McCormick & Company, Incorporated

Good morning. This is Fatin Freja, VP of Investor Relations. Thank you for joining today's first 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. I'll now turn the discussion over to Brendan.

Good morning, everyone, and thank you for joining us. We are pleased to start the year with solid first quarter results that are in line with our expectations. Our performance continues to demonstrate the success of our prioritized investments in the areas that we believe will continue to drive the most value and sustain our momentum for the remainder of 2025 and beyond. McCormick remains a growth-oriented company with robust plans that leverage the demand for flavor and the strength of our brands. Our strategies have proven to be effective by driving growth and compounding that growth over the years. With our strategies and best-in-class leadership, we are well-positioned to continue on our trajectory and 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 first quarter results, focusing mostly on top-line drivers. Next, I will review how McCormick is positioned relative to an evolving consumer landscape. Then, I will highlight some areas of success and the areas we continue to work on, as well as our growth plans. Marcos will then go into more depth on the first quarter 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 first quarter, total organic sales increased by 2%, primarily driven by volume and product mix growth, and partially offset by pricing, in line with our expectations. In global consumer, organic sales growth was volume-led, demonstrating continued momentum across key markets. We delivered robust volume growth in all three regions. This sustained growth is supported by investments across our core categories, including innovative brand marketing, accelerated innovation aligned with consumer trends, expanded distribution, and robust category management initiatives. As expected, volume growth was partially offset by price. In the Americas, price declined due to price gap management plans that were implemented in the second quarter of 2024. and a targeted incremental promotion related to seasonal recipe mixes. In EMEA, we took selective pricing actions to cover rising commodity costs and still maintain volume momentum. For the year to go, we expect price in our global consumer segment to be flat. Now to the global flavor solutions segment, where organic sales growth was also volume-led. We delivered sequential volume improvement relative to the fourth quarter and are pleased with our results. Volume growth was driven by continued execution of our strategic priorities and flavors amid a challenging customer environment. Faster-growing customers partially offset larger CPG customer softness. In addition, QSR customer performance improved in Asia Pacific and the Americas, led by innovation. Furthermore, across Asia Pacific, including China, we delivered strong volume growth as we partnered with QSR customers on new products and limited-time offers. Consistent with prior years, we expect flavor solutions volume growth to fluctuate quarterly due to timing of customer activities. However, on a full year basis, we continue to expect to deliver positive volume growth. From a profitability perspective, we delivered results in line with our expectations. As the first quarter was impacted by increased investments in marketing and technology, as well as the timing of stock-based compensation expenses, that shifted relative to the prior year. As we look to the year-to-go period, we remain confident in our operating income and earnings growth outlook on a constant currency basis. Moving now to the macro environment, including the current state of the consumer. There is increasing consumer uncertainty and concern over returning to more inflation, and this has impacted consumer sentiment, particularly in the last month. This prolongs the consumer context of 2024, where consumers, especially lower-income consumers, are more cautious, exhibiting more value-seeking behavior, and tightening their budgets, as many are worried about the future, job security, and rising costs. We are seeing this not just in the U.S., but across our key markets. At the same time, we are all witnessing shifts in consumer preferences. They are becoming more health-conscious, and this trend is continuing to gain momentum. They are cooking at home more often and increasingly shopping at perimeter for protein and produce. As we look at growth in edible categories, unit growth is primarily driven by these perimeter categories. Healthier and better-for-you trends, as well as a desire to stretch budgets, are fueling a continued interest in cooking from scratch, reinforcing the demand for flavor and for McCormick's categories. Spices and seasonings remain the top-growing center store categories. As a result, consumption trends in our business remain strong. Ultimately, we expect the global consumer segment to continue to benefit from these secular trends. And we have the plans and advantage portfolio to capitalize on them. And in our flavor solution segment, we continue to partner with customers to launch new products or reformulate existing ones to fit healthier lifestyles. Furthermore, our exposure to faster growing customers allows us to win in several high growth categories. many of which are benefiting from the trends towards healthier eating. In the context of this environment, McCormick's trends remain strong. Our volume-driven first quarter results and continued strength in consumption trends demonstrate our ability to continue to successfully meet our objectives for the year. We continue to monitor consumer trends. Our focus remains on meeting consumers and customers where they are, delivering value, expanding our presence in growing channels, including mass, club, and e-commerce. and delighting them with flavor, as well as helping customers innovate to meet consumers' changing dietary needs. We believe we have the right plans in place, and we remain well positioned to capitalize on secular trends and continue to drive differentiated long-term growth across both of our segments. Let's move to slide five, and let me highlight for the quarter some