Faten Freiha, VP of Investor Relations, introduces the Third Quarter Earnings Call for McCormick and mentions accompanying slides on their website. She is joined by key executives Brendan Foley (President and CEO), Mike Smith (CFO), and Marcos Gabriel (incoming CFO). The call will reference non-GAAP financial measures, and participants are directed to the presentation for detailed information. Forward-looking statements are included, and their potential inaccuracy is noted. Brendan Foley then addresses the impact of Hurricane Helene and moves on to discuss the company’s alignment with third-quarter expectations, emphasizing successful prioritization in investments that drive value, volume growth, and improved unit share trends.

The paragraph discusses McCormick's financial performance and strategic outlook. McCormick remains confident in achieving its long-term growth objectives due to successful investments in 2024. During an Investor Day, executives will present their strategic roadmap. The third quarter saw flat sales in constant currency, with flat pricing and 1% volume and product mix, and was influenced by a canning divestiture. Despite a challenging environment, McCormick achieved positive volume growth in both the consumer and flavor solutions segments. In the Americas, the Consumer segment saw a 1% volume growth for the third consecutive quarter due to innovation, consumer trend alignment, and expanded distribution. EMEA also experienced positive volume growth driven by new product innovation and expanded distribution.

In the Asia Pacific region, excluding China, there was significant sales growth driven by new packaging and expanded distribution for core spices and seasonings. However, China's performance was weaker than expected, and challenges there are anticipated to persist into the fourth quarter. Strong volume growth in the Americas boosted Flavor Solutions, while in EMEA, volume trends were negatively affected by softer QSR customer volumes, and in Asia Pacific, by the timing of customer promotions. Profitability improved compared to the previous year due to delayed investments shifting to the fourth quarter. For the second half of the year, operating income met expectations, and earnings per share slightly exceeded them due to a tax benefit. Consumer behavior remains resilient but cautious, with shoppers making smaller, more frequent grocery trips, focusing on reducing waste and operating on limited budgets. Overall foodservice traffic remains low, especially in QSRs, benefiting food-at-home growth driven by older generations and lower-income households.

Consumers are increasingly cooking at home and seeking flavorful options, purchasing more protein, produce, and spices. McCormick's products, including spices, seasonings, condiments, and sauces, are in high demand, especially among Gen Z, who prefer high-quality and premium items. Trends show a preference for larger sizes as well as trial and onetime use mixes, reflecting a desire for flavor exploration. McCormick is committed to meeting these evolving demands through a consumer-centric approach and continuous innovation. The company's Global Consumer segment experienced growth in key markets, particularly in the Americas, EMEA, and Asia Pacific, and outperformed private label competitors in the US for spices and seasonings.

This quarter, our grilling products outpaced market growth in several key metrics, and we are preparing to launch new packaging for Grill Mates. Our recipe mixes are performing well in the Americas, surpassing private labels, with significant growth driven by our Cholula line, especially among millennials and younger families. In the UK, recipe mixes boosted volume and market share, and mustard sales are strong in both the Americas and Poland. Our prepared food categories in the Americas have stabilized with improved growth, and we achieved distributor point gains in spices, seasonings, recipe mixes, and mustard. Additionally, we saw significant e-commerce growth in both the Americas and EMEA, driven by consumer demand for convenience. In Flavor Solutions, we experienced robust growth in branded foodservice and flavors.

In the Americas branded foodservice business, despite a generally soft market, the company achieved growth in volumes and distribution, specifically in spices, seasonings, and condiments, and gained hot sauce tabletop share through new initiatives. In the Flavors segment, consumer packaged food customers saw volume improvements, especially in high-growth areas like Performance Nutrition and beverages. However, pressure remains in certain areas: hot sauce trends are impacted by a competitor recovering from supply issues, and volume is affected by mini trial sizes despite their success. The Flavor Solutions segment also faced challenges due to slower QSR traffic, particularly in EMEA and Asia Pacific, with geopolitical boycotts further impacting results in Australia and Southeast Asia. The company is optimistic about upcoming holiday season performance.

