacturing and lower inventory levels, we expect lower material losses. We have managed through various supply chain challenges over the last several years. I'm confident in our disciplined approach to resolving the increased costs within our supply chain while prioritizing meeting our customers' needs. The impact of our actions is expected to normalize our supply chain costs, enhance our efficiency and ability to meet demand, reduce inventory levels, and ultimately increase our profit realization as reflected in our 2023 outlook. Our global operating effectiveness program has considerable momentum and we look forward to sharing more on our progress with you after our first quarter of 2023. Now, moving to fourth quarter business updates for each of our segments. Turning to our consumer segment on slide eight, sales performance in the quarter was impacted by factors mentioned previously. The kitchen basics divestiture, exits of businesses, and COVID-related disruptions in China, as well as trade inventory dynamics between years. These factors, as well as lapping high COVID-related demand early in the year, also impacted the full-year performance. Importantly, on a three-year basis, we've grown annual sales at a 5% CAGR driven by the Americas region, and we are ending the year with positive momentum in our consumption trends. Now for some regional highlights on sales and consumption. Starting with the Americas, during the fourth quarter of 2021, because we were restocking, shipments were higher than consumption, and we are lapping that this quarter, which impacts our sales growth. As we entered the holiday season this year, and having shipped fairly in line with consumption for the first three quarters of the year, customers did not need to replenish their inventory as much, despite strong consumer consumption during the holiday season. We estimate our fourth quarter sales growth rate was unfavorably impacted 6% related to these restocking comparisons. We did not fully appreciate the level of fourth quarter restocking in 2021, especially of high margin holiday herbs and spices, and the resulting impact on our year-over-year growth, and as such, had expected stronger sales growth this year. That said, excluding this impact, our underlying volume performance in the fourth quarter was better than in the second and third quarters. We have confidence that as we move out of the first quarter, the holiday season fluctuations this year between consumption and inventory levels, as well as retailer restocking resulting from pandemic-driven dynamics, will have normalized and we have an increased level of confidence in our visibility. Our total U.S.-branded portfolio consumption growth of 6% this quarter, as indicated by our IRI consumption data combined with unmeasured channels, was the strongest of the year. Our investments in brand marketing and stronger holiday merchandising proved to be effective. And with the stabilization of supply disruptions, restoration of our service levels continued, and our fourth quarter service level was the best of the year, just shy of our pre-pandemic standards. Our consumption, dollar sales, units, and volume all accelerated sequentially, and our total distribution points, or TDPs, have stabilized. In spices and seasoning, Our fourth quarter performance was the strongest of the year. Consumers are responding to our value messaging, trading up to larger sizes, and according to our consumer insights, are learning to navigate the current environment. We're continuing to build distribution on the Lowry's Everyday Spice range we launched last quarter, and earlier results are positive. We are seeing incremental sales and profits of the category as consumers are trading up to this line for private labels. In recipe mixes, we gained share for the fifth consecutive quarter, and with improved packaging supply, we also gained share in hot sauce and mustard during the quarter. Across the portfolio, our trends are continuing to strengthen in the first quarter of 2023. In EMEA, we ended the year with our strongest sales growth in the fourth quarter. Our effective pricing and new product growth accelerated versus the first three quarters With our fourth quarter price realizations the highest of the year and our volume decline the lowest, our strong consumption momentum continued and accelerated sequentially. In the fourth quarter and for the full year, we gained share versus last year and 2019 in the UK and Eastern Europe herbs, spices, and seasoning. Those gains were somewhat offset by software performance in France. In the UK, we're driving the hot sauce category with Frank's Red Hot continuing to gain share again in the quarter and for the full year versus last year as well as compared to 2019. additionally in the uk we advanced our recipe mix leadership during 2022 to the number one share position as we entered 2023 we're confident in our continued momentum in the emea region in the asia pacific region growth for the quarter and the year was impacted by the exit of low margin business in india which we will laugh after the first quarter of 2023, as well as the COVID-related disruption in China. Reflected in our outlook, we are expecting continued disruption into the first quarter of 2023, with an expected recovery after the Chinese New Year. While we are currently experiencing this short-term pressure, we continue to believe in the long-term growth trajectory of our business in China. Our brand marketing, new product, and category management initiatives are driving positive momentum with more to come in 2023, and we look forward to sharing this and our growth plans at Cagney in a few weeks. Turning to flavor solutions on slide nine, sales growth reflected pricing actions as well as higher base volume growth in new products. Our sales performance has been outstanding all year. led by double-digit growth every quarter in the Americas and EMEA regions, resulting in 12% growth for the full year. On a three-year basis, we have grown annual sales at an 8% CAGR with strong growth in all three regions. Now for some regional highlights. Our Americas' fourth quarter sales growth was the strongest of the year. Growth in flavors, including snack seasonings and flavors for performance nutrition and health and market applications, as well as branded food service products drove our fourth quarter performance, as well as our strong broad-based growth for the year. We continue to realize the benefits from the combined capabilities of Bona and McCormick, with new products contributing approximately 30% more growth in flavors in 2022 than last year. Demand continues to strengthen with branded food service restaurants and institutional food service customers increasing. and we're also expanding distribution and gaining share in both spices and seasonings and hot sauce. In the EMBA, our strong fourth quarter performance in all product categories kept an outstanding year of 17% growth, including significant volume growth of 9% as well as pricing. We're winning in all markets and channels. Growth remains strong across our customer base, led by the momentum with our quick service restaurant or QSR customers. partially driven by expanded distribution and their promotional activities. In APZ, we're driving further menu penetration with our QSR customers, realizing growth from strong performance of core menu items we flavor. We've delivered solid growth in the APZ region for the year despite the COVID-related disruptions in China. Across markets outside of China, we drove double-digit growth with contributions from both volume and pricing. Overall, Flavor Solutions demand has remained strong, and for certain parts of our business, in the Americas and EMEA regions, our supply chain continues to be pressured to meet this high demand, driving extraordinary costs to service our customers. We appreciate our customers working with us and are encouraged by the results our collaboration is already beginning to yield. While our Flavor Solutions sales growth has been outstanding, we are not delivering profit growth in this segment. We are committed to restoring Flavor Solutions profitability, recovering margin while ensuring we keep our customers in supply, and driving growth for both McCormick and our customers. We are confident we will achieve margin recovery through three actions. Effective price realization. Our price increases are only now catching up to the pace of inflation, and we're beginning to recover the cost of inflation our pricing lacked last year. The successful execution of the global operating effectiveness program I just mentioned. In particular, we expect the elimination of supply chain inefficiencies and the investments in capacity to have a significant impact in the flavor solutions segment. And finally, continued focus on driving growth in high margin parts of our portfolio. The strength of our flavor solutions portfolio and capabilities, including our customer engagement approach and culinary inspired innovation, are driving our outstanding flavor solution momentum. We look to sharing more about our growth plans and margin recovery at Cagney in a few weeks. Now some summary comments before turning it over to Mike. Turning to slide 10. Global demand for flavor remains the foundation of our sales growth, and we have intentionally focused on great, fast-growing categories that will continue to differentiate our performance. We continue to capitalize 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 more relevant today than 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 strong global flavor portfolio we're delivering flavor experiences for every meal occasion. Through our products and our customers' products and our driving growth, we are end-to-end flavor. 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, including through the pandemic and other periods of volatility. 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, give us confidence in our growth momentum and in our ability to navigate the dynamic global environment. As we look ahead to 2023, we will focus on capitalizing on strong demand, optimizing our cost structure, and positioning McCormick to deliver sustainable growth and long-term shareholder value. The fundamentals that drove our industry-leading historical financial performance remain strong and we're confident we are well-positioned to drive profitable growth in 2023. I want to recognize McCormick employees around the world for their contributions in 2022 and the momentum they're driving in 2023. Now, I'll turn it over to Mike. Thanks, Lawrence, and good morning, everyone. Starting on slide 13. our top-line constant currency sales grew 2% compared to the fourth quarter of last year. This growth was tempered by a 1% unfavorable impact from the kitchen basics divestiture, a 1% impact from the exits of low-margin business in India and the consumer business in Russia, and a 1% impact from China consumption disruption related to COVID restrictions. In our consumer segment, constant currency sales declined 4%, with the divestiture of kitchen basics contributing 1% to the decline and the combined impact of exiting the businesses in India and Russia, as well as the China consumption disruption, contributing 3% to the decline. On slide 14, consumer sales in the Americas declined 4% in constant currency. Pricing actions in the region were more than offset by a volume decline, including a 2% impact from the kitchen basics divestiture, as well as a 6% impact from lapping the restocking of retail inventory in the fourth quarter of last year and higher level of retail inventories entering this year's holiday season. Additionally, returning to pre-pandemic promotional levels also tempered our sales comparison to the fourth quarter of last year. In EMEA, constant currency consumer sales grew 2%. Pricing actions across all markets were partially offset by lower volume of product mix, including a 4% unfavorable impact from lower sales in Russia. Constant currency consumer sales in the Asia-Pacific region declined 22%. including a 23% 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. Turning to our flavor solutions segment at slide 17, we grew fourth quarter constant currency sales 14%, primarily due to pricing actions, with higher volume product mix also contributing to growth in all regions. In the Americas, Flavor Solutions constant currency sales grew 13%, with pricing actions and higher volume contributing to the increase. Higher sales of packaged food and beverage companies with strength in snack seasonings led to growth. Higher demand for branded food service customers also contributed to growth. In EMEA, we drove 16% constant currency sales growth, with 10% related to pricing actions and 6% behind the mix. EMEA's Flavor Solutions growth was broad-based across its portfolio, led by strong growth with QSR and packaged food and beverage company customers. In the Asia-Pacific region, flavor solution sales grew 11% in constant currency, with pricing actions and higher volume contributing to the increase. Growth was driven by higher sales to QSR customers, driven by strength in their core menu items. As seen on slide 21, adjusted gross margin declined 410 basis points in the fourth quarter versus the year-ago period. I'll spend a moment on the significant drivers, highlighting the ones that drove more compression than we had expected. First, approximately 60% of this decline, or 250 basis points, is due to the dilutive impact of pricing to offset our dollar cost increases. Next, product mix was unfavorable as compared to the fourth quarter of last year, as well as compared to our expectations for the quarter. First, in our consumer segment, as mentioned earlier, lower U.S. spices and seasoning sales, stemming from fourth quarter inventory restocking comparisons of 2021 and 2022, as well as lower sales of higher margin products in China due to the COVID restrictions, negatively impacted mix. The sales shift between our consumer and flavor solution segments also contributed to the unfavorable product mix as compared to the fourth quarter of last year. The impact of the unfavorable product mix was higher than we expected due to the shortfall in consumer sales from what we had anticipated. driven by both lower U.S. and China sales. Now for the impact of supply chain challenges on gross margins. In our consumer segment, we experienced lower operating leverage because of the sales comparisons already discussed. The impact, though, was greater than expected due to the China COVID-related plant shutdowns. In our flavor solution segment, as we transition production to our new UK Peterborough manufacturing facility, we continue to incur dual running costs, we expect the unfavorable year-over-year impact of these costs to continue in the first quarter of 2023, and then for the balance of the year, expect them to be comparable to 2022. Additionally, we are still incurring elevated costs to meet high demand in certain parts of our business. While painful short term, we know these investments to support our customers during periods of disruption are the right approach to drive long-term growth. That said, we did make progress on reducing the level of these costs in the fourth quarter. However, the impact of that progress was offset by the unfavorable transactional impact of foreign currency exchange rates and some discreet issues we experienced in our flavor solutions operations during the quarter. While we recovered quickly from these issues, they still contributed significant unexpected costs to the quarter. Finally, partially offsetting the unfavorable drivers I just mentioned were our CCI-linked cost savings. End of note, our price increases continue to catch up with cost inflation during the quarter for both segments. This was in line with our expectations and consistent with our performance. In 2023, we plan to fully recover the inflation our pricing has lagged over the last two years. Now moving to slide 22, selling general and administration expenses, or SG&A, declined from the fourth quarter of last year with lower incentive compensation expenses partially offset by higher distribution costs and brand marketing investments. As a percentage of net sales, SG&A declined 270 basis points. The net impact of the factors I just mentioned resulted in a constant currency decline in adjusted operating income, which excludes special charges and transaction and integration costs of 9% compared to the fourth quarter of 2021. In constant currency, the consumer segment's adjusted operating income declined 5%. And in the flavor solution segment, it declined 26%. Turning to interest expense and income taxes on slide 23, our interest expense increased significantly over the fourth quarter 2021, as well as over our third quarter of this year, both driven by the higher rate environment. Our fourth quarter adjusted effective tax rate was 23.1%, compared to 21.3% in the year-ago period. Both periods were favorably impacted by discrete tax items, with a more significant impact last year. At the bottom line, as shown on slide 24, fourth quarter 2022 adjusted earnings per share was 73 cents, as compared to 84 cents for the year-ago period. The decrease was driven primarily by lower adjusted operating income. with higher interest expense and a higher fourth quarter adjusted effective tax rate also contributing to the decrease. On slide 25, we summarized highlights for cash flow and the year-end balance sheet. Our cash flow from operations for the year was $652 million, which is lower than the same period last year. This decrease was primarily driven by lower net income and higher inventory levels. We returned $397 million of cash to our shareholders through dividends and used $262 million for capital expenditures in 2022. Our capital expenditures included growth investments and optimization projects across the globe. In 2023, we expect our capital expenditures to be comparable to 2022 as we continue to spend on the initiatives we have in progress, as well as to support our investments to fuel future growth. We expect 2023 to be a year of strong cash flow driven by our profit and working capital initiatives. 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. We remain committed to a strong investment grade rating, and we have a history of strong cash generation and profit realization. With improving our gross margin through our plan to normalize our supply chain costs and inventory levels, we will be better positioned to continue paying down debt and expect to de-lever to approximately three times by the end of fiscal 2024. Now turning to our 2023 financial outlook on slide 26. Our 2023 outlook reflects our positive top line growth momentum and with the optimization of our cost structure increased profit realization. We expect to drive margin expansion with strong sales and adjusted operating income growth that reflects the health of our underlying business performance as well as the net favorable impact from several discrete drivers. We expect our adjusted operating profit growth will be partially offset below operating profit by significantly higher interest expense and a higher projected effective tax rate. We also expect there will be minimal impact from currency rates. At the top line, we expect to grow sales 5% to 7%, driven primarily by the wrap of last year's pricing actions combined with new pricing actions we are taking in 2023. We expect several factors to impact our volume and product mix over the course of the year, including price elasticities, which we expect to be consistent with 2022 at lower levels than we have historically experienced, but in line with the current environment. A 1% estimated benefit from last year's impact of COVID-related disruptions in China although we expect the impact will vary from quarter to quarter given 2022's level of demand volatility, the divestiture of our kitchen basics business in August of last year, and the exit of our consumer business in Russia during last year's second quarter. And finally, the continual pruning of lower margin business from our portfolio. As always, we plan to drive growth through the strength of our brands, as well as our category management, brand marketing, new products, and customer engagement plans. Our 2023 adjusted gross margin is projected to range between 25 to 75 basis points higher than 2022. This adjusted gross margin expansion reflects a favorable impact from pricing, cost savings from our CCI-led and global operating effectiveness programs, partially offset by the anticipated impact of a low to mid-teens increase in cost inflation. We expect cost pressures to be more than offset by pricing during the year as we recover the cost inflation our pricing lagged last year. Moving to adjusted operating income, first let me walk through some discrete items and their expected impact to our 2023 adjusted operating profit growth. First, the cost savings from our global operating effectiveness program are expected to have an 800 basis point impact. The savings from this program are expected to scale up as the year progresses. Next, the benefit of lapping the impact of COVID-related disruptions in China is expected to have a 300 basis point favorable impact. The kitchen basics divestiture is expected to have an unfavorable 100 basis point impact. And finally, an 800 basis point unfavorable impact is expected as we build back incentive compensation. The net impact of these discrete items is a favorable 200 basis points. This favorable impact, combined with expected 7% to 9% underlying business growth, which is driven by our improved operating momentum, results in our adjusted operating income projection of 9% to 11%. In addition to the adjusted gross margin impacts I just mentioned, this projection also includes a low single digit increase in brand marketing investments and our CCI-led cost savings target of approximately $85 million. Based on the anticipated timing of certain items, We expect our adjusted operating profit growth to be pressured in the first quarter, accelerated in the second quarter, and return to normalized cadence of delivery for the remainder of the year. The impact of cost inflation will be weighted toward the first half of 2023, with peak inflation in the first quarter. Also in the first quarter, we expect continued pressure to sales and profit from COVID-related disruptions in China. And then the benefit beginning in the second quarter from lapping last year's impact. Additionally, the exit of our consumer business in Russia will impact the first quarter. As a reminder, we began exiting it during the second quarter of last year. Finally, related to profit timing, while we expect a minimal impact from currency rates, we project an unfavorable impact in the first half of the year, an expected 3% unfavorable in the first quarter, and a favorable impact in the second half of the year. We are anticipating a meaningful step up in interest expense driven by the higher interest rate environment, which will impact our floating debt. We estimate that our interest expense will range from $200 million to $210 million in 2023, spread evenly throughout the year. As a reminder, in 2022, we realized an $18 million favorable impact from optimizing our debt portfolio, which we will lap in 2023. The net impact of these interest-related items is expected to be an 800 basis point headwind to our 2023 adjusted earnings per share growth. Our 2023 adjusted effective income tax rate is projected to be approximately 22%, based on our estimated mix of earnings by geography, as well as factoring in a level of discrete impacts. Versus our 2022 adjusted effective tax rate, we expect this outlook to be a 100 basis point headwind to our 2023 earnings growth. We expect our rate to be higher in the first half of the year compared to the second half. To summarize, our 2023 adjusted earnings per share expectations reflect strong underlying business growth of 8% to 10%, a 2% net favorable impact from the discrete items I just mentioned impacting profit, the global operating effectiveness program, the China recovery, the kitchen basics to vestiture, and the incentive compensation rebuild, partially offset by the combined interest and tax headwind of 9%. This results in an expected increase of 1% to 3%, or a projected guidance range for adjusted earnings per share in 2023 of $2.56 to $2.61. We are projecting strong operating performance in 2023 with continued top-line momentum, significant optimization of our cost structure, and strong adjusted operating profit growth, as well as margin expansion. While this performance is expected to be tempered by interest and tax headwinds, we remain confident in the underlying strength of our business and that with the execution of our proven strategies, we will drive profitable growth in 2023. 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 28. Our fourth quarter sales performance, despite challenges from the COVID-related disruptions in China, reflects the underlying strength of our global portfolio. and the continued execution of our long-term strategies. With the stabilization of service and our supply chain, in addition to positive momentum in consumption trends, we expect an acceleration in consumer segment sales, dollars, and volume in 2023 and continued strong flavor solutions performance as the strength of our portfolio is met with outstanding demand across our customer base. We have strong growth programs, and we look forward to sharing them at Cagney. We are committed to increasing our profit realization. The actions we have underway to normalize our supply chain costs and increase our organizational effectiveness and efficiency are already yielding results. Our global operating effectiveness program is expected to deliver $125 million of cost savings. We expect the benefits of the program to scale up through each quarter of 2023 and continue to be accretive into 2024. While actively responding to the macroeconomic challenges we're facing, we continue to operate with the same discipline and commitment to execution as we have in any other operating environment. The fundamentals that have driven our historical performance remain in place, and we are as diligent as ever in driving value for our employees, consumers, customers, and shareholders in both 2023 and beyond. The compounding benefit of our relentless focus on growth, performance, and peoples continues to position McCormick to drive sales growth. This, coupled with our focus on recovering cost inflation and lowering costs to expand margins, will allow us to realize long-term sustainable earnings growth. Before turning to your questions, I want to reiterate my confidence in driving the profitable growth reflected in our 2023 outlook. And now for your questions.

