McCormick & Company, Incorporated Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
March 29, 2022

There are 11 speakers on the call.

Operator

Good morning.

Speaker 1

This is Casey Jenkins, Senior Vice President of Corporate Strategy and Investor Relations. Thank you for joining today's Q1 earnings call. To accompany this call, we posted a set of slides at ir.mccormick.com. We will begin with remarks from Lauren Perseus, Chairman, President and CEO and Mike Smith, Executive Vice President and CFO, and we'll close with a question and answer session. During this call, we will refer to certain non GAAP financial measures.

Speaker 1

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. In addition, as a reminder, today's presentation contains projections and other forward looking statements. Actual results could differ materially from those projected.

Speaker 1

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 statements on Slide 2 for more information. I will now turn the discussion over to Lars.

Speaker 2

Good morning, everyone. Thanks for joining us. Before I go to business, it is with great sadness that I mentioned the passing of Buzz McCormick, who is one of the most beloved and admired leaders in McCormick's history. Buzz's career at McCormick spent 50 years, rising through the ranks across many functions, becoming President and CEO in 1987 and Serving as Chairman of the Board for a total of 11 years until his retirement for the 3rd time in 1999. As CEO buzz focused McCormick on flavor By divesting non core businesses and driving category leadership in spices and seasonings, setting the course for McCormick to be the global leader in flavor.

Speaker 2

Notably McCormick's market cap grew by 4 times under his leadership. Buzz will not only be remembered for his enduring legacy of performance, But just as importantly for his deep commitment to the well-being of all McCormick employees, he truly made McCormick a great place to work, Believing his biggest accomplishment as a CEO was helping all McCormick employees have a better life. Today, as we reflect on his life and his contributions, We know that his legacy will live on. He has inspired many generations of McCormick leaders with his passion for people, focus on flavor and commitment to delivering shareholder value. Next, I'd like to comment on the situation in Ukraine.

Speaker 2

1st and foremost, we extend our deepest sympathies to the people of Ukraine and hope for an immediate end to the conflict and the suffering of innocent people. As we previously announced, we suspended our operations in Russia in mid March. Our operations in Ukraine have been paused to focus on the safety of our employees and their families. Our thoughts are with the people impacted by these tragic events, particularly our employees who we continue to support. To aid in humanitarian efforts, we're donating to the Polish Center For International Aid and the World Central Kitchen.

Speaker 2

I would also like to express my sincere appreciation to our EMEA employees, especially those in Poland for their many personal efforts aiding their Ukrainian neighbors in need, their actions epitomize our Power of People principle. Now moving to Slide 4 at our business results. We delivered solid financial results in the Q1 in line with our expectations, Driven by the successful execution of our strategies and the engagement of employees, we are confident our strong Year to date momentum will continue to drive strong performance throughout 2022. In the Q1, we grew sales 3% We're 4% in constant currency on top of our 20% constant currency growth in the Q1 of last year, Demonstrating again the strength of our product offering and broad global portfolio, which drives differentiated growth and consistency in our performance. Consumer segment sales, while lapping high year ago demand, continued to reflect the sustained shift to higher at home consumption compared to pre pandemic levels.

Speaker 2

Our flavor solutions segment growth was driven by outstanding growth with our packaged food and beverage customers as well as robust demand from restaurant and other foodservice Customers due in part to recovery from curtailed away from home dining in the year ago period. Through the breadth At reach of our balanced flavor portfolio, we are meeting the global demand for flavor and delivering flavor experiences for every meal occasion To our products and our customers' products, we are end to end flavor. Adjusted operating income was down 14 or 12% in constant currency and adjusted earnings per share was down 13%. As anticipated, the profit driven by our sales growth It was more than offset by the well known and anticipated headwinds of higher inflation and broad based supply chain challenges. We have a demonstrated history of successfully navigating through a volatile environment and we expect to do the same through this high current inflationary period Using pricing and other levers to offset cost pressures, which is reflected in our 2022 profit outlook.

Speaker 2

Now for more on our Q1 segment performance. Starting with the Consumer segment on Slide 5, Growth in the Americas was more than offset by lower sales in the EMEA and APZ regions. Total consumer segment sales declined 2% Against 35% consumer growth in the Q1 of 2021, given the difficult year over year comparison, volume declines were reflected in each On a 2 year basis, however, compared to the Q1 of 2020, each region grew sales by double digits. This growth highlights the strength of our categories and importantly our products as consumers continue to cook more at home, demand for flavor continues to grow. The pricing actions we have taken were also reflected in each region's results and the elasticity impact we experienced has been lower than historical level.

Speaker 2

As we look ahead and our additional pricing actions are phased in, the elasticity we experienced may change and this could be a cumulative effect, We still expect the impact to be lower than historical level. Turning to highlights by the region, starting with the Americas. Our total U. S. Branded portfolio consumption, as indicated by our IRI consumption data and combined with unmeasured channels, grew 2%, which follows a 15% consumption increase in the Q1 of 2021.

Speaker 2

This is the 8th consecutive quarter of Double digit consumption growth versus the 2 year ago period. Demand has remained high and we continue to realize the benefit of the manufacturing capacity we added as well as our increased resilience. Our Q1 shipments were in line with consumption, however some products remain stretched by sustained high demand. Shelf conditions continue to improve as does our share performance with another sequential improvement in the Q1 as we expected. Versus last year, we are beginning to grow our spices and seasoning share and in recipe mixes we had another quarter of considerable share gain over 4 share points.

Speaker 2

We continue to see further improvement as we begin the Q2 and we are confident in our continued momentum. In EMEA during the Q1, we lapped high prior year demand, partially due to restrictions resulting from COVID resurgences last year, While continuing our momentum with strong consumption growth in key categories compared to the Q1 of 2020, Our market share performance was stronger this quarter. We maintained our total EMEA region, herbs, spices and seasoning share on Top of strong gains in the 1st quarters of the last 2 years. Of note, Frank's Red Hot has grown consumption 60% We gained significant share versus the 2 year ago period. And in the Asia Pacific region, 1st quarter growth was tempered by scaled down Chinese New Year celebration Due to several cities in China imposing restrictions as a result of new COVID outbreak, these restrictions impacted our branded food service That is included in the Consumer segment in China.

