Brendan Foley:

Good morning, everyone, and thank you for joining us. We are pleased with our second quarter performance, particularly as we continue to navigate a changing and complex consumer landscape. Our differentiated results demonstrate the success of our prioritized investments to accelerate volume trends and further capitalize on the underlying growth of our categories. McCormick remains a growth company, and 2024 continues to be an important investment year. As planned, as we have activated many of our initiatives and we are starting to see results that support our confidence in delivering on our long-term objectives. This morning, I will begin my remarks with an overview of our second quarter results focusing on the top-line drivers. Next, I will provide perspective on industry trends, highlight some areas of success as well as areas we continue to work on, and review our growth plans with a focus on innovation. Mike will then go into more depth on the second quarter financial results and review our 2024 outlook. And finally, before your questions, I will have some closing comments. Turning now to our results on Slide 4. In the second quarter, sales declined by 1% in constant currency, reflecting flat pricing, and a 1% decline in volume and product mix. Volume growth in our Consumer segment was offset by declines in Flavor Solutions related to softness in some of our quick serve restaurant, or QSR, and packaged food customers volumes as well as the timing of customer activities, as expected. Although certain parts of our Flavor Solutions business are pressured, given our collaboration and strong innovation pipeline with our customers, we expect volume trends to improve during the second half of the year. In our Consumer segment, volumes improved substantially from the first quarter across our major markets and delivered volume growth. In the Americas, we delivered solid sequential volume improvement for three consecutive quarters, and our pricing in the second quarter reflects the activation of our price gap management plans to support improved volumes in the second half, as planned. In EMEA, we drove positive volume growth across our major markets and core categories for the second consecutive quarter. We expanded distribution in the grocery, discounter and e-commerce channels, and realized benefits from new product innovation. In Asia Pacific, outside of China, we delivered strong volume-led sales growth, as we executed the rollout of our new consumer preferred packaging for our core spices and seasonings portfolio and realized distribution gains. This performance was tempered by China as expected, although sequentially volume trends improved in China. Results in our Consumer business reflect continued focus on increased brand marketing investments, accelerating innovation in alignment with consumer trends, and expanding distribution. Let me now share our current view on the state of the consumer. Consumers continue to exhibit value seeking behavior. Financial anxiety remains elevated, particularly in the United States, and especially with mid- to low-income households due to the compounding impact of inflation. In addition, inflation in the foodservice channel is leading to softness in food away-from-home consumption and impacting restaurant traffic, particularly with QSRs across many of our regions. Volumes on the retail side, particularly in the center of store, remained soft. Consumers continue to buy just for what they need and make more frequent trips to the store. On the other hand, they are increasingly shopping the perimeter and continuing to cook at home. Certain categories such as spices and seasonings as well as condiments and sauces are seeing a benefit amid these trends. As consumers are looking to stretch their budgets, our categories represent a fraction of the cost relative to proteins, produce, and carbs and drive the majority of the flavor. In fact, in the second quarter, spices and seasonings was the top category in center store growth across measured channels. And McCormick is the leading branded player and driving category unit growth. What continues to differentiate McCormick is that we operate in great categories across all channels. We offer products at every price point, from premium to lower price points. We have a broad and diversified portfolio to meet evolving consumer demands. We are part of the solution for consumers. Importantly, we believe that we have the right plans in place that are continually informed by what matters most to our consumers and customers. Moving to Slide 5, let me highlight for the quarter some of the key areas of our success. For our global Consumer segment, including the Americas, our core categories delivered solid volume growth. In spices and seasonings, we delivered volume growth across all of our major markets. In the US, our share performance improved, resulting in positive gains in unit share for the quarter. In addition, we drove dollar share gains in France and Eastern Europe. In recipe mixes, we continued to strengthen consumption trends in the Americas, particularly in our Mexican product lines, through our price gap management investments as well as distribution growth. In addition, in EMEA, recipe mixes were a significant driver of UK volume growth and we realized dollar market share gains for two consecutive quarters. In mustard, we are driving improved unit consumption and unit market share trends across our regions. In the Americas we expanded distribution and actioned our pricing investments. In addition, innovation is yielding results. Our creamy dill fickle mustard performance is exceeding our expectations. In Poland, mustard consumption continues to grow and we are realizing dollar market share gains, which strengthened from the first quarter. In Flavor Solutions, we had pockets of strength this quarter. In our Americas Branded Foodservice business, despite softness in the overall market, we grew volumes. In our Americas Flavors business, our performance with high-growth innovator customers remained strong. We grew in non-alcoholic beverages and saw continued strength in performance nutrition. In Asia Pacific, including China, we drove strong volume growth as we benefited from new customer products and promotions. Let me now touch on some areas where we are seeing some pressure. We continue to experience volume declines in the prepared food categories that we participate in, like frozen and Asian and Americas consumer. Importantly, these items represent a small part of our portfolio and the volume growth in our core categories is beginning to fully offset these declines. In hot sauce, we have underlying strength in our base business and strong consumer loyalty, and we continue to invest in our market-leading brands. In the Americas, consumption and share trends improved in the second quarter on top of our first quarter improvement. A couple of short-term items continue to impact our share. First, [as appears] (ph) that is lapping their own supply chain disruptions, and second, new price pack architecture in the form of trial sizes, which have been incremental to the category. As we realize the benefit of our increased innovation, including Frank's new Dip'n sauces and Squeeze bottles, as well as mini trial sizes, A&P investments and distribution expansion, we expect to drive improved hot sauce consumption trends in the second half of 2024. In Flavor Solutions, our volumes were impacted by slower QSR traffic in both EMEA and the Americas. We expect to improve these volume trends as we continue to execute on our growth plans in the second half of the year. Finally, some of our consumer packaged food customers experienced additional softness in volumes within their own business in both the Americas and EMEA. We are collaborating with our customers to support their innovation plans and we are continuing to diversify our customer base over time. Before moving to our growth plans, I'd like to note that our total US Branded portfolio consumption, as indicated by Circana data and combined with unmeasured channels, outpaced our sales growth this quarter, as our brand investments drove improved consumption and we are lapping the increased shipments that came in ahead of the 2023 pricing actions of the prior year. This is a function of timing from quarter-to-quarter. Let's now move to our growth plans on Slide 6, which are supporting our second quarter performance and will continue to drive our success in 2024 and into 2025. Our base business is strengthening across major markets and core categories, and we have a number of initiatives in flight that will continue to drive this performance and differentiation. And I look forward to sharing more details on these plans at our upcoming Investor Day in October. Brand marketing, new products and packaging innovation, category management, proprietary technologies and customer engagement continue to be the levers that drive our growth. For today, I'd like to take the opportunity to highlight one of these levers, innovation, on Slide 7 and 8. First, it's important to recognize that we are one of the few, if not the only company that operates in end to end flavor with both our Consumer and Flavor Solutions segments. We are in a unique position with our portfolio's breadth and reach. Our shared insights give us a strong understanding of consumers' flavor needs, preferences and trends. And we have the ability to translate this into innovation, making McCormick a global leader in flavor trends and flavor innovation. Innovation is a priority for us. It drives one-third of our long-term algorithm. It meaningfully contributed to our results for the first half of 2024, and we expect it to drive strong performance in the second half. As a management team, we discussed the latest trends and insights and how those might translate into innovation in both segments. We are continuously leading the pursuit of what's next in flavor. In our company, everyone is engaged in innovation. In the first half of the year, our results benefited from new products and packaging and the performance of these launches continues to improve. Importantly, our pipeline for the remainder of the year remains robust. In our Consumer segment, our renovated US everyday urban spice portfolio is fully shipped, and roughly two-thirds of our new packaging is currently on shelf, driving double-digit velocity gains and contributing to our strong volume improvement in spices and seasonings. New products within our spices and seasonings portfolio, including Lawry's new seasoning blends, Flavor Maker blend, and our exciting grilling portfolio of Stubb's rubs and new Grill Mates seasonings blends in partnership with Max the Meat Guy fuel first-half results and are expected to accelerate our performance in the second-half. In fact, in 2024, we are launching nearly 4 times more grilling rubs and seasonings compared to 2023. Importantly, our grilling season, which kicked-off at the end of second quarter is off to a great start. In addition to our grilling blends and rubs, we are excited about early results from Frank's RedHot Dip'n sauce and popular flavors in the Squeeze bottle format that we launched this year. We are energized for the grilling season and expect our [Flame & Flavor] (ph) marketing campaign that launched in the second quarter to drive incremental consumer demand. Our Cholula salsas and recipe mixes that launched in 2023 are driving new buyers to the category and continue to exceed our expectations since launch. Cholula salsas are driving strong incremental category growth with our high repeat buy rates and our Cholula recipe mixes are a top recipe mix brand after just one year in the market. They are driving the second highest unit growth within the category. We continue to build US distribution and we are launching both formats in Canada this year. In EMEA, growth from new product sales is accelerating and we expect it to drive significant growth in the second half of the year. In the UK, across recipe mixes and seasonings, our Schwartz range with Nadiya Hussain, restaurant-branded partnerships and a range of classic American recipe mixes with Frank's, OLD BAY and French's are driving our innovation performance and expanding household penetration with younger consumers. In France, we are collaborating with Juan Arbelaez, a celebrity Colombian French chef, to drive engagement with younger households. And recently we partnered with him to launch a range of unique and delicious Ducros barbecue seasonings in time for the summer barbecue season. Moving now to our Flavor Solutions segment, we continue to leverage our proprietary technologies to support our innovation in flavors, to win new customers, diversify our customer base and drive share gains across our portfolio. Our momentum with our high-growth innovator and consumer products' customers continues to be strong and fuel our new product pipeline. As we look to our innovation pipeline that we support for our customers, we expect to pick up in the back half of the year. We are collaborating with many customers to heat up their products from snacking to beverages to performance nutrition. Our win rate with heat briefs are strong across our regions and we continue to dedicate resources to where we have the right to win. In Branded Foodservice, our 2023 launches, including Frank's Mild Wings Sauce and Frank's Nashville Hot, are delivering strong results in the first half of the year. Our early 2024 launches are also contributing to our growth and include a number of e-products like Grill Mates Fiery Habanero and Cholula Chili Lime. Looking ahead to the second half, we expect new products to meaningfully drive our top-line, and importantly, we have a strong innovation agenda, including launching Frank's Garlic Buffalo and Mango Habanero in the Americas, as well as Frank's RedHot Mayo in the UK and France, and we are further extending McCormick Mayonesa, which has had great performance in our Consumer segment into the foodservice channel. Overall, we are very excited about our innovation plans for 2024. We expect new product performance to be in-line with our long-term objectives and to drive a meaningful portion of our volume growth. In addition, in the second half of the year, sales from new products are expected to nearly double compared to the first half, and a meaningful portion of this innovation is in heat. Heat-infused products span our portfolio. Across both segments, we expect heat to continue to be a long-term growth accelerator globally for total McCormick. We are uniquely positioned to win in heat with our global iconic brands, deep consumer insights and our meaningful scale, technology and expertise that we have been building for decades. As we look ahead, we are maintaining our outlook for 2024. Mike will share more of the details. At a high level, we continue to expect our top-line to be at the mid- to high-end of our guidance range given the momentum we saw in the first half of the year, particularly in our Consumer segment. We are confident in our initiatives and we have provided proof points of where they are working. That said, we also remain prudent and continue to reflect the uncertainty in the consumer environment in our outlook for 2024. To wrap up, let me reiterate three key points. The long-term trends that fuel our categories, consumer interest in healthy flavorful cooking, flavor exploration and trusted brands continues to be very strong, and importantly, consumer interest in cooking remains strong. We remain dedicated to accelerating our volume trends. We refine and adapt our plans as needed and are prioritizing our investments to drive impactful results and return to sustainable volume-led growth, and you should continue to expect improvement over the coming year and into 2025 and beyond. We believe the execution of our growth plans will be a win for consumers, customers, our categories and McCormick, which will continue to differentiate and strengthen our leadership. Now, before Mike's remarks, I'd like to speak to the management transition. As you likely know, last night we announced Mike's decision to retire at the end of February. Mike has been an exceptional leader at McCormick for more than three decades. His strategic leadership and focus on value creation have been instrumental in driving top-tier organic growth as well as our successful acquisition agenda. His deep knowledge of McCormick and effective execution of our CCI initiatives helped fuel our growth investments to deliver profitable growth. Mike is the embodiment of McCormick values and teamwork. He helped build a world-class global finance team. He will be missed by me and employees throughout the organization. Mike, congratulations on your successful career and your upcoming retirement. In the same announcement, Marcos Gabriel was named Executive Vice President and CFO effective December 1. Marcos will serve on our management committee and lead the company's finance organization and global business services team. Marcos is a proven global leader with over 25 years of experience in the consumer products industry. His expertise across major multinational companies in several geographies will be instrumental as we continue to execute our growth plans. I have worked with Marcos over the last seven years. He has served in key senior leadership roles at McCormick, contributing meaningfully to our profitable growth and improved productivity. Marcos, congratulation on this promotion and I look forward to working with you in this new role.

Mike Smith:

Thanks very much for those remarks, Marcos and Brendan. Joining McCormick more than 30 years ago was one of the best decisions I've ever made. This is a great company and it continues to get better. I am proud of the progress we have made over the years. We significantly grew our top-line, generated fuel for growth through improved productivity and continued to deliver solid results despite the complexity and uncertainty we experienced the last few years. I am so proud of and grateful for our entire team here at McCormick and appreciate all of their contributions and efforts. My decision to retire in February is based in part on Marcos' readiness to move into the role. I've had the privilege of working with him for several years and witnessed his strong financial leadership and ability to drive results. I'm confident that Marcos, in partnership with Brendan and the rest of our leadership team, have the capabilities and vision to continue to advance our leadership and differentiation and capture all the great opportunities that are ahead for McCormick. Lastly, I look forward to partnering with Brendan and Marcos to ensure a smooth transition over the next few months. Now moving to our results for the second quarter. Starting on Slide 11, our top-line constant currency sales declined 1% compared to the second quarter of last year, including the impact of the canning divestiture and reflects flat pricing, offset by a 1% volume and product mix decline. As expected, volume declines were primarily driven by lower customer demand and the timing of customer activities in the Flavor Solutions segment. In our Consumer segment, constant currency sales declined 1%, driven by pricing investments. Volumes were slightly positive and reflect a substantial sequential improvement from the first quarter. On Slide 12, Consumer sales in the Americas declined to 2% versus the second quarter of last year. This decline reflects pricing investments of 1% and flat volumes. Volume growth in spices and seasonings was offset by volume declines in prepared food categories, including frozen and Asian. In terms of pricing, we continue to take a surgical and data-driven approach to managing price gaps, and our investments are still expected to impact about 15% of our Americas Consumer segment. In EMEA, constant currency Consumer sales increased 4%, driven entirely by volume. Sales growth was broad based across product categories in our major markets. We are pleased with the volume growth we delivered in EMEA and expect the momentum to continue through in 2024. Constant currency Consumer sales in the APAC region were down 1%, driven by a 2% volume decrease, primarily due to the macro environment in China. Outside of China, we delivered volume-led growth in the mid-teens that was broad based across categories and markets. Turning to our Flavor Solutions segment in Slide 15, second quarter constant currency sales declined 1%, reflecting a 1% contribution from price, offset by a 2% decline in volume and the impact of the divestiture of the canning business. In the Americas, Flavor Solutions constant currency sales declined 1%, reflecting a 1% contribution from price, offset by a 2% decrease in volume, driven by the timing of customer activities as well as the softness in quick service restaurant and packaged food customer volumes. This was partially offset by volume growth in our Branded Foodservice business, as Brendan mentioned. In EMEA, constant currency sales decreased by 8%, including a 3% impact from the divestiture of the canning business, lower volume and product mix of 4%, reflecting the impact of QSR and packaged food customers' volumes and the timing of some customer activities. In the APAC region, Flavor Solutions sales grew 10% in constant currency. Volume grew 9%, driven by customers promotions, limited time offers and new products, while pricing contributed 1%. As seen on Slide 19, gross profit margin expanded by 60 basis points in the second quarter versus the year-ago period, driven primarily by the benefit of our Comprehensive Continuous Improvement program, or CCI. As we look ahead, we continue to expect higher margins in the second half compared to the first half of the year. Now, moving to Slide 20. Selling, general and administrative expenses, or SG&A, increased versus the second quarter of last year, driven by brand marketing investments, which were partially offset by CCI cost savings. As a percentage of net sales, SG&A increased 40 basis points. As expected, brand marketing increased significantly compared to the prior year. Our investments are yielding results and we can anticipate continuing to invest behind these efforts. Adjusted operating income was flat compared to the second quarter of 2023 with minimal impact from currency as gross margin expansion was offset by higher SG&A expenses. Adjusted operating income in the Consumer segment declined 3% or 2% in constant currency. While in Flavor Solutions, adjusted operating income increased 6% with minimal impact from currency. We remain committed to restoring Flavor Solutions profitability. And in the second quarter, as expected, we drove margin expansion versus prior year in this segment. Our performance this quarter reflects our commitment to increase our profit realization and positions us well to make continued investments in 2024 to fuel top-line growth. Turning to interest expense and income taxes on Slide 21. Our interest expense was up slightly versus the prior year. The reduction in average debt was more than offset by higher short-term interest rates. And touching on tax, our second quarter adjusted effective tax rate was 13.6% compared to 22.3% in the year-ago period. Both periods were favorably impacted by discrete tax items with a more significant benefit this year. Our second quarter adjusted rate benefited from a discrete tax item, primarily due to the recognition of a deferred tax asset related to an international legal entity reorganization. We continue to expect our tax rate to be approximately 22% for the year. Our income from unconsolidated operations in the second quarter reflect strong performance in our largest joint venture, McCormick de Mexico. We remain the market leader with our McCormick brand of mayonnaise, marmalade and mustard product lines in Mexico, and the business continues to contribute meaningfully to our net income and operating cash flow results. At the bottom-line, as shown on Slide 23, second quarter 2024 adjusted earnings per share was $0.69 as compared to $0.60 for the year-ago period. The increase was primarily due to the discrete tax benefit and higher income from unconsolidated operations I just mentioned. On Slide 24, we've summarized highlights for cash flow and the quarter-end balance sheet. Through the first half of 2024, our cash flow from operations was $302 million compared to $394 million in 2023. This decline was primarily driven by increased incentive compensation payments and the timing of cash tax payments. We returned $226 million of cash to our shareholders through dividends and used $130 million for capital expenditures. As a reminder, capital expenditures include projects to increase capacity and capabilities to meet growing demand, advance our digital transformation and optimize our cost structure. Our priority remains 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. Importantly, we remain committed to a strong investment-grade rating and continue to expect 2024 to be another year of strong cash flow, driven by profit and working capital initiatives. Now, turning to our 2024 financial outlook on Slide 25. Our outlook continues to reflect our prioritized investments in key categories to strengthen volume trends and drive long-term sustainable growth, while appreciating the uncertainty of the consumer environment. Turning to the details. First, currency rates are expected to unfavorably impact sales, adjusted operating income and adjusted earnings per share by approximately 1%. At the top-line, we continue to expect constant currency net sales to range between a decline of 1% to growth of 1%. Given the momentum in our first half, we expect to be at the mid- to high-end of our guidance range. In terms of pricing, we expect the favorable impact related to the wrap of last year's pricing actions, realized primarily in the first quarter to be partially offset by our price gap management investments that will drive volume growth. As we look to the second half of the year, we expect total pricing to be flat relative to the prior year and segment trends are expected to be similar to the second quarter. We expect to drive improved volume trends as the year progresses through the strength of our brands and the intentional and targeted investments we are making. As we noted, our initiatives will take time to materialize and we continue to expect to return to total volume growth during the second half of the year, absent any new macroeconomic headwinds. We expect to continue to prune lower-margin business throughout the year as we optimize our portfolio. The impact of which will be reflected within the natural fluctuation of sales. In China, our food-away-from-home business, which is included in APAC Consumer, was impacted by slower demand in the first half of the year. And we continue to expect China Consumer sales to be flat to 2023 for the full year. While we recognize there has been volatility in demand in China, we continue to believe in that long-term growth trajectory of the China business. Finally, the divestiture of the Giotti canning business will impact us through the third quarter. Our 2024 gross margin is projected to range between 50 basis points to 100 basis points higher than 2023. This gross margin expansion reflects favorable impacts from pricing, product mix and cost savings from our CCI and GOE programs, partially offset by the anticipated impact of low-single digit increases in cost inflation and our increased investments. Additionally, we expect to begin reducing our dual running costs related to our transition to the new Flavor Solutions facility in the UK in the back half of the year. Moving to adjusted operating income, we expect 4% to 6% constant currency growth. This growth is projected to be driven by our gross margin expansion as well as SG&A cost savings from our CCI and GOE programs, partially offset by investments to drive volume growth, including brand marketing. We expect our brand marketing spend to increase high-single digits in 2024, reflecting a double-digit increase in investments, partially offset by CCI savings. And we continue to expect our increased investments in brand marketing be concentrated in the first half of the year. Our 2024 adjusted effective income tax rate projection of approximately 22% is based upon our estimated mix of earnings by geography as well as factoring in discrete items. We expect a mid-teens increase in our income from unconsolidated operations, reflecting the strong performance we anticipate in McCormick de Mexico. To summarize, our 2024 adjusted earnings per share projection of $2.80 to $2.85 reflects a 4% to 6% increase compared to 2023. As Brendan noted, we continue to prioritize our investments to drive impactful results and return to differentiated and sustainable volume-led growth. We are moving in the right direction and we remain confident in the underlying fundamentals of our business and delivering on our 2024 financial outlook and long-term objectives over time.

Operator:

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your questions.

Mike Smith:

Thank you, Andrew. We'll see you at Investor Day.

Andrew Lazar:

Thanks. I guess first off, looking at the sequential improvement in volume in the Consumer segment, particularly in the Americas, certainly seems like the investments are starting to yield results. I was hoping maybe you could unpack that for us a bit and speak to the levers that are driving the performance, and what gives you the confidence that that will continue through the back half?

Andrew Lazar:

Great. Thanks for that. And a quick follow-up. Mike, you had called out some weakness in Flavor Solutions volume several weeks ago. The result today, I guess, was at the sort of more favorable end of that range you provided in terms of Flavor Solutions volume in the quarter. And I guess, I'm just trying to get a sense of sort of what the exit rate of sort of volume in Flavor Solutions in the Americas and Europe sort of looked like kind of coming out of fiscal 2Q? Just to get a sense if maybe it sort of weakened from what we saw in the 2Q result or maybe if we can expect some sequential improvement in the US and Europe as we move further into fiscal 3Q? Thank you so much.

Andrew Lazar:

Thank you.

Peter Galbo:

Hey, guys. Good morning.

Peter Galbo:

Congrats, Mike, on your retirement, and congrats to Marcos as well. Maybe just to pick up on Andrew's question just around kind of consumer confidence in the back half of the year, and that acceleration, Brendan, I think in your prepared remarks, you mentioned a bit more -- you're seeing consumer shopping the perimeter of the store relative to center store and maybe that explains why you might be bucking the trend relative to some of your peers. But maybe you could just unpack that a bit more what you're seeing from that consumer perspective and again what kind of drives the confidence as you get into the back half?

Peter Galbo:

Got it. And Mike, I think, depending on whether you look at the IRI or -- sorry, the Circana or the Nielsen data, there was maybe a gap just in Americas consumer relative to the -- I think you gave some of the factors, but just anything you can dimension there on kind of the gap in terms of shift to consumption of that?