Thank you. We'll now take the question and answer session. If you'd like to ask a question this morning, please press star 1 from your telephone keypad, and the confirmation tone indicate that 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 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. Our first question is from the line of Andrew Lazar with Barclays. Pleased to see you with your questions.

Great. Thanks. Good morning, everybody.

Hi, Andrew.

Hi there. I guess the question I'm getting, I think, most from investors this morning really has to do with the fiscal 23 operating profit guidance of 9% to 11%. I understand you've got incremental cost savings that are set to offset the incentive comp rebuild, and you have some of the China recovery built in as well. But I guess in what's still clearly a dynamic operating environment, this still seems, I guess, aggressive to a bunch of folks we've spoken to this morning, especially given it's expected to be a somewhat back-end loaded year from a profitability standpoint. So I was hoping, Lawrence, maybe you could comment a bit on that and add some more color on the level of confidence around this, and then I've just got to follow up. Thank you.

Sure. This almost comes off of my final comments and prepared remarks. We really believe that this is balanced guidance. It is certainly not aggressive. We have a due degree of humility after last year and have a balanced outlook considering risks. And we have a high degree of confidence in this guidance, including the operating profit guidance.

You know, it's underscored by our strong consumer demand.

You know, the underlying demand from the consumer is quite strong. Coming out of fourth quarter is actually the strongest demand, consumer demand, that we've seen. And we continue to have tremendous demand from our flavor solutions customers We have very strong programs that we did not talk about on this call, particularly on herbs and spices, and we'll be sharing those growth programs at CAGNI, and so that is a foundation underlying the performance on operating profit. We have very strong confidence in our ability to realize the cost savings that we described. These programs are being managed programmatically through the same team that manages our CCI program. And I believe that they are very much in our control and we're quite confident about them. And I think that they more than offset the build of incentive comp. And maybe what some of the people you're talking about haven't fully considered is that we expect to cover not only this year's cost inflation, but also recover all of the costs that we have lacked over the last two years with our pricing actions early in the year. As you know, pricing actions take time to sell in, so you would be correct in assuming that many of these conversations are either completed or well underway at this time.

Great. That's helpful, and that's a good segue into my follow-up, which is you know, with low to mid-teens inflation still to come, and as you've talked about, likely further pricing action still ahead, I'm just trying to get a sense how that jibes with, you know, the price gap issue that you've talked about previously in your core spice and seasonings category, and the fact that pricing decelerated sequentially in fiscal 4Q in consumer versus 3Q, and I thought it was supposed to build, and maybe that was mixed versus actual pricing.

I'm going to say a couple words about that, and I'm going to let Brendan... First of all, on that pricing, I would not forget that the significant portion of it is going to be on the flavor solutions side of the business. Certain contract windows have come up and have allowed us to make some moves there, and so that is certainly a big part of the pricing equation. Our inflation outlook is higher, actually, on the flavor solutions inputs than on consumer inputs. for the year, so the pricing is similarly skewed more towards the flavor solutions side of it. I'm going to let Brendan talk about the price gaps and take it from here, please. Yeah, just to build, Andrew, just to build on Lawrence's reply, I'll just jump right to maybe I think one of the points you brought up regarding private label. We are seeing price gaps narrow right now. And we certainly saw that in the fourth quarter and even leading into the first quarter. And we've started to see that trade down moderate, honestly, through the quarter. So that's kind of an insight. And maybe that's also a reaction, just sort of the macro inflationary factors have seemed to moderate also out there in the economy overall. Consumers are looking for brands, but they're also looking for value. And so it's not necessarily the lowest priced.

Parts of our portfolio we're seeing really start to drive a lot of growth just on large sizes, as we see consumers kind of look for that value.

We also, as you called out, launched this Lawry's Everyday Line of Spices, and we're starting to continue to build distribution on this, but the early results are really good, maybe better than what we expected. We're seeing a lot of incremental category sales and profit coming from this line, Mostly because consumers are trading up from private labels. That's kind of the source of volume that we're seeing coming from this and it's bringing in new consumers into the McCormick portfolio. So we like the results so far that this is providing, but that's certainly a good outcome and it factors into how we think about next year. On pricing, just sort of comparing quarter to quarter. To your point, I think that's probably more a function of the fact that we've been reinstating promotional activity. That's been, I think, called out previously. We're also lapping last year's increases, which were higher on a relative basis. But also our volume miss in the fourth quarter had an impact on that overall level of pricing, too. So we've covered that with regard to the restocking comparison, and that's factored into that quarter-to-quarter view.

