Q3 2022 McCormick & Company Inc Earnings Call

Speaker 2: The.

Speaker 3: I.

Speaker 4: Good morning. This is Casey janin, Chief strategy Officer and senior Vice President Investor Relations. Thank you for joining today's third quarter earnings call. To accompany this call, we post to set Slide at IR formmce com with me this morning: our laurece curliw, Chairman and CEO , brrenon Foley, President and CEO . And Mike Smith, Executive Vice President and cesa.

Speaker 5: During this call we will refer to certain non-GAAP financial measures. The nature of those non-GAAP financial measures and the related reconciliation to the GAAP results are included in this morning's press release and slides.

Speaker 6: In our comments, certain percentages are rounded. Please refer to our presentation for complete information. Today's presentation contains projections and other forward-looking statements. Actual results could differ materially from those projected. The company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or other factors.

Speaker 4: Please refer to our forward-looking statements on Slide two for more information. I will now turn the discussion over to laren.

Speaker 7: Good morning everyone. Thanks for joining us.

Speaker 7: Third quarter sales increased 3% from the year-ago period as anticipated in constant currency sales through a 6% reflecting 10% growth from pricing actions, partially offset by a 1% decline from the kitchen basics divestiture, the 1% decline attributable to the exits of low-margin business in India and the consumer business in Russia, and a 2% decline in all other volume and product mix.

Speaker 7: Our underlying third quarter growth reflects the strength of our broad global portfolio, as well as the effective execution of our strategies and pricing actions against the backdrop of a volatile operating environment.

Speaker 8: Using 2019 as a prepandemic base.line, third quarter sales grew at a conant currency three -year compounded annual growth rate, or kger of 7%, reflecting the sustained momentum in our business across both our consumer and flavor solutions segments.

Speaker 7: Moving to profit, adjusted operating income was down 12% or 11% in constant currency, and adjusted earnings per share was down 14%.

Speaker 7: During the third quarter, supply chain challenges continued and recovery of certain constrained materials is taking longer than expected.

Speaker 7: We continue to incur elevated costs and meet high demand on our flavor resolutions segment. Although our consumer segment or demand moderated from elevated consumption trends more quickly than expected, we are experiencing lower than optimal operating leverage.

Speaker 7: Across the supply chain. We remain focused on managing inventory level and eliminating inefficiencies.

Speaker 7: Though the normalization of our supply chain cost is taking longer than expected, pressuring gross margin and profit realization in the current period. Over the current coming months, we will be aggressively eliminating supply chain inefficiencies.

Speaker 7: Importantly, as we had expected in the third quarter, our price increases are catching up with the pace of cost inflation in both segments. We began to recover the cost inflation that had been outpacing our pricing actions and other levers, both significantly in the consumer segments.

Speaker 7: We expect this will continue into the next year, as we plan to fully offset inflation over time.

Speaker 7: Before discussing our third quarter segment performance in more detail, I'd like to comment on our supply chain plans. Starting on Slide 5, we have a focused plan in flight that leverages the discipline of our established comprehensive continuous improvement, or CCI, program to ensure that we are able to flexibly support.

Speaker 7: Customer demand. Both work has been sustained at higher levels and, where it has moderated, while eliminating inefficiencies and normalizing both our cost structure and inventory levels.

Speaker 7: Our actions are well underway. Our top supply chain priority reneeds keeping our customers in supply and supporting their growth. There are areas of our business that have sustained high levels of demand for an extended period and our supply chain has been pressured to meet this demand. We have several initiatives in progress that will increase our capacity, strengthen our supply chain resiliency and importantly, enable us to service our customers So they can grow their business.

Speaker 7: For example, we investing an additional flavor solutions seasoning capacity which will be online in early 2023. We expanding phonus footprint to support our flavor growth. We recently opened our new U K Peter borough Flavor Solutions manufacturing facility to support our strong growth momentum with quick service restaurants. And just earlier this week, the first pallet per ship from our new Maryland logistics center.

Speaker 7: And from a cost perspective. As we responded to demand volatility over the past several years, we have incurred additional cost above inflation, service our customers and have seen inefficiencies develop in our supply chain.

Speaker 7: These are costs we have absorbed. We have not passed into customers. On our pricing actions, we are targeting to eliminate at least $1 million of these costs, with a significant benefit in 2020. -three.

Speaker 7: We're moving aggressively to take these costs and inefficiencies out, as well as normalized inventory levels that have built up. None of our actions include investing to increase both manufacturing capacity and reliability and bottleneck areas to enable better customer service and repatriation for production from excessive use of co-packers.

Speaker 7: We're returning to more normal ship schedules and reducing our spend on expensive surge capacity. We are already seeing the benefit of lower overtime and temporary labor reductions.

Speaker 7: In this more normalized environment, as well as new customer collaboration, we are already beginning to reduce expedited freight costs and less on truckload ship and costs, as well as other transportation and efficiencies.

Speaker 7: We are resolving raw material and packaging supply issues. For example, they are beyond the shorge of flass, botle and certain organic spices which impacted supply of our U's ormain line.

Speaker 7: A supplier facility closure, announced in September , drove the discontinuation of a component of our dry rest pmix packaging and through our quick qualification of alternative supply, we mitigated a major disruption during the fourth quarter.

Speaker 7: A long-running shortage. Our french'smusteard botle will be resolved in the first half of 2023 as new moles come online at a second supplier and from an inventory perspective. We are also executing on plants to return to historical safetyestock levels, which were raised to protect against supply disruption.

Speaker 7: We expect the impact of our actions to normalize our supply chain costs, increase our efficiency and ability to meet demand, lower our inventory level and importantly, increase our profit realization beginning in the first half of 2020. -three and.

Speaker 7: We have managed through various supply chain challenges over the last several years, with the peak disruption experienced in the third quarter of last year.

Speaker 7: Since then, there has been steady improvement, building progress and bolstering our confidence in our plan to enhance our operational performance and optimize our cost structure.

Speaker 7: While we will always prioritize meeting our customers' needs, I'm encouraged by our disciplined approach to resolving the increased costs within our supply chain.

Speaker 8: We've continued to define and quantify specific actions within our plant as, since we share, we would be driving the elimination of the supply chain inefficiencies and our preannouncement last month.

