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.

For the fiscal year,

Unconsolidated income increased 32%, reflecting strong performance in McCormick in Mexico. We remain the market leader with our McCormick-branded mayonnaise, marmalade, and mustard product lines in Mexico, and the underlying business continues to perform well and has contributed meaningfully to our net income and operating cash flow results this past year. Turning to our segment operational results on slide 13, adjusted operating income in the consumer segment decreased 3%, with minimal impact from currency. The decrease was primarily due to pricing and increased H&A costs, partially offset by cost savings generated by our CCI program. 2024 was a year of investments, and as such, adjusted operating income in the consumer segment rose 1%, while adjusted operating margin declined 10 basis points as we invested to drive top-line volume-led growth. We are well-positioned to continue this volume-led growth trajectory with strong margins. In Flavor Solutions, adjusted operating income increased 5% or 7% in constant currency, driven by product mix, pricing, and cost savings, partially offset by increased SCNA costs. For the fiscal year, our Flavor Solutions operating income grew 14%, and operating margin expanded 140 basis points, reflecting our continued focus on restoring Flavor Solutions' profitability. At the bottom line, as shown in slide 14, Fourth quarter 2024 adjusted earnings per share was $0.80, as compared to $0.85 for the year-ago period. This decrease was primarily due to the unfavorable tax rate, as well as the increase in S&A that I mentioned earlier. For the year, we delivered adjusted earnings per share of $2.95, which represents a 9% increase over 2023 and above the high end of our guidance range. On slide 15, we've summarized highlights for cash flow and the year-end balance sheet. Our cash flow from operations in 2024 was $922 million, compared to $1.2 billion in 2023. The benefit from the increase in earnings year over year was more than offset by the impact of cash used for working capital, primarily inventories driven by strategic buying decisions, increased incentive compensation payments, and timing of cash tax payments. We returned $451 million of cash to our shareholders through dividends and used $275 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. This means funding investments to drive growth, returning a significant portion of cash to our shareholders through dividends, and maintaining a strong balance sheet. We remain committed to strong investment grade rating. With another year of strong cash flow driven by profit and working capital initiatives, we successfully reduced our leverage ratio to below three times in 2024 and improved our cash conversion cycle by 10% as compared to the prior year. In 2025, we expect to continue to deliver strong cash flow driven by profit and working capital initiatives. Overall, our results for 2024 were consistent and in line with our guidance and reflect the success of our strategies in focusing investments in the areas that drive the greatest value. Now turning to our 2025 financial outlook on slide 16. Our outlook continues to reflect our prioritized investments in key categories to strengthen volume trends, and drive long-term profitable growth while appreciating the uncertainty of the consumer and macro environment. In addition, this outlook is in line with the expectations we laid out on Investor Day in October and reinforced our confidence in our 2028 targets as well as our long-term objectives. Turning to the details, first, currency rates are expected to have a one-point negative impact on both net sales and adjusted operating income and two points on adjusted earnings per share. At the top line, we expect organic net sales growth to range between 1% and 3%, and our growth to be volume-led with minimal pricing. In China, our food-away-from-home business, which is included in the APEC consumer, continues to be impacted by slower demand. As a result, our outlook assumes a gradual recovery, and we expect China consumer sales to improve slightly year over year. While we recognize there has been weak demand, we continue to believe in the long-term growth opportunity of the China business. Our 2025 gross margin is projected to range between 50 to 100 basis points higher than 2024. This gross margin expansion reflects favorable impacts from product mix and cost savings from our CCI program, partially offset by the anticipated impact of a low single-digit increase in cost inflation. In addition to our gross margin expansion, we expect SG&A benefits from cost savings to be partially offset by investments to drive volume growth, including brand marketing. For the year, we expect our brand marketing spend to increase in the highest single digits, reflecting a double-digit increase partially offset by anticipated CCI savings. As a result, our adjusted operating income is expected to grow 4% to 6% in constant currency, A balanced outlook that gives us the flexibility to continue to invest in the business while expanding margins in line with our 2028 objectives. In terms of tax, we expect our tax rate to be approximately 22% for the year, compared to 20.5% in 2024, where we benefited from a number of discrete tax items that are not expected to repeat in 2025. We expect our income from unconsolidated operations to decline in the mid-teens range in 2025, reflecting the strengthening of the US dollar against the Mexican peso, which is impacting the results of our largest joint venture, McCormick in Mexico. Excluding this currency headwind, McCormick in Mexico continues to deliver its strong performance. To summarize, our 2025 adjusted earnings per share projection of $3.03 to $3.08 on a reported dollar basis reflects currency headwinds and the impact of the increased tax rate relative to the prior year. On a constant currency basis, adjusted EPS is expected to grow between 5% and 7%. As we head into 2025, let me summarize some of the puts and takes to consider related to our performance. We expect to continue to deliver total volume growth across both segments. Gross margin expansion for the first quarter is expected to be modest relative to the prior year, primarily due to price gap management investments that were mostly in place since the second quarter of 2024. We expect gross margin to build over the year, consistent with historical trends. We anticipate our SG&A will be impacted by a consistent increase in brand marketing every quarter, in line with our full year guidance. In addition, our stock-based compensation expense will shift from the second quarter to the first quarter, impacting comparisons to the prior year. Our adjusted operating profit will be impacted by this shifting timing, causing the first quarter to be flat or slightly down relative to the prior year. However, this will be more than offset by operating profit growth in the second quarter, and we expect our profitability to build throughout the year. As Brenda noted, We continue to prioritize our investments to drive impactful results. Our continuation of volume net 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 2025 financial outlook, near-term, and long-term objectives.