The paragraph discusses McCormick's positive outlook and strategic plans for the upcoming holiday season and beyond. The company is enhancing its merchandising, supporting its portfolio with marketing campaigns, and has several initiatives in place to drive growth. The speaker reiterates confidence in continued strong performance into 2024 and 2025, emphasizing the importance of consumer interest in healthy cooking and trusted brands. The speaker also highlights the company's commitment to sustainable volume growth and anticipates improvements as the year concludes and into the future. A change in CFO is announced, with Mike Smith expressing gratitude as he retires after more than three decades with the company.

The paragraph provides a detailed analysis of the third quarter sales performance for a company, highlighting results across various segments and regions. Overall sales were similar to the prior year's third quarter, with a 1% volume growth offset by pricing changes and the impact of a canning divestiture. In the Consumer segment, sales remained comparable with slight volume growth and pricing adjustments, with specific performance noted in the Americas, EMEA, and APAC regions. The Flavor Solutions segment also had constant sales, with a modest increase in the Americas driven by pricing and volume growth in branded foodservice.

The paragraph details the sales performance and financial metrics for the EMEA and APAC regions, highlighting a 9% sales decrease in EMEA due to factors like the divestiture of the canning business and lower volumes. In APAC, sales were steady despite slow QSR traffic outside of China, counterbalanced by growth in China. The gross profit margin in the third quarter improved by 170 basis points year-over-year, mainly driven by favorable mix in the Flavor Solutions segment and a continuous improvement program (CCI). Selling, general, and administrative expenses decreased, contributing to a 15% increase in adjusted operating income, aided by gross margin expansion and lower expenses. The Consumer segment saw an 8% rise in adjusted operating income, while the Flavor Solutions segment experienced a 31% increase, emphasizing efforts to enhance profitability.

The paragraph discusses the company's performance in the third quarter, highlighting a commitment to increased profitability and investment for growth. It mentions a lower adjusted effective tax rate of 16.8%, benefiting from the resolution of a long-standing tax matter, and anticipates a roughly 21% tax rate for the year. McCormick de Mexico, a significant joint venture, contributed strongly to net income and operating cash flow, though its future growth will be measured against last year's strong results. Adjusted earnings per share rose to $0.83 from $0.65 due to higher operating profit and discrete tax benefits. Marcos Gabriel then discusses the balance sheet and cash flow, noting that operational cash flow for the first nine months of 2024 was lower than in 2023 due to increased working capital, incentive compensation payments, and cash tax payments.

The company returned $338 million to shareholders via dividends and invested $189 million in capital projects to enhance capacity, digital transformation, and cost optimization. These activities aim to balance cash use between growth investments, shareholder returns, and debt reduction. The company remains committed to maintaining a strong investment grade rating and expects a leverage ratio below three times in 2024, driven by strong cash flow. For 2024, they foresee minimal impact from currency rates on financial metrics and expect steady sales with a slight increase in pricing. In China, lower demand is affecting the food service business, leading to a slight decline in consumer sales for the year. Despite current challenges, the company is optimistic about China's long-term growth.

In 2024, the company expects 4% to 6% constant currency growth and a gross margin improvement of 50 to 100 basis points over 2023, driven by pricing, product mix, and cost savings programs, though offset by slight cost inflation and increased investments. SG&A cost savings will partly offset investments in brand marketing, which is expected to rise by high single digits. The anticipated tax rate is approximately 21%, better than the previously expected 22%, due to discrete items. Income from unconsolidated operations is projected to grow by mid-teens, driven by strong performance in McCormick de Mexico. Adjusted earnings per share for 2024 are projected at $2.85 to $2.90, a 5% to 7% increase over 2023, with results likely near the higher end of this range due to an improved tax rate. Volume growth in both Consumer and Flavor Solutions segments is expected in the fourth quarter, with sequential improvement from Q3. However, pricing investments in the Consumer segment will have a slight negative impact, partially offset by Flavor Solutions. Gross margins are expected to improve sequentially from Q3 but remain flat year-over-year.

