Earnings Call Transcript - MKC Q4 2020

Kasey Jenkins, Vice President of Investor Relations

Good morning. This is Kasey Jenkins, Vice President of McCormick Investor Relations. Thank you for joining today’s Fourth Quarter Earnings Call. To accompany in this call, we’ve posted a set of slides at ir.mccormick.com. Currently, all participants are in a listen-only mode. Following our remarks, we will begin a question-and-answer session. We’ll begin with remarks from Lawrence Kurzius, Chairman, President, and CEO; and Mike Smith, Executive Vice President and CFO. During our remarks, we will refer to certain non-GAAP financial measures. These include information in constant currency, as well as adjusted gross margin, adjusted operating income, adjusted income tax rate, adjusted earnings per share and adjusted leverage ratio that exclude the impact of special charges, transaction and integration expenses related to the acquisitions of Cholula and FONA, and for 2019, the net non-recurring benefit associated with the U.S. Tax Act. Reconciliations to the GAAP results are included in this morning’s press release and slides. As a reminder, we completed a 2-for-1 stock split at the end of our fiscal 2020. As a result, all per share amounts mentioned today will also be included in our 10-K, reflecting the virtual access presentation of those amounts on a split adjusted basis. In our comments, certain percentages are rounded. Please refer to our presentation for complete information. In addition, as a reminder, today’s presentation contains projections and other forward-looking statements. 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. It is important to note these statements include expectations and assumptions, which will be shared related to the impact of the COVID-19 pandemic. As seen on Slide 2, our forward-looking statement also provides information on risk factors including the impacts of COVID-19 that could affect our financial results. It is now my pleasure to turn the discussion over to Lawrence.

