Faten Freiha, VP of Investor Relations, introduces the Second Quarter Earnings Call with Brendan Foley, President and CEO, Mike Smith, Executive Vice President and CFO, and Marcos Gabriel, Senior Vice President, Global Finance and Capital Markets. They will be discussing non-GAAP financial measures, projections, and forward-looking statements. Brendan Foley highlights the company's strong performance in the second quarter, attributing it to investments in accelerating volume trends and capitalizing on category growth. He also mentions that 2024 will be an important investment year and that their initiatives are starting to show results. Foley then outlines the top-line drivers for the company's success.

In the second quarter, sales for the company declined by 1% due to flat pricing and a decline in volume and product mix. However, there were areas of success, such as volume growth in the Consumer segment and positive volume growth in EMEA and Asia Pacific (excluding China). The company expects volume trends to improve in the second half of the year. Mike will provide more details on the financial results and the company's 2024 outlook.

In the third quarter, the results in the Consumer business were driven by increased brand marketing investments, innovative products aligned with consumer trends, and expanded distribution. Consumers are exhibiting value-seeking behavior and financial anxiety due to inflation, leading to softness in food away-from-home consumption. However, there is growth in certain categories such as spices and seasonings and condiments and sauces as consumers cook at home more frequently. McCormick's diverse portfolio and ability to offer products at various price points make them a valuable solution for consumers. The company's success is attributed to their strong presence in great categories, offering products at different price points, and having the right plans in place informed by consumer needs.

The global Consumer segment, including the Americas, saw solid volume growth in core categories such as spices and seasonings, recipe mixes, and mustard. In the Americas, there were positive gains in unit and dollar share, while in EMEA, recipe mixes were a significant driver of volume growth and market share gains. In Flavor Solutions, there were pockets of strength, particularly in the Americas Branded Foodservice and Flavors businesses. However, there were also areas of pressure, such as volume declines in prepared food categories like frozen and Asian in the Americas.

The company's portfolio is experiencing volume growth in their core categories, which is offsetting declines in other areas. In the hot sauce category, there is strength in the base business and investments in market-leading brands. Consumption and share trends improved in the second quarter, but there are short-term factors impacting share. The company expects improved consumption trends in the second half of the year due to increased innovation and distribution expansion. In Flavor Solutions, volumes were impacted by slower QSR traffic, but the company expects to improve these trends in the second half of the year. Some customers experienced softness in volumes, but the company is collaborating with them and diversifying its customer base. The company's total US Branded portfolio consumption outpaced sales growth this quarter due to brand investments and timing.

Slide 6 outlines the growth plans that have contributed to our strong second quarter performance and will continue to drive our success in the coming years. Our base business is strengthening and we have several initiatives in place to support this growth, including brand marketing, new products and packaging innovation, category management, proprietary technologies, and customer engagement. Innovation is a key focus for us and drives one-third of our long-term algorithm. We have a unique advantage in the flavor industry with our end-to-end operations and shared insights. Our strong understanding of consumer needs and trends allows us to lead the pursuit of what's next in flavor. Everyone in our company is engaged in innovation and our pipeline for the remainder of the year is robust.

McCormick's Consumer segment has seen strong growth in their spices and seasonings portfolio, driven by renovated packaging and new products such as Lawry's seasoning blends and Stubb's rubs. They are also excited about the launch of new grilling products, including a partnership with Max the Meat Guy and the successful launch of Frank's RedHot Dip'n sauce. Their Cholula salsas and recipe mixes have exceeded expectations and are driving category growth, with plans to expand into Canada. In EMEA, new product sales are expected to drive significant growth in the second half of the year.

The company is experiencing strong innovation performance in the UK and France, with partnerships with celebrity chefs driving engagement with younger consumers. In the Flavor Solutions segment, the company is leveraging proprietary technologies to win new customers and drive share gains. They expect to see an increase in their innovation pipeline in the second half of the year, particularly in the heat category. In Branded Foodservice, their recent launches, including Frank's Mild Wings Sauce and Frank's Nashville Hot, are performing well and they have more products planned for 2023 and 2024.

