McCormick & Company, Incorporated

Good morning. This is Fratin Frejha, VP of Investor Relations. Thank you for joining today's third 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. Third quarter top-line performance was strong and marked our fifth consecutive quarter of volume-led growth, reflecting our differentiation and the benefit of continued investments in our brands, expanded distribution, and innovation. Due to the dynamic global trade environment, our gross margin was further pressured by rising costs. However, our effective execution on efficiency initiatives drove continued operating profit growth. We are executing with discipline on the actions within our control, while adapting quickly to the dynamics in the external environment, and at the same time, positioning McCormick for sustained long-term growth. This morning, I will begin my remarks with an overview of our third quarter results, focusing mostly on top-line drivers. Next, I will review how McCormick is positioned relative to an evolving consumer landscape for the remainder of this year and into 2026. Then, I will highlight some areas of success and the areas we continue to work on, as well as our growth plans. Marcus will then go into more depth and review our 2025 outlook, including an update on 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 third quarter, total organic sales increased by 2%, driven by volume growth, primarily in the consumer segment, in line with our expectations. In global consumer, organic sales growth was volume-led and demonstrated continued momentum across key markets and core categories in the Americas and EMEA. In Asia Pacific, our China retail business continued to deliver growth, However, our food service business, which is reported within China Consumer, faced softer demand due to slower consumption in certain channels, such as high-end dining. Despite this unforeseen headwind, we remained confident in a gradual full-year recovery in China Consumer for 2025. In global flavor solutions, despite soft industry trends, we grew underlying volumes as we lapped favorable growth related to the timing of customer activities in the prior year in the Americas. Softness in large CPG and branded food service customers volumes was also more than offset by QSR growth in both Americas and Asia Pacific. Also, we are increasingly benefiting from continued momentum in health and wellness categories, driven by both high growth innovators and private label customers. Lastly, in EMEA, QSR trends began to stabilize, marking an improvement relative to recent periods. Let me now share our current view on the state of the consumer and considerations for 2026. The environment remains challenging across our key markets, with market dynamics pointing to continued pressure into 2026. Consumers, especially low- to middle-income households, are adapting to the economic environment by adjusting how they shop. making more frequent trips with fewer items per basket, choosing larger pack sizes to maximize value, and stretching meals across a number of occasions. In addition, they continue to cook at home more often and shop the perimeter for fresh foods to help lower overall meal costs. These behaviors reinforce the demand for flavor, particularly in our core categories, with herbs and spices continuing to lead center-of-store unit consumption. health and wellness trends continue to gain momentum. Consumers are preparing healthier, more affordable meals at home while exploring new flavors and culinary creativity. High protein and healthy claims are driving purchase trends across retail and food service, alongside growth in functional foods that deliver great taste with added benefits such as protein, fiber, hydration, energy, and better sleep. Convenience Paired with flavor exploration remains an area where consumers are willing to pay more and e-commerce growth continues to accelerate across our core categories. These trends are fundamental, long-lasting, and support the continued demand for flavor, benefiting both the consumer and flavor solution segments. With our broad global reach, strong local brands, ongoing innovation, and strategic pricing, we're well-positioned to meet the needs of consumers and continue to deliver value through flavor. As we address immediate priorities in today's rising cost environment, it's important to reiterate that our strategy remains consistent. We remain committed to delivering volume growth and investing in our brands, technology, and digital transformation as we continue to reinforce the structural advantages that will drive our future success. We are balancing volume and profitability, and this year, we expect to offset rising commodity costs and tariffs as much as we can. Our global manufacturing location strategy, resilient supply chain, global sourcing capabilities, and collaborative efforts across the organization continue to be competitive advantages, enabling us to mitigate the impact of tariff and tariff-related costs and maintain business momentum. We are absorbing some incremental costs this year, which has a near-term impact on our profitability. This approach enables us to maintain our volume momentum and sustain investment in our growth initiatives, while still delivering operating profit growth for the year. As a result, we reaffirmed our volume-led sales growth and expect to deliver at least the midpoint of the range. In addition, we revised our profitability outlook to the low end of the range provided in January. This reflects the updated net impact of rising commodity costs and tariffs since our second quarter call. As we look ahead to 2026 and beyond, we will remain consumer-centric, committed to delivering value, flavor, and quality while maintaining our volumes and protecting our profitability. Let's move to slide five, and let me highlight for the quarter some of the key areas of success. Across the global consumer segment, we continue to successfully execute on our plans. We have held steady or improved share across many core categories in key markets for the last five quarters. McCormick-branded unit consumption growth continues to outpace the broader edible category in the U.S. In EMEA, unit and dollar consumption are outpacing branded and private label fast-moving consumer goods or FMCG food. Let me provide some additional color. Starting with spices and seasonings, we drove strong volume growth across all regions. In the U.S., volume growth continued to outpace private label for the fifth consecutive quarter. In Canada, we continue to grow overall share. In France and Poland, share gains in spices and seasonings are contributing meaningfully to EMEA's gains. This quarter, the strong performance in our grilling portfolio was supported by the rollout of our new consumer-preferred packaging for Grillmates. as well as increased Frank's Red Hot promotions and innovation. In mustard, we are pleased