Q3 2022 McCormick & Company Inc Earnings Call
Good morning. This is Kasey Jenkins, Chief strategy Officer, and senior Vice President Investor Relations. Thank you for joining today's third quarter earnings call.
Maintenance cost, because you're satisfied and I arent dot.
Dot Com with me. This morning are like Crazy, Chairman and CEO , Brendan Foley, President and CEO and.
And Mike Smith, Executive Vice President and CFO .
During this call we will refer to certain non-GAAP financial measures today.
non-GAAP financial measures and related reconciliation to the GAAP results are included in this morning's press release and slides.
In our comments certain percentages are rounded please refer to our presentation for complete information today's presentation contains projections and other forward looking statements.
Actual results could differ materially from those projected the company undertakes no obligation to update or revise publicly any forward looking statements, whether because of new information future events or other factors. Please refer to our forward looking statements on slide two for more information I will now turn the discussion over to.
Lauren.
Good morning, everyone. Thanks for joining us.
Third quarter sales increased 3% from the year ago period, as anticipated and constant currency sales grew 6%, reflecting 10% growth from pricing actions, partially offset by a 1% decline from the kitchen basics divestiture.
1% decline attributable to the exit of low margin business in India, and the consumer business in Russia, and a 2% decline in all other volume and product mix.
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.
Using 2019 as a pre pandemic baseline third quarter sales grew at a constant currency three year compounded annual growth rate or CAGR.
7%, reflecting the sustained momentum in our business across both our consumer and flavor solutions segments.
Moving to profit adjusted operating income was down 12% or 11% in constant currency and adjusted earnings per share was down 14%.
During the third quarter supply chain challenges continued and recovery of certain constraints materials is taking longer than expected.
We continue to occur elevated cost to meet high demand in our flavor solutions segment, although in our consumer segment, where demand moderated from elevated consumption trends more quickly than expected, we are experiencing lower than optimal operating leverage.
Across the supply chain that we remain focused on managing inventory levels and eliminating inefficiencies. So the normalization of our supply chain cost is taking longer than expected pressure in gross margin and profit realization in the current period.
Over the coming months, we will be aggressively eliminating supply chain inefficiencies 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 leavers most significantly in that.
Consumer segment.
We expect this will continue into the next year as we plan to fully offset inflation over time.
Before discussing our third quarter segment performance in more detail I'd like to comment on our supply chain plans starting on slide five we have a focused plan in flight leverages. The discipline of our established comprehensive continuous improvement our CCI program to ensure that we are able to flexibly support.
Customer demand both word has been sustained at higher levels and word has moderated while <unk>.
Eliminating inefficiencies and normalizing, both our cost structure and inventory levels, our actions are well underway.
Our top supply chain priority remains keeping our customers and supply and supporting their growth there.
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 to strengthen our supply chain resiliency and importantly enable us to service our customers. So they can grow their business. For example, we're investing an additional flavor solutions seasoning capacity, which will be online in early 2023.
Expanding <unk> footprint to support our flavor growth.
We recently opened our new UK Peterborough 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 Merrill Lynch Logistics Center.
From a cost perspective, as we responded to demand volatility over the past several years, we have incurred additional costs above inflation service, our customers and have seen inefficiencies developed in our supply chain. These are costs. We absorbed we have not passed onto customers and our pricing actions, we are targeting to eliminate at least.
$100 million of these costs with a significant benefit in 2023.
We're moving aggressively to take these costs and inefficiencies out as well as normalized inventory levels that have built up some of our actions include investing to increase both manufacturing capacity and reliability and bottleneck areas.
To enable better customer service and repatriation of production from excessive use of co Packers.
We're returning to more normal shift schedules and reducing our spend an extensive search capacity.
Already seeing the benefit of lower overtime and temporary labor reductions.
And this is more normalized environment as well as through customer collaboration we are already beginning to reduce expedited freight costs and less than truckload shipping costs as well as other transportation inefficiencies.
We are resolving raw material and packaging supply issues. For example, they are beyond distorted because of glass bottle and certain organic spices, which impacted supply of our U S core mainline.
Supplier facility closure announced in September drove the discontinuation of a component of our dry recipe mix packaging and through our quick qualification of alternative supply we mitigated major disruption during the fourth quarter.
Long running shortage of French's mustard bottle will be resolved in the first half of 2023 is new molds come online at a second supplier.
And from an inventory perspective, we're also executing on plans to return to historical safety stock levels, which were raised to protect against the supply disruption.
We expect the impact of our actions to normalize our supply chain cost increase our efficiency and ability to meet demand lower our inventory levels and importantly increase our profit realization beginning in the first half of 2023.
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.
Then there has been steady improvement building progress in bolstering our confidence in our plan to enhance our operational performance and optimize our cost structure.
While we will always prioritize leading our customers need and are encouraged by our disciplined approach to resolving the increased cost within our supply chain.
We've continued to define and quantify specific actions within our plants as we should.
Since we shared we would be driving the elimination of the supply chain inefficiencies in our pre announcement last month.
We look forward to sharing more details and progress with you in January when we provide our 2023 outlook.
