Brendan M. Foley
Director, President & Chief Executive Officer at McCormick & Company, Incorporated
Good morning, everyone, and thank you for joining us.
Let me start by sharing what we will cover in this morning's call. I will begin with an overview of our fourth quarter year-over-year results focusing on top-line drivers. Next, I will briefly reflect on our full-year 2023 performance and share our plans and building blocks to improve volume in 2024. Mike will then go into more depth on the fourth-quarter financial results and the details of our 2024 financial outlook. And finally, before your questions, I will share some closing comments, including our key priorities as I begin my first full year as CEO.
Turning now to our results on Slide 4. I want to start by acknowledging that our top-line results for the fourth quarter did not meet our expectations, as volume trends decelerated relative to the third quarter. There was greater-than-expected pressure on the consumer that drove changes in their behavior, which impacted our growth. We did, however, see sequential improvement in several key areas within our portfolio, underscoring that our strategies and initiatives are working as I will highlight in a moment.
That said, we do recognize that consumers are exhibiting even more value-seeking behavior. They are increasing shopping trips, reducing basket size, and making just-in-time purchases creating further uncertainty in the consumer environment. I want to be clear that we are dedicated to improving volumes. We have refined our plans and are prioritizing our investments to drive impactful results and return to differentiated and sustainable volume-led growth. And you should expect improvement over the coming year and into 2025 and beyond. Now, let's review our fourth quarter performance in more detail.
Turning to Slide 5. In our fourth quarter, sales increased 3%, including a 1% favorable impact from currency. In constant currency, sales grew 2%, reflecting if 5% contribution from pricing, which was partially offset by a 3% decline in volume and product mix. As expected, the benefit from the China recovery was fully offset by the impact of our strategic decisions to exit DSD, Direct Store Delivery, of our bagged Hispanic spices in the Americas; and the exit of private-label product line and the divestiture of a small canning business, which was part of our Giotti Flavor Solutions operations in EMEA. Starting with where results differed from expectations. In Americas Consumer, we expected volume declines in the prepared food categories that we participate in, like Frozen in Asian. But the decline was greater than we anticipated due to the more challenging macro trends and was broadly consistent with the performance of these categories.
For Mustard in the Americas, extremely low price points and private label impacted our consumption and is driving down category dollars. We plan to improve our volume trends in 2024 by narrowing price gaps, increasing promotions and importantly through distribution wins. Recipe mixes in the Americas, showed increased stress from crossing key price points due to previous pricing actions. We have a plan to address these to return to volume growth. In our Flavors product category, some of our Consumer Packaged Food Group customers experienced greater softness in volumes within their own business, more than we expected in both the Americas and EMEA. Finally, our growth of Quick Service Restaurants and Flavor Solutions was impacted by slower-than-expected restaurant traffic in EMEA and Asia-Pacific. Within Asia-Pacific, some of our customers are experiencing boycotts from Southeast Asia related to geopolitical events. We are monitoring this situation and anticipate continued softness in these customers' volume to continue into 2024.
Turning to what met our expectations in the quarter. We drove volume growth for a second quarter in a row in Americas Spices and Seasonings. In Branded Food Service, our growth was strong across the portfolio, driven by volume. In Asia-Pacific Consumer, our recovery from COVID-related disruptions in China was in line with the expectations we had at the beginning of the quarter. Outside of China, for the quarter, our volume growth was strong across all categories. In EMEA Consumer, consistent with the third quarter, pricing actions contributed to double-digit growth, which pressured volumes. Now, I'd like to further build on some of the initiatives within our growth levers, notably, increased brand marketing, targeted price gap management, new products and packaging renovation, which have already proven to strengthen our volume trends in key areas. We have intentionally chosen our investments in these areas as we believe they will generate the most significant returns.
We are confident our investments will continue to drive improved results in 2024. And we expect to invest more, positioning us further for success in 2025 and going forward. First, Americas Spices and Seasonings as a priority investment area for us, given our category leadership and its profitable growth potential for both McCormick and our customers. Our initiatives are driving US Branded sales volume growth which strengthened during the fourth quarter and holiday performance. And looking at consumption, we continue to sequentially improve share trends, again in the fourth quarter, both in terms of dollars and units. We continue to activate initiatives of price gap management innovation, packaging, and a meaningful step-up in brand marketing support for Americas Spices and Seasonings. And the results have begun to materialize, demonstrating that we have the right plans and are taking the right actions to grow in this attractive category.