Speaker 7: We look forward to sharing more detail and progress with you in January , when we provide our 2023 outlook.

Speaker 7: Now moving to third quarter business updates for each of our segments.

Speaker 7: Starting with our consumer segment on Slide six and the status of our pricing actions. Our third quarter sales reflect the impact of our pricing actions in all three regions, with an acceleration of effective pricing in the quarter versus the first half of the year, in line with what we expected.

Speaker 7: While broad pressure on consumers cost of voing from inflation, which heightened during our third quarter, has resulted of higher price elasticity than we originally anticipated. roelasticity remain lower than historical levels and our most recent pricing actions, which in the? U's took effect as we began our fourth quarter, we focused on areas that are less elastic and did not take pricing on some products where we'had seen the highest elasticity.

Speaker 7: Now for some further highlights by region, starting with the Americas.

Speaker 7: Our total U's branded portfolio consumption, as indicated by our IRI consumption data and combined with unmeasured channels, grew 4% in line with our shipments and over the last three years since. Since 2019, consumption is grown at a three -year kre of 8%, which highlights how the sustained shift in consumer consumption continues to drive increased demand for our products and outpaced prepandemic level.

Speaker 7: In early August we divested our Kitchen basics business.

Speaker 7: We consistently grew this brand over the years But as it was the only U's brand we had in the stock and broadbile, our resources were better focused on core categories where we have leading brand.

Speaker 7: Demand has a remained high, with strong growth in the majority of our categories. Spices and seasonings has been one of our strongest categories in the past three years and, as a result, we are lapping all-time high than consumption. This has created challenging comparisons in some product lines, such as baking-related items, which have returned to a prepandemic level, unlike most of our categories.

Speaker 7: drilling-related items were impacted, versus last year, by high meat prices, although drilling is still strong versus prepandemic.

Speaker 8: selfalth conditions continue to improve, a seen in our recipe mixed share performance, with the fourth consecutive quarter of share gain.

Speaker 7: Our spices in seasoning share was pressured by service-related distribution losses.

Speaker 7: The shortage of certain packaging items, as well as certain organic spices, which has largely been resolved, and some trading down by consumers who remain under pressure from broad-based inflation.

Speaker 7: We are using our category and revenue management capabilities to strengthen our spices and seasoning presence on shelf to strengthen of our brands and our category leadership has recently won us new distribution which we're beginning to realize now.

Speaker 8: In EMEA we continue to have solid share performance at bird's vices and seasoning in the U K, Eastern Europe and Italy, somewhat offset by softer performance in France.

Speaker 8: We are continuing to gain share on Frank's Red hot in the U? K and we are beginning to build momentum with tula as we expand that brand into this market.

Speaker 9: For the quarter and year-to-date. Versus last year, as well as since 2019, we are driving the U K COP sofce category growth.

Speaker 10: Our bota brand of homemade desserve products in France, a product line unique to our EMEA region, as slowed as we have seen baking, return to a more prepandemic baseline level in the EMEA two again, unlike our other categories.

Speaker 7: Turning to the Asia Pacific region, last year the region experienced supply chain challenges such as ocean trade capacity constraints and lapping. That impact contributed to growth in the third quarter. Additionally, following an extended lockdown in the second quarter, covert restrictions in Shanghai and some other cities throughout China eased as we began the third quarter, resulting in trade and pantry replenishments, contributing to growth.

Speaker 7: Recently several cities in Central China, which is the primary market of our woon operations, have experienced new COVID-related lockdowns and we're continually monitoring the situation. Overall, our China performance is on track with our expectations.

Speaker 7: Across all regions. In our consumer segment, we are achieving the price realization we expected and we are executing on our proven growth strategies, pivoting action kinds as needed, based on our consumer insights and the environment.

Speaker 8: We continue to invest behind our brands. We increased brand marketing investments in the third quarter and have additional investments plans for the fourth quarter. In addition to our highly effective and inspiring holiday messaging, we exhivoted our digital messaging to emphasize value and show consumers how our products helhelp them stretch theirdigrocery dollars without sacrificing flavor.

Speaker 7: We are focusing our innovation efforts to meet the needs of consumers concerned about their budgets.

Speaker 11: In the Americas. We have launched a new lowies-branded opening price point range of every day 10 spices and our large size format super deal is one of the best performing product lines as consumers are looking for greater value. This format size is approximately a 40% better value per ounced than the smaller sizes.

Speaker 7: We've also launched large-siz resealable pounches of top-selling items in markets across all regionss.

Speaker 7: In terms of category management, we are collaborating with our customers to ensure the rightate assortment and price points on shelf to optimize category performance and increase profitability for our customers. And, as always, we have a strong merchandising program plant for the holiday season.

Speaker 7: We are confident in our brand marketing investments, innovation and category management initiatives which will continue to drive strong growth.

Speaker 7: Turning to flavor solutions on Slide 8, our sales performance for the quarter was strong, with growth led by our pricing actions in all three regions, with an increase in our effective pricing versus the first half of the year, as we expected.

Speaker 7: Now for some regional highlights.

Speaker 9: In the America, S strong growth was driven by snacks, evening favory flavors and branded food service products. Demand continues to strengthen the branded food service, restaurant and institutional foodservice customers as mobility and strong summer travel continued to fuel consumption and importantly, we also are expanding distribution.

Speaker 8: In EMEA, growth remained strong across our entire customer base. Our third quarter growth was led by strong quick service restaurant for QR momentum in all markets, partially driven by expanded distribution and our customers' promotional activities. And we're seeing an acceleration of demand in branded food service as customers shift to more economical formats.

Speaker 7: Our full spectrum of solutions across price points is driving growth.

Speaker 9: We are winning at both regions with our new product momentum and Americas's growth from new products contributed approximately 25% more growth and flavors in the third quarter and the year-ago period, driven by beverage stvvery, snacks and performance nutrition flavors.

Speaker 9: We are continuing to win share in these categories.

Speaker 8: And in EMEA, our third quarter, new product launches accelerated versus earlier in the year and for the full year we expect new product introductions to outpace 2021. We are fueling future growth.

Speaker 8: In the apd we're driving further menu penetration with our QSR customers putning new limited time offers as well as realizing growth for strong performance of their core menu items. We flavor- in many cases we are the heat in their spicy offerings.

