Earnings Call
Mccormick & Co Inc (MKC)
Earnings Call Transcript - MKC Q2 2025
Faten Freiha, VP of Investor Relations
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, Chairman, President and CEO; and Marcos Gabriel, Executive Vice President and CFO. 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 statements on Slide 2 for more information. I will now turn the discussion over to Brendan.
Brendan Foley, Chairman, President and CEO
Good morning, everyone, and thank you for joining us. We are pleased with our second quarter performance and the progress we made year-to-date to continue to advance our leadership and differentiation. By focusing on the levers within our control, we are delivering profitable volume-led growth by investing in our brands, expanding distribution, driving innovation and increasing operational efficiencies. McCormick remains a growth-oriented company with robust plans that leverage the demand for flavor and the strength of our brands. As consumer preferences evolve, we continue to execute on our proven strategies in alignment with consumer trends and with speed and agility to capture the demand for flavor and value across all occasions and channels. Our results continue to demonstrate the success of our prioritized investments in the areas that we believe will continue to drive the most value and sustain our momentum for the remainder of 2025 and beyond. This morning, I will begin my remarks with an overview of our second quarter results, focusing mostly on top line drivers. Next, I will review how McCormick is positioned relative to an evolving consumer landscape, including our view on tariffs. Then I will highlight some areas of success and the areas we continue to work on as well as our growth plans. Marcos will then go into more depth on the second quarter results as well as review our 2025 outlook, including a discussion of our tariff exposure and mitigation plans. And finally, before your questions, I will have some closing comments. Turning now to our results on Slide 4. In the second quarter, total organic sales increased by 2%, primarily driven by volume growth, in line with our expectations. Volume growth of more than 3% in the Consumer segment was partially offset by declines in Flavor Solutions as expected. This was primarily driven by overall softness in customer volumes in packaged food and EMEA quick service restaurants, or QSRs. Although customer demand in parts of our Flavor Solutions business remains pressured, we are performing better than the trends as we continue to benefit from pockets of growth, from emerging brands and health-driven categories, which are expected to continue to moderate these declines. In Global Consumer, organic sales growth was volume led across all three regions demonstrating continued momentum across key markets. This sustained volume growth is supported by investments across our core categories, including innovative brand marketing, accelerated innovation aligned with consumer trends, expanded distribution and robust category management initiatives. In the Americas, we drove volume growth and share gains across core categories. In EMEA, our results reflect select pricing actions to cover rising commodity costs and continued solid volume momentum. In Asia Pacific, our business in China continues to gradually recover in line with our expectations. Let me now share our current view on the state of the consumer and provide our perspective on where tariffs currently stand. Although the environment remains challenged, consumers continue to show resilience across our key markets. They are adapting to economic pressures by adjusting how they shop, making more frequent trips with fewer units per basket, choosing larger pack sizes to stretch their budgets and increasingly using leftovers. Importantly, they continue to spend and not compromise on flavor. What's most notable is the continued conversions of two enduring trends: value-seeking behavior and a heightened focus on health and wellness. Consumers are cooking at home more. 86% of meal occasions are sourced at home, which remains above pre-pandemic levels. This shift supports demand for flavorful, fresh and healthy meals that offer both value and health benefits. This is where McCormick plays a critical role. We're not competing for calories; we're flavoring them. Our portfolio helps consumers bring creativity and enjoyment to the meals they're already preparing and aligned with how people are eating today, whether it's spices and seasonings, sauces or condiments, we enable better, more flavorful meals without adding complexity or cost. With our broad global reach, strong local brands, ongoing innovation and strategic pricing, we're confident that we are well positioned to meet the needs of consumers and continue to deliver value through flavor. Before I discuss highlights for the quarter, I'd like to provide a high-level perspective on the current global trade environment and the actions we're taking to manage our business. The global trade environment is increasing the cost of agricultural ingredients we source from outside the United States, which is impacting our cost of sales. We have numerous levers to manage this impact, which is enabling us to maintain our volume-led top line growth and operating profit outlook for 2025, inclusive of tariffs. First, it's important to recognize that we have a global manufacturing footprint designed so that products sold within a region are made locally within that region. Therefore, our tariff exposure is primarily through importing agricultural raw materials, many of which can't be grown or are not commercially available in the United States. Our competitors are facing similar challenges. Earlier this year, we formed a cross-functional team dedicated to monitoring trade policy developments and implementing mitigating actions that position us well for both the short term and long term. As a result, we are executing on plans to offset these costs through sourcing plans supported by advanced analytics, including alternative sourcing locations for certain raw materials and cost savings and operational efficiencies across the P&L. Additionally, we are collaborating with our customers to implement surgical and strategic pricing while also maintaining our volume momentum. Overall, our manufacturing location strategy, resilient supply chain, global sourcing capabilities, collaborative efforts across the organization and the strength of our brands continue to be a competitive advantage, enabling us to mitigate our costs and maintain our business momentum. Let's move to Slide 5, and let me highlight for the quarter, some of the key areas of success. Across our Global Consumer segment, we continue to successfully execute on our plans and have driven share gains across our core categories in key markets for the last three quarters. Globally, McCormick branded unit consumption continues to outpace edible categories, center store and perimeter growth in the U.S. as well as fast-moving consumer goods growth in EMEA and Asia Pacific. Let me provide some color on the categories globally. Starting with spices and seasonings, we drove strong volume growth across all regions, leading to volume share across the Americas and EMEA. In the U.S., volume growth continues to outpace private label for the fourth consecutive quarter. In Canada, we continue to grow overall share. And in Poland, share gains in spices and seasonings are contributing meaningfully to EMEA's