McCormick & Company, Incorporated Q2 2022 Earnings Call Transcript

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Provided by Quartr
June 28, 2022

There are 10 speakers on the call.

Operator

Good morning. This is Casey Jenkins, Chief Strategy Officer and Senior Vice President, Investor Relations. Thank you for joining today's Q2 earnings call. To accompany this call, we've posted a set of slides at ir.mccormick.com. With me this morning are Lawrence Kurzius, Chairman and CEO Brendan Foley, President and Chief Operating Officer and Mike Smith, Executive Vice President and CFO.

Operator

During this call, we will refer to certain non GAAP financial measures. The nature 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 presentation are rounded. Please refer to our presentation for complete information. Today's presentation contains projections section and other forward looking statements.

Operator

Actual results could differ materially from those projected. 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 statement on Slide 2 for more information. I will now turn the discussion over to Lauren.

Speaker 1

Good morning, everyone. Thanks for joining us. I'd like to start by welcoming Brendan to this morning's call. In addition to his continuing role as President of our Global Consumer Business. Brendan now has responsibility for our business worldwide in his newly appointed role of President and COO.

Speaker 1

At the Volatility has been industry leading and met or exceeded our financial objectives. Broadly, our results in the Q2 were in line with our sales and profit expectations a significant disruption in China from COVID related lockdowns and the conflict in Ukraine. As our Q2 progressed, the dynamics These conditions intensified and negatively impacted our sales and profit results. Before discussing our 2nd quarter results in more detail. I'd like to comment on each of these starting on Page 5.

Speaker 1

Consistent with the rest of the industry, high cost Inflation and supply chain are continuing challenges. To partially offset cost pressures, we've taken multiple pricing actions. And as planned, we are raising prices again. Inflation continued to escalate. We've adjusted our upcoming pricing instructions accordingly.

Speaker 1

We appreciate our customers working with us to navigate this environment. Additionally, our plans to mitigate cost this and other levers to begin to outpace cost pressures late in Q3 with higher costs and higher offsetting pricing actions that we expected on our last pressures over time. In China during the Q2, there was significant unanticipated disruption in consumption due to severe COVID related lockdowns in Shanghai and other cities throughout China. China is our 2nd biggest sales country with operations in Shanghai, Guangzhou and Wuhan. Our Shanghai operation produces approximately 40% of our total China sales, which are distributed throughout the country and supports Once we were able to reopen, we are impacted by lockdown related labor shortages due to workers being quarantined.

Speaker 1

During April In May, we incurred significant incremental manufacturing and transportation costs to supply our customers. In addition, as restaurants largely closed and consumers Unable to shop for extended periods in our strongest geographies, we experienced significant demand softness as well. Market conditions trajectory of our business in China, but we will not be able to recover the sales and profit impact we experienced in this fiscal year. Finally, Regarding the conflict in Ukraine, in mid March, we suspended operations in Russia and our operations in Ukraine were paused. 2nd quarter results starting with sales on Slide 7.

Speaker 1

Sales declined 1% from the Q2 of last year, including an favorable impact from currency. Our constant currency sales were comparable to last year with growth from pricing actions offset by decline in volume and product mix. The volume decline was impacted unfavorably by several discrete items, including a 1% sales performance would have been 4% growth, reflecting the strength of our broad global portfolio and effective execution of our strategies and this. While growth in both segments was impacted by the discrete items, they were more impactful to our consumer segment. Notably, our growth in flavor solutions was outstanding.

Speaker 1

Comparisons to 2021 2020 remain difficult due to this: Dramatic shifts in consumer consumption between at home and away from home experienced in the Q2 of the last 2 years. Using 2019 6% or CAGR of 6%. Moving to profit, adjusted operating income was down 33% or 32% in constant 7% unfavorable impact from the disruption to China's consumption and the conflict in Ukraine. Although we anticipated the profit driven by sales The 2nd quarter would be more than offset by higher inflation and broad based supply chain challenges, the impact was greater than expected due to continuing cost While this pressured second quarter profit, we expect to mitigate this impact later this year. Now moving to second quarter business updates for each of our segments.

Speaker 1

Starting with our Consumer segment on Slide 9, our 2nd quarter sales reflect the impact of our pricing actions in all 3 regions. In the Americas, our first wave of pricing was phased in during our Q4 of last year, the second wave during the second quarter very low level of elasticity. With the 2nd wave, we're seeing more price elasticity, although still below historical level. While consumer spending has remained strong, consumers are now under significant pressure from broad based inflation, notably fuel prices and other macro factors. As we look impact to be lower than historical levels.

