Q3 2020 McCormick & Company Inc Earnings Call
Investor Relations. Thank you for joining todays third quarter earnings call to accompany this call. We've posted a set of slides at IR Dot Mccormick Dot com.
Currently all participants are in a listen only mode. Following our remarks, we will begin a question and answer session. If you need to reach the operator at any time during the call. Please press star Zero EPS will begin with remarks from Lawrence Kurzius, Chairman, President and CEO, and Mike Smith, Executive Vice President and CFO.
In our remarks, we will refer to certain non-GAAP financial measures. These include information in constant currency as well as adjusted operating income adjusted income tax rate and adjusted earnings per share that exclude the impact of special charges and for 2019, the net nonrecurring benefit associated with the U.S. tack that reference.
Liaisons to the GAAP results are included in this mornings press release and slides.
In our comments certain percentages around it please refer to our presentation for complete information. In addition, as a reminder, today's presentation contains projections and other forward looking statements actual.
Got it.
On slide two our forward looking statement also provides information on risk factors, including the impact of the coated 19 that could affect our financial results. It is now my pleasure to turn the discussion over to Lawrence.
Thank you Jason good morning, everyone. Thanks for joining us below.
The last few months has been an extraordinary period and the code breaking situation continues to evolve daily.
Incredibly proud of the way Mccormick is before in this unprecedented operating environment.
Starting on slide four let me highlight a few points on the curve conditions were seeing and are prepared for lynparza.
First the lower consumer segments around the world, we are experiencing strong sustained consumer demand, which has real incremental consumption and reflects the trend of consumers cooking more at home.
In China, which is viewed as a leading indicator because they're covertly into recovery is ahead of the rest of the world. The demand for food at home continues to be very strong we see the same in Europe and of course in the Americas the sick.
The significant shift to consumers' eating more at home. This persisting long enough that it has become a hub.
Our proprietary consumer survey data supported by other research indicates a majority of consumers are cooking more from scratch enjoying the cooking experience than adding flavor to their meal occasions. These.
New behavior, coupled with some consumer discomfort regarding EBITDA for driving an increase as with both preference for cooking at home we buy.
We believe this will continue globally as thus further benefit our consumer segment.
Turning to our flavor solutions segment, where we have a very diverse customer portfolio, we are seeing varying stages of recovery.
Starting with the away from home portion of the segments with our quick service restaurant customers for QSR, we're seeing strong signs of recovery their business model for already oriented to drive through or carry out not dining is.
Internal QSR traffic has recovered to near normal levels and limited time offers and promotions are driving demand in the room.
In the rest of the APC region as well as the EMEA and Americas. The focus has been on core menu items, but moving into the fourth quarter, We see limited time offerings beginning to reserve.
Across the rest of food service all of her show signs of recovery since our second quarter. The pace is less slower and various other channel market.
As we have previously mentioned, we expect the recovery in this area of the business to be more gradual and take time likely years, both restaurants and other food service venues such as stadiums and cafeterias continue to be largely closed we're operating under capacity limitations consumer.
Consumers are reluctant to nine out of the restaurant industry has experienced significant pain.
From a food at home perspective, our flavor solutions grow very flood packaged food customers, but overall, we're returning to pre covance 19 level as is.
As expected.
New product opportunities with a slow during the crisis and had been more focused on expansion of the core are beginning to gain increased momentum and we're excited about their contribution to growth next year and so.
In summary for our total flavor solution segments business is gradually rebuilding so not yet for 2019 levels.
Moving to our global supply chain coming into the crisis. There was more finished goods inventory in the system, both for us and our customers, which was depleted early in the crisis the sustained elevated level of demand coupled with our added employee safety measure of sales for our manufacturing operations.
Service has been stressed in some areas and inventory replenishment will take some time, but real quick.
The real pressure has been on our us manufacturing operations that we've had to suspend or curtail production some secondary products to meet demand for our top selling product.
While the rest of the World is also experiencing elevated consumer demands they've not experience the same level of manufacturing pressure given the capacity and capabilities. We've built outside of the Americas in the past few years in.
In EMEA, where our supply chain is very well positioned to meet demand. We've gained distribution of other manufacturers have faced challenges.
For the Americas as we said on our earnings call in June we're expanding our workforce in increasing manufacturing capacity to optimize scheduling and investments, particularly around blending capacity as well as scaling our partnership with third party manufacturer.
To be clear this added capacity is still ramping up this cup.
This capacity just started to come online in August and will continue to ramp up over the next few months and is targeted to be completely in place by the end of the calendar year.
And by then we will have added the equivalent of an additional plant for view EPS manufacturing capacity.
Course, with this rapid scale up there are extra cost and for term inefficiencies, but we're confident we're implementing efficient long term solutions.
Investments, we're making are not just to meet the higher demand for the balance of 2020, but the strength in our supply chain resiliency longer term that to support the Americas consumer growth, we anticipate continuing into next year, driven by both sustained demand as well as retailer inventory replenishment.
We're making good progress our service levels continue to improve and we are confident in our capabilities and ability to meet demand, particularly during the holiday season.
We're positioning ourselves for continued success I want to thank our supply chain employees for their remarkable efforts as well as our suppliers and customers for their partnership in this challenging environment.
The positive fundamentals, we have in place have enabled us to manage through this period of volatility.
The investments we've made and the capabilities. We've built combined with our strong business model prepared us to execute from a position of strength.
As the crisis subsides, we will emerge an even better company by driving our long term strategies responding to changing consumer behavior and capitalizing on opportunities from our relative strength.
Now I'd like to focus on our third quarter performance. This.
Business updates on our consumers labor solutions segments, and our two for one stock split announcements.
As seen on slide six we have a broad an advantaged global flavor portfolio, which continues to position us to meet the demand for flavor around the world and grow our business.
The breadth and reach of our portfolio across segments geographies channel customers and product offerings trades at Dallas portfolio to drive consistency in our performance in a volatile environment as evidenced by our third quarter results.
