Q2 2022 McCormick & Company Inc Earnings Call

June 29, 2022

Good morning. This is Kasey Jenkins Chief strategy Officer, Senior Vice President of Investor Relations. Thank you for joining today's second quarter earnings call to accompany this call we've posted to satisfy that ironed out Mccormick Dot Com with me. This morning from Lawrence <unk>, Chairman and CEO , Brendan Foley President and Chief.

Operating officer, and Mike Smith, Executive Vice President and CFO . 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 slides in our comments certain percentages are rounded.

Please refer to our presentation for complete information 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 thank you for more information I will now turn the discussion over to Lawrence.

Good morning, everyone and thanks for joining us I'd like to start by welcoming Brian looks at this morning's call. In addition to his continuing role as president of our global consumer business. Brendan now has responsibility for our business worldwide and the newly appointed role of President and COO.

At the end of our prepared remarks, I may ask him to weigh in on some of your questions.

Mccormick's long term performance, including through the pandemic and other volatility has been industry, leading and met or exceeded our financial objectives broadly our results in the second quarter were in line with our sales and profit expectations, despite certain global challenges, including a greater than expected level of high cost inflation.

And supply chain challenges significant disruption in China from Covid related Lockdowns and the conflict in Ukraine.

As our second quarter progress the dynamics of these conditions intensified and negatively impacted our sales and profit results.

Before discussing our second quarter results in more detail I'd like to comment on each of these starting on page five.

Consistent with the rest of the industry high cost inflation and supply chain are continuing challenges.

Partially offset cost pressures, we've taken multiple pricing actions and as planned we are raising prices again.

Inflation continued to escalate we have adjusted our upcoming pricing actions. Accordingly, we appreciate our customers working with us to navigate this environment. Additionally.

Additionally, our plans to mitigate cost pressures include our CCI led cost savings revenue management initiatives, and reducing discretionary spend where possible.

We expect our pricing actions another leap versus to begin to outpace cost pressures late in the third quarter with higher cost and higher offsetting pricing actions that we expected on our last call, which further weights are 2022 profit to the second half of the year, we plan to fully offset cost pressures over time.

In China during the second quarter, there was significant unanticipated disruptions in consumption due to severe COVID-19 related lockdowns in Shanghai and other cities throughout China.

China is our second biggest sales country with operations in Shanghai, Guangzhou and Wuhan, our Shanghai operation produces approximately 40% of our total China sales, which are distributed throughout the country that supports both of our segments.

And as a reminder, our branded foodservice demand is included in our consumer segment in China.

The Lockdowns, Alaska, roughly 75 days with our Shanghai plant forced to close for two weeks at the onset with employees living in the facility.

Once we were able to reopen we were impacted by lockdown related labor shortages due to workers being quarantined.

During April and May we incurred significant incremental manufacturing and transportation costs to supply our customers.

In addition, with restaurants, largely closed and consumers unable to shop for extended periods and our strongest geographies, we experienced significant demand softness as well.

Market conditions in China have also allow very little opportunity to increase prices, but we're currently experiencing in the short term pressure. We continue to believe in the long term growth trajectory of our business in China, but we will not be able to recover the sales and profit impact we experienced in this fiscal year.

Finally regarding the conflict in Ukraine in mid March we suspended operations in Russia, and our operations in Ukraine, where costs. These countries account for less than 1% of our overall business. We have recently decided to exit of our consumer business in Russia.

Now for more detail on our second quarter results, starting with sales on slide seven sales declined 1% from the second quarter of last year, including an unfavorable impact from currency or constant currency sales were comparable to last year with growth from pricing actions offset by a decline in volume and product mix.

The volume decline was impacted unfavorably by several discrete items, including a 1% impact from the China consumption disruption and the conflict in Ukraine I just mentioned.

1% impact from the exit of low margin business in India, and a 2% impact from lapping the U S trade inventory replenishment for last year's second quarter excluding.

Excluding these items our sales performance for the first 4% growth, reflecting the strength of our broad global portfolio and effective execution of our strategy and pricing actions.

Growth in both segments was impacted by the discrete items they were more impactful to our consumer segment, notably our growth in flavor solutions was notwithstanding.

Comparisons to 2021, and 2020 remain difficult due to the dramatic shifts in consumer consumption between at home and away from home experienced in the second quarter of the last two years.

Using 2019 as a pre pandemic baseline second quarter sales have grown at a constant currency compounded annual growth rate or CAGR of 6%.