Thank you, Marcos. Before moving to Q&A, I would like to close with our key takeaways on slide 17. The long-term trends that fuel our categories, consumer interest in healthy, flavorful cooking, heat, flavor exploration, and trusted brands continue to be strong. And importantly, consumer interest in cooking remains elevated. We are pleased with our results for the quarter and for the year. These results demonstrate 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 and driving category leadership. Our plans are yielding strong results, and we expect the momentum to continue into 2025. 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 performance, coupled with our growth plans, gives us confidence in achieving our near and long-term objectives. 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. Finally, I want to recognize all McCormick employees for their dedication and contributions, particularly as we navigate this complex environment. Reiterate my confidence that together we will continue to drive differentiated results and shareholder value. Now for your questions.

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Andrew Lazar with Barclays. Please proceed with your questions.

Great. Thanks so much. Good morning, everybody. Good morning, Andrew. I guess to start off, Brendan, consumer organic sales came in almost 2.5%, well ahead of what the street was anticipating. And within that, volume growth of four was obviously quite strong, even despite the weakness in China, particularly in the context, I guess, of the broader packaged food environment. So I guess to what do you attribute this strength? And I guess more importantly, how do you see this momentum continuing into fiscal 25?

Thank you, Andrew. Well, just to kind of lead off, we believe we're really well positioned to win in an evolving environment. And I think you saw, obviously, some of that come through in our performance in the fourth quarter. leading up to the fourth quarter, I think, year to date. So we've been delivering on our plans and our guidance for the year, essentially accomplishing what we said we would do. So specifically from a consumer perspective, just looking at it, we're really pleased with the performance of the portfolio in the fourth quarter. The performance was pretty strong. Global volume growth is around 4%, but importantly, like in the Americas, We saw about 5% volume mix growth with strong acceleration from the third quarter to the fourth quarter. And we saw very consistent strong performance in EMBA at about 5%. So we're seeing volume growth in our core categories. I think a way to think about it is leading up to the fourth quarter, there are a lot of very healthy things in place, which were increased investments across our business. Increased brand marketing. We've had increased innovation. A lot of the new products that we're launching are meaningful to our performance, expanded distribution. And then we also implemented price gap management, too. So all those were things kind of in the face kind of leading up to the fourth quarter, which were all quite positive in providing and supporting already what was emerging as really strong, healthy volume growth. I think on top of that, what was different in the fourth quarter in which you sort of accelerated that performance was just great holiday season execution. It's one of the best I've seen us execute, and we're really, really happy with the way that unfolded. We also had very successful limited time offering in these finishing sugars. That was like a 90% sell-through. It just really flew off the shelf, so we had really good performance off of that. We are also running a brand-new marketing campaign supporting broadly the umbrella of McCormick, especially in the holidays, and we think that campaign It was a refresh of what we had been running, and it's really performing quite well. And I would also add on top of that, we're growing faster in unmeasured channels like e-commerce. And it's just sort of great execution beyond just grocery and mass. So overall, we saw that 5% increase in volume also translate to 5% consumption growth. So it was in line with shipment. So I think it was a really pretty healthy quarter. As we look beyond the fourth quarter and into 2025, I would, as we said in investor day, continue to increase in our brand marketing investment. We get great ROIs on that. We get great performance. We'll continue to sort of lean into more brand management investments. I continue to increase in innovation. So as we look ahead, we'll have strong performance on the items that we launched in 2024. But then we'll also have more launching in 25. We'll also have continued focus on renovation. We spent some time talking about this yesterday, but we'll have the new package for our grilling line fully on shelf by the time the grilling season starts. And we have the gourmet launch sometime in the second half, which is a relaunch of just product packaging and graphics. And so that'll be exciting. And the existing price gap management plans will remain in place. So that's part of our basis as we move forward. We'll share more details at Cagney, but we do feel reasonably pretty good about, you know, I think the performance in the fourth quarter around our consumer business globally.