Speaker 1

Overall, our pricing actions in EMEA and APZ are on track and our elasticity impacts are similar to the Americas. Guidelines on when we take pricing, which generally creates a lag in the timing of pricing compared to the Americas. In this unprecedented environment, however, we are portfolio of consumption as indicated by our IRI consumption data and combined with unmeasured channels grew 1%. And over the last 3 years since 2019, consumption has grown at a 3 year CAGR of 7%, which highlights how the sustained shift in consumer included the impact of lapping a 4% over shipment of consumption to replenish retailer inventories in the Q2 of last year. Our 2nd quarter shipments this year were in line with our consumption change.

Speaker 1

Demand has remained high and we are realizing benefit of the manufacturing capacity we added as well as our increased resilience. However, some products remain stretched by sustained high demand. Shelf conditions continue to improve as seen in our recipe mix share performance of another quarter of fair game. Our spices and seasoning share was pressured during the quarter by the shortage of certain packaging materials as well as certain 6 spices. Some of these have been resolved and some will remain ongoing.

Speaker 1

We continue to use our category EMEA where restrictions extended longer than other regions. Our Vatinet brand of homemade dessert products in France, a product line unique to our EMEA region was most impacted as recently we've seen baking return to a more pre pandemic baseline level. In other categories in the region, we believe there has been a step up in consumption. And in the Asia Pacific region, in addition to the assumption disruption in China. 2nd quarter growth was impacted by the exit of low margin business in India.

Speaker 1

At the end of last year, we our rice business, the Kuih this on Slide 10. Our sales performance for the quarter was outstanding with both pricing and volume growth contributing. We grew double digit growth in both the at home and away from home parts of our portfolio. Looking at our flavor solutions growth over the past three few years since the COVID-nineteen restrictions caused dramatic second quarter comparisons in 2020 2021, our sales CAGR is 8% service part of our portfolio follow the same cadence as those in each region's consumer business. In the rest of our flavor solutions business, pricing is based on contractual windows with automatic price adjusters in many contracts and the timing is going to vary based on those windows.

Speaker 1

In this dynamic environment though with costs escalating so quickly, we are having discussions outside of those windows and passing costs through Demand has remained strong for certain parts of our business in these regions. Our supply chain is being pressured to meet this demand and we are still on some extraordinary costs to service our customers. We appreciate our customers working with us through this pressure. In the Americas, where post performance nutrition and health applications with these customers. In EMEA, our customer base is more student quick service restaurants or this this channel, particularly as travel accelerates and restaurants benefit from consumers shifting to takeaway and delivery.

Speaker 1

Overall, our flavor sales demand and growth momentum continues to be strong. Now let me expand on our growth platform focus on great fast growing categories that will continue to differentiate our performance. We are capitalizing on the long term consumer trends that accelerated a a set of expectations 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 global flavor portfolio, this footprint to support future flavor growth.

Speaker 1

We are also increasing our capacity in the fast growing hot sauce category and investing in seasoning a this. While we still experienced disruptions in the supply chain, they are much more specific, mainly from a transportation and packaging supply with our 3 year brand marketing CAGR approximating our consumer segment sales CAGR for the same period. We're Pivoting our messaging to emphasize to consumers how our products help them stretch their grocery dollars. For instance, this this today. Our portfolio includes branded items to accommodate consumers' needs and provide solutions for everyone at every price point as well as private label products.

Speaker 1

Our new product launches include additional entry level price point products for affordability and larger sizes of key high usage items for better value. While we are still seeing strong consumer spending, we know that inflation During the pandemic to monitor for any signals of changing behavior. Our research continues to indicate consumers are going to cook as much at during recessionary period. Now, some summary comments on Slide 13 before turning it over to Mike. We remain focus on the long term goals, strategies and values that have made us so successful.

Speaker 1

We have grown and compounded that growth over the years regardless of quarter, we are well positioned and confident in delivering strong performance in 2022 and beyond, while driving sustainable long term value for first. McCormick employees continue to do a great job navigating dynamic environment. Their agility and their teamwork drive our momentum success and I want to thank them for their dedicated efforts and engagement. And now I'll turn it over to Mike. Thanks, Lawrence, and good morning, everyone.

Speaker 1

Starting on Slide 7% decline in volume and product mix. Excluding the 4% impact of the discrete items Lawrence mentioned earlier, our sales performance would have reflected 4% growth. Consumer segment sales declined 7% in constant currency. The impacts from U. S.

