McCormick & Company, Incorporated

Q3 2024 Earnings Conference Call

10/1/2024

spk01: 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.
spk05: 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.
spk08: 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.
spk05: Thank you, Marcos. Before moving to Q&A, I would like to close with our key takeaways on slide 24. We are pleased with our results for the quarter, especially as it marks an inflection point for total company volumes turning positive. This demonstrates that we are investing in the areas that drive the most value and reinforces our confidence in our plans and long-term objectives. We continue to execute on our strategic roadmap with speed and agility and in alignment with consumer trends. further capitalizing on our attractive categories across segments. In addition, our plans are yielding the expected results. We also continue to expand margins and manage our costs as we are investing in the business. These improvements are led by our favorable product mix and cost savings programs. Our results in the third quarter benefited from the timing of these investments, and we continue to expect our second half operating profit results to be in line with our expectations. Our year-to-day performance coupled with our growth plans give us confidence in achieving the mid to high end of our projected constant currency sales growth for 2024. Finally, I want to recognize all McCormick employees for their dedication and contributions, particularly as we navigate this complex environment, and reiterate my confidence that together we will continue to drive differentiated results and shareholder value. Now for your questions.
spk11: Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants 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. Our first question today comes from the line of Andrew Lazart with Barclays. Please proceed with your questions.
spk13: Great. Good morning, everybody.
spk00: Good morning, Andrew.
spk13: Hey. Brendan, it's certainly nice to see the continued sequential volume improvement in consumer, especially in the Americas. I think pricing in consumer was down a little less than a point, and that was pretty close to where expectations were. But I'm curious if you're seeing the expected magnitude of volume lift, right, from some of these pricing actions and investments that you've made? And I guess if you are, would there be reason maybe to lean in even a little bit further, right, to keep the momentum going, given you've got some flexibility this year from things like tax rate and some below-the-line items?
spk05: Yeah, thanks, Andrew. Let me just maybe lead in with a couple of opening thoughts here. I mean, we do continue to make the right progress, and we're on track with where we expect it to be. We turned the corner in our growing volume, which was, obviously, as we started the year, our goal in the second half of the year. I think, importantly, we're outperforming private label in volume across all of our core categories, and I do like the progress that we're making in labor solutions, especially in this last quarter in the Americas region. Having said that, you know, we're never going to be satisfied. So I think that we still see an opportunity to continue strengthening our plans and execution in the back, you know, the rest of 24 going into 25. But our programs are working and we believe they're delivering, you know, the growth that we thought that they would. Just to add context on all those levers that you know, on top of that price gap management that you referred to that we think are really driving our business. It is increased investment in brand marketing and A&P just across all of our core categories. You know, we've launched innovation that's really contributed meaningfully to our performance. And, you know, that's been an exciting part because that's a lot more innovation than we launched in 2022 and 2023, which was an important goal that we had here in 24. We've We're expanding distribution in our core categories. I think we had a really good quarter there in terms of performance as we expected it would start to build. In terms of pricing, we maintain that price gap management program that we've talked about in the third quarter. It will continue to play out as expected in the fourth quarter, too. But it's only a portion of our strategy. But it is yielding, I think, the results that we expected from that. And I just would add, we're also operating in great categories. So let's not forget that that's also part of the, you know, I think the strength behind our business is that we do operate in really strong categories. You know, I do want to say broadly at a global level, we also saw really good performance across the consumer segment at a global level. Definitely in the MEA, Australia, Southeast Asia, we just saw broadly good performance, including our spices and seasonings category, growing volume across the entire consumer segment for McCormick. Having said all of that, I think our guidance is appropriate given the dynamic consumer environment. So we're confident in our plans and we will be at that mid to high end of our top line range. But we also have to really, I think, make sure that we reflect what's going on in the environment right now. Hey, China is slightly worse than we expected and it does remain challenging. So we're factoring that into our thinking. QSR trends continue to be a bit uncertain. And so that's kind of factored into our thinking, too. And, you know, as we go into the fourth quarter, as all of you know, this is the biggest part of the year for us. So we want to make sure that we're balanced and we deliver on our expectations. But it is a big quarter for us.
