Lawrence E Kurzius
Chairman and Chief Executive Officer at McCormick & Company, Incorporated
Good morning, everyone. Thanks for joining us. Our fourth quarter concluded a challenging and volatile year that impacted our ability to deliver on our expectations and our financial performance. At the same time, we ended the year with positive momentum in consumer consumption trends and Flavor Solutions demand, stabilized service levels and supply and meaningful progress in starting to reshape our cost structure. While more work remains to be done, our confidence in our outlook for 2023 and beyond are strong. Our organization is focused squarely on executing on the priorities I just mentioned. All of which are important drivers in the successful execution of our strategies and the delivery of stronger results.
Turning to Slide 5. At our fourth quarter results, our sales declined 2% from year-ago period, including a 4% unfavorable impact from currency. In constant currency, sales grew 2% within our implied fourth quarter guidance range, but below our expectations, greater-than-expected COVID related disruptions in China, unfavorably impacted our expected sales growth for both total McCormick and the consumer segment by approximately 2%. Fourth quarter sales would have grown in the range of 4% in constant currency, excluding the impact of China on our results. We had anticipated even higher growth. The fourth quarter restocking comparisons in the America's Consumer segment further tempered our growth.
As compared to last year, our fourth quarter constant currency sales growth of 2% reflected a 9% contribution from pricing actions partially offset by a 4% decline in underlying volume and product mix and expect a 2% volume decline from the kitchen basics divestiture and the exit of low margin business in India and the consumer business in Russia and the 1% year-over-year volume decline from the China COVID related disruption. Despite the tempered fourth quarter sales performance, our underlying sales strength positions us well to accelerate sales growth in 2023. In our Consumer segment excluding China, consumption trend strengthened, particularly in the US for our fourth quarter total branded consumption grew 6%.
In our Flavor Solutions segment, our sales growth was outstanding continued momentum across all regions. Consumers increasing demand for Flavor, whether it's through our products or our customers' products is both reflected in this performance and in our most recent proprietary consumer insights research. Our alignment with the long-term consumer trends at cooking at-home, clean and flavorful eating and valuing trusted brands continues to deliver results. This alignment combined with our broad and advantaged portfolio plus the fundamental strength of our categories continues to underscore McCormick's positioning for long-term differentiated growth in Flavor.
Moving to profit. Our adjusted operating income decline of 10% or 9% in constant-currency and adjusted earnings per share decline of 13% fell short of our expectations. Let me spend a moment on the differences to our expectation. Unfavorable product mix was the driving factor, particularly in our Consumer segment. This was primarily due to lower US base and seasoning sales stemming from fourth quarter inventory restocking comparison in both 2021 and 2022, which I'll discuss in a moment.
Our results also reflected lower than anticipated sales in China and then, unfavorable product mix related to the sales mix between segments. In addition the two COVID related plant shutdowns in China, we realized lower operating leverage. During the quarter, we made meaningful progress to lower our run rate costs in Flavor Solutions with the reduction of elevated costs that we've been incurring to meet high-demand and parts of our business. The impact of that progress was offset in the fourth quarter by unexpected discrete one-time initiatives. However, we expect to see positive benefits in our results going forward.
Turning to Slide 7. We're committed to increasing our profit realization in 2023. In our last earnings call, we discussed normalizing our supply chain costs and increasing efficiencies also strengthening our ability to service customers. To that end, we have targeted the elimination of $100 million of supply chain costs over the next two years. We are often taking streamlining actions across our entire organization, targeting an incremental $25 million of cost savings. The combination of these actions, which is our global operating effectiveness program, is incremental to our Comprehensive Continuous Improvement or CCI savings. Our CCI program has a well established track record of success and we are leveraging its proven program discipline to drive results.
We expect our global operating effectiveness program to drive annual cost savings of approximately $125 million of which we expect to realize $75 million through the P&L in 2023, enabling increased profit realization. We can see the results coming through and we expect the impact to scale up as the year progresses. Now let me share more details on our actions. During last year, we transitioned to our global operating model, allowing us to more effectively leverage our scale and drive cost reductions. As we further advance that model and streamline our processes, strengthen our collaboration and align our structure to work more efficiently, we're taking corresponding action to streamline our workforce across the entire organization.