Now moving to the third quarter business update for each of our segments sorry.
Starting with our consumer segment on slide six and the status of our pricing actions are 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.
While broad pressure on consumers' cost of living from inflation, which heightened during our third quarter as a resulted in higher price elasticity than we originally anticipated.
<unk> remained 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.
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 4% in line with our shipments.
Over the last three years since <unk>.
Since 2019 consumption has grown at a three year CAGR of 8%, which highlights how the sustained shift in consumer consumption continues to drive increased demand for our products and outpaced pre pandemic level.
In early August we divested our kitchen basics business we.
We consistently grew this brand over the years, but as it was the only U S brand, we had in the stock and broth aisle. Our resources, we are better focused on core categories, where we have leading brands.
Has it 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 highs in consumption.
Has created challenging comparisons in some product lines, such as baking related items, which have returned to our pre pandemic level. Unlike most of our categories.
Drilling related items were impacted versus last year by high meat prices, although grilling is still strong versus pre pandemic.
Sales conditions continue to improve as seen in our recipe mix share performance with a fourth consecutive quarter of share gain.
Our spices and seasonings share was pressured by service related distribution losses.
A 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.
We are using our category and revenue management capabilities to strengthen our spices and seasoning presence on shelf the strength of our brands and our category leadership as recently want us new distribution, which we're beginning to realize now.
In EMEA, we continue to have solid share performance had herbs spices and seasonings in the UK Eastern Europe , and Italy, somewhat offset by softer performance in France.
<unk> to gain share on Frank's Red Hot in the U K and we are beginning to build momentum with tallulah as we extend that brand into this market.
For the quarter and year to date versus last year as well as since 2019, we're driving the UK hot sauce category growth.
Our Boston eight brands of homemade dessert products in France, a product line of unique to our EMEA region has slowed as we have seen baking returned to a more pre pandemic baseline level in EMEA too again, unlike our other categories.
Turning to the Asia Pacific region last year, the region experienced supply chain challenges such as ocean freight capacity constraints and lapping that impacts contributed to growth in the third quarter.
<unk> following an extended lockdown in the second quarter, Covid restrictions and Shanghai and some other cities throughout China eased as we began the third quarter, resulting in trade and pantry replenishment contributing to growth.
Recently, several cities in Central China, which is the primary market of our Wuhan operations have experienced new COVID-19 related lockdowns and we're continually monitoring the situations overall, our China performance is on track with our expectations.
Across all regions in our consumer segment, we are achieving price realization, we expect it and we're executing on our proven growth strategies pivoting action plans as needed based on our consumer insight and the environment.
We continue to invest behind our brands, we increased brand marketing investments in the third quarter and have additional investments planned for the fourth quarter.
In addition to our highly effective and inspiring holiday messaging.
Pivoted, our digital messaging to emphasize value and show consumers, how our products help them stretch their grocery dollars without sacrificing flavor.
We are focusing our innovation efforts to meet the needs of consumers concerned about their budgets in the Americas, We have launched a new <unk> branded opening price point range of everyday spices and our large sized 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 ounce than the smaller sizes.
We've also launched large size resealable pouches of top selling items and markets across all regions.
In terms of category management, we are collaborating with our customers to ensure the right assortment and price points on shelf to optimize category performance and increased profitability for our customers and as always we have a strong merchandising program planned for the holiday season.
We are confident in our brand marketing investments innovation and category management initiatives, which will continue to drive strong growth.
Turning to flavor solutions on slide eight 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.
Now for some regional highlights.
In the Americas strong growth was driven by snack seasonings and savory flavors and branded foodservice products demand continues to strengthen with branded foodservice restaurant and institutional foodservice customers as mobility and strong summer travel continued to fuel consumption and importantly, we also are expanding distribution.
In EMEA growth remained strong across our entire customer base. Our third quarter growth was led by strong quick service restaurants, or <unk> momentum in all markets, partially driven by expanded distribution and our customers' promotional activities and we're seeing an acceleration of demand and branded foods.
Service as customers shift to more economical formats, our full spectrum of solutions across price points, that's driving growth.
We are winning in most regions with our new product momentum in Americas growth from new products contributed approximately 25% more growth in flavors in the third quarter and the year ago period, driven by beverage and savory snacks and performance nutrition flavors.
Continuing to win share in these categories.
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.
And Apd for driving further menu penetration with our <unk> customers, putting new limited time offers as well as realizing growth from strong performance of their core menu items, we flavor in many cases, we are the heat and theyre spicy offerings.
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 pressure to meet this high demand.
As I said earlier, we are still taking on some extraordinary cost to service our customers. We appreciate our customers working with us and we see light ahead.
Now some summary comments before turning it over to Mike.
Turning to slide nine.
Global demand for flavor remains the foundation of our sales growth and we are intentionally focused on great fast growing category that will continue to differentiate our performance. We continue to capitalize on the long term consumer trends accelerated during the pandemic healthy and flavorful cooking increased digital engagement.
Trusted brands and purpose minded practices.
These long term trends and the rising global demand for great taste are more relevant today than ever with the younger generations fueling them at a greater rate.
