McCormick & Company, Incorporated

Good morning. This is Fafn Freja, VP of Investor Relations. Thank you for joining today's fourth quarter earnings call. To accompany this call, we posted a set of slides on our IR website, ir.mccormick.com. With me this morning are Brendan Foley, President and CEO, Mike Smith, Executive Vice President and CFO, and Casey Jenkins, Chief Growth Officer. During this call, we will refer to certain non-GAAP financial measures. The nature of those non-GAAP financial measures and the related reconciliations to the GAAP results are included in this morning's press release and slides. In our comments, certain percentages are rounded. Please refer to our presentation for complete information. Today's presentation contains projections and other forward-looking statements. Actual results could differ materially from those projected. The company undertakes no obligation to update or revise publicly any forward-looking statements. whether because of new information, future events, or other factors. Please refer to our forward-looking statements on slide two for more information. I will now turn the discussion over to Brendan.

Good morning, everyone, and thank you for joining us. Let me start by sharing what we will cover in this morning's call. I will begin with an overview of our fourth quarter year-over-year results focusing on top-line drivers. I will briefly reflect on our full year 2023 performance and share our plans and building blocks to improve volume in 2024. Mike will then go into more depth on the fourth quarter financial results and the details of our 2024 financial outlook. And finally, before your questions, I will share some closing comments, including our key priorities as I begin my first full year as CEO. Turning now to our results on slide four. I want to start by acknowledging that our top line results for the fourth quarter did not meet our expectations, as volume trends decelerated relative to the third quarter. There was greater than expected pressure on the consumer that drove changes in their behavior which impacted our growth. We did, however, see sequential improvement in several key areas within our portfolio, underscoring that our strategies and initiatives are working, as I will highlight in a moment. We do recognize that consumers are exhibiting even more value-seeking behavior. They are increasing shopping trips, reducing basket size, and making just-in-time purchases, creating further uncertainty in the consumer environment. I want to be clear that we are dedicated to improving volumes. We have refined our plans and are prioritizing our investments to drive impactful results and return to differentiated and sustainable volume-led growth. and you should expect improvement over the coming year and into 2025 and beyond. Now, let's review our fourth quarter performance in more detail. Turning to slide five, in our fourth quarter, sales increased 3%, including a 1% favorable impact from currency. In constant currency, sales grew 2%, reflecting a 5% contribution from pricing, which was partially offset by a 3% decline in volume and product mix. As expected, the benefit from the China recovery was fully offset by the impact of our strategic decisions to exit DSD, direct store delivery, of our bagged Hispanic spices in the Americas, and the exit of a private label product line and the divestiture of a small canning business, which was part of our Giotti Flavor Solutions operations, in the NBA, starting with where results differed from expectations. In America's consumer, we expected volume declines in the prepared food categories that we participate in, like frozen and Asian, but the decline was greater than we anticipated due to the more challenging macro trends and was broadly consistent with the performance of these categories. For mustard in the Americas, Extremely low price points for private label impacted our consumption and is driving down category dollars. We plan to improve our volume trends in 2024 by narrowing price gaps, increasing promotions, and importantly, through distribution wins. Recipe mixes in the Americas showed increased stress from crossing key price points due to previous pricing actions. We have a plan to address these to return to volume growth. in our flavors product category, some of our consumer packaged food group customers experience greater softness and volumes within their own business, more than we expected in both the Americas and EMEA. Finally, our growth of quick service restaurants and flavor solutions was impacted by slower than expected restaurant traffic in EMEA and Asia Pacific. Within Asia Pacific, some of our customers are experiencing boycotts in Southeast Asia related to geopolitical events. We are monitoring this situation and anticipate continued softness in these customers' volume to continue into 2024. Turning to what met our expectations in the quarter, we drove volume growth for a second quarter in a row in America's spices and seasonings. In branded food service, our growth was strong across the portfolio driven by volume. In Asia Pacific consumer, Our recovery from COVID-related disruptions in China was in line with the expectations we had at the beginning of the quarter. Outside of China, for the quarter, our volume growth was strong across all categories. An EMEA consumer, consistent with the third quarter, pricing actions contributed to double-digit growth, which pressured volumes. Now, I'd like to further build on some of the initiatives within our growth levers. notably increased brand marketing, targeted price gap management, new products, and packaging renovation, which have already proven to strengthen our volume trends in key areas. We have intentionally chosen our investments in these areas as we believe they will generate the most significant returns. We are confident our investments will continue to drive improved results in 2024, and we expect to invest more, positioning us further for success in 2025 and going forward. First, America's Spices and Seasonings is a priority investment area for us, given our category leadership and its profitable growth potential for both McCormick and our customers. Our initiatives are driving U.S.