Q2 2022 McCormick & Company Inc Earnings Call

June 29, 2022

Good morning. This is ky jenk's Chief strategy Officer. senor, Vice President, Investor Relations. Thank you for joining today's second quarter earnings call. To accompany this call, we posted a set of slides that IR do McCormick, com with me this morning: our laurece curest, Chairman eo, runan Foley, President and Chief Operating Officer, and Mike Smith, Executive Vice President and CF. During this call, we will refer to certain non-GAAP financial measure. 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 sles.

In our comments. Certain presentes 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 public lyate any forward-looking statements, whether because of new information, future events or other factorsplease refer to our forward-looking statement on Slide Q for more information. I will now turn the discussion over to laureren.

Good morning everyone. Thanks for joining us. I'd like to start by welcoming brandman for this morning's call. In addition to his continuing role as President of our global consumer business, brena now has responsibility for our business worldwide in this newly appointed role of President and COO.

Speaker 1: At the end of our prepared remarks. I may ask them to weigh in on some of your questions.

mccormx's long-term performance, including through the pandemic and other volatility, has been industry-leading and met or exceed our financial objectives.

Speaker 1: Broadly, our results in the second quarter were in line with our salable 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 cot-related lockdown and the conflict in Ukraine.

As our second quarter progressed, the dynamics of these conditions intensified and negatively impacted our sales and prst results.

Speaker 1: 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.

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

Inflation continued to escalate and we have adjusted our upcoming pricing actions accordingly.

Speaker 1: We appreciate our customers working with us to navigate this environment.

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

We expect our pricing actions and other levers to begin to outpace cost pressures late in the third quarter, with higher costs and higher offsetting pricing actions than we expected on our last call, which further weiates our 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 disruption in consumption due to severe cot-related lockdowns in Shanghai and other cities throughout China.

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

And as a reminder, our branded food service demand is included in our consumer segment of China.

The lockdowns last abruptly 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 in our strongest geographies, we experienced significant demand softness as well. Market conditions in China have also allowed very little opportunity to increase prices.

Speaker 1: While we're currently experiencing 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 recouse. These countries account for less than 1% of our overall business. We have recently decided to exit our consumer business in Russia.

Now for more details on our second quarter results, starting with sales. On Slide 7: sales declined 1% from the second quarter of last year, including an unfavorable impact from currency.

Speaker 1: Our constant currency sales were. Comparable to last year was growth from pricing actions offset by a decline in volume and product mix.

Excluding these items, our sales performance put have been 4% th, reflecting strength of our broad global portfolio and effective execution of our strategies and pricing actions.

While growth in both segments was impacted by the discrete item, they were more impactful to our consumer segment notably, our growth in flavor solutions was outwithstanding.

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

Using 2019 as a prepandemic baseline second quarter sales have grown at a constant currency compounded annual growth rate or care of 6% and the.

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

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

Although we anticipated the profit driven by sales growth than the second quarter would be more than offset by higher inflation and broad-based supply chain chative, 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 second quarter business updates for each of our segments.

Starting with our consumer segment. On Slide 9, 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 the third wave will go into effect at the end of the third quarter.

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

But the second wave. We are seeing more price elasticity, although still belong historical level.

Speaker 1: While consumer spending has remain 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 experience may change, but we still expect the impact to be lower than historical levels.

Overall our pricing actions in mea and APZ are on track and our elasticity impacts are similar to the Americas.

In ea and APZ. Pricing timing varies by market for the each region.

In some markets, particularly at eda, there are regulatory guidelines of when we take pricing which generally creates the lag and assigning of pricing compared to the Americas.

In this unprecedented environment however, we are taking additional actions in markets across the Na.

Now for some further 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 1% and.

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

In the America, S sales declined in the second quarter included the impact of lapping a 4% overship 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 change.

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 remained stretched by sustained high demand.

shehel's conditions continue to improve a scene on our restcipe mix share performance of another quarter of share gain.

Speaker 1: Our spices and seasoning share was pressured during the quarter by the shortage of certain packaging materials, as well as certain organic spices. Some of these have been resolved and some will remain ongoing.

We continue to use our category for revenue management capability to strengthen our spices and seasoning portfolio and optimize the category performance for both McCormick and our retailers.

Speaker 1: The strength of our brand and our category leadership has recently won us new distribution which we will begin to realize later this year.

In the EMEA, we continue to have strong share performance in most categories and markets.

During the second quarter we laped strong year-ago consumption, partially due to last year's COVID-related restrictions throughout EMEA, where restrictions extended longer than other regions.

Our bte brand of homemade dert products in France, a product line unique to our eda region, was most impacted. As recently we've seen baking returned to a more prepandemic baseline level and other categories in the region, we believe there's been a step-up in consumption.

And in 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 expected to exit our rice business, the kouan ore brand, to enable the region to focus on our higher-margin core category. Turning the flavor solutions on Slide 10, our sales performance for the quarter was outstanding, with both pricing and volume growth contributing. We grerove double-digit growth in both the time home and away from home parts of our portfolio.

Speaker 1: Looking at our Flavor Solutions, growth over the past three years since the COVID-19 restrictions coused dramatic second quarter comparisons in 20 per 21. our sales taigger is 8%, largely driven by volume.

Our pricing actions increased sales in all three regions.

Speaker 1: Broadly pricing actions in the branded food service part of our portfolio follow the same CAD as those in each region's consumer business.

And the rest of our Flavor Solutions. Business pricing is based on contractual windows with automatic price suggters in many contracts, and the timing is going to vary based on those windows and this dynamic environment. Though, with costs escalating So quickly, we are having discussions outside of those windows and passing costs through faster than usual.

Our volume also contributed to growth in the Americas and EMEA region.

Speaker 1: Demand has remained strong for certain parts of our business in these regions. Our supply chain has being pressured to meet this demand and we are still taking on some extraordinary costs to service our customers.

Speaker 1: We appreciate our customers working with us through this pressure.

In the Americas, where our customer base is, skews more to package food and beverage customers, our at-home customers.

Strong growth was driven by flavors for sabreres snact, as well as performance, nutrition and health applications with beef custommer.

In EMEA our customer base is more sspeed quick service restaurants for QSRs and our strong QSR momentum contributed to growth in all markets, partially driven by expanded distribution.

Branded food service. Growth was strong in both the Americas and EMEA region.

Driven by restaurant and institutional food service customers. Demand continues to strengthen in this channel, particularly as travel accelerate and restaurant benefit from consumers shifting to takeaway and delivery.

Overall our Flavor Solutions, sales demand and growth momentum continues to be fong.

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

Turning to Slide 11. global demand for flavor remains the foundation of our sales growth and we ve intentionally focused on great, fast-growing category that will continue to differentiate our performance. We are capitalizing on a long-term consumer trend that accelerated during the pandemic: healthy and flavorful cooking, increased digital engagement, trustedit brands and purpose-minded practices.

These long-term trends and the rising global demand for great pace are as relevant today as ever, but the younger generations fueling them at a greater rate.

Mccormick is uniquely positioned to capitalize on this demand for great pacete, but the breadth and reach of our global flavor portfolio. We are delivering flavor experiences for every meal location through our products and our customers' products. We are end-to-end flavor.

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

In our global supply chain. We increased our capacity with a recently opened U K peterborough Flavor Solutions manufacturing facility and, as we UN errred our expansion of bonus footprint to support future flavor growth. We are also increasing our capacity and the fast-growing hot soft category and investing in 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 add it, while we still experienced disruptions in the supply chain and are much more specific, mainly from a transportation and packaging supply standpoint. We experienced the peak disruptions in the third quarter of last year and when, every months, the 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 brand marketing taker approximating our consumer segment sales takers for the same period.

We're pivoting our messaging to emphasize to consumers how our products helped them stretch their grocery dollar. For instance, for launching a digital messaging highlighting the value of our product but making a great flavorful meal economically. We add flavor for only pennies per serving and recipes like our thirty-minute Taco cast roll, 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, a increase at home wunches. For instance, our new patent pending- French's creami 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 products for affordability and larger sizes of P. high usage items for better value.

Speaker 1: While we are still seeing strong consumer spending, we know that inflation is a significant concern for consumers, more so than cot. We re 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 at home, or more, than they did during the pandemic, from many reasons. one of them is that they find it more economical to the extent there in the recession, that further reinforces cooking at home, and we know from our past sales performance that our categories and brands perform well during recessionary periods.