of the key areas of success. Across our global consumer segment, we successfully executed on our plans with increased investment and competitive focus towards driving growth. We improved unit and volume share gains across our core categories in key markets. In the U.S., the vast majority of our categories are growing unit share. Let me provide some color on the categories globally. Starting with spices and seasonings, in Americas, EMEA, and Asia Pacific, including China, we delivered strong volume growth. In the U.S., we drove unit and volume share growth, outpacing private label for the third consecutive quarter. In addition, we drove market share gains in Canada and China. In recipe mixes, we continued to strengthen consumption trends in the Americas and drove unit and volume share gains in the first quarter. In the U.S., McCormick gravy and chili recipe mixes were a significant growth driver as they deliver on the value and convenience consumers are seeking. In addition, we are outpacing the total category in total new buyers, as well as dollars per buyer. In Canada, we drove dollar, unit, and volume share gains. In mustard, we've made great progress globally over the last four quarters and are pleased to see that our plans are driving great results. In the first quarter, we drove dollar, unit, and volume 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 dollar share gains. In addition, we are gaining dollar share in the U.K. In Hot Sauce, our plans continue to yield great results. In the U.S., we drove positive unit share gains reflecting significant progress. Distribution gains, as well as investments in differentiated brand marketing, including a strong Super Bowl activation and innovation, continue to fuel our performance. Outside of the U.S., we are gaining market share in France, the U.K., and Australia. Additionally, we continue to make progress on total distribution points. In the Americas, we significantly expanded TDPs across spices and seasonings, recipe mixes, and hot sauce in the Americas. In the EMEA, we are seeing broad-based distribution gains in spices and seasonings and hot sauce. We are also gaining distribution in high-growth channels like discounters and e-commerce. In Asia Pacific, our business in China is recovering gradually relative to the prior year, as expected. We delivered strong performance amid a continually challenged environment. Growth in our categories, including spices and seasonings and condiments, outpaced the market, which included the Chinese New Year holiday. Moving to flavor solutions, we saw strength in our technically insulated high-margin product category, flavors. In flavors, in the Americas, we remain focused on being the partner of choice across our four taste competencies, savory, heat, naturally sweet, and citrus and fruit. As a result of this continued focus, we are winning new customers and gaining share. We outperform the industry across many end categories, including alcoholic and non-alcoholic beverages, as well as snacking bars. Partially offsetting this is the softness we continue to see in larger CPG customer volumes. QSR trends improved in the Americas and in Asia Pacific. In the Americas, we are continuing to drive innovation with our customers, driving volume growth amid soft book traffic. In China and Australia, our customers' new products and promotions are driving strong volume growth. In Southeast Asia, volume growth benefited from our customers lapping the impact of geopolitical boycotts in the prior year. Let me now touch on some areas where we are seeing some pressure. The areas of pressure are primarily in our flavor solutions business. In the Americas and in EMEA, some of our CPG customers continue to experience softness and volumes within their own businesses. We continue to work on offsetting these trends through innovation and collaboration with customers, and by winning new customers. The food service environment remains challenged. While our food away from home performance continues to outpace the industry, we are seeing flat performance in branded food service in the Americas, as well as some of our customers are seeing softness in their volumes due to a slowdown in foot traffic. QSR traffic remains soft in the MEA. 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. As outlined on slide six, 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 focus on brand marketing as our plans across all categories are supported by our global brand marketing initiatives. We are prioritizing investments to connect with consumers and fuel growth. Our differentiated brand marketing is driven by a combination of factors. In addition to maintaining a high share of voice, We are committed to having the best content in our categories, content that inspires and educates consumers and reaches them at the right points on their path to purchase and on their flavor or diet journey. From flavor exploration, to menu planning, to shopping and cooking, and even to eating and sharing the experience online. In the first quarter, brand marketing spend increased against the high spend in the prior year as expected. This increase was broad-based and a key driver in supporting volume growth for this quarter, as well as for maintaining our volume momentum for 2025. Through our efforts across multiple channels and by leveraging our digital capabilities, we are driving further household penetration and increasing buy rates across our core categories. Our holiday campaigns across our regions proved successful. Our marketing campaigns in the Americas highlight our everyday value, innovation, and point of difference to consumers. and are supporting our volume growth and driving share gains. Our Frank's Super Bowl activation campaign with Paris Hilton was very successful. We gained new buyers, and media and consumer sentiment was incredibly positive. To wrap up our growth plans, although we are navigating in a difficult environment, we remain confident in the long-term health of our business and in our fundamentals, and in delivering our 2025 financial outlook on both near-term and long-term objectives. we remain focused on investing behind our growth levers to continue to drive differentiated performance.

