Q1 2023 McCormick & Company Inc Earnings Call
Speaker 1: I three TR.
Speaker 2: Good morning. This is Casey Jenkins, Chief Strategy Officer and Senior Vice President, Investor Relations. Thank you for joining today's first quarter earnings call. To accompany this call, we have posted a set of slides at IR.McCormick.com. With me this morning are Lauren Curzio, Chairman and CEO , and
Speaker 2: Brandon Foley, President and COO, and Mike Smith, Executive Vice President and CFO . During this call, we will refer to certain non-GAAP financial measures. The nature of the non-GAAP financial measures and the related reconciliation to the GAAP results are included in this morning's press release and slide.
Speaker 2: 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 why.
Speaker 2: whether because of new information, future events, or other factors. Please refer to our forward-looking statement on slide 2 for more information. I will now turn the discussion over to Lauren.
Speaker 3: Good morning everyone, thanks for joining us. We are pleased with the start of the year. We delivered solid first quarter results that reflect strong demand and early results from our actions to increase our profit realization in 2023. Our sales performance reflects the strength of our broad global portfolio and the effective execution of our strategies.
Speaker 3: Our Global Operating Effectiveness, or GOE, program is yielding results with first quarter cost savings in line with our expectations.
Speaker 3: The progress we are making on gross margin improvement reflect the level of urgency with which we are addressing the pressure points from last year. These results, combined with the strong demand we continue to expect across our portfolio and our diligent approach to optimizing our cost structure, bolster our confidence in our plan and our 2023 full year outlook.
Speaker 3: Turning to slide 5, in the first quarter we drove 3% sales growth, or 5% in constant currency. Our constant currency sales growth reflected strong underlying business performance with an 11% contribution from pricing, partially offset by a 3% decline in underlying volume and product mix. Our constant currency sales growth reflected strong underlying business performance with an 11% contribution from pricing, partially offset by a 3% decline in underlying volume and product mix.
Speaker 3: a planned 1% decline from our kitchen basics divestiture and the exit of our consumer business in Russia, and an expected 1% year-over-year volume decline from lower consumption due to COVID-related disruption in China, which expect to see a return toward normal consumption trends in the coming quarters.
Speaker 3: Our underlying first quarter sales performance positions as well for continued top line growth for the balance of the year.
Speaker 3: Our growth in the first quarter was led by outstanding performance in our flavor solution segment, with positive momentum continuing in all three regions. In our consumer segment, our underlying sales growth was led by the Americas region.
Speaker 3: Moving to profit, our adjusted operating income was comparable to the first quarter of last year and constant currency had increased 2%. Higher interest expense and a higher effective tax rate more than offset our adjusted operating income growth on the quarter resulting in a 6% decline in adjusted earnings per share.
Speaker 3: I'd like to say a few words about our gross margin performance, which Mike will cover in more detail in his discussion of our adjusted operating income growth drivers in a few moments.
Speaker 3: We drove considerable improvement in our gross margin performance in the first quarter. Our gross margin reflects the continued recovery of the cost inflation our pricing lagged over the last two years as well as cost savings from our CTI and GOE programs. As we've said previously, in 2023 we plan to fully recover the inflation our pricing previous.
Speaker 3: lag, as well as offset current year inflation, so are pricing actions and other levers.
Speaker 3: Our gross market also reflects the results of our diligence in optimizing our costs through our DOE program. This is progressing as planned and remains a key focus.
Speaker 3: We expect the impact of our DOE program to scale up as the year progresses and we remain on track to realize $75 million of cost savings in 2023, which we will take to the bottom line because of our actions to normalize our supply chain costs and to streamline our organization.
Speaker 3: We remain confident that we have the right plans in place and are taking the right action. It's still early, but our first quarter results speak for themselves, and we expect to continue driving profitable growth at an accelerated rate the balance of the year. Demand is strong. We're driving improvement in our margin profile.
Speaker 3: and optimizing our cost structure effectively.
Speaker 3: Now, let's move to first quarter business updates for each of our segments as well as discussion of our growth plans.
Speaker 3: Turning to our consumer segment on slide 6, our underlying performance was strong, reflecting the effective execution of our pricing actions and continuing positive momentum in our consumption trends. Even with lacking the elevated at-home consumption in the first quarter of 2022,
Speaker 3: to the Omicron in the Americas and the EMEA regions.
Speaker 3: That performance was partially offset by the impacts related to the sale of kitchen basics, our exit of Russia, and the COVID related disruption in China. Beginning in the second quarter, the activation of exciting growth initiatives, as well as lapping the impact of last year's COVID related shutdowns in China, has been a major concern.
Speaker 3: and the exit of our consumer business in Russia, which we began to exit in the second quarter of last year, is expected to drive an acceleration of our consumer segment growth.
Speaker 3: Now for some highlights by region starting with the Americas.
Speaker 3: Our total U.S. branded portfolio consumption as indicated by our IRI consumption data and combined with unmeasured channels grew 5% in line with our shipments.
Speaker 3: As we anticipated, the dynamics between consumption and retail inventory levels have begun to normalize as we move beyond the holiday season impact, and we anticipate greater alignment between consumption and shipments going forward.
Speaker 3: Importantly, our volume performance in the first quarter was better than the fourth quarter on higher price realization.
Speaker 3: In spices and seasonings, both consumption dollars and units accelerated sequentially from the last several quarters with strengthener seasoning blends which provide consumers both convenience and flavor exploration.
Speaker 3: Early results of our Lowry's Everyday Spice range, our largest innovation launch since pre-pandemic continue to be positive.
Speaker 3: We're seeing incremental sales and profits of the category over half of the purchases are from new buyers to McCormick and overall incremental to the category.
Speaker 3: Hot Sauce remains on fire with double digit growth of both Cholula and Frank's Red Hot in the US and Canada. We continue to build excitement with our Hot Sauce brand marketing initiatives and reach the younger generation, most recently through gaming. In our big game campaign during the quarter, our flavor pack version of Fortnite, the floor is flavor.
Speaker 3: had players navigating an immersive chicken wing shaped island and a volcano that spewed Frank's red hot and included, in partnership with TGI Fridays and DoorDash, a free chicken wings offer. This was our best big game campaign, capturing over 1 billion impressions in North America.
Speaker 3: And with the resolution of the long-running shortage of French's mustard bottles, we drove over 20% consumption growth for the second consecutive quarter. Our creamy mustard launch last year continues to perform very well, with another flavor launch coming this year.
Speaker 3: Finally in the Americas, we continue to drive double-digit consumption growth in e-commerce, led by spices and seasoning.
Speaker 3: We are realizing high returns on our investments, gaining new customers, and growing with new products. For instance, McCormick Popcorn Seasonings and Frank's Variety Packs are both off to a great start following their online introductions earlier this year. In EMEA, we continue to have solid share performance of herbs, spices, and seasonings in the EMEA segment.
Speaker 3: across the region in expanding our distribution and gaining share in the fast growing discount table.
Speaker 3: Our investments in brand marketing, merchandising, and new products are proving to be effective in driving growth.
Speaker 3: In the Asia-Pacific region, growth for the quarter and the year was impacted by the exit of low-margin business in India, which we will have laughter after this quarter, as well as the COVID-related disruptions in China.
Speaker 3: As we have moved past the Chinese New Year, we are seeing a return to normalization.
Speaker 3: We continue to expect the benefit beginning in the second quarter from lasting the impact of last year's disruptions.
Speaker 3: Outside of the China and India impacts, growth in the region was driven by new products and brand marketing initiatives.
Speaker 3: Frank's red hot and Cholula performance was strong in Australia, and extending the power of our brands, we have launched Old Bay into the Australian market and Cholula into Southeast Asia.
Speaker 3: As always, we continue to fuel our consumer segment growth with the power of our brand, as well as our brand marketing, new products, and category management initiatives.
Speaker 3: We are excited about the growth plans we are executing and expect they will drive an acceleration of growth for the balance of the year.
Speaker 3: First, as we mentioned at CAGNY, we are completely renovating our US Core Everyday Spicer Earth portfolio.
Speaker 3: with consumer preferred packaging as well as leveraging new flavor seal technology. The atmosphere in the bottle is nitrogen flushed to remove oxygen, which means visibly fresher flavor, brighter color and stronger aroma. The modern new snap-type trademark lid seals in the aroma and freshness.
Speaker 3: We're also printing the product name and an easy-to-read Best Buy date on the top. The new high-quality bottle and label design highlights the transparency and quality of our spices and herbs. And the bottle is made of 50% post-consumer recycled plastic, approximately a 20% carbon footprint reduction from the card package.
Speaker 3: We are really excited about these changes and so are consumers. Testing has confirmed 40% higher freshness perception, two times higher preference, and a 25% increase in loyalty among current buyers. The product began rolling out last month. The transition on store shelves will happen over the course of the year.
Speaker 3: supported with our highest spend France marketing campaign of the past five years.
Speaker 3: Importantly, the new packaging fits right into the existing shelf spots. This is a seamless transition for our retail partners that we expect to drive category performance. This initiative, coupled with other new product introductions I'll mention in a minute, along with our stabilized service levels, will build total distribution points and market share improvement as we go through the year.
Speaker 3: as we outlined last month at Cagney. We are also expanding into the fast-growing Mexican aisle with authentic Mexican flavor of Cholula in new format. We are launching Cholula Taco recipe mixes as well as salsas based on authentic Mexican formulas and crafted in Mexico using locally sourced fresh tomatoes and tomatillos.
Speaker 3: Retail acceptance has been strong and consumers will find these new products and the authenticity they are looking for on US shelves soon.
Speaker 3: The product began shipping yesterday ahead of Cinco de Mayo and the rollout will continue over the course of the second quarter. We're launching new products in the first half of 2023 to inspire consumers' flavor exploration as well as deliver the convenience consumers are looking for.
Speaker 3: In the Americas, we're kicking off the grilling season with new flavors, including a Griller's Choice marinade you can use as three different flavors. And we're really excited about our new Stubbs Master Series. Made with technology from our FONA acquisition, these dry season rubs capture real, authentic hardwood smoke flavor.
Speaker 3: Leveraging the product successes of 2022, we're extending our Tabitha Brown line into new flavors, formats, and channels, and we're also launching a French's Creamy Roasted Garlic Mustard.
Speaker 3: In direct-to-consumer, we continue to grow our platform with new, innovative flavors as a testing ground. And as a club channel, we're launching a world flavors line.
Speaker 3: In EMEA, we're enabling consumers to discover the authentic taste of America by introducing Old Bay to the UK market, as well as introducing a new line of products leveraging the French's brand, including American's favorites recipe kit.
Speaker 3: In the UK, we also just launched Schwartz brand gravy, which are beating the top competitor on taste.
Speaker 3: In APZ, we've recently launched meal bases of favorite Keens recipes and will be launching a gourmet garden zesty lemon paste.
Speaker 3: both making consumers' flavor exploration easier. In China, we've introduced new packaging for our chicken bouillon product, a pouch with a resealable pork cap that makes it convenient for consumers and extends the open product shelf life by locking out moisture.
Speaker 3: We are continuing to build our heat platform across all regions with the launch of new products including in the U.S. Grillmates Nashville Hot Chicken Seasoning, Frank's Red Hot Dill Pickle Hot Sauce, and a Tallulah Reserva crafted with 100% agave tequila. Our flavor forecast of the year.
Speaker 3: Vietnamese Cajun style seasoning.
Speaker 3: In China, we're introducing iconic Chinese city spicy blends and then the UK Frank's Red Hot Spicy recipe mixes. Across all regions, we're increasing our brand marketing investments in 2023.
Speaker 3: and expect the most significant year-over-year increase in the second quarter.