Peter Galbo:

Great. Thanks very much guys.

Ken Goldman:

Hi, thank you. And Mike and Marcos, congratulations to both of you. And Mike, thank you for all of your help over the years. I know you're not done yet, but it's appreciated. I wanted to ask a little bit about -- you have a pretty confident tone, I think it's fair to say, about the direction of trends into the second half. You beat this quarter on the bottom-line by a decent amount. You beat the first quarter by a decent amount. It sounds like you're implicitly -- well, you are implicitly guiding for the tax rate to be closer to 24% in the second half roughly. I guess putting that all together, were there any thoughts of raising guidance? I realize it's a pretty unpredictable environment right now, but I just want to get a little bit of sense for how you view the second half in terms of -- I'll use the word prudence in relation to just how well the first half performed at least versus external expectations?

Mike Smith:

You want to get it?

Mike Smith:

Yeah.

Mike Smith:

As we think about where we are on the life cycle of the year, and we talked about Q2 being an important quarter for us, because it was the pivot quarter where pricing is -- we lose some of the protection of pricing, which we saw in the first quarter and last year, the shift of volume and particularly what makes us happy is that consumer volume going positive, which is great. There's some back-half assumptions on volume growth in Consumer, which were very -- we know the programs are working, but you still have to assume that the second half of the year is the biggest half and biggest quarter is the fourth quarter. So, while we're really pleased with the results, we realized the second half is important to continue that momentum and we believe we will. We're always looking at the guidance. I mean, you referenced tax, I'm kind of chuckling, because I think my first earnings call, we probably I think we had a big tax adjustment as similar and we talked about guidance for the year versus these things happen lumpily in the quarter or half. So, I'll take that one right off, 24% in the second half because our underlying rate is 24% to 25%, so that's roughly what we'll probably land. I mean, we do have the second half, if you think about built-in operating margin growth, we have volume growth, things like that. So, we feel like we've called it prudently. Obviously, if there's opportunities as things change, we want to keep our financial flexibility to make investments in some of these growth drivers that we're really seeing positive on. So, we want to have that flexibility, too. But I think we're really pleased going into the third quarter. We talked a bit about some of the consumer uncertainty, which impacts some of our Flavor Solutions business. We're always cautious there too, but I'd say we've called it pretty much down the middle with hopefully a lean in to the positive.

Operator:

Our next question is from the line of Alexia Howard with Bernstein. Please proceed with your question.

Brendan Foley:

Alexia, thanks for the question. Good morning. I think as you think about the core of your question is that long-term outlook as you think about our customer space and portfolio of Flavor Solutions, I would go back to things that we've said in prior discussions. If we think about the Flavor Solutions business is constantly in activity of continuing to shape that portfolio to higher value-added products and technologies and customer base. So, as we continue to shape that portfolio, it continues to go in the direction of sort of our flavors business, which includes seasonings as we think about our portfolio. And in many ways, some of the fastest-growing areas of that portfolio happened to be the small, highly-innovative, emerging customers that are operating in categories that like performance nutrition or non-alcoholic beverages, where like this quarter, we continue to see real strength. That is a form of looking at how we diversify our customer base, but we're also operating where we think there are strong areas of growth. And these this really I think is kind of the central point that we've talked about is, we'll continue to shape that part of our -- the Flavor Solutions segment and that portfolio to that higher value-added sort of product and technology sale that we have. And this is, I think, what you see quarter-to-quarter is a reflection of that.

Alexia Howard:

Great. Thank you very much. Could I just do a quick follow-up on the highlights of the remaining cost saving opportunities? You talked a little bit about getting rid of costs that were incremental through COVID. What are the major buckets of cost savings remaining to you over the next couple of years?

Alexia Howard:

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

Steve Powers:

Hey, guys. Good morning. And Mike and Marcos, congrats from me as well. So, Brendan, I wanted to talk a little bit about the price gap management initiatives you've put in place in Consumer. With the commentary on year-over-year pricing in the back half expected to resemble what we've seen in the second quarter, it doesn't sound like you expect a whole lot more of incremental unit price investment over the course of the year. And I guess just wanted to kind of test that assumption. And then, in the context of what you were saying around just the value seeking behavior and the consumer financial pressures that you're observing across the consumer landscape, just what gives you the confidence that that kind of -- you've kind of done enough at this point and you've got in place what you need for the duration of the year? Thank you.

Steve Powers:

Yes. I appreciate that. Thank you very much. And if I could maybe pivot, Mike, a question on gross margin. I apologize if you already provided some commentary here, but indulge me anyway. Through the first half of the year, you're trending towards the upper end of that gross margin expansion range. And I guess just as I extrapolate to the back half, is it fair to assume that you're comfortable with the upper half of the range at least for the full year? Or is -- are we open to more volatility in the back half, where that the full range is kind of in play?

Steve Powers:

Yeah. Okay. Fair enough. Thank you.

Steve Powers:

Understood. Okay. Appreciate it. Thank you very much.

Adam Samuelson:

Yes. Thank you. Good morning, everyone.

Mike Smith:

Good morning.

Mike Smith:

Yeah.

Mike Smith:

Yeah, I'll start. I mean, at the end of the day, the net sales guidance we gave for pricing and the results of what we showed, again, you have for the Consumer business for the second quarter was down a little under 1%, which we continue to see that in the second half. So that would suggest that the pricing actions we said we were going to do, the surgical pricing actions on a limited part of the portfolio, that's what shown up through net sales. Now what happens when that gets to shelf, that's a whole another story. And in addition to the things that we're doing on some of those items, there's other retailer actions that are happening too. Because as Brendan said before, this is a category -- our categories are growing. That's where people want to shop in more of the perimeter of the store. They're wanting to use products like ours to flavor these -- and manage cost inflation across protein and things like that. So, the retailers also are contributing to some of these things. We might not -- it might not be our price adjustments on items, that maybe other ones that they're seeing and operating in their stores too. So, I think there's a combination of factors that maybe skewing a little bit of the data you're seeing versus our internal kind of what we're actually reporting on these calls.

Adam Samuelson:

All right. That's helpful color. If I just ask a clarifying question just on guidance? On the JV on Mexico, if I look at the guidance, it would seem like you've already achieved for the full year the equivalent of mid-teens profit growth on income from the Mexican JV. And I just -- make sure I'm understanding, is there expectations of profit declines in the back half or -- because otherwise you're going to be well above mid-teens profit growth on that line...

Adam Samuelson:

Okay. All right. That's helpful. I'll pass it on. Thank you.

Tom Palmer:

Good morning. Mike and Marcos, congratulations to you both. I wanted to clarify just on the expected volume recovery in the back half of the year in Flavor Solutions. Are you assuming that industry trends get better or this is really McCormick-specific initiatives or maybe it's a combo? I just want to clarify that.

Tom Palmer:

Okay. Thanks for that. No, I was just trying to reconcile some of the foodservice weakness with the positive tone. And so that was helpful. Thank you.

Tom Palmer:

No, that was very helpful. Thank you. Just on the expected margin improvements in Flavor Solutions, should we be thinking about continued sequential improvement in margin as the year plays out and some of these cost initiatives take hold?

Tom Palmer:

Thank you.

Rob Dickerson:

Great. Thanks so much. I think I always get the final question with McCormick. Just, I guess, kind of a broader question around frozen, Asian that you commented, it seems like consumers are shopping at the perimeter of the store a little bit, understand kind of the desire to kind of cook at home still. Maybe there's some value seeking in there. But I'm just curious like if you step back and you think about that consumer behavior on the perimeter and on the spice and seasoning side relative to kind of what you've seen in frozen and Asian, maybe you could just provide a little bit more color as to how you're thinking about kind of that relative performance of those two areas and maybe why parts are frozen and Asian specifically aren't performing as well as maybe they have in past economic cycle? Thanks.

Rob Dickerson:

Yeah. No, that was very helpful. Thank you. And then, Mike, first, congratulations, [indiscernible]. I think there was a comment you made, Mike, in the prepared remarks where you said that there might be similar segment trends expected as you get to the back half relative to Q2. And I may have missed that, but I just wanted to clarify because clearly everything else we've been talking about in Q&A suggests that things should get better. So, just want to understand what you're...

Rob Dickerson:

Okay. Got it. That's all.

Rob Dickerson:

Yeah. No, right. I get it. Appreciate it. Thank you.

Faten Freiha:

Thank you. And thanks everybody for joining today's call. If you have any further questions on the information we shared today, please feel to contact me. And this concludes this morning's conference call. Thank you.

Brendan Foley:

Good morning, everyone, and thank you for joining us. As many of you have probably seen on the news this morning, the Francis Scott Key Bridge collapsed in Baltimore. Our thoughts go out to everyone impacted by this terrible tragedy. We have activated a team and are monitoring the situation. We are pleased to start the year with a strong first quarter. Our performance reflects the early success of our prioritized investments to improve volume trends and drive profitable growth. I will begin my remarks this morning with an overview of our first quarter results, focusing on top-line drivers. Next, I will provide perspective on industry trends, highlight some early signposts of success, as well as areas we continue to work on and review our growth plans. Mike will then go into more depth on the first quarter financial results and review our 2024 outlook, and finally, before your questions, I will have some closing comments. Turning now to our results on slide four. In the first quarter, sales grew 2% in constant currency, reflecting a 3% contribution from pricing, partially offset by a 1% decline in volume and product mix, primarily driven by the pruning of low-margin business and our canning business divestiture. Underlying volume was flat compared to the prior year. Sequentially from the fourth quarter, volume trends improved in both Consumer and Flavor Solutions. We believe this improvement is an indication of continued progress as we remain focused on driving quality top-line growth throughout our portfolio. In Consumer, volumes improved substantially from the fourth quarter in the Americas. In EMEA, we drove positive volume growth while continuing to benefit from pricing actions. In Asia Pacific, volume performance was impacted by the macro environment in China, as we expected. We continue to expect full year 2024 China Consumer sales to be comparable to 2023. Outside of China, we delivered strong sales growth driven by both price and volume. In Flavor Solutions, our results were solid and growth was driven by price and underlying volume growth, partially offset by the impact of our canning divestiture. We are pleased with our performance recognizing many of our customers, including Consumer Product Companies or CPGs and Quick Service Restaurants or QSRs, continue to experience volume softness in their businesses. We are continuing to collaborate with our customers to navigate this challenging environment and we remain optimistic about our growth for the year. It's worth noting that volume trends and Flavor Solutions typically fluctuate from quarter-to-quarter, largely attributable to customer activity, including new product launches, limited time offers, and their other promotional activity. As we said at the CAGNY conference, McCormick is a growth company, and 2024 is an important investment year to return to our long-term objectives. Our results demonstrate the early impact of investments we have made to fuel our top-line and further capitalize on the underlying growth of our categories. We have a robust set of initiatives and continue to expect share gains in units to lead our trends and our results will build throughout 2024. Let me share some of our perspectives on industry trends. We are in a unique position with our portfolio's breadth and reach in both Consumer and Flavor Solutions. Our shared insights give us a very strong understanding of consumers flavor needs, preferences, behaviors, and trends. Consumers remain challenged. Two years of steep inflation has had an impact and many are exhibiting value seeking behavior. While food inflation is slowing, its compounded impact is still being felt by consumers. Budgets are stretched, resulting in choiceful spending decisions, a trend that is continuing from the fourth quarter. In the first quarter, with higher inflation in the food service channel and slowing retail food prices, we broadly saw a shift from food away-from-home to food-at-home consumption in our major markets. We are also seeing improvement in center store categories and some softness in restaurant traffic across all regions. As we said, the current state of the consumer is not defined by any one trend, it remains dynamic, and we are responding with speed and agility. I am encouraged by the early success of our key initiatives. We have the right plans in place that are continually influenced by what matters most to our consumers and customers, and fit within our strategic priorities. Moving to slide five, let me highlight for the quarter some of the key signposts of our success that demonstrate we have the right plans in place. Starting with spices and seasonings. In Americas, EMEA and Asia Pacific, excluding China, we grew volumes. In the U.S., our unit share performance continues to improve and we drove dollar share gains in Eastern Europe. In recipe mixes, we strengthened our performance with volume growth in the Americas, reversing the trends from the fourth quarter. Recipe mixes were a significant driver of U.K. volume growth and homemade desserts were also a substantial driver of France's volume growth. In both, we realized both unit and dollar market share gains. Volume growth in our Flavors business is strong across key categories, including outpacing the category in alcoholic beverages and performance nutrition. Finally, we grew volume in branded foodservice and realized market share gains in spices and seasonings and on Tabletop in hot sauces. Before I get into our growth plans, let me touch on some areas where there is some pressure. We continue to experience volume declines in the prepared food categories that we participate in, like Frozen and Asian. In Americas Consumer, importantly, these items represent a small part of our portfolio and the improved volume trends in our core categories is beginning to offset these declines. For mustard in Americas Consumer, as we discussed in our last earnings call, we continue to experience extremely low price points for private label, which is impacting our consumption and driving down category dollars. While performance in mustard improved relative to the fourth quarter, we still have work ahead of us. We plan to drive further volume improvement by narrowing price gaps and increasing promotions, new products, including Creamy Dill Pickle, and importantly through recent distribution wins. Moving to hot sauce, in Americas Consumer of consumption, volume trends improved from the fourth quarter, particularly coinciding with our successful Super Bowl activation campaign. Reflecting on our first quarter performance, it highlights two dynamics. First, we have underlying strength in our base business and strong consumer loyalty. Our growth plans remain consistent, fueling growth through increasing both Cholula and Frank's RedHot brand marketing, with Frank's activated year-round for the first time, as well as exciting innovation aligned with consumer trends and expanding distribution. Second, recently we have seen a surge in $1 price point trial sizes from new and existing small players, which is incremental to the category and is pressuring our share performance. We remain the leader in this attractive, fragmented and growing category. New buyers present a great opportunity to win new households using our growth levers, as well as our scale and capabilities. In Flavors, our growth with Quick Serve Restaurants and Flavor Solutions was impacted by slower QSR traffic in EMEA and Asia Pacific. Finally, some of our consumer packaged food customers continue to experience softness in volumes within their own business, in both Americas and EMEA. We are focused on working with our customers to support their innovation plans and continue to diversify our customer base over time. Before I talk through our growth plans in detail, let me touch on spices and seasonings. At a global level, we are pleased with the growth and consumption we delivered in the quarter. Specifically looking at U.S. spices and seasonings, we are driving significant improvements. Our new packaging continues to increase velocity on shelf, and we are recapturing distribution points, and our sequential improvement led to positive unit share gains at the end of the quarter. In addition, our growth is supported by our increased brand marketing and new products. Lastly, we expect to largely start seeing the impact of our actions in our results during the second half of the year, following most of our customers shelf resets at the end of the second quarter. Let's now move to our growth plans on slide six, which are leading our strong first quarter performance and will continue to drive our success in 2024 and beyond. Brand marketing, new products, and packaging innovation, category management, proprietary technologies, and customer engagement continue to be the initiatives behind our growth levers. Starting with brand marketing, our plans across all categories are supported by our global brand marketing initiatives. We are prioritizing investments to connect with consumers and fuel growth. Our differentiated brand marketing is driven by a combination of factors. In addition to maintaining a high share of voice, we are committed to having the best content in our categories. Content that inspires and educates consumers and reaches them at the right points on their path to purchase and their flavor journey. From flavor exploration and menu planning, to shopping and cooking, and even to eating and sharing the experience online. In Q1, brand marketing spend was up significantly compared to the prior year as expected. This increase was broad-based across all regions and was an important driver in improving volumes. Through our efforts across multiple channels, particularly in retail media, we are driving further household penetration and increasing buy rates across spices and seasonings, recipe mixes, and condiments. Our holiday campaigns across our regions proved successful. Our marketing campaigns in the Americas highlight our everyday value and point-of-difference to consumers and are supporting our improved volume trends and share improvement. Our Frank Super Bowl activation campaign with Jason Kelce, now a retired NFL player, was very successful. We gained new buyers and media and consumer sentiment, as well as engagement from other big brands, was incredibly positive. We continue to benefit from new products and packaging. It is one of the primary drivers of our growth and as we said at CAGNY, the performance of our launches continues to improve. We are continuing to realize growth from our 2023 launches. For example, our Cholula sauces and recipe mixes are driving new buyers to the category and are exceeding our expectations since launch, and we continue to build U.S. distribution and are also launching both formats in Canada this year. The rollout of our U.S. Everyday Herbs & Spices portfolio is on plan and expected to be fully shifted by the end of the second quarter. Our Nadiya Hussain range of Schwartz seasonings and recipe mixes continue to drive our innovation performance and expand household penetration with younger consumers. As we look ahead to the rest of the year, with our renovated recipe mixes, we have opportunities to win more dinner occasions with new global cuisine seasonings in both Americas and the AMEA and reshaping the portfolio by shifting offerings to meet consumers growing preference for non-red meat proteins. In Seasoning Blend, an exciting growth opportunity we mentioned at CAGNY, we are launching new Lawry's, seasoning blends in large sizes, which offer a value price point to consumers. And we are really excited about the Frank's RedHot dips and popular flavors in a squeeze bottle format we just launched and are looking forward to another campaign featuring Jason Kelce. In Flavor Solutions, we are leveraging our proprietary technologies to support our innovation in flavors, to win new customers, diversifying our customer base, and drive share gains across our portfolio. Our momentum with our flavors customers continues to be strong and fuel our new product pipeline. We are collaborating with many of our customers to heat up their products from snacking to beverages. Our heat-brief win rates are strong across our regions. We continue to dedicate resources where we have the right to win. In Branded Food Service, we have a strong innovation agenda, including launching a Cattlemen's Hawaiian Barbecue flavor, expanding our Seasonings portfolio with Ducros line extensions, and extending McCormick Mayonesa, which has had great performance in our consumer segment into this channel. Let's turn to category management, where I'd like to review our revenue management efforts and expanding distribution. First, revenue management remains a capability and we have a history of optimizing pricing on shelf to benefit both McCormick and the retailer. We continue to take a surgical approach to managing our price gaps to private label and branded competitors. Our price investments are primarily focused in Americas consumer, where they impact about 15% of our portfolio in that segment. Revenue management will continue to be an important tool for driving growth, and we will consistently leverage real-time analytics and insights to refine our plans. In terms of expanding distribution, we continue to make progress on restoring a majority of the distribution that was lost due to supply issues. We have secured winds and new distribution. To further strengthen our value proposition in EMEA, we have grown distribution in the fast growing discount channel, and in the U.S., our Lawry's opening price point is expanding across the stores of a leading discounter. And in China, we are expanding in small format stores, which have grown rapidly in recent years, as well as into third and fourth-tier cities. We are meeting the consumer where they live and shop. Let me briefly mention our heat platform. As you heard in my remarks, heat-infused products span our portfolio and are driving growth. We expect heat to continue to be a long-term growth accelerator globally for McCormick. Consumers, particularly younger generations, continue to drive demand in this flavor profile. We are uniquely positioned to win in heat with our global iconic brands and our meaningful scale and expertise that we have been building for decades. To wrap up, we believe the execution of our growth plans will be a win for consumers, customers, our categories, and McCormick, which will differentiate and strengthen our leadership. As we look ahead to 2024, we are maintaining our outlook. Mike will share more of the details. At a high level, we expect our top-line to be at the mid to high-end of our guidance range, given the momentum we saw in the first quarter. We are confident in our initiatives and we have provided proof points of where they are working. That said, we also continue to reflect on the uncertainty in the consumer environment in our outlook for 2024. Before I pass the call to Mike, let me reiterate a few points. We are deliberately focused on attractive, high-growth categories across both segments, resulting in a significant long-term tailwind to drive profitable growth. That said, it is crucial that we continue to capitalize on this position of strength. The long-term trends that fuel our categories, consumer interest in healthy, flavorful cooking, flavorful exploration, and trusted brands continue to be very strong. And, importantly, consumer enjoyment in cooking is growing. We remain dedicated to improving volumes. We continue to refine our plans and are prioritizing our investments to drive impactful results and return to differentiated and sustainable volume-led growth. And, you should continue to expect improvement over the coming year and into 2025 and beyond. Now, over to Mike.

Brendan Foley :

Thank you, Mike. Before moving to Q&A, I would like to close with our key takeaway on slide 23. First quarter results in our volume trajectory demonstrate that we are making the right investments to drive long-term sustainable organic growth and reinforces our confidence. We are executing on proven strategies and investing behind our business with speed and agility and in alignment to consumer behavior, and capitalizing on our advantage categories across segments. We are able to do this and continue to make great progress on managing costs, led by our GOE and CCI programs, to support our increased investments in the business and drive margin expansion. Our performance for the quarter, coupled with our growth plans, give us confidence in achieving the mid-to-high end of our projected constant currency sales growth for 2024. Finally, I want to recognize McCormick employees around the world for their contributions and reiterate my confidence that together we will drive the profitable growth reflected in our 2024 outlook. Now, for your questions.

Andrew Lazar :

Great, thanks. Good morning, Brendan and Mike.

Andrew Lazar :

Maybe to start off, your first quarter organic sales obviously came in better than I think the Street had forecast and sounds like maybe better than you might have initially expected, but of course, it's a seasonally smaller quarter for McCormick as well. And while you did confirm the full year sales growth range, obviously it was notable in your comments about having increased confidence and achieving the mid-to-high end of your constant currency sales growth range for the full year. So I was hoping maybe you could give us a sense of some of the specifics of what gives you that greater confidence now than when you first gave guidance last quarter?

Andrew Lazar :

Great. Then, I know volumes, specifically in Consumer Americas, I think were down about 6% in the fourth quarter last year, and as you noted, down a much more modest, sort of less than 3% in the first quarter. Would you expect Consumer Americas volume to sort of continue to improve sequentially from here? And again, in that segment, that it could inflect a positive during the second half of the year? Or are some of the headwinds you pointed out that still exist in Consumer Americas still more of a challenge to that?

Mike Smith:

I think – to think about too, this is not just about Americas Consumer. I mean, we're building volume globally in the consumer side, and a lot of the same brand building activities, such as increased A&P, we talked about this in the call, is in all regions. So we continue to support those brands globally in each of our regions, not just Americas.

Operator:

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

Brendan Foley:

Sure.

Mike Smith:

Peter, thanks for your question on that. On an apples-to-apples basis, our consumption is roughly in line with our sales and we are shipping to consumption. What's probably driving the U.S. consumption, lagging on Americas consumer sales is we had good growth in Latin America and Canada and that contributed to our total growth. But we also delivered growth in unmeasured, excluding that DSD business exit that we talked about. So we do expect and continue the alignment between consumption and shipments moving forward. We don't really believe that there's any sort of inventory movement that we can call out at this point in time. But it's also important to call out that in that unmeasured growth was primarily driven by e-commerce. It represents this globally for us, about 10% of our total consumer sales, and so that's pretty healthy and positive. But we've seen double digit growth in all of 2023 in e-commerce and did again in Q1. So we continue to believe that e-commerce is a growth channel, and we do continue to put resources up against it. But coming back to sort of the top of your question on the influences on measured channels, I would probably think about that as one thing to consider and think about. But largely, we really believe that our shipments and consumption are broadly in line with.