Now, over to Marcos. Thank you, Brandon, and good morning, everyone. Starting on slide eight, our total organic sales grew 2% for the quarter. This increase was volume-led, with more than 2% volume and product mix growth partially offset by pricing. Moving to our consumer segment on slide nine, Organic sales increased 1% as volume growth of 3% was partially offset by a 2% impact of pricing investment. Consumer organic sales in Americas was flat. 3% volume growth was offset by price investment. Volume growth was strong across our core categories and was really more investment in brand marketing, innovation, and category management. In terms of pricing, The decline primarily reflects the price gap management investments that were mostly in place in the second quarter of 2024, as well as incremental and targeted promotional activities. In EMEA, we grew consumer organic sales 4%, driven by a 2% increase in volume and 2% increase in price. The volume growth was broad-based across product categories in our major markets. We're pleased with the strong sustained volume growth in EMEA, As Brenda mentioned, we took selective pricing actions in EMEA to offset commodity costs. Consumer organic sales in the Asia-Pacific region increased 3%, driven by a 2% increase in volume and 1% contribution from price. This growth reflects the gradual recovery we expected in China. We're pleased with our performance and expect these trends to continue through 2025. Turning to our flavor solutions segment on slide 10, First quarter organic sales increased 3%, driven by volume growth of 2% and a 1% contribution from price. In the Americas, flavor solutions organic sales increased 4%, reflecting 3% price contribution and 1% volume growth. Our results reflect a strong performance with faster growing flavor customers and improved QSR growth, which were partially offset by sub-CPG customer volumes. The price contribution is primarily related to currency in Latin America. 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 Asia-Pacific region, flavor solutions organic sales increased 15%, with volume growth of 16% driven by QSR customer promotions, limited time offers, as well as new products, partially offset by pricing. Moving to slide 11, as expected, gross profit margin expanded by 20 basis points in the first quarter versus the year-ago period, driven primarily by the benefit from our comprehensive continuous improvement program, or CCI. Spelling, general, and administrative expenses, or SG&A, increased relative to the first quarter of last year, driven primarily by a shift in timing of our stock-based compensation expense from the second quarter into the first quarter, as well as increased investments in technology and brand marketing as expected. For the quarter, adjusted operating income declined by 5%. Excluding impact of currency, adjusted operating income decreased by 3%. This decline was driven by the increase in expenses I just mentioned. Our first quarter adjusted effective tax rate was 22%, compared to 26% in the year it appeared. Our tax rates This past quarter benefited from discrete tax items. Our income from unconsolidated operations in the first quarter declined 18 percent, primarily due to the strengthening of the U.S. dollar against the Mexican peso. Turn to our segment operational results on slide 12. Adjusted operating income in the consumer segment decreased 17 percent, or 16 percent, in constant currency. The decrease was primarily due to pricing and increased cost including brand marketing and technology investments, partially offset by cost savings generated by our CCI program. Looking ahead, we expect consumer-adjusted operating income margin expansion to normalize in the year-to-go period. In flavor solutions, adjusted operating income increased 28%, or 33% in constant currency, driven by product mix, pricing, and CCI-like cost savings, partially offset by increased H&A costs. we continue to make progress in expanding operating margins in line with our objectives. The bottom line, as shown on slide 13, first quarter 2025 adjusted earnings per share was $0.60, as compared to $0.63 for the year-ago period. This decrease was primarily due to the SG&A increase I mentioned earlier, as well as the increasing impact of currency on our operating profit and unconsolidated results, partially offset by a more favorable tax rate. The impact of currency on adjusted earnings per share is about 3 cents per share. On slide 14, we've summarized highlights for cash flow and balance sheet. Our cash flow from operations for the first quarter of 2025 was $116 million, compared to $138 million in 2024. The decrease was driven primarily by higher cash used for working capital, partially offset by lower incentive compensation. We return $121 million of cash to shareholders through dividends and use $37 million for capital expenditures. Note that the timing of capital expenditures would fluctuate on a quarterly basis, depending on the phasing of initiatives, including 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 shareholders through dividends, and maintaining a strong balance sheet. We remain committed to a strong investment grade rating and expect to continue to deliver strong cash flow in 2025, driven by profit and working capital initiatives. Now turning to our 2025 financial outlook on slide 15. We are maintaining our guidance for the year. Our outlook continues to reflect our prioritized investments in key categories to strengthen volume trends and drive long-term profitable growth, while appreciating the current level of uncertainty in the consumer and macro environment. First, let me address tariffs. As you know, the situation remains fluid. At this time, we plan to offset costs related to U.S. import tariffs on China with our CCI savings and some very targeted price adjustments. Our focus remains on safeguarding the health and competitiveness of our brands, sustaining the growth momentum in our business, and maintaining transparency with our customers. We don't believe our current plan actions will be material to the total business or will have a significant impact on our volume mix outlook for the year. That said, due to continued uncertainty on this topic, our outlook does not include any additional impacts on tariffs that could potentially be implemented this year. As things evolve, We'll provide updates on our outlook within your typical reporting cadence. Turning now to the details of our outlook. Current rates are still 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 continue to expect organic net sales growth to range between 1% and 3%, and for growth to be volume-led. In the years to go, we expect to deliver total volume growth across both segments, and for total pricing to be flat to slightly positive, primarily driven by flavor solutions. For China, our outlook assumes a gradual recovery, and we expect China consumer sales to improve slightly year over year. We saw this come through this past quarter, and we expected it to continue for the rest of the year. Our 2025 gross margin is still 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. Consistent with historical trends, we expect our gross margin expansion to build throughout the year. In addition, for gross margin expansion, we expect SG&A benefits from cost savings to be partially offset by investments in technology, as well as brand marketing to drive volume growth. For the year, we expect our brand marketing spend to increase in the high 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. Similar to our gross margin trends, we expect growth in our operating income to build throughout the year. This remains 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 U.S. dollar against the Mexican peso, which is impacting the results of our largest joint venture, McCormick in Mexico. To summarize, our 2025 adjusted earnings per share projection of $3.03 to $3.08 on the reported dollar basis reflects currency headwinds and the impact of increased tax rates relative to the prior year. On a constant currency basis, adjusted EPS is still expected to grow between 5% and 7%. To wrap up, our continued volume growth underscores that our plans are yielding results and sustaining this differentiated performance. Looking ahead, our cost savings programs will continue to fuel our investments and drive margin expansion. And we remain confident in the underlying fundamentals of our business and in 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 16. While the environment has gotten more challenging and consumer sentiment has been impacted, we have managed through these environments in the past, and we expect to navigate through this successfully as we continue to refine and align our plans. 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 is growing. 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 results demonstrate that we are investing in the areas that drive the most value and we expect to maintain this momentum. We also expect to 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, historically and over the last few quarters, coupled with our growth plans, give us confidence in achieving our near and long-term objectives. Ultimately, 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 and 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'd like to ask a question, you may press star one from your telephone keypad and a confirmation tone will indicate your lines in the question queue. You may press star two if you'd like to withdraw your question 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, for the first question. Thank you. Our first question will be coming from the line of Andrew Lazar with Barclays. Please receive your questions.