-branded sales volume growth, which strengthened during the fourth quarter in holiday performance. And looking at consumption, we continue to sequentially improve share trends again in the fourth quarter, both in terms of dollars and units. We continue to activate initiatives of price gap management, innovation, packaging, and a meaningful step up in brand marketing support for America's spices and seasonings. And the results have begun to materialize, demonstrating that we have the right plans and are taking the right actions to grow in this attractive category. The renovation of our U.S. core everyday urban spice portfolio, which began in the second quarter of 2023, continues to roll out according to plan. At the end of the fourth quarter, we had shipped about 75% of our renovated SKUs, and notably, products that have fully transitioned on shelf experienced stronger velocity. We are pleased with our results to date, which increase our confidence that this renovation will be a strong contribution to our growth in 2024 as our customer shelves continue to transition. We are making progress on restoring distribution that was lost due to past supply issues. We have secured wins and new distribution. We expect to largely start seeing the impact of our actions in our results mid-2024, coinciding with most of our customers' shelf resets. Overall, we have a robust set of initiatives in flight and anticipate making progress throughout the year. I would expect growth in share gains in units and volume to lead our trends. Spending a moment on spices and seasonings in other key markets, similar initiatives as in the US are driving volume growth and share gains in Canada, France, and Australia. We also renovated our spice and herb portfolio in Southeast Asia with the same innovative packaging as the US and EMEA and began shipping the new products in the fourth quarter. We are supporting this transition with increased marketing spend in the first quarter. Next, In branded food service, we achieve strong volume growth across all customer segments. Our food service operators continue to expand their value menu options, and they are turning to our products to deliver great taste for a fraction of their costs. We drove share gains in spices and seasonings, as well as our hot sauce share of tabletop, with expanded distribution, new products, customer wins, and increased menu penetration, as well as our expertise in heat. Cage continues to be a growth accelerator globally for Total McCormick, outpacing the rest of the portfolio as customers and consumers alike continue to drive demand in this flavor profile. New products contributed to fourth quarter growth. For instance, in the U.S., our Cholula Salsas in the Mexican aisle are building distribution and bringing new consumers to the category, and our branded food service items, Frank's Mild Wing Sauce and Frank's Nashville Hot continue to perform well. In the UK and Australia, we are driving hot sauce category growth with Cholula gaining momentum on shelf. In the US, we secured new hot sauce distribution during the quarter, and in the first quarter, we are launching new Frank's Red Hot Dips and popular flavors in a squeeze bottle format, as well as our national launch of Frank's Dill Pickle. We are well positioned going into our Super Bowl merchandising period. In summary, our investments in the key areas I just highlighted favorably impacted both our volume and margin performance for the quarter. Moving to gross margin, we are pleased with our performance, which continued to improve as the year progressed. Our results reflect effective price realization, the optimization of our cost structure, and favorable product mix driven by our portfolio optimization and focus in key areas. While confident in our ability to return to our historical margin profile, in the near term we will use improvements in our profitability to fuel continued investments in our business to drive our top line. We are in a strong position to benefit from the virtuous flywheel of margin expansion given the work that's been done throughout the business and we are able to intentionally focus our investments on areas that we expect will have the greatest impact on improving volume performance and driving sustainable profit growth. Reflecting on our full year 2023 performance, I am proud of the progress we made in advancing our business in the right direction, and our team is focused on returning to our long-term growth algorithm, strengthening our margins, significantly improving our cash flow, paying down our debt, and reducing our leverage ratio. all have put McCormick in a position of strength to further invest with a focus on growth. Our foundation is strong. We have proven and powerful brands, and the results we are seeing from our refined and strengthened plans provide confidence in the effectiveness of our strategies and investments. Our initiatives will take time to materialize, and we expect volume trends to improve throughout the year and volume growth during the second half. notwithstanding any new macroeconomic headwinds. The pace of margin recovery to historical levels will take time as our focus is on investing to drive sustainable sales growth to generate quality earnings for years to come. I also want to highlight on share performance that we are approaching our plans differently with an even greater competitive posture and more intentionality towards driving growth in our key categories. Now let me highlight some ways in which we will drive growth through category management, brand marketing, new products, our proprietary technologies, and our differentiated customer engagement. Starting in our consumer segment with category management, where a key capability is revenue management, we have been building our discipline in revenue management for several years and have a history of optimizing pricing on shelf to benefit both McCormick and the retailer. As you would expect, this has become even more important in recent years. In the current environment, we