Thanks for that. And then just briefly, Marcos, you know, no surprise that fiscal 25 is another reinvestment year, as you all highlighted at your analyst day last fall. I was hoping you could talk a bit more about where this investment is targeted and how this all plays into your broader guidance for the year. Thanks so much.

Yeah, so Andrew, so we are expecting that we'll continue to make investments on technology. We talked about technology being one of the levers that shifted from Q3 into Q4, and you saw that S&A was impacted in Q4 by that, but you look at S&A for the full year was at 40 basis points. And that was primarily driven by brand marketing and a little bit of technology. But that technology in Q4 will continue to be a line item into 2025. We're stepping up investments there. We continue to drive our ERP implementation program, plus also the new generation of capabilities, I would say, AI, things like that, and machine learning capabilities. We are building a new data analytics hub across the organization. So we are stepping up investments in technology, and I believe that over time we'll continue to drive CCI and productivity savings for the company.

Thank you. Thank you. Our next question has come from the line of Peter Galba with the Bank of America. Please proceed with your questions.

Hey, guys. Good morning. Thanks for the question. Good morning. Good morning. If I could just follow up actually on Andrew's question around kind of organic sales and the acceleration that you saw in the fourth quarter and was expected for 25. Maybe just two things, Brendan. One, I think when we talked at Investor Day, we were looking more for like a two to three on organic sales for 25 as an initial. And now the range has moved slightly below that. So just curious kind of what transpired or what's changed from an organic sales standpoint. And the second is, you know, obviously that range would also imply a deceleration versus the fourth quarter. So just, you know, it seems like you have great momentum coming out of 4Q and the comps aren't incredibly difficult. So just curious kind of where the, you know, maybe there's some conservatism in there, but just where the range has moved would be helpful. Thanks.

Yeah, we have to provide some perspective around, you know, the guidance specifically on net sales. You know, we're actually in 2024 with a strong performance and good momentum, like you called out. And it does set us up for even good, stronger performance in 2025. I think from a top line perspective, this guide reflects the volume-driven plan around our business. And it's really on algorithm, if you will, from a volume perspective, somewhat like we called out at Investor Day. So it does call for meaningful volume improvement year over year, and there's very little, if any, price in the aggregate We are building off a stronger base of performance, you know, let's say compared to 23. And there's balanced growth between, let's say, both the consumer business and the flavor solutions business. We also believe this guidance reflects just the context of the evolving marketplace. I think I kind of maybe speak from two points. What frames our range on the low end is China from a consumer perspective. You know, we're still seeing, you know, weak consumer confidence there, and we suspect It's sort of slight to the gradual recovery there. It's also the weakness, you know, when I think about flavor solutions, it's the weakness that we're seeing in QSR channels, particularly in EMEA. What frames the high end, though, is the strength in consumer volumes in the Americas and EMEA. I think overall this, you know, our outlook is strengthening from what we said in 2024. It reflects kind of a prudent view of a changing marketplace. It's consistent with what we said at Investor Day. And nothing's really changed in our thinking since then. It's all, frankly, quite consistent as we look at how we were thinking about 2025 back then in October and how we're thinking about it today.

