Mike Smith
Executive Vice President and Chief Financial Officer at McCormick & Company, Incorporated
Thanks, Brendan, and good morning, everyone. Starting on Slide 12, our top line constant currency sales grew 10%, compared to the second quarter of last year, reflecting 11% from pricing, partially offset with a 1% volume and mix decline. As Lawrence already mentioned, there were impacts to volume related to the China recovery, the Kitchen Basics divestiture, the exit of our consumer business in Russia, and strategic decisions we made related to optimizing the profitability of our portfolio. At the total company level, all these impacts netted out.
In our Consumer segment, constant currency sales increased 7%, reflecting a 9% increase from pricing actions, partially offset by a 2% volume decline. Including in this volume decline are a net 1% increase from the recovery in China, partially offset by the Kitchen Basics divestiture and our business exit in Russia, a 1% decline from exiting DSD or Direct Store Delivery business for our Hispanic bag products in the Americas.
On Slide 13, consumer sales in the Americas increased 4% in constant currency, with an 8% increase from pricing actions partially offset by a 1% volume decline from the Kitchen Basics divestiture, a 2% volume decline from the Hispanic product DSD exit and 1% underlying volume and mix decline. Our strong underlying sales growth was driven by the products in our grilling portfolio, Brendan mentioned earlier.
In EMEA, constant currency consumer sales increased 9% with a 12% increase from pricing actions, partially offset by a 2% volume decline from exiting Russia and a 1% underlying volume and mix decline. Excluding Russia, sales growth was broad-based across all categories and markets. Constant currency consumer sales in the Asia Pacific region increased 28% driven by a 20% volume increase from China recovery and a 6% increase from pricing actions across the entire region, as well as 2% increase in all other volume and product mix.
Turning to our Flavor Solutions segment on Slide 16, we grew second quarter constant currency sales 13%, reflecting a 14% increase from pricing actions partially offset by a 1% volume decline. Included in this volume decline are a net 1% increase from the recovery in China offset by a 1% decline from discontinuing a private label food service product line in EMEA. In the Americas, flavor solutions, constant currency sales rose 11%. Pricing actions contributed to higher sales across the customer base. Volume and product mix declined in the quarter as strong volume growth and seasonings was more than fully offset by the impact of pruning of low margin business.
In EMEA, constant currency sales increased 15% with pricing actions partially offset by lower volume and product mix, including a 2% impact from discontinuing the private label product line I mentioned earlier. EMEA's Flavor solutions outstanding growth was driven by pricing and was broad-based across its portfolio, led by higher sales to QSR customers. Volume and mix outside the product discontinuation declined due to softness in some of our customers' volume within their own businesses, mainly packaged food and beverage customers as well as QSRs.
In the Asia Pacific region, Flavor Solutions sales grew 22% in constant currency with a 13% volume benefit in China due to lapping the prior year COVID-related disruption, an 8% increase from pricing actions and a 1% increase in all other volume and mix driven by Australia.
As seen on Slide 20, gross profit margin expanded 310 basis points in the second quarter versus the year ago period, reflecting our unwavering focus on increasing profit realization. Favorable drivers in the quarter were our CCI and GOE programs. The continued recovery of the cost inflation our pricing lagged over the last two years as we planned, and favorable product mix in both segments. We offset current year inflation in the second quarter with our pricing.
Notably, in flavor solutions, while we continue to incur some level of higher cost to meet high demand in certain parts of our business. We continue to make progress on reducing the level of these costs. And as we expected, the second quarter's dual running costs we experienced in the U.K. were comparable to last year. We are very pleased with our gross margin expansion for the quarter and expect to continue to drive margin improvement in the balance of the year.
Now moving to Slide 21, selling, general and administrative expenses or SG&A increased relative to the second quarter of last year as higher employee incentive compensation expenses and distribution costs were partially offset by CCI lead and GOE savings. Brand marketing increased compared to the second quarter of last year and we are expecting an even more significant year-over-year increase in the third quarter. As a percentage of net sales, SG&A increased 20 basis points.
Strong sales growth and gross margin expansion partially offset by higher SG&A costs resulted in a constant currency increase in adjusted operating income of 36%, compared to the second quarter of 2022. In constant currency, the Consumer segment's adjusted operating income increased 24% and the Flavor Solutions segment grew 66%.
Turning to interest expense and income taxes on Slide 22, our interest expense increased significantly over the second quarter of 2022, driven by the higher interest rate environment. Our second quarter adjusted effective tax rate was 22.3%, compared to 18.6% in the year ago period. Both periods were favorably impacted by discrete tax items with a more significant impact last year.
At the bottom line, as shown on Slide 23, second quarter 2023 adjusted earnings per share was $0.60, as compared to $0.48 for the year ago period. The increase was driven by higher adjusted operating income, partially offset by higher interest expense and a higher effective tax rate.
On Slide 24, we've summarized highlights for cash flow and the quarter end balance sheet. Our cash flow from operations year-to-date was strong. $394 million in 2023, compared to $154 million for the first half of 2022. The increase was primarily driven by higher net income and working capital improvements, including lower inventory, as well as lower incentive compensation payments. We returned $209 million of cash to our shareholders through dividends and used $119 million for capital expenditures through the second quarter.
