Q1 2022 McCormick & Company Inc Earnings Call
Good morning. This is Kasey Jenkins senior Vice President of corporate strategy and Investor relations. Thank.
Thank you for joining today's first quarter earnings call to accompany this call.
Satisfy.
We will begin with remarks from our.
Chairman, President and CEO , and Mike Smith, Executive Vice President and CFO and will close with a question and answer session. During this call.
Certain non-GAAP financial measures the nature of the non-GAAP financial measures and the related reconciliation to the GAAP results.
In this morning's press release and slides.
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.
Good morning, everyone. Thanks for joining us.
Before I go to business. It is with great sadness that I mentioned in the passing of does Mccormack.
One of the most beloved and admired leaders in recorded history.
His career at Mccormick spent 50 years rising through the ranks across many functions, becoming president and CEO and 1987.
Serving as chairman of the board for a total of 11 years until his retirement for the third time in 19 back.
Our CEO bus focused mccormick on flavor by divesting non core businesses driving category leadership, and spices and seasonings setting the course for our core it could be the global leader in flavor.
Notably mccormick's market cap grew by four times.
At our ship.
Thus, we will not only be remembered for his enduring legacy of performance, but just as importantly for his deep commitment to the wellbeing of all Mccormick employees be truly made Mccormick a great place to work, leaving his biggest accomplishment as a CEO with helping all Mccormick employees have a better life.
Today as we reflect on this life and its contributions we know that his legacy will live on isn't start many generations of Mccormick leaders with his passion for people focus on flavor and commit.
To delivering shareholder value.
Next I'd like to comment on the situation in Ukraine.
First and foremost we extend our deepest sympathies to the people of Ukraine and hope for an immediate end to the conflict and the suffering of benefit people as.
As we previously announced we suspended our operations in Russia in mid March our operations in Ukraine has been paused to focus on the safety of our employees and their families. Our thoughts are with the people impacted by these tragic events, particularly our employees, who we continue to support that.
Eight and humanitarian efforts, we're donating to the Polish center for internationally and the world Central kitchen.
I'd also like to express my sincere appreciation to our EMEA employees, especially those in Poland for there are many personal efforts in aiding the Ukrainian neighbors in need their actions epitomize our power of people principle.
Now moving to slide four our business results, we delivered solid financial results in the first quarter in line with our expectations driven by the successful execution of our strategies and the engagement of employees.
We are confident our strong year to date momentum will continue to drive strong performance throughout 2022.
In the first quarter, we grew sales, 3% or 4% in constant currency on top of our 20% constant currency growth in the first quarter of last year, demonstrating again, the strength of our product offering and broad global portfolio, which drives differentiated growth and consistency in our performance.
Consumer segment sales, while lapping a year ago with them that continued to reflect the sustained shift is higher at home consumption compared to pre pandemic level. Our flavor solutions segment growth was driven by outstanding growth with our packaged food and beverage customers as well as robust demand from restaurants and other foodservice.
Due in part to recovery from curtailed the away from home dining into Europe go period.
Through the breadth and reach of our balanced later portfolio. We are meeting that global demand for flavor and delivering flavor experiences for every meal occasion for our products and our customers' products. We are end to end flavor.
Adjusted operating income was down 14% or 12% in constant currency and adjusted earnings per share was down 13% as anticipated the profit driven by our sales growth was more than offset by the well known and anticipated headwinds of higher inflation and broad based supply chain challenges we have.
A demonstrated history of successfully navigating through a volatile environment and we expect to do the same through this high current inflationary period using pricing another lever to offset cost pressures, which is reflected in our 2022 profit outlook.
Now for more on our first quarter segment performance.
Starting with the consumer segment on slide five growth in the Americas was more than offset by lower sales in the EMEA and APAC region.
Total consumer segment sales declined 2% against 35% consumer growth in the first quarter of 2021.
Given the difficult year over year comparison volume declines were reflected in each region on a two year basis, however, compared to the first quarter of 2020, each region grew sales by double digits.
This growth highlights the strength of our categories and importantly, our products as consumers continue to cook more at home demand for flavor continues to grow.
The pricing actions. We've taken were also reflected in each region's results and the elasticity impact we experience has been lower than historical level.
We look ahead and our additional pricing actions are phased in.
The city, we experienced may change and this could be a cumulative effect, but we still expect the impact to be lower than historical levels.
Turning to highlights by region, starting with the Americas, Our total U S branded portfolio consumption as indicated by our IRI consumption data and combined with unmeasured channels grew 2%, which follows a 15% consumption increase in the first quarter of 2021. This is the eighth consecutive quarter of double.
Consumption growth versus the two year ago period.
Demand has remained high and we continue to realize the benefit of the manufacturing capacity, we added as well as our increased resilience. Our first quarter shipments were in line with consumption or with some products remains stressed by sustained high demand shelf.
Self conditions continue to improve as does our share performance with another sequential improvement in the first quarter as we expected versus last year, we are beginning to grow our spices and seasonings share in recipe mixes we had another quarter of considerable share gain over four share points.
We continue to see further improvement as we begin the second quarter and we are confident in our continued momentum.
In EMEA during the first quarter, we lapped high prior year demand.
Partially due to restrictions, resulting from COVID-19 resurgence as last year, while continuing our momentum with strong consumption growth in key categories compared to the first quarter of 2020 are.
Our market share performance was stronger this quarter, we maintained our total EMEA region herbs spices and seasonings share on top of strong gains in the first quarters over the last two years.
Of note Frank Red Hot has grown consumption, 60% gain significant share versus the two year ago period.
And then the Asia Pacific region first quarter growth was tempered by scaled down Chinese new year celebration due to several cities in China imposing restrictions as a result of new Covid outbreak.
These restrictions impacted our branded foodservice demand that is included in the consumer segment in China.
Turning to slide six our flavor solutions segment grew 12% or 14% in constant currency driven by base business growth new products and one month of incremental sales for our acquisition of <unk> in December 2020.
