Brendan M. Foley
President and Chief Executive Officer at McCormick & Company, Incorporated
Good morning, everyone, and thank you for joining us. Let me start by saying how pleased I am to join you today for my first earnings call as President and CEO. Just over one month into my new role, I am energized by our underlying business trends, which reinforce our competitive advantages and differentiation. Let's turn to our results. We drove another quarter of strong performance, reflecting sustained demand and effective execution of our growth strategies across our Consumer and Flavor Solutions segments. Our results were in line with our expectations across our business, notwithstanding challenges for our Consumer segment in Asia Pacific or APAC, where the pace of China's economic recovery has been slower than previously anticipated.
Let me start with the highlights for the third quarter. We delivered solid constant currency sales growth. We continue to realize effective price realization, and importantly, volume performance, excluding China, has improved each quarter throughout the year. We continue to see top line momentum in our business, positioning McCormick for sustained growth. We drove meaningful year-over-year margin expansion, underscoring our focus on profit realization. Year-to-date cash flow from operations more than doubled relative to the prior year due to higher operating income and working capital improvements. Our performance demonstrates the strength of our business fundamentals and the effective execution of our proven strategies while leveraging the sustained demand for flavor.
Turning to Slide 5. In the third quarter, we drove 6% sales growth in constant currency, demonstrating the strength of our broad global portfolio. Our constant currency growth reflected strong business performance with an 8% contribution from pricing and a 2% decline in volume and product mix. This decline in volume was driven by two factors, a 1% volume decline attributable to the impact of a slower than expected economic recovery in China, and a 1% decline related to the divestiture of Kitchen Basics, the exit of our Consumer business in Russia and the pruning of low-margin business to optimize our portfolio. All other underlying volume and mix performance was flat for the quarter, which is a sequential improvement from the second quarter where total underlying volume growth was down approximately 1%. I would like to now share a few highlights on gross margin and operating income for the quarter, which Mike will cover in more detail. We drove strong gross margin improvement year-over-year, reflecting continued recovery of the cost inflation our pricing lagged last year and cost savings from our CCI and GOE programs.
We remain focused on improving our margins over the long-term and believe that our recovery will be a continuous build. And we expect to return to historical levels and believe there is a runway beyond that, recognizing it will take some time. Higher gross profit for the quarter was partially offset by lower than expected performance in China as well as higher SG&A. As planned, we continue to build back incentive compensation and increased brand marketing investments. The net impact was a 5% increase in adjusted operating income versus the prior year. Overall, we are pleased with our execution and results year-to-date. These results, combined with the strong demand we continue to expect across our portfolio and our focused approach to optimizing our cost structure, reinforce our confidence in our growth trajectory during the fourth quarter and beyond.
Moving into the fourth quarter, we can continue to expect top line momentum across our portfolio, including growth in China as we lap the COVID-related disruptions. China's growth, however, is expected to be less than originally anticipated, which when combined with its year-to-date performance, has led to a lower full year 2023 benefit than we originally expected. Despite this impact, however, we are reaffirming our sales outlook and now anticipate our results will be closer to the middle of our guidance range. We are reaffirming our operating income outlook, which highlights stronger than originally expected profit realization on our business excluding China. Demand is strong. We are driving improvement in our margin profile and are optimizing our cost structure effectively.
Now for our performance by segment. Starting with our Consumer segment on Slide 7. We saw solid results across the Americas and EMEA, which were tempered by our APAC region due to China, as I mentioned earlier. Notwithstanding China, we are pleased with our underlying performance. Now for some highlights by regions. First, in the Americas. Our total U.S. branded portfolio consumption as indicated by our IRI consumption data and combined with unmeasured channels grew approximately 4%. Excluding the year-over-year impact of the Kitchen Basics divestiture and the exit of DSD, Direct Store Delivery, of our bagged Hispanic spices. There is a minor difference between our sales and consumption, which is attributable to listing fees for a significant increase in new distribution and new products, for example, our new Cholula and Stubb's items and Tabitha Brown line extensions. Importantly, our categories remain advantaged in terms of growth relative to overall macro trends, and we are well positioned to drive future growth. The fundamental strength of the spices and seasonings category is evident as cooking at home has remained elevated since pre-COVID and consumers have an increasing demand for flavor.
U.S. spices and seasonings growth is continuing to outpace the total edible category in units and dollars. We have the right plans in place and are taking the right actions to grow market share in this very attractive and competitive category. We have made progress and shown improvement relative to the beginning of the year. We continue to restore distribution, which was lost because of supply issues. As we look at our performance and our trends, we are happy to see total distribution point growth in the third quarter. We also continue to be pleased that our assortment on shelf is more productive than pre-COVID. In addition, we have significant new distribution and innovation that is starting to come online as customers reset their shelves. As we've said before, restoration will take some time and we expect to drive growth as we continue to progress. In addition to driving distribution gains, we have a continued focus on supporting our brands and optimizing pricing. As you would expect, this has become a more important part of our category management efforts in recent years.