Speaker 2

Turning to Slide 6, our Flavor Solutions segment grew 12% We're 14% in constant currency, driven by base business growth, new products and 1 month of incremental sales for our acquisition of Fona in December 2020. All three regions contributed to our growth, each with higher volume and product mix as well as the pricing actions partially offset costs. Our Q1 flavor solutions results reflect similar market conditions across the region. As a reminder, Our customer base in the Americas skewed more to packaged food and beverage customers and in EMEA and APZ to quick service restaurant or QSR customers. Our differentiated customer engagement and technical capabilities continue to drive outstanding growth, both in base business and with new products, With our packaged food and beverage customers, our at home customer base.

Speaker 2

Our performance with these customers led our Q1 flavor solutions results The double digit growth in flavors for performance nutrition and health and market applications as well as savory snacks And our momentum with flavors for alcoholic beverages also continued. Our QSR momentum has been strong with core menu items And limited time offers driving 1st quarter growth and other restaurant business continues to rebound. Our first quarter results also reflect the lapping curtailed away from home dining last year. Restaurants are benefiting from the shift to takeaway and delivery that was amplified by the pandemic. There's been a blurring between channels and most of the restaurant food being consumed off premise.

Speaker 2

For instance, 1 in 4 dinners Consumed at home is supplemented with a restaurant or other foodservice item. For our other institutional foodservice customers and our Branded foodservice product category, we expected some recovery coming into 2022 and we saw that demand strengthen in our Q1 And drove growth in the Americas and EMEA regions. Now I'd like to share some comments on our momentum and the growth initiatives we have underway. Turning to Slide 7, global demand for flavor remains the foundation of our sales growth and we have intentionally focused on great Fast growing categories that will continue to differentiate our performance. We are capitalizing on the long term consumer trends that accelerated during the pandemic, Healthy and flavorful cooking, increased digital engagement, trusted brands and purpose minded practices.

Speaker 2

These long term trends and the rising global demand for great taste are as relevant today as ever with the younger generations fueling them at a greater rate. Our alignment with these trends in combination with the breadth and reach of our global portfolio and the successful execution of our strategies Sustainably positions us for future growth. In this current dynamic global environment, we remain focused on long term sustainable growth. We continue to experience cost pressures from higher inflation and broad based supply chain challenges. To partially offset rising costs, We raised prices where appropriate late last year, are currently facing an additional pricing actions and as costs have continued to accelerate, We will raise prices again this year where appropriate.

Speaker 2

We appreciate our customers working with us to navigate this environment. Additionally, our plans to mitigate cost pressures include our CCI led cost savings, revenue management initiatives and taking prudent steps To reduce discretionary spend where possible. Throughout our history, we have successfully grown and compounded our growth Regardless of the environment and plan to do so again in 2022 as we continue to accelerate our momentum and drive growth from a position of strength. In our consumer segment across our major measured markets, we have gained millions of households over the last 2 years and had double digit buy rate growth. Our brands have gained new consumers and we have driven increased usage at the same time.

Speaker 2

This performance Combined with billions of additional at home eating occasions from consumers cooking more at home has created a new baseline for growth. We are continuing to drive our consumer segment momentum by accelerating flavor usage, including delivering on the demand for heat, building confidence in the kitchen and inspiring flavor exploration. We're also strengthening our consumer relationships at every point of purchase and creating a delicious, healthy and sustainable future. We're fueling growth through our brand marketing investments, category management initiatives and new products. Our brand marketing is resonating with consumers, particularly as we connect with them online.

Speaker 2

And as we expand the capabilities of our marketing excellence Globally, we are gaining efficiencies, executing with greater speed and shifting our investments to working dollars to drive greater effectiveness. Our U. S. Spice Aisle reinvention is further driving our category leadership with growth for McCormick and our customers. This initiative is continuing this year with additional stores being implemented and we're also starting to build momentum with similar initiatives Canada, the UK and France.

Speaker 2

Our consumer new product innovation differentiates our brand and strengthens our relevance with our consumers. Our new products are focused on what's important to consumers such as freshness, modern packaging, convenience and flavor exploration as well as affordability and value. 75% of global consumers find it more economical to cook at home and in the current inflationary environment it resonates even more now. Our products are already part of the consumer solution to manage inflation across their whole grocery basket. For For instance, inflation is hitting the meat case hard and a little bit of our flavor can make lesser cuts of meat more palatable and make the We have products at all price points that attract many types of consumers and households As well as different income levels, we continue to focus on ensuring we're launching new products that appeal to all types of consumers, Such as additional entry level price points for affordability as well as value offerings, including larger sizes to meet the needs of price conscious consumers.

Speaker 2

And with our new products and recipes tailored to popular new appliances Such as air fryers and instant pots, we are providing consumers flavor and inspiration and greater convenience when using our products. In our flavor solutions segment, we plan to continue migrating our portfolio to more value added products and technically insulated products, Particularly our flavors product category, we're targeting opportunities to grow with our customers in attractive High growth end markets such as alcoholic beverages, savory snacks and performance nutrition. We've been outpacing the market Growth in these categories, they all contributed first to strong growth in our Q1 results and further migrated our portfolio. Following a record year of new product growth last year, we're excited about our robust 2022 pipeline of culinary inspired innovation. We're leveraging our broad technology platform to develop clean label, organic and better for you solutions to solve our customers' issues without compromising on taste.

Speaker 2

We're using Sage, our AI enabled product development tool to develop consumer preferred flavors At an increased speed, we have a track record for lasting longer in the market for our customers. And we are building a pipeline of opportunities To accelerate our global seasonings growth by expanding our mid tier customer base, being added to core supplier list And strengthening our leadership in heat. We plan to continue to drive flavor solutions growth through our differentiated customer engagement. We have a strong passion for creating a flawless customer experience. Across both segments, our strong sales and growth plans Bolster our confidence in continuing our growth trajectory.

Speaker 2

We also recognize we're operating in a challenging global environment. Before Mike reiterates our guidance in a few moments, I'd like to comment on some current conditions. We will continue to monitor the situation And Russia and Ukraine very closely and adapt accordingly. Cost inflation has remained persistent with recent escalation in some areas such as call. And as such, we have raised our cost inflation guidance.

