Mccormick & Co Inc Q2 FY2024 Earnings Call

Good morning. This is Faten Freiha, VP of Investor Relations. Thank you for joining today's Second Quarter Earnings Call. To accompany this call, we've posted a set of slides on our IR website, ir.mccormick.com. With me this morning are Brendan Foley, President and CEO; Mike Smith, Executive Vice President and CFO; and Marcos Gabriel, Senior Vice President, Global Finance and Capital Markets. During this call, we will refer to certain non-GAAP financial measures. The nature of those non-GAAP financial measures and the related reconciliations to the GAAP results are included in this morning's press release and slides. In our comments, certain percentages are rounded. Please refer to our presentation for complete information. Today's presentation contains projections and other forward-looking statements. Actual 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. Please refer to our forward-looking statement on Slide 2 for more information. I will now turn the discussion over to Brendan.

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, 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. Lastly, 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 the store, remain 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 were the top category in center store growth across measured channels. And McCormick is the leading branded player 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 pickle mustard's 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 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, competitors are 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 businesses 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. 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 Slides 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. 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 fueled first-half results and are expected to accelerate our performance in the second half. In fact, in 2024, we are launching nearly four times more grilling rubs and seasonings compared to 2023. Importantly, our grilling season, which kicked off at the end of the 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 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. 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 is 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, including 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, 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. Additionally, 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 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 continue 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 prioritize 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, congratulations on this promotion, and I look forward to working with you in this new role.

Thank you, Brendan. I'm honored to serve as the CFO of McCormick and excited to continue to partner with the entire team to deliver long-term profitable growth and drive shareholder value. It has been great to work closely with Mike and the management committee for the past year to transition into this new role. Mike, I want to thank you for your mentorship and offer my congratulations on your retirement.

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 in 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 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 into 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 customer 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. In the second quarter, as expected, we drove margin expansion versus the prior year in this segment. Our performance this quarter reflects our commitment to increase our profit realization and position 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. On taxes, 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 reflects 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. 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 the 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. We continue to expect our increased investments in brand marketing to 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.

Thank you, Mike. Before moving to Q&A, I would like to close with our key takeaway on Slide 26. First-half results and volume performance in the Consumer segment demonstrate that we are making the right investments to drive long-term sustainable organic growth and reinforce our confidence. We are executing on proven strategies and investing behind our business with speed and agility and in alignment with consumer behavior, capitalizing on our advantaged categories across segments. We're able to do this and continue to make great progress on managing costs, led by our cost-saving programs to support our increased investments in the business and drive margin expansion. Our performance for the first half 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 dedication and their contributions, and reiterate my confidence that together we will continue to drive differentiated results and shareholder value. Now, for your questions.

Thank you. We'll now be conducting a question-and-answer session. Our first question comes from Andrew Lazar with Barclays. Please proceed with your questions.

Great. Thanks so much. Mike, congratulations to you on your retirement announcement. Glad we have you around for another couple of quarters. And Marcos, congratulations to you on the new role.

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

Thank you, Andrew.

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?

Thanks, Andrew, and good morning. Just to maybe open up with a couple of points to reinforce, we did have a good quarter and sales do continue to strengthen, which gives us confidence in that mid- to upper-end of our range. But this also includes that short-term weakness that we felt with Flavor Solutions in the quarter. I think one of the important things I want to make sure we get across is that we did drive volume growth in our global Consumer segment. And it does reflect, in many ways, I think that additional program that we talked about. We're also driving strong sequential volume improvement in the Americas, as you just called out in the Consumer business, and specifically in spices and seasonings, we delivered volume growth across all major markets and then included driving unit share growth in the US. So, we said this was a year of investment, and we further executed those programs that we've been talking about. At the same time, we still expanded margins. So, we're pretty pleased with the results at this point. It is a halfway point in the year and we do like the progress that we're making. If I were to add more context to unpacking those levers that we've been talking about on this call and in previous calls, a lot of it is we did ramp up brand marketing in the first half, and it wasn't just in the first quarter. We also saw a significant ramp-up in the second quarter, too. A lot of that investment was going more against our core categories to drive demand and support our initiatives. We continue to expect healthy levels as we go into the second half of the year on brand marketing. New products were also a big part of that, too, in the first half, and it contributed pretty meaningfully, especially as a lot of that build happened in the second quarter. I would say, it was more pronounced in the second quarter than even in the first, just because of the build of getting items on shelf and beginning to ship them. We expect to double that innovation when you compare the second half to the first half. So, that lines up nicely as we go into the balance of the year. Then, we expanded distribution in certain categories. Our new products are gaining strong retail acceptance. And so, that's obviously one of those levers that helps. In terms of pricing in the second quarter, we activated many of our price gap management programs, and so we expect this to continue into the second half, because we know the uplift with the performance that we're seeing from that, but it's still only a portion of our strategy. As we said before, it impacts about 15% of our Americas Consumer business, but it is yielding the results that we were expecting to get. So, all of these growth levers are contributing and driving, I think, really healthy outcomes as we think about the performance of our business. By the way, we operate in great categories, too. So, the categories are performing well also, and that obviously is a nice tailwind as part of that.