Our diverse portfolio allows us flexibility to optimize our pricing effectiveness. We look at both our everyday price and our promotional returns, as well as use innovation, including price pack architecture to drive growth. Our efforts are yielding results. The renovation of our U.S. core everyday spice and herb portfolio is rolling out according to plan. At the end of the third quarter, we have shipped about 40% of our renovated SKUs. And notably, products that have transitioned on shelf have seen high-teens improvement in velocity. And our significant brand marketing campaign featuring the benefits of the new packaging ramped up at the end of the third quarter leading into the holiday season. Our larger-size Super Deal herbs and spices continues to gain share. We saw strong performance in the third quarter, driven by pricing and higher unit volume.
Expanded distribution has been a major driver for our performance, as well as consumers that are seeking value and trading up to larger sizes. We have the right assortment in this environment. Our household penetration on larger sizes is greater than pre-COVID. We are confident this product line will continue to drive growth as we expand distribution further and launch new line extensions. Our grilling performance was strong this quarter, supported by our Fire Up campaign as well as contribution for new product launches that we discussed on our earnings call in June. Frank's RedHot sauces, French's mustard and Stubb's Bar-B-Q sauce, rubs, as well as Lawry's marinades, all delivered significant growth in the third quarter relative to the prior year.
We drove double-digit sales growth with contributions from pricing and volume across our total grilling portfolio. And we drove market share gains in mustard, barbecue sauce and marinades in the third quarter. Our expansion into the fast-growing Mexican aisle with new Cholula taco recipe mixes and salsas is continuing to build distribution and performance to-date is outperforming our expectations. Finally, in the Americas, we continue to drive double-digit consumption growth in e-commerce led by spices and seasonings. We are realizing high returns on our investments, gaining new customers and growing with new products.
Turning to EMEA, where we delivered a great quarter, our strongest quarterly sales performance in more than two years with double-digit sales growth. Notably, in the U.K. and France, we drove volume growth as pricing remained elevated. In both countries, we delivered significant growth in the discount channel, driven by expanded distribution with new and existing customers. In other parts of the region, we are also making meaningful progress in this fast-growing channel. We grew our business in the discount channel by over 30% across EMEA in the third quarter. Our grilling activations with key retailers in France and our promotional activities in the U.K. along with brand marketing support drove strong third quarter growth across the growing portfolio. E-commerce also contributed meaningfully to our growth in both countries.
Consumption data continues to indicate that the consumer is holding up well in our categories, with consumption trends continues to accelerate across the region. We grew share in herbs, spices and seasonings for our total EMEA business, with the U.K., Eastern Europe, Italy and France all contributing. France grew share for the first time in two years. And U.K. recipe mixes, we extended our leading share position during the third quarter. New products and effective in-store promotions drove share gains. We also continue to drive hot sauce category growth in the U.K., with Cholula leading to growth in the third quarter. And we are also building distribution of Cholula in France. In our APAC region, while the pace of recovery in this business has been slower than expected, we continue to believe in the long-term growth trajectory of our business in China. Notwithstanding the slower recovery in China, in all regions, in our Consumer segment, our investments in brand marketing, category management initiatives and new products are proving to be effective and driving strong growth across our categories.
We are making sequential improvement on volume, advancing our heat platform and are pleased with our performance. We continue to fuel our growth with the power of our brands and increased innovation and brand marketing. We are also forming strategic partnerships to reach and enhance brand awareness with loyal built-in audiences. Building on the success we have with our Tabitha Brown partnership in light of new products in the U.S., where growth continues to accelerate, we are partnering with Nadiya Hussain, a celebrity British chef who won the sixth series of BBC's The Great British Bake Off in EMEA. We are launching a delicious range of short seasonings, recipe mixes, and meal kits with Nadiya and are helping build the confidence of U.K. consumers in the kitchen with cook-along videos and recipe ideas. We are thrilled to partner with Nadiya and preliminary results are very positive. We are looking forward to working with her on various future initiatives across the region to expand our brand awareness and accelerate new product growth. Our brand marketing efforts continue to drive awareness and strengthen our brands.