The company is expecting new products to drive their top-line in the second half of the year, with a strong focus on innovation and extending their successful products into new markets. They are confident in their long-term objectives and expect new products to drive a significant portion of their volume growth. Heat-infused products are a key area of growth globally for the company. They are maintaining their outlook for 2024, with a focus on the strong consumer interest in healthy and flavorful cooking and their dedication to accelerating volume trends.

The company is constantly refining and adapting its plans to drive growth and prioritize investments. They expect to see improvement in the coming years and believe this will benefit consumers, customers, and the company as a whole. The management transition was also announced, with the current CFO retiring and a new Executive Vice President and CFO named. The new CFO has extensive experience in the consumer products industry and has already been instrumental in the company's growth.

Marcos Gabriel, CFO of McCormick, expresses his gratitude for the opportunity to serve in his new role and thanks outgoing CFO Mike Smith for his mentorship. Smith also shares his pride in the company's progress and confidence in Gabriel's ability to continue driving results. The company's second quarter results show a 1% decline in sales due to the canning divestiture, flat pricing, and a 1% decline in volume and product mix.

In the second quarter, volume declines in the Flavor Solutions segment were due to lower customer demand and timing of customer activities. In the Consumer segment, sales declined 1% due to pricing investments, but volumes showed improvement. In the Americas, sales declined 2%, with pricing investments and flat volumes. In EMEA, sales increased 4% due to volume growth in all major markets. In APAC, sales were down 1% due to a decrease in volume in China, but showed growth in other markets. In the Flavor Solutions segment, sales declined 1% due to a decrease in volume and the divestiture of the canning business. In the Americas, sales declined 1% due to lower customer activities and softness in certain customer volumes, partially offset by growth in the Branded Foodservice business.

In the EMEA region, sales decreased by 8% due to the divestiture of the canning business, lower volume and product mix. In the APAC region, Flavor Solutions sales grew 10% driven by promotions and new products. Gross profit margin increased by 60 basis points due to the Comprehensive Continuous Improvement program. Selling, general and administrative expenses also increased due to brand marketing investments. Adjusted operating income was flat compared to the previous year, with Consumer segment declining and Flavor Solutions segment increasing. The company remains committed to restoring Flavor Solutions profitability and plans to make investments in 2024 for top-line growth.

The company's interest expense was slightly higher in the second quarter due to increased short-term interest rates. The adjusted effective tax rate was lower in the second quarter compared to the year-ago period, primarily due to a discrete tax benefit. The company's income from unconsolidated operations was strong, particularly in their joint venture in Mexico. Adjusted earnings per share increased in the second quarter due to the tax benefit and higher income from unconsolidated operations. Cash flow from operations decreased in the first half of the year, but the company returned cash to shareholders through dividends and invested in projects to meet demand and improve their digital transformation.

The company's main focus is on using cash to fund investments for growth, returning some to shareholders through dividends, and paying off debt. They are committed to maintaining a strong credit rating and anticipate strong cash flow in 2024. Their financial outlook for 2024 includes a projected decline in sales due to currency rates, but they expect to be at the mid- to high-end of their guidance range. They also anticipate flat pricing for the second half of the year and improved volume trends through brand strength and targeted investments. They will continue to remove lower-margin business from their portfolio throughout the year.

In China, the food-away-from-home business has been impacted by slower demand but the company still expects flat sales for the full year and believes in the long-term growth potential. The divestiture of the Giotti canning business will have an impact in the third quarter. The company projects a gross margin expansion for 2024 due to pricing, product mix, and cost savings, but this will be partially offset by cost inflation and increased investments. Adjusted operating income is expected to grow by 4-6%, driven by gross margin expansion and cost savings, but offset by investments in volume growth and brand marketing. The company also expects a mid-teens increase in income from unconsolidated operations and a 22% adjusted effective income tax rate for 2024.