Speaker 1

Trade inventory replenishment, the consumption disruption in China, the exit of low margin business in India and the conflict in the Ukraine contributed 6% to that decline. The remaining 1% decline was due to lower volume partially offset by pricing actions. On a 3 year basis, our 2nd quarter this mix partially offset by pricing actions. This decline is attributable to lapping trade inventory replenishment in the Q2 Consumer sales declined 11%, primarily due to lapping high year ago demand driven by COVID related lockdowns, the most significant specific region declined 18%, including a 20% unfavorable impact from the consumption disruption in China as well as the exit of low margin business in India. Pricing actions in all markets across the region partially offset this unfavorable in India impacts I just mentioned.

Speaker 1

Excluding those impacts, sales grew at a 5% CAGR over the past 3 years. Turning to our flavor solutions segment on Slide 19. We grew 2nd quarter constant currency sales 11% due to pricing actions as well as higher volume and mix. This growth was partially offset by a 1% decline in sales related to the combined impact of the China disruption and the

Speaker 2

a

Speaker 1

service customers also contributing to growth. Over the past 3 years, constant currency sales in the Americas grew at a CAGR of 8%. In EMEA, we drove 19% constant currency sales growth with a 14% increase in volume and mix and 5% over the past 3 years, EMEA's constant currency sales grew at a 10% CAGR. In the Asia Pacific region, flavor solutions sales declined 6% in On Slide 23, adjusted gross profit margin declined 5 50 basis points in the 2nd quarter versus the year ago period. Realizing this is visible compression.

Speaker 1

I will spend a moment on the significant drivers. Let me start with the drivers we anticipated. First, nearly Half of this declined approximately 2 50 basis points is due to the dilutive impact of pricing to offset our dollar cost increases. We focus on gross profit dollars. This impact was more significant than in the Q1 because of the higher level of pricing in We're lapping strong U.

Speaker 1

S. Spices and seasoning growth related to the inventory replenishment. In our Flavor Solutions segment, sales growth in A sales shift between our Consumer and Flavor Solutions segments also contributed to the unfavorable product mix. In our Flavor Solutions segment, as we mentioned in our last earnings call, gross margin was unfavorably impacted by startup and dual running costs as we transition production to new UK Peterborough manufacturing facility. Of note, CCI led cost savings partially offset the impacts I just walked through, and we are on track to deliver expected savings of $85,000,000 for the full year.

Speaker 1

In addition to the net impact of the anticipated this as I just detailed. Gross margin was also unfavorably impacted by the following items. As Lawrence discussed, cost inflation and supply chain pressures upcoming pricing actions to reflect that escalation and we plan to fully offset cost pressures over time. Our 2nd quarter gross margin compression reflects the usual lag associated with pricing. We expect pricing to begin outpacing the cost pressures just later this year and continue into next year.

Speaker 1

Our cost recovery will vary by region and segment. Currently, our pricing lag is more significant in our Flavor Solutions segment. Laurence previously mentioned we have incremental costs to meet strong demand for certain parts of our flavor solutions business, thus impacting favorable impact to profit. Moving to Slide 24. Selling, general and administrative expenses were lower than the Q2 of last year and as this this investment was driven by China and Russia reductions.

Speaker 1

Importantly, across our other markets, we invested in brand marketing at a comparable level to last year. The net impact of the factors I just mentioned resulted in a decline in adjusted operating which excludes special charges, up 33% compared to the Q2 of 2021. In the Consumer segment, adjusted Operating income declined 29% and in the Flavor Solutions segment, it declined 40%. A 1% unfavorable impact this is included in each of these declines. Turning to income taxes on Slide 25.

Speaker 1

Our 2nd quarter adjusted effective tax discrete tax items this year. At the bottom line, as shown on Slide 26, 2nd quarter 2022 fair share of income. On Slide 27, we've summarized highlights for cash flow and the quarter end balance sheet. Our Cash flow from operations was $154,000,000 through the Q2 of 2022 compared to 2.20 $1,000,000 through the Q2 of 2021. This decrease was primarily driven by lower net income.

Speaker 1

Cash flow from operations will be weighted to the second half of the year similar to our profit growth. We returned $198,000,000 of cash to our shareholders through dividends and used $102,000,000 for capital expenditures through the Q2. We expect 2022 to be a year of strong cash flow driven by profit and working capital initiatives. And our priority is to continue to this the greater impact from these items. In addition and as noted previously, we have always expected our profit growth to be weighted to the second half of the year.