spk13: That's helpful. Thank you. And then a quick one is I think you mentioned that your sort of prepared foods business in the Americas, which had been weaker, was stabilizing, and that trends in the sales that you make to other sort of packaged food manufacturers have we're starting to look a bit better I think you mentioned so I guess as it relates to the sort of this the industry as a whole right where the big debate is you know when when do we start to see some some sort of better volume trends recover and whatnot across the space your view into that based on some of the businesses that you've got seem to suggest maybe that's sort of starting to happen I'll be it gradually I'm curious to get your sense on your view into that aspect thank you yeah I think
spk05: And that certainly bridges off of our second quarter call. More or less, our customer plans were performing as expected, which was we were expecting some improvement compared to the second quarter. And so we believe that largely did start to play out. Our flavors business in the Americas region, we saw good results across those areas that we consider high innovator growth customers. So that plays out in categories like performance nutrition or alcoholic beverages or for non-alcoholic beverages, but we believe we outperformed the category broadly there. And then we did see strength in our branded food service business. And that also played into, I think, some of the improvement that we're seeing broadly across flavor solutions, the segment. Having said that, QSR traffic was weak and slower than probably we would have expected, but that's speaking back again to that level of uncertainty. However, having said that, we do see our customers being responsive to what's going on in the market and trying to drive volume growth, et cetera. So we do think as we go into Q4, that trend should continue broadly, that we see sequential improvement from the third quarter.
spk13: Thanks so much, and see you in a couple weeks.
spk02: Great.
spk11: Our next question is from the line of Ken Goldman with J.P. Morgan.
spk14: Hi, and Mike, thanks again for everything. We appreciate all your help over the years. Two questions, if I can. Number one, I don't think you quantified, forgive me if you did, the timing of the activities of your customers, how much that benefited 3Q. I think it was largely in America's flavor solutions, but just wanted to clarify that. And you did say that shift will be reflected in 4Q results, just making sure we should kind of model all of that reversing in 4Q. And then I have a follow-up.
spk05: Yeah, this is Mike. As we said in the last call, there's a bit of a positive that was going to come into the third quarter from Q2, and that happened. It wasn't the biggest. Brendan talked about the really good flavor solutions underlying performance and branded through service in other areas, but that did have a positive impact in Q3, which will kind of normalize in Q4 as we think about year-on-year comparisons.
spk14: Okay, and then for my follow-up, I know it's too early to talk about 2025, but I'll take a quick stab anyway. I guess the main question is, well, give it a shot. Is there any reason, you know, to think at this time you won't be on algo? And the reason I'm asking is you have talked about, you know, volume growth into next year. You kind of reiterated that a little bit today. You know, you've previously said you have the right level of investments in place, so I don't expect that to rise. You know, you always have great CCIs. So just trying to get a sense, you know, is there anything you're seeing? Obviously, there's hot sauce, there's QSRs, there's, you know, China in general. That could hold you back, but there's other positives happening as well. So just wanted to get that sense. And then while you're answering it, I'm just curious, what is the underlying EPS algo X M&A? I mean, many years ago, you said that the combination of M&A and repo would contribute around 2% in the average year to EPS, but I wasn't sure how you broke that down today. So hopefully that makes sense. Thank you.
spk05: Well, that last follow-up question felt like it had maybe a few buried in there. So I'm going to do do my best to remember everything, but I'm going to ask Mike and Marcos to help me out with this. Yeah, we're not prepared to talk about 25 guidance at this point. So, you know, although in investor day, we feel like we'll share more context about how we're looking at the future and how we think about, you know, overall performance and what will drive, you know, our long-term volume growth, which is something that we've historically done. And so we'll spend some time talking about our view into what will be those drivers as we look from a long-term perspective. And when I think about what's going well in 24 and why should it continue in 25, it's just we believe that these are the right programs and the right things to do in our business. And these are things that we believe as part of just doing a good job in delivering growth in our categories. Mike, do you want to add anything else? I would just say, too, as we go back to guidance early in January and Cagney, you know, the things we talked about making investments this year to really drive kind of second half volume growth, which we're attaining. We're happy with the performance. Not totally satisfied, as Brendan said. We'd love to do more, but build that momentum into 2025. There's uncertainty in the economic market, as there always is, but we feel like we're well-positioned. And I think you'll hear more from Investor Day, which would be three weeks from now. That's right.