Great. Thanks so much. Good morning, everybody.

Good morning, Andrew. Good morning, Andrew.

I think on last quarter's call, you had guided to operating profit in fiscal 1Q to be sort of flat to slightly down. And as you mentioned, operating profit fell about 5% in the quarter. Decline was heavily weighted, obviously, to the consumer segment. I think you mentioned pricing, stock-based comp, and brand investments, I think a lot of which were anticipated previously. So I'm just trying to get a better sense for what drove maybe the stronger-than-forecast operating profit decline, particularly in consumer. You know, was it a timing shift relative to initial expectations or sort of what drove that? And then more importantly, I guess, what now gives you the confidence in sort of reaffirming the full year? Thanks so much.

Okay. Andrew, let me kick it off, and I'll have Marcos handle maybe more directly the question on operating profit. You know, at a high level, Q1 was roughly in line with what our expectations were. And, in fact, you know, we had planned for Q1 to be sort of a different quarter than what the rest of the year will look like. And I think you kind of see that play out in a lot of our prepared comments. But there are timing elements that were called out before, like you mentioned, that certainly impact that. But we do remain confident in the year to go, period. And it's really supported by strong sales performance. Marcos, you want to?

Yeah, sure. So, Andrew, on the operating profit, I mean, you mentioned minus 5% decline in Q1. Adjusted for currency was minus 3%. So on constant currency basis, 3%. A couple of timing-related items, as we mentioned on the call. One is the shift of the stock-based compensation from Q2 into Q1. If you normalize for that, ROP would be essentially flat for Q1. Also, we had some timing in terms of brand marketing and technology investments hitting Q1. We're going to continue to have some of those investments and on the back in the future quarters of the year. But a little bit of timing between Q1 and Q2 there as well. In the consumer space specifically, you know, we had to lap the price gap management investments that we put in place in 2024. So that was a headwind that's going to go away. If you think about it on the consumer operating profit decline of 16 percent, I mean, two-thirds of it will go away in the next quarter, which is the pricing and the stock comp shift. And, you know, FX was a bigger headwind. I mean, we're trying to focus on the things that we can control. It was a bigger headwind. Now we're seeing FX moderating a little bit going forward. So that's why we're keeping the guidance as it is. And then in terms of the guidance question, yes, we do have a lot of confidence in the guidance that we put out there. I mean, top line is coming as we expected. We will continue to see growth in both segments, consumer and labor solutions. for the full year. And the consumer, you're going to see growth all quarters and across all regions for the balance of the year. Pleased with the flavor solutions performance this quarter, driving not only top line, but also profitability. As you saw, profitability was up 240 basis points on the back of CCI, product mix, and as well as the top line that drives leverage through the P&L. So happy there as well. You know, gross margin will build throughout the year, as I said on the call, 50 to 100 business points on the full year basis on the back of the CCI program. We want to invest back in the business, as we said before, in terms of SG&A, particularly brand marketing. And we feel confident about expanding margins for the full year. You know, between 4% and 6% operating profit growth for the full year, you know, primarily driven by the flavor solution segment.

Thanks so much. Appreciate the call.

Our next questions are from the line of Peter Galbo with Bank of America. Please proceed to your question.

Hi. Good morning, guys. Two questions on the Americas consumer business. And Brendan, I'll toss the first one to you. I think you mentioned that the price gap management, the incremental price gap management in the first quarter was maybe seasonal or tied to a seasonal business. And the expectation is that the consumer price will be flat going forward. I'm just wondering if on an underlying basis, you know, within America, if that pricing still has an opportunity to be negative given some incremental investments. And maybe that's, you know, you saw good returns on the promo around the holidays. And so you'll look at that as we get into grilling season. And then you're offsetting that possibly with EMEA. But I just want to understand kind of the pieces underneath the flat price for consumer comment at a total company level relative maybe to the geographies.