Brendan Foley:

Sure. I'll make a couple of comments here, and Mike might have some things to add. We are not thinking about China any differently than what we said last quarter. It largely met our expectations for the first quarter, both from a consumer segment perspective and a flavor solution segment perspective. And we continue to expect that for total 2024, China Consumer sales to be comparable to 2023. Broadly our outlook for the Chinese consumer does remain cautious. I mean, there are several reasons to continue to think that way, persisting unemployment with young adults, reduced consumer confidence. Consumers are still somewhat reluctant to spend. In our business, and that falls into our consumer segment, is sales to smaller independent restaurants and they are losing some traffic to the larger QSR chains. That might be where you're hearing us say two different things. So off of that is some perspective around that. Yet, like we do with other regions, we have plans in flight to address how we're looking at China and the changing trends of Chinese consumers. We do expect our Flavor Solutions business to be stronger in 2024, just based on the trends that we're seeing. So, that's I think, some of the perspective. Mike, do you want to add anything?

Peter Galbo :

Great. Thanks, guys.

Max Gumport :

Hey, thanks for the question.

Max Gumport :

The last quarter you talked about making, good progress on restoring distribution that was lost to past supply issues. And it sounded like you're reiterating that commentary and that you still have line of sight to making some good progress on getting that distribution back following customer resets the middle of this year. I was just curious if you could give us a bit more color on some of the updated insights you've gotten over the past couple of months since we last heard from you on what you are seeing, what you are hearing with regard to customer wins in U.S. spices and seasoning. Thanks.

Max Gumport :

Great. And then one more on Flavor Solutions. So, it's nice to see the positive volume growth to start the year. It was a bit earlier than we all expected, at least from RC. I know you called out that this segment can have fluctuations, whether it's due to limited time offerings or promotional timing, new product launches, what have you. With that comment, are there any things you know about right now that would make you think we could see some step back in Q2? Or is it more just trying to let us know that this is a segment that is more volatile and there's potentially reason to think that we could see a dip back to flatter performance in Q2? I'll leave it there. Thanks.

Max Gumport :

Thanks very much.

Adam Samuelson :

Yes, thank you. Good morning, everyone.

Adam Samuelson :

So I guess, I wanted to dig in a little more on the Americas Consumer business and just maybe provide a little more context, Brendan, Mike, on the point on spices and seasonings and the unit share kind of improvement. Just is that was that coming through faster than you expected? Is that tracking as you thought and just retail sales broadly in January in particular accelerated for the for the whole industry? A little bit of weather and some of that channel shift that you alluded to seems like it’s gone back to the same similar trend through February. Was that – do you think you've held that unit share through existing the quarter through February or was there some bigger uplift towards the end of the quarter there?

Adam Samuelson :

Okay, that's helpful. And then maybe just to follow up from Mike, just the comments on the second quarter and the gross margin that will be up modestly year-over-year. I guess I'm just trying to make sense of from a – should we be thinking about SG&A percent of sales similar to the first quarter? It doesn't seem like your top line, maybe a little bit of setback in Flavor Solutions sequentially in terms of the top line. But it doesn't seem like you're talking about a big setback probably in terms of the overall company sales. I know last year was a tougher comp on price cost, but I guess I'm trying to just make sure I understand why it would seem like the profit growth, if not the profit dollars themselves are decelerating.

Adam Samuelson :

The color is appreciated. I'll pass it on. Thank you.

Robert Moskow:

Hi. Just a couple of follow-ups. Thanks. Can you remind us again what percent of the portfolio in the U.S. are you executing this price gap strategy? I think you said it's 50%? And maybe a little more color on what segments you're working on right now and what you're learning from that. Secondarily, I think you mentioned some dollar trial sizes in hot sauces. I haven't seen that. Can you explain a little bit why you think that's incremental to the category? Is your competition doing it? And if so, are they gaining any share as a result, or is it really just helping everybody? Thanks.

Robert Moskow:

15%

Robert Moskow:

I thought you maybe said 50%, and it's 15%.

Robert Moskow :

Okay, I got it. And just to follow up on the 15%, as you make it through the year, just optically we see market share data that still doesn't look like it's where you want it to be from $1 basis in spices and seasonings. Is it possible that the other 85% of the portfolio might also need to be addressed in terms of price gaps? Or are you comfortable that you don't need to take any action there?

Robert Moskow :

Got it. Okay. Thank you.

Matthew Smith :

Hi. Good morning. I wanted to ask a follow-up question on that targeted price gap management in the U.S. consumer spices and seasonings business, particularly in terms of phasing as you've built up or are you targeting 15% of the portfolio, meaning was it more targeted in the fourth quarter? You made some progress against the 15% that you're targeting in the first quarter, and there's still some more to go in these categories where you see the opportunity to use your price gap management tools to improve share. Should we expect that to continue to build into the second quarter?

Mike Smith:

No, and Matt, good question. And just as I said in the script, the second quarter is a bit of pressure because it does more activation in the second quarter. So, you're right, a little bit in the fourth, more in the first. Second quarter is when it's really almost fully activated quite nicely so. But, again, these are investments that drive that volume growth building throughout the year, which we – the early results of the fourth and first quarter investments have been very positive, combined with the A&P and things like Brendan just mentioned, so that holistic program.

Brendan Foley:

So, I'll speak first to mustard. We just, again, readdressed sort of the context and the background on this. We definitely are seeing sort of a lot of low price points in private label, fairly low, which impacted our consumption, and it's driving down the category dollars, but importantly, it's impacting, our trajectory on consumption. So, we do plan to improve those trends in 2024. Largely, I think we're going to look at increasing promotional programs. We have a big grilling season, quite excited, actually, about the grilling season coming up. Mustards a big part of that as are a number of items within our portfolio. That plus, just making sure we are at the right price points, I think, across that business. We're also strengthening distribution, too, which will strengthen trends on top of that. So, that's a perspective on mustard. It will continue to get better, but as we were talking about in the fourth quarter, I don't know that we saw – what we saw in the first quarter was, contrary to what we were expecting as we start to implement those plans, particularly as we get to the grilling season. On the prepared foods category that we spoke to, we're riding the trends right now in the marketplace, and I think that's what you would expect to see us – how we would see us perform. It's a smaller part of our portfolio. We would not kind of call it this part of that core, and so we are really, I think, just watching the trends, making sure we follow what's going on in the category, and we're treating it much like in that manner.

Matthew Smith:

Thank you for that. I can pass it on.

Tom Palmer :

Good morning, and thanks for the question. I wanted to ask on just the shelf resets coming later in the second quarter. Is this incremental from a shelf space standpoint? I mean, is there going to be, depending on how the timing goes, the potential for some favorable shipment timing as we think about the second quarter? I would assume that's not factored into your outlook. I just want to understand kind of the moving parts there, and also kind of if that's the key driver of this expanded shelf set. Thanks.

Mike Smith:

I think, Thomas, maybe as your saying, I think you are kind of focusing on the shelf renovation with the new bottles. That's been rolling out from the end of last year into this year, and that's really not a big shipment, that's what we're replacing. It's kind of going – it's not a big reset. It's the same size bottle basically. It fits on a roll bin, so we're just kind of filling the pipeline with that. So you're not going to see a big spike. Now, you will see better velocity and things like that, which is why we did it, and that will build throughout the year. Some of the resets we talked about with winning new business on other categories, those shelf sets happen sometime in the second quarter and will benefit us in the second half. So there's kind of two different thoughts there as you think about it. And welcome to the call. It's your first call with us, Thomas.

Operator:

Thank you. Our final question this morning comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Mike Smith:

Well, Rob, I think there's possibly two different questions there. I'll make an attempt at what I think you are getting at, which is what we're seeing in our business, and we read our business through Circana, and that's a much broader, more refined view of our categories, and so we are reflecting that kind of data in our performance as we talk about it. Compared to what Nielsen might be reporting, I think traditionally over time we've seen differences in that reporting. We don't really reconcile that on the call or do anything of that nature, but there have been at times a difference in what Nielsen might be reporting in terms of how they are capturing the category versus the more refined, higher level, broader view as we look at spices and seasonings in our category. So that might address part of your question. Now, the other half of that could be, it's about unmeasured channels, etc., and I would go back to the comments that I made earlier that we largely see everything pretty much being in line between shipments and consumption. We are getting a lot of strong growth in e-commerce, as I called out earlier in the call. So that certainly is something that could create a difference in the numbers and the metrics, and obviously good performance in Canada and Latin America. I'm going to pause to see if maybe we thoughtfully addressed, I think.

Brendan Foley:

No, our McMex’s [ph] joint venture had a great first quarter. I mean it's comping against a weaker first quarter too, so there's some of that in there. It's a little bit too early to call it the year. Just like here, there's the economy in Mexico. There's a lot of price volume things that are going through also as they've managed the year. So again, strong underlying business and we’re really happy with it, but yes, we're hoping the rest of the year is just as strong as the first quarter, but it's a little bit too early to call on that one.

Brendan Foley:

I'm glad you asked that question, because we don't get a lot. I mean, it's such a large part of our portfolio. It gets ignored because it's below operating profit, but very profitable business. We have dominant – well, not dominant, but we have real strong brand positions down there across a couple of categories. And we export into the U.S., too, mayonnaise and other things too. So it's really, really good business for us.

Brendan Foley:

The fact that we didn't provide it means it's not really that material. We only – I think last year was the first year we provided it, but it was roughly equal for the first quarter, so I wouldn't expect a whole lot of change for the year.

Operator:

Thank you. That concludes our question-and-answer session. I'll turn the floor back to Ms. Freiha for any final comments.

Brendan Foley:

Good morning, everyone, and thank you for joining us. Let me start by sharing what we will cover in the 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 go to 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 a 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 a 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 and 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 in 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 in Southeast Asia related to geopolitical events. We are monitoring the situation and anticipate continued softness in these customer's 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 America spices and seasonings. In branded food service, our growth was strong across the portfolio driven by volume. In Asia 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, America's spices and seasonings is 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 U.S. branded sales volume growth, which strength during the fourth quarter in 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 America's 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 U.S. core everyday herb and 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 shifted 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 customers' shelves continue to transition. We are making progress on restoring distribution that was lost due to 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 in share gains in units and volume to lead our trends. Spending a moment on spices and seasonings and other key markets. Similar initiatives as in the U.S. are driving volume growth and share gains in Canada, France and Australia. We also renovated our spice and herb portfolio in Southeast Asia, with the same innovative packaging as the U.S. 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 foodservice, we achieved strong volume growth across all customer segments. Our foodservice operators continue to expand their 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 tabletop, with expanded distribution, new products, customer wins and increased menu penetration, as well as our expertise in 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 U.S., 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 continue to perform at. In the U.K., Australia, we are driving hot sauce category growth with Cholula gaining momentum on shelf. In the U.S., we secured new hot sauce distribution during the quarter. And in the first quarter, we are launching new Frank's RedHot dips and 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 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 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 are 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 to 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 would 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 profitable volume growth that is outpacing the category volume growth in these product lines. As I mentioned earlier, across 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 buy rates with additional focus in retail media. Our first quarter plans include an increased Christmas holiday campaigns in all regions, increasing our value-focused messaging for our everyday spices and seasonings and recipe mix in the U.S. Also, supporting our packaging renovations that I mentioned earlier in both the U.S. 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, 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 U.K. recipe mixes, which was double 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 continue 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 foodservice, with our heat platform and value-oriented products for foodservice operators. We are pleased with our 2023 performance from new products, which contributed to our sales growth and accelerate 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 and 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 in 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 we'll 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 of 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 product 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.

Brendan Foley:

Thank you, Mike. Before moving to Q&A, I would like to provide some closing comments on Slide 25. Our business is moving in the right direction, we strengthened our margins, significantly improved our cash flow and are deleveraging ahead of expectations. From a top line perspective, volume trends improved sequentially through the third quarter, but fourth quarter performance was disappointing. Parts of our portfolio grew underscoring that our strategies and initiatives are working. In areas that were challenged, we know the drivers and are addressing those that we control. And combined with the initiatives we have in place, we fully expect we will drive improved trends and build to volume growth during the second half of 2024. We are committed to recovering our margins in both segments to historical levels, while making investments to drive sustainable top line growth. The fundamentals that have driven our historical performance remain in place. And we are as diligent as ever in driving value for our employees, consumers, customers and shareholders in 2024 and beyond. I am excited for the year ahead, which will be my first full year as CEO. I plan to drive an ambitious agenda with greater competitive posture and more intentionality that capitalize on our strong business fundamentals as well as the value of our brands and capabilities and have driven our past success. McCormick is a growth company, a global leader in flavor, with a long-term orientation and a strong culture. I am committed to advance our leadership and our differentiation. Our strategic pillars

Andrew Lazar:

Great. Thanks so much. Good morning everybody.

Andrew Lazar:

Great. Maybe to start off, given where you ended 2023 and coupled with your commentary on investing in the business, I guess, can you tell us a bit about how you're thinking about volume as you progress through 2024, and I guess how you would be positioned going into 2025?

Andrew Lazar:

Thanks. And then I guess a good segue to that is, how is that you're able to make investments to drive the top line and yet still improve margins. I was hoping you could help us a bit with that perspective. Thank you.

Mike Smith:

Yes. Good morning, Andrew. Yes, as you saw from our results, we ended the year with strong operating margin performance, and for the full year, up 100 basis points. A big key to our recovery was recovering the cost increases through pricing. Obviously, 20% cost increases two years ago, over 10% last year, there was a big job to do that. So we're able to do that in 2023, which helped our margins. Our CCI and GOE programs, we've talked about a lot, really performed and give a strong momentum, frankly, into 2024. 2024, as you think about this year, we're showing some margin improvement about 80 basis points. And with low single-digit inflation, and you think about four or five years ago when we had low single-digit inflation, CCI really works for us. You take a little bit of pricing and we're having some pricing wrap in 2024 and then you can decide what to do with. And CCI, some of it drops to the bottom line through margin improvement, we're making those increased revenue price cap investments, which we've always done some degree of that, but also our brand A&P up -- double digits is another way we're using CCI this year. So it's kind of a sweet spot for us at low single-digit inflation environment as we think about it. And the portfolio optimization we've talked about last year, which -- a bit of that continues into this year. So, again, helping drive our margins up. We want to recover over time the gross profit margins we had pre-pandemic, but we're doing it judiciously.

Brendan Foley:

Mike said on sort of this portfolio optimization, we really do see that working. So we did make a couple of intentional moves as you know. That's really, I think, allowing us to invest even more in the part of the portfolio, which we know will be the strongest. And then we did make a lot of targeted investments in '23. So that's yielding results. We like where that's going. And it's achieving high ROI, and that's carrying us into '24. So I do believe this intentional investment in those categories that are core to us will really be the biggest drivers of profitable growth. And we should see that margin accretion from that mix of sales. So we really do believe we're operating in a position of strength there.

Operator:

Thank you. Our next question comes from the line of Ken Goldman with JPMorgan. Please proceed with your questions.

Brendan Foley:

Good morning.

Mike Smith:

Okay. Let me kick off and -- a couple of questions in there. The first, I think, had to do with just promotional lifts and what we're seeing. And I'm not necessarily trying to compare to the comments of other companies. But what we're seeing right now in our business today is we're not seeing huge declines or sort of reduced significant lifts of promotion. But there's an important consideration there, which is we're really a heavy base business. We don't have a ton of, if you think about our percentage of consumption. We're in the 90% range in terms of base consumption and the rest is really coming through promotions. So we're not overly reliant there. And I would just say that it's probably an area that I don't know that it's fair to draw a correlation between our performance and others. Now price gap management, in terms of how we're approaching that, we're looking across our portfolio. And just in the case of like spices and seasonings, it's a really broad portfolio with many subcategories underneath there. And each and every item -- you take compare black pepper to Montreal Steak they all have different price elasticities and where the consumer is to go. And so we have been surgically looking at this at a SKU level to make sure that we're doing the right thing to really drive overall growth in volume and unit consumption. And so that's allowed us to really, I think, be very, very sharp about how we drive this investment in a targeted way to make sure that we're starting to drive volume growth. In 2023, we saw a lot of improvement in parts of our business where we started to apply this. And I think like I said on the call, a good example was Black Pepper or Vanilla, and we started to really see the -- not only the volume of the unit share gain. And so that gave us really, I think, a lot of kind of stair-step into those investments. And that's the way we're going to do it in 2024 too. We're expanding that investment. We're going to continue to look at the line, we assess it. Honestly, every month and taking a look at where we see the individual products perform across the shelf. And then we decide what we need to do from a revenue and category standpoint. But I wanted to put on top of that, we're applying more A&P to the business, too, at the same time. And I think that's really important. We are seeing really good performance from A&P and it encourages us to continue to spend more on the business. And so you'll see more of that from us, I think, going forward. I'm not sure if I captured all your questions there, but let me know if I did.

Ken Goldman:

No that’s helpful. Thank you. And just a very quick follow-up, I wasn't quite sure I picked up on what you think the most important tactics may need to be to get momentum rolling in your China Consumer business to the extent you want. And maybe how quickly some of those actions can start to take effect.

Ken Goldman:

Thanks so much.

Alexia Howard:

Good morning everyone.

Mike Smith:

Good morning.

Mike Smith:

Hi, Alexia, yes, it's around 1% for Q1, but then it really Peters out the rest of the year. So very small the rest of the year. But 1% for Q1 as we lapped the decisions we made last year.

Brendan Foley:

Well, Alexia, thanks for the question. We never really project exactly what to expect and share, because there's just a lot of dynamics that might happen at the shelf. But I would point to how we're talking about volume and our outlook on volume as we think about the first half, the second half and as we expect to kind of grow volume in the back half of the year. That certainly will have an influence on what we see play out in share performance. But we tend not to sort of specifically tell you. I don't think that there is a specific quarter I can tell you when that's going to happen.

Operator:

Thank you. Our next question comes from the line of Max Gumport with BNP Paribas. Please proceed with your question.

Mike Smith:

I mean the pricing, Max, is really focused on the first half a bit more in the first quarter based on the timing of our pricing. I mean, the volume growth is sequential across both segments. And as you know, based on our fourth quarter performance, Flavor Solutions is exiting the year a little better trajectory than -- or at least based than Consumer. So as you model those things, you think about sequential improvement to get to that zero to negative two volume growth kind of the first half, second half story. And then pricing is really heavily weighted to the first half, primarily the first quarter.

Brendan Foley:

Well, good morning, Max, I'll maybe kick it off with some context around your question on sales and consumption and sort of the state of the consumer, and I'll pass it over to Mike for commentary on -- I think you had a question there with regard to margin. But I think we are taking a cautious view with regard to where the consumer is right now. And that's really informed by what we saw in Q4. We just saw a little bit more shifting, particularly as you think about how the quarter played out and if you think about consumption trends, we saw consumers really pulled back in September and October, and then really wait until right before the holidays to really make a lot of their purchases. And we even see -- saw similar indications leading up to Christmas. So, what's underneath that, I think, is people were certainly holding off there, making a lot more trips to the store, buying a lot fewer items and units. And maybe even smaller units actually started to come true, I think, from a consumer trend standpoint. And I think we just have to acknowledge that this is a little bit different than what we saw in the summer. It was a little bit more pronounced. Certainly, it affected our trends as we kind of been really clear about. And so it's prudent for us to just take a cautious view where the consumer is going to be going here in early 2024. And so we felt like it was best to recognize that in our outlook, particularly as we think about the first half of the year. But we're also going to be putting in more investment in the business, more A&P. So we expect also to be able to meet the consumer where they are right now and really try to focus on our game plan, which is to drive volume growth. Mike, do you want to add...

Max Gumport:

I was wondering if the conservatism that you discussed that really is just focused on the commentary you just discussed on volumes or if it applies to gross margins as well, that there's some -- more cautious outlook embedded in the gross margin guidance as well?

Max Gumport:

Great. Thanks very much.

Steve Powers:

Hi. Thanks very much.

Steve Powers:

So -- good morning. So it sounds like at the enterprise level, pretty minimal pricing in the back half. I think that implies, as I listened to the commentary and kind of do the math and think about the price gap management, I think that implies negative pricing in the Consumer business at least in the U.S. in the back half. I wonder if you can talk about that, how deep those kind of above-the-line investments may need to be or how you're thinking about that. And whether there's a risk that at the enterprise level pricing actually, this negative, as we flow through the year in pursuit of this volume recovery.

Steve Powers:

Okay. Okay. Fair enough. I guess in Flavor Solutions, can you help just maybe a little bit more perspective on what you're assuming both in terms of Flavor's customer volume trends and restaurant traffic, both in the U.S. and overseas, where you've seen some softness to late? Just want to a little perspective there on that segment.

Steve Powers:

Okay. Thank you very much. I appreciate it. I’ll pass it on. Thank you.

Operator:

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

Brendan Foley:

Good morning.

Brendan Foley:

Well, with so much has changed since 2019, I think that -- if I think about the entirety of all the different levers and variables that you were talking about, whether it's price elasticity or volume and where the consumer is, there's been reasonably enough significant change that. As we take a look at our categories, we're taking a look at in terms of how they're performing today and where we need to go in order to drive volume growth. And as we said earlier, that's a component of increased A&P. A lot of that advertising focused on talking about value. Parts of our portfolio, we know that price gap management can have a really effective impact on turning around unit volume trends. And so I think that's an indication of where the consumer is right now. If you look at unit volume performance, either in our business or probably the category, pricing has had an impact, and we have to acknowledge that. Having said that, though, if I compare our business organically, and product mix, compared to 2019, our total organic volume is about the same as 2019. We haven't really lost significant volume or on product mix since pre-pandemic. And so I think that's one sort of consideration to have is, while there's been a lot of change in many ups and downs, I think, if you think about all these macro dynamic impacts we've been going through, we find ourselves in a similar volume position as we were in 2019. I don't -- I think I might have provided the context that you're looking for.

Brendan Foley:

Well, as I think about our competitive posture in Flavor Solutions, I feel really good about it. It starts with having great capabilities in technology and a great team. And I think we do have a differentiated approach towards driving growth, particularly in flavors and seasonings in that part of our business. From a technology standpoint, we continue to win and sort of there's -- a lot of categories that we operate in there that we're targeting because they're positive and high growth. And we also tend to get a good mix of large customers and moderately in small-sized customers who tend to be characterized by much even higher growth. As we think about that as a portfolio mix of customers, we're seeing a lot of strength coming from that. And I would just point to our Boeing trends throughout '23. And as we think about '24 to be an indication of how we think we're performing relative to the market there overall. And so those are some indications. Now, the other one on top of that would be heat. And we continue to see growth through heat. We continue to see that as a as the part of that portfolio, if you will, it tends to grow at an even higher rate just due to where consumers are. And we talked a lot about heat extensively in terms of how popular it is. And so that's another reason to believe that we feel like we're competitively poised in this part of our business. It's an exciting part of our business. It's an exciting part of our business. It's one that's receiving a lot of increased investment, too, as we think about building capacity, technology and really growing to global scale.

Operator:

Thank you. Our next question comes from the line of Matt Smith with Stifel. Please proceed with your questions.

Mike Smith:

Hi Matt, its Mike. I mean they're not materially different between segments to be honest. So the 50 to 100 basis points at the gross margin line and approximately 80 at the OP margin line. To your point, there are some price gap management items within the Consumer business, but there's also portfolio optimization, the GOE and CCI numbers which hit both segments. So I would say not materially different.