That's helpful. Thanks for framing that, Brendan. And maybe just to follow up, the less talked about outside of America's consumer, just your perspectives, U.S. Food Service, it seems like maybe we're setting up for a bit better year in 2025. EMEA as well, you know, you talked about the weakness on QSR, but just the EMEA consumer business has been delivering strong as well. So just how you're thinking about Europe in 25. Thanks very much.

Yeah, I think, well, we're certainly, we saw a lot of strength in 2024 out of EMEA from a consumer business. It certainly offset what was weakness in flavor solutions. I think our view is we still see continued strength in our consumer segment there in the market. The plans are strong. The Similar points to what I said in just sort of the fourth quarter, those continue as we go into 25. On the flavor solution side of the business, we see a sort of gradual strengthening of where we are there, but we have to kind of call out right now. It is sort of weak volumes, so that's where we're seeing life today. But I think as we look towards the year improvement, overall in our performance in that part of the world from a flavor solutions perspective. From a CPG customer to a QSR customer, we think the strength will come in certainly from a CPG. It'll start to build. There is one, a couple still issues geopolitically happening within that part of the marketplace. So we're seeing that come through. and some of not only the perspective that we're getting from our customers, but that is playing out a little bit. The Middle East conflict is starting to affect not just the QSR side of the business, but CPG.

However, we still see improved performance versus 24 on the flavor solution side. Thank you.

Thank you. Our next question has come from the line of Alexia Howard with Bernstein. Please proceed with your questions.

Good morning, everyone. So first of all, can I ask about the pivot that you're doing in the flavor solutions segment into these new faster growth innovative customers? I know you started that maybe a year or two ago. How quickly is that happening? Are you able to share what proportion of sales those new customers represent and how that might develop over time? And then I have a follow-up.

Sure, happy to provide some perspective around that. We're not going to necessarily speak to sort of how the whole portfolio breaks down. But despite what we're seeing in terms of just sort of overall flattish volumes as you saw in the fourth quarter broadly, we do see just faster performance. And to give you some context, just these tend to be, you know, as we describe them as sort of, you know, higher growth innovator, you know, sort of customers. But it's happening in categories like bars and granola, crackers, you know, soups and broth, you know, beverage, whether it's with alcohol, without alcohol, or even just sort of performance nutrition. We continue to see strength in a number of these categories. sort of in categories, if you will, up against those taste competencies that we called out at investor day. So these are customers that we continue to seek and acquire, and we believe that as we go into 25, we continue to really drive growth across this business, not only as volumes improve, but also as we gain share in the marketplace overall. So if I were to think about what that added context might be, given the spirit of your question, That's probably, I think, the context of this. Think about it from a market category perspective. We're just seeing a little bit faster growth in these areas. Just to add, in food away from home, when you think about branded food service, we're still seeing a very healthy year in 2024 around that part of our business. We expect that to also, because that contributes to it, Alexia, is our performance in branded food service, too. and we expect traffic to incrementally get better, but we're gaining share, and we're just driving a lot more activity with our customer base there, and it's been pretty healthy growth.

Perfect. And as a follow-up, and this is another broader-based question, if we see a number of food additives like red number three or some of the others eliminated from the generally recognized as safe designation, and we see a round of reformulation across the broader industry. How do you position yourself to best tap into that on the flavor solution side to be part of that cycle if it plays out? Thank you, and I'll pass it on.