Speaker 1

We now as mentioned. We also expect there will be an estimated 2 percentage point unfavorable impact of currency rates on sales, adjusted operating income and adjusted earnings per share, an increase from our previous estimate of 1 percentage point unfavorable. On significantly in the second half versus the first half. While we anticipate volume and product mix to be impacted by increasing elasticities, we expect elasticity to remain at a lower rate than historical levels. Our volume and product mix will also continue to be impacted by the pruning of lower margin business from our portfolio as well as the impact of demand disruptions in China and Ukraine.

Speaker 1

We plan to drive continued growth through the strength of our brands as well as our category management, brand marketing, new product and customer engagement growth plans. We are now projecting our 2022 adjusted gross profit margin to 2 100 basis points to 150 basis points lower than 2021. Given the rapidly escalating cost this dollars. This has a dilutive impact on our adjusted gross margin and is the primary driver of our projected compression. We now expect to grow our adjusted operating income 2% to 4% in currency.

Speaker 1

In addition to the gross margin impacts I just mentioned, this projection also includes our CCI led cost savings target event in Russia. Considering the year to date impact from discrete items as well as our estimated mix of earnings by geography, we now project our 20 2022 adjusted effective income tax rate to be approximately 22%. This outlook is expected to be a year over 2022 adjusted earnings per share expectations to a range of $3.03 to 3.08 compares to $3.05 of adjusted earnings per share in 2021 and represents a decline of 1% to an increase of 1% or in constant currency growth of 1% to 3%. This reflects our lower adjusted operating profit outlook and an expected $15,000,000 benefit from the impact of this to continue our operating momentum and drive another year of strong performance. Thank you, Mike.

Speaker 1

Now that Mike has shared our financial results and outlook in more detail, I'd I'd like to recap the key takeaways as seen on Slide 29. Our long term performance has been industry leading and met or exceeded our objectives, including through volatile environments. The long term fundamentals that drove this historical performance remains strong. Several discrete the items unfavorably impact our sales comparison to the Q2 of last year.

Speaker 3

Excluding these

Speaker 1

impacts, our sales performance reflects the strength of our broad global portfolio, the effective execution of our strategies and our pricing actions. Our sales growth momentum is strong. Persistent high cost inflation and supply chain challenges intensified as the Q2 progressed and unfavorably impacted our profits. Importantly, we expect to mitigate this impact in the 2nd half of the year. We're confident that with our broad and advantaged flavor portfolio, effective growth strategies and our ability to navigate challenging environments, we will drive another year of strong performance in 2022 and build value for our shareholders.

Speaker 1

Now

Speaker 2

Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Speaker 4

Great. Thanks very much. Good morning, everybody.

Speaker 1

Good morning, Andrew. Good morning, Andrew. Hi, Andrew.

Speaker 5

Hi, Andrew.

Speaker 4

I guess first off, as you talked about organic sales came in below where the Street was looking for it, though you raised the outlook for organic for the full year. And I appreciate some of the items in 2Q you highlighted were discrete, but maybe you could talk a little bit What gives you the confidence in raising the organic guidance for the full year? Are you expecting headwinds in 2Q to become tailwinds in the second half or Better momentum in the underlying business. The scanner data has not necessarily showed any meaningful inflection yet, but I can see at least on a year over year basis. I appreciate the multi year CAGR of organic sales.

Speaker 4

So I'm trying to get a better sense for The underlying confidence in raising the full year organic to start with.

Speaker 1

Well, sure, Andrew. Well, first of all, our plan as back half loaded and stronger in the second half than in the first half. And one of the factors driving quarter. Our pricing contribution to sales was about 7% and It's significantly higher going into the second half of the year and that is a big driver of total sales. And we'll build 3rd quarter, 4th quarter.

Speaker 1

And that's I mean that's the driver of sales, it's also a driver on of business in China as we go through the second half, particularly we really expect it to be normal by the time we get to Q4. And just our experience with the initial COVID lockdown a couple of years ago tells us that there that when We get normalization. There's a significant surge in restocking by both the consumer and by our trade channels. And so we would expect Yes, a strong contribution from China in the second half of the year. And then finally, our U.

Speaker 1

S. And EMEA Have less difficult comparisons going into the second half than they did in the first half of the year, not locking Not lapping inventory replenishment that we talked about last year and also not lapping some of the COVID lockdowns that were still in effect in the particularly Q2. And finally, we expect continued strong underlying demand from our consumers and our customers that we're continuing to see. Mike, do you have anything you want to add to that? Yes.

Speaker 1

I think I'd add that We see a lot of strength in our flavor solutions business. We saw that in the second quarter and we know that will continue in the second half. So we certainly think that's going support I think really our outlook for the second half overall. But also we're seeing a lot of new business come through in the back half of the year in both segments. And so we see a lot of strength coming through on that too.

