McCormick & Company, Incorporated

measures and the related reconciliations to the GAAP results are included in this morning's press release and slides. In our comments, certain percentages are rounded. Please refer to our presentation for complete information. Today's presentation contains projections and other forward-looking statements. Actual results could differ materially from those projected. The company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or other factors. please refer to our forward looking statement on slide two for more information. I will now turn the discussion over to Brendan.

Good morning, everyone, and thank you for joining us. We are pleased with our second quarter performance and the progress we made year to date to continue to advance our leadership and differentiation. By focusing on the levers within our control, we are delivering profitable volume led growth by investing in our brands, expanding distribution, driving innovation, and increasing operational efficiencies. McCormick remains a growth-oriented company with robust plans that leverage the demand for flavor and the strength of our brands. As consumer preferences evolve, we continue to execute on our proven strategies in alignment with consumer trends and with speed and agility to capture the demand for flavor and value across all occasions and channels. Our results continue 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. This morning, I will begin my remarks with an overview of our second quarter results, focusing mostly on top-line drivers. Next, I will review how McCormick is positioned relative to an evolving consumer landscape, including our view on tariffs. 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 second quarter results, as well as review our 2025 outlook, including a discussion of our tariff exposure and mitigation plans. And finally, before your questions, I will have some closing comments. Turning now to our results on slide four. In the second quarter, total organic sales increased by 2%, primarily driven by volume growth, in line with our expectations. Volume growth of more than 3% in the consumer segment was partially offset by declines in flavor solutions, as expected. This was primarily driven by overall softness in customer volumes in packaged food and EMEA quick service restaurants, or QSRs. Although customer demand in parts of our flavor solutions business remains pressured, we are performing better than the trends as we continue to benefit from pockets of growth from emerging brands and health-driven categories. which are expected to continue to moderate these declines. In global consumer, organic sales growth was volume-led across all three regions, demonstrating continued momentum across key markets. This sustained volume 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. In the Americas, we drove volume growth and share gains across core categories. In EMEA, our results reflect select pricing actions to cover rising commodity costs and continued solid volume momentum. In Asia Pacific, our business in China continues to gradually recover in line with our expectations. Let me now share our current view on the state of the consumer and provide our perspective on where tariffs currently stand. Although the environment remains challenged, consumers continue to show resilience across our key markets. They are adapting to economic pressures by adjusting how they shop, making more frequent trips with fewer units per basket, choosing larger pack sizes to stretch their budgets, and increasingly using leftovers. Importantly, they continue to spend and not compromise on flavor. What's most notable is the continued convergence of two enduring trends. value-seeking behavior, and a heightened focus on health and wellness. Consumers are cooking at home more. 86% of meal occasions are sourced at home, which remains above pre-pandemic levels. This shift supports demand for flavorful, fresh, and healthy meals that offer both value and health benefits. This is where McCormick plays a critical role. We're not competing for calories. We're flavoring them. Our portfolio helps consumers bring creativity and enjoyment to the meals they're already preparing and aligned with how people are eating today. Whether it's spices and seasonings, sauces or condiments, we enable better, more flavorful meals without adding complexity or cost. With our broad global reach, strong local brands, ongoing innovation and strategic pricing, We're confident that we are well-positioned to meet the needs of consumers and continue to deliver value through flavor. Before I discuss highlights for the quarter, I'd like to provide a high-level perspective on the current global trade environment and the actions we're taking to manage our business. The global trade environment is increasing the cost of agricultural ingredients we source from outside the United States, which is impacting our cost of sales. We have numerous levers to manage this impact. which is enabling us to maintain our volume-led top line growth and operating profit outlook for 2025, inclusive of tariffs. First, it's important to recognize that we have a global manufacturing footprint designed so that products sold within a region are made locally within that region. Therefore, our tariff exposure is primarily through importing agricultural raw materials, many of which can't be grown or are not commercially available in the United States. our competitors are facing similar challenges. Earlier this year, we formed a cross-functional team dedicated to monitoring trade policy developments and implementing mitigating actions that position us well for both the short-term and long-term. As a result, we are executing on plans to offset these costs through sourcing plans supported by advanced analytics, including alternative sourcing locations for certain raw materials and cost savings and operational efficiencies across the P&L. Additionally, we are collaborating with our customers to implement surgical and strategic pricing while also maintaining our volume momentum. Overall, our manufacturing location strategy, resilient supply chain, global sourcing capabilities, collaborative efforts across the organization, and the strength of our brands continue to be a competitive advantage, enabling us to mitigate our costs and maintain our business momentum. 