spk02: Thanks so much. Our next question is from the line of Peter Galbo with Bank of America.
spk11: Please proceed with your question.
spk09: Hey, guys. Good morning. Thanks for taking the questions. And, Mike, thanks again. Maybe to follow up on Ken's question just around, you know, this year, you know, the gross margin guidance, I think we're getting questions this morning. Just you're up 125 basis points year to date. Obviously, you didn't move the gross margin guidance higher. And maybe there's some timing factors there. But just trying to understand if there's maybe a bit of conservatism in there as well and why that rate of change just wouldn't kind of continue through the fourth quarter.
spk05: Yeah, if you think about it, and some perspective here, we talk about this year in halves a lot, first half, second half, and because, as you know, a quarter can, you know, it's such a small unit of measure, sometimes you get some moves, but so we try to keep it pretty high level in halves this year, and we've seen really good sequential improvement first half into second half, and actually by quarter, it's gone that way too. We see the fourth quarter actually, you know, higher, gross margin than the third quarter, which is our normal trend. So we're really happy with that. Year-on-year, you always get a little mixed. Sometimes that happens. We talk about normalizing mixed versus last year in the flavor solution side. Not necessarily from third to fourth quarter, but from fourth quarter this year to last year. Marcus highlighted some of the supply chain investments, and I'll let him talk about that in a second. And there's a slight pricing quarter year-on-year comparison there that puts a little bit of pressure, not a whole lot.
spk08: Yeah, so you think about a gross margin and the puts and takes between Q3 and Q4. You know, we're thinking about Q4 as more of a normalized flavor solutions product mix than Q3, so we think about it that way. We're also thinking about, you know, some of the supply chain investments that we have planned for the year around building capacity, particularly around the heat platform that we have, continue to invest in that platform. will be impacting Q4 more so than the rest of the year. So that is an impact there. And also, I would say that a little bit of pricing. We're going to have slightly negative pricing in consumer going into Q4, partially upset by labor solutions, but there's going to be a little bit of that negative impact through pricing as we continue to invest back in the business to drive top line growth. There's some elements between Q3 and Q4. As Mike said, you know, some points and takes between the two quarters. I think if you look at it, the second half profitability is very much in line with what we expected before.
spk05: You'll hear us today talk about it yesterday about 10 times, but, you know, this heat investment that we're making in supply chain, I think you'll be excited to see the potential, as we've talked about in the past on heat, but it's really driving a lot of our growth, which is great.
spk09: Okay, great. Thanks for that. And then maybe just pivoting, you know, Brendan, I wanted to ask you on China specifically. I think maybe you spent some time there earlier this year and, you know, the market at least seems to be rewarding. China exposed stocks in the past week or so on the back of some of the macro there. Just curious, kind of get your perspectives on, you know, if there is some kind of stimulus policy in China, how you're thinking about, you know, improved consumer demand or improved consumer psyche there. Any perspectives would be helpful. Thanks very much. Sure, Peter.
spk05: On China, we do expect the environment there is going to be broadly challenged, and we do expect our business probably to be down slightly in 2024. So just for the sake of clarity, I mean, that's the outlook that we're looking at for the balance of our year. But when you reference, I think, this latest news on stimulus, I'm just not in a position to sort of predict the impact of that. You know, I will say, though, in previous actions that have been taken in terms of in the country regarding stimulus, I don't know that they've necessarily had a material impact on our, you know, sort of the consumption in our business. And so at this moment, right now, we believe that they'll just continue to make sequentially good progress. It's just not the speed we thought it might happen. And by the way, we didn't plan on a lot, I think, this year in China to begin with. um so it's just a little bit it's more muted than we expected and um i think given the latest economic news out of the country we're still waiting to see what kind of impact that might have great thank you our next question is from the line of alexia howard with bernstein this is you with your questions good morning everyone morning morning
spk07: So can I ask about the margin recovery in flavor solutions? I think you mentioned that it may have been driven partially by product mix. I'm just wondering how much more runway there is for continued improvement on that side and specifically what the mix driver was.
