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.

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 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 share gains across our core categories. Our results demonstrate that we are investing in the areas that drive the most value, and we expect to maintain this momentum. Similar to many of our peers, we are facing rising costs due to the global trade environment, and we are leveraging our competitive advantages and cost savings initiatives to lessen the impact of these costs, maintain our volume momentum, fuel our investments, and drive profitable growth. Importantly, we view tariffs as a discrete headwind to work through. However, we remain committed to our strategic priorities, sustaining a healthy top line, investing in the business, and maximizing profitability. 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 using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. And the first question comes from the line of Andrew Lazzar with Barclays. Please proceed with your questions.

Andrew Lazzar with Barclays. Great. Thanks so much. Good morning, Brendan and Marcos.

Good morning.

Brendan, you reiterated again today your expectation for positive volume in the consumer segment in your fiscal fourth quarter. Volume in consumer was again positive in 3Q, but did decelerate sequentially from 2Q, and we see that a bit in the recent data too. I guess now that you'll have some incremental pricing flowing through in the fourth quarter, I guess what's your visibility to a positive volume outcome, you know, given potential elasticity, and what are you seeing in the quarter so far around elasticities given you're kind of more than a month in?

Well, thanks for the question, Andrew. This is another strong quarter of sales growth for us, and our consumer business continues to drive differentiated performance, really driven by volume. And so is our flavor solutions business, too. We can talk more about that if necessary. But when I think about any deceleration that you might have noted, I think that's a function, first, just of overall food unit growth was down in the quarter, like almost a full percent. So that's going to impact us a little bit in terms of some element of deceleration. I see that less about the consequence of our plans and our activity, but more about what's just going on broadly in grocery and food in the industry. We definitely saw a deceleration overall in the third quarter. Now, having said that, though, we're working with our customers to identify the appropriate offset for the impact of tariffs. And as we've been talking about pricing, In consumer, we're focused on maintaining our volume momentum and ensuring that we have the right price at shelf that meets the consumer demand for value. So we're pleased with the way those conversations have gone. It also demonstrates just broad customer alignment with our approach. And I think both of us are committed to making sure that we maintain consumer affordability in our category. So that's kind of an underlying element, I think, with regard to our consumer base. So in the fourth quarter, the levers that remain in place will be continued increased investment in A&P. It'll be messaging that resonates and is targeted and digitally enabled. We'll continue to benefit from innovation launched in 2024. And that's items like Frank's Squeeze bottles of, you know, new flavors of Frank's Red Hot. Cholula Extra Hot is out there, you know, also on shelf. It's going to get some benefit year over year. And price gap management remains part of our baseline overall. What's been incremental to that has just expanded core distribution across our categories. As you heard on the prepared remarks, you know, we continue to see growth in TV. Innovation and renovation launches, you know, are looking also quite strong. And we're expecting, you know, strong and good growth from expanding Cholula in the U.S. We're expanding that into cremosas and cooking sauces. We have launched another year of McCormick Vanishing Sugars, and people start to see that in stores right now. And we've also started, you know, the relaunch of McCormick Gourmet with that, you know, countertop-worthy packaging, and that's starting to appear on shelf right now, too. And even across, you know, in markets like in EMEA, we're seeing growth on things like air fry seasonings and all-purpose seasonings that are, you know, new to the market if you look at, you know, this fourth quarter over last year. We also have a strong holiday merchandising plan overall. So we have confidence in our plans broadly that we'll continue to deliver value to the consumers, which also means we're going to drive positive volume growth in the quarter. But a lot of those price gap management efforts do remain in place. They're very surgical and strategic as to how we've looked at pricing. And we're using the same sort of very robust and disciplined analytics led by our revenue growth management team to make sure that we drive you know, we drive this offset, you know, as much as we can from a tariff standpoint in the areas where we think we can, you know, certainly the elasticities can support it, you know, overall. But we like our progress so far this year and we keep running the same plays and that's what's been driving, I think, a lot of our growth.