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 continue to successfully execute on our plans and have driven share gains across our core categories in key markets for the last three quarters. Globally, McCormick branded unit consumption continues to outpace edible categories, center store, and perimeter growth in the U.S., as well as fast-moving consumer goods growth in EMEA and Asia-Pacific. let me provide some color on the categories globally. Starting with spices and seasonings, we drove strong volume growth across all regions, leading to volume share across the Americas and EMEA. In the U.S., volume growth continues to outpace private label for the fourth consecutive quarter. In Canada, we continue to grow overall share. And in Poland, share gains in spices and seasonings are contributing meaningfully to EMEA's gains. In recipe mixes, We continue to drive unit volume and dollar growth in the Americas. In Canada, with the strength of our local brands and continued investments, we drove dollar, unit, and volume share gains. We have plans in place to continue to drive category growth across all of our regions, most notably in the UK, as we continue to expand distribution. In mustard, we are pleased to see that our plans are continuing to drive great results. In the second quarter, similar to the first quarter, we drove dollar, unit, and volume share gains in the Americas. In EMEA, we drove unit and dollar share gains in mustard. In hot sauce, we are achieving strong results. In the U.S., we drove unit and volume share gains reflecting significant progress. Continued distribution gains as well as investments in differentiated brand marketing and innovation continue to fuel our performance. Outside of the U.S., we are building distribution in new markets within EMEA. We continue to make progress on total distribution points, or TDPs. In the Americas, we significantly expanded TDPs across spices and seasonings, recipe mixes, and hot sauce. In EMEA, we are gaining distribution in high-growth channels like e-commerce. In Asia Pacific, our business in China is recovering gradually relative to the prior year, As expected, we delivered strong performance. Growth in our categories, including spices and seasoning and condiments, continues to outpace the market. Moving to flavor solutions, we continue to see 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 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 beverages as well as salty snacks and bars. We continue to win business across beverage flavors and snack seasonings, and we are working through product reformulations with some of our customers to meet regulatory and consumer needs. QSR performance remains strong in both the Americas and Asia Pacific. In the Americas, performance was driven by innovation, customer growth, and continued share gains. In China and Southeast Asia, our customers' new products and promotions continue to drive strong volume growth. Let me now touch on some areas where we are seeing pressure. In the Americas and in EMEA, within flavors, some of our large 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 our customers and by winning new customers. 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 some of our customers are seeing softness in their volumes due to continued slowdown in foot traffic. QSR traffic remains soft in the NBA. We have seen this pressure impact our results for several quarters, and it is difficult to predict QSR traffic, particularly as some of our customers were impacted by geopolitical boycotts related to the conflict in the Middle East. We continue to collaborate with customers as they focus on improving their volumes through innovation and value and align with consumer trends. As outlined on slide six, Our growth plans remain consistent to drive growth through category management, brand marketing, new products, 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 support our differentiated performance for the second half of the year. In the consumer segment, our investments to drive volume growth remain in place, including increased brand marketing, innovation, and revenue management initiatives. They have driven our strong and differentiated performance over the last five quarters. While we are starting to lap this performance, we continue to see strong consumption trends and expect continued volume growth. In the back half of the year, we expect our distribution growth, accelerated innovation and renovation across the portfolio to drive increased purchase interest and velocity and support our strong volume performance. Let me provide a couple of examples. This quarter, we started to roll out our preferred consumer packaging across our grilling portfolio in time for the grilling season. We are energized for the grilling season and expect our newly launched Flavor is Calling marketing campaign to drive incremental consumer demand. Later this fiscal year, in alignment with consumer preferences, we are relaunching the gourmet line with countertop-worthy new packaging, including a vibrant gold cap that seals in freshness, provides a modern look, and highlights that we only use the best raw materials. In terms of new products, we are expanding our Cholula line into cremosas, chamoy, and cooking sauces. We are launching new limited-time offer finishing salts this summer and new finishing sugars for the holiday season, which build on last year's successful finishing sugars offer. In EMEA, we are expanding across multiple markets with our air fryer seasonings, which continue to be successful in the UK by addressing consumers' increased appetite for air fryer-focused seasonings. In addition, in EMEA, we are launching our new all-rounder seasonings This innovation addresses the desire from younger consumers for enhanced flavor without being specific to one type of meal. Moving now to our flavor solution segment, starting with branded food service, where we leverage the equity of our iconic brands that consumers love in the away from home channel. We continue to fuel growth with operator relevant and on trend innovation. For example, we are beginning to see on menus the 2025 flavor of the year, aji amarillo seasoning. In addition, we continue to focus on reaching consumers and operators through increased branded menu placements and with our new online shop called McCormick for Chefs, which launched early this quarter. Shifting to flavors, we are leveraging our culinary heritage and deep expertise in natural flavors and ingredients to support innovation with existing customers to ensure their products meet regulatory changes and preferences of health conscious consumers. And we are winning new high growth customers, which will help offset the softness we are seeing from center store CPG customers. We are collaborating with large and emerging brands to flavor energy, hydration, protein based beverages, and zero sugar drinks. In addition, We are leveraging our expertise in functional ingredients and our technologies to help customers mask off notes or enhance flavors as they add protein across categories, like protein-based snacks. Our win rate with health and wellness related briefs is strong across our regions, and we continue to dedicate resources to where we have the right to win. To wrap up our growth plans and specifically our view on the second half, we remain confident in the long-term health of our business, our fundamentals, and in delivering on our plans to continue to drive industry-leading differentiated performance. Now, over to Marcus.