Mccormick is uniquely positioned to capitalize on this demand for great taste with the breadth and reach of our strong global flavor portfolio. We are delivering flavor experiences for every meal occasion for our products and our customers' products and are driving growth. We are end to end flavor.
We remain focused on our long term goals strategies and values that have made us so successful.
Have grown and compounded that growth over the years, including through the pandemic and other periods of volatility our solid track record of achieving our long term objectives highlights the resiliency of our business through a variety of market conditions as well as our focus on sales growth and profit realization.
Long term fundamentals that drove our industry, leading historical performance remained strong.
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 global dynamic environment.
The compounding benefits of our relentless focus on growth performance and people continues to position Mccormick to drive sales growth balanced with our focus on lowering costs to expand margins realized long term sustainable earnings growth.
Teamwork of our Mccormick 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.
Thanks, Lawrence 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 exit of low margin business in India, and the consumer business in Russia.
In our consumer segment, we drove constant currency sales growth 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 in the consumer business in Russia contributed a combined 1% impact to the lower volume.
A three year basis, our third quarter constant currency sales CAGR of 6%.
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.
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 CAGR of 6%.
In EMEA constant currency consumer sales declined 1%, which included a 3% unfavorable impact from lower sales in Russia.
Growth in other markets, which are driven by pricing actions, partially offset by lower volume with the most significant volume impact attributable to lower sales of Vahine homemade dessert products over.
Over the past three years EMEA constant currency sales grew at a 3% CAGR.
Constant currency consumer sales in the Asia Pacific region grew 10%, including a 7% unfavorable impact from the exit of low margin business in India as.
As Lawrence mentioned growth was driven by higher volume, mainly attributable to trade and pantry replenishment in China. Following the extended Shanghai locked down last quarter as.
As well as the region lapping supply chain challenges in the year ago period.
Pricing actions in all markets across the region also contributed to growth.
On a three year basis, <unk> third quarter constant currency sales grew at a 4% CAGR.
Turning to our flavor solutions segment on slide 16.
We grew third quarter constant currency sales, 10%, primarily due to pricing actions with higher volume and product mix also contributing to growth.
Third quarter constant currency sales for the last three years grew at an 8% CAGR.
In the Americas favorite solutions constant currency sales grew 10% driven by pricing.
Higher sales of packaged food and beverage companies with particular strength of snack seasonings led the growth.
Higher demand from branded foodservice customers also contributed to growth okay.
Over the past three years constant currency sales in the Americas grew at a CAGR of 8%.
In EMEA, we drove 11% constant currency sales growth was 7% related to price actions and 4% volume index.
EMEA is flavor solutions growth, excluding a 1% decline related to lower sales in Russia was broad based across the portfolio led by strong growth from <unk> branded foodservice and packaged food and beverage company customers.
Over the past three years EMEA is constant currency sales growth was.
It was 9% CAGR.
In the Asia Pacific region flavor solutions sales grew 11% in constant currency with pricing actions and higher volume contributing to the increase.
This was driven by higher sale security of our customers in part due to the timing of the promotional activities.
<unk> grew constant currency sales at a 6% CAGR over the past three years.
I've seen on slide 20, adjusted gross profit margin decline of 320 basis points in the third quarter versus the year ago period.
Let me spend a moment on the significant drivers.
First almost 80% of this decline approximately 250 basis points is due to the dilutive impact of pricing to offset our dollar cost increases.
Next I'll cover the impact of supply chain challenges all gross margin.
In our flavor solutions segment, we have continued to incur elevated cost to meet high demand for certain parts of that business and there's also been an unfavorable impact from the startup and dual running costs as we transition production to our new UK Peterborough manufacturing facility.
In our consumer segment, where demand has moderated more quickly than we expected we are experiencing lower operating leverage.
Overall, while the normalization of our supply chain cost is taking longer than expected pressuring gross margin. We are taking actions to normalize our cost as Lawrence mentioned, which we're confident will be reflected in our 2023 gross margin.
Partially offsetting these impacts I, just mentioned, where our CCI led cost savings where are we on track to deliver our expected savings of $85 million for the full year.
And finally of note in line with our expectations the impact of our pricing actions in the third quarter began outpacing cost inflation in both segments more significantly in the consumer segment.
We expect pricing to continue outpacing inflation into next year as we plan to fully offset inflation over time.
Overall, our cost recovery in gross margin improvement will vary by region and segment with a slower flavor solutions recovery.
Importantly, though we have now passed the inflection point with significant gross margin improvement since last quarter, driven by our consumer segment performance and we expect further improvement in the fourth quarter.
Now moving to slide 'twenty, one selling general and administrative expenses or SG&A were comparable to the third quarter of last year with higher distribution costs in brand marketing investments offset by lower employee benefit expenses.
As a percent of net sales SG&A declined 60 basis points.
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 2021.
In the consumer segment adjusted operating income declined 1% in constant currency and in the flavor solutions segment declined 34%.
Turning to income taxes on slide 22.
Third quarter adjusted effective tax rate was 21, 2% compared to 14, 1% in the year ago period.
