Q3 2021 McCormick & Company Inc Earnings Call
[music].
Good morning. This is Kasey Jenkins Vice President of Mccormick Investor Relations. Thank you for joining today's third quarter earnings call to accompany this call posted to satisfy at IR Dot Mccormick Dot Com, we'll begin with remarks from Lawrence Kersey Chairman President.
Our CEO and Mike Smith, Executive Vice President and CFO, and we will close with a question and answer session. During this call we will refer to certain non-GAAP financial measures. The nature of those non-GAAP financial measures and the related reconciliation to the GAAP results are included in this morning's press release and spot.
In our comments certain percentages are 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 statements, whether because of new information future events or other factors. Please refer to our forward looking statements on slide two for more information I will now turn the discussion over to Lawrence.
Thank you Casey good morning, everyone. Thanks for joining us.
Our third quarter performance demonstrates again that the combination of our balanced portfolio.
Most of the execution of our strategy is to capitalize on accelerating consumer trends and strong engagement with our employees have positioned us well to drive differentiated growth.
Marketplace, we delivered an 8% sales increase versus last year.
18% versus 2019.
Our third quarter results reflect a robust and sustained growth momentum as we delivered organic sales growth on top of our exceptional third quarter performance last year.
Our third quarter results also includes strong contributions for Tallulah in Florida.
Sales growth.
Flavor solutions segment was broad based with the at home products in our portfolio flavors and seasonings growing at approximately the same rate as our away from home products, which was primarily driven by a robust recovery from last year as lower demand from our restaurants and other foodservice customers attributable to COVID-19 restrictions and consumers.
The dine out.
Our consumer segment results reflect the lapping of the year ago elevated demand and the lockdown dates of the pandemic from consumers eating and cooking more at home as well as the sustained shift to consumer at home consumption higher than pre pandemic levels.
Taken together these results continued to demonstrate strength and diversity of our offerings.
Breadth and reach of our portfolio with compelling offerings for every retail and customer strategy across all channels.
It's a balanced and diversified portfolio that enables us to drive consistency in our performance even in a volatile environment.
Turning to slide five total third quarter sales grew 8% from the year ago period or 5% in constant currency.
Constant currency sales growth in our flavor solutions segment more than offset slight constant currency sales decline in our consumer segment driven by the factors I just mentioned.
Adjusted operating income was comparable to the third quarter of last year, including a 3% favorable impact from currency the benefit of higher sales was more than offset by higher cost inflation and industry wide logistics challenges as well as by a shift in sales between segments.
The bottom line, our third quarter adjusted earnings per share was <unk> 80, compared to <unk> 76.
Year ago period, driven by higher sales at a lower tax rate, partially offset by cost pressures.
As we've stated previously we expect growth to vary by quarter in 2021.
Importantly, we have delivered outstanding year to date performance sales and adjusted operating income are up 13% and 9% year over year, respectively. Both of which include a 3% favorable impact from currency and we've grown adjusted earnings per share 8%.
Year to date versus 2019, we've driven sales adjusted operating income and adjusted earnings per share growth of nearly 20% across all three metrics.
I'd like to say a few words about the current cost environments impact on our third quarter results as well as our outlook, which Mike will cover in more detail.
We stated in our July earnings call. We are operating in a dynamic cost environment like the rest of the industry experiencing cost pressures.
We're seeing broad based inflation across our raw and packaging materials as well as transportation costs.
Partially offset rising costs, we have raised prices where appropriate but as usual there is a time lag associated with pricing, particularly with how quickly costs are escalating and therefore the season of most of our actions that's taking place during the fourth quarter. Those pricing actions are on track and we appreciate our customers working with us to navigate this environment.
In the last few months inflation has continued to ratchet up mainly with packaging and transportation costs.
Experiencing the highest inflationary period of the last decade or even two.
We along with our peers and customers are also facing additional pressure on our supply chain due to strained transportation capacity and labor shortages distributions.
These pressures not holding <unk> costs, but also negatively impact sales as the addition of further supply chain complexity makes it harder to get order ship and received for customers and this pressure is amplified by continued elevated demand.
Overall, we have a demonstrated history of managing through inflationary period for the combination of pricing and cost savings and we expect to manage through this period as we have in the past.
Now, let's turn to our third quarter segment business performance, which includes comparisons to 2019 pre pandemic levels. As we believe these will be more meaningful than the comparisons to 2020, given the dramatic shifts in consumer consumption between at home and away from home experienced in the year ago period.
Starting on slide seven consumer segment sales grew 1%, including a 2% favorable impact from currency and incremental sales from our <unk> acquisition compared to the highly elevated demand levels of a year ago period, our consumer segment organic sales momentum on a two year basis was up double digits highlighting.
The sustained shift in consumer consumption continues to drive increased demand for our product it outpaces pre debt pre pandemic level.
Our Americas constant currency sales declined 1% in the first quarter with incremental sales from our Tallulah acquisition contributing 3% growth.
Our total Mccormick U S branded portfolio consumption as indicated in our IRI consumption data and combined with unmeasured channels declined 10% following a 31% consumption increase in the third quarter of 2020, which results in a 19% increase on a two year basis.
It has remained high and we are realizing the benefit of our U S manufacturing capacity expansion, although some products remains stressed by sustained high demand <unk>.
Self conditions are improving and we're seeing sequential improvement in our share performance.
That said as I mentioned moments ago, the current issues related to logistics pressures continued to make it challenging for market leader like Mccormack to keep high demand products in stock, which has prevented us from making further progress in replenishing, both retailer and consumer inventory in the third quarter.
Importantly, though we are better positioned than we were last year entering the holiday season and are confident in our holiday merchandising plans.
Focusing further on our U S branded portfolio are 19% consumption growth versus the third quarter of 2019 was led by double digit growth in spices, and seasonings Hot sauces book to Lula and frame Red Hot and barbecue sauce, as well as our Asian that frozen product and pure play E Commerce.