The renovation of our US core everyday urban spice portfolio, which began in the second quarter of 2023, continues to roll out according to plan. At the end of the fourth quarter, we had shipped about 75% of our renovated SKUs and notably products that have fully transitioned on shelf experienced stronger velocity. We are pleased with our results to date, which increased our confidence that this renovation will be a strong contribution to our growth in 2024 as our customer shelves continue to transition. We are making progress on restoring distribution that was lost due to these past supply issues. We have secured wins and new distribution. We expect to largely start seeing the impact of our actions in our results mid 2024 coinciding with most of our customers' shelf resets. Overall, we have a robust set of initiatives in flight and anticipate making progress throughout the year. I would expect growth and share gains in units and volume to lead our trends.
Spending a moment on Spices and Seasonings in other key markets. Similar initiatives, as in the US, are driving volume growth and share gains in Canada, France and Australia. We also renovated our spice and herb portfolio with Southeast Asia with the same innovative packaging as the US and EMEA, and began shipping the new products in the fourth quarter. We are supporting this transition with increased marketing spend in the first quarter. Next in Branded Food Service, we achieved strong volume growth across all customer segments. Our food service operators continue to expand our value menu options and they are turning to our products to deliver great taste for a fraction of their costs. We drove share gains in Spices and Seasonings, as well as our hot sauce share of a tabletop with expanded distribution, new products, customer wins, and increased menu penetration as well as our expertise and Heat. Heat continues to be a growth accelerator globally for total McCormick outpacing the rest of the portfolio as customers and consumers alike continue to drive demand in this flavor profile.
New products contributed to fourth-quarter growth. For instance, in the US our Cholula salsas in the Mexican aisle are building distribution and bringing new consumers to the category. And our Branded Food Service items Frank's Mild Wings Sauce and Frank's Nashville Hot continued to perform well. In the UK and Australia, we are driving hot sauce category growth with Cholula, gaining momentum on shelf. In the US, we secured new hot sauce distribution during the quarter. And in the first quarter, we are launching new Frank's RedHot dips in popular flavors in a squeeze bottle format as well as our national launch of Frank's Dill Pickle. We are well-positioned going into our Super Bowl merchandising period. In summary, our investments in the key areas I just highlighted favorably impacted both our volume and margin performance for the quarter.
Moving to gross margin, we are pleased with our performance, which continued to improve as the year progressed. Our results reflect effective price realization, the optimization of our cost structure, and a favorable product mix, driven by our portfolio optimization and focus in key areas. While confident in our ability to return to our historical margin profile, in the near term, we will use improvements in our profitability to fuel continued investments in our business to drive our top line. We are in a strong position to benefit from the virtuous flywheel of margin expansion, given the work that's been done throughout the business. And we are able to intentionally focus our investments on areas that we expect will have the greatest impact on improving volume performance and driving sustainable profit growth.
Reflecting on our full-year 2023 performance, I am proud of the progress we've made in advancing our business in the right direction, and our team is focused on returning to our long-term growth algorithm, strengthening our margins, significantly improving our cash flow, paying down our debt and reducing our leverage ratio, all have put McCormick in a position of strength to further invest with a focus on growth. Our foundation is strong. We have proven and powerful brands and the results we're seeing from our refined and strengthened plans provide confidence in the effectiveness of our strategies and investments.
Our initiatives will take time to materialize. And we expect volume trends to improve throughout the year and volume growth during the second half, notwithstanding any new macroeconomic headwinds. The pace of margin recovery to historical levels will take time as our focus is on investing to drive sustainable sales growth to generate quality earnings for years to come. I also want to highlight on share performance that we are approaching our plans differently with an even greater competitive posture and more intentionality towards driving growth in our key categories.
Now let me highlight some ways in which we will drive growth through category management, brand marketing, new products, our proprietary technologies, and our differentiated customer engagement. Starting in our Consumer segment with category management where a key capability is revenue management, we have been building our discipline in revenue management for several years and have a history of optimizing pricing on-shelf to benefit both McCormick and the retailer. As you would expect, this has become even more important in recent years. In the current environment, we are taking a surgical approach to managing our price gaps with private-label and branded competitors, accelerating our efforts across various products and are seeing results. In our Spices and Seasonings category, we selected individual items we believe will be the most responsive based on the elasticities we were experiencing. For instance, in our iconic black pepper and vanilla product lines, our actions proved to be effective.