Periods were favorably impacted by discrete tax items with a more significant impact last year.
At the bottom line as shown on slide 23 third quarter of 2022 adjusted earnings per share was <unk> 69, as compared to 80 for the year ago period. The decrease was driven by our lower adjusted operating income.
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.
On slide 24, we've summarized highlights for cash flow in a quarter end balance sheet, our cash flow from operations was $250 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.
We returned $298 million of cash to our shareholders through dividends and used $167 million for capital expenditures through the third quarter.
Our priority is to continue to have a balanced use of cash funding investments to drive growth returning a significant portion to our shareholders through dividends and paying down debt, 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 that did delever to our TARP.
<unk> net debt to adjusted EBITDA ratio of approximately three times by the end of fiscal 'twenty two.
We remain committed to a strong investment grade rating and we have a history of strong cash generation and profit realization with.
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.
Now turning to our 2022 financial outlook on slide 25.
We are projecting strong topline growth with profit impacted by cost inflation and supply chain challenges.
We also expect there'll 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.
On the top line, we expect to grow our constant currency sales, 3% to 5%, we expect sales to be driven primarily by pricing while.
While we anticipate volume and product mix to be impacted by price elasticities, we expect that last cities elasticity to remain at a lower rate than historical levels, given our focused approach led by consumer insights.
Our volume and product mix will also be impacted by the divestiture of our kitchen basics business.
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.
Plan to drive continued growth through the strength of our brands as well as our category management and marketing new product and customer engagement growth plans.
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.
Given the rapidly escalating cost environment this year cost inflation outpaced outpaced pricing in the first half of the year.
We expect pricing to outpace pace of inflation in the second half of the year and continue into next year.
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 the segments and favorable favorable impacts from pricing and CCI led cost savings.
As a reminder, we have price to offset dollar cost increases. This has a dilutive impact on our adjusted gross margin and is the primary driver of our projected compression.
We expect our adjusted operating income to decline, 11% to 9% in constant currency in.
In addition to our gross margin impacts I. Just mentioned this projection also includes our CCI led cost total cost savings target of approximately $85 million and a low single digit increase in brand marketing investments compared to 2021.
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%.
We are projecting our 2022 adjusted earnings per share to be in the range of $2 63 to $2 68 as.
As compared to $3 <unk> and 2021.
This projection includes a <unk> <unk> unfavorable impact from the divestiture of the kitchen basics business.
As we currently progressing our fourth quarter, we are confident in delivering our 2022 outlook continuing our strong topline 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.
We are targeting to eliminate at least $100 million of these costs or approximately a 150 basis point impact to our operating margin.
With our proven track record of delivering CCI led savings to fuel growth investments and expand our operating margin. We are leveraging the discipline of our CCI program to aggressively eliminate costs and inefficiencies overall, we're 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 2023.
We look forward to sharing more details on progress with you in January when we provide our 2023 outlook.
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 26.
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.
The challenges in our supply chain have taken longer to normalize we have now passed that 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 cost and we expect 2022 fourth quarter operating margin expansion and continued improvement.
2023.
Our long term performance, including through periods of volatility has been industry, leading and long term fundamentals that drove this historical performance remains strong.
Our proven track record of execution and are confident we will successfully navigate this dynamic environment, our future sustainable growth and build long term value for our shareholders now lets turn to your questions.
Thank you, we'll now be conducting a question and answer session.
To ask a question. Please press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue.
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For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one known please pull for questions.
Thank you. My first question is from the line of Ken Goldman with Jpmorgan. Please proceed with your questions.
Thanks, so much.
Hey, good morning, Ken by the way.
Hi, good morning.
You highlighted that you're past the inflection point right, where your pricing is now ahead of your cost and this of course is natural rate given the timing.
Not unexpected, but you know one of the pushback we here on the industry is that larger retail customers as they start to I guess, maybe noticed these margin trends will start to ask for a bigger piece of the profit pie. So I guess my question is.
To what extent do you expect sort of these gross margin net tailwind to be sustainable or is.
Is it reasonable to expect maybe some pressure from customers as they see their vendors margins starting to get better.
Well I think that.
There's always some tension.
Talking about pricing and margins.
Customers.
And so I don't want to get into anything with any one specific customer, but right now all of our customers recognize that inflation is ongoing.
We continue to have.
Yeah, I'd say productive pricing discussions with our customers. We just did take another round.
The effective use of our fourth quarter, and we're really not seeing that kind of pushed back right now.
I think the reality is we're still recovering.
Where our peso.
<unk> has caught up now.
Cost.
Like we said, we'll recover dollar for dollar in 2023.
But there is a trend that is going the right direction and obviously as we look at 2023, we're looking at what's the cost environment things like that we need to go again next year, but that's still kind of on that.
Particularly on the flavor solutions side of the business. We have we still have more work more work to do.
Got it. Thank you and then for my follow up you're guiding to at least $100 million.
Incremental cost savings.
About a small number so I just wanted to get a little bit of clarification.
How much of that is incremental to ongoing CCI.