Speaker 7: Overall Flavor Solutions has remained strong and for certain parts of our business in the Americas and EMEA regions, our supply chain continues to be pressured to meet this high demand and, as I said earlier, we are still taking on some extraordinary costs to service our customers. We appreciate our customers working with us and we see light ahead.

Speaker 9: Now some summary comments before turning it over to Mike.

Speaker 9: Turning to Slide nine.

Speaker 7: Global demand for flavor remains the foundation of our sales growth, and we have intentionally focused on great, fast-growing categories that will continue to differentiate our performance. We continue to capitalize on the long-term consumer trends that accelerated during the pandemic: healthy and flavorful cooking, increased digital engagement, trusted brands and purpose-minded practices.

Speaker 9: These long-term trends and the rising global demand for great peace are more relevant today than ever, with the younger generations fuel in them at a greater rate.

Speaker 9: mccormac is uniquely positioned to capitalize on this demand for great tas. With the breadth and reach of our strong global flavor portfolio. We are delivering flavor experiences for every meal location, for our product and our customers' product and our driving growth. We are end-to-end flavor.

Speaker 9: 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, including through the pandemic and other periods of volatilityour solid track record of achieving our long-term objectives highlights through resiliency of our business through a variety of market condition, as well as our focused on sales growth and profit realization.

Speaker 9: A long-term fundamentals that drove our industry-leading historical performance remain strong.

Speaker 7: 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, give us confidence in our growth momentum and in our ability to navigate the global dagnamanic environment.

Speaker 8: The compounding benefits of our relentless focus on growth, performance and people continues to position McCormick to drive sales growth and, balanced with our focus on lowering cost to expand margins, realize long-term sustainable earnings growth.

Speaker 7: The teamwork of home reformment employees drive our momentum and success, and I want to thank them for their dedicated efforts and engagement. And now I will turn it over to Mike.

Speaker 9: Thanks larence, and good morning everyone. Starting on Slide 12, our top line constant currency sales grew 6% compared to the third quarter of last year, including a 1% unfavorable impact from the kitchen basics divestiture, as well as a 1% impact from the exits of low margin business in India and the consumer business in Russia.

Speaker 9: In our consumer segment we drove constant currency sales growp of 4%, with 10% related to pricing actions partially offset by a 1% impact from the kitchen basics divestiture, as well as lower volume, with the exits of low-margin business in India and the consumer business in Russia contributing a combined 1% impact to the lower volume.

Speaker 9: On a three -year basis. Our third quarter constant currency sales cager was 6%.

Speaker 9: On Slide 13. consumer sales in the Americas increased 3% in constant currency, driven by pricing actions, partially offset by a decline in volume, as well as a 1% impact from the kitchen basics divestiture.

Speaker 9: As Lawrence mentioned, the volume decline was impacted not only by elasticities, but also by constrained supply of certain input materials, primarily packaging items. Over the past three years, constant currency sales in the Americas grew at a cager of 6%.

Speaker 12: In EMEA constant currency, consumer sales declined 1%, which included a 3% unfavorable impact from lower sales in Russia.

Speaker 9: Growth in other markets were driven by pricing actions, partially offset by lower volume, with the most significant volume impact attributable to lower sales of volu e homeme dazert products.

Speaker 9: Over the past three years, EMEA's constant currency sales grew at a 3% KER.

Speaker 9: Constant currency, consumer sales in the Asia Pacific region grew 10%, including a 7% on unfavorable impact from the exit of low-margin business in India.

Speaker 9: As Lawrence mentioned, growth was driven by higher volume, mainly attributable to trade and pantry replenishments in China following the extended Shanghai lockdown last quarter, as well as the region lapping supply chain challenges in the year ago period.

Speaker 9: Pricing actions in all markets across the region also contributed to growth.

Speaker 9: On a three -year basis. apc's third quarter Costa currency sales grew at a 4% kger.

Speaker 9: Turning to our flavor solut segment and Slide 16, we grew third quarter const currency sales 10%, primarily due to pricing actions with higher volume and product mix also contributing to growth.

Speaker 9: Third quarter, constant currency sales for the last three years grew at an 8% taker.

Speaker 9: In the Americas fior Solutions constant currency sales grew 10%, driven by pricing.

Speaker 9: Higher sales to packaged food and beverage companies, with particular strength in snacks. evenasonings led the growth.

Speaker 9: Higher demand from branded food service customers also contributed to growth. Over the past three years, constant currency sales in the Americas grew at each taker of 8%, and.

Speaker 9: In EMEA we drove 11% constant currency sales growth, with 7% related to price actions and 4% volume and mix.

Speaker 9: Ema's Flavor Solutions growth, excluding a 1% decline related to lower sales in Russia, was broad based across its portfolio, led by strong growth for QSR branded feel service and packagage, shofood and beverage company customers.

Speaker 9: Over the past three years, EMEA's constant currency sales group was 9% KER.

Speaker 9: In the Asia Pacific region. Flavor solution sales gre 11% in constant currency, with pricing actions and higher volume contributing to the increase.

Speaker 9: Growth was driven by higher sales secuits our customers, in part due to the timing of the promotional activities.

Speaker 9: apv grew constant currency sales at a 6% cager over the past three years.

Speaker 9: As've seen on Slide, 20 adjusted gross profit margin declined three hundred and 20 basis points in the third quarter versus but a year-ago period. Let me spend a moment on the significant drivers.

Speaker 9: First almost 80% of this decline, approximately 250 basis points, is due to the dilutive impact of pricing to offset our dollar cost increases.

Speaker 9: Next I'll cover the impact of supply chain challenges on brross margin.

Speaker 9: In our Flavor Solutions segment. We have continued to incur elevated costs to meet high demand for certain parts of that business.

Speaker 9: And there has also been an unfavorable impact from the start-up end dual running cost as we transition production to our new U K peterborough manufacturing facility.

Speaker 9: In our consumer segment, where demand is moderated more quickly than we expected, we are experiencing lower operating leverage.

Speaker 9: Overall while the normalization of our supply chain cost is taking longer than expected, pressuring gross margin, we are taking actions to normalize our costs, as Lawrence mentioned, which we are confident will be reflected in 2023 gross margin.

Speaker 9: Partially offsetting these impacts I just mentioned were our CCI led cost savings, where we're on track to deliver our expected savings up $85 million for the full year.