Now for some summary comments on Slide 13, Before turning it over to Mike.

We remain focused on the 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- a long-term fundamental that drove our industry-leading historical performance- remained strong.

Speaker 1: 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.

Speaker 1: 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.

The corman employees continue 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 on engagement. And now I'll turn it over to Mike.

Speaker 1: Thanks larence, and good morning everyone. Starting on Slide 15, our top line 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.

Speaker 1: Excluding the 4% impact of the discrete items Lawrence mentioned earlier, our sales performance would have reflected 4% growth.

Consumer segment sales declined 7% in constant currency. The impacts from lapping the? U's trade inventory replenishment, the consumption disruption in China, the 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.

Speaker 1: On a three -year basis. Our second quarter constant currency sales changer was 4%.

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

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

Pricing actions in all markets partially offset the lower volume. Over the past three years EMEA's constant currency sales grew at a 3% KER.

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. apc's second quarter constant currency sales caer was a 7% decline driven by the China and India impact I just mentioned.

Speaker 1: Excluding those impact sales grew any 5% kger over the past three years.

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

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

Speaker 1: Second quarter, constant currency sales for the last three years grew at an 8% tiigger.

In the Americas Flavor Solutions. Constant currency sales grew 12%, driven by both pricing and the combination of volume and mix.

Speaker 1: Higher sales to package shofood and beverage companies with articular strength of snacks seasonings led the growth, with higher demand from branded foodservice customers also contributing to growth.

Over the past three years, constant currency sales in Americas grew at a cagor of 8%.

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

Emea's Flavor Solutions. Growth excluding a 1% decline related to the conflict in Ukraine, was brought based across its portfolio, led by strong growth with QSR and branded food service customers.

Over the past three years EMEA's constant currency sales grew, had a 10% cager.

In the Asia Pacific region. Flavor solution sales declined 6% in constant currency.

Speaker 1: The decline was driven by a 7% impact from lower volume in China due to the cot-related restrictions.

Speaker 1: Partially offset by pricing actions in all markets across the region.

Apz grew consequrency sales at a 3% kar 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.

Speaker 1: Realizing this is a sizable compression. I will spend a moment on the significant drivers.

Let me start with the drivers. We anticipated.

First nearly half of this- declined approximately 250 basis points- is due to the dilutive impact of pricing offset, our dollar cost increase.

We focus on gross profit dollars.

Speaker 1: This impact was more significant than in the first quarter because of the higher level of pricing in the second quarter.

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.

A 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 start-up and dual running costs as we transition production to our new U K peterborough manufacturing facility.

Of' note: TCI led cost savings partially offset the impactx. I just walked through every on track to deliver our expected savings on $85 million for the full year.

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

As larence 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.

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

Our cost recovery will vary by region and segment.

Speaker 1: Currently our pricing lag is more significant in our flavor solution segment.

Lawrence. 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-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.

Speaker 1: 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 decled 29% and in the flavor solutions segment declined 40%.

In 1%. Unfavorable impact on currency is included in each of these declines.

Turning to income taxes, on Slide 25, our second quarter adjusted effective tax rate was 19%, compared to 22% in the year ago period, driven by a higher level of discrete tax items this year.

At the bottom line, the sha, if shown on Slide 26, second quarter 2022, adjusted earnings per share was 48 cent, S as compared to 69 cents for the year ago period.

Speaker 1: The decrease was driven by our lower adjusted operating income.

On Slide 27 we've summarized highlights for cash flow in the quarter-end balance sheet.

Speaker 1: Our cash flow from operations was $154 million through the second quarter of 2022, compared to 229 million through the second quarter of 2021.

Speaker 1: This decrease was primarily driven by lower net income.

Speaker 1: Cash flow from operations will be weighted to the second half of the year, similar to our profit current.

Speaker 1: 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 balance 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 twenty-eight.

Speaker 1: 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 fat moving.

Speaker 1: 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 expected to be even more so.

We are projecting strong top line growth, with profit impacted by the global challenges I just mentioned.

Speaker 1: We also expect there will be an estimated two percentage point unfavorable impact of currency rates on sales, adjusted operating income and the earning adjusted earnings per share. 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 elasticities to remain at a lower rate than historical levels.

Speaker 1: Our 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.

Speaker 1: 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.

Speaker 1: 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 that the type outpaced are, pricing and future actions have been adjusted to reflect the higher cost level.

This adjusted curt's margin compression reflects the impact of a high teenss increase in cost inflation.

An unfavorable impact of sales mix between segments and favorable impact from pricing and CCI led cost savings.

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

This has a dildilutive impact on our adjusted risk margin and is the primary driver of our projected compression.

We now expect to grow our adjusted operating income to percent to 4% in constant currency.

Speaker 1: In addition to the gross margin impacts I just mentioned, this projection also includes our cciled cost savings target of approximately $85 million and brand marketing investments comparable to 2021, which reflects reductions in China and Russia.

This outlook is expected to be a year-over-year headwind to our 2022 adjusted earnings per share of approximately 2%.

Speaker 1: We are lowering our 2000 and twent-two adjusted earnings per share expectations to a range of $3 and three cents to $3 an eight cents.

Speaker 1: This compares to $3 a five cent of adjusted earnings per share in 2021 and represents a decline of 1% to an increase of 1% or, in 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 improved strategies to continue our operating momentum and drive another year of strong performance.

Thank you, Mike. Now I Mike to shared our financial results and outlook in more detail. I'd like to recap the key takeaways of seen on Slide twenty-nine.

Speaker 1: Our longterm performance has been industry-leading and met work exceed our objectives, including through volatile environments. The long-term fundamentals that drove this historical performance remains strong.

Several discrete items unfavorably impacted our sales comparison to the second quarter of last year.

Excluding these impacts. Our sales performance reflects the strength of our broad global portfolio, the effective execution of our strateggy pand on pricing actions. Our sales growth momentum is strong.

Persistent high-cost compleflion as supply chain challenges intensified as the second quarter progressed and unfavorably impacted our profit. Importantly, we expect to mitigate this impact in the second half of the year.

We are confident that, with a broad and advantaged labor 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 let's turn to your questions.

Thank you. At this time I'll be conducting athe question-and-answer session. If you'd like to ask a question, Please press star one your telephone key pad. A confirmation ton will indicate your line is in the question queue. You may press start two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Keys.

Our first question comes in line of Andrew Lazar with barclay. Please proceed with your question.

okthanks. Very much. Good morning everybody porting, I guess. First off, as you talked about organicsales, came in below where the street was looking for it. Though you raise the outlook for organic for the full year and I appreciate some of the items in two Q you highlighted. We discrete, but maybe you could talk a little bit about what gives you the confidence in raising the organic guidance for the full year. You know you expecting headwinds in two Q to become tailwinds in the second half for or better momentum in the underlying business. You know the sstandard data has not necessarily showed any meaningful inflection yet. That I can see, at least on a year over year basis. I appreciate the multiyear- you know kgor of- of organic sales, So I'm trying to get a better sense for.

Know right now for the quarter or.

Pricing. Contribution to sales was was about 7% and significantly higher going into the second half of the year. ahad is a big driver of.

Total sand will build third quarter, fourth quarter. I think I Don.

And that's I mean that's a driver sales, also a driver on the operating profit EPS.

Because there. The second thing is that we're, you know, we did not expect the disruption that we've had in China in.

Second quarter the extent of the lockdowns was was a surprise to us and I think to everybody and China is a big contributor to us and we expect the normalization of business in China as we go through the second half. Particularly we really expect it to be normal by Don T get th fourth quarter and just our experience with the initial coed lockdown. A couple of years ago tells us that therethat what we get normalization. There's a significant.

The surge of restocking by both the consumer and by our trade channel and so we would expect the strong contribution from China in the.

Second half of the year.

And then finally, U's and NBA have less difficult comparisons going it to the second half than they did in the first half of the year.

Not bcking, not bucing inventory replenishment that we talked about last year.

And also not lapping some of the COVID-19 lockdowns that were still in effect in.

exular second quarter and finally, we expect continue strong underlying demand from our, from our consumers and our customers and that we're continuing to see my year.ar, I think. one add to yes, I think I' add that we see a lot of strength in our Flavor Solutions business. We saw that in the second quarter and we know that we're continuing the second half, So certainly think that's going to support, I think, really our outlook for the second half overall. 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 to.