Okay, so thanks, Peter. First of all, let me just kick off with, you know, overall, we had very, really strong sales performance throughout the company, both in both segments. Specifically, though, thinking about consumer, that's where most of your question focused on. We delivered really strong volume growth, you know, across the business. I mean, across all regions, up 2.6%. So we really think that that was indicative of the type of strength that we had been communicating on in the prior quarters. There was a price element, obviously, as you called out, specifically in Americas in Q1. And a lot of that had to do with we did target an incremental promotion on a recipe mix business. I'm not sure. If everyone felt the cold weather that most of the country felt but that's really good for chili volume and gravy and so we saw an opportunity really a great opportunity to just Continue to drive that business even harder during the first quarter because it's a great time of the year for those specific products and we really see it actually in a lot of our volume and share performance and that that segment of our business and So that's what really drove a lot of it. It was, you know, sort of one of those, we reserve the flexibility to be able to spend across the business where we feel like we need to. And that might have been, you know, sort of the one element that was, you know, if you could say incremental to what the price gap management, you know, plans and programs one would have expected. As we look to the rest of the year, we don't really see price having much contribution, you know, in terms of it being super positive or super negative. across the portfolio globally, but I would say that's definitely going to be the case in the Americas. We're going to be maintaining the price investments from the prior year. There is a little bit of pricing that's going to come through in EMEA to deal with some commodity pressures that they're feeling. So, you will see a little bit of that, but they will be growing volume. And so, that's kind of one perspective, I think, on, you know, how to think about the first quarter and then what to expect the rest of the year. Volume growth in the Americas is really the fundamental driver. I think you saw that strength in our consumption. You're also seeing it in the actual sales results. There might have been a little bit of a gap from a standpoint of our consumption and our sales, but that's really typical dynamics for us in the first quarter, as we would typically see that after, obviously, a very strong holiday period that we had. So I'll stop there to see if I've addressed your question, but happy to take on more.

No, thanks, Brendan. I think that's very helpful context. And maybe just as a follow-up, you know, I think we've gotten a few questions this morning just around, again, in America's consumer kind of shipment versus consumption. And just whether there were any dynamics, you know, you saw from a carryover perspective on inventories out of Thanksgiving or any timing shift related to Easter just that you're thinking about, again, as we contemplate the shift to consumption. Thanks.

Let me add some more context on shipments to consumption. We have very few concerns about our shipment versus consumption profile, just to give you some more context. First of all, we had a really great holiday program, resulting in really strong consumption, not only in Q4, but also in Q1. So we have a really strong consumption profile kind of underpinning really our sales growth. over the past two quarters. Consumption, you know, and the outpacing in Q1 of sales is a typical dynamic that we see on inventory patterns across our business over, you know, the last decade or so. And that's just something that we typically expect. There's probably two other variables, though, that I think one could say is a little bit incremental or new in this quarter. And the first one is we're not really seeing any early Easter shipments like we did last year because Easter is falling later in April. And so it's just there isn't really anything happening in Q1 with regard to Easter like it might have the year before. And then we do have a strong innovation plan for the year. We got an early kickoff on that this year, which means a little bit more slotting spend. whatever increases we had in slotting comes into the first quarter because it matches with the shipments of the item. So, you know, that's one, you know, indication that, you know, obviously we're off to a good start on innovation, but some of that spend comes into the first quarter, and that was a little bit heavier than it was the prior year. But I don't look at those two things as, you know, structural problems. Those are just cycles that we go through. It's really quite normal. I think it looks, the profile is what we'd expect. If you combine Q4 and Q1 together into one number, it's exactly where we'd want to be.

Great. Thanks so much, Bennett.

Our next questions are from the line of Alexia Howard with Bernstein. Please proceed with your question.

Good morning, everyone. Good morning, Alexia. Hi there. So can I focus on the growth of sales in flavor solutions? I'm wondering if you can quantify or at least comment on how much these new high-growth customers adding to your sales or your volumes in that segment? And then by contrast, how much the QSRs benefited also in there? And then offsetting that, you had the CPG customer weakness. How big was that compared to some of the other dynamics? And then I have a follow-up.

Thanks for the question, Alexia. We did have a good quarter on flavor solutions overall. In fact, I would say in two out of our three regions, you know, we have volume growth, mostly in the Americas and Asia Pacific. Just to give you a little bit more, you know, context and detail, I'm not going to be able to sort of quantify each individual segment within or, you know, kind of categorize each volume and give it, you know, a framing on numbers, but I'll give you some context in terms of what we saw, you know, in the quarter. We did very well with those high growth, you know, sort of, you know, innovator customers that are a lot of emerging segments, many of them attached to health and wellness. And so we continue to see strong growth from them. We also continue to acquire new customers there. So it's not only volume, but it's also gaining share that's helping us there. And it allows us to diversify our sales mix and our portfolio. But we also saw strength in the QSR business. Even if there is weak traffic in the industry, And what was driving that is, you know, we had some innovation wins execute in the quarter. We also want some new customers there, too. So in the Americas region, you know, it was the QSR customer base and that, you know, the small high innovator customers that we have in flavor that were really driving and offsetting any of the weakness that we saw with larger CPGs. In Asia Pacific, it was a lot of QSR performance that drove the business. Increased customer promotions and limited time offers, you know, certainly contributed to some strong numbers, but also we were lapping the geopolitical boycotts from a year ago. So that also improved volume performance in Asia Pacific. EMEA, on the other hand, definitely saw, you know, continued weakness, although we see sequential improvement quarter to quarter. It still is soft in terms of traffic with QSRs, and so that one, you know, that region was down. But underlying all of this, there is a softness with larger CPG companies, I would say, not just within the Americas, but also we're seeing that in Europe, too. And that's consistent with what you're hearing, I think, from other company reports. And so we're seeing a little bit of that in our performance. I would say, though, when we look at it category to category, we tend to still outperform what's going on in the broader market. But nonetheless, the volumes are weaker.

Great. And as a quick follow-up, it's probably too early to say anything, but RSK Jr. seems to be pursuing an agenda of driving out artificial additives across packaged food and probably in the restaurant sector as well. As I say, it's probably too early to tell because he's just turned up on the scene, but are you seeing any uptick in reformulation efforts on the part of your CPG or restaurant customers in the U.S.? ?