gains. In recipe mixes, we continue to drive unit volume and dollar growth in the Americas. In Canada, with the strength of our local brands and continued investments, we drove dollar, unit and volume share gains. We have plans in place to continue to drive category growth across all of our regions, most notably in the U.K. as we continue to expand distribution. In Mustard, we are pleased to see that our plans are continuing to drive great results. In the second quarter, similar to the first quarter, we drove dollar, unit and volume share gains in the Americas. In EMEA, we drove unit and dollar share gains in Mustard. In Hot Sauce, we are achieving strong results. In the U.S., we drove unit and volume share gains, reflecting significant progress. Continued distribution gains as well as investments in differentiated brand marketing and innovation continue to fuel our performance. Outside of the U.S., we are building distribution in new markets within EMEA. We continue to make progress on total distribution points or TDPs. In the Americas, we significantly expanded TDPs across spices and seasonings, recipe mixes and hot sauce. In EMEA, we are gaining distribution in high-growth channels like e-commerce. In Asia Pacific, our business in China is recovering gradually relative to the prior year as expected. We delivered strong performance growth in our categories, including spices and seasonings, and condiments continue to outpace the market. Moving to Flavor Solutions, we continue to see strength in our technically insulated high-margin product category, Flavors. In Flavors, in the Americas, we remain focused on being the partner of choice across four taste competencies: savory, heat, naturally sweet, and citrus and fruit. As a result of this continued focus, we are winning new customers and gaining share. We outperformed the industry across many end categories, including alcoholic beverages as well as salty snacks and bars. We continue to win business across beverage flavors and snack seasonings, and we are working through product reformulations with some of our customers to meet regulatory and consumer needs. QSR performance remains strong in both the Americas and Asia Pacific. In the Americas, performance was driven by innovation, customer growth and continued share gains. In China and Southeast Asia, our customers' new products and promotions continue to drive strong volume growth. Let me now touch on some areas where we are seeing pressure. In the Americas and in EMEA within flavors, some of our large CPG customers continue to experience softness in volumes within their own businesses. We continue to work on offsetting these trends through innovation and collaboration with our customers and by winning new customers. While our food away-from-home performance continues to outpace the industry, we are seeing flat performance in branded food service in the Americas as some of our customers are seeing softness in their volumes due to continued slowdown in foot traffic. QSR traffic remains soft in EMEA. We have seen this pressure impact our results for several quarters, and it is difficult to predict QSR traffic, particularly as some of our customers were impacted by geopolitical boycotts related to the conflict in the Middle East. We continue to collaborate with customers as they focus on improving their volumes through innovation and value and align with consumer trends. As outlined on Slide 6, our growth plans remain consistent, to drive growth through category management, brand marketing, new products, proprietary technologies, and our differentiated customer engagement. Our growth levers are supported and enhanced through data and analytics as we continue to accelerate our digital transformation. Our base business is strengthening across major markets and core categories. And we have a number of initiatives in flight that will continue to support our differentiated performance for the second half of the year. In the consumer segment, our investments to drive volume growth remain in place, including increased brand marketing, innovation and revenue management initiatives. They have driven our strong and differentiated performance over the last five quarters. While we are starting to lap this performance, we continue to see strong consumption trends and expect continued volume growth. In the back half of the year, we expect our distribution growth, accelerated innovation and renovation across the portfolio to drive increased purchase interest and velocity and support our strong volume performance. Let me provide a couple of examples. This quarter, we started to roll out our preferred consumer packaging across our grilling portfolio in time for the grilling season. We are energized for the grilling season and expect our newly launched 'Flavor is Calling' marketing campaign to drive incremental consumer demand. Later this fiscal year, in alignment with consumer preferences, we are relaunching the gourmet line with countertop worthy new packaging, including a vibrant gold cap that seals in freshness, provides a modern look and highlights that we only use the best raw materials. In terms of new products, we are expanding our Cholula line into cremosas, chamoy and cooking sauces. We are launching new limited-time offer Finishing Salts this summer and new Finishing Sugars for the holiday season, which build on last year's successful Finishing Sugars offer. In EMEA, we are expanding across multiple markets with our air fryer seasonings, which continue to be successful in the U.K. by addressing consumers' increased appetite for air fryer focused seasonings. In addition, in EMEA, we are launching our new all-rounder seasonings. This innovation addresses the desire from younger consumers for enhanced flavor without being specific to one type of meal. Moving now to our Flavor Solutions segment. Starting with branded food service, where we leverage the equity of our iconic brands that consumers love in the away-from-home channel. We continue to fuel growth with operator-relevant and on-trend innovation. For example, we are beginning to see on menus, the 2025 flavor of the year, Aji Amarillo seasoning. In addition, we continue to focus on reaching consumers and operators through increased branded menu placements and with our new online shop called McCormick For Chefs, which launched early this quarter. Shifting to flavors, we are leveraging our culinary heritage and deep expertise in natural flavors and ingredients to support innovation with existing customers to ensure their products meet regulatory changes and preferences of health-conscious consumers. And we are winning new high-growth customers, which will help offset the softness we are seeing from center store CPG customers. We are collaborating with large and emerging brands to flavor energy, hydration, protein-based beverages and zero sugar drinks. In addition, we are leveraging our expertise in functional ingredients and our technologies to help customers mask off notes or enhance flavors as they add protein across categories, like protein-based snacks. Our win rate with health and wellness-related briefs is strong across our regions, and we continue to dedicate resources to where we have the right to win. To wrap up our growth plans and specifically our view on the second half, we remain confident in the long-term health of our business, our fundamentals and delivering on our plans to continue to drive industry-leading differentiated performance. Now over to Marcos.
