McCormick & Company, Incorporated

Good morning. This is Fafn Freihaus, VP of Investor Relations. Thank you for joining today's fourth 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, Chairman, President, and CEO, and Marcos Gabriel, Executive Vice President and CFO. During this call, we will refer to certain non-GAAP financial measures, the nature of those non-GAAP financial measures, and the related 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. Lastly, I'd like to call out that we made changes to our release and slides to streamline and enhance our communications, and these changes are in alignment with investor and analyst feedback. In terms of metrics, to simplify, we are adopting the organic sales measure, which is defined as the impact of volume and mix plus price and excludes the impact of FX and any divestitures or acquisitions. As a reminder, the reconciliations of our sales measures can be found in the appendix of our slides and in our press release. I will now turn the discussion over to Brendan.

Good morning, everyone, and thank you for joining us. I am pleased to report on our strong performance for the fourth quarter in fiscal year 2024, an important year for McCormick in which we built momentum and strengthened our leadership and differentiation, returning to quality, volume-led growth. We invested in our core categories, drove improved unit and volume share trends, while also expanding our margins and delivering strong earnings growth. Our results demonstrate the success of our prioritized investments in the areas that we believe will drive the most value and set us up to continue to drive momentum for 2025 and beyond. McCormick remains a growth company. We have robust plans that leverage the demand for flavor and the strength of our brands. Our strategies have proven to be effective in driving growth and compounding that growth over the years. And I remain confident that we have the right leadership team in place and engaged employees globally to deliver on our near-term and long-term objectives with industry-leading performance. This morning, I will begin my remarks with an overview of our fourth quarter, focusing primarily on top-line drivers. Next, I will highlight some areas of success and the areas that we continue to work on. Then, I will briefly reflect on our full-year performance and share our plans at a high level to continue to drive momentum in 2025. I will review how McCormick is positioned relative to an evolving consumer landscape. Marcus will then go into more depth in the fourth quarter, as well as 2024 fiscal year financial results, and review our 2025 outlook. And finally, before your questions, I will have some closing comments. Turning now to our results on slide four. In the fourth quarter, total organic sales increased by 2%, reflecting volume and product mix growth of more than 2%. partially offset by pricing. Total volume improved sequentially for the fourth consecutive quarter, despite a challenging environment. And this improvement in the fourth quarter was driven by our consumer segment, where volume and product mix increased approximately 4% compared to the prior year. In America's consumer, we delivered meaningful sequential volume improvement, leading to more than 5% volume growth year over year. This growth reflects continued focus on our core categories, investing in brand marketing, accelerating innovation in alignment with consumer trends, expanding distribution, and price gap management plans. In EMEA, we continue to drive positive volume growth across our major markets and core categories. We realize benefits from new product innovation as well as expanded distribution. In Asia Pacific, Our results were impacted by China as the environment in this market remains challenged. Looking forward, we expect a slight and gradual recovery in 2025 relative to the prior year. Marcos will discuss this when he covers our outlook for 2025. Moving to flavor solutions, volumes were flat for the global segment. Volume performance was primarily impacted by volume softness in our CPG and QSR customers' volumes. Sequentially, relative to third quarter volume growth, our results were impacted by the timing of customer activities. Let's move to slide five and let me highlight for the quarter some of the key areas of success. In our global consumer segment, we successfully executed on our plans with increased investment and competitive focus towards driving growth across our core categories. In the Americas, across all categories, we drove unit, volume, and dollar consumption growth. Notably, our unit and volume consumption outpaced both branded food peers and private label in the fourth quarter. In global spices and seasonings, we drove solid unit, volume, and dollar consumption growth across key markets in the Americas, EMEA, and Asia Pacific. In the U.S., we continue to improve on our competitiveness Our volume consumption outpaced both branded competitors and private label for the quarter. Overall holiday performance was terrific. We saw high demand and sellout on our displays that featured core holiday items, as well as new innovation. We had strong performance across the portfolio, and our holiday limited-time offer finishing sugars contributed to our share momentum and were incremental to the category. In recipe mixes, We continue to strengthen consumption trends in the Americas and EMEA, driving overall share. In the U.S., our Cholula line remains a significant growth driver. We are innovating with Cholula recipe mixes, bringing new consumers to the category, particularly with millennials and younger families. In the U.K., our new short seasonings and recipe mixes, specifically designed for air fryers, are performing well and driving strong consumption. In mustard, We made great progress globally over the last three quarters and are pleased to see that our plans are driving great results. In the fourth quarter, we drove unit, volume, and dollar share gains in the Americas. In Poland, one of the top mustard-consuming countries, our mustard consumption continues to grow, and we are also realizing unit and dollar share gains. In hot sauce, we continue to have underlying strength in our base business and strong consumer loyalty. we drove positive unit volume and dollar growth in the fourth quarter, demonstrating that our plans are working. Sequentially, we drove significant improvement in dollar and unit share trends. This improvement was driven by distribution gains, increased brand marketing, and innovation. We continue to make progress on total distribution points. We expanded TDPs across spices and seasonings, recipe mixes, mustard, and hot sauce in the Americas. In the NBA, We are also seeing distribution growth across markets in spices and seasonings and condiments and sauces. We are also gaining distribution in growing channels like discounters and e-commerce. 