are taking a surgical approach to managing our price gaps to private label and branded competitors, accelerating our efforts across various products and are seeing results. In our spices and seasonings category, we selected individual items we believe would be the most responsive based on the elasticities we were experiencing. For instance, In our iconic black pepper and vanilla product lines, our actions proved to be effective. We are recapturing buyers, increasing household penetration, and are driving profitable volume growth that is outpacing the category volume growth in these product lines. As I mentioned earlier, we crossed key price points in America's recipe mixes and are also leaning into our revenue management execution in this category. For example, in the fourth quarter, we focused on gravy as a key holiday item. Which drove results, contributing to our successful holiday season? We expect to see further results from our actions as we work through the portfolio. Across all markets, our diverse portfolio allows us flexibility to optimize our pricing effectiveness. We look at both our everyday price and our promotional returns, as well as use innovation, including price pack architecture, to drive growth. These investments we make in price gap management result in greater volumes and improved margins over time. Importantly, customers that are adopting our recommendations are seeing better category performance and McCormick is driving volume and share growth in their respective businesses. We are prioritizing brand marketing, connecting with consumers and fueling growth with our increased investments. We have a history of investing behind our brands and did so again in 2023. We plan for a strong start to 2024 with aggressive first quarter brand marketing investments, which are well underway. We expect a significant increase for the year, concentrated to the first half. We will continue to invest across various channels. We plan to further drive household penetration and increase buy rates with additional focus in retail media. Our first quarter plans included increased Christmas holiday campaigns in all regions. increasing our value-focused messaging for our everyday spices and seasonings and recipe mix in the U.S. Also, supporting our packaging renovations that I mentioned earlier in both the U.S. and Southeast Asia, and promoting our new products in EMEA. Turning to new products, which are a key growth driver in both our consumer and flavor solution segments. In the consumer segment, our 2023 launches are expected to substantially contribute to growth in 2024. For instance, in EMEA, we are thrilled with the early results from our range of Schwartz seasonings and recipe mixes that we launched with Nadia Hussein, a British celebrity chef, as we entered the fourth quarter. We are expanding our household penetration and bringing in new and younger households into the brand. The recipe mixes in this range contributed along with other new products and expanded distribution to our fourth quarter growth and UK recipe mixes, which was double the category rate. In Flavor Solutions, collaborating with our customers on innovation continues to be a key driver of success. Across the portfolio, our customers continue to focus on innovation to meet consumers' needs. We are winning in flavors with better-for-you products and on-trend flavors, and and branded food service with our heat platform and value-oriented products for food service operators. We are pleased with our 2023 performance from new products, which contributed to our sales growth and accelerated compared to the prior year, as we expected. Importantly, we have a strong lineup of new products spanning heat, freshness, value, convenience, and flavor exploration in our consumer segment for 2024, which we will share more about at CAGNI in February. And in flavor solutions, we are also carrying a robust pipeline of new products into 2024, positioning McCormick and our customers for success. We are leveraging our proprietary technologies and flavor solutions to support our innovation, to win share in attractive high-growth categories, and to attract new customers. In addition, with our differentiated customer engagement approach, we are intentionally targeting a mid-market customer base, who are category leaders and high-growth innovators, as well as diversifying our customer base to drive share gains across our portfolio and profitable growth. Our actions are yielding results. For instance, in the fourth quarter, our volume growth and performance nutrition significantly outpaced the market. And in the beverage category, we drove sales growth, even though the category decelerated, partially by targeting high-value and high-growth segments within beverage. With our flavor leadership and continued investments, we are fully committed to vigorously fuel category growth with our differentiated portfolio. We have confidence in our plans, which will build throughout the year and yield volume growth during the back half of the year. We are dedicating more resources to categories where we have the right to continue to win. We are seeing our actions drive momentum and solid results in areas where we have focused We believe that the execution of our growth plans will be a win for consumers, our categories, and McCormick, which will differentiate and strengthen our leadership. Now, before I turn it over to Mike to provide more details on our fourth quarter financial performance and 2024 outlook, I would like to comment on recent changes in our board of directors. Freeman Hrabowski, who has served as a director for 27 years, will be retiring from the board as of the end of March. I am grateful for his service and contributions, which has significantly benefited McCormick, and we will miss him. I also want to welcome Terry Thomas, who has joined our board. Terry brings extensive global consumer product industry expertise through his current role as Chief Growth Officer for Flowers Foods and his experience at Unilever prior to that. I look forward to working with Terry and the contributions he will make to McCormick.

