McCormick & Company, Incorporated

Good morning. This is Fatin Freyhan, VP of Investor Relations. Thank you for joining today's second quarter earnings call. To accompany this call, we've 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 Marcos Gabriel, Senior Vice President, Global Finance and Capital Markets. 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 statement on slide two for more information. I will now turn the discussion over to Brendan.

Good morning, everyone, and thank you for joining us. We are pleased with our second quarter performance, particularly as we continue to navigate a changing and complex consumer landscape. Our differentiated results demonstrate the success of our prioritized investments to accelerate volume trends and further capitalize on the underlying growth of our categories. McCormick remains a growth company. And 2024 continues to be an important investment year, as planned, as we have activated many of our initiatives and we are starting to see results that support our confidence in delivering on our long-term objectives. This morning, I will begin my remarks with an overview of our second quarter results, focusing on the top-line drivers. Next, I will provide perspective on industry trends, highlight some areas of success, as well as areas we continue to work on, and review our growth plans with a focus on innovation. Mike will then go into more depth on the second quarter financial results and review our 2024 outlook. And finally, before your questions, I will have some closing comments. Turning now to our results on slide four. In the second quarter, sales declined by 1% in constant currency, reflecting flat pricing, and a 1% decline in volume and product mix. Volume growth in our consumer segment was offset by declines in flavor solutions related to softness in some of our quick serve restaurant, or QSR, and packaged food customers' volumes, as well as the timing of customer activities as expected. Although certain parts of our flavor solutions business are pressured, given our collaboration and strong innovation pipeline with our customers, we expect volume trends to improve during the second half of the year. In our consumer segment, volumes improved substantially from the first quarter across our major markets and delivered volume growth. In the Americas, we delivered solid sequential volume improvement for three consecutive quarters, and our pricing in the second quarter reflects the activation of our price gap management plans to support improved volumes in the second half as planned. We drove positive volume growth across our major markets and core categories for the second consecutive quarter. We expanded distribution in the grocery, discounter, and e-commerce channels and realized benefits from new product innovation. In Asia Pacific, outside of China, we delivered strong volume-led sales growth as we executed the rollout of our new consumer preferred packaging for our core spices and seasonings portfolio and realized distribution gains. This performance was tempered by China, as expected, although sequentially volume trends improved in China. Results in our consumer business reflect continued focus on increased brand marketing investments, accelerating innovation in alignment with consumer trends, and expanding distribution. Let me now share our current view on the state of the consumer. Consumers continue to exhibit value-seeking behavior. Financial anxiety remains elevated, particularly in the United States. and especially with mid to low income households due to the compounding impact of inflation. In addition, inflation in the food service channel is leading to softness in food away from home consumption and impacting restaurant traffic, particularly with QSRs across many of our regions. Volumes on the retail side, particularly in the center of store, remain soft. Consumers continue to buy just for what they need and make more frequent trips to the store. On the other hand, they are increasingly shopping the perimeter and continuing to cook at home. Certain categories, such as spices and seasonings, as well as condiments and sauces, are seeing a benefit amid these trends. As consumers are looking to stretch their budgets, our categories represent a fraction of the cost relative to proteins, produce, and carbs, and drive the majority of the flavor. In fact, in the second quarter, spices and seasonings was the top category in center store growth across measured channels. and McCormick is the leading branded player and driving category unit growth. What continues to differentiate McCormick is that we operate in great categories across all channels. We offer products at every price point from premium to lower price points. We have a broad and diversified portfolio to meet evolving consumer demands. We are part of the solution for consumers. Importantly, We believe that we have the right plans in place that are continually informed by what matters most to our consumers and customers. Moving to slide five, let me highlight for the quarter some of the key areas of our success. For our global consumer segment, including the Americas, our core categories delivered solid volume growth. In spices and seasonings, we delivered volume growth across all of our major markets. In the U.S., our share performance improved, resulting in positive gains in unit share for the quarter. In addition, we drove dollar share gains in France and Eastern Europe. In recipe mixes, we continued to strengthen consumption trends in the Americas, particularly in our Mexican product lines, through our price gap management investments as well as distribution growth. In addition, in EMEA, recipe mixes were a significant driver of U.K. volume growth and we realized dollar market share gains for two consecutive quarters. In mustard, we are driving improved unit consumption and unit market share trends across our regions. In the Americas, we expanded distribution and actioned our pricing investments. In addition, innovation is yielding results. Our creamy dill pickle mustard performance is exceeding our expectations. In Poland, mustard consumption continues to