Marcos Gabriel, Executive Vice President and CFO
Thank you, Brendan, and good morning, everyone. Let's start on Slide 8. Total organic sales grew 2% for the quarter, driven by volume and mix. This reflects total volume-led growth for the last four quarters and underscores our differentiation. Moving to our consumer segment on Slide 9. Organic sales increased 3%, driven by volume and mix. Consumer organic sales in the Americas grew 3% with 4% volume growth, partially offset by a 1% decrease in price related to targeted incremental promotions. The volume growth was strong across our core categories and was driven by our investments in brand marketing, innovation and category management. In EMEA, we grew consumer organic sales 3%, driven by a 2% increase in volume and a 1% increase in price, related to targeted actions taken as a result of increased commodity costs. We're pleased with the strong sustained volume growth in EMEA. Consumer organic sales in the Asia Pacific region increased by 4% driven by volume. This growth reflects the gradual recovery we expected in China. We're pleased with our performance and expect these trends to continue in the second half of 2025. Turning to our Flavor Solutions segment on Slide 10. Second quarter organic sales were flat with a 1% contribution from price, offset by a 1% decline in volume and mix. In the Americas, Flavor Solutions organic sales increased 1%, reflecting a 2% price contribution, partially offset by a 1% decline in volume. Our results reflect a strong performance with faster growing flavor customers and continued QSR growth, offset by softness in CPG customers' volumes. The price contribution is primarily related to currency in Latin America. In EMEA, organic sales decreased by 7% including a 5% impact of lower volume and a 2% decline from price, reflecting the impact of soft CPG and QSR customers volumes, which were impacted by geopolitical boycotts related to the Middle East conflict. In the Asia Pacific region, Flavor Solutions organic sales increased 3% with volume growth of 5%, driven by QSR customer promotions and limited time offers, partially offset by price of 2%. Moving to Slide 11. Gross profit margin was flat in the second quarter versus the year-ago period, driven by costs to support increased capacity for future growth and higher commodity costs, partially offset by savings from our comprehensive continuous improvement program, or CCI. While we would have expected gross margins to improve relative to the prior year, we're seeing increased cost pressure caused primarily by the global trade uncertainty. Selling, general and administrative expenses or SG&A decreased relative to the second quarter of last year driven by the shift in timing of our stock-based compensation expense as well as savings from CCI, including our SG&A streamlining initiatives. For the quarter, adjusted operating income increased by 10%. Excluding the impact of currency, adjusted operating income increased by 11%. This increase was driven by CCI savings, including our SG&A streamlining initiatives, partially offset by gross margin and increased investments to drive growth, most notably in digital as well as our sustained investments in brand marketing. Our second quarter adjusted effective tax rate was 24% compared to 14% in the year-ago period. Our tax rate in the prior year benefited from a higher level of favorable discrete tax items relative to the current year. Our income from unconsolidated operations in the second quarter increased 17%, primarily due to strong operational performance from our largest joint venture, McCormick de Mexico, partially offset by the strengthening of the U.S. dollar against the Mexican peso. Turning to our segment operational results on Slide 12. Adjusted operating income in the consumer segment increased 10% with minimal impact from currency. The increase was primarily driven by improved SG&A expenses. In Flavor Solutions, adjusted operating income increased 10% or 13% in constant currency, driven by product mix, pricing and improved SG&A expenses. We continue to make progress in expanding our operating margins in line with our objectives. At the bottom line, as shown on Slide 13, second quarter 2025 adjusted earnings per share was $0.69 and comparable with the year-ago period. The benefits from operating profit and unconsolidated income growth were offset by lower gross margin and a less favorable tax rate relative to the prior year. On Slide 14, we'll summarize highlights for cash flow and balance sheet. Our cash flow from operations through the second quarter of 2025 was $161 million compared to $302 million in 2024. The decrease was driven by higher cash used due to the timing of working capital. We returned $242 million of cash to shareholders through dividends and used $85 million for capital expenditures. Note that the timing of capital expenditures fluctuates on a quarterly basis dependent on the phasing of initiatives, including 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. This means funding investments to drive growth, returning a significant portion of cash to shareholders through dividends, and maintaining a strong balance sheet. We remain committed to a strong investment-grade rating and expect to continue to deliver strong cash flow in 2025 driven by profit and working capital initiatives. Before turning to our outlook, let me provide some details on our tariff exposure and mitigation plans on Slide 15. First, it's important to reiterate their views reflect tariffs as they currently stand. It is also worth calling out that we purchased over 17,000 unique materials from over 90 countries and no single commodity has a disproportional material impact on our cost of goods sold. Importantly, we have also focused over the last number of years on decreasing our reliance on any one geography. Across the U.S., Canada, China and our largest markets in Europe, more than 85% of what we sell in those countries is made in those countries; specifically, in the U.S. it's more than 90%. As you can see on the slide, we expect to fully offset the impact of current tariff costs for 2025. In addition, our plans will not have a significant impact on our sales volume outlook for the year. Our total gross annualized tariff exposure is approximately $90 million. And in terms of 2025, in-year exposure, it's about $50 million. We are offsetting