Sure. You know, we see ourselves as actively in that going on right now today. You know, the way we sort of have an opportunity to sort of, you know, play into those changes that may or may not occur. As we talked about, changes in food regulation are just sort of a push towards healthier eating. We actively play a part right now with the customer base that we have today in terms of working on reformulations and product improvements. I believe that this is where innovation really drives the industry. It has for decades and will continue to moving forward. And so we believe we're poised pretty well to be able to work with our customers on making any product formulation changes that they would like to make. This could be the removal of artificial colors, sodium reduction, just increasing in clean ingredients. These are areas that we have been working on well up and prior to 2025. We're quite confident that we'll participate in that.

Great. Thank you very much. I'll pass it on.

Thank you. Our next questions come from the line of Robert Masco with TD Cowen. Please proceed with your questions.

Hi. Thanks for the question. Actually, I have a couple. I want to know if I could hone in a little bit more on the guidance range of one to three. You mentioned that the low end factors in, you know, weakness in China. And I wanted to know, could you be more specific about your expectations in China? With the low end of the range, the 1% entail China getting worse, or are you not that specific on what the 1% means? And then I had a quick follow-up.

I think our characterization, you know, in terms of what starts to sort of provide context around where that loan might be is, you know, thinking about, you know, at times China has not met expectations, right? We certainly saw that in 23, and then we saw it again in 24. And so I think what we're doing is we're kind of factoring that into our thinking, Rob, as China, we do expect it to get that slight and gradual improvement. In fact, Marcus and I were there actually just in the first week of January, spending time with our leaders in that business, looking over just the changes in the marketplace as well as what are the growth plans for the year and what expectations should we have. So I think we're seeing a level of prudence from us just in terms of how to think about China. And I think that's That's kind of the context, I would say, that sort of provides that low-end context, you know, obviously juxtaposed against, you know, what I framed as sort of what's driving the high-end.

Yeah, Rob, this is a dynamic environment. We want it to be balanced in our call right now, not only in terms of top line, but also in terms of from an OP perspective and EPS, as you saw in the guide. So we want it to really be, I mean, I think it is a positive environment, but also its balance given the environment that we are in.

Okay. And the follow-up, in fourth quarter, you know, the flow through to operating income wasn't quite as strong as we and I think the street had expected. And, you know, you talked about some really strong volumes in consumer. It looked really great. And my perception is that consumer is higher gross margin than flavor solutions or just higher margins. So can you explain, was your operating income in fourth quarter in line with your expectations, or was there a little more incremental spending on distribution, which you mentioned in your press release, or the tax spending thing?

No, Rob, I mean, it was pretty much in line with our expectations. I mean, how we came in in Q4, I mean, we talked about in the last call that we were going to be shifting some of the expenses primarily related to technology and R&D from Q3 into Q4. So that's what you've seen in the P&L for this quarter, an impact from H&A primarily, and that is what is kind of, you know, taking us down to a negative OP, slightly negative OP. But if you think about the H&A from the H&A perspective on a full-year basis, you know, it's in line as well with our expectations, 40 basis points incremental year-on-year on the back of A&P, continued technology investments, as I mentioned before, And this step up in technology will continue into 2025. Okay, great. Thank you.

Thank you. Our next questions come from the line of Rob Dickerson with Jefferies. Please proceed with your questions.