Brendan Foley:

Largely, I think it's a product of price gaps that we can manage to. But I think your observations would align with ours in that it isn't strictly an issue regarding private label or other branded competition. I think it's really an attractive category that has always received new competitors and new entrants. And so we look broadly when we think about competition in that part of our portfolio, as being -- and at the shelf is both watching those gaps versus private label and also branded competitors.

Operator:

Thank you. Our next question comes from the line of Robert Moskow with TD Cowen. Please proceed with your question.

Brendan Foley:

Good morning Rob. Hello.

Brendan Foley:

We do. I mean we look at that annually. And it's part of our strategic planning process. And so yes, we do spend time making sure we understand how that's performing. But I think your 5% to 7%, I think, is -- or actually you said 4% to 6%, but I would tell you it's generally around those same numbers. We tend to think about it is 5% to 7% at a global level.

Brendan Foley:

No, I would urge you not to take away that as an indication that the category is weaker. This is still a very attractive category. Also appreciate that the category at the global level has also gone through a lot of inflation in pricing and similar factors, but we still see this as a very attractive category for the total company. And so that is not the view that we take, particularly with the data that we look at. And so I think maybe that got at the heart of your question.

Brendan Foley:

It's harder to quantify because it's – we know how much we're shipping out in terms of our total portfolio that's getting this new package. And so as I said, that number is at 75%. And that, we feel that's – we're pretty accurate about that. But now the reflection on shelf, as all this inventory is flowing in on shelf, that's happening on a lag to that 75% number. We expect it to just continue to increase through the first half of the year. I think through the first half of the year, we should largely be caught up to that number to specific standpoint, too. If you walk into a store today, you're going to see on the shelf some in the old package, some of the new package, and that's just maybe an indication of how you might think about flow-through overall. However, I will tell you that as we do look at specific accounts and locations where we know we're seeing a lot of that flow through already have occurred, we are seeing a nice pickup in velocity as we would have expected to be the case, because we've seen this package perform in EMEA in a similar way. And it really does deliver on the SKUs for freshness for consumers and really kind of takes it up a notch in terms of the overall benefit and offering that we're providing consumers. So we feel pretty good about that. What you'll also hear us talk about is we're going to start to move other parts of the product line into this package, too, beginning in the back half of 2024. So we're not done. But this part of our line that we've been speaking about since mid-last year is still in the process of flowing through on shelf.

Robert Moskow:

Right. I'm sorry, one last question. I appreciate the plan to increase brand building this year. Can you tell us how much it increased in 2023 when it was all said and done?

Mike Smith:

3% to 4% range, yes.

Robert Moskow:

Okay. Thank you.

Rob Dickerson:

Great. Thanks so much. Maybe if we could just touch quickly on kind of Q1, because I think kind of throughout the call, I've heard you say maybe slightly higher cost relative to the full year in Q1 and then also feel like A&C is a little front half loaded. And then I think maybe volumes, given -- hopefully, they improved of the year, would imply that there be a little bit more pressure in Q1, especially given the divestment. So, just curious if there are certain moving pieces to Q1 that you would clearly like us to consider. So that's the first question.

Rob Dickerson:

Okay. Perfect. That's very helpful. And then quickly, just on Flavor Solutions. Clearly, if we look back a few years ago, we speak to the margin recovery now kind of coming out of the post-pandemic cost inflation environment, really kind of the main driver of kind of your somewhat depressed margin now relative to history, still from Flavor Solutions, maybe a little less so. I mean, clearly, you're not optimize or maximize on consumer, but there is a little bit more pressure on Flavor Solutions. So, I'm just curious, I remember going back 15 years or so, right, and there was a strategy to increase that margin in Flavor Solutions that didn't happen, but then it actually really did happen. And now it's just not happening again. So I'm kind of curious, as you think longer term, right, kind of margin profile of McCormick, kind of given the initiatives you've been discussing even today, on improving that side of the business, what kind of does get you back there, right? I mean it's just volume and mix? Or it just seems like that recovery has maybe been a little bit slower? That's all.

Brendan Foley:

The only thing I'll add on top of what Mike just said with regard to just that constant focus against improving margin. We're also -- as we continue to shift customers to higher-margin product lines, more insulated technology, et cetera, it allows us to continue to grow margin too. But I think Mike pretty much nailed it there. And that's our outlook on it. It's still pretty positive. And it's just going to take us a little bit longer, as we've been calling out really ever since, I think, last year.

Operator:

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

Operator:

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

Brendan Foley:

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 been slower than previously anticipated. Let me start with the highlights for the third quarter. We delivered solid constant currency sales growth. We continued to realize effective price realization, and importantly, volume performance, excluding China, has improved each quarter throughout the year. We continued 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

Brendan Foley:

Thank you, Mike. Before we turn it over to Q&A, I would like to provide some closing comments. Global demand for flavor remains the foundation of our sales growth, and we have intentionally focused on great fast-growing categories. Our alignment with long-term consumer trends, healthy and flavorful cooking, trusted brands, increased digital engagement, and purpose-minded practices continue to create a tailwind for growth. McCormick is uniquely positioned to capitalize on this demand for great flavor. With the breadth and reach of our strong global flavor portfolio, we are end-to-end flavor for our consumers and customers. We remain a different kind of CPG company, one differentiated by our growth platform, the results that we have achieved over the last years and our culture. We play in great and fast growing categories. Our two segments, Consumer and Flavor Solutions, complement each other, reinforcing our differentiation. The scale, insights, and technology that we leverage from both segments are meaningful in driving sustainable growth. We continue to leverage the strength of our culture and the power of people to drive success. I want to thank McCormick employees worldwide as their energy and excitement for the business is coming through in our results. Now to recap the key takeaways as seen on Slide 30. Our third quarter performance was strong, reflecting sustained demand and the effective execution of our growth strategies. And our volume performance, excluding China, continued to improve. We drove meaningful year-over-year margin expansion, underscoring our focus on profit realization. Our year-to-date cash flow from operation results was strong, already equal to our full year 2022 results. Our reaffirmed sales and operating profit guidance, despite lower-than-expected China recovery, highlights the growing strength of the rest of the business. The strength of our business model, the value of our products and capabilities, and execution of our proven strategies bolsters our confidence in our growth trajectory over the long term. Now for your questions.

Andrew Lazar:

Great. Thanks very much. Good morning, everybody.

Mike Smith:

Good morning.

Brendan Foley:

Well, thanks Andrew for your question. Just to maybe speak first to last year's fourth quarter. I think our sales growth back in 2022 was down about 1.7%, I think, on sales. And that was up without Kitchen Basics. And we were lapping the 2021 retail inventory build in a high level. I think we, as we talked about on that call, entered the 2022 holiday with just a lot stronger inventory than we were counting on or predicting or forecasting. So, the way we're looking at it is the net sales impact really was up about -- a little over 4% in the fourth quarter last year. So, we're not seeing that necessarily as an easy comparison overall, but just talking to dollars first, that's kind of our view is just we're still looking at a pretty robust fourth quarter from a year ago just knowing that we had that comparison in the fourth quarter. Now, when we look at this year's fourth quarter, as we said on the call here earlier, you will see the impact of that DSD continuation in our Hispanic bagged spices part of our business. It just tends to be -- that business tends to be heavier in the fourth quarter because of the holidays, so that will be a little bit stronger then. But to our spices and seasonings business, we continue to see improving trends in that part of our portfolio. And you should expect to see that in the fourth quarter, that sequential improvement in performance overall. And we feel like we're going to have a strong holiday. I mean, I think the reasons why we feel good about the direction of that part of our portfolio is, and you heard it on the call, we're gaining share and we're gaining distribution on Super Deal, Herbs & Spices. On the Lowry's opening price point platform, we're still getting really good performance for that, but still also building out distribution. And we have one value retailer that we've only begun just starting shipments on, and they'll start to build out and fill out more store locations because we have like just in that one particular account, 85% of the locations still yet to come. So, we still see distribution build happening behind Lowry's overall. And that renovation that we launched here this year, we talked about in the second quarter, is doing really well where we see it getting on shelf. Now we shipped about 40%, but what's appearing on shelf is probably just a little bit different because we don't really have that data. But what we're seeing with when we see that new package come on shelf is that [Indiscernible] improves quite a bit. So, we're really encouraged by our performance there. And we're definitely seeing strong consumer reaction to the new package. And so that will obviously continue to build in the four quarter. And we're also turning on our media right now, advertising the benefits of the package. But then we're also having holiday campaigns starting to run too. So, we feel like there's a lot of good momentum in the pipeline. Obviously, a lot of that will carry into 2024, but we still feel really good about the strength of that part of our business going into the fourth quarter. What's also helping us though is that our core categories are performing a little bit stronger than overall total edible in the grocery store. So, we see continued strength there just from a category standpoint. We have good performance across other core categories like recipe mix, condiments, and sauces. So, we expect pretty good performance there. But there are some categories where we participate along with our food peers, it's probably at a much smaller scale. But these are categories like frozen or the Asian category where we see more volume decline like we've seen in the rest of center of store in that part of our business. That's just one part of it. The portfolio I just gave you some color on that we're seeing definitely the type of softness that you're seeing in other categories. But the fundamental trends have not shifted. Despite this recovery in China being a lot slower, U.S. and Europe are performing as expected. And as you heard in the call, we kind of reaffirmed our guidance on sales despite China, which is meant to indicate that we still see a strength in the performance of our business overall.

Operator:

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

Brendan Foley:

Good morning.

Brendan Foley:

Thanks, Alexia. Yeah, I think as we take a look at our performance overall in terms of shares, et cetera, just talking maybe specifically to spices and seasonings, the dollars are a bit tricky because we are seeing private label and our competitors take more price right now in the last couple of months to catch up to the pricing that we've taken in the marketplace. But this is helpful obviously because it starts to close price gaps. And so, I think you're seeing some stronger dollar performance there. But from a unit standpoint, we believe we're performing even better. That lag is even less. And so, as we then look to the pipeline of activities that we have going on, much like I just mentioned on the previous question, whether it's parts of our product line that are really starting to build momentum or distribution that builds momentum, we see a strong pipeline across that part of our portfolio as well as just stronger overall marketing initiatives now that we have really a shared supply across all of our portfolio. So, when we talk about light at the end of the tunnel, we just see sequential improvement over the course of time as we fall back on distribution points, which we've grown this quarter, as well as just the pipeline of activity and renovation that we have across our portfolio. You're seeing a good view of that right now, but there's more to come. And so, we do feel pretty confident about our ability to continue driving sequential improvement, whether it's in spices and seasonings or across other categories.

Alexia Howard:

Great, thank you. And just as a quick follow-up. You talked about the free cash flow allowing you to de-lever more quickly than expected. What's your level of appetite for acquisitions next year? And where are the priorities? Is it Consumer? Is it Flavor Solutions? Domestic? International? Just wondering how you're thinking about the pipeline on the M&A side. And I'll pass it on. Thank you.

Brendan Foley:

But right now, paying down our debt is our priority.

Operator:

Our next question is from the line of Max Gumport with BNP Paribas. Please proceed with your question.

Brendan Foley:

Thanks for the question. We're seeing value play out through many different types of actions from the consumer. Some are going to larger sizes and we see that quite a bit and as an example of where we're taking an opportunity to continue growing even more quickly. In that part of our portfolio, we're definitely seeing sustainable continued trends towards larger sizes. And what's also interesting about larger sizes, at least in the categories that we have, especially spices and seasonings, is that the purchase rate is still just as fast as it was with a smaller size. So, people are going through when they have it in the household, they're going through a little bit just as fast or more quickly. But the other way value kind of presents itself too is opportunities like this opening price point. With the pricing that's happened in the market, as we talked about before, it created a price pocket that we feel like we needed to fill with a brand like Lowry's. And so that's playing a role in our portfolio that's offering a brand to consumers. And a lot of consumers still prefer brands. And it's allowing them to move towards a brand that's a lower opening price point and fills the need. And we're seeing a lot of success with that too. But the other way we're really talking a lot about value is directly to the consumer, especially if you think about a lot of our communication right now over the past year has been value oriented. And we're talking about the role that our portfolio plays in terms of providing flavor for pennies of serving. And that is really having a positive impact. Plus, a lot of our content is also focusing on how consumers continue to save money by creating, let's say, for example, just larger batch sizes of food so they can have leftovers for a couple nights in a row, or tricks and hacks like that that allow consumers to create even more value and stretch the food dollar even further. That's where we see our category really playing a role in the household, especially during this kind of -- where there's a lot of consumer concern around inflation, our categories are playing a helpful role in that. So, we're looking at it from a number of different angles, but I just illustrated three right there that we are hitting pretty hard during this period of time.

Operator:

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

Mike Smith:

Good morning.

Adam Samuelson:

Good morning. I guess maybe trying to take Andrew's question in maybe a slightly different kind of light. Brendan, is there any way to help frame the distribution kind of gains that you're seeing and expect to see over the incoming quarters? Any way to quantify kind of how we should think about total distribution growth and where that will peak from a TDP perspective into 2024? It's harder to fully see that expansion in the scanner data. And so, I'm wondering if part of it is growth in certain unmeasured channels or value retailers that aren't captured in Nielsen.

Adam Samuelson:

Okay, that's helpful. And if I could just ask a separate question on the Flavor Solutions segment. And as you think about some of the different customer types that you have and geographies, how would you frame kind of recent inbound kind of bid activity in RFPs and contract win rates? Are you seeing your customers accelerate their innovation agenda to drive growth in their business? Or is activity levels slowing down? Just any color -- as you think about that pipeline of new business wins, kind of how would you frame that?

Adam Samuelson:

Okay, I appreciate all that color. I'll pass it on. Thanks.

Steve Powers:

Hey, great, and good morning. Thank you.

Mike Smith:

Hi, Steve.

Mike Smith:

Well, thanks, Steve. This is Mike. I'll take that one. I'm surprised it took five questions to get to gross margin, so thanks for asking that question. First of all, we're really pleased with the gross margin performance this year. We've had improvement. We had a strong third quarter. You think about the things we're doing with the cost recovery through our pricing, which we've really been successful at this year. The GOE and CCI commitments we put out at the beginning of the year, we're really happy with our performance there across those segments, that's the other thing. These margin improvements are happening both in the Consumer and Flavor Solutions side, which is really -- which is great. As far as raising for the year, as you know, we've had good performance year-to-date. And even with some of the challenges in China, our strong underlying performance has really held through. So, as to why we wouldn't raise really the A&P spent, I mean, we feel really comfortable where we are from A&P with our current guide. The third quarter was up 8% and it was the highest dollar amount we've ever spent in the third quarter. So, we feel we're very effective there. Actually, CPI is a topic, we get savings across all costs of goods sold, but we get it on SG&A too. And A&P is an area where the teams have gotten real cost savings or efficiencies in our advertising program. So, it's even higher than you see from a dollar perspective. So, I think we're confident where we are in gross margin. We're building back. If you go back to pre-'19 -- pre-COVID in 2019, our gross margins were around 40%. Using our implied guidance this year, gets you around 37%. The interesting thing is if you look at the map on the pricing dilution that has happened, it's been -- it's over 500 basis point headwind to us, which you can see, we're down 300 basis points. So during that time, through CCI and other things, we've captured some of that back, which we continue to see in the future as we get back to those pre-COVID gross margin and operating profit levels.

Steve Powers:

Okay. That's great. And so, I guess -- that's helpful. Thank you. And Mike, so just playing back the various puts and takes on gross margin, is it fair to say that the biggest sort of upside surprise for you over the course of the year has just -- has been successful price realization, or are there elements of business mix or other drivers there? Because it feels like the productivity has come in solidly, but roughly in line with, I think, original expectations. Cost inflation hasn't changed materially, so it seems like the buckets has to be pricier, or...

Steve Powers:

Yeah. Okay. Very good. Thank you so much.

Matt Smith:

Hi, good morning. Thank you for taking my question.

Matt Smith:

If I could follow up on the margin commentary and the headwind from pricing dilution, as we look at the Flavor Solutions business, you've been making margin recovery progress there. But can you talk about the factors that are keeping the current margin 400 basis points or so below historical levels? And how much of that is the mechanical pricing impact versus other factors? And then, what supports the margin recovery from here?

Brendan Foley:

But we do like the progress we're making independent of price and dilution, just on overall improvement in the margin there. So, we do believe we're moving in the right direction.

Mike Smith:

Okay. Thanks, Matt.

Robert Moskow:

Hi, thanks for the question.

Brendan Foley:

Good morning. Rob.

Mike Smith:

Hey, Rob, just to clarify, you just mentioned the word -- number 3%. Our implied guide is in the midpoint is 3.7% to 11.2%, which implies 7.5%.

Brendan Foley:

Yeah, I think -- Rob, it's Brendan. The things to keep in mind, I think for the fourth quarter, it's our largest quarter. So, we're not able to provide a precise estimate, but I think some broad concepts to consider is we do expect some growth in China in Consumer in the fourth quarter. If you recall, we're lapping over a pretty severe lockdown at that time, this time a year ago overall. We still expect to have a reasonable impact from the DSD discontinuation in the Americas, heavier because it's during the holiday season. We still expect some softness in Flavor Solutions demand that will persist, that will certainly be there, but we will also lap the impact of the Kitchen Basics divestiture, as well as the Consumer business exit in Russia. So those are just some considerations I think when we take a look at fourth quarter sales.

Robert Moskow:

That's fine. So, maybe that answers the question, Mike. So, you're not expecting any kind of decel in U.S. retail conditions in fourth quarter?

Robert Moskow:

Got it. Okay. Thank you.

Operator:

Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Brendan Foley:

Thanks for the question. Just to make sure I clarify what we said in the prepared remarks, about 40% of those SKUs are shipping and the SKUs we're talking about is part of our core herbs and spices line. These tend to be those straight fill items, meaning it's a bottle of cumin or a bottle of cinnamon, et cetera, so that's what we're calling those straight fill spices. And we have visibility to the SKUs that are being shipped. It's not as easy to track exactly what has hit shelf yet. And that's really dependent on the retailers' plans. But where we know it has, there's really been an improvement in velocity overall. And one of the drivers of that, just there's a lot of different benefits from this new package. We've talked about it before, but it is nitrogen-flushed, so there's even -- what we're providing there is just greater long-term freshness. Until you open up that package, we're really securing the freshness of that product. There's sort of a nice click and snap with the cap that really kind of tells the consumer, not only just through seeing but also listening, there's a real sort of snap to disclosure that kind of again creates to retain freshness. And the package is 50% post-consumer recycled plastic, so it also has a big sustainability benefit. It just has a great appearance on the shelf overall. And so, we knew that this was a strong packaging innovation because we've launched it in other markets around the world like in EMEA. And also, it's also going out to the Asia Pacific too. So, we have some experience with this package and how it performs. And we're seeing similar, if not better, velocity performance as we get started here on U.S. shelves. So that's a little bit of context around what we're seeing from that renovation in our product line.

Rob Dickerson:

Got it, Okay. Super. Thanks. And then maybe just quickly and kind of simplistically on SG&A. Q3 you ran for total SG&A about 22% of revenues. Clearly, that's up, but kind of inline-ish, right, relative to maybe the kind of prior four or five years. As we think about Q4 and then I guess kind of going forward, is like 22% of sales, is that kind of fair? Or could there be certain quarter-to-quarter movement? Thanks.

Rob Dickerson:

And maybe if I could just sneak one last one in. Asia-Pac, clearly understand what you're talking about in terms of just getting a slower China recovery. And I think you called out maybe a few kind of one-off drivers, but maybe it's more EMEA-driven. Kind of net-net, right, Asia-Pac in Consumer, it was still down a quarter, but clearly Asia-Pac in Flavor Solutions is doing better, and I realize, like, part of your China business is in Consumer, but maybe it's still somewhat foodservice. So, I'm just trying to understand kind of the comparison between kind of Asia-Pac Consumer versus Asia-Pac Flavor Solutions, and what's driving the delta? That's all. Thanks.

Rob Dickerson:

All right. Super. Thanks so much.

Faten Freiha:

Thank you all for joining today's call. If you have any further questions regarding today's information, please feel free to contact me. And that concludes this morning's conference call. Thank you.

Lawrence Kurzius:

Good morning, everyone. Thanks for joining us. To start, last night, we announced that Brendan Foley will become McCormick’s next Chief Executive Officer on September 1, and he is joining the Board of Directors immediately. I could not be more pleased with Brendan as my successor. I will continue to serve McCormick and all of its stakeholders as Executive Chairman of the Board once Brendan becomes CEO. This is a transition that we have been planning internally as part of an orderly multi-year succession plan, and it's exciting to finally share the news with all of you. As many of you know, Brendan is exceptionally well qualified and prepared to lead McCormick. He deeply understands the importance of delivering continued strong growth, while doing the right things for people, communities, and the planet. With our advantaged competitive positioning, supported by the growing demand for flavor and with our tremendous depth of talent, I have utmost confidence that McCormick, under Brendan's leadership, will continue to drive differentiated growth and long-term shareholder value. Congratulations, Brendan. Now on to our earnings update. First, I'll provide an overview of our second quarter results. Brendan will provide the business segment update, Mike will provide details on our financial results and 2023 outlook, and after your questions, I will have some final comments. Starting with our second quarter results. We're pleased with our strong second quarter performance, which reflects sustained demand across our business and effective execution of our strategy. We delivered double-digit constant currency sales growth. Our pricing actions are in place and, importantly, our volume performance improved. We continue to see top line momentum in our business, positioning McCormick for sustained growth. Additionally, we drove meaningful year-over-year margin expansion in both segments, underscoring our focus on profit realization. Our global operating effectiveness or GOE program, which includes the optimization of our supply chain cost structure, is yielding results. We grew adjusted earnings per share of 25% driven by significant adjusted operating income growth, and despite interest rate and tax headwinds. Year-to-date, cash flow from operations more than doubled driven by higher earnings, I just mentioned and working capital improvements. Notably, we're reducing inventory levels as planned. Both segments in all regions contributed with strong growth. Our results benefited from our recovery in China. And while the timing and pace of recovery in our China business was less robust than anticipated, it was still strong, and we are confident in the contribution China will provide to our results as the year progresses. Overall, we are pleased with our execution and results during the first half of 2023. Our year-to-date results, combined with the strong demand we continue to expect across our portfolio and our diligent approach to optimizing our cost structure, bolster our confidence in our growth trajectory as we enter the second-half of the year. As such, we are raising our adjusted operating income and earnings per share outlook for the full-year. Turning to slide five. In the second quarter, we drove 8% sales growth or 10% in constant currency. Our constant currency sales growth reflected strong business performance, with an 11% contribution from pricing and a 1% decline in volume and product mix. Netted in this volume decline are net 1% volume increase from China recovery, partially offset by our Kitchen Basics divestiture and the exit of our Consumer business in Russia, and 1% decline attributable to pruning low-margin business. As examples, we exited direct store delivery, DSD, of our bagged Hispanic products in our Americas consumer segment and a private label food service line in EMEA. From a segment lens, both the Consumer and Flavor Solutions segments delivered strong sales growth in each region. In the Consumer segment, we continue to have strong price realization and we drove a sequential improvement in volume performance. Flavor Solutions, our exceptional performance continued with our ninth consecutive quarter of constant currency double-digit sales growth. Our sales performance demonstrates the strength of our broad global portfolio and positions us well for continued top line growth for the balance of the year. I'd like to share a few highlights about our gross margin performance, which Mike will cover in more detail in a few moments. We drove significant gross margin improvement, reflecting the continued recovery of the cost inflation or pricing lagged last year. Cost savings from our CCI and GOE programs and the impact of strategic decisions we've made to optimize our portfolio, with a focus on driving margin improvement as we continue to prune low-margin business. Our gross margin expansion in the quarter was partially offset by higher SG&A as we build back incentive compensation as planned. Our adjusted operating income increased by 35% versus the second quarter of last year or, in constant currency, 36%. This growth drove an adjusted earnings per share increase of 25%, which also reflected higher interest and effective tax rate. We remain confident that we have the right plans in place and are taking the right actions. We are halfway through the year. Our year-to-date results speak for themselves. We expect to continue driving profitable growth for the balance of the year. Demand is strong. We're driving improvements in our margin profile and optimizing our cost structure effectively. I want to thank McCormick employees worldwide for their collective power is driving our success. I'm proud of the tremendous job that McCormick team has done navigating the dynamic environment over the last few years. I'd like to recognize their energy and excitement for the business, which is coming through in our results. Now I'd like to ask Brendan to share the second quarter business updates for our segments.

