Kasey Jenkins, Chief Strategy Officer, welcomed everyone to the second quarter earnings call. Lawrence Kurzius, Chairman and CEO, announced that Brendan Foley would become the new CEO of McCormick on September 1st and join the Board of Directors immediately. Kurzius expressed his confidence in Foley as his successor and will stay on as Executive Chairman of the Board. Foley is well-qualified and prepared to lead McCormick.

McCormick is pleased to announce Brendan's leadership, and to provide an overview of their strong second quarter performance. They delivered double-digit constant currency sales growth, and year-over-year margin expansion in both segments. Additionally, their global operating effectiveness program is yielding results, and they have seen significant adjusted earnings per share growth. Both segments and all regions have contributed to their success, and their cash flow from operations has more than doubled.

In the second quarter of 2023, the company experienced 8% sales growth or 10% in constant currency, driven by strong business performance and pricing. The Consumer and Flavor Solutions segments both delivered strong sales growth in each region. The company is pleased with its execution and results during the first half of the year and is raising its adjusted operating income and earnings per share outlook for the full-year. The sales performance demonstrates the strength of its broad global portfolio and positions it well for continued top line growth for the rest of the year. The gross margin performance will be discussed in more detail later.

In the second quarter, the company drove a significant gross margin improvement and an adjusted operating income increase of 35%. This was partially offset by higher SG&A due to incentive compensation. Demand is strong and the company is confident in their plans and actions to drive profitable growth for the rest of the year. The Americas saw a 7% increase in total U.S. branded portfolio consumption.

McCormick saw an increase in sales and consumption in the second quarter, largely due to the introduction of new products such as Cholula and Stubs, and the expansion of the Tabitha brown line. The Lawry's everyday spice range has seen positive results, with consumers trading up from private label and over half of the purchases coming from new buyers. The renovation of the U.S. core Everyday Spice is rolling out according to plan, and the larger-size Super Deal herbs and spices have seen 11% consumption growth. A brand marketing campaign will be ramping up at the end of the third quarter.

McCormick & Company is expecting a successful grilling season with its new products, including Smash Burger and Garlic Butter Grill Mates, Griller's Choice Marinades, Stubs Real Smoke Rubs, and Stubb Jalapeno and Honey Barbecue Sauce. The company is also increasing its Cholula brand marketing investments with its expanded portfolio and increasing investments for the McCormick Gourmet product line with its “further for flavor” campaign. These investments are expected to increase consumer demand and support the premium product offering.

McCormick & Company is experiencing double-digit growth in e-commerce in the Americas, with new products such as Frank Dill Pickle hot sauce selling out quickly. In EMEA, the company is seeing its strongest quarterly sales performance in two years, with increased share in Eastern Europe and Italy. They are celebrating the 60th anniversary of their [Indiscernible] brand with grilling activations in France and the U.K. and increasing their third quarter brand marketing investments. They are also making progress in the discount channel and gaining share of the U.K. hot sauce category.

McCormick is driving growth in EMEA and Asia Pacific with brand marketing, merchandising, and new products. In China, the business is recovering, but the pace of reopening is slower than expected and consumer spending is being affected by economic pressures. McCormick is using their strength in category management to increase distribution and drive growth, and they are continuing to experience double-digit sales growth in their flavor solutions segment.

In the second quarter, the company experienced strong sales growth from pricing actions and new products across all three regions. In the Americas, seasonings and flavors products saw the most growth, while in EMEA, quick service restaurant customers drove sales and in APZ, China saw a recovery and strong performance from quick service restaurant customers' promotions.

McCormick and FONA have seen double-digit growth outside of China due to their flavor solutions portfolio and customer engagement. This growth is driven by demand from QSRs, Healthy Nutrition wins, and new products, increased menu penetration, and culinary partnerships. Despite impacts to volume from the China recovery, Kitchen Basics divestiture, and business exit in Russia, all of these impacts netted out, resulting in a 7% increase in Consumer segment sales with a 9% increase from pricing actions, partially offset by a 2% volume decline.

Consumer sales in the Americas increased 4%, while EMEA saw a 9% increase and Asia Pacific a 28% increase. Flavor solutions saw a 13% increase in constant currency sales, with 11% in the Americas, 15% in EMEA, and 20% in Asia Pacific. Pricing actions drove most of the growth, with volume declining in some regions due to the pruning of low margin business and the exit of certain product lines.

In the second quarter, volume and mix outside the product discontinuation declined due to softness in some customers' businesses. Flavor solution sales grew 22% in constant currency in the Asia Pacific region, and gross profit margin expanded 310 basis points. Selling, general and administrative expenses increased due to higher employee incentive compensation expenses and distribution costs, partially offset by CCI lead and GOE savings. Brand marketing also increased compared to the same period last year.