a significant portion of this impact with sourcing plans supported by advanced analytics and CCI savings. The remainder will be offset through revenue management initiatives. As we said, we're taking a very targeted and surgical approach to pricing and leveraging robust analytics and planning tools to ensure we maintain volume momentum and continue to meet consumers and customers' needs for both value and flavor. In addition to the direct costs from tariffs, we're seeing elevated pressure on the cost of certain commodities due to the global trade environment. We have seen this impact our second quarter, and we expect it to continue for the remainder of the year. We plan to mitigate this impact primarily through SG&A savings. Now let's turn to our 2025 financial outlook on Slide 16. We are maintaining our net sales, adjusted operating profit and adjusted earnings per share guidance for the year. Our outlook continues to reflect our prioritized investments in key categories to strengthen volume trends, and drive long-term profitable growth while appreciating the current level of uncertainty in the consumer and macro environment. Overall, in terms of currency, our assumptions remain the same. At the top line, we continue to expect organic net sales growth to range between 1% and 3% and for our growth to be volume-led and primarily driven by our consumer segment. Flavor Solutions volumes are now expected to be flat for the year. In terms of price, we expect a slightly higher contribution primarily through the Flavor Solutions segment and some tariff-related pricing will come through in the fourth quarter. For China, our outlook continues to assume a gradual recovery, and we expect China's consumer sales to improve slightly year-over-year. We saw this come through in the past two quarters, and we expect it to continue for the rest of the year. Our 2025 gross margin is now projected to range between flat to up 50 basis points for the year compared to prior guidance of 50 to 100 basis points. This reflects elevated cost of certain commodities coming in higher than we had planned, as I mentioned earlier. As we look ahead to the second half, we expect year-over-year gross margin expansion to be weighted towards the fourth quarter, driven by the timing of certain mitigation efforts. On SG&A, we expect CCI savings, inclusive of our streamline initiatives to be partially offset by investments in technology as well as brand marketing to drive volume growth. We continue to invest in brand marketing and we're driving more efficiencies through the use of technology as well as our CCI program. As a result, our adjusted operating income growth expectations remain 4% to 6% in constant currency. Year-to-date, our adjusted operating income grew 4% on a constant currency basis, in line with our expectations and implies a higher level of growth for the second half compared to the first half. We want to maintain a balanced outlook that gives us the flexibility to continue to invest in the business while expanding margins. In terms of tax, we expect our tax rate to be between 22% and 23% for the year, compared to 20.5% in 2024, where we benefited from a number of discrete tax items that are not expected to repeat in 2025. Our tax rate is slightly higher than our prior guide due to changes in the benefit from discrete tax items. We expect our income from unconsolidated operations to decline in the high-single-digit range in 2025, reflecting the strengthening of the dollar against the Mexican peso, which is impacting the strong operational results of our largest joint venture, McCormick de Mexico. The business continues to perform well and is contributing to our net income and operating cash flow results. In summary, our 2025 adjusted earnings per share projection of $3.03 to $3.08 on a reported dollar basis reflects currency headwinds and the impact of the increased tax rate relative to the prior year. On a constant currency basis, adjusted EPS is still expected to grow between 5% and 7%. In closing, the strength of our performance underscores that our plans are yielding results and sustaining our differentiation. We're pleased that we're maintaining our volume-led momentum and expanding operating margins in 2025. They certainly work ahead for 2026 to offset the continued headwinds and sustain our strong business momentum. We believe we have the right plans and capabilities in place, and we remain confident in the underlying fundamentals of our business and in delivering on our 2025 financial outlook and long-term objectives.
Brendan Foley, Chairman, President and CEO
Thank you, Marcos. Before moving to Q&A, I would like to close with our key takeaways on Slide 17. We expect to continue to execute on our proven strategies in alignment with consumer trends and with speed and agility. The long-term trends that fuel our attractive categories, consumer interest in healthy, flavorful cooking, flavor exploration and trusted brands are enduring trends. We continue to drive differentiated volume-led top line growth and driving share gains across our core categories. Our results demonstrate that we are investing in the areas that drive the most value, and we expect to maintain this momentum. Additionally, we are well positioned with our robust CCI and cost savings plans to mitigate tariff-related costs in 2025, fuel growth investments and expand operating margins. Our performance historically and over the last few quarters, coupled with our growth plans give us confidence in achieving our near- and long-term objectives. Ultimately, 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. Finally, I want to recognize all McCormick employees for their dedication and contributions and reiterate my confidence that together, we will continue to drive differentiated results and shareholder value. Now for your questions.
Operator, Operator
And the first question comes from Andrew Lazar with Barclays.
Andrew Lazar, Analyst
I guess, Brendan, recently, you're heading into second quarter results, McCormick had been kind of reminding investors that EBIT growth would likely be more weighted towards the second half. But second quarter EBIT actually came in far stronger, right, than expected across both segments. So what's either surprised you or came in differently in terms of the outcome versus maybe what you had been messaging before the quarter?