During the third quarter, the shifts in consumer behavior to cooking and eating more at home or at home consumption drove a substantial increase in our consumer segment demand as well as increases with our packaged food company customers and our flavor solutions segments.
On the other hand, we experienced a decline in demand from our restaurants and other food service customers for the away from home products in our portfolio, which historically has represented approximately 20% of our total annual company sales yeah.
The impact of the shift to more at home consumption varied by region due to the differing levels of away from home consumption in each as seen on slide six as well as the pace of each regions covert 19 recovery.
Taken together these impacts continue to demonstrate the strength and diversity of our offerings.
While we may experience temporary disruptions in parts of our business underlying consumer demand continues to underpin our growth.
Now let me cover the highlights of our third quarter, which were broadly in line with the trends we discussed in our earnings call in June.
Starting with our top line third quarter sales increased 8% from the year ago period in constant currency sales grew 9% mainly attributable to significantly higher volume and product mix in our consumer segment with a partial offset from a low single digit declines in our flavor solutions segments.
Adjusted operating income increased 5%, including a 1% unfavorable impact from currency. These.
These results were driven by higher sales favorable mix, primarily driven by the sales mix between segments and CCRI led cost savings, partially offset by higher costs, including those related to covert 19th.
Our third quarter adjusted earnings per share was $1.53, 5% higher than the year ago period of $1.46 driven primarily by our strong operating performance with.
With one quarter left in the year, we have resumed guidance and expect to deliver another year of strong profitable growth.
Our results continued to be driven by the engagement of our employees and the successful execution of our strategies and we are confident in our 2020 outlook, which will be covered in detail in a few moments.
Now, let me spend a few minutes on our business segments uptake.
Starting on slide eight with our consumer segment sales rose, 15% with minimal impact from currency fueled by the change in consumer behavior, Greece.
Research and trend data show that not only our consumers cooking more at home. They are enjoying it both from a flavor and family experience and have even accelerated their use of spices seasonings and covenants as the pandemic has progressed.
Additionally, as at home consumption from restaurant carry out and delivery is increasing many consumers are adding flavor with spices sauces or condiments they have at home.
We believe these trends will last beyond the cobot 19 pandemic and drive continued growth.
Our Americas constant currency sales growth was 17% in the third quarter our.
Our total Mccormick U.S. branded portfolio as indicated in our higher I consumption data for 28%, which is substantial and reflects the strength of our categories as consumers become more at home.
Our sales increase was lower than the USA IRI consumption growth attributable to a few factors.
First the service level pressures and product allocation from the supply chain challenges I mentioned previously.
Next the timing of the holiday program, we offer retailers.
We generally offer the program during our third quarter to encourage early in store display and Merchandizing of holiday products.
The impact of this program was included in our third quarter shipments in 2019 to two.
The 2020, though with the elevated level of demand and focused on keeping core items on shelf.
A portion of retailer purchases for this program has shifted to our fourth quarter.
Notwithstanding this shift we still expect another year of strong holiday execution.
And lastly increased level of pricing growth in the scanner data due to curtail third quarter promotions and a channel shift.
Grocery outpacing mass merchandisers and club stores.
Focusing on the us branded portfolio consumption in all key categories grew at a double digit rate in the third quarter with the majority of our categories continuing to outpace the total store and center of store growth rates.
In fact consumption in our portfolio during the third quarter through two and a half times the center of store rate, which is an increase from the comparison in the second quarter.
While we do not expect consumption to continue at the highly elevated level of our third quarter. We do expect continued and long lasting growth from the increase in consumers cooking at home. The most recent IRI scanner sales data for the week ended September 13th showed Mccormick us branded portfolio consumption still growing over time.
20% with continued strength in spices and seasonings.
We gained share in seven out of 11 categories. During the third quarter, those which were less impacted by supply constraints, including cost sauces stocks and broad barbecue sauce, what marinates and Asian products.
While there was noise in the third quarter share numbers for categories impacted by supply such as spices, and seasonings try recipe mixes and mustard on a year to date basis were relatively flat or gaining share in those categories too.
New products launched earlier in the earlier in the year, such as French Red Hot six sauces will they hot sauce, and subs reduced sugar barbecue sauce, that's continuing to get exceptional trials and contributed to the third quarter growth.
The sell in of our second half new product launches. However has been slowed due to the focus on keeping core items on retail shelves and these launches will now be further opportunities to fuel growth next year.
The strong performance across household penetration and rate of repeat buyers continued in the third quarter across our portfolio.
Our household penetration rate increased 8% compared to last year, driving a significant amount of trial for millions of new households across multiple categories.
Prices and seasonings try recipe mixes and hot sauces has the biggest game but.
But even smaller brands like simply Asia, and Thai kitchen grew significantly and there.
And the rate of repeat buyers increased 7% during the quarter with double digit repeat rates in many categories.
These metrics increasing significantly both in our second quarter and third quarter indicate a high level of usage and speaks to the stickiness of our products consumers are coming into our brands, having a good experience and buying our products again.
With our high level of effective brand marketing investments, including planned increases in the fourth quarter and our initiatives to deepen our digital connection with consumers. We're capitalizing on the opportunity to build long term brand equity Patrick trial and increased usage by existing consumer for.
We're continuing to design targeted media messaging focussed on cooking at home seeking consumers have user products and providing a flavor inspiration and as they.
And as the younger generation continues to fuel the demand for flavor and everyone is accelerated or online presence, we're executing on creative ways to connect with them.
For instance, one way we are connecting with consumers by helping them discover new ways to enjoy time on our tradition take tailgating for example, with football season now in full swing, we partner with former New York Giants quarterback Eli Manning to create the largest virtual home gating experienced flooding lucky fans interact with.
Eli to learn about his favorite Franks Red Hot flavored snacks. The recent event garnered over 750 million media impressions across digital media platform.
Moving from the football season to the holiday season, our fourth quarter is an important one from a seasonal standpoint.
Our consumers holiday dinner may be more important than ever this year, and we're excited about helping banks and memorable flavor experiences.
