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.