We delivered triple digit growth compared to 2019 with Mccormick branded consumption outpacing all major category.
This is the sixth consecutive quarter, our U S branded portfolio consumption grew double digits versus the same period, two years ago, which reflects the continuation of consumers cooking and using flavor more at home and the strength of our brands.
Our key categories continue to outpace the center of store growth rates versus the same period of two years ago favorably impacting not only the Mccormick brand, but our smaller brands as well.
Household penetration and repeat rates are also growing versus 2019, and when our consumers shop. They are buying more of our products than they were pre pandemic.
Mccormick continues to win in hot sauce across our brands and the corporate growth to be the number one source manufacturer globally earlier this year in the third quarter Frank's Red Hot the number one brand in the U S was joined at the top of the category, but Tallulah, which we have driven to the number two ranking.
Now turning to EMEA, which has continued its outstanding momentum we had strong market share performance in the third quarter versus last year, maintaining or gaining share across the region and key category. Following a strong gains in the third quarter of last year.
Compared to the third quarter of 2019, our total EMEA region we.
We drove double digit consumption growth in herbs, spices, and seasonings and turning up the heat Frank's Red Hot has grown consumption, 75% and is gaining significant share versus the two year ago period.
Across the region, our household penetration and repeat rates are also growing versus the two year ago period.
Our year to date higher brand marketing investments and EMEA are proving to be effective as evidenced by the metrics I just discussed as well as our achieving above benchmark rates for reach engagement and click through for instance in our digital marketing.
In the Asia Pacific Region third quarter sales were strong, reflecting our continued recovery from China's lower branded foodservice sales last year, our consumer product demand in the region declined due to lapping significant growth last year. The region has also experienced supply chain challenges with ocean freight capacity constraints impacting the quarter's growth.
In Australia, we continue to see strong consumption growth versus 2019 with key brands recently trending back towards 2020 levels with Frank's Red Hot already higher than last year's elevated consumption.
Across all regions in our consumer segment, we are continuing to fuel our growth with our strong brand marketing new product launches and our category management initiatives.
We're making brand marketing investments across our portfolio to connect with our consumers, particularly online.
Early in the third quarter in the Americas, We began our search for the first director of Taco Relations. This was a dream opportunity for the over 5000 applicants who showcase their taco expertise and enthusiasm for our products and their video application.
We have garnered over 1 billion earned impressions related to our search and these will continue to grow upon the announcement of our new director of Taco Relations next week on October 4th in celebration of National Taco Day.
We are not only creating buzz through our digital marketing, but also with our e-commerce direct to consumer new product launches and.
In the Americas, we grew up new passionate users to our brands and digital properties with the launch of Sunshine, All purpose seasoning and new products developed in partnership with social media Influencer Tabitha Brown inspired by her joyful personality and health and wellness focused recipes to solve three and gluten free Caribbean inspired blend.
Sold out in just 39 minutes generating record sales from E Commerce, driven innovation and over $700 million earned impressions.
Our new product launches differentiate our brands and strengthen our relevance with consumers.
With our global leadership position in Hot sauce, we are in the perfect position to capitalize on consumers' rising demand for Hopkins spicy flavors through a global Heath platform or.
Our recent launches of French Red Hot frozen appetizers, and so little wings sauces in the Americas as well as Frank's Red Hot Kraft flavors in EMEA.
Made strong contributions to growth in the third quarter.
Just in time for Halloween EMEA is introducing dead heart gift sets for E Commerce, featuring Frank's Red Hot and in China, Our recently launched ready to eat chili pace as the highest 30 day repeat rate of all Mccormick direct to consumer products on Tmall.
Turning to category management, our initiatives are designed to strengthen our category leadership by driving growth for both Mccormick and retailers.
These initiatives include simply changing shelf placement for instance, increasing tallulah velocity over 30% of changing its aisle placement at a large retailer to reinvesting the spice and seasoning all shopping experience.
We're anticipating a cumulative implementation of our <unk> program since it began in 2020 at 10000 stores by year end.
Versus 2019 to remove year over year noise sales through the beginning of August show retailers that have adopted despite all changes are growing the category faster than those who have not and mccormick branded spices and seasoning portfolio is growing solid mid single digit faster and implement at stores versus stores, which.
Not adopted the changes.
And in Eastern Europe, the rollout of our first choice bottle, which is perceived as premium and what was predominantly a sachet only market.
Elevating the spices and seasoning category driving increased share in our eastern European market.
Moving forward, we are confident that we will continue the momentum of our consumer segment, we have more consumers than pre pandemic. They have come into our brands are having a good experience and are buying our products again.
Excited about our growth trajectory and expect long lasting growth from the sustained shift to consumers cooking more at home fueled by our brand marketing new product and category management initiatives.
Turning to slide nine our flavor solutions segment grew 21% or 17% in constant currency, reflecting both strong base business growth and contributions from our phone and Tallulah acquisition.
Our third quarter results include the robust recovery from last year's lower demand from our restaurants and other foodservice customers many of which are lapping the curtailment appropriate away from home dining as well as strong continued momentum with our <unk>.
Packaged food and beverage customers, notably growth was driven equally from both the at home and the away from home products in our portfolio on a two year basis. Our sales also increased double digits with strong growth in all three regions.
In the Americas are bona and Tallulah acquisitions made a strong contribution towards significant third quarter growth and we're executing on our strategy to shift our portfolio to more value added and technically insulated product.
We continue to see outstanding growth momentum with our consumer packaged food customers through new products and base business strength.
Consumers rising global demand for hot and spicy flavors is driving growth for both our customers sent six and four seasons that flavor them.
Compared to last year's third quarter snack seasonings grew high single digits with strong growth in core iconic products as well as new products and the innovation pipeline continues to be robust.
Our confidence that photo will accelerate our global flavors platform continues to be reinforced by their excellent performance with double digit sales growth compared to last year beverages are driving significant growth with particular strength in the fast growing performance nutrition category.