Speaker 2

It is now a mid to high teen increase. And in regard to COVID, as I mentioned earlier, there are new COVID restrictions being imposed in several cities in China. We are continually assessing the dynamics of these conditions as they evolve. We recognize there will be some near term impact, which we expect to mitigate later in the year In part with additional pricing actions, we are well positioned to deliver another strong year of growth and performance in 2022 due to the effective execution of our strategy and with our robust operating momentum. In addition to delivering top tier financial results, we are also committed to doing what's right for people, communities and the planet.

Speaker 2

We recently released our 2021 purpose led performance progress report, which highlights our key initiatives and the progress we are making, Including our recent announcements on the update of our science based target to reduce greenhouse gas emissions by 2,030 Aligning with the United Nations 1.5 degree Celsius target as well as our commitment to net 0 by 2,050. As we move forward in 2022, we're excited to continue to share our progress and success on all our purpose led performance goals. Now for some summary comments on Slide 11 before turning it over to Mike. The combination of our strong business model, The investments we have made, the capabilities we have built and the power of our people position us well to continue our robust growth momentum. We are in attractive categories and are capitalizing on long term consumer trends that are in our favor.

Speaker 2

We are actively responding to changing market conditions, Consumer behavior and customer needs are remaining forward looking in an ever changing environment. We have a strong foundation and are well equipped Navigate today's environment, responding with agility to volatility and disruptions, while remaining focused on the long term objectives, strategies And values that have made us so successful. Through the execution of our strategies that are designed to drive long term value, We have grown and compounded that growth successfully over the years regardless of the environment. Our fundamentals that drove that performance And our momentum and outlook are stronger than ever. McCormick employees continue to do a great job navigating a dynamic environment.

Speaker 2

Their agility and teamwork drive our momentum and success, and I want to thank them for their dedicated efforts and engagement. Now, I'll turn it

Speaker 3

over to Mike. Thanks, Lawrence, and good morning, everyone. Starting on Slide 13, our top line growth continues to be strong. During the Q1, we grew constant currency sales 4%, driven by pricing actions across both segments and incremental sales from our Fona acquisition. Consumer segment sales declined 2% in constant currency due to lapping high demand in all three regions last year, with a partial offset from pricing.

Speaker 3

On a 2 year basis, compared to the Q1 of 2020, constant currency sales grew 30% with double digit growth in all three regions, Reflecting the sustained shift to at home consumption, higher than pre pandemic levels. On Slide 14, consumer sales in the Americas increased 2% in constant currency, driven by pricing actions, partially offset by lower volume and product mix due to lapping last year's elevated demand. Branded products led the growth with strength in McCormick, Vatarens, Stubs, Olde Day, Simply Asia, Frank's Red Hot and French's, partially offset by a decline in private label. In EMEA, constant currency consumer sales declined 9% from a year ago, Driven by lower volume and product mix, most significantly in Wahine homemade dessert products due to lapping last year's high demand across the region. This decline was partially offset by pricing actions.

Speaker 3

Constant currency consumer sales in the Asia Pacific region declined 6%, Driven by the exit of some lower margin business in India. China's consumer and branded foodservice demand, partially related to the Chinese New Year impacts Lawrence mentioned earlier, Also contributed to the decline. These declines were partially offset by pricing actions. Turning to our Flavor Solutions segment and Slide 17. We grew 1st quarter constant currency sales 14%, including a 2% contribution from incremental Fona sales in December.

Speaker 3

As a reminder, we acquired Fona on December 30, 2020. The remaining increase was driven by higher volume and product mix, as well as pricing actions. Compared to the Q1 of 2020, constant currency sales grew 18% with double digit growth in all three regions. In the Americas, flavor solutions constant currency sales grew 12%, with FOTA contributing 2% and the remaining growth due to both pricing and the Combination of volume and product mix. Higher sales to packaged food and beverage companies with particular strength in snack seasonings led the growth With the recovery of demand from branded food service customers also contributing.

Speaker 3

In the EMEA, we drove 24% constant currency sales growth With a 17% increase in volume and product mix and 7% related to pricing actions, EMEA's growth was led by the robust recovery of demand QSRs and branded foodservice customers. In the Asia Pacific region, flavor solutions sales rose 5% in constant currency, driven by pricing actions and growth from higher volume and product mix. This growth was driven by our QSR customers, Both in their core menu items as well as their limited time offers and promotional activities. As seen on Slide 21, Adjusted operating income, which excludes transaction and integration costs related to the Chula and Kona acquisitions, as well as special charges, Declined 14% or in constant currency 12% in the Q1 versus the year ago period. Adjusted operating income declined 12% in the Consumer segment with minimal impact from currency.

Speaker 3

And in the Flavor Solutions segment, it declined 17% or 11% in constant currency. Both segments were unfavorably impacted by higher inflation and distribution costs, Both of which accelerated in the second half of last year as well as incremental investment spending on our ERP program, which we expected to be higher earlier in 2022 versus 2021. CCI led cost savings favorably impacted both segments. In the Consumer segment, lower sales, partially offset by a reduction in COVID-nineteen related costs, also contributed to the decline. In the Flavor Solutions segment, higher sales were more than offset by the unfavorable drivers I just mentioned, as well as costs related to supply chain investments, which will continue in the Q2.

Speaker 3

As seen on Slide 22, adjusted gross profit margin declined 2 60 basis points in the Q1 versus the year ago period. This was driven by the net impact of cost pressures we are experiencing and the pricing actions we have taken. We estimate the dilutive impact of pricing to offset this dollar inflation increase was approximately 200 basis points in the Q1. Additionally, a sales shift between segments also contributed to the margin decline. Our selling, general and administrative expense as a percent of net sales Increased 20 basis points from the Q1 of last year due to higher distribution costs and a higher level of investment in our ERP program.

Speaker 3

This combined with the adjusted gross margin compression resulted in an adjusted margin decline of 2 80 basis points in line with our expectations. Turning to income taxes on Slide 23. Our first quarter adjusted effective tax rate was 19.7% Compared to 22.7% in the year ago period, driven by a higher level of discrete tax items this year. Adjusted income from unconsolidated operations declined 30% versus the Q1 of 2021 Due to the elimination of higher earnings associated with minority interest as well as higher inflation costs impacting our McCormick to Mexico joint venture. At the bottom line, as shown on Slide 25, Q1 2022 adjusted earnings per share was $0.63 As compared to $0.72 for the year ago period, the decrease was driven by our lower adjusted operating income.