Thank you, Brandon, and good morning, everyone. Let's start on slide eight. Total organic sales grew 2% for the quarter, driven by volume and mix. This reflects total volume-led growth for the last four quarters, and underscores our differentiation. Moving to our consumer segment on slide nine, organic sales increased 3% driven by volume and mix. Consumer organic sales in the Americas grew 3% with 4% volume growth partially offset by a 1% decrease in price related to targeted incremental promotions. The volume growth was strong across our core categories and was driven by our investments in brand marketing, innovation, and category management. In EMEA, we grew consumer organic sales 3%, driven by a 2% increase in volume and a 1% increase in price, related to targeted actions taken as a result of increased commodity costs. We're pleased with the strong sustained volume growth in EMEA. Consumer organic sales in the Asia-Pacific region increased by 4%, driven by volume. This growth reflects the gradual recovery we expected in China. We're pleased with our performance and expect these trends to continue in the second half of 2025. Turning to our flavor solution segment on slide 10, second quarter organic sales were flat with a 1% contribution from price offset by 1% decline in volume and mix. In the Americas, flavor solutions organic sales increased 1%, reflecting a 2% price contribution partially offset by a 1% decline in volume. Our results reflect a strong performance with faster growing flavor customers and continued QSR growth, offset by softness in CPG customers' volumes. The price contribution is primarily related to currency in Latin America. In EMEA, organic sales decreased by 7%, including a 5% impact of lower volume and a 2% decline from price. reflecting the impact of soft CPG and QSR customers volumes, which were impacted by geopolitical boycotts related to the Middle East conflict. In the Asia Pacific region, flavor solutions organic sales increased 3%, with volume growth of 5% driven by QSR customer promotions and limited time offers, partially offset by price of 2%. Moving to slide 11. Gross profit margin was flat in the second quarter versus the year-ago period, driven by costs to support increased capacity for future growth and higher commodity costs, partially offset by savings from our Comprehensive Continuous Improvement Program, or CCI. While we would have expected gross margins to improve relative to the prior year, we're seeing increased cost pressure caused primarily by the global trade uncertainty. Selling, general, and administrative expenses, or SG&A, decreased relative to the second quarter of last year, driven by the shifting timing of a stock-based compensation expense, as well as savings from CCI, including our SG&A streamlining initiatives. For the quarter, adjusted operating income increased by 10%. Excluding impact of currency, adjusted operating income increased by 11%. This increase was driven by CCI savings, including our SG&A streamlined initiatives, partially offset by gross margin, and increased investments to drive growth, most notably in digital, as well as our sustained investments in brand marketing. Our second quarter adjusted effective tax rate was 24%, compared to 14% in the year-ago period. Our tax rate in the prior year benefited from a higher level of favorable discrete tax items relative to the current year. Our income from unconsolidated operations in the second quarter increased 17%, primarily due to strong operational performance from our largest joint venture, McCormick in Mexico, partially offset by the strengthening of the US dollar against the Mexican peso. Turning to our segment operational results on slide 12, adjusted operating income in the consumer segment increased 10% with minimal impact from currency. The increase was primarily driven by improved SG&A expenses. In flavor solutions, adjusted operating income increased 10% or 13% in constant currency, driven by product mix, pricing, and improved SG&A expenses. We continue to make progress in expanding our operating margins in line with our objectives. At the bottom line, as shown in slide 13, second quarter 2025 adjusted earnings per share was 69 cents and comparable with the year-ago period. The benefits from operating profit and unconsolidated income growth were offset by lower gross margin and a less favorable tax rate relative to the prior year. On slide 14, we've summarized highlights for cash flow and balance sheet. Our cash flow from operations through the second quarter of 2025 was $161 million, compared to $302 billion in 2024. The decrease was driven by higher cash used due to the timing of working capital. We returned $242 million of cash to shareholders through dividends and used $85 million for capital expenditures. Note that the timing of capital expenditures fluctuates on a quarterly basis dependent 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 our shareholders through dividend, and maintaining a strong balance sheet. We remain committed to strong investment grade rating and expect to continue to deliver strong cash flow in 2025, driven by profit and working capital initiatives. Before turning to our outlook, let me provide some details on our tariff exposure and mitigation plans on slide 15. First, it's important to reiterate that our views reflect tariffs as they currently stand. It is also worth calling out that we purchased over 17,000 unique materials from over 90 countries, and no single commodity has a disproportionate material impact on our cost of goods sold. Importantly, we have also focused over the last number of years on decreasing our reliance on any one geography. Across the U.S., Canada, China, and our largest markets in Europe, more than 85% of what we sell in those countries is made in those countries. Specifically in the U.S., it's more than 90%. As you can see on the slide, we expect to fully offset the impact of current tariff costs for 2025. In addition, our plans will not have a significant impact on our sales volume outlook for the year. Our total gross annualized tariff exposure is approximately $90 million, and in terms of 2025 in-year exposure, it's about $50 million. We are offsetting a significant portion of this impact with sourcing plans, supported by advanced analytics and CCI savings. The remainder will be offset through revenue management initiatives. As we said, we're taking a very targeted and surgical approach to pricing and leveraging robust analytics and planning tools to ensure we maintain volume momentum and continue to meet consumers' and customers' needs for both value and flavor. In addition to the direct costs from tariffs, we're seeing elevated pressure on costs of certain commodities due to the global trading environment. We have seen this impact our second quarter, and we expect it to continue for the remainder of the year. We plan to mitigate this impact primarily through SG&A savings. Now let's turn to our 2025 financial outlook on slide 16. We are maintaining our net sales, adjusted operating profit, and adjusted earnings per share 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. Overall, in terms of currency, our assumptions remain the same. At the top line, we continue to expect organic net sales growth to range between 1% and 3%. and for our growth to be volume-led and primarily driven by our consumer segments. Flavor Solutions volumes are now expected to be flat for the year. In terms of price, we expect a slightly higher contribution, primarily through the Flavor Solutions segment, and some tariff-related pricing will come through in the fourth quarter. For China, our outlook continues to assume a gradual recovery, and we expect China's consumer sales to improve slightly year over year. We saw this come through in the past two quarters, and we expect it to continue for the rest of the year. Our 2025 gross margin is now projected to range between flat to up 50 basis points for the year, compared to prior guidance of 50 to 100 basis points. This reflects elevated cost of certain commodities coming in higher than we had planned, as I mentioned earlier. As we look ahead to the second half, we expect year-over-year gross margin expansion to be weighted towards the fourth quarter driven by the timing of certain mitigation efforts. On SG&A, we expect CCI savings, inclusive of our streamlined initiatives, to be partially offset by investments in technology as well as brand marketing to drive volume growth. We continue to invest in brand marketing and we're driving more efficiencies through the use of technology as well as our CCI program. As a result, our adjusted operating income growth expectations remains 4 to 6% in constant currency. Year-to-date, our adjusted operating income grew 4% on a constant currency basis, in line with our expectations, and implies higher level of growth for the second half compared to the first half. We want to maintain a balanced outlook that gives us the flexibility to continue to invest in the business while expanding margins. In terms of tax, We expect our tax rate to be between 22% and 23% 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. Our tax rate is slightly higher than our prior guide due to changes in the benefit from discrete tax items. We expect our income from unconsolidated operations to decline in the high single digit range in 2025, reflecting the strengthening of the dollar against the Mexican peso, which is impacting the strong operational results of our largest joint venture, McCormick de Mexico. The business continues to perform well and is contributing to our net income and operating cash flow results. In summary, our 2025 adjusted earnings per share projection of $3.03 to $3.08 on a reported dollar basis, reflects currency headwinds and impact of the increased tax rates relative to the prior year. On a constant currency basis, adjusted EPS is still expected to grow between 5% and 7%. In closing, the strength of our performance underscores that our plans are yielding results and sustaining our differentiation. We're pleased that we're maintaining our volume-led momentum. and expanding operating margins in 2025. There's certainly work ahead for 2026 to offset the continued headwinds and sustain our strong business momentum. We believe we have the right plans and capabilities in place, and we remain confident in the underlying fundamentals of our business and in delivering on our 2025 financial outlook and long-term objectives.