In terms of brand marketing, we are launching a holiday version of our it's going to be great campaign, which recognize the celebrations might be different. This year. In addition to our normal holiday promotion activities.
And from a supply chain standpoint, we're protecting our top selling holiday products. We have confidence we are well positioned for a successful holiday season.
Our portfolio and the plans, we have in place or even more relevant today than they were before the crisis as we expect the increase in at home cooking to persist.
We will continue to drive our category leadership and growth momentum through strong brand marketing category management initiatives and new product innovation.
Now turning to EMEA, our constant currency sales rose, 23% with broad based growth across the region our large.
Our largest markets drove double digit total branded consumption growth with market share gains across the region in our key categories and.
Importantly, we gain total EMEA region share in spices, and seasonings and dry recipe mixes.
The spices and seasonings consumption was strong in all markets driven by consumers cooking more at home and discovering they need our products for great tasting healthy flavor solutions are.
Our brand marketing campaign, highlighting our product superiority and culinary partnerships, coupled with pivoting or digital messages based on real time consumer insights the topics most relevant to consumers and formats that resonate the modes are driving spices and seasoning momentum.
In the UK, our sports brand, new dry recipe mixes such as one pen needles seasonings operating convenient and natural urban Spice blends for vegetarian options are attracting younger consumers to the category and driving new distribution gains as well as the category growth we achieved.
We achieved a leading UK market share position in dry recipe mixes at the beginning of the year and we continued to gain significant market share in the third quarter.
And with the momentum in baking continuing combined with successful new product launches, we again had exceptional consumption growth in our vaccinate brand in France, outpacing the homemade dessert category and gaining share.
Notably Franks Red Hot turned up the heat during the third quarter with over 40% consumption growth driven partly by a successful digital grilling campaign as well as new distribution.
We're gaining millions of new households, and driving repeat purchases our household penetration increased significantly across our major brands and markets during the third quarter compared to last year with double digit growth percentages in both the UK and France, spices, and seasonings category as well as in the UK dry recipe.
Mixes and France, homemade dessert category and.
And our rate of repeat buyers in these markets and categories also grew by double digits.
Our strong brand marketing and digital campaigns, which weve increased in EMEA provide us with confidence we will continue growing with our new consumer we're welcoming to our brands as well as our existing value consumer.
Moving forward any M&A will continue to capture the momentum Weve gained and are excited about our growth trajectory following challenging market conditions over the past few years.
In the Asia Pacific region, our constant currency sales declined 6% driven by declines in branded food service products, which are included in our consumer segment in China.
Excluding those impacts sales for the region would have increased reflecting the increase in consumer demand across the region related to more cooking at home and.
In China, our consumer business growth was strong driven by consumers demand for convenient solutions fueling our growth of recipe mixes as well as world flavor and hotspot sauces.
Continued momentum and condiments also contributed to growth.
In other parts of the region, we have broad based growth led by Australia strong consumption and share growth in branded spices, and seasonings, particularly in gourmet garden with high double digit rates of new consumers and repeat buys and Franks red hot with over 50% growth during the pandemic.
Finally in all regions consumers' digital engagement has increased significantly as we continue to experience accelerated ecommerce growth in all categories, whether it be pure play click and collect for our own direct to consumer properties the pace.
The pace of growth has slowed from the second quarter, which was heavily impacted by more extensive stay at home period, but we again drove triple digit growth in the third quarter as well as increasing our market share in several markets.
We expect the shift to online shopping behavior to continue and we are well positioned for through the investments we've made and continue to make in this channel.
Our consumer growth plans based on our strategy has been in place since the beginning of the year and we are yielding results before the crisis and we've been able to leverage our initiatives to capitalize on the opportunity to help our consumers. During this time and strengthened our category leadership positions, which further bolsters our confidence that we will drive.
Future growth.
Turning to slide 10 in our flavor solution segment, our sales performance improved substantially from a second quarter constant currency declined 16%.
Our third quarter constant currency sales were 1% lower than last year attributable to lower demand from restaurants, and other food service customer.
Our Americas and EMEA regions, driven by the decline in away from home consumption.
Almost fully offsetting this lower demand was continued growth in sales to our packaged food customers across all regions as well as strong sales growth to quick service restaurants in China.
In the Americas, our sales declined 3% in constant currency driven by demand declines across both branded food service and restaurant customers.
The branded foodservice impact more significant as more away from home customer base in the Americas skews more to that channel.
We're continuing to work with our customers impacted by away from home consumption declines to manage through their recovery efforts.
With our customer intimacy approach, we are collaborating to provide solutions such as menu simplification and optimization branded portion control packaging for dialing in and carry out and condiment dispensing solutions for foodservice operations.
We are building menu excitement with the strong promotions leveraging the power of our brands driving wounds for both our customers and us.
We're excited about new distribution gains as well as upcoming menu participation and limited time offers as the recovery momentum continues.
In EMEA, our sales rose, 1% in constant currency, a significant rebound from a 31% decline in our second quarter ROI.
Our away from home customer base in this region is skewed more compusafe and in the third quarter as they reopen with adapted operating model and resumed limited died in options our demand from these customers rebounded, although still modestly below the third quarter of last year.
The recovery with other foodservice customers also began in the third quarter as cobot 19 restriction piece, although as expected slower and not to the same expenses QSR.
Turning to our at home customer base, we had strong growth in our flavor sales packaged food companies similar to create Cobas 19 level driven by the strength in their core iconic products as well as momentum from new products launched at the beginning of the year.
We're advantaged and fire differentiated customer engagement in this evolving environment, which has driven continued wins with our EMEA flavor solutions customers.
Whether it be quickly scaling up to meet aggressive recovery plan collaborating on opportunities, we're managing through demand volatility, we're responding with speed and agility and further strengthening our customer relationships.
In the Asia Pacific region, our constant currency sales grew 7% driven by China, and Australia, EPS growth with QSR customers during the.