All three regions contributed to our growth each with higher volume and product mix as well as the pricing actions, partially offset costs.
Our first quarter flavor solutions results reflect similar market conditions across the region as a reminder, our customer base in the Americas skewed more to packaged food and beverage customers and in EMEA and APC to quick service restaurants booked USR customers.
Our differentiated customer engagement and technical capabilities continued to drive outstanding growth, both in base business and with new products, but our packaged food and beverage customers are at home customer base.
Our performance with these customers led our first quarter flavor solutions results with double digit growth in flavors for our performance nutrition, and health and market applications as well as savory snacks and our momentum with flavors for alcoholic beverages also continues.
Our <unk> has been strong with core menu items and limited time offers driving first quarter growth and other restaurant business continues to rebound.
Our first quarter results also reflect the lapping of curtailed the away from home dining last year.
Restaurants are benefiting from the shift to takeaway and delivery that was amplified by the pandemic, there's been a blurring between channel and most of the restaurant food being consumed off premise for instance, one in for dinner consumed at home to supplement it with a restaurant or other foodservice items.
For our other institutional foodservice customers in our branded foodservice product category, we expected some recovery coming into 2022, and we saw that demand strengthened our first quarter and drove growth in the Americas and EMEA regions.
Now I'd like to share some comments on our momentum and the growth initiatives we have underway.
Turning to slide seven global demand for flavor remains the foundation of our sales growth and we are intentionally focused on great fast growing category that will continue to differentiate our performance. We are capitalizing on the long term consumer trends that accelerated during the pandemic healthy and flavorful cooking increased digital <unk>.
Gatwick trusted brands at purpose mining practices.
These long term trends and the rising global demand for great case are as relevant today as ever with the younger generations fuelling them at a greater rate.
Our alignment with these trends in combination with the breadth and reach of our global portfolio and the successful execution of our strategies sustainably positions us for future growth.
In this current dynamic global environment, we remain focused on long term sustainable growth, we continue to experience cost pressures from higher inflation and broad based supply chain challenges.
Partially offset rising cost, we raised prices where appropriate late last year.
Currently facing an additional pricing action and as costs have continued to accelerate we will raise prices again, this year where appropriate.
We appreciate our customers working with us to navigate this environment.
Additionally, our plans to mitigate cost pressures and include our CCI led cost savings revenue management initiatives, and taking prudent steps to reduce discretionary spend where possible.
Throughout our history, we have successfully grown and compounded our growth regardless of the environment and plan to do so again in 2022 as we continue to accelerate our momentum to drive growth from a position of strength.
In our consumer segment across our major measured markets, we have millions of households over the last two years it had double digit by rate growth our brands to new consumers and we have driven increased usage at the same time. This performance combined with billions of additional at home eating occasions from.
Consumers cooking more at home has created a new baseline for growth.
We are continuing to drive our consumer segment momentum by accelerating flavor usage.
<unk> delivering all the demand for heat building confidence in the kitchen and inspiring flavor exploration were also strengthening our consumer relationships at every point of purchase and creating a delicious healthy and sustainable future.
We are fueling growth through our brand marketing investments category management initiatives and new products.
Our brand marketing is resonating with consumers, particularly as we connect with them online.
And as we expand the capabilities of our marketing excellence organization globally, youre, gaining efficiencies executing with greater speed and shifting our investments to working dollars to drive greater effectiveness.
Our U S spiked to aisle reinvention is further driving our category leadership with growth.
For Mccormick and our customers this.
This initiative is continuing this year with additional stores being implemented and we're also starting to build momentum with similar initiatives in Canada, the U K and France.
Our consumer new product innovation differentiates our brands and strengthens our relevance with our consumer our new products are focused on what's important to consumers such as freshman modern packaging convenient and flavor exploration as well as affordability and value <unk>.
75% of global consumers.
More economical to Cook at home and in the current inflationary environment it resonate even more now.
Our products are already part of the consumer solution to manage inflation across their whole grocery basket for instance, inflation is hitting the meat case heart and a little bit of our flavor can make the lesser meet more palatable and makes a consumer's home both more affordable and flavorful.
We have products at all price points that attract many types of consumers and households, as well as different income levels. We continue to focus on ensuring that we are launching new products that appeal to all types of consumers such as additional entry level price points for affordability as well as value offerings, including larger sizes to meet the needs of price.
As consumers.
And with our new products and recipes tailored to popular new appliances, such as air Fryers that instant pot, we're providing consumers flavor inspiration and greater convenience when using our product.
In our flavor solutions segment, we plan to continue migrating our portfolio to more value added products and technically insulated products, particularly our flavor product category.
Targeting opportunities to grow with our customers in attractive high growth end markets, such as alcoholic beverages savory snacks and performance nutrition, we've been outpacing the market growth in these categories.
They all contributed to strong growth in our first quarter results and further migrated our portfolio.
Following a record year of new product growth last year. We are excited about our robust 2022 pipeline of culinary inspired innovation.
Bridging our broad technology platform to develop clean label organic and better for you solutions to solve our customers' issues without compromising on take rate.
We are using sage, our AI enabled product development tool to develop consumer preferred flavor.
<unk> seen that happen.
<unk> record for lasting longer and the market for our customers and.
And we are building a pipeline of opportunities to accelerate our global seasonings growth.
Pending our mid tier customer base.
A core supplier list and strengthening our leadership in heat.
We plan to continue to drive flavor solutions growth.
<unk> customer engagement, we have a strong passion for creating a flawless customer experience.
Across both segments, our strong sales and growth plans bolster our confidence in continuing our growth trajectory.
We also recognize we are operating in a challenging global environment.
Before Mike reiterated our guidance in a few moments I would like to comment on some current conditions.
We will continue to monitor the situation in Russia, and Ukraine, very closely and adapt accordingly.
Cost inflation has remained persistent with recent escalation in some areas such as transportation costs and as such we have raised our cost inflation guidance. It is now a mid to high teen increase.