Great. Thanks so much, and see you guys in Florida.

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

Hi, good morning. Good morning. Hi, hi, thank you. I wasn't sure if I heard you correctly, and maybe you said this and maybe you didn't, but you said that sales growth will be driven primarily by pricing. Does this mean you expect volumes for the year in 23 to be positive? And I guess along those lines, I think you mentioned that you expect elasticity to not necessarily worsen. in 23 versus 22. I think if I heard you right, you said it will remain kind of at today's level. Just curious why that is given that the consumer environment, you know, it does seem to be eroding a small amount.

I'm going to start with the last part of it, Ken. You know, we've seen some moderation of elasticity as we've gone through the year. You know, it looks like peak elasticity was around the time when gas prices were at $5 a gallon. and above for most of the country. And it was really not so much a reaction to our price increase, but to the general level of inflation that consumers were experiencing and the high pressure on their wallets. So our outlook for 2023 seems that similar environment carries forward. and that we're seeing elasticity in that range. We've also adjusted, we've looked at, we've seen where we've had greater elasticity and where we've had lesser elasticity and we've reflected that in our future pricing actions. So I think that we've really been thoughtful around the question of elasticity. We do expect the consumer to be under pressure in 2023. I don't care whether you call it a recession or a soft landing. Consumers on the lower end of the income spectrum, I'm not talking about the bottom, I'm talking about the lower half, are certainly going to have less money and are going to be careful with their budgets. We are reflecting that in our marketing programs already. and with some of the innovation that we've launched. It's not all about buying the cheapest product. Consumers are looking for value, and that's really come through clear in our proprietary research, and value has many components. It is true that our sales growth is driven primarily by pricing in 2023. And at the total company level, we expect volume to be pretty much flat. And so that would be an improvement in the trend line. But that's going to vary tremendously by region. And a good bit of the overall volume growth is going to come from recovery in China following this quarter. where we have that tremendous COVID impact right now during Chinese New Year. Did I miss anything there? No, I think I did.

Just a quick follow-up, and thank you for that. On the restocking, you mentioned that perhaps you hadn't quite recognized at the time how large the impact was the last couple of years. Totally understandable given the volatility that everyone's going through. I'm just curious if the company is doing anything to maybe improve slightly improve its ability to quantify those dynamics, maybe in a more real-time way, so that going forward, there's just fewer surprises from your end.

That's a great question, Ken. Thanks, Ken, for the question.

Definitely, this environment, certainly volatile, made it tougher to read.

But as we think about this moving forward, it's definitely going through, I think, this period of time has allowed us to kind of refine how we look at You're restocking and just the fluctuations, particularly coming out of the season, you know, between consumption and shipments. This has allowed us to kind of refine our view. You know, overall, we definitely had a pretty disciplined approach to this even prior to the pandemic. But I think this is refined how we look at it in the tools that we use, the analytics that we apply. So we have a lot of confidence going into this next year, particularly as we exit the first quarter that. just the fluctuations that we typically would see during the holiday season between consumption and shipment, and then on top of that, this restocking comparison, things begin to normalize, I think, is our view as we come out of Q1, providing just a little bit more stability in that read. Some of that's internal, too. I mean, our supply chain is really operating at a much higher level now than it has from a service perspective and a stability. That's another thing that gives us better insight into our sales.

Thank you.

Our next question comes from the line of Robert Moscow with Credit Suisse. Let's just hear your question.

Hi, thanks. I was hoping to break down your volume forecast by consumer versus labor solutions because I think one of the strange dynamics of 2022 is that at a time when consumers are trying to save money, volumes were weak in consumer but your volumes are pretty strong in flavor solutions. So I'm wondering, how do you think of 23? And is there a risk that because the consumer environment is so volatile that it might be very tough to determine what the trade-down between, like, food service and retail might be?

Well, I don't think that we're given on providing a split between the growth rates on consumer and flavor solutions. I will say that would expect higher growth on flavor solutions in 2023. We have, if nothing else, a higher level of pricing expected in the flavor solution segment, and that alone is going to drive a higher increase year on year. Flavor solutions is a bit of a portfolio itself. That includes branded food service where we believe that we have gained significant share in North America in particular and our branded food service business with the number of wins as we've gone through the year. We've had tremendous growth on flavors and flavor seasonings for our flavor solutions. customers in the area of snacks, performance nutrition, the health end market. We've had very strong unit growth through the entire pandemic and continuing through 22, and we've seen no end in sight on that. We have been slightly capacity constrained in that area, and we have some significant new capacity for longer term investments that are finally coming on line in the second quarter that opens up additional capacity for us that's both for flavor with some expansion that we've done at Bona for spray drying capability and in snack seasonings where we've been in the process of converting one of our plants from some low margin products to the ability to run snack seasonings and that conversion is effective coming online. We're in the trial stages right now. It should be online in the second quarter. So it might be a bit of a longish answer there, but I hope that covered it.

Okay. Can I ask a follow-up? You talked about the new plant that's opening in the UK and the double costs, I guess, that are involved in it. Why is it taking so long to get past these double costs?

Hey, Rob. It's Mike. I'll answer that. I'd say this. We have a very large footprint in one part of the UK. The Peterborough plant, which we've talked about, is a massive facility. We're doing this in a two-step process to make sure we service our customers properly. So it's different than when you're just building new capacity like we've talked about where you're kind of adding on to a plant. We're actually closing a plant in a very difficult environment to close plants for a lot of reasons, moving it to a brand new facility. So that does take more time. The good news is we're kind of almost out of that after the first quarter. You think about the incremental cost we've talked about is in the first quarter after it levels out. And as that production, you know, the remaining production transfers over the rest of this year, you know, 24 will be a really clean year. But when you're closing big plants and opening up big plants, these don't take one quarter. You know, they take about a year if you think about it. That's what, you know, this one's taking around that much time. Okay. Thank you.

Our next question is from the line of Alexia Howard with Bernstein. Please proceed with your questions.

Good morning, everyone.

Hi, Alexia.

Hi there. Can I focus in on the flavor solutions business? You gave us the three reasons why margins should improve this year. I'm kind of curious about timing on that. How quickly will the pricing kick in and the elimination of the capacity expansion costs? Just a little bit on the timing. Thank you, and I have a follow-up.

Yeah, I mean, I wasn't really being specific on the dual running costs when I was describing the improvement in flavor solutions. In terms of the pricing, I don't want to get overly specific on this because we are in customer conversations right now, and there's a certain amount of commercial tension in all of those conversations. But we fully expect, as I've said about pricing generally, that on the labor solution side of the business as well, that we will recover all of the inflation that we are not only incurring in the new year, but also the cumulative inflation that we've collected, that we've experienced in the last two. And I would say that our lag in getting caught up is greater in flavor solutions than it has been on the consumer side. So it's going to be pretty meaningful, and that's an important element. We fully expect to have that work complete early in the year. I think the other point too, Alexia, a couple things. We talked about inflation being weighted to the front of the year. The first quarter is the highest inflation. That impacts labor solutions as well as consumer. The other thing is our global operating effectiveness program. I mean, there's been a lot of positive activity. The reality, though, is the first quarter is going to have the least impact, and it's going to wrap up really rapidly in the second, third, and fourth quarter. So the second quarter is going to be a big impact. A lot of the inefficiencies we've talked about over the last year have been in the supply chain area for flavor solutions, so we do see more of that savings go into that segment, which will help.

Great. And then as a follow-up, I hate to come back to it, but the share dynamics in the U.S. herbs and spices that we're seeing in the Nielsen data. It looks as though you're still losing market share. It doesn't look like it's private label anymore. I presume it's smaller brands. When do you expect that to turn the corner, and can you give us any more color about what the dynamics are there? Thank you, and I'll pass it on.

Alexia, I would love to answer that question, but I'm going to let Brandon answer it. Thanks, Lauren.

Alexia, as we look at our business, I think just first remarking on the fourth quarter, I think what we were really feeling pretty good about in terms of momentum we've talked about before is that we've seen sequential improvement not only across Total McCormick portfolio and consumer in the U.S., but also in herbs and spices.

Fourth quarter is probably our best quarter of the year. We saw sequential improvement on not only sales, but also unit and also volume as we went through the second quarter all the way to the fourth quarter. So that's pretty good momentum going into the next year. Having said that, though, certainly, We saw a stabilization of where our share is right now and expect to improve that over the course of 2022. But we don't ever really get into the habit of sort of projecting what share will be in the future. So we're not going to do that on this call necessarily. But we do expect to have improved performance in 2023.

And I think related to what those plans will be, we'll talk a lot more about that at Cagney. And so I think, you know, there will be a lot of great opportunity to kind of go deeper on what those plans and opportunities look like.

We actually would have loved to have done that on this call in case you just insisted that we paid some higher power for carrying it. I know your question, Alexia, was about U.S.

herbal spices specifically, but if I could just step back, you know, and look at the fourth quarter. Weed Gain Share and Hot Sauce Weed, We gained substantial share in mustard, but we finally are back in full supply. We had, I think, our fifth consecutive quarter in a row of strong share growth in recipe mixes, and everyone forgets those, but their profitability is right there with herbs and spices. And then in many of our international markets, we had share gains in herbs and spices specifically. So when you look at the full picture, generally, as has been the case all along, we've had good supply. We have had the ability to grow our market share. A lot of the share loss that you're seeing is due to CDP losses early in the year that are still being lapped. And I expect we have won some of those CDPs back, and I expect us to continue to do so as we go through 2030.

Very helpful. Thank you very much. I'll pass it on.

Our next question is from the line of Adam Samuelson with Goldman Sachs. Please receive your question.

Yes. Good morning, everyone.

Good morning, Adam. Hi, Adam. Good morning.

Hi. So I wanted to maybe hone in a little bit on the kind of net operating income growth guidance and where you shake out for 2023 because I'm just trying to square the thought relative to where profit was in 2020 and 2021. Especially 21, you're still at the high end of the guidance range, 80, 90 million lower than you were last year, which there shouldn't be an incentive comp kind of comparison issue in there. And you talk about fully recovering pricing, cost inflation. Currency's been a little bit of a headwind. Divestiture's kind of net sold a few things and volumes are lower. But I guess I'm just trying to reconcile kind of where on an absolute dollar basis we shake out for 2023 inclusive of the incremental restructuring and the cumulative effect of pricing relative to where the profit dollars were two years ago, three years ago, and how we should think about that at the company level moving forward? I mean, if we rebase somewhat as we've come through COVID, or is there an acceleration beyond 2024 and 2023 in profit growth to kind of get the long-term kind of EBIT CAGR back into that kind of mid to high single-digit range?

Hey, Adam, it's Mike. Good question. I mean, we put together that slide in the earnings deck to really walk you from the current guidance and from a percentage basis, realizing it's not dollars, but from a percentage basis constant currency guidance to the underlying base growth. And if you think about it, you know, you look at that underlying base growth. Once you take out all the kind of, I hate to say one-timers, but things that are really discrete items year over year, and some of which will continue into next year, you know, like the Global Operating Effectiveness Program, as you talk about rebuilding getting back to our long-term profit algorithm by taking out these costs that have really come through during the pandemic. So I think there is a case for acceleration into the future. We're not talking about 24, 25 right now. We need to nail 23. But if you look at that underlying base growth, 4% to 6% net sales growth, which actually went out both on M&A at the high end of our guidance, so really good underlying performance. you know, we get back to the seven to nine operating profit growth, you really, if you think about the recovery of the pricing that we talked about, that allows us to really drive that three percentage point increase to get to that seven to nine so that we feel good about that, along with our normal things like our normal CCI program and things like that, investing a bit more in advertising to grow the brand. So that virtuous cycle we talked about, you know, to get the operating profit And 1% leverage below there. We'd love to pay down more debt. That's why we're driving hard on our working capital programs this year to get our inventories back down to where they need to be. So we feel good about, like Lauren said before, it's a prudent call. We feel really confident about it. So I think hopefully it helps you understand that moving parts other than discrete items Some of which the positives will continue to next year, even the net recovery in China. Hopefully 24 is better than 23. But we feel good about the underlying base for it. You know, I will add to that that the guidance that we're giving is balanced and I'll even say prudent. And just from, that's our opinion and you've heard from some of the other questions that there's some who think that this actually might even be aggressive. But we've tried to give balance guidance here. But our teams are used to winning and have very aggressive business plans. And we will do everything we can to not just recover but exceed. And we're used to starting every year-end earnings call with the phrase record results. We are not able to do that this year. and we would like to get back on track with that law record of historic performance.