Thanks for that. I appreciate it. And then I know it's way too early to get specific on fiscal 26, but obviously you would see, you know, you'll still have some underlying inflation to deal with as well as incremental tariffs. I guess at this stage, How do we think about the magnitude of potential further mitigation opportunities in both CCI and RGM levers, you know, as we all sort of work through, you know, whether or not an on-algorithm year is reasonable to expect in fiscal 26? And because, Marcos, I think you mentioned some of your current mitigation efforts are not permanent, and so you have to kind of keep generating, I guess, incremental ones as you go forward.

Yeah, that's right, Andrew. So, yeah, it is a little bit early to predict what, you know, the exact impact of tariffs for twenty twenty six. We wanted to provide an updated view of the growth number. You know, there is one forty million dollars now versus the nine that we provided before due to the new tariffs that were in place as of August. We'll continue to, you know, there's a lot of factors that we have to take it into account as we think about next year. One is obviously closing the year, continue to monitoring the tariff rates and the situation around that. There could be potential changes there. Our own mitigation plans, we have very solid mitigation plans in place right now, as you saw, around productivity, savings, alternative sourcing, as well as surgical pricing coming through. We've been relatively successful this year, offsetting most of the impacts in 2025. Those will continue. We're going to scale them up into next year. They will continue. The objective is really to lessen the impact as much as we can going into next year. So, as I said before, we're pulling all the levers that we can across the P&L to minimize all these impacts. We'll continue to monitor the plans that we have now in place, some pricing now coming in Q4. We do have robust analytics, as Brenda mentioned, in terms of elasticity, but we're going to continue to monitor elasticity. That will also help us refine the plans as we go into 2026. But I would say we are confident that we are going to be able to lessen the impact as we move into 2026.

You know, one thing to add to Marcus's remarks there, Andrew, is we meet on this weekly. So, you know, and we see changes every week as we continue to go through this and identify new opportunities and breakthroughs in terms of how we can think about, you know, next year. So this is something that I think we'll continue to build over the next, you know, few months just to make sure that we have the best approach towards 2026 regarding, you know, sort of the incremental tariff impact.

Thank you.

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

Hey, good morning, guys. Thanks for the questions. Marcos, I was hoping to start, you took the cost inflation guidance for the year up, even excluding the tariff in 25. So maybe you can just unpack a bit of what actually accelerated through the quarter, what's kind of driving that change again, given that it seems like it's not solely tied to the increase in the tariff rate?

Yes, Peter. Now, thanks for the question. I mean, in Q3, just to take a step back, in Q3, our gross margin was down 120 basis points versus last year. You know, a couple of buckets, I would say. The bucket number one is around, you know, increased commodity costs and existing and new tariffs that were in place, existing from April, new tariffs as of August. That is about two-thirds of the impact that you saw in the quarter. And then in addition to that, the remaining one-third was related to costs to support capacity for future growth, primarily related to our HEAT platform. So that is investments that we're putting within supply chain. As I alluded to in the Q2 call, as well as in the last investor conference, I mean, we were seeing the rise of commodity costs in Q2, and they actually accelerated in Q3. And plus, the new tariffs in place made us revise the guide. It was, I would call it a modest update to the guide to reflect those impacts. It is around commodity costs and tariffs primarily, but also we are seeing input costs in general coming through. Packaging is one example. that we're seeing come through. So all in all, we've revised the guide a little bit as a way also to provide the latest view that we have, but also to be able to continue to invest in the business and giving us the flexibility and the latitude to continue to invest in brand marketing in Q4.

Thanks, Marcos. And maybe a follow-up also on the gross margin. I mean, I think even with the revised guidance that you provided this morning, it would imply that the fourth quarter gross margin needs to step up closer to something like 41% to hit comparable for the year on year. You know, that would not only be a normal, I think, sequential step up into Q4, but it would be margins actually up versus the fourth quarter last year. So, A, I just want to make sure that I have that right, or if there's any nuance as we think about the fourth quarter gross margin specifically. Thanks very much.