Moving to profit adjusted operating income was down 33% from 32% in constant currency and adjusted earnings per share was down 30%.

The adjusted operating income for comparison includes 7% unfavorable impact from the disruption to China's consumption in the conflict in Ukraine.

We anticipated the profit driven by sales growth in the second quarter would be more than offset by higher inflation and broad based supply chain relative to the impact was greater than expected due to continuing cost escalation.

While this pressured second quarter profit, we expect to mitigate this impact later this year.

Now moving to the second quarter business updates for each of our segments.

Starting with our consumer segment on slide nine our second quarter sales reflect the impact of our pricing actions in all three regions in the Americas. Our first wave of pricing was phased in during our fourth quarter of last year. The second wave during the second quarter in April and a third wave will go into effect at the end of the third.

Quarter.

But the first wave we saw a very low level of elasticity.

But the second wave, we are seeing more price elasticity, although still below historical levels.

While consumer spending has remained strong consumers are now under significant pressure for broad based inflation, notably fuel prices and other macro factors.

As we look ahead and our additional pricing actions are faced in elasticity, we experienced may change, but we still expect the impact to be lower than historical levels.

Overall, our pricing actions in EMEA and <unk> are on track and our elasticity impacts are similar to the Americas.

In EMEA and APC pricing timing varies by market, but in each region.

Some markets, particularly in EMEA, there are regulatory guidelines on when we take pricing, which generally creates a lag in the timing of pricing compared to the Americas.

In this unprecedented environment. However, we are taking additional actions in markets across EMEA.

Now for some further highlights by region, starting with the Americas.

Our total U S branded portfolio of consumption as indicated by our IRI consumption data and combined with unmeasured channels grew 1%.

And over the last three years since 2019 consumption has grown at a three year CAGR of 7%, which highlights how the sustained shift in consumer consumption continues to drive increased demand for our product and outpaced pre pandemic levels.

In the Americas, our sales declined in the second quarter included the impact of lapping of 4% over shipment of consumption to replenish retailer inventories in the second quarter of last year, our second quarter shipments. This year were in line with our consumption changed.

Demand has remained high and we are realizing the benefit of the manufacturing capacity, we added as well as our increased resilience.

However, some products remains stressed by sustained high demand.

Shelf conditions continue to improve as seen in our recipe mix share performance of another quarter of share gains.

Our spices and seasonings share was pressured during the quarter by the shortage of certain packaging materials as well as certain organic spaces. Some of these have been resolved at some will remain ongoing.

We continue to use our category, where revenue management capabilities to strengthen our spices and seasoning portfolio and optimized the category performance for both Mccormick and our retailers.

The strength of our brands and our category leadership as recently won us new distribution, which we will begin to realize later this year.

In EMEA, we continue to have strong share performance in most categories and markets. During the second quarter, we lapped strong year ago consumption, partially due to last year's COVID-19 related restrictions throughout EMEA, where restrictions extended longer than other regions are bought in a brand of homemade dessert products in frac.

It's a product line unique to our EMEA region.

Most impacted as recently, we have seen baking returned to a more pre pandemic baseline level and.

In other categories in the region, we believe theres been a step up in consumption.

And then the Asia Pacific Region. In addition to the consumption disruption in China second quarter growth was impacted by the exit of low margin business in India at the end of last year, we decided to exit our rice business. The <unk> brand to enable the region to focus on our higher margin core category.

Turning to flavor solutions on slide 10, our sales performance for the quarter was outstanding with both pricing and volume growth contributing we grow double digit growth in both at home and away from home parts of our portfolio.

Looking at our flavor solutions growth over the past three years since the COVID-19 restrictions caused dramatic second quarter comparison in 2020 one hour.

Our sales CAGR is 8% largely driven by volume.

Our pricing actions increased sales in all three regions.

<unk> pricing actions and the branded foodservice part of our portfolio follow the same cadence as those in each regions consumer business and.

And the rest of our flavor solutions business pricing is based on contractual windows with automatic price adjustors in many contracts.

Timing is going to vary based on those windows.

In this dynamic environment, though with cost escalating. So quickly we are having discussions outside of those windows and passing costs through faster than usual.

Higher volume also contributed to growth in the Americas and EMEA region demand has remained strong for certain parts of our business in these regions. Our supply chain is being pressured to meet this demand and we are still taking on some extraordinary costs to service our customers. We appreciate our customers working with us through this pressure.