Great. Thanks so much. I guess just, you know, in terms of pricing, the commentary that, you know, you gave to be around Q1, you know, as you continue to look to manage, you know, price gaps. I guess, you know, my question is kind of like how much more, I guess, do you think you need to actually manage price gaps? I think you talk about investment, but you're talking about, you know, technology investment, kind of brand building in general, a lot of different investments. If we focus just on price, you know, do you feel like there's actually that much more price investment that needs to come through with Q1 than maybe, you know, any perspective on kind of how that flows through for the year? And I just ask given, you know, especially Consumer America's volumes, you know, we're fairly strong in Q4. And I'm not sure if that's, you know, Q4 specific because of some of the holiday, you know, products you had in the marketplace or not. volume to continue, why do you need to continue to invest in price capital? Thanks. Rob, on price, I think there's really kind of two points maybe there to address in your question. As we think about price and we called out, we're still going to be overlapping the beginning of those investments in Q1. That's consistent, that level of investment is consistent with what we were doing, you know, previously like Q2, Q3, you know, sort of year to date. So as we go into Q1, we're not seeing a step up in that. We're seeing sort of a maintenance of it, if you will, as we go into Q1. And the way I would, you know, ask you to think about it for the balance of year is maintaining that investment. It's in our baseline, if you will. of how we think about supporting our brands and supporting the volume group that we've been driving. So the price gap management, as we have it planned for right now in 25, is a continuation of how we applied it in 24. Of course, throughout the year, we just don't sort of set those numbers and leave them and never look at them. We're constantly evaluating how they're performing. So we have sort of surgical review of, of what's the return that we're getting, how they're applied, but I think from a macro standpoint, you should think about that as a continuation of what we did in 24. You mentioned a little bit about the performance in the fourth quarter and its strength. Let's also remember the fourth quarter is our biggest quarter of the year in terms of consumption, and I think what you saw was just obviously a really strong execution a pickup from consumers in terms of more scratch cooking, the holiday season. That holiday season was a bit compressed, but it didn't seem to hurt us in any way. And we had really overall pretty good performance. But those are just a little other points of context I would add as you think through the profile of our performance. Okay, great. And then maybe just kind of more broadly speaking, as you think of your portfolio, at least on the consumer side, you know, it does seem as if, let's say, at least through the back half of last year, right, that kind of more meal-related items seem to be doing a little bit better, right, like primitive store, whether it's chicken, pasta, et cetera, you know, versus, you know, maybe some more incremental pressure or ongoing pressure and some more discretionary items. Kind of my guess is, you know, there is still some benefit, right, from those meal-related items, but something you've been talking about for years, right, you know, consumers cooking from scratch and at home and heard all through COVID. And I'm just kind of curious, kind of what the updated perspective is, you know, on some momentum, let's say on the perimeter and some of these no related items, and then clearly how that would benefit, again, your consumer Americans business. That's all I have. Thank you. Rob, I think there was a little bit there where you may have cut out, but I think I got your question. And that was more of, so what's our outlook on sort of the consumer in 2025? I would say our outlook on the consumer environment hasn't changed significantly, but that doesn't mean it's boring. There's a lot going on right there, and I think a lot of it does really position us well to win in this evolving environment. The demand for flavor is pretty strong. As we've said before, others compete for the calories. We flavor them. And we are seeing a continuation of cooking at home and a focus on healthier eating. And we believe that, obviously, this positions our portfolio well to perform well in an environment like this. You know, we believe that value is going to remain important for consumers. As you saw in some of my prepared remarks, you know, it's still that lower income consumer still remains quite challenged overall. And they're looking for value and affordability, and not just in the United States. They're looking for it in Europe. They're looking for it in Asia. And so these are things that we believe are kind of globally consistent themes that we're seeing and influence our plans and the way we think about our portfolio overall. So that's our context with the consumer. Going into 2025, I would say remaining focused on driving towards healthy eating. When we see people go to the perimeter to buy more produce, to buy more proteins, We think they're doing it for two reasons. They're doing it because they're looking to obviously save money, stretch their budgets, but also there's a bias towards eating healthier.

All right, super. Thank you.

Thank you. Our next question has come from the line of Ken Goldman with J.P. Morgan. Please proceed with your questions.

Hi, thank you. I was hoping for a little bit of color on your outlook for margin expansion growth between the two segments. This past year, 2024, consumer was flattish. Obviously, Flavor Solutions had a great performance in terms of margin growth. Are you expecting maybe not the same magnitude, but sort of directional similarity, just given some of the pressure that consumer might feel from higher ad spending, maybe a little maybe a little bit more promotion. Just wanted to get a sense for, you know, how you would like us to kind of think about that progression from here.