Yes, Peter, you're seeing that, right? I mean, we're seeing the flat to modest dips as percentage of net sales expansion in the fourth quarter.

Thank you.

Okay. The next question is from the line of Tom Palmer with J.P. Morgan. Please proceed with your question.

Good morning. Thanks for the question. Maybe first, I just want to clarify on tariffs. A quarter ago, I think the expectation on kind of round one was to fully offset it both for this year and for next year. And I know the number has moved higher. So maybe when we think about that initial number, does that still hold? You would expect to fully offset it. And now there are maybe more decisions still to be made in terms of your ability to fully mitigate the incremental step up that we've seen since.

Um, no, let me, let me just give you a little bit of a color there, Tom. I mean, uh, when we talked about the $50 million for in year, the year and year impact before the $90 million for, uh, 2026 at that time, uh, we talked about offsetting, uh, 2025, the $50 million in 2025 only a number, um, with mitigations that I mentioned before, um, and, uh, and continue obviously to work through, uh, you know, the mitigations going into 2026. So, um, We did not talk really much about 2026 or the annualized net impact going into 2026 as we're still working through those mitigation plans.

Okay. Understood. And on the gross margin for 3Q, look, and maybe the street misunderstood, but I think we were looking at more flattish year over year initially for the third quarter. It does sound like tariffs were an impact. I guess I'm trying to understand the timing of how it flowed through so quickly in 3Q. I think a lot of the step up was more August, and I would have thought more of a lag in terms of how it flowed through COG. So what really was the, I guess, incremental step up to think about in 3Q versus more of this increased tariff burden really kicking in come 4Q?

Yeah, you're right. I mean, tariffs was a piece of that. The new tariffs was a piece of the impact in Q3 as tariffs came in in August. The main impact was higher commodity costs that accelerated in Q3. When we were at, you know, guiding Q2, we talked about, you know, guiding the profitability to be more weighted towards Q4. So we were seeing some of the rise of commodity costs in Q2 and that would impact Q3. But in fact, it accelerated and we saw more inflation come through this quarter than we expected.

So Tom, just to build on a little bit of what Marco said, when we think about this incremental commodity cost that we're definitely observing, I would say there's sort of two drivers to call out. There's broad uncertainty that's kind of driving suppliers to sort of stand still. They're pausing and waiting for more information to see how the market moves. And I think this slows down typical forces of supply and demand. And so, you know, that's definitely been an element that we've seen even as early as the second quarter. But more recently, we certainly start to see that they're passing along their tariff impact. It's expressed as our overall inflation, although indirectly, you know, that impact coming through tariffs. So, you know, we have a very diverse basket of commodities and input costs, and this is where we're seeing this coming through.

Okay. Thank you for the details. Sure.

Sure. The next question is from the line of Alexia Howard with Bernstein. Please just use your questions.

Good morning, everyone.

Good morning.

Can I start with the reformulation comments you made in the prepared remarks? Specifically, you talked about gaining customers on the flavor solution side. Which customers or what types of customers, what types of categories are you gaining the customers in? And I'm particularly curious about Walmart announced last week that I think across the whole of their private label business, they're planning to eliminate 30 additives, which is much broader than the eight artificial dyes that have already been put on the chopping block for 2027. Do you expect to see an acceleration in private label and maybe branded CPG efforts to reformulate, particularly in light of that Walmart announcement. And then I have a follow-up.