During the third quarter QSR as these countries were largely open and we are seeing momentum gained in the core business and limited time offers and our customer promotional activities.
Government imposed cobot 19 restrictions and reduced levels of limited time offers continued to curtail growth in parts of the region for.
For the balance of the year, we expect a reduced level of our customers limited time offers and promotional activity versus last year to impact growth.
We continue across all regions to be fully committed to helping our customers manage through the cold at 19 recovery phase of which the duration is still uncertain.
Slow and evolving recovery process is dependent on many factors, including restrictions being lifted venues fully reopening and possible resurgence as we have.
We have positive fundamentals in place to navigate through this period of volatility.
And we remain confident in the successful execution of our strategies and driving long term growth trajectory in flavor solution.
Now before turning it over to Mike and beginning on slide 11, I'd like to mention stock split we announced this morning and provide a few summary comments, including on our 2020 outlook on.
I'm pleased with our announcement this morning of a two for one stock split, reflecting our sustained positive performance and outlook for continued growth. It has been 18 years since the last split the stock which was in 2002 when the pre split share price was $52 to 33 cents we.
We believe this will provide greater liquidity and be appreciated by individual investors and employees.
And now in summary at the foundation of our sales growth is the global demand for flavor.
We're capitalizing on the growing consumer interest in healthy flavorful cooking heritage brands and digital engagement.
These long term trends of not only remain intact during the crisis, they have accelerated and our alignment with and positions us well to meet increased consumer demand both through our products and our customers products.
We are driving sales growth balanced with a focus on lowering cost to expand margins and sustainably realize earnings growth.
We have a solid foundation ended in an environment that continues to be dynamic and fast pace.
We are ensuring we remain agile relevant and focus on long term sustainable growth.
We have delivered outstanding year to date results during a period of great disruption proving the strength of our business model, our strategies are effective and reinforcing our confidence they will continue to drive future growth.
Our 2020 outlook, which Mike will discuss in detail in a few moments reflects the strength of our year to date performance and the momentum we are carrying into our fourth quarter and 2021, we are.
We are achieving the objectives, we have in place at the beginning of the year delivering stronger sales and underlying operating performance. While importantly, also ensuring the health and safety of our employees.
Testing in our supply chain resiliency to meet growth, we expect in 2021, recognizing the exceptional performance of our people throughout the cobot, making crisis and supporting our communities through relief efforts.
Our growth expectations reflect our confidence in the sustainability of higher at home consumption trends as.
As we look towards fiscal 2000, 2001, we expect constant currency organic sales growth in both of our segments on top of the outstanding consumer segment growth this year.
I want to recognize Mccormick employees around the world for driving our momentum and success and thank them for their efforts engagement and for adapting to this new environment. It is now my pleasure to turn it over to Mike.
Thanks, Lawrence and good morning, everyone I'll.
Ill begin now by providing some additional comments on our third quarter performance and then our financial outlook for the balance of the year.
Starting on slide 14 during the third quarter sales rose, 9% in constant currency.
Sales growth growth was driven by by substantially higher volume and mix in our consumer segment, partially offset by lower volume and mix in our flavor solutions segments type.
Pricing to partially offset cost inflation also contributed favorably to both the segments.
Consumer segment sales grew 15% in constant currency led by the Americas and EMEA regions.
The shift to at home consumption and cooking more at home as well as consumers, adding flavor at home to a restaurant carry out delivery has driven substantial demand for our consumer products driving higher volume and mix in these regions.
On slide 15 country.
Consumer segment sales in the Americas increased 17% in constant currency versus the third quarter of 2019.
The increase was driven by significant growth across our branded portfolio include.
Including higher volume and product mix of Mccormick spices and seasonings.
As well as simply Asia packaging format Garden, Frank's Red Hot veterans stabs batteries and outboard products.
Additionally, the pricing actions, taking prior to Kevin 19 in the first quarter to partially offset increased costs.
Also contributed to the growth.
Any M&A constant currency consumer sales grew 23% from a year ago with double digit volume and mix growth in all countries across the region.
The most significant growth drivers were our schwartz from different brand spices and seasonings.
Our blocking a homemade dessert products.
And our Schwartz dry recipe mixes.
Consumer sales in Asia Pacific declined 6% in constant currency driven by lower branded food service sales as Lawrence mentioned.
This decline was partially offset by increased consumer demand across the region with.
With growth led by China's recipe mixes sauces, and cabinets as well as Australia is brand new spices seasonings and continents.
Turning to our flavor solutions segment and slide 18 third.
Third quarter constant currency sales decreased 1% driven by declines in away from home products in the portfolios of our Americas and EMEA regions.
In the Americas favorite solutions constant currency sales declined 3% driven by a significant decline in sales to branded food service customers. In addition to lower sales to fixed service restaurants.
Partially offsetting these declines were increased sales of packaged food companies and pricing to offset cost increases.
In EMEA constant currency sales increased 1% driven by pricing to cover cost increases offset partially by lower volume and product mix.
Volume and product mix decline driven by a reduction in sales to branded foodservice customers. In addition to lower sales to quick service restaurant customers.
Partially offsetting these declines with sales growth of packaged food companies.
In the Asia Pacific region flavor solution sales rose, 7% in constant currency driven by higher sales to fix service restaurants in China and Australia first.
Partially driven by our customers limited time offers and promotional activities.
As seen on slide 22.
Adjusted operating income, which excludes special charges increased 5% in the third quarter versus year ago period.
In constant currency adjusted operating income grew by 6% and was driven by substantial growth in the consumer segment, partially offset by a significant significant declines in a flavor solutions segments.
Adjusted operating income growth in the consumer segment was 18% increase.
Increasing to $209 million.
We're in constant currency was 19%.
Driven primarily by higher sales.
In a flavor solutions segment, adjusted operating income declined 24% to $64 million.
22% in constant currency, driven partially by lower sales unfavorable product mix due to decline in branded food service sales and an unfavorable impact to manufacturing costs, resulting from the lower volumes.