Lawrence Kurzius, Chairman, President, and CEO

Thank you, Kasey. Good morning, everyone. Thanks for joining us. Starting on Slide 4. Our fourth quarter results completed a year of strong financial performance. We delivered strong results in 2020, despite great disruption proving the strength of our business model, the value of our product, our capabilities as a company, as well as the successful execution of our strategies. I am incredibly proud of the way McCormick has performed in this unprecedented operating environment. We drove outstanding underlying operating performance while protecting our employees and recognizing their exceptional performance, making important investments in our supply chain, and brand building to fuel future growth and supporting our communities through relief efforts. We’re also excited about the recent acquisitions of Cholula and FONA, two fantastic businesses that will continue to support differentiated growth and performance, positioning McCormick for success in 2021 and beyond. As seen on Slide 5, we have a broad and advantageous global flavor portfolio with compelling offerings for every retail and customer strategy across all channels. The breadth and reach of our portfolio across segments, geographies, channels, customers, and product offerings create a balanced and diversified portfolio to drive consistency in our performance during volatile times, as evidenced by our fourth quarter and fiscal year results. The sustained shift in consumer behavior to cooking and eating more at home has driven substantial increases in our Consumer segment demand as well as an increase with our packaged goods customers in our Flavor Solutions segment. On the other hand, we experienced declines in demand from our restaurant and other food service customers in the away-from-home products in our portfolio. The impact of this shift to more at-home consumption has varied by region due to differing levels of away-from-home consumption in each, as well as the pace of each region’s COVID-19 recovery. Taken together, these impacts continue to demonstrate the strength and diversity of our offerings. Heading into 2021, I’m confident our operating momentum will continue. Our 2021 outlook, coupled with underlying business momentum and the Cholula and FONA acquisitions, are expected to drive robust sales, adjusted operating income, and earnings growth and fund our investments in business transformation. This morning, I’ll begin with our fourth quarter results, reflect on our 2020 achievements, and then share with you some of our 2021 business momentum and plans. After that, I will turn it over to Mike, who will go into more depth on the quarter-end fiscal year results, as well as the details of our 2021 guidance. Turning to Slide 6, starting with our fourth quarter results, which were in line with the guidance we provided for sales, adjusted operating profit, and adjusted earnings per share on our last earnings call. On our top line versus the year-ago period, we grew total sales 5%, including a 1% favorable impact from currency. In constant currency, we grew total sales 4% with both segments contributing to the increase. Adjusted operating income declined 4% as growth from higher sales and CCI-led cost savings were more than offset by higher planned brand marketing investments, COVID-19 related costs, and higher employee benefit expenses. Our fourth quarter adjusted earnings per share was $0.79 compared to $0.81 in the prior year, driven primarily by lower adjusted operating income with a partial offset for lower interest expense. Turning to our fourth quarter segment business performance, starting on Slide 7 in our Consumer segment, we grew fourth quarter sales by 6%, on constant currency 5%, driven by consumers cooking and eating more at home. Our Americas constant currency sales growth was 6% in the fourth quarter. Our total McCormick U.S. branded portfolio, as indicated in our IRI consumption data, grew 14%, which reflects the strength of our categories as consumers continue to cook more at home. Similar to previous quarters, our sales increase was lower than the U.S. IRI consumption growth, which is attributable to service level pressures and an increased level of pricing and scanner data. As mentioned in our earnings call at the end of September, we expected service level pressures in the fourth quarter due to the sustained increase in demand to protect our top-selling holiday items. We had to suspend or curtail production on some secondary products, which importantly drove our strong holiday execution. Consistent with previous quarters, scanner data includes higher pricing growth due to the channel shift with grocery outpacing mass merchandisers and club stores, as well as some impact from the lower promotional activity. Focusing on the U.S. branded portfolio, spices and seasonings, and other key categories, excluding dry recipe mixes, we grew fourth quarter consumption at double-digit rates and again, increased our household penetration and repeat buyer rates. Our fourth quarter dry recipe mix consumption was impacted by supply constraints, although it had double-digit growth for the year, as did spices and seasonings and other key categories. In the fourth quarter, we continued to gain share in categories less impacted by supply constraints, including hot sauces, stocks and broth, barbecue sauce, wet marinades, and Asian products. The majority of our categories continued to outpace the total store, and center-of-store growth rates, favorably impacting not only the McCormick brand, but smaller brands as well, such as Stubb’s, Lawry’s, Simply Asia, and Thai Kitchen. In e-commerce, we had triple-digit pure-play growth as McCormick branded consumption outpaced all major categories. But we do not expect consumption to continue at the highly elevated levels of our fourth quarter. We do expect sustained long-lasting growth from the increase in consumers cooking more at home. The most recent IRI scanner sales data for the five weeks ending January 17 showed that total McCormick U.S. branded portfolio consumption is still growing at approximately 11.5% with continued strength in spices and seasonings. Consumers are continuing to come to our brands, have a good experience, and buy our products again. In the fourth quarter, we increased our brand marketing investments in all regions as planned, with the Americas messaging and promotional activities focused on a holiday proving to be successful. Our high level of effective brand marketing investments and our initiatives to deepen our digital engagement with consumers are capitalizing on the opportunity to build long-term brand equity after trial and increased usage by existing consumers. And with the manufacturing capacity we’ve recently added, we are well-positioned moving into 2021, and we’ll continue to drive growth through strong brand marketing, category management initiatives, and new product innovation. Now, turning to EMEA, our constant currency sales rose 10% in the fourth quarter with broad-based growth across the region. Our largest markets continued to drive double-digit total branded consumption growth with market share gains across several categories. Spices and seasonings consumption was strong in all markets, and our Vahine brand in France again had strong consumption growth and outpaced the homemade desserts category. In the UK, Frank’s RedHot drove the hot sauce category growth and gained share with over 50% consumption growth. In EMEA, our household penetration and rate of repeat buyers increased significantly across our major brands and markets during the fourth quarter and the full year compared to last year. Importantly, for the full year, we gained total EMEA region market share in spices and seasonings and dry recipe mixes. In the Asia Pacific region, our constant currency sales declined 10%, driven by softness in branded food service products, which are included in our Consumer segment in this region. The food service industry is continuing to recover, but at a gradual pace. Growth in China was also impacted by a shift to a later Chinese New Year in 2021, which in turn impacted shipments at the end of our year. Excluding those impacts, consumer consumption in the region was strong, particularly at Gourmet Garden and Frank’s RedHot in Australia. Turning to Slide 8, our sales performance in Flavor Solutions returned to growth in the fourth quarter. For the constant currency, sales increased 3% with all three regions contributing to the sales growth. In both the Americas and EMEA regions, we experienced increased demand from our consumer packaged food customers or at-home customer base, with strength in the base business as well as momentum with new products. Also, in both regions, we experienced demand declines in our away-from-home customer base for branded food service and restaurant customers. The net impact of this demand volatility along with pricing actions to cover cost increases drove EMEA’s fourth quarter constant currency sales growth of 5% and in the Americas, which is more skewed to branded food service growth of 2%. In the Asia Pacific region, our constant currency sales grew 7%, driven by Australia and China’s growth with quick-service restaurant or QSR customers. However, we continue to see momentum in limited-time offers as a core business, partially driven by the customer’s promotional activities. Moving from our fourth quarter results, I’m pleased to share our full fiscal year accomplishments, which not only highlight what we’ve achieved during 2020, but fuel our confidence to drive another year of strong operating performance in 2021. Starting with our 2020 financial results as seen on Slide 9, we drove 5% constant currency sales growth with 10% growth in our Consumer segment, led by consumers cooking and eating more at home. Partially offsetting this growth was a 2% constant currency sales decline in the Flavor Solutions segment. COVID-19 restrictions in most markets, as well as consumer reluctance to dine out reduced demand from restaurants and other food service customers. We achieved $113 million of annual cost savings driven by our CCI program, our fuel for growth, and there continues to be a long runway in 2021 and beyond to deliver additional cost savings. 