grow, and we are realizing dollar market share gains, which strengthened from the first quarter. In flavor solutions, we had pockets of strength this quarter. In our America's branded food service business, despite softness in the overall market, we grew volumes. In our America's flavors business, our performance with high-growth innovator customers remained strong. We grew in non-alcoholic beverages and saw continued strength in performance nutrition. In Asia Pacific, including China, we drove strong volume growth as we benefited from new customer products and promotions. Let me now touch on some areas where we are seeing some pressure. We continue to experience volume declines in the prepared food categories that we participate in, like frozen and Asian, and America's consumer. Importantly, these items represent a small part of our portfolio, and the volume growth in our core categories is beginning to fully offset these declines. In hot sauce, we have underlying strength in our base business and strong consumer loyalty, and we continue to invest in our market-leading brands. In the Americas, consumption and share trends improved in the second quarter, on top of our first quarter improvement. A couple of short-term items continue to impact our share. First, it is a peer that is lapping their own supply chain disruptions, and second, new price pack architecture in the form of trial sizes, which have been incremental to the category. As we realize the benefit of our increased innovation, including Frank's new dipping sauces and squeeze bottles, as well as many trial sizes, A&P investments, and distribution expansion, we expect to drive improved hot sauce consumption trends in the second half of 2024. In flavor solutions, our volumes were impacted by slower QSR traffic in both EMEA and the Americas. We expect to improve these volume trends as we continue to execute on our growth plans in the second half of the year. Some of our consumer packaged food customers experience additional softness and volumes within their own business in both the Americas and EMEA. We are collaborating with our customers to support their innovation plans, and we are continuing to diversify our customer base over time. Before moving to our growth plans, I'd like to note that our total U.S. branded portfolio consumption, as indicated by CERCANA data and combined with unmeasured channels, outpaced our sales growth this quarter. as our brand investments drove improved consumption and we are lapping the increased shipments that came in ahead of the 2023 pricing actions of the prior year. This is a function of timing from quarter to quarter. Let's now move to our growth plans on slide six, which are supporting our second quarter performance and will continue to drive our success in 2024 and into 2025. Our base business is strengthening across major markets and core categories. And we have a number of initiatives in flight that will continue to drive this performance and differentiation. And I look forward to sharing more details on these plans at our upcoming Investor Day in October. Brand marketing, new products, and packaging innovation, category management, proprietary technologies, and customer engagement continue to be the levers that drive our growth. For today, I'd like to take the opportunity to highlight one of these levers, innovation. on slide seven and eight. First, it's important to recognize that we are one of the few, if not the only company that operates in end-to-end flavor with both our consumer and flavor solution segments. We are in a unique position with our portfolios breadth and reach. Our shared insights give us a strong understanding of consumers' flavor needs, preferences, and trends. And we have the ability to translate this into innovation, making McCormick a global leader in flavor trends and flavor innovation. Innovation is a priority for us. It drives one third of our longterm algorithm. It meaningfully contributed to our results for the first half of 2024 and we expect it to drive strong performance in the second half. As a management team, we discussed the latest trends and insights and how those might translate into innovation in both segments. We are continuously leading the pursuit of what's next in flavor in our company, Everyone is engaged in innovation. In the first half of the year, our results benefited from new products and packaging, and the performance of these launches continues to improve. Importantly, our pipeline for the remainder of the year remains robust. In our consumer segment, our renovated U.S. Everyday Urban Spice portfolio is fully shipped, and roughly two-thirds of our new packaging is currently on shelf, driving double-digit velocity gains and contributing to our strong volume improvement and spices and seasonings. New products within our spices and seasonings portfolio, including Lowry's new seasoning blends, flavor maker blends, and our exciting grilling portfolio of Stubbs rubs and new grill-made seasonings blends in partnership with Max the Meat Guy, fuels first half results and are expected to accelerate our performance in the second half. In fact, in 2024, we are launching nearly four times more grilling rubs and seasonings compared to 2023. Importantly, our grilling season, which kicked off at the end of the second quarter, is off to a great start. In addition to our grilling blends and rubs, we are excited about early results from Frank's Red Hot dip and sauces and popular flavors in a squeeze bottle format that we launched this year. We are energized for the grilling season and expect our Flamin' Flavor marketing campaign that launched in the second quarter to drive incremental consumer demand. Our Cholula salsas and recipe mixes that launched in 2023 are driving new buyers to the category and continue to exceed our expectations since launch. Cholula salsas are driving strong incremental category growth with their high repeat buy rates, and our Cholula recipe mixes are a top recipe mix brand after just one year in the market. They are driving the second highest unit growth within the category. We continue to build U.S. distribution, and we are