Brendan Foley, Chairman, President and CEO
Thank you for the question, Andrew. I’d like to share a few thoughts on that before handing it over to Marcos. We had a solid quarter, and the outcomes aligned with our expectations. Our consumer business is performing well, driven by volume in our core categories, and we are gaining market share. In Flavor Solutions, we are navigating the challenging conditions facing our customers, and we have performed better than many in the industry. The results were in line with our predictions. I’m very proud of our team's ability to manage through this dynamic environment; they have done exceptionally well. We are seeing trends among consumers where the desire for value and health and wellness converge, which continues to benefit our categories and business from both a short-term and long-term perspective. This allows us to maintain positive momentum, which was evident in the second quarter. Marcos, would you like to add anything specific?
Marcos Gabriel, Executive Vice President and CFO
Yes, certainly. In addition to the strong top-line performance we experienced this quarter, particularly in the Consumer segment which was driven by volume, we also achieved a significant operating profit of around 11% on a constant currency basis. This success can be attributed mainly to our SG&A costs. Year-over-year, there are two key factors influencing this strong performance. First, half of the variance we saw year-over-year is linked to stock-based compensation, which was a challenge in Q1 but became favorable in Q2. Second, the CCI program and our streamlining efforts, especially within SG&A, played a crucial role. We have worked diligently to optimize costs across all lines of the P&L. This quarter, we took further steps to reduce costs in SG&A, including cuts to discretionary spending, professional fees, travel, and entertainment. Additionally, we made some organizational changes that impacted Q2, which will continue to have effects for the rest of the year. This encapsulates the main factors that contributed to our Q2 performance. If we look at this on a normalized basis and consider the first and second halves of the year, operating profit for the first half grew by 4% in constant currency, suggesting we need a stronger growth rate in the second half to meet our objectives. Looking ahead to the second half, we expect our fourth quarter to be weighted with results due to the implementation of our mitigation efforts and actions currently in place, which will be fully rolled out by Q4. Therefore, we anticipate improvements in gross margin and operating profit in Q4. This gives a comprehensive view of the quarter and provides relevant context for the halves.
Andrew Lazar, Analyst
All right. And then maybe just quickly, can you talk a little more specifically about the tariff mitigation actions? Maybe how much is the cost work versus the sort of strategic pricing that you're planning? And I guess, how do you go about determining where it's more appropriate to be able to take some pricing actions without impeding obviously the really strong volume momentum that you've been developing over the last couple of quarters?
Marcos Gabriel, Executive Vice President and CFO
Yes, that's a good question, Andrew. I mean, we have been very mindful in terms of all the levers that we're pulling in terms of mitigation actions to offset tariffs, $50 million in year. And the team has done a fantastic job putting a lot of scenarios for us to assess. And at the end, we came with the majority of the mitigation actions are driven by sourcing as well as CCI. We have a very robust sourcing organization with a lot of experience. But then on top of it, we have a lot of data and analytics that help us make decisions in terms of buying decisions and procuring and sourcing locations and things like that as well as CCI. So that is the majority of it that we're taking on. And then in terms of pricing, it is the residual, right? The residual is pricing that we're taking, we're being very targeted and surgical in the way that we do that. We have also analytics that help us take pricing where we see the elasticity elements of it. And so therefore, it's a very surgical approach to it that we want to continue to balance, as you said, the top line momentum that we have, but also protecting operating profit. I don't know, Brendan, if you want to add any comments on that?
Brendan Foley, Chairman, President and CEO
Yes. I'll expand on what Marcos said. The investments in price gap management that we discussed earlier are still foundational to our strategy, and we don’t anticipate that our targeted pricing approach will hinder our overall momentum. As we begin to implement these price gap management initiatives in the second half, we still expect solid performance from them. It's important to understand that these efforts may not be applied to the same products where we are implementing the targeted pricing strategies. Regarding the data analytics that Marcos mentioned, we consistently utilize this information in a disciplined manner, and our revenue management team has been very effective. We have a strong team dedicated to this work. We anticipate some impacts from elasticity, which is expected, but we still expect to achieve solid volume growth as we progress through the latter part of the year.
Operator, Operator
The next question is from the line of Peter Galbo with Bank of America.
Peter Galbo, Analyst
Brendan, I was hoping maybe to get a little bit more detail if you can frame up kind of the gross tariff exposure of the $90 million, expanding a little bit about just kind of how you arrived at that number. And I believe, just to clarify, you also made some comments around cost of goods being impacted just by global trade environment, which I think is separate from the tariffs. So maybe just to start some additional detail around those two items, please.
Brendan Foley, Chairman, President and CEO
Yes. I think just on your last point there, we are distinguishing one from the other, to your point. Let me ask Marcos to kind of provide a little bit more context.
Marcos Gabriel, Executive Vice President and CFO
Yes, framing the $90 million, I would begin with our supply chain footprint. We are well positioned regarding our manufacturing capabilities and sourcing strategies. As I mentioned on the call, we produce most of the products we sell in our largest market. In the U.S., for instance, around 90% of what we sell is made domestically. Therefore, our exposure mainly relates to raw materials in regions where we cannot cultivate in the U.S. We manage 17,000 ingredients across 90 markets, with no single material comprising a significant part of our cost of goods sold (COGS). We are actively working to reduce reliance on any specific geography through our sourcing organization. The raw materials line represents a substantial part of our COGS, but not all raw materials incur tariffs. Regarding the materials affected by tariffs, we currently apply a 30% tariff on materials from China and a 10% tariff on those from the rest of the world, in addition to USMCA compliance for imports from Canada and Mexico, which is nearly zero. This results in a blended rate of approximately 2% of global COGS. The impact varies by region, with some areas, particularly in the Americas, experiencing a higher percentage than the 2% COGS. However, we are taking all possible measures to lessen the impact in 2025, aiming for the $50 million through the actions I outlined earlier.