2020 was the ninth consecutive year of record cash flow from operations, ending the year at over $1 billion, a 10% increase from last year. We’re making great progress with our working capital improvements. At year-end, our Board of Directors announced a 10% increase in the quarterly dividend marking our 35th consecutive year of dividend increases. We have paid dividends every year since 1925, and are proud to be a dividend aristocrat. Now, I’d like to comment on some of our 2020 achievements beyond our financial performance. E-commerce growth accelerated significantly in 2020, which we were well-prepared for from our past investments and investments we activated early in the year. Our 2020 growth of 136% was outstanding with triple-digit growth in all categories, including pure-play, click and collect, and our own direct-to-consumer properties. We expect the consumer shift towards increased online shopping to continue, and we are well positioned for the opportunities still ahead. We continue to build long-term brand equity through our brand marketing investments, increasing 7% in fiscal 2020, most recently with a double-digit increase in the fourth quarter across all regions, which will continue to drive strong growth momentum into 2021. We designed targeted media messaging focused on cooking at home and connecting with consumers digitally more than ever in 2020. Our digital leadership was again recognized as we were ranked as the number one food brand with the highest designation of Genius by Gartner L2 Research and their digital IQ U.S. ranking. This is the seventh consecutive year we were ranked in the top five food and beverage brands. We continue to be recognized for our efforts in doing what’s right for people, communities, and the planet. In 2020, we were recognized for the fourth consecutive year as DiversityInc’s Top 50 companies. Earlier this week, Corporate Knights ranked McCormick in their 2021 Global 100 Most Sustainable Corporations Index as number one in the food products industry for the fifth consecutive year, as well as the number one U.S. company overall and globally, number six overall. Finally, during the year, we continued to invest to expand our global infrastructure. In the Americas, we broke ground on a new state-of-the-art Northeast Distribution Center in Maryland, which will optimize our distribution network. In our EMEA region, we began construction on a new Flavor Solutions manufacturing facility in the UK to support the region's strong and growing customer base. In China, we are investing in flavor capabilities to further drive Flavor Solutions growth. These investments will create both capacity and capability, which will further drive our growth momentum. Turning to 2021, Mike will go over our guidance in a few moments, but I’d like to comment on a recent acquisition announcement and provide highlights related to our growth momentum in 2021 plans. Starting on Slide 11, in addition to the accomplishments I just mentioned, we have reinforced our global flavor leadership and accelerated our condiment and flavors growth platforms. There’s the recent acquisitions of Cholula and FONA. Cholula, an iconic brand in a high-growth category, is a leading Mexican hot sauce and highly complements our existing hot sauce portfolio, broadening our flavor offerings to consumers and food service operators. FONA is a leading North American manufacturer of flavors and enhances the scale of our global flavors platform with the addition of its highly complementary portfolio to our Flavor Solutions segment, expanding our breadth and accelerating our portfolio migration to more value-added and technically insulated products. We’re excited about the 2021 growth contributions we expect from Cholula and FONA, which closed at the end of November and December respectively. For both acquisitions, our transition and integration activities are progressing according to our plans, and the alignment of our organizations is underway to deliver on opportunities quickly and to aggressively drive growth. We have a proven playbook and unmatched expertise to effectively and efficiently unlock Cholula’s significant growth potential. In our Consumer segment, we will leverage our operational expertise and infrastructure to elevate Cholula’s brand presence, increase the availability of its product, and expand its product offerings into new flavors, formats, and eating occasions to drive trial and household penetration. Building on our enthusiasm is the outstanding momentum Cholula carried into 2021, continuing to outpace category growth with strong consumption. In our Flavor Solutions segment, with our broad presence across all food service channels, we’ll be focusing on strengthening Cholula’s go-to-market model. There are opportunities to expand its distribution and existing food service channels, as well as increase new restaurant penetration, where we are uniquely positioned to realize and drive growth. McCormick’s reach across customers, combined with our culinary foundation and deep insights on menu trends, expands to the recipe inspiration and Flavor Solutions that we offer operators. Turning to FONA, which, in addition to accelerating our portfolio migration, will be the cornerstone for accelerating our Americas flavor platform. By expanding our breadth and depth and developing flavors, while also combining our infrastructures to provide greater scale and increase our manufacturing capacity and technical bench strength, we’re providing our customers with a more comprehensive product offering, bolstering our competitive position and creating more opportunities for growth. With the addition of FONA, we’re advancing our health and wellness portfolio. We’re expanding our research and development capabilities and technology platform with additional proprietary encapsulation methods. We’re leveraging expertise in flavoring health and performance nutrition products across a variety of applications. Our clean and natural platform is meaningfully enhanced with the addition of FONA’s predominantly natural portfolio, as well as their expertise, particularly in citrus fruit flavors. The combination of our technology platform and capabilities will provide a long runway for growth, enabling us to remain at the forefront of flavor development and expand our ability to create better-for-you and consumer-preferred flavor solutions across a diverse range of applications for our customers. Our complementary customer base of global and mid-tier customers provides growth opportunities for our collective portfolios. FONA’s customer-centric culture is very similar to ours, and with the combined power of our organizations, we’re well-positioned to reach a broader customer base, deepening existing customer relationships by cross-selling and establishing inroads with new customers while driving innovation. Customer response to the acquisition has been favorable as they recognize our combined power increases our customer value proposition. We’re confident we’ll deliver on our acquisition plan. This confidence is bolstered by our proven track record of successfully integrating and increasing the performance of acquired businesses, such as Frank’s and French’s. Acquisitions are a key part of our long-term growth strategy, and both Cholula and FONA will add to our strong history of creating value through acquisition. Now, I’d like to briefly comment on the conditions we’re seeing in our markets, their potential impact, and our 2021 organic growth plans, starting on Slide 14. Global demand for flavor remains the foundation for our sales growth. We’re capitalizing on the growing consumer interest in healthy flavorful cooking, trusted brands, as well as digital engagement and purpose-minded practices. These long-term trends have only accelerated during the pandemic. Our alignment with these consumer trends, combined with the breadth and reach of our portfolio, sustainably positions us for continued growth. These underlying trends, current market conditions, and a robust 2021 