And in regard to Covid as I mentioned earlier, there are new COVID-19 restrictions being imposed in several cities in China.
We are continually assessing the dynamics of these conditions as they evolve we recognize there will be some near term impact, which we expect to mitigate later in the year.
In part with additional pricing actions.
We're well positioned to deliver another strong year of growth and performance in 2022 did the effective execution of our strategy and with our robust operating momentum.
In addition to delivering top tier financial results. We are also committed to doing what's right for people communities and the planet.
Recently released our 2021 purpose led performance progress report, which highlights our key initiatives and the progress we are making including our recent announcements on the update of our science based targets to reduce greenhouse gas emissions by 2030 aligning with the United Nations, One five degree Celsius target.
As well as our commitment to net zero by 2050.
Move forward in 2022, we're excited to continue to share our progress and success on all our purpose led performance goals.
Now for some summary comments on slide 11 before turning it over to Mike.
The combination of our strong business model. The investments we have made the capabilities, we've built and the power of our people position us well to continue our robust growth momentum.
We're in attractive categories and are capitalizing on long term consumer trends that are in our favor.
<unk> responding to changing market conditions consumer behavior and customer needs, while remaining forward looking in an ever changing environment. We.
We have a strong foundation and are well equipped to navigate today's environment.
Honey with agility to volatility and disruption while remaining focused on our long term objectives strategies and values that have made us so successful through.
Through the execution of our strategies that are designed to drive long term value, we have grown and compounded that growth successfully over the years, regardless of the environment are fundamentals that drove that performance and our momentum and outlook are stronger than ever.
Mccormick employees continue to do a great job navigating a dynamic environment.
Our agility and teamwork drive our momentum and success and I want to thank them for their dedicated efforts and engagement.
Now I'll turn it over to Mike.
Thanks, Lawrence and good morning, everyone. Starting on slide 13, our topline growth continues to be strong during the first quarter. We grew constant currency sales, 4% driven by pricing actions across both segments and incremental sales from our <unk> acquisition.
<unk> segment sales declined 2% in constant currency due to lapping high demand in all three regions last year with a partial offset from pricing.
On a two year basis compared to the first quarter of 2020 constant currency sales grew 30% with double digit growth in all three regions, reflecting the sustained shift to at home consumption higher than pre pandemic levels.
On slide 14 consumer sales in the Americas increased 2% in constant currency driven by pricing actions, partially offset by lower volume and product mix due to lapping last year's elevated demand.
Branded products led the growth with strength in Mccormick veterans Stubs full day simply Asia, Frank's Red Hot infringes, partially offset by a decline in private label.
In EMEA constant currency consumer sales declined 9% from a year ago, driven by lower volume and product mix move significantly in finding a homemade dessert products due to lapping last year's high demand across the region.
This decline was partially offset by pricing actions.
Constant currency consumer sales in the Asia Pacific region declined 6% driven by the exit of some lower margin business in India.
China's consumer and branded foodservice demand partially related to the Chinese new year impacts mornings mentioned earlier also contributed to the decline.
These declines were partially offset by pricing actions.
Turning to our flavor solutions segment and slide 17, we grew first quarter constant currency sales, 14%, including a 2% contribution from incremental furnace sales in December .
As a reminder, we acquired on December 30, <unk> 2020.
The remaining increase was driven by higher volume and product mix as well as pricing actions.
Compared to the first quarter of 2020 constant currency sales grew 18% with double digit growth in all three regions.
In the Americas flavor solutions constant currency sales grew 12% with <unk> contributing 2% and the remaining growth due to both pricing and the combination of volume and product mix.
Higher sales to packaged food and beverage companies with particular strength in snack seasonings led the growth with the recovery of demand from branded foodservice customers also contributing.
In EMEA, we drove 24% constant currency sales growth with a 17% increase in volume and product mix and 7% related to pricing actions.
Emea's growth was led by the robust recovery of demand from <unk> and branded foodservice customers.
In the Asia Pacific region flavor solutions sales rose, 5% in constant currency, driven by pricing actions and growth in higher volume and product mix. This growth was driven by our choice our customers both in their core menu items as well as our limited time offers and promotional activities.
As seen on slide 21, adjusted operating income, which excludes transaction and integration costs related to the true up and fill in acquisitions as well as special charges declined 14% constant currency of 12%.
In the first quarter versus the year ago period.
Adjusted operating income declined 12% in the consumer segment with minimal impact from currency.
And in the flavor solutions segment declined 17% or 11% in constant currency.
Both segments were favorably impacted by higher inflation and distribution costs.
Both of which accelerated in the second half of last year.
Well as incremental investment spending on our ERP program, which we expect it to be higher earlier in 2022 versus 2021.
CCI led cost savings favorably impacted both segments and.
In the consumer segment lower sales, partially offset by a reduction in COVID-19 related costs also contributed to the decline.
In our flavor solutions segment higher sales were more than offset by the unfavorable drivers I just mentioned as well as costs related to supply chain investments, which will continue in the second quarter.
As seen on slide 22.
Adjusted gross profit margin declined 260 basis points in the first quarter versus the year ago period.
This was driven by the net impact of cost pressures, we are experiencing and the pricing actions we have taken.
We estimate the diluted impact of pricing to offset this dollar inflation increase was approximately 200 basis points in the first quarter. Additionally.
Additionally, the sales shift between segments also contributed to the margin decline.
Our selling general and administrative expense as a percentage of net sales increased 20 basis points from the first quarter of last year due to higher distribution costs and the higher level of investment in our ERP program.
This combined with the adjusted gross margin compression resulted in an adjusted margin decline of 280 basis points in line with our expectations.
Turning to income taxes on slide 23, my first quarter adjusted effective tax rate was 19, 7%.
Compared to 22, 7% in the year ago period, driven by a higher level of discrete tax items. This year.
Adjusted income from unconsolidated operations declined 30% versus the first quarter of 2021.
Due to the elimination of higher earnings associated with minority interest as well as higher inflation costs impacting our Mccormick de Mexico joint venture.