Thanks, Brendan, and good morning, everyone. Starting on slide 10, our top-line constant currency sales grew 2% compared to the fourth quarter of last year, reflecting 5% of pricing benefit offset by a 3% volume mix decline. As Brendan mentioned, our volume performance was impacted by changes in consumers' behavior. In our consumer segment, constant currency sales were flat, reflecting a 4% increase from pricing actions, offset by a 4% volume decline. The benefit from our recovery in China and Hispanic product DSD exit to optimize margins led to no overall impact for the total consumer segment. On slide 11, consumer sales in the Americas decreased 4% in constant currency, with the DSD exit I just mentioned driving 2% of that decline. The remaining sales decline was due to lower volume of product mix in several areas of the portfolio. including, as Brendan mentioned, prepared foods, mustard, and recipe mixes, which was partially offset by volume growth in spices and seasonings, which was driven by our investments. In EMEA, constant currency consumer sales increased 9%, with a 13% increase from pricing actions, partially offset by a 4% volume decline. Sales growth was broad-based across markets and categories. We remain in an elevated pricing environment in EMEA. and we expect volumes to improve as pricing wanes in 2024. Constant currency consumer sales in the APAC region increased 31%, driven by a 26% volume increase, primarily due to the expected recovery in China. Outside of China, we also drove double-digit sales growth with strong volume and broad-based growth across all categories and markets. Turning to our flavor solution segment in slide 14, we grew fourth quarter constant currency sales 5%, reflecting a 7% increase from pricing, offset by a 2% decrease from volume and product mix. Our growth momentum in this segment was exceptional through the third quarter. And even with a deceleration in the fourth quarter, our sales growth for the year was strong. In the Americas, Flavor Solutions constant currency sales rose 6%, driven by pricing, as volume and product mix was comparable to the prior year. Sales growth was broad-based across the portfolio and led by branded food service. In EMEA, constant currency sales increased 2%, with pricing actions contributing 14%, partially offset by a 3% impact from the divestiture of the Giotti canning business, a 9% decline in all other volume due to softness in some of our customers' volumes within their own businesses, and a 1% impact from exiting a private label product line. In the APAC region, Flavor solution sales grew 5% in constant currency with a 6% contribution from pricing, all set by a 1% volume decline. Our business in China delivered strong growth. Outside of China, sales were negatively impacted by geopolitical boycotts in some of our quick-service restaurant customers, as Brendan mentioned. As seen on slide 18, gross profit margin expanded 320 basis points in the fourth quarter versus the year-ago period. Drivers in the quarter included favorable product mix in both segments and our CCI and GOE programs, as well as effective price realization. Additionally, we lapped elevated costs related to some discrete issues in flavor solutions operations. Overall, we ended 2023 meeting the cost recovery plans we set as we entered the year. We are pleased with our gross margin expansion for the quarter and the year. Now moving to slide 19, selling general and administrative expenses, or SG&A, increased relative to the fourth quarter of last year as higher employee incentive compensation expenses were partially offset by CCI and GOE cost savings. Brand marketing also increased compared to the fourth quarter of last year, and we expect to invest further in 2024 to support our brands. As a percentage of net sales, SG&A increased 190 basis points. Sales growth and gross margin expansion, partially offset by higher SG&A cost, resulted in a constant currency increase in adjusted operating income of 11% compared to the fourth quarter of 2022. In constant currency, adjusted operating income in the consumer segment was flat. And in flavor solutions, adjusted operating income increased 73% in constant currency. We remain committed to restoring flavor solutions profitability And in the fourth quarter, as expected, we drove significant margin expansion versus prior year in this segment. For the total company, we expanded our adjusted operating margin by 130 basis points in the fourth quarter and 100 basis points for the year, which reflects our commitment to increase our profit realization and positions us well to make investments early in 2024 to fuel top-line growth. Turning to interest expense and income taxes on slide 20, Our interest expense increased significantly over the fourth quarter of 2022, driven by the higher interest rate environment. And quickly touching on tax, our fourth quarter adjusted effective tax rate was 22.3%, compared to 23.1% in the year-ago period. Both periods were favorably impacted by discrete tax items, with a more significant impact this year. Our income from unconsolidated operations in the fourth quarter reflects strong performance in our largest joint venture, McCormick de Mexico. We are the market leader with our McCormick-branded mayonnaise, marmalades, and mustard product lines in Mexico, and the business contributes meaningfully to our net income and operating cash flow results. At the bottom line, as shown on slide 22, fourth quarter 2023 adjusted earnings per share was 85 cents, as compared to 73 cents for the year-ago period. The increase was attributable to higher operating income driven by gross margin expansion and the results from our McCormick New Mexico joint venture I just mentioned. On slide 23, we've