plan position us well to successfully execute on our growth strategies in both segments. Starting with our Consumer segment. Around the world, we continue to experience sustained elevated consumer demand, which has real incremental consumption and reflects the trend of consumers cooking more at home. Across our APZ region, consumer demand continues to be strong. In China, consumer consumption remains strong, and we continue to see recovery in food service, which in China is in our Consumer segment, as well as optimism about the Chinese New Year Holiday, which was significantly disrupted last year by the COVID-19-related lockdown. In Australia, even with restaurant restrictions eased and away-from-home demand increasing, at-home consumption has remained elevated. In EMEA, many of our largest markets have recently implemented more restrictive COVID-19 measures, further fueling at-home consumption, and we’re seeing sustained levels of demand. And of course, we see the same in the Americas. Consumers cooking more from scratch and adding flavor to their meal occasions is a key long-term trend, which has accelerated during the pandemic. Our proprietary consumer survey data, supported by external research, indicates consumers are enjoying the cooking experience and feel meals prepared at home are safer, healthier, better-tasting, and cost less. And while there have been great advances in vaccine development and distribution, there’s a significant amount of uncertainty regarding the pace of vaccination in the upcoming months. We believe the consumer behavior and sentiment driving an increased and sustained preference for cooking at home will continue globally and will persist beyond the pandemic, further driving consumer demand for our products fueled by robust marketing, differentiated new products, and our strong category management initiatives. Our categories across the globe have experienced sustained elevated levels of demand for most of 2020, because of this shift in consumer preference, which, coupled with added employee safety measures, initially reduced manufacturing capacity, depleting finished goods inventory levels, both for us and our customers and challenged our operations. The real pressure has been on our U.S. manufacturing operations, where for the latter part of 2020, we added significant capacity. We ended the calendar year with considerable incremental capacity through the expansion of our workforce, scaling up partnerships with third-party manufacturers, and other measures in line with our previously shared plan. In December, our Americas consumer production output was approximately 40% higher than last year. Currently, service levels are improving and the restoration plans have begun on most of the secondary items, which were suspended in order to meet the significant demand for our top-selling products. We’ve now resumed shipping approximately two-thirds of the products that had been suspended, with the balance to be added over the next several weeks. We expect shelf conditions to improve considerably over the next few weeks. We’re continuing to work through a stabilization period, and inventory replenishment will progress through the first half of the year. Our category management initiatives are designed to drive growth for both our customers and McCormick. Now, I’d like to thank our customers for their partnerships and working together with us on long-term solutions. We’re confident we’re well-positioned for success in 2021 and have implemented the efficient long-term solutions that strengthened our supply chain resiliency longer-term to support continued growth. Also in the U.S., in 2020, we began our initiative to reinvent the in-store experience for spices and seasonings consumers by introducing new merchandising elements to improve navigation and drive inspiration. Our rollout will continue in 2021, and with increased cooking at home expected to continue, this initiative is even more exciting to drive both category and McCormick branded growth. Turning to global brand marketing. We continue to increase our investments across our entire portfolio, which have proven effective and achieved high ROI. We will continue to connect with consumers online, turning real-time insights into action by targeting messaging focused on providing information and inspiration. For instance, with tips, tricks, new recipes and products, to keep meals exciting and cooking easy. We expect our brand marketing investments, combined with our valuable brand equities and strong digital consumer engagement, will continue to drive growth with existing consumers and the millions of consumers gained in 2020. New products are also integral to our sales growth. In 2020, 7% of our total McCormick sales were from products launched in the last three years. In our Consumer segment, new product innovation differentiates our brands and strengthens our relevance with consumers. Our 2020 launches provide significant momentum going forward with exceptional trial. Overall, the selling of our new product launches and big-bet innovation from our Flavor Solutions customers slowed in 2020 due to the focus on keeping core items on retail shelves. Moving into 2021, we’re excited about the strong pipeline both we and our Flavor Solutions customers are carrying into the year. In our Flavor Solutions segment, we have a diverse customer base and have seen various stages of recovery from a food-at-home perspective. Our Flavor Solutions growth varies by packaged food customer. But overall, as we mentioned last quarter, we’ve returned to pre-COVID growth rates. We’re carrying our growth momentum with packaged food customers into 2021, driven by strength in their core iconic products, as well as new products and bigger-bet innovations in 2021. In our away-from-home portion of this segment, our restaurant and other food service customers are still impacted by government-imposed COVID-19 restrictions in those markets. In some areas, our restaurant customers, including quick service restaurants, have faced an increase in restrictions due to case resurgences. Although the impact has not been as significant as at the beginning of the crisis, given many customers have adapted their operating models for delivery or carry-out. The recovery of our branded food service customers continues to be slow and is also impacted by COVID-19 resurgences. Overall, there has been significant disruption experienced in 2020. Recovery has begun, and we’re expecting it to continue in 2021. As QSR customers are oriented less to dine in, their recovery will be at a faster pace than the rest of the restaurant and food service industry. We have positive fundamentals in place to navigate through this period and are excited about the recovery momentum. We are advantaged by our differentiated customer engagement in Flavor Solutions and plan to drive further wins for both us and our customers in fiscal 2021. With our customer intimacy approach, we will continue to drive new product wins, collaborate on opportunities and solutions, manage through recovery plans, and importantly, further strengthen our customer partnerships. Additionally, the execution of our strategy to migrate our portfolio to more technically insulated and value-added categories will continue in 2021. With top-line opportunities gained from our investments to expand our flavor scale or momentum in flavor categories, as well as the opportunities from our FONA acquisition, we expect to realize further results from this strategy. In summary, we continue to capture the momentum we have gained in our Consumer segment, have positive fundamentals in place to navigate through the Flavor Solutions recovery, and are excited about our Cholula and FONA acquisitions, all of which bolster our confidence for continued growth in 2021. We expect sales growth to vary by region and quarter in 2021, given 2020's level of demand volatility and the pace of COVID-19 recovery. But importantly, we expect to drive overall organic sales growth in both of our segments. Our fundamental momentum and growth outlook are stronger than ever. Our achievements in 2020, our effective strategies, and our robust operating momentum reinforce our confidence in delivering another strong year of growth and performance in 2021. Following an extraordinary year in 2020, our 2021 outlook reflects both our strong underlying based business performance and acquisitions, driving significant sales growth as well as strong operating income growth, even considering extraordinary COVID-19 costs and our business transformation investments, which highlights our focus on profit realization. Our top-tier long-term growth objectives remain unchanged, and we’re positioned for continued success. Importantly, McCormick employees around the world drive our momentum and success. During 2020, our employees demonstrated and advanced their skills, agility, and resiliency during a highly challenging time. Now, I’d like to thank them for their dedicated efforts and engagement, as well as their adaptability to this new environment. Now, Mike will share additional remarks on our 2020 financial results and 2021 guidance.