Speaker 3: We will continue to support our brands with messaging on everyday use value and the superiority of our ingredients and flavors and more Specifically with mustard supply issues resolved. We've launched a flavor on campaign for mustard are Elevating our mother of sauce alula campaign to support the launch of the new format capitalize on Cinco de Mayo
Speaker 3: And of course, with grilling season starting during the quarter, we plan to reach grillers with our Just Flame and Flavor campaign.
Speaker 3: A robust growth plan gives us confidence in continuing to drive positive momentum. We believe they will all be a win for consumers, customers, our categories and McCormick, differentiating us even more and strengthening our flavor leadership in core categories.
Speaker 3: Turning to flavor solutions on slide 9, our sales performance in this segment continues to be outstanding. This was our 8th consecutive quarter with double digit sales growth. Our first quarter growth was led by pricing actions in all three regions which, as we expected, accelerated versus previous quarters. Now for regional highlights. For America's first quarter, strong sales growth.
Speaker 3: was led by our flavors product category. Within flavors, snack seasoning growth was strong, including volume growth related to new products and strengthened our customers' iconic products, partially fueled by their marketing, as well as our improved ability to service our customers as we began to realize the benefits of the capacity we're bringing online.
Speaker 3: Flavors for performance nutrition and health and market applications also contributed to our strong performance as we continue driving double-digit sales growth. We are winning with new customers and new products.
Speaker 3: Volume was tempered in the quarter by the pruning of some low margin business, the impact of a very cold December on the away from home part of our portfolio, and lower volume of alcoholic beverage flavors due to what must have been a drier January than last year.
Speaker 3: In EMEA, we continued to drive broad-based growth across the portfolio, which was led by higher sales to our quick-service restaurant customers in the first quarter. Overall, our price realization nearly doubled versus last quarter.
Speaker 3: In APC, we delivered solid volume growth in the markets outside of China driven by demand from quick service restaurants or QSRs for our products to heat up their hot and spicy offerings.
Speaker 3: Overall, flavor solutions demand has remained strong, particularly in certain parts of our business in our Americas and EMEA regions. As we continue to bring additional capacity online and reduce both supply chain pressure and the extraordinary cost to service our customers, we appreciate their patience and collaboration. We're continuing our positive sales growth momentum and flavor.
Speaker 3: with the pace of inflation and we were beginning to recover the cost of inflation, our pricing lagged the last two years. This is continuing at an even greater rate than the first quarter. And earlier, I discussed optimizing our costs through our two-lead program, which will contribute to the Flavor Solutions margin recovery.
Speaker 3: GOE will have a significant impact in the flavor solution segment. And finally, we continue to focus on driving growth in high margin parts of our portfolio, such as the flavor product category volume growth I mentioned a few minutes ago in the Americas region.
Speaker 3: Now I'm excited to share the growth plans we're executing on and expect will continue to drive our growth momentum.
Speaker 3: We continue to fuel our flavor solution segment growth using our differentiation, including our Culinary Foundation, our unique and powerful Consumer Insights Advantage, our proprietary technologies and our passion for providing our customers with a differentiated collaborative experience.
Speaker 3: While we cannot get too specific about product development, following a strong year of innovation in 2022, we carried a robust new product pipeline into 2023.
Speaker 3: As we mentioned at CAGNY, we are specifically targeting opportunities to grow in high growth end markets. Applications such as savory snacks, alcoholic beverages, and performance nutrition have outpaced market growth. And as I just shared, our robust growth momentum continued in the first quarter, as we expect it will the balance of the year.
Speaker 3: The capabilities we build for these categories are creating significant top-line opportunities. The power of McCormick and FONA together continues to fuel greater opportunities for growth. This acquisition is exceeding our expectations.
Speaker 3: for capitalizing on opportunities to increase our sales to existing customers by cross-selling across our more comprehensive product offering and target new customers.
Speaker 3: We are leveraging our global footprint and capabilities to drive future growth. We are currently in the process of expanding performance nutrition into Canada as well as localizing confectionary flavors and chiaotti for our FONA customer.
Speaker 3: Finally, in branded food service we have a robust 2023 innovation agenda, launching more than double the new items than in 2022, including Frank's Red Hot Nashville Hot, a line of Cholula Street Tacos, McCormick Culinary Global Blend, and a French's Dijon Portion Control Package.
Speaker 3: Our plans included continuing to leverage our culinary partnerships, inspire menu ideas with our customers, win placement on away-from-home menus including with quick service restaurants, and drive growth with promotional activities. Our robust growth plans and flavor solutions also give us confidence.
Speaker 3: continuing our growth trajectory and drive our flavor solutions leadership.
Speaker 3: Now for summary comments before turning it over to Mike. Turning to slide 11, global demand for flavor remains the foundation of our sales growth and we've intentionally focused on great, fast-growing categories that will continue to differentiate our performance. We continue to capitalize on the long-term consumer trends.
Speaker 3: healthy and flavorful cooking, increased digital engagement, trusted brands, and purpose-minded practices. McCormick is uniquely positioned to capitalize on this demand for great taste. With the breast and reach of our strong global flavor portfolio, we're delivering flavor experiences for every meal occasion.
Speaker 3: Through our products and our customers' products and our driving growth, we are end-to-end flavor.
Speaker 3: The strength of our business model, the value of our products and capabilities, and the execution of our proven strategies give us confidence in our gross momentum and ability to continue navigating the dynamic global environment.
Speaker 3: As we look ahead to the balance of the year, we will continue to focus on capitalizing, on strong demand, optimizing our cost structure, and positioning McCormick to deliver sustainable growth. We have robust growth plans in place, including building momentum with our new products and heat platform, and are delivering on our commitment to increasing our profit realization. We are confident with the successful execution of our plans and concrete actions.
Speaker 3: we will drive profitable growth in 2023.
Speaker 3: I want to recognize McCormick's employees around the world as they drive our momentum and success. I want to also thank all of our customers, suppliers, and investors for their collaboration and patience as we move beyond the unique environment we've been operating in since the onset of the pandemic.
Speaker 3: The fundamentals that drove our historical financial performance remain intact and we are confident We will continue to not only deliver strong sales growth, but also drive total shareholder return at an industry leading pace Now, I'll turn it over to Mike
Speaker 3: Thanks, Lawrence, and good morning, everyone. Starting on slide 14, our top-line constant currency sales grew 5% compared to the first quarter of last year. This growth was tempered by a 2% unfavorable impact from the kitchen basics divestiture, the exit of the consumer business in Russia, and lower consumption due to the COVID-related disruption in China.
Speaker 3: In our consumer segment, constant currency sales increased 1%, reflecting a 9% increase from pricing actions, partially offset by a 3% volume decline related to the kitchen basics, Russia, and China impacts I just mentioned, as well as a 5% decline in all other volume and product names.
Speaker 3: On slide 15, consumer sales in the Americas increased 4% in constant currency, including a 2% decline from the Kitchen Basics divestiture.
Speaker 3: Growth was broad-based across all product categories driven by pricing actions.
Speaker 3: partially offset by lower volume. Lapping elevated demand due to Omicron in the first quarter of last year contributed to the volume decline. In EMEA, constant currency consumer sales declined 2%. Pricing actions were more than fully offset by lower volume and product mix.
Speaker 3: including a 4% unfavorable impact from the lower sales in Russia. Lapping elevated demand due to Omicron in the first quarter of last year contributed to the volume decline.
Speaker 3: Constant currency consumer sales in the Asia-Pacific region declined 8%, driven by a decline in volume, partially offset by pricing actions.
Speaker 3: The combination of lower volume in China due to COVID-related disruptions and the exit of lower margin business in India grew up an 11% reduction in volume.
Speaker 3: Turning to our flavor solution segment in slide 18, we grew first quarter constant currency sales 12%, reflecting a 13% increase in pricing actions and a 1% decline in volume and mix.
Speaker 3: In the Americas, Flavor Solutions' constant currency sales rose 12%. Pricing actions contributed to higher sales across the customer base, which skews to packaged food and beverage companies, as well as branded pre-service customers.
Speaker 3: Volume in product mix declined in the corner as strong volume growth in snack seasonings and flavors for performance, nutrition, and health applications.
Speaker 3: was more than fully offset by the impact of pruning of low margin businesses and lower volume of away from home products as our customers business was impacted by cold weather.
Speaker 3: In the NBA, constant currency sales increased 17%, with pricing actions partially offset by lower volume at product mix.
Speaker 3: EMEA's Flavor Solutions outstanding growth was broad-based across its portfolio led by higher sales to QSR customers.
Speaker 3: First quarter volume declined, driven primarily by softness and some of our packaged food and beverage customers' volume within their own businesses. In the Asia-Pacific region, flavor solution sales grew 5% in constant currency, with pricing actions partially offset by lower volume and product mix. Solution and product mix declined as the impact of scaled-back QSRs increased by 5% in the
Speaker 3: While more work needs to be done, we are pleased with our progress and are confident in the actions underway to continue driving further improvement over the balance of the year.
Speaker 3: Gross margin in the quarter was impacted by several drivers. First, we're still incurring elevated costs and flavor solutions to meet high demand in certain parts of our business. While painful in the short term, we know making these investments to support our customers is the right approach to driving long term growth.
Speaker 3: That said, we continue to progress on reducing the level of these costs in the first quarter. Also in Flavor Solutions, we incur dual running costs related to the transition to our new UK Peterborough manufacturing facility.
Speaker 3: We expect the balance of the year cost to be comparable to 2022. And a sales shift between our consumer and flavor solution segments as compared to last year, unfavorably impacted gross margin.
Speaker 3: Partially offsetting the unfavorable drivers I just mentioned were our CCI-led cost savings, as well as the cost savings from our GOE program that Lawrence discussed, and which were in line with our expectations. Finally, end of note, we offset current year inflation in the first quarter, which we expect will be the highest of the year through our pricing actions.
Speaker 3: And, as Lauren said, we continue to recover the cost inflation our pricing lagged over the last two years, as we planned. While the net of these impacts drives gross profit dollar growth, there is still a level of dilution that tempers the actual gross margin percentage.
Speaker 3: Now moving to slide 23, selling general and administrative expenses, or SG&A, were comparable to the first quarter of last year.
Speaker 3: Higher distribution costs were offset by CCI-led and GOE cost savings, as well as lower planned brand marketing and employee benefit expenses in the quarter. For the year, we continue to expect both brand marketing and employee benefit expenses to be higher than last year. As a percentage of sales...
Speaker 3: SG&A declined 40 basis points driven by leverage from sales growth. Higher sales, partially offset by lower gross margin, resulted in a constant currency increase in adjusted operating income of 2% compared to the first quarter of 2022.
Speaker 3: In constant currency, consumer segment adjusted operating income increased 6% and in the flavor solution segment it declined 11%.
Turning to interest expense and income taxes on slide 24. Our interest expense increased significantly over the first quarter of 2022 driven by the higher rate environment. Our first quarter adjusted effective tax rate was 21.8% compared to 19.7% in the year ago period.
Both periods were favorably impacted by discrete tax items with a more significant impact last year.
At the bottom line, as shown on slide 25, first quarter 2023 adjusted earnings per share was $0.59, as compared to $0.63 for the year-to-year period.
The decrease was due to higher interest expense and a higher first quarter adjusted effective tax rate.
On slide 26, we summarize highlights for cash flow in the quarter end balance sheet. Our cash flow from operations for the first quarter was $103 million compared to $18 million in the first quarter of 2022. The increase was primarily driven by lower incentive compensation payments. We returned $105 million of cash to our shareholders through dividends.
and use $62 million for capital expenditures this quarter. We expect 2023 to be a year of strong cash flow driven by our profit and working capital initiatives.