Speaker 3

On Slide 26, we've summarized highlights for cash flow and the year end balance sheet. Our cash flow from operations was an inflow of $18,000,000 in the Q1 of 2022 compared to an outflow of $32,000,000 in the Q1 of 2021. This increase was primarily driven by working capital improvements And lower payments for transaction and integration costs related to our Cholula and Fona acquisitions. We returned $99,000,000 of cash to our shareholders through dividends and used $44,000,000 for capital expenditures this quarter. We expect 2022 to be a year of strong cash flow, We provide profit and working capital initiatives and our priority is to continue to have a balanced use of cash, funding investments to drive growth, Returning a significant portion to our shareholders through dividends and paying down debt.

Speaker 3

Now turning to our 2022 financial outlook on Slide 27. First, I would like to provide some additional perspective on some of the current conditions Lawrence mentioned earlier. As we have said, we are currently not operating in Russia and Ukraine. And while the impact is not fully known, Our business in these markets is small, with the combined sales across both segments totaling less than 1% of total company sales last year. Additionally, we have no manufacturing in either country.

Speaker 3

Any operating profit impact would include those related to the impact on sales As well as potential expenses stemming from the current situation. Regarding cost inflation, we are revising our outlook and are now projecting inflationary pressure in the mid to high teens as compared to mid teens increase in our previous guidance. We expect cost inflation to remain persistent, especially as it relates to transportation, and we are continuing actions to mitigate these costs, including pricing. Again, as Lawrence mentioned, we recognize these dynamics will have some impacts on our results, certainly in the Q2. While we continue to monitor impacts on the broader economy and will adapt as necessary, we are reiterating our 2022 sales and profit outlook that we previously shared in our January earnings call.

Speaker 3

We are projecting strong top line growth and operating performance With earnings growth partially offset by a higher projected effective tax rate, we also expect there will be an estimated 1 percentage point unfavorable impact of currency rates on sales, adjusted operating income and adjusted earnings per share. On the top line, we expect to grow constant currency sales 4% to 6%. We expect pricing to be a significant driver of our growth with volume and product mix to be impacted by elasticities, although at a lower level than we have experienced historically. We plan to drive growth through the strength of our brands as well as our category management, brand marketing, new product Customer Engagement Growth Plans. Our volume and product mix will also continue to be impacted by the pruning of lower margin business from our portfolio.

Speaker 3

Our 2022 adjusted gross margin is projected to range between comparable to 2021 to 50 basis points lower than 2021. This adjusted gross margin compression reflects the anticipated impact of a mid to high teens increase in cost inflation, An unfavorable impact of sales mix between segments, a favorable impact on pricing and CCI led cost savings. As a reminder, we price to offset dollar cost increases. We do not margin up. This has a dilutive impact on our adjusted gross margin and is the primary driver of our projected compression.

Speaker 3

We expect to grow our adjusted operating income 8% to 10% in constant currency, which reflects our robust operating momentum, a reduction in COVID-nineteen related costs and our continuing investment in ERP Business Transformation. This projection includes inflationary pressure in the mid to high teens, a low single digit increase in brand marketing investments And our CCI led cost savings target of approximately $85,000,000 As we shared on our last earnings call, We expect our profit growth to be weighted to the second half of the year. During the second quarter, we are phasing in pricing actions and with costs continuing to escalate, We'll raise prices again as appropriate. While we plan to cover the cost pressures due to the recent acceleration of inflation, there will be a lag. And as a result, our profit will now be weighted to the second half of the year even more than originally expected.

Speaker 3

And as a reminder, We expect our ERP investment to be higher earlier in the year versus 2021. Our 2022 adjusted effective income tax rate It's projected to be 22% to 23% based upon our estimated mix of earnings by geography as well as factoring any level of discrete impacts. This outlook versus our 2021 adjusted effective tax rate is expected to be a headwind to our 2022 adjusted earnings per share growth of approximately 3%. Our 2022 adjusted earnings per share expectations reflect strong operating growth of 8% to 10% in constant currency, partially offset by the tax headwind I just mentioned. This resulted in an increase of 4% to 6% or 5% to 7% in constant currency.

Speaker 3

Our guidance range for adjusted earnings per share in 2022 is $3.17 to $3.22 compared to $3.05 of adjusted earnings per share in 2021. In summary, we are well positioned with our broad and advantaged labor portfolio and effective growth strategies to continue to accelerate our operating momentum and drive another year of strong growth and performance.

Speaker 2

Thank you, Mike. Now that Mike has shared our financial results and outlook in more detail, I would like to recap the key takeaways as seen on Slide 28. We delivered solid Q1 results in line with our expectations with strong sales growth on top of our 20% constant currency growth last We are confident that the hard work and dedication of our employees will continue to drive momentum. We recognize we're operating in a challenging global environment. Through the execution of our strategies, we've successfully grown long term value over the years Regardless of the environment, our long term fundamentals that drove our performance are stronger than ever.

Speaker 2

The strength of our business model, The value of our products and capabilities, our alignment with long term consumer trends that are in our favor and the attractive categories we are in provide a strong foundation for long term sustainable growth. We're confident that our broad and advantaged flavor portfolio, Our robust operating momentum and effective growth strategies will drive another year of strong growth in 2022 and build value for our shareholders. Now let's turn to your questions.

Speaker 4

Thank you. At this time, we'll now be conducting a question and answer session. One moment please while we poll for questions. Thank you. And our first question We'll be coming from the line of Andrew Lazar with Barclays.

Speaker 4

Please proceed with your question.

Speaker 3

Hi, good morning everybody.

Speaker 2

Good morning, Andrew.

Speaker 5

Hi there. McCormick reiterated its full year outlook, right, despite a worsening inflation outlook and a Still dynamic operating environment and as you noted now requires an even more significant margin inflection in the back half of the year To stay within sort of your full year gross margin guidance. So I was hoping you could speak a little bit to what gives you the visibility that is playing out. I know you detailed some items on the last call such as pricing and lapping COVID costs, smoother cadence of ERP spend and CCI saves and such. So So perhaps you can remind us of these and share if there are any additions or changes to the above.

Speaker 5

Thank you.