So the going to that 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 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 at this time around- I'm, justcurious- what you're seeing there, anything of note that we should be aware of? Thanks so much, you know. I don't think that there's anything of special note there. We, you know we are seeing some trade by consumers, not' just in our category But another categories that we track it. You know it's no surprisethat.

Speaker 1: Say consumers at the lower end of the income scale of particularly, are feeling a better pressure from inflation, not hours, but inflation across everything you know.

meangas prices are five five or $6 again on depending on where you live of and that puts pressure on consumers's pocketbook. But I would say that it's still at a pretty low level's particularly when we look at our brands and the elasticity that we are experiencing. It's still significantly below historical levels and.

It's not a particular concern. Thanks so much. I Sal ES as that our sale with private label products.

thatare certain know poor part of our business, but not particularly surging.

Speaker 1: Poor part of our business, but not particularly surgingthank you.

Thank you. Our next question comes in line of Ken Goldman with JP Morgan. Please proceed with your question.

Hi Thanks so much I just wanted to make sure I heard your commentary about pricing correctly and then I'm doing some basic math right. You did about I think 6% pricing in the first half. You're saying I' double in the second half and you also I think I'm implying that you need around 10% organic sales growth in the second half to to hit. Your. Guide started to do the math on the call. I apologize. We're putting you on the spot but are you effectively saying that it's reasonable for us to model maybe you know 12% pricing overall in the second half with volume may down. Around two peoplecent is that goingg out here yes.

M pointing on that, but I think you're right're in the right neighborhood with. With those numbers, you know we took you the first get, I think, about the cadence of our increases and the timing of the effect veness, you're in the right neighborhood.

When you think about going from six to 12 in the second half. I would add that you, in our next pricing action in our in Americas, are of artgest, our region is in August , and so you would.

If you're thinking about fachasing that.

Speaker 1: 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 just be ond the same level.

Ok great, that's be helpful. Thanks, and then quick follow up. It sounds like you mentioned pricing will kind of Phase in a little bit over the second half. In this context, and given some of the other factors you've 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 three Q? Is it more four Q WA? Maybe any color you could provide there would helpful as we think about modeling. Okay Mike, that great question. We see actually the cost peak year on year. We see its third quarter.

Speaker 1: And 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 impact of that pricing, full benefit there and the cost. And also think about the fourth quarter or strongest quarter overall from the volume perspective there and, as brence said before, things like China, which we make really divung on as that recovers from third and the th two that should be a positive for four Q.

Great Thank you so much. Thank you. Our next question comes in line of Steve Powers with Thank you Bank. Please proceed with your questionyes Hey, Thank you and good morning.

So you gave a good deal of bottoms up color on the incremental headwinds facing the business. So I think I think I'm clear on that. But I just want to play it back from the top down, because your overall sales outlook hasn't really changed. Despite the more adverse currency. You're now expecting a marginally lower tax rate, a marginally lower share count, slightly less brand marketing and, while the expected cost inflation is higher at the high teens level, it's not outside the bounds of the prior outlook. So I guess just is what isolated and see if you can better definfind what is exactly driving the reduced operating profit in EPS. So EPS outlook- it feels like it's the updated outlook on China Russia, kcrrane.

Speaker 2: And supply conditions above and beyond the normal cost inflation. But I just want to want to confirm that and if there's a way to quantify a rank order those, those factors at the great eight is the Lawrence, and I think that you some of the little things, I think we're going to want to come back and and talk about some of those marginal changes that you talked about, But on the big picture item you've got it exactly right and in fact this was part of what we were trying to message at your recent conference. The big change.

Speaker 1: Here are the things that were external factors that surprised us, and that is what's flow through. Let like walk through the.

Actual bridge on that, but I think it's, if you thing about in our guidance, come down 14 cents. If you think about from China Russia, Ukraine perspective, that's 11 cents right there and then as X, as you said, we're going up one 1%, that's three cent. So there's your 14. now we're recognizing that the cost inflation which you mentioned we had we had mid the high double digit. We actually moved that the high double digit. So one to 2% more costs during the year driven by transportation packaging, things like that. So that did hurtus in the second quarter and we're dropping a bit of that through the rest of the year. But we have pricing that to help mitigate that. And then, below the lines, some of the things we you talked about, taxesis a little bit of a help.

In the second quarter, as you know, truly transitory. So is there anything that I mean had when you experienced in the second quarter, that is is, you know, kind of unique and discrete to the second quarter, doesn't carry over? You know, at least directionally yes, a sense of the anything behind you. The one thing I say, and your're new to orththere, but the China business to us is very material. If our second biggest market we have.

three three large manufacturing facilities and the shutdown really put a lot of pressure on on our cost there, a lot of extra cost for transportation loss absorption, things like that. So as that business or covers, 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 fuelll cost- if if you go back to CH gasoline prices in the quarter versus March up 25%, that stuff roll through the panout very quickly and pricing will catch up on that. But a one month lag and pricing could be 30 to $4 million of impact, which is a 10 cents a share. So we're mitigating that as quickly as we can, but sometimes we see that is.

Speaker 1: Had been one month or earlier. That's what the difference were, when I was pretty confident that the never we're going to catch up with the cost.

Understood I just want to play back just real quick. What Mike point on China. I get it that China was uniquely detrimental to two Q, but I don't think you're Ing that's 100% of transitory, that's doesn't know as a two first. That's not behind you right that it gets better, but it's not you know. So that's why that, why I said: can T really help us in the fourth quarter more? It's still good enough. Different levels of openings that are happening now. That will happen throughout the quarter ke.

Understood I just want to play back just real qu Li point point on China. I get it that China was, you know you, uniquely detrimental to two Q, but I don't think you're saying that that's 100% of transitory. That's doesn't you know, as a to first. That's not behind you right, that it gets better, but it's not you know So. That's why that I said I CAn't really help us in the fourth quarter. It's still IR enough different levels of openings that are happening now. That will happen throughout the quarter, understood? Ok, Thank you very much.

Thank you. Our next question comes in line of Robert Moscow was credit wease, Please perce with your questioni. Thanks for the question, Lawrence. In your opening remarks you said that your research shows that there's that consumers will continue just 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. 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?

I I feel like me. You take that one sure. Good morning, we on.

We're, I guess, just to react to some of those launs to share there. We're seeing through a lot of our research also. What we're seeing and their secondary research out there is that there's still a heavy level of sustained cooking at home.

In the data. Overall, whether we're researching it or we'regetting it from some of our our suppliers there, we definitely see a sustained level of eating at home. andoverall, I would say that the consumer hasn't really change that much now as it's performing in our categories. We're seeing it play out in a number of our categories- a recipe mix, hot saues. We still have a lot of strong sort of consumption growth there and so we certainly still see a play. outcertainly there are categories like meet we. We do see some decline going on there and 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.

You know we saw in the really back rotate that there was a return to dining away from hoan at a reduction in cooking at home. But in recent weeks that has started to turn back the other way, probably driven by economic pressures on consumer.

Cooking at home is more economical. I think for a variety of reasons we're still pretty optimistic on the whole retention of cooking at home behaviors. There are some pockets that are different. Baking was really largely driven by kids being at home from from school. We've seen it baking related items return to the kind of prep really prepandemic level. That certainly is a part of our European story where' our boning brand is a big factor. But the overall.

The general cooking at home trend persists and all of those new deal engagents are food to homeitations now because of people working remotely.

Continue to support that strong consumption.

Okay and maybe a follow-up for brendan, as you're talking to the trade, about the holiday seasons and the price increases and consumer behavior. What's the reception been like? As the price is the price increased? Well understood for seasons, the reasons why, and are the eager to merchandise aggressively during the holiday season?

Yes I think the way our conversations are unfolding with customers and looking at the holiday season is.

one where we're still looking at, I think, improvement supply across the season and that is, I think, one of the things that underpins really a lot of optimism and strength as we go into the back half, especially as we go into this holiday season. We are certainly communicating a strength in our ability to supply and drive the holiday promotions and displays and everything else. So I would say the conversations with customers have been rather positive and strong and the outlook remains pretty healthy, underpinned by supply. I would say is one of the important factors there.