Speaker 9: And finally, of note, in line with our expectations, the impact of our pricing actions in the third quarter began outpaccing cost inflation in both segments, more significantly in the consumer segment.

Speaker 9: We expect pricing to continue outpacing inflation into next year, as we plan to fully offset inflation over time.

Speaker 7: Overall our cost recovery and gross margin improvement will vary by region segment with a slower Flavor Solutions recovery. Importantly though, we have now passed the inflection point with indsignificant gross margin improvement since last quarter, driven by our consumer segment performance, and we expect further improvement in the fourth quarter.

Speaker 9: Now moving to Slide 21, selling general and administrative expenses, or sgna, were comparable to the third quarter of last year, with higher distribution cost and brand marketing investments offset by lower employee benefit expenses.

Speaker 9: As a repercent of net sales. Sga declined 60 basis points.

Speaker 9: The net impact of the factors I just mentioned resulted in a constant currency decline in adjusted operating income, which excludes special charges and transaction and integration costs, of 11% compared to the third quarter of 2021.

Speaker 9: In the consumer segment, adjusted operating income declined 1% in constant currency and in the flavor solutions segment that declined 34%.

Speaker 9: Turning to income taxes, on Slide 22, our third quarter adjusted effects of tax rate was 21%, precompared to 14% in the year ago period. Both periods were favorably impacted by discrete tax items, with a more significant impact last year.

Speaker 9: At the bottom line as shown on Slide 23, third quarter 2022 adjusted earnings per share with 69 cents as compared to 80 cents for the year ago period. The decrease was driven by our lower adjusted operating income.

Speaker 9: A favorable impact from optimizing our debt portfolio in the third quarter was fully offset by the impact of higher adjusted effective tax rate in the third quarter of this year.

Speaker 9: On Slide 24 we summarize highlights for cash flow in a quarter-end balance sheet.

Speaker 9: Our cash flow from operations was $25 million through the third quarter of 2022, which is lower than the same period last year. This decrease was primarily driven by lower net income and higher inventory levels.

Speaker 9: We returned $298 million of cash to our shareholders through dividends and used $167 million for capital expenditures through the third quarter.

Speaker 9: Our priority is to continue to have a balanceced use of cash funding investment to drive growth returning a significant portion to our shareholders through dividends and paying down debt. While our fourth quarter has historically generated our highest cash flow from operations based on our current profit outlook and working capital position. We do not expect a deleverred to our targeted net debt to adjusted EBITDA ratio of approximately three X by the end of fiscal' twenty-two and.

Speaker 9: We remain committed to a strong investment-grade rating and we have a history of strong cash generation and proper realization.

Speaker 9: With our improving gross margin, as well as our plan to normalize our supply chain costs and inventory levels, we will be better positioned to continue paying down debt.

Speaker 9: Now turning to our 2022 financial outlook on slides twenty-five.

Speaker 9: We are projecting strong top line growth, with profit impacted by cost inflation and supply chain challenges.

Speaker 9: We also expect there will be a three percentage point unfavorable impact of currency rates on sales and a two percentage point unfavorable impact on adjusted operating income and adjusted earnings per share.

Speaker 9: On the top line. We expect to grow constant currency sales 3% to 5%. We expect sales to be driven primarily by pricing.

Speaker 7: While we anticipate volume on product mix to be impacted by price El asticities, we expect El El IC ity to remain at a lower rate than historical levels, given our focused approach led by consumer insights.

Speaker 7: Our volume and product mix will also be impacted by the divestiture of our Kitchen basics business.

Speaker 7: The demand disruptions experienced in China and the exit of our consumer business in Russia, as well as continual pruning of lower-margin business from our portfolio.

Speaker 7: 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 7: We are projecting our 2022 adjusted gross profit margin to be 350 to 300 basis points lower than 2021, primarily driven by our Flavor Solutions segment.

Speaker 7: Given the rapidly escalating cost environment, this year cost inflation out outpaceed pricing in the first half of the year. We expect pricing to outp pace inflation in the second half of the year, then continue into next year.

Speaker 7: This adjusted gross margin compression reflects the impact of a high teens increase in cost inflation, higher supply chain costs, lower operating leverage and unfavorable impact of sales mix between segments and favor favorable impacts of pricing and CCI led cost savings.

Speaker 7: As a reminder, we have priced to offset dollar cost increases.

Speaker 7: This has a dilutive impact on our adjusted gross margin and is the primary driver of our projected compression.

Speaker 9: We expect our adjusted operating income to decline 11% to 9% in constant currency. In addition to our gross margin impacts I just mentioned, this projection also includes our ccix cost total cost savings target of approximately $85 million and a low single-digit increase in brand marketing investments compared to 2021.

Speaker 9: We are projecting 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%, and.

Speaker 9: We are projecting our 2022 adjusted earnings per share to be in the range of $2 and 63 cents, to do $2 and 68 cents as compared to $2 and five cents in 2021 .

Speaker 9: This projection includes a 2: two cent unfavorable impact from the divestiture of the kitchen basics business.

Speaker 9: As we currently progress in our fourth quarter. We are confident in delivering our 2022 outlook, continuing our strong top line growth trajectory and, as our guidance implies, delivering fourth quarter operating margin expansion, while executing on a focused plan to drive improvement in our cost structure.

Speaker 9: We are targeting to eliminate at least $1 million of these costs, or approximately a 150 basis point impact to our operating margin.

Speaker 9: With our proven track record of delivering ci-led savings to fuel growth investments and expand our operating margin, we are leveragating the discipline of the CCI program to aggressively eliminate cost and inefficiencies.

Speaker 9: Overall we are confident our focus on profit realization will drive margin improvement and, while parts of our plan to optimize our cost structure will take longer than others, we expect to begin seeing the benefits of our actions in the first half of 2020. -three.

Speaker 7: We look forward to sharing more details on progress with you in January . Only provide our 2023 outlook.

Speaker 8: Thank you, Mike. B am Mike to shair our financial results and outlook in more detail. I'd like to recap key takeaways as seeing on Slide twenty-six.

Speaker 7: Our third quarter sales performance reflects the strength of our broad global portfolio and the effective execution of our strategies against the backdrop of a volatile operating environment, our sales growth momentum is strong.