Mike Smith:

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 solution 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.

Operator:

Thank you. At this time we’ll conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Brendan Foley:

Well, thank you, Andrew. That's very kind of you to say that.

Andrew Lazar:

Good stuff. Good stuff. I've got just two questions. First one would be McCormick essentially flowed through the second quarter EPS upside to the full-year, but also did not flow through any of the more significant upside in 1Q to the year. So I'm trying to get a sense whether this is simply some conservatism, or is there something in the back half of the year that change that requires either the need from our marketing or it's really just McCormick being sort of opportunistic on the increased marketing in 3Q?

Andrew Lazar:

And then second, as we think about the back half of the year and McCormick starting to lap some of the pricing, would your expectations still be that volume would turn positive? And if so, what would be the key drivers that give you the sort of the visibility to that?

Brendan Foley:

Just to build on that from a regional perspective, Andrew. In the Americas, yes, we're performing pretty much as planned. I think you have to look at sort of volume and price together when we take a look at the profile. But we're showing sequential improvement across the portfolio, and that's been fairly consistent, sort of, month-to-month and quarter-to-quarter so far. And we also need to recognize that in the second quarter result, it does include, kind of, the exit of this DSD business, which when you take that out, I think it kind of underscores the warrants is kind of broader view of what we think is going to kind of unfold in the back half. But it is broadly an improvement versus the first. China, we think we're going to have a strong recovery. Also, pretty confident in that, although it's a little bit less than just kind of a more gradual recovery than what we initially had planned for. So that's probably a little bit different than what we had been thinking about previously. But nevertheless, it is still a strong recovery. And I would say, in EMEA, we're pretty pleased with the performance on volume. And when you factor out the elements of Russia exit or overall, the underlying volume and mix when you exclude that was really actually pretty nice. So we're pleased to see that we have some volume growth despite those things in the EMEA region. On to the whole idea of this just to provide more color on this DSD exit, I would say that this is a business that we've been trying to kind of improve over time. And what we see from it is that this is -- the DSD portion that we delivered to store, we also have a warehouse and distribution delivery that we would handle. And that was a business that just simply wasn't profitable, and we decided we need to exit, but it was a meaningful chunk, I think, out of the second quarter, about 2 points. So as we transition away from that business, it will probably be an impact for the rest of the year, but something that we have planned for.

Lawrence Kurzius:

Thanks, Andrew.

Ken Goldman:

Hi, thanks and please accept my sincere congratulations as well, Lawrence, Brendan, and Kasey, too. Everyone's moving up in the world, it’s great to see. I think I'm contractually obligated after yesterday to ask how you're feeling about, I guess, your customers' inventory levels in general? And if you're sensing, you know, maybe any risk of a retail safety stock deload or anything similar as your supply chain continues to normalize and get back to where it was?

Brendan Foley:

Ken, thanks for the question. We're not experiencing anything unusual or significant trade inventory destocking. Honestly, there's really how much drama in the quarter for us on this. The difference between our sales and consumption was more attributable to just the retail sell-through of the discontinued items, and the point I just made regarding DSD is an example of that. But also, we have higher listing fees this quarter just due to the fact that we're launching more new products. And so I think you see that in lot of our dialogue in terms of Cholula or Grill Mates items for grilling or at Tabitha brown line, so we definitely had that. But as we anticipated, our alignment between consumption and shipments is normalizing. There's not really anything unusual going on in this quarter.

Ken Goldman:

Got it. Thank you. And then just as a quick follow-up, I wanted to ask a little bit about the commentary about Europe and the Consumer side. Maybe some of the softness you're seeing with your -- or sorry, the Flavor Solutions side. And just how you're seeing that progress as we go into the current quarter, is it still worsening? Just trying to get a sense for how some of your larger customers, whether it be food, beverage or QSR are performing as the year progresses.

Mike Smith:

I think too, just to add a little color on the volume there. About one-third of that decrease in volume is due to the exit of that private label, the two service lines. So again, another portfolio optimization.

Ken Goldman:

Great. Thanks so much.

Peter Galbo:

Hey, guys. Good morning and congratulations again to Brendan and to Lawrence.

Brendan Foley:

Thanks, Peter.

Brendan Foley:

Thanks for the question, Peter. We're off to a really good start on grilling for this summer season, and we definitely saw that as a good start in Q2. A lot of it's really driven by just -- if you think about we have a solid innovation plan, I think, for the grilling season, we're launching some new grilling items. Plus we're also in just really much healthier supply on mustard and Frank's RedHot. And these are areas in Lawry’s marinades, where if we look at last year and before that, certainly we're coming on top of now a period of where we just have really full supply, assured supply for our customers, and we're turning back on normal promotional activity on the business. So we feel like all of those things put together, innovation, supply, getting back to the way you want to run a season on grilling, we have a really good start to the year. And as we look at it kind of from a share standpoint, we really probably performed quite well kicking off in the second quarter. So all those things come together, I think, for a great start to the summer season.

Mike Smith:

Yes. I mean, for the year, Peter, as you know, we did raise our guidance on gross margin, 25 basis points to 75 basis points to 50 basis points to 100 basis points. So we reflected some of the increased pricing realization we talked about in the call. We're really, really doing well in our GOE program and realizing those savings and those ramp up in the second-half. The thing about the second quarter, that 300 basis point improvement, second quarter last year was our worst performance of the year. You'll see improvements in the back half and basis points versus last year, but they won't be as big as the 300 we had in the second quarter.

Lawrence Kurzius:

Go ahead. Finish this line of…

Mike Smith:

I mean, based on the mix of our business, generally, the back half does have higher margins, especially in the fourth quarter. Our implied guidance has high of almost 90 basis points improvement, lows 0s, so you get a little bit of a squeeze factor there. But if we continue to have success, and again, we see that ramp up in the second-half. China is going to have a really strong recovery in Q4, that's a positive for us. We have scale over there and have good margins.

Mike Smith:

I guess, Lawrence said, everything is moving in the right direction.

Lawrence Kurzius:

Peter, you know, I'm not sure that we -- I know that you've got some interest in the DSD exit, so I just want to spend a second with you and elaborate on that. This is a range of very -- there are a lot of units, but they're very low value. We're talking to sell a bag spices and dried peppers in settle bags that largely moved through unscanned channels, and we've had a DSD business in that, that we've banged our head against for a long time and we've chosen as part of optimizing our portfolio, improving the profit performance to exit that part of the business, we still sell those same brands through the warehouse to major customers where -- because of the difference in the distribution channel, the margins are attractive and worth -- and the business is worth staying in. But the DSD portion of it was just not a moneymaker. It's a lot of units, but not a lot of value.

Operator:

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

Brendan Foley:

Well, Alexia, thank you for the question on TDPs and overall distribution. First of all, I'd like to say, we continue to make really good progress year-to-date. And as we look at our performance and our trends and all the different metrics we might look at, we're happy to see that come through as a positive, especially in the second quarter. And we do expect to see continued progress as we go into the back half. We have some significant improvements that we know will start to come online just because as customers reset their shelves, and those things start to happen. A lot of the wins that we get through category management and all of that really important effort we put forth in terms of help the retailer guide the category. We know that there's going to be some helpful improvements coming through on that as we go to the back half. I'm reluctant to kind of quantify all that as we think about that into the back half of ‘23 and all the way into ‘24. But this is an effort, as we've said before, that we're going to continue to be working on over the course of not only this year, but also next year. And as we look at overall distribution, we know that we're not going to get all of that back in terms of rough points, because almost half of that was discontinuations originally. So we feel really good about our progress right now on an overall distribution points, and it should continue to improve as we go through ‘23 and also in ‘24.

Mike Smith:

And then with our brand marketing, we're going to be mid-single-digit increase in the second half. A lot of that's going to go into the third quarter that are willing to support those plans.

Mike Smith:

Okay. Let me think about that. So you're referring to -- we have dual running costs in our EMEA region, due to our new large facility over there. I feel -- I think, I'm pretty sure I said in the last call, we're around $20 million for this year, which is about the same as last year. We're still going to have some cost next year, because it's going to go into the first and second quarter, the transition, because these are large manufacturing facilities. So if I were winging it, I'd say half of that is going to go away, but I'm going to be off, depending on the exact timing.

Lawrence Kurzius:

And of course, our GOE program continues next year.

Alexia Howard:

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

Steve Powers:

Great, good morning. And congratulations to everyone as well from me. Two questions both related to Flavor Solutions. The first one, in part as a follow-up to the topic that Ken Goldman had raised, just around inventory dynamics. We've heard various discussions of potential customer destocking from a Flavor Solutions perspective, as well from different pockets of the industry. I was just curious to see if that's at all impacting you or if you expect it to impact the business over the second half of the year?

Lawrence Kurzius:

I'll also agree that a lot of customer wins and believe we're gaining share in this space, and so that is a positive contributor for us as well.

Steve Powers:

Okay. Great. Great. And then my second question, actually, a good segue, is on the margin front. Just because you continue to trend well ahead of at least our expectations year-to-date on Flavor Solution's margin recovery. And I guess if you think about that forward, maybe I was wondering if you could just frame for us how much or whether you expect further progress on that front in the second-half. And then any updates as to how the progress you are making here year-to-date influences how you think about that build back to pre-pandemic levels or higher as you look out over the longer term?

Lawrence Kurzius:

And I will just add to that, just if I can step it up to the total company level, it's hard not to be excited about the 280 basis point expansion in operating margin that we had this quarter. We're really moving in the right direction in both of our segments in a big way. And we’ve all seen that we raised OP guidance for the year, it's a long time, on the back of that margin improvement. And we're very pleased and -- we're pleased with our progress in this area.

Operator:

Thank you. Our next question comes from the line of Max Gumport with BNP Paribas. Please proceed with your question.

Mike Smith:

Yes. I mean what you have to remember, Max, is when you're pricing to cover costs over a multi-year time you're going to have a large dilution impact just due to the math. And we said before, I mean, that has been a large headwind last year, but I think we quantified in the 200 basis point to 300 basis point range as the margin line. We haven't talked about it much this year, but we're still having some of that. We will get that back over time as we said, through our CCI programs, more normal cost inflation in the future. So it's hard to compare the four years ago to gross margin at this point, but a lot of that is dilution, but we see an upward trajectory as we see in the second quarter. That's the important thing. What makes me really excited is even with over -- we're catching up on the pricing we've under recovered the last two years. Even with that, that is a negative dilution impact. Even with that, we're showing gross margin impact, a positive based on the GOE program or the CCI programs. So that really gives us confidence going forward.

Brendan Foley:

Yes. Just like we've seen in our current trends, Max, the sequential sales unit, and volume improvement across the portfolio and even specifically within spices and extracts in Americas, we do think that reflects, kind of, those long-term tailwinds of our categories, but also our growth plans. So we continue to invest in brand marketing, really focused category management and innovation. And that allows us to kind of focus on those volumes and that sustainable growth, and also get that compounding effect of those investments. So yes, I do expect that profile to improve as we go through the back half. As you called out, reasonably the improvement in TDP, we should also then start to see an improvement overall as we think about dollar share. And so that is a reasonable thing I think to look out for. What is driving our performance right now and we think will, as we continue moving forward, is increased distribution, brand marketing, category management and innovation, and we also see a similar trend on this in Europe. So these are areas that we continue to put a lot of focus up against. And I would say our outlook is -- as everyone has said so far this morning, I guess, I'm going to say it, too. Everything is moving in the right direction. So we feel that same way about our external performance off shelf.

Max Gumport:

Great. Thanks very much.

Adam Samuelson:

Yes, thank you. Good morning, everyone. And let me add my congratulations to Lawrence, Brendan, and the whole team. I guess just first, making sure -- there's a lot of ground have been covered today. If you think about some of the cadence of earnings and margins, just the headwinds on a year-on-year basis from, kind of, from incentive comp, how much of that has actually been realized in the first-half as we think about layering that into the back half of the year? And then, again, maybe coming back to this question on gross margins, the sequential cadence. I mean, historically, second-half gross margins would be higher than the first particularly in the fourth quarter, given that's your biggest volume quarter. It doesn't seem to imply -- so the guidance doesn't seem to imply much gross margin improvement in the second-half from where you were in the second quarter? And I'm just trying to make -- is that just mix between the different business units or just conservatism? Is there something on price cost and mix in there that we're missing? I'm just -- usually, there's a bigger step up certainly in the fourth quarter, it doesn't seem to be implied even at the high end of the guidance range?

Lawrence Kurzius:

Yes. And I want to be sure we're differentiating -- because your question, actually, I'm confused a little bit. Our gross margin in our underlying business is always higher in third and fourth quarter. That's a mix of the business, and that's the natural state. I think you're asking -- it sounds like you might be asking about that. We're expecting that relationship still holds, and we are expecting to continue to have improvement versus prior year in both those quarters as well.

Mike Smith:

The gross margin change in the first-half, we were favorable, up 113 basis points to last year. The second-half guidance implies 40 basis point to 50 basis point improvement at the midpoint. So we're showing improvement. Remember that second quarter last year, we had a really positive 300-some basis points increase in Q2. So that's a bit of why it's over 100 basis points in the first-half. But 50 basis points improvement, we're happy with that.

Mike Smith:

Great, thanks.

Matt Smith:

Hi, good morning and congratulations. Wanted to ask a follow-up question on the Consumer business in the Americas or more specifically in the U.S. We've seen elasticities improve in recent periods in measured channel data, and now you're ramping up new product activity and marketing along with what sounds like some positive distribution tailwinds. So how should we think about elasticity in the second-half? With consideration to the commentary on your outlook talking about elasticities overall in line with the prior year, which are a little softer than the trends we're currently seeing in the U.S.?

Lawrence Kurzius:

I would say though that there's a good, solid sustained demand from the Consumer. And as you take that with the -- I think, really robust and compelling growth plans that we've got in the second-half, we're -- we've a good reason to believe that we're going to continue to see volume improvement in our U.S. business specifically as we go through the year.

Brendan Foley:

Well, I think in terms of -- did we see a sequential improvement or any sequential changes as we went through the quarter? No, I would say that, largely, as we observed, kind of, the performance in the quarter in China, the one thing that was obvious is they're dealing with higher unemployment. And Consumer spending isn't as robust as maybe many and all of us were planning on, yet still being a strong rebound, but we weren't seeing any sort of different performance throughout the quarter, I would say, it was pretty much consistent. And our view, once we saw the quarter open up, it sort of held that way throughout the end of the second quarter. I think your question though -- in the back half of your question, maybe you meant on sort of how we're thinking about the third quarter. And recall last year though, that was a big rebound period in recovery with China in the third quarter. So we don't expect that same level of recovery in the third quarter this year just, because we're comparing up against that. But we expect those same trends to kind of flow through into the third quarter. And then again, when we get to the fourth, it's going to be different yet again. So we're going to be comparing against a very challenging period with respect to COVID lockdowns, et cetera. And so that is likely to feel more like the second quarter.

Lawrence Kurzius:

And we just actually had our China management team here in the office a couple of days ago, and we spent quite a lot of time with them talking about the roller coaster ride that they have been on as the economy reopened, lockdown, reopened, lockdown, reopen. And that creates a lot of noise in the year-to-year comparison. We all -- the question about how robust the recovery in China was going to be? It's really strong. I don't want anyone on the call to think otherwise. Our question all along has been is the recovery going to -- is the performance going to -- is the growth is going to start with a two or three or four? Right now, it looks like a three, not a four. And -- but -- so we have actually tempered our -- not just captured it in our results today, but we've also tempered our outlook a little bit for China that is considered in our guidance, I would say it.

Operator:

Thank you. Ladies and gentlemen, our final question comes from the line of Robert Moskow with TD Cowen. Please proceed with your question.

Lawrence Kurzius:

Thank you so much, Rob. And welcome back by the way. Congratulations to you.

Robert Moskow:

Yes. Well, we're -- I'm a little jealous of you. So -- but -- I got to be honest. But I wanted to follow-up on, Brendan, what you said about what your consumer research says about preferences for brands versus private label. I think you said the consumers prefer brands. The market share data shows that private label is growing and has been growing every year for the last couple of years, I think. And I want to know if your data is showing the same thing in terms of market share and how do you reconcile those two things together in the U.S.?

Robert Moskow:

Great. Thank you.

Operator:

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

Kasey Jenkins:

Thank you, Lawrence, and thank you to everyone for joining today's call. If you have any further questions, please feel free to contact me. And as we enter the summer season and for some of you in the U.S., the 4th of July, and Canada have to make energize, fire up those grills with the McCormick products. This concludes this morning's conference call.

Lawrence Kurzius:

