McCormick & Company, Incorporated

Good morning. This is Facin Freja, VP of Investor Relations. Thank you for joining today's third 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 and incoming CFO. During this call, we will refer to certain non-GAAP financial measures, The nature of those non-GAAP financial measures and the related reconciliations to the GAAP results are included in this morning's press release and slides. In our comments, certain percentages are rounded. Please refer to our presentation for complete information. Today's presentation contains projections and other forward-looking statements. Actual results could differ materially from those projected. The company undertakes no obligation to update or revise publicly any forward-looking 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. Before we begin reviewing our financial results, I would like to address Hurricane Helene. Our thoughts go out to all those impacted by this devastating storm. We continue to monitor the situation closely. Now moving to our results. Our third quarter performance is aligned with our expectations, especially as we continue to navigate an evolving and complex consumer landscape. Our results demonstrate the success of our prioritized investments in the areas that we believe will drive the most value and improve unit share trends, drive volume growth, and capitalize on our advantage categories. As we have said, McCormick remains a growth company, and our investments in 2024 are yielding results that support our confidence in delivering on our top-tier long-term objectives. We are excited to share our strategic roadmap and building blocks that support these long-term objectives at our upcoming investor day. This morning, I will begin my remarks with an overview of our third quarter results, focusing on the top-line drivers. Next, I will provide perspective on consumer trends, highlight some areas of success, and the areas that we continue to work on. Mike will then go into more depth on the third quarter financial results, and Marcos will 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 third quarter, sales were flat in constant currency, reflecting flat pricing, 1% volume in product mix, as well as the impact of our canning divestiture. This quarter, we reached a meaningful milestone by delivering total positive volume growth, despite the challenging environment. Our volume trends improved sequentially across both consumer and flavor solutions. Our results today, coupled with our proven growth plans, fuel our continued confidence in our ability to deliver on the mid to high end of our constant currency sales growth guidance. In our consumer segment in the Americas, we delivered solid sequential volume improvement for the third consecutive quarter. leading to 1% volume growth. Volume growth reflects our continued focus on accelerating innovation in alignment with consumer trends and expanding distribution. Our pricing reflects the continuation of our price gap management plans to support improved volumes as planned. In EMBA, we continue to drive positive volume growth across our major markets and core categories for the third consecutive quarter. We realized benefits from new product innovation and expanded distribution. In Asia Pacific, outside of China, we delivered strong volume-led sales growth as we continued to benefit from the rollout of our new consumer preferred packaging for our core spices and seasonings portfolio, as well as distribution gains. This performance was tempered by China, slightly more than we had originally expected. As we look ahead to the fourth quarter, we expect the environment in China to remain challenged, and this is reflected within our guidance. Marcos will provide more color on this when he covers our outlook for the remainder of the year. Moving to flavor solutions, we delivered strong sequential volume improvement, primarily driven by growth in the Americas. In ENDA, our volume trends were impacted by softness in our QSR customers' volumes, and In Asia Pacific, our results were impacted by the timing of customer promotions. From a profitability perspective, we delivered strong results relative to the prior year, as the third quarter benefited primarily from the timing of investments, which are shifting to the fourth quarter. As we look at the second half of the year, operating income results remain largely in line with our expectations, and earnings per share results are slightly ahead due to a discrete tax item benefit. Let me now share our view on the state of the consumer, which has remained similar since we reported our second quarter results. Overall, consumers are resilient but remain challenged. They are exhibiting value-seeking behavior, making more frequent trips to the grocery store with smaller baskets, and shopping just for what they need. They are also focused on reducing waste and stretching their budgets. Food service traffic remains soft across most restaurant types, particularly in QSRs. These trends are starting to benefit growth in food at home and this shift is driven by older generations as well as lower income households. Consumers overall continue to cook at home and they are increasingly shopping the perimeter for protein and produce. This further reinforces their demand for flavor and McCormick's categories included spices and seasonings as well as condiments and sauces. is not something consumers are willing to sacrifice. Spices and extracts remain the number one center store growth category. From a value perspective, we are seeing several trends. Demand for larger sizes remains elevated. At the same time, there is increased demand for small or trial sizes, as well as one-time use recipe mixes, highlighting that flavor exploration remains important to consumers And our plans need to match that demand with the right product offering. Gen Z, our new and future customers, are also cooking at home. They're interested