Peter Galbo, Analyst
Got it. No, that's helpful. And Brendan, just going back to your prepared remarks, I think in Flavor Solutions in the Americas, in particular, on Slide 5. You kind of had a couple of headwinds and a couple of tailwinds in the quarter and maybe more on the go forward. But maybe you can unpack each of those four or five that you talked about and how we should think about those specifically more in the second half.
Brendan Foley, Chairman, President and CEO
Yes, Peter, I’d be happy to. From the Flavor Solutions segment perspective, let me first break down our flavor business and what we're observing there, as well as the food away from home segment and our insights on that. I'll also incorporate some regional context as I summarize. Starting with flavor, we’re definitely noticing the effects of slower volumes and pressure in the grocery market, especially with some of our larger CPG customers. This trend is occurring at a global scale and is not restricted to any one region. We are seeing a slowdown in center store volume, which has been acknowledged by our peers and customers, and it doesn’t seem to be more challenging than it was in the first quarter. Conversely, we continue to see positive results with what we refer to as high-growth innovators, which are typically smaller customers compared to larger global manufacturers. These customers often operate in health and wellness categories. For example, we observe growth in hydration and energy beverages, as many are incorporating protein into their products or opting for zero sugar options. We are also witnessing more recent opportunities in areas such as collagen, sleep supplements, and digestive health — all of which require flavor. We're experiencing higher growth rates in these areas, which somewhat mitigates the softness we've been observing, though not entirely. These product lines necessitate flavor, and we are performing well in these markets. Our competitive advantages resonate with this customer base, particularly due to our strong functional ingredients and technologies that effectively enhance flavors. We work swiftly and accurately in this marketplace, maintaining strong coordination with our innovative customers. Moving on to food away from home, let’s first discuss quick-serve restaurants, or QSRs. In the Americas, we’re seeing some strength here, despite overall traffic trends being less robust. Our success is primarily tied to promotional activities and limited-time offers, in which we're actively participating. This engagement has been accelerating the performance of our customers and our brands, generating considerable excitement around these promotions. We see similar positive trends in the Asia Pacific region, where quick-serve restaurants have demonstrated sustained strength driven by strong promotions. Beyond quick-serve restaurants, fast casual dining is actually seeing traffic growth and performing well. Within our brands, we’re increasing our tabletop market share and gaining presence in those locations, enhancing consumer interest by offering value—thereby strengthening the value proposition for dining out. However, in EMEA, we are experiencing continued softness in quick-serve restaurants, which is somewhat below our expectations. This downturn is mainly influenced by geopolitical boycotts related to the conflict in the Middle East, which we did not anticipate to have such a significant impact. Nevertheless, we believe the situation in EMEA will stabilize as we compare against lower numbers from the previous year. I’ll stop here since there’s a lot of diverse segments to address, and I hope this answers your questions.
Operator, Operator
Our next question is from the line of Robert Moskow with TD Cowen.
Robert Moskow, Analyst
A couple, Marcos. When you say that you found sourcing opportunities, I imagine that means you're finding less expensive options. But I know that you make a point to buy higher-quality ingredients than your peers. So how do you go about doing both of those things at the same time? Is there any risk of sacrificing quality? And then secondly, you also mentioned elevated pressure on certain commodities due to the global trade environment; can you be more specific on what that is? And why do you choose to mitigate it through SG&A?
Brendan Foley, Chairman, President and CEO
Rob, let me just take the first part of your question, and then I'll hand it over to Marcos for additional context. There is no trade-off in our business with regard to quality. So I think that's really an important thing to say immediately because, yes, it's a fair assumption that if we're mitigating this, we're finding a lower cost to offset what might have been a higher cost, but quality remains a top priority for our company, and we're still able to procure items that meet our quality requirements, which tend to be higher than anyone else in the industry. So I would just start off with that. But Marcos, would you like to add any other.
Marcos Gabriel, Executive Vice President and CFO
I think you already addressed the first point. We are not going to compromise on quality for price, and that's a key advantage of our sourcing organization. It's an "and," not an "or." Regarding the second question about the pressure, I was referring to the global trade environment. What I meant is that suppliers and customers are somewhat at a standstill right now. The supply/demand dynamics we expected to help drive costs down did not happen. This is impacting our gross margin, which is why we adjusted our gross margin outlook for the year to between flat and down 50 basis points. We're taking a very strategic approach to pricing since we want to maintain our business momentum and protect operating profit. We're making various adjustments in our P&L, and a key strategy is managing SG&A. In the latter half of the year, you will see gross margin expansion compared to the first half, although this will be offset by our SG&A initiatives. While we will continue investing in SG&A for advertising, brand marketing, and technology, this will be balanced by our CCI program and the SG&A streamlining efforts we implemented in Q2. Our focus is on minimizing volume impact while achieving margin expansion.