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. We remain committed to a strong investment grade rating, and we have a history of strong cash generation and profit realization.
Now turning to our Financial Outlook on slide 27. Our 2023 outlook reflects our continued positive top-line growth momentum and with the optimization of our cost structure, we increase profit realization.
We expect to drive margin expansion with strong sales and adjusted operating income growth that reflects the health of our underlying business performance, as well as the net favorable impact from several to three drivers.
We expect our adjusted operating profit growth will be partially offset below operating profit by higher interest expense and a higher projected effective tax rate. We also expect there will be a minimal impact on currency rates, although there will be a timing aspect as we project an unfavorable impact in the first half of the year and a favorable impact in the second half of the year.
of volume and product mix over the course of the year, including price elasticities which are consistent with 22 at lower levels than we have historically experienced, but in line with the current environment.
A 1% estimated benefit from lapping last year's impact of COVID-related disruptions in China, although we expect the impact will vary from quarter to quarter given 2022's level of demand volatility. The divestiture of our kitchen basics business in August of last year and the exit of our consumer business in Russia during last year's second quarter. And finally, the continual pruning of lower margin business from our portfolio. As always, we plan to drive growth through the strength of our brands and our customers.
as well as our category management, brand marketing, new products, and customer engagement plans. Our 2023 adjusted gross margin is projected to range between 25 to 75 basis points higher than 2022.
This adjusted gross margin expansion reflects a favorable impact on pricing, cost savings from our CCI-led and GOE programs, partially offset by the anticipated impact of a low-to-mid teens increase in cost inflation.
We expect cost pressures to be more than offset by pricing during the year as we recover the cost inflation or pricing lag the last two years.
Moving to adjusted operating income, first let me walk through some discrete items and their expected impact to our 2023 adjusted operating profit growth.
First, the cost savings from our GOE program are expected to have an 800 basis point impact. The savings from this program are expected to scale up as the year progresses.
Next, the benefit of lapping the impact of COVID-related disruptions in China is expected to have a 300 basis point favorable impact.
The kitchen basics divestiture is expected to have an unfavorable 100 basis point impact.
And finally, an 800 basis point unfavorable impact is expected as we build back incentive compensation.
The net impact of these discrete items is a favorable 200 basis points. This favorable impact, combined with expected 7 to 9% underlying business growth, which is driven by our improved operating momentum, results in our adjusted operating income projection of 9 to 11%.
In addition to the adjusted gross margin impact I just mentioned, this projection also includes a further low single-digit increase in brand marketing investments and our CCI-led cost savings target of approximately $85 million. We are anticipating a meaningful step up in interest expense driven by the higher interest rate environment which will impact our floating debt.
We estimate that our interest expense will range from $200 to $210 million in 2023, spread evenly throughout the year.
As a reminder, in 2022, we realized an $18 million favorable impact from optimizing our debt portfolio, which we will last in 2023.
The net impact of these interest-related items is expected to be approximately an 800 basis point headwind to our 2023 adjusted earnings per share growth.
Our 2023 adjusted effective income tax rate is projected to be approximately 22% based upon our estimated mix of earnings by geography, as well as factoring in a level of discrete impacts.
Versus our 2022 adjusted effective tax rate, we expect this outlook is to be a 100 basis point headwind to our 2023 earnings growth. To summarize, our 2023 adjusted earnings per share expectations reflect strong underlying business growth of 8 to 10 percent and a 2 percent net favorable impact from the discrete items I just mentioned impacting profit.
the GUE program, the China recovery, the kitchen basics, the vetchezure, and the employee benefit cost rebuild, partially offset by the combined interest and tax headwind of 9%. This results in an expected increase of 1 to 3% or a projected guidance range for adjusted earnings per share in 2023 of $2.56.
to $2.61. We are projecting strong operating performance in 2023 with the continued top line momentum, significant optimization of our cost structure, and strong adjusted operating profit growth, as well as margin expansion.
While this performance is expected to be tempered by interest and tax headwinds, we remain confident in the underlying strength of our business and that with the execution of our proven strategies we will drive profitable growth in 2023. Thank you Mike. Now that Mike has shared our financial results and outlook in more detail, I'd like to recap the key takeaways I've seen on slide 29.
Our first quarter sales growth reflects the strength of our broad global portfolio and the effective execution of our strategies. Our underlying business performance is driven by our pricing actions and strong ongoing demand.
Our first quarter progress on margin improvement reflects the level of urgency with which we are addressing the pressure points from last year.
We are committed to increasing our profit realization and our actions are yielding results on optimizing our cost structure and recovering the cost inflation our pricing lacked last year. We expect our progress to scale up as the year progresses.
We have robust growth plans in place, including building momentum with product innovation and renovation, and are driving improvement in our margin profile. We expect to draw profitable sales growth at an accelerated rate, the balance of the year, and have bolstered confidence in delivering our outlook for 2023 and building shareholder value.
The compounding benefit of our relentless focus on growth, performance, and people continues to position McCormick to drive sales growth. This, coupled with our focus on recovering cost inflation and lowering costs to expand margins will allow us to realize long-term sustainable earnings growth. Now for your questions. Climate Change and Lynn Mccarran Melindaustle
We will now be conducting a question and answer session. If you would like to ask a question today, please press star 1 from your telephone keypad and a confirmation tone will indicate your line is in the question queue. Let me press star 2 if you would like to remove your question from the queue.
For participants who are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Thank you, and our first question comes from the line of Ken Goldman with JP Morgan. Please proceed with your questions. Please proceed with your questions.
Hi, thank you. Good morning.
Just curious, you know how one cue came in versus your internal expectations
I guess it's been a broad sense and maybe if anything specific stands out in terms of drivers. I won't ask if you considered raising guidance. I assume it's a little early in the year, but if the quarter was above what you would forecast, were there specific reasons that stand out and is there any reason to think some of those drivers can't continue into 2Q and beyond maybe?
Well, Ken, thanks. We are off to a solid start on the year, that is for sure, and we're really pleased with the start of the year. We had good sales growth and we made excellent progress on our plans for improved profit realization. Most of our pricing that we have planned for the year is in place and we are really pleased with the start of the year.
Our GOE program is beginning to show results and as I said, we are bolstered in our confidence, in our guidance, in part because the quarter did come in a little bit better than we planned. There's no one specific thing that stands out, but overall it was a little bit better. We had that sense of confidence already when we spoke at CAGNY and...
from where we were at that time came in pretty much as we thought. And as you said, Ken, it's the first quarter to use a March Madness thing. We put some points on the board and we're going to continue focusing on growing the business. And as Lawrence said, we've made really good progress on our cost agenda too, which is great.
Got it. Thank you for that. And then sort of along the same lines, but maybe more specifically, you know, flavor solution volume. You know, they were down slightly in the first quarter, but you know, it was your hardest top of the year. It was high pricing. It seems that they're doing pretty well in the scheme of things. Just curious how to think about modeling, you know, volumes for flavor solution.
in two and for the rest of the year, just giving that there may be a little more moving pieces than usual. You have that pricing, and then you guys mentioned some headwinds in one queue, maybe some lower sales to CPGs in EMEA, for example. So just wanted to get a sense of that kind of cadence as we go through the year, as far as you can tell now. Sure, it was a strong performance. And our guide for the year, we've...
and for the rest of the year, just giving that there may be a little more moving pieces than usually. You have that pricing, and then you guys mentioned some headwinds in 1Q, maybe some lower sales to CPGs and EMEA, for example. So just wanted to get a sense of that kind of cadence as we go through the year, as far as you can tell now. Sure. It was a strong performance. In our guide for the year, we've said our volumes are going to be...
be flattish overall and I'd say where expectation by segment is maybe a little bit positive in flavor solutions, a little bit negative in consumer, but overall all of it within kind of a plus or minus one range versus flat. And so I think that's a good way to think about it. I do expect.
to see strong pricing impact the year as we go through the whole year on flavor solutions.
You know I would just, Ken, just to maybe add a few thoughts to that. Yeah we did see volume strength in our portfolio especially you know I think we called it out in the script but just from snack seasonings and performance nutrition and health and that's pretty consistent with what we've been seeing but the offsets really are not related to price elasticity.
So, you know, I think that's maybe important to call out and you know, there was a couple things noted like
cold weather impact on branded food service or you know we're certainly seeing an inflationary impact on on our customer base and EMEA. They're going through a fair amount of inflation right now in that market the consumer is and just pruning of natural pruning of lower margin business so those are having an impact too on the volume profile but
think our confidence still for the balance of the years is where Lawrence placed it.
Our next question is from the line of Andrew Lazar with Barclays. Please proceed with your questions.
Thanks. Good morning, everybody. Hey, Andrew. I was hoping we could talk a little bit about what you're seeing evolve in terms of price gaps in core spices and seasonings versus private label, particularly with some of the incremental pricing that came into play sequentially in the first quarter.
And Brendan, why don't you take that one? Yeah, Andrew, we still see price gaps continuing to narrow, you know, compared to private label. You know, that happened in Q4. We saw it again in Q1. It's really a result of seeing more private label taking price on the shelf. So that seems to be coming through and reading through the scanner data.
And we would say, and what we're seeing is that the impact just continues to moderate. Again, it's pretty consistent with what we saw in Q4. You know, we really do believe a lot of our initiatives and focus on value is also having a positive impact on our brands.
And we continue those efforts, whether it's messaging or focused on value sizes, etc. So that's also probably having an impact too. So that's really the nature of what we're seeing right now with regard to price gaps on the private label. Thank you. And then you mentioned, it's early, I know, but early results of sort of the Lowry's BYS.
sort of value brand launch or kind of doing what you wanted to do. I think you said that over half of the purchases are from new buyers to McCormick, and then I think overall incremental to the category.
I'm just trying to get a sense of where are these new consumers to the category coming from, where they just didn't operate in this category before? What is it about the Lowries brand launch that's drawing new consumers overall to the category? That's obviously particularly important for your retail partners as well. It is performing better than we expected right now, and so we're pretty pleased with the performance. We're thrilled to see so many different companies, as well as other companies rely and invest heavily in this new technology. We can't wait to show real value to our business on aiq10. So very happy with what we are doing here in the company. The sole goal is what it does, what the music is about. What we are doing here is what it does for the people of our partners.
A lot of the volume that we are sourcing as we called out, it's definitely incremental to from a retailer standpoint, but also a lot of new brand buyers are coming into the McCormick franchise through lorries. I think it's people seeking the brand, they're looking for value, and so we see that playing out and it's been largely positive as we think about building out even more distribution. These are companies that are merely percentage notified as
into those stores being offered, they may not be buying then private label.
or they may not be buying in other retail outlets. So, that's where we see a lot of the growth coming from in the incrementality. You're going to see more distribution growth on this bill in 2023.
Thank you so much. Our next question is from the line of Alexia Howard with Bernstein. Please refuse your questions. We'll see you with your questions.
Thank you so much. Our next question is from the line of Alexia Howard with Bernstein. Please just use your questions. Good morning everyone.
Hi, Alexia. Hi there. First question is on China. You called out the fact that the China lockdowns and disruption over there pressured sales this quarter. Is that getting better and what should we expect in Q2? And then I have a follow up.
Well, of course China was a really complicated story this quarter because our first quarter begins in December and in December the country was still largely in lockdown. I've only got a train going by in the background.
The country was largely in lockdown in December , then they reopened and they had a very concentrated pandemic period where a huge proportion of the population.
I wonder if we've lost power. Great. But anyway, just a question of the population. You know, got COVID. So, you know, that was quite a big impact on the quarter. I thought that post-Chinese New Year, we'd probably begin to see...
now. Great. But anyway, the population, you know, got COVID. So, yeah, so that was quite a big impact on the quarter. We thought that post Chinese New Year, we would probably begin to see recovery and I think we're.