to see that our plans are continuing to drive great results. For the third quarter in a row, we drove dollar, unit, and volume share gains in the Americas. In EMEA, we drove unit and dollar share gains in mustard for the last two quarters. In hot sauce, we continue to achieve good results. In the U.S., we continue to drive unit share gains fueled by expanded distribution as well as investments in differentiated brand marketing and innovation. In the UK, we accelerated unit consumption, leading to dollar share gains. We continued to make progress on total distribution points, or TDPs. In the Americas, we expanded TDPs across spices and seasonings, recipe mixes, hot sauce, and mustard. In the Americas and EMEA, we continued to gain distribution in high-growth channels, like e-commerce. In flavor solutions, we continue to see strength in our technically insulated high margin product category, flavors. In flavors in the Americas, we continue to diversify our customer base by winning new customers and gaining share, increasingly benefiting from both high growth innovators and private label customers. In addition, we are seeing an increase in reformulation projects, particularly with larger customers. Lastly, we outperformed the industry across many end categories, including nutrition bars, alcoholic and non-alcoholic beverages, and we continue to win business across snack seasonings and better-for-you categories. QSR performance remained strong in both the Americas and Asia Pacific, and volumes have stabilized in EMEA relative to recent trends. 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 some pressure. Starting with global consumer, in recipe mixes, we continue to demonstrate underlying strength in our base business and strong consumer loyalty. We saw growth across many product lines. However, total growth was pressured by increased competition in the U.S., particularly within the Mexican flavor category. We expect these trends to improve as we launch new innovation, gain distribution, leverage our authentic Mexican brands like Cholula, and invest behind our brand marketing initiatives. In Asia Pacific consumer, as I mentioned, the food service business faced softer demand in certain channels. Looking ahead to the fourth quarter, we continue to diversify into high growth channels and expand our distribution. As a result, we remain confident in a gradual full-year recovery in China consumer for 2025. Moving to flavor solutions. In the Americas and in EMBA, 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 and by winning new customers. In branded food service, foot traffic remains soft. which continues to impact our customers' volumes. We are seeing sequential improvement in our underlying business performance, driven by non-commercial customers. This includes places of employment, hospitals, and colleges and universities. As outlined on slide six, our growth levers remain consistent to drive growth through category management, brand marketing, new products, proprietary technologies, and our differentiated customer engagement. These levers are supported and enhanced through data and analytics as we continue to accelerate our digital transformation. The strength of our base business continues across major markets and core categories. And we have a number of initiatives in flight that will continue to support our performance for the fourth quarter. I am excited about the growth opportunities ahead. 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 strong and differentiated performance over the last six quarters. We continue to see strong consumption trends and expect continued volume growth for the fourth quarter. We expect distribution growth, accelerated innovation, and renovation across the portfolio and brand marketing investments to drive increased purchase interest and velocity and support volume performance. Let me provide a couple of examples. We are seeing great early results from the relaunch of our McCormick Gourmet line, with countertop-worthy new packaging, including a fiber gold cap that seals in freshness, provides a modern look, and highlights that we only use the best raw materials. In addition, we secured incremental distribution, which will support strong growth in the fourth quarter. In terms of new products, the Cholula line of cremosas and cooking sauces in addition to our new McCormick finishing sugars that were launched for the holiday season, are also yielding great results. Shifting to EMEA, Schwartz air fryer seasonings continue to be successful, addressing consumers' increased appetite for air fryer-focused seasonings. In addition, our new all-purpose seasonings are performing well with younger consumers, meeting demand for enhanced flavor without being specific to one type of meal. Lastly, we are excited about the holiday season and are well positioned with our promotion and innovation plans. We are increasing our merchandising levels, supporting our portfolio with holiday brand marketing campaigns, and are expecting a strong holiday season. Moving now to the flavor solution segment. Starting with branded food service, we are leveraging our iconic brands in the food away from home channel. For example, driving strong growth in Cholula hot sauce in the front of the house, and increasingly in back of the house, leading to share gains. French's mustard continues to perform well, with share gains across regional and national chains for the last four quarters. Furthermore, we are fueling growth with operator-relevant and on-trend innovation, with products like McCormick Blackened and Korean BBQ Seasonings, and our Flavor of the Year, Aji Amarillo, as well as Cattleman's Memphis Sweet BBQ Dip. Lastly, we are expanding distribution and growing channels, including cash and carry, non-commercial, and e-commerce, where we are seeing good momentum. Shifting to flavors, we are leveraging our culinary heritage, regulatory, research and innovation, and product development expertise to support customers in navigating evolving regulatory environment and meeting consumer needs for health and wellness with innovations. We are seeing an increase in reformulation projects, particularly with large CPG customers. Momentum is building, and the execution and impact are expected to materialize over time. This is due to extended validation and launch timelines of these projects. In terms of innovation, we are collaborating with large and emerging brands to flavor energy, hydration, protein-based beverages, protein or fiber snacks, and zero sugar drinks. We are increasingly benefiting from growth in health and wellness categories driven by high-growth innovator customers with emerging brands and private label customers. 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 in 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 for the remainder of the year, 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 Marcos.