launching both formats in Canada this year. In EMBA, growth from new product sales is accelerating, and we expect it to drive significant growth in the second half of the year. In the UK, across recipe mixes and seasonings, our Schwartz range with Nadia Hussein, restaurant-branded partnerships, and a range of classic American recipe mixes with Frank's, Old Bay, and French's are driving our innovation performance and expanding household penetration with younger consumers. In France, we are collaborating with Juan Abelais, a celebrity Colombian French chef, to drive engagement with younger households. And recently, we partnered with him to launch a range of unique and delicious Ducro barbecue seasonings in time for the summer barbecue season. Moving now to our flavor solution segment. We continue to leverage our proprietary technologies to support our innovation in flavors. to win new customers, diversify our customer base, and drive share gains across our portfolio. Our momentum with our high-growth innovator and consumer products customers continues to be strong and fuel our new product pipeline. As we look to our innovation pipeline that we support for our customers, we expect a pickup in the back half of the year. We are collaborating with many customers to heat up their products, from snacking to beverages to performance nutrition. Our win rate with heat briefs are strong across our regions, and we continue to dedicate resources to where we have the right to win. In branded food service, our 2023 launches, including Frank's Mild Wing Sauce and Frank's Nashville Hot, are delivering strong results in the first half of the year. Our early 2024 launches are also contributing to our growth and include a number of heat products, like Grillmates Fiery Habanero and Cholula Chili Lime. Looking ahead to the second half, we expect new products to meaningfully drive our top line, and importantly, we have a strong innovation agenda, including launching Frank's Garlic Buffalo and Mango Habanero in the Americas, as well as Frank's Red Hot Mayo in the UK and France, and we are further extending McCormick Mayonesa, which has had great performance in our consumer segment, into the food service channels. Overall, we are very excited about our innovation plans for 2024. We expect new product performance to be in line with our long-term objectives and to drive a meaningful portion of our volume growth. In addition, in the second half of the year, sales from new products are expected to nearly double compared to the first half, and a meaningful portion of this innovation is in heat. Heat-infused products span our portfolio. Across both segments, we expect heat to continue to be a long-term growth accelerator globally for Total McCormick. We are uniquely positioned to win in heat with our global iconic brands, deep consumer insights, and our meaningful scale, technology, and expertise that we have been building for decades. As we look ahead, we are maintaining our outlook for 2024. Mike will share more of the details. At a high level, we continue to expect our top line to be at the mid to high end of our guidance range, given the momentum we saw in the first half of the year, particularly in our consumer segment. We are confident in our initiatives, and we have provided proof points of where they are working. That said, we also remain prudent and continue to reflect the uncertainty in the consumer environment in our outlook for 2024. To wrap up, let me reiterate three key points. The long-term trends that fuel our categories, consumer interest in healthy, flavorful cooking, flavor exploration, and trusted brands continues to be very strong. And importantly, consumer interest in cooking remains strong. We remain dedicated to accelerating our volume trends. We refine and adapt our plans as needed and are prioritizing investments to drive impactful results and return to sustainable volume-led growth. And you should continue to expect improvement over the coming year and into 2025 and beyond. We believe the execution of our growth plans will be a win for consumers, customers, our categories, and McCormick, which will continue to differentiate and strengthen our leadership. Now, before Mike's remarks, I'd like to speak to the management transition. As you likely know, last night we announced Mike's decision to retire at the end of February. Mike has been an exceptional leader at McCormick for more than three decades. His strategic leadership and focus on value creation have been instrumental in driving top-tier organic growth as well as our successful acquisition agenda. His deep knowledge of McCormick and effective execution of our CCI initiatives help fuel our growth investments to deliver profitable growth. Mike is the embodiment of McCormick values and teamwork. He helped build a world-class global finance team. He will be missed by me and employees throughout the organization. Mike, congratulations on your successful career and your upcoming retirement. In the same announcement, Marcos Gabriel was named Executive Vice President and CFO effective December 1st. Marcos will serve on our management committee and lead the company's finance organization and global business services team. Marcos is a proven global leader with over 25 years of experience in the consumer products industry. His expertise across major multinational companies in several geographies will be instrumental as we continue to execute our growth plans. I have worked with Marcos over the last seven years. He has served in key senior leadership roles at McCormick, contributing meaningfully to our profitable growth and improved productivity. Marcos, congratulations on this promotion, and I look forward to working with you in this new role.

Thank you, Brandon. I'm honored to serve as the CFO of McCormick. and excited to continue to partner with the entire team to deliver long-term profitable growth and drive shareholder value. It has been great to work closely with Mike and the management committee for the past year to transition into this new role. Mike, I want to thank you for your mentorship and offer my congratulations on your retirement.