We were seeing that unfold after Chinese New Year in a positive way. And in second quarter, we're going to lap the lockdowns from last year. So it's not going to be a complete exact what I have planned.
and we're expecting a significant recovery in China as we go through the second quarter. We're certainly going to have double-digit growth compared to a year ago, unless there's some other exogenous shock. The question on that double-digit is just what the first number is, but it's going to be big.
Great. Can you comment on that for me? No, I just think, Alexia, we're optimistic that this normalization will continue to unfold in the market. We expect to see much of that come true on Q2. Great. Sorry about the noise there. We've got some very impatient taxi drivers out here on the New York City streets, apparently.
Quick follow-up, inventory, retailer inventories were a big upset last quarter in terms of the year-on-year changes. Is that now behind us? And are you seeing any shifts particularly in North America relative to the Nielsen data that we are seeing, consumer take away versus shipment? Well, I think that we said that we thought that this would be behind us.
inventory, retailer inventories were a big upset last quarter in terms of the year-on-year changes. Is that now behind us and are you seeing any shifts particularly in North America relative to the Nielsen data that we're seeing consumer take away versus shipment? We thought that this would be behind us in first quarter.
That's largely how it's played out. Great. Thank you. Our next questions are from the line of Robert Moskow with Credit Suisse. Please receive your questions. Hi. Good morning. Hi. We're on anymore. Hi. Hi.
For modeling purposes, I wanted to know the phasing of the comparisons on your incentive comp. I couldn't quite tell in first quarter whether it was flat year over year or it was a...
And also for the rest of the year. It's a big number for the full year. Can you tell us how to think about it? Second and third? I'm going to let Mike go for this one. Yeah, it was a relatively small favorable in the first quarter. But it will build during the year, as we said on the last conference call. So third and fourth quarter, second half, as you think about it will be.
versus last place.
Right, right, right. Okay. And I guess a similar question on China. I remember you called out an 11 cent per share impact in 2Q last year. So, can I assume you're going to get all that back and more? And then in third, was there also an impact? It was never quantified, but it must be significant too.
Wait, that actually kind of is the second and fourth quarter.
negative impact. You know, we had a big negative impact in the second quarter, and then they had a reopening, solid third quarter, and then a relockdown in the fourth quarter, which was part of our mess in the fourth quarter. We had no idea that was going to happen when we gave guidance. I think our full year got.
because for the order of magnitude that you were talking about. Yes, if you look at that chart, the 2023 outlook chart in our earnings effect, that 3% impact on EPS, that's the full year impact.
Which is around sure okay, but it's really 2q and 4q that are the real yeah, yeah comparisons exactly yep
Okay, last question. Do you think your sales force will get some more momentum regaining shelf space that they lost in 2022 as a result of the packaging redesign? Is that kind of a good way to get in with retailers to regain some of the SKUs that were cut or is it...
kind of a two separate discussions. I think that absolutely there's a tremendous opportunity for our Salesforce this year for a couple of reasons. One is that our service is in much better condition so that we don't have
as many unproductive conversations with our customers. The second is the sheer amount of innovation and the balance that we're bringing to our customers is.
It's going to be really positive and Brendan, I'm going to ask you to say a few words about that. Yeah, it isn't as we would always say, Rob, it's never just one thing, it's a system of things and you know that really drive that competitive strength and that applies I think to your question as well. Yeah, we have a big renovation plan as you called out and that's definitely going to be a big lever and I think it's...
that's going to continue building also additional distribution points. We really like our innovation platform and the items that we're coming out with this year. So we expect to see a lot from that too. And all of these things put together with just very, very strong levels of brand marketing and it brings together a really, you know,
you know, strong category of, you know, conversation with the retailer. I think importantly though, we keep pointing out the performance of McCormick and our other brands on shelf just continues to sort of outperform competition. And so, you know, those are the, you know, some of the things that we use in category management to really prove the case that it's a more productive shelf, the more McCormick guidance you have on it.
I think supporting those new products in our brand marketing, we were slightly favorable in the first quarter versus last year, but you'll see in the second quarter that support will increase year on year. Got it. Thank you very much. Our next question is from the line of Max Gupper with BNP Paribas. Please receive your questions.
Thanks for the question. First one's on gross margin. So it came in well above three expectations in the quarter. And I recognize it's early and you talked about putting points on the board. But I do wonder that as you think about your path to mitigating the pressure points that impacted this line last year, have your views changed at all? It would seem like with inflation accepted to ramp down through the year and your GOE program accepted to ramp up through the year.
confidence. The GUE program, the implementation of those programs, which are very programmatic in nature, gives us more confidence. But before we start celebrating, we want to again put points on the board in the second quarter. On the consumer margin, operating profit margin, up 110 base points in the first quarter.
improve that flavor solution of market performance. But as Mike said, you know, this is our first quarter, it's also the smallest quarter of the year, you know, we're certainly bolstered in our confidence, but we don't want to get overconfident. Great, makes sense. And then on the TLE program, is there a number you're giving for the first quarter? I rise to...
Our next question is from the line of Steve Powers with Deutsche Bank. Please receive your questions.
Yes, thank you. Just going back maybe to the question on trade inventory that I think Alexia originally raised, just to play it back, it seems like from what you had said before that you exited the quarter with trade inventory levels roughly in balance on the consumer business. Just want to make sure that was correct.
As we go forward, I guess the base case is that you shift more or less to consumption for the balance of the year with maybe a little bit of opportunity to shift ahead to the extent that the renovation work leads to those incremental distribution points. Is that the right interpretation of what you said so far? Well, I think if I took the question mark off and replaced it with a period, we'd have the answer.
But, Fred, did you want to comment on that? Yeah, I mean maybe, Steve, just to focus on the front end of your question first, what we saw in the first quarter, we did, shipments were in line with consumption, but I think more importantly that the dynamics that we would typically see in the first quarter following a holiday season played out as it behaved much like, you know, a normal period of time.
So that's what we hoped to see in Q1, that's what we did see in Q1, and what that, you know, I think means looking ahead now, which is kind of the back end of your question is, that we see things normalizing and operating a little bit more like we would typically, you know, operate. I'd have to think a little bit of what that means by the end of the year, but we would just see a shift in consumption.
model really play out as we normally do. Just remember though, in that fourth quarter, we have a big, that's our biggest quarter of the year and our big holiday season. So we tend to kind of even things out after Q1 and then sort of life begins again as we think about that cycle. So that's the way I would think about it. But the important takeaway for me and I think maybe in this call is that we saw normalization of that, how that would typically behave in Q1.
Thank you very much. Our next question is from the line of Adam Samuelson with Goldman Sachs. Please just use your questions. Yes, thank you. Good morning, everyone. Good morning. I guess I wanted to come back to flavor solutions. I think the comment and response from earlier question was, expect to see the margins there build.
through the year. And that's also, I think, where the majority of the global operating effectiveness program would show up. Can you just remind us this year kind of the excess cost that you're carrying for the UK facilities you execute?
This is the changeover to the new plant and we think about that layering out of the system in 2024 and beyond. This is the changeover to the new plant and we think about that layering out of the system
the Flavor Solutions margins back up to the mid-teens level if they were at pre-COVID. Yeah, I mean we're roughly comparable on the Luteburgh facility the last year as we said. I mean after this quarter, but into next year. There's still going to be some carryover into next year. So I'd almost hesitate to say a number right now. Overall, we've said before around $20 million.
just like on the consumer side of business, that will go down the rest of the year. Pricing realization will support that. Then the GUE business, or the GUE program, that really benefits both of our segments too. So I wouldn't say all of us go into flavor solutions. It's really across the board where we've had inefficiencies that have built up in the system since the pre-pandemic. We've called out some of those very clear examples in flavor solutions like COPACs and things like that, but it really is a more broad-based program.
concentrated customer base and getting kind of the full price recovery there is it is it mix is it capacity I'm just trying to think about what where the margins had gotten to in 2018 2019 exiting this year they're still going to be in kind of high single digit range I think and we think we have a long runway of improvement flavor solutions margins you refer back 18 and 19 our margins were
because you've seen accelerated growth there, we talked about today. So, you know, we do, but it's not going to happen, snap your fingers by the end of this year. This is a program that is going to play out over the next couple of years.
Well, I get that it's not going to happen just this year, but if I just push, the business mix isn't all that different today versus where it was three or four years ago. So apart from we've had this big run of inflation, what's really changed in terms of the profitability of the portfolio today? Well, I mean, the three things we said in the last earnings call were the significant inflation and we're recovering that inflation now through incremental price.
And I would say that it's not true that the business mix has not changed. The business mix has changed and we continue our portfolio migration towards more value-added products. You hear us talking about pruning the portfolio. We have not been specific because
We don't want to talk about things that might be identifiable to a specific customer, but there's definitely been a movement within our portfolio, both by category and within product category, to improve that business for the long term. When Mike said that we don't look at the pre-pandemic, we don't look at the pre-pandemic.
operating margin as a ceiling, you know, as we said at the time, you know, we look to some of our pure labor house peers who publish public numbers who have significantly higher operating margins. That's more what we aspire to in the very long run.
Okay, I appreciate all of that, Connor. I'll pass it on. Thank you. Thanks. Thank you. Our next question is from the line of Peter Galvo with Bank of America. Please assist with your questions. Hey, guys. Good morning. Thanks for taking the questions. Good morning, Peter. Good morning.
Mike, just to go back to the question around kind of GOE and the square, some of the gross margin kind of math on the quarter.
It seemed like you were saying GOE was pretty minimal in terms of contribution to gross in one Q. Maybe you can help us with the other components. What did PCI contribute in one Q? Where did the actual COGS inflation rate in the quarter fall relative to that low to mid team number for the year? What did the total cost of the COGS inflation rate in the quarter fall relative to that low to mid team number for the year?
Well, we said the first quarter is the highest overinflation rate, so it turned out to be that way. It will go down the rest of the year sequentially. GLE was a small impact as you referred to. CCI, roughly, it is really spread throughout the year, so we don't get really specific around when CCI occurs because it's a continuous program. You have every quarter.
it's approximately the same level as last year, slightly higher depending on your guide. We said this year is $85 million, last year was $85 million, so probably roughly the same. I think as you think about the margin improvement, the pricing realization that we've seen, as you've seen in our numbers, is really driving a good chunk of that. So that's what gives us confidence on the rest of year two. We're recovering those costs. That we incurred the last couple years. We're catching up this year, and we're seeing that in the first year.
Actually, I would say that with our higher, with our approved service levels, I'd say our promotional levels have also normalized. We're able to support promotional volumes now. The promotions that we run tend to be ROI positive. I think that's an important part of building back market share.
that we didn't talk about actually in making our points and I'm glad you asked the question. I would also say that sometimes promotion is thought of as dealing back price. That is not what we're talking about. We're talking about quality merchandising events that drive consumer takeaway.
I know we're a little bit over time, but we're going to take everybody's questions. Also, not too long. Thank you. The next question is from the call-in of Cody Ross with UBS. Please proceed with your questions. Good morning, everyone. Thank you for taking our questions.
I just wanted to hit back on the last question as it related to your volume expectations for the quarter. How do you think about promotions for the rest of the year, especially in terms of what your competitors are doing? Are you seeing promotions increase? And then as it's related, how did your volume come in in the quarter relative to your expectations? Well, as I said, I think our ability to supply, we've also gone back to a full schedule of merchandising activity with our customers.