With related to the pricing. I mean, I think we work a lot with our customers making sure that we're both driving category growth, and so that is a big part of our conversations as well, and and again, I think those conversations and we appreciate the partnership we're working with our customers on that, but the outlook I think remains very healthy and again I'll does undersre that well, we don't want to get specific.

Discussions about pricing because there is customer competitive considerations there and there is always some natural tension in those discussions. Our customers know that we've taken a long-term perspective on our relationship with them, that we are transparent in the reasons for pricing and they themselves are continuing to experience inflation that's very broad, based some of the same factors that we are, and so those conversations have been continue to be quite constructive.

Very helpful. Thank youthank you. Our next question comes in line at Alexia Howard with bernon. Please as you with your question.

Good morning everyone, or Alexia by there. Can I ask about just the global supply chain dynamics? You obviously a sourcing ingredients from many different places around the world, probably more so than other large package food companies. I'd just be curious to hear that of what you're seeing in terms of global supply chain, domestic supply chain. Where are the real pain points for you now, and is there any light at the end of the tunnel? Sure Alexia, this is actually I. there are worst disruption of supply chain really the third quarter of last year.

And has continued to get better incrementally every every month. We're not out of the ones by a long shot in terms of normalization but the really broad scale disruptions that we re experiencing a year ago or far behind us the.

Disruptions are pretty much more discrete factors at there. Global sourcing of raw materials from points all around the world for our various markets around the world has been one of our strength through the whole pandemic experience and the post-pandemic time and continues to be a strength. Our challenges have been more on either.

predominly local packaging issues and specific packageed materials from very specific suppliers. There are, some of them are continue to be store points, and then in areas where we have, there's still some areas where, even though we've had a lot of capacity, the demand is still extraordinary and we're pressed to.

Meet the needs of our customers, and I those again. Those would be in a few very specific areas.

Very hard.

And then just to a quick follow.-: up. There was a comment in the press release about unfavorable mix in flavor solutions. How important was that? Because obviously the profit decline was very marasked this quarter and what drove that. And then I'll pass it on.

Yes I mean it mightike mean unfavorable mix was one of the factors that, if you think on a quarter-to quarter perspective, look back to your really strong performance in some of the the higher-margin categories kind of this year the strongest performance that wasn'in the way from a whole versus to ad hot. So a little bit of between those two categories. Just we mixed down a little bit. Nothing to be concerned about. As we talked about flavor, solutions can be lumpy based on the products we sell, things like that, but that's part of the reason. Great, Thank you very much. I'll posit on.

Thank you. Our next question comes from the line of Adam tmilon but, leman sax, please proceed with your question.

Yes Thank you. Good morning everyone R So I' open. I just maybe try to understand the second half kind of framing, maybe from a different light, because it would seem like the full year guidance.

Implies second half operating margins up about 250 basis points year-over-year. I get that there's a incremental pricing actions that benefit in that price cost balance.

' F to price positively, presumably in the fourth quarter was, but also that's a dilutive impact to percent margins.

Presumably in the fourth quarter. But also that's a dilutive impact to percent margins.

Just trying to get a sense of what. How do we?

Notwithstanding some of the three things in the may quarter, specifically to that China impact particular. But we've got volumes that demand elasticity. That would suggest volumes aren't going to get better. Your businesses Flavor Solutions is probably growing faster than consumers. That some mix headwind at the corporate level.

And I M trying to understand kind of how do we get to that magnitude of percent margin improvement in the back halfand. I'm going to start I'm going to let my pick it up just underscore that there's a big change in the relationship between pricing and cost as we go through the as we go through the year and the second half we.

Price increases you overtake and cost increases and and, rather than trailing, we're beginning to, we're recovering the cost increases going to be a big factor between the continued strong demand and having twice as much as effect of pricing in the second half as the first half is going to be a really big factor, like there's other factors through out. I, we're really you. We talk about pricing as a we to offset cost Le other levers. So we talk about revenue management or C? C cost savings. So we're know we continue to lean hard on driving additional cost savings in this inflationary environment.

We see continued strong demand driving that high margin products helping us there. So there's a lot of reasons to believe your point. Though I mean between third and fourth quarter. I mean the fourth quarter where a lot of this comes fruition from getting to a positive margin change here on and at So we don't expect COVID-19 lock down to repeat in China. That's a wildc we've been surprised there before that could happen again. Don't think we're not expecting that but that was a big unfavorable and the.

In the first half, particularly in the second quarter. Again that we expect to correct and normaliz as we go about thir second half.

Okay So it maybe, maybe just to help clarify that, as we think about the year-to-date second quarter or year-to-date kind of performance, what's been the realized CCI savings year-to-date, relative to the 85 you talked about for the full year?

First I on there a specific number in terms of what the realized cost inflation has been.

Year-to-date, just relative to that high-teens number that you've targeted, are you've expected for the for the full year and I guess, just anyway to help, I immentionalize some of the.

You give the brand marketing piece but other sdna, just where that magnitude of kind of tizing the do with all strings there how Le back can contribute in the second half.

Speaker 3: Because it's weight to the second half. That, and that's all'm going to say.

Okay all right, I appreci, I appreciate that color of F on.

Thank you. Our next question comes from line of Peter glvt with bengo America. Please proceed with your question.

Hey guys, good morning. Thank you for question.

Learn like I just wanted to circle back actually to Andrew's question around private label and going back to the slides. You know you do have section you're talking about. You know more entry price points and I'm just just curious is that you know a response to what you see is impending. You know more share shifting to private label and so you feel like you need more entry price points or is it something else you know you talked about inflating cost baskets and maybe in you know other categories like proteed than I notice here your tal entry price pointson thingslike real mate and lawores which tend to be more tied the prote. So just just curious to kind of get the thoughts around youknow that this is the private label but do a concern consumers that the.

That we want to be able to make sure that consumers especially in lower half of the income scale are still being served that have access to our categories. We are goal to have products that appeal to consumers that every price point across the whole category and between our new product launches are our brand marketing and our brand marketing activity. We are taking a tone that.

Able to make sure that consumers, especially in lower half of the income scale, are still being served, that have access to our categories, with our goal is to have products that appeal to consumers, that every price point across the whole category and between our new product launches are our brandmarketing and our brand marketing activity. We are taking a tone that tried to address.

That pressured consumer that we've got. I know we're kind of hitting time in general, mills is probably talking right now, but preperman's got a lot of color that you can add on this question and that'd like to get a chance to.

Well I think. I think you hit it largely right that we're trying to make sure that our portfolio and our assortment is really geared towards what consumers are certain to face, and it could very well be price points that are lower in terms of smaller sizes. I would say that also, there's a there's another dynamic on the other end which is happening, which is we actually see even more consumers switching to larger sizes, looking for more value and so that it's playing out really on both ends, and so those are things that we're reacting to and making sure that we drive even more distribution and items in our assortment that serve those needs.

For our organic spices in our core may arrange. That I think we have resolved now and we've had some ongoing challenges on some other more rigid container kind of packaging and mostly in the? U's franklly.

Got allright. Thanks, very much thanks.

Speaker 4: Thank you, Ladies and gentlemen. That concludes our question-and-answer session. mr cury, I'll turn the F back to you for any final comments.

Thank you, mccorick's. Alignment with consumer trends and arrising demand for flavor, in combination with subrereadth and reach of our global portfolio and our strategic investment to provide a strong foundation for sustainable growth, for a disciplined on our focus on the right opportunities and investing in our business. We are continuing to drive further growth as we successfully execute on our long-term strategy, actively respond to changing consumer behavior and capitalize on opportunities from our relative strengthwe are well positioned for continued success and remain committed to driving long-term value for our shareholders.

Thank you, Lan. Thank you to everybody joining today's call, pologize for those that we've didn't to get to. If you have any further questions, please reach out to me today. And this concludes this morning's call. Thank you very much, and for those of you and we you at, have a wonderful holiday weekend. We a lot. And for those of you in Canada, happy Canada day and everybody else have a great weekend.

Will.

Good morning. This is katy jenk's Chief strategy Officer and senior Vice President, Investor Relations. Thank you for joining today's second quarter earnings call. To accompany this call, we posted a set of slides that IR on mcormic com with me this morning: our laure pervest, Chairman and eo run fullyley, President and Chief Operating Officer, and mlake Smith, Executive Vice President and CF. During this call we will refer to certain non-GAAP financial measure. The nature of those non-GAAP financial measures and the related reconciliations to the GAAP results are included in this morning's press release and slides. In our comments, certain presentators are rounded.