Sure, Alexia. There's a couple of, you know, vantage points in your question there. I'll try to address most of them if I recall them all. You know, first of all, you asked where are we getting the new customers or where are we getting, you know, sort of this increased share. And a lot of that's happening with what we said earlier, which is high-growth innovator, you know, emerging brands, and even private label customers. And so we definitely see continued accelerated growth in that part of our customer portfolio. And even an increasing amount of that started to come through in the third quarter. But that's consistent with what we've said previously when we think about where new customers are coming from overall. In terms of the heightened reformulation activity, this is consistent also with what we said in the second quarter. But You know, it's a focus on a shift from natural colors, you know, from synthetic ones. But it's also reduced sugar, reduced salt, natural and healthy ingredients, you know, from artificial, eliminating ingredients of concern. And so that's the type of activity that we're seeing. And it's somewhat expected, I think, with what you've seen broadly, you know, reported in the media. in terms of where consumer concerns are. And I would just say a lot of this is based in just staying close to the consumer. A lot of the food industry is focused around that. And so we've been looking at this and working on it for some time. Related to the announcement that you talked about, Alexia, I think that's good news in terms of an announcement from that large retailer. And that's an example of the type of activity I think that one will see. And it's consistent with what other other branded CPG companies have announced more recently. Now, you said you had a follow-up question.

Yes. I want to ask about acquisitions, and I'm trying to figure out how to answer this delicately. You've obviously already got your Mexico JV announcement out there, so that's set up for early next year. There's concerns that I've heard from investors about whether you might be interested in the very large taste elevation company that will be split off from Kraft Heinz's North American grocery business next year. I mean, frankly, on paper, it's two and a half times the size of McCormick. It's on both the top and the bottom line. It looks too big, even though the Heinz brand might be quite attractive. Could you talk about maybe just in broad terms, what your acquisition strategy is and the magnitude of the types of deals that you might be prepared to take on, maybe taking that one off the table because it just looks so vast. And are you interested more in condiments at this point, maybe at a more bolt-on level, and or other capabilities that you need to pick up on the flavor solution side? I hope that was delicate enough, but anything you can say on that front would be helpful. Thank you.

I appreciate the diplomatic question. When we think about M&A, and we don't comment on any sort of speculation going on out there or anything of that sort, so I'm not speaking directly to any investor concern or whatever it might be, but I will tell you just broadly to kind of go back to what we said previously about how we think about M&A. You know, obviously we think about both of our segments first, consumer and flavor solutions. And I'll first unpack, you know, consumer and then I'll unpack flavor solutions because they're both important to us. You know, we still believe in our two-segment strategy as we look at our business. And we'll consider both, you know, old-time and transformative opportunities as they present themselves. And this is something that we're working on all the time, as we've said before. From a consumer perspective, you know, the two areas that are of most interest to us is we think about our portfolios remaining focused in flavor. And in many ways, we express that through herb spices and seasonings at a global level, as well as condiments and sauces at a global level. And so we're thinking about this, you know, across all of our regions overall. But we like those two areas. those two areas of category focus. And we believe there's a lot of opportunity still for us to think about it that way. And, you know, it can be in any form, whether it be bolt-on or transformational overall. When we think about labor solutions, you know, we think about it through the lens of what enhances our ability from a technology standpoint, the taste competencies that we're particularly strong at. You know, can we reinforce those with not only great technology but also great talent? And so we think about it that way in terms of what is a complimentary or incremental fit to our business when we think about flavor. And again, we think about those across all the regions in which we compete and operate in. And that's another high area of interest that we have across our business. So we have a broad set of opportunities that we look at. We like the fact that we have a broad set of opportunities to consider. Our most recent, you know, sort of transaction we think is very much aligned strategically with what we're trying to accomplish. And, you know, in the present moment right now, we're focused on making sure that we close that in, you know, in early 2026, which is our plan.

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

Next question is from the line of Robert Moscow with TD Count. Please receive your question.

Hey, good morning. Thanks for the question. Hey, Brendan, it's very noticeable in the remarks that you're highlighting the importance of differentiated volume-led growth compared to food peers. But you're heading into an environment where you definitely need more pricing to offset higher costs. So I'm just curious if you could articulate your priorities. It sounds like if the priority is really volume growth, To what extent are you willing to let volume dip into negative territory, maybe even just temporarily, as you try to raise prices to offset costs?