And how much of that is derived from maybe a normalization of certain factors such as inventories versus what you would consider more.
I guess discrete savings beyond that.
Well first of all.
All of this is incremental to our normal CCI program using the processes and the.
And the organization.
Talent that drives our CCI program to actually execute on these.
This is <unk>.
Incremental.
Savings.
Although some of them.
I would characterize as a onetime takeout.
It goes straight to run rate these are incremental costs that we incur.
Incurred.
Due to.
Fences surge capacity some of the things we talked about in our prepared remarks overtime temporary labor inefficient ships.
Excessive use of co Packers a lot of premium.
<unk> charges.
We expect to get that out of our system get back to a pre pandemic operating standards.
And so we would expect.
A.
A onetime takeout it go straight to a run rate.
Understood. Thanks, so much.
Very clear.
Our next question is from the line of Robert Moskow with Credit Suisse. Please proceed with your question.
Hi, Thanks.
So flavor solutions is really the division that has stumbled the most I mean, when I look at profit this year compared to like pre pandemic, it's well below pre pandemic levels. So can I assume that most of the $100 million in savings.
Is or a recovery is going to happen there.
And then and then my second question is I remember years and years ago that the flavor solutions.
Had problems because he was trying to do too many things for too many customers and it's spread itself too thin it needed eventually to have a rationalization of its customer base and and I wanted to make sure that that's not possibly one of the root causes today.
You've grown your sales a lot do you feel like the organization is capable of still getting back to like.
12% operating margin across all of those customers.
I think that stumbled is the wrong way to characterize it I think that we're a bit of a victim of our own success. We've won a lot of new business.
We prioritize.
Keeping our customers in stock in supplying them.
And that has put a lot of pressure.
<unk> on our supply chain and a few in a few areas and we've got projects underway to address the.
The normalization of that.
Our production.
Through capacity additions.
Some of these wins are substantial and we've had real brick and mortar projects that take a couple of years to put into place.
Coming online right now and that are going to get at a lot of the.
Extraordinary.
<unk> you know there is some parts of our business. He is a 24 seven shifts that we've gotten out of it most of our business and we're still doing that.
And a lot of them.
Well I would say a lot of parts of our flavor solutions business and that is less.
Sure.
Shift pattern.
Even though.
Some some capacity that would be an example of expensive surge capacity, but.
We've got new.
Seasonings capacity coming online in the Americas.
Some of it now some of it.
Some of it in the first early part of 2023.
We're starting up.
New flavor solutions plant in.
In the U K, we've got.
Expanded distribution.
Uh huh.
Yeah.
That's shipping really starting to ship right right now.
And so I think that.
I think that we've got a lot going for us in flavor solutions.
To support that strong growth in a more efficient way.
Margin issue flavor solutions, partly is just the way our contractual arrangements work with.
With our customers there is a pass through mechanism for the major.
Raw materials that go into there.
Products Theres, a theres a lag to it at times when inflation was two 3% that really wasn't important but.
This year.
It's been double digits it has been important.
And we are gonna catch cats.
That's that's set up I think.
Remember we've talked about this before.
Over half of the dilution. This year is due to the cost versus pricing. So that's just the math will get back over time also these projects Mark mentioned Theres a lot of double running costs as we bring them to bring those big projects up like UK Peterborough that eventually will go away so that will help the margins too.
To your point, though.
Are we spread too thin.
Actually at the flavour division back in 2005, when that was identified there's no comparison to today.
Really focus and spending.
I was just going to say, Mike one thing I would add Rob is the composition and profile of our business is so different to 2005 and you know this.
Our strategy to keep driving and evolving the business towards that higher value added.
Portfolio is what youre seeing in our business.
Portfolio today, and so there's a very different I think a set of conditions compared to the point you.
Currency and we have done a lot of portfolio pruning behind the scenes as we especially as we went through.
These last three years.
The extraordinary growth.
But we have the.
And the parts of the business that we're focused on.
Yeah.
More than made up for parts of the business, where we were getting out of low margin.
Hi touch businesses.
And I think it's been a.
They are self reinforcing.
Strategy, the migration of our business more and more towards the <unk>.
You added technically insulated.
And flavor end of the spectrum.
<unk> made our product with a stick.
Stickier and our R&D teams more able to work on new business.
Focus on constantly winning a bid business.
Great I'm, sorry to bring up 2005, but we're all over that we all remember it so.
Maybe just one follow up of the $70 million or so of profit decline. This year in flavor solutions can you quantify how much of that is just pricing catch up.
Okay.
I would say I wouldn't I think the bigger bucket is actually some of the excess costs that we talked about it.
Which actually would have driven more salesmen could've supplied it but the excess costs that we.
For the recently called down.
In our pre announcement, we haven't been able to get those out of the system yet.
Pricing is a bit behind it means it was the thing that gives us the comfort that we're going to recover more at margin flavor solutions that because we've seen it in consumer the consumer yes, turning very is turning positive from a gross margin and operating profit perspective is pricing wave comes through it youll see the same flavor solutions, but I don't have an exact number for you.
Okay. Thank you.