And finally in the Americas branded foodservice contributed significant growth to the quarter as our demand for this channel has continued to strengthen as more dining options reopened.
In EMEA, we had strong growth versus both last year and 2019 across all markets and channels quick service restaurants, or <unk> are driving growth through increased promotional activity and limited time offers are branded foodservice sales with easing restrictions in the hospitality industry.
<unk> increased at a double digit rate versus the third quarter of last year and as packaged food and beverage companies. Our performance was strong on top of last year's strong growth, but the hot and spicy trend fueling growth in snack seasonings, particularly through new product innovation.
Our sales growth in the Asia Pacific region was partially impacted by the timing of our <unk> customers strong limited time offers and their promotional activities in the third quarter of last year, which increased restaurant traffic as COVID-19 restrictions lifted.
As we've said in the past limited time offers and promotional activity and caused some sales volatility from quarter to quarter.
We recognized a part of our third quarter flavor solutions results were due to the comparison to low away from home demand last year, notably our growth also includes strong contributions from pharma and tallulah robust growth with packaged food and beverage customers both of the base business and the new product wins driven by our differentiated.
Customer engagement and continuing momentum with the <unk> year.
Year to date versus 2019, we've delivered 13% constant currency growth, including <unk>, and <unk> and 6% constant currency organic growth. These.
These results combined with our effective growth strategies bolster our confidence in the continuation of our robust growth trajectory in our flavor solutions segment.
Now on slide 10, I am excited to share. Some important purpose led performance news just a few days ago, we renamed as our global compact lead company by the United Nations for our ongoing commitment to the UN global compact and its 10 principles for responsible business we.
We are honored by this recognition for our commitment to sustainability and to be one of only 37 companies in the world and the only U S based food producer to be included on this prestigious list.
Sustainable sourcing is a top priority and we've been actively working on initiatives such as our sustainability linked financing partnership with IFC and city, which provides our urban spice suppliers in Indonesia, and Vietnam with financial incentives linked to improvements in measures of social and environmental sustainability.
As well as our partnership with T for international on the launch of the car to Forestry project, which aims to increase small holder farmers resilience and improve the quality of cardamom and all sites in Guatemala.
In addition, Latina style, Inc. Recently named US as one of the top 50 best companies for Lumpiness to work in the U S.
We are thrilled to be recognized for our continued efforts around diversity and inclusion.
We're committed to the long term vitality of the people communities and the planet, we share and are proud of our impact in these areas. We look forward to sharing more about these accomplishments as well as many others with you through our purpose led performance report, which will be issued early next year.
Before turning it over to Mike I'd like to make some qualitative comments regarding 2022 to be clear we are not providing 2022 guidance at this time.
We are a growth company and we expect to grow in both of our segments next year at the foundation of our sales growth is the rising consumer demand for flavor fueled by the younger generations. We are intentionally focused on great categories that are growing and generating a long term tailwind for capitalizing on the long term consumer trend.
That accelerated during the pandemic and we're successfully executing on our strategies and initiatives.
In this dynamic and fast paced environment, we are ensuring that we remain focused on long term sustainable growth.
<unk> cost pressures have rapidly accelerated and we're preparing for them to remain in 2022, we plan to mitigate these costs, which we expect to fully offset over time through a combination of CCI led cost savings revenue management initiatives and pricing actions as needed. In addition, we're taking prudent steps to reduce disk.
Freshener spend where possible. We also expect the impact of COVID-19 to persist into 2022, which will create continued broad based supply chain challenges.
We successfully demonstrated in the past our ability to manage through inflationary environment and cost pressures.
Importantly, our strong growth trajectory supports our confidence in our long term financial algorithm to drive continuous value creation through topline growth and margin expansion. We have a strong foundation and remain focused on the long term goals strategies and values that have made us so successful.
Around the World Mccormick employees drive our momentum and success and I. Thank them for their hard work engagement and dedication, particularly in such a volatile environment and now I'll turn it over to Mike.
Thanks, and good morning, everyone for the reasons Lawrence mentioned my comments will also include comparisons to 2019.
Starting on slide 13, our topline growth continues to be strong.
Constant currency sales, 5% during the third quarter compared to last year with incremental sales from our Lula and <unk> acquisitions contributing 4% across both segments.
<unk> and mix drove our organic sales increase with flavor solutions growth offsetting a decline in the consumer segment.
Versus the third quarter of 2019, we grew sales 15% in constant currency with both segments growing double digits.
During the third quarter, our consumer segment continued to lap last year's exceptionally high demand.
Versus 2020, our third quarter consumer segment sales declined 1% in constant currency, which includes a 3% increase from the <unk> acquisition.
Third to the third quarter of 2019 consumer segment sales grew 14% in constant currency.
On slide 14 consumer segment sales in the Americas declined 1% in constant currency lapping elevated locked down demand in the year ago period as well as the logistics challenges Lawrence mentioned earlier, Inc.
Incremental sales from the <unk> acquisition contributed 3% growth.
Compared to the third quarter of 2019 sales increased 17% in constant currency led by significant growth in the Mccormick Lowry Grill mates obey Frank's brand Hot Tallulah, Zatarain's Gourmet Garden, simply Asia, stubs and whirlpool branded products.
A lot of brands, partially offset by a decline in private label.
In EMEA constant currency consumer sales declined 11% from a year ago.
Also due to lapping the high demand across the region last year.
Notably this decline includes strong growth in our eastern European market on top of their significant volume growth last year, which was more than offset by declines in the regions other markets.
On a two year basis sales increased 10% in constant currency driven by strong growth in our canvas Schwartz with Frank's brand hot branded products.
Consumer sales in the Asia Pacific region increased 11% in constant currency due to the recovery of branded foodservice sales with a partial offset from the decline in consumer demand as compared to the elevated levels in the year ago period.