In the Americas, where our customer base of skews more to packaged food and beverage customers are at home customers strong growth was driven by flavors for savory snacks as well as performance nutrition and health applications with these customers.

EMEA, our customer base is more skewed in quick service restaurants, or <unk> and our strong <unk> momentum contributed to growth in all markets, partially driven by expanded distribution.

Branded foodservice growth was strong in both the Americas, and EMEA regions, driven by restaurant and institutional foodservice customer.

<unk> continues to strengthen in the channel, particularly as traveled accelerates and restaurants benefit from consumers shifting to takeaway and delivery.

Overall, our flavor solutions sales demand and growth momentum continues to be strong.

Now, let me expand on our growth platform and positioning in the current environment.

Turning to slide 11, and global demand for flavor remains the foundation of our sales growth and we are intentionally focused on great fast growing categories that we 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 engagement trusted brands on purpose minded practices.

This long term trend and the rising global demand for great taste are as relevant today as ever with the younger generations fueling them at a greater rate Mccormick is uniquely positioned to capitalize on the demand for great taste, but the breadth and reach of our global flavor portfolio. We are delivering flavor experiences for every meal occasion.

Through our products and our customers' products, we are end to end flavor.

We continue to make investments to sustainably meet growing demand and to fuel further growth.

Global supply chain, we increased our capacity for the recently opened UK Peterborough flavor solutions manufacturing facility and have begun our expansion of bonus footprint to support future flavor growth.

We are also increasing our capacity in the fast growing hot sauce category and investing seasoning capacity to support increased demand and strengthen resiliency.

As we've said with the sustained level of high consumer demand, we're benefiting from the manufacturing capacity we've added.

While we still experienced disruptions in the supply chain are much more specific mainly from a transportation and packaging supply standpoint, we experienced the peak disruption in the third quarter of last year and with every month to supply chain continues to get better we feel good about the progress we're making.

We are strategically investing behind our brands to drive growth, including in brand marketing as we did throughout the pandemic with our three year branch marketing canker approximating our consumer segment sales CAGR over the same period.

We're pivoting our messaging to emphasize to consumers, how our products help them stretch their grocery dollar for.

For instance for launching digital messaging, highlighting the value of our product, but making a great flavor full meal economically we add flavour for only pennies per serving and recipes like our 30 minute Taco casserole, our family and budget friendly answers to what's for dinner.

We continue to invest in new products in our consumer segment, we are responding to new consumer behavior like increased at home lunches for instance, our new patent pending french's creamy muster is off to a great start.

We're sensitive to the needs of price conscious consumers not just in these challenging economic times, but every day.

Our portfolio includes branded items to accommodate consumers' needs and provide solutions for everyone. At every price point as well as private label products. Our new product launches include additional entry level price point product for affordability and larger sizes of key high usage items for better value.

While we are still seeing strong consumer spending we know that inflation is a significant concern for consumers more so than COVID-19 for leveraging our proprietary research for service well during the pandemic to monitor for any signals of changing behavior. Our research continues to indicate consumers are going to cook as much or more.

More than they did during the pandemic for many reasons one of them is that they find it more economical.

To the extent there is a recession if further reinforces cooking at home and we know from our past sales performance at our categories and brands performed well during recessionary period.

Now for some summary comments on slide 13 before turning it over to Mike.

We remain focused on our long term goals strategies and values that have made us. So successful we have grown and compounded that growth over the years, regardless of the environment. The long term fundamentals that drove our industry, leading historical performance remained strong.

The strength of our business model the value of our products and capabilities and the execution of our proven strategies by our experienced leaders while adapting to changes accordingly gives us confidence in our growth momentum and in our ability to navigate the challenging global environment.

Despite the pressures we experienced in the second quarter, we are well positioned and confident in delivering strong performance in 2022 and beyond while driving sustainable long term value for our shareholders.

Cormack employees continued to do a great job navigating dynamic environment their agility and their teamwork, our momentum and success and I want to thank them for their dedicated efforts and engagement and now I'll turn it over to Mike.

Thanks, Lawrence and good morning, everyone. Starting on slide 15, our topline constant currency sales were comparable to the second quarter of last year, reflecting 7% growth from pricing actions offset by a 7% decline in volume and product mix, excluding the 4% impact of the discrete items Lawrence mentioned earlier, our sales performance would have reflected $4.

<unk> Chris.