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 five quarters and underscores our differentiation and ability to drive growth, even in a consumer backdrop that remains challenging overall. Moving to our consumer segment on slide nine. Organic sales increased 3%, driven primarily by volume and mix, with minimal benefit from pricing. Consumer organic sales in the Americas grew 3%, with 3% volume growth and flat pricing. 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 4%, driven by a 1% increase in volume and 3% increase in price, related to targeted actions taken as a result of increased commodity costs. We're pleased with the sustained volume growth in EMEA despite price increases. Consumer organic sales in the Asia-Pacific region decreased by 1%. This decline was driven primarily by softness in the food service business in China that Brandon mentioned earlier. Turning to our flavor solution segment on slide 10, third quarter organic sales were up 1%, driven by price contributions of 1% and flat volume and mix. the volumes for the quarter were impacted by unfavorable comparisons related to the timing of customers' activities in the prior year. Underlying volume was positive for the quarter. In the Americas, flavor solutions organic sales increased 1%, reflecting a 2% price contribution, partially offset by a 1% decline in volume. Our results include the unfavorable comparison I mentioned earlier and reflect strong performance with faster-growing flavor customers and continued QSR growth, partially offset by softness in CPG customers' volumes. The price contribution is primarily related to currency in Latin America. In EMEA, organic sales decreased by 3%, including a 2% decline from price and a 1% impact of lower volume, reflecting soft CPG customers' volumes. We're pleased to see that volumes have stabilized in EMEA relative to recent trends. In the Asia-Pacific region, flavor solutions organic sales increased 6%, with volume growth of 9%, driven by QSAR customer promotions and limited time offers, partially offset by price of 3%. Moving to slide 11. Adjusted gross profit margin was down 120 basis points in the third quarter due to higher commodity costs, tariffs, and costs to support increased capacity for future growth, partially offset by savings from our Comprehensive Continuous Improvement Program, or CCI. Overall gross margins came in below our expectations, as we're seeing incremental cost pressures due to the global trading environment. In the fourth quarter, more of our mitigation efforts will come through, leading to gross margin improvement. Selling, general, and administrative expenses, or SG&A, decreased 100 basis points relative to the third quarter of last year, driven by lower employee-related benefits expenses as well as CCI savings, including our SG&A streamlining initiatives, partially offset by continued investments in brand marketing and technology. For the quarter, adjusted operating income increased by 2%, with minimal impact from currency. This increase was driven by improved SG&A, partially offset by gross margin and increased investments to drive growth. Our third quarter adjusted effective tax rate was 16%, and comparable with the year-ago period rate of 17%. Our tax rate in both periods benefited from favorable discrete tax items. Our income from unconsolidated operations in the third quarter decreased 6% as the strong operational performance from our largest joint venture, McCormick de Mexico, was more than offset by the strengthening of the U.S. dollar against the Mexican peso. Turn to segment operational results on slide 12. Adjusted operating income in the consumer segment increased 4% or 3% in constant currency. The increase was driven by sales growth and improved SG&A, partially offset by increased tariffs and commodity costs. In flavor solutions, adjusted operating income declined by 2%, with minimal impact from currency, as we lapped a strong quarter in the prior year and faced increased tariffs and commodity costs. These headwinds were partially offset by pricing and improved SG&A. Year to date, flavor solutions adjusted operated income increased by 10%, or 12% in constant currency, in line with our expectations. We continue to make progress in expanding our flavor solutions operating margin and expect our total adjusted operating margin expansion for the year to be led by this segment. At the bottom line, as shown on slide 13, Third quarter 2025 adjusted earnings per share was $0.85, an increase of 2% compared to the year ago period, driven primarily by increased adjusted operating income. On slide 14, we've summarized highlights for cash flow and balance sheet. Our cash flow from operations through the third quarter of 2025 was $420 million, compared to $463 million in 2024. The decrease was driven by higher cash use due to the timing of working capital. We returned $362 million of cash to our shareholders through dividends and used $138 million for capital expenditure. The timing of capital expenditure depends 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 dividends, and maintaining a strong balance sheet. We remain committed to a strong investment rate 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 an update on our tariff exposure and mitigation plans on slide 15. Since our last earnings call, new and higher tariff rates have been introduced. As this situation remains fluid, it's important to call out the reviews reflect tariffs as they currently stand. As you can see on the slide, our current gross tariff costs for 2025 are now expected