As you may have seen in July, we partnered with Mars and launched a limited edition French's mustard-flavored SKITTLES. The objective of the campaign was to create top-of-mind awareness for French's through a buzzworthy moment to further strengthen the power of our brand. And of course, you can always have fun with mustard. We are thrilled that this was our most successful earned campaign to date with a record 5 billion impressions. It is also a perfect example of how we leverage our strengths across both segments, underscoring their complementary nature. Our Flavor Solutions team created the mustard flavor for this limited-edition product, which built awareness for both our Consumer and Foodservice businesses. Our segments are working together to further bolster French's success. I am passionate about how our two segments, Consumer and Flavor Solutions, complement each other, reinforcing what differentiates McCormick and enabling us to drive sustainable growth.
Looking ahead to the fourth quarter, we are excited about the holiday season and our related brand marketing plans across all regions. Importantly, with our supply issues resolved, we are better positioned than we were last year entering this season. We are increasing our merchandising levels to one similar to pre-COVID and are supporting our portfolio with holiday brand marketing campaigns across all regions. We are expecting a strong holiday season. Wrapping up the Consumer update, our year-to-date results bolster our confidence that we will continue to drive sales growth as we have in the past. The supply issues we experienced last year are resolved and we are using our strength in category management to increase distribution and drive McCormick and category growth. We believe the execution of our growth plans will be a win for consumers, customers, our categories and McCormick, which differentiates us even more and strengthening our leadership in our core categories.
Now turning to Flavor Solutions on Slide 10. Our growth momentum in this segment continues to be exceptional. The third quarter marks our 10th consecutive quarter with double-digit constant currency sales growth. Our growth was led by pricing actions in all three regions. We are priced to cover current year inflation and are continuing to recover the cost inflation our pricing lagged the last two years. We remain committed to restoring our Flavor Solutions profitability. And in third quarter, we again drove significant margin expansion versus prior year and expect continued progress toward our objective to build back our margin in this segment.
Let me turn to our highlights by region. Our Americas third quarter strong sales growth was led by pricing, with an increase in volume contributing as well. Both the flavors and branded foodservice product categories grew by double-digits. With flavors, our seasonings growth was strong, including volume growth related to new products. We are helping our customers grow with the strength of our brands. Our continued success with providing the seasonings for co-branded items included new ones with Frank's RedHot and Stubb's this quarter, contributed to our growth. Strength in our customers' iconic products also contributed to our seasonings growth, particularly related to our heat platform. We also have strong momentum in flavors for performance nutrition beverages and health and market applications.
Our growth is outpacing the market, fueled by the advantages of our proprietary technologies. Importantly, we are winning with new products for existing and new customers, largely across our mid-market customer base, who are category leaders in specific markets or are high-growth innovators and whose growth is outpacing larger customers. We continue to have a robust pipeline of new products and our conversion rate is strong. We are creating preferred flavors, enabling our customers to continue to win in the marketplace. In branded foodservice, we gained share in spices and seasonings this quarter. Additionally, our recent new products, Frank's Mild Sauce and Frank's Nashville Hot Seasoning, are performing very well and are exceeding our expectations. They have both been well received by our customers, reinforcing that the demand for heat is growing at both the mild and hot end of the spectrum. We are excited for continued growth in these items as well as the overall breadth of opportunity in heat.
Moving to EMEA, we continue to drive broad-based growth across the portfolio with strong growth in both our quick-service restaurant and packaged food and beverage customers. Pricing drove the growth as some of our customers in both channels continue to experience softness in the volume within their own businesses. As we continue to prune low-margin business in our Flavor Solutions segment, while it did not impact the third quarter, I want to mention that we divested a small canning business which was part of our Giotti operations in Italy. This divestiture allows us to focus our resources on our core flavors product category and drive further growth. Mike will have more on the future impact of this divestiture on the EMEA region in a few minutes. And in APAC, while the economic recovery in China was not as strong as anticipated, China contributed to the regional pricing and volume growth. Across the region, we benefited from our QSR customers increase in promotional activity.
The strength of our Flavor Solutions portfolio and capabilities, including our differentiated customer engagement and culinary-inspired innovation, are driving outstanding Flavor Solutions momentum. Our flavors product category, our 100% focus on flavor, our breadth and reach, our unrivaled consumer insights and our proprietary technology platform gives us an advantage and positions us well to continue to win in the technically-insulated and value-added part of our portfolio, driving growth and advancing our flavor leadership. And in branded foodservice, we expect new products, increased menu penetration, culinary partnerships, and our expertise in heat to drive continued growth. Our robust growth plans in Flavor Solutions and effective execution of our proven strategies bolster our confidence in continuing our growth trajectory and driving our Flavor Solutions leadership as well as margin restoration.
Now I'd like to turn it over to Mike to provide details on our financial performance.