Both segments were also unfavorably impacted by coded 19 related supply chain costs.
Putting those related to additional compensation for operations employees safety and sanitation measures and scaling up to meet increased demand as.
As well as higher incentive compensation, which was driven by our strong year to date sales and operating profit performance.
These unfavorable impacts were partially offset by CIA led cost savings.
Gross profit margin expanded 70 basis points in the third quarter versus the year ago period.
Driven primarily by favorable product mix.
Resulting from the sale shift between segments MCC I'd like cost savings.
With a partial offset from coated 19 related costs.
Adjusted operating margin compression of 60 basis points compared to the third quarter of last year was driven.
It was driven by the net impact of the factors I just mentioned as well.
As well as higher distribution costs.
Turning to income taxes on slide 24, our third.
Our third quarter adjusted effective income tax rate was 19.3% as compared to 17.6% in the year ago period.
So here is were favorably impacted by discrete tax items.
Basically stock option exercise.
Income from unconsolidated operations up $10 million in the third quarter was comparable to the year ago period.
At the bottom line as shown on slide 26 third quarter 2020, adjusted earnings per share was $1.53 cents as compared to $1.46 cents for the year ago period.
The increase was primarily driven by our higher adjusted operating income was lower interest expense offsetting the impact of a higher adjusted income tax rate.
This increase also includes an unfavorable impact from foreign currency exchange rates.
On slide 27, we summarized highlights for cash flow in the quarter end balance sheets.
Our cash flow provided from operations was $627 million for the third quarter of 2020 between.
The 27% increase compared to $495 million to the third quarter of 2019.
And was driven by higher net income.
We finished the third quarter with a cash conversion cycle at 36 days down seven days versus our 2019 at fiscal year end.
We returned $247 million of cash to shareholders through dividends and use $146 million for capital expenditures through the third quarter of 2020.
Additionally, we were very happy that during the third quarter, we fully paid off the terms notes related to the acquisition of the Franklin franchise brands and then.
And ended the third quarter with a net debt to adjusted EBITDA ratio of 3.1 times.
We continue to project another year of strong cash flow.
Our priority is to continue to have a balanced use of cash maybe.
Making investments to drive growth, including through acquisitions.
Returning a significant portion to our shareholders through dividends and to pay down debt.
Let's now move to our 2020 financial outlook.
As a reminder, we withdrew our 2020 guidance during our first quarter earnings call in late March.
The operating environment over the past six months has continued to evolve.
While there still remains much uncertainty and many variables, which can drive a range of possible outcomes. We recognize our year to date performance has been strong and we are currently in the last quarter of our fiscal year.
As such we are resuming our 2020 guidance at this time based on the expectations Lawrence shared earlier this morning.
Most notably that the shift in consumer demand to at home consumption versus away from home will continue for the balance of the year.
And even beyond.
We believe this shift will continue to favorably impact the consumer segment in our fourth quarter.
While the away from home part of a flavor solutions portfolio has begun to recover you will continue to be unfavorably impacted.
We expect the impact for both segments will not be to the same extent that we have realized in the past six months.
Starting with the top line.
We expect to grow sales at the upper end of a 4% to 5% range.
Which in constant currency due to a range of 5% to 6%.
This increase is expected to be on text entirely organic and reflects growth driven by new products expanded distribution brand marketing and pricing.
Which in conjunction with cost savings is expected to offset anticipated mid single digit inflationary pressures.
It includes the net impact of the shift in demand due to cope in 19 and the can.
And the consumers sustained preference for cooking at home.
Our 2020 gross profit margin is expected to be 75 to 100 basis points higher than 2019.
In part driven by RCC, I'd like cost savings and favorable product mix, partially offset by 219 related costs.
Our adjusted operating income growth rate reflects the expected strength of our constant currency sales performance and underlying profit realization, partially offset by higher expenses related to the 19 and incentive compensation.
We are projected to grow adjusted operating income by 4% to 5%.
Our 5% to 6% in constant currency.
This includes our cost savings targets of approximately $105 million and an expected mid single digit increase in brand marketing investments.
We are estimating our coated 19 costs, which include expenses related to additional compensation for our frontline operations employees safety.
Safety and sanitation measures and scaling up to meet increased demand as well as the nations to relief organizations will be approximately 40 million to $50 million for fiscal year 2020.
With the majority of this cost impacted gross profit.
Our estimated increase in incentive compensation is driven by a projected strong fiscal year sales and operating profit performance.
And is consistent with our commitment to a pay for performance philosophy.
Our 2020 adjusted effective income tax rate is projected to be approximately 20%.
Based on our year to date performance, including the impact of favorable discrete items and the estimated mix of earnings by geography.
Outlook compares to our 2019 adjusted effective tax rate of 19.5%.
Our income from unconsolidated operations is also expected to be impacted by unfavorable currency rates and as a result, we are projecting a mid single digit decline.
Our guidance range for adjusted earnings per share in 2020 is $5.64 to $5.72.
This compares to $5 or 35 cents of adjusted earnings per share in 2019 and reps.
And represents a 5% to 7% increase which.
Which in constant currency is a 6% to 8% increase.
In summary, we are projecting another strong year of underlying operating performance.
Doing is right by first protecting our employees and recognizing their contributions second.
Second by supporting our communities to relief efforts, and finally by making supply chain and brand marketing investments to meet our expected growth into fiscal 2021.
And while we're not providing guidance for next year.
I want to note that we do expect constant currency organic sales growth in both our segments in 2021 as Lawrence mentioned earlier.
Additionally, I want to provide you a brief update on our ERP replacement program.
We indicated in March that we will be facing a timing of this program to focus on the challenging environment during the pandemic.
We remain excited and committed to our global transformation initiative.
While the environment is still challenging we have continued to work on this program.
The delay provides us an opportunity to do some re planning and as S&P has improved their products our ramp up will be on a new version with a broader suite of applications allow.
Allowing us to save an upgrade cycle as well.
We have not completed our planning yet, but we do not anticipate any major go lives in 2021.