At the bottom line as shown on slide 25 first quarter 2022 adjusted earnings per share was <unk> 63.
As compared to 72 for the year ago period. The decrease was driven by our lower adjusted operating income.
On slide 26, we summarized highlights for cash flow and the year end balance sheet.
Our cash flow from operations was an inflow of $18 million in the first quarter of 2022.
Compared to an outflow of $32 million in the first quarter of 2021.
This increase was primarily driven by working capital improvements and lower payments for transaction and integration costs related to our chiller and cone acquisitions.
We returned $99 million of cash to our shareholders through dividends and used $44 million for capital expenditures this quarter.
We expect 2022 to be a year of strong cash flow driven by profit and working capital initiatives and our priority is to continue to have a balanced use of cash funding investments to drive growth returning a significant portion to our shareholders through dividends and paying down debt.
Now turning to our 2022 financial outlook on slide 27.
First I would like to provide some additional perspective on some of the current conditions Lawrence mentioned earlier.
As we have said we are currently not operating in Russia and Ukraine.
While the impact is not fully knows our business in these markets is small.
The combined sales across both segments totaling less than 1% of total company sales last year.
Additionally, we have new manufacturing in either country any operating profit impact would include those related to the impact on sales as well as potential expenses stemming from the current situation.
Regarding cost inflation, we are revising our outlook and are now projecting inflationary pressure in the mid to high teens as compared to mid teens increase in our previous guidance, we expect cost inflation to remain persistent, especially as it relates to transportation and we are continuing actions to mitigate these costs, including pricing.
Again as Lawrence mentioned, we recognize these dynamics will have some impacts on our results certainly in the second quarter.
While we continue to monitor impacts on the broader economy, and we will adapt as necessary. We are reiterating our 2022 sales and profit outlook that we previously shared in our January earnings call.
We are projecting strong topline growth and operating performance with earnings growth, partially offset by a higher projected effective tax rate.
We also expect there will be an estimated one percentage point unfavorable impact of currency rates on sales.
<unk> operating income and adjusted earnings per share.
On the top line, we expect to grow constant currency sales, 4% to 6%.
We expect pricing to be a significant driver of our growth with volume and product mix to be impacted by elasticity, although at a lower level than we have experienced historically.
We plan to drive growth through the strength of our brands as well as our category management brand marketing, new product and customer engagement growth plans.
We're going in and product mix will also continue to be impacted by the pruning of lower margin business from our portfolio.
Our 2022 adjusted gross margin is projected to range between comparable to 2021 to 50 basis points lower than 2021.
This adjusted gross margin compression reflects the anticipated impact of the mid to high teens increase in cost inflation.
And unfavorable impact of sales mix between segments, a favorable impact from pricing and CCI led cost savings.
As a reminder, we price to offset dollar cost increases we do not margin up this has a dilutive impact on our adjusted gross margin and is the primary driver of our projected compression.
We expect to grow our adjusted operating income, 8% to 10% in constant currency, which reflects our robust operating momentum a reduction in COVID-19 related costs and our continuing investment in ERP business transformation.
This projection includes the inflationary pressure in the mid to high teens, a low single digit increase in brand marketing investments and our CCI led cost savings target of approximately $85 million.
As we shared on our last earnings call, we expect our profit growth to be weighted to the second half of the year during.
During the second quarter, we are phasing in pricing actions and with cost continuing to escalate wage prices again as appropriate, but we plan to cover the cost pressures due to the recent acceleration of inflation, there will be a lag and as a result, our profit will now be weighted to the second half of the year, even more than originally expected and.
As a reminder, we expect our ERP investment to be higher earlier in the year versus 2021.
Our 2022 adjusted effective income tax rate is projected to be 22% and 23% based upon our estimated mix of earnings by geography, as well as factoring any level of discrete impacts this outlook versus our 2021 adjusted effective tax rate is expected to be a headwind to our 2022 adjusted earnings per share growth of approximately three.
<unk>.
Our 2022 adjusted earnings per share expectations reflect a strong operating growth of 8% to 10% in constant currency, partially offset by the tax headwind I just mentioned.
This resulted in an increase of 4% to 6% or 5% to 7% in constant currency.
This range for adjusted earnings per share in 2022 to $3 17 to $3 22 compared to $3 <unk> of adjusted earnings per share in 2021.
In summary, we are well positioned with our broad and advantaged flavor portfolio and effective growth strategies to continue to accelerate our operating momentum and driving another year of strong growth and performance.
Thank you Mike 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 28.
We delivered solid first quarter results in line with our expectations with strong sales growth on top of our 20% constant currency growth last year.
We are confident.
The hard work and dedication of our employees will continue to drive momentum.
We recognize we are operating in a challenging global environment.
The execution of our strategies, we've successfully grow long term value over the years, regardless of the environment. Our long term fundamentals that drove our performance are stronger than ever.
The strength of our business model the value of our products and capabilities, our alignment with long term consumer trends that are in our favor and the attractive categories, where and provide a strong foundation for long term sustainable growth for.
We're confident that our broad and advantaged flavor portfolio, a robust operating momentum and effective growth strategies will drive another year of strong growth in 2022 and build value for our shareholders now lets turn to your questions.
Thank you we'll now at this time, we'll now be conducting a question and answer session.
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One moment, please pull for questions.
Thank you and our first question today will be coming from the line of Andrew Lazar with Barclays. Please proceed with your question.
Hi, good morning, everybody.
Good morning.
Hi, there.
Cormack reiterated its full year outlook, despite a worsening inflation outlook and still dynamic operating environment and as you noted requires even more significant margin inflection in the back half of the year to stay within sort of your full year gross margin guidance. So I was hoping you could speak a little bit to what gives you the visibility to this.
Playing out and I know you detailed some items on our last call such as pricing and lapping COVID-19 costs.
Luther cadence of ERP spend in CCI saves and such so perhaps you could remind us of visa and share. If there are any additions or changes to the above thank you.
Andrew I'll start on this and then let Mike follow up follow up.