Speaker 1

So the growth momentum does look even stronger as we move towards the back half.

Speaker 4

Great. And then just a quick follow-up, I don't think you mentioned it. I know you did last quarter, when When you were talking about in the core consumer business, private label had not yet really had much of a move one way or the other. I don't think you mentioned it this time around. I'm just curious what you're seeing there, anything of note that we should be aware of?

Speaker 4

Thanks so much.

Speaker 1

I don't think there's anything of special note there, we are seeing some trade down by consumers, not just in our category, but in other categories Inflation across everything. I mean gas prices are $5 or $6 a gallon depending on where you live and that puts pressure Consumer's pocketbook. But I would say that it's still at a pretty low level, particularly when we look at historical levels and it's not a particular concern. Great.

Speaker 4

Thanks so much.

Speaker 1

I would say also I'll add that

Speaker 2

Question comes from the line of Ken Goldman with JPMorgan. Please proceed with your question.

Speaker 6

Hi, thanks so much. I just wanted to make sure I heard your commentary about pricing correctly and that I'm doing some basic math right. You did about, I think, 6% In the first half, you're saying that will double in the second half. And you also I think are implying that you need around 10% organic sales growth Sorry to do the math on the call. I apologize for putting you on the spot.

Speaker 6

But are you effectively saying that it's reasonable for us to model Maybe 12% pricing overall in the second half with volume down around 2%. Is that kind of what we're going to have

Speaker 1

Yes, Kennel, let me start with that. I'm going to let Mike point in on that. But I think you're in the right neighborhood With those numbers, we took the first when I think about the cadence of our Increases and the timing of their effectiveness, you're in the right neighborhood when you think about going ERCA is our largest region in August. And so if you're thinking about phasing that, You should have that in mind as well. I'd also just add, you're going to see it across both consumer and flavor solutions pretty much same

Speaker 6

level. Great. That's helpful. Thanks. And then quick follow-up.

Speaker 6

It sounds like You mentioned pricing will kind of phase in a little bit over the second half. In this context and given some of the other factors you've talked about, how do we think about the cadence of the gross margin improvement in the back half. Should we expect a substantial improvement in 3Q? Is it more 4Q weighted? Maybe any color you could provide there would be helpful as we think about modeling.

Speaker 1

Ken, this is Mike. Great question. Yes, we see Actually, the cost peak year on year we see is Q3 and a little bit of moderation in the Q4. We see the pricing obviously growing 2nd to 3rd to 4th. So I think what you'll see is still some gross margin challenges in the Q3, but in the Q4, the combination impact of that pricing and full benefit a And also think about the 4th quarter as our strongest quarter overall from a volume perspective there.

Speaker 1

And as Lawrence said before, things like China, which we make really good margin As that recovers from 3rd into 4th 2, that should be a positive for 4Q. Great. Thank you so much.

Speaker 2

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

Speaker 7

Yes. Hey, thank you and good morning. So you gave a good deal of bottoms up color on the incremental headwinds facing the So I think I'm clear on that, but I just want to play it back from the top down, because your overall sales outlook hasn't really changed despite the more adverse currency. You're now expecting a marginally lower tax rate, a marginally lower share count, slightly less brand marketing. And while the expected cost inflation is higher at the high teens level, it's not outside the bounds of the prior outlook.

Speaker 7

So I guess just as want to isolate and see if you could better what is exactly driving the reduced operating profit and EPS outlook. It feels like it's the updated outlook on China, Russia, Ukraine and supply this above and beyond the normal cost inflation. But I just want to confirm that and if there's a way to quantify or rank order those factors, that'd be great.

Speaker 1

Hey, Steve. This is Lawrence. And I think that you some of the little things that I think we're going to want to come back and talk about some of those marginal changes that you talked about. But on the big picture item, you've got it exactly right. And in fact, This was part of what we were trying to message at your recent conference.

Speaker 1

This. The big change here are the things that were external factors that surprised us, and that is what's going through. I'll let Mike walk The actual bridge on that, but that's it. Yes, if you think about our guidance, we're coming down 0.14 a If you think about from a China, Russia, Ukraine perspective, that's $0.11 right there. And then FX, as you said, We're going up 1%, that's $0.03 there.

Speaker 1

So there's your $0.14 Now we're recognizing that the cost inflation, which you mentioned, We had mid to high double digit. We actually moved that to high double digit. So 1% to 2% more cost during the year driven by transportation, packaging, things like So that did hurt us in the Q2. However and we're dropping a bit of that through the rest of the year, but we have pricing that's to help mitigate this. And then below the line, some of the things you talked about, tax is a little bit of help.