The paragraph discusses the company's outlook on financial performance and investments. It notes that brand marketing investments will increase sequentially from the third quarter and that IT and digital transformation costs will rise in the fourth quarter. Operating profit is expected to remain comparable to the previous year due to the timing of these investments. Despite this, the company believes it is on track with its plans and confident in achieving its 2024 financial goals. Brendan Foley highlights the positive turn in company volumes and the effective execution of their strategy, which aligns with consumer trends and includes cost-saving measures that improved margins and costs in the third quarter.

The paragraph reports McCormick's confidence in achieving the upper range of its projected sales growth for 2024, credits employees for their dedication in a complex environment, and opens the floor to a Q&A session. Andrew Lazar from Barclays questions Brendan Foley about the consumer volume improvement and pricing in the Americas, asking if the volume uplift from recent pricing actions is as expected and if further action might be taken given financial flexibility. Brendan Foley responds positively, noting progress in volume growth, outperformance over private label in core categories, and advancements in Flavor Solutions, while asserting an ongoing drive for improvement.

The paragraph discusses the company's continued efforts to strengthen its plans and execution into 2024 and beyond, emphasizing the success of its current programs in driving growth. Key strategies include increased investment in brand marketing, innovation, and expanding distribution in core categories. The company has maintained effective price gap management, contributing to expected results, and operates in strong categories that bolster its business. Additionally, there has been strong global performance across various regions and categories, particularly in spices and seasonings. The company remains confident in its guidance despite the dynamic consumer environment, aiming for the mid to high end of its top-line range.

In the paragraph, the speaker acknowledges that economic conditions, particularly in China, are slightly worse than anticipated and are being considered in their strategic planning. They note uncertainties in Quick Service Restaurant (QSR) trends and emphasize the importance of meeting expectations in the upcoming fourth quarter, which is crucial for their business. Andrew Lazar asks about the state of the prepared foods business in the Americas, noting some stabilization and improvement in sales to other food manufacturers. Brendan Foley responds, confirming that customer plans are performing as expected and showing improvement. They saw positive results in the Flavors business and strength in their branded foodservice sector, particularly in high-growth categories like Performance Nutrition and beverages.

The discussion focuses on the overall improvement in the Flavor Solutions segment, despite weaker than expected QSR traffic due to market uncertainties. The company expects positive trends to continue into Q4. During the Q&A, Ken Goldman from JPMorgan inquires about the timing impact of customer activities on Q3 results, particularly in the Americas Flavor Solutions segment, and confirms it will normalize in Q4. Mike Smith acknowledges this, highlighting it had a positive but not dominant impact on Q3. Ken also asks about the company's outlook for 2025, specifically on volume growth, but receives no definitive response about deviating from their strategy.

The speaker discusses expectations regarding investments and performance in their business. They reaffirm that the current level of investment is appropriate and not expected to increase. They mention some challenges, like hot sauce, QSRs, and China, as well as positives affecting the business, and express confidence in ongoing programs and strategies to drive growth. However, specific guidance for 2025 isn’t provided, with more details anticipated at the upcoming Investor Day. Mike Smith adds that earlier guidance indicated making investments aimed at boosting second-half volume growth, which is being achieved.

The paragraph discusses performance and economic conditions, with Brendan Foley pointing out that while they are happy with the performance, they aren't completely satisfied and aim to build momentum into 2025. Economic uncertainties persist, but they feel well-positioned and expect to provide further updates at Investor Day in three weeks. Peter Galbo from Bank of America asks about the gross margin guidance, noting it's up 125 basis points year-to-date but hasn't been raised, suggesting conservatism or timing factors. Mike Smith explains their preference for viewing performance in halves rather than quarters, mentioning sequential improvements and expecting higher gross margins in the fourth quarter, despite some year-on-year mix variations and supply chain investments Marcos highlighted.

In the paragraph, Marcos Gabriel discusses the financial outlook for Q4 compared to Q3, highlighting expectations of a more normalized product mix in Flavor Solutions, impacts from continued supply chain investments, particularly in the heat platform, and a slight negative effect from consumer pricing. Despite these factors, the overall profitability for the second half of the year remains in line with expectations. Brendan Foley adds that these investments in the heat platform are anticipated to drive significant future growth. Peter Galbo shifts the focus to China, asking Brendan Foley about his views on potential consumer demand improvements in China amidst possible macroeconomic stimulus policies.