spk05: Yeah, Alexia. You know, you think about our long-term journey on flavor solutions, and we've talked about portfolio migration in the past and more recently. And as you think about the things that are higher margin within that portfolio, branded food service, as Brendan mentioned, had a really good quarter, you know, gaining share, driving growth. If some of the categories within flavors which were gaining share in performance nutrition, things like that, again, lean to the higher margin side of things. It's a little indication of a proof point of our vision to move these margins higher as we migrate the portfolio. Continuing with the CCI, someone mentioned CCI before. Again, another bedrock. We've approved flavor solutions margins the last two years through our CCI and our global operating effectiveness program. Continue that CCI journey there. We'll talk about that more on Investor Day, too. I think we're very positive on flavor solutions longer term. Quarter to quarter is going to, you know, we talk about this business sometimes being lumpy. I think we've got to come up with another word since I'll be leaving. But volatile. But, you know, again, there is room for margin improvement here.
spk08: And also, just to add to that, Mike, I mean, as we continue to grow the business, we'll see leverage coming through the P&L. That's also going to impact our margins going forward.
spk07: Great. Thank you. And then just to follow up, You mentioned branded food service being a big driver of the margin improvement on the flavor solution side. Is that because traffic is improving in the quick service restaurants as their value menus are picking up? Or is it something different that's happening? I think you mentioned share games. Just trying to get a flavor for what's happening on the branded food service side and what's driving that. Thank you.
spk05: Alexia, to give you a flavor of that, just to repeat the pun a little bit, the drivers on branded food service have less to do with traffic trends. In fact, we see them quite subdued still at this point in time, and they have been for the last, even in the second quarter when we reported, we saw just depressed trends from a traffic perspective in most sort of segments within food service. The driver of our growth seems to be, or is, gaining share, gaining more tabletop placements on things like Frank's Red Hot. And just broadly, I think winning in the marketplace with our full platform of both spices and seasonings and also condiments and sauces. And so we like the programs that we drive and that we run. And often what you'll see, I think, in that business is we're doing a lot of limited-time offers with our brands. So brands like Cholula or Frank's Red Hot, tend to be brands that we've seen operators like to use and leverage as ways of driving interest and excitement on their menu because those are obviously flavors that are quite appealing to consumers. And so we're seeing that that part of our branded food service business take up even a little bit more because we've been running a lot more of those types of programs and promotions with our customer base. So it's really doing well in a tough marketplace, I think is broadly the answer I would give.
spk07: Perfect. Thank you very much.
spk02: I'll pass it on.
spk11: The next question is from the line of Max Comfort with BNP Barabas. Please proceed with your question.
spk06: Hey, thanks for the question. Just to follow up on flavor solutions margins. So you had a very strong quarter, up 300 basis points year over year. I think it's the highest margin we've seen for that segment since the pandemic started. And by our math and a few assumptions we're making, it would seem like the guidance for the full year implies you have a pretty big step back in 4Q and flavor solutions margins. It sounds like product mix is one headwind you're seeing on the horizon, although it wasn't clear to me if you're saying product mix was abnormal in 4Q23 and it's a tough compare or abnormal in 3Q24 and we take a step back towards a more normal mix in 4Q24. I'm curious if there's any other factors you're seeing on the horizon, or this is really just some conservatism for the volatility and lumpiness of the segment. Thanks.
spk05: Thanks. Yeah, I'd say it's more balanced, honestly. I mean, again, quarter to quarter, you're going to get some variability here. If you look back at the fourth quarter last year, as I mentioned before, the kind of compare and mix, it's normalizing significantly. you know, supply chain investments. I think, honestly, if you think about it, supply chain investments, the things we're getting on heat that Marcus talked about, impact labor solutions. It's a smaller sales base, too, so you probably get more of a gross margin impact. But for the year, getting back to your comment, you know, we're on plan. We're happy with the margin improvement there.
spk08: But overall, I mean, our operating profit margin should improve for the full year versus last year. So we're going to continue to make that sequential improvements in terms of operating margins. So we've increased margins by 200 basis points, 2023 versus 2022, and that will continue to drive operating margin up for the full year as we had planned before.