I think that's part of what gives us confidence in our outlook for the year, frankly, is that we're able to have those kinds of positive conversations with our customers as opposed to some of the negative ones that we might have been having over the last few years about supply and their desire to promote. I think some great examples are like our French's mustard where...
We finally have bottles in supply and we've been able to drive 20% volume growth for the last two quarters and gain significant share. I think we're going to do a similar thing with grilling products. I think the renewal of our ability to meet our core product demand has also allowed us to innovate. Those promotions in many cases are showcasing our new products in store, which also I think will contribute to volume and get our outlook for volume on the consumer.
And then just one last question, more on capital allocation. Your leverage stands above board times. You called that out as a reason why interest expense is moving higher this year. Historically, share repurchases have not been a big use of cash. Just given the difficult operating environment in the credit markets right now, can you share with us how you think about prioritizing DIP pay down versus M&A? And then in that context, can you also update us on what the M&A pipeline looks like right now? Thank you. It's always dangerous when the CEO
by the end of 2024, so really nothing has changed.
From that and we continue, you know, as more so we continue to look at great assets along the way But you know our priority right now is paying down debt
Great, thank you very much. I'll pass it on. Thanks. Thank you. Our final question is from the line of Rob Dickerson with Jefferies. Please proceed with your questions.
Great, thanks so much. Hey, Bob. Hey, how's it going?
Obviously, there's some expected tailwinds coming from China as we get through Q2 and lap, some Omicron pressure, et cetera. Just in terms of that expected acceleration, is that fairly similar in consumer relative to flavor solutions? Just obviously because you have a little bit of a fairly easier compare on the volume side.
Robert, you know as we take a look at you know kind of the profile that you see in the first quarter I think you know that's probably a profile largely that you'll see carried out through the rest of the year. You know as Mike and Lawrence have said a couple of times we expect volume to be kind of in that plus or minus to 1% range. So there's you know effectively more pricing and flavor solutions as a result of you know kind of the inflation profile that you've talked about.
I think it tends to move forward that way throughout the rest of the quarters.
And I will say that on the consumer side, we have tremendous growth plans, including a lot of innovation.
and the renovation of her everyday spice line hitting the market in second quarter.
and a number of major customer wins that are going to go on shelf in the third quarter. And we're expecting a strong recovery in China in the second quarter. So even though it's a dynamic environment, we are actually really encouraged about the recovery.
sales outlook for the rest of the year. Okay super and then I guess maybe more for you Lawrence you know some questions asked already just around kind of mix of the business how you're thinking about price gaps and private label in the US.
We've heard from a number of companies over the past couple of years, and we've seen actions taken to potentially divest certain pieces of the business to reduce overall private label exposure. Clearly, you would not be divesting your US spices and herbs business, right?
coming in the core spices and seasonings business. But when I look at like Tallulah and I look at Red Franks, it seemed like there's a little bit higher share in those brands, better market penetration potential, maybe less private label exposure. So as you think of those innovation plans on a go forward as it also relates back to the industry,
Well I will say that that is a wide-ranging question and I could go absolutely buck wild answering it. We have gotten rid of some of the, when we said we're pretty in the business, some of it's not visible as we talked about on a previous question.
But some of it is. Kitchen Basics, for example, is a brand that, well, it's a great brand. We liked it a lot. It was the only thing we had in that aisle. It was hard for us to bring our category management tools to bear on it. And...
And it was a little bit of an orphan. There was a bit of pressure both from leading brands and from private label on that. And we didn't see a good path to grow it with a good return for us. We were just the wrong owner of that brand. And so we thought about other parts of our portfolio that way. The things that we've gotten out of it tended to be pretty small though.
is differentiated.
It brings more differentiation to our brand, flavors, blends that are hard to duplicate. We brought Bona Technology into some of our innovation as we have with Bona.
with the true taste technology that we're using in our new stuffs, rubs. And I think we just set a tough act to follow. And the renovation that we're doing on our core herbs and spice brand is going to be very differentiating, not just versus private label, but versus other brands. I mean, you've got to be able to have that oxygen-free atmosphere that's going to bring freshness into the market.
and a better appearance and aroma for consumers, that is gonna be very differentiating and difficult to follow quickly, that's for sure.
And a lot of the things that we're doing around that renovation are either trademarked or patented. And I think that everything you look at, whether it's the pruning of our portfolio, or the migration of our portfolio to higher value or technically insulated products on the flavor side.
to the innovation that we're bringing in our brand. It serves to differentiate us, extend our leadership, and push the gap between us and private label to be more of a discussion around total value and cost and benefit than just about the cheapest price. And we really love the categories we're in, whether it's S&E or...
Frank's Net Hot, things like that. We've intentionally picked these categories. All right, got it. Good answer. We'll end it there. Thanks for the question. And that is our final question.
So, I was waiting for the moderator to possibly say something, but that's okay. It's not necessary. You know, performance alignment with consumer trends and the rising demand for flavor, in combination with the breadth and reach of our global portfolio and our strategic investments provide a strong foundation for sustainable growth. We are disciplined and are focused on the right opportunities and investing in our business.
We're continuing to drive further growth as we successfully execute on our long-term strategies, actively respond to changing consumer behavior, and capitalize on opportunities from our relative strengths. We continue to be well positioned for continued success and remain committed to driving long-term value for our shareholders. Thank you, Lawrence, and thank you to everybody for joining today's call. If you have any other questions, we will call for a follow-up.
Please feel free to contact me. This concludes this morning's call. Thank you all, and have a great day.
I.
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Good morning. This is Casey Jenkins, Chief Strategy Officer and Senior Vice President Investor Relations. Thank you for joining today's first quarter earnings call. To accompany this call, we have posted the set of slides at IR.Lecormick.com. With me this morning are Lawrence Curzio, Chairman and CEO , Brendan Foley, President and COO, and
and Mike Smith, Executive Vice President and CFO . During this call, we will refer to certain non-GAAP financial measures. The nature of the non-GAAP financial measures and the related reconciliation to the GAAP results are included in this morning's press release and slide. 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. Some 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 statement on slide 2 for more information. I will now turn the discussion over to Lawrence. Good morning, everyone. Thanks for joining us. We are pleased with the start of the year. We delivered solid first quarter results that reflect strong demand and early results from our actions to increase our profit realization in 2023.
Our sales performance reflects the strength of our broad global portfolio and the effective execution of our strategies. Our Global Operating Effectiveness, or GOE, program is yielding results with first-quarter cost savings in line with our expectations. The progress we are making on gross margin improvement reflects the level of urgency with which we are addressing the pressure points from last year.
These results, combined with the strong demand we continue to expect across our portfolio and our diligent approach to optimizing our cost structure, bolster our confidence in our plan and our 2023 full year outlook. Turning to slide 5, in the first quarter we drove 3% sales growth, or 5% in constant currency. Our constant currency sales growth reflected strong underlying business performance.
with an 11% contribution from pricing, partially offset by a 3% decline in underlying volume and product mix. A planned 1% decline from our kitchen basics divestiture and the exit of our consumer business in Russia, and an expected 1% year-over-year volume decline from lower consumption due to COVID-related disruption in China, which expect to see a return toward normal consumption trends in the coming quarters. Our underlying first quarter sales performance positions as well.
continued top-line growth for the balance of the year. Our growth in the first quarter was led by outstanding performance in our flavor solution segment with positive momentum continuing in all three regions.
In our consumer segment, our underlying sales growth was led by the Americas region. Moving to profit, our adjusted operating income was comparable to the first quarter of last year, and constant currency had increased 2%. Higher interest expense and a higher effective tax rate more than offset our adjusted operating income growth in the quarter.
resulting in a 6% decline in adjusted earnings per share. I'd like to say a few words about our gross margin performance, which Mike will cover in more detail in his discussion of our adjusted operating income growth drivers in a few moments.
We drove considerable improvement in our gross margin performance in the first quarter. Our gross margin reflects the continued recovery of the cost inflation our pricing lagged over the last two years as well as cost savings from our CTI and GOE programs. As we've said previously, in 2023 we plan to fully recover the inflation our pricing previously lagged. Add line
as well as offset current year inflation, so our pricing actions and other levers. Our gross margin also reflects the results of our diligence in optimizing our costs through our DOE program. This is progressing as planned and remains a key focus. We expect the impact of our DOE program to scale up as the year progresses, and we remain on track to realize $75 million of cost savings in 2023, which we will take to the bottom line because of our actions to normalize our supply chain costs and to streamline our organization.
We remain confident that we have the right plans in place and are taking the right action. It's still early, but our first quarter results speak for themselves, and we expect to continue driving profitable growth at an accelerated rate to the balance of the year. Demand is strong. We're driving improvement in our margin profile.
and optimizing our cost structure effectively. Now let's move to first quarter business updates for each of our segments as well as discussion of our growth plans. Turning to our consumer segment on slide six, our underlying performance was strong reflecting the effect of execution of our pricing action and continuing positive momentum in our consumption trends.
even with lapping the elevated at-home consumption in the first quarter of 2022 due to Omicron in the Americas and the EMEA regions. That performance was partially offset by the impacts related to the sale of kitchen basics, our exit of Russia, and the COVID-related disruption in China.
Beginning in the second quarter, the activation of exciting growth initiatives, as well as lapping the impact of last year's COVID-related shutdowns in China, and the exit of our consumer business in Russia, which we began to exit in the second quarter of last year, is expected to drive an acceleration of our consumer segment growth. Now for some 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, through 5% in line with our shipments. As we anticipated, the dynamics between consumption and retail inventory levels have begun to normalize as we move beyond the holiday season impact, and we anticipate greater alignment between consumption and shipments going forward. Importantly, our volume performance in the first quarter was better than the fourth quarter on higher price realization. In spices and seasonings, both consumption dollars and units accelerated sequentially from the last several quarters with strengthener seasoning blends which provide consumers with convenience and flavor exploration.
Early results of our Lowry's Everyday Spice range, our largest innovation launch since pre-pandemic, continue to be positive. We're seeing incremental sales and profits of the category. Over half of the purchases are from new buyers to McCormick and overall incremental to the category. Hot Sauce remains on fire with double digit growth of both Cholula and Frank's Red Hot in the US and Canada. We continue to build excitement with our Hot Sauce brand marketing initiatives and reach the younger generation, most recently through gaming.
In our big game campaign during the quarter, our flavor-packed version of Fortnite, The Floor is Flava, had players navigating an immersive chicken wing shaped island and a volcano that spewed Frank's red hot and included, in partnership with TGI Fridays and DoorDash, a free chicken wings offer. This was our best big game campaign, capturing over one billion impressions in North America. And with the resolution of the long running shortage of French's mustard bottles, we have a great deal of fun. We hope you enjoyed this video. If you did, please like, share, and subscribe.
We drove over 20% consumption growth for the second consecutive quarter. Our creamy mustard launch last year continues to perform very well, with another flavor launch coming this year. Finally in the Americas, we continue to drive double-digit consumption growth in e-commerce, led by spices and seasoning.
We are realizing high returns on our investments, gaining new customers, and growing with new products. For instance, McCormick Popcorn Seasonings and Frank's Variety Packs are both off to a great start following their online introductions earlier this year.
In EMEA, we continue to have solid share performance of herbs, spices, and seasonings in the UK, Eastern Europe , and Italy, somewhat offset by softer performance in France.
We are continuing to gain share on Frank's Red Hot in the UK and are building momentum with Cholula. We are driving the UK hot sauce category growth. We are taking meaningful progress across the region in expanding our distribution and gaining share in the fast growing discount channel. Our investments in brand marketing, merchandising and new products are proving to be effective in driving growth.
In the Asia Pacific region, growth for the quarter and the year was impacted by the exit of low margin business in India, which we will have laughter after this quarter, as well as the COVID-related disruptions in China.