Speaker 8: The challenges in our supply chain have taken longer to normalize. We have now passed an inflection point. We have begun to recover the cost inflation that has been outpacing our pricing actions, while executing on a plan to aggressively eliminate supply chain costs, and we expect 2022 fourth quarter operating margin expansion and continued improvement into 2020.

Speaker 13: -three.

Speaker 7: Our long-term performance, including through periods of volatility, has been industry-leading, and long-term fundamentals that drove this historical performance remains strong. We a proven track record of execution and are confident it will successfully navigate this dynamic environment, our future sustainable growth and build long-term value for our shareholders.

Speaker 8: Now let's turn to your questions.

Speaker 8: Thank you, we'll now be conducting the question-and-answer session. If you'd like to ask a question, Please press star one from your telephone key pad and the confirmation tone indicate your l in the question Q.

Speaker 8: Me press start two of you later move your question from the queue.

Speaker 8: For presens using speaker equipment. It may be necessary to pick up your handset before person. The starkeys or one more, Please will we pull for questions.

Speaker 8: Thank you. Our first question is from the line of Ken Goldman with JP Morgan. Please dis you your questions.

Speaker 12: Hi Thanks so much. I'm big morortningan, byway.

Speaker 12: Hi good morning. You highlighted that your past the inflection point right where your pricings now ahead of your costs, and this, of course, it natural right given the timing, and not unexpected. But you know, one of the pushbacks we hear on the industry is that larger retail customers, as they start to, I guess, maybe notice these margin trend, will' start to ask for a bigger piece of the profit pie.

Speaker 12: So I guess my question is: you know, to what extent do you expect sort of these gross margin net tailwinds to be sustainable? Or, you know, is it reasonable to expect maybe some pressure from customers as they see their vendors margin starting to get better?

Speaker 14: Well I think that there's always some tension when you're talking about pricing and margins with customers and and so we don't want to get into, I think, any one specific customer. But right now, all of our customers recognize that inflation is ongoing and we continue to have.

Speaker 13: youi'd say productive pricing discussions with our customers. You know we just did take another round. That is, in fact, that our fourth quarter, and we're will be not see that kind of pushback right now, I think. I think the reality C we're still recovering, you know we've our pace of pricing has caught up now with cost. We we recovered dollar a dollar in 2023, but we know there is a trend that is GI in the right direction and obviously, you know, as we look in 2020, we's the cost environment, things like that.

Speaker 7: We need to go again next year. But that's still, and I think, particularly on the flavor solution side of the business, we have still have more work, more work to do.

Speaker 12: Got it, Thank you, and then.

Speaker 15: From my follow up, you're guiding to at least one million of incremental cost savings. It's not a small number. So I just wanted to get a little bit of clarification. How much of that is incremental to ongoing C, CI and how much of that is derived from maybe, a normalization of certain factors such as inventories versus? Would you consider more, I guess, discrete savings beyond that?

Speaker 7: Well first of all, all of this is incremental to our almost CCI program- are using the processes and the the organization talent that drives our CCI program to actually execute on these. But this is incremental.

Speaker 16: Savings that we- but although some of I would characterize as a onetime take out it, it goes straight to run rate. These are incremental costs that we have have incurred due to expensive surge capacity- some of the things we talked about in our prepared remarks over time, temporary labor and efficient shift, except to be copac, kers- a lot of premum transportation charges.

Speaker 7: We expect to get that out of our system back to our prepandemic operating standards and we would expect, while this is a onetime take out, it goes straight to run rate.

Speaker 17: Understood Thanks so much Ye very clear.

Speaker 8: Our next question is from line of Robert Moscow, with current swees, Please suit your question.

Speaker 18: Thanks So So Flavor Solutions is really the division that has stumbled the most. I mean, when I look at profit this year compared to like prepandemic, it it's well below your pre pandemic levels. So can I assume that most of the one million and savings is, or a recovery is going to happen there? And then then my second question is: I remember years and years ago that the flavor solutions had problems because it was trying to do too many things for too many customers and it spread itself too thin.

Speaker 8: It needed eventually to have a rationalization of its customer base and- and I wanted to to make sure that that's not possibly one of the root causes. Today you know you've grown your sales a lot. Do you feel like the, the organization is, is capable of still getting back to like?

Speaker 19: 12% operating margin across all of those customers.

Speaker 20: Yes I think that stumbled those raway to characteriz. I think that we're a bit of the vtim, our own success. We've won a lot of new business we and we've prioritize, keep air customers and stock and supply them and that has put a lot of pressure on on our supply chain in a few, in a few areas that we've got projects underway to address kind of a normalization, our production and through capacity additions.

Speaker 11: Some of these wins are substantial and we've had real brick and more projects that take a couple of years to put into place, that are coming online right now and that are going to get at a lot of the extraordinary cost. there'ssome parts of our business' 24, seven ships that we've gotten out of in most of our business and we're still doing that in a lot of our fly, a lot of parts of our lavor Solutions business and that less efficient.

Speaker 11: shipift pattern, even though some capacity said be an example of expensive surge capacity. But we've got a new.

Speaker 11: Seasoning capacity coming online in the Americas. Some, some of it now, some of it some of it in the first early part of 2023. We're starting up a.

Speaker 11: New Flavor Solutions plant in the U K. we've got.

Speaker 11: Expanded distribution that.

Speaker 11: You that's shipping really startty to ship right right now. And so you know, I think that you know, I think that you know we've got a lot going for flavor solutions. You know you to support that strong growth and in a more bus way. I gu the margin issue on Flavor Solutions partly is just the way our contractual arrangements work you with, where our customers, you know there is a past through makec and isn't for the major, from materials that go into their, their product.

Speaker 7: There there's a lag to it. You know the times when in placeation was, you know, one to 3%. You know that lag really wasn't important but this year were been double P it. It has been important and we are going to catch. Catch, that's that I think, to remember we've talked about this before- over half of the dilution this year due to the cost versus pricing.

Speaker 9: So that's that that get back over time. Also, know these projects mar mention there's a lot double running costs as we bring, bring those big projects up, like you came Peter, that event ually will go away, So that will help the margins to. To point, are we spread to been I actually at the flavor division back in 2005 when I was identified. There's no comparison to today.