<unk> segment sales declined 7% in constant currency the impact from lapping the U S trade inventory replenishment the consumption disruption in China.

Exit of low margin business in India, and the conflict in the Ukraine contributed 6% to that decline.

The remaining 1% decline was due to lower volume, partially offset by pricing actions on a three year basis, our second quarter constant currency sales CAGR was 4%.

On slide 16 consumer sales in the Americas declined 4% in constant currency, driven by lower volume and mix, partially offset by pricing actions. This decline is attributable to lapping trade inventory replenishment in the second quarter of last year over the past three years constant currency sales in the Americas grew at a CAGR of 7%.

Yeah.

In EMEA constant currency consumer sales declined 11%, primarily due to lapping high year ago demand driven by Covid related lockdowns. The most significant impact of which was lower sales at Viking today homemade dessert products.

1% unfavorable impact from lower sales in Russia, and Ukraine also contributed to the decline.

<unk> actions in all markets, partially offset the lower volume over the past three years EMEA constant currency sales grew at a 3% CAGR.

Constant currency consumer sales in the Asia Pacific region declined, 18%, including a 20% unfavorable impact from the consumption disruption in China as well as the exit of low margin business in India.

Pricing actions in all markets across the region, partially offset this unfavorable impact.

On a three year basis.

<unk> second quarter constant currency sales CAGR was a 7% decline driven by the China and India impacts I just mentioned <unk>.

Excluding this impact sales grew at a 5% CAGR over the past three years.

Turning to our flavor solutions segment in Slide 19, we grew second quarter constant currency sales, 11% due to pricing actions as well as higher volume and mix.

This growth was partially offset by a 1% decline in sales related to the combined impact of the China disruption and the conflict in Ukraine.

Second quarter constant currency sales for the last three years grew at an 8% CAGR.

In the Americas flavor solutions constant currency sales grew 12% driven by both pricing and the combination of volume and mix higher sales to packaged food and beverage companies with particular strength of snack seasonings led the growth with higher demand from branded foodservice customers also contributing to growth over the <unk>.

Past three years constant currency sales in the Americas grew at a CAGR of 8%.

In EMEA, we drove 19% constant currency sales growth with a 14% increase in volume and mix and 5% related to pricing actions.

Flavor solutions growth, excluding a 1% decline related to the conflict in Ukraine was broad based across the portfolio.

By strong growth with <unk> and branded foodservice customers.

Over the past three years EMEA is constant currency sales grew at a 10% CAGR.

In the Asia Pacific region flavor solutions sales declined 6% in constant currency.

The decline was driven by a 7% impact from lower volume in China due to the COVID-19 related restrictions, partially offset by pricing actions in all markets across the region.

Z grew constant currency sales at a 3% CAGR over the past three years.

As seen on slide 23, adjusted gross profit margin declined 550 basis points in the second quarter versus the year ago period.

Realizing this is a sizeable compression I will spend a moment on the significant drivers.

Let me start with the drivers we anticipated.

First nearly half of its declined approximately 250 basis points is due to the dilutive impact of pricing to offset our dollar cost increases we focus on gross profit dollars. This impact was more significant than in the first quarter because of the higher level of pricing in the second quarter.

Product mix was unfavorable as compared to the second quarter of last year.

In our consumer segment as we mentioned earlier, we're lapping strong U S spices and seasonings growth related to the inventory replenishment.

In our flavor solutions segment sales growth in our away from home products was higher than our at home products and we are lapping strong sales of beverage flavors last year.

The sales shift between our consumer and flavor solutions segments also contributed to the unfavorable product mix.

In our flavor solutions segment as we mentioned in our last earnings call gross margin was unfavorably impacted by startup and dual running costs as we transition production to our new UK Peterborough manufacturing facility.

Of note CCI led cost savings, partially offset the impacts I just walked through and we are on track to deliver our expected savings of $85 million for the full year.

In addition to the net impact of the anticipated items I just detailed gross margin was also unfavorably impacted by the following items.

As Lawrence discussed cost inflation and supply chain pressures escalated during the second quarter impacting our results more than expected primarily related to transportation costs and faster turning materials.

While we have adjusted our upcoming pricing actions to reflect that escalation and we plan to fully offset cost pressures over time, our second quarter gross margin compression reflects the usual lag associated with pricing.

We expect pricing to be begin outpacing the cost pressures later this year and continue into next year.