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. 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 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.

Yes, that's fine. We mentioned in the call that we're anticipating some sequential improvement in the third and fourth quarters. About a month ago, we discussed expectations of low-single digit to mid-single digit growth. We achieved results at the low-single digit level, which we are pleased with. We are generally satisfied with these results. As we look into customer activity timing, we have gained more clarity regarding some partnerships we're engaged with, and we're learning more about customer activities. Some of these activities are related to the second half of the year, while others may extend into 2025. We are cautious not to overestimate, but we are optimistic about the sequential improvement we are observing, along with the strong consumer performance that Brendan mentioned.

Our next question is from the line of Peter Galbo with Bank of America. Please proceed with your questions.

Hey, guys. Good morning.

Good morning.

Congratulations to Mike on his retirement and to Marcos as well. I would like to follow up on Andrew's question regarding consumer confidence in the latter half of the year. Brendan, in your prepared remarks, you noted that consumers are increasingly shopping around the perimeter of the store compared to the center store, which might explain why you are performing better than some of your competitors. Could you elaborate on what you are observing from the consumers' perspective and what factors contribute to their confidence as we enter the second half of the year?

Yes, I think what drives our confidence is our assessment of the business, the brand, and the key categories at the unit level. We believe the programs are having a strong impact, combined with the trends we see in consumer behavior in stores. With the rise in inflation and a shift towards eating at home, we're definitely observing a move away from dining out, which benefits our business as we've previously noted. As consumers shop the perimeter of the store, they are looking for ways to enhance the flavor of their meals, which positively impacts our categories. However, when considering the overall consumer outlook, it hasn’t changed much since our last guidance or call. We are confident in our initiatives and believe they are effective, but we anticipate that consumer behavior will remain consistent with what we saw in the fourth quarter of '23 and the first half of '24. We maintain a cautious outlook, reflecting the uncertainty we often observe in the market. Even in such an environment, we expect our operations to deliver the planned performance. We notice consumers are changing their shopping habits and switching channels, which is evident in the numbers and tends to benefit our business, both in foodservice and at-home meals. As a comprehensive provider of flavor, we believe we will benefit from these shifting channels.

Got it. And Mike, I think, depending on whether you look at the IRI or the Circana or the Nielsen data, there may have been a gap concerning the Americas consumer. I believe you mentioned some of the factors, but can you provide more detail about the gap in terms of the shift to consumption?

Yeah, absolutely. There are a number of factors that kind of impact the difference between our shipments and consumption. Just to give you some context around that, and maybe I'll just share with you three points to consider. First, our consumption is strengthening. If I were to think about how that progressed through the second quarter, I think more of it we saw in the back half of the second quarter than in the front half. So, that would reflect as we started to really get execution of our programs in retail, we were seeing stronger consumption. In Q2 across the total portfolio, we drove almost a full point of unit growth. That gave us reason to feel confident, and that includes those declines in prepared foods that we talked about like the frozen and Asian category declines. It was a substantial improvement from Q1 and driven by that increased programming. I think that is, to some degree, a condition of sales catching up to our performance on shelf. As retailers start to see our movement, we obviously expect sales to keep up with that. I would expect more strengthening to continue in the second half. The other condition in the second quarter, it's important to call out that we were lapping increased shipments that came ahead of the 2023 pricing actions of the prior year. We also had a similar condition in '22 compared to '23. It did play a little bit of impact when we look at shipments versus consumption. In terms of retailers, they're always looking to be more efficient. That's not new. It's always a focus of theirs. Overall, we are not seeing at this time any unusual activity. So, I think just to give you a bit of context on consumption as an impact, what was going on in the prior year and then how our retailers behave, I think that would be the perspective I would want you to think about with McCormick.

Great. Thanks very much, guys.

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

Hi, thank you. Congratulations to both Mike and Marcos. Mike, I appreciate all your help over the years. I wanted to ask about your confident outlook regarding trends for the second half. You exceeded expectations this quarter and in the first quarter as well. It seems like you're suggesting that the tax rate could be around 24% in the second half. Given all this, were there any considerations to raise guidance? I understand the environment is quite unpredictable, but I would like to know how you perceive the second half, especially in relation to how the first half performed against external expectations.