Okay, I appreciate all that, Collar. If I could just ask a follow-up on flavor solutions. I mean, there's a meaningful portion of that business that's selling into other food companies and just want to get a sense if you saw or have experience or worried about any destocking amongst some of your food company customers who either have taken similar working capital kind of reduction actions as you are taking yourselves or kind of have counseled you to think about that potential moving forward in the context of a still fairly sluggish underlying consumption.

I would say at this point, no.

The fact is that our supply chain recovery, I believe, and the feedback we get from our customers is generally ahead of the peers, and so many of them are still fairly hand-to-mouth right now and have a different set of dynamics. Many of them are still rebuilding inventories in the store at the shelf and getting items reinstated. and those in the area of snacking are just experiencing explosive growth. If I could build on that, Lawrence. Adam, the other thing to consider regarding our flavor solutions business is a good part of that sales growth algorithm is a lot of new product and innovation activity for our customers, as well as winning new customers and winning share in the market.

And so that factors into how we think about our growth.

Okay. All right. That's all helpful. I'll pass it on. Thank you.

The next question is coming from the line of Chris Grohe with Stifel. Please proceed with your questions.

Hi. Good morning. Morning. Hi, Chris. Hi. I had a question coming back to kind of the U.S. business overall, and Brendan had talked about kind of moderating and trade down in the U.S., and I wanted to understand, do you attribute that to your promotional spending? Was that one of the factors that helped drive that in? And would you expect promotional spending to be up in fiscal 23? Because I'm trying to square that with the need for more pricing. And can you accomplish the price points you need and also kind of the value it seems that consumers are seeking here?

Yeah, I will say that promotional activity isn't all about discounting.

And so a lot of the promotional activity that we've been able to reinstate is around merchandising activity, which includes displays and discounts. digital partnerships, and these things have very good ROI, and we are quite positive about it. I'm going to give the floor here to Brendan, though. Yeah, I mean, Chris, I think as we go into 23 and how we look at it, just to build off of where Lawrence is going, a lot of that promotional spending is getting back into driving the categories with our customers, and the feedback we're getting from them is welcome, frankly, in that regard, because we want to keep

driving up that overall growth. Can you just remind me, the front end of your question, though, was in regards to what?

Just that you've seen a moderating and trade-down, and you've had an increase in promotional settings. So I was trying to understand, is that driving that moderating and trade-down? And then can you accomplish that if you're trying to get prices higher?

I think you're seeing a confluence of a number of things happening in the quarter where some of those macro factors that we may have spoken about before, like prices, gas, et cetera, those seem to have moderated. So therefore, broadly, we think that has an impact. But also the reinstatement of promotions probably during, obviously, a very important season like the holiday would have also a year-over-year impact there too. But I think there's a couple other things we'd like to add is we got more aggressive in Q4 for a reason. We called that out in the third quarter. And part of that included also a lot of focus and an increased A&P around value messaging. And we've seen a lot of great response from that. And so I think there's a number of things playing in here, Chris, that lead us to believe that we've got good momentum going into 23. I'll also say that our proprietary consumer survey shows that between May and December, when we ask consumers about their mechanisms for coping with higher pricing, trading down to private label and store brands was the item that had the biggest decline in terms of the consumers who said they were doing that. And so I think that matches up well with what we're seeing through the scanner and in our other data.

Okay, that's helpful. Thanks for all that color there. Just one other quick follow-on or question would be that, inventory was kind of a moving factor year over year, and you had a big increase last year in inventory. Did you build less inventory, I guess, overall, or should I say that maybe better, that did inventory move lower in the fourth quarter than you expected? Is that the unique factor around the inventory move in the quarter?

We did start making progress on our inventory in the fourth quarter, as you mentioned, both in the raw material and finished goods side, which was really a focus. With our global operating excellence for efficiency program, one of the outputs of that is a reduced inventory, too, as you stabilize your supply chain. And we have very aggressive targets for this year. And again, it goes back to creating more cash to help drive our debt down.

How about at retail? How about at retail as well? Did retail inventories move lower in the fourth quarter?

No, Chris, I would say that's not really, you know, the relationship we're trying to, you know, describe here. We feel like inventories, simply retailers that have done a lot of restocking in the fourth quarter of 21, and they just happen to have more on hand as we are going into the holiday season. But I don't believe we're trying to say that they are executing the holiday season differently than they have, you know, as normal. And just in a normal ebb and flow of things, remember our fiscal year ends in the middle of the holiday season. So coming in the first quarter, you know, retailer inventories are always high. We always ship low consumption in the first quarter. That's like a normal seasonal pattern and I think that we're well set up for that. Just given the rapid amount of change, we're just being cautious about that and we're And in our remarks, we've said we expect normalization after Q1.

Yes, that makes sense. Thanks so much for the call there.

Thank you. Our next question is from the line of Max Gumpert with BNP Paribas. Please just use your question.

Hey, thanks for the question. Hi, welcome.

Hey, thanks. On the call, you gave some helpful details on the puts and takes to consider with regard to the cadence of your EPS and FY23. If I have it right, it sounds like the first quarter will be pressured as a result of peak inflation, cost savings ramping up throughout the year, a continued impact from COVID-related disruptions in China, and a higher tax rate, among other impacts. Can you help give us a sense for how dramatically these factors could hold back your first quarter EPS?

Yeah, I mean, I think on top of that, the highest commodity cost increases the first quarter. You know, I think the first quarter is always our smallest quarter. If you think about the cadence of max in our history, you know, fourth quarter is where most sales and most profit comes through because of the holiday season, except for China, which is actually inverse. China's first quarter is their biggest quarter because of the Chinese New Year. So that's another factor that's going to put pressure on our first quarter this year because of the COVID issues. But I hesitate to say in round numbers what it's going to be, but it's going to be a difficult first quarter for all the factors. You named four or five of the factors right on our list. I added the China impact also to that. So as well as Fx is flat for the year max, but in the first quarter, it's about a 3% negative year on year. So that's another reason that the first quarter is going to be the most challenging, but for all the reasons you mentioned with the global operating effectiveness, the recoveries, and that will be strong the rest of the year.

Great. Thanks very much. I'll leave it there. Great. Thanks.

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

Hey, guys. Good morning. Thanks for taking the question. I'll keep it pretty quick. I guess just as I think about the operating income bridge, you know, the incentive comp piece of that, that's kind of an 800 basis point headwind as you rebuild that, you know, that function, you know, like how flexible is that or how discretionary is that? And the reason for the question is, let's say, you know, if something in the plan that you have for the year goes wrong outside of your factors, right, China takes longer to reopen or, destocking takes longer or restocking takes longer in the U.S. Can you pull that piece of the puzzle back more as a means to kind of still hit the operating income target? Or is that pretty much, you know, you're committed to spending that at this point?

Well, Peter, you know, our incentive comp pays for growth. And we fell short of growth in 2022. And so that's reflected in very low incentive comp that we did take back and popped into the P&L. As we went through 2022 and 2023, it starts a new year, and so we are starting with the expectation that we're going to hit our goals. And of course, as we over or underachieve, we'll adjust incentive comp as we go through the year. It's very formulaic. in the majority of our incentive confidence based on McCormick profit, which is basically our operating profit, less a capital charge. We call it kind of light EDA model to make sure all of us are held accountable for capital improvement. So it's really focused a lot on operating profit and a bit on EPS, too. It's very formulaic, and we pay for growth.

Great. Thanks very much, Chris.

Thanks.

Thank you.

At this time, I'll turn the floor back to Lawrence Garcia for closing remarks.

Great. 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 strategies actively respond to changing consumer behavior, and capitalize on opportunities from our relative strength. We continue to be well-positioned for continued success and remain committed to driving long-term value for our shareholders.