Good morning, everyone. Thanks for joining us. We are pleased with the start of the year. We delivered solid first quarter results that reflect strong demand and early results from our actions to increase our profit realization in 2023. Our sales performance reflects the strength of our broad global portfolio and the effective execution of our strategies. Our global operating effectiveness, or GOE program, is yielding results with first quarter cost savings in line with our expectations. The progress we are making on gross margin improvement reflects the level of urgency with which we are addressing the pressure points from last year. These results, combined with the strong demand we continue to expect across our portfolio and our diligent approach to optimizing our cost structure, bolster our confidence in our plan and our 2023 full year outlook. Turning to Slide 5. In the first quarter, we drove 3% sales growth or 5% in constant currency. Our constant currency sales growth reflected strong underlying business performance with an 11% contribution from pricing, partially offset by a 3% decline in underlying volume and product mix, a planned 1% decline from in basics divestiture and the exit of our consumer business in Russia, and an expected 1% year-over-year volume decline from lower consumption due to COVID-related disruption in China, which we expect to see a return towards normal consumption trends in the coming quarters. Our underlying first quarter sales performance positions us well for continued top line growth for the balance of the year. Our growth in the first quarter was led by outstanding performance in our Flavor Solutions segment with positive momentum continuing in all three regions. In our Consumer segment, our underlying sales growth was led by the Americas region. Moving to profit. Our adjusted operating income was comparable to the first quarter of last year and in constant currency increased 2%. Higher interest expense and a higher effective tax rate more than offset our adjusted operating income growth in the quarter, resulting in a 6% decline in adjusted earnings per share. I'd like to say a few words about our gross margin performance, which Mike will cover in more detail in his discussion of our adjusted operating income growth drivers in a few moments. We drove considerable improvement in our gross margin performance in the first quarter. Our gross margin reflects the continued recovery of the cost inflation or pricing lagged over the last two years as well as cost savings from our CCI and GOE programs. As we've said previously, in 2023, we plan to fully recover the inflation our pricing previously lagged as well as offset current year inflation through our pricing actions and other levers. Our gross margin also reflects the result of our diligence in optimizing our cost through our GOE program. This is progressing as planned and remains a key focus. We expect the impact of our GOE program to scale up as the year progresses, and we remain on track to realize $75 million of cost savings in 2023, which we will take to the bottom line because of our actions to normalize our supply chain costs and to streamline our organization. We remain confident that we have the right plans in place and are taking the right actions. It's still early, but our first quarter results speak for themselves, and we expect to continue driving profitable growth at an accelerated rate for the balance of the year. Demand is strong. We're driving improvement in our margin profile and optimizing our cost structure effectively. Now let's move to first quarter business updates for each of our segments as well as discussion of our growth plans. Turning to our Consumer segment on Slide 6. Our underlying performance was strong, reflecting the effective execution of our pricing actions and continuing positive momentum in our consumption trend, even with lapping the elevated at-home consumption in the first quarter of 2022 due to Omicron in the Americas and the EMEA regions. That performance was partially offset by the impacts related to the sale of Kitchen Basics, our exit of Russia and the COVID-related disruption in China. Beginning in the second quarter, the activation of exciting growth initiatives, as well as lapping the impact of last year's COVID-related shutdowns in China and the exit of our consumer business in Russia, which we began to exit in the second quarter of last year, is expected to drive an acceleration of our consumer segment growth. Now for some highlights by region, starting with the Americas. Our total U.S. branded portfolio consumption, as indicated by our IRI consumption data and combined with unmeasured channels, grew 5% in line with our shipments. As we anticipated, the dynamics between consumption and retail inventory levels have begun to normalize as we move beyond the holiday season impact, and we anticipate greater alignment between consumption and shipments going forward. Importantly, our volume performance in the first quarter was better than the fourth quarter on higher price realization. In spices and seasonings, both consumption dollars and units accelerated sequentially from the last several quarters, with strength in our seasoning blends, which provide consumers both convenience and flavor exploration. Early results of our Lawry's everyday spice range, our largest innovation launch sense pre-pandemic, continue to be positive. We are seeing incremental sales and profit to the category. Over half of the purchases are from new virus to McCormick and overall incremental to the category. Hot sauce remains on fire with double-digit growth of both Cholula and Frank's RedHot in the U.S. and Canada. We continue to build excitement with our hot sauce brand marketing initiatives and reached the younger generation, most recently through gaming. And our big game campaign during the quarter, our flavor pack version of Fortnite, the Floor is Flavor, had players navigating an immersive chicken wing shaped island and a volcano that's put Frank's RedHot and included in partnership with TGI Fridays and DoorDash, a free chicken wings offer. This was our best big game campaign, capturing over 1 billion impressions in North America. And with the resolution of the long-running shortage of French's mustard bottles, we drove over 20% consumption growth for the second consecutive quarter. Our creamy muster launch last year continues to perform very well, with another flavor launch coming this year. Finally, in the Americas, we continue to drive double-digit consumption growth in e-commerce, led by spices and seasonings, but we're realizing high returns on our investments, gaining new customers and growing with new products. For instance, McCormick Corn seasonings and Frank's variety packs are both off to a great start following their online introductions earlier this year. In EMEA, we continue to have solid share performance of herbs, spices and seasonings in the U.K., Eastern Europe and Italy, somewhat offset by softer performance in France. We're continuing to gain share on Frank's RedHot in the U.K. are building momentum with Cholula. We're driving the U.K. hot sauce category growth. We're taking meaningful progress across the region and expanding our distribution and gaining share in the fast-growing discount channel. Our investments in brand marketing, merchandising and new products are proving to be effective in driving growth. In the Asia Pacific region, growth for the quarter and the year was impacted by the exit of low-margin business in India, which we will have lapped after this quarter as well as the COVID-related disruptions in China. As we have moved past the Chinese New Year, we are seeing a return to normalization. We continue to expect a benefit beginning in the second quarter from lapping the impact of last year's disruptions. Outside of the China and India impact, growth in the region was driven by new products and brand marketing initiatives. Frank's RedHot and Cholula performance was strong in Australia and extending the power of our brands, we have launched Old Bay into the Australian market and Cholula into Southeast Asia. As always, we continue to fuel our Consumer segment growth with the power of our brands as well as our brand marketing, new products and category management initiatives. We're excited about the growth plans we're executing and expect they will drive an acceleration of growth for the balance of the year. First, as we mentioned at CAGNY, we are completely renovating our U.S. core everyday spice of portfolio with consumer-preferred packaging as well as through leveraging new flavor seal technology. The atmosphere in the bottle is nitrogen flushed to remove oxygen, which means visibly fresher flavor, brighter color and stronger aroma. The modern new Snap-type trademark lid seals in the aroma and freshness. We're also printing the product names and an easy-to-read Best Buy date on the top. The new high-quality bottle and label design highlights the transparency and quality of our spices and herbs, and the bottle is made of 50% post-consumer recycled plastic, approximately a 20% carbon footprint reduction from the current package. We are really excited about these changes and so are consumers. Testing has confirmed 40% higher freshness per session, 2x higher preference and a 25% increase in loyalty among current buyers. The products began rolling out last month. The transition on store shelves will happen over the course of the year, supported with our highest spend brand marketing campaign of the past five years. Importantly, the new packaging fits right into the existing shelf stock. This is a seamless transition for our retail partners that we expect to drive category performance. This initiative, coupled with other new product introductions, I'll mention in a minute, along with our stabilized service levels, will build total distribution points and market share improvement as we go through the year as we outlined last month at CAGNY. We're also expanding into the fast-growing Mexican aisle with authentic Mexican flavor of Cholula in new formats. We are launching Cholula Taco recipe as well as sauces based on authentic Mexican formulas and crafted in Mexico using locally sourced fresh tomatoes and. Retail acceptance has been strong and consumers will find these new products and the authenticity they are looking for on U.S. shelves soon. Product began shipping yesterday ahead of, and the rollout will continue over the course of the second quarter. We're launching new products in the first half of 2023 to inspire consumers flavor exploration as well as the opinions consumers are looking for. In the Americas, we are kicking off the grilling season with new flavors including a Griller's Choice marinate you can use as three different flavors. And we're really excited about our new Stubs Master series made with technology from our FONA acquisition, these dry seasoning rubs capture real authentic hardwood smoke flavor. Leveraging the product successes of 2022, we are extending our Tabitha brown line into new flavors, formats and channels, and we're also launching a French's creamy roasted garlic mustard. In direct-to-consumer, we continue to grow our platform with new innovative flavors as a testing ground and in the club channel, we're launching a world flavors line. In EMEA, we're enabling consumers to discover the authentic taste of America by introducing old Bay to the U.K. market as well as introducing a new line of products leveraging the French's brand, including American favorites recipe. In the U.K., we also just launched Schwartz brand gravy, which are beating the top competitor on taste. In APZ, we've recently launched meal basis, a favorite Keane's recipes and will be launching a Gourmet Garden SD lemon paste, both making consumers flavor exploration easier. In China, we've introduced new packaging for our Chicken Bullion product, a pouch with a resealable port cap that makes it convenient for consumers and extends the open product shelf life by locking up moisture. We're continuing to build our heat platform across all regions with the launch of new products, including in the U.S., Gourmet Nashville hot chicken season, Frank's RedHot Dill Pickle hot sauce and a Cholula reserve crafted with 100% tequila and our flavor forecast of the year, Vietnam's agent sale season. In China, we're introducing iconic Chinese city spicy blend and then the U.K. Frank's RedHot spicy recipe mixes. Across all regions, we're increasing our brand marketing investments in 2023 and expect the most significant year-over-year increase in the second quarter. We will continue to support our brands with messaging on everyday use, value and the superiority of our ingredients and flavors and more specifically, with mustard supply issues resolved, we've launched a flavor on campaign for mustard or elevating our mother of sauce, Cholula campaign to support the launch of the new format and capitalize on. And of course, with grilling season starting during the quarter, we plan to reach grillers with our just flame and flavor campaign. A robust growth plan gives us confidence in continuing to drive positive momentum. We believe they will all be a win for consumers, customers, our categories and McCormick, differentiating us even more and strengthening our flavor leadership in core categories. Turning to Flavor Solutions on Slide 9. Our sales performance in this segment continues to be outstanding. This was our eighth consecutive quarter with double-digit sales growth. Our first quarter growth was led by pricing actions in all three regions, which as we expected, accelerated versus previous quarters. Now for regional highlights. Our Americas first quarter strong sales growth was led by our Flavors product category. Within Flavors, snack seasoning growth was strong including volume growth related to new products and strengthen our customers' iconic products, partially fueled by their marketing as well as our improved ability to service our customers as we began to realize the benefit of the capacity we're bringing online. Flavors for Performance Nutrition and health end market applications also contributed to our strong performance as we continue driving double-digit sales growth. We are winning with new customers and new products. Volume was tempered in the quarter by the pruning of some low-margin business. The impact of a very cold December on the away-from-home part of our portfolio and lower volume of alcoholic beverage flavors due to what must have been a drier January than last year. In EMEA, we continue to drive broad-based growth across the portfolio, which was led by higher sales to our quick service restaurant customers in the first quarter. Overall, our price realization nearly doubled versus last quarter. And in APC, we delivered solid volume growth in the markets outside of China, driven by demand from quick service restaurants, or QSRs, for our products to heat up their hot and spicy offerings. Overall, labor solutions demand has remained strong, particularly in certain parts of our business in our Americas and EMEA regions. As we continue to bring additional capacity online and reduce both supply chain pressure and the extraordinary cost to service our customers, we appreciate their patience and collaboration. We're continuing our positive sales growth momentum in Flavor solutions, and we're committed to restoring profitability in this segment, recovering margin while ensuring we keep our customers in supply and driving growth for both McCormick and our customers. We're confident we will achieve margin recovery. In our January earnings call, we set our price increases had just begun to catch up with the pace of inflation and we were beginning to recover the cost inflation or pricing lag in the last two years. This is continuing at an even greater rates in the first quarter. And earlier, I discussed cost through our two lead program, which will contribute to the Flavor Solutions margin recovery. GOE will have a significant impact in the Flavor Solutions segment. And finally, we continue to focus on driving growth in high-margin parts of our portfolio such as the flavor product category volume growth I mentioned a few minutes ago in the Americas region. Now I'm excited to share the growth plans we're executing on and expect will continue to drive our growth momentum. We continue to fuel our Flavor Solutions segment growth using our differentiation, including our culinary foundation, our unique and powerful consumer insights advantage, our proprietary technologies and our passion for providing our customers with a differentiated collaborative experience. While we cannot get too specific about product development, following a strong year of innovation in 2022, we carried a robust new product pipeline into 2023. As we mentioned at CAGNY, we are specifically targeting opportunities to grow in high-growth end markets. Applications such as savory snacks, alcoholic beverages and Performance Nutrition and have outpaced market growth and as I just shared, our robust growth momentum continued in the first quarter. As we expect it will the balance of the year, the capabilities we built for these categories are creating significant top line opportunities. The power of McCormick and FONA together continues to fuel greater opportunities for growth. This acquisition is exceeding our expectations. We're capitalizing on opportunities to increase our sales to existing customers by cross-selling across our more comprehensive product offering and target new customers. We're leveraging our global footprint and capabilities to drive future growth. We are currently in the process of expanding performance nutrition into Canada as well as localizing confectionery flavors in for our FONA customer. Finally, in branded foodservice, we have a robust 2023 innovation agenda, launching more than double the new items than in 2022, including Frank's RedHot, Nashville Hot, a line of Cholula Street Tacos, McCormick culinary Global blend and a French's portion control package. Our plans include continuing to leverage our culinary partnerships, inspire menu ideas with our customers, win placement on away-from-home menus, including with quick service restaurants and drive growth with promotional activities. Our robust growth plans in Flavor Solutions also give us confidence in continuing our growth trajectory and drive our Flavor Solutions leadership. Now for summary comments before turning it over to Mike. Turning to Slide 11. Global demand for flavor remains the foundation of our sales growth, and we've intentionally focused on great fast-growing categories that will continue to differentiate our performance. We continue to capitalize on the long-term consumer trends, healthy and flavorful cooking, increased digital engagement, trusted brands and purpose-minded practices. McCormick is uniquely positioned to capitalize on its demand for great taste, with the breadth and reach of our strong global flavor portfolio, we are delivering flavor experiences for every meal occasion. Through our products and our customers' products and are driving growth, we are end-to-end flavor. The strength of our business model, the value of our products and capabilities and the execution of our proven strategies give us confidence in our growth momentum and ability to continue navigating the dynamic mobile environment. As we look ahead to the balance of the year, we will continue to focus on capitalizing on strong demand, optimizing our cost structure and positioning McCormick to deliver sustainable growth. We have robust growth plans in place including building momentum with our new products and heat platform and are delivering on our commitment to increasing our profit realization. We are confident with the successful execution of our planned and concrete actions we will drive profitable growth in 2023. I want to recognize McCormick employees around the world as they drive our momentum and success. I want to also thank all of our customers, suppliers and investors for their collaboration and patients as we move beyond the unique environment we've been operating in since the onset of the pandemic. The fundamentals that drove our historical financial performance remain intact, and we are confident we will continue to not only deliver strong sales growth, but also drive total shareholder return at an industry-leading pace. Now, I'll turn it over to Mike.

Lawrence Kurzius:

Thank you, Mike. Now that Mike has shared our financial results and outlook in more detail, I'd like to recap the key takeaways as seen on Slide 29. Our first quarter sales growth reflects the strength of our broad global portfolio and the effective execution of our strategies. Our underlying business performance was driven by our pricing actions and strong ongoing demand. Our first quarter progress on margin improvement reflects the level of urgency with which we are addressing the pressure points from last year. We are committed to increasing our profit realization, and our actions are yielding results on optimizing our cost structure and recovering the cost inflation or pricing lag last year. We expect our progress to scale up as the year progresses. We have robust growth plans in place, including building momentum with product innovation and renovation and are driving improvement in our margin profile. We expect to drive profitable sales growth at an accelerated rate in the balance of the year and have bolstered confidence in delivering our outlook for 2023 in building shareholder value. The compounding benefit of our relentless focus on growth, performance and people continues to position McCormick to drive sales growth. This coupled with our focus on recovering cost inflation and lowering costs to expand margins, will allow us to realize long-term sustainable earnings growth. Now for your questions.

Ken Goldman:

I was just curious how 1Q came in versus your internal expectations. I guess, post in a broad sense, and maybe if anything specific stands out in terms of drivers. I won't ask if you considered raising guidance. I assume it's a little early in the year. But if the quarter was above what you would forecast, were there specific reasons that stand out. And I guess, is there any reason to think some of those drivers can't continue into 2Q and beyond maybe?

Mike Smith:

And as you said, Ken, the first quarter to your March Madness, I think we put some points on the board, and we're going to continue focusing on growing the business. And as Lawrence said, we've made real good progress on our cost agenda to it, which is great.

Lawrence Kurzius:

Sure. It was strong performance. In our guide for the year, we've said our volumes are going to be flattish overall. And I'd say our expectation by segment is maybe a little bit -- a little bit positive in Flavor Solutions, a little bit negative in the Consumer. But overall, all of it within kind of a plus or minus one range versus flat. And so I think that's a good way to think about it. We do expect to see strong pricing impact the year as we go through the whole year on Flavor Solutions.

Operator:

Our next question is from the line of Andrew Lazar with Barclays. Please proceed with your question.

Lawrence Kurzius:

Brendan, why don't you take that?

Andrew Lazar:

And then you mentioned -- it's early, I know, but early results of sort of the Lawry's sort of value brand launches or kind of doing what you wanted to do. I think you said that over half of the purchases are from new buyers to McCormick. And then I think overall, incremental to the category. So I'm just trying to get a sense of where -- I guess, where are these new consumers to the category coming from where they just didn't operate in this category before? Or what is it about the Lawry's brand launch that's drawing, I guess, new consumers overall to the category because that's obviously particularly important, I guess, for your retail partners as well?

Operator:

Our next question is from the line of Alexia Howard with Bernstein. Please proceed with your question.

Lawrence Kurzius:

Well, of course, China was really complicated story this quarter because our first quarter begins in December. And in December, the country was still largely in lockdown -- now they got a train going behind the ground. The country is largely locked down in December, then they reopened and they had a very concentrated pandemic period or a huge proportion of the population. I wonder if you've lost -- but a question of the population got COVID. So that was quite a big impact on McCormick. We thought that post-Chinese New Year would probably begin to see a recovery. And I think we were seeing that unfold after Chinese New Year in a positive way. And in second quarter, we're going to lap the lockdowns from last year, and we're expecting a significant recovery in China. As we go through the second quarter, we're certainly going to have double-digit growth compared to a year ago unless there's some other exogenous shock. The question on that double digit is just what the first number is, but it's going to be big.

Lawrence Kurzius:

Brendon?

Alexia Howard:

Great. And sorry about the noise there. We've got some very impatient taxi drivers out here on the New York City street apparently. A quick follow-up. Inventory, retailer inventories were a big upset last quarter in terms of the year-on-year changes. Is that now behind us? And are you seeing any shifts, particularly in North America relative to the Nielsen data that we're seeing, consumer takeaway versus shipments?

Operator:

The next questions are from the line of Robert Moskow with Credit Suisse. Please proceed with your question.

Lawrence Kurzius:

I'm going to let Mike go for this one.

Robert Moskow:

Okay. When you said favorable, so it was favorable in first...

Robert Moskow:

Right, right, right. Okay. And I guess a similar question on China. I remember you called out an $0.11 per share impact in 2Q last year. So can I assume you're going to get all that back and more? And then in third, was there also an impact? It was never quantified, but it must be significant, too.

Mike Smith:

Yes. If you look at that the 2023 outlook chart in our earnings deck, a 3% impact on EPS, that's the full year impact, which is around...

Mike Smith:

Yes. Those are the -- exactly. Yes.

Lawrence Kurzius:

I think that absolutely, there is a tremendous opportunity for our sales force this year for a couple of reasons. One is that our service is in much better condition so that we don't have as many unproductive conversations with our customers. The second is the sheer amount of innovation and the balance that we're bringing to our customers is going to be really positive. And Brendan, I'm going to ask you to just say a few words about that.

Mike Smith:

And I think supporting those new products in our brand marketing, we were slightly favorable in the first quarter versus last year, but you'll see in the second quarter that support will increase year-on-year.

Max Gumport:

For the question. First one is on gross margin. So it came in well above Street expectations in the quarter. And I recognize it's early and you talked about putting points on the board. But I do wonder that as you think about your path to mitigating the pressure points that impacted this line last year, have your used changed at all? It would seem like with inflation accepted to ramp down through the year and your GOE program as to ramp up through the year, you might now have a bit more visibility towards the higher end of your previous 25 to 75 basis point guidance range.

Lawrence Kurzius:

And I think you'll see as we go through the year, that we will steadily improve that flavor solution margin performance. But as Mike said, this is our first quarter, it's also the smallest quarter of the year. We certainly bolstered in our confidence, but we don't want to get overconfident.

Mike Smith:

Yes. I mean basically, like two months ago, we said it's a small impact on first building into the second then in the second half is where you see the significant impact it scales up.

Steve Powers:

Yes. Just going back maybe to the question on trade inventory that I think Alexia originally raised. Just to play it back, it seems like from what you had said before that you exited the quarter with trade inventory levels roughly in balance from the consumer business. Just want to make sure that was correct. And then so as we go forward, I guess the base case is that you ship more or less to consumption for the balance of the year with maybe a little bit of opportunity to ship ahead to the sense that the renovation work leads to those incremental distribution points. Is that the right interpretation of what you said so far?

Brendan Foley:

Yes. I mean maybe, Steve, just to focus on the front end of your question first. What we saw in the first quarter, we did -- shipments were in line with consumption. But I think more importantly, the dynamics that we would typically see in the first quarter following a holiday season played out as it behave much like a normal period of time. So that's what we'd hope to see in Q1. That's what we did see in Q1. And what that, I think, means looking ahead now, which is kind of the back end of your question is we see things normalizing and operating a little bit more like we would typically operate. I have to think a little bit of what that means by the end of the year, but we would just see a shift to consumption model really play out as we normally do. Just remember, though, in that fourth quarter, we have a big -- that's our biggest quarter of the year, in our big holiday season. So we tend to kind of even things out after Q1 and then sort of like begins again as we think about that cycle. So that's the way I would think about it. But the important takeaway for me and I think maybe in this call is that we saw a normalization of that, how that would typically behave in Q1.

Adam Samuelson:

So, I guess I wanted to come back to Flavor Solutions. And I think the comments in response to earlier question was kind of expect to see the margins there build through the year. And that's also, I think, where the majority of the global operating effectiveness program would show up. Can you just remind us this year, kind of the excess costs that you're carrying for the U.K. facility as you execute the changeover to the new plant, and we think about that layering out of the system in '24 and beyond? And maybe more broadly, help us think about the road map to building the Flavor Solutions margins back up to the mid-teens level that they were at pre-COVID?

Lawrence Kurzius:

After this quarter.

Adam Samuelson:

And I guess then as we think about kind of exiting this year on Flavor Solutions and beyond, I mean you're still kind of -- the margin structure of the business seem to be well below where you were a couple of years ago. And just trying to think about kind of some of the building blocks, whether it's, say, concentrated customer base and getting kind of the full price recovery there? Is it mix? Is it capacity? I'm just trying to think about what -- where the margins have gotten to in 2018, 2019. And exiting this year, they're still going to be in kind of high single-digit range, I think.

Adam Samuelson:

Well, I get that's not going to happen just this year, but if I just push in -- the business mix isn't all that different today versus where it was three or four years ago. So apart from we've had this big run of inflation, what's really changed in terms of the profitability of the portfolio today?

Lawrence Kurzius:

And I would say that it's not true that the business mix has not changed. The business mix has changed, and we continue our portfolio migration towards more value-added products. You hear us talking about pruning the portfolio. We have not been specific because we don't want to talk about things that are -- that might be identifiable to a specific customer, but there's definitely been a movement within our portfolio, both by category and within product categories to improve that business for the long term. And Mike said that we don't look at the pre-pandemic operating margin as a ceiling. As we said at the time, we look to some of our pure labor house peers who publish public numbers who have significantly higher operating margins. That's more what we aspire to in the very long run.

Peter Galbo:

Mike, just to go back to the question around kind of GOE and to square some of the gross margin kind of math on the quarter. It seemed like you were saying GOE was pretty minimal in terms of contribution to gross in 1Q. But maybe you can just help us like the other components, what did CCI contribute in 1Q? And just where did the actual inflation rate -- the COGS inflation rate in the quarter fall relative to that low to mid-teens number for the year?

Peter Galbo:

Okay. That's helpful. And Lawrence, maybe just -- you talked a little bit about drilling season and some of the new product innovation. We've heard from some others as well. Just curious how you're thinking about promotional maybe cadence over some of the summer holidays, if that's maybe the depths aren't back to a more normal level. But are you seeing a chance to maybe increase promotional frequency as you get into some of your bigger, more important holiday season?

Operator:

The next question is from the line of Cody Ross with UBS. Please proceed with your question.

Lawrence Kurzius:

Well, as I said, I think our -- our ability to full schedule of merchandising activity with our customers. I think that's part of what gives us confidence in our outlook for the year, frankly, is that we're able to have those kinds of positive conversations with our customers as opposed to some of the negative ones that we might have been having over the last few years about supply and their desire to promote. I mean, I think some great examples are like our French mustard where we finally have bottles in supply, and we've been able to drive 20% volume growth for the last two quarters and gained significant share. And I think that we're going to do a similar thing with growing products. I think the renewal of our ability to meet our core product demand is also allowed us to innovate. And so those promotions, in many cases, are showcasing our products in store, which also, I think, will contribute to volume. And again, our outlook for volume on the Consumer side of the business relatively flat for the year, I think we're up against a tough comparison in the first quarter, and that's part of the reason why volume is down lapping Omicron a year ago and so on. But I think we're pretty optimistic actually on volume. And the pricing actions that we needed to take are loaded to the year. And again, so I think that, that's something that will -- it's not in the way of growing our volume.

Lawrence Kurzius:

It's always dangerous when the CEO talks about capital allocation, so I'll let Mike give us the talking here. The one thing I'll say about M&A is it's not our priority right now, but we would not miss a good strategic opportunity.

Operator:

Our final question is from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Lawrence Kurzius:

Brendan, why don't you take?

Lawrence Kurzius:

And I'm going to say that on the Consumer side, we have tremendous growth plans, including a lot of innovation and the renovation of our everyday spice line, hitting the market in the second quarter and a number of major customer wins that are going to go on shelf in the third quarter. And we're expecting a strong recovery in China in the second quarter. So while it's a dynamic and that we are actually really encouraged about the sales outlook for the rest of the year.

Lawrence Kurzius:

That's not our...

Lawrence Kurzius:

Well, I will say that, that is a wide-ranging question, and I can go absolutely while answering it. However, we have gotten rid of some -- when I say when we said we're pruning the business, I mean, some of it is not visible, as we talked about on a previous question. But some of it is Kitchen Basics, for example, is a brand that -- well, it's a great brand. We like it a lot. It was the only thing we had in that aisle. It was hard for us to bring our category management tools to bear on it and it was a little bit of an orphan. There was pressure both from leading brands and from private label on that. And we didn't see a good path to grow it with a good return for us, the wrong owner of that brand. And so we've thought about other parts of our portfolio that way. The things that we've gotten out of have tended to be pretty small, though. And that's a good example of one of the bigger things that we've done. Most of what we -- the other things we've gotten out of have been small or would be less familiar to you because they're in a different region of the world. But the innovation that we will do is differentiated. It brings more differentiation to our brand, flavors, blends that are hard to duplicate. We brought on a technology into some of our innovation as we have with the true taste technology that we are using in our new stubs rugs. And I think we just had a tough act to follow. And the renovation that we're doing on our core herbs and spice brands is going to be very differentiating, not just versus private label, but versus other brands. I mean to be able to have that oxygen-free atmosphere that is going to bring freshness to the market and a better appearance and aroma for consumers, that is going to be very differentiating and difficult to follow quickly. That's for sure. And a lot of the things that we're doing around that renovation are either trademarked or patented. And I think -- I mean, I think that everything you look at, whether it's the pruning of our portfolio or the migration of our portfolio to higher value or technically insulated products on the Flavor side, to the innovation that we're bringing in our brands, serves to differentiate us, extend our leadership and push the gap between us and private label to be more of a discussion around total value and cost and benefits than just about the cheapest price.

Lawrence Kurzius:

Thanks for your question. And that is our final question. So, I was waiting for the moderator to possibly say something, but that's okay. It's not necessary. But core alignment with consumer trends and the rising demand for Flavor in combination with the breadth and reach of our global portfolio and our strategic investments provide a strong foundation for sustainable growth. We are disciplined and our focus on the right opportunities and investing in our business. We're continuing to drive further growth as we successfully execute on our long-term strategy, actively respond to changing consumer behavior and capitalize on opportunities from our relative strength. We continue to be well positioned for continued success and remain committed to driving long-term value for our shareholders.