Thank you, Marcos. Before moving to Q&A, I would like to close with our key takeaways on slide 17. We expect to continue to execute on our proven strategies in alignment with consumer trends and with speed and agility. The long-term trends that fuel our attractive categories, consumer interest in healthy, flavorful cooking, flavor exploration, and trusted brands are enduring trends. We continue to drive differentiated, volume-led, top-line growth and driving share gains across our quarter categories. Our results demonstrate that we are investing in the areas that drive the most value, and we expect to maintain this momentum. Additionally, we are well positioned with our robust CCI and cost savings plans to mitigate tariff-related costs in 2025, fuel growth investments, and expand operating margins. 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 at this time, please press star 1 from your telephone keypad and a confirmation tone to indicate your line is in the question queue. You may press star 2 if you'd like to withdraw your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, for our first question. Thank you. And the first question comes from the line of Andrew Lazar with Barclays. Please proceed with your questions.

Great. Thanks so much. Appreciate it. I guess, Brendan, recently, you know, heading into second quarter results, McCormick had been kind of reminding investors that EBIT growth would likely be more weighted towards the second half, but second quarter EBIT actually came in far stronger, right, than expected across both segments. So what's either surprised you or came in differently in terms of the outcome versus maybe what you had been messaging before the quarter?

Well, thank you for the question, Andrew, and good morning. Let me just make a couple opening, you know, open up with a couple thoughts on that and then turn it over to Marcos. You know, we did have a good quarter, and I think about, you know, the things that we thought would happen, you know, broadly happen. You know, our consumer business continues to perform well, driven by volume across our core categories, and we're building shares. And in Flavor Solutions, I think we're working through the tough conditions that our customer base is facing, and I think we've performed better than most. So that was relatively pretty close to expectations. And I'm really proud of how our team has really worked through a very dynamic period. I mean, there's just certainly a lot of things going on, and they've done terrifically well. And probably with consumers, the trends that we've been speaking about, about this convergence between the seeking for value and seeking for health and wellness is those tend to still benefit our categories and our business. And that's both from a short-term and a long-term outlook perspective. So all of this enables us to maintain positive momentum, and we saw that play through in the second quarter. Marcos, you want to make a comment on specifically?

Yeah, sure. Yeah, sure. So, I mean, in addition to the top-line performance that we had in this quarter, which was very strong, particularly in the consumer segment, volume-led top-line growth, We also had a very strong operating profit delivery of about 11% on constant currency. And that was primarily driven by HNA, if you look at the P&L. And the HNA, year on year, we have two elements that is impacting that strong performance. One is half of the variance that we saw year on year is related to the stock-based compensation that we talked about in Q1, which was a headwind in Q1, and now it was a tailwind in Q2. That's half of it. The other half is essentially CCI program and our streamline initiatives, particularly within SCNA. We have been working very hard and diligent in terms of streamlining the costs of all lines of the P&L. As you recall, CCI touches all lines of the P&L. This quarter, we went a little bit further in terms of, you know, streamlining the costs within SCNA. And that is like things like discretionary, indirect spend, professional fees, travel and entertainment and things like that. Also, we made some organizational changes that had an impact in Q2. Those changes will continue for the balance of the year. So that is essentially the biggest element that drove the performance in Q2. But if you think about it on a normalized basis, and you should think about half one and half two together in this moment in the year, and you think about half one, If you normalize half one, operating profit grew by 4%, constant currency, which implies a higher growth in the second half of the year for us to hit our objectives that we laid out. And then if you think about the second half of the year, I would just add that you're going to see more of a fourth quarter weighted results due to the mitigation efforts that were put in place and actions were put in place will be They are implementing right now, but they're going to be fully implemented by Q4. So you should see a gross margin more towards Q4 as well as operating profit hitting Q4. So that's kind of the overall picture of the quarter and a half for perspective.

All right. Thanks for that. And maybe just quickly, can you talk a little more specifically about the tariff mitigation actions? Maybe, you know, how much is the cost work versus the sort of strategic pricing that you're planning? And I guess, how do you go about determining where it's more appropriate to be able to take some pricing actions without impeding, you know, obviously the really strong volume momentum that you've been developing over the last couple quarters. Thank you.

