Q4 2020 McCormick & Company Inc Earnings Call
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Good morning, and this is Casey Bank and Vice President of of Mccormick Investor Relations. Thank you for joining today's fourth quarter earnings call to accompany this call. We posted a set of slides that IRR of that Mccormick Dot Com. Currently all participants are in a listen only mode. Following our remarks, we will begin the question and answer.
The recession, if you need to reach the operator at any time during the call. Please press star Zero and we'll begin with remarks from Lawrence Courteous, Chairman, President and CEO and Mike Smith Executive Vice President and CFO. During our remarks, we will refer to certain non-GAAP financial measures. These include information and constant currency as well as adjusted growth.
The margin adjusted operating income adjusted income tax rate adjusted earnings per share and adjusted leverage ratio that exclude the impact of special charges transaction and integration expenses related to the acquisition of true love and fairness.
And for 2019, the net non recurring benefit associated with the U S tax Act reconciliations to the GAAP results are included in this morning's press release and slides as a reminder, we completed a two for one stock split at the end of our fiscal 'twenty and 'twenty as a result, all per share amounts mentioned today, which for the will be.
Also included in our 10-K reflects the retroactive presentation of those amounts on a split adjusted basis.
And our comments certain percentages of rounded please refer to our presentation for complete information. In addition, as a reminder, today's presentation contains projections and other forward looking statements actual results could differ materially from those projected the company undertakes no obligation to update or revise publicly any forward looking.
And whether because of new information future events or other factors. It is important to note. These statements include expectations and assumptions, which will be shared related to the impacts of the COVID-19 pandemic and.
On slide two our forward looking statement also provides information on risk factors, including the impact of COVID-19, and that could affect our financial results. It is now my pleasure to turn the discussion over to Lawrence.
Thank you Tracy and good morning, everyone. Thanks for joining us.
Starting on slide for our fourth quarter results completed the year of strong financial performance. We delivered strong results for 2020, despite great disruption proving the strength of our business model the value of our products for capabilities of the company as well as the successful execution of our strategies and <unk>.
Credibly proud of the way and Mccormick has performed and this unprecedented operating environment.
We drove outstanding underlying operating performance, while protecting our employees and recognize their exceptional performance and important investments and our supply chain and brand building the fuel future growth and supporting our communities through the Threep efforts.
We're also excited about the recent acquisitions of Toledo and photo true.
Fantastic businesses that will continue to support differentiated growth and performance positioning Mccormick for success and 2021 and beyond.
The theme on slide five we of abroad, and advantaged global flavor portfolio, the compelling offerings for every retail and customer strategy across all channels.
The breadth and reach of our portfolio of across segments geographies and channels customers and product offerings for the.
Balanced and diversified portfolio to drive consistency and our performance during the volatile time.
The evidence for our fourth quarter and fiscal year results the.
Sustained shift of consumer behavior for cooking and eating more at home for at home consumption drove substantial increases and our consumer segment, the math as well as increases with our packaged food company customers and our flavor solutions segment.
On the other hand, we experienced declines in demand from our restaurants, and other foodservice customers and the away from home products and our portfolio the.
The impact of this shift to more at home consumption has vary by region due to differing levels of away from home consumption and each as well as the pace of each region's COVID-19 recovery.
Taken together these impacts continue to demonstrate the strength and diversity of our offer.
And we enter 2021 I'm confident our operating momentum will continue.
And our 2021 outlook, our continued underlying business momentum and the Tallulah and for the acquisitions are expected to drive robust sales adjusted operating income and earnings growth and for.
And our investments and business transformation.
This morning, I'll begin with our fourth quarter results reflect on our 2020 of achievements and then share with you some of our 2021 business momentum of the players.
After that I will turn it over to Mike who will go in more depth on the quarter and fiscal year results as well as the details of our 2021 guidance.
Turning to slide six starting with the fourth quarter results, which were in line with the guidance. We provided for sales adjusted operating profit and adjusted earnings per share on our last earnings call.