We are making considerable progress on the streamlining actions we have underway. A large component of our streamlining actions at a US voluntary retirement program, which is very far along with a targeted separation date at February 1st. This will be followed by other actions, some of which will be involuntary, as always, we will care for employees in keeping with our share value.
Moving to the supply chain. Our top supply chain priority remains keeping our customers in supply and supporting their growth. And while we expect continued volatility in global supply chain, we have strengthened our resiliency over the past few years to achieve this priority. As we responded to demand volatility over the past several years, we incurred additional costs above inflation service our customers and are seeing inefficiencies develop in our supply chain. Some of these costs for investments and decisions made to support continued growth for both our customers and McCormick and some are the result of a buildup that can occur in periods of disruption.
In 2022, with the service levels of focus the normalization of our supply chain costs and inventory level has taken longer than expected. As we stated on our third quarter call, during the fourth quarter we began to implement initiatives to optimize our cost structure, increase our capacity and reduce inventory level, strengthening our supply chain resiliency and ability to service our customers.
Now for some details on these initiatives. First and foremost, while we continue to resolve some outliers, we have rebuilt and stabilized our service back to strong level and at a high level of finished goods inventory on hand. Operating from this position enables us to maximize our performance, reduce our labor costs and peer back excessive use of co-packers within our operations. Starting with labor as we expect it to be the most significant driver of our cost reductions, during the fourth quarter we reinstated more normal shift schedule with most locations now operating on a 24/5 pattern.
This allows us to eliminate inefficient and unpopular difficult to staff shift. Additionally, as we move away from the industry-wide labor issues seen during the pandemic, we have stabilized absenteeism and turnover rates in our workforce and returned to more standard staffing by line. During the quarter, we optimized our leadership structure throughout our facilities and upgraded the talented key role. Simultaneously, we are increasing the capability levels of our teams. We are also accelerating automation ranging from individual piece of equipment through a completely automated lines for a high volume packaging format. We expect that these initiatives to reduce 10% of our Americas supply chain workforce and over the past three months, we have already achieved half of the planned reduction.
Next, turning to our capacity, we are supporting future growth and enabling better customer service by investing to increase both manufacturing capacity and reliability in constrained areas. These investments also enable the repatriation of the production we scaled up with copackers, while continuing to meet the elevated demand. At our Flavor Solutions segment our Flavors volume including seasonings and flavor encapsulation has been growing at a mid single-digit rate for each of the past three years and demand remains strong. Our investments in additional seasonings capacity as well as spray dried capacity with the expansion of bonus footprint, we're are on track to be outlined during the second quarter.
Meanwhile, in our Consumer segment, we've been using co-packers for targeted high demand packaging formats such as some of our large value size items. Now, given the efficiencies gained and the investments already inflight, we have started to repatriate some of these formats. Overall, we are on track for co-pack spending in 2023 to be the lowest in the past five years. From an inventory perspective, we are executing on initiatives to return to historical safety stock levels, which has been disrupted and raised by the supply chain issues of the last few years. We reduced both raw material and finished good inventory during the fourth quarter, but we are aware, we have further progress to make we're confident and encouraged by the results of our initiatives are delivering so far.
As we progressed to a more normalized environment, we will realize additional benefits from these changes. For example, we expect to see reductions in expedited freight and less than truckload shipping costs and will streamline other transportation inefficiencies. With the recent opening of our new Maryland logistics center, we're able to eliminate expensive external warehouse costs before even fully realizing the inventory reductions, accelerating the expense savings.
With more efficient manufacturing and lower inventory levels, we expect lower material losses. We have managed through various supply chain challenges over the last several years. I'm confident that our disciplined approach to resolving the increased costs within our supply chain while prioritizing meeting our customers needs. The impact of our actions is expected to normalize our supply chain costs enhance our efficiency and ability to meet demand, reduce inventory level and ultimately increase our profit realization has reflected in our 2023 outlook. Our global operating effectiveness program has considerable momentum and we look forward to sharing more on our progress with you after our first quarter of 2023.