Yeah, that's a good question, Andrew. I mean, we have been very mindful in terms of all the levers that we're pulling in terms of mitigation actions to offset tariffs, $15 million in a year. And the team has done a fantastic job pulling a lot of scenarios for us to assess. And at the end, we came with the majority of the mitigation actions are driven by sourcing, as well as CCI. We have a very robust sourcing organization with a lot of experience, but then on top of it, we have a lot of data and analytics that help us make decisions in terms of buying decisions and procuring and sourcing locations and things like that, as well as CCI. So that is the majority of it that we're taking on. And then in terms of pricing, it is the residual, right? The residual is pricing that we're taking. We're being very targeted and surgical in the way that we do that. We have also analytics that help us take pricing where we see the elasticity elements of it. And so therefore, it's a very surgical approach to it that we want to continue to balance, as you said, the top-line momentum that we have, but also protecting OPs. I don't know, Brendan, if you want to add any comments on that.

Yeah, I'll just build on what Marco said, Andrew. You know, the price gap management investments that we've talked about previously remain in our base, and we don't expect surgical pricing, you know, that we've talked about to slow down that overall momentum. So as we overlap right now that price gap management investment, you know, we start to overlap that in the second half, and we still see actually pretty good performance from it even as we overlap it. So I think that needs to be, you know, put into context. But, you know, that price gap management efforts aren't necessarily going to be on the same SKUs that where we might apply, you know, some of the surgical pricing. So, you know, back to the point about data analytics that Marcus mentioned, you know, we are leveraging that all the time and looking at it, you know, in a quite disciplined way. And our revenue management team has really been quite strong on this. We have a deep team doing that work. We do expect some elasticity impact. That's to be expected, but we still expect to drive solid volume as we go through the back half of the year.

Thanks so much.

The next questions are from the line of Peter Galbo with Bank of America. Please receive your questions.

Hey, guys. Good morning. Thanks for the question. Good morning.

Hi, Peter.

Morning. Brendan, I was hoping maybe to get a little bit more detail, if you can frame up kind of the gross tariff exposure of the $90 million, you know, expanding a little bit about just kind of how you arrived at that number. And I believe, just to clarify, you also made some comments around, you know, cost of goods being impacted just by global trade environment, which I think is separate from the tariffs. So maybe just to start some additional detail around those two items, please.

Yeah, I think just on your last point there, we are distinguishing one from the other, to your point. Let me ask Marcos to kind of provide a little bit more context.

Yeah, framing, Peter, the $90 million, I mean, it's essentially, you know, I would start from our supply chain footprint. We're very well positioned in terms of manufacturing footprint, as well as our sourcing strategies. And as I said on the call, I mean, we are producing most of the things that we sell in the biggest market. So in the U.S., for reference, it's about 90% of what we sell in the U.S. is made in the U.S. So it's essentially our exposure is really related to raw materials, ingredients that we cannot grow in the U.S. You know, we have 17,000 ingredients across 90 markets. You know, there's no one single material that represents a significant portion of our COGS. And we continue to minimize the reliance on any one geography. So that work continues to be done by our sourcing organization. So when you get to the raw materials line, which is a sizable portion of our COGS, but not all raw materials are subject to tariffs. So when you think about the materials that are subject to tariffs, then we use the 30% tariffs on China, which is currently in place, 10% on the rest of the world, as well as USMCA compliance for Canada and Mexico imports that are close to zero. So you get to a blended rate between 30, 10, and zero. You get to a blended rate, which leads us to about 2% of COGS globally. So that's kind of the framing. It's different by region. Some of the regions, particularly in America, has a higher percentage than the 2% COGS. But that's kind of the framing. But more importantly, we are, you know, pulling all the levers that we can to mitigate the impact in 2025, the $50 million through the actions that I mentioned before.

Got it. No, that's helpful. And Brendan, just going back to your prepared remarks, you know, I think in flavor solutions in the Americas in particular, on slide five, you kind of had a couple of headwinds and a couple of tailwinds in the quarter and maybe more on the go forward. But maybe you can unpack each of those four or five that you talked about and how we should think about those specifically more in the second half. Thanks very much.