Yes, with regard to colors, just let me first provide some context in the McCormick portfolio, our consumer portfolio. We don't really have a lot of usage of color in our products, as you might expect, at least very, very few overall. Now, with respect to formulations, we are seeing more activity on that, definitely. Now, reformulation activity has always been a part of the work that we do with our customer base. And we've been doing that for quite some time. But we are seeing a take-up in reformulation activity. And that would align with what you're seeing and being written out in the news media regarding what we're hearing from the new administration. But it isn't just colors. It's also sodium. We've always been working on sodium. It's also about just working on trends that are certainly positive, like hydration, functional foods, high-protein. We're seeing reformulation activity across our customer base, but also a lot of new product activity too.

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

Thank you. The next question is from the line of Ken Goldman with J.P. Morgan. Pleased to see you with your questions.

Hi. Thank you. Understanding the situation changes daily or sometimes hourly, You know, what should investors be looking for in terms of key tariff risks ahead, you know, as well as, I guess, related headwinds and, you know, actions that the company will take in response? And I know these are myriad in nature, but anything you're really keeping an eye on that we should also be following, I think, would be helpful.

Well, just in case it might have been missed, there are known tariffs already that we have accounted for in our forecasts and our guides for the year. Those were specifically the ones that were levied on China. So those are already factored into our thinking right now, you know, overall, Ken. As it relates to anything moving forward, it is difficult to, you know, sort of project on what will be the areas that we have to focus on because we're not exactly sure how exactly, you know, these might come through. So, we're certain, you know, like you just said, we're staying very close to what the latest news and the latest potential plans might be. We're thinking through a number of scenarios there in terms of how that might get applied. There's obviously a lot of variability on how one might think through these tariffs just based on, you know, what might be, you know, recent reports. But we're staying close to, you know, what everyone else is learning too. I think from a broader standpoint, I would just say, you know, these are situations that we've dealt with in the past, and we expect to be able to deal with them successfully moving forward, too, you know, depending on, you know, where the tariff might be in terms of country or on type of, you know, sort of raw ingredient or finished good. I mean, this is quite varied, I would say, and as you might expect, complex. But we're prepared to work through it when we know exactly what will happen.

Okay, thank you. And then a quick follow-up. I recognize that giving quarterly guidance isn't always your practice, but just in light of some of the moving pieces in the first half and some of the, you know, the conversation about pricing and SBC shifts, excuse me, how would you like us to sort of think about directionally EBIT and EPS in 2Q, you know, either relative to 1Q or versus a year ago? Just I think any help you can get in or we can get in sort of narrowing that would be useful. Thank you.

Yeah, you know, I'm going to maybe kick it off and then ask Marcos to add more context to this. But kind of back to my opening remark, you know, we always saw Q1 as being a very different quarter than the rest of the year. And so I think that would be, you know, the picture that we continue to paint. We felt like we've made that, you know, kind of clear when we closed the fiscal year in 24. But Marcos, you want to... Yes, Ken.

So it's difficult to give quarterly guidance, as you can imagine, especially in this dynamic environment that we are in these days. You should see a continued momentum in terms of, you know, our top-line growth will continue, as I mentioned, between Q2 and Q4. The margin, gross margin will build progressively. You'll see, you know, the bulk of our profitability comes in the second half of the year, which is, you know, second half is bigger than our first half. So you should see more of the gross margin impacting, you know, the second in a positive way impacting the second half versus the first half. And that will flow through the P&L to operating profit as well. Continue to invest in SG&A every quarter. And that is, you know, proving to be, you know, positive in terms of the volume that we're getting out of those investments that we're making. And then, you know, profitability will continue to build as well in line with the gross margin build. So, you should see some of the flip and timing related items that impacted in Q1. as a tailwind into Q2, but then continue to build gross margin and operating margin through the balance of the year.

Thank you. Our next question is in the line of Robert Moscow with TD Callen. Please proceed with your question.

Hi there. Thanks for the question. Brendan, I wanted to follow up to Andrew's question at the top of the call. You described the results as roughly in line with your expectations, and I'm just trying to drill down a little bit more into the organic growth for consumer versus organic growth for flavor solutions. You know, just based on tone heading into the results, I would have thought that flavor solutions would be a little weaker, consumer would be stronger, given everything you said about the shift to scratch cooking, the desire for more fresher foods and the flavors that are used to prepare them. And so this is kind of the reverse in first quarter. And I want to know if that was also in line with your expectations or not. And then more specifically on the chili promotion, is that a profitable promotion? It obviously drove a lot of volume. You said it was incremental. Did it grow profits? Thanks.