spk06: Great, thanks. And then turning to hot sauce in the U.S., it sounds like it remains a challenge. You're still seeing pressure from peers' trial size package offerings. It sounds like also that you're pleased with the initial reaction to your own trial size packages, but can you just give us an update on what you're seeing there, what you expect from your action plans over the coming quarters? Thanks very much. I'll leave it there.
spk05: Max, thank you for the question on hot sauce. Hot sauce is an attractive category. There's new competition always entering the category. That's something that we deal with all the time. As I said in the for a pair of remarks, we really do like the underlying health of our base business and just continued strong consumer loyalty. And this is also part of our portfolio that's also receiving a fair amount of increased investment. But there is one thing that's really, I think, impacting from a share perspective, just two particular things going on in the marketplace. A peer of ours is lapping a big supply chain constraint from the prior year. which hasn't affected our business as much, but definitely affected theirs. And so we're seeing that volume return back under their label. But also, we're seeing a lot of surge in unit volume from these many trial sizes, which we were able to participate in, or begin to participate in, in the third quarter. Our units are holding up well in this category, too. So there is a fair amount of noise going on in the hot sauce category. And so when we look at those minis, just to give you some more perspective around that, we're seeing a lot of pickup and velocity. What it's doing is it's helping us drive trial on new flavors. I think we have a sriracha in there, and we also have a creamy buffalo sauce. Both are super good, but at a dollar, these are really low price points for consumers to just really, it lowers the barrier to trial. And so we've seen a nice pickup and velocity on those mini trial sizes, and expect that obviously to be a positive part of our portfolio or that brand assortment that we'll have moving forward. I also want to draw attention to we have strong early acceptance on our overall innovation, like our Frank's Red Hot Squeeze products that are coming out, Frank's Dill Pickle Hot Sauce. These are items from an innovation perspective that have been kind of rolling out in the market in the back half of this year, and we like the performance that we've seen there. We'll continue to work through that. We believe we'll have better performance as we move towards the end of 2024, sequentially improve versus the third quarter. But this is an area that we get a lot of attention to, and it's an exciting area in the store.
spk02: Thanks very much. Very helpful.
spk11: The next question is from the line of Steve Powers with Deutsche Bank. Please receive your question.
spk02: Yes. Hi. Good morning.
spk15: The first question on the planned ramp in marketing and advertising support that you called out and was implied in the fourth quarter guidance. I'm curious as to sort of how much of that is just more intense programming around holidays and sort of specific to stimulating 4Q demand. versus maybe more everyday programming that has maybe a more durable ROI in 25?
spk05: Well, when you think about the fourth quarter and our posture walking into the fourth quarter, I think maybe a good way to think about it is we still have the same level of programs and activity that's been driving our business results. We expect that will continue in its and its strength going into the fourth quarter. We're not pulling back or anything like that, but we like the progress and the results that we're getting across the portfolio with those investments and those plans and programs. It's also our big holiday season quarter. We really do believe we have a very strong holiday plan set up with our customers. This is an area that we expect to have really good performance in the holidays. That obviously is a you know, a tick up when you think about it sequentially from the third quarter. And, uh, you know, that's something to be expected. But some of this, as you mentioned, you know, every day, we talked about Frank's bad hot sauce early in the year, turning that on every day. So that does, that is a change we've made earlier this year.
spk15: Okay. Okay. That's, that's, thank you for that. Um, and then, you know, I know this is very new, but the, the, um, the dock workers strike that's in news this morning, um, I guess from your perspective, I'm assuming that if it's relatively short-lived, the impact is relatively manageable, but from the outside, how long, if this extends, how long before this becomes a more material issue for you based on your current visibility inventory levels?
spk05: Thanks for the question on this, Steve. East Coast port strike, from an inbound supply planning perspective for us, we've been contingency planning on this, on the potential for this since like April of this year. We really have been thinking about this as maybe something that could happen. And so we've been planning our actions around that possibility. We've also coordinated mitigation plans with our domestic suppliers because they might be counting on inbound supply coming from outside the United States. So we believe we've mitigated most of those risks, you know, with the strike now officially occurring, but we believe we're broadly covered. We are monitoring it daily, though, just to make sure that, you know, we don't have any interruption of supply, but we feel like we plan for this. Overall, though, we encourage both sides to work through this as productively as they can and with pace, because this is something, obviously, that, you know, we don't want to see have a long extended event. But those are our thoughts right now on that, and we're going to watch it closely like everyone else.