Speaker 11: It's really focused and findending about. Know I was just going to say like one thing I would add, their Rob is the composition and the profile of our business is so different to 2005 and you know this, our strategy to keep, you know, driving in, evolving the business towards that higher value added. You know portfolio is what you're seeing in our business, you know.

Speaker 21: You know portfolio the today, and so there's a very different, I think, to the conditions compared to you, the point you reference and we have done a lot of portfolio pruning behind the themes as we, especially we want to know the 5, three year where extraordinary growth, you know.

Speaker 22: That we have in the parts of the business that we're focused on more than made up for parts of the business where we were getting out of low margin, high-touch businesses, and I think it's been a.

Speaker 11: Self reinforcing.

Speaker 7: Strategy the migration of our business more and more towards the value-added, technically insulated and flavor end of the spectrum has made our product wins stickier and our rnd teams more able to work on new business and not focused on constantly rewinning the business.

Speaker 19: Up great, I'm sorry to bring up 2005, but we're all older that we all remember it. So maybe just one follow-up of the $7 million or so of profit decline this year in flavor solutions. Can you quantify how much of that is just pricing catchup?

Speaker 16: I would say I wouldn't think the bigger bucket is actually some of the excess cost, but we talked about it in and then, which actually would it D more sales. We could have suply that the excess cost that we- for the reason we call down that preannouncement was we haven't been able to get those- is out of a system. Again, pricing is a bitbehind the me.

Speaker 9: The thing that gives us the comfort that we're going to recover more margin in flavor solutions is because we seen it in consumer. The consumer Turning very is turning positive from a gth margin and operating profit perspective. Pricing way it comes through. You'll see the same Flavor Solutions But I don't have in Act number for you.

Speaker 23: Okay Thank you.

Speaker 8: Our expquestion is from the line of the Steve Powers of Torch Bank. Please sues your question.

Speaker 24: Yes Hey, Thank you and good morning. Picking up on that, that last thread on the pricing catch up in flavor solutions.

Speaker 25: Can you talk a little bit about the expected timing of that and cadence of that because it seems like.

Speaker 26: You know, most of it, or a good P, good portion of it, should be, I think, a foreseeable disbased on the timing of a sort of the contracted adjustments in pricing and contract renewals, not kind of things. So is it it? Should we be expecting a relatively smooth catch up from here? Or you know, is it is it, is there a reason to believe you can catch up?

Speaker 27: Happen to a more accelerated, accelerated time? I'd rather describe more in terms of our firstross margins trajectory. To talk about pricing is specifically because a worry that it's going to get into things that might up upset our customers. But but you can see that margin trajectory on this business that you need to turn. We talked about an inflection point, Flavor Solutions.

Speaker 11: Margins have been at been ticking down through the quarter of the year, atturnneing.

Speaker 20: The year ear year comparison has narrow in the in the in the third quarter and we expect it to continue to narrow and begin of recovery as we go through a.

Speaker 12: yeah we, from a dollar perspective, work like I said before, provo cussumer lor solution business. We will catch up on the.

Speaker 11: Cost the next year. We just took branded food service as's a part of favor solutions along with our consumer business at the begning of the quarter. That will be a positive flow the next year rapidly. So yes know, like one thing B you catch up as it's over time. But in 2023 we will catch up.

Speaker 28: Okay okay. On the manufacturing startup: coough are those, I guess? What inning are we in there and how much of that remains versus is in the rearview?

Speaker 16: theother I would say, I mean from a.

Speaker 19: You're only going to have some of these grams. To say that we're always going tohave some of this, I think this year is kind of high watermark that we should get them go in next year. But the some of these, these programs take a bit of time to get fully, fully have done. These are big programs on Project. We just have to shift our first power as mar out of the, out of our big working distributions there.

Speaker 7: But we want to move over five into 22. 23 will be movingin parts of our business into that, So they ll be a bit of ineeficiency there. But, and know you know, I want to just emphasize that the things that we talked about on the call in terms of getting at the, the pro remarks in terms of getting at the cost for examples, So they to overly focus on any one particular thing and give it too much weight, were we were sharing examples and we next court in January will be able to get some progress updates on those exact examples.

Speaker 29: As well, and cap for other actions.

Speaker 28: Ok Thank you, if I could just one little house keeping. Sorry I missed it, but just, was there anything you know notable that caused that resulted in reported this quarter coming in above what you had pronounced? A quarter closed is then anything as you closed the books. That was now like we said. Like said we renounced me, we haven'tclosed our book yet.

Speaker 9: So these are all estimates and we felt pretty good where he landed. There was know a couple of things: tax came in a little bit more favorable about a penny, some other's D a things came in a little bit more favorable, but nothing, nothing material. And you saw that one malale landed right where we thought. I mean when we pre announced it was say, for had little bit more visibility in thesales versus profit.

Speaker 30: And you know, between Q3 and Q4 there's a little shift.

Speaker 28: yeah yeah okay, thanks so much.

Speaker 31: Thank you. Our next question is from the line of Chris gy with seail. Please is you your questionions.

Speaker 32: Thank you. Good morning Chris. Sorry it no in. No are no. Thank you for com of my question. I appreciate it. I just want to go a couple, I guess, followed questions. I just want to be sure on that lag in pricing in flavor solutions that when we talked on the past along features of that business that typly been like a one quarter lag. Is that still the case?

Speaker 33: So if you caught up now when you talk about pricing beat over inflation other, if you caught up with that and I guess that's want to also understand, was that a, was that a? A factor weanghne on profit in the quarter or was it more just a supply chain challenges? Well, of course it was a factor weingghing on profit in the quarter and has been all your.

Speaker 34: You know again, you know every customers ly different contractual arrangement. I think think about a quarter lag is a good way to think about it. But remember cost keep coming in. I mean we didn't get cost inflation. You know January first and price for you know these costs of de ly increasing you all year and and then that continued to increase. The inflationary outlook has not settled.

Speaker 35: So you know. You know there's. You know there's been a bit of A. we've got we passed cost through, but but there's been a bit of facing at A. costs have continued to go up. I'm T lot friend and comment on this a little further. Well, let's sure I think just you. The thing I would ke in on is there is unlike, let's say, our consumer and our latervor are granted to service business.