Operator, Operator
Our next question is from the line of Alexia Howard with Bernstein.
Alexia Howard, Analyst
A couple of questions here. First of all, what do you make of the expanded list of over 40 additives that Texas is planning to require unpack labels saying that they've been banned in other countries like Canada and the EU? This list of over 40 additives seems broader than just the artificial dyes that the federal level has covered so far. It seems to include antioxidants and preservatives that may be harder for food companies to find replacements for without reducing shelf life. It's obviously very early days; this only happened in the last few days. But do you anticipate another step-up in reformulation efforts as a result of that?
Brendan Foley, Chairman, President and CEO
Alexia, regarding the activities happening at the state level, we are collaborating closely with the Consumer Brands Association and other industry peers and partners to navigate what can be quite disruptive at a national level when considering state-specific issues. We believe it is important to address consumer needs at a national level rather than allowing state-by-state approaches, which can lead to significant disruption overall. Specifically, concerning additives, each one requires its own discussion, making it challenging to address a list of 40 items comprehensively. At this point, I can't provide a direct response due to the considerable amount involved, and we need to focus our conversations to a more manageable scope. That’s about all I can share for now, as we are still in the early stages.
Alexia Howard, Analyst
Perfect. And then just as a follow-up, I know that back in 2020, you were planning to do your big SAP transition as a big event that year, and then obviously, the pandemic put it off. I believe that you're still in the process of executing that. Is that going to be a meaningful step-up in investment? Or is it a similar level of investment next year as maybe you've seen this year? Just wondering about the path for the investment on the IT side over the next couple of years.
Brendan Foley, Chairman, President and CEO
Sure, Alexia. I’ll take that one. We've changed our implementation plan to reduce the risks associated with the ERP implementation. That's the first thing I want to mention. Instead of a large-scale approach, we've switched to a functional deployment method. This takes a bit longer but minimizes the risks. So, this has extended the timeline for implementing the ERP system. However, it has also made the spending and investments smoother. You shouldn’t expect to see a surge in investments related to the ERP implementation for next year; it will align more closely with what we've experienced this year. Of course, we will continue to invest in digital technology and AI, but specifically for the ERP, you should not anticipate an increase in spending. It will be consistent with what we've seen this year.
Operator, Operator
The next question is from the line of Steve Powers with Deutsche Bank.
Steve Powers, Analyst
So I wanted to ask about the brand marketing tweaks that you've made in your outlook. I think you've been pretty clear in your intent to drive higher brand marketing investments to underscore the top line momentum that you've talked about. So I guess in that context, the decision to step down brand marketing. By my math, it looks like maybe a $5 million to $10 million reduction versus your prior planning. So I guess my question is why not reinvest those efficiencies to provide further top line insurance in an uncertain world, even if it were to cost you a couple of pennies in near-term EPS.
Brendan Foley, Chairman, President and CEO
Well, thanks for the question, Steve. I think when we looked at overall advertising & promotion, what you're seeing right there is just really a reflection. I think I even said this in our prepared remarks; just our efforts around productivity and CCI, we're constantly looking at ways to just buy more cheaply and do things more effectively. And I think we continue to find ways to do that when we think about advertising & promotion. And honestly, technology has been an enabler there for us. So I think that's one point of context, I think it's worth sharing. When we look at the rest of the year, we still have quite a bit of increased investment to happen for the balance of the year and the second half. So this is one of not pulling back on anything and not reducing sort of the amount of intensity and focus that we put around that. So we have quite still a bit of advertising & promotion growth that's going to support the business over and above the prior year as we look at the back half. So we're very pretty comfortable, I think right now, that we continue to invest at higher levels year-over-year, but it's not an indication of any adjustment in strategy or trying to pull away investment for the business. We were simply just reflecting now to the point about having the opportunity to reinvest things. I will tell you that we're doing that every quarter. And so we've done it in the first quarter. You heard our commentary around, I think, recipe mix. We also did it again in the second quarter around hot sauce, and we're really starting to see strong results behind that, right now, too. And I'm sure we may look at other opportunities in the second half where we can also continue to reinvest. So that's kind of the perspective around that, Steve. I would think about it as even contribution as the year progresses, what is incremental if you think about what was already in place and then what's incremental. We have continued growth in advertising & promotion support and spend on the business. We're going to see more new items hit the shelf in the second half versus the first half or even last year. We're also going to see even stronger distribution. I think it's already starting to come through in the data. And so that will be incremental to what we had in the prior year or in the first half of the year. And it's kind of going to hit, I think, both quarters evenly. What won't, I don't think, is as some of the surgical pricing that we talked about; that's probably likely to show up more in the fourth quarter. And so therefore, you might see a slightly different composition. But broadly, the pressure that we have in the back half, I would say, is it's going to be consistent from quarter three to quarter four. Does that help?
Operator, Operator
The next question is from the line of Max Gumport with BNP Paribas.
Max Gumport, Analyst
First, Brendan, you mentioned your continued confidence in your long-term objectives. I just wanted to confirm that even with the inclusion of tariffs now in your outlook, the long-term targets you provided at the Investor Day last year for the period from FY '23 to FY '28 still stand.
Brendan Foley, Chairman, President and CEO
Yes, we still feel like I'm confident and comfortable with those. Obviously, as things change, we have to modify our plans at times like if you think about sort of the first half of this year, but it hasn't taken us off our game plan from a long-term perspective.