Yeah.

You want to get it?

I'll lead off with a couple of comments, Mike. I mean, I do think, Ken, we felt like we did have strong consumer performance and our investments are working and doing what we said we would do. That does give us confidence going into the second half, and perhaps that's why you're hearing a little bit of confidence in our tone. But given how the first half performed, we expect those growth levers in the consumer part of our business to continue to operate and work well. As we said on Flavor Solutions, we expect sequential improvement versus what we saw in the second quarter because there are many other things that I think, as Mike said earlier in the questions here, it does give us confidence as we think about what how we might look at the Flavor Solutions business. But Mike, if you want to talk a little bit about what drives our prudence probably has to do with the back half is a big part of the year...

As we consider the current stage of the year, we noted that the second quarter is crucial for us as it marks a turning point where we lose some pricing protection that we experienced in the first quarter of last year. We're particularly pleased to see consumer volume turning positive. We have some expectations for volume growth in the consumer sector for the latter half of the year, which we believe will be significant, especially in the fourth quarter. While we are happy with our current results, we understand the importance of maintaining that momentum in the second half, and we are optimistic about our ability to do so. We continually assess our guidance. I chuckle when thinking about our first earnings call, where we faced a significant tax adjustment and discussed yearly guidance while recognizing that these events can vary greatly from quarter to quarter or half to half. So, I anticipate around a 24% rate in the second half, given our underlying rate is between 24% and 25%. That’s likely where we’ll end up. We expect built-in operating margin growth along with volume growth, which supports our cautious yet optimistic outlook. We want to keep our financial flexibility to invest in growth opportunities as they arise. Looking ahead to the third quarter, we are cautious about some consumer uncertainty affecting our Flavor Solutions business. However, we feel we've set our expectations reasonably with a slight leaning towards a positive outcome.

Yes. Thank you. Good morning, everyone.

Good morning.

Good morning.

I want to extend my congratulations to Mike and Marcos. I'm eager to collaborate with you. I would like to continue the discussion about pricing that we've just had. When I examine the spices and seasonings category in the recent scanner data, it appears that your entire portfolio has seen a decline in unit pricing compared to last year. It seems that size, unit, and price pack architecture aren’t necessarily affecting this. Additionally, the promotional percentage is also slightly lower year-over-year. I'm trying to reconcile the idea of more targeted pricing actions on a small segment of the portfolio with the overall spices and seasonings category, which has shown negative pricing trends in the last few months of Nielsen data.

At the end of the day, the net sales guidance we provided for pricing indicates that the Consumer business for the second quarter decreased by just under 1%, and we expect to see this trend continue in the second half. This points to the implementation of our targeted pricing actions on a limited portion of the portfolio, which is reflected in the net sales. However, how this translates to retail shelves remains uncertain. Additionally, there are other actions taking place among retailers as well. As Brendan mentioned earlier, our categories are experiencing growth, with consumers increasingly shopping in the perimeter of the store. They are looking to use our products to add flavor and manage cost inflation related to protein and similar items. Retailers are also playing a role in these dynamics. It's possible that the price adjustments we made on certain items may not be the only factors influencing this situation; there may be other price changes occurring in their stores as well. I believe a combination of elements could be causing some discrepancies in the data you are observing compared to our internal reports shared during these calls.

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 cook at home still. Maybe there's some value-seeking in there. I'm just curious, if you step back and think about that consumer behavior on the perimeter and on the spice and seasoning side relative to 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 the 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 cycles?

Thank you for the question, Rob. When I think about that segment of our portfolio, it's important to note that it's a smaller part of our business. The declines started around the fourth quarter of '23 and have been significant, which is affecting the overall view of our portfolio. That's why we wanted to highlight this issue, as we plan to focus more of our investment on our core categories, which we believe will help mitigate those declines. As we progress through the year, we expect these core categories to recover from any potential declines. Regarding consumer behavior, we believe inflation is greatly influencing this marketplace. We're a relatively small player in several of these categories and don't have the scale that others may possess, so we certainly feel the impact of inflation. Additionally, we observe some shifts in consumer trends away from certain areas, particularly in frozen and Asian categories where we compete. This doesn't suggest a permanent change but rather a trend we are navigating, and we expect this to continue throughout most of the fiscal year. What we're seeing in the perimeter store is that flavor is increasingly important, whether it relates to protein, produce, or carbs. Our categories will play a significant role in providing flavor, and consumers are likely shifting toward these areas in search of healthier eating options. This is not a new trend, and it continues to drive our business. That's where I'd like to leave it for now.

Thank you. At this time, we've reached the end of our question-and-answer session. I'll hand the floor back to management for closing remarks.

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