Speaker 10: There's not, you know, sort of one moment in time where you know that pricing is know therefore, affected in the business, and so that's another way to make think about it Chris, and I think you know, just to build on, you know, part of your question, you know the certainly supply chain, as we've been talking about quite a bit in the prepared remarks and we're certain an influence on on how we're looking at that.

Speaker 36: Ok Thank you for that. And then I did just to understand if I'm hearing it properly. But like the pricing should accelerate in the fourth quarter, it sounds like the again some continue to catch up in pricing. I guess that's true for flavor solutions and I think about consumer. Is that one where we should expect incremental pricing based on what you mean on?

Speaker 33: So far enough? Not asking friend, they knew there. But I also understand that maybe how you're utilizing promotional spending thereyou know, as a means of, you know trying to try to attack some those price gap issues in some areas of the business therei.

Speaker 20: You know, we have.

Speaker 7: Been guiding all year and you can see it coming through now, and not just our reported numbers but also through the scanner. So we would have more pricing in effect in the second half of the year, especially going into the fourth quarter, than we have, than we did in the.

Speaker 9: Early part of the year. You now we've.

Speaker 9: You know, in the America you this year taken number know the number of rounds of pricing that included the most recent one being here right beginning in the fourth quarter, but there is more pric in effect now. Talk about our consumer business primarily there and so you can. You can see that. You can see that coming through now and really other than the you know the contractualal window that we're just talking about in flavor solutions, we we largely have our actions for this year in place and we're looking at the 2023 Now I think that in a that we've got one more around that goes to affect affected this, but through ER 2022 action are are away and I gave such a long answer to that but fact forgot part of your question, but I'm going to let friend and answer.

Speaker 7: So I think we- you were going- was just looking for some context or our promotional spending, and know, I think, that the context we provide is as we go into the holiday. You know we feel really good about our supply. We have a strong program, you know, plan for the holiday season, as as we would, you know, every year, but it certainly feels, you know, I think, a little bit more robust, you know, now compared to, let's say, you know 20, one in 20, just because we're better situation from the standpoint of overall context in the market.

Speaker 21: So we are turning back on promotions where we feel really comftent about supply and we're at the holiday season that way. Those, those choices are are not necessarily connected to any pricing decisions we're making in the market, but really just support of the business and helping to drive the category for our retailers. See, and I would say that there supply situation on the consumer business going to holiday: the best that's been in the last several years.

Speaker 33: That's great thanks for all that context I appreciate.

Speaker 37: Thank you.

Speaker 8: Our new question comes from the line of Andrea lazarre with Barclays. Please re use with your questions.

Speaker 38: Break morning everybody. I to start off. I think when you had had pre announced results for the quarter, one of the factors that you had highlighted in the consumer business was that sort of private label price points at some retailers on shelf had not yet really sort of moved upward, leading to some price gaps that get wider maybe. And then you'd like or had been anticipated and if I miss, if I apologize, I didn't know if that you'd seen any movement there yet or have heard of any movement that's likely to happen on that front.

Speaker 20: i- and no one has asked that I'm glad, did you know? Only a very short time since we preannounced And so we don't have a lot of new information on consumer behavior or on on retailer behavior. brendan, GI some color on that and' I'll P it back.

Speaker 21: Yes I think bandam things are largely consistent with what we had discussed or it shared broadly within the last four weeks. So we haven't really seen a lot of new information or data, they seem. This price gets seem to be kind of holding in the very same range that we talked about before.

Speaker 7: And we still are leading supplier private label into the category and we're passing those price increases along to customers to, as we have on branded products, and that's a retailer by retailer decision, I think, on what gets realized at itshel. But in the meanwhile we're still driving a lot of that value programming that we had talked about, whether it's not only our messa, ging but also we're seeing a lot of lift and some of those parts of our portfolio that tend to drive more value we offer.

Speaker 21: Our offerings are really across the spectrum. You know that that would meet consumers' needsand. We're seeing growth. The premium we're seeing th on the value and parts of our business like gre me. Garden which tend to be on the premium end are actually do really well you know in this context and then you know we see our value sizes like super deal.

Speaker 21: Performing very strongly you know also off shelf and in the market and they we're introducing you know more value into the markets through this opening price point lawies' program and we're also doing that in other parts of our other markets around the world where we're you know in many of them we were launing receivable pouches that are larger than usual and a allow of consumers to kind of you know realize more value that way.

Speaker 21: But that's the part y addtied context. I would share you know since the last month and it doesn't exactly what you may atattend to talk about this. A little bit I want to emphasize that know we have in our.

Speaker 39: Offering items for every price point and every retailer strategy and.

Speaker 27: And category, from the premium and all way down to opening price point and private label, and we spent a fair bit a time talking about you, the consumer. That's under pressure and greatly So. We are concerned about pressure on the consumer, especially the consumers and on the lower half, the income spect. We want to make sure that our, our products are accessible and approachable but more May and premium end of our business is still very strong and sometimes those price gas can be exaggerated.

Speaker 7: And brendan mentioned large size and super deal. ieton data is a pretty plunt in want to report unit price doesn't catch the fact that some of these value packs are really big and carry a high price point.

Speaker 14: If you adjusted out the.

Speaker 7: The large size taxs that are growing strongly for us and that price gap actually narrows quite a bit.

Speaker 38: And that's very helpful perspective. Thank you, and then I don't any on time. Just to ick one obviously we're not a point where you're going to get too specific at all about about next year, of course, but with you know, with the sort of the inflection that's starting to happen in pricing, the new cost saves, you know, in recover, margin recovery actions that you you've kind of highlight today.

Speaker 38: You know the- I guess the consensus already has McCormick sort of getting back to what we call more of an non algorithm type of earnings grow next year particularly, that is, would you would deem, I think you know a bunch of the things you talk about impacting this year is somewhat more transitory, you as you improve them going forwardth. So I didn't know if there were even just any broad comments around that.

Speaker 38: You know whether there's a need, you think, to lean in right on the marketing side going into next year, just given the whatever the value orientation of the consumer, some of the new product innovations you got planned, or just things larger puts and takes that we should sort of think about. You know, as given how I guess the street has already started to sort of lock in expectations for next year.

Speaker 40: Thanks so much.

Speaker 20: So I will start with the caveat that we're not going to give any guid for twent, 23 or now. I've got everyone's spending around your Lim.