We expect 2023 to be a year of strong cash flow driven by our profit and working capital initiatives. 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. We remain committed to a strong investment grade rating and we have a history of strong cash generation and profit realization.
Now turning to our updated 2023 financial outlook on Slide 25. Our 2023 outlook reflects our continued positive top line growth momentum and with the optimization of our cost structure, increased profit realization. We expect to drive margin expansion with strong sales and adjusted operating income growth that reflects the health of our underlying business performance, as well as the net favorable impact from several discrete drivers.
We expect our adjusted operating profit growth will be partially offset below operating profit by higher interest expense and a higher projected effective tax rate. We also expect there will be a minimal impact from currency rates, although there will be a timing aspect as we realize an unfavorable impact in the first-half of the year, and projected favorable impact in the second-half.
For fiscal 2023, we are reaffirming our sales outlook and as Lawrence mentioned, we are raising adjusted operating income and adjusted earnings per share, driven by our strong year-to-date performance, combined with the robust demand we continue to expect and our diligent approach to optimizing our cost structure. At the top line, we continue to expect 5% to 7% growth, driven primarily by the wrap of last year's pricing actions combined with new pricing actions we have taken in 2023.
We expect several factors to impact our volume and product mix over the course of the year, including price elasticities consistent with 2022 at lower levels than we have historically experienced, but in line with the current environment, a 1% estimated benefit from lapping last year's impact of COVID-related disruptions in China, although we expect the impact will vary from quarter-to-quarter given 2022's level of demand volatility. The divestiture of our Kitchen Basics business in August of last year and the exit of our consumer business in Russia during last year's second quarter.
And finally, the continual pruning of lower margin business from our portfolio. We estimate the Americas Consumer segment DSD exit and the EMEA Flavor Solution private label discontinuation to be approximately a 1% impact on the year, which began to impact us in the second quarter. As always, we plan to drive growth through the strength of our brands, as well as our category management, brand marketing, new products, and customer engagement plans.
Our 2023 gross margin is projected to range between 50 basis points to 100 basis points higher than 2022, compared to our prior guidance 25 basis points to 75 basis points. This gross margin expansion reflects a favorable impact from pricing, cost savings from our CCI led and GOE programs and portfolio optimization, partially offset by the anticipated impact of a low to mid-teens increase in cost inflation. We expect cost pressures to be more than offset by pricing during the year as we recover the cost inflation our pricing lagged for the last two years.
Moving to adjusted operating income. First, let me walk through some discrete items and their expected impact to our 2023 adjusted operating profit growth. First, the cost savings from our GOE program are expected to have an 800 basis point impact. The savings from this program are expected to scale up as the year progresses.
Next, the benefit of lapping the impact of COVID-related disruptions in China is expected to have a 300 basis point favorable impact. The Kitchen Basics divestiture is expected to have an unfavorable 100 basis point impact. And finally, an 800 basis point unfavorable impact is expected as we build back incentive compensation. The net impact of these discrete items is a favorable 200 basis points.
This favorable impact, combined with expected 8% to 10% underlying business growth, which is driven by our improved operating momentum, results in our adjusted operating income projection of 10% to 12%, compared to our previous guidance of 9% to 11%. In addition to the adjusted gross margin impacts I just mentioned, this projection also includes a low-single-digit increase in brand marketing investments and our CCI leg cost savings target of approximately $85 million.
We continue to anticipate a meaningful step up in interest expense driven by the higher interest rate environment, which will impact our floating debt. We estimate that our interest expense will range from $200 million to $210 million in 2023 spread evenly throughout the year. As a reminder, in 2022, we realized an $18 million favorable impact from optimizing our debt portfolio, which we will lap in the third quarter of 2023.
The net impact of these interest related items is expected to be approximately 800 basis point headwind to our 2023 adjusted earnings per share growth. Our 2023 adjusted effective income tax rate is projected to be approximately 22% based upon our estimated mix of earnings by geography, as well as factoring in a level of discrete impacts versus our 2022 adjusted effective tax rate. We expect this outlook to be a 100 basis point headwind to our 2023 earnings growth.
To summarize, our 2023 adjusted earnings per share expectations reflect strong underlying business growth of 10% to 12% and a 2% net favorable impact from the discrete items, I just mentioned impacting profit. The GOE program, the China recovery, the Kitchen Basics divestiture, and the employee benefit cost rebuild, partially offset by the combined interest, and tax headwind of 9%. This resulted in an expected increase of 3% to 5% or projected guidance range for adjusted earnings per share in 2023 of $2.60 to $2.65.
Before turning it back to Brendan, I would like to recap the key takeaways I've seen on Slide 27. Our second quarter sales growth reflects sustained demand across our business and the effective execution of our strategies. Our pricing actions are in place and our volume of performance improved. We drove meaningful year-over-year margin expansion in both segments underscoring our focus on profit realization.
Our cost savings programs are yielding results in line with our expectations. Our year-to-date results combined with continued robust demand expectations and our actions to optimize our cost structure, bolster our confidence in delivering the strong operating performance projected in our enhanced 2023 outlook.