in seasoning blends that make cooking easier and convenient. Interestingly, they are leaning into higher quality and premium flavor items. We're seeing velocity take up on our gourmet line and it's coming from Gen Z as they seek to recreate restaurant quality meals. As you step back and reflect on all these trends, it reinforces the importance of our consumer-centric mindset, which is present across our entire business. It's at the heart of everything that we do at McCormick. We are strengthening our broad portfolio to meet evolving consumer demands and delighting them with innovation. And we believe 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. In our global consumer segment, we drove solid unit consumption growth in spices and seasoning across our key markets in the Americas, EMEA, and Asia Pacific. In the U.S., we continue to improve on our competitiveness relative to private label as our volume consumption outpaced private label for spices and seasonings this quarter. This quarter, Our grilling portfolio outpaced category growth on unit sales, displays, velocity, and distribution. And in the fourth quarter, we are excited to begin the rollout of our new consumer-preferred packaging for grill mix ahead of next year's grilling season. In recipe mixes, we continue to strengthen consumption trends in the Americas, driving both unit and volume share and outpacing private label in the U.S. Our Cholula line continues to be a significant driver of growth we are innovating with Cholula recipe mixes, bringing new consumers to the category, particularly with millennials and younger families. In EMBA, recipe mixes were a significant driver of UK volume growth, and we realized dollar market share gains for two consecutive quarters. In mustard, we had a strong quarter, as we drove both unit and volume share in the Americas. In addition, our unit and volume growth outpaced private label in the US. In Poland, mustard consumption continues to grow, and we are realizing unit and dollar market share gains. We made great progress over the last two quarters and are pleased to see that our plans are driving the expected improvement. In America's consumer, the declines we previously experienced in the prepared food categories that we participated in, like frozen and Asian, which represent a small part of our portfolio, have now stabilized and we are seeing improved growth. We continue to make progress on total distribution points. We expanded TDPs and gained TDP share in spices and seasonings, recipe mixes, and mustard in the Americas. Finally, in the Americas and EMEA, we drove double-digit consumption growth in e-commerce, outpacing the market. E-commerce was a significant driver of our unit consumption growth for the quarter, as consumers continue to seek convenience. In flavor solutions, we saw strength in both of our technically insulated high-margin product categories, branded food service and flavors. In America's branded food service business, despite softness in the overall food service market, we grew volumes and expanded points of distribution across spices and seasonings and condiments. In addition, we are winning hot sauce tabletop share behind new distribution, packaging, and promotion. In flavors, our consumer packaged food customers are seeing some improvement in volumes within their own business in both the Americas and EMEA. In the Americas, our performance with high-growth innovator customers remains strong. We delivered solid growth in performance nutrition beverages as well as alcoholic and non-alcoholic beverages, outpacing category growth. Let me now touch on some areas where we are seeing some pressure. In hot sauce, We continue to have underlying strength in our base business and strong consumer loyalty. Our share trends remain impacted by a peer that is lapping their own supply chain disruptions. In the Americas, our unit share trends improved sequentially. However, volumes are impacted by many trial sizes. We are pleased so far with the performance of Frank's minis. Minis are incremental to the category and are driving trial of our new flavors. We expect our innovation expanded distribution, and brand marketing to help improve our trends as we exit 2024. In flavor solutions, our volumes were impacted by slower QSR traffic, particularly in EMEA. We have seen this pressure impact our results for several quarters. It's difficult to predict QSR traffic. However, we are collaborating with our customers as they focus on improving their volumes through innovation and value aligned with consumer trends. In Asia Pacific, Volume was soft as it was impacted by slower QSR traffic outside of China, most notably in Australia and Southeast Asia, where some of our customers remain impacted by geopolitical boycotts. Looking ahead to the fourth quarter, we are excited about the holiday season. With our promotion and innovation plans, we are well positioned entering this season. We are increasing our merchandising levels, supporting our portfolio with holiday brand marketing campaigns, and are expecting a strong holiday season. Before I wrap up, let me reiterate our growth plans on slide 6, which support our performance year-to-date and will continue to drive our success in 2024 and into 2025. Our base business is strengthening across major markets and core categories. We have several initiatives in-flight that will continue to drive this performance and differentiation. I look forward to sharing more details on these plans at our upcoming Investor Day. To wrap up, let me share three key points. The long-term trends that fuel our categories, consumer interest in healthy, flavorful cooking, flavor exploration, and trusted brands, continue to be strong. And importantly, consumer interest in cooking remains strong. We are dedicated to accelerating our volume trends. We refine and adapt our plans as needed and are prioritizing our investments to drive impactful results and return to