In the conversation between Brendan Foley and Peter, Brendan discusses the challenging business environment in China, predicting a slight decline for their business in 2024. He mentions that past government stimulus actions have not significantly impacted their business consumption and expects gradual progress at a slower rate than anticipated. Peter then thanks Brendan before the operator introduces Alexia Howard from Bernstein, who shifts the conversation to asking about margin recovery in Flavor Solutions and its drivers, which Mike Smith begins to address by referring to their long-term journey and portfolio migration efforts.

The paragraph discusses the positive performance and margin improvements in the company's portfolio, specifically highlighting Branded Foodservice and its growth in categories like Performance Nutrition. It mentions that higher-margin products are driving this growth. The company's CCI and global operating effectiveness programs have contributed to improved margins in Flavor Solutions over the past two years, with a positive outlook for future growth despite some volatility. Marcos Gabriel adds that business growth will leverage the P&L and further impact margins positively. Alexia Howard then asks if the margin improvement in Branded Foodservice is due to increased traffic in quick service restaurants or other factors, to which Brendan Foley responds that it is not primarily due to traffic trends.

The paragraph discusses the current state and growth drivers of a company's Branded Foodservice business, focusing on brands like Frank's RedHot and Cholula. It highlights that despite subdued traffic trends in the foodservice sector, the company is gaining market share through more tabletop placements and diverse product offerings, including spices, seasonings, condiments, and sauces. The company is also running limited-time promotions to generate interest and excitement. Alexia Howard concludes the discussion, and Max Gumport from BNP Paribas asks about the Flavor Solutions segment's strong quarterly margins, noting that the full year guidance suggests a potential decline in Q4 margins.

The paragraph discusses the challenges and expectations surrounding product mix, supply chain investments, and market conditions. Mike Smith mentions that while there is variability from quarter to quarter, the product mix is normalizing, and supply chain efforts are impacting margins. Despite these factors, the company is on plan and expects operating profit margins to improve for the full year, continuing the 200 basis point increase seen in 2023 versus 2022. Max Gumport then raises a question about the hot sauce market in the US, noting competition and trial-size packaging challenges. Brendan Foley acknowledges these issues but affirms that hot sauce remains an attractive category.

The paragraph discusses the challenges and opportunities in the hot sauce market. The company faces constant competition but remains confident in its strong consumer loyalty and ongoing investments. Market disruptions, such as a peer recovering from supply chain issues and a surge in mini trial sizes, have impacted market share. The company has capitalized on the popularity of these mini sizes, which encourage consumers to try new flavors like sriracha and creamy buffalo. Additionally, innovations such as Frank's RedHot Squeeze products and Frank's Dill Pickle Hot Sauce have been well-received, and the company is optimistic about their future market performance.

In the paragraph, company representatives Brendan Foley and Mike Smith discuss their marketing and advertising strategies for the fourth quarter. Foley emphasizes that while they will maintain the same level of marketing programs that have been successful so far, they are particularly focused on the holiday season, expecting strong performance during this period. Smith adds that some changes, like ramping up promotion for Frank's RedHot Sauce, were made earlier in the year to enhance everyday sales. Overall, they anticipate an increase in marketing efforts in the fourth quarter, driven both by holiday demand and ongoing initiatives.

The paragraph discusses the response to a dock workers' strike on the East Coast. Brendan Foley explains that they have been contingency planning for this potential event since April and have coordinated mitigation plans with domestic suppliers. Despite the strike now occurring, they believe they have mitigated most risks and are closely monitoring the situation to avoid supply interruptions. Foley encourages both sides to resolve the strike quickly. Stephen Powers thanks Foley and the operator introduces the next question from Rob Dickerson of Jefferies, who asks for more details on the Q4 earnings guidance.

The paragraph discusses the financial outlook for Q4, highlighting factors impacting the earnings per share (EPS) decline compared to the previous year. Key points include the anticipated sequential sales improvement and a more normalized but stable gross margin relative to Q3. The increase in selling, general, and administrative (SG&A) expenses is identified as a core driver of the year-over-year EPS decline. Additionally, there's a slight headwind from the tax rate and notable year-over-year growth from income from unconsolidated entities, particularly McMex. Despite these factors, overall improvements in sales and gross margin from Q3 to Q4 are expected.