Now moving to fourth quarter business updates for each of our segments. Turning to our Consumer segment on slide eight. Sales performance in the quarter was impacted by factors mentioned previously, the kitchen basics divestiture, exits of businesses and COVID related disruptions in China as well as trade inventory dynamics between years. These factors as well as lapping high COVID related demand early in the year also impacted the full year performance.
Importantly, on a three year basis, we have grown annual sales at a 5% CAGR driven by the Americas region. We ended the year with positive momentum in our consumption trend.
Now for some regional highlights on sales and consumption. Starting with the Americas, during the fourth quarter of 2021, because we were restocking. Shipments were higher than consumption and we are lapping that this quarter, which impacts our sales growth. As we enter the holiday season this year and having shift fairly inline with consumption for the first three quarters of the year, customers did not need to replenish their inventory as much despite strong consumer consumption during the holiday season. We estimate our fourth quarter sales growth rate was unfavorably impacted 6% related to these restocking comparisons.
We did not fully appreciate the level of fourth quarter restocking in 2021 especially of high margin holiday herbs and spices and the resulting impact on our year-over-year growth and as such expected stronger sales growth this year. That said, excluding this impact, our underlying volume performance in the fourth quarter was better than in the second and third quarters. We have confidence that as we move out of the first quarter, the holiday season fluctuations this year between consumption and inventory levels as well as a retailer restocking resulting from pandemic driven dynamics will have normalized and we have an increased level of confidence in our visibility.
Our total US branded portfolio consumption growth was 6% this quarter. As indicated by our IRI consumption data combined with unmeasured channels was the strongest of the year. Our investments in brand marketing and stronger holiday merchandising proved to be effective and with the stabilization of supply disruptions restoration of our service levels continue and our fourth quarter service level was the best of the year just shy of our pre-pandemic standards. Our consumption dollar sales of unit and volume all accelerated sequentially and our total distribution points or TDP have stabilized. In spices and seasoning, our fourth quarter performance was the strongest of the year.
Consumers are responding to our value messaging, trading up the larger sizes and according to our Consumer Insights learning to navigate the current environment. We're continuing to build distribution on the Lawry's everyday spice rates we launched last quarter and early results are positive. We are seeing incremental sales and profit at the category as consumers are trading up to this line for private label. In recipe mixes, we gained share for the fifth consecutive quarter and with improved packaging supply, we also gained share in hot sauces and mustard during the quarter. Across the portfolio our trends are continuing to strengthen in the first quarter of 2023.
In EMEA, we ended the year with our strongest sales growth in the fourth quarter. Our effective pricing and new product growth accelerated versus the first three quarters with our fourth quarter price realization, the highest of the year and our volume decline the lowest. Our strong consumption momentum continued and accelerated sequentially. In the fourth quarter and for the full year, we gained share versus last year end 2019 in the UK and Eastern Europe, herbs, spices and seasoning. Those gains were somewhat offset by softer performance in France.
In the UK, we're driving the hot sauce category with Frank's RedHot continuing to gain share again in the quarter and for the full year versus last year as well as compared to 2019. Additionally, in the UK, we advanced our recipe mix leadership during 2022 to the number one share position. As we enter 2023, we're confident in our continued momentum in the EMEA region. In the Asia Pacific region, growth for the quarter and year was impacted by the exit of low margin business in India, which we will last after the first quarter of 2023 as well as the COVID related disruption in China.
Reflected in our outlook, we are expecting continued disruption into the first quarter of 2023 with an expected recovery after the Chinese New Year. While we are currently experiencing the short-term pressure, we continue to believe in the long-term growth trajectory of our business in China. Our brand marketing, new products and category management initiatives are driving positive momentum with more to come in 2023, and we look forward to sharing this and our growth plans at CAGNY in a few weeks.