Sales increased 4% compared to the third quarter of 2019, including a sales decline in India, resulting from a slower COVID-19 recovery.
Turning to our flavor solutions segment, and slide 17, we grew third quarter constant currency sales, 17%, including an 8% increase from our <unk> and <unk> acquisitions.
The year over year increase led by the Americas and EMEA regions was due to strong growth with both packaged food and beverage customers and in away from home products.
Compared to the third quarter of 2019 flavor solutions segment sales grew 16% in constant currency.
In the Americas flavor solutions constant currency sales grew 19% year over year with Kona and she will look contributing 12%.
Volume and product mix increased driven by significantly higher sales through branded foodservice customers together with growth to packaged food and beverage companies with strength in snack seasonings.
On a two year basis sales increased 15% in constant currency versus 2019 with higher sales from acquisitions and packaged food and beverage companies, partially offset by the exit of some lower margin business.
In EMEA constant currency sales grew 19% compared to last year due to increased sales to <unk> and branded foodservice customers.
As well as continued growth momentum with packaged food and beverage companies.
Constant currency sales increased 23% versus the third quarter of 2019, driven by strong sales growth with packaged food and beverage companies and <unk> customers.
In the Asia Pacific region flavor solutions sales rose, 1% in constant currency versus last year and increased 8% in constant currency versus the third quarter of 2019.
This is driven by <unk> growth and partially impacted by the timing of our customers' limited time offers and promotional activities.
As seen on slide 21, adjusted operating income, which excludes transaction and integration costs related to the Tula and <unk> acquisitions as well as special charges was comparable to the third quarter of last year, including.
Including a 3% favorable impact from currency.
Adjusted operating income in the consumer segment declined 10% to $188 million were in constant currency, 12% driven.
Driven by the cost pressures from inflation and logistics challenges, partially offset by CCI led cost savings.
These logistics challenges not only impacted cost, but also negatively impacted sales.
In the flavor solutions segment, adjusted operating income rose, 32% to $84 million or 27% in constant currency.
Higher sales CCI led cost savings and favorable product mix as we continue to migrate our portfolio.
More than offset the cost pressures in this segment.
Across both segments incremental investment spending for our ERP program was offset by lower COVID-19 cost compared to last year.
During the quarter, we invested in brand marketing ahead of last year, and notably we have increased our investments and 11% on a year to date basis.
As seen on slide 22, adjusted gross profit margin declined 260 basis points, driven primarily by the cost pressures, we are experiencing and the lag in pricing.
Our selling general and administrative expense as a percentage of sales declined 110 basis points driven by leverage from sales growth.
These impacts netted to an adjusted operating margin decline of 150 basis points in.
In addition to the factors I've mentioned, a few moments ago and sales shift between segments unfavorably impacted both gross and operating margins.
Turning to income taxes, our third quarter adjusted effective tax rate was 14, 1% compared to 19, 3% in the year ago period.
Both periods were favorably impacted by discrete tax items with a larger impact this year due to the favorable impact of the reversal of a tax accrual.
Adjusted income from unconsolidated operations declined 5% versus the third quarter of 2020.
Based on our year to date results. We now expect a mid single digit increase in our adjusted income from unconsolidated data operations for 2021.
Up from our previous projections of a low single digit decrease.
This improvement is driven by strong performance from our Mccormick to Mexico joint venture.
At the bottom line as shown on slide 25 third quarter 2021 adjusted earnings per share was <unk> 80.
Compared to 76 for the year ago period.
The increase was primarily driven by lower adjusted income tax rate.
As compared to the third quarter of 2019, our 10% increase in adjusted earnings per share was primarily driven by sales growth.
On.
Slide 26, we summarized highlights for cash flow and the quarter end balance sheet.
Through the third quarter of 2021, our cash flow from operations was $373 million, which is lower than the same period last year.
The decrease was primarily due to the payment of transaction and integration costs and higher use of cash associated with working capital.
This includes the impact of planned higher inventory levels to support significantly increased demand and to mitigate supply and service issues as well as buffer against cost volatility.
During the third quarter, we've returned $272 million of this cash to our shareholders through dividends and used $190 million for capital expenditures.
Our priority is to continue to have a balanced use of cash funding investments to drive growth.
Turning to a significant portion to our shareholders through dividends and paying down debt.
Now turning to our 2021 financial outlook on slides 55.
With our broad and advantaged flavor portfolio, a robust operating momentum effective growth strategies, we are well positioned for another year of differentiated growth and underlying performance Tim.
Tempered by the higher inflation ahead of pricing and the logistics challenges, we previously mentioned.
For 2021, we're projecting top line and earnings growth from our strong base business and acquisition contribution.
Earnings growth, partially offset by incremental COVID-19 costs and ERP investment.
As well as a higher projected adjusted effective tax rate.
We continue to expect an estimated three percentage point favorable impact of currency rates on sales.
And for the adjusted operating income and adjusted earnings per share a two percentage point favorable impact of currency rates.
At the top line due to our strong year to date results and robust operating momentum.
We now expect to grow constant currency sales, 9% to 10%.
Which is the high end of our previous projection of 8% to 10% in.
It includes a 4% incremental impact from the cholula infill acquisitions.
We had initially projected and incremental acquisition impact in the range of three 5% to 4%.
We anticipate our organic growth will be led by higher volume and product mix driven by our category management brand marketing and new products as well as pricing.
We are now projecting our 2021 adjusted gross profit margin to be 150 to 170 basis points lower in 2020 due to the increasing cost pressures I mentioned earlier.
While we continue to expect a mid single digit increase in inflation for the year. It has moved higher and is now approaching a double digit increase in the fourth quarter.
Overall, our projected adjusted gross margin compression reflects unfavorable impacts from sales mix between segments cost inflation and COVID-19 costs.
Partially offset by pricing and margin accretion from the <unk> acquisitions.