We will provide further updates on our ERP program on our earnings call in January.
Finally, I would also like to mention that yesterday, our board of directors approved a two for one stock split with one share of common stock for common stock non voting to be issued for each like outstanding share.
The additional shares will be distributed on November Thirtyth trading trading is expected to begin on a split adjusted basis on December Onest.
The stock split reflects the confidence we have in our future and we believe it will provide greater liquidity and allow the stock to be more assessable to a broad range of investors.
I'd like to now turn it back to Lawrence for some closing remarks before we move to your questions.
Thank you Mike now that Mike has shared our financial results and 2020 outlook in more detail I'd like to recap the key takeaways as seen on slide 29.
We delivered outstanding year to date results during a period of great disruption proving the strength of our business model the value of our products and our capabilities as a company. Our foundation is solid and our strategies are effective.
2020 outlook reflects another year of strong operating performance, while doing what is right for our employees and communities as well as making investments for the growth we expect in both segments next year.
We are confident in our ability to perform in this dynamic environment and to continue delivering differentiated results and build long term value and now I'd like to turn to your questions.
Thank you well now be conducting a question and answer session.
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Thank you and our first question is from the line of Andrew I'm, Sorry with Barclays. Please proceed with your questions. Good morning.
Morning, everybody.
Hi, Andrew Good morning, Thanks for hanging in there for a very long script.
No worries no worries our pleasure.
So two things would be first off thanks for your thoughts around your expectations for organic sales into next year I'm curious as we think about EBITDA for next year, obviously, we're not in a position to give any kind of guidance, but maybe you can just cover off on a couple of the discrete items puts and takes that we kind of know about meaning.
You covered my $40 million to $50 million.
Coping related cost this year.
Is all of that expected to not repeat next year or is a portion going to next year and then any way you can be.
Anyway, you can break out what the incremental maybe incentive comp cost is expected to be this year and just any other things that are discrete that we kind of know now that we should take into account as we think about sort of profit growth next year and then I've just got a follow up thank you.
Andrew It's Mike I'll answer this in this floor sets any comments you can you can chime in you referred to the Colgate cost obviously, we talked about this year about $40 million to $50 million incremental costs.
2020, we expect some of those to continue however, some of those we don't expenses continue in some of the things like we're scaling up production were onboarding people need incremental co Packers in place now we don't expect that to not impact us into next year. However, some of the things weve done like ERP and other costs.
Coverage for our employees, we do expect to continue so it's a mix of that however, we will be really a.
A lot depends on the environment and continued resurgence our January guidance.
Our January guidance, we'll give you a lot more detail on that August right, but there is other in addition to what Mike said you know there are costs that we incurred for temporary plant closures extraordinary sanitation that we do not anticipate.
On happening again next year, and just bringing on all of this capacity.
It's been done very quickly and and and.
And as a result, it's been brought on some of inefficiently in the short term and we would expect that efficiency rate to go up as we get into next year now on incentive comp Mike mentioned, the worried about that I, certainly hope that that doesnt, because it's not a tailwind next year.
So this is not is because really if it if it isn't the tailwind it's because of the continued extraordinary.
Formats, we ended on a pay for performance philosophy, our employees will be delivered this year and so incentive comp.
Across the all levels of the organization is pretty much at the at the top of our program range.
And so we've taken.
That is really extraordinary performance to repeat that so probably it's going to be a tailwind.
As well, but in any case the underlying business results that we delivered this year don't get paid for twice in our plants pay for growth.
Yes makes sense and you mentioned capacity in him I want to dig into that a little bit I'm curious, if there's a way to sort of spread out a little bit how much of the upcoming capacity. That's coming online is sort of internal versus steps to abuse of third parties and really the reason I ask is it I assume that mccormick would not be adding its own sort of internal Japan.
Lastly, in any significant way unless you thought that some of these recently elevated trends were likely to persist somewhat longer term not not at current levels of necessarily but longer term in a way that you kind of felt like you needed internal capacity as opposed to just the more as opposed to just accessing you're accessing this the flexible.
City of third party.
So Andrew is essentially its a mix. So you know some of the capacity we have gained its been for life.
Adding people and changing our shift patterns. So that we have more of our facilities operating on a 24 725 seven.
Schedule not just on on some lines with some case on all lines. So that's one way we've added capacity. We have made some short we've recently, we've been able to make some investments in blending capacity that you have that.
<unk> are those that are internal and then we have brought on quite a lot of third party co packing.
Capacity.
That is an incremental cost that we would hope to absorbed into our own facilities over the course of next year and that's primarily with strategic partner that we are ready to co packing with also so we're not creating a quality risks out there also.
Great. Thank you very much.
Your next question is from the line as Ken Goldman Jpmorgan. Please proceed with your question.
Hi, Thank you one clarification and then I have a broader question and just building on Andrews question, you talked about no major go lives for ERP in 2021.
Is it fair for us to assume that obviously the costs will be delayed maybe until 2022 as well from that or are there. Some some costs that you'll incur in advance just curious on that for me were continuing.
Even though we talked earlier about delaying ERP, we're still on current cost. This year, we're going to spend in 2020 around the same level as we did in 2019. So you can expect that we refinanced will have cost in next year. We're not prepared at this point to talk about the level of costs, but we just wanted to highlight the fact that.
Yes go lives, we term you'll bring with them major costs aren't going to really happen until 2022, and we will.
And we will have more great hotspots January guidance will sharpening the pencils for that yet.
Okay. That's helpful and then I.
I wanted to poke around a little bit on your commentary about organic growth in the consumer segment next year, we've got the markets right now looking for the street looking for low single digit decline, so you're you're surprising to the upside I think and I wanted to ask.
Clearly you have a very strong first quarter coming up you should anyway, given that you don't lapping.
But you don't lap against coated but after that there is some reasonably high bars to comp against and I'm. Just curious to what extent is your confidence in this topline growth next year informed maybe a little bit by the increase in capacity.