The company is projecting a 4% to 6% increase in adjusted earnings per share for 2024 and remains confident in their long-term objectives. The first-half results and volume performance in the Consumer segment demonstrate the success of their investments in driving sustainable growth. The company is also focused on managing costs and achieving margin expansion. The CEO recognizes the contributions of employees and expresses confidence in their ability to continue driving results and shareholder value. The call then moves on to a Q&A session.

The speaker congratulates Marcos on his new role and discusses the company's recent performance. They mention an improvement in volume in the Consumer segment, particularly in the Americas, and attribute it to investments that are yielding results. They also mention driving volume growth and expanding margins while executing investment programs. The speaker adds that there has been a significant increase in brand marketing in both the first and second quarters.

The company has invested heavily in brand marketing and new products, which have contributed significantly to their growth in the first half of the year. They expect to continue this trend in the second half, with a doubling of innovation and expansion of distribution. They have also implemented price gap management programs, which have had a positive impact on their Americas Consumer business. The company operates in strong categories, which have also helped drive their performance. There was some weakness in Flavor Solutions volume, but the reported results were at the more favorable end of the range previously provided.

Peter Galbo asked about the exit rate of volume in Flavor Solutions in the Americas and Europe and if there was any sequential improvement in the US and Europe in fiscal Q3. Mike Smith responded that there was a low-single digit improvement in Q3 and Q4, with some customer activity timing and partnerships carrying into 2025. Brendan Foley mentioned that they are seeing an acceleration in consumer confidence and an increase in shopping the perimeter of the store, which may explain why they are performing better than some of their competitors.

Brendan Foley, a company executive, explains that the company's confidence for the future is driven by the success of their programs and the shift towards eating at home. He also mentions that the overall consumer outlook has not changed much and the company is taking a cautious view on their outlook. However, they believe that their business will benefit from the shift in consumer behavior towards eating at home and their role as an end-to-end provider of flavor.

Mike Smith explains that there is a gap between shipments and consumption in the Americas region, but consumption is strengthening. He attributes this to increased programming and expects more strengthening in the second half. He also mentions that they were lapping increased shipments from the prior year and retailers are always focused on efficiency.

The speaker discusses McCormick's performance and the impact of consumer behavior on their business. They express confidence in the direction of trends for the second half of the year and mention the potential for raising guidance. The strong consumer performance and successful investments give them confidence in the future.

The company expects improvement in the Flavor Solutions business in the third quarter compared to the second quarter. The second quarter was an important pivot quarter for the company, as they lost some protection on pricing and saw a shift in volume, with consumer volume going positive. The second half of the year is important for the company to continue their momentum, and they are looking at guidance prudently. The company expects a tax rate of 24% in the second half, which is in line with their underlying rate. They have built-in operating margin growth and volume growth in the second half.

The company wants to maintain financial flexibility in order to make investments in growth drivers. They are pleased with their performance going into the third quarter, despite some consumer uncertainty affecting their Flavor Solutions business. The company is focused on diversifying their customer base and portfolio in the long-term, with a goal of shifting towards higher value-added products and technologies.

The company's small, innovative customers in the performance nutrition and non-alcoholic beverages categories are driving growth in their Flavor Solutions portfolio. They are focused on diversifying their customer base and expanding into higher-value products and technologies. The branded through service business is also performing well and they are constantly looking for opportunities to optimize and diversify their portfolio. The company's CCI program has a track record of generating sustainable cost savings and they are finalizing the transition to a new UK Flavor Solutions business, which will provide a tailwind for next year.

The company's CCI program targets all levels of the P&L, not just cost of goods sold. They are optimizing SG&A and A&P spending to touch more customers effectively. The ideas for the program come from the bottom up in the organization. The company expects to continue seeing year-over-year pricing similar to the second quarter and does not expect to make further unit price investments. They have confidence in their current pricing strategy despite consumer financial pressures.