Thank you, Lawrence, and thank you to everybody for joining today's call. If you have any questions regarding the information, please feel free to contact me. This concludes the call for the day. Thank you. music music Thank you. Good morning. This is Casey Jenkins, Chief Strategy Officer and Senior Vice President, Investor Relations. Thank you for joining today's fourth quarter's earnings call. To accompany this call, we've posted a set of slides at ir.mecormick.com. With me this morning are Lawrence Kurzias, Chairman and CEO, Brendan Foley, President and COO, and Mike Smith, Executive Vice President and CFO. During this call, we will refer to certain non-GAAP financial measures. The nature of those on 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. 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. Our fourth quarter concluded a challenging and volatile year that impacted our ability to deliver on our expectations and our financial performance. At the same time, we ended the year with positive momentum. The consumer consumption trends and flavor solutions demand stabilized service levels and supply, and meaningful progress in starting to reshape our cost structure. While more work remains to be done, our confidence and our outlook for 2023 and beyond is strong. Our organization is focused squarely on executing on the priorities I just mentioned, all of which are important drivers in the successful execution of our strategies and the delivery of stronger results. Turning to slide five and our fourth quarter results Our sales declined 2% from the year-ago period, including a 4% unfavorable impact from currency. In constant currency, sales grew 2% within our implied fourth-quarter guidance range, but below our expectations. Greater-than-expected COVID-related disruptions in China unfavorably impacted our expected sales growth for both Total McCormick and the consumer segment by approximately 2%. Fourth quarter sales would have grown in the range of 4% in constant currency, excluding the impact of China on our results. We had anticipated even higher growth, but fourth quarter restocking comparisons in the America's consumer segment further tempered our growth. As compared to last year, our fourth quarter constant currency sales growth of 2% reflected a 9% contribution from pricing actions, partially offset by a 4% decline in underlying volume and product mix. an expected 2% volume decline from the kitchen basics divestiture and the exit of low-margin business in India and the consumer business in Russia, and a 1% year-over-year volume decline from the China COVID-related disruption. Despite tempered fourth-quarter sales performance, our underlying sales strength positions us well to accelerate sales growth in 2023. In our consumer segment, excluding China, consumption trends strengthened, particularly in the U.S., For our fourth quarter, total branded consumption grew 6%. In our flavor solution segment, our sales growth was outstanding with continued momentum across all regions. Consumers' increasing demand for flavor, whether through our products or our customers' products, is both reflected in this performance and in our most recent proprietary consumer insights research. Our alignment with the long-term consumer trends of cooking at home, clean and flavorful eating, and valuing trusted brands continues to deliver results. This alignment, combined with our broad and advantaged portfolio, plus the fundamental strength of our category, continues to underscore McCormick's positioning for long-term, differentiated growth in flavor. Moving to profit, our adjusted operating income decline of 10%, or 9% in constant currency, and adjusted earnings per share decline of 13% fell short of our expectations. Let me spend a moment on the differences to our expectation. Unfavorable product fix was a driving factor, particularly in our consumer segment. This was primarily due to lower U.S. spice and seasoning sales, stemming from fourth quarter inventory restocking comparison in both 2021 and 2022, which I'll discuss in a moment. Our results also reflected lower than anticipated sales in China, and an unfavorable product mix related to the sales mix between segments. In addition, with two COVID-related plant shutdowns in China, we realized lower operating leverage. During the quarter, we made meaningful progress to lower our run rate costs in flavor solutions with the reduction of elevated costs that we've been incurring to meet high demand in parts of our business. The impact of that progress was offset in the fourth quarter by unexpected, discrete, one-time issues. However, we expect to see positive benefits in our results going forward. Turning to slide seven, we're committed to increasing our profit realization in 2023. In our last earnings call, we discussed normalizing our supply chain costs and increasing efficiencies, also strengthening our ability to service customers. To that end, we have targeted the elimination of $100 million of supply chain costs over the next two years. We are also now taking streamlining actions across our entire organization, targeting an incremental $25 million of cost savings. The combination of these actions, which is our global operating effectiveness program, is incremental to our comprehensive continuous improvement, or CCI, savings. Our CCI program has a well-established track record of success, and we're leveraging its proven program discipline to drive results. We expect our global operating effectiveness program to drive annual cost savings of approximately $125 million, of which we expect to realize $75 million through the P&L in 2023, enabling increased profit realization. We can see the results coming through, and we expect the impact to scale up as the year progresses. Now let me share more details on our actions. During last year, we transitioned to our global operating model allowing us to more effectively leverage our scale and drive cost reductions. As we further advance that model and streamline our processes, strengthen our collaboration, and align our structure to work more efficiently, we are taking corresponding action to streamline our workforce across the entire organization. We are making considerable progress on the streamlining actions we have underway. A large component of our streamlining actions is a U.S. voluntary retirement program, which is very far along. with a targeted separation date of February 1st. This will be followed by other actions, some of which will be involuntary. As always, we will care for employees in keeping with our shared values. Moving to the supply chain, our top supply chain priority remains keeping our customers in supply and supporting their growth. And while we expect continued volatility in global supply chain, we have strengthened our resiliency over the past few years to achieve this priority. As we responded to demand volatility over the past several years, we incurred additional costs above inflation to service our customers and have seen inefficiencies develop in our supply chain. Some of these costs were investments and decisions made to support continued growth for both our customers and McCormick, and some are the result of a buildup that can occur in periods of disruption. In 2022, with the service levels of focus, the normalization of our supply chain costs and inventory levels, taken longer than expected as we stated on our third quarter call during the fourth quarter we began to implement initiatives to optimize our cost structure increase our capacity and reduce inventory level of strengthening our supply chain resiliency and ability to service our customers now for some details on these initiatives first and foremost while we continue to resolve some outliers we have rebuilt and stabilized our service back to strong levels and and at a high level of finished goods inventory on hand. Operating from this position enables us to maximize our performance, reduce our labor costs, and pare back excessive use of co-packers within our operations. Starting with labor, as we expect it to be the most significant driver of our cost reductions, during the fourth quarter, we reinstated more normal shift schedules, with most locations now operating on a 24 by 5 pattern. This allows us to eliminate inefficient and unpopular difficult-to-staff shifts. Additionally, as we move away from the industry-wide labor issues seen during the pandemic, we have stabilized absenteeism and turnover rates in our workforce and returned to more standard staffing by line. During the quarter, we optimized our leadership structure throughout our facilities and upgraded the talent in key roles. Simultaneously, we're increasing the capability levels of our teams, We're also accelerating automation, ranging from individual pieces of equipment to a completely automated line for a high volume packaging format. We expect, through these initiatives, to reduce 10% of our American supply chain workforce, and over the past three months, we have already achieved half of the planned reduction. Next, turning to our capacity, we're supporting future growth and enabling better customer service by investing to increase both manufacturing capacity and reliability in constrained areas. These investments also enable the repatriation of the production we scaled up at Copackers while continuing to meet the elevated demand. Our flavor solution segment, our flavors volume, including seasonings and flavor encapsulation, has been growing at a mid-single-digit rate for each of the past three years, and demand remains strong. Our investments in additional seasonings capacity as well as spray dry capacity with the expansion of bonus footprint are on track to be online during the second quarter. Meanwhile, in our consumer segment, we've been using co-packers for targeted high-demand packaging formats, such as some of our large value size items. Now, given the efficiencies gained and the investments already in flight, we have started to repatriate some of these formats. Overall, we're on track for co-packed spending in 2023 to be the lowest in the past five years. From an inventory perspective, we're executing on initiatives to return to historical safety stock levels, which has been disrupted and raised by the supply chain issues of the last few years. We reduced both raw material and finished good inventory during the fourth quarter. While we're aware we have further progress to make, we're confident and encouraged by the results our initiatives are delivering so far. As we progress to a more normalized environment, we will realize additional benefits from these changes. For example, we expect to see reductions in expedited freight and less than truckload shipping costs, and will streamline other transportation inefficiencies. With the recent opening of our new Maryland Logistics Center, we're able to eliminate expensive external warehouse costs before even fully realizing the inventory reductions, accelerating the expense savings. With more efficient manufacturing and lower inventory levels, we expect lower material losses. We have managed through various supply chain challenges over the last several years. I'm confident in our disciplined approach to resolving the increased costs within our supply chain while prioritizing meeting our customers' needs. The impact of our actions is expected to normalize our supply chain costs, enhance our efficiency and ability to meet demand, reduce inventory level, and ultimately increase our profit realization as reflected in our 2023 outlook. Our global operating effectiveness program has considerable momentum and we look forward to sharing more on our progress with you after our first quarter of 2023. Now, moving to fourth quarter business updates for each of our segments. Turning to our consumer segment on slide eight, sales performance in the quarter was impacted by factors mentioned previously. the kitchen basics, the vestiture, exits of businesses, and COVID-related disruptions in China, as well as trade inventory dynamics between years. These factors, as well as lapping high COVID-related demand early in the year, also impacted the full-year performance. Importantly, on a three-year basis, we've grown annual sales at a 5% CAGR driven by the Americas region, and we're ending the year with positive momentum in our consumption trends. Now for some regional highlights on sales and consumption. Starting with the Americas, during the fourth quarter of 2021, because we were restocking, shipments were higher than consumption, and we are lapping that this quarter, which impacts our sales growth. As we enter the holiday season this year, and having shipped fairly in line with consumption for the first three quarters of the year, Customers did not need to replenish their inventory as much, despite strong consumer consumption during the holiday season. We estimate our fourth quarter sales growth rate was unfavorably impacted 6% related to these restocking comparisons. We did not fully appreciate the level of fourth quarter restocking in 2021, especially of high margin holiday herbs and spices, and the resulting impact on our year-over-year growth, and as such, had expected stronger sales growth this year. That said, excluding this impact, our underlying volume performance in the fourth quarter was better than in the second and third quarters. We have confidence that as we move out of the first quarter, the holiday season fluctuations this year between consumption and inventory levels, as well as retailer restocking resulting from pandemic-driven dynamics, will have normalized, and we have an increased level of confidence in our visibility. Our total U.S. branded portfolio consumption growth of 6% this quarter, as indicated by our IRI consumption data combined with unmeasured channels, was the strongest of the year. Our investments in brand marketing and stronger holiday merchandising proved to be effective. And with the stabilization of supply disruptions, restoration of our service levels continued, and our fourth quarter service level was the best of the year, just shy of our pre-pandemic standards. Our consumption, dollar sales, units, and volume all accelerated sequentially, and our total distribution points, or TDPs, have stabilized. In spices and seasoning, our fourth quarter performance was the strongest of the year. Consumers are responding to our value messaging, trading up to larger sizes, and according to our consumer insights, are learning to navigate the current environment. We're continuing to build distribution on the Lowry's everyday spice range we launched last quarter, and earlier results are positive. We're seeing incremental sales and profits of the category as consumers are trading up to this line for private labor. In recipe mixes, we gained share for the fifth consecutive quarter, and with improved packaging supply, we also gained share in hot sauce and mustard during the quarter. Across the portfolio, our trends are continuing to strengthen in the first quarter of 2023. In EMEA, we ended the year with our strongest sales growth in the fourth quarter. Our effective pricing and new product growth accelerated versus the first three quarters, with our fourth quarter price realization the highest of the year and our volume decline the lowest. Our strong consumption momentum continued and accelerated sequentially. versus last year and 2019 in the UK and Eastern Europe, herbs, spices, and seasoning, those gains were somewhat offset by software performance in France. In the UK, we're driving the hot sauce category, with Frank's Red Hot continuing to gain share, again in the quarter and for the full year versus last year, as well as compared to 2019. Additionally, in the UK, we advanced our recipe mix leadership during 2022 to the number one share position, As we entered 2023, we're confident in our continued momentum in the EMEA region. In the Asia-Pacific region, growth for the quarter and the year was impacted by the exit of low-margin business in India, which we will laugh after the first quarter of 2023, as well as the COVID-related disruption in China. Reflected in our outlook, we are expecting continued disruption into the first quarter of 2023 with an expected recovery after the Chinese New Year. While we are currently experiencing this short-term pressure, we continue to believe in the long-term growth trajectory of our business in China. Our brand marketing, new products, and category management initiatives are driving positive momentum with more to come in 2023, and we look forward to sharing this and our growth plans at Cagney in a few weeks. Turning to flavor solutions on slide 9. And sales growths reflected pricing actions, as well as higher base volume growth in new products. Our sales performance has been outstanding all year, led by double-digit growth every quarter in the Americas and EMEA regions, resulting in 12% growth for the full year. On a three-year basis, we have grown annual sales at an 8% CAGR with strong growth in all three regions. Now for some regional highlights. Our America's fourth quarter sales growth was the strongest of the year. Growth in flavors, including snack seasonings and flavors for performance nutrition and health and market applications, as well as branded food service products drove our fourth quarter performance, as well as our strong broad-based growth for the year. We continue to realize the benefits from the combined capabilities of Bona and McCormick, with new products contributing approximately 30% more growth in flavors in 2022 than last year. Demand continues to strengthen with branded food service restaurant and institutional food service customers, and we're also expanding distribution and gaining share in both spices and seasonings and hot sauce. In the EMEA, our strong fourth quarter performance in all product categories kept an outstanding year of 17% growth, including significant volume growth of 9% as well as pricing. We're winning in all markets and channels. Growth remains strong across our customer base, led by the momentum with our quick service restaurant or QSR customers, partially driven by expanded distribution and their promotional activities. In APZ, we're driving further menu penetration with our QSR customers, realizing growth from strong performance of core menu items we flavor. We've delivered solid growth in the APZ region for the year despite the COVID-related disruptions in China. Across markets outside of China, we drove double-digit growth with contributions from both volume and pricing. Overall, flavor solutions demand has remained strong, and for certain parts of our business in the Americas and the EMEA regions, our supply chain continues to be pressured to meet this high demand, driving extraordinary costs to service our customers. We appreciate our customers working with us and are encouraged by the results our collaboration is already beginning to yield. While our Flavor Solutions sales growth has been outstanding, we are not delivering profit growth in this segment. We are committed to restoring Flavor Solutions profitability, recovering margin while ensuring we keep our customers in supply, and driving growth for both McCormick and our customers. We are confident we will achieve margin recovery through three actions. Effective price realization. Our price increases are only now catching up to the pace of inflation, and we're beginning to recover the cost inflation our pricing lacked last year. The successful execution of the global operating effectiveness program I just mentioned. In particular, we expect the elimination of supply chain inefficiencies and the investments in capacity to have a significant impact in the flavor solutions segment. And finally, continued focus on driving growth in high margin parts of our portfolio. The strength of our flavor solutions portfolio and capabilities including our customer engagement approach and culinary-inspired innovation, are driving our outstanding flavor solution momentum. We look to sharing more about our growth plans and margin recovery at Cagney in a few weeks. Now some summary comments before turning it over to Mike. Turning to slide 10, global demand for flavor remains the foundation of our sales growth, and we have intentionally focused on great, fast-growing categories that will continue to differentiate our performance. We continue to capitalize 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 more relevant today than 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 strong global flavor portfolio, we're delivering flavor experiences for every meal occasion. Through our products and our customers' products and our driving growth, we are end-to-end flavor. 