Our next question is from the line of Steve Powers with Deutsche Bank. Please proceed with your question.
Yes, Hey, thank you and good morning.
Picking up on that.
Last thread on the pricing catch up.
In flavor solutions.
Could you can you talk a little bit about the.
The expected timing of that and cadence of that because it seems like.
Most of it or a good portion a good portion of it should be I think foreseeable just based on the timing of.
But sort of a contracted.
Adjustments in pricing and contract renewals in that kind of thing. So if you could or should we be expecting a relatively smooth catch up from here or.
Is it is there a reason to believe you can catch up happens on a more accelerated.
I'd rather describe it more in terms of our gross margin trajectory to talk about pricing, specifically, because I'm worried that it's going to get into things that might upset our customer.
But but you can see the.
BARDA trajectory on this business you need to turn that we talked about at an inflection point flavor solutions margins have been.
That's been ticking down.
The second quarter of the year.
Okay.
The year on year comparison has narrowed.
In the third quarter, and we expect it to continue to narrow and begin the recovery as we go through next year.
Dollar perspective, like I said before for both consumer and flavor solutions business, we will catch up.
Cost next year, we just took branded foodservice that support our flavor solutions, along with our consumer business at the beginning of the quarter that will be a positive flows into next year rapidly. So.
There's no one big baggy catch up it's over time.
'twenty three we will catch up.
Okay. Okay.
On the manufacturing startup.
Are those.
I guess, what inning are we in there and how much of that remains versus the book is in the rearview.
Yes.
Say I mean from.
You're always going to have some of these programs I'll, just say that because you're always going to have some of this I think this year is kind of a high watermark that we should get some tailwind next year, but.
Some of these these programs take a bit of.
Time to get fully fully done, but these are big programs I mean project.
Shipped our first pilot is largely out of the out of our big northeast distribution center, but we would've been over.
Over time into 'twenty, two 'twenty, three we will be moving parts of our business into that so.
The a bit of inefficiency there but.
Yes.
Emphasize that.
Things that we've talked about.
On the call in terms of getting at the prepared remarks in terms of getting at the cost for example.
The overly focused on any one particular thing.
It too much weight.
Yes, we were sharing.
Examples.
We next.
Next.
Report in January .
Being able to give some progress updates on those exact example.
As well okay.
Other act.
Okay.
Thank you.
If I could just one little housekeeping, sorry, if I missed it but was there anything.
Notable that caused that resulted in a reported EBIT this quarter coming in above what you had pre.
<unk> at quarter close just any anything as you close the books that was no I mean like we said like we said, we pre announced we haven't closed the books yet. So these are all estimates and we felt pretty good about where we landed there was you know a couple of things tax came in a little bit more favorable of about a penny if some other SG&A things came in a little bit more favorable but nothing.
Nothing material.
Landed right, where we thought yes, I mean, when we pre announced it was it was.
Eight 4%.
Little bit more visibility into sales versus profit in between Q3, and Q4 Theres a little shift.
Yeah, Okay. Thanks, so much.
Yeah.
Thank you. Our next question is from the line of Chris <unk> with Stifel. Please proceed with your questions.
Okay.
Thank you good morning.
Hey, good morning, Chris sorry, it was hard to buy it.
No worries no. Thank you for coming and my question here I appreciate it.
I just wanted to give him a couple I guess follow up questions I just want to be sure on that.
The lag in pricing in flavor solutions.
Can you tell us some of the pass along features of that business that that has typically been like a one quarter lag is that still the case or have you caught up now when you talk about pricing beat over inflation have you caught up with that.
And I guess I just want to also understand was that or was that.
A factor weighing on profit in the quarter or was it more just the supply chain challenges well of course, it was a factor weighing on profit in the quarter and it has been all year.
Again.
Every customer's got us so different contractual arrangements I think thinking about a quarter lag. It's a good way to think about it but remember cost keep coming in I mean, if we didn't just get cost inflation.
On January 1st and then price for these costs have been steadily increasing.
Year end and in fact continue to increase the inflationary outlook has not settled.
So so.
Yes.
Spend a bit of a.
Yeah, we've gotten past costs through.
There's been a bit of chasing it is as costs have continued to go up a little of a friend who can comment on this a little further.
Sure I think just the thing I was keen on is there is unlike let's say, our consumer and our flavors our branded foodservice business, there's not sort of one moment in time, where.
You know that pricing is therefore effective into business.
So that's another way to maybe think about it Chris and I think just to build on part of your question.
Certainly supply chain as we've been talking about quite a bit in the prepared remarks, you know, we're certainly an influence on how we're looking at that.
Okay. Thank you for that and then just.
Understand if I'm hearing it properly, but like the pricing should accelerate in the fourth quarter. It sounds like there'll be again, some continue to catch up on pricing I guess, that's true for flavor solutions as I think about consumer is that one where we should expect incremental pricing based on what you've announced so far enough not asking for anything new there, but I also want understand that maybe how you utilize.
Promotional spending there as a means of.
Trying to trying to attack some of those those price gap issues in some areas of the business there.
I think you've got it I'm going to try to unpack that.
Pieces.