And also the potential trade load that could bleed from this year into next and I'm asking because you know obviously, we should continue to see great food at home trend next year.
But maybe that guidance will be easier to digest. It. It's built on I guess something more than the expectation of just end demand grows so hopefully that makes sense.
Okay that makes a lot of sense and that is a great question because I think you've written about this and I think that.
Analysts community as a group.
The consensus that's out there right now.
Under calls, but we think the growth potential is and that's why we have commented on 2021 at this early stage when we normally would really be focused completely on 20.
2020.
Yes, even before covert 19 hit consumers were looking more at home they were using more spices and seasonings and sauces to.
To prepare fresher healthier meals, they were moving to trusted and heritage brands, we talked about this the pandemic accelerated these trends.
And other trends like ecommerce that already underpinned our strategies and that we were already capitalizing on and consumers haven't been doing anything that is contrary to what the has been trending to do already they are just doing more rather than data that we've got we talked about on.
In our prepared remarks, Joe.
Isn't that most consumers are cooking more they're enjoying it they intend to cook more and our brands are gaining penetration in millions of households, with a high level of repeat.
That shows a strong satisfaction with their experiences that theyre, having and we're not just seeing it into us we're seeing this play out.
Hopefully, we continue to invest behind our brands and.
Driving through the entirety of the crisis.
And and we've got a robust pipeline of innovation that includes some backlog from this year to launch in 2021 too.
We've done a lot of resilience and capacity in the supply chain and the.
Market frankly has taken all of it and we're still.
And we're still ramping up.
For more.
Just to beat the existing demand for consumption.
And as you noted we have store shelves to restock retailer inventory to replenish and a broad range of suspended skews to restart. So yeah, we think that there's going to be some moderation there going to be a couple of periods and areas, where there are tough comparisons, but we absolutely expect growth in our country.
From a segment next year for very good reasons I think also to highlight the fact that we're upping our spend and brand marketing in the fourth quarter. We're going to have this we've guided to mid single digits for the year, which would imply have a 12% to 18% increase in the fourth quarter because that that advertising will drive growth in the first and second quarter. So we're we're really.
Vesting behind the brand at this opportunity.
Very clear thank you and I believe we need to talk about flavor solutions has everybody.
No no yeah, no I think that I think we expect that to be up already thank you.
Our next question comes from the line of Alexia Howard with only his friendship to receive your questions.
Good morning, everyone I'd like to you this morning.
HM.
I know you mentioned promotional activity.
With reduced obviously because of the constraints on on supply over the last few months on the consumer side.
As you look footage are the retailers beginning Jack ups and outstanding back I know spices, and seasonings and generally that heavily promote you've done I'm just wondering if that dynamic, which we challenged patent leather that likely to all elevated spasms as housing challenges this year in each 2021 sure.
I will let you know all that Weve done first of all it's been done and cooperation and collaboration with our retailers I'm pretty much through the through much of the third quarter and into fourth our promotional plans are actually in place.
But what's.
What's different is that the product is on allocations in many cases and so the amount that retailers can take on the promotion is a is limited number one.
Then number two we had a shift in our timing of our of our holiday program. You know normally just because of the scale of the holiday program, we actually start deliveries.
In August two.
To get a displays up early on just kind of just advantage the surge.
And as part of managing overall demand we pushed that.
About half of that off into Q4 so.
So there's a timing difference there.
But.
I think that for the most part our our promotional plans are or are not complete those are those those comments are pretty specific to the U.S. and.
In the <unk> and Canada in the rest of the World where are we really.
We really havent been constrained by supply promotional plans have gone forward.
Normal at this point.
Great and as a follow up.
Did you manage to de lever a little over three times net debt to EBITDA.
How does that.
I just your thinking on acquisitions obvious.
Obviously, there's a lot going on your plate just operating incidents in Ireland, which in the past you've been particularly bullish on the IDR at doing that.
The deal 10, just wondering how which snacks.
That kind of opportunity looks right now and how actively you you might be consuming class a interest pot to debate.
So it had been our goal to de leverage to three times.
EBITDA by the end of non 2020, it looks like we're.
Certainly.
They are positive.
That's about right.
[laughter].
Our goals for our your acquisition strategy is unchanged, which is the acquisition support our growth strategies and so.
No. We're we've been signaling for a while that that we didn't feel that we actually had to literally get to report a 3.0 before we'll be back in the market and and and.
And so we would say that we are open for business and the acquisition Department.
Great. Thank you very much on profit on.
Our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.
Hi, Rob are you there.
Hi, Mr must come back can you hear me.
I'm, sorry about that yeah that.
Yeah that was that was me.
So it doesn't sound like that's my.
That's like that's like the cliche of our time right now [laughter] those units have too many yeah I agree with you, but Fortunately no dogs barking in the background [laughter].
My time I I didn't have it just kind of a broader question about your margin structure, you're you're making investments in capacity this year and that will dilute your margins in fourth quarter.
And then then you have this big ERP program.
Right that will will probably dilute margins next year just.
Just just big picture like would you say the investments are setting you up to two service.
It could become a bigger company to service.
Bigger demand.
And if so like when do you get back to a pattern of margin expansion and benefiting from all that that scale that you put out its kind of up and you know and I guess the second part is.
Do you get back then to your normal pattern of op margin expansion. That's in your long term algo.
And that's a great question, Rob and I'll start it now it's great Great point and as we went into this year. Obviously, when we had planned to 60 ish million dollar investment in ERP that was going to be.
Dilutive to our margins however, we need to.
Be become a bigger company increase our scale ERP program drives efficiencies across the organization and really allows us to grow faster and make acquisitions faster.
You know, it's hard to pin it down to one get one year investment and then to get back right away, but the over a three four year period, where we look at our constant currency sales growth in our margins and we see that really is our long term guidance one years, you're going to have some short term flux and downs on it you guys are saying levers we can pull.
Well two from an advertising perspective spending more or less CCRI is a tool we've used in the past and we eat into when we had investments to make so you're right I think in January you will see a better picture for next year, but the investments that we've made in supply chain. This year has really been extraordinary because of the extraordinary.