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, including through the pandemic and other periods of volatility. 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, give us confidence in our growth momentum and in our ability to navigate the dynamic global environment. As we look ahead to 2023, we will focus on capitalizing on strong demand, optimizing our cost structure, and positioning McCormick to deliver sustainable growth and long-term shareholder value. The fundamentals that drove our industry-leading historical financial performance remain strong, and we're confident we are well-positioned to drive profitable growth in 2023. I want to recognize McCormick employees around the world for their contributions in 2022 and the momentum they're driving in 2023. Now, I'll turn it over to Mike. Thanks, Lawrence, and good morning, everyone. Starting on slide 13, Our top-line constant currency sales grew 2% compared to the fourth quarter of last year. This growth was tempered by a 1% unfavorable impact from the kitchen basics divestiture, a 1% impact from the exits of low-margin business in India and the consumer business in Russia, and a 1% impact from China consumption disruption related to COVID restrictions. In our consumer segment, constant currency sales declined 4%, with the divestiture of kitchen basics contributing 1% to the decline and the combined impact of exiting the businesses in India and Russia, as well as the China consumption disruption, contributing 3% to the decline. On slide 14, consumer sales in the Americas declined 4% in constant currency. Pricing actions in the region were more than offset by a volume decline, including a 2% impact from the kitchen basics to vestiture, as well as a 6% impact from lapping the restocking of retail inventory in the fourth quarter of last year and a higher level of retail inventories entering this year's holiday season. Additionally, returning to pre-pandemic promotional levels also tempered our sales comparison to the fourth quarter of last year. In EMEA, constant currency consumer sales grew 2%. Pricing actions across all markets were partially offset by lower volume of product mix, including a 4% unfavorable impact from lower sales in Russia. Constant currency consumer sales in the Asia-Pacific region declined 22%, including a 23% 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. Turning to our flavor solutions segment at slide 17, we grew fourth quarter constant currency sales 14%, primarily due to pricing actions, with higher volume product mix also contributing to growth in all regions. In the Americas, Flavor Solutions constant currency sales grew 13%, with pricing actions and higher volume contributing to the increase. Higher sales of packaged food and beverage companies with strength in snack seasonings led to growth. Higher demand for branded food service customers also contributed to growth. In EMEA, we drove 16% constant currency sales growth, with 10% related to pricing actions and 6% behind the mix. EMEA's Flavor Solutions growth was broad-based across its portfolio, led by strong growth with QSR and packaged food and beverage company customers. In the Asia-Pacific region, flavor solution sales grew 11% in constant currency, with pricing actions and higher volume contributing to the increase. Growth was driven by higher sales to QSR customers, driven by strength in their core menu items. As seen on slide 21, adjusted gross margin declined 410 basis points in the fourth quarter versus the year-ago period. I'll spend a moment on the significant drivers, highlighting the ones that drove more compression than we had expected. First, approximately 60% of this decline, or 250 basis points, is due to the dilutive impact of pricing to offset our dollar cost increases. Next, product mix was unfavorable as compared to the fourth quarter of last year, as well as compared to our expectations for the quarter. First, in our consumer segment, as mentioned earlier, lower U.S. spices and seasoning sales stemming from fourth quarter inventory restocking comparisons in both 2021 and 2022, as well as lower sales of higher margin products in China due to the COVID restrictions, negatively impacted mix. A sales shift between our consumer and flavor solution segments also contributed to the unfavorable product mix as compared to the fourth quarter of last year. The impact of the unfavorable product mix was higher than we expected due to the shortfall in consumer sales from what we had anticipated. driven by both lower U.S. and China sales. Now for the impact of supply chain challenges on gross margins. In our consumer segment, we experienced lower operating leverage because of the sales comparisons already discussed. The impact, though, was greater than expected due to the China COVID-related plant shutdowns. In our flavor solution segment, as we transition production to our new UK Peterborough manufacturing facility, we continue to incur dual running costs, We expect the unfavorable year over year impact of these costs to continue in the first quarter of 2023 and then for the balance of the year, expect them to be comparable to 2022. Additionally, we are still incurring elevated costs to meet high demand in certain parts of our business. While painful short term, we know these investments to support our customers during periods of disruption are the right approach to drive long term growth. That said, we did make progress on reducing the level of these costs in the fourth quarter. However, the impact of that progress was offset by the unfavorable transactional impact of foreign currency exchange rates and some discreet issues we experienced in our flavor solutions operations during the quarter. While we recovered quickly from these issues, they still contributed significant unexpected costs to the quarter. Finally, partially offsetting the unfavorable drivers I just mentioned were our CCI-linked cost savings. End of note, our price increases continued to catch up with cost inflation during the quarter for both segments. This was in line with our expectations and consistent with our performance. In 2023, we plan to fully recover the inflation our pricing has lagged over the last two years. Now moving to slide 22, selling general and administration expenses, or SG&A, declined from the fourth quarter of last year with lower incentive compensation expenses partially offset by higher distribution costs and brand marketing investments. As a percentage of net sales, SG&A declined 270 basis points. The net impact of the factors I just mentioned resulted in a constant currency decline in adjusted operating income, which excludes special charges and transaction and integration costs of 9% compared to the fourth quarter of 2021. In constant currency, the consumer segment's adjusted operating income declined 5%. And in the flavor solutions segment, it declined 26%. Turning to interest expense and income taxes on slide 23, our interest expense increased significantly over the fourth quarter 2021, as well as over our third quarter of this year, both driven by the higher rate environment. Our fourth quarter adjusted effective tax rate was 23.1%, compared to 21.3% in the year-ago period. Both periods were favorably impacted by discrete tax items, with a more significant impact last year. At the bottom line, as shown on slide 24, fourth quarter 2022 adjusted earnings per share was 73 cents, as compared to 84 cents for the year-ago period. The decrease was driven primarily by lower adjusted operating income. with higher interest expense and a higher fourth quarter adjusted effective tax rate also contributing to the decrease. On slide 25, we summarized highlights for cash flow and the year end balance sheet. Our cash flow from operations for the year was $652 million, which is lower than the same period last year. This decrease was primarily driven by lower net income and higher inventory levels. We returned $397 million of cash to our shareholders through dividends, and used $262 million for capital expenditures in 2022. Our capital expenditures included growth investments and optimization projects across the globe. In 2023, we expect our capital expenditures to be comparable to 2022 as we continue to spend on the initiatives we have in progress, as well as to support our investments to fuel future growth. We expect 2023 to be a year of strong cash flow driven by our profit and working capital initiatives. 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. We remain committed to a strong investment grade rating, and we have a history of strong cash generation and profit realization. With improving our gross margin through our plan to normalize our supply chain costs and inventory levels, we will be better positioned to continue paying down debt and expect to de-lever to approximately three times by the end of fiscal 2024. Now turning to our 2023 financial outlook on slide 26. Our 2023 outlook reflects our positive top line growth momentum and with the optimization of our cost structure increased profit realization. We expect to drive margin expansion with strong sales and adjusted operating income growth that reflects the health of our underlying business performance as well as the net favorable impact from several discrete drivers. We expect our adjusted operating profit growth will be partially offset below operating profit by significantly higher interest expense and a higher projected effective tax rate. We also expect there will be minimal impact from currency rates. At the top line, we expect to grow sales 5% to 7%, driven primarily by the wrap of last year's pricing actions combined with new pricing actions we are taking in 2023. We expect several factors to impact our volume and product mix over the course of the year, including price elasticities, which we expect to be consistent with 2022 at lower levels than we have historically experienced, but aligned with the current environment. A 1% estimated benefit from lapping last year's impact of COVID-related disruptions in China although we expect the impact will vary from quarter to quarter given 2022's level of demand volatility, the divestiture of our kitchen basics business in August of last year, and the exit of our consumer business in Russia during last year's second quarter. And finally, the continual pruning of lower margin business from our portfolio. As always, we plan to drive growth through the strength of our brands, as well as our category management, brand marketing, new products, and customer engagement plans. Our 2023 adjusted gross margin is projected to range between 25 to 75 basis points higher than 2022. This adjusted gross margin expansion reflects a favorable impact from pricing, cost savings from our CCI-led and global operating effectiveness programs, partially offset by the anticipated impact of a low to mid-teens increase in cost inflation. We expect cost pressures to be more than offset by pricing during the year as we recover the cost inflation our pricing lagged last year. Moving to adjusted operating income, first let me walk through some discrete items and their expected impact to our 2023 adjusted operating profit growth. First, the cost savings from our global operating effectiveness program are expected to have an 800 basis point impact. The savings from this program are expected to scale up as the year progresses. Next, the benefit of lapping the impact of COVID-related disruptions in China is expected to have a 300 basis point favorable impact. The kitchen basics divestiture is expected to have an unfavorable 100 basis point impact. And finally, an 800 basis point unfavorable impact is expected as we build back incentive compensation. The net impact of these discrete items is a favorable 200 basis points. This favorable impact, combined with expected 7% to 9% underlying business growth, which is driven by our improved operating momentum, results in our adjusted operating income projection of 9% to 11%. In addition to the adjusted gross margin impacts I just mentioned, this projection also includes a low single digit increase in brand marketing investments and our CCI-led cost savings target of approximately $85 million. Based on the anticipated timing of certain items, We expect our adjusted operating profit growth to be pressured in the first quarter, accelerated in the second quarter, and return to normalized cadence of delivery for the remainder of the year. The impact of cost inflation will be weighted toward the first half of 2023, with peak inflation in the first quarter. Also in the first quarter, we expect continued pressure to sales and profit from COVID-related disruptions in China. And then the benefit beginning in the second quarter from lapping last year's impact. Additionally, the exit of our consumer business in Russia will impact the first quarter. As a reminder, we began exiting it during the second quarter of last year. Finally, related to profit timing, while we expect a minimal impact from currency rates, we project an unfavorable impact in the first half of the year, an expected 3% unfavorable in the first quarter, and a favorable impact in the second half of the year. We are anticipating a meaningful step up in interest expense driven by the higher interest rate environment which will impact our floating debt. We estimate that our interest expense will range from $200 million to $210 million in 2023, spread evenly throughout the year. As a reminder, in 2022, we realized an $18 million favorable impact from optimizing our debt portfolio, which we will lap in 2023. The net impact of these interest-related items is expected to be an 800 basis point headwind to our 2023 adjusted earnings per share growth. Our 2023 adjusted effective income tax rate is projected to be approximately 22%, based on our estimated mix of earnings by geography, as well as factoring in a level of discrete impacts. Versus our 2022 adjusted effective tax rate, we expect this outlook to be a 100 basis point headwind to our 2023 earnings growth. We expect our rate to be higher in the first half of the year compared to the second half. To summarize, our 2023 adjusted earnings per share expectations reflect strong underlying business growth of 8% to 10%, a 2% net favorable impact from the discrete items I just mentioned impacting profit, the global operating effectiveness program, the China recovery, the kitchen basics to vestiture, and the incentive compensation rebuild, partially offset by the combined interest and tax headwind of 9%. This results in an expected increase of 1% to 3%. or projected guidance range for adjusted earnings per share in 2023 of $2.56 to $2.61. We are projecting strong operating performance in 2023 with continued top line momentum, significant optimization of our cost structure, and strong adjusted operating profit growth, as well as margin expansion. While this performance is expected to be tempered by interest and tax headwinds, we remain confident in the underlying strength of our business and that with the execution of our proven strategies, we will drive profitable growth in 2023. 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 28. Our fourth quarter sales performance, despite challenges from the COVID-related disruptions in China, reflects the underlying strength of our global portfolio and the continued execution of our long-term strategies. With the stabilization of service and our supply chain, in addition to positive momentum in consumption trends, we expect an acceleration in consumer segment sales, dollars, and volume in 2023 and continued strong flavor solutions performance as the strength of our portfolio is met with outstanding demand across our customer base. We have strong growth programs, and we look forward to sharing them at Cagney. We are committed to increasing our profit realizations, The actions we have underway to normalize our supply chain costs and increase our organizational effectiveness and efficiency are already yielding results. Our global operating effectiveness program is expected to deliver $125 million of cost savings. We expect the benefits of the program to scale up through each quarter of 2023 and continue to be accretive into 2024. While actively responding to the macroeconomic challenges we're facing, We continue to operate with the same discipline and commitment to execution as we have in any other operating environment. The fundamentals that have driven our historical performance remain in place, and we are as diligent as ever in driving value for our employees, consumers, customers, and shareholders in both 2023 and beyond. The compounding benefit of our relentless focus on growth, performance, and people continues to position McCormick to drive sales growth. coupled with our focus on recovering cost inflation and lowering costs to expand margins, will allow us to realize long-term sustainable earnings growth. Before turning to your questions, I want to reiterate my confidence in driving the profitable growth reflected in our 2023 outlook. And now for your questions.