Speaker 5: 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- called brief- any forward-looking statements, whether because of new information, future events or other factors. Please refer to our forward-looking statements on Slide Q for more information. I will now turn a discussion over to laurece.

Good morning everyone. Thanks for joining us. I'd like to start by welcoming brandman for this morning's call. In addition to his continuing role as President of our global consumer business, banda now has responsibility for our business worldwide in this newly appointed role of President and COO.

Speaker 1: At the end of our prepared remarks. I may ask them to weigh in on some of your questions.

maccormick's long-term performance, including through the pandemic and other volatility, has been industry-leading and nett or exceed 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 lockdown and the conflict in ukraineas our second quarter progressed, the dynamics of these conditions intensified and negatively impacted our sales, and it results.

Speaker 1: 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's high cost, inflation and supply chain are continuing challenges.

Speaker 1: To partially offset cost pressures, we've taken multiple pricing actions and, as planned, we are raising prices again.

Inflation continued to escalate and we have adjusted our upcoming pricing actions accordingly.

Speaker 1: We appreciate our customers working with us to navigate this environment. Additionally, our planans to mitigate cost pressures include our cciisland cost savings. Revenue management initiatives and reducing discretionary spend were possible. We expect our pricing actions and other levers to begin to outpace cost pressures late in the third quarter with higher costs and higher offsetting pricing actions that we expected on our last call, which further weits our 2022 profit to the second half of the year. We plan to fully offset cost pressures over timein China. During the second quarter, there was significant unanticipated disruption and consumption due to severe covidate related lockdowns in Shanghai and other cities throughout China.

Speaker 1: Incremental manufacturing and transportation costs to supply our customers.

In addition, with the restaurants largely closed and consumers unable to shop for extended periods in our strongest geographies, we experienced significant demand softness as well. Market conditions in China have also allow very little opportunity to increase prices.

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

Now for more details on our second quarter results. Starting with sales on Slide to 7, sales declined 1% from the second quarter of last year, including an unfavorable impact from currency.

Speaker 1: Our 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 replenishments during the last year's second quarter. Excluding these items, our sales performance would have been 4% throwough for flect strength of our broad global portfolio and effective execution of our strategies and pricing actions. While growth in both segments was impacted by the discrete items, they were more impactful through our consumer segment.

Speaker 1: Notably our growth in flavor solutions was outwithstanding. Comparisons to 2021 and 2020 remained 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 prepandemic baseline second quarter sales have grown at a constant currency compounded annual growth rate or care of 6%. The.

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

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

Although 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 chenges, the impact was greater than expected due to continuing cost escalation.

Speaker 1: While this pressured second quarter profit, we expect to mitigate this impact later this year.

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

Starting with our consumer segment. On Slide 9, our second quarter sales reflect the impact of our pricing actions in all three regions.

But the first way we saw a very low level of elasticity. But the second wave: we are seeing more price elasticity, although still below historical level. While consumer spending has remained strong, consumers are now under significant pressure for broad-based inflation, notably fuel prices and other macro factors.

Speaker 1: As we look ahead and our additional pricing actions are faced in, the elasticity we experience may change, but we still expect the impact to be lower than historical levels.

Overall our pricing actions in mea and APZ are on track that our elasticity impacts are similar to the Americas.

In EMEA and APZ. Pricing timing varies by market for the each region.

In some markets, particularly at eda, there are regulatory guidelines of when we take pricing which generally creates the lag and assigning of pricing compared to the Americas.

In this unprecedented environment however, we are taking additional actions in markets across the Na.

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

In the Americas sales declined in the second quarter included the impact of laping of 4% overship at of consumption to replenish retailer inventories in the second quarter of last year.

Speaker 1: Our second quarter shipments this year were in line with our consumption change.

Demand has remained high and we are realizeding the benefit of the manufacturing capacity we added, as well as our increased resilience. However, some products remained stretched by sustained high demand.

shehel's conditions continue to improve a scene in our restpspemix share performance of another quarter of share gain.

Speaker 1: Our spices and seasoning share was pressurered during the quarter by the shortage of certain packaging materials, as well as certain organic spices. Some of these have been resolved and some will remain ongoing.

We continue to use our category for revenue management capability to strengthen our spices and seasoning portfolio and optimize the category of performance for both McCormick and our retailers.

Speaker 1: The strength of our brand and our category leadership as recently won us new distribution which we will begin to realize later this year. In the EMEA we continue to have strong share performance and most categories and markets during the second quarter lap strong year-ago consumption, partially due to last year's cot-related restrictions throughout EMEA, where restrictions extended longer than other regions. Our vta brand of homemade desert products in France and product line unique to our EMEA region was most impacted. As recently we've seen baking returned to a more prepandemic baseline level and other categories in the region, we believe there's been a step-up in consumption.

And in 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 exided to exit our rights business, the kouan ore 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 drove double-digit growth in both the at-home and away from home parts of our portfolio.

Speaker 1: Looking at our Flavor Solutions. Growth over the past three years since the COVID-19 restrictions cost dramatic second quarter comparisons in 20 per 21. our sales cager is 8%, largely driven by volume. Our pricing actions increased sales in all three regions.

Speaker 1: Broadly pricing actions in the branded food service part of our portfolio follow the same CAD as those in each region's consumer business.

In the rest of our Flavor Solutions. Business pricing is based on contractual windows with automatic price sujustters in many contracts, and the timing is going to vary based on those windows and this dynamic environment. Though, with costs escalating So quickly, we are having discussions outside of those windows and passing costs through faster than usual.

Our volume also contributed to growth in the Americas and EMEA regionsdemand 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.

Speaker 1: We appreciate our customers working with us through this pressure.

In the Americas, where our customer base is skewused more to package food and beverage customers, our at-home customers.

Strong growth was driven by flavors for saby snacks, as well as performance, nutrition and health applications with theseef customersin eemmea. Our customer base is more sstuded to quick service restaurants, or QSRs, and our strong QSR momentum contributed to growth in all marketspartially driven by expanded distributionbranded foodservice growth was strong in both the Americas and eemmea region, driven by restaurant and institutional food service customers. Demand continues to strengthen in this channel, particularly as travel accelerate and restaurant benefit from consumers shifting to take away and de.

Purpose-minded practices.

These long-term trends 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 this demand for great pas with the breadth and reach of our global flavor portfolio. We are delivering flavor experiences for every meal looccasation through our products and our customers' products. We are end-to-end flavor.

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

As we've said, with the sustained level of high consumer demand, we're benefiting from the manufacturing capacity. We've add Ed. While we still experienced disruptions in the supply chain, they are much more specific, mainly from a transportation and packaging supply standpoint. We experienced the peak disruptions in the third quarter of last year and when every months the supply chain continues to get better. We feel good about the progress we're making.

We are strategically investing behind our brand to drive growth, including in brand marketing, as we did throughout the pandemic with our three -year brand more kingancaker, approximating our consumer segment sales cakers. For the same period, we're pivoting our messaging to emphasize to consumers how our products helped them stretch their grocery dollarfor instance, we're launching a digital messaging highlighting the value of our product but making a great flavorful meal economically. We add flavor for only pennies per serving and recipes like our 30 minute Taco cast role 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 increase at home oneches. For instance, our new patent pending, French' cremi 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 products for affordability and larger sizes of P. high usage items for better value.

Speaker 1: While we are still seeing strong consumer spending, we know that inflation is a significant concern for consumers, more so than cot. We're 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 at home, or more, than they did during the pandemic, from many reasons. one of them is that they find it more economical.

To the extent there are. In the recession that further reinforces cooking at home and we know from our past sales performance. But our category and brands performed well during recessionary period. Now from some summary comments on Slide 13 Before turning it over to Mike.

Speaker 1: The strength of our business model, the value of our products and capability, 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 environmentdespite the pressures we experienced in the second quarter, we are well positioned and confidence in delivering strong performance in 2022 and beyond, while driving sustainable long-term value for our shareholdersthe corman employees continue 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 larence, and good morning everyone. Starting on Slide 15, our top line, 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.

Speaker 1: Excluding the 4% impact of the discrete IMS Lawrence mentioned earlier, our sales performance would have reflected 4% growth.

Speaker 1: 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 caer was 4% and.