sustainable volume-led growth. You should continue to expect improvement as we close the 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, over to Mike. Thank you, Brandon, and good morning, everyone. Today's earnings call is bittersweet for me, as it marks my last one as CFO of this incredible company before I retire. Reflecting on my tenure of more than three decades, I am filled with immense pride and gratitude for our entire team and appreciate all of their contributions and efforts over the years. Lastly, I would like to thank all of you, our sell-side analysts and investors, for your time and engagement over the years. Your thoughtful questions and insights have been invaluable to me and they reflect your commitment to understanding our business and long-term strategy. Now let's move to our results for the third quarter. Starting on slide eight, our top-line sales were comparable to the third quarter of last year, including the impact of the canning divestiture, and reflect 1% volume growth, partially offset by pricing. In our consumer segment, sales were comparable with the prior year, as the 1% impact of pricing investments was offset by 1% volume growth, reflecting solid sequential improvement from the second quarter. On slide nine, consumer sales in the Americas were comparable with the prior year. This reflects 1% volume growth offset by pricing investments, and this volume growth was driven by our core categories. We continue to take a surgical and data-driven approach to managing price gaps, and our investments are still expected to impact about 15% of our Americas consumer segment. In EMEA, Constant currency consumer sales increased 3%, driven by volumes of 4%, partially offset by pricing of 1%. Sales growth was broad-based across product categories in our major markets. We are pleased with the volume growth we delivered in EMEA and expect the momentum to continue through 2024. Constant currency consumer sales in the APAC region were flat, primarily due to the macro environment in China. Outside of China, we delivered volume-led growth that was broad-based across categories and markets. Turning to our Flavor Solutions segment in slide 12, third quarter constant currency sales were comparable to the prior year, reflecting a contribution from price which was fully offset by a 1% impact of the divestiture of the canning business. In the Americas, Flavor Solutions constant currency sales increased 3%, reflecting a 1% contribution from price and a 2% increase in volume driven by the timing of customer activities, as well as strength in branded food service. In EMEA, constant currency sales decreased by 9%, including a 3% impact from the divestiture of the canning business, lower volume and product mix of 5%, reflecting the impact of QSR customers' volumes, and lower price of 1%. In the APAC region, flavor solution sales were comparable in constant currency, with minimal contributions from both price and volume. As Brendan mentioned, our volumes and impact were impacted by slower QSR traffic outside of China, most notably in Australia and Southeast Asia where some of our customers remain impacted by geopolitical boycotts. This was offset by growth in China due to QSR customer promotions. As seen on slide 16, gross profit margin expanded by 170 basis points in the third quarter versus the year ago period. driven primarily by stable mix within our flavor solution segment and the impact of our comprehensive continuous improvement program, or CCI. Now moving to slide 17, selling general and administrative expenses, or SG&A, decreased relative to the third quarter of last year, driven by lower distribution costs generated by our CCI program and lower employee-related benefit expenses. As a percentage of net sales, SG&A decreased 60 basis points. Adjusted operating income increased 15% as compared to the third quarter of 2023, or 16% in constant currency, with gross margin expansion and lower SG&A expenses both contributing. Operating profit benefited from a shift in the timing of our investments, which now will be reflected in our fourth quarter results. Marcus will address this shortly when he reviews our outlook for the remainder of the year. Adjusted operating income in the consumer segment increased 8%, with minimal impact from currency. In Flavor Solutions, adjusted operating income increased 31% or 32% in constant currency, reflecting our continued focus on restoring Flavor Solutions' profitability. Our performance this quarter reflects our commitment to increase our profit realization and positions as well to make continued investments to fuel top-line growth. And touching on tax, our third quarter adjusted effective tax rate was 16.8% compared to 21.4% in the year-ago period. The tax rate benefited from the resolution of an outstanding tax matter dating back several years, as well as our state sales mix. As a result, we now expect our tax rate to be approximately 21% for the year, which is slightly better than the 22% rate we had previously provided and reflects the discrete items I just discussed. Our income from unconsolidated operations in the third quarter reflects strong performance in our largest joint venture, McCormick, New Mexico. We are the market leader with our McCormick branded mayonnaise, marmalades, and mustard product lines in Mexico. And the business continues to contribute meaningfully to our net income and operating cash flow results. It is important to note that in the fourth quarter, we will be lapping strong results in the prior year period for McCormick, New Mexico. At the bottom line, as shown on slide 20, Third quarter 2024 adjusted earnings per share was 83 cents, as compared to 65 cents for the year-ago period. This increase was primarily due to our increased operating profit, as well as the street tax benefits that I mentioned earlier. With that, let me turn the call over to Marcos, who will cover our balance sheet and outlook for 2024.