Speaker 2

Thanks, Andrew. I'll start on this and then let Mike I'll follow-up on and talk about those specific items. But first of all, I want to emphasize that 1st quarter is really right up the middle with our expectations and it all starts with Strong demand and strong top line performance. We expect to see continued strong demand as we And as we go through the Q2 in particular, more pricing action goes into effect, Which on top of that strong demand and with the relatively low elasticity that we're seeing will translate into both strong top line and strong Bottom line of growth in the second half of the year. This is aligned with the guidance that we talked about on our last call at the end of when we gave guidance for the Mike, do you want to talk about those specific items?

Speaker 2

Yes.

Speaker 3

I think the thing that's really changed since the 1st quarter for the year end call when we talked about the inflation moving from mid teens Mid to high teens, really, there's been a bit of acceleration, things like fuel costs that will impact the Q2. So but we see on average across the year that cost inflation around the same mid to high single teams, but it's been moved forward into the second quarter. Pricing though is continuing to build, as Lauren said. For the full year, before we said on the last call, Mid to high pricing impact, we're at the high we'll be at the high end of that now. And actually in the second 6, we'll be in the low double digit pricing impact range, which gives us more confidence About the second half profit realization.

Speaker 3

As you mentioned, there were some other factors, ERP spending is up in the first six versus last year. Investments in supply chain, we just announced some of the transition of production over to the Peterborough facility in the UK. There are startup costs that have hit us in the Q1, that will be more of that in the second quarter, really hitting the flavor solutions segment. So we do see some of those negative impacts in Q2, but really

Speaker 2

confident about the second six With some of the actions that we've identified.

Speaker 5

And then just quickly, you've talked about the capacity coming on online And I think you mentioned you shipped essentially or closer to consumption this quarter, so sort of making progress there and we've seen that in the market share improvements. But it doesn't sound like you've yet had the ability to truly sort of really rebuild retailer inventories. And I assume there's still some opportunity for that as you go Forward through this year and perhaps you could just update us on that. Thanks so much.

Speaker 2

I think that this is a work in progress. Supply chain continues to get better. It's not perfect, as our some of our customers will remind us, but the disruptions that we are Seeing are much more discrete and specific rather than Q3 of last year, it seems like everything It was a problem. So supply chain has gotten better. Our ability to meet that demand has really gotten better.

Speaker 2

And although I I did make that remark about certain customers a minute ago. The fact is our customers tell us that generally we are We're better than our competitive set and this is allowing us to win new business. So we really feel You're pretty good about how that has improved and I think you'll continue to see us build We shared performance consecutively, as we have been for the last several quarters with our ability to supply. Additional capacity coming on has really made the difference.

Speaker 5

Great. Thank you so much.

Speaker 4

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

Speaker 6

Thank you. Good morning, everyone. Can I ask first of all about the private label dynamics? Because we're looking at The level of price inflation really across the grocery store. And under normal circumstances, you would expect Trade down to private label, but I know that you mentioned that your private label sales are actually down year on year.

Speaker 6

I'm just wondering what's driving that. Is it supply chain related? Is it retailer driven or is it simply that consumers are feeling still feeling reasonably flush and able to afford the branded product? And then I have a follow-up.

Speaker 2

Sure. I think 2 things. First of all, we have not yet seen significant movement in private label as a trend in either Direction. Some of the recent market data shows some increase And but it's really slight in our category. There's a dynamic you have to watch out for.

Speaker 2

Private label, the costs are going up for everybody. It's driven by raw material, by packaging and transportation and the same penny cost increase That's impacting brands is also impacting private label. And so when you put that same amount of cost increase Through to private label, percentage increase is bigger and it creates an optic of private label growing faster On a dollar basis, it's really again, it's that cost pass through. So I want to make that clear. The second point that I want to make though is that we are believers that there's a role for both our brand and private label, Especially in the European Spice category and we provide both to our customers and the best competitive environment for us as a company This is what both our brands and private label are gaining share, putting pressure on everybody else.

Speaker 2

Great.

Speaker 6

Thank you. And as a follow-up, obviously Russia, Ukraine is a very difficult situation right now. Can you share what percentage of sales that is for you? I'm pretty sure it's fairly low. But what do you see as the risks around the world, if the situation persists.

Speaker 6

And I'm really talking about when we've gone through previous commodity cycles, we've seen problems, Because of the in affordability of basic food stuffs like bread in Egypt and so on, would your supply chain I mean given what you've seen in the past when we see these grain cycles, are there particular ingredients that I'm just trying to get at the risks there. Thank you, and I'll pass it on.

Speaker 3

Alexia, thanks. It's Mike. I'll start the answer. We have said in our 8 ks, sales for Russia and Ukraine are less than 1% of our total sales. So that's and That's worth it.

Speaker 3

And

Speaker 2

it will have an impact

Speaker 3

in the Q2, obviously, because that's when the crisis has unfolded. And as far as your Question about broader impacts, primarily inflation. I think you've seen in the last couple of weeks and part of the reasons we've taken our inflation expectations up and discussed pricing is Because of some of those impacts, I mean from a commodity perspective, I mean our market basket is a lot different than a lot of other food companies. I mean there are products that Could be impacted. We source mustard from that part of the world, but we have secondary sourcing capabilities there, which we've moved to.

Speaker 3

So I think our global Hi, Shane. One of the strengths we have is it's deep and it's a long history and there's alternative markets for a lot of our materials. And no one raw material makes up more than 5% of our total cost of goods sold. So I think that diversity really helps us. And I

Speaker 2

would say we're less exposed to the grain complex than Most of our peer companies would be. I think our concern

Speaker 3

and part of what we're considering

Speaker 2

in our inflationary outlook It's cost of energy, which now looks like it's going to remain higher than perhaps it might have otherwise.

Speaker 3

And that

Speaker 2

flows through the packaging too like plastic resins and things like that.

Speaker 6

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

Speaker 4

Our next question comes from the line of Anurag Nandan with JPMorgan. Please proceed with your question.

Speaker 7

Hi, good morning.

Speaker 2

Good morning.

Speaker 7

In light of some of the incremental cost pressures you're facing, the year on year decline we saw in the Q1 gross margin, is this A reasonable level of decline to think about in the Q2 as well? Or was or should we think about the Q1 as a low point in terms of progression?