On Slide 16. consumer sales in the Americas declined 4% in constant currencydriven. By lower volume, the mix partially offset by pricing actions. This decline is attributable to lapping trade inventory replenishments in the second quarter of last year. Over the past three years, constant currency sales in the Americas grew at a cor of 7%, and.

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 of volume a homeome dessert products. A 1% unfavorable impact from lower sales in Russia and Ukraine also contributed to the decline. Pricing actions in all markets partially offset the lower volume. Over the past three years, EMEA's constant currency sales grew at a 3% KER.

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. apc's second quarter constant currency sales caater was a 7% decline driven by the China and India impact I just mentioned.

Speaker 1: Excluding those impact sales gre a 5% kigger over the past three years. Turning to our Flavor Solutions segment and Slide 19, we grew second quarter constant currency sales 11% due to pricing actions as well as higher volume than mix. This growth was partially offset by a 1% decline in sales related to the combined impact of a China disruption and the conflict. Ukraine, second quarter constant currency sales for the last three years grew at an 8% kigger. In the Americas, Flavor Solutions constant currency sales grew 12%, driven by both pricing and the combination of volume and mix. Higher sales to package stre of average companies.

With particular strength of snack seasonings, led the growth, with higher demand from branded food service customers also contributing to growth. Over the past three years, constant currency sales in the Americas grew Ed iccor of 8%. In eemmea we drove 19% constant currency sales growth, with a 14% increase in volume the mix and 5% related to pricing actions.

Emea's Flavor Solutions growth, excluding a 1% decline related to the conflict in Ukraine, was broad, based across its portfolio, set by strong growth with QSR and branded foodservice customers.

Over the past three years EMEA's constant currency sales grew, had a 10% kger in the Asia Pacific region. Flavor solution of sales declined 6% in constant currency. The decline was driven by a 7% impact from lower volume in China due to the cot-related restrictions, partortially offset by pricing actions in all markets across the region.

apv grew constant currency sales at a 3% cayear over the past three years. I've seen on Slide 23: adjusted gross profit margin declined 550 basis points in the second quarter versus the year-ago period.

Speaker 1: Realizing this is a sizable compression. I will spend a moment on the significant drivers.

Let me start with the drivers we anticipated first. Nearly half of this declined. Approximately 250 basis points is due to the dilutive impact of pricing. Offset our dollar cost increase.

Let me start with the drivers we anticipated first. Nearly half of this 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.

Speaker 1: 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 are lapping strong U's spices of seasoning 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.

Sales shift between our consumer and labor solutions segments also contributed to the unfavorable product mix.

In our flavor solution segment, as we mentioned in our last earnings call, first margin was unfavorably impacted by start-up and dual running costs as we transition production to our new U K peterborough manufacturing facility.

I' note ccilike cost savings partially offset the impacts I just walked through and we are on track to deliver 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.

Speaker 1: 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 in outpacing the cost pressures later this year and continue into next year. Our cost recovery will vary by region and segment.

Speaker 1: Currently our pricing lag is more significant. In our Flavor Solutions segment Lawrence, previously mentioned, we have incremental costs 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 coic-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 marginting expenses, as well as discretionary spending reductions partially offset by higher distribution costs.

Speaker 1: 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 yearthe 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%.

The 1% unfavorable impact on currency is included in each of these declines.

Turning to income taxes, on Slide 25 our second quarter adjusted effective tax rate was 18: 26% compared to 22% 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- 20.022 thousand adjusted earnings per share was 48 cents as compared to twentsixty-nine cents for the year ago period.

Speaker 1: The decrease was driven by our lower adjusted operating income. On Slide 27 we've summarized highlights for cash flow and the quarter end balance sheet. Our cash flow from operations was $154 million for the second quarter of 2022, compared to 229 million through the second quarter of 2021.

Speaker 1: 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 curth.

Speaker 1: We return $198 million of cash to our shareholders through dividends and used $102 million for capital expenditures through the second quarterwe 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 balan use of cash funding investments to drive growth returning a significant portion to our shareholders through dividends and paying down debtnow. Turning to our 2022 financial outlook on Slide twenty-eightas 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 great.

Speaker 1: 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 eelasticity to remain at a lower rate than historical levels.

Our volume of 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 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.

Speaker 1: 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 aboutoutpid, our pricing and future actions have been adjusted to reflect the higher cost levelthis adjusted gross margin compression reflect the impact of a high teens increase in cost inflation, an unfavorable impact of sales mix between segments and favorable impact from pricing and CCI net cost savings. As a reminder, we price offset dollar cost increases. We focus on gross profit dollars. This has a dilutdiluted impact on our adjusted gross margin and is the primary driver of our projected compression. We now expect to grow our adjusted operating income two cent to 4% in constant currency.

Speaker 1: In addition to the gross margin impacts, I just mentioned that this projection also includes our cciled cost savings target of approximately $85 million and brand marketing investments comparable to 2021, which reflects 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 approximately 2%.

Speaker 1: We are lowering our 2022 adjusted earnings per share expectations to a range of $3 and three cents to $3 an eight cents.

Speaker 1: This compares to $3 a five cents of adjusted earnings per share in 2021 and represents a decline of 1% to an increase of 1% or, in 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 end 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 twenty-nine.

Speaker 1: Our long-term performance has been industry-leading and met work exceed our objectives, including through volatile environments. The long-term fundamentals that drove this historical performance remains strong.

Several discrete items unfavorably impact our sales comparison to the second quarter of last year. Excluding these impact, our sales performance reflects the strength of our broad global portfolio, the effective execution of our strategies and our pricing action. Our sales growth momentum is strongpersistent, high-cost inflation and supply chain challenges intensified as the second quarter progress and unfavorably impacted our profit. Importantly, we expect to mitigate this impact in the second half of the year.

We're confident that, with a broad and advantaged labor portfolio, effective growth strategies and our abilities and navigate challenging environments, we will drive another year of strong performance in 2022 and build value for our shareholders. Now let's start to your questions. Thank you, at this time we'll be conducting your question and answer session. If you'd like to ask your question, Please press star one on your telephone key pad. A confirmation to will indicate your line is in the question que you may press start two if you'd like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keysour. First question comes in line of Andrew Lazar with barcl. Please proceed with your question.

Speaker 6: okright Thanks very much for morning everybody report I guess first off as you talked. About organicsales came in below where where the street was looking for it. Though you raise the outlook for organic for the full year and I appreciate some of the items. In two Q you highlighted we're discrete but maybe you could talk a little bit about what gives you the confidence in raising the organic guidance for the full yearyou. Know are you're expecting headwinds in two Q to become tailwinds in the second half for or better momentum. In the underlying business. You know the sstandard. Data has not necessarily showed any meaningful inflection yet that I can see at least on a year over year. Basis I appreciate the the multi year you know kgor of of organic sales. So I'm trying to get a better sense for.

Speaker 6: That the underlying confidence in raising the full year organic to start with well. I'm sor Andrew first of all our plan as we've shared the previous calls. The conference that has always been back half loaded and stronger in the second half than.

Speaker 6: Confidence in raising the full year organic startment. Well, I'm sorry, Andrew. Well, first of all, our plan, as we've share that the previous calls in conferences is, has always been back half loaded and stronger in the second half than in the first half.

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

Yes there is quiteice as much effective pricing in the second half of the year as in the first half of the year and, as you can seeright now for the quarteror pricing contribution the sales was about seven percentted to significantly higher. Going into the second half of the year, had is a big driver of total total. Sand will build third quarter, fourth quarters. I think we go.

And that's- I mean that's a driver sales, also the driver on the operating profit EPS.

Speaker 1: We've got through. The second thing is that we're you know we did not expect the disruption that we've had in China in.

Second quarter the extent of the lockdowns was was a surprise to us and I think to everybody and China is a big contributor to us and we expect a normalization of business in China as we go through the second half. Particularly we really expect it to be normal by how get fourth quarter and just our experience with the initial COVID-19 lockdown. A couple of years ago tells us that there that what we get normalization there's a significant.

thesurge and restocking by both the consumer and find our trade channel and so we would expectthe strong contribution from China in.

The surge and restocking, you know, by the, by the, by the, both the consumer and by our trade channel omb, and so you know we would expect the strong contribution from China in the in the second half of the year.

And then finally, U's and NBA have less difficult comparisons going it through the second half RA than they did in the first half of the year.