Talk about those specific items, but.
First of all I want to emphasize that.
First quarter is really right up the middle.
Our expectations.
And it all starts with strong demand and strong topline.
We expect to.
Continued strong demand as we go through the year and as we go through the second quarter in particular more pricing action goes into effect.
On top of that strong demand and with the relatively low elasticity that we're seeing will translate into both strong top line and strong bottom line growth in the second half of the year. This is in line with the guidance that we talked about.
On our last call at the end of when we gave guidance for the year.
You're initially.
Let's talk about the specifics, but yes, I think the thing that's really changed since the first quarter.
The year end call when we talked about you'd be inflation moving from.
Mid mid teens to mid to high teens really theres been a bit of an acceleration or things like fuel costs that will impact the second quarter.
So we see on average across the year that concentration around the same mid to high single teams, but it didn't move forward into the second quarter pricing, though is continuing to build as Martin said.
For the full year before we said.
On the last call mid to high pricing impact we're at the high it will be at the high end of that now and actually in the second six will be in the low double digit pricing impact range, which gives us more confidence about the second half profit realization as you mentioned there were some other factors ERP spending is up in the first six versus last year.
That's been the supply chain, we just announced some of the transition of production over to the Peterborough facility in the UK. There is startup costs that have hit us in the first quarter that will be more of that in the second quarter really hitting the flavor solutions segment. So we do see some of those negative impacts in Q2, but really.
Copies are confident about the second six with some of the actions that we've identified.
And then just quickly.
You've talked about the capacity coming online and I think you mentioned you shipped essentially closer to consumption. This quarter, so sort of making progress there and we've seen that in the and the market share improvements.
But it doesn't sound like you've yet had the ability to truly sort of really rebuild retailer inventories and I assume there is still some opportunity for that as you go forward through this year and perhaps you can just update us on that thanks, so much.
I think that this is a work in progress.
Supply chain continues to get better it's not perfect.
Some of our customers will remind us but.
The disruptions that we're seeing are much more discrete.
<unk>.
And specific rather than third quarter of last year. It seems like everything was a problem.
So our supply chain has gotten better our ability to meet that demand has really gotten better and although.
Make that remark about certain customers a minute ago.
The fact is our customers tell us that generally we are performing better than our competitive set.
This is allowing us to win.
New business, so really feel pretty good.
Pretty good about health.
Improved.
Thank you, we'll continue to see us.
Sure performance consecutively.
As we have been for the last several quarters.
<unk> to supply.
Additional capacity coming on is really neat.
These are different.
Great. Thank you so much.
The next question is coming from the line of Alexia Howard with Bernstein. Please proceed with your question. Thank.
Thank you and good morning, everyone.
Good morning Alexia.
First of all about the private label dynamic.
Because we're looking at the level of price inflation really across the grocery store and under normal circumstances, you would expect to trade down to private label, but I know that you mentioned that Youll private label sales are actually down year on year I'm, just wondering what's driving that is it supply chain related.
Retailer driven or is it simply that consumers are feeling still feeling reasonably slosh enables with what the branded product and then I have a follow up sure I think two things. So first of all we have not yet seen significant movement in private label as a trend in either direction.
Some of the some of the recent market.
Data shows.
Increase in.
But it's really slight in our in our category.
Yes, there is a dynamic you have to watch out for private label the costs are going up for everybody.
It's driven by raw materials or packaging.
In transportation and the same any cost increase that's impacting brand is also impacting private label and so when you put that same amount of cost increase through to private label.
The percentage increase is bigger and it creates an uptake of private label growing faster.
On a dollar basis.
It's really again, it's that cost.
So I want to make that clear.
Second point that I want to make though is that we are believers that there's a role for both.
Our brand and private label, especially in the urban Spice category.
And we provide both to our customers and be.
Competitive environment for us as a company is when both our brand and private label or gaining share putting pressure on everybody else.
Yeah.
Great. Thank you and then as a follow up.
Obviously, Russia and Ukraine is a very difficult situation right now.
Sure what percentage of sales that is deal I'm pretty sure it's fairly low.
But what do you see as the risks around the world if the situation persists and I'm.
I'm really talking about when we come through previous commodity cycles, we've seen problems.
Because of the in affordability of basic foodstuffs like Brian in Egypt, and so on would you all supply chain.
I mean, given what you've seen in the past when we see these grain cycles.
All of that particular ingredient.
It might be more challenge I'm, just trying to get at the risks.
And I'll pass it out.
Alexia, it's Mike I'll start the answer.
<unk> said in our 8-K C sales.
Sales for Russia, and Ukraine are less than 1% of our total sales. So that's.
So thats, where it will have an impact in the second quarter, obviously, because that's when the.
The crisis has unfolded and as far as as far as your question about broader impacts primarily inflation I think you've seen in the last couple of weeks and part of the reasons, we've taken our inflation expectations up and discuss pricing is because of some of those impacts.
On a commodity perspective, I mean, our market basket is a lot different than a lot of other food companies. I mean, there are products that could be impacted we source mustard from that part of the world, but we have secondary sourcing capabilities, there, which we've moved too so I think our.
Our global supply chain one of the strengths. We have is a deep and long history in alternative markets for a lot of our materials and no one raw material makes up more than 5% of our total cost of goods sold so I think that diversity really helps us and I would say, we're less exposed to the grain complex.
The bar peer companies would be.
But I think our concern.
And part of what we're considering in our inflationary outlook.
It's the cost of energy.
Now it looks like it's going to remain higher than perhaps it might have otherwise and that flows through the packaging to like plastic resin and things like that.
Great. Thank you very much I'll pass it on.
Our next question comes from the line of.
Normally not with Jpmorgan. Please proceed with your question.
Hi, good morning.
Okay.
In light of some of the incremental cost question I think the year on year decline. We found the first quarter gross margin is that a reasonable level of decline to think about in the second quarter as well or was or should we think about the first quarter is the low point in terms of progression.
I would say.
Between the first half of second half.