Speaker 1

Some of the interest expense things are going to help offset that. But the big drivers of the external factors, the one thing I wanted to just correct you on brand or just give you insight, brand marketing is now flat. However, that is really driven by the reduction in China, Russia, Ukraine and FX. So we're still spending up in our big markets to drive growth.

Speaker 7

Okay. That's That's helpful. Yes, that's perfect. That's perfect. Just a quick follow-up.

Speaker 7

On the to follow-up on, I think, Ken's question, just the cadence of gross margin recovery. Is there anything that you would call out in the second quarter as truly So is there anything, that any headwind that you experienced in the Q2 that is kind of unique and discrete To the Q2 that doesn't carry over at least directionally. Yes. Just trying to get a sense if there's anything behind you.

Speaker 1

The one thing I'd say, and you're new to our business, But the China business to us is very material. It's our 2nd biggest market. We have 3 large manufacturing facilities and the shutdown really put a lot of pressure on our cost there, a lot of extra cost for transportation, loss absorption, things like that. So as that business Obviously, that goes away. I think the other thing too is, if you think about some of these costs that came up rapidly like transportation and packaging, I mean fuel costs, if you go back to March, gasoline prices in the quarter versus March were up 25%.

Speaker 1

So that stuff rolls through the P and Very quickly. And pricing will catch up on that, but a 1 month lag in pricing can be $30,000,000 to $40,000,000 of impact, which is like $0.10 a share. So we're mitigating that as quickly as we can, but sometimes we see that as It's stabilizing now and going forward, like I told you, 3rd Q4 where we see our cost outlook. But I think that is as to your point about what is Transitory what is not. I think that gets most of it.

Speaker 1

And Steve, I would really underscore that timing aspect, one Month difference in the effective date of our price increase. We'd be having a Different conversation. It would be $0.11 or $0.12 of EPS on the quarter. And And of course, those price increases are in effect. I'm just saying that it won't fit in 1 month earlier,

Speaker 7

Understood. I just want to play back just real quick with Mike's point on China. I get it that China Uniquely detrimental to 2Q, but I don't think you're saying that that's 100% of transitory. That doesn't As of June 1, that's not behind you, right? It gets better, but it's not so it's

Speaker 1

Yes, that's why I said that's going to really help us in the Q4 more. It's still fair enough. Yes. There's different levels of openings that are happening now that will happen throughout

Speaker 2

line of Robert Moskow with Credit Suisse. Please proceed with your question.

Speaker 8

Hi, thanks for the question. Hi, Laurence. In your opening remarks, you said that your research shows that there's That consumers will continue to cook as much at home as they did during the pandemic, if not more. And just Anecdotally, I find that this year that's not the case. People are regaining mobility, Returning to the workforce, what have you.

Speaker 8

And you can see it in your numbers too. So do you have any like kind of real time insight into how consumers are behaving this year. In light of the fact that your category in the U. It's much weaker than other packaged foods categories have been tracking.

Speaker 1

Preston, I'll let you take that one. Yes, sure. Good morning, Rob. I guess just to react to some of the thoughts Just shared there, we're seeing through a lot of our research, also what we're seeing in the secondary research out there is that there So it's still a heavy level of sustained cooking at home in the data overall, whether We're getting it from some of our suppliers there. We definitely see a sustained level of eating at home.

Speaker 1

And overall, I would say that The consumer hasn't really changed that much. Now, as it's performing in our categories, we're seeing it play out in a number of our categories, a recipe mix, Hot sauces. We still have a lot of strong sort of consumption growth there. And so we certainly still see it play out. Certainly, there are categories like meat where you see you do see some decline going on there.

Speaker 1

That might affect an item or 2 here, but we Definitely still have a very balanced portfolio where we're seeing still a lot of at home consumption going on. And frankly, historically, as you go back, Rob, a long way with us, So if a recession does occur, that will drive more people cooking at home. So that bodes well, I think, for our fraud portfolio. Yes. For our research, I would say, is as recent in the 30 days, is telling us that there is still a sustained level.

Speaker 1

And I mean, if you look at our Our flavor solutions business, I mean, clearly food services is strong. Restaurants have People are not forced to cook at home, but there still seems to be a strong preference in that direction. And Actually, as we went through the first half, we saw in the early macro data To turn back the other way, probably driven by economic pressures on consumers. Cooking at home is more economical. I think for a variety of reasons, We're still pretty optimistic on the whole retention of cooking at home behaviors.