Thank you. On that note, I'll take the question and answer session. If you'd like to ask a question this morning, please press star 1 from your telephone keypad. and the confirmation tone indicate that your line's 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. Our first question is from the line of Andrew Lazar with Barclays. Pleased to see you with your questions.

Great, thanks. Good morning, everybody.

Hi, Andrew.

Hi there. The question I'm getting, I think, most from investors this morning really has to do with the fiscal 23 operating profit guidance of 9% to 11%. I understand you've got incremental cost savings that are set to offset the incentive comp rebuild, and you have some of the China recovery built in as well. But I guess in what's still clearly a dynamic operating environment, this still seems, I guess, aggressive to a bunch of folks we've spoken to this morning, especially given it's expected to be a somewhat back-end loaded year from a profitability standpoint. So I was hoping, Lawrence, maybe you could comment a bit on that and add some more color on the level of confidence around this, and then I've just got to follow up. Thank you.

Sure. This almost comes off of my final comments and prepared remarks. We really believe that this is balanced guidance. It is certainly not aggressive. We have a due degree of humility after last year and have a balanced outlook considering risks. and we have a high degree of confidence in this guidance, including the operating profit guidance.

You know, it's underscored by our strong consumer demand.

You know, the underlying demand from the consumer is quite strong. Coming out of fourth quarter is actually the strongest demand, consumer demand, that we've seen, and we continue to have tremendous demand from our flavor solutions customer We have very strong programs that we did not talk about on this call, particularly on herbs and spices, and we'll be sharing those growth programs at CAGNI, and so that is a foundation underlying the performance on operating profit. We have very strong confidence in our ability to realize the cost savings that we described. being managed programmatically through the same team that manages our CCI program. And I believe that they are very much in our control and we're quite confident about them. And I think that they more than offset the build of incentive comp. And maybe what some of the people you're talking about haven't fully considered is that we expect to cover not only this year's cost inflation, but also recover all of the costs that we have lacked over the last two years with our pricing actions early in the year. As you know, pricing actions take time to sell in, so you would be correct in assuming that many of these conversations are either completed or well underway at this time.

Great. That's helpful, and that's a good segue into my follow-up, which is with low to mid-teens inflation still to come, and as you've talked about, likely further pricing action still ahead. I'm just trying to get a sense how that jibes with the price gap issue that you've talked about previously in your course, Spice and Season, this category, and the fact that pricing decelerated sequentially in fiscal 4Q in consumer versus 3Q, and I thought it was supposed to build, and maybe that was mixed versus actual pricing.

I'm going to say a couple of words about that, and I'm going to let Brendan... First of all, on that pricing, I would not forget that a significant portion of it is going to be on the flavor solutions side of the business. Contract windows have come up and allowed us to make some moves there, and so that is certainly a big part of the pricing equation. Our inflation outlook is higher, actually, on the flavor solutions inputs than on consumer inputs. for the year, so the pricing is similarly skewed more towards the flavor solutions side of it. I'm going to let Brendan talk about the price gaps and take it from here, please. Yeah, just to build, Andrew, just to build on Lawrence's reply, I'll just jump right to maybe I think one of the points you brought up regarding private label. We are seeing price gaps narrow right now. And we certainly saw that in the fourth quarter and even leading into the first quarter. And we've started to see that trade down moderate, honestly, through the quarter. So, you know, that's kind of an insight. And maybe that's also a reaction to sort of the macro, you know, inflationary factors have seemed to moderate also, you know, out there in the economy. You know, overall, you know, consumers are looking for brands, but they're also looking for value. And so it's not necessarily the lowest priced. Parts of our portfolio we're seeing really start to drive a lot of growth just on large sizes, as we see consumers kind of look for that value. We also, as you called out, launched this Lawry's Everyday Line of Spices, and we're starting to continue to build distribution on this, but the early results are really good, maybe better than what we expected. We're seeing a lot of incremental category sales and profit coming from this line, Mostly because consumers are trading up from private labels That's kind of the source of volume that we're seeing coming from this and it's bringing in new consumers into the McCormick portfolio so we are we like the results so far that this is providing but But you know that that's certainly a good outcome and it factors into how we think about you know next year on I'm pricing just sort of you know comparing quarter to quarter and To your point, I think that's probably more a function of the fact that we've been reinstating promotional activity. That's been, I think, called out previously. We're also lapping last year's increases, which were higher on a relative basis. But also our volume miss in the fourth quarter had an impact on that overall level of pricing, too. So we've covered that with regard to the restocking comparison, and that's factored into that quarter-to-quarter view.

Great. Thanks so much, and see you guys in Florida.

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

Hi, good morning. Hi, hi, thank you. I wasn't sure if I heard you correctly, and maybe you said this and maybe you didn't, but you said that sales growth will be driven primarily by pricing. Does this mean you expect volumes for the year in 23 to be positive? And I guess along those lines, I think you mentioned that you expect elasticity to not necessarily worsen. in 23 versus 22. I think if I heard you right, you said it will remain kind of at today's level. Just curious why that is given that the consumer environment, you know, it does seem to be eroding a small amount.

I'm going to start with the last part of it, Ken. You know, we've seen some moderation of elasticity as we've gone through the year. You know, it looks like peak elasticity was around the time when gas prices were at $5 a gallon. and above for most of the country. And it was really not so much a reaction to our price increase, but to the general level of inflation that consumers were experiencing and the high pressure on their wallets. So our outlook for 2023 seems that similar environment carries forward. and that we're seeing elasticity in that range. We've also adjusted, we've looked at, we've seen where we've had greater elasticity and where we've had lesser elasticity and we've reflected that in our future pricing actions. So I think that we've really been thoughtful around the question of elasticity. We do expect the consumer to be under pressure in 2023. I don't care whether you call it a recession or a soft landing. Consumers on the lower end of the income spectrum, I'm not talking about the bottom, I'm talking about the lower half, are certainly going to have less money and are going to be careful with their budgets. We are reflecting that in our marketing programs already. and with some of the innovation that we've launched. It's not all about buying the cheapest product. Consumers are looking for value, and that's really come through clear in our proprietary research. Value has many components. It is true that our sales growth is driven primarily by pricing in 2023. And at the total company level, we expect volume to be pretty much flat. And so that would be an improvement in the trend line. But that's going to vary tremendously by region. And a good bit of the overall volume growth is going to come from recovery in China following this quarter. where we have that tremendous COVID impact right now during Chinese New Year. Did I miss anything there? No.

Just a quick follow-up, and thank you for that. On the restocking, you mentioned that perhaps you hadn't quite recognized at the time how large the impact was the last couple of years. Totally understandable given the volatility that everyone's going through. I'm just curious if the company is doing anything to maybe you know, slightly improve its ability to quantify those dynamics, maybe in a more real-time way, so that, you know, going forward, there's just fewer surprises from your end.

That's a great question, Ken. Thanks, Ken, for the question.

You know, definitely, you know, this environment, you know, certainly volatile, you know, made it tougher to read.

But as we think about this moving forward, it's definitely, you know, going through, I think, this period of time has allowed us to kind of refine how we look at, you're restocking and just the fluctuations, particularly coming out of the season, you know, between consumption and shipments. This has allowed us, I think, to kind of refine our view, you know, overall. We definitely had a pretty disciplined approach to this even prior to the pandemic, but I think this has refined how we look at it and the tools that we use, the analytics that we apply. So we have a lot of confidence going into this next year, particularly as we exit the first quarter, that just the fluctuations that we typically would see during a holiday season between consumption and shipment, and then on top of that, this restocking comparison, things begin to normalize, I think, is our view as we come out of Q1, providing just a little bit more stability in that read. Some of that's internal to me. Our supply chain is really operating at a much higher level now than it has from a service perspective and a stability. That's another thing that gives us better insight into our sales.

Thank you.

Our next question comes from the line of Robert Moscow with Credit Suisse. Who's this with your question?

Hi, thanks. I was hoping to break down that. Hi. I was hoping to break down your volume forecast by consumer versus flavor solutions. Because, you know, I think one of the strange dynamics of 2022 is that at a time when consumers are trying to save money, volumes were weak in consumer but your volumes are pretty strong in flavor solutions. So I'm wondering, how do you think of 23? And is there a risk that because the consumer environment is so volatile that it might be very tough to determine what the trade-down between, like, food service and retail might be?

Well, I don't think that we're providing a split between the growth rates on consumer and flavor solutions. I will say that I would expect higher growth on flavor solutions in 2023. We have, if nothing else, a higher level of pricing expected in the flavor solution segment, and that alone is going to drive a higher increase year on year. Flavor solutions is a bit of a portfolio itself. That includes branded food service where we believe that we have gained significant share in North America in particular and our branded food service business with the number of wins as we've gone through the year. We've had tremendous growth on flavors and flavor seasonings for our flavor solutions. customers in the area of snacks, performance nutrition, the health end market. We've had very strong unit growth through the entire pandemic and continuing through 22, and we see no end in sight on that. We have been slightly capacity constrained in that area, and we have some significant new capacity for longer-term investments. that are finally coming online in the second quarter that opens up additional capacity for us that's both for flavor with some expansion that we've done at Bona for their spray drying capability and in snack seasonings where we've been in the process of converting one of our plants from some low margin products to the ability to run snack seasonings and that conversion is effectively coming online. We're in the trial stages right now So it might be a bit of a longish answer there, but I hope that covered it.

Okay. Can I ask a follow-up? You talked about the new plant that's opening in the UK and the double costs, I guess, that are involved in it. Why is it taking so long to get past these double costs?

Hey, Rob. It's Mike. I'll answer that. I'd say this. We have a very large footprint in one part of the UK. The Peterborough plant, which we've talked about, is a massive facility. We're doing this in a two-step process to make sure we service our customers properly. It's different than when you're just building new capacity like we've talked about where you're adding on to a plant. We're actually closing a plant in a very difficult environment to close plants for a lot of reasons. moving it to a brand-new facility. So that does take more time. The good news is we're kind of almost out of that after the first quarter. You think about the incremental cost we talked about is in the first quarter. After that, it levels out. And as that production, you know, the remaining production transfers over the rest of this year, you know, 24 will be a really clean year. But when you're closing big plants and opening big plants, these don't take one quarter. You know, they take about a year if you think about it. That's what, you know, this one's taking around that much time. Thank you.

Our next question is from the line of Alexia Howard with Bernstein. Please proceed with your questions.

Good morning, everyone.

Hi, Alexia.

Hi there. Can I focus in on the flavor solutions business? You gave us the three reasons why margins should improve this year. I'm kind of curious about timing on that. How quickly will the pricing kick in and the elimination of the capacity expansion costs? just a little bit on the timing. Thank you, and I have a follow-up.

Yeah, I mean, I wasn't really being specific on the dual running costs when I was describing the improvement in flavor solutions. In terms of the pricing, I don't want to get overly specific on this because we are in customer conversations right now, and there's a certain amount of commercial tension in all of those conversations.

But

But we fully expect, as I've said about pricing generally, that on the flavor solution side of the business as well, that we will recover all of the inflation that we are not only incurring in the new year, but also the cumulative inflation that we've collected and that we've experienced in the last two. And I would say that our lag in getting that getting caught up is greater in flavor solutions than it has been on the consumer side. So it's going to be, you know, it's pretty meaningful and that's an important element. We fully expect, you know, to have that work complete early in the year. I think the other point too, Alexia, a couple things. We talked about inflation being weighted to the front of the year. You know, first quarter is the highest inflation. That impacts flavor solutions as well as consumer. The other thing is our global operating effectiveness program. I mean, there's been a lot of positive activity. The reality, though, is the first quarter is going to have the least impact, and it's going to wrap up really rapidly in the second, third, and fourth quarter. So, you know, the second quarter is going to be a big impact. And that's skewed to the flavor solutions because a lot of the inefficiencies we've talked about over the last year have been in the supply chain area for flavor solutions. So we do see more of that savings go into that segment, which will help.

Great. And then as a follow-up, I hate to come back to it, but the share dynamics in the U.S. herbs and spices that we're seeing in the Nielsen data, it looks as though you're still losing market share. It doesn't look like it's private label anymore. I presume it's smaller brands. When do you expect that to turn the corner, and can you give us any more color about what the dynamics are there? Thank you, and I'll pass it on.

Alexia, I would love to answer that question, but I'm going to let Brandon answer it. Thanks, Lawrence.

Alexia, as we look at our business, I think just first remarking on the fourth quarter, I think what we were really feeling pretty good about in terms of momentum we talked about before is that we've seen sequential improvement not only across Total McCormick portfolio and consumer in the U.S., but also in herbs and spices.