Our cost recovery will vary by region and segment currently our pricing lag is more significant in our flavor solutions segment.

Lauren as previously mentioned, we have incremental cost to meet strong demand for certain parts of our flavor solutions business, thus impacting our gross margin.

And finally as already mentioned significant costs due to the COVID-19 related restrictions in China had an unfavorable impact to profit.

Moving to slide 24, selling general and administrative expenses were lower than the second quarter of last year and as a percentage of net sales declined 20 basis points. The decline was driven by lower employee benefit and brand marketing expenses as well as discretionary spending reductions, partially offset by higher distribution costs.

<unk>.

The decline in brand marketing investments was driven by China, and Russia reductions importantly across our other markets, we invested in brand marketing at a comparable level to last year.

The net impact of the factors I just mentioned resulted in a decline in adjusted operating income, which excludes special charges of 33% compared to the second quarter of 2021.

In the consumer segment adjusted operating income declined 29% and in the flavor solutions segment declined 40% a.

A 1% unfavorable impact from currency is included in each of these declines.

Turning to income taxes on slide 25, our second quarter adjusted effective tax rate was 18, 6% compared to 22, 2% in the year ago period.

Driven by a higher level of discrete tax items this year.

At the bottom line shown on slide 26 second quarter 2022, adjusted earnings per share was <unk> 48 as.

As compared to 69 for the year ago period the decrease.

It was driven by a lower adjusted operating income.

On slide 27, we summarized highlights for cash flow in the quarter end balance sheet our.

Our cash flow from operations was $154 million through the second quarter of 2022 compared to $229 million through the second quarter of 2021.

This decrease was primarily driven by lower net income cash flow from operations will be weighted to the second half of the year similar to our profit growth.

We returned $198 million of cash to our shareholders through dividends and used $102 million for capital expenditures through the second 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 28.

As a reminder, last quarter the conditions in Russia, Ukraine, and China were just unfolding and cost inflation and supply chain challenges remain dynamic and fast moving.

Today, we have a better view of the macro environment and our guidance for the full year considers the greater impact from these items. In addition, and as noted previously we have always expected our profit growth to be weighted to the second half of the year. We now expect it to be even more so.

We are projecting strong topline growth with profit impacted by the global challenges I. Just mentioned, we also expect there will be an estimated two percentage point unfavorable impact of currency rates on sales adjusted operating income and net earnings adjusted earnings per share and.

An increase from our previous estimate of one percentage point unfavorable.

On the top line, we now expect to grow constant currency sales, 5% to 7%, we expect sales to be driven primarily by pricing, which will accelerate significantly in the second half versus the first half, while we anticipate volume and product mix to be impacted by increasing elasticities, we expect Alaska.

<unk> to remain at a lower rate than historical levels are.

Volume and product mix will also continue to be impacted by the pruning of lower margin business from our portfolio as well as the impact of demand disruptions in China and Ukraine we.

We plan to drive continued growth through the strength of our brands as well as our category management brand marketing, new product and customer engagement growth plans.

We are now projecting our 2022 adjusted gross profit margin to be 200 to 150 basis points lower than 2021.

Given the rapidly escalating cost environment cost pressures have outpaced our pricing and future actions had been adjusted to reflect the higher cost level.

This adjusted gross margin compression reflects the impact of a high teens increase in cost inflation and unfavorable impact of sales mix between segments and favorable impacts from pricing and CCI led cost savings.

As a reminder, we price to offset dollar cost increases we focus on gross profit dollars.

It has a dilutive dilutive impact on our adjusted gross margin and is the primary driver of our projected compression.

We now expect to grow our adjusted operating income 2% to 4% in constant currency. In addition to the gross margin impacts I. Just mentioned this projection also includes our CCI led cost savings target of approximately $85 million and brand marketing investments comparable to 2021, which refer.

Flex reductions in China and Russia.

Considering the year to date impact from discrete items as well as our estimated mix of earnings by geography, We now project. Our 2022 adjusted effective income tax rate to be approximately 22%.

This outlook is expected to be a year over year headwind to our 2022 adjusted earnings per share of <unk>.

Approximately 2%.

We are lowering our 2022 adjusted earnings per share expectations to a range of $3 <unk>.

Two $3 eight.

This compares to $3 <unk> of adjusted earnings per share in 2021 and represents a decline of 1% to an increase of 1% or <unk> constant currency growth of 1% to 3%.

This reflects our lower adjusted operating profit outlook, and an expected $15 million benefit from the impact of optimizing our debt portfolio.