Speaker 1

There are some pockets that are different. Baking was really largely driven by kids being at home from school. We've seen in baking related items, return to kind of really pre pandemic levels. That certainly is a part of our

Speaker 8

For Brendan, as you're talking to the trade about the holiday seasons and the price increases this and consumer behavior. What's the reception been like? Is the price increase well understood for seasons, the reasons why and are they eager to merchandise aggressively During the holiday season. Yes.

Speaker 1

I think the way our conversations are unfolding with customers and looking at holiday season is one where you're still looking at, I think, improvement in supply across the season. And that is, I think one of the things that underpins really a lot of optimism and strength as we go into the back half, especially as we go into this holiday season, we are certainly indicating a strength in our ability to supply and drive the holiday promotions and displays and everything else. So I would say, the conversations with customers have been rather positive and strong and the outlook remains pretty healthy underpinned by I would say is one of the important factors there. Related to pricing, I mean, I think we work a lot with our customers and making sure that we're both driving category growth. And so that is a big part of our conversations as well.

Speaker 1

And again, I think those conversations and Appreciate the partnership and working with our customers on that. But the outlook, I think, remains very healthy. And again, I'll just Underscore that, well, we don't want to get too specific on discussions about pricing because there is customer those considerations there and there is always some natural tension in those discussions. Our customers know that we've taken a long term perspective They themselves are continuing to experience inflation that's very broad based on some of the factors that we are and so those conversations have continued to be quite constructive.

Speaker 8

Very helpful. Thank you.

Speaker 2

Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your

Speaker 3

session. Good morning, everyone.

Speaker 1

Good morning, Alexia.

Speaker 3

Hi, there. Can I ask about just the global supply chain dynamics? You obviously are sourcing ingredients from many different places around the world, probably more so than other large packaged food companies. I'd just be Curious to hear sort of what you're seeing in terms of global supply chain, domestic supply chain. Where are the real pain points for you now?

Speaker 3

And is there any light

Speaker 1

quarter of last year and has continued to get better Every month. We're not out of the woods by a long shot in terms of normalization, but The really broad scale disruptions that we are experiencing a year ago are behind us and the disruptions are really much more discrete I'd say our global sourcing of raw materials from points all around the world for our various markets around the world has been one of our strengths through The whole pandemic experience and the post pandemic time and continues to be a strength. Our Challenges have been more on either predominantly global packaging issues and specific packaged materials from very specific suppliers. Some of them are continue to be 4 points and then in areas where we have there's still some areas where even though we've added a lot of capacity, the demand And it's still extraordinary and we're pressed to meet the needs of our customers. And again, those would be in a few very specific areas.

Speaker 3

Sorry, a And then just as a quick follow-up. There was a comment in the press release about unfavorable mix in sales of labor solutions. How important was that? Because obviously, the profit decline was very marked this quarter. And what drove that?

Speaker 3

And then I'll pass it on.

Speaker 1

Yes. This is Mike. I mean unfavorable mix was one of the factors. If you think on a quarter to quarter perspective, look back here, really strong performance in some of the higher margin categories, kind of this year, the strongest performance was in the away from home versus to flat hole. So a little bit between those two categories, just we mixed down a little bit, nothing to be concerned about.

Speaker 1

As we've talked about, flavor solutions can lumpy based on the products we sell and things like that, but that's part of the reason.

Speaker 3

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

Speaker 1

Couple of questions.

Speaker 2

Thank you. Our next question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.

Speaker 5

Yes. Thank you. Good morning, Hi, Adam. Hi. So I was hoping to just maybe try to understand the second half kind of framing maybe from a different Because it would seem like the full year guidance implies second half operating margins those actions that benefit in the price cost balance will probably flip positively, presumably in the Q4.

Speaker 5

But also that's a dilutive impact to percent margins. Just trying to get a sense of what how do we notwithstanding some of the discrete things in the May quarter, specifically to the China impact in particular, but we've got volumes that demand elasticity that would suggest volumes aren't going to get better. Businesses, flavor solutions is probably growing faster than consumers. That's a mixed headwind at the corporate level. And so I'm just trying to get us understand kind of how do we get to that magnitude of percent margin improvement in the back half?

Speaker 1

So Adam, I'm going to start and I'm going to let Mike pick it up. Again, I want to underscore that there's a big change in The relationship between pricing and cost as we go through the year and the second half, we price increases begin to overtake The cost increases and rather than trailing what we're beginning to recover the cost increases. That's going to be in the second half versus the first half is going to be a really big factor. Mike, do you want to talk about that? Yes.