Speaker 3

I'd say between the first half and the second half, you're going to have that Big change due to the pricing dynamic I mentioned before, some of the one timers in the first six. The things we've laid out As far as costs increasing versus our original expectations in the Q2, I think it's probably a pretty good estimate that in that range Of the gross margin, what we did in the Q1 is probably close. We do have the additional Peterborough supply chain investment costs like I talked about for dual running costs and things like that. So I don't think you're far out of the ballpark there.

Speaker 7

Great. Thank you. That's helpful. And then I just wanted to switch to ask about pricing in consumer EMEA. The pricing remains like fairly muted in the quarter.

Speaker 7

So can you Walk us through what to expect from pricing in this region as the year progresses and what some of the challenges are, if any, to taking pricing here?

Speaker 1

Thank

Speaker 2

you. I'd say that we've said we're going to take pricing as appropriate. And so different regions are going to have Different levels of inflationary impact and different levels of pricing and different timings in which Those pricing actions might take effect. And so I don't and then within even within regions, there are going to be differences From country to country, especially in the region. Even within segments.

Speaker 2

Within our segments, certainly. I can't say though that Broadly, we have our current pricing actions that our pricing actions that we've spoken about We are very much on track. We have pricing going into effect in the 2nd quarter in Several markets, I know your question was about EMEA, but I'll be more specific about our U. S. Consumer business because increases are going into effect this week for the next round.

Speaker 2

In our flavor solutions segment, broadly the branded foodservice part of the portfolio moves with consumer pricing And the rest of the flavor solutions business, pricing is based on contractual windows and the timing is going to vary tremendously Based on the windows of reassessing the pricing. And I'd say that in EMEA and APZ, the pricing actions are on track and are going to be phased in Through the first half of the year, pricing is always an ongoing discussion and we would not get too specific, really been quite specific just now For both customer and for competitive reasons. Yes, I think you'll see the

Speaker 3

same trends across the regions that pricing will build during the year.

Speaker 7

Got it. Thank you.

Speaker 4

The next question is coming from the line of Robert Moskow with Credit Suisse. Please proceed with your question.

Speaker 8

Hi, thanks for the question. I guess it's in 2 parts. I wanted to confirm what I heard about the level of pricing you think Mike That will show up in your P and L by the end of the year. I thought I heard you say low teens, but I could have gotten that wrong. Is it scaling up that much?

Speaker 8

And then the second part is, I think, Lawrence, you said that you're operating from a higher baseline because You brought in a lot of consumers to the franchise and the category has expanded perhaps structurally. But the category is declining in the U. S. Modestly. It's declining a lot in Europe from what I can tell.

Speaker 8

Is there a risk here that as consumers regain more mobility And they're gaining it very quickly right now that the consumer category might not be at the right baseline, There might be a lower baseline out there than what you would expect. Thanks.

Speaker 2

Well, first of all, good morning, Rob. We'll start with the pricing. Yes, let me answer the pricing and go back to the cash.

Speaker 3

Yes. What I said and just to be clear, we had Given guidance that pricing for the full year was going to be mid to high single digit based on the new Based

Speaker 2

on the we're moving to

Speaker 3

the high end of that based on the price based on the recent cost increases.

Speaker 2

Obviously, that's single digit.

Speaker 3

You're right. I'm getting confused. Mid to high single digit. We moved to high based on some of this recent cost inflation I talked about primarily impacting the second quarter. Yes.

Speaker 3

What I said about first half, second half, in the second half, if you look at that in particular, back to Andrew's question, We are going to see low single low double digit price increases, which are cumulative coming through for the 3rd Q4. So it builds during the year to my point before. Not for the full year, but for the second 6. Yes. Okay.

Speaker 8

That's a big price increase in the back half of the year. Well, I

Speaker 3

think you're lapping and you're lapping last year in the Americas Particularly pricing in the Q4 of last year. So you do get that cumulative impact of several price increases, 3 of them actually.

Speaker 8

Okay. And then the risk to the baseline?

Speaker 3

Well, of course,

Speaker 2

There was elevated demand because consumers were forced to stay at home and cook. And we never expected all of it to remain, but we do believe that consumers have moved to a higher level of consumption And higher level of cooking at home structurally. All of our research points in that direction. Yes, just the logic of people still cooking at home, that's hard still working from home in part. Lunch is going to be a meal occasion that is consumed more at home.

Speaker 2

Breakfast because of

Speaker 3

work from home

Speaker 2

people are actually cooking breakfast instead of using more

Speaker 3

ready to eat

Speaker 2

Solutions and so there's kind of both the qualitative and the quantitative Work at that point to say consumption at home is going to continue to remain elevated. I mean, 88% of consumers say they're going to cook as much at home or as much or more at home than they did during The pandemic, to the extent there's economic pressure on us from a recession, that also reinforces The whole Cook at Home and we know in particular our categories and our brands performed well during recessionary periods during both of the last two The recessions, our brand growth was right in line with our long term guidance. We are seeing a difference in our consumer business in the U. S. Versus Europe, but the biggest factor there is actually that Europe has in our European business, we have a significant component that is Baking, take away with our Botany brand in France.

Speaker 2

And so we've seen baking return to more of a baseline level. But we do believe that there's been a step up in our other categories.

Speaker 3

Yes, I mean, just look at total McCormick consumer in the last 2 years And we were lapping a really tough quarter last year in Q1. We're up 30% in 2 years constant

Speaker 8

And maybe one last follow-up if I could. If pricing is up low double digit, let's say it's like 12% In the back half of the year, it's probably not unheard of to expect a volume decline of like negative 5, negative 6. Is that close to how you're thinking about elasticity, number 1? And if volume is that down that much, Does that have any implications for your fixed cost leverage or what does it do to your the rest of your P and L if anything?

Speaker 2

Well, I'm not going to get too specific on our price on our exact elasticity modeling, But we do model elasticity. These price increases are really outside the range of those models. And the environment is different from the environment in which those models were built. So I think that all of us are in a little bit uncharted territory right now. But we've assumed a level of elasticity And so far so good in the sense that the elasticity that we're actually seeing is actually at the low end of what we've been modeling.