spk15: Okay. Thank you very much. Appreciate it.
spk11: Our next question is from the line of Rob Dickerson with Jefferies. Please just use your questions.
spk04: Great. Thanks so much. Just two quick ones. I guess the first one is I just kind of wanted to get maybe a little bit more color on Q4. Because I think kind of around midpoint of the EPS implied guide, it looks like it's down about 15% year over year. But at the same time, it sounds like maybe sales could be a little bit better sequentially, like relative to we're seeing Q3. And then the comments around gross margin, seems like gross margin a little bit more normalized, but still better than Q3, maybe flat year over year. So kind of what's implied, everything we're talking about, right, is like SG&A. should be up a decent amount. And then I guess there is, you know, a little bit of implied tax rate headwind, but then also like income from unconsolidated clearly is, I don't know, it's been up like 50%, you know, year over year, year to date versus the mid teens guide. So I'm just trying to kind of gauge like what, what's the core driver of that and, year-over-year absolute EPS implied decline in Q4. And it sounds like it's SG&A. Thanks.
spk05: Yeah, I think you kind of walked the P&L very well, highlighting kind of the squeeze there. You know, we talked about the SG&A investments we're making, and that was a timing shift in some of the supply chain investments. Just to touch on tax and on consolidated really briefly, and I'll let Marcos then cover a little bit of the other stuff. But, you know, the tax, a little bit of a headwind after some, you know, pretty large favorables that we talked about in the call, which were more timing related, but we did call the tax rate down for the whole year by 1%. But unconsolidated, really great performance by Micmex continues. We're laughing, really great performance in the fourth quarter of last year, but also the pace there has devalued pretty significantly. So I think that's part of the reason it may look wonky to you on that line. But maybe I'll turn it to Marcos to talk a little bit more about the HPNL.
spk08: Yeah, so we talked about it. I mean, the top line, I mean, sequentially improving from Q3 to Q4. You know, we gave the mean to height double the range in terms of the full year. But, I mean, if you think about Q4, it's going to improve both in consumer and flavor solutions from Q3. The same applies to gross margin. I mean, gross margin is going to continue to improve sequentially from Q3 to Q4. If you compare versus per year, it's going to be flat. given the reasons that I mentioned before, you know, in terms of the investments that we're making in supply chain, you know, the normalization of the mix, a bit on the flavor solution side, and some of the pricing that, you know, within consumer that's going to be partially offset by flavor solutions. So that's how we see the gross margin coming into Q4. On SG&A, we had some investments that shifted from Q3 into Q4 as well, particularly around IT and digital transformation. As you know, we have a digital transformation journey across the company. I'm going to be commenting more about that at Investor Day. But we see some investments in Q4 around digital marketing, in terms of data analytics. We're putting a hub around data analytics to serve the business, as well as some efficiencies across manufacturing. So some of the investments that we're making in terms of digital transformation, there is really kind of a landing in Q4. So that's a little bit of that impact that you see. But operating profits are going to be comparable to last year, so for Q4. And those are kind of the puts and takes that we see from Q3 to Q4.
spk05: I think the other thing, Rob, if you get to the fourth quarter, again, it's one quarter out of four. It's the biggest quarter. You get into a little bit of a squeeze play. So we've already, in essence, narrowed the sales by going mid to high earlier in the year. We've kind of said zero to one, in essence. We've never gone below 1% of the spread in the fourth quarter. So You get a little bit into that to get a math exercise, so the range is maybe a little bit more than you'd like. But I think you've understood that in the past.
spk04: Yeah, yeah, yeah. All very helpful, very clear. And then maybe just one easy follow-up. I heard you kind of mention a couple times, Jeff, the call, kind of that – you know, or let's call it more little it digital transformation spend. Right. I mean, it doesn't sound like that's like the lion's share of like, what's, you know, coming in Q4, maybe there's some timing shift. And I also, you know, respect the fact that you're, you're not talking 25 and probably don't even want to, you know, talk long-term that's, that's for the investor day. But is there, is there like something more to that? You know, is that like a, Yeah, I mean, there could be a little bit more of kind of an investment program around kind of a bigger piece of kind of where we're viewing the digital IT side. And, you know, that could be ongoing for a little bit. Or is that like, no, that's just a Q4 thing? That's all. Thanks.