In addition, we are well positioned with our broad and advantaged flavor portfolio and effective growth strategies to continue our operating momentum and drive another year of strong performance.

Thank you Mike now that Mike has shared our financial results and outlook in more detail I'd like to recap the key takeaways as seen on slide 29.

Our long term performance has been industry, leading and met or exceeded our objectives, including through volatile environments. The long term fundamentals that drove this historical performance remained strong.

Several discrete items unfavorably impacted our sales comparisons for the second quarter of last year <unk>.

Excluding these impacts our sales performance reflects the strength of our broad global portfolio, the effective execution of our strategies and our pricing actions are sales growth momentum is strong.

Persistent high cost inflation and supply chain challenges intensified as the second quarter progressed and unfavorably impacted our profit.

Fortunately, we expect to mitigate this impact in the second half of the year.

We're confident that with our broad and advantaged flavor portfolio effective growth strategies, and our ability to navigate challenging environments. We will drive another year of strong performance in 2022 and build value for our shareholders now lets turn to your questions.

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.

Information tone will indicate your line is in the question Kim You May press star two if you'd like to remove your question from the queue.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

First question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Thanks, very much good morning, everybody good morning, Andrew.

Alright.

I guess first off as you talked about organic sales came in below where the street was looking for it.

Raise the outlook for organic for the full year and I. Appreciate some of the items in <unk> you highlighted were discrete but maybe you could talk a little bit about what gives you the confidence in raising the organic guidance for the full year are you expecting headwinds in.

<unk> to become <unk> in the second half or or better momentum in the underlying business.

Scanner data is not necessarily shown any meaningful inflection yet that I can see at least on a year over year basis I appreciate that the multiyear.

Organic sales, so I'm trying to get a better sense for.

The underlying confidence in raising the full year organic start with loans.

Sure Andrew well first of all.

Plan as we.

Sure.

Kohls.

In conferences.

As always been back half loaded.

Stronger in the second half.

In the first half.

And.

And one of the factors driving that is the cadence of our.

Pricing actions.

Yes, there is.

Twice as much effective pricing in the second half of the year.

In the first half of the year and as you can see right now.

For the quarter.

Sure.

Pricing contribution to sales.

About 7%.

And it's significantly higher going into the second half of the year and how does it a big driver of coal and it will build third quarter fourth quarter.

Right.

And and and.

And that's I mean, that's the driver sales Tulsa driver on the operating profit and EPS.

As we go through the second thing is that we.

We did not expect the disruption we've had in China.

Second quarter.

Yes.

Step of the Lockdowns was was it a surprise to us and I think to everybody in China.

A big contributor.

To us and we expect a normalization of business in China.

As we go through the second half, particularly really expect it to be normal by the time, we get for it.

And then just our experience with the initial Covid Lockdown a couple of years ago tells us that there.

We get normalization.

That's significant.

Yes.

Urgent restocking.

By being both the consumer and fine.

Our trade channels.

We would expect.

The strong contribution from China.

Second half of the year, and then finally, our U S and EMEA.

With less difficult comparisons going into the second half than they did in the first half of the year.

Sure.

Im not talking not lapping inventory replenishment that we talked about last year.

And also not.

Lapping some of the Covid lockdowns that work.

In effect.

And.

Particularly in the second.

Second quarter and finally, we expect continued strong underlying demand from our from our consumers and our customers.

We're continuing to see.

Mike do you have anything you want to add to that.

Yes, I think I'd add to it.

See a lot of strength in our flavor solutions business, we saw that in the second quarter and we know that will continue in the second half.

So we certainly think thats going to support I think really our outlook for the second half of the wall.

But also we're seeing a lot of new business come through in the back half of the year in both segments.

And so we see a lot of strength coming through on that too. So the gross to net and it does look even stronger as we move towards the back half.

And then just a quick follow up I don't think you mentioned it I know you did last quarter.

When you were talking about in the core consumer business private label had not yet really had much of a move one way or the other.

I don't think you mentioned it this time around I'm, just curious what youre seeing there anything of note.

We should be aware of thanks, so much.

I don't think that Theres anything special note there.

<unk> seen some trade down by consumers.

Not just in our category, but in other categories that we track.

<unk> it.

It's no surprise that.

The consumers at the lower end of the income scale, particularly.

Our feeling a bit of pressure from inflation, not not ours, but inflation across everything.