Speaker 2

So that gives us some encouragement. And again, elasticity is probably based on substitutability and everything's going up. And so kind of even though our prices are going up, the consumer's perspective or kind of relative frame of preference, It's in the context for all the substitutes and everything that products

Speaker 3

are used on, it's going up

Speaker 2

as well. And again, as we tried to say in our prepared remarks and what we've seen and heard from consumers in In the past, our products are a very small part of the cost of their meal. And in many cases are part of them solving their whole grocery basket inflation problem. They've got meat going up 40%. The increase on spices pales by comparison And using even more spice to substitute a lower cost cut of meat is real behavior that we see in consumer.

Speaker 3

I'm less worried about the fixed costs in our supply chain. I mean, we manage ups and downs all the time. So if there happens to be some volume decrease, There's been a large investment in capacity the last couple of years and we've gotten out a lot of those co pack costs from COVID. So we would absorb that.

Speaker 2

Yes. And I would say we're still in order

Speaker 3

to meet that high level

Speaker 2

of demand, maybe the volume came down a little bit, it actually might even benefit us.

Speaker 8

Oh, interesting. Okay. All right. Thank you.

Speaker 4

Our next question is coming from the line of Adam Samuelson with Goldman Sachs.

Speaker 9

So I was hoping to dig in on the flavor solutions growth a little bit and really trying to think about the performance in some of the different buckets Very different comp layout in that part of the business than in the consumer segment, where you were still lapping some easy foodservice and quick service a year ago, those get notably tougher. Your packaged Food customers, especially North America might kind of are probably wrestling with a lot of the same demand elasticity questions that Rob and others have been asking about already. So I'm just trying to think about how we should think about the volume growth, whether it's by region or by the different parts of that business over the balance of the

Speaker 2

I'll start off to say that, Flavor Solutions growth for the total company was Really strong and for Americas and EMEA, it was likewise Really, really strong. And even Asia Pacific, where the growth was a little bit lighter, I'm not I'm not going to complain about the amount of growth that we recognized over there as well. The food away from home Components, slightly trailed food at home overall, but those results were really different by region. Our whole flavor and seasoning business has really been robust in the Americas and that drove A lot of the growth and quick service restaurant recovery Has continued to be strong and branded foodservice is now reopening. So we're seeing solid growth there.

Speaker 2

I mean it's hard to What's not?

Speaker 3

I mean, I couldn't tell you what's not growing. Yes, not only the secular trends, but we're winning business. I mean, that's the thing. We talked about the Fono acquisition, what That is unlocked across the flavor business and some of these high growing categories. We talked about it in CAGNY.

Speaker 3

So I think you're seeing a lot of good trends Across Paper Solutions.

Speaker 2

Right. I know I get that. I'm just trying

Speaker 9

to think about this on the go forward. The comp layout on volumes is going to look very different from an activity level than your consumer business. And I'm trying to think about, Especially if there's risks of maybe a bit lower economic growth, especially in EMEA. You got COVID lockdowns in Asia Or in China specifically, just how do we how are

Speaker 2

you thinking about that business as we go to the balance of the year?

Speaker 3

Well, I think gosh, I mean all companies are struggling like this. But I think in times when other of our, say, packaged food companies are trying to come up with Innovation, maybe take cost out, where our products are such a small percentage of the total product they sell to the consumer, it's actually an opportunity for us to work with them. So I'm less concerned about some of the elasticity there seeing things like that you've said. We're a small component just like on the consumer side of that meal, whether you're branded Good service or whether you're buying a snack seasoning.

Speaker 2

And on China specifically, we're watching this, but I'd say it's within the normal there are always Puts and takes and pressures within the business, I'd say that what we're seeing at least so far is within that range.

Speaker 9

Okay. And then and if I could quickly follow-up on the commodity cost inflation point and I appreciate your basket looks very different than a lot of other food companies. You guys also

Speaker 2

are much more diverse just in terms of the spices, seasonings, herbs that are going to have a lot

Speaker 9

of emerging market kind of growers, Very smallholder farmers. Can you talk about the contracting of that? How much just when you actually will agree to price with those growers Through the year, just they're going to be facing some pretty dramatic input cost inflation. I'm wondering how that will impact the price that you're paying For that basket of commodities, is that really a more fiscal 2023 event as we think about their costs flowing up to you?

Speaker 3

I think, honestly, most of the impact we've talked about, especially recently, is more on the transportation and the packaging side. There's exposures to the Resins and oil costs and things like that. And for commodities, we have long history of relationships with partners and joint ventures that Secure commodities over time. And you can look at our balance sheet. We have more raw materials now than we did last year.

Speaker 3

So that's part of the way we protect our future Right.

Speaker 2

And I think that we could get into too much detail here. I would say that our global sourcing and our foods on the ground and our long relationships With producers in these markets and kind of the strategic partnerships that in some cases are multi generational, Have really advantaged us in this area and this has actually been an area that where I think that we've demonstrated tremendous competitive advantage and is Giving us some buffer, I think that others are probably experiencing even greater cost inflation pressure for some of these same components. It's an area where scale really matters.

Speaker 9

Okay. All right. That's all helpful. I'll pass it on. Thanks.

Speaker 9

Thanks,

Speaker 2

Steve. Okay. Thanks.

Speaker 4

Thank you. Our next question is from the line of Steve Powers with Deutsche Bank. Please proceed with your questions.

Speaker 3

Yes. Hey, thanks and good morning. Perhaps Building on your comments in response to Alexia's question on private label and Rob's questions as well, it seems there's an increased focus In your comments this morning on entry price points for affordability, maybe that just limited the private label, Generally and value offerings such as the larger pack sizes. I guess I just want to validate that I'm picking up on a fair evolution in tone since the start of the year, number 1. And then number 2, maybe some comments around how that's altered your outlook for volume versus product mix alongside the increases in pricing?

Speaker 3

Clearly, you have All through the top line outlook and you've mentioned the incremental pricing anticipated, so we can solve for the difference. But within that, I'm curious how you're thinking about volume versus mix trade offs. It sounds like you expect the response to skew more towards mix versus a unit volume decline, but I just again want to validate that and love some incremental I mean, I'll start with this. There's a lot of them to unpack. I mean, the nice thing on our consumer business is Whether you're buying recipe mixes or bottles of spices or Frank's Red Hot Sauce, the margins are very solid.

Speaker 3

So we have a real we have a broad For all portfolio products or flavor things, but really high margin business across the board. So I don't think there's going to be an impact There from a shift. I mean, you may see in previous recessions like we've talked about, I don't think we're shifting a message. I think we've talked about very consistently in recession periods such as 2,001, 2,009, our products do really well. We show volume growth and pricing growth that we need to.