Not bocking. Not bopping inventory replenishment that we talked about last yearand also notlapping some of the cot lockdowns that were still effectin the particular second and second quarter. And finally, we expect continue strong underlying demand from our, from our consumers and our customers, and that we're continuing to see might Dear anything when add to that yes, I think I added that we see a lot of strength in our Flavor Solutions business. We saw that in the second quarter. We know that we'll continuing the second half.

Speaker 1: So we certainly think that's going to support, I think really, our outlook for the second half overall. 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 growth ammoment does look even stronger as we move towards the back half. And I' just a quick follow up. Don't think you mentioned it, I know you did last quarter when you were talking about in the 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 at this time around. I'm just curious what you're seeing there, anything of note that we should be aware of? Thanks, so much, you know. I don't think that there's anything of special. No, there we we are seeing some trade.

Help by consumers, not just in our category But another categories, that we track it. It's no surprise that say, consumers at the lower end of the income scale particularly, are feeling a bit of pressure from inflation- not ours, but inflation across everything. I mean. Gas prices are 5, five or $6 again on, depending on where you live of- and that puts pressure on consuers's pocketbook, but I would say that it's still a pretty low level's, particularly when we look at our brands and the elasticity that we re.

Experiencing. It's still significantly below historical levels and it's not a particular concern. Thanks so much. I fa all like that. Our sale with private label products.

Our servant importantor part of our business, but not particularly surgingthank you.

Thank you. Our next question comes from line of Ken Goldman with JP Morgan. Please prosue with any question.

Hi Thanks so much I just wanted to make sure I heard your commentary about pricing correctly and then I'm doing some basic math right you did about I think 6% pricing in the first half. You're saying don't double in the second half and you also I think'm I'm implying that you need around 10% organic sales growth in the second half to to hit your guide started to do the math on the call. I apologize we're putting you on the spot but are you effectively saying that it's reasonable for us to model. Maybe you know 12% pricing overall in the second half with volume may get down around two people that we're going out here. Yes.

M that pointing on that? But I think you're right. 're the right neighborhood with with those numbers. You know we took the first going to think about the cadence of our increases and the timing of the their effectiveness. You're in the right neighborhood when you think about going from six to 12 in the second half.

Had that in our mixed pricing action. Our in the Americas are artgest region is in August , and so I do which.

' thinking about ingthat have not in mind as well. I'd also just add- you're going to see it across: both consumer and flavor solutions pretty much know the same level. Ok great, that's helpful. Thanks, and then quick follow up. You know, it sounds like you mentioned pricing will kind of Phase 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 three Q? Is it more four qated? Maybe any color you could provide there would be helpful as we as we think about modeling. Ok, ID Mike, that a great question. yeah, we see, you know. Actually, the cot peak year on year we see its third quarter.

Speaker 3: And 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 growross margin challenges in the third quarter but in the fourth quarter the combination impact of that pricing and full benefit there and the cost. And also think about the fourth quarter or strongest quarter overall from the volume perspective there and, as barr said before, things like China, which we make really debun it on that, that recovers from third and the fourth two that should be a positive for four Q.

Great Thank you so much. Thank you. Our next question comes in line of Steve Powers with Thank Bank. Please proceed with your question.

Yes Hey, Thank you and good morning.

Despite the more adverse currency, you're now expecting a marginally lower tax rate, a marginally lower share count, slightly less brand marketing and while the expected cost inflation is higher at the high teens level, it's not outside the bound of the prior outlook.

So I guess just is what, isolated and see, you can better defindine what is exactly driving the reduced operating profit, EPS. So EPS outlook: at it feels like it's the updated outlook on China Russia, Ukraine and supply conditions above and beyond the normal cost inflation, but it just want to want to confirm that. And if there's a way to quantify a rank order those, those factors, at the great 18, that is the large and I think that you 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 ite, you've got it exactly right and in fact this was.

Part of what we were trying to message at your recent conference. The big change here are the things that were external factors that surprised us, and that is what's flow through. 11 like walk through.

Actual bridge on that, but I think it's thing about in our guidance come down 14 cents. If you think about from a China Russia, Ukraine perspective, that's 11 cents right there. And then FX, as you said, we're going up 1- 1%. That's three cent there. So there's your 14. now we're recognizing that the cost inflation which you mentioned we had, we had mid the high doubledigit. We actually MO that the high double digit. So one to 2% more costs during the year driven by transportation packaging, things like that. So that did curtis in the second quarter however, and we're dropping a bit of that through the rest of the year. But we have pricing that's to help mitigate that and then, below the lines, some of the things you talked about: taxesis. A little bit of help.

Speaker 3: Some of the interest expense things are going to help offset that, but but the big drivers of the external factors? The one thing I want to just correct you on brand or just give you inside: Grand marketing 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 big markets to drive, to drive. Ok, that's, that's helpful. yeah, that's perfect, that' perfect. Just a quick ffollow up, you know, on the, on the.

It to follow up on, I think, Ken's question C of gross market covery, is there, is there anything that you would call out, in the second quarter, as you know, truly transitory? So is anything and when the experienced in the second quarter, that is, you know, kind of unique and discrete to the second quarter, that doesn't carry over? You know, at least directionally yes, sense anything behind it. The one thing I say here and your new door, there's a that the China businessas to us is very material if' our second biggest market. We have 3, three large manufacturing facilities and you know the shutdown really put a lot of pressure.

On our cost there a lot of extra cost for transportation loss, absorption of 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 of packaging, I mean he will cost- if you go back to March, gasoline prices in the quarter versus March up 25%. That stuff rolles through the pianout very quickly and pricing will catch up on that. But a one month lag and pricing can be 30 to $4 million of impact, which is like 10 cents a share. So we're mitigating that as quickly as we can. But sometimes we see that is kind of stabilizing that and going forward. Like I told you, a third and fourth quarter where we see our cost outlook. But I think that is as.

Speaker 3: To your point about what is transitory, what is not. I think that gets most of it. sen would really underscore that timing aspect. You know one month difference on the effective date of our price increase.

Would a compleleetly would be had a different conversation, would it would be?

11 12 cents of EPS on the the quarter andof course, those price increases in. In fact I was just avid, but we to it in one months earer, that's what the difference would have been. Yes, when I was pretty confident that never, ever're going to catch up with the cost.

Understood I just want to play back just real qu. What Mike' point I' point on China: I get it that China was, you know, uniquely detrimental to two Q, but I don't think you're saying that that's 100% of transitory. That's doesn't you know, as a June first, that's not behind you right, that it gets better, but it's not, you know So. That's why, said I, CAn't really help us in the fourth quarter. More is, it's still enough different levels of openings that are happening now. That will happen throughout the quarter.

Understood okay, Thank you very much. Thank you. Our next question comes in line of Robert Moscow with cardis sweet. Please prosuip with your questionions.

I thanks for the question Lawrence in your opening remarks you said that your research shows that there's that consumers will continue just 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 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.

Right I Don T feel like you take that one sure good morningwere upwe're, I guess, just toreact to some of the laun to share there. We're seeing through a lot of our research also. What we're seeing and secondary research out there is that there's still a heavy level of sustained cooking at home in the data overall, whether we're researching it or we're getting it from some of our suppliers there, we definitely see a sustained level of being at home and overall I would say that the consumer hasn't really changed that much now.

asit'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 a play out, certainly there. Our categories, like meet, we see you do see some decline going on there and that might affect the 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 you go back route a lot way with us if a recession does occur and that will drive more people cooking at home. So that bodes well, I think. Fraud portfolio and our.

And cooking at home. But in recent weeks that has started to turn back the other way, probably driven by economic pressures on consumers.

General cooking at home trend persists and all of those few deal occasions that are food homeitations now because of people working remotely.

Continue to support that stroke consuion. Ok, and maybe a follow up for brendan. You know, as you're talking to the trade, about the holiday season and the price increases and you know consumer behavior. What's the reception been like as the price? Is the price increase well understood for for seasons, the reasons why and are the eager to you know merchandise aggressively during the holiday season?

Yes I think the way our conversations are unfolling with customers and looking at the holiday season is.

one where we're still looking, I think, improvement in supply across the season and that is, I think, one of the things that underpins really a lot of optimism and strength as we go into the back half, especially as we go into this holiday season. We are certainly communicating a strength in our ability to supply and drive the holiday promotions and displays and everything else. So I would say the conversations with customers have been rather positive and strong and the outlook remains pretty healthy, underpinned by supply. I would say is one of the important factors there with related to pricing. I mean, I think we work a lot with our customers.