Mike Smith, Executive Vice President and CFO

Thanks, Lawrence, and good morning, everyone. I will now provide some additional comments on our fourth quarter performance and full-year results, as well as detailed on our 2021 outlook. Starting on Slide 19, during the fourth quarter, sales rose 4% in constant currency. Sales growth was driven by higher volume and mix in our Consumer segment, with volume index in our Flavor Solutions segment comparable to last year. Pricing to partially offset cost inflation also contributed favorably to both segments. The Consumer segment sales grew 5% in constant currency, led by the Americas and EMEA regions. The sustained shift to at-home consumption and cooking more at home, as well as consumers adding flavor at home to their restaurant carryout and delivery meals, continues to drive increased demand for our consumer products, resulting in higher volume and mix in these regions. On Slide 20, consumer segment sales in the Americas increased 6% in constant currency versus the fourth quarter of 2019, driven by higher volume and product mix across many brands, including Simply Asia, Thai Kitchen, Frank's RedHot, French’s, Lawry's, Zatarain's, Gourmet Garden, and Stubb's to name a few. Partially offsetting these increases are volume declines in McCormick branded spices and seasonings, and recipe mixes, as well as private-label products due to capacity constraints. In EMEA, constant currency consumer sales grew 10% from a year ago, with strong growth in all countries across the region. The most significant volume and mix growth drivers for our Schwartz and Ducros branded spices and seasonings, our Vahine homemade dessert products, and our Kamis branded products in Poland. Consumer sales in the Asia Pacific region declined 10% in constant currency, driven by the lower branded food service sales, and a shift to a later Chinese New Year as Lawrence mentioned. Turning to our Flavor Solutions segment on Slide 23, we grew fourth-quarter constant currency sales 3%, with growth in all three regions. In the Americas, Flavor Solutions constant currency sales grew 2%, driven by pricing to cover cost increases, and also partially by lower volume and product mix. Volume and product mix declined due to a reduction in demand from branded food service and other restaurant customers. Partially offsetting this decline was higher demand from packaged food companies, with particular strength in snacks seasoning. In EMEA, constant currency sales increased 5%, attributable to pricing to cover cost increases, as well as higher volume and product mix. Volume and product mix increase driven by sales growth with packaged food company with strengthened snack seasonings, partially offset by lower sales to branded food service and other restaurant customers. In the Asia Pacific region, Flavor Solutions sales rose 7% in constant currency, driven by higher sales to QSRs in China and Australia, partially due to our customers’ limited-time offers and promotional activities. As seen on Slide 27, adjusted operating income, which excludes transaction costs related to the Cholula and FONA acquisitions and special charges, declined 4% in the fourth quarter versus the year-ago period, with minimal impact from currency. Adjusted operating income declined in the Consumer segment by 2% to $221 million or in constant currency, 3%. In the Flavor Solutions segment, adjusted operating income declined 9% to $70 million or 8% in constant currency. Growth from higher sales and CCI-led cost savings were more than offset in both segments by several drivers. In the Consumer segment, an 18% increase in brand marketing from the fourth quarter of last year unfavorably impacted adjusted operating income growth, and in the Flavor Solutions segment, an unfavorable product mix due to the decline of branded food service sales contributed to its adjusted operating income decline. Both segments were also unfavorably impacted by COVID-19 related costs and higher employee benefit expenses, including incentive compensation. As seen on Slide 28, gross profit margin in the fourth quarter was comparable to the year-ago period as we had planned. Adjusted operating margin declined 180 basis points compared to the fourth quarter of last year, driven by the net impact of the factors I mentioned a moment ago, as well as higher distribution and transportation costs. For the fiscal year, gross margin expanded 100 basis points driven by CCI-led cost savings and favorable product mix, resulting from the sales shift between segments, which more than offset COVID-19 related costs. Adjusted operating income increased 5% in constant currency, and adjusted operating margin was comparable to last year. The Consumer segment grew adjusted operating income 16% at constant currency, primarily due to higher sales and CCI-led cost savings, partially offset by a 7% increase in brand marketing, higher incentive compensation expense, and COVID-19 related costs. In constant currency, the Flavor Solutions segment adjusted operating income declined 20%, driven by lower sales, unfavorable product mix and manufacturing costs, COVID-19 related costs and higher incentive compensation expense with a partial offset from CCI-led cost savings. Turning to income taxes on Slide 29, our fourth-quarter adjusted effective tax rate of 22.9% compared to 24.7% in the year-ago period was favorably impacted by discrete items. For the full year, our adjusted tax rate was 19.9%, as compared to 19.5% in 2019. Income from unconsolidated operations declined 9% in the fourth quarter of 2020, and the full year was comparable to 2019. At the bottom line, as shown on Slide 31, fourth quarter 2020 adjusted earnings per share was $0.79 as compared to $0.81 for the year-ago period. The decline was primarily driven by our lower adjusted operating income, partially offset by the lower interest expense and a lower adjusted income tax rate. For the year, our 5% constant currency increase in adjusted operating income combined with a lower interest expense drove a 6% increase in adjusted earnings per share to $2.83 for fiscal 2020, including the impact of unfavorable currency exchange rates versus last year. On Slide 32, we summarized highlights for cash flow and the year-end balance sheet. Our cash flow from operations ended the year at a record high of more than $1 billion. A 10% increase compared to $947 million in 2019, primarily driven by higher net income. We finished the fiscal year with our cash conversion cycle down 9% versus our 2019 fiscal year end as we continue to execute against programs to achieve working capital reductions. We’ve returned $330 