But our top line versus the year ago period, we grew total sales, 5%, including a 1% favorable impact from currency and.
The constant currency, we grew total sales, 4% with both segments contributing to the increase.
Adjusted operating income declined 4% as growth from higher sales and CCI led cost savings for more than offset by higher planned brand marketing investments COVID-19 related costs and higher employee benefit expenses.
Our fourth quarter adjusted earnings per share for 79 cents compared to 81 from the prior year driven primarily by lower adjusted operating income for the partial offset from lower interest expense.
Turning to our fourth quarter segment business performance, starting on slide seven and our consumer segment, we grew fourth quarter sales by 6% growth constant currency, 5% driven by consumers cooking and eating more at home.
Our Americas constant currency sales growth was 6% for the fourth quarter.
Our total Mccormick U S branded portfolio as indicated and our IRI consumption data grew 14%, which reflects the strength of our categories as consumers continue to cook more at home gym.
Similar to previous quarters, our sales increase was lower than the U S. IRI consumption growth, which was attributable the service level pressures and an increased level of pricing and scanner data.
As mentioned and our earnings call at the end of September we expected service level pressures from the fourth quarter due to the sustained increase in demand.
To protect our top selling holiday items, we had the suspend or curtailed production on some secondary product, which importantly drove our strong holiday execution.
And consistent with previous quarters scanner data includes higher pricing growth due to the channel shift with grocery outpacing mass merchandisers and club stores as well as some impact from lower promotional activity.
Focusing on the U S branded portfolio and spices, and seasonings and other key categories, excluding dry recipe mixes and we grew fourth quarter consumption at double digit rates and again increased our household penetration and repeat buy rates.
The fourth quarter dry recipe mixes consumption was impacted by supply constraints.
The double digit growth for the year as the spices and seasonings and the other key categories.
And the fourth quarter, we continued to gain share and categories less impacted by supply constraints, including hot sauces stocks and broth barbecue sauce, wet marinate and agent product.
The majority of our categories continued to outpace the total score and center of store growth rates favorably impacting the OLED. The Mccormick brand the smaller brands as well such as stubs borrowers simply Asia and Thai kitchen.
And then ecommerce we had triple digit pure play growth does Mccormick branded consumption outpacing all major categories.
While we do not expect consumption to continue at the highly elevated level of our fourth quarter. We do expect continued and long lasting growth from the increase of consumers cooking more at home. The most recent IRI scanner sales data for the five weeks ending January 17th So total Mccormick U S branded portfolio of <unk>.
<unk> is still growing at approximately 11, 5% with continued strength and spices and seasonings.
Consumers are continuing to come to our brands have a good experience and buy our products again.
And the fourth quarter, we increased our brand marketing investments and all regions as planned with the Americas messaging and promotional activities focused on the holiday proving to be successful and our high level of effective brand marketing investments and our initiatives to deepen our digital engagement with consumers.
Consumers.
We're capitalizing and the opportunity to build long term brand equity capture trial and increased usage by existing consumers and.
And with the manufacturing capacity, we have recently added we are well positioned moving into 2021, and we will continue to drive growth and strong brand marketing category management initiatives and new product innovation.
Now turning to EMEA, our constant currency sales rose, 10% from the fourth quarter with broad based growth across the region. Our largest markets continued to drive double digit total branded consumption growth with market share gains across the region and several categories.
Spices, and seasonings consumption was strong and all markets and our broth and paper and in France, again had strong consumption growth and outpace the homemade desserts category and the <unk>.
UK Frank's Red Hot drove the hot sauce category growth and gained share with over 50% consumption growth.
And EMEA, our household penetration and rate of repeat buyers increased significantly across our major brands and markets during the fourth quarter and the full year compared to last year and <unk>.
Accordingly for the full year, we gained total EMEA region market share and spices, and seasonings and dry recipe mixes.
And the Asia Pacific region, our constant currency sales declined 10% driven by softness of branded foodservice products, which are included in our consumer segment and this region.
The foodservice industry is continuing to recover but out of gradual pace growth in China was also impacted by a shift to a later Chinese new year and 2021 with the turn impacted shipments at the end of our year.