Yeah, Peter, I'd be happy to. From a flavor solutions segment perspective, if I were just to break down maybe first talk about our flavor business and what we're seeing there, and then also then talk about food away from home and what we're seeing there. And then maybe I'll throw in some regional perspective as I pull it all together for you. First of all, in flavor, we're definitely seeing the impact of slower volumes and just volume pressure in the grocery marketplace, particularly with some of our larger CPG customers. And I would say this is happening broadly at a global level. So it isn't specifically related to one region. But we definitely are, you know, seeing that slow down the center store volume. And that's been widely reported by peers and customers. And it does appear to be incrementally softer than the first quarter, you know, overall. On the other hand, though, we continue to see benefits with what we've, you know, framed as high growth innovators. Those are those maybe smaller customers compared to a larger global manufacturer. And, you know, we typically see them operating in some of these health and wellness-oriented categories. We see that in, you know, sort of hydration, as an example, or energy beverages. You know, many are trying to add protein, you know, to the products that they have. Or, you know, they're going with zero sugar. Or it could even be, you know, frankly, we're seeing even more recently, you know, opportunities in areas like with collagen and sleep supplements and digestive health. All of this needs flavor. And this is where we're also seeing, you know, some higher growth rates. And so that's tended to offset somewhat a little bit of that softness that we're seeing, but not all of it, clearly. But those are areas where we tend to see a little bit more growth right now. And those categories, those product lines also need flavor. And we're doing quite well there. And our competitive advantage is you know, seem to work out well, you know, with that customer base too, because we're working with functional ingredients, our technologies, the mask are really strong there. And in terms of enhancing flavors, we're also very, we're very fast and we're very accurate in terms of how we operate that marketplace. And, you know, there's a strong coordination with those high innovator, you know, customers that we've got. So that's our, you know, kind of our picture, if you will, if you think about, you know, our flavor business overall. And when I go next to food away from home, You know, I'll first talk to what is, you know, broadly what we call QSRs, quick serve restaurants. In the Americas, we're seeing some strength there, even if, you know, maybe overall traffic trends are not necessarily as strong. But where we're tending to do well is on their promotional activity and their limited time offers. We're participating a fair amount in that activity. And that tends to drive, you know, sort of accelerated improvement in those customers' performance. But it also includes our brands. And in many cases, that can really drive a lot of excitement, I think, to some of these promotions. And so we see some upside there in the Americas, and we're also seeing it in a specific region. Now, in that region, quick-serve restaurants have been actually quite strong for the last several quarters. And so we see continued strength in their performance. And again, it's driven by, you know, strong promotional activity and And driving traffic. But that's been true for some time. And, you know, obviously those markets and they're broadly performing well. If I also think, though, about, you know, food away from home and you look at, you know, beyond quick serve restaurants, areas like fast casual are actually growing in traffic and they're performing well in our brands. We're growing tabletop market share and we're seeing our brands get even more presence in locations like that. And so that tends to drive consumer excitement, particularly when they're thinking about where they can find value. Those are things that really strengthen, I think, the value proposition when you're eating away from home. And so we're seeing strength there, particularly in the Americas region. Having said all that, in the EMEA, we're definitely seeing continued softness in quick-serve restaurants. I would say it's a little bit softer than what we expected, but most of that, we think, is driven really by what has been framed as geopolitical boycotts due to the conflict in the Middle East. And so that is an area that I probably don't think we had expected to see as much softness coming from that. But as we look forward to the rest of the year, especially in a market like EMBA, we believe that that will tend to stabilize because we're also comparing against some pretty low numbers from the prior year. So I'll stop there because it's obviously a lot of individual diverse segments, and I'll see if that addresses what you're looking to get.

Yep. Thanks very much, guys.

Our next question is from the line of Robert Moscow with DD Cowen. Please proceed with your questions.

Hi, thanks for the question. A couple, Marcos. When you say that you've found sourcing opportunities, I imagine that means you're finding less expensive options. But I know that you make a point to buy higher quality ingredients than your peers. So how do you go about doing both of those things at the same time? Is there any risk of sacrificing quality And then secondly, you also mentioned elevated pressure on certain commodities due to the global trade environment. Can you be more specific on what that is, and why do you choose to mitigate it through SG&A? Thanks.

Rob, let me just take the first part of your question, and then I'll hand it over to Marcos for additional context. There is no tradeoff in our business with regard to quality. So I think that's really an important thing to say, immediately because, yes, it's a fair assumption that if we're mitigating this, we're finding a lower cost to offset what might have been a higher cost. But quality remains a top priority for our company, and we're still able to procure items that meet our quality requirements, which tend to be higher than anyone else in the industry. So I would just start off with that. But Marcus, would you like to add anything?

I think that you hit the first one. I mean, we're not going to make any trade-offs between quality and price, and we'll continue to. And that's really the advantage that we have in our sourcing organization, that we do both. It's an end, not an or, really. In terms of the second question, Rob, in terms of the pressure, I mean, when I said, you know, the global trade environment, I mean, what I meant was really The fact that, you know, suppliers and customers are in somewhat of a standstill right now. And if you think about it, I mean, the supply-demand dynamics that we expected, we expected to see drive, that dynamics driving lower costs, and that didn't materialize. So that is what is really impacting, you know, our gross margin. And that's essentially why we'll call down our gross margin for the year to zero, to flat and 50 basis points. And, you know, we're taking a very surgical approach to pricing, as I said, because we want to make sure that we maintain the momentum that we have in the business, the volume momentum, but also protecting OP. So we're pulling all the levers that we can through the P&L, and one big lever that we're pulling is SG&A. So if you go towards the back half of the year, you're going to see gross margin expansion in the second half compared to the first half. but we're going to offset that by SG&A initiatives. Although we're going to continue to invest in SG&A in terms of A&P, brand marketing, and technology, but that's going to be offset by the CCI programs that we have in place, including the SG&A streamlined initiatives that we implemented in Q2. So it's really playing with all the levers to minimize volume impact, but yet deliver margin expansion. Okay, thank you.

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

Good morning, everyone. A couple of questions here. First of all, what do you make of the expanded list of over 40 additives that Texas is planning to require on pack labels saying that they've been banned in other countries like Canada and the EU? This list of over 40 additives seems broader than just the artificial dyes that the federal level has covered so far. It seems to include antioxidants and preservatives that may be harder for food companies to find replacements for without reducing shelf life. It's obviously variola days. This only happened in the last few days. But do you anticipate another step up in reformulation efforts as a result of that?

You know, Alexa, I think with regard to the activities that are going on at a state-by-state level, we're working hand-in-hand with the Consumer Brands Associations and other industry peers and partners just to certainly work through what we believe can be a very, when you think about things on a state-by-state level, that can get really disruptive at a national level. And so the first thing that we would advocate, along with all of our other business partners out there, is whatever the consumer needs, you know, let's address it at a national level. Because when it goes state by state, that's just incredibly disruptive, you know, overall. Now, specifically, though, you know, with regard to additives, you know, I think each and every one of those just needs its own conversation. So it's hard to address, like you said, a list of 40 things. So today, I don't think I could address it directly with you, just because it's almost, it's certainly a significant, you know, amount. And I think that we have to get this down to a manageable level of conversation. That's about the most I could say right now on this because it is early days.