As a reminder, we price to offset cost increases we do not margin up.
Our estimate for COVID-19 cost remains unchanged at $60 million in 2021 versus $50 million in 2020 and is weighted to the first half of the year.
Reflecting the change in gross profit margin outlook, we are lowering our expected constant currency adjusted operating income growth.
Our adjusted operating income growth rate reflects expected strong underlying performance from our base business and acquisitions projected to be 8% to 10% constant currency growth.
This includes the higher inflation ahead of pricing and logistics challenges and partially offset by a 1% reduction from increased COVID-19 costs compared to 2020, and a 3% reduction from the estimated incremental ERP investment.
This results in a total projected adjusted operating income growth rate of 4% to 6% in constant currency.
This projection includes the mid single digit inflationary pressure as well as our CCI led cost savings target of approximately $110 million.
It also includes an expected low single digit increase in brand marketing investments.
Considering the year to date impact from discrete items, we now project. Our 2021 adjusted effective income tax rate to be approximately 21% as compared to our previous projection of 23%.
This outlook versus our 2020 adjusted effective tax rate is expected to be a headwind to our 2021 adjusted earnings per share growth of approximately 1%.
We are lowering our 2021 adjusted earnings per share expectations to 5% to 7% growth.
Which includes the favorable impact from currency.
This reflects our lower adjusted operating profit outlook and lower adjusted income tax rate as well as the higher adjusted income from unconsolidated operations.
Our guidance range for adjusted earnings per share in 2021 is now $99.0 to $3 two.
This compares to $85.0 of adjusted earnings per share in 2020, and represents 8% to 10% growth in constant currency from a strong base business and acquisition performance, partially offset by the impacts related to COVID-19 costs are incremental ERP investment and the tax headwind.
I'll now turn it back tomorrow.
Now that Mike has shared our financial results and outlook in more detail I would like to recap the key takeaways as seen on slide 29.
Our third quarter results reflect a robust and sustained growth momentum as we drove strong sales growth. Despite the challenging year over year comparison here.
Year to date versus 2019, we've driven significant double digit growth rates for sales adjusted operating profit and earnings per share.
We have a strong foundation and a balanced portfolio, which drives consistency in our performance, we expect higher at home consumption will persist beyond the pandemic and are continuing the momentum we're gaining in away from home consumption. We're confident the growth momentum of our business is sustainable.
As a reminder, mccormick has grown and compounded that growth successfully over the years, regardless of short term pressures.
Our strong growth trajectory supports our confidence in our long term growth algorithm to drive continuous value creation through topline growth and margin expansion, we're driving Mccormick for building value for our shareholders now lets turn to your questions.
Thank you.
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Thank you.
Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your questions. Good morning, everybody.
Hi, Andrew Andrew.
Maybe to start out.
In a recent conference and then again this morning, you've alluded to cost and supply chain disruptions likely continuing into fiscal 'twenty. Two others have made very similar sort of comments of course, you'll have more pricing kicking in and among other actions to mitigate some of the challenges I think you also had mentioned that ERP costs could be offset by Covid expenses.
Down so I guess things remain very fluid of course, and youre, not obviously, giving specific 'twenty two guidance as of yet, but I'm trying to get a sense of whether an.
An algorithm year, particularly on the profit side would be too much to ask in fiscal 'twenty. Two at this stage all things considered particularly given what I assume will be continued margin pressure at least through the first half of next year.
First of all Andrew Thanks for the opportunity to talk about.
<unk>.
High level question right out of the right out of the gate in your question you did a couple of points that I would absolutely make to answer it.
Beginning with the just to be clear I'm not going to give guidance for next year.
There are a lot of moving parts things are are fluid we are right in the middle of putting together our budgets for next year right now.
We said in the call are long.
We're very confident about our algorithm over the long term.
I'm, just not ready to talk about it.
2022, specifically just yet but in the end.
The prepared remarks, I did say, we expect growth in both segments until <unk>.
Start there and then I'll bring it back to profit.
Mccormick is unique and that we have been differentiated by strong growth.
Underlying trends that support our business includes the demographic tailwind from younger consumers that has nothing to do with the pandemic and then many of the consumption trends, we believe for reinforced and accelerated by the pandemic. So we believe that going into the pandemic our growth was differentiated already.
Through it it's been differentiated and coming out.
<unk> to be differentiated that rebate investments, including during the time of the pandemic, both organic and through smart acquisitions that put our portfolio more and more into high growth categories like hot sauce.
Flavor and on top of this quarter and.
Half the top line benefit of pricing in 2022.
<unk> and strong growth going forward for.
Our operating profit.
There are a lot of puts and takes over the last.
Few years, we've had rising ERP investment over the last two weeks at the shock of extraordinary COVID-19 costs.
And right now we as everyone else not just in our industry, but across business in general are wrestling with decades high inflation.
And.
That's an area, where we're not unique to the first two of these.
Rising ERP investment versus Covid costs.
Should largely offset in 2022 and I think just given the magnitude of the cost as we've described previously.
Everyone should have.
And expectation around those largely offsetting.
And versus the cost pricing is going to kick in pricing has lagged.
Pricing.
In the U S largely going into effect.
In the fourth quarter in particular.
So I.
I would expect that we would see uhm.
You should expect to see the benefits from that discipline of topline, but running through the P&L, but are under the math says that margins compressed when we take pricing our approach is to take <unk>.
Racing.
Pass through costs until.
That both the numerator and denominator.
Go up and so the fraction gets a little bit smaller.
So while we do expect that person to come in it would be reasonable to expect some level of margin compression.
Nonetheless.
With the pricing action and other steps, we'll take to offset cost.
The topline growth that we expect.
Think it's very reasonable to expect solid operating profit growth next year I'm not ready yet to say if it's exactly on algorithm.
Alright, I appreciate that color. That's helpful. And then one very quick follow up and maybe tough to parse out in the quarter, though.