Speaker 3

So there may be a shift in products from gourmet to recipe mixes because people are going down the value chain, but The margins are there and the use of the 1 packet dry season mix versus a bottle actually helps us in some way. So I don't I think the fear that you're raising isn't fair. Yes.

Speaker 2

We're not trying to signal anything when we talk about we offer this whole range of price points All the way from super premium to mid tier to entry price point. And at a time when we and everybody are Taking pricing actions, we also want to make sure that our products are accessible to lower income And value conscious consumers and really that's how we're really trying to provide reassurance in that area. It's Not in anticipation of some change or it's not a shift in strategy or focus for us.

Speaker 10

Okay. Okay.

Speaker 3

Fair enough. Thank you very much.

Speaker 4

Thank you. Next question is from the line of Chris Growe with Stifel. Please proceed with your question.

Speaker 10

Hi, good morning.

Speaker 3

Hi, Patrick.

Speaker 10

Hi. Just had a couple of quick questions. I think these have become pretty much follow ups at this point, but just to be clear on a couple of points. But Given the higher inflationary outlook you mentioned, you do have more pricing coming online in the Q2. Is that new pricing or is that pricing that was Expected to pick up from some of your actions I think you put in place in the Q4?

Speaker 2

No, I can tell you, we could we've this is pricing that has been planned. We With these price increases in order for them to be effective now were presented before our last call, I can assure you, Dan. So these are not new. And the additional pricing that we're planning later in the year Was planned, the magnitude of that pricing was still flexible and we're locking that in now.

Speaker 10

That makes sense. I got it. Okay, got it. And then I just want to be clear on the cost inflation that accelerates in the second quarter. Even though prices accelerate, it sounds like it's still going to be some extra costs, whether it be ERP and the new and the facility costs in Factors that would keep the gross margin from improving much sequentially, but the second half should show that improvement as more of the pricing comes through.

Speaker 10

Is that the way to think about that relative between pricing and inflation?

Speaker 3

Yes. I think maybe the second half, as I said, for the reasons you mentioned, but also the fact that that cost acceleration For the fuel costs and things like that into the second quarter in addition to some of the things we've made out before with some of the supply chain. So yes, you're right.

Speaker 10

Okay. I just have one question. Go ahead, sorry.

Speaker 2

I was just saying, I think you got it.

Speaker 10

Okay, great. One quick question on flavor solutions. You talked about some strategic investment spending. Is that related to future demand or is that related to Petersboro, for example, or things you're moving around? I'm Curious what that referred to?

Speaker 3

That's specifically reflecting majority of it is related to the Peterborough start up costs and redundant running costs

Speaker 10

Okay. Thanks so much.

Speaker 3

Which is a great new facility of net carbon 0 and manufacturing and running it's going to be

Speaker 2

fantastic long term, but There is a startup call. Yes.

Speaker 4

Thank you. Our final question is from the line of Peter Galba with Bank of America.

Operator

Hey, good morning, Lawrence

Speaker 2

and Mike.

Operator

Thank you guys for fitting in. Good morning. Just wanted to Circle back, I think, to some comments you made maybe a few years ago around China and make sure some of the numbers we're working with are still okay. But I believe, In the past, you disclosed that China is sub-ten percent of the business, and I think about half of that business is away from home, just as we're thinking about 2Q impacts of potential lockdowns.

Speaker 2

You're right about less than 10%. I think it's close enough.

Speaker 3

I think it's close enough.

Operator

And on the away from home at home. Yes.

Speaker 2

That's how I mean. Yes.

Speaker 3

I mean, you have to remember, within our consumer business, we have there's products we sell that are used for both In foodservice, that we classify them as part of consumer, which is a little different than other parts of the world just because the fact they can be used in both channels. Right. Okay. Okay.

Operator

And then maybe just as a follow-up, Mike, and I know we've kind of gone over this on the cost And pricing, but I just on reconciling the gross margin guidance specifically for the year, Given kind of the hole you're working out of in 1Q, some of the lasting impacts in 2Q and not margining up when you take price in the back half of the year, just How do you kind of still get to a flat to down 50 basis points gross margin number as you're looking at it internally? Just can you help us there?

Speaker 3

I think you got to remember, Q1 is historically the smallest quarter. So and

Speaker 2

the back half The year

Speaker 3

is traditionally our biggest quarter. So there you get the math thing going that helps us as we have increased volumes and pricing and things like that we've talked about.

Speaker 2

That helps fill some of that gap you're talking about.

Speaker 3

I mean, we're always looking we talked at CAGNY. We talked in the earnings call about the things that are going to help us, whether it's CCI. People forget about the reduction in COVID costs. We spent $60,000,000 in COVID costs last year, of which some of that still remains in the underlying business, But that was a that's a big tailwind for us to help offset some of the segment mix we've talked about, the pricing compression that we've talked about, which is the main driver. So There's other things we're doing with this rev management, the shift to higher margin products, both in the flavor solution side and consumer that we're Potentially doing so, there's a lot of things that there's a lot of puts and takes within that 0% to 50% or 50 basis points for the full year.

Speaker 3

But We're 1 quarter in and it's just too early to move. And things will move in that range too as things change with Ukraine, Russia, commodity cost, pricing, so we're comfortable with where we are right now. That's a lot I threw at you there.

Operator

No, thanks very much.

Speaker 4

Thank you. I'll now turn the floor over to Lawrence Curzews for closing remarks.

Speaker 2

Great. Thank you. McCormick is differentiated by The breadth and reach of our balanced portfolio, which has positioned us for sustainable growth. We're very proud of our solid Q1 operating performance. We're disciplined and are focused on the right opportunities and investing in our business.

Speaker 2

We're continuing to accelerate our momentum and drive further growth As we successfully execute on our long term strategies, actively respond to changing consumer behavior and capitalize on opportunities from our relative strength, We are well positioned for continued success and remain committed to driving long term value for our shareholders.

Speaker 1

Thank you, Lauren. Thank you to everybody for joining today's call. If If you have any further questions about today's information, please feel free to contact me. This concludes this morning's call. Have a nice day.

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Earnings Conference Call
McCormick & Company, Incorporated Q1 2022
00:00 / 00:00