Yes.
Have.
Been guiding all year and it is and you can see it coming through now.
In our reported numbers, but also through this.
Through the scanner that 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.
And the early part of the year.
In the Americas.
This year <unk> taken.
Number the number of rounds of pricing that included the most recent one being here right at the beginning of the fourth quarter. So there is more pricing 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 that.
The contractual windows that we were just talking about and flavor solutions.
We largely have our actions for this year in place and we're looking ahead to 2020.
I think that in Asia, We've got one more round that goes into effect this month.
But really 2022 actions are are away and I gave such a long answer to that but I forgot. The second part of your question, but I'm going to let Brendan answer it.
Yeah.
[laughter].
So I think where you were going with just looking for some context went up promotional spending and.
I think the context, you can provide us as we go into the holiday we feel really good about our supply we have a strong program.
Plans for the holiday season.
Wood every year, but it certainly feels I think a little bit more robust now compared to lets say 'twenty. One 'twenty just because we're in a better situation from the standpoint of the overall context in the market. So we are turning back on promotions, where we feel really confident about supply and we're looking at the holiday season that way.
Those choices are not necessarily connected to any pricing decisions, we're making in the market, but really to support the business and will help them to drive the category for our retailers, yet I would say that the supply situation on the consumer business going into holiday is the best it's been in the last several years.
That's great. Thanks for all that context I appreciate it.
Thank you.
Our next question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.
Great Good morning, everybody.
Okay.
Maybe just start off I think when you 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 and then you'd.
Or had been anticipated.
And if I missed this I apologize I didn't know if that you've seen any movement, there yet or heard of any movement, that's likely to happen on that front right. Andrew No. One has asked that yet so I'm glad that you did.
Only a very short time since we pre announced and so we don't have.
A lot of new information on.
Consumer behavior or on on retailer behavior.
Brendan can give some color on that.
I'll take it back.
But yes, I think dangerous things are largely consistent with what we hit discussed you know or shared broadly you know within the last four weeks. So we haven't really seen a lot of new information or data that they've seen this this price gap seem to be kind of holding in the very same range that we've talked about before.
But we still are a leading supplier of private label into the category.
We're passing those price increases along to customers just as we have on branded products and that's a retailer by retailer decision I think on on what gets you don't realize the shelf, 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 messaging, but also we're seeing a lot of lift in some of those those parts of our portfolio that tend to drive more value we offer.
Our offerings are really across the spectrum that would meet consumers' needs and we're seeing growth on the premium and we're seeing growth on the value end.
The parts of our business like Gourmet garden, which tend to be on the premium end or actually do really well.
In this context, and then we see our value sizes like Super deal performing very strongly.
So off shelf and in the market and there were introducing more value into the market through this opening price point Lawry's program and we're also doing that in other parts of our.
In other markets around the world and many of them were launching resealable pouches that are larger than usual and allow consumers to kind of realize more value that way, but that's the only added context I would share since the last month.
Andrew It doesn't exactly what you asked but gives me, giving me a chance to talk about this a little bit.
Now I want to emphasize that we have in.
And our.
Offering.
The items.
Items for every price point and every retailer strategy.
And category.
From the premium end all the way down to opening price point private label and we've spent a fair bit of time talking about.
The consumer that's under pressure and briefly so we are concerned about pressure on the consumer, especially the consumers in the lower half.
Income spectrum, and we want to make sure that our products are accessible and approachable, but.
Gourmet and premium and of our business is still very strong and.
Sometimes those price gaps can be exaggerated Brendan mentioned large sizes and super deal.
The Nielsen data is a pretty blunt instrument when it reports unit price it doesn't catch the fact that some of these value packs are really big and carry a high price point.
If you adjusted out.
The.
With large sized packs that are growing.
Growing strongly for us and that price gap actually narrowed quite a bit.
That's very helpful perspective, Thank you and then I know we're running short on time, just a quick one obviously, we're not at a point, where youre 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 and recover margin recovery actions that you've you've kind of highlighted today.
I guess the consensus already has mccormick sort of getting back to what we'll call. It more of an on algorithm type of earnings growth next year.
Particularly as you would you would deem I think.
A bunch of the things you talked about impacting this year, it's somewhat more transitory as.
As you improve them going forward so.
I didn't know if there were even just any broad.
Comments around that whether there's a need you think to lean in right on the marketing side going into next year, just given that whenever the value orientation of the consumer or some of the new product innovations you've got planned or just things.
Larger puts and takes that we should sort of think about.
You know as you've given how I guess the street has already started to sort of lock in expectations for next year. Thanks, So much.
I will start with the caveat that we're not going to give any guidance for 2023 right now I've got everyone's spending around here.
Holding their breath I'm going to say something a rash of about that but.
So it is a bit early for that and I appreciate the confidence and the investment that's reflected in those consensus outlook.
But but there are some big puts and takes that Mike talked about those.
Yeah, obviously, a big wildcard for next year is the inflation environment. So we're in the process now actually rolling up budgets and things like that taking a look at that.
<unk> pricing actions.
Obviously.