In making sure that we're both driving category growth and so that is a big part of our conversations as well, and and again I think those conversations and we appreciate the partnership working with our customers on that, but the outlook, I think, remains very healthy and again does underscore that. Well, we don't want to get to specific.

Discussions about pricing because there is customer or competitive considerations there and there is always some natural tension in those discussions. Our customers know that we've taken a long term perspective on our relationship with them, that we are transparent in the reasons for pricing and themselves are continuing to experience inflation that's very broad, based on some of the same factors that we are, and so those conversations have been continue to be quite constructive, very helpful, Thank you.

Thank youour next question comes to line and I" S you how it Please you with your question. Good morning everyone, or I' ex year by there. Can I ask about just the global supply chain dynamics? You obviously are sourcing ingredients for many different places around the world, probably more so than other large package trefood companies. I'd just be curious to hear that of what you're seeing in terms of global supply chain, domestic supply chain. Where are the real pain points for you now, and is there any light at the end of the tunnel? For all ex year, this is actually.

I'd say our worst disruption of supply chain really was third quarter of last year and has continued to get better incrementally every every month. We're not out of the ones by a long shot in terms of normalization but really fron scale disruptions that we re experiencing a year ago or far behind usas. The.

Disruptions are pretty much more discrete factors. I there. Global sourcing of raw materials from points all around the world for our various markets around the world has been one of our strength through the whole pandemic experience then and the post-pandemic time and continues to be a strength. Our challenges have been more on either.

predominly local packaging issues and specific package materials from very specific suppliers. There are, some of them are continue to be store points, and then in areas where we have were, there's still some areas where, even though we've had as a lot of capacity, the demand is still extraordinary and we're pressed to.

Global packaging issues and specific package materials from very specific suppliers. There are, some of them are continue to be store point and and then, in areas where we have were', there's still some areas where, even though we've got a lot of capacity, the demand is still extraordinary and we're pressed to meet the needs of our of our customers.

And again. Those would be, in a few very specific areas, very hard.

And then just to a quick follow.-: up. There was a comment in the press release about unfavorable mix in flavor solutions. How important was that? Because obviously the profit decline was very marked this quarter and what drove that. And then I'll pass it on.

Yes I mean this mightike, I mean unfavorable mix was one of the factors that, if you think on a quarter-to quarter perspective, look back to really strong performance in some of the the higher-margin categories kind of this year the strongest performance that wasn in the way for a home versus to ad hohome. So a little bit between those two categories. Just we mixed down a little bit. Nothing to be concerned about. As we've talked about, Flavor Solutions can be lumpy based on the products tell things like that, but that's part of the reason.

I mean it mighti, I mean unfavorable mix was one of the factors that, if you think on a quarter to quarter perspective, look back here, really strong performance in some of the the higher margin categories kind of this year, the strongest performance that wasn'in the way for home versus to ad home. So a little bit, you know, between those two categories. Just we mixed down a little bit. Nothing to be concerned about. As we talked aboutflaor solutions can be lumpy based on the products. We tell things like that, but that's part of the reason. Great, Thank you very much. I'll POS.

A cold, Thank you. Our next question comes in line, Adam tmison, the gleman' Act. Please receme your question, our yes, Thank you're. Good morning everyone. Well, that I just maybe try to understand the second half kind of framing, maybe from a different light, because it would seem like the full year guidance implies second half operating margins up about 250 basis points year over year. I get that there's a incremental pricing actions that benefit in that price cost balance.

Up to price F positively, presumably in the fourth quarter. But but also that's a dilutive impact to percent margins.

Presumably in the fourth quarter. But also that's a dilutive impact to percent margins.

Just trying get a sense of what. How do we, notwithstanding some of the three things in the may orarder specifically, it'to the China impact particular, but we've got volumes that demand elasticity. That would suggest volumes aren't going to get better. Your businesses Flavor Solutions is probably growing faster than consumers. That's some mixed headwind at the corporate level and I M trying to get understand kind of. How do we get to that magnitude of percent margin improvement in the back half? Underscore that. There's the.

Speaker 3: We alloffset costs, leave other leververs. So we talk about revenue management or C? C like cost savings. So we're, you know we continue to lean hard on driving additional cost savings in this inflationary environment. We see continued strong demand driving that high margin products helping us there. So there's a lot of reasons to believe feyour point, though I mean third, between third and fourth quarter. I mean the fourth quarters where a lot of this comes, fuation from getting to a positive margin change here on here, and so we don't expect COVID-19 lock down to repeat in China. That's a wild C you know. You know we've been surprised there before that could happen again.

Speaker 1: We don't think, we're not, we're not expecting that, but that was a big unfavorable and the in the first se, ularearly in the second quarter that we expect to correct normaliz as we go through second half. Ok, So it maybe, maybe just to help clarify that as we think about the year to date, second quarter, or year to date kind of performance: what's been the realized C C, I savings year to date relative to the 85 we talk about for the full year. First on there a specific number in terms of.

What the realized cost inflation has been year-to-date, just relative to that high-teens number that you've targeted, are you've expected for the for the full year and, I guess, just any way to help dimmentionalize some of the.

You give the brand marketing piece but other sdna, just where that magnitude of kind of tiing the Ping with adult strings there. How much back can contribute in the second half because it's waited. The breg half that and that's all that. It's a.

Okay all right, I appreciate. I appreciate that color off that onthank you. Our next question comes from line Peter delt with banko America. Please prosued with your question. Hey guys, good morning. Thank you for much.

Learns like. I just wanted to circle back actually to Andrew's question around private label and going back to the slides, you know you do have section you're talking about. You know more entry price points and I'm just just curious: is that you know a response to what you see is impending? You know more share shifting to private label and so you feel like you need more entry price poinpoints or is it something else you know? You talked about inflating cost baskets and maybe in you know other category like proteed than I notice' hereyou're talking entry price points on things like real Mates and lorri which tend to be more tied to prote. So just just curious to kind of get the thoughts around. You know that 't the private label, but do a concern consumers that?

We want to be able to make sure that consumers, especially in lower half of the income scale, are still being served, that have access to our categories, know we are goal to have products that appeal to consumers, that every price point, across the whole category and between our new product launches our, our brand marketing and our brandmarketing activity, we are taking a tone that trying to address that pressure to consumer that we've got. I know we're kind of hit time. General Mills is probably talking right now pre friend 'has got a a lot of color that he can add on this question.

What the consumers are looking for.

Got it. That's helpple. And maybe just a quick one Lawrence. You did mention, I think, that packaging. You know tightness was impacting us. A certain couple of categories in U's season- spices and seasonings- to any more color there. What specifically brands or categories we should be looking at? Just effect, start to improve what we see. And I don't want to get too specific that they also don't really want to call out our suppliers with who we're trying to have a construct competitors either for that matter. But not, you know, we had some trouble with packet with glass for our organic spices are in our coar may range. That I think we have resolved now.

And we've had some ongoing challenges on some other, more of the rigid container kind of packaging and mostly in the U's, frankly.

And we've had some ongoing challenges on some other, more of the rigid container kind of packaging and mostly in the? U's. franklin got right. Thanks so much yes.

thanksthank you, Ladies and gentlemen. That conudes our question-and answer session. mr ky, I'll turn the F back to you for any final comments.

Thank you, mccorick's. Alignment with consumer trends and the rising demand for flavor, in combination with the breadth and reach of our global portfolio and our strategic investment to provide a strong foundation for sustainable growth, where disciplined on our focus on the right opportunities and investing in our business are, are continuing to drive further growth. As we successfully execute on our long-term strategy, actively responond to changing consumer behavior and capitalize on opportunities from our relative strength, we are well positioned for continued success and remain committed to driving long-term value for our shareholders.

Thank you, lace. Thank you to everybody joining today's call, apologize for those that we didn't get to. If you have any further questions, please reach out to me today. And this concludes this morning's call. Thank you very much and for those of you in the AP, have a wonderful holiday weekend, grow a lot. And for those of you in Canada, happy Canada today and everybody else, have a great weekend.

Q2 2022 McCormick & Company Inc Earnings Call

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