Fourth quarter is probably our best quarter of the year. saw sequential improvement on not only sales, but also unit and also volume as we went through the second quarter all the way to the fourth quarter. So that's pretty good momentum going into the next year. Having said that, though, certainly we saw a stabilization of where our share is right now and expect to improve that over the course of 22. But we don't ever really get into the habit of sort of projecting what share will be in the future. So we're not going to do that on this call necessarily, but we do expect to have improved performance in 23. And I think, you know, related to what those plans will be, we'll talk a lot more about that at CAGNI.

And so I think, you know, there will be a lot of great opportunity to kind of go deeper on what those plans and opportunities look like.

We actually would have loved to have done that on this call in case you just insisted that we paid some higher power for CAGNI. I know your question, Alexia, was about U.S.

herbal spices specifically, but if I could just step back and look at the fourth quarter. We gained share in hot sauce. We gained substantial share in mustard, but we finally are back in full supply. We had, I think, our fifth consecutive quarter in a row of strong share growth in recipe mixes, and everyone forgets those because their profitability is right there with herbs and spices. Then in many of our international markets, we had share gains in herbs and spices specifically. So when you look at the full picture, generally, as has been the case all along, we've had good supply. We have had the ability to grow our market share. A lot of the share loss that you're seeing is due to CDP losses early in the year that are still being lapped. And I expect we have won some of those CDPs back, and I expect us to continue to do so as we go through 2023.

Very helpful. Thank you very much. I'll pass it on.

Our next question is from the line of Adam Samuelson with Goldman Sachs. Please receive your question.

Yes. Good morning, everyone.

Good morning, Adam. Hi, Adam. Good morning.

Hi. So I wanted to maybe hone in a little bit on the kind of net operating income growth guidance and where you shake out for 2023 because I'm just trying to square the thought relative to where profit was in 2020 and 2021. Especially 21, you're still at the high end of the guidance range, 80, 90 million lower than you were last year, which there shouldn't be an incentive comp kind of comparison issue in there. And you talk about fully recovering pricing, cost inflation. Currency's been a little bit of a headwind. Divestiture's kind of net sold a few things and volumes are lower. But I guess I'm just trying to reconcile kind of where on an absolute dollar basis we shake out for 2023 inclusive of the incremental restructuring and the cumulative effect of pricing relative to where the profit dollars were two years ago, three years ago, and how we should think about that at the company level moving forward? I mean, have we rebased somewhat as we've come through COVID, or is there an acceleration beyond 2024 and 2023 in profit growth to kind of get the long-term kind of EBIT CAGR back into that kind of mid to high single-digit range?

Hey, Adam, it's Mike. Good question. I mean, we put together that slide in the earnings deck to really walk you from the current guidance and from a percentage basis, realizing it's not dollars. but from a percentage basis constant currency guidance to the underlying base growth. And if you think about it, you know, you look at that underlying base growth. Once you take out all the kind of, I hate to say one-timers, but things that are really discrete items year over year, and some of which will continue into next year, you know, like the Global Operating Effectiveness Program, as you talk about rebuilding or our profit algorithm, getting back to our long-term profit algorithm by taking out these costs that have really come through during the pandemic. So I think there is a case for acceleration in the future. We're not talking about 24 or 25 right now. We need to nail 23. But if you look at that underlying base growth, 4% to 6% net sales growth, which actually went out both on M&A at the high end of our guidance, so really good underlying performance. you know, we get back to the seven to nine operating profit growth. If you really, if you think about the recovery of the pricing that we talked about, that allows us to really drive that three percentage point increase to get to that seven to nine so that we feel good about that, along with our normal things like our normal CCI program and things like that, investing a bit more in advertising to grow the brand. So that virtuous cycle we talked about, you know, to get the operating profit And 1% leverage below there. We'd love to pay down more debt. That's why we're driving hard on our working capital programs this year to get our inventories back down to where they need to be. So we feel good about, like Lauren said before, it's a prudent call. We feel really confident about it. So I think hopefully that helps you understand that moving parts other than discrete items Some of which the positives will continue to next year, even the net recovery in China. Hopefully 24 is better than 23. But we feel good about that on base card.

You know, I will add to that that the guidance that we're giving is balanced and I'll even say prudent.

And just from, that's our opinion and you've heard from some of the other questions that there are some who think that this actually might even be aggressive. But we've tried to give balance guidance here, but our teams are used to winning and have very aggressive business plans, and we will do everything we can to not just recover but exceed. And we're used to starting every year-end earnings call with the phrase record results. We are not able to do that this year. and we would like to get back on track with that long record of historic performance.

Okay, I appreciate all that, Collar. If I could just ask a follow-up on Flavor Solutions, and it just, I mean, there's a meaningful portion of that business that's selling into other food companies, and just want to get a sense if you saw or have experience or experience worried about any de-stocking amongst some of your food company customers who either have taken similar working capital kind of reduction actions as you are taking yourselves or kind of have counseled you to think about that potential moving forward in the context of a still fairly sluggish underlying consumption environment.

I would say at this point, no.

The fact is that our supply chain recovery has been and the feedback we get from our customers is generally ahead of the peers, and so many of them are still fairly hand-to-mouth right now and have a different set of dynamics. Many of them are still rebuilding inventories in the store at the shelf and getting items reinstated, and those in the area of snacking are just experiencing explosive growth. If I could build on that, Lawrence. Adam, the other thing to consider regarding our flavor solutions business is a good part of that sales growth algorithm is a lot of new product and innovation activity for our customers, as well as winning new customers and winning share in the market. And so that factors into how we think about our growth.

Okay. All right. That's all helpful. I'll pass it on. Thank you.

The next question is coming from the line of Chris Grohe with Stifel. Please proceed with your questions.

Hi, good morning.

Good morning.

Hi, Chris. Hi. I had a question coming back to kind of the U.S. business overall. And Brendan had talked about kind of moderating and trade down in the U.S. And I wanted to understand, do you attribute that to your promotional spending? Was that one of the factors that helped drive that? And would you expect promotional spending to be up in fiscal 23? Because I'm trying to square that with the need for more pricing here. And can you accomplish the price points you need and also see kind of the value it seems that consumers are seeking here?

Yeah, I will say that, you know, the promotional activity isn't all about discounting.

And so, you know, a lot of the promotional activity that we've been able to reinstate is around merchandising activity, which includes displays and digital partnerships. And these things have very good ROI performance. and we are quite positive about it. I'm going to give the floor here to Brandon, though. Yeah, I mean, Chris, I think as we go into 23 and how we look at it, just to build off of where Lawrence is going, a lot of that promotional spending is getting back into driving the categories with our customers, and the feedback we're getting from them is welcome, frankly, in that regard, because we want to keep driving up that overall growth. Can you just remind me, the front end of your question, though, was in regards to what?

Just that you've seen a moderating in trade down, and you've had an increase in promotional settings. So I was trying to understand, is that driving that moderating in trade down? And then can you accomplish that if you're trying to get prices higher?

I think you're seeing a confluence of a number of things happening in the quarter where some of those macro factors that we may have spoken about before, like prices, gas, et cetera, those seem to have moderated. So therefore, broadly, we think that has an impact. So also the reinstatement of promotions probably during, obviously, a very important season like the holiday would have also a year-over-year impact there too. But I think there's a couple other things we'd like to add is we got more aggressive in Q4 for a reason. We called that out in the third quarter. And part of that included also a lot of focus and an increased A&P around value messaging And we've seen a lot of great response from that. And so I think there's a number of things playing in here, Chris, that lead us to believe that we've got good momentum going into 23. I'll also say that our proprietary consumer survey shows that between May and December, when we ask consumers about their mechanisms for coping with higher pricing, trading down to private label and store brands was the item that had the biggest decline in terms of the consumers who said they were doing that. And so I think that matches up well with what we're seeing through the scanner and in our other data.

Okay, that's helpful. Thanks for all that color there. Just one other quick follow-on or question would be that, inventory was kind of a moving factor year over year, and you had a big increase last year in inventory. Did you build less inventory, I guess, overall, or should I say that maybe better, that did inventory move lower in the fourth quarter than you expected? Is that the unique factor around the inventory move in the quarter?

We did start making progress on our inventory in the fourth quarter, as you mentioned, both in the raw material and finished goods side, which was really a focus. With our global operating excellence for efficiency program, one of the outputs of that is a reduced inventory, too, as you stabilize your supply chain. And we have very aggressive targets for this year. And again, it goes back to creating more cash to help drive our debt down.

How about at retail? How about at retail as well? Did retail inventories move lower in the fourth quarter?

No, Chris, I would say that's not really, you know, the relationship we're trying to, you know, describe here.

We feel like inventories, simply retailers that had done a lot of restocking in the fourth quarter of 21, and they just happen to have more on hand as we are going into the holiday season. But I don't believe we're trying to say that they're executing the holiday season differently than they have, you know, as normal. And just in a normal ebb and flow of things. Remember, our fiscal year ends in the middle of the holiday season. So coming in the first quarter, retailer inventories are always high. We always ship low consumption in the first quarter. That's like our normal seasonal pattern, and I think that we're well set up for that. Given the rapid amount of change, we're just being cautious about that, and we're And in our remarks, we've said we expect normalization after Q1.

Yes, that makes sense. Thanks so much for the caller there.

Thank you. Our next question is from the line of Max Gumpert with BNP Paribas. Please just use your questions.

Hey, thanks for the question. Hi, you're welcome.

Hey, thanks. On the call, you gave some helpful details on the puts and takes to consider with regard to the cadence of your EPS and FY23. If I have it right, it sounds like the first quarter will be pressured as a result of peak inflation, cost savings ramping up throughout the year, a continued impact from COVID-related disruptions in China, and a higher tax rate, among other impacts. Can you help give us a sense for how dramatically these factors could hold back your first quarter EPS?

Yeah, I mean, I think on top of that, the highest commodity cost increases the first quarter. You know, I think the first quarter is always our smallest quarter. If you think about the cadence of Max in our history, you know, the fourth quarter is where most sales and most profit comes through because of the holiday season, except for China, which is actually inverse. China's first quarter is their biggest quarter because of the Chinese New Year. So that's another factor that's going to put pressure on our first quarter this year because of the COVID issues. But I'd hesitate to say in round numbers what it's going to be, but it's going to be a difficult first quarter for all the factors. You named four or five of the factors right on our list. I added the China impact also to that. So as well as Fx is flat for the year max, but in the first quarter, it's about a 3% negative year on year. So that's another reason that the first quarter is going to be the most challenging, but for all the reasons you mentioned with the global operating effectiveness, the recoveries, and that will be strong the rest of the year.

Great. Thanks very much. I'll leave it there. Great. Thanks.

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

Hey, guys. Good morning. Thanks for taking the question. I'll keep it pretty quick. I guess just as I think about the operating income bridge, you know, the incentive comp piece of that, that's kind of an 800 basis point headwind as you rebuild that, you know, that function, you know, like how flexible is that or how discretionary is that? And the reason for the question is, let's say, you know, if something in the plan that you have for the year goes wrong outside of your factors, right, China take longer to reopen or, restocking takes longer in the U.S. Can you pull that piece of the puzzle back more as a means to still hit the operating income target? Or is that pretty much you're committed to spending that at this point?

Well, Peter, our incentive comp pays for growth. And we fell short of growth in 2022. And so that's reflected in very low incentive comp that we did take back and popped into the P&L. As we went through 2022 and 2023, it starts a new year. And so we are starting with the expectation that we're going to hit our goals. And of course, as we over or underachieve, we'll adjust incentive comp as we go through the year. It's very formulaic. in the majority of our incentive confidence based on McCormick profit, which is basically our operating profit, less a capital charge. We call it kind of light EDA model to make sure all of us are held accountable for capital improvement. So it's really focused a lot on operating profit and a bit on EPS, too. But it's very formulaic, and we pay for growth.

Great. Thanks very much, Chris.

Thanks.

Thank you.

At this time, we'll turn the floor back to Lawrence Hersey for closing remarks.

Great. 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 strategies actively respond to changing consumer behavior, and capitalize on opportunities from our relative strength. We continue to be well-positioned for continued success and remain committed to driving long-term value for our shareholders.

Thank you, Lawrence, and thank you to everybody for joining today's call. If you have any questions regarding the information, please feel free to contact me. This concludes the call for the day.