Perfect. Thank you. And then just as a follow-up, I know that back in 2020, you were planning to do your big SAP transition as a big event that year, and then obviously the pandemic put it off. I believe that you're still in the process of executing that. Is that going to be a meaningful step up in investment or is it a similar level of investment next year as maybe you've seen this year? Just wondering about the path for the investment on the IT side over the next couple of years. Thank you and I'll pass it on.

Sure, Alexia. I'll take that one. You know, we've pivoted our implementation plan. to really de-risk the ERP implementation. That's the first thing that I want to say. Instead of a big ban, we've pivoted to a functional deployment approach, which takes a little longer, but it takes the risk off the table. So that was the first thing that we wanted to do. So that's elongated a little bit of the implementation of the ERP system. But at the same time, it smoothed out the spends and investments. So you should not see a peak of investments regarding the ERP implementation going into next year. You should see something that is more normalized to what we've seen this year. But obviously, around technology more broadly, we'll continue to invest in digital, in AI, and things like that. But the ERP, specifically for the ERP, you should not see an increase in spend. It's pretty much going to be in line with what we've seen this year.

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

The next question is from the line of Steve Powers with Deutsche Bank. Please receive your question.

Yes. Hey, good morning, everybody. Good morning. So I wanted to ask about the brand marketing tweak that you've made in your outlook. I think you've been pretty clear in your intent to drive higher brand marketing investments to underscore the top line momentum that you've talked about. So I guess in that context, just the decision to step down brand marketing, by my math, it looks like maybe a $5 to $10 million reduction versus your prior planning. So I guess my question is, why not reinvest those efficiencies to provide further top-line insurance in an uncertain world, even if it were to cost you a couple of pennies in near-term EPS?

Well, thanks for the question, Steve. I think when we looked at overall A&P, What you're seeing right there is just really a reflection. I think you even said this in our prepared remarks of just our efforts around productivity and CCI. You know, we're constantly looking at ways to just, you know, buy media more cheaply and do things more effectively. And I think we continue to find ways to do that when we think about A&P. You know, and honestly, technology's been an enabler there, you know, for us. So I think that's, you know, one point of context I think it's worth sharing. When we look at the rest of the year, we still have quite a bit of increased investment to happen for the balance of the year in the second half. So this was one of not pulling back on anything and not reducing sort of the amount of intensity and focus that we put around that. So we have quite still a bit of A&P growth that's going to support the business over and above the prior year as we look at the back half. So we're really pretty comfortable, I think, right now that we continue to invest at higher levels year over year. But it's not an indication of any adjustment in strategy or trying to pull away investment for the business. We were simply just reflecting now to the point about having the opportunity to reinvest things. I will tell you that we're doing that every quarter. And so we've done it in the first quarter. You heard our commentary around, you know, I think recipe mix. We also did it again in the second quarter around hot sauce, and we're really starting to see strong results behind that right now too. And I'm sure we may look at other opportunities in the second half where we can also continue to reinvest. So that's kind of the perspective around that, Steve.

Okay, very helpful. And if I could, Brendan, you alluded to a good deal of innovation and distribution advances in your prepared remarks. I know you have a lot of activity ongoing and more coming. As we think about the back half, does the incrementality of those distribution innovation pushes skew it all to 3Q versus 4Q, or is it a fairly even contribution as the year progresses?

I would think about it as an even contribution as the year progresses. What is incremental? If you think about what was already in place and then what's incremental, we have continued growth in A&P support and spend on the business. We're going to see more new items hit the shelf in the second half versus the first half or even last year. We're also going to see even stronger distribution. I think it's already starting to come through in the data. And so that will be incremental to what we had in the prior year or in the first half of the year. And And that's kind of going to hit, I think, both quarters evenly. What won't, I don't think, is some of the surgical pricing that we talked about, that's probably likely to show up more in the fourth quarter. And so, therefore, you might see a slightly different, you know, composition. But broadly, the pressure that we have in the back half, I would say, is going to be consistent from quarter three to quarter four.

Does that help? Very good. Perfect. Thank you very much. Appreciate it.

All right.

Great. The next questions are from the line of Max Gumport with BNP PowerMath. Please proceed with your questions.

Thanks for the question. First, Brendan, you mentioned your continued confidence in your long-term objectives. I just wanted to confirm that even with the inclusion of tariffs now in your outlook, the long-term targets you gave at the investor day last year from FY20 through to FY28, do those still stand?

Yeah, we still feel like, you know, confident and comfortable with those. Obviously, as things change, we have to modify our plans at times, like if you think about, you know, sort of the first half of this year, but it hasn't taken us off our game plan from a long-term perspective.

Great. And then you talked about seeing an uptick in innovation activity from the large CPG customers, particularly in the U.S., who are also seeing some volume softness right now. You mentioned that they're doing things like putting more protein in their products, but could you talk more broadly about the level to which you're seeing this uptick take hold? Is it one of the higher levels you've seen in the past several years? And then give a bit more detail about the types of actions you're seeing from these large CPG customers with regard to innovation and how you think your business might be able to benefit from this activity. Thanks very much, and I'll leave it there.

Okay, thank you, Max. Well, from an activity perspective, we always have had activity in terms of reformulations, matching, you know, helping to roll out innovation and new products for our customers. When you look at the mix of activity, we're definitely seeing an acceleration in reformulation activity and even matching activity. And so those are areas that are on top of what would be a normal level of innovation activity. So it is net incremental, in my view, in terms of sort of the activity that we're seeing and what's happening. And we believe over time that will result in just increased overall performance, and we'll see that benefit come through our business. I just can't necessarily predict exactly when that will happen. Everything's on a different time schedule at times. But, you know, the other thing we look at is, frankly, our ability, our win rate and how we're performing, you know, overall in terms of when those opportunities come up. And we tend to do, you know, pretty well. I don't have any percentages I'm going to share right now on a call or anything like that. But we're pleased with our win rate and the type of performance that we're getting when we engage with customers or new customers in terms of winning those briefs, winning that activity. But the activity has definitely taken up, Max. I think that's maybe the spirit of your question. And we're seeing it, large customers, small customers. It's really overall quite active, I think, in the marketplace. And we see that as being a lot of health and wellness-driven activity.