Speaker 7: Holding their brush hering. I'm going to say something rash about that, But So it is a bit early for that- and I appreciate very confidence in the investment community. It's reflected in those consensus outlook. But there are some big puts and takes. I then then let Mike talk about So.

Speaker 41: yeah obviously I have a big log art for next year- is the inflation environment. So we're in the process's actually rolling up budget things like that takinga- look, you know that drives pricing actions. Obviously you know some of the other puts and takes you think about, you know, interest expense. Obviously some of the acs we took this year might be a negative for next year.

Speaker 19: Cost for and we talked about you're going to give you a lot more detailon January . So I'd say right now is there's so many big moving cards to be hard even to to to give you any guys, but I mean frankly, in ad of comsts to be rebuilt right.

Speaker 42: Thank you.

Speaker 8: Our next questionions from the line of Adam Samuelson with Goldman Sachs. Please receive the questions.

Speaker 43: I thanks, good morning.

Speaker 44: mor So a lot, lot of grounds in covered. I wanted to just come back to flavor solutions quickly and just the way you'd characterize kind of the business performance on the strong demand and I guess I'm trying tovolume mix in the quarter was up 80 basis pointsandso I'm just trying to get alittle bit more color on kind of the pieces within the flavor solutions business, because it's not really one business, it's a collection of a a bunch of them.

Speaker 45: It would seemthe from the way you characterizethe.

Speaker 43: Some arios of strength that maybe some of the higher value flavor businesses were were.

Speaker 43: At or below kind of segment average growth and just is at the right calibration and be just any color on the growth of the dips of the different pieces.

Speaker 7: M struggling to take of a part of it that was weak. We had strong performance on Flavor Solutions.

Speaker 13: In that segment across the globe and all.

Speaker 46: segments- I'm sorry, I oh PE that's are not failed. All regions and all of the pieces of it.

Speaker 9: Well maybe a little bit of out I be. We didtalk about a month ago mean some of the challenges our lavor solutions. This year we we re cost related to plblack constraints. We could have sold more, we could have had the higher volumes than you noted until the things. In that perspective, some of actions we've talked about for ty, of more capacity, will help, but the demand is very strong and is very strong.

Speaker 43: Okay all right. I just, I guess, relative to historical force, that business- 80 basis points of volume, volume mixed growthum and- and I T know there's noisiness in the comps- is with COVID-19 recovery and it'.s a lumpybusiness.

Speaker 43: Doesn't usually that businesses could be stronger than 80 basis points of you mix. I'm trying to get that the, the calibrations, but enormous person- to 10% prising.

Speaker 44: Okay and then just think on quickly on's D A- and I used to lose this in thinking it's 23 a little bit, but it would seem like the way the gross margin an EBIT guidance lays out, apimplied for the fourth quarter, that total's g n a is going to be down high Ing high, high single digits A. is that kind of the right calibration and is within that, just how much is incentive comp resetting lower talk about kind of the declines in's g a dollars that you've you've seen this year.

Speaker 47: Yes I mean fa. Your rate is going to be down in the quarter as primarily driven by the incentive comp.

Speaker 41: We're also getting higher fixed cost leverage to you think about it but.

Speaker 43: So most that decline in offcentiveof comp as we think about the headwind that would be rolling into next year.

Speaker 48: I mean, we adjust incentive comp every quarter, So I wouldn't take one quarter to then try to exatulate next year.

Speaker 43: Yes okay, all right, I appreciate the color, Thank you.

Speaker 37: Thank you. Our final question is from the line of Peter gala Bank, America. Please just see your questions.

Speaker 49: yys, good morning. Just two really quicklyones for me, maybe just to pick up on Adam's question there. Mike, I just wanted to clarify the operating margin comment for the fourth quarter of operating margin expansion. That was the year-over-year comment, the fourth quarter, not a sequential.

Speaker 50: Thank do.

Speaker 51: Well okay okay that's helpfulble and then just broader broader question on the just thinking about the cost savings for next year and we spent a lot of time talking about that but just.

Speaker 49: Cause you think about, like repatriating production, surarch capacity, coming down, normalizing inventory levels, like is there a way to quantify? I would imagine there there's probably a volume imp that comes with you, you'll get the benefit on the stside, but maybe theres a, there's an offset, little atleast on P line line volume, isthere any to quantif this don't that's what we're say at all and think we tantified the cost.

Speaker 14: But I don't think that there's a, there's an impact of volume at all. I mean this is.

Speaker 9: Normalization and.

Speaker 13: And we want to do this year and I don't think that it that has an impact of course. I kind of don't want to get into 2023 guidance. But whatever is that that would all be reflected in whatever guidance we give for next year and I do want to emphasize that we spent a lot of time talking about supply chain in our our remarks and on.

Speaker 35: In the Q a here you know I do want to be clear that what's the most important thing I'm glad you really process point up about. The volume now is that the continued growing demand for flavor and strong growth of both businessa that we're fueling was executing on our strategies and with our passionate and engaged employees is the most important thingank.

Speaker 7: Inflation is a reality and our pricing.

Speaker 13: Has caught up with that. We're seeing that coming through in the margin bil, you're going to see it. You know see keep, keep caught up and taking the actions that are necessary, and then comes to fly chain. That's really kind of the third most important, I thing.

Speaker 13: Which is to eliminate the excess of cost and inefficiencies that have prepped into the supply chain. So you want to keep that in the perspective, that growth is so at the top of the eat.

Speaker 51: Fair enough. Thank you muchgoodbye Thank.

Speaker 37: Thank you at this timelet turn for back to management for for closing remarks.

Speaker 50: Great Thank you. A mccormx. Alignment with consumer trend and the rising demand for flavor, the combination with the B and reach for our molobal portfolio and our strategic investment provide a strong foundation for sustainable growth. We are disciplined on our focus on the right opportunities and investing in our business're continuing to drive further growth.

Speaker 50: As we successfully execute on our long-term strategies, actively respond to changing consumer behavior and capitalize on opportunities from our relative strength, we continue to be well positioned for continued success and remain committed to driving long-term value for our shareholders.

Speaker 6: Thank you Lan, and thanks to everybody for joining today's call. If you give any further questions on today's information, please feel free contact me.

Speaker 52: This concludes one call.

Speaker 53: Thank you again.