Lawrence Kurzius:

Good morning, everyone. Thanks for joining us. Our fourth quarter concluded a challenging and volatile year that impacted our ability to deliver on our expectations and our financial performance. At the same time, we ended the year with positive momentum with consumer consumption trends and flavor solutions demand, stabilized service levels and supply and meaningful progress in starting to reshape our cost structure. While more work remains to be done, our confidence in our outlook for 2023 and beyond is strong. Our organization is focused squarely on executing on the priorities I just mentioned. All of which are important drivers in the successful execution of our strategies and the delivery of stronger results. Turning to Slide 5, at our fourth quarter results, our sales declined 2% from the year ago period, including a 4% unfavorable impact from currency. In constant currency, sales grew 2% within our implied fourth quarter guidance range, but below our expectations. Greater-than-expected COVID-related disruptions in China unfavorably impacted our expected sales growth for both total McCormick and the Consumer segment by approximately 2%. Fourth quarter sales would have grown in the range of 4% in constant currency, excluding the impact of China on our results. We had anticipated even higher growth with fourth quarter restocking comparisons in the Americas Consumer segment further tempered our growth. As compared to last year, our fourth quarter constant currency sales growth of 2% reflected a 9% contribution from pricing actions partially offset by a 4% decline in underlying volume and product mix, an expected 2% volume decline from the Kitchen Basics divestiture and the exit of low-margin business in India and the consumer business in Russia and a 1% year-over-year volume decline from the China COVID-related disruption. Despite tempered fourth quarter sales performance, our underlying sales strength positions us well to accelerate sales growth in 2023. In our Consumer segment, excluding China, consumption trends strengthened, particularly in the U.S., where our fourth quarter total branded consumption grew 6%. In our Flavor Solutions segment, our sales growth was outstanding, continued momentum across all regions. Consumers increasing demand for flavor, whether through our products or our customers’ product is those reflected in this performance and in our most recent proprietary consumer insights research. Our alignment with the long-term consumer trends of cooking at home, clean and flavorful eating and valuing trusted brands continues to deliver results. This alignment, combined with our broad and advantaged portfolio, plus the fundamental strength of our category continues to underscore McCormick’s positioning for long-term differentiated growth in flavor. Moving to profit, our adjusted operating income decline of 10% or 9% in constant currency and adjusted earnings per share decline of 13% fell short of our expectations. Let me spend a moment on the differences to our expectation. Unfavorable product mix was a driving factor, particularly in our Consumer segment. This was primarily due to lower U.S. bites and seasoning sales stemming from fourth quarter inventory restocking comparison in both 2021 and 2022, which I will discuss in a moment. Our results also reflected lower-than-anticipated sales in China and an unfavorable product mix related to the sales mix between segments. In addition, with two COVID-related plant shutdowns in China, we realized lower operating leverage. During the quarter, we made meaningful progress to lower our run-rate cost in flavor solutions with the reduction of elevated costs that we have been incurring to meet high demand in parts of our business. The impact of that progress was offset in the fourth quarter by unexpected discrete one-time issues. However, we expect to see positive benefits in our results going forward. Turning to Slide 7, we are committed to increasing our profit realization in 2023. In our last earnings call, we discussed normalizing our supply chain costs and increasing efficiencies while also strengthening our ability to service customers. To that end, we have targeted the elimination of $100 million of supply chain costs over the next 2 years. We are also now taking streamlining actions across our entire organization targeting an incremental $25 million of cost savings. The combination of these actions, which is our global operating effectiveness program, is incremental to our comprehensive continuous improvement or CCI savings. Our CCI program has a well-established track record of success and we are leveraging its proven program discipline to drive results. We expect our global operating effectiveness program to drive annual cost savings of approximately $125 million, of which we expect to realize $75 million through the P&L in 2023, enabling increased profit realization. We can see the results coming through and we expect the impact to scale up as the year progresses. Now, let me share more details on our actions. During last year, we transitioned to our global operating model allowing us to more effectively leverage our scale and drive cost reductions. As we further advance that model and streamline our processes, strengthen our collaboration and align our structure to work more efficiently, we are taking corresponding actions to streamline our workforce across the entire organization. We are making considerable progress on the streamlining actions we have underway. A large component of our streamlining actions is a U.S. voluntary retirement program, which is very far along with a targeted separation date of February 1. This will be followed by other actions, some of which will be involuntary. As always, we will care for employees in keeping with our shared value. Moving to the supply chain. Our top supply chain priority remains keeping our customers in supply and supporting their growth. And while we expect continued volatility in global supply chain, we have strengthened our resiliency over the past few years to achieve this priority. As we responded to demand volatility over the past several years, we incurred additional costs above inflation, service our customers and have seen inefficiencies to develop in our supply chain. Some of these costs for investments and decisions made to support continued growth for both our customers and McCormick and some are the result of a buildup that can occur in periods of disruption. In 2022, with the service levels of focus the normalization of our supply chain costs and inventory levels has taken longer than expected. As we stated on our third quarter call, during the fourth quarter, we began to implement initiatives to optimize our cost structure, increase our capacity and reduce inventory levels while strengthening our supply chain resiliency and ability to service our customers. Now for some details on these initiatives. First and foremost, while we continue to resolve some outliers, we have rebuilt and stabilized our service back to strong levels and at a high level of finished goods inventory on hand. Operating from this position enables us to maximize our performance, reduce our labor costs and pare back excessive use of co-packers within our operations. Starting with labor as we expect it to be the most significant driver of our cost reductions, during the fourth quarter, we reinstated more normal shift schedule with most locations now operating on a 24/5 pattern. This allows us to eliminate inefficient and unpopular difficult to staff shifts. Additionally, as we move away from the industry-wide labor issues seen during the pandemic, we have stabilized absenteeism and turnover rates in our workforce and returned to more standard staffing by line. During the quarter, we optimized our leadership structure throughout our facilities and upgraded the talented key roles. Simultaneously, we are increasing the capability levels of our team. We are also accelerating automation, bringing for individual pieces of equipment to a completely automated line for a high-volume packaging format. We expect through these initiatives to reduce 10% of our Americas supply chain workforce. And over the past 3 months, we have already achieved half of the planned reduction. Next, turning to our capacity. We are supporting future growth and enabling better customer service by investing to increase both manufacturing capacity and reliability in constrained areas. These investments also enable the repatriation of the production we scaled up at co-packers while continuing to meet the elevated demand. In our Flavor Solutions segment, our flavors volume, including seasonings and flavor encapsulation, has been growing at a mid single-digit rate for each of the past 3 years and demand remains strong. Our investments in additional seasoning capacity as well as spring dry capacity with the expansion of bonus footprint are on track to be online during the second quarter. Meanwhile, in our Consumer segment, we have been using co-packers for targeted high-demand packaging format such as some of our large value sized items. Now given the efficiencies gained and the investments already in flight, we have started to repatriate some of these formats. Overall, we are on track for co-pack spending in 2023 to be the lowest in the past 5 years. From an inventory perspective, we are executing on initiatives to return to historical safety stock levels which has been disrupted and raised by the supply chain issues of the last few years. We reduced both raw material and finished good inventory during the fourth quarter. While we are aware we have further progress to make, we are confident and encouraged by the results our initiatives are delivering so far. As we progress to a more normalized environment, we will realize additional benefits from these changes. For example, we expect to see reductions in expedited freight and less than truckload shipping costs and will streamline other transportation inefficiencies. With the recent opening of our new Maryland logistics center, we are able to eliminate expensive external warehouse costs before even fully realizing the inventory reduction, accelerating the expense savings. With more efficient manufacturing and lower inventory levels, we expect low material losses. We have managed through various supply chain challenges over the last several years. I am confident in our disciplined approach to resolving the increased cost within our supply chain while prioritizing meeting our customers’ needs. The impact of our actions is expected to normalize our supply chain cost, enhance our efficiency and ability to meet demand, reduce inventory levels and ultimately increase our profit realization as reflected in our 2023 outlook. Our global operating effectiveness program has considerable momentum and we look forward to sharing more on our progress with you after our first quarter of 2023. Now moving to fourth quarter business updates for each of our segments. Turning to our Consumer segment on Slide 8, sales performance in the quarter was impacted by factors mentioned previously, the Kitchen Basics divestiture, exits of businesses and COVID-related disruptions in China as well as trade inventory dynamics between years. These factors as well as lapping high COVID-related demand early in the year also impacted the full year performance. Importantly, on a 3-year basis, we have grown annual sales at a 5% CAGR, driven by the Americas region, but we are ending the year with positive momentum in our consumption trend. Now for some regional highlights on sales and consumption. Starting with the Americas, during the fourth quarter of 2021 because we were restocking, shipments were higher than consumption and we are lapping that this quarter, which impacts our sales growth. As we entered the holiday season this year and having shifted fairly in line with consumption for the first three quarters of the year, customers did not need to replenish their inventory as much despite strong consumer consumption during the holiday season. We estimate our fourth quarter sales growth rate was unfavorably impacted 6% related to these restocking comparisons. We did not fully appreciate the level of fourth quarter restocking in 2021, especially of high-margin holiday herbs and spices and the resulting impact on our year-over-year growth and as such, had expected stronger sales growth this year. That said excluding this impact, our underlying volume performance in the fourth quarter was better than in the second and third quarters. We have confidence that as we move out of the first quarter, the holiday season fluctuations this year between consumption and inventory levels as well as retailer restocking resulting from pandemic-driven dynamics will have normalized and we have an increased level of confidence in our visibility. Our total U.S. branded portfolio consumption growth was 6% this quarter, as indicated by our IRI consumption data combined with unmeasured channel was the strongest of the year. Our investments in brand marketing and stronger holiday merchandising proved to be effective. And with the stabilization of supply disruptions, restoration of our service levels continued and our fourth quarter service level was the best of the year, just shy of our pre-pandemic standards. Our consumption dollar sales, unit and volume all accelerated sequentially and our total distribution points or TDPs have stabilized. In spices and seasoning, our fourth quarter performance was the strongest of the year. Consumers are responding to our value messaging, trading up to larger sizes and according to our consumer insights are learning to navigate the current environment. We are continuing to build distribution on the Lawry’s everyday spice range we launched last quarter and early results are positive. We are seeing incremental sales and profit to the category as consumers are trading up to this line for private label. In recipe mixes, we gained share for the fifth consecutive quarter and with improved packaging supply, we also gained share in hot sauce and mustard during the quarter. Across the portfolio, our trends are continuing to strengthen in the first quarter of 2023. In EMEA, we ended the year with our strongest sales growth in the fourth quarter. Our effective pricing and new product growth accelerated versus the first three quarters with our fourth quarter price realization, the highest of the year and our volume decline, the lowest. Our strong consumption momentum continued and accelerated sequentially. In the fourth quarter and for the full year, we gained share versus last year and 2019 in the UK and Eastern Europe herbs, spices and seasoning. Those gains were somewhat offset by softer performance in France. In the UK, we are driving the hot sauce category with Frank’s RedHot continuing to gain share again in the quarter and for the full year versus last year as well as compared to 2019. Additionally, in the UK, we advanced our recipe mix leadership during 2022 to the number one share position. As we entered 2023, we are confident in our continued momentum in the EMEA region. In the Asia-Pacific region, growth for the quarter and the year was impacted by the exit of low margin business in India, which we will lap after the first quarter of 2023 as well as the COVID-related disruption in China. Reflected in our outlook, we are expecting continued disruption into the first quarter of 2023 with an expected recovery after the Chinese New Year. While we are currently experiencing the short-term pressure, we continue to believe in the long-term growth trajectory of our business in China. Our brand marketing, new products and category management initiatives are driving positive momentum with more to come from 2023 and we look forward to sharing this and our growth plans at CAGNY in a few weeks. Turning to Flavor Solutions on Slide 9, sales growth reflected pricing actions as well as higher base volume growth in new products. Our sales performance has been outstanding all year, led by double-digit growth every quarter in the Americas and EMEA regions, resulting in 12% growth for the full year. On a 3-year basis, we have grown annual sales at an 8% CAGR with strong growth in all three regions. Now for some regional highlights. Our Americas fourth quarter sales growth was the strongest of the year. Growth in flavors, including snack seasonings and flavors for performance nutrition and health end market applications, as well as branded foodservice products drove our fourth quarter performance as well as our strong broad-based growth for the year. We continue to realize the benefits from the combined capabilities of FONA and McCormick with new products contributing approximately 30% more growth in Flavors in 2022 than last year. Demand continues to strengthen with branded foodservice restaurant and institutional foodservice customers and we are also expanding distribution and gaining share in both spices and seasonings and hot sauce. In EMEA, our strong fourth quarter performance in all product categories capped an outstanding year of 17% growth, including significant volume growth of 9% as well as pricing. We are winning in all markets and channels. Growth remains strong across our customer base led by the momentum with our quick-service restaurant or QSR customers, partially driven by expanded distribution and their promotional activities. In APV, we are driving further menu penetration with our QSR customers, realizing growth from strong performance of core menu item sweet flavor. We delivered solid growth in the APC region for the year despite the COVID-related disruptions in China. Across markets outside of China, we drove double-digit growth with contributions from both volume and pricing. Overall, Flavor Solutions demand has remained strong. And for certain parts of our business in the Americas and EMEA regions, our supply chain continues to be pressured to meet this high demand, driving extraordinary costs to service our customers. We appreciate our customers working with us and are encouraged by the results our collaboration is already beginning to yield. While our Flavor Solutions sales growth has been outstanding, we are not delivering profit growth in this segment. We are committed to restoring Flavor Solutions profitability, recovering margin while ensuring we keep our customers in supply and driving growth for both McCormick and our customers. We are confident we will achieve margin recovery through three actions, effective price realization. Our price increases are only now catching up to the pace of inflation and we are beginning to recover the cost inflation or pricing live last year. The successful execution of the global operating effectiveness program I just mentioned, in particular, we expect the elimination of supply chain inefficiencies and the investments in capacity to have a significant impact in the Flavor Solutions segment. And finally, continued focus on driving growth in high-margin parts of our portfolio. The strength of our Flavor Solutions portfolio and capabilities, including our customer engagement approach and culinary inspired innovation are driving our outstanding flavor solution momentum. We look to sharing more about our growth plan and margin recovery at CAGNY in a few weeks. Now some summary comments before turning it over to Mike. Turning to Slide 10, global demand for Flavor remains the foundation of our sales growth and we have intentionally focused on great fast-growing categories that will continue to differentiate our performance. We continue to capitalize on the long-term consumer trends that accelerated during the pandemic, healthy and flavorful cooking, increased digital engagement, trusted brands and purpose-minded practices. These long-term trends and the rise in global demand for great taste are more relevant today than ever, but the younger generation stealing them at a greater rate. McCormick is uniquely positioned to capitalize on this demand for great taste with the breadth and reach of our strong global flavor portfolio we are delivering flavor experiences for every meal occasion through our products and our customers’ products and are driving growth. We are end-to-end flavor. We remain focused on the long-term goals, strategies and values that have made us so successful. We have grown and compounded that growth over the years, including through the pandemic and other periods of volatility. The strength of our business model, the value of our products and capabilities and the execution of our proven strategies by our experienced leaders while adapting to changes accordingly, give us confidence in our growth momentum and in our ability to navigate the dynamic global environment. As we look ahead to 2023, we will focus on capitalizing on strong demand optimizing our cost structure and positioning McCormick to deliver sustainable growth and long-term shareholder value. The fundamentals that drove our industry leading historical financial performance remains strong and we are confident we are well positioned to drive profitable growth in 2023. I want to recognize McCormick employees around the world for their contributions in 2022 and the momentum they are driving in 2023. Now, I will turn it over to Mike.

Lawrence Kurzius:

Thank you, Mike. Now that Mike has shared our financial results and outlook in more detail, I would like to recap the key takeaways as seen on Slide 28. Our fourth quarter sales performance despite challenges from the COVID-related disruptions in China reflects the underlying strength of our global portfolio and the continued execution of our long-term strategies. With the stabilization of service and our supply chain in addition to positive momentum and consumption trends, we expect an acceleration in consumer segment sales dollars and volume in 2023 and continued strong flavor solutions performance as the strength of our portfolio is net with outstanding demand across our customer base. We have strong growth programs, and we look forward to sharing them at CAGNY. We are committed to increasing our profit realization. The actions we have underway to normalize our supply chain costs and increase our organizational effectiveness and efficiency are already yielding results. Our global operating effectiveness program is expected to deliver $125 million of cost savings. We expect the benefits of the program to scale up through each quarter of 2023 and continue to be accretive into 2024. While actively responding to the macroeconomic challenges we are facing, we continue to operate with the same discipline and commitment to execution as we have in any other operating environment. The fundamentals that have driven our historical performance remain in place, and we are as diligent as ever in driving value for our employees, consumers, customers and shareholders in both 2023 and beyond. The compelling benefits of our relentless focus on growth, performance and people continues to position McCormick to drive sales growth. This, coupled with our focus on recovering cost inflation and lowering costs to expand margins will allow us to realize long-term sustainable earnings growth. Before turning to your questions, I want to reiterate my confidence and driving the profitable growth reflected in our 2023 outlook. And now for your questions.

Andrew Lazar:

Great, thanks. Good morning, everybody.

Andrew Lazar:

Hello. I guess the question I’m getting, I think, most from investors this morning really has to do with the fiscal ‘23 operating profit guidance of 9% to 11%. I understand you’ve got incremental cost savings that are set to offset the incentive comp rebuild and you have some of the China recovery built in as well. But I guess, in what’s still clearly a dynamic operating environment, it still seems, I guess, aggressive to a bunch of folks we’ve spoken to this morning, especially given it’s expected to be a somewhat back-end loaded year from a profitability standpoint. So I was hoping, Lawrence maybe you could comment a bit on that and add some more color on the level of confidence around this. And then I’ve just got a follow-up. Thank you.

Andrew Lazar:

Great. That’s helpful. And that’s a good segue into my follow-up, which is with low to mid-teens inflation still to come and as you’ve talked about likely further pricing actions still ahead, I’m just trying to get a sense how that jives with the price gap issue that you’ve talked about previously in your core spice and seasonings category and the fact that pricing decelerated sequentially in fiscal 4Q in consumer versus 3Q? And I thought it was supposed to build and maybe that was mix versus actual price? Thanks.

Brendan Foley:

Yes, it’s still – Andrew, just to build on and Lawrence has replied. I’ll just jump back to maybe, I think one of the points you brought up regarding private label. We are seeing price gaps narrow right now. And we certainly saw that in the fourth quarter, even leading into the first quarter. And we started to see that trade down moderate honestly, through the quarter. So that’s kind of an insight. And maybe that’s also a reaction just sort of the macro inflationary factors have seem to moderate also out there in the economy overall. Consumers are looking for brands, but they are also looking for value. And so it’s not necessarily the lowest price. Parts of our portfolio, we’re seeing really start to drive a lot of growth just on large sizes as we see consumers kind of look for that value. We also – you should have called out, launched this Lawry’s everyday line of spices and we are starting to continue to build distribution on this, but the early results are really good, in fact, maybe better than what we expected. We’re seeing a lot of incremental category sales and profit coming from this line, those because consumers are trading up from private label. That’s kind of the source of volume that we’re seeing coming from this and it’s bringing in new consumers into the McCormick portfolio. So we are – we like the results so far that this is providing. But that’s certainly a good outcome, and it factors into how we think about next year. On pricing, just sort of comparing quarter-to-quarter, to your point, I think that’s probably more a function of the fact that we’ve been reinstating promotional activity that’s been, I think, called out previously. We’re also lapping last year’s increases, which were higher on a relative basis. But also our volume is in the fourth quarter had an impact on that overall level of pricing, too. So we’ve covered that with regard to the restocking comparison, and that’s factored into that quarter-to-quarter view.

Operator:

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

Lawrence Kurzius:

Hey, Ken. Good morning.

Lawrence Kurzius:

Start with the last part of it, Ken. We’ve seen some moderation of elasticity as we’ve gone through the year. It looks like peak elasticity was around the time when gas prices were at $5 a gallon and above for most of the country and was really not so much a reaction to our price increase, but to the general level of inflation that consumers were experiencing and the high pressure on their wallet. So our outlook for 2023 seems that the similar environment carries forward and that we’re seeing elasticity in that range. We’ve also adjusted – we’ve looked at – we’ve seen where we’ve had greater elasticity and where we’ve got less elasticity, and we’ve reflected that in our future pricing actions. So I think that we’ve really been thoughtful around the question of elasticity. We do expect the consumer to be under pressure in 2023. I don’t care whether you call it a recession or a soft landing. Consumers on the lower end of the income spectrum, not even – I’m not talking about the bottom, I’m talking about the lower half. I’m certainly going to have less money and are going to be careful with their budgets. We are reflecting that in our marketing programs already, and with some of the innovation that we’ve launched. It’s not all about buying the cheapest product that consumers are looking for value, and that’s really come through clear on our proprietary research and value has many components. It is true that our sales growth is driven primarily by pricing in 2023. And at the total company level, we expect volumes to be pretty much flat. And so that would be an improvement in the trend line, but that’s going to vary tremendously by region and a good bit of the overall volume growth is going to come from recovery in China following this we expect following this quarter where we have that tremendous COVID impact right now during Chinese New Year.

Mike Smith:

No, I think.

Lawrence Kurzius:

That’s a great question, Ken. I’m going to pass that straight to Brendan.

Mike Smith:

Some of that is internal to me. Our supply chain is really operating at a much higher level now than it has an investment service perspective and stability. That’s another thing that gives us better insight into our sales.

Operator:

Our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.

Lawrence Kurzius:

Well, I don’t think that we are giving or providing a split between the growth rates on consumer and flavor solutions. And I will say that we would expect higher growth on flavor solutions in 2023. We have – if nothing else, a higher level of pricing expected in the Flavor Solutions segment, and that alone is going to drive a higher increase year-on-year. Flavor Solutions is a bit of a portfolio itself. It includes branded foodservice, where we believe that we have gained significant share in North America, in particular, in our branded foodservice business with the number of wins as we have gone through the year. We have had tremendous growth on flavors and flavor seasonings, for our flavor solutions customers in the area of snacks, performance nutrition. The health end market, we have had a very strong unit growth through the entire pandemic and continuing through ‘22, and we have seen no end of sight on that. We have been slightly capacity constraint in that area. And we have some significant new capacity that for longer term investments that are finally coming on line in the second quarter that opens up additional capacity for us that’s both for flavor with some expansion that we have done. And at bona or spray drying capability, and in snack seasonings, where we have been in the process of converting one of our plants from some low-margin products, the ability to run a snack seasonings and that conversion is effectively coming online. We are in the trial stages right now, should be online in second quarter. So, a bit of a longish answer there, but I hope that covered it.

Mike Smith:

Hey Rob, it’s Mike. I will answer that. I mean I would say this, I mean we are taking – we have a very large actually footprint in one part of the UK and then the Petersburg plant, which we talked about is a massive facility. So, we are kind of doing this in a two-step process to make sure we service our customers properly. So, it’s different than when you are just building new capacity like we have talked about, where you are kind of adding on to a plant. We are actually closing a plant in a very difficult environment to close plants for a lot of reasons, moving it to a brand-new facility. So, that does take more time. The good news is we are kind of almost out of that after the first quarter. You think about the incremental costs we have talked about is in the first quarter after it levels out. And as that production – the remaining production transfers over the rest of this year, ‘24 will be a really clean year. But when you are closing big plants and opening a big plant, they don’t take one quarter, it will take about a year, if you think about it, that’s what this one is taking around that much time.

Operator:

Our next question is from the line of Alexia Howard with Bernstein. Please proceed with your question.