Sure. Thank you, Rob. Let me go to the top of your question in terms of expectations overall. I do think that flavor solution is a little bit stronger than what we would have expected. I think it really came through more in the QSR volume performance. You know, overall, so I think that was one part of your question. But then from a consumer standpoint, boy, I'm looking at volume, and it was really quite good. I mean, the Americas was up, I think, 2.9%. We talked about shift to consumption, obviously, as being a dynamic there that we typically expect. But overall, we felt like, and as you see the consumption increase, we think it was quite strong overall. And in fact, a nice continuation from what we saw in Q4. Now the holiday season obviously has a lot more demand going on in it, but we see a continuation of the strength that we have. China, I would say, we were looking for gradual improvement and we were pleased with the performance of China in the first quarter. as we look at our performance versus the Chinese New Year in the market, we believe that we slightly outperformed there. So that was, you know, we planned on growth. We called it slight growth. I would say, you know, that 3% that we saw was pretty good in terms of, you know, the challenging marketplace that is and where consumer sentiment is at that point in time. So just to give you context on the consumer side, I would say quite pleased with performance of volume in the Americas and, you know, as well as in China. EMEA also performed well, too. Now, we see a little bit more pricing coming through in EMEA as a result of some commodity pressure that they're feeling, but we're still growing volume in the context of having a little bit more pricing. And so, that's the profile there. Now, with respect to the, you know, incremental promotional and recipe mix, you know, when we look at price, you know, overall revenue management, price gap management, all of those things, we certainly take a very hard look at whether or not they're smart from a profit perspective. So I can tell you that our team, when they execute these programs, they're doing it because they know that they're strategically good for the business, they build loyalty, and they're also financially smart. And so we're pretty pleased with the performance, I think, overall in the first quarter. And just to kind of help bridge if there was any slight disappointment in the consumer number, I would just say we felt like that number was pretty strong.

Great. That's helpful. Thank you.

Did I? Yeah. Okay. I want to make sure I caught all the points of your question. Okay, great.

Thanks. Our next question is from the line of Max Gunther with BNP Paribas. Please receive your question.

Hey, thanks for the question. Recently packaged food players, particularly those with exposure to snacking, some of whom are your key customers in flavor solutions, have been observing prolonged softness and attributing it to the consumer feeling financial pressure. It sounds like you'd acknowledge some of those pressures, but you also seem to be attributing much more of this to changing consumer preferences as well, which is supporting some of your key categories in the consumer segment. I was hoping you could provide a bit more color on these changing consumer preferences that you're seeing and also how you would think about parsing out the weakness that we're seeing in snacking between the consumer feeling financial pressure versus the consumer changing their preferences for eating.

Thanks very much. Well, thanks for the question, Max. As it relates to sort of snacking trends and, you know, are the drivers related more towards affordability or the drivers related to health and wellness trends? you know, like a lot of things in life. It's a lot of both things, I think, probably. It's hard to parse that out. Let me tell you what I think we're seeing is, you know, in terms of snacking trends, there is a little bit more softness, but we're seeing pockets of growth also in snacking too. So especially within those value-added segments. So protein-based snacks and better-for-you options are in many ways, part of the snacking category as well. And we see growth in those areas. So I don't know that snacking by itself is the issue. It's just people are looking for other opportunities and other options as they consider snacking as part of the repertoire throughout the day. But we also, in terms of our own performance, believe that we're gaining market share in a number of these areas, you know, from competitors. So it's helped offset what we believe to be maybe a little bit of, you know, temporary weaknesses as we're looking at the snacking category, but it's more dynamic than maybe just one version of it. And that would be, you know, sort of one context I would give from a consumer perspective specifically on snacking. Now, if you think about just broadly the state of the consumer, Max, we think consumers continue to be resilient, but they're definitely still in a challenging environment. And You know, as many of us have seen, consumer sentiment has been impacted, especially over this past month, you know, primarily related to concerns over rising inflation potentially. And I think our view is that this prolongs what we saw, you know, as we thought about sort of the back half of 24, that the mindset of the consumer may not be getting, you know, shifting, you know, all that much towards the positive. It's just still kind of remaining resilient but challenged. They're still cautious about how they spend their money on food and beverage, and they're continuing that value-seeking behavior. In our own categories, what we're seeing is some people are maybe trading down to smaller units, but we're also seeing a lot of growth in our larger units, actually. So it tells me that people are looking for value. They're also putting a lot of focus on the value per ounce that they're spending. I think consumers are quite savvy, as we all know, and they're trying to make their dollar stretch as much as they can, which is another reason why they go into the perimeter of the store to make scratch meals, et cetera. They see them as healthier, but they also see them as cheaper. And so I think both of these, you know, kind of, you started with the snacking segment, but I'm going to end just more broadly. What we're seeing in our own categories is consumers are sort of blending both, and it's hard to parse them apart.

Great. Thanks very much. I'll leave it there.

The next question is from the line of Steve Fowers with Deutsche Bank. Please proceed with your question.

Hey, everybody. Good morning. Thank you. Brendan, I was hoping you could talk a little bit more about what you're seeing in Europe and I guess in the EMEA segment as it relates to consumer. Volume growth there as well this quarter, and you've got some pricing coming through because of the commodity backdrop. But at the same time, you cited other CPG companies in Europe kind of facing parallel dynamics as we're seeing here in the U.S. with consumer weakness. So as you think about the progression of demand in Europe over the balance of the year, I guess how are you sort of thinking through the scenarios there? And is there incremental investment that may have to be – be put into place in Europe as well as the year goes on to offset some of that demand weakness?