million of this cash to our shareholders through dividends, and we are very pleased that we fully paid off the term loans related to the acquisition of the Frank’s RedHot and French’s brands. Following the acquisitions of Cholula and FONA, we have a pre-synergy pro forma net debt to adjusted EBITDA ratio of approximately 3.9 times, and we expect to deleverage to approximately three times by the end of fiscal 2022. Based on our demonstrated track record of debt paydown and our anticipated strong cash flow generation, we are confident that we will deliver on our plan. Our capital expenditures were $225 million in 2020 and included growth investments and optimization projects across the globe, including our ERP business transformation investment, and beginning of supply chain global infrastructure investments that Lawrence mentioned earlier. In 2021, we expect our capital expenditures to be higher than 2020 as we continue to spend on all the initiatives we have in progress, as well as support our investments to fuel future growth. We expect 2021 to be another year of strong cash flow driven by profit and working capital initiatives. Our priority is to continue to have a balanced use of cash, funding investments to drive growth, returning a significant portion to our shareholders through dividends, and paying down debt. Now, I would like to discuss our 2021 financial outlook on Slides 33 and 34 with a brief update on our ERP replacement program first. Starting with our ERP replacement program, we remain committed to this business transformation initiative and have recently completed our rephasing of the program. We are now projecting the total cost of our ERP investment to range between $350 million to $400 million from 2019 through the anticipated completion of our global rollout in fiscal 2023, with an estimated split of 50% capital spending and 50% of operating expenses. As such, the total operating expense impacts for the program to be incurred from 2019 through 2023 is estimated to be between $175 million and $200 million, slightly lower than our previous estimates. In fiscal 2021, we are projecting our total operating expense to be approximately $50 million, which is an incremental $30 million over fiscal 2020. At this time, we are not anticipating any significant go-lives in 2021. By the end of 2021, we will spend approximately $90 million of the total program operating expense. We are excited to continue moving forward with this investment to enable us to further transform our ways of working and realize the benefits of a scalable growth platform. Moving to our 2021 outlook with our broad and advantageous flavor portfolio, our robust operating momentum, and effective growth strategies, we are well positioned for another year of differentiated growth and performance. In our 2021 outlook, we are projecting top line and earnings growth from our strong base business and acquisition contribution, which will lead to earnings growth partially offset by the incremental COVID-19 costs and the ERP investment, as well as the projected effective tax rate. We also expect an estimated two percentage point favorable impact of currency rates on sales, adjusted operating income, and adjusted earnings per share. At the top line, we expect to grow constant currency sales by 5% to 7%, including the incremental impact of the Cholula and FONA acquisition, which is projected to be in the range of 3.5% to 4%. We anticipate our organic growth will be primarily led by higher volume and product mix driven by our category management, brand marketing, new products, and customer engagement growth plans. As Lawrence mentioned earlier, we expect sales growth to vary by region and quarter in 2021, given 2020’s level of demand volatility and the pace of the COVID-19 recovery. But importantly, we expect to drive overall organic sales growth in both of our segments. Our 2021 adjusted gross profit margin is projected to be comparable to 25 basis points higher than 2020, which reflects margin accretion from the Cholula and FONA acquisitions, as well as unfavorable sales mix between segments and COVID-19 costs. We estimate COVID-19 costs to be approximately $60 million in 2021, compared to $50 million in 2020, and weighted toward the first half of the year. Fiscal 2021’s COVID-19 costs are largely driven by third-party manufacturing costs and, of course, could vary based on demand fluctuations. Our adjusted operating income growth rate reflects expected strong underlying performance from our base business and acquisitions, which is projected to be 10% to 12% constant currency growth, partially offset by a 1% reduction from increased COVID-19 costs and a 3% reduction from the estimated incremental ERP investment. This results in a total projected adjusted operating income growth rate of 6% to 8% in constant currency. This projection includes low single-digit inflationary pressure and our CCI-led cost savings target of approximately $110 million. It also includes an estimated low single-digit increase in brand marketing investments, which will be heavier in the first half of the year. Our 2021 adjusted effective income tax rate is projected to be approximately 23% based upon our estimated mix of earnings by geography, as well as factoring in a low level of discrete impacts. This outlook versus our 2020 adjusted effective tax rate is expected to be a headwind to our 2021 adjusted earnings per share growth of approximately 4%. Our 2021 adjusted earnings per share expectations reflect strong base business and acquisition performance growth of 9% to 11% in constant currency, partially offset by the impact that I just mentioned related to COVID-19 costs, incremental ERP investment, and tax headwinds. This results in an increase of 3% to 5%, or 1% to 3% in constant currency. Our guidance range for adjusted earnings per share in 2021 is $2.91 to $2.96, compared to $2.83 of adjusted earnings per share in 2020. Based on the expected timing of some expense items, such as COVID-19 costs and brand marketing investments, as well as the low tax rate in the first quarter of last year, we expect our earnings growth to be weighted to the second half of the year. We have a strong start to the year but recognize we are lapping a very strong second quarter of 2020. In summary, we are projecting a strong underlying base business performance and growth from acquisitions in our 2021 outlook, with earnings growth partially offset by incremental COVID-19 costs, ERP investment, as well as a higher projected effective tax rate. I’d like to now turn it back to Lawrence for some additional remarks before we move to your questions.