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 our technically insulated high-margin product category, flavors, and in branded food service. In flavors, in the Americas, we remained focused on being the partner of choice across four taste competencies, savory, heat, naturally sweet, and citrus and fruit. These are areas of deep expertise and strength, and where we are recognized as leaders within the flavor industry. As a result of this continued focus, our performance with our high-growth innovator customers remains strong, and we outperform the industry across most end categories. In America's branded food service business, we drove volume growth and expanded distribution across spices and seasonings and condiments, outperforming the industry. In addition, we are winning in hot sauce tabletop unit share and with innovation, new distribution, packaging, and promotion. Let me now touch on some areas where we are seeing some pressure. As I mentioned earlier, in our Asia-Pacific consumer business, the environment in China remains challenging. Consumer sentiment remains low, and October and November distributor inventory buildup was below prior years due to the expected softer consumption. In flavor solutions, in both Americas and EMEA, some of our CPG customers experience continued softness in volumes within their own businesses. And in EMEA, some of these customers were impacted by geopolitical boycotts in the region related to the Middle East conflict. This geopolitical impact may continue into 2025. In addition, QSR traffic remains soft in EMEA and in the Americas. 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 and aligned with consumer trends. Now, I would like to reflect on our performance for the fiscal year on slide six. We successfully delivered on the goals we set and shared with you for 2024. We demonstrated our dedication to improving volumes. We refined our plans and prioritized our investments to drive impactful results and returned to differentiated and sustainable volume-led growth, the kind of growth that investors expect from McCormick. I am very proud of what we achieved and you should expect continued momentum in 2025. Our team remains focused on returning to our long-term growth algorithm, strengthening our profitability, continuing our strong cash flow, paying down our debt, and reducing our leverage ratio. All have put McCormick in a position of strength to invest further with a sustained focus on growth. A few highlights for the year. On the top line, Sales growth came in close to the high end of our guidance range as we expected. Importantly, we drove total positive volume growth for the year with the consumer business delivering 1% volume growth for 2024. We continue to invest in our business as well as drive margin expansion in line with our guidance. Importantly, we made significant progress in advancing our flavor solutions operating margins. Our growth for 2024 on the top line and the bottom line reinforces our confidence in achieving the 2028 targets we set out at our investor day as well as our long-term objectives. Our results demonstrate that our foundation is strong. We have proven and powerful brands and the results we are seeing from our refined and strengthened plans provide confidence in the effectiveness of our strategies and investments. We made significant progress this past year and we have plans to continue that momentum in 2025 and beyond. Let me now share our perspectives on consumer trends. Our portfolio's breadth and reach in consumer and flavor solutions and our shared insights give us a strong understanding of consumers' flavor needs, preferences, behaviors, and trends. We are continuously monitoring these trends across the globe and adapting our strategies accordingly. Demand for flavor remains the foundation of our growth. Our business is differentiated. We do not compete for calories. We flavor them. Importantly, our opportunity continues to grow no matter where calories are shifting, and the demand for flavor continues to have a long runway. Our products in the consumer segment help flavor home-cooked meals, and in the flavor solution segment, we are collaborating with many of our customers through reformulations and flavoring to meet the evolving consumer needs for healthy products, including snacks and beverages. Overall trends continue to evolve. Consumers remain challenged, particularly lower-income consumers. While everyone continues to watch their spending, there appears to be some easing with mid- and higher-income cohorts, yet all still remain focused on maximizing value without compromising flavor. Demand for larger sizes remains elevated as they are seeking value. At the same time, there is increased demand for small or trial sizes. highlighting that flavor exploration remains important. Furthermore, consumers continue to cook at home and are increasingly shopping the perimeter for protein and produce. Healthier and better-for-you trends, as well as a desire to stretch budgets, are fueling this continued interest in cooking from scratch, reinforcing demand for flavor and for McCormick's categories. Spices and extracts remains the number one center store growth category. Lastly, our consumer-centric mindset remains at the heart of everything that we do, and we believe we have the right plans that are continually informed by what matters most to consumers and customers. As outlined on slide 7, our growth plans remain consistent to drive growth through category management, brand marketing, new products, our proprietary technologies, and our differentiated customer engagement. Our growth levers are supported and enhanced through data and analytics as we continue to accelerate our digital transformation. 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. Let me highlight a few areas that support and enable these growth plans. Our decisions to optimize our portfolio over the years allows us to concentrate our focus on four global categories, spices and seasonings, condiments and sauces, branded food service and flavors. We are intentionally focused on these categories as they are critical to driving our profitable sales growth and strengthening our flavor leadership. They drive the greatest value for McCormick and we are excited about our plans to continue to drive growth in each of them. Furthermore, Consumer demand for hot and spicy is strong and remains a significant tailwind to our growth. We are uniquely positioned to win in heat with our global iconic brands, deep consumer insights, meaningful scale, technology, and expertise that we have been building for decades. Heat is a growth enabler in both of our segments and yet another reason to believe in our long-term objectives. Lastly, underpinning our long-term growth objectives is a unique system of advantages that work together to drive our industry-leading growth. These advantages include the breadth and reach of our focused global portfolio, powerful leading brands, our heat platform, unique consumer insights, global sourcing capabilities, and our disciplined approach to acquisitions and integrations. Importantly, our power of people culture is at the foundation of it all. These advantages, together with the execution of our strategies, are critical to ensuring we deliver on our growth potential. over to Marcos.