to be approximately $70 million, compared to the $50 million we provided on our last call. Our total gross annualized tariff exposure is now approximately $140 million compared to $90 million we provided previously. For 2025, we continue to expect to offset most of the tariff impact. But it's worth noting that not all of our mitigation efforts are permanent, and this will need to be addressed next year. As we look ahead to 2026, we plan to offset as much of the incremental impact as we can with productivity savings across the P&L alternative sourcing, supply chain initiatives, and of course, leverage our revenue management capabilities, including pricing. As you know, this is an evolving situation and we'll continue to monitor how policies impact rates and therefore our costs. We expect to provide more color on this when we report our fourth quarter of results in January and share our outlook for 2026. It's worth noting that we have began implementing targeted tariff pricing and we'll be monitoring elasticities to help inform our plans for 2026. As we said, we're taking a very surgical approach to pricing and leveraging robust analytics and planning tools to ensure we maintain volume growth and continue to meet consumers' and customers' needs for both value and flavor. We're staying agile with mitigation plans across all lines of the P&L to protect our profitability. In summary, we see tariffs as a discrete headwind to work through. However, we remain committed to our strategic priorities to continue to drive a healthy top line, invest in the business, and maximize our profitability. Now let's turn to our updated 2025 financial outlook on slide 16. We're maintaining our net sales and revising adjusted operating income and adjusted earnings per share guidance for the year to reflect our updated estimates on the impact of higher commodity costs and tariffs. Overall, in terms of currency, assumptions remain about the same. At the top line, we continue to expect organic net sales growth to range between 1% and 3% and expect to achieve at least the midpoint of our guidance range. Growth remains volume-led and primarily driven by our consumer segment, with flavor solutions continuing to be flat for the year. In terms of price, we continue to expect a contribution, primarily through the flavor solution segment and tariff-related pricing will mostly come through in the fourth quarter. For China, our outlook continues to assume a gradual recovery, and we expect China consumer sales to improve slightly year over year. We saw this come through in the year-to-date period, and we expect it to continue for the rest of the year. In terms of inflation, excluding the impact of tariffs, our estimate has changed for the year. To low to mid single digits, compared to low single digits in our prior outlook. Our 2025 gross margin is now projected to be flat for the year, compared to our prior guidance of flat to 50 basis points. This reflects elevated costs of commodities and tariffs coming in higher than we had planned. As we look ahead to the fourth quarter, we expect gross margins to improve, as more of our mitigation efforts will be in place. On SG&A, we expect CCI savings, inclusive of our streamlining initiatives, to be offset by investments in technology as well as brand marketing to drive volume growth. We continue to invest in brand marketing in line with our guidance, and we're driving more efficiencies through the use of technology as well as our CCI program. Adjusted operated income growth is now expected to be 3% to 5% in constant currency, compared to a prior range of 4% to 6%. The decrease of one point represents the incremental increase in tariff and commodity costs. It's worth noting there are revised range brackets, the low end of our prior guidance, which was set back in January of this year, prior to the changes in the global trade environment. In addition, we want to maintain a balanced outlook that gives us the flexibility to continue to invest in the business while growing adjusted operated income. In terms of tax, We expect our tax rate to be approximately 22% for the year, compared to 20.5% in 2024, where we benefit from a number of discrete tax items that are not expected to repeat in 2025. Our income from unconsolidated operations is expected to decline in the high single-digit range in 2025, reflecting the strengthening of the US dollar against the Mexican peso, which is impacting the strong 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. We continue to expect to close the McCormick de Mexico transaction early in 2026. In the meantime, we're developing plans to support our integration efforts and we look forward to providing an update on our fourth quarter call. In summary, our 2025 adjusted earnings per share projection is now $3 to $3.05 and compared to a prior guidance of $3.03 to $3.08 on a reported dollar basis, reflecting the impact of our updated adjusted operated income outlook. Year-over-year, adjusted EPS growth is impacted by currency headwinds and increased tax rate compared to the prior year. On a constant currency basis, adjusted EPS is expected to grow between 4% and 6% compared to a prior guidance of 5% to 7%. In closing, we remain on track to deliver volume-led constant currency top-line growth. Despite higher costs, we're investing strategically, executing with discipline and driving efficiencies, enabling us to deliver operating profit growth and sustain our differentiation. We're confident in our ability to deliver on our updated 2025 outlook and long-term objectives.