I mean gas prices are five or $6, a gallon, depending on where you live and that puts pressure on consumers' pocketbook, but I would say that it's still a pretty low level, particularly when we look at our brands and the elasticity that we're experiencing it's still significantly below.

Our quote levels.

It's not a particular concern.

Thanks, So much I'll tell you also I'll add to that our sales of private label products.

Our surplus.

Important part of our business, but not particularly surging.

Thank you.

Thank you. Our next question comes from the line of Ken Goldman with Jpmorgan. Please proceed with your question.

Hi, Thanks, so much.

I just wanted to make sure I heard your commentary about pricing correctly, and then im doing some basic math right. You did about I think 6% pricing in the first half youre, saying that will double in the second half and you also I think are implying that you need around 10% organic sales growth in the second half to hit your guide sorry to do the math on that.

Call I apologize for putting you on the spot, but are you effectively saying that it's reasonable for us to model, maybe 12% pricing overall in the second half.

Volumes are down around 2% is that can I follow up with you.

Yes, Ken I'll, let me, let me start with that.

Mike pointed on that but I think youre right you are in the right neighborhood.

With the.

Those numbers.

Took.

Yes.

So when I think about the cadence of her increases and the timing of their.

Claire effectiveness youre in the right neighborhood.

You think about going from six to 12.

In the second half.

Yeah.

And our next pricing action and are in the Americas our largest.

Region.

In August and so.

If you're thinking about the phasing that.

You should have that in mind as well I'd also just add you're going to see it across both consumer and flavor solutions pretty much the same level.

Oh, great. That's helpful. Thanks, and then quick follow up.

It sounds like you've mentioned pricing will kind of phased in a little bit over the second half in this context and given some of the other factors you talked about how do we think about the cadence of the gross margin improvement in the back half should we expect a substantial improvement in <unk> is it more <unk> weighted maybe any color you can provide there would be helpful.

As we think about modeling. Okay. This is Mike Great question, Yeah, we see actually the cost peak year on year, we see as third quarter.

A little bit of moderation in the fourth quarter, we see the pricing obviously growing.

Second to third to fourth so I think what you'll see is some still some gross margin challenges in the third quarter, but in the fourth quarter the combination of impact of that pricing.

Full benefit there in the costs and also think about the fourth quarter is our strongest quarter overall from a volume perspective there.

And as Martin said before things like China, which we make really good margin on that as that recovers.

Third and the fourth too that should be a positive for <unk>.

Great. Thank you so much.

Yeah.

Thank you. Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.

Yes, Hey, thank you and good morning.

So you gave a good deal of bottoms up color on the incremental headwinds facing the business.

I think I think I'm clear on that but just want to play it back from the top down.

Because your overall sales outlook Hasnt really changed.

The more adverse currency.

We're now expecting a marginally lower tax rate, a marginally lower share count slightly less brand marketing and while we expect the cost inflation is higher at the high teens level, it's not outside the bounds of the prior outlook.

I guess just want to isolate and see if he can better define what is exactly driving the reduced operating profit EPS. So EPS outlook. It feels like it's the updated outlook on China, Russia, Ukraine, and supply conditions above and beyond the normal cost inflation, but I just want to I want to.

Confirm that and if there's a way to quantify or rank order those.

Those factors that'd be great.

This is laurence.

Thank you.

Yes.

Some of the little things.

I think we're going to want to come back and talk about some of those marginal changes that you talked about on the big picture items, you've got it exactly right and in fact this was.

Part of what we were trying to message.

At your recent conference.

Yes.

The big change here are the things that were external factors that surprised us.

And that is whats flowing through I'll, let Mike walk through the.

Actual bridge on that but yes.

Think about what our guidance coming down 14th.

If you think about.

China, Russia, Ukraine perspective, that's 11 right there and then FX as you said were gone up one 1% that's three since there so there's a 2014.

Now, we're recognizing that the cost inflation, which you mentioned we've had we had mid to high double digit.

I actually knew that the high double digits, so 1% to 2% more costs during the year driven by transportation packaging things like that so that did hurt us in the second quarter.

A bit of that through the rest of the year, but what we are pricing to help mitigate that.

And then below the line some of the things you talked about taxes, a little bit of a help some of the interest.

Things are going to help offset that.

But the big drivers of the external factors.

The one thing I wanted to just correct you on Brent or just give you insight brand marketing that is now flat. However that is really driven by the reduction in China, Russia, Ukraine and FX. So we're still spending up in our in our big.