Lawrence Kurzius:

Hi Alexia.

Lawrence Kurzius:

Yes. I mean I wasn’t really being specific on the dual running costs when I was describing the improvement in flavor solutions. In terms of the pricing, I don’t want to get overly specific on this because we are in customer conversations right now. And there is a certain amount of commercial tension in all of those conversations. But we fully expect, as I have said about pricing generally on the flavor solutions side of the business as well that we will recover all of the inflation that we are not only incurring into the New Year, but also the cumulative inflation that we collected – that we have experienced the last two. And I would say that our lag in getting that getting caught up is greater in flavor solutions than it has been on the consumer side. So, it’s going to be – it’s pretty meaningful and that’s an important element. We would fully expect to have that work complete early in the year.

Alexia Howard:

Great. And then as a follow-up, the – I have to come back to it, but the share dynamics in the U.S. herbs and spices that we are seeing in the Nielsen data. It looks as though you are still losing market share. It doesn’t look like it’s private label anymore. I presume it’s smaller brands. When do you expect that to turn the corner? And what – can you give us any more color about what the dynamics are there? Thanks and I will pass it on.

Brendan Foley:

Thanks Lawrence. Alexia, I just – as we look at our business, I think just first, remarking on the fourth quarter. I think what we were really feeling pretty – feel pretty good about in terms of the momentum we have talked about before is that we have seen sequential improvement not only across the total McCormick portfolio and consumer in the U.S., but also in herbs and spices. Fourth quarter is probably our best quarter of the year. We saw sequential improvement on not only sales, but also unit and also volume as we went through the second quarter all the way to the fourth quarter. So, that’s pretty good momentum going into the next year. Having said that, though, certainly, we saw a stabilization of where our share is right now and expect to improve that over the course of ‘22. But we don’t never really get into the habit of sort of projecting what share will be in the future. So, we are not going to do that on this call necessarily, but we do expect to have improved performance in ‘23. And I think related to what those plans will be, we will talk a lot more about that at CAGNY. And so I think there will be a lot of great opportunity to kind of go deeper on what those plans and opportunities look like.

Alexia Howard:

Very helpful. Thank you very much. I will pass it on.

Adam Samuelson:

Yes. Good morning everyone.

Adam Samuelson:

Good morning. Hi. So, I wanted to maybe hone in a little bit on the kind of net operating income growth guidance and where you shake out for 2023, because I am just trying to square the thought relative to where profit was in 2020 and 2021. Especially ‘21, you are still at the high end of the guidance range, $80 million, $90 million lower than you were last year, which there shouldn’t be an incentive comp kind of comparison issue in there and you talk about fully recovering pricing – cost inflation. Currency has been a little bit of a headwind. Divestitures kind of net sold a few things and volumes are lower. But I guess I am just trying to reconcile kind of where on an absolute dollar basis, we shake out for 2023, inclusive of the incremental restructuring and the cumulative effect of pricing relative to where the profit dollars were 2 years ago, or 3 years ago and how we should think about that at the company level moving forward? I mean if we rebase somewhat through as we come through COVID, or is there an acceleration beyond 2024 and 2023 in profit growth to kind of get the long-term kind of EBIT CAGR back into that kind of mid to high-single digit range?

Lawrence Kurzius:

I will add to that, that the guidance that we are giving is balanced and all we have been saying prudent. And just from – that’s our opinion. And as you have heard from some of the other questions, that there is somebody think that this actually might even be aggressive. But we have tried to give a balanced guidance here, but our teams are used to winning and have – we have very aggressive business plans, and we will do everything we can to not just recover, but exceed. We are used to starting every year-end earnings call with record – with the phrase record results. We were not able to do that this year, and we would like to get back on track with that low record of historic performance.

Lawrence Kurzius:

I would say at this point, no. The fact is that our supply chain recovery, I believe and the feedback we get from our customers is generally ahead of the peers. And so many of them are still fairly hand to mouth right now and have a different set of dynamics. Many of them are still rebuilding inventory – sorry, rebuilding inventories in the store at the shelf and correctly getting items reinstated. And those in the area of snacking are just experiencing explosive growth.

Adam Samuelson:

Okay. Alright. That’s all helpful. I will pass it on. Thank you.

Chris Growe:

Hi. Good morning.

Chris Growe:

Hi. I had a question coming back to kind of the U.S. business overall, and Brendan had talked about kind of moderating and trade down in the U.S. I wanted to understand, do you attribute that to your promotional spending? Was that one of the factors that helped drive that? And would you expect promotional spending to be up in fiscal ‘23, because I am trying to square that with the need for more pricing. And can you accomplish the price points you need and also see kind of the value it seems like consumers are seeking here?

Brendan Foley:

Yes. I mean Chris, I think as we go into ‘23 and how we look at it, just to build off of where Lawrence is going, a lot of that promotional spending is getting back into driving the categories with our customers. And the feedback we are getting from them is welcome, frankly, in that regard because we want to keep driving up better overall growth. Can you just remind me the front end of your question, though, was in regards to what?

Brendan Foley:

I think you are seeing a confluence of a number of things happening in the quarter where some of those macro factors that we may have spoken about before, like the price of gas, etcetera, those seem to have moderated. So therefore, broadly, we think that has an impact. So, also the reinstatement of promotions probably during, obviously, a very important season like the holiday would have also a year-over-year impact there, too. But I think there is a couple of things we would like to add is we got more aggressive in Q4 for a reason. We called that out in the third quarter. And part of that includes also a lot of focus and an increased A&P around value messaging. And we have seen a lot of great response from that. And so I think there is a number of things playing in here, Chris, that lead us to believe that we have got good momentum going into ‘23.

Chris Growe:

Okay. That’s helpful. Thanks for all of that color there. Just one other quick follow-on or question will be that inventory was kind of a moving factor year-over-year and you had a big increase last year in inventory. Did you build less inventory, I guess overall or should I say that maybe better that did inventory move lower in the fourth quarter than you expected? Is that the unique factor around the inventory move in the quarter?

Chris Growe:

How about at retail?

Chris Growe:

How about at retail as well, did retail inventories move lower in the fourth quarter?

Mike Smith:

Yes. And just in the normal ebb and flow of things. Remember, our fiscal year end stands in the middle of the holiday season. So, coming in the first quarter, retailer inventories are always high. We always ship below consumption in the first quarter. That’s like a normal seasonal pattern. And I think that we are well set up for that. Just given the rapid amount of change, we are just being cautious about that. And in our remarks, we have said we expect normalization after Q1.

Lawrence Kurzius:

Thank you.

Max Gumport:

Hi. Thanks for the question.

Max Gumport:

On the call, you gave some helpful details on the puts and takes to consider with regard to the cadence of your EPS in FY ‘23. If I have it right, it sounds like the first quarter will be pressured as a result of peak inflation, cost savings ramping up throughout the year, a continued impact from COVID-related disruptions in China and a higher tax rate among other impacts. Can you help give us a sense for how dramatically these factors could hold back your first quarter EPS?

Max Gumport:

Great. Thanks very much. I will leave it there.

Operator:

Thank you. Our final question today comes from the line of Peter Galbo with Bank of America. Please proceed with your question.

Lawrence Kurzius:

Well, Peter, our incentive comp pays for growth. And we fell short of growth in 2022. And so that’s reflected in a very low incentive comp that we didn’t take back and confidence to the P&L. As we went through 2022, in 2023, it starts a New Year. And so we are starting with the expectation that we are going to hit our goals. And of course, as we over or under achieve, we will adjust incentive comp as we go through the year.

Peter Galbo:

Great. Thanks very much guys.

Lawrence Kurzius:

Great. Thank you. McCormick is aligned with consumer trends and the rising demand for flavor in combination with the breadth and reach of our global portfolio and our strategic investments provide a strong foundation for sustainable growth. We are disciplined in our focus on the right opportunities and investing in our business. We are continuing to drive further growth as we successfully execute on our long-term strategy actively respond to changing consumer behavior and capitalize on opportunities from our relative strength. We continue to be well positioned for continued success and remain committed to driving long-term value for our shareholders.

Lawrence Kurzius:

Good morning, everyone. Thanks for joining us. Third quarter sales increased 3% from the year ago period as anticipated. In constant currency, sales grew 6%, reflecting 10% growth from pricing actions, partially offset by a 1% decline from the Kitchen Basics divestiture and 1% decline attributable to the exits of low-margin business in India and the consumer business in Russia and a 2% decline in all other volume and product mix. Our underlying third quarter growth reflects the strength of our broad global portfolio as well as the effective execution of our strategies and pricing actions against the backdrop of a volatile operating environment. Using 2019 as a pre-pandemic baseline, third quarter sales grew at a constant currency three-year compounded annual growth rate, or CAGR, up 7%, reflecting the sustained momentum in our business across both our Consumer and Flavor Solutions segments. Moving to profit, adjusted operating income was down 12% or 11% in constant currency adjusted earnings per share was down 14%. During the third quarter, supply chain challenges continued and recovery of certain constrained materials is taking longer than expected. We continue to incur elevated costs to meet high demand in our Flavor Solutions segment. While in our Consumer segment, where demand moderated from elevated consumption trends more quickly than expected, we are experiencing lower-than-optimal operating leverage. Across the supply chain, we remain focused on managing inventory levels and eliminating inefficiencies, though the normalization of our supply chain cost is taking longer than expected, pressuring gross margin and profit realization in the current period. Over the coming months, we will be aggressively eliminating supply chain inefficiencies. Importantly, as we had expected in the third quarter, our price increases are catching up with the pace of cost inflation in both segments. We began to recover the cost inflation that had been outpacing our pricing actions and other levers most significantly in the Consumer segment. We expect this will continue into the next year as we plan to fully offset inflation over time. Before discussing our third quarter segment performance in more detail, I'd like to comment on our supply chain plan, starting on Slide 5. We have a focused plan in flight that leverages the discipline of our established Comprehensive Continuous Improvement or CCI program to ensure that we are able to flexibly support customer demand, both where it has been sustained at higher levels and where it has moderated, while eliminating inefficiencies and normalizing both our cost structure and inventory levels. Our actions are well underway. Our top supply chain priority remains keeping our customers in supply and supporting their growth. There are areas of our business that have sustained high levels of demand for an extended period and our supply chain has been pressured to meet this demand. We have several initiatives in progress that will increase our capacity, strengthen our supply chain resiliency and importantly, enable us to service our customers so they can grow their business. For example, we're investing in additional Flavor Solutions seasoning capacity, which will be online in early 2023. We're expanding FONA's footprint to support our flavor growth. We recently opened our new U.K. Peterborough Flavor Solutions manufacturing facility to support our strong growth momentum with quick service restaurants. And just earlier this week, the first pallet was shipped from our new Maryland Logistics Center. And from a cost perspective, as we responded to demand volatility over the past several years, we have incurred additional costs above inflation to service our customers and have seen inefficiencies develop in our supply chain. These are costs we have absorbed. We have not passed into customers on our pricing actions. We are targeting to eliminate at least $100 million of these costs with a significant benefit in 2023. We're moving aggressively to take these costs and inefficiencies out as well as normalized inventory levels that have built up. Some of our actions include investing to increase both manufacturing capacity and reliability in bottleneck areas to enable better customer service and repatriation of production from excessive use of co-packers. We're returning to more normal ship schedules and reducing our spend on expensive surge capacity. We are already seeing the benefit of lower overtime and temporary labor reductions. In this more normalized environment as well as through customer collaboration, we are already beginning to reduce expedited freight costs and less-than-truckload shipping costs as well as other transportation inefficiencies. We are resolving raw material and packaging supply issues. For example, we are beyond the shortages of glass bottles and certain organic spices, which impacted supply of our U.S. gourmet line. A supplier facility closure announced in September drove the discontinuation of a component of our dry recipe mix packaging and through our quick qualification of alternative supply, we mitigated a major disruption during the fourth quarter. Long-running shortage of French's mustard bottle will be resolved in the first half of 2023 as new molds come online at a second supplier. And from an inventory perspective, we are also executing on plans to return to historical safety stock levels, which were raised to protect against supply disruption. We expect the impact of our actions to normalize our supply chain costs, increase our efficiency and ability to meet demand, lower our inventory levels and importantly, increase our profit realization beginning in the first half of 2023. We have managed through various supply chain challenges over the last several years with the peak disruption experienced in the third quarter of last year. Since then, there has been steady improvement building progress and bolstering our confidence in our plan to enhance our operational performance and optimize our cost structure. While we will always prioritize meeting our customers' needs, I'm encouraged by our disciplined approach to resolving the increased cost within our supply chain. We've continued to define and quantify specific actions within our plans as we - since we shared we would be driving the elimination of the supply chain inefficiencies in our preannouncement last month. We look forward to sharing more details and progress with you in January, when we provide our 2023 outlook. Now moving to third quarter business update for each of our segments. Starting with our Consumer segment on Slide 6 and the status of our pricing actions, our third quarter sales reflect the impact of our pricing actions in all three regions, with an acceleration of effective pricing in the quarter versus the first half of the year, in line with what we expected. While broad pressure on Consumers' cost of lending from inflation, which heightened during our third quarter, has resulted in higher price elasticity than we originally anticipated, our elasticities remain lower than historical levels. And our most recent pricing actions, which in the U.S. took effect as we began our fourth quarter, we focused on areas that are less elastic and did not take pricing on some products where we had seen the highest elasticity. Now, for some further highlights by region, starting with the Americas. Our total U.S. branded portfolio consumption as indicated by our IRI consumption data and combined with unmeasured channels grew 4%, in line with our shipments. And over the last three years, since 2019, consumption has grown at a three-year CAGR of 8%, which highlights how the sustained shift in consumer consumption continues to drive increased demand for our products and outpace pre-pandemic levels. In early August, we divested our Kitchen Basics business. We consistently grew this brand over the years but as it was the only U.S. brand we had in the stock and broth aisle our resources were better focused on core categories where we have leading brands. Demand has remained high with strong growth in the majority of our categories. Spices and seasonings has been one of our strongest categories in the past three years. And as a result, we are lapping all-time highs in consumption. This has created challenging comparisons in some product lines, such as baking related items, which have returned to a pre-pandemic level unlike most of our categories. Grilling-related items were impacted versus last year by high meat prices, although grilling is still strong versus pre-pandemic. Health conditions continue to improve as seen in our recipe mix share performance, with the fourth consecutive quarter of share gain. Our spices and seasoning share was pressured by service-related distribution losses, a shortage of certain packaging items as well as certain organic spices, which has largely been resolved and some trading down by consumers who remain under pressure from broad-based inflation. We are using our category and revenue management capabilities to strengthen our spices and seasoning presence on shelf. The strength of our brands and our category leadership has recently won us new distribution, which we're beginning to realize now. In EMEA, we continue to have solid share performance at herbs, spices and seasonings in the U.K., Eastern Europe and Italy, somewhat offset by softer performance in France. We are continuing to gain share on Frank's RedHot in the U.K., and we are beginning to build momentum with Cholula as we expand that brand into this market. For the quarter and year-to-date versus last year, as well as since 2019, we are driving the U.K. hot sauce category growth. Our Bottone brand of homemade dessert products in France, a product line of unique to our EMEA region, as flows, we have seen baking return to a more pre-pandemic baseline level in EMEA to, again, unlike our other categories. Turning to the Asia Pacific region. Last year, the region experienced supply chain challenges such as ocean freight capacity constraints and lapping that impact contributed to growth in the third quarter. Additionally, following an extended lockdown in the second quarter, COVID resurgence in Shanghai and some other cities throughout China eased as we began the third quarter, resulting in trade and pantry replenishment contributing to growth. Recently, several cities in Central China, which is the primary market of our Wuhan operations, have experienced new COVID-related lockdowns and we are continually monitoring the situation. Overall, our China performance is on track with our expectations. Across all regions in our consumer segment, we are achieving the price realization we expected and we're executing on our proven growth strategies, pivoting action plans as needed based on our consumer insights and the environment. We continue to invest behind our brands. We increased brand marketing investments in the third quarter and have additional investments planned for the fourth quarter. In addition to our highly effective and inspiring holiday messaging, we have pivoted our digital messaging to emphasize value and show consumers how our products help them stretch their grocery dollars without sacrificing flavor. We are focusing our innovation efforts to meet the needs of consumers concerned about their budgets. In the Americas, we have launched a new Lawry's branded opening price point range of every day 10 spices. And our large-size format Super Deal is one of the best-performing product lines as consumers are looking for greater value. This format size is approximately a 40% better value per ounce than the smaller sizes. We've also launched large-sized resealable pouches of top-selling items in markets across all regions. In terms of category management, we are collaborating with our customers to ensure the right assortment and price points on shelf to optimize category performance and increase profitability for our customers. And as always, we have a strong merchandising program planned for the holiday season. We are confident in our brand marketing investments, innovation and category management initiatives, which will continue to drive strong growth. Turning to Flavor Solutions on Slide 8. Our sales performance for the quarter was strong, with growth led by our pricing actions in all three regions with an increase in our effective pricing versus the first half of the year as we expected. Now for some regional highlights. In the Americas, strong growth was driven by snack seasonings, savory flavors and branded foodservice products. Demand continues to strengthen the branded foodservice restaurant and institutional foodservice customers as mobility and strong summer travel continued to fuel consumption. And importantly, we also are expanding distribution. In EMEA, growth remained strong across our entire customer base. Our third quarter growth was led by strong quick service restaurant, or QSR, momentum in all markets partially driven by expanded distribution and our customers' promotional activities. And we're seeing an acceleration of demand in branded foodservice as customers shift to more economical formats. Our full spectrum of solutions across price points is driving growth. We are winning in both regions with our new product momentum. In Americas, growth from new products contributed approximately 25% more growth in flavors in the third quarter than the year ago period, driven by beverage, savory snacks and Performance Nutrition flavors. We are continuing to win share in these categories. And in EMEA, our third quarter new product launches accelerated versus earlier in the year. And for the full year, we expect new product introductions to outpace 2021. We are fueling future growth. In APG, we're driving further menu penetration with our QSR customers, winning new limited time offers as well as realizing growth from strong performance of their core menu items we flavor. In many cases, we are the heat in their spicy offerings. Overall, Flavor Solutions has remained strong and for certain parts of our business in the Americas and EMEA regions, our supply chain continues to be pressured to meet this high demand. And as I said earlier, we are still taking on some extraordinary costs to service our customers. We appreciate our customers working with us, and we see light ahead. Now some summary comments before turning it over to Mike. Turning to Slide 9. Global demand for Flavor remains the foundation of our sales growth, and we have intentionally focused on great fast-growing categories that will continue to differentiate our performance. We continue to capitalize on the long-term consumer trends that accelerated during the pandemic, healthy and flavorful cooking, increased digital engagement trusted brands and purpose-minded practices. These long-term trends and the rising global demand for great taste are more relevant today than ever with the younger generations fueling them at a greater rate. McCormick is uniquely positioned to capitalize on this demand for great taste with the breadth and reach of our strong global flavor portfolio. We are delivering flavor experiences for every meal occasion through our products and our customers' products and are driving growth. We are end-to-end flavor. We remain focused on the long-term goals, strategies and values that have made us so successful. We have grown and compounded that growth over the years including through the pandemic and other periods of volatility. Our solid track record of achieving our long-term objectives highlights the resiliency of our business through a variety of market conditions as well as our focus on sales growth and profit realization. The long-term fundamentals that drove our industry-leading historical performance remains strong, the strength of our business model, the value of our products and capabilities and the execution of our proven strategies by our experienced leaders, while adapting to changes accordingly, give us confidence in our growth momentum and in our ability to navigate the global dynamic environment. The compounding benefits of our relentless focus on growth, performance and people continues to position McCormick to drive sales growth and balanced with our focus on lowering costs to expand margins realize long-term sustainable earnings growth. The teamwork of our McCormick employees, driver momentum and success and I want to thank them for their dedicated efforts and engagement. And now I will turn it over to Mike.

Lawrence Kurzius:

Thank you, Mike. Now that Mike has shared our financial results and outlook in more detail, I'd like to recap the key takeaways as seen on Slide 26. Our third quarter sales performance reflects the strength of our broad global portfolio and the effective execution of our strategies against the backdrop of a volatile operating environment. Our sales growth momentum is strong. Though challenges in our supply chain have taken longer to normalize, we have now passed an inflection point. We have begun to recover the cost inflation that has been outpacing our pricing actions while executing on a plan to aggressively eliminate supply chain costs, and we expect 2022 fourth operating margin expansion and continued improvement into 2023. Our long-term performance, including through periods of volatility and has been industry-leading and long-term fundamentals that drove this historical performance remains strong. We have a proven track record of execution and are confident we will successfully navigate this dynamic environment for our future sustainable growth and build long-term value for our shareholders. Now let's turn to your questions.

Ken Goldman:

Hi. Thanks so much.

Ken Goldman:

Hi. Good morning. You highlighted that you've past the inflection point, right, where your pricing is now ahead of your costs. And this, of course, is natural, right, given the timing and not unexpected. But one of the push-backs we hear in the industry is that larger retail customers, as they start to, I guess, maybe notice these margin trends, they'll start to ask for a bigger piece of the profit pie. So I guess my question is to what extent do you expect sort of these gross margin net tailwinds to be sustainable? Or is it reasonable to expect maybe some pressure from customers as they see their vendors' margins starting to get better?

Mike Smith:

I think the reality, Ken, is we're still recovering. Our pace of pricing has caught up now with cost and we say, we'll recover dollar to dollar in 2023. But there is a trend that is going in the right direction. And obviously, as we look at 2023, we look at what's the cost environment, things like that, we need to go again next year, but that's still -

Ken Goldman:

Got it. Thank you. And then for my follow-up, you're guiding to at least $100 million of incremental cost savings. It's not a small number. So I just wanted to get a little bit of clarification. How much of that is incremental to ongoing CCI? And how much of that is derived from maybe a normalization of certain factors such as inventories versus what you would consider more, I guess, discrete savings beyond that?

Ken Goldman:

Understood. Thanks so much. Yes, very clear.

Robert Moskow:

Hi. Thanks. So Flavor Solutions is really the division that has stumbled the most. I mean, when I look at profit this year compared to like pre-pandemic, it's well below your pre-pandemic levels. So can I assume that most of the $100 million in savings is - or recovery is going to happen there? And then my second question is, I remember years and years ago that the Flavor Solutions had problems because it was trying to do too many things for too many customers. It had spread itself too thin. It needed eventually to have a rationalization of its customer base. And I wanted to make sure that that's not possibly one of the root causes today. You've grown your sales a lot. Do you feel like the organization is capable of still getting back to like 12% operating margin across all of those customers?

Mike Smith:

I think remember, we've talked about this before, over half of the dilution this year is due to the cost versus pricing. So that's just the math that we'll get back over time. Also, these projects, Lawrence mentioned, there's a lot of double running costs as we bring those big projects up like U.K., Peterborough that eventually will go away. So that will help the margins, too. To your point, though, about - are we spread too thin? I actually have to flavor division back in 2005 when that was identified, there's no comparison to today. It's really focus and Lawrence, why don’t you…

Robert Moskow:

Great. I'm sorry to bring up 2005, but we're all old and we all remember it. So maybe just one follow-up. Of the $70 million or so of profit decline this year in Flavor Solutions, can you quantify how much of that is just pricing catch-up?

Robert Moskow:

Okay. Thank you.

Steve Powers:

Yes. Thank you and good morning.

Mike Smith:

Good morning.