Are you able to sort of break out what impact some of the supply constraints may have had on overall sort of company organic growth I think organic growth was up about 1% I don't know if some of the supply constraints were significant enough that it would.
Meaningfully change what organic growth looked like in the quarter.
It actually did have an impact on the fourth quarter I think.
Sorry.
Fourth I misspoke there.
Third quarter.
And we haven't quantified that.
And I'm not prepared to but but but it was material.
Cereal.
We normally would not have a backlog.
At all.
And to have the idea of having a having a backlog of orders is unprecedented we have.
Backlog bets measurable date and so it did have it definitely had an impact.
It would have been our hope to actually continue to rebuild trade inventories as we went through.
The third quarter.
Which has not yet been fully.
Fully recovered and we were not able to do so we really wanted to wanted and planned to ship more of these logistics challenges.
Are are very realistic.
Just from a very attractive from a very strategic discussion just now to a very tactical one but.
But just simply getting the product out there has been.
The challenge in the face of that but it's still very high demand at the same time that we're having these logistical challenges I would say that the.
Trade channels are still a bit starved for inventory.
You noticed we did narrow our range on sales to the high end of the range. So we have very strong confidence in the fourth quarter.
Thanks, so much.
Thank you.
Our next question is from the line of Ken Goldman with Jpmorgan. Please proceed with your question.
Hi, Thank you.
Just on pricing are there any geographies or categories or brands, where maybe getting the pricing you hoped for has been a little more challenging than in others and I guess I'm curious where are you in your I guess journey, so to speak of taking incremental pricing to offset some of the newer or more severe headwinds you're facing.
I am trying to figure out if youre still having conversations with customers do you feel most of the heavy lifting is done there for maybe some of the second round.
That'd be helpful. Thank you.
Well first of all I won't say that there is a particular problem. There these days.
Yes.
Actions always have some degree of commercial tension in them and so I don't want to get too specific there.
Sure.
It's not so much that there are ongoing conversations with customers I think that there are some new customer new conversations to be had all of our actions on pricing are.
On <unk>.
Track.
Particularly for the for the U S.
The price increases that we talked about earlier in the year.
<unk> sold in.
There is a time lag, though especially with how quickly costs have gone up.
Inflation has accelerated since we.
Watch those pricing plans and so.
There is more work to do in that area.
In 2022.
The phase in of most of our actions is happening.
Q4.
We would expect to see the benefit of that in 2022.
And I think I'd point, you back to historical perspective here.
Had high inflationary periods in the past in the 2008.2009 timeframe 2011, and 2012, where we successfully put in pricing actually both Lawrence and I were at U S. Consumer during one of those time periods and we're able to pass through the pricing. We also pull a lot of other levers level levers, whether it's CCI discretionary spending.
<unk>.
And to Andrew's point about getting back on algorithm from a profit perspective.
Great. Thank you and I'll pass it on there.
Yes.
Next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.
Thanks.
I think this question will sound like Ken's question maybe.
A different tact.
<unk> is the conversation different with retailers on on how to take pricing or how to think about pricing in the latest.
In relation to the latest acceleration.
Because I think some retailers out there consider the supply chain disruption to be temporary.
Labour challenges will go away and Thats. A result does that mean you have to shift more towards.
I don't know more more variable actions on promotions or packaging changes rather than a straight up list price increase.
Well again im going to say that I can't get specific about any one particular customer certainly the pricing actions that we just took we had a lot of company.
And going out there.
And so.
I think retailers.
What they what they heard from us with similar to what they've heard from and from others.
Sure we have not gotten that kind of feedback that retailers think that these increases are transitory.
Theres been some discussion about inflation not continuing to escalate, but there hasnt been any discussion about this not being a reset of pricing levels.
And I think that there is broad recognition of that and I will say that I was on a call with.
Mr Chairman, Jerome Powell yesterday, or keep the same pretty much the same thing.
And so I think that the outlook is that these costs are not transient there are here to stay and they are.
Eventually going to have to find their way through.
<unk>.
Pricing that gets to the consumer and belt tightening across.
Entire supply chain, including us as a supplier to our customers.
Okay great.
Saying is it's similar types of conversations there's no different types of pushback on the second round compared to the first round, it's a similar conversation.
Yes.
I am not.
No.
Differentiating between the two right now.
I think I think it is.
If I go much further than that I am getting into.
Specifics that are bit too granular.
Two perspective.
Okay anything else you want to tell us about what Jerome Powell set or do you want to leave.
Yeah.
Just like us that you've got to do it in a public forum. So it's all out there.
Okay. Thank you.
The next question is coming from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.
Yes, Thank you and good morning, everyone. Good.
Good morning, good morning, good morning.
So I guess.
On the inflation.
Dynamics, you've highlighted we significantly logistics.
And packaging.
And I just wanted to be clear.
That is that more on the ocean freight sided domestic trucking all of the above and beyond those two discrete buckets is there anything notable in terms of your own wage rates and are you seeing pressures in your own labor force domestically gift.
Given the rise in.
Given given the broad based on the pressures you're seeing.
Adam It's Mike I'll take this fourth May add a few comments I mean, like we said on the call. It is youre right, it's 80% to 90% of it is really logistics transportation packaging things like that so I mean, we haven't really good line of sight to our commodity costs in the fourth quarter obviously.
It's really both ocean freight, but also domestic freight and you've actually seen after hurricane either some of the domestic rates have gone up again. So that's part of the new news that I think we're all experiencing in the U S. In particular, you're seeing globally in the U K natural gas challenges and things like that too and trucking challenges. So.
It's both it's both getting it here and getting it to customers.
From a wage rate perspective, we.
Taken actions just like other companies have to try to aggressively attract talent.
Our in our manufacturing facilities in Dcs with retention bonuses and other actions like that so I think it's a lawrence's point these labor rates aren't going to go back down. These are there's a been a reset of our cost level that you may not escalate further.