Thanks, Steve. Well, in Europe specifically, let me step back. We do a lot of proprietary research throughout the year, you know, frequently throughout the year. And we're trying to understand consumer sentiment not only with cooking and shopping and value and, you know, inflation, et cetera, many other topics, but we do this, you know, almost every quarter. And that helps us understand what the sentiment of the consumer is, especially, you know, let's say comparing Europe to the U.S. or, you know, other big markets that we operate in. What's striking to us is the similarity that we're seeing from a U.S. consumer sentiment broadly. with European, and so very similar trends in terms of, hey, I'm cooking from scratch more often, I'm eating at home more often than I did. I'm looking for value overall. We see growth in discounters as an example of that, which we're gaining distribution in. We also see performance of e-commerce really accelerating too. So people are looking for sort of that convenience you know, overall, and that's accelerating quite nicely in that marketplace. So, we're seeing somewhat of a similar sort of parallel, if you will, you know, behaviors and sentiment, you know, from a consumer standpoint. You know, the worry of inflation is just as high there as it would be here in the U.S. And so, that's coming through in the data that we're looking at. So, I don't know that I could pinpoint something uniquely different in Europe that's happening in the U.S. right now.

Okay. Maybe if I could just follow up. So is there, as we see net positive pricing flowing through your business this quarter and over the course of the year as expected, is what we're really seeing in there is sort of commodity-based pricing offset by promotional investments and the like, or is the need for this in value not quite as strong as the U.S., despite those dynamics?

The commodity inflation that we're experiencing is not broad-based. It's very targeted on specific items. And so, as you know, like, for example, we have a homemade desserts business in France. And so, you know, they're very, very specific items are receiving, you know, some inflation there. And so think about this as, you know, quite targeted. But still, having said that, we're focused on making sure that we have the right price points on shelves. it isn't necessarily through promotions only, but it's also through, you know, just sort of that, you know, making sure like price gap management, you know, that we're getting to the right price point on the shelf. But I do want to illustrate that's more of a targeted issue from a commodity standpoint, not broad-based.

Yeah, understood. Thank you so much. Sure. Our next question is from the line of Tom Palmer with Citi.

Please proceed with your question.

Good morning and thanks for the question. Maybe just to start out, I wanted to clarify an element of Ken's question from earlier. I appreciate the sales momentum and the expectation for gross margin to build as the year progresses, but I wanted to just clarify on SG&A, given some of the timing items that were called out in one queue. I think traditionally, SG&A dollars in the second quarter are quite a bit higher than we see in the first quarter. Does this still hold this year, or was there enough hold forward of some of these items into one Q that'll be a bit more balanced?

It is going to be balanced between Q1 and Q2. We should look at those two quarters together, Tom, as you think about the SG&A line. You know, there's a shifting to Q1, a negative shifting to Q1, as I explained. But that's going to be a tailwind into Q2. Brand marketing technology will continue across both quarters. So, Q1, you saw some of that. A little bit more heavily than, you know, anticipated, but it's going to come back in Q2 as well. We're going to continue to invest on the back of those two items. So, I would look at it as the combination of Q1 and Q2 for more of a normalized view on S&A.

Okay, thank you. And I wanted to ask on Canada, we've seen headlines about weaker sales for US brands. Are you seeing any of that at this point? And just any refresher on your exposure to Canada? Thank you.

In Canada, we actually had a really, just like in the US, a really robust quarter in terms of consumption and performance there. And, you know, I'm familiar with what you're referring to in terms of what we've seen written in the press. But we currently, you know, we're not experiencing any sort of difficulties there. And honestly, as we look at our performance from a consumption and sales standpoint, we're pretty happy with it.

Okay. Thank you.

Yeah. Thank you. Our final question is from the line of Matt Smith with Stiefel. Let's just use your question.

Hi. Good morning. I wanted to follow up on America's QSR trends or QSR trends more broadly. You called out weaker traffic trends, but volumes were actually up. Can you talk about the drivers of growth that more than offset that traffic weakness and your expectation for the rest of the year in terms of industry traffic trends and your ability to outpace the industry traffic? Were some of the limited-time offers and many benefits more short-term, or do those continue and allow you to outperform others? the traffic trends we're seeing for QSR. Thank you.

You know, we've often described this business as lumpy, variability quarter to quarter. And one of the variables that drives that is things like customer promotions and limited time offers, because they may or may not continue for either a short period of time or a long period of time. Difficult for us to fully predict, but that is one element in terms of, you know, what we saw is just, particularly when you think about in Asia Pacific, just a lot more heightened activity. In fact, I would say QSRs in Asia Pacific have been doing, you know, pretty well for the last couple of quarters, and so they've been growing stores, but also you know, accelerating on traffic overall. In fact, I think the store growth itself is one other contributor to, you know, overall performance there, which is not the same store sales type metric overall. You know, the other items that, you know, for us, if we win more business or we get innovation, that becomes incremental to the prior year. And so, you know, that enables one to sort of overcome whatever might be the trends with traffic going on in the industry. So, You know, we saw more of that happen in the Americas region. And that is an example of, you know, something that isn't necessarily short term, but rather it's something that, you know, sort of, you know, we're continuing to sort of improve our sales mix by either winning new customers or getting new products overall or selling them new products, if you will. So that's the other context there, which is, you know, equivalent to gaining share, if you will.

Thank you, Brendan. I'll pass it on. Thank you. I'll now turn the call back to Brendan Foley for closing remarks.

Thank you 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 conference call for this morning.