Excluding those impacts consumer consumption and the region was strong, particularly at Gourmet garden, and Frank's Red Hot and Australia.
Turning to slide eight our sales performance and flavor solutions returned to growth and the fourth quarter for the constant currency sales increase of 3% and all three regions contributed to the sales growth and.
And both of our Americas, and EMEA regions, we experienced increased demand from a consumer packaged food customers for our at home customer base the.
Of the strength and the base business as well as momentum with new products.
Also in both regions, we experienced demand declines and our away from home customer base for branded foodservice and restaurant customers.
Net impact of this demand volatility along with pricing actions to cover cost increases drove emea's fourth quarter constant currency sales growth of 5% and and the Americas, which is more skewed the branded foodservice growth of 2%.
And the Asia Pacific region, our constant currency sales grew 7% driven by Australia, and China growth with quick service restaurants for <unk> customers, but we continue to see momentum and limited time offers and the core business, partially driven by the customers' promotional activities.
Moving from our fourth quarter results I'm pleased to share our full fiscal year of accomplishments, which not only highlight what we've achieved during 2020 with fuel and confidence to drive another year of strong operating performance in 2021.
Starting with our 2020 financial results as seen on slide nine we drove 5% constant currency sales growth was 10% growth and our consumer segment led by consumers cooking and eating more at home.
Partially offsetting this growth was of 2% constant currency sales decline and the flavor solutions segment. The COVID-19 restrictions and most markets as well as consumer reluctance to dine out reduced demand from restaurants and other foodservice customers.
We achieved $113 million of annual cost savings driven by our CCI program, our fuel for growth and there continues to be a long runway and 2021 and beyond to deliver additional cost savings.
2020 for the ninth consecutive year of record cash flow from operations any of the year at over 1 billion of.
The 10% increase from last year, we're making great progress with our working capital improvements at.
And at year, and our board of Directors announced the 10% increase and the quarterly dividend sparkling our 30 <unk> consecutive year of dividend increases we have paid dividends every year since making 25 and are proud to be of dividend aristocrat.
Now I would like to comment on some of our 2020 achievements beyond our financial performance.
E Commerce growth accelerated significantly in 2020, which we were well prepared for from our past investments and investments we activated early of the year.
Our 2020 growth of 136% with outstanding with Triple digit growth and all categories, including pure play click and collect and our own direct to consumer properties.
We expect the consumer shift increased online shopping to continue and we are well positioned for the opportunities still ahead.
We continue to build long term brand equity for our brand marketing investments increasing of 7% and fiscal 2020.
Most recently with the double digit increase and the fourth quarter.
Across all regions, which will continue to drive strong growth momentum into 2021.
The design targeted media and messaging focused on cooking at home and connecting with consumers digitally more than ever in 2020.
And our digital leadership was again recognized as we were ranked as the number one food brand with the highest designation of genius by Gartner <unk> research and their digital IQ U S ranking the.
This is the seventh year in a row, we were ranked in the top five food and beverage brands.
We continue to be recognized for our efforts for doing what's right for people communities and the planet. During 2020, we were recognized for the fourth consecutive year as the diversity, Inc. Top 50 company and earlier this week corporate Knights, Frank Mccormick and their 2021 global 100, most sustainable.
<unk> index is number one and the food products industry for the fifth consecutive year as well as the number one U S company overall and globally number six overall.
Finally during the year, we continue to invest to expand our global infrastructure and the Americas, We broke ground on a new state of the art northeast distribution Center, and Maryland, which will optimize our distribution network.
And our EMEA region, we began construction on the new flavor solutions manufacturing facility and the U K to support the region strong and growing customer base.
And China, we are investing and flavor capabilities to further drive flavor solutions growth. These investments will create both capacity and capability, which will further drive our growth momentum.
Turning to 2021, Mike will go over our guidance and a few moments, but I'd like to comment on our recent acquisition of announcements and provide highlights related to our growth momentum and 2021 plants.
