Mccormick & Co Inc Q1 FY2020 Earnings Call

Good morning. This is Kasey Jenkins, Vice President of McCormick Investor Relations. Thank you for joining today’s First Quarter Earnings Call. To accompany this call, we posted a set of slides at ir.mccormick.com. Currently, all participants are in listen-only mode. Following our remarks, we will begin a question-and-answer session. We’ll begin with remarks from Lawrence Kurzius, Chairman, President and CEO, and Mike Smith, Executive Vice President and CFO. During our remarks, we will refer to certain non-GAAP financial measures. These include information in constant currency, as well as adjusted operating income, adjusted income tax rate, and adjusted earnings per share that exclude the impact of special charges. Reconciliations to the GAAP results are included in this morning’s press release and slides. In our comments, certain percentages are rounded. Please refer to our presentation for complete information. In addition, as a reminder, today’s presentation contains projections and other forward-looking statements, as results could differ materially from those projected. The company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or other factors. It is important to note, these statements include expectations and assumptions which will be shared related to the impact of the COVID-19 pandemic. As seen on slide two, our forward-looking statement also provides information on risk factors including the impact of COVID-19 that could affect our financial results. It is now my pleasure to turn the discussion over to Lawrence.

Thank you, Kasey. Good morning, everyone. Thanks for joining us. To start, I’d like to comment on the extraordinary and continually evolving global impact of COVID-19. On behalf of everyone at McCormick, I’d like to first express our deepest sympathies to all those who are affected by COVID-19 and thank those working to keep people safe through this crisis. McCormick is committed to maintaining critical food supply across all our markets and supporting our communities. We are working through the challenges of today while keeping our focus on the long-term goals, strategies, and values that have made us so successful. We have three priorities while navigating through this period of volatility and uncertainty. First, to ensure the health and safety of our employees and the quality and integrity of our product. Second, to keep our brands and our customers' brands supplied and maintain the financial strength of our business. Our third priority is to ensure McCormick emerges strong from this event. It will come to an end. We will come out a better company by driving our long-term strategies, responding to changing consumer behavior, and capitalizing on opportunities from our relative strength. We’re taking steps to safely operate our business and supply our customers. We continue to operate our supply chain without significant disruption. We have implemented contingency planning with most employees working remotely where possible. We have global and regional crisis teams in place, continually monitoring the rapidly evolving situation and recommending risk mitigation actions. And we’ve implemented travel restrictions, visitor protocols, and social distancing practices, as you would expect. We’ve also recently announced incentives to further recognize and support employees who work on-site in locations critical to keeping our operations running globally. We will increase hourly wages, further extend sick leave to support family members, and maintain salaries if operations are suspended. It’s essential that we show our appreciation to employees while doing our part for the betterment of public health and to support our communities. And moving to slide five, to highlight a few points on the current conditions we’re seeing and the potential impact. First, as we mentioned at CAGNY, the significant disruption in China’s consumption in the first quarter impacted our results. The events in China during the second half of the quarter were extraordinary. While total McCormick sales follow a seasonal pattern with the first quarter generally the lightest, the first quarter is typically our peak season in China. Additionally, over half our China business relates to away-from-home consumption. And Hubei province is one of our most highly developed regions due to the DaQiao brand being founded and made in Wuhan. This made the China lockdown, coupled with no opportunity for consumers to stock their pantries, to be a significant impact. We believe we cannot use the China results to extrapolate the overall impact for the rest of the company due to differences related to lockdown durations, pantry stocking opportunities, as well as the different percentages of foodservice business and other dynamics in each region. The disruption in China resulted in a 3% reduction in total company first quarter sales and reduced our total consumer and flavor solutions segment sales by 5% and 1%, respectively. As a reminder, in China, our Consumer segment includes the branded foodservice component because those foodservice products use the same packaging format and share a common distribution channel, particularly in traditional trade and in the smaller markets as other consumer products in China. The lower operating income from China impacted the total company’s growth in both adjusted operating income and adjusted earnings per share by 10%. Currently, during the early stages of recovery in China, we are seeing increased cooking at home and a surge in consumer retail demand, both in stores as well as through e-commerce and the start of a recovery in foodservice as most restaurants and caterers reopen and consumer confidence gradually builds. We expect China’s results to be significantly impacted in the second quarter as the market begins to recover gradually.

Thanks, Lawrence. And good morning, everyone. I’ll begin now by providing some additional comments on our first quarter performance and then discuss some of our expectations for the balance of the year. Starting on slide 14, during the first quarter, sales declined 1% in constant currency, driven primarily by the COVID-19 impact in China, which had a negative 3% constant currency effect on the total company. Excluding the impact of China, favorable volume and product mix from base business and new products, as well as pricing drove sales growth. The consumer segment sales declined 6% in constant currency, primarily driven by the Asia Pacific region. Turning to our Flavor Solutions segment on slide 18, we grew first quarter constant currency sales by 5% due to strong growth in the Americas and EMEA regions. In the Americas, flavor solutions constant currency sales increased 5%, driven by new products and base business volume growth, with particular strength in snack seasonings and branded foodservice. Additionally, pricing also contributed to growth across the portfolio. In EMEA, we grew flavor solutions sales by 9% in constant currency. Sales increased to both quick service restaurants and packaged food companies, driven by new products and volume growth on the base business as well as pricing. In the Asia Pacific region, flavor solutions sales declined by 4% in constant currency, driven by the decline in China. Other parts of the region drove growth.

We have a strong foundation and a history of growth, performance, and engagement with our employees, which is critical during these times. Thank you for your attention. And it is now my pleasure to turn it over to Mike.

Thank you, Lawrence, and thanks to everyone for joining today’s call. If you have any further questions regarding today’s information, please reach out to me. This concludes the call this morning. Have a good day and hope everyone stays healthy and safe.