Well, we try to balance those two points that you brought up, Rob. And we take a very long-term view. So You know, I'm not going to sort of lay out here sort of the certain numbers and where they can land, et cetera, in terms of growth or decline. Our goal right now is consistent with our goal for the last two years, which is to be volume-led in terms of our momentum and take a long-term view on making sure that we do what's right as we think about growth of the consumer, meeting their needs, meeting the benefits that they're looking for. And, you know, we've seen a real convergence around value, but also health and wellness. And those are things that we think will continue to drive our categories. Yet we have to deal with realities, obviously, of offsetting what is a reasonable amount of, you know, sort of discrete new costs coming into our P&L as we think about 2025 and 2026. And so far, we've been able to find a way to, you know, offset that in really productive ways, but yet still maintain that focus on sort of really healthy volume-driven growth. As we go into 26, it's going to be our ambition is to do the very same thing. Do I know exactly what level that will be? I don't. I think it will be in positive territory. I can't tell you right now how high. But that's going to be part of as we wrap up our planning for 2026, and we'll share that at the end of our fourth quarter and our fourth quarter call in January. But this is something that we talk about a lot within the company, you know, in leadership and across our business units, and think about the right balance that we need to strike. It's also a function of the conversations that we're having with customers, and we're both looking at it in very much similar ways, which is we want to drive affordability for consumers. We also have to find ways to offset this cost. I'm not sure that we're going to offset all of the cost, but it is something that we are taking a very hard look at in terms of what's striking the right balance.

and thanks for that. It may be a follow-up. In those conversations with customers, I would imagine they're a little bit less willing to raise prices for tariffs, given that the tariffs may not be permanent. Is that part of the discussion too? And can you come up with temporary measures with customers that can be reversed if necessary?

Well, one adjustment to some of the assumptions you laid in your question there is whether or not tariffs are permanent. We're seeing it as a discrete one-time impact at this point, and so we do view those as staying in the cost structure. So whatever we do, whether it's in the near term or in the long term, we look to offset that over time overall. In our conversations with customers, we're thinking very collaboratively about how do we deal with what are real true input costs but also thinking about continued volume growth with consumers. And so that mutual sort of alignment around priorities, I think, has helped us navigate what have been productive conversations with customers.

Got it. All right. Thank you.

Our next question is in the line of Max Gumpert with BNP Parva. Please receive your questions.

Hey, great. Thanks for the question. I wanted to come back to what we're seeing in the U.S. scanner data and thinking through how to square that with your still robust volume-led growth in Consumer Americas. So specifically, Consumer Americas, the volume growth still looks quite strong, running roughly 3%, roughly similar to what we saw in 2Q. I think it's fair to say that U.S. scanner data has shown some deceleration from 2Q to 3Q and now into early starts of 4Q with regard to volume performance. I know you mentioned that you can attribute part of that to just what we're seeing in the broader U.S. food industry, but when we're thinking through why that gap is not showing up as fully in your consumer America's results, can we attribute it to other countries outside of the U.S., or is it non-track channels, or is it the stronger performance we're now seeing from private label? Just trying to get a sense for what's... helping to blunt the gap that we are seeing or the slowdown that we are seeing in scanner. Thanks very much.

Max, I just want to clarify what I think your question is, which is speaking specifically to U.S. perspective or broadly, globally?

Yeah, it's really looking at, I think, what is a pretty clear slowdown in U.S. scanner data for McCormick-branded. but a not as clear slowdown in your consumer America's results. I'm trying to understand why those two are no longer as tightly correlated. What's propping up consumer America's when we are seeing a slowdown in the Cormac's branded U.S. milk?

I think my reply might get at the spirit of your question in terms of sort of you think about measured channels and unmeasured channels. We are seeing an acceleration in e-commerce as well as in the club store channel too. And so that might speak a little bit to what might be sort of any difference that you might see, Max, overall. And also, you know, we have our Canadian business in there too, and it's also performing well also. So I think that those might, you know, from a, if you think about what might be the points to talk more about, I would just lay out those three. I might just sort of, you know, dwell a little bit on e-commerce. We're certainly seeing an acceleration there. And we're seeing, what's interesting about value with consumers is they're willing to pay for this increased value on delivery, you know, the sort of ease of use with e-commerce and, you know, click and collect, et cetera. And that has been, part of our business that is only quarter by quarter just continues to get stronger and certainly growing as a percentage of overall total net sales. And so I think this unmeasured versus measured channels might explain some of the points that you're talking about.