Big markets to drive to drive growth.

Okay. That's that's helpful. Yeah, that's perfect. That's perfect just a quick follow up on the.

The.

To follow up on Ken's question, just the cadence of gross margin is there is there anything you would call out in the second quarter as.

Truly <unk>.

Transitory so is there anything.

The headwind that you experienced in the second quarter that is kind of unique and discrete to the second quarter that doesn't carryover at least directionally I'm trying to get a sense. If there's anything behind you. The only thing I would say.

Youre, new to our business, but the China business to US is very material is our second biggest market we have.

Three three large manufacturing facilities and the shutdown really put a lot of pressure on our cost there a lot of extra cost for transportation loss absorption or things like that so as that business recovers, obviously that goes away.

I think the other thing too is if you think about some of these costs that came up rapidly like transportation and packaging I mean fuel costs. If you. If you go back to March gasoline prices in the quarter versus March were up 25% that stuff rolls through the P&L very quickly.

And pricing will catch up on that.

A one month lag in pricing because the $30 million to $40 million of of impact, which is like 10 cents a share. So yes, we're mitigating that as quickly as we can but sometimes we see that as kind of stabilizing now and going forward like I told you of third and fourth quarter, where we see our cost outlook, but I think that is.

To your point about what is transitory what is not I think that gets most of it Steve.

Underscore the timing aspect.

One month difference in the effective date of our price increase.

With us.

We'd be having a different conversation.

But it would be.

11, and 12 cents of EPS on the quarter.

Quarter end.

Ed.

And of course, those those price increases are in effect I'm, just a bit but there's been one.

A month earlier, that's what the difference worth it.

Yes.

We're pretty confident that that.

The work that we're going to catch up with the costs.

Understood I just wanted to play back just real quick.

Mike's point I'm trying to think I get it that China was uniquely.

Detrimental to <unk>, but I don't think youre, saying that thats, 100% transitory that it doesn't.

<unk> first that's not behind you right that it gets better.

But it's not.

So that's why that's why I said, that's going to really help us in the fourth quarter more of it.

Fair enough yeah different levels of openings that are happening now that will happen throughout the quarter.

Yes.

Understood. Okay. Thank you very much.

Thank you. Our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.

Hi, Thanks for the question.

Rob.

Hi, Laurence.

When you in your opening remarks, you said that your research shows that there is.

Consumers will continue to cook as much at home as they did during the pandemic if not more.

And just anecdotally.

I find that this year, that's not the case you know people are regaining mobility.

Returning to the workforce what have you and you can see it in your numbers too. So do you have any like kind of real time.

Insight into how consumer consumers are behaving this year.

In light of the fact that your category in the U S.

It's much weaker than other packaged foods categories have been tracking.

Bill let me take that one sure.

Morning.

I guess just to.

React to some of those launch into shared there.

Seeing through a lot of our research also what we're seeing.

Secondary research out there is that there is a still a heavy level of sustained cooking at home.

In the data.

Overall weather, we're researching it or we're getting it from some of our our suppliers there.

We see a sustained level of eating at home.

Overall, I would say that.

The consumer hasn't really changed that much now.

It's performing in our categories, we're seeing it play out in a number of our categories. A recipe mix Hot sauces, we still have a lot of strong sort of consumption growth there and so we certainly still see it play out.

Certainly there are categories like meat, where you see you do see some decline.

Going on there that might affect an item or two here, but we definitely still have a very balanced portfolio, where we're seeing still a lot of at home consumption going on.

And frankly, historically, if you go back a long way with us.

Session does occur that will drive more people cooking at home, so that bodes well I think for our broad portfolio and our research I would say is as recent in the last 30 days.

<unk> us that there is still a sustained level.

I mean look at it.

Our flavor solutions.

Business, I mean, clearly food services.

His strong restaurants are pretty open people are not forced to cook at home, but there still seems to be a strong preference in that direction.

And actually.

As we went through the first half.

We saw that.

The.

Macro data that.

There was a return to dining away from home and a reduction in cooking at home and <unk>.

<unk> has started to turn back the other way probably driven by economic pressures on consumers cooking at home is more economical.

I think for a variety of reasons.

So pretty.

Optimistic on a whole.

Retention of cooking at home.

Behaviors.

There are some pockets that are different baking.

It was really largely driven by kids being at home from school, we've seen in banking.

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