Lawrence Kurzius, Chairman, President, and CEO

Thank you, Mike. As Mike has shared our financial results and outlook in more detail, I would like to recap the key takeaways as seen on Slide 35. We delivered strong results in 2020, despite great disruption proving the strength of our business model, the value of our product, and our capabilities as a company, as well as the successful execution of our strategies. We have a strong foundation. We’re confident in the sustainability of at-home consumption. With the investments we’ve made to strengthen our supply chain resiliency, we are even better positioned to capitalize on accelerating consumer trends. We’re excited about the recent acquisitions of Cholula and FONA, which reinforce our global flavor leadership and accelerate our condiment flavors growth platform. We’re confident these investments further position us for continued success. Our fundamentals, momentum, and growth outlook are stronger than ever. Our 2021 outlook reflect another year of differentiated growth and performance while also making investments for the future. We’re confident we will emerge stronger from these uncertain times. Now, let’s turn to your questions.

Operator, Operator

Thank you. Our first question comes from Andrew Lazar with Barclays. Please proceed with your questions.

Andrew Lazar, Analyst

Good morning, everybody. Thanks for the question.

Lawrence Kurzius, Chairman, President, and CEO

Hey, good morning, Andrew.

Andrew Lazar, Analyst

Hi there, Lawrence. Thank you for the additional color in consumer, Americas around some of the capacity and service level dynamics that you were facing over the last couple of months or quarters. I guess, first off, I’m curious if those dynamics are in such a place now, where we should expect shipments to start to outpace consumption, in the first quarter and second quarter, or if you expect still maybe, somewhat of a lag effect, because you’re still building the capacity and the service levels to where you want them to be, because I’m trying to just dimensionalize that sort of first quarter aspect. But more importantly, how to dimensionalize maybe, how big of a benefit to 2021 organic growth, just a rebuilding of inventory levels to the extent that needs to happen can be to organic growth? I’m going to just have a quick follow-up. Thank you.

Lawrence Kurzius, Chairman, President, and CEO

Sure. Well, Andrew, we’ve been ramping up production as we’ve gone through the fourth quarter. Certainly, through the third and fourth quarter, as we talked about on previous calls, anybody that walks into the store can see that the shelves are in pretty poor condition. There are a lot of holes in the shelf, particularly in spices and seasonings. The recipe mix is that reflects the fact that we’ve had our secondary skews on suspension to protect the key holiday items, and it’s really been those two categories that had the greatest impact, while our other product categories have had pretty good service through the third and fourth quarters and into this year. So that’s been our focus area. We have, starting at the beginning of January, begun reinstating those secondary items. And so they are coming back on, as we said in our prepared remarks about two-thirds of them have been reinstated, with the remainder coming in the coming weeks. So, I think we’ll see the shelves starting to get a lot better gradually over the next few weeks. We still are allocating products. There’s a big bow wave of demand ahead of us as our customers want to rebuild their inventory. And frankly, everyone forgets about consumer pantries being a bit bare during this time as well. So, we do expect there to be a benefit to this fiscal year. We’re really thinking about it in terms of the first half regarding the rebuild of inventory. I also want to emphasize that this is an Americas problem. Our manufacturing has really been able to keep up with demand in the rest of the world. Just the scale of our consumer business and the Americas is so great. Particularly, in the fourth quarter of the year, even under normal circumstances, we have to pre-build inventory to supply that huge demand that comes through in those categories in the fourth quarter of the year; and coming into the fourth quarter, we were very much hand to mouth already due to sustained demand. That’s why we were signaling that we were going to have service issues through the fourth quarter. We knew that to be the case. I’ll just comment on current conditions, and I don’t want to get too much into 2021. We’re almost two-thirds of the way through our first quarter, and the service levels that we are shipping to our customers meet, while we’re always still allocating products, it’s the best service that we’ve had since the spring.

Andrew Lazar, Analyst

Got it. Thank you for that. And then a super quick follow-up, I found your comments very interesting around the trends you’re seeing in Australia, as restrictions ease, consumption of at-home items still remains elevated at this point. And some other companies have said similar things. I’ve also heard similar things be discussed around China for some companies as well. Various restrictions ease, and I may have missed it. Are you seeing that same dynamic in your China business as well?

Mike Smith, Executive Vice President and CFO

Yes, we are, but it’s not quite as clean in China. Because in China, they reinstated some restrictions that’s not the same as it was a year ago, where there was a government lockdown. The government is encouraging people not to travel and to celebrate the Chinese New Year at home. Generally, in China, when the government gives encouragement to do something, people do it. As of right now, related to Chinese New Year, I’m not sure we can draw a lot of conclusions regarding consumer behavior. It’s not quite as clean as in Australia, where COVID seems to be under control, and restrictions have been lifted, and consumers are still making the choice without that government encouragement to continue to cook at home. In 2021, Chinese New Year is later in the first quarter, so after that, we’ll have a better read on it. Yes, I think so.

Lawrence Kurzius, Chairman, President, and CEO

Andrew, there are a couple of other companies that I’ve commented on, and I’ll just say it again. Our consumer research, both the syndicated information that we get and our own proprietary research say consumers are enjoying cooking more at home. Three out of four consumers say it relaxes them and reduces their stress. Fully up to 40% of consumers say they actually tend to cook more at home after the pandemic than they did even prior, and with the added uncertainty around the vaccine timing and the take-up of the vaccine, and with the variants emerging, I think that there’s a lot of reasonable expectation that consumption is going to be elevated this year for quite some time.

Ken Goldman, Analyst

Hi, thanks so much.

Lawrence Kurzius, Chairman, President, and CEO

Hey, Ken.

Ken Goldman, Analyst

I wanted to ask – hey everybody. I think you’ve mentioned when you talked about the sales drivers – organic sales drivers for 2021, I think you mentioned volume and product mix. Unless I missed it, I didn’t think I heard pricing. So, I’m curious, do you expect pricing to play any major role in your growth this year? And as a corollary to that, how might you maybe, describe the willingness of your customers to kind of accept price increases at this time?

Lawrence Kurzius, Chairman, President, and CEO

Sure. Well, Ken, first of all, pricing is an ongoing discussion with customers. I don’t want to get too specific about pricing actions that haven’t been taken for customer and competitive reasons. So, our comments on that are pretty limited right now. I’ll remind everyone on the call that 40% of our sales are in the Flavor Solutions segment, and a great portion of those is based on contractual relationships for price pass-through. I don’t think we have the same pressure on pricing as maybe some other companies. Our outlook is for low single-digit inflation. We have a unique basket of commodities and input costs that are not an exact match to inflation or an exact match to our peers. We do use CCI as well. We are seeing cost inflations, and freight is up; ocean freight in particular is an emerging concern, but really, we are not prepared to make too many specific comments about pricing right now. We do have some wrap from 2020 pricing actions, and where we need to take pricing in 2021, we’re confident we can take it.