Circumstances.
Then on precedent.
Increase in demand.
Been sustained over time, but we have really got to work.
Almost throw money in order to pull through in order to meet and it and.
And that hasn't been done in the most efficient way to think that as we commented on the first question from Andrew.
I would expect that some of those costs.
Would would would come out.
Think about really this year people have already forgotten the first quarter, China was such a shock to us and everybody and your consumers there didnt get a chance to really buy so that wasn't large first quarter impact for us, which really hurt our margins.
Yeah, I mean, even in the flavor solutions business, we talked about continuing to mix up there with portfolio management. This year has been a little tough because each service frankly service, which is high margin has been hurt by this code that situation, whereas QSR as a recovering effects that has hurt us from a mix perspective, but we see that overtime recovering also.
Okay, and actually I do have a follow up question, you said that Europe had already expanded capacity sufficiently to to meet that 20 plus percent increase in demand, but the U.S. had not is there any reason that the capacity expanded in one region, but not the other Oh sure you know.
Over the last several years, we've been building our capacity and capabilities in Asia Pacific first and in the Europe second as a as an area of investment focus and and actually we just turn to the Americas. This year, we announced.
A big.
We estimate and highly automated does logistics center.
Earlier, this year, but for pre pre pre coated.
And so so some are investment cycle has turned to the current for the Americas, but.
It's not to say, we have ignored American leader in investments along the way, but also there's a saying Legion for us right now.
Virtually all of our plants in Asia that have.
Either new and renovated in in the last several years and we've made a number of big investments in expansion and an automation in the in the meeting we were just turning to the Americas, but even beyond that is it just the scale of the services that they didn't meet the U.S. business is so big.
That even the same percentage growth turns into.
This.
Massive amount of amount of volume.
Got it okay. Thank you.
Our next question is from the line of prescribing with Stifel. Please proceed with your question.
Hi, good morning.
Morning, Chris.
Hi, good morning.
The first question just to understand you talked earlier in the call about [noise] pushing off some new product launches and how those could benefit 2021, I think was the implication.
Is that a function of the retailers sort of acceptance of new products are you seeing that kind of picked back up and also just understand how the capacity lines up for some of those new products is are these largely third party producers than new production capacity able to produce those products. So we get a sense of how those will play out in 2021.
Very well as you know was the surgeon demand both.
Both we and the retailers really wanted to focus on and on.
Core items.
No.
For us it was a surplus supply and weve retailers still had the.
Challenge of bringing product and then just the logistics of the cool.
The increase in consumer shopping and theirs and their their total store. So so there was theres been much more of a focus on encore and the new items that we actually had launched early in the year got unprecedented trial, but the items that we had planned for the second half really have been deferred.
To into 2021 and add to that.
Add to that pipeline I don't think our experience in that area is much different than what others set out, but we also had a big shelf initiative.
Yes, we had a smile reinvention program that we unveiled in it.
Cagney and a plan to get into thousands of stores. We are we past.
Yes, we made that change in thousands of source, but nowhere near the to the magnitude that we expected and so that's also going to be a part of the program for us for next year on the flavor solution side of the business also our customers have tended to focus on their core items on that as well.
As well and so innovation in that area and is also been curtailed you know quick service restaurants, trying to manage demand and their drive through and take the takeaway model.
Focus more on non core items and are really only now getting back into the limited time offers and promotional offerings.
In the end or or or consumer food manufacturing customers are also just now ramping up their innovation programs. We have a lot of projects underway in an area that I think will be a benefit not segment next year, but but really as you go through the crisis. The focus has been on core items, both for us our customers.
Both on flavor solutions as retailers and some evidence of that you have a QSR is in APV in China, and Australia are recovering faster and more LCOS are coming out now as we've talked about this quarter and we'll see that continue hopefully into next year.
Okay. Thank you for that and I just one quick follow up if I could on the gross margin and I guess DMP.
I guess the implied gross margin for the fourth quarter. It doesn't indicate some less growth or even a bit of a decline in the fourth quarter based on performance year to date, our their residual cobot cost we have to keep in mind is that co Packers and also you have some costs around the new capacity or.
Those sort of the factors that play into the fourth quarter gross margin performance Oh definitely creates we talk to you at the last call you were talking about $30 million in a split between the second and third quarter now, we're saying 40 to 50 of which as you know we're in we're considering that the fourth quarter because of that unprecedented demand. So yes, we will.
Those costs are continuing into the fourth.
The biggest factor yeah, that's it really.
We're saying to you a little bit we've had some very favorable segment mix over the last couple of quarters, we're going to see a little bit less of that in the fourth quarter profit. The primary thing is the cobi cost as Martin said.
Okay that sounds great. Thanks for your time this morning.
Our next question is from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.
Hi, Thanks, Good morning, everyone 40 got going right.
I think this is first it turns into a little bit of the question on the shift on holiday sales into the into the fourth quarter in terms of the loading but can you just comment little bit on retailer.
Inventories and trade inventories in unique in the U.S. right now just given the surge in demand that we've seen just how do you. How do you think about that and how you think about that potentially being low and into next year. I think you only have to walk into a store to know that the cupboard is bare you know you know we have the first or second quarter view us demand was.
Through the scanner was up 55% in the in the second quarter. It was.
It was a 28% Uh huh our latest Nielsen.
Still hasn't burning up over 20 or latest IRI. So has it running up over 20% we that we have struggled to keep up with.
With that demand you've seen that we've reported lower numbers and that gap over a lot of that gap represents inventory reduction so I'd say that show.
Shelf stocks are our low Doc.
Bruce stocks are loaded nonexistent, there's there's a there's a lot to rebuild and as we go through the fourth quarter. You know we were ramping up capacity, but that's really meeting demand.
The real you rebuild of.
Shelf stock of retailers safety stock.
The inventories ended in the hole in the normal level of inventories of trade pipeline.
Rebuild is going to happen.