Youre going to have that big change due to the pricing dynamic I mentioned before in some of the one timers in the first six.
If I were.
We've laid about laid out as far as cost increasing versus our original expectations in the second quarter I think it's probably a pretty good estimate that in that range of gross margin. What we did in the first quarter is probably close we do have additional Peter Burke supply chain investment cost I could talk about some dual running costs and things like that so I don't think.
Four out of the ballpark there.
Great. Thank you that's helpful.
And then I just wanted to switch to ask about pricing and consumer.
The pricing remained fairly muted in the quarter. So can you walk us through what to expect from pricing in this region of the process and what some of the challenges are if any to taking pricing.
Hello.
I'd say that we've said, we're going to take pricing as appropriate.
And so in different regions are going to have different.
Levels of <unk>.
The inflationary impact and different levels of pricing in different timings so much.
Those pricing actions.
Take effect and so I don't and then within even within region theyre going to be differences from from country to country, especially in the regions.
Within the segments.
Within our segments, certainly I can say, though that.
Broadly.
We have.
Current pricing actions, our pricing actions that we've spoken about.
Are very much on track we get pricing.
Going into effect.
And second quarter in several markets I know your question was about EMEA, but healthy.
Specific about our U S.
Consumer business because increases are going into effect this week.
For the.
For the next round.
Our flavor solutions segment.
Broadly the branded foodservice FERC for the portfolio moves with consumer pricing.
And.
The rest of the flavor solutions business pricing is based on contractual windows on the timing is going to vary.
Tremendously.
Basically based on the Windows.
Nothing.
The pricing and I would tell you that.
And.
The pricing actions are on track and are going to be phased in.
First half of the year well it isn't on pricing is always an ongoing discussion.
Not to get too specific up really quite specific just now.
For both the customer and for competitive reasons.
Yes, I think youll see the same trends across the regions that pricing will build during the year.
Got it thank you.
The next question is coming from the line of Robert Moskow with Credit Suisse. Please proceed with your question.
Hi, Thanks for the question I guess, it's in two parts.
I wanted to confirm what I heard about the level of pricing.
You think Mike that will show up in your P&L by the end of the year.
I thought I heard you say low teens, but I could have gotten that wrong.
It's scaling up that much.
And then the second part is.
I think.
Laurence you said that.
Youre operating from a higher baseline because you brought in a lot of consumers to the franchise and the category has expanded perhaps structurally.
But the category is declining in the U S.
Modestly it's declining a lot in Europe from what I can tell is there a risk here that as consumers regain more mobility and theyre gaining it very quickly right now.
That the consumer category might not be at the right baseline that there might be a lower baseline out there.
Then what you would expect.
Well first of all good morning, Rob.
Oh it.
I'll start with yes.
Let me answer that.
Yes.
What I said and just to be clear.
We've given guidance that pricing for the full year was going to be mid to high single digits.
Based on the new.
Based on the move into the high end of that based on the price based on the recent cost increases.
A single deal.
Okay.
Mid to high single digits, we moved to high based on some of this recent cost inflation I talked about primarily impacting the second quarter.
Yeah, what I said about first half second half in the second half if you look at that in particular back to Andrew's question, we arent going to see low single low double digit price increases, which are cumulative coming through for the third and fourth quarter. So it builds during the year to my point before.
Not for the full year, but for the second six.
Yeah Yeah.
Yes.
Okay.
That's a big that's a big price increase in the in the back half of the year, well I think Goodyear lapping.
Lapping last year in the Americas, particularly.
Pricing in the fourth quarter.
Sure. So you do get that cumulative impact of several price increases three of them actually.
Okay, and then the risk to the baseline.
Well.
Yeah of course.
So what's elevated demand.
Because consumers were forced to stay at home and Cook.
And we never expected all of it to remain but we do believe that consumers have moved to a.
Higher level.
Consumption.
Higher level of cooking at home structurally.
All of our research points in that direction.
Yes.
The logic of people still cooking at home.
Yeah.
Still working from home and art.
It's going to be.
Occasion.
That is.
That is consuming more at home.
Breakfast because of work from home people are actually cooking practice, you did more ready to eat solutions.
And then.
So there is.
Kind of both the qualitative and quantitative.
Work at that point to say consumption at home is going to continue to remain elevated.
88% of consumers safer going to cook as much at home.
As much or more at home than they did during the pandemic to the extent, there's economic pressure on us from a recession.
It also reinforces the whole cook at home and that we know in particular, our category and.
And our brands performed well during recessionary periods are in both of the last two.
Sessions.
Our brand growth was right in line with our long term.
Long term guidance, we are seeing a.
<unk>.
Our consumer business.
In the U S versus Europe , but the biggest factor there is actually that Europe has.
<unk> business, we have a significant component of that is making.
Particularly with our phosphate brand in France.
And so urgency, making return to more of a baseline level, but we do believe that.
There's been a step up.
Our other category.
Look at total Mccormick consumer over the last two years, we were lapping a really tough quarter last year and Q1 were up 30% in two years constant currency consumer sales, that's pretty amazing that step up that Laurence is talking about.
Yes.
Okay.
And maybe one last follow up if I could.
Pricing is up low double digits, let's say, it's like 12% in the back half of the year, it's probably not.
Unheard of to expect a volume decline of like negative five negative six.
Is that close to how youre thinking about elasticity number one.
And if volume is that down that much does that have any implications for your fixed cost leverage or what does it do to your the rest of your P&L if anything.
I'm trying to get too specific on it.
Our.
Elasticity modeling.
But we do model elasticity these price increases.
<unk> are really.
Outside the range of those models.
The environment is different from the environment in which those models were built so I think that all of us are at a little bit uncharted.
Territory right now.
But.
But we've assumed a level of elasticity.
So far so good in the sense that the elasticity that we're actually seeing is actually at the low end of what we've what we've been modeling so that gives us some encouragement.
Again, a licensed elasticity is partly based on substitutability.
Everything is going up.
And so I don't know.