Yeah, sure, Ken. So first of all, I mean, we're very pleased with the gross margin expansion we had in 2024. I mean, it was 90 basis points at a high end of our guidance range. And we have really, you know, good reasons to believe that this will continue into 2025. So our call is for 50 to 100 basis points into 2025 as well. A couple of items there. I would say that it's driving these expectations for us. Obviously, CCI and our productivity savings that we have in place right now is working very well for us. I mentioned technology before. Technology will also help drive more savings in the future years. The usage of global business services organization will continue to tap on that. Simplifying processes is standardizing the way that we do work. All of those things will help us drive more savings going into the future years. And then portfolio mix is a big lever, particularly within flavor solutions. As we continue to shift our portfolio to a high margin category, such as flavors, branded food service, those categories drive higher margins. So if you think about it between the two segments, I would expect more gross margin coming from the flavor solution segment versus the consumer segment. That is also in line with our strategy of continuing to drive profitability at the bottom line for flavor solutions. As you saw, we've improved our operating margin by 140 basis points in 2024, and we have a commitment to get back to 14.5% by 2028, so that was a very important progress that we made. now two years in a row on flavor solutions. So that is the whole, you know, idea about our guide in terms of gross margin as well as operating margin.

Okay, thank you.

Thank you. Our next question has come from the line of Max Gumport with BNP Paribas. Please proceed with your questions.

Thanks for the question. In the U.S. specifically, Your consumer segment is posting strong volumes, but you called out that your CPG customers in flavor solutions have soft volumes, which we can clearly see in Nielsen data as well. So I'm just curious for your color on what's driving that dichotomy. Thanks very much.

Well, as you know, Max, we compete. within segments that are, you know, sort of very focused around, you know, herb spices and seasonings and condiments and sauces. And I think, you know, when we think about our portfolio compared to, you know, the rest of, you know, food and beverage within the United States, you know, I think we first have to start there. And these categories have healthy growth. And so we benefit from that. But also I believe that we jumped on execution quite early in 2024. If you think about Maybe my remarks back at the beginning at this time last year, I said that it was our goal to move fast and really meet the consumer with where they were or where they are today. That was a real intentional focus on our part from the standpoint of being competitive and executing quickly in the marketplace. I think we've also benefited from that. You know, some of the categories in which we compete, you know, large ones like condiments and sauces, we're competing in what we believe are some of the faster-growing versions of condiments and sauces, like heat as one example. But you take a category like mustard, we're growing it because we're making mustard important to consumers. By the way, a very sort of healthy profile when you think about that condiment. So I think there's a number of indicators here that give us a little bit of, you know, sort of an improved profile. And it's a combination of both our execution and our commitment to drive the volume, but also we're operating in relatively healthy categories. And the consumer environment right now, you know, certainly, as it always has, continues to favor the categories we play in.

Thanks.

And then, Marcos, there is the comment about cash flow in general. in 24 being impacted by decisions to increase inventory. I think there were strategic buying decisions. Can you just provide more color on what those were and how we should think about those in FY25? I'll leave it there. Thanks very much.

Sure. I mean, the cash flow continues to be a very positive outcome for us this year. Continues to drive a lot of cash, this company. $922 million in 2024. We made some, you know, and this is business as usual for us, we made decisions about for buying some of the commodities for us at times. So oftentimes we make those decisions to bring in inventory to protect service and to drive supply chain, be available for supply chain, but also to lock in some favorable costs. And so we do take those decisions oftentimes. Difficult to predict what's going to happen in 2025, but this is part of our playbook in terms of how we manage. all the input costs and the components across the globe within our procurement organization. They have a very data-driven analysis and the methodology that they use, and we leverage a lot of that to make those decisions.

Great. Thanks very much.

Thank you. Thank you. Our next questions come from the line of Stephen Powers with Deutsche Bank. Please proceed with your questions.