Speaker 1

There's other factors too, Adam. I mean, really We talk about pricing as a way to offset costs. So we have other levers. So we talk about revenue management, our CCI led cost savings. So we're we continue to lean hard on driving additional cost savings in this inflationary environment.

Speaker 1

We see continued strong demand driving that, high margin products helping us there. So there's a lot of reasons to believe. To your point though, I mean, between 3rd Q4, I mean, the 4th quarter is where a lot of this fruition from getting to a positive margin change year on year. And I'll add, so we don't expect COVID Lockdowns to repeat in China. That's a wildcard.

Speaker 1

We've been surprised there before That could happen again. We don't think we're not expecting that, but that was a big unfavorable In the first half, particularly in the second quarter, that we expect to correct and normalize as we go through the second half.

Speaker 5

Okay. So maybe just to help clarify that, as we think about the year to date Q2 or year to date kind of performance. What's been the realized CCI savings year to date relative to the 85 For the full year and I guess just any way to help dimensionalize some of the you gave the brand marketing piece, but other SG and A just where that magnitude

Speaker 1

of kind

Speaker 5

of tightening the belt strings there and how much that can contribute in the second half?

Speaker 1

This is weighted I can ask that, and that's all I'm going to say.

Speaker 5

Okay. All right. I appreciate that color. I'll pass it on.

Speaker 2

Thank you. Our next question comes from the line of Peter Galba with Bank of America. Please proceed with your question.

Speaker 9

Hey, guys. Good morning. Thank you for taking the questions. Laurence, I just wanted to circle back actually to Andrew's question around private label and going back to the slides. You do have section here talking about more entry price points.

Speaker 9

And I'm just curious, is that a response to what you see as impending more share shifting to private label. And so you feel like you need more entry price points? Or is it something else? I mean, you talked about inflating cost baskets and maybe no other categories like proteins. And I noticed here, you're talking about entry price points on things like Grill Mates and Lawrie's, which tend to be more tied to protein.

Speaker 9

So just curious to kind of get the thoughts around that.

Speaker 3

Yes. This is that really doesn't

Speaker 1

have anything to do with private label. What it has to do with is our concern Consumers may be under pressure. As we we're seeing some early signs that consumers are maybe feeling some Economic pressure. It's no secret that things like gas prices were up, our customers as we go into the second half and even into 2023 that we want to be able to Make sure that consumers, especially in the lower half of the income scale, are still being served and have access to our those. Our goal is to have products that appeal to consumers at every price point across the category and between our new product launches, Our brand marketing and our brand marketing activity, we are taking a tone that to try to address that pressured consumer.

Speaker 1

Now we've got I know we're Kind of hitting time as General Mills is probably talking right now. But Brendan has got a lot of color that he can add on this question and I'd like to give them a chance to. Well, I think, Lawrence, I think you hit it largely right. We're trying to make sure that our portfolio and our assortment is really geared towards what Some of those are starting to face and it could very well be price points that are lower in terms of smaller sizes. I would say that also there's another dynamic on the other end, which is happening, which is we actually see even more consumers switching to larger this looking for more value.

Speaker 1

And so that it's playing out really on both ends. And so those are things that we're reacting to and making sure that we Drive even more distribution and items in our assortment that serve those needs and those price points that consumers are

Speaker 9

Got it. That's helpful. And maybe just a quick one. Lawrence, you did mention, I I think that packaging tightness was impacting a certain couple of categories in U. S.

Speaker 9

Spices and seasonings. Just any more color there? What specifically brands or this. I don't want

Speaker 3

to get too specific because

Speaker 1

they also don't really want to call out our suppliers We're trying to have a constructive Competitors either for that matter. But we had some trouble Glass for our organic spices in our core May range that I think we have

Speaker 2

Thank you. Ladies and gentlemen, that concludes our question and answer session. Mr. Kurzis, I'll turn the floor back to you for any final comments.

Speaker 1

Thank you. McCormick's alignment with consumer trends and Rising demand for flavor in combination with the breadth and reach of our global portfolio and our strategic investments provide a strong foundation sustainable growth. We're disciplined and are focused on the right opportunities and investing in our business. We're continuing to drive further thorough growth as we successfully execute on our long term strategies, actively respond to changing consumer behavior and capitalize on opportunities from

Operator

note for everybody joining today's call. I apologize for those that we didn't get to. If you have any further questions, please reach out to me today and this to conclude this morning's call. Thank you very much. And for those of you in the U.

Operator

S, have a wonderful holiday weekend, grill a lot. And for

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Earnings Conference Call
McCormick & Company, Incorporated Q2 2022
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