Okay, great.

And we're seeing more growth shift towards unmeasured.

Right. And then turning to cash flows, I realize you started off the year pretty far behind where you were a year ago. You're cashing up now as a 3Q, but you're still a bit below where you were a year ago in terms of operating cash flow. You're still attributing it to higher cash needs for working capital. Can you just double-click on what exactly working capital is driving this and how you expect to end the year of 25. It sounds like you do expect a strong cash flow year. We're just hoping for a little bit more color on the working capital needs and what you expect to see in 4Q. Thanks very much.

Yes, Max. I mean, that's a good question. I mean, we have very strong confidence about the cash flow for the year. As you said, we are catching up now in Q3 year to date. We are We had a bigger lag in Q2. We got caught up a little bit more in Q3. You know, we had a little bit more use of working capital through inventories. We purchased some inventories. Ford bought some inventories, specifically some raw materials in the quarter. But we expected this to normalize going into the back half of the year and continue to deliver very strong cash flow performance for the full year 2025. Just to recall, Q4 is our biggest quarter, not only in terms of P&L, but also in terms of cash. So you will see that cash come through in Q4. Great.

Thank you very much.

The next question is from the line of Stephen Powers with Deutsche Bank. Please proceed with your questions.

Thanks. Hey, good morning, guys. Good morning. So I think we've been circling around this a little bit. I just want to get a little bit more sense of your planning posture around pricing as you begin to implement pricing in response to tariffs. Focusing on the consumer business, just maybe a little bit more detail on what you've seen so far in early elasticity analytics and maybe where you think consumers are likely to be more accepting of pricing versus more price sensitive. I guess just what your going in base case expectations are. are around elasticity as you layer in this early pricing?

Steve, it's really early. In fact, I don't even think we've got a whole lot of, we've got a little bit of data maybe on September that would maybe give us some indication. So what I would share with you right now is too early to give you any sort of real insight around trends or or, you know, outcomes, you know, regarding that. But, you know, we believe in sort of the analytics that we use to predict these things. And so I would say that right now we feel really pretty confident with what we think the impact will be, but it's very early. Okay.

Okay. And then maybe, you know, Marcos, as we think about 26, and you talked about sourcing and productivity, cost savings, as well as pricing as the different levers you have to mitigate cost inflation and tariffs into next year. As a starting point, is your kind of working assumption that there's a balance, kind of an even balance between pricing and some of the sourcing and savings initiatives, or is it skewed towards savings or skewed towards pricing? Just A little sense of just early planning thoughts as you approach the year.

Yeah, it is, Steve, it is more skewed towards the savings. You know, CCI savings overall, we talked about productivity savings as well as alternative sourcing, but also think about it as a way of all lines of the P&L. CCI across all lines of the P&L. You've seen this quarter, H&A came in strong for us. We continue to drive. you know, CCI savings in that part of our P&L. So that should continue going into 2026. So I would say it's more skewed towards savings and productivity initiatives that we have in place and more to come. And then the residual will be through surgical price initiatives.

Okay, perfect. Thank you very much.

Sure. The next question is from the line of Scott Marks with Jefferies. Please proceed with your questions.

Hey, good morning. Thanks so much for taking our questions. First thing I wanted to ask about, you noted some softness in the China food service arena. Still expecting a gradual recovery kind of for the rest of this year and sounds like maybe a little stronger for next year. Just wondering if you can share some thoughts on maybe what you're seeing and what gives you the confidence in that gradual recovery continuing.