Starting on Slide 11, and addition to the accomplishments I just mentioned, we have reinforced our global flavor leadership and accelerated for condiment and flavors growth platforms through the <unk>.
And <unk> acquisitions of Tallulah and phone to.
The Lula and iconic brand and of high growth category as the leading Mexican hot sauce, and highly complements our existing hot sauce portfolio broadening our flavor offerings to consumers and foodservice operators.
Kona, a leading north American manufacturer of flavors and increases the scale of our global flavors platform with the addition of its highly complementary portfolio to our flavor solutions segment, expanding our breadth and accelerating our portfolio migration more value added and technically insulated products.
We're excited about the 2021 growth contributions, we expect from Tallulah and <unk>, which closed at the end of November and December respectively.
For both acquisitions, our transition and integration activities are progressing according to our plans and the alignment of our organizations and underway to deliver on opportunities quickly and to aggressively drive growth.
Yeah.
We have a proven playbook and unmatched expertise to effectively and efficiently unlock tallulah significant growth potential.
And our consumer segment, we will leverage our operational expertise and infrastructure to elevate the luminous brand presence and <unk>.
And the availability of its product and extend its product offerings into new flavors and formats and eating occasions to drive trial and household penetration.
Building, our enthusiasm is an outstanding momentum till the carried into 2021, continuing to outpace category growth with strong consumption.
And our flavor solutions segment, but our broad presence across all foodservice channels, we'll be focusing on strengthening to <unk> go to market model.
And there are opportunities to expansion of <unk> distribution and its existing foodservice channel as well as increased new restaurant penetration, which we are uniquely positioned to realize and drive growth.
<unk> reach across the customers combined with our culinary foundation of deep insights on menu trends expanse of the recipe inspiration and flavor solutions that we offer operators.
Turning to filter, which in addition to accelerating our portfolio migration will be the cornerstone for accelerating our Americas flavor platform.
By expanding our breadth and depth and developing flavor, while also combining our infrastructures and proprietary to scale and increase for manufacturing capacity and technical bench strength.
We are providing our customers with a more comprehensive product offerings, bolstering, our competitive position and creating more opportunities for growth.
With the addition of phone, we're advancing our health and wellness portfolio for expanding our research and development capabilities and technology platform with additional proprietary encapsulation methods for food.
The expertise and flavor and health and performance nutrition products across a variety of applications.
Our clean and natural platform for meaningfully enhanced with the addition of phone is predominantly natural portfolio as well as their expertise, particularly in citrus fruit flavors.
Combination of our technology platforms and capabilities will provide a long runway for growth, enabling us to remain at the forefront of flavor development and expand our ability to create better for you and consumer preferred flavor solutions across a diverse range of applications for our customers.
Our complementary customer bases of global and mid tier customers provides growth opportunities for our collective portfolios.
Bonus customer centric culture is very similar to ours and with the combined power of our organizations, we're well positioned to reach a broader customer base deepening existing customer relationships by cross selling and the cinemas inroads with new customers, while driving innovation customer response to the acquisition has been favorable as they recognize our combined power increase.
And as our customer value proposition.
We're confident we'll deliver on our acquisition plans. This confidence is bolstered by our proven track record of successfully integrating and increasing the performance of acquired businesses, such as our acquisition of Frank's and French's.
The acquisitions are a key part of our long term growth strategy and both Tallulah and phone add for a strong history of creating value through acquisitions.
And I would like to briefly comment on the conditions, we're seeing and our markets their potential impact and our 2021 organic growth plans starting on slide 14.
Global demand for flavor remains the foundation for our sales growth.
We are capitalizing on the growing consumer interest and healthy flavorful cooking trusted brands as well as digital engagement and purpose minded practices. These.
These long term trends have only accelerated during the pandemic.
The alignment with these consumer trends combined with the breadth and reach of our portfolio sustainably positions us for continued growth.
And these underlying trends current market conditions, and a robust 2021 plans position us well to successfully execute on our growth strategies and boat segments.