As we have moved past the Chinese New Year, we are seeing a return to normalization. We continue to expect a benefit beginning in the second quarter from lapping the impact of last year's disruptions. Outside of the China and India impacts, growth in the region was driven by new products and brand marketing initiatives. Frank's Red Hot and Saluda performance was strong in Australia.
and extending the power of our brands, we have launched Old Bay into the Australian market and Cholula into Southeast Asia. As always, we continue to fuel our consumer segment growth with the power of our brand, as well as our brand marketing, new products, and category management initiatives. We're excited about the growth plans we're executing and expect they will drive an acceleration of growth for the balance of the year. First, as we mentioned at Cagney, we are completely renovating our US core everyday Spicer Airport.
and quality of our spices and herbs. And the bottle is made of 50% post-consumer recycled plastic, approximately a 20% carbon footprint reduction from the current package. We are really excited about these changes and so are consumers. Testing has confirmed 40% higher freshness perception, two times higher preference, and a 25% increase in loyalty among current buyers.
The product began rolling out last month. The transition on store shelves will happen over the course of the year, supported with our highest spend brand marketing campaign of the past five years. Importantly, the new packaging fits right into the existing shelf spots. This is a seamless transition for our retail partners that we expect to drive category performance. This initiative, coupled with other new product introductions I'll mention in a minute, will
along with our stabilized service levels, we'll build total distribution points and market share improvement as we go through the year as we outlined last month at Cagney. We're also expanding into the fast-growing Mexican aisle with authentic Mexican flavor of Cholula in new format. We are launching Cholula taco recipe mixes as well as salsas based on authentic Mexican formulas and crafted in Mexico using locally sourced fresh tomatoes and tomatillos. Detail acceptance has been strong and consumers will find these new products and the authenticity.
Made with technology from our FONA acquisition, these dry seasoning rubs capture real, authentic hardwood smoke flavor.
Leveraging the product successes of 2022, we're extending our Tabitha Brown line into new flavors, formats, and channels, and we're also launching a French's Creamy Roasted Garlic Mustard.
In direct-to-consumer, we continue to grow our platform with new, innovative flavors as a testing ground, and in the club channel we're launching a world flavors line. In EMEA, we're enabling consumers to discover the authentic taste of America by introducing Old Bay to the UK market, as well as introducing a new line of products leveraging the French's brand, including American's favorites recipe kit.
In the UK, we also just launched Schwartz brand gravies, which are beating the top competitor on taste. In APZ, we've recently launched meal bases of favorite Keens recipes and will be launching a gourmet garden zesty lemon paste.
In the UK, we also just launched Schwartz brand gravy, which are beating the top competitor on taste. In APZ, we've recently launched meal bases of favorite Keens recipes and will be launching a gourmet garden zesty lemon paste, both making consumers' flavor exploration easier.
In China, we've introduced new packaging for our chicken bouillon product, a pouch with a resealable pork cap that makes it convenient for consumers and extends the open product shelf life by locking out moisture. We're continuing to build our heat platform across all regions with the launch of new products including in the U.S. Grillmates Nashville Hot Chicken Seasoning, Frank's Red Hot Dill Pickle Hot Sauce, and a Cholula Reserva crafted with 100% agave tequila. And our flavor forecast of the year, Vietnamese Cajun style seasoning. In China, we're introducing iconic Chinese City Spicy Blend and then the U.K. Frank's Red Hot Spicy Recipe Mix.
Across all regions, we are increasing our brand marketing investments in 2023 and expect the most significant year-over-year increase in the second quarter.
We will continue to support our brands with messaging on everyday use, value, and the superiority of our ingredients and flavors. And more specifically, with mustard supply issues resolved, we've launched a Flavor On campaign for mustard, are elevating our Mother of Sauce Tallulah campaign to support the launch of the new format and capitalize on sacred mayo, and of course, with grilling season starting during the quarter.
We plan to reach grillers with our Just Flame and Flavor campaign. A robust growth plan gives us confidence in continuing to drive positive momentum. We believe they will all be a win for consumers, customers, our categories, and McCormick, differentiating us even more and strengthening our flavor leadership in core categories.
Turning to flavor solutions on slide 9, our sales performance in this segment continues to be outstanding. This was our 8th consecutive quarter with double digit sales growth. Our first quarter growth was led by pricing actions in all three regions which, as we expected, accelerated versus previous quarters. Here are our regional highlights.
Our America's first quarter strong sales growth was led by our flavors product category. Within flavors, snack seasoning growth was strong, including volume growth related to new products and strengthen our customers' iconic products, partially fueled by their marketing, as well as our improved ability to service our customers as we began to realize the benefit of the capacity we're bringing online. Flavors for performance nutrition and health and market applications also contributed to our strong performance.
As we continued driving double-digit sales growth, we were winning with new customers and new products. Volume was tempered in the quarter by the pruning of some low margin business, the impact of a very cold December on the away-from-home part of our portfolio, and lower volume of alcoholic beverage flavors due to what must have been a drier January than last year. In EMEA, we continued to drive broad-based growth across the portfolio, which was led by higher sales to our quick-service restaurant customers in the first quarter.
Overall, our price realization nearly doubled versus last quarter. And at APZ, we delivered solid volume growth in the markets outside of China, driven by demand from quick service restaurants, or QSRs, for our products to heat up their hot and spicy offerings. And half go back in 2016 to 2015, when we updated our
Overall, flavor solutions demand has remained strong, particularly in certain parts of our business in our Americas and EMEA regions. As we continue to bring additional capacity online and reduce both supply chain pressure and the extraordinary cost to service our customers, we appreciate their patience and collaboration. We're continuing our positive sales growth momentum in flavor solutions.
and we're committed to restoring profitability in this segment, recovering margin while ensuring we keep our customers in supply, and driving growth for both McCormick and our customers. We're confident we will achieve margin recovery. In our January earnings call, we said our price increases had just begun to catch up with the pace of inflation, and we were beginning to recover the cost of inflation our pricing lag of the last two years. This is continuing at an even greater rate than the first quarter.
Earlier, I discussed optimizing our costs through our GEOE program, which will contribute to the Flavor Solutions margin recovery. GEOE will have a significant impact in the Flavor Solutions segment. Finally, we continue to focus on driving growth in high margin parts of our portfolio, such as the Flavor Product Category Volume growth I mentioned a few minutes ago in the Americas region. Now, I'm excited to share the growth plans we're executing on and expect will continue to grow.
product pipeline into 2023.
As we mentioned at CAGNY, we are specifically targeting opportunities to grow in high growth end markets. Applications such as savory snacks, alcoholic beverages, and performance nutrition have outpaced market growth. And as I just shared, our robust growth momentum continued in the first quarter, as we expect it will the balance of the year.
The capabilities we build for these categories are creating significant top-line opportunities. The power of McCormick and FONA together continues to fuel greater opportunities for growth. This acquisition is exceeding our expectations. We're capitalizing on opportunities to increase our sales to existing customers by cross-selling across our more comprehensive product offering and target new customers. We're leveraging our global footprint and capabilities to drive future growth.
We are currently in the process of expanding performance nutrition into Canada, as well as localizing confectionary flavors and chiaotti for our FONA customer. Finally, in branded food service, we have a robust 2023 innovation agenda, launching more than double the new items than in 2022, including Frank's Red Hot Nashville Hot, a line of Cholula Street tacos, McCormick Culinary Global Blend, and a French's Dijon portion control package. Our plan included continuing to leverage our culinary partnerships.
Inspire menu ideas with our customers, win placement on away from home menus, including with quick service restaurants, and drive growth with promotional activities. Our robust growth plans and flavor solutions also give us confidence in continuing our growth trajectory and drive our flavor solutions leadership.
Now for summary comments before turning it over to Mike. Turning to slide 11, global demand for flavor remains the foundation of our sales growth and we've intentionally focused on great fast growing categories that will continue to differentiate our performance. We continue to capitalize on the long term consumer trends, healthy and flavorful cooking, increased digital engagement, trust and variance, and
purpose-minded practices. McCormick is uniquely positioned to capitalize on this demand for great taste. With the breadth and reach of our strong global flavor portfolio, we're delivering flavor experiences for every meal occasion. Through our products and our customers products and our driving growth, we are end-to-end flavor.
The strength of our business model, the value of our products and capabilities, and the execution of our proven strategies give us confidence in our growth momentum and ability to continue navigating the dynamic global environment. As we look ahead to the balance of the year, we will continue to focus on capitalizing, on strong demand, optimizing our cost structure, and positioning McCormick to deliver sustainable growth. We have robust growth plans in place.
including building momentum with our new products and heat platform, and are delivering on our commitment to increasing our profit realization. We are confident with the successful execution of our plans and concrete actions, we will drive profitable growth in 2023. I want to recognize McCormick employees around the world as they drive our momentum and success. I want to also thank all of our customers, suppliers, and investors for their collaboration and patience as we move beyond the unique environment we've been operating in since the onset of the pandemic.
The fundamentals that drove our historical financial performance remain intact, and we are confident we will continue to not only deliver strong sales growth, but also drive total shareholder return at an industry-leading pace. Now, I'll turn it over to Mike. Thanks, Lawrence, and good morning, everyone. Starting on slide 14, our top-line constant currency sales grew 5% compared to the first quarter of last year. This growth was tempered by a 2% unfavorable impact from the Kitchen Basics domestic structure, the exit of the consumer business in Russia, and lower consumption due to the COVID-related disruption in China. In our consumer segment, we saw a growth of 5.3% compared to the first quarter of last year.
Constant currency sales increased 1%, reflecting a 9% increase from pricing actions, partially offset by a 3% volume decline related to the kitchen basics, Russia, and China impacts I just mentioned, as well as a 5% decline in all other volume and product mix. On slide 15, consumer sales in the Americas increased 4% in constant currency, including a 2% decline from the kitchen basics to vestiture.
Growth was broad-based across all product categories driven by pricing actions, partially offset by lower volume. Lapping elevated demand due to Omicron in the first quarter of last year contributed to the volume decline. In EMEA, constant currency consumer sales declined 2%. Pricing actions were more than fully offset by lower volume of product mix, including a 4% unfavorable impact from the lower sales in Russia. Lapping elevated demand due to Omicron in the first quarter of last year contributed to the volume decline. Constant currency consumer sales in the Asia-Pacific region declined 8%, driven by a decline in volume.
partially offset by pricing actions. The combination of lower volume in China due to COVID related disruptions and the exit of lower margin business in India drove an 11% reduction in volume. Turning to our flavor solution segment in slide 18, we grew first quarter constant currency sales 12%, reflecting a 13% increase in pricing actions and a 1% decline in volume and mix. In the Americas, flavor solutions constant currency sales rose 12%. Pricing actions contributed to higher sales across the customer base.
which skews to packaged food and beverage companies, as well as branded food service customers. Volume and product mix declined in the corner as strong volume growth in snack seasonings and flavors for performance nutrition and health applications was more than fully offset by the impact of pruning of low-margin businesses and a lower volume of away-from-home products as our customers' business was impacted by cold weather.
In EMEA, constant currency sales increased 17%, with pricing actions partially offset by lower volume and product mix. EMEA's Flavor Solutions' outstanding growth was broad-based across its portfolio, led by higher sales to QSR customers. First quarter volume declined, driven primarily by softness in some of our packaged food and beverage customers' volume within their own businesses. In the Asia-Pacific region, Flavor Solutions sales grew 5% in constant currency.
with pricing actions partially offset by lower volume and product mix. Volume and product mix declined as the impact of scaled back QSR activities in China due to COVID-related disruptions more than offset QSR volume growth outside of China. As seen on slide 22, gross profit margin declined 80 basis points in the first quarter versus the year ago period. This is an improvement from our performance last year, while more work needs to be done, we are pleased with our progress and are confident in the actions underway to continue driving further improvement over the balance of the year.