Some of the other puts and takes you're thinking about interest expense. Obviously some of the actions. We took this year might be a negative for next year.
This cost program you talked about Youre going to give you a lot more detail in January so I'd say right now because theres. So many big moving parts it would be hard even to that.
Give you any guidance I mean, frankly incentive comp has to be rebuilt.
Okay. Thank you.
Our next question is from the line of Adam Samuelson with Goldman Sachs. Please proceed with your questions Hi, Yes.
Thanks, Good morning.
Good morning.
So a lot of Ground's been covered I wanted to just come back to flavor solutions quickly and just the way you would characterize kind of the business performance.
Strong demand and I guess I'm trying to.
Volume mix in the quarter was up 80 basis points and so I'm just trying to get a little 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 bunch of them. It would seem from the way you characterize it.
Some areas of strength that maybe some of the higher value flavor businesses.
Sure.
At or below segment average growth and just any.
The right calibration and B, just any color on the growth of the some of the pieces.
You know.
I'm struggling to think of a part of it that was weak we had strong performance on flavor solutions.
Segment across the globe.
All right.
Segments.
Oh, sorry, all right.
All regions and all of the pieces of it.
Yeah.
Okay.
Maybe a little bit of Adam maybe you did talk about a month ago and some of the challenges in our flavor solutions. This year.
Cost related supply constraints, we could have sold more we could've had a higher volumes and then you noted so I think from that perspective, some of the actions we've talked about.
It will help but the demand is very strong meant is very strong.
Okay Alright.
Relative to historical performance of that business for 80 basis points of volume and volume mix growth.
And I know, there's noise in the comps with Covid recovery and it's a lumpy business it doesn't.
It doesn't always usually that business could be stronger than 80 basis points of volume mix and kind of what I'm trying to get that the calibration.
Enormous price, 10% pricing, we feel pretty good about that.
Okay, and then just quickly on SG&A and I used to live in thinking of a 23 a little bit.
But it would seem like the way the gross margin and EBIT guidance lays out implied for the fourth quarter that total SG&A is going to be down high single.
High single digits.
And is that.
Kind of the right calibration and.
Within that just how much is incentive comp.
Resetting lower and talk about kind of the declines in SG&A dollars that you have.
You've seen this year.
Yes, I mean, SG&A, you're right, there's going to be down in the quarter is primarily driven by incentive comp.
We're also getting higher fixed cost leverage Joe as you think about it but yes.
So it is most of that decline in incentive comp as we think about the headwind that would be rolling into next year.
I mean, we adjust incentive comp every quarter, so I wouldn't take one quarter and try to extrapolate into next year.
Yeah.
Yeah, Okay, Alright, I appreciate the color. Thank you.
Thank you. Our final question is from the line of Peter Galbo with Bank of America. Please proceed with your questions.
Hey, guys. Good morning, just two really quick ones from me, maybe just to pick up on Adam's question, there Mike I just wanted to clarify.
Operating margin comment for the fourth quarter of operating margin expansion that was the year over year comment in the fourth quarter not a sequential.
Thanks Bose.
Okay.
Okay. That's helpful. And then just broader broader question on that.
Thinking about the cost savings for next year I know, we spent a lot of time talking about that but just.
As you think about like repatriating production surge capacity coming down normalizing inventory levels like.
Is there a way to quantify I would imagine there theres, probably a volume impact that comes with that you'll get the benefit on the cost side, but maybe there's a there's an offset a little bit at least on on topline out volume is there any way to quantify that at this point no I don't think that's what we're saying at all and I think we've quantified the cost benefit, but I don't think that there's a.
There was an impact on volume at all.
This is.
Normalization in.
You know that we're going through this.
This year and.
I don't think that it has an impact of course.
I kind of don't want to get into 2023 guidance.
But whatever that will that would all be reflected in whatever guidance, we give for Q4 for next year.
I do want to emphasize that we've spent a lot of time talking about supply chain.
Our remarks.
And then the Q&A here.
I do want to be clear that the most important thing I'm glad you really process went up about volume.
Is that the continued growing demand for flavor and strong growth of our business.
We're fueling with executing on our strategies and with our passionate and engaged employees is the most important thing inflation is a reality in our pricing.
Is caught up with it would seem that coming through in the margin. So you can see it.
Keep keep caught up.
And taking actions that are necessary and then comes to supply chain, that's really kind of as the third most important.
Thank you.
As you know.
Eliminate the excess of cost and inefficiencies that have crept into the into the <unk>.
So if you want to keep that.
Respective that growth to fill at the top of the heap.
Fair enough thanks, very much guys.
Thanks.
At this time I will turn the floor back to management for closing remarks.
Great. Thank you mccormick's alignment with consumer trends and the rising demand for flavor combinations with the breadth and reach of our global portfolio and our strategic investments provide a strong foundation for sustainable growth through disciplined and our focus on the right opportunities and investing in our business. We're continuing to drive further growth as we success.
Fully 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. Thank.
Thank you Lawrence and thanks to everybody for joining today's call.
Any further question on today's information.
You may contact me.
This concludes this morning's call.
Thank you again.
Yeah.