Max Gumport, Analyst
Great. And then you talked about seeing an uptick in innovation activity from the large CPG customers, particularly in the U.S. who are also seeing some volume softness right now. You mentioned that they are doing things like putting more protein in their products. But could you talk more broadly about the level to which you're seeing this uptick take hold? Is it one of the higher levels you've seen in the past several years and then give a bit more detail about the types of actions you're seeing from these large CPG customers with regard to innovation and how you think your business might be able to benefit from this activity.
Brendan Foley, Chairman, President and CEO
Thank you, Max. From an activity standpoint, we consistently engage in reformulations, matching, and assisting with the launch of new products for our customers. Recently, we've observed a significant increase in both reformulation and matching activities. These efforts are above what we typically experience in terms of innovation. I believe this uptick represents additional activity, and over time, it should enhance our overall performance, though I can't pinpoint exactly when that will occur, as timelines can vary. Additionally, we examine our capability and success rate in seizing opportunities, and we generally perform well in this regard. While I won't disclose specific percentages during this call, we are satisfied with our success rate and the performance we achieve when collaborating with both current and prospective customers. Overall, the activity level has definitely increased, which I believe reflects the essence of your question. We're witnessing significant engagement from both large and small customers, indicating a healthy level of activity in the marketplace, primarily driven by health and wellness initiatives.
Operator, Operator
Our next question is from the line of Scott Marks with Jefferies.
Scott Marks, Analyst
Two questions from me. First, I think previously, you had spoken to maybe some more volatile growth trends within the flavor solutions business, just given the timing of wins and other things. And you also made some comments earlier about expecting the EMEA side of that business to stabilize. So just wanted to confirm maybe how you're thinking about cadence of growth for the second half of the year within the Flavor Solutions segment.
Brendan Foley, Chairman, President and CEO
Within Flavor Solutions, we do not provide quarterly guidance. However, regarding the Americas region, we anticipate that the trends we have observed so far will continue. This business tends to be somewhat inconsistent, as we've mentioned before. Beyond the usual fluctuations, if you analyze our first and second quarters together, you will notice some trends and variability. In the Americas, we expect these trends to be sustained, and an increase in traffic would enhance that. While quick-service restaurants represent a smaller portion of our business in this region, we expect their performance to remain strong. In EMEA, we are comparing against weaker performance from the previous year, which is consistent across both quarters. We hope to see this begin to stabilize based on current observations. One unpredictable factor is the geopolitical situation, which has introduced volatility in the last year and a half. We cannot foresee these events, but they have influenced the first half of the year. As for the Asia Pacific region, I have a similar outlook to what I mentioned for the Americas; we expect consistent trends in the second half as we did in the first.
Marcos Gabriel, Executive Vice President and CFO
And just to be on that, Brendan, I would say, Scott, I mean, you would see in that part of the portfolio, a little bit more pricing actions taking now as we go towards the second half of the year. And that is due to the commodities that I talked to before, but also some FX impact, primarily in Latin America. So we're taking some surgical, again, pricing in those markets just to make sure that we are protecting our operating margin. And for the full year, the operating margin will expand in Flavor Solutions in line with our objectives to get back to a level of operating margin that we had before.
Brendan Foley, Chairman, President and CEO
We feel we have had very positive and productive conversations with all our customers. We adopt a customer-led approach in everything we do because our goal is to help them grow their categories in their stores and banners. We take a strong category perspective on what will benefit the category, which includes the performance of our brands, their private label products, and the category overall. We believe we have performed well, especially over the last two years, by pursuing a more aggressive agenda and capitalizing on opportunities to drive growth with consumers. Currently, we are seeing the benefits of this approach, as evidenced by our distribution growth, which results from strong conversations and relationships that focus on what is best for the consumer. This reflects our strengths in areas such as category management, revenue management, innovation, and brand marketing support, all aimed at driving growth for our retail customers. Overall, we believe our discussions have been very productive and collaborative.
Operator, Operator
Final question is from the line of Bryan Adams with UBS.
Bryan Adams, Analyst
As we look ahead, I anticipate operating income growth in the mid- to high single digits for the second half of the year across the total company. Can we expect this growth to be more concentrated in the consumer segment or Flavor Solutions? It seems from the earlier comments that the top line may perform better in Consumer compared to Flavors, but I also understand that Flavors presents more opportunities for margin expansion in the long run. Additionally, Marcos mentioned some pricing adjustments in that area. I’m trying to reconcile these two aspects, and any insights you can provide would be appreciated.
Marcos Gabriel, Executive Vice President and CFO
Yes. This may vary quarterly and between segments. In the second half of the year, you will see contributions from both segments in terms of operating margin. For the full year, Flavor Solutions will be a significant contributor as we continue to reinvest in the business to drive volume momentum. Our approach is to assess the segments on an annual basis rather than quarterly. In the consumer segment, the intent is to reinvest gross margin gains into brand marketing and technology to maintain top line growth through volume. Regarding Flavor Solutions, the focus is on expanding margins and recovering profitability while also aiming for growth. Overall, you should expect Flavor Solutions to be a key driver for the full year.
Faten Freiha, VP of Investor Relations
Okay. Thank you, everybody, for joining us this morning. If you have any questions following this call, please reach out. Thank you, and have a great day.
Operator, Operator
This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.