Brendan Foley, the CEO of McCormick & Company, discusses the company's price gap management activity and how it reflects their performance so far. He also mentions their broad portfolio of products and how it allows them to cater to different price points and meet consumer needs. Cooking at home remains popular and spices are a small percentage of the cost of a meal.

Consumers are increasingly shopping the perimeter of stores and cooking at home, making categories like condiments and sauces more important. In the second quarter, spices and seasonings were the top category in center store growth, showing that consumers are using these products to enhance their meals. McCormick is the leading branded player in this category and is driving category unit growth. Younger consumers are buying more of the gourmet line, while low- to mid-income consumers are attracted to Lawry's line for its price point and trusted brand. Consumers are also shopping for smaller sizes and McCormick is adjusting its price pack architecture accordingly. In recipe mixes, there is a trend towards smaller sizes as well.

The company is using various programs to attract more consumers and increase household penetration in the recipe mix category. They are also launching mini trial sizes to allow consumers to try new flavors at a lower cost. The company is also seeing strong gross margin expansion in the first half and expects it to continue in the second half, with a range of 5 to 100 basis points.

During the first quarter, pricing was a major factor for the company, but it is expected to decrease in the second half. The focus is now on volume growth, which will have a positive impact on gross margin and mix. The company is comfortable with their current guidance, but will not guide to the higher end at this point. The cost savings program, such as GOE, will also contribute to the decrease in pricing. However, the company expects to see a higher gross margin in the second half of the year compared to the first half. The goal is to return to pre-COVID gross margin levels. In the recent months, the scanner data shows that the spices and seasonings category has lower unit pricing compared to the previous year, with no significant impact from size and unit or price pack architecture. The promotional percentage is also slightly lower year-over-year.

The speaker is trying to reconcile the fact that the company has implemented surgical pricing actions on a small part of their portfolio, but the overall spices and seasonings category has shown negative pricing in recent months according to Nielsen data. The speaker explains that the net sales guidance given for pricing aligns with the results shown in the second quarter, but the impact of these actions on shelf prices is yet to be seen. The speaker also mentions that other factors, such as retailer actions, may be contributing to the data. Overall, the percentage of the company's portfolio that is affected by these pricing actions is small.

The company expects volume growth in the second half of the year in Flavor Solutions due to increased brand investment, new items, and distribution. They are also lapping a tough comp from last year. The volume recovery is not based on industry trends, but on McCormick-specific initiatives and their understanding of customer plans and programs.

The speaker explains that the company's focus is on individual customers rather than making broad projections on an industry. They also mention that the Branded Foodservice sector is performing well due to diverse programming and growth in certain categories. When asked about expected margin improvements in Flavor Solutions, the speaker suggests that there may be continued sequential improvement throughout the year as cost initiatives take hold.

Mike Smith of McCormick discusses the company's margin improvement and guidance for the fiscal year. He mentions that they are happy with the 80 basis points of OP margin improvement in Flavor Solutions and are comfortable with 50-100 basis points for the whole company. He also notes that volume growth in the Consumer business is driving margin improvement, but there may be some pressure in Flavor Solutions in the second quarter. Smith expects sequential improvement in Flavor Solutions and this is consistent with their previous guidance. The final question from Rob Dickerson from Jefferies is about the company's frozen and Asian products, which are seeing increased demand as consumers shop more at the perimeter of the store and cook at home.

Brendan Foley, responding to a question about consumer behavior in the perimeter and spice and seasoning categories compared to frozen and Asian categories, explains that the declines in the latter two categories have been steeper and are pulling down the overall view of the portfolio. However, the company is focusing on its core categories to offset these declines. Foley suggests that inflation and shifting consumer trends may be contributing to the decline in these categories, but it is not indicative of a structural change.

The speaker discusses their expectations for the fiscal year and how the primitive store is seeing a shift towards healthier eating. They also mention that similar trends are expected for the remainder of the year in terms of pricing and segment performance. The call is then opened for any final questions before closing.

The paragraph is concluding a conference call and inviting participants to ask any remaining questions.

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