Great. Thanks very much.

Our next questions are from the line of Scott Marks with Jefferies. Pleasure to see you with your questions.

Hey, good morning. Thanks so much for taking the questions. Good morning. Two questions from me first. I think previously you'd spoken to maybe some more volatile growth trends within the flavor solution business, just given timing of wins and other things. And you also made some comments earlier about expecting the EMEA side of that business to stabilize. So just wanted to confirm maybe how you're thinking about cadence of growth for the second half of the year within the flavor solutions segments.

Well, within Flavor Solutions, I think that we don't really provide a guide by quarter. So when I think about it, though, and trying to think about what is the context that we can provide, I think in the Americas region, we expect that the trends that we've seen so far to be sustained. And I don't know that I would expect to see... By the way, this business is typically lumpy, as we've used that description before. So that always applies. But when you think about beyond sort of the traditional element of lumpiness, if you just look at our first quarter and second quarter and then add up the first half, you'll see what I mean with regard to, you know, sometimes we see some lumpiness and trends. But in the Americas, we expect mostly those trends to sustain. Obviously, if we see a tick up in traffic, that would even improve that. And although QSRs are probably a smaller piece of our business in the Americas region, you know, we expect that to continue to perform well. In EMEA, I think we're comparing against weaker performance in the prior year, and that is sort of the same in both quarters. And we would hope that that would start to flatten out and begin to stabilize based on what we're seeing. And the one thing that we just cannot predict is just what may be happening geopolitically, and that might have an impact. That seems to have had a more of a volatile effect over the last year and a half. And so those are things that we We will not try to predict, but that has been one element in the first half of the year. When I look at Asia Pacific, I would give you the same reply as I did the Americas region. We expect those trends to really be consistent in the second half as in the first.

And just to be on that, Brendan, I would say, Scott, I mean, you would see in that part of the portfolio a little bit more pricing actions taking now as we go towards the second half of the year. And that is due to the commodities that I talked to before, but also some FX impact, primarily in Latin America. So we're, you know, taking some surgical, again, pricing in those markets, you know, just to make sure that we are in, you know, protecting our operating margin. And for the full year, the operating margin will expand its labor solutions in line with our objectives to get back to a level of operating margin that we had before.

Got it. And then just as it relates to the consumer business, obviously given strength of some of your categories, perimeter of store relative to some more center store areas right now, wondering just what are discussions like with retailers right now? Are they kind of more receptive to innovations? are they more receptive to surgical price increases than maybe some of your peers right now? Just trying to gauge, you know, what the conversations are like relative to history.

Well, I think broadly, we are, we feel like we're having very positive, productive conversations with all of our customers. You know, we take a customer-led, you know, framework and position in everything that we do, because we're there to grow their categories in their stores and in their banners. And so we certainly take very much a very strong category view of what's going to be healthiest for the category. And that includes the performance of our brands, as well as the performance of their private label and the category, you know, in general. And so... We believe that we've done really quite well, especially in the last two years, in really bringing forth just a more aggressive agenda and driving the categories and seizing opportunity to drive growth with consumers. And right now, I think we're seeing the strength of that, even if you look at distribution growth. That is a byproduct of great conversations, great relationships in terms of deciding what's right for the consumer. And so that is, we believe, an area of strength of ours. whether it's category management, revenue management, innovation, and also just our high levels of brand marketing support all really are there to drive the categories for our retailer customers. And so that's all going, I think, quite strongly. I would say our conversation has really been quite productive and quite collaborative.

Thank you. Final question is from the line of Brian Adams with UBS. Please receive your questions.

Hey, morning, guys. Thanks for taking the question. Just a housekeeping one. As we think about the, I think it's mid to high single digits or so, operating income growth for the second half of the year total company, do we expect that to be more concentrated in consumer or flavor solutions? Because on the one hand, based on some of the responses so far, Sounds like top line is probably going to be a bit stronger in consumer than in flavors. But I know flavors is also the area where you see more room for margin expansion longer term. And I know, Marcos, you just mentioned some pricing coming in there, too. So just try to balance those two things, if you could give any color there. Thanks.

Yeah, so on a quarterly basis, this may fluctuate. It does fluctuate between segments, as you know. And so in the second half of the year, you're going to see contributions from both segments. in terms of operating margin. You know, and then on a full-year basis, you would see that flavor solutions will have a driver, will be the biggest driver as we want to continue to invest back in the business, in the consumer, you know, to drive the volume momentum that we have. So that's kind of our philosophy. It's really on a full-year basis. You should look at the segments on a full-year basis more than on a quarterly basis. And in the consumer, the spirit is really to invest back, you know, the gross margin gains back into brand marketing as well as technology to continue to drive the volume line, the volume, the top line momentum through volume. And then on the flavor solutions is really about, you know, expanding margins and recovering our profitability there. But also growing, obviously, right? But that's kind of a, so on a full year basis, you should see more of a flavor solutions as a driver.

Good stuff. Thanks, guys. Okay. Thank you.

I'm going to turn the call back to management for closing remarks.

Okay. Thank you, everybody, for joining us this morning. If you have any questions following this call, please reach out. Thank you, and have a great day.

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.