Thank you, Brandon, and good morning, everyone. I'm pleased to be reporting on strong results for both the quarter and the year. Starting on slide 9, our total organic sales grew 2% for the quarter. This increase was volume-less, with more than 2% volume and product mix growth partially offset by pricing. We drove strong sequential volume improvement, as you can see on the slide. Moving to our consumer segment on slide 10, Organic sales increased 3% as volume growth of 4% was partially offset by a 1% impact of price investments. Consumer organic sales in the Americas increased by 4%. This increase reflects 5% volume growth, partially offset by price investments of 1%. Volume growth was focused in our core categories and was driven by our investments in brand marketing, innovation, and expanded distribution. Our investments are yielding positive results. as seen in our improved consumption, and we expect the momentum to continue into 2025. In EMEA, we grew consumer organic sales 3%, driven by a 5% increase from volume, partially offset by promotional pricing of 2%. Volume growth was broad-based across product categories in our major markets. We're pleased with the strong sustained volume-led growth momentum in EMEA in 2024. Consumer organic sales in the IPEC region declined 10%, driven by an 11% decrease in volume, partially offset by a 1% contribution from price. This volume decline was primarily attributable to the macro environment in China. Turning to our flavor solution segment on slide 11, fourth quarter organic sales increased 1%, driven by pricing. In the Americas, flavor solutions organic sales increased 1%, reflecting a 2% contribution from price, partially offset by a 1% decrease in volume driven by softness in our CPG and QSR customers' volumes. This was partially offset by volume growth in flavors with high growth innovator customers, as well as growth in the branded food service business. In EMEA, organic sales decreased by 4%, including a 2% decline from price and a 2% impact of lower volume and product mix. reflecting the impact of soft, CPG, and QSR customers' volumes. In the impact region, flavor solutions organic sales increased 6%, with volume growth of 7% driven by QSR customer promotions, limited time offers, as well as new products, partially offset by pricing of 1%. As seen on slide 12, gross profit margin expanded by 20 basis points in the fourth quarter versus the year-ago period. driven primarily by the benefit from our comprehensive continuous improvement program, or CCI. For the year, gross margin expanded 90 basis points with incremental benefit from product mix and pricing. Selling, general, and administrative expenses, or SG&A, increased relative to the fourth quarter of last year, driven primarily by increased technology costs that shifted from the third quarter, as we expected. As a percentage of net sales, SG&A increased 80 basis points. For the fiscal year, SG&A increased 40 basis points relative to 2023, primarily due to increased brand marketing as planned. For the fourth quarter, adjusted operating income declined by 1% with minimal impact from currency. This decline was driven by the increase of SG&A as expected. For the total company, we grew fiscal year adjusted operating income 4.5%. with minimal impacts on currency and drove adjusted operating margin expansion of 50 basis points, with gross margin expansion more than offsetting the increase in SG&A expenses, including our planned increased investments in brand marketing. Our performance in 2024 reflects our commitment to increase our profit realization and positions as well to make continued investments to fuel top-line growth. Our fourth quarter adjusted effective tax rate was 25.4% compared to 22.3% in the year ago period, as expected. For the year, our adjusted tax rate was 20.5%, a decrease of 150 basis points from 2023, driven by a greater level of discrete tax benefits than in the prior year. Our income from unconsolidated operations in the fourth quarter declined 3%. As we mentioned on the last call, Our results were impacted by the strengthening of the US dollar against the Mexican peso, which more than offset the strong performance in our largest joint venture, McCormick de Mexico. The US to Mexican peso exchange rate was around 17 in the prior year compared to more than 20 in the fourth quarter, reflecting approximately an 18% fluctuation that impacted our reported results.