Sure, Scott. You know, our third quarter results were, you know, definitely impacted by what we saw as a reaction to sort of these austerity measures that were put in place. And a lot of it was focused on, you know, sort of high-end dining, catering. And we saw that consumption shift out into other out-of-home channels that, you know, sort of might be either lower cost or, you know, greater value. And so we've diversified, you know, and that By the way, that tended to impact the part of our food service business that serves that part of the marketplace. And so as we think about diversifying and also looking for more distribution, we're certainly following those trends in the marketplace. But we're also seeing strength in our retail business. And our team identified a lot of high growth opportunities as we think about the channel shifting that's going on in China. And there's quite a bit of it. And it's been going on for at least the last year, if not longer. And we continue to strengthen distribution in those areas where we think consumers are shifting to. In the case of our retail business, it happens to be more smaller format stores. And so getting more distribution in those locations has helped us continue to drive growth, which we think, based on the data that we're seeing, is slightly stronger than the marketplace itself. And so that gives us the confidence to think about, for the total year, we think we're headed in that same direction with you know, having that slight to gradual growth in our business in China. And it's also worth adding that as we look at the fourth quarter, we're lapping an easier comparison relative to the fourth quarter of the prior year. So year to date, our results are in line with our expectations for this gradual recovery. I think we're up like 2%, you know, year to date within total Asia Pacific. And we do expect that our business in China to improve slightly in the context of that. And long term, we believe in the opportunity of China. It's a strong market where we have good penetration right now, but we still have room for growth. And so we're strengthening our plans and capabilities to make sure that we serve, you know, sort of the Chinese marketplace where we see opportunities.

Appreciate the answer there. Thank you for that. And then just a quick follow up, just coming back to the topic of reformulation, you know, wondering maybe if you can give us a sense of magnitude of impact, let's say, for the reformulations as it relates to maybe more pressure on some of the, you know, legacy branded products? Just trying to gauge how we should be thinking about, you know, offsets to what we see from broader food softness, let's say.

Well, I think about reformulations as, you know, broadly, you know, continue to address what we hear from consumers and what they're looking for And that will have a positive impact on brands, whether it be so-called legacy brands or even new emerging brands. And as broadly, the food industry continues to address what consumers are asking for, we see that as having a positive outcome. In magnitude, I probably would maybe shift my reply into, think about it from a timing perspective. It may take some time for some of these larger brands you know, projects to, you know, to go through validation and get out into the marketplace. So I don't see it as being necessarily immediate or happening right away. You know, in the case of, you know, announcements that have been made, you know, people are suggesting 2027 as an example. But, you know, every company is going to be different in terms of what types of changes and reformulations I'm trying to drive. But I see this as a continuation of innovation within the industry, and it's all about making brands relevant.

Thanks very much. Pass it on.

Thank you. Our last question is from the line of Brian Adams with UBS. Pleasure to see you with your questions.

Hey, morning, guys. Thanks for the question. Just a quick one here for me. So on the 4Q growth, I think if you look at what you said, Marcos, about midpoint or better of the 1% to 3% top line guide for the year implies something like 2.5% or so growth for the fourth quarter or more. So just in terms of that improvement exit in the year, I assume that's mostly, you along with maybe some of the easier 4Q APAC comps that you just mentioned, Brendan. But just beyond that, is there anything else I'm missing there in terms of what drives the conviction to step up in 4Q versus 3Q? Thanks, guys.

Yeah, so we talked about the midpoint of the guidance range on top line for the full year. That implies the same level of growth in the fourth quarter and in constant currency, obviously. So that will continue. We still, you know, despite the price increases that we're having taken in the Americas, we also see volume growth in the Americas. We see growth across, I would say, pretty much all regions. in the consumer segment going into the balance of the year. And then in flavor solutions, you will see more of a moderation of volume and price. We guided price to be volume to be flat in the flavor solutions for the full year, given a little bit more pricing there. So that's how we're seeing Q4 play.

Really helpful. I'll leave it there. Thanks, guys. Thank you.

Thank you. I'll now turn the floor back to Madge for closing remarks.

Thank you, and thanks everybody for joining today's call. If you have any additional questions regarding today's information, please feel free to contact me. And this concludes this morning's call. Thank you.