Gross margin in the quarter was impacted by several drivers. First, we are still incurring elevated costs in Flavor Solutions to meet high demand in certain parts of our business. While painful in the short term, we know making these investments to support our customers is the right approach to driving long term growth. That said, we continue to progress on reducing the level of these costs in the first quarter. Also in Flavor Solutions, we incurred dual running costs related to the transition to our new UK Peterborough manufacturing facility.
We expect the balance of the year cost to be comparable to 2022. And a sales shift between our consumer and flavor solution segments as compared to last year, unfavorably impacted gross margin. Partially offsetting the unfavorable drivers I just mentioned were our CCI-led cost savings, as well as the cost savings from our GOE program that Lawrence discussed, and which were in line with our expectations. Finally, end of note.
We offset current year inflation in the first quarter, which we expect will be the highest of the year through our pricing actions. And, as Lauren said, we continue to recover the cost inflation our pricing lagged over the last two years, as we planned. While the net of these impacts drives gross profit dollar growth, there is still a level of dilution that tempers the actual gross margin percentage.
Now, moving to slide 23, selling general administrative expenses, or SG&A, were comparable to the first quarter of last year. Higher distribution costs were offset by CCI-led and GOE cost savings, as well as lower planned brand marketing and employee benefit expenses in the quarter.
For the year, we continue to expect both brand marketing and employee benefits expenses to be higher than last year. As a percentage of sales, SG&A declined 40 basis points driven by leverage from sales growth.
Higher sales, partially offset by lower gross margin, resulted in a constant currency increase in adjusted operating income of 2% compared to the first quarter of 2022. In constant currency, consumer segment adjusted operating income increased 6% and in the flavor solution segment it declined 11%. Turning to interest expense and income taxes on slide 24.
Our interest expense increased significantly over the first quarter of 2022 driven by the higher rate environment.
Our first quarter adjusted effective tax rate was 21.8% compared to 19.7% in the year ago period. Both periods were favorably impacted by discrete tax items with a more significant impact last year.
At the bottom line, as shown on slide 25, first quarter 2023 adjusted earnings per share was $0.59 as compared to $0.63 for the year-to-year period. The decrease was due to higher interest expense and a higher first quarter adjusted effective tax rate.
On slide 26, we summarize highlights for cash flow in the quarter end balance sheet. Our cash flow from operations for the first quarter was $103 million compared to $18 million in the first quarter of 2022. The increase was primarily driven by lower incentive compensation payments. We returned $105 million of cash to our shareholders through dividends and used $62 million for capital expenditures this quarter.
We expect 2023 to be a year of strong cash flow driven by our profit and working capital initiatives. 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. We remain committed to a strong investment grade rating, and we are committed to a strong investment grade rating.
and we have a history of strong cash generation and profit realization. Now turning to our financial outlook on slide 27. Our 2023 outlook reflects our continued positive top-line growth momentum and with the optimization of our cost structure, increased profit realization.
We expect to drive margin expansion with strong sales and adjusted operating income growth that reflects the health of our underlying business performance as well as the net favorable impact from several to three drivers. We expect our adjusted operating profit growth will be partially offset below operating profit by higher interest expense and a higher projected effective tax rate. We also expect there will be a minimal impact from currency rates, although there will be a timing aspect as we project an unfavorable impact in the first half of the year.
that we have historically experienced, but in line with the current environment.
A 1% estimated benefit from lapping last year's impact of COVID-related disruptions in China, although we expect the impact will vary from quarter to quarter given 2022's level of demand volatility. The divestiture of our kitchen basics business in August of last year and the exit of our consumer business in Russia during last year's second quarter. And finally, the continual pruning of lower margin business from our portfolio. As always, we plan to drive growth through the strength of our brands as well as our category management, brand marketing, new products, and customer engagement plans.
Our 2023 adjusted gross margin is projected to range between 25 to 75 basis points higher than 2022. This adjusted gross margin expansion reflects a favorable impact on pricing, cost savings from our CCI-led and GOE programs, partially upset by the anticipated impact of a low to mid teens increase in cost inflation. We expect cost pressures to be more than offset by pricing during the year. As we recover, the cost inflation or pricing lag the last two years. Moving to adjusted operating income.
First, let me walk through some discrete items and their expected impact to our 2023 adjusted operating profit growth. First, the cost savings from our GOE program are expected to have an 800 basis point impact. The savings from this program are expected to scale up as the year progresses. Next, the benefit of lapping the impact of COVID-related disruptions in China is expected to have a 300 basis point favorable impact. The kitchen basics divestiture is expected to have an unfavorable 100 basis point impact.
And finally, an 800 basis point unfavorable impact is expected as we build back incentive compensation. The net impact of these discrete items is a favorable 200 basis points. This favorable impact, combined with expected 7 to 9% underlying business growth, which is driven by our improved operating momentum, results in our adjusted operating income projection of 9 to 11%. In addition to the adjusted gross margin impact I just mentioned, this projection also includes a further low single digit increase in brand marketing investments.
and our CCI-led cost savings target of approximately $85 million. We are anticipating a meaningful step up in interest expense driven by the higher interest rate environment which will impact our floating debt. We estimate that our interest expense will range from $200 to $210 million in 2023, spread evenly throughout the year.
We're certainly going to have double digit growth compared to year ago, unless theres. Some other exogenous shock.
A question on that double digit is just what the first number is.
But it's going to be but it's going to be big.
Okay, Great and then.
No I just think <unk>.
We're optimistic that this normalization will continue to unfold in the market, we expect to see much of that come through in Q2.
Great and sorry about the asset noise, there, but we've got some very impatient taxi guys of that.
Feel pretty treats apparently.
Quick follow up on inventory retailer inventories were a big offset last quarter in terms of the year on year changes is that now behind US I know you are seeing any.
Particularly in North America relative to be at the Nielsen data that we're seeing consumer takeaway package.
Thanks.
Said that that we thought that this would be behind us.
In the first quarter.
Largely how it played out.
Okay.
Great. Thank you.
Our next questions are from the line of Robert Moskow with Credit Suisse. Please proceed with your question.
Hi, good morning.
<unk>.
Hi.
For modeling purposes, I wanted to know the.
The phasing of the comparisons on your incentive comp.
I couldn't quite tell in first quarter, whether it was flat year over year or it was.
And also for the rest of the year you know, it's a big number for the full year can you tell us how to think about it.
Is that going into <unk>.
I will let Mike go go.
Yes, it was.
Relatively small favorable in the first quarter, but it will build during the year as we said.
Last conference call, So third and fourth quarter second half as you think about it will be significantly higher that you will see the impact.
Okay. When you said favorable so it was it was favorable and for last year.
Yes, slightly unfavorable at first but over the next three quarters really the third and fourth the second half will be Thats, where youll see the increments holiday versus last.
Right right right Okay.
And I guess somewhat similar question on China, I remember you called out <unk> 11 per share impact in <unk> last year. So can I assume youre going to get all that back and more and then third was there also.
An impact it was never quantified but.
It must be significant too.
That actually kind of as a segment.
Quarter.
Could have impact.
The big negative impact in the in the second quarter and then at a reopening solid third quarter and then a re locked down in the fourth quarter were just part of our Miss in the fourth quarter.
Yeah that was going to happen when we gave guidance.
I think our full year guide is for the order of magnitude that you're talking about yes. If you look at that two.
2020 outlook look charted our earnings backed up 3% impact on EPS for the full year impact which is around the <unk> sure.
But it's really <unk> and <unk> that are the real those are the comparisons feedback yet.
Okay last question.
Do you think your sales force will get some more momentum regaining shelf space that they lost in 2022 as a result of the packaging redesign is that kind of a.
A good way to get in with retailers too.
We regained some of the Skus that were cut or is it kind of a two separate discussions.
That absolutely there.
Tremendous opportunity for our sales force this year.
For a couple of reasons one is that our service is.
Much better conditions, so that we don't have as many.
Unproductive.
Conversations with our customers. The second is the sheer amount of innovation.
And the balance that we're bringing to our customers.
It's going to be really positive Brendan I'm going to ask you. This.
Say, a few words about that.
Yes. It is because we would always say Rob it's never just one thing it's a system of things and really drive that competitive strength and that applies I think to your question as well.
Yes, we have a big renovation plan as you called out and Thats definitely to be a big lever and I think it's it's all about driving and improving the category and so our sales organization certainly is kind of selling behind the strength of the story.
We will continue to reclaim.
Distribution points not only over this year, but also over the next year.
That's part of the process of doing this but as long as called out I just think our innovation platform is going to continue building.
Also additional distribution points, we really liked our innovation platform.
And the items that we're coming out with this year. So we expect to see a lot from that too.
All of these things put together with just very very strong local brand marketing.
Together are really.
The strong category conversation with the retailer I think importantly, though we keep pointing out the performance of Mccormick and our other brands.
Shelves just continues to sort of outperform competition and so those are the some of the things that we use in category management to really prove the case that it is a more productive shelf the more Mccormick guidance you have on it and I think supporting those new products and our brands with brand marketing and were slightly favorable in the first quarter versus last year, but youll see in the second quarter. So thats it.
Portable increase year on year.
Got it thank you very much.
Our next question is from the line of Mexico with BNP Paribas. Please proceed with your questions.
Hey, Thanks for the question first one is on gross margin. So it came in well above street expectations in the quarter and I recognize it's early and you talked about putting points on the board.
But I do wonder that as you think about your path to mitigating the pressure points that impact. This line item last year heavier use changed at all.
It seemed like with inflation expected to ramp down through the year of your Geo program attested to ramp up through the year, you might not have a bit more visibility towards.
The higher end of our previous 25 to 75 basis point guidance range.
Again. This is the first quarter the first quarter results, though do really give us they bolster our confidence as Lawrence said the pricing realization recovering those costs.
And frankly over recovering in the year, which gives us more confidence.
Program the implementation of those programs, which are very programmatic in nature.
Gives us more confidence.
But before we start celebrating we want to again put points on the board in the second quarter I will note consumer margins operating profit margin up 110 basis points from the first quarter were really happy with that and while flavor solutions is still negative. It was about 200 basis points less than last year. There was a sequential improvement from the fourth quarter and were re.
Really focused on driving those margins higher this year and I think youll see as we go through the year.
We will steadily improve that flavor solution.
Margin performance, but as Mike said.
First quarter, it's also the smallest quarter of the year.
Certainly bolstered and our confidence, but but we don't want to get overconfident.
Great makes sense and then on the <unk> program is there a number you are giving for the first quarter high rise at $75 million for the year, but just curious if you can.
Yes, I mean basically two months ago, we said, it's a small impact on first building into the second event in the second half is where you see the significant impact it scales up.
Great. Thanks very much.
Our next question is from the line of Steve Powers with Deutsche Bank. Please proceed with your questions.
Yes.
Yes. Thank you.
Just going back.
Maybe to the question on trade inventory that I think Alexia originally raised.
Just to play it back it seems like.
What you had said before that you exited the quarter with trade inventory levels roughly in balance on the consumer business just wanted to make sure that was correct.
And then so as we go forward I guess the base cases that you you ship more or less to consumption for the balance of the year with maybe a little bit of opportunity to ship ahead to the extent that the renovation work leads for those incremental distribution points is that is that the right.
Right interpretation of what you said, so far well I think if I took the question Mark off the replacement of the periods moving half the answer but.
But the front end.
Do you want to comment on that yes, I mean, maybe Steve just to focus on the front end of your question first of what we saw in the first quarter.
Good.