Turning to Flavor Solutions on Slide 9. Sales growth reflected pricing actions as well as higher base volume growth in new products. Our sales performance has been outstanding all year led by double-digit growth every quarter in the Americas and the EMEA regions, resulting in a 12% growth for the full year. On a three year basis, we have grown annual sales at an 8% CAGR with strong growth in all three regions.
Now for some regional highlights. Our Americas fourth quarter sales growth was the strongest of the year. Growth in flavors, including snacks, seasonings, and flavors for performance nutrition and health end-market applications as well as branded foodservice products drove our fourth quarter performance as well as our strong broad-based growth for the year. We continue to realize the benefits from the combined capabilities of FONA and McCormick with new products contributing approximately 30% more growth in Flavors in 2022 than last year. Demand continues to strengthen with branded foodservice restaurants and institutional food service customers and we're also expanding distribution and gaining share in both spices and seasonings and hot sauce.
In EMEA, our strong fourth quarter performance in all product categories capped an outstanding year of 17% growth including significant volume growth of 9% as well as pricing. We are winning in all markets and channels. Growth remained strong across our customer base led by the momentum with our quick service restaurant or QSR customers partially driven by expanded distribution and their promotional activities. In APZ, we're driving further menu penetration with our QSR customers realizing growth from strong performance of core menu items we flavor. We delivered solid growth in the APZ region for the year despite the COVID related disruptions in China across markets outside of China we drove double-digit growth with contributions from both volume and pricing.
Overall Flavor Solutions demand has remained strong and for certain parts of our business in the Americas and EMEA regions, our supply chain continues to be pressured to meet this high demand driving extraordinary costs to service our customers. We appreciate our customers working with us and are encouraged by the results. Our collaboration is already beginning to yield. Our Flavor Solutions sales growth has been outstanding. We are not delivering profit growth as a segment. We are committed to restoring Flavor Solutions profitability. Recovery margin, while ensuring we keep our customers and supply and driving growth for both McCormick and our customers.
We are confident we will achieve margin recovery through three actions. Effective price realization, our price increases are only now catching-up to the pace of inflation and we're beginning to recover the cost inflation our pricing last year.
The successful execution of the global operating effectiveness program I just mentioned. In particular, we expect the elimination of supply chain inefficiencies and the investments in capacity to have a significant impact in the Flavor Solutions segment. And finally continued focus on driving growth and high margin parts of our portfolio. The strength of our Flavor Solutions portfolio and capabilities, including our customer engagement approach and culinary inspired innovation are driving our outstanding Flavor Solutions momentum. We look to sharing more about our growth plans and margin recovery at CAGNY in a few weeks.
Now some summary comments before turning it over to Mike. Turning to Slide 10, 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 continue to capitalize on the long-term consumer trends that accelerated during the pandemic, healthy and flavorful cooking, increased digital engagement, trusted brands and purpose minded practices.
These long-term trends and the rising global demand for great taste are more relevant today than ever, but the younger generations fueling them at a greater rate. McCormick is uniquely positioned to capitalize on this demand for great taste with the breadth and reach of our strong global flavor portfolio. We are delivering flavor experiences for every meal occasion through our products and our customers' products and are driving growth. We are end-to-end flavor. We remain focused on the long-term, goals, strategies and values that have made us so successful. We have grown and compounded that growth over the years, including through the pandemic and other periods of volatility. The strength of our business model, the value of our products and capabilities and the execution of our proven strategies by our experienced leaders, while adapting to changes accordingly, give us confidence in our growth momentum and in our ability to navigate the dynamic global environment.
As we look ahead to 2023, we will focus on capitalizing on strong demand, optimizing our cost structure and positioning McCormick to deliver sustainable growth and long-term shareholder value. The fundamentals that drove our industry leading historical financial performance remains strong and we're confident we are well-positioned to drive profitable growth in 2023. I want to recognize McCormick employees around the world for their contributions in 2022 and the momentum they're driving in 2023.
Now I'll turn it over to Mike.