Thanks, Mike. On slide 22, we'll summarize highlights for cash flow and the quarter-end balance sheet. For the first nine months of 2024, our cash flow from operations was $463 million compared to $660 million in 2023. The benefit from the increasing earnings year over year was more than offset by the impact of cash used for working capital, increased incentive compensation payments, and time of cash tax payments. We returned $338 million of cash to shareholders through dividends and used $189 million for capital expenditures. As a reminder, 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, fund investments to drive growth, return a significant portion to our shareholders through dividends, and paying down debt. Importantly, we remain committed to a strong investment grade rating and expect our leverage ratio to be below three times for 2024, with another year of strong cash flow driven by profit and working capital initiatives. Now turning to our 2024 financial outlook on slide 23. Our outlook continues to reflect our prioritized investments in key categories to strengthen volume trends and drive long-term sustainable growth while appreciating the uncertainty of the consumer environment. Turning to the details. First, currency rates are now expected to have a minimal impact on sales, adjusted operating income, and adjusted earnings per share, a change from the previously anticipated unstable impact of approximately 1%. At the top line, we continue to expect constant currency net sales to range between a decline of 1% to growth of 1%, and anticipate our results will be at the mid to high end of our guidance range. In terms of pricing, we anticipate about a 1% increase for the year, similar to what we said last quarter. In China, our food-away-from-home business, which is included in an impact consumer, continues to be impacted by slower demand. And we now expect China consumer sales to be down slightly compared to 2023 for the full year, while we presumably expect it to be flat. And this is reflected within our guidance. While we recognize there has been continued weak demand in China, we continue to believe in the long-term trajectory of the China business. Moving to adjusted operating income, we continue to expect 4% to 6% constant currency growth. 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 needs, and cost savings from CCI and GOE programs, partially offset by the anticipated impact of a low single-digit increase in cost inflation and our increased investment. In addition to our gross margin expansion, H&A benefits from cost savings will be partially offset by investments to drive volume growth. including brand marketing. For the year, we continue expecting our brand marketing spend to increase high single digits, reflecting a double-digit increase in investment, partially offset by CCI savings. In terms of tax, we now expect our tax rate to be approximately 21% for the year, which is slightly better than the 22% rate we had previously provided and reflects the benefit of discrete items Mike mentioned earlier. We continue to expect mid-teens increase in our income from unconsolidated operations, reflecting the strong performance we anticipate in McCormick de Mexico for the year. To summarize, our 2024 adjusted earnings per share projection of $2.85 to $2.90 reflects a 5% to 7% increase compared to 2023, and we anticipate our results will be close to the high end of the range as we benefit from the improved tax rate. As we head into the fourth quarter, let me summarize some of the puts and takes to consider. We expect to drive volume growth in both consumer and flavor solutions and sequential improvements from the third quarter. Pricing is expected to have a slight negative impact, with the price investment in our consumer segment only partially offset by flavor solutions. We expect gross margins to sequentially improve from the third quarter and to be flat relative to the prior year, driven by price, a comparable year-over-year flavor solutions product mix, and plan supply chain investments to support growth. We expect our investments in brand marketing to rank sequentially from the third quarter and anticipate an increase in SG&A year-over-year related to IT and digital transformation investments shifting into the fourth quarter. And I will talk more about these investments at our upcoming investor day. As a result, our operating profits will likely be comparable with the prior year due mostly to the time of our investment. However, This remains largely in line with how we had expected our operating profits to perform for the second half of the year. As Brendan noted, we continue to prioritize our investments to drive impactful results. Our return to volume-led growth underscores that we are moving in the right direction, and we remain confident in the underlying fundamentals of our business and delivering on our 2024 financial outlook and long-term objectives over time.