To be seen but it's not we're not going to have deflation on labor rates right and I'll tell you I'll just to add to that.
The cost increase that we're talking about are not these are not things that are unique to mccormick at all.
The biggest increase.
The increases have been on packaged materials and on transportation costs.
Followed followed by raw material and labor.
And I would tell you that that we would look a lot like everybody else in that regard.
Okay.
That's helpful. And then if I could ask a more longer term margin question and its really in the flavor solutions business and I guess I'm thinking to kind of a couple of years pre COVID-19 in that business and <unk> done it through acquisition and internal initiatives have done a lot of heavy lifting to get the margins in that business today.
Kind of 14, 15% level from about 10% back in 2015.2016.
And.
We're now back in the <unk> <unk>.
<unk> to 14% range I'm, just trying to think about where that business can go from here. Once we maybe get through some of these price cost imbalances in the near term do you think theres a lot more room on on mix to really push that business higher.
Our investments in technology and R&D on the flavors side that you've got and accelerates attempt to temper that I'm just trying to think about that being a driver of earnings growth maybe beyond some of the shorter term inflationary pressures that we're experiencing right now.
We're going to have to bring to you and to help right some of our IR materials.
The.
We have great confidence in the.
Margin trajectory of our flavor solutions business.
We've.
Really change in the portfolio.
Yes.
Big driver.
Our margin improvement over time has been the shift in the portfolio.
More value added.
Technically insulated.
Product suites made organic investments in that part of the business. We've done acquisitions in that part of the business to accelerate the growth and as the portfolio continues.
Continues to shift in that direction thats going to drive.
Really a structural improvement.
And margin those are just categories.
Command, a better margin and its kind of mix of the business up and at the same time, we've made decision to get out of some of the lower margin stuff.
Stuff some of which is really low margin and.
And we've found a graceful ways of exiting some some of that without.
But getting on the wrong side of the customer.
Customer relationships so.
Our long term outlook for continued expansion of our flavor solutions is one of the things that underpins our confidence our long term algorithm.
And I think the phono acquisition has even given us more confidence in continuing to migrate that portfolio.
Combining their technical expertise with ours.
<unk>.
Theres been a number of the notes are going to try and parse it organic sales out from acquisition and so on.
Yes, we're going to we're reporting 100% of what we sell a phone as is.
Acquisition related, but we have grown that business tremendously since we bought it.
We're very payment for the Lula and same with Tallulah as well, but.
Your question, specifically was about flavor solutions.
That's really part of that portfolio migration.
Okay. That's that's helpful color I'll pass it on thanks.
Our next question is coming from the line of Chris Growe with Stifel. Please proceed with your question.
Hi, good morning.
Good morning, Hi, I just had a question for you if I could in relation to pricing just to understand do you would you expect that your pricing would offset your inflation once all your pricing is in place.
Hi.
I was going to say that all of the levers that we're going to pull whether that's fair enough and part of what CCI does is offset.
Inflation, two to an extent and part of it offset cost increases and part of it.
And to reinvest in the business in other ways and Thats part of it makes its way to the bottom line and Thats the intent.
So so so.
And that over time, we will we will recover all of the costs of all of the levers.
It won't be a 100% through pricing.
Okay.
Yes, okay.
Yeah.
I understand thank you and I understand the other question was going to say was just as you get into is it expected that you would have a lot of these leavers pulled by say first quarter of 'twenty. Two I know you've got some pricing going into place in the fourth quarter I'm not trying to get to an exact time or guidance for next year just to understand the timeframe around pulling all these.
Leavers I.
Thank that.
I don't want to get too deep into talking about 2022, yes, I did want to give guidance for the year I don't want to give guidance for any of the quarters.
But I think that this is something that's going to unfold over time.
We have taken pricing action.
We said that.
<unk> has continued to accelerate so theres more to go.
I think that's all going to be in place in Q1 is probably not.
So you realize there's a lot of focus on the U S timing, but this happens around the world with different time points based on political so it will have a lot more.
To say it in the January call.
Okay and I have just one other question and it's just a more to understand kind of this inventory situation will call. It I guess in rebuilding.
We can debate IRI or Nielsen data, but it shows like your U S sales down 11% and again, we can we can debate that number I see your Americas business again, not a perfect representation totally in the U S being down four is that gap.
Sort of inventory build you expected for this quarter year over year, knowing that you were shipping below inventory below consumption a year ago or is there more inventory build to come I guess, what I'm trying to get to.
The math looking back two years, so look at the undisturbed to 2019 last year Youre right, we weren't shipping to consumption demand was.
Strong early elevated.
And if you strip out the acquisition yet demand consumption is up 19%. Our shipments are up 13. So just the straight math on that would suggest we under shipped by about six percentage points, which is very substantial and we did that same math in Q2 and it was we were ahead by four so so it looked like.
We've unwound some of the some of the.
Inventory build that we did but in 2019, we had a holiday terms program in place, which we normally would do they normally in the third quarter, where we're starting to build trade inventories for the heavy fall season.
And so that would've been part of the underlying demand. So when you net that all out we think we're pretty close to even on on it.
Shipping versus versus the true change and change in consumption, but.
But the.
That includes not really not being able to bill for the <unk>.
The trade inventories for the holiday as we put up as we go.
Okay.
So we do think that we're a bit.
As I said earlier, one of the questions earlier, the trade channel right now has been starved for inventory.
In the U S. Now, we think of that as really sloshing between third and fourth quarter and that's still going to end up getting captured within the year.
So.
So it doesn't.
<unk> change our outlook for the full year.
As anticipated pretty strong pretty strong fourth quarter, but.
Bring it back to where we are in rebuilding we're not as far along as we would've hoped.
Okay.
That's good color thanks for that time.
Okay.
Our next question is from the line of Steve Powers with Deutsche Bank. Please proceed with your questions.
Yes, hey, thanks.
You might have just I think you sort of addressed this in response to christy's question.