Even though our prices are going up.
Tumors.
Perspective.
Relative frame of reference.
It's been a context.
All in all the substitutes and everything that products are used on it is going up as well.
And again, we tried to say in our prepared remarks in which we've seen and heard from.
Tumors.
In the past.
Our products are a very small.
Part of the cost of their meal and.
And in many cases are part of solving their whole grocery basket inflation problem.
Got it meet going up 40%.
The increase on spices pales by comparison.
And using even more space to substitute lower Costco to meet real behavior that we've seen.
Nevertheless, about I'm less worried about the fixed cost.
<unk> chain I mean, we manage ups and downs of all the time, so if there happens to be some volume decrease.
There's been a large investment in capacity the last couple of years, we've gotten a lot of those co pack costs from Covid. So we would absorb that and I would say, we're still in order to meet the high level of demand.
<unk>.
Okay.
It came down a little bit actually might even benefit us.
Oh interesting okay, alright, thank you.
Our next question is coming from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.
Yes. Thank you good morning, everyone.
Good morning.
Good morning.
So I was hoping to dig in on the on the flavor solutions.
A little bit and really trying to think about the performance in some of the different buckets and very different comp lay out in that part of the business than in the consumer segment, where you were still lapping some easy foodservice and quick service comps a year ago those get <unk>.
Notably.
Tougher.
Your packaged food customers, especially North America might kind of probably roughly a lot of the same demand elasticity.
Questions that.
Rob and others have been asking about already so I'm just trying to think about how we should think about the volume growth, whether it's by region or by the different types different parts of that business over the balance of the year.
I'll start off to say that flavor solutions growth for the total company was really strong.
For Americas.
EMEA was.
Likewise.
Really really strong and even in Asia Pacific.
The growth was a little bit lighter.
I'm not going to complain about.
The growth that we recognized over there as well.
The food away from home.
Component.
Likely trailed food at home.
Overall.
Those results were really different bye bye.
Region.
Yes.
Our hope at whole flavor and seasoning business.
Really been robust in the Americas.
It drove.
A lot of a lot of the growth.
And quick service restaurant recovery.
That's continued to be as continued to be strong in branded foodservice is now reopening and so we're seeing solid growth. There I mean, it's hard to say, what's not I mean, I can't I couldn't tell you what's not growing.
It's not only the secular trends that we are winning business I mean, it's the things that we talked about the new acquisition.
That has unlocked across the flavor business in some of these high growing categories you talked about at Cagny. So I think youre seeing.
A lot of good trends across the flavor solutions.
Right no I get that Im just trying to think about this on the go forward the comp lay out volumes is going to look very different from an activity level than your consumer business.
And I'm trying to think about.
Especially if theres risks of.
Maybe a bit slower economic growth, especially in EMEA.
You've got Covid Lockdowns in Asia.
Or in China, specifically, just how do we how do you how are you thinking about that business.
The balance of the year.
Well I think.
Gosh I mean, all companies are struggling like this but I think in times when other packaged food companies are trying to come up with innovation, maybe take cost out where our products are such a small percentage of the total product. So the consumer it's actually an opportunity for us to work with them. So I'm less concerned about some of the.
<unk>, they're seeing things like that you've set.
We're small component just like on the consumer side of that Neil whether youre, a branded foodservice or whether you are buying a.
Snack seasoning and that's trying to specifically we're watching this but I'd say, it's within the norm.
This puts and takes and pressures within the business. So I'd say that what we're seeing at least so far.
Within that range.
Okay, and then if I could follow up on the commodity cost inflation point and I. Appreciate your basket looks very different than a lot of other other food companies.
You guys also have a much more diverse just in terms of the spices seasoning curves that are going to have a lot of emerging market kind of growers.
Smallholder farmers could you talk about the contracting of that how much. It's just when you actually will agree to price with those growers.
Through the year, just theyre going to be facing some pretty dramatic input cost inflation and I'm wondering how that will impact the price that you are paying for that basket of commodities is that really a more of a fiscal 'twenty three events as we think about their costs flowing up to you I'm just trying to I think most likely in fact, we've talked about especially recently is more on the transportation.
<unk> on the packaging side Theres exposures to the resins and oil cost and things like that for commodities, we have a long history of relationships with partners and joint ventures, but secure commodities over time and you can look at our balance sheet, we have more raw materials now than we did last year. So that's part of the way, we we protect our future supply right and I think that we can.
Get into too much detail here I would say that our global sourcing and boots on the ground and our long relationships.
With.
Producers in these markets.
So the strategic partnerships that in some cases are multi generational.
Really advantaged us in this area and it's actually been an area that I think that.
Demonstrated tremendous competitive advantage.
It's giving us some buffer I think the others are probably experiencing greater cost pressure inflation pressure for some of these same components.
It's an area where scale really matters.
Okay, Alright, that's all helpful I'll pass it on thanks.
Thanks.
Thank you.
Next question is from the line of Steve powers with Deutsche Bank. Please proceed with your questions.
Yeah, Hey, thanks, and good morning.
Perhaps building on your comments in response to <unk> question on private label and Rob's questions as well.
It seems there's an increased focus in your comments. This morning on an entry price points for affordability.
Maybe that's just limited to private label, but generally and value offerings, such as the larger pack sizes.
I guess.
Holidays that I'm picking up on a fair evolution in tone since the start of the year number one and then number two.
Maybe some comments around how that's altered your your outlook for volume versus product mix alongside the increases in price and clearly you've.
You haven't altered the topline outlook can you dimension the incremental pricing anticipated. So we can solve for the difference but within that I'm curious, how you're thinking about volume versus mixed tradeoffs.
Sounds like you expect the response to skew more towards mix versus the unit volume decline, but I just did.
One of the only validate that lump sum some incremental thoughts.
I'll start with a sort of a lot of.
Unpack I mean, the nice thing on our consumer businesses.
Whether you are buying recipe mixes our bottles of spices or Frank's hot sauce.
The margins are very solid so we have a real live abroad.