Great. Hey, thanks. Just one question for me, but maybe you both want to weigh in on it. Maybe the part for Marcos is just on your brand marketing plans for the year, it sounded like the rate of increase year over year was going to be pretty even throughout the year. Just wanted to play that back and validate, and if that's not correct, if you could give us a little sense of the cadence of increase. And then, Brendan, the other part of that is just kind of the where that money is going to go? And is it, should we think about it, is it just more spending in the same directions? Or does the makeup of brand marketing and the focus of that marketing shift at all in 25 versus what we've seen, you know, looking backwards? Thank you.

Sure. So, Steve, the first part of the question is yes. I mean, the answer is yes. I mean, we're going to be spending similarly to 2024 levels on AP, high single digits. and it's going to be across all quarters. So pretty much even across all quarters leading to the high single digits, which is the same as we saw in 2024.

Steve, from a perspective of how we're spending that money, where we see obviously driving strong returns, I think it serves two perspectives on that. If you think about the vehicles that we go into and you think about the presentation that we shared at Investor Day, those aren't the vehicles in which we're going into. It's not that we see dramatic change in exactly how we're spending it, but you see that we're getting even greater penetration and reach as we add more dollars to support the investment behind our brands. I would also say we also look strategically across the portfolio and decide to increase spend levels on one brand versus another. If you think about this idea of driving resources and focus where we get the strongest return, that also drives our thinking about that allocation of A&P. So as we said, for example, in the beginning of 24, we are going to add a lot more media coverage and more 12-month coverage on a brand like Frank's Red Hot, and we've seen good performance off of that. And so that's in our baseline and we'll continue to build on it. There are other brands which we are going to start to, you know, flex even more, you know, A&P spend into. So this is the mindset that we use. But I think the review that Tabata gave, you know, at Investor Day, I think is a good illustration of where we tend to spend the money. But it's also sort of starting to place, you know, increased spend on certain other brands.

Great. Thank you very much. You're welcome. Sure.

Thank you. Our final questions will come from the line of Tom Palmer with Citi. Please proceed with your questions.

Good morning, and thanks for having me in.

I wanted to, I guess, first ask on just the cadence of earnings relative to the annual growth ranges for organic sales growth and operating profit growth. Should we be thinking about starting off the year within these annual guidance ranges and sustaining it, or is there some build to be thinking about. Thanks.

So in terms of top line, we'll continue to drive top line momentum from 2024 into 2025. You'll see volume growth across both segments in Q1, and that should continue through Q4. So that's our expectations into this year. In terms of profit, in my prepared remarks, I mentioned a little bit of a shift between Q1 and Q2. So you will see an operating profit that is in Q1 that is slightly down to flattish, I would say, given the pricing that we're lacking from prior year, but also stop the compensation shift from Q2 into Q1 now for our new policy. So that's going to impact Q1, but it's going to be more than offset by the increase of OP in Q2. And then you should see the similar trend going into the back half of the year. So I'd say, you know, top line consistent across all quarters, a little bit of shift in OP between Q1 and Q2. Gross margin line pretty much consistent and growing across, you know, from Q2 to Q4.

Thanks for that, Collar. And just on the GB income, I just wanted to clarify the currency versus underlying trends. If we were to exclude the currency headwind, would this business – in kind of how you're thinking about 2025, still be growing?

Oh, yes. I mean, the business is still growing. The business is very robust down in Mexico. Brennan and I are part of the board of the JV, and we monitor the performance on a very close and quarterly basis. And, I mean, the business is a very good business. It drives a lot of volume. It drives a lot of profitability as well. You know, what's impacting is really the SX. The effects, the strengthening of the dollar against the Mexican peso, and I mentioned it, it's about 20% evaluation of the Mexican peso year on year, from 17 to 20 Mexican peso to the dollar. That is really what's impacting on the translation of those results back into us. But the underlying performance of the business is really, really strong right now.

Great. Thank you.

Thank you. We have reached the end of our question and answer session. I would now like to hand the call back over to Fayton Freeha for closing remarks.

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. This concludes our call this morning.

Thank you. This does conclude today's teleconference. You may disconnect at this time.