Just to play it back so when we think about your intention to fully offset pressures over time.
Appreciating that there is there is a rolling process to this.
I think I don't know if Chris you were speaking of Christian.
Responses, particularly on pricing or does all the offsets, but I guess, what I'm trying to get a sense for is.
On that on those rolling offsets when do you think you'd hit.
Run rate.
Your run rate achievement of those offsets is that middle of next next year type of timeline or is it more realistic to think that it progresses, all the way through and it's not until the closer to the end of 'twenty, two where you hit the hit the full offset run rate just trying to get a sense order of magnitude.
The pacing of.
Yes, I mean, obviously a lot depends on the future cost environment too and this I mean, we put into pricing in the U S.
Its kind of partially hit in the fourth quarter like we said last quarter the <unk>.
The impact is going to be in 2022, now if costs continue to accelerate it we will have to address that with other actions.
But I think its speculative at this point to try to call 'twenty two.
And the timing.
<unk> quarter ended by Haps.
Okay, No I understood Okay, Okay fair enough.
Just a cleanup on tax.
We appreciate the discrete benefits.
You have now realized and in 'twenty one.
And I'm not asking for 'twenty two I'm just on a normalized basis, how should we think about your.
So the tax run rate for the business going forward.
Color on cash taxes versus <unk>.
Versus GAAP taxes that that'd be great as well no. It's a great question.
And obviously, we talked about the fact that our 10-Q discloses amount, we talk about kind of underlying rate of 24% to 25% based on the.
Country mix the underlying.
Tax rates that we have and our expectations for the year and generally what happens and what happened. This quarter. There are discrete either programs that our tax team runs their acquisitions in the past that we cleaned up some of the assumptions or estimates or theirs statutes of limitations that drop off where we've tended to realized some discrete tax benefits. So that's exactly what happened this quarter.
But under the current tax regime with guilty and city and all of these things globally, it's 24% to 25% obviously, we're all waiting to see what happens in Washington to see what future rates are the same.
Cash taxes are pretty close to that too.
We pay our fair share.
Yes, thank you very much.
Sure. Our next question is from the line of Rob Dickerson with Jefferies. Please proceed with your question.
Hi, great. Thank you.
I just wanted to touch on private label for a second.
Even when you think you still operate in that side of the business.
As well as brands, obviously, there's been some discussion kind of where state of that overall industry finished.
Kind of sits as we kind of get through the pandemic. So I'm just curious.
Given some of the comments around let's say either trade inventory not.
I think where you'd want it to be going all day.
And pricing forthcoming.
Just kind of curious what what you've seen or heard.
And the retailers as of late around demand for your private label products versus brands.
And then just kind of how you think about price gaps as you kind of enter this pricing.
Chris.
Sure.
Generally across all categories private label.
Net loss share.
Okay.
<unk>.
The group had have gained in the recent results that we just announced.
Announced our brands were strong private label as one of the soft points.
When it comes to pricing that costs are going up.
Four.
Every if raw materials packaging labor and transportation and that applies to private label as well and so the pricing actions that we're going forward.
For our products, including the <unk>.
Private label products that we manufacture and I would expect.
In many cases, let's just because.
Priced at a lower price point.
A higher percentage of inflation rate.
Because of the pain.
Of our cost group.
It's going to be a bigger percentage.
Okay Fair enough and then.
Just quickly.
We've obviously heard from a lot of companies so far elasticity measures look great right relative to history, given some this elevated demand.
I'm just curious.
I know youre, not giving <unk> guidance, but yes, they have some thoughts.
What you might be baking in on the elasticity side and kind of what I'm hearing is that there is.
Gross expected in both segments next year and pricing coming I'm kind of assuming that the answer here is that.
There could be some incremental distribution gains to offset some elasticity demand remains elevated but just kind of any comments around that kind of volume side versus the price side.
Thank you <unk> you can shake out thanks.
Sure.
<unk> remains elevated our categories for that were already growing before the pandemic.
To grow through it.
And there is.
<unk>.
Talk endlessly about the underlying demand for flavor growing.
Consumers are fueling that and as we've gone through the pandemic we've gained household penetration.
Usage rates are up.
And we haven't talked about it much but lead.
We had a comment about it in the prepared remarks.
Purchases per purchase occasion are up a lot.
And so consumers are buying more of our products and we expect that to continue to be the case, so let's say our outsourcing.
Turning to be positive.
Positive.
For the strong sales growth.
<unk>.
So if you look at consensus sales for next year that are out there.
Yes.
They're pretty anemic.
I guess, we're trying to suggest that but theres a reason.
Reconsider that.
Alright. Thank you that's very helpful. Laurence I appreciate it.
Thank you. Our final question is a follow up from the line of Robert Moskow Credit Suisse. Please proceed with your questions.
Hey, just very quickly Laurence I think you quantified.
On a two year basis, Americas shipments up 13% consumption up 19%.
And doesn't that also include your private label business being down.
In that two year period.
So therefore.
The gap isn't really 600 basis points, it might be a little bit less.
Very small number overall compared to our branded portfolio to change it.
Definitely less than 1% differential question, 1%.
Okay. Thanks for the math.
Okay.
Thank you at this time I will turn the floor back to management for closing remarks.
Yeah.
Oh My Gosh, we're out of questions great. Thanks, everyone for your questions and for participating on today's call.
<unk> is differentiated by the breadth and the reach of our balanced portfolio, which has sustainably positioned us for growth. We're very pleased with our outstanding year to date operating performance, which proves the strength of our business model the value of our products and capabilities as a company looking ahead, we expect to drive even further growth as we continue to execute on our strategy.
<unk> actively respond to changing consumer behavior and capitalize on new opportunities. Thank you for your time this morning.
Thank you Mark and thanks to everyone for joining today's call. If you have any further questions regarding today's information. Please reach out to me. This concludes this morning's call have a good day everybody.