summarized highlights for cash flow and the year-end balance sheet. Our cash flow from operations was strong in 2023, $1.2 billion, nearly double our cash flow of $652 million in 2022. The increase was primarily driven by higher operating income and working capital improvements, including lower inventory. We returned $419 million of cash to our shareholders through dividends and used $264 million for capital expenditures in 2023. Our capital expenditures include projects to increase capacity and capabilities to meet growing demand, advance our digital transformation, and optimize our cost structure. Our priority remains 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. We expect 2024 to be another year of strong cash flow, driven by profit and working capital initiatives. We are well positioned to continue paying down debt, and coupled with ending 2023 with a leverage ratio slightly above our 2024 year-end target of three times, we are pleased to be deleveraging faster than expected. Now turning to our 2024 financial outlook on slide 24. Our 2024 outlook reflects our prioritized investments in key categories to strengthen volume trends and drive long-term sustainable growth, while appreciating the uncertainty of the consumer environment. We are well positioned with our cost savings programs, to fuel investments for volume growth, as well as generate operating margin expansion. The balancing of margin expansion and investments to drive growth is critical to our success, not only in 2024, but also into 2025 and beyond, as we remain committed and confident in our long-term algorithm. Turning to the details. First, currency rates are expected to unfavorably impact sales, adjusted operating income, and adjusted earnings per share by approximately 1%. On the top line, we expect constant currency net sales to range between a decline of 1% to growth of 1%. We expect a favorable impact related to the wrap of last year's pricing actions, most significantly in the first half, partially offset by our price cap management investments that will drive volume growth. We expect several factors to impact our volume and product mix over the course of the year. First, we expect to drive improved volume trends as the year progresses through the strength of our brands and the intentional and targeted investments we are making. Our initiatives will take time to materialize, and we are expecting to return to volume growth during the second half of the year, notwithstanding any new macroeconomic headwinds. We have made strategic decisions to optimize our portfolio for profitable growth that will also impact volumes during the year. We decided to exit DSD of our bagged Hispanic spices in America's consumer and to exit a private label product line in EMEA Flavor Solutions. Both will impact the first quarter. And we divested the Giotti canning business, which will impact us through the third quarter. We expect to continue to prune lower margin business through the year as we optimize our portfolio, the impact of which will be reflected within the natural fluctuation of sales. And finally, in China, Our food away from home business, which is included in APAC consumer, is expected to be impacted by slower demand in the first half of the year. And as such, we expect China consumer sales to be comparable to 2023 for the full year. While we recognize there has been volatility in demand in China, we continue to believe in the long-term growth trajectory of our China business. Moving to gross margin. Our 2024 gross margin is projected to range between 50 to 100 basis points higher than 2023. This gross margin expansion reflects favorable impacts from pricing, product mix, and the cost savings from our CCI and GOE programs, partially offset by the anticipated impact of a low single-digit increase in cost inflation and our increased investments. Additionally, we expect to begin reducing our dual running costs related to our transition to the new flavor solutions facility in the UK in the back half of the year. Moving to adjusted operating income, we expect 4% to 6% constant currency growth. This growth is projected to be driven by our gross margin expansion as well as SG&A cost savings from CCI and GOE programs, partially offset by our investments to drive volume growth, including brand marketing. We expect our brand marketing spend to increase high single digits in 2024, reflecting a double-digit increase in investments, partially offset by CCI savings. And we expect our increased investments in brand marketing to be concentrated in the first half of the year and weighted more to the first quarter. Overall, based on the flow-through of our volume expectations and the timing of our investments, we expect our profits to be less robust in the first half and anticipate strong profit growth in the second half of the year. Our 2023 adjusted effective income tax rate projection of approximately 22% is based upon our estimated mix of earnings by geography, as well as factoring in discrete items. We expect our rate to be higher in the first half of the year compared to the second half of the year. We expect a mid-teens increase in our income from unconsolidated operations, reflecting the strong performance we anticipate in McCormick, New Mexico. To summarize, our 2024 adjusted earnings per share projection of $2.80 to $2.85 reflects a 4% to 6% increase compared to 2023, or 5% to 7% in constant currency. As Brendan noted, we are dedicated to improving volumes. We are prioritizing our investments to drive impactful results and return to differentiated and sustainable volume-led growth. We remain confident in the underlying fundamentals of our business and delivering on the profitable growth reflected in our 2024 financial outlook.