Starting with our consumer segment around the world. We continue to experience sustained elevated consumer demand, which is real incremental consumption and reflects the trend of consumers cooking more at home.
Across our <unk> region consumer demand continues to be strong and China consumer consumption remains strong and we continue to see recovery and foodservice, which and China is and our consumer segment as well as optimism about the Chinese new year holiday, which was significantly disrupted last year by the COVID-19 related lockdown.
And then Australia, either with restaurant restrictions eased and away from home demand increasing at home consumption has remained elevated and the.
EMEA and many of our largest markets have recently implemented more restrictive COVID-19 measures further fueling at home consumption and we are seeing sustained levels of demand and of course, we see the same and the Americas.
And tumors cooking more from scratch and adding flavor to the relocations as a key long term trend, which has accelerated during the pandemic.
And our proprietary consumer survey data supported by external research indicates consumers are during the cooking experience and field meals prepared at home are safer healthier better tasting and cost less.
And while there has been great advances in vaccine development and distribution and Theres, a significant amount of uncertainty regarding the pace of vaccination and the upcoming months.
We believe the consumer behavior and sentiment driving and increased and sustained preference for cooking at home will continue globally and will persist beyond the pandemic further driving consumer demand for our products fueled by robust marketing differentiated new products and our strong category management initiatives.
Our categories across the globe experienced the sustained elevated level of demand for most of 2020 because of this shift and consumer preference, which coupled with added employee safety measures that initially reduced manufacturing capacity depleted the finished goods inventory levels, both for us and our customers and challenged our operations.
The real pressure has been on our U S manufacturing operations, where the the latter part of 2020, we added significant capacity.
We ended the calendar year with considerable and incremental capacity through the expansion of our workforce scaling up partnerships with third party manufacturers and other measures in line with our previously share plant and December our Americas consumer production output was approximately 40% higher than last year.
Currently service levels are improving and restoration plans have begun on most of the secondary items, which were suspended in order to meet the significant demand for our top selling product. We've now resumed shipping approximately two thirds of the products, which had been suspended for the balance to be added over the next several weeks and.
We expect shelf conditions to improve considerably over the next few weeks for.
And we're continuing to work through a stabilization period and inventory replenishment will progress through the first half of the year.
Our category management initiatives are designed to drive growth for both of our both our customers and Mccormick and I'd like to thank our customers for their partnership and working together with US a long term solution.
We're confident we're well positioned for success in 2021 and have implemented the efficient long term solutions and strengthened our supply chain resiliency longer term to support continued growth.
Also in the U S of 2020, we began our initiative to reinvent the in store experience for spices, and seasonings consumers by introducing new merchandising elements to improve navigation and drive inspiration.
Our rollout will continue in 2021 and with increased cooking at home and expected to continue. This initiative is even more exciting to drive both category and Mccormick branded growth.
Turning to global brand marketing, we continue to increase of our investments across our entire portfolio, which have proven effective and achieved high ROI.
We will continue to connect with consumers online for in a real time insights into action by targeting messaging focused on providing information and inspiration for instance, with tips and tricks, new recipes and products keep their meals exciting and cooking easy.
We expect our brand marketing investments combined with our valuable brand equities and strong digital consumer engagement will continue to drive growth with existing consumers and the millions of consumers gain and 2020.
New products are also integral to our sales growth and 2027% of our total Mccormick sales were from products launched and the last three years.
And our consumer segment, new product innovation differentiates our brands and strengthens our relevance with consumers are.
Our 2020 launches provide significant momentum going forward with exceptional trial.
Overall, the sell in of our new product launches and big bet. The innovation from our flavor solutions customers slowed in 2020 due to the focus on keeping core items on a retail shelf moving.
Moving into 2021, and we're excited about the strong pipeline, both we and our flavor solutions customers are carrying into the year.
And our flavor solutions segment, we have a diverse customer base and have seen various stages of recovery.
And from a food and home perspective, our flavor solutions growth varies by packaged food customer, but overall as we mentioned last quarter. We have returned to pre COVID-19 growth rates for cash.