The company experienced strong sales growth and gross margin expansion in the second quarter of 2023, resulting in a 36% increase in adjusted operating income compared to the same period in 2022. Interest expense and taxes were higher than the year before, resulting in an increase in adjusted earnings per share from $0.48 to $0.60. Cash flow from operations was also strong, with $394 million in the first half of 2023, compared to $154 million in the first half of 2022. The company plans to use a balanced approach to cash management, investing in growth, returning a significant portion to shareholders through dividends, and paying down debt.

The 2023 financial outlook reflects continued positive top line growth and increased profit realization due to cost optimization. Margin expansion is expected with strong sales and adjusted operating income growth, partially offset by higher interest expense and a higher projected effective tax rate. Sales are expected to grow 5-7%, driven by pricing actions and lower price elasticities than historically experienced, while the impact of the divestiture of the Kitchen Basics business and the exit of the consumer business in Russia will also affect volume and product mix.

The Americas Consumer segment DSD exit and EMEA Flavor Solution private label discontinuation are estimated to have a 1% impact on the year, which began in the second quarter. The company expects a gross margin expansion of 50-100 basis points due to pricing, cost savings from CCI and GOE programs, and portfolio optimization. Additionally, there are expected to be 800 basis point savings from the GOE program, a 300 basis point favorable impact due to the lapping of COVID-related disruptions in China, an unfavorable 100 basis point impact due to the Kitchen Basics divestiture, and an 800 basis point unfavorable impact due to the building back of incentive compensation. These discrete items will result in a favorable 200 basis point impact, and combined with 8-10% underlying business growth, will result in an adjusted operating income projection of 10-12%.

In the second quarter of 2023, the company expects to see strong underlying business growth of 10-12%, as well as a 2% net favorable impact from discrete items. This will be partially offset by a combined interest and tax headwind of 9%, resulting in an expected increase of 3-5% in adjusted earnings per share.

McCormick is leading the global flavor industry with its strong portfolio of products and its focus on healthy and flavorful cooking, digital engagement, trusted brands, and purpose-minded practices. The company is committed to optimizing its cost structure and delivering sustainable growth and long-term shareholder value. Brendan Foley, the new CEO, is confident that successful execution of the company's plans will lead to the profitable growth outlined in their 2023 financial outlook.

Lawrence has been a transformational leader for McCormick, bringing its global flavor platform to life and driving sales growth of over 50% and market capitalization more than doubling. He has invested to drive future growth, improved cash flow from operations, and returned more than $2.5 million to shareholders. He has also championed the company's sustainability efforts and successfully led McCormick through the pandemic. As Executive Chairman, he will continue to support the company.

Andrew Lazar asked about McCormick's second quarter EPS and why they had not flowed through the first quarter's upside to the full-year. Lawrence Kurzius responded that McCormick has been thoughtful and deliberate in their succession planning and that Brendan Foley has been a great partner for many of their key initiatives. He also said that they are confident in their outlook for the back half of the year.

McCormick is expecting their volume performance to improve in the second half of the year, and they are forecasting that their volumes will be close to flat, plus or minus 1%. In the Americas, they are performing as planned. However, the recovery in China has been slower than expected, which has been factored into their guidance.

Lawrence Kurzius discussed the sequential improvement in the portfolio, the exit of the DSD business, and the strong recovery in China. He also noted that the EMEA region had some volume growth despite the exit from Russia. Lastly, he mentioned that the DSD portion of the business was not profitable and that there would be an impact for the rest of the year as they transition away from it.

Ken Goldman from JPMorgan asked about the inventory levels of McCormick's customers and if there was any risk of destocking due to the normalizing of the supply chain. Brendan Foley responded that there was no unusual or significant destocking, and that the difference between sales and consumption was due to the retail sell-through of discontinued items and higher listing fees due to more new products. Lawrence Kurzius added that service levels had been solid for a while, so retailers had time to adjust stock levels. Goldman followed up by asking about the softness in the Flavor Solutions side in Europe.

Brendan Foley and Lawrence Kurzius discussed the slowing of consumer demand from their customers in the EMEA region, which is largely attributed to inflation. They noted that about one-third of the decrease in volume is due to the exit of a private label service line, which was planned for the beginning of the year. Peter Galbo asked a question about the commentary on the exit of DSD and how it relates to the Consumer business.

Brendan Foley reports that grilling season has gotten off to a good start in Q2, due to their solid innovation plan, healthier supply of mustard and Frank's RedHot, and returning to normal promotional activity. Mike Smith then adds that gross margin guidance remains unchanged, implying some conservatism for the back half of the year.

Mike Smith and Lawrence Kurzius discussed the guidance on gross margin, which had been raised 25 basis points to 100 basis points. They mentioned the 300 basis point improvement in the second quarter of the previous year, and explained that the back half of the year will still have improvements, though not as significant. They also expressed optimism about continued gross margin and operating profit margin improvement as the year progresses. Finally, they discussed the DSD exit, which Peter had expressed interest in.