The paragraph discusses the company's financial outlook for Q4, noting that gross margins will improve sequentially but remain flat compared to the previous year due to supply chain investments, product mix normalization, and pricing strategies. SG&A expenses will be higher due to investments in IT and digital transformation, including digital marketing and data analytics. Despite these costs, operating profit is expected to be similar to last year. Finally, it mentions that Q4 is critical as the largest quarter, emphasizing the complexity of narrowing down sales projections, which have been previously managed within a small range. Rob Dickerson acknowledges the clarity of these points and seeks a follow-up.

In the call, Rob inquired if the digital transformation and IT expenditure expected in Q4 is a one-time event or part of a more sustained investment program. Marcos Gabriel responded that more details about their digital transformation journey would be discussed at the upcoming Investor Day and confirmed ongoing investments in digital marketing and other areas for Q4. Marcos indicated it’s too early to discuss specifics for 2025 and that long-term plans will be elaborated at the Investor Day. Rob acknowledged the response and ended the exchange. The operator then introduced Robert Moskow from TD Cowen, who raised a question about the impact of FX and a discrete tax benefit on their financial guidance.

In the paragraph, Brendan Foley and Mike Smith discuss various financial aspects including incentives, tax reasons, and FX, with a specific focus on brand investment and pricing strategies. Foley mentions the move's essence due to tax and FX reasons reflected in a $0.05 change. Robert Moskow asks if brand investment increased by a high single-digit percentage in the third quarter, as guided for the year. Smith clarifies that investment is discussed in halves rather than quarters, emphasizing that guidance is for the full year. Moskow inquires about pricing strategies for 2025, given recent hyperinflation and its sudden halt. Foley responds that their long-term plans might include some pricing but there is no clear change in their current outlook.

The paragraph discusses the company's strategies and initiatives for maintaining healthy volume growth and managing revenue in the near future, particularly in 2024. Mike Smith and Marcos Gabriel emphasize the importance of long-term revenue and category management, including price gap management, understanding product line cannibalization, and innovation. They also mention the necessity of retaining pricing strategies as a tool to address fluctuating commodity and freight costs. The company has earned trust from both Flavor Solutions and Consumer customers by effectively passing on cost increases. Lastly, they highlight the ongoing success of their CCI (Continuous Cost Improvement) program in contributing to their overall financial health.

In the paragraph, the speaker discusses their strategy of using the CCI (Continuous Cost Improvement) as a way to fund investments for driving top-line growth. They mention balancing various levers, including pricing and top-line volume, in a holistic manner. Robert Moskow thanks the speaker, and Adam Samuelson from Goldman Sachs asks about the spices and seasonings market in the US. He inquires about consumption growth, market share, and competitive positioning against private labels and smaller brands. Brendan Foley responds by stating that their company is performing well in terms of volume and believes they are competitive across different market segments, despite the entry of new competitors in the attractive category.

In the paragraph, a company representative discusses their strategy and performance in the third quarter, emphasizing their focus on category growth and increasing total distribution points (TDPs). They highlight ongoing efforts to grow both unit and volume measures across their business. A follow-up question about cash flow is addressed by Mike Smith, who notes that the fourth quarter is traditionally their strongest for cash flow. He explains that some working capital issues, partly due to contingency planning for a port strike, have affected year-to-date figures, but they still expect a strong cash flow year overall. The final question is handed over to Thomas Palmer from Citi.

The discussed paragraph involves a Q&A session about SG&A (Selling, General & Administrative) expense increases in Q4. Marcos Gabriel indicated that the increase will be seen across both Consumer and Flavor Solutions segments. In another question, Thomas Palmer sought clarity on the growth of unconsolidated operations, noting a close to 50% growth rate, and whether any factors could affect future earnings. Mike Smith pointed to currency impact, specifically the Mexican peso's fluctuation against the dollar, as a significant factor. The session concluded with Faten Freiha offering to answer any further questions.

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