Broad portfolio of products or flavor things, but really high margin business across the board. So I don't think.
Yes, I don't think theres going to be an impact there from a shift I mean, you may see in previous recessions like we've talked about it I don't think were shifting our message I think we've talked about very consistently in a recessionary periods such as 2001 2009, our products do really well we show volume growth.
And pricing growth that we need to so.
So there may be a shift in products from gourmet to recipe mixes because people are going down the value chain, but but the margins are there.
Use of the <unk> packet DSM dry seasoning mix versus a bottle actually helps us in some way so.
I think the fear that you're raising is unfair trade.
Trying to signal anything.
Talk about we offer a full range of price points.
So all the way from.
Superpremium.
Mid tier good entry price point.
At a time one.
When we in.
Everybody are taking pricing actions, we also want to make sure.
Our products are accessible to lower income consumers.
Value conscious consumers.
All right. That's all we're really trying to provide reassurance in that area.
It's not in anticipation of.
So.
Change et cetera, et cetera shifted strategy or focus for us.
Okay. Okay fair enough. Thank you very much.
Okay.
Thank you next question is from the line of Chris Growe with Stifel. Please proceed with your question.
Hi, good morning.
Hi, just had a couple of quick questions. I think these have become pretty much follow ups at this point, but just to be clear on a couple of points, but given.
Given the higher inflationary outlook, you mentioned, you do have more pricing coming online in the second quarter.
Is that and do pricing or is that pricing that was expected to pick up from some of your actions I think you put in place in the fourth quarter.
This was pricing that has been planned.
Price increases in order for them to be effective now.
We're presented before our last call I can assure you that so.
These are these are not new.
And the additional pricing that we're planning.
And the year was one.
As planned the <unk>.
Magnitude of that pricing was still flexible and we're locking that in now.
That makes sense I got it okay got it and then I just want to be clear on the cost inflation that accelerates in the second quarter.
Even though prices accelerating it sounds like it's still going to be some extra some extra costs, whether it be ERP and the new facility costs. If he does for all that would be factors that would keep the gross margin from improving much sequentially for the second half should show that improvement is more of the pricing comes through is that the way to think about that relative between price and inflation.
Maybe the second half as I said for the reasons you mentioned, but also the fact that that cost acceleration for the fuel costs and things like that into the second quarter. In addition to some of the things we've paid off the floor with some of the supply chain.
Okay.
Okay sorry.
I would just say I think you've got it okay.
Okay, Great. One quick question on flavor solutions.
You talked about some strategic investment spending is that related to future demand or is that related to Petersburg for example, or things you're moving around I'm, just curious what that referred to specifically.
Reflecting the majority of it is related to the Peterborough startup costs and redundant running cost there.
Okay. Thanks.
Thanks, So much which is a great new facility, if net carbon zero in manufacturing it and running its going to be fantastic long term.
There is a startup costs yeah yep.
Yes.
Thank you.
Our final question is from the line of Peter Galbo with Bank of America. Please proceed with your question.
Hey, good morning warrants, Mike. Thank you guys. Thanks for fitting me in.
Good morning.
Just wanted to circle back I think to some comments you made maybe maybe a few years ago around China and make sure. Some of the numbers. We're working with are still okay, but but I believe in the past you've disclosed that China is sub 10% of the business and I think about half of that business is away from home just as we're thinking about.
<unk> impacts and potential lockdowns.
It does.
Right about less than 10%.
It's.
I think that's close enough.
Okay.
Oh wait wait enrolled at homes, but yes, that's what I mean, I think that yes, I mean, you have to remember within our consumer business.
We have.
There's products, we sell that are used for both in foodservice that we classify them as part of consumer which is a little different than other parts of the world just because of the fact that could use them both channels.
Yeah.
Right Okay.
And then maybe just as a follow up Mike and I know, we've kind of gone over this on the cost inflation side and pricing but.
I I just on reconciling the gross margin guidance, specifically for the year.
Given kind of the whole youre working out it <unk> some of the lasting impact in <unk> and not margining up when you take price in the back half of the year, just how do you kind of still get too.
Flat to down 50 basis points gross margin number.
As Youre looking at it internally just can you help us there. Thanks very good all right well I think you have to remember first quarter is historically the smallest quarter. So.
And.
Back half of the year is traditionally our biggest quarter. So there you get a mapping go and that helps us as well.
We have increased volumes and pricing and things like that we've talked about.
Yes.
Helps fill some of that capture talking about I mean, we're always looking we talked we talked at Cagny, we talked on the earnings call about the things that are going to help us whether it's CCI.
People forget about the reduction in Covid costs.
We spent $60 million in COVID-19 costs last year of which some of that still remains in the underlying business, but that was a that's a big tailwind for us to help offset some of the the segment mix, we've talked about the pricing compression that we've talked about which is the main driver. So there.
There's other things we're doing whether it's Rev management, the shift to higher margin products, both in the flavor solutions side in consumer.
Essentially doing so theres a lot of things that theres, a lot of put and take puts and takes within that zero to 50% or 50 basis points for the full year, but.
We're one quarter in and it's just too early to move and things will move in that range to as things change, but Ukraine, Russia commodity cost pricing. So we're comfortable with where we are right now.
That's a lot of threw at you there.
No. Thanks, thanks very much.
Thank you.
So rich Lawrence <unk> for closing remarks.
Great. Thank you Mccormick is differentiated by the breadth of reach of our balanced portfolio, which has positioned us for sustainable growth for very proper a solid first quarter operating performance for disciplined and our focus on the right opportunities and investing in our business, we're continuing to accelerate our momentum and drive further growth as we successfully execute on our.
Long term strategies actively respond to changing consumer behavior and capitalize on opportunities from our relative strength.
We're well positioned for continued success and remain committed to driving long term value for our shareholders. Thank.
Thank you and thank you to everybody for joining today's call. If you have any further questions about any information. Please feel free to contact me. This concludes this morning's call have a nice day.
Okay.
Yeah.
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