Carrying our growth momentum for packaged food customers into 'twenty, one driven by strength and their core iconic products as well as new products and bigger bets innovation and 2021.
And our away from home portion of this segment, our restaurants and other foodservice customers are still impacted by government imposed COVID-19 restrictions and most markets and <unk>.
Some areas of our restaurant customers, including quick service restaurants and <unk>.
Been faced with an increase and restrictions due to the case for surfaces. Although the impact has not been of significant as at the beginning of the crisis given many customers of adapted their operating model for delivery and Carryout.
The recovery of our branded foodservice customers continues to be slow and is also impacted by COVID-19 resurgence of.
Overall, there was significant disruption experienced in 2020 recovery has begun and we're expecting it to continue in 2021.
The <unk> customers are oriented less of the dine in their recovery will be at a faster pace than the rest of the rest of the restaurant and foodservice industry. We.
We had positive fundamentals in place to navigate through this period and are excited about the recovery of momentum.
We are advantaged by our differentiated customer engagement and flavor solutions and plan on driving further wins for both us and our customers and fiscal 2021.
With our customer intimacy approach, we will continue to drive new product wins and collaborate on opportunities and solutions managed through recovery clients and importantly, further strengthen our customer partnerships.
Additionally, the execution of our strategy and migrate our portfolio to more technically insulated and value added categories will continue in 2021 with topline opportunities gained from our investments to expand our flavor of scale, our momentum and flavor categories as well as the opportunities from a phone and acquisition, we expect to realize further <unk>.
<unk> from the strategy.
In summary, we continue the capture of the momentum we've gained and our consumer segment of positive fundamentals in place and navigate through the flavor solutions recovery and are excited about our tallulah and phone and acquisitions all of which bolster our confidence for continued growth for 2021.
We expect sales growth to vary by region and quarter and 2021, given 2000 twenty's level of demand volatility and the pace of COVID-19 recovery, but importantly, we expect we will drive overall organic sales growth and both of our segments.
Our fundamentals momentum and growth outlook are stronger than ever.
And our achievements in 2020, our effective strategies and a robust operating momentum reinforce our confidence and delivering another strong year of growth and performance and 2021.
Following an extraordinary year and 2020 or 2021 outlook reflects both our strong underlying base business performance and acquisitions driving significant sales growth as well as strong operating income growth, even considering extraordinary COVID-19 cost and our business transformation investments, which highlights our focus.
On the profit realization.
Our top tier long term growth objectives remain unchanged and we're positioned for continued success.
And importantly, Mccormick employees around the world drive of our momentum and success during 2020, our employees demonstrated and advance their skills, the agility and resiliency during a highly challenging time now I'd like to thank them for their dedicated efforts and engagement as well as adaptive for this new environment now.
Now Mike will share additional remarks on our 2020 financial results and 2021 guidance.
Thanks, Lawrence and good morning, everyone I will now provide some additional comments on our fourth quarter performance and full year results as well as detail on our 2021 outlook.
Starting on slide 19 during the fourth quarter sales rose, 4% and constant currency sales growth was driven by higher volume and mix and our consumer segment with volume and mix and our flavor solutions segment comparable to last year.
Pricing to partially offset cost inflation.
So contributed favorably to both segments.
The consumer segment sales grew 5% and constant currency led by the Americas and EMEA regions.
The sustained shift to at home consumption and cooking more at home as well as consumers, adding flavor at home to the restaurant Carryout and delivery meals continues to drive increased demand for our consumer products.
<unk> and higher volume and mix and these regions.
On slide 20, consumer segment sales and the Americas increased 6% and constant currency versus the fourth quarter of 2019, driven by higher volume and product mix across many brands, including simply Asia Thai kitchen, Thanks for AD hoc trenches Lowry Zatarain's Gourmet garden and Stubbs to name a few.
Partially offsetting these increases were volume declines and Mccormick branded spices, and seasonings and recipe mixes as well as private label products due to capacity constraints.
And the EMEA constant currency consumer sales grew 10% from a year ago.