spk08: Yeah, we're going to be talking more about our digital transformation journey at Invest4Day, Rob. And, you know, in Q4, particularly around continuing to drive investments that can sustain our top-line performance. Digital marketing is one of them that we're going to be continuing to do that in Q4 particularly, and others, as I mentioned in the call. So, you know, it's too early to get into specifics for 2025. We're going to unpack, you know, the long-term plans as part of the investor day, and we're going to be covering all of our digital transformation programs at that point.
spk04: All right, great. Well, see you there.
spk11: Thank you so much.
spk08: Okay, see you.
spk11: Thank you. The next question is from the line of Robert Moscow with TD Cowen. Please proceed with your question.
spk10: Hi, thanks. Maybe I'll just clean up a couple of things. The FX no longer being a headwind and also this discrete tax benefit, when you add all that together, is that like an eight-cent benefit versus your prior expectations? You know, you raise guidance by five. I'm just wondering if I'm doing the math right or if it's not material.
spk05: Well, yeah, there's a lot of circularity in anything when you look at these things with other programs, too, and things like that. So we've kind of moved it in essence due to the tax reason and due to FX. Kind of that five-inch sense really reflects that.
spk10: Okay. And another question on third quarter. Did brand investment increase high single digit in third quarter similar to your guidance for the year? I don't remember hearing about it in the comments.
spk05: Yeah, we've talked about this again in halves, Rob. I mean, the first half, heavy investment. Second half, we talked about moving the dollars up third and the fourth, which we're doing. But we haven't really talked about if it's up quarter on quarter.
spk10: Okay, so just the guidance is for the halves, not for the quarters.
spk05: Yeah. Well, actually, for the year. Yeah.
spk10: for the year overall. Okay. And then finally, you know, as you head into 2025, it would appear that there's not a lot of room for additional pricing, but I believe that the long-term algo includes some pricing assumptions. And given, you know, we've been in this hyperinflation environment for, you know, for a couple of years, and now it's kind of, come to a screeching halt. You know, is there any reason to think that the pricing lever is kind of off for, you know, until further notice? And how do you think about that in terms of your long-term algo? Thanks.
spk05: Well, you know, Rob, I'll open up with maybe a couple thoughts here and then ask Mike to wrap it up. But you know, in our long-term algorithm, I think we've always talked about there very well might be, you know, a little bit of price in those long-term objectives. I don't think we're in a position to say today, like, whether or not anything has sort of materially changed in our outlook there. But as we deal with sort of the near-end, you know, 2024, you know, perspective, I mean, clearly we've made some decisions there in order to make sure that we, you know, get back to healthy top line, sorry, healthy volume growth pretty quickly. You know, predicting the future from an inflation standpoint or how we'll play out pricing, I think it's a bit challenging, you know, unless we're, you know, speaking just in broad terms regarding a long-term algorithm. Mike, do you want to add anything there? Yeah, I think, too, there's been a lot of focus, deservedly so, on things like price cap management this year for us and others. I think of these things as long-term revenue management, category management initiatives. We've early invested it and continue to drive. Some of the things Marcus talked about in fourth quarter investment continue to get closer to understanding cannibalization of product lines, innovation, how it impacts, what price does. We think we're really close to best in class in this area and really going to continue that into next year. I think you always have to have that pricing tool in your toolbox because commodities may go up or down. Freight costs may go up because of the dock strike. We don't know that right now. So you have to have that lever. And we've been really good with our customers about making sure we pass on cost increases versus margin, keeping margin. We've been very, I think we've won a lot of trust from both our flavor solutions and consumer customers there. And we'll look at that into the future. I'm sure Marcus will carry that banner going forward.