Brendan Foley stated that they have been making good progress in regaining lost distribution in U.S. retail channels and they are expecting to see continued progress in the back half of the year. This is due to customers resetting their shelves and other measures, which will result in a positive performance and tailwind for the company over the next year to 18 months.

The company is confident about their progress in terms of distribution points and will continue to improve as they move into 2024. They have a number of customer wins that will increase their TDP in the third quarter. In terms of brand marketing, they will increase mid-single-digit in the second half and will support those plans. Finally, they will eliminate one-time costs by 2024 and will have two plants running in the U.K.

Mike Smith and Lawrence Kurzius discussed the co-manufacturing costs in the EMEA region, which is around $20 million for the year, and are expected to transition and go away in the first and second quarter. They also mentioned their GOE program which will wrap up in 2024. Brendan Foley was then asked about potential customer destocking from a Flavor Solutions perspective, to which he responded that it has not yet impacted the business, but it could in the second half of the year.

The Flavor Solutions business has seen healthy growth in performance nutrition, seasonings, and health and nutrition, and the company believes their volume profile reflects this focus. Lawrence Kurzius also noted that customer wins and share gains have been positive contributors. Mike Smith mentioned that innovations have also been driving volume and margin in Flavor Solutions. Finally, the company is pleased with their margin progress year-to-date and expects further progress in the second-half, with the possibility of building back to pre-pandemic levels or higher in the long term.

McCormick & Company reported a strong second quarter, with a 280 basis point expansion in operating margin and an improved gross margin compared to expectations. The company is confident in its Flavor Solutions' recovery, with a goal of returning to pre-pandemic gross margin levels, though there may be some quarter-to-quarter lumpiness due to running costs. McCormick & Company raised its operating profit guidance for the year on the back of the margin improvement.

Mike Smith explains that the gross margin for the company is impacted by dilution due to pricing to cover costs over a multi-year time, but there is an upward trajectory due to the CCI programs. He also mentions that despite the negative dilution impact, the GOE program and CCI programs are showing a positive gross margin impact. Finally, he points out that while there has been a recovery in TDPs and U.S. spices and seasoning, there has not been a significant pickup in dollar share yet.

Brendan Foley states that McCormick & Company's performance is improving due to increased distribution, brand marketing, category management, and innovation. This trend is seen in both Americas and Europe, and is resulting in improved sales unit and volume and share gains in Australia and Asia. Foley expects to see an improvement in dollar share as the year progresses.

Mike Smith answered a question from Adam Samuelson about the headwinds on a year-on-year basis from incentive comp and gross margin improvement in the second-half. He explained that the incentive comp headwinds are mostly in the second-half, and that the second quarter of last year was a difficult quarter. He also noted that historically, second-half gross margins are higher than the first, but the guidance doesn't imply much improvement in the second-half from where they were in the second quarter.

The speaker is discussing the company's gross margin expectations for the second half of the year. They are expecting improvement from the 37.1% in the second quarter and are being "prudent" in their expectations. The speaker also mentions that their gross margin in the underlying business is usually higher in the third and fourth quarters due to the mix of the business. They also mention that they were up 113 basis points in the first-half of the year compared to the previous year.

The Consumer business in the Americas is expected to remain under pressure in 2023, yet it has held up better-than-expected. Price elasticity has remained consistent with what was seen in the first and fourth quarters, and a retail price increase in April had no effect on price elasticity. There is no indication that the elasticity will worsen.

Lawrence Kurzius and Brendan Foley discussed the sustained demand from consumers and the robust growth plans in the second half of the year. Foley noted that while consumer spending is not as robust as expected, there was no sequential improvement throughout the quarter. Foley also commented on the higher unemployment rate and the expectation that the performance in the third quarter will remain consistent.

The China management team recently visited the office and discussed the roller coaster ride of the economy reopening and locking down multiple times. This has caused a lot of noise in the year-to-year comparison, and the question of how robust the recovery in China is remains. The current outlook is for a three, not a four, and the guidance has been tempered accordingly.

Robert Moskow is asking Brendan Foley about his consumer research, which suggests that consumers prefer brands over private label, despite the growing market share of private label. Foley acknowledges the trend of trade down to private label, but notes that it has moderated in their categories. He explains that consumers are looking for value, not necessarily the cheapest option, and that they still prefer brands. Foley also notes that they are in the private label business and believe there is a role for both brands and private label in their categories. They are focusing on value and the growth of their line sizes.

Lawrence Kurzius thanked the analyst and investor community for their insights and perspectives which have helped shape McCormick's strategies and clarify their messaging. He believes McCormick is well-positioned for continued success due to their alignment with consumer trends, the breadth and reach of their portfolio, and strategic growth investments. He is confident that these investments will drive long-term value for shareholders.

The speaker concluded the conference call by wishing everyone a happy summer season and 4th of July, and encouraged them to use McCormick products when grilling. They also invited anyone with further questions to contact them.

This summary was generated with AI and may contain some inaccuracies.