We are recapturing buyers, increasing household penetration, and are driving the profitable volume growth that is outpacing the category volume growth in these product lines. As I mentioned earlier, we crossed key price points in Americas Recipe Mixes and are also leaning into our revenue management execution in this category. For example, in the fourth quarter, we focused on gravy as a key holiday item, which drove results contributing to our successful holiday season. We expect to see further results from our actions as we work through the portfolio. Across all markets, 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. These investments we make in price gap management result in greater volumes and improved margins over time.
Importantly, customers that are adopting our recommendations are seeing better category performance and McCormick is driving volume and share growth in their respective businesses. We are prioritizing brand marketing, connecting with consumers, and fueling growth with our increased investments. We have a history of investing behind our brands and did so again in 2023. We plan for a strong start to 2024 with aggressive first quarter brand marketing investments, which are well underway. We expect a significant increase for the year concentrated to the first half. We will continue to invest across various channels. We plan to further drive household penetration and increase by rates with additional focus on retail media. Our first quarter plans included increased Christmas holiday campaigns in all regions, increasing our value-focused messaging for our everyday spices and seasonings and recipe mix in the US. Also supporting our packaging renovations that I mentioned earlier, in both the US and Southeast Asia, and promoting our new products in EMEA.
Turning to New Products, which are a key growth driver in both our Consumer and Flavor Solutions segments. In the Consumer segment, our 2023 launches are expected to substantially contribute to growth in 2024. For instance, in EMEA, we are thrilled with the early results from our range of Schwartz seasonings and Recipe Mixes that we launched with Nadiya Hussain, a British celebrity chef, as we entered the fourth quarter. We are expanding our household penetration and bringing in new and younger households into the brand. The Recipe Mixes in this range contributed along with other new products and expanded distribution to our fourth quarter growth in UK Recipe Mixes, which was doubled the category rate.
In Flavor Solutions, collaborating with our customers on innovation continues to be a key driver of success. Across the portfolio, our customers continued to focus on innovation to meet consumers' needs. We are winning in flavors with better-for-you products and on-trend flavors, and in Branded Food Service with our Heat platform and value-oriented products for Food Service operators. We are pleased with our 2023 performance from New Products, which contributed to our sales growth and accelerated compared to the prior year, as we expected. Importantly, we have a strong lineup of New Products spanning heat, freshness, value, convenience, and flavor exploration in our Consumer segment for 2024, which we will share more about at CAGNY in February. And in Flavor Solutions, we are also carrying a robust pipeline of new products into 2024, positioning McCormick and our customers for success.
We are leveraging our proprietary technologies in Flavor Solutions to support our innovation, to win share in attractive high-growth categories and to attract new customers. In addition, with our differentiated customer engagement approach, we are intentionally targeting a mid-market customer base, who are category leaders and high-growth innovators, as well as diversifying our customer base to drive share gains across our portfolio and profitable growth. Our actions are yielding results. For instance, in the fourth quarter, our volume growth in performance nutrition significantly outpaced the market and in the beverage category, we drove sales growth even though the category decelerated, partially by targeting high-value and high-growth segments within beverage.
With our Flavor leadership and continued investments, we are fully committed to vigorously fuel category growth with our differentiated portfolio. We have confidence in our plans, which will build throughout the year and yield volume growth during the back half of the year. We are dedicating more resources to categories where we have the right to continue to win. We are seeing our actions drive momentum and solid results in areas where we have focused. We believe that the execution of our growth plans will be a win for consumers, our categories, and McCormick, which will differentiate and strengthen our leadership.
Now, before I turn it over to Mike to provide more details on our fourth-quarter financial performance and 2024 outlook, I would like to comment on recent changes in our Board of Directors. Freeman Hrabowski, who has served as a Director for 27 years, will be retiring from the Board as at the end of March. I am grateful for his service and contributions, which has significantly benefited McCormick, and we will miss him. I also want to welcome, Terry Thomas, who has joined our Board. Terry brings extensive global consumer products industry expertise through his current role as Chief Growth Officer for Flowers, Foods; and his experience at Unilever, prior to that.
I look forward to working with Terry and the contributions he will make to McCormick.