Ken Goldman, Analyst

Thank you for that. And then for my follow-up, you’re balancing a lot of things right now that some might consider outside what might be the normal course of business. You’re undertaking an ERP implementation; at least you’re starting to, right? You’re integrating two acquisitions, and you’re navigating through COVID. So, can you just help us think about how you and your team are maybe balancing some of the balls in the air right now, or keeping them in the air and how you sort of allocate your time to the day-to-day blocking and tackling of just selling core products? There’s a lot sort of going on right now with the company.

Lawrence Kurzius, Chairman, President, and CEO

Well, Ken, there is a lot going on, but I think that we can handle it. We have a strong ambition to grow. We’ve been thoughtful about priorities. And so we suspended our business transformation in ERP activity last year in order to make sure that we could focus on dealing with the crisis and keeping people safe for quality and doing all the right things for business continuity, and coming out stronger, but that was a pause, not a suspension. We paused our activity, and we think we’ve got the resources to ramp it back up. Even during that pause, we spent some time re-scoping and aligning partners, and we’ve actually come out of it with a stronger program and got a lot of data cleansing done that the folks, who’ve been through this before know that’s always an issue. And so we feel pretty good about our ability to handle that – handle the recovery of our business. And we really are actually quite thrilled about the two acquisitions that we made. We’ve added a great asset in each one of our segments. We think that this has been a great capital allocation decision, and the integration of these is pretty straightforward, I believe. Mike, do you want to comment on that?

Mike Smith, Executive Vice President and CFO

Yes. I mean, the integration is going very well. I mean, the Cholula obviously is more of a plug and play. It’s a lot of co-pack, like we said, so that’s a pretty straightforward one, and FONA has a great business. As I said before, it’s discrete teams focusing on them and helping integrate into our business. So, it’s not taking away from the base focus we need on the core business, if that’s kind of where you’re going at.

Alexia Howard, Analyst

Good morning, everyone.

Lawrence Kurzius, Chairman, President, and CEO

Good morning, Alexia.

Alexia Howard, Analyst

Hi, there. So, my first question actually goes to e-commerce. I just wonder where you ended up for fiscal 2020 in terms of e-commerce as a percent of sales and has that slowed down at all in the later part of the year? I’m just wondering what the prognosis is in terms of growth on that side.

Lawrence Kurzius, Chairman, President, and CEO

Well, we’ve had tremendous growth in e-commerce. As we went through the year, we’ve talked about this a couple of times, and then told as everybody else, and I know our own experiences anecdotally, are that many of us that shop on e-commerce. If you take all three legs of e-commerce, as we think about it—CTC, pure-play, and our click-and-collect type customer brick-and-mortar efforts—all of that was up well over 100% on a global scale. While we don’t actually disclose the total percentage of our business that is from e-commerce, on the consumer side, it’s less than 10%, but it’s up substantially from past years and continues a long trend of shift by consumers to shopping with e-commerce.

Faiza Alwy, Analyst

Yes. Hi, good morning. So, first, I just wanted to ask Lawrence, you’d made a comment early on about the pricing disconnect that we’re seeing in Nielsen. So it just – I was wondering if you could expand a little bit on that, maybe clarify. And what I’m really trying to get out is, I think Andrew had asked the question around the – if there’s any quantification of what the inventory reload might be in the first half, that would be really helpful.

Lawrence Kurzius, Chairman, President, and CEO

Okay. Well, I think those are two different questions. But on pricing, there are two things that are happening in Nielsen that make it look like there’s more pricing perhaps than there actually is. The first is that there has been a bit of a channel shift as we’ve gone through the crisis, where I’d say regular grocery has been stronger than other channels. It tends to carry a higher price point as a result of that, and comes through as pricing inflation in the Nielsen data that is really a kind of artificial; and that was one of the things that was pointing to. And then the other is there’s still a reduced level of promotional activity that is happening. Not just for us, but across the board, that comes through as a focus on price increase in the Nielsen data. As far as the inventory build, we’ve not really quantified it, but it stands to reason that there’s going to be a substantial catch-up on trade stock as we’ve shipped under consumption now for three quarters. And I think you can expect that we will – as our American supply chain catches up, you’ll start to see shipping above consumption. That consumption is still very strong. I mentioned that our production was up 40% in December for our U.S. consumer business. The market took all of that, and there’s still a blast through. It’s—when we talk about inventories, if it’s not back-room warehouse stock, it’s still if it’s restocking the shelf itself that that’s part of that. I think that that’s going to be a gradual process as we go through the first half of the year.

Peter Galbo, Analyst

Hey guys. Good morning. Thank you for taking the question.

Lawrence Kurzius, Chairman, President, and CEO

Hey, Peter.

Peter Galbo, Analyst

Lawrence, maybe just to go back to Andrew Lazar’s question, around China, I guess maybe what’s underappreciated is the idea that organic growth and consumer probably realize at least to some extent on China food service, making a pretty remarkable comeback. We’ve heard about some retrenchment there recently, I think in your prepared remarks, you said as well, can you just maybe give us a look into how you’re thinking about that recovery of your China food service customers for the balance of 2021? And then I have a follow-up.

Lawrence Kurzius, Chairman, President, and CEO

Well, I’ll speak broadly about China. I’m expecting that we’re going to have a very strong recovery in China. China had a very strong response to the COVID crisis with a very comprehensive lockdown. Consumers did not have a chance to shop, and so the results in China in the first and second quarters last year were really depressed. I expect to see a very strong rebound from that as we lapse those numbers. Additionally, I think there’s a little bit of a benefit from Chinese New Year being later this year than last year, so some of our Chinese New Year volumes that would normally ship at the end of our fiscal year are actually falling into the fourth quarter. So that’s going to be a favorable comparison as well.