spk08: Well, what I would add is that in addition to that, pricing is a lever that will continue to be part of a long-term algo. I mean, we have, we look at TNL holistically, right? And we think about our CCI program working for us and it has been working for us over the last so many years and will continue to work for us in the future. So, That is kind of the first lever that we go about is like using the CCI as a way of funding, you know, the investments that we need to continue to drive top line growth. So it's always a mix about, you know, all these levers about a little bit of pricing, the CCI coming through, the top line, very important, the top line volume coming through. So all those levers we kind of manage from a more holistic standpoint, I would say.
spk10: That's great. Thank you very much.
spk11: Thank you. The next question is from the line of Adam Samuelson with Goldman Sachs. Let's just hear your third question.
spk12: Yes, thank you. Good morning, everyone. A lot of ground has been covered. I wanted to maybe come back to spices and seasonings in the U.S., if I may. I think you alluded to your consumption growth outpacing private label in the quarter, but you notably didn't necessarily say the category, and that isn't really what we would see in Nielsen either. And I'm wondering if you could talk about kind of the share environment in that category and maybe outperforming private label, but there's some smaller brands that continue to grow pretty rapidly and just how you think about the competitive positioning and how maybe the assortment or price points in that category maybe still have some adjustment to do or if there's adjustment needed to respond to some of the smaller brands which are growing.
spk05: Adam, from a perspective of that category, what we're seeing right now is we're doing quite nicely, especially from a volume perspective across that part of our business. And I'll have to check on the way that we're sharing that particular metric. But what we're seeing broadly in the category is as we have a very broad offering across the category, we think we compete quite well with all different forms of competitors in what is an attractive category for people to enter. And so that is something that I would just give you. We always have sort of dealt with smaller competitors and at the same time private label. So this doesn't feel like we have any sort of really new dynamic going on as we kind of take a look at the performance of the third quarter. What you're seeing is McCormick really focused on capturing what is healthy category growth in the consumer and making sure that we're growing both unit and volume measures across our business. Now, we're also growing TDPs, total distribution points, you know, across this part of our, well, frankly, across all of our core categories. But we're also seeing nice distribution point gain across the whole portfolio. So really, that's also helping us. But these are the perspectives I think I would share right now in terms of, you know, our third quarter performance and as we go into the fourth quarter.
spk12: Okay, that's helpful. And if I could just ask a quick follow-up just on cash flow. Last year, working capital was a big source of cash for the full year. Just year-to-date, it's been a decent-sized use of cash. I know fourth quarter is generally a big working capital reversal. Is there an expectation that working capital is a source or a use of cash for the full year once the books close?
spk05: Yeah, fourth quarter is our strongest cash flow quarter, as you know. Yeah, it's interesting. We talked about some of the drivers of while we're a little short year-to-date versus prior year. One of those drivers was working capital, and, you know, Brendan alluded to the port strike, and part of that is due to us, some of our contingency planning that he mentioned to make sure we were ready. So, you know, that should naturally hopefully unwind, but we're still expecting a strong cash flow here.
spk12: All right. That's helpful. I'll pass it on. Thank you.
spk11: Thank you. Our final question is from the line of Tom Palmer with Citi. Pleased to see you with your question.
spk03: Hey, thanks for the question. I wanted to ask on the SG&A step up here coming in 4Q, is there a particular segment where we're going to see this most apparently? And I'm really just trying to get to kind of operating profit on a segment basis. You've got Flattish overall, but is there one area where maybe we'll see more growth than the other?
spk08: Not specifically. It's going to be across both segments, consumer and flavor solutions.
spk03: OK, thanks. And on the unconsolidated operations, Well, maybe the answer is just a little conservatism, but the level of growth this year, you know, close to 50%. I know that comparison is a lot tougher in 4Q, but when we look at the run rate of the past couple of quarters, is there anything notable to call out that could trigger incremental earnings pressure? Or again, is there reiteration just more with respect to thinking about last year's 4Q being so strong?
spk05: Well, I think it's that I mentioned before, the FX. I mean, the peso is dancing around 20 now versus 17.5-ish last year. So that's a pretty material impact as we translate their earnings back to our P&L.
spk02: Great. Thank you.
spk11: Thank you. At this time, I'll turn the floor back to management for closing remarks.
spk01: Thank you, and thanks to all for joining today's call. If you have any further questions regarding today's information, please feel free to contact me. That concludes our conference call for this morning.
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