Shipments were in line with consumption.
But I think more importantly, the <unk> the dynamics that we would typically see in the first quarter. Following the holiday season played out is it behaving much like.
A normal period of time, so that will be and hope to see in Q1, that's what we did see in Q1 and what that I think means looking ahead, now which is kind of the <unk>.
And to your question is yes, we see things normalizing in operating a little bit more likely with typically.
Right.
I'd have to think a little bit of what that means by the end of the year, but we would just see a shift to consumption.
Model really play out as we normally do just remember, though in that fourth quarter, we have a.
That's our biggest quarter of the year and a big holiday season. So we tend to kind of even things out after Q1, and then sort of like begins again.
As we think about that cycle. So that's the way I would think about it but the important takeaway for me and I think maybe in this call was that we saw a normalization of that.
That would typically behave in Q1.
Okay. Okay very good thank you very much.
The next question is from the line of Adam Samuelson with Goldman Sachs. Please proceed with your questions.
Yes. Thank you good morning, everyone.
So I guess I wanted to come back to flavor solutions.
I think the comments in response to earlier question was.
We expect to see the margins they are billed.
Through the year.
And.
That's also I think we are.
The majority of the global.
Operating effectiveness program would show up.
Can you just remind us this year kind of the excess costs that you're carrying for that for the U K facility as you execute.
The changeover to the new plant and we think about that layering out of the system in 'twenty, four and beyond and maybe more broadly help us think about the roadmap to building.
Flavor solutions margins back up to the mid teens level that they were they were at pre Covid, yes.
Yes.
Roughly comparable on a little bar facilities last year as we said I mean in this quarter. After this quarter, but into next year, there's still going to be some carryover into next year. So I almost hesitate to say I would say a number right now.
Overall, we've said before around $20 million of kind of dual running costs.
On an annual basis. So a good chunk of that should go away next year, but again that depends on there's a lot of factors relating into that but if you think about this year with flavor solutions.
The.
First quarter is one of the highest commodity and other costs were and that will just like on the consumer side of the business that will go down the rest of the year pricing realization will support that then the <unk> business or the <unk> program that really benefits both of our segments.
I wouldn't say all of it is going to flavor solutions is really across the board, where we've had inefficiencies that have built up in the system since the pre pandemic.
We've called out some of those very clear examples in flavor solutions like co packs and things like that but it really is a more broad based program.
And I guess, then as we think about kind of the.
Exiting this year on on flavor solutions.
And beyond I mean, youre still kind of the margin structure of the businesses seem to be well below where you were you were a couple of years ago and I'm just trying to think about kind of some of the building blocks, whether it's paid concentrated customer base and getting kind of a full price recovery.
There is it mix is it capacity I'm, just trying to think about what where the margins had gotten too in 2018 2019.
Magazine. This year, they are still going to be in kind of high single digit range I think well. We think we have a long runway of improvement flavor solutions margins you referred back to 18 and 19, our margins were in the 14 ish range and we feel we can get back there overtime as we <unk>.
Over and over.
We recover those costs we've talked about.
Cost moderate as we get more efficient. So we don't see 2019 is really the ceiling and portfolio pruning portfolio.
Driving more towards the higher margin products, because we've been you've seen accelerated growth. There we've talked about today. So yeah, we do but it's not going to happen in snap your fingers and by the end of this year. This is a.
Our program.
It's going to play out over the next couple of years.
Well I got it.
That's not going to happen just this year, but if I just pushing.
The business mix isn't all that different today versus where it was three or four years ago and so apart from we've had all this big amount of inflation, what's really changed in terms of the profitability of <unk>.
The portfolio today.
Three things, we said in our last earnings call, where the significant inflation and we're recovering that inflation now through incremental pricing.
Significant incremental costs we've incurred.
Since pre Covid, we're addressing them through a <unk> program across both segments and the incremental cost for driving additional capacities as an example, our little bear investments. So those three things have really driven that operating profit degradation, which we are in process of now reversing and I would say that it's not true that the business mix has not.
Changed the business mix has changed.
We continue our portfolio migration towards more value added products.
<unk> talking about pruning the portfolio, we have not been specific because we don't want to talk about things that are.
That might be an identifiable to a specific customer but.
But there is definitely been movement within our portfolio, both by category and within product categories.
<unk>.
Improved that business for the long term.
When Mike said that that we don't look at the pre pandemic operating margin as a ceiling.
Yes, as we said at the time.
We look to some of our pure labor House peers, who published public numbers, who have significantly higher operating margins at more what we aspire to in the very long run.
Okay I appreciate all that color I'll pass it on thank you.
Thanks.
Thank you. Our next question is from the line of Peter Galbo with Bank of America. Please proceed with your questions.
Hey, guys. Good morning, Thanks for taking the question good morning.
Peter.
Mike just to go back to the question around kind of.
And does square some of the gross margin kind of math on the quarter.
It seemed like you were saying Joey was pretty minimal in terms of contribution to growth in <unk>, but maybe you can just help us like the other components.
PCI contribute in <unk>, and just where did the actual inflation rate the cogs inflation rate in the quarter fall relative to that loan.
Logan mid teens number for the year.
Well, we said in the first quarter is the highest of.
Of our inflation rates and it turned out to be that way.
We'll go down the rest of the year sequentially.
Joey was a small impact as you referred to.
CCI roughly.
It really spread throughout the year. So we don't get really specific around the CCI occurs because it's a continuous program. So you have every quarter.
It's approximately the same level as last year or slightly higher depending on the day of your guide. We said that this year is $85 million last year was $85 million of probably roughly the same but.
I think as you think about the margin improvement the pricing realization that we've seen.
As you've seen in our numbers is really.
Driving.
A good chunk of that so that's what gives us confidence on the rest of the year to recover recovering those costs, we said.
That we incur the last couple of years, we're catching up this year.
<unk> seen that in the first quarter.
Okay. That's helpful and Lori, maybe just you talked a little bit about grilling season, and some of the new product innovation, we've heard from some others.
You know as well.
Curious, how youre thinking about promotional cadence over some of the summer holidays.
Maybe the depths arent back to a more normal level, but are you seeing a chance to maybe increase promotional frequency as you get into some of your bigger more important holiday season.
<unk> I would say that with our higher with our improved service levels. So I'd say our promotional levels have also normalized we were able to support promotional volumes now.
The promotions that we run tend to be ROI positive.
I think that's an important part of <unk>.
Building back market share that we didn't talk about actually making our points and I'm glad you asked the question.
Okay.
I would also say that sometimes promotion is thought of as dealing back price that is not what we're talking about we're talking about quality merchandising events that drive consumer takeaway.
Okay.
Hey, we're going to work.
But over time, but we're going to take everybody's questions. So.
It's also not too long.
Thank you.
Next question is from the line of Cody Ross with UBS. Please proceed with your questions.
Good morning, everyone. Thank you for taking our question I just wanted to hit back on the last question as it related to your volume expectations for the quarter.
How do you think about promotions for the rest of the year and especially in terms of what your competitors are doing are you seeing promotions increase and then as its related how did your volumes come in in the quarter relative to your expectations.
Well as I said I think our.
Ability to supply we've also gone back to a full schedule of merchandising activity with our customers I think that's part of what gives us confidence in our outlook for the year frankly is that we're able to have those kinds of positive conversations with our customers as opposed to.
Some of the negative once we might've been having over the last few years about about supply and their desire to promote.
I think some great examples of our like our French's mustard ware.
We're currently have bartleson supply and we've been able to drive 20% volume growth for the last two quarters.
<unk> gained significant share and I think we're going to do a similar thing with grilling product.
I think the renewal of our ability to meet.
Our core product demand is also allows us to innovate.
And so those promotions in many cases are showcasing our new products in store.
Also.
I think it will contribute to that.
Two.
Volume.
Given our outlook for volume on the consumer side of the businesses relatively flat for the year I think we're up against a tough comparison in the first quarter as part of the reason why volume is down year over lapping omicron, a year ago and so on.
But I think we're pretty optimistic actually.
On volume and the pricing actions that.
We needed to take.
Front end loaded to the year and again, so I think that Thats something.
And it will.
Not in the way of growing our volume.
Thank you for that and then just one last question more on capital allocation. Your leverage stands above four times you called that out as a reason why interest expense thats moving higher this year historically share repurchases have not been a big use of cash just given the difficult operating environment and the credit markets right now can you share with us how you.
Think about prioritizing debt paydown versus M&A and then in that context can you also update us on what the M&A.
Pipeline looks like right now, it's always dangerous when the CEO talks about capital allocation I'll, let Mike do most of the talking here. The one thing I'll say about M&A.
Not our priority right now, but not a good strategic opportunity.
Yeah, and I would say like we've said both at Cagny, probably in their earnings call last earnings call two months ago.
Our priorities right now as we're paying down debt generating more cash and our debt to EBITDA back down to three times by the end of 2024, So really nothing has changed from that and we continue.
As Lawrence said, we continue to look at great assets, along the way, but our priority right now is paying down debt.
Great. Thank you very much I'll pass it on.
Thanks.
Thank you. Our final question is from the line of Rob Dickerson with Jefferies. Please proceed with your questions.
Great. Thanks, so much.
Hey, How's it going.
Just first question on the topline Simplistically said.
Obviously theres some expected tailwind is coming from China as we get through Q2.
Lap, some omicron pressure et cetera.
Just in terms of that kind of expected acceleration is that fairly similar and consumer relative to flavor solutions.
Just obviously, because you have a little bit of a.
Easier compare on the volume side in consumer and then secondly, just kind of any perspective as to it.
It seems like you've been able to take a little bit more incremental pricing.
In flavor solutions versus consumer and maybe just why that is.
And then I have a quick follow up.
Brendan.
Yes, it was all right.
As we take a look at.
Kind of the profile that you see in the first quarter I think it is.
Probably a profile largely that youll see carried out through the rest of the year as Michael Lawrence have said a couple of times, we expect volume to be kind of in that plus or minus 2% to 4% range. So.
There is.
Effectively we're pricing in flavor solutions, just a result of kind of the inflation profile that you've talked about so that's in flight that should provide I think a little bit of indication as to how we think about sort of the the balance between flavor solutions in consumer on the sales line.
Having said that we expect continued.
Underlying strength as we go throughout the year in our consumer business too, but the profile that you see in Q1.
I think it tends to move forward that way throughout the rest of the quarters.
But I will say that.
On the consumer side.
We have tremendous growth plans, including a lot of innovation.
And the renovation of our everyday.
Spice line hitting the market in the second quarter.
And a number of major customer wins that are going to go on shelf in the third quarter.
We're expecting a strong recovery in China.
In the second quarter, so the quality dynamic environment, we are actually really encouraged about.
Sales outlook for the rest of the year.
Sure.
Okay Super and then I guess.
Maybe more for you Lawrence.
Some questions asked already just around kind of mix of the business.
How are you thinking about price gaps in private label in the U S.
We've heard from a number of companies over the past couple of years.
Some of you have seen.
Actions taken to potentially divest certain pieces of the business to kind of reduce overall private label exposure clearly you would not be diverse senior U S spices and herbs business.
Right.
Other than that that's.
That's something that's taking place.
It's low probability.
But I am curious just kind of given your commentary on product pruning of lower margin businesses and then this innovation slate you have I mean, there still is some innovation you're kind of coming in a core spices and seasonings business, but when I look at like <unk> and I look at Red.
Thanks.
It would seem like there's a little bit.
Higher share in those brands and a better market penetration potential maybe less private label exposure. So as you think of those innovation plans on a go forward as it also relates back to the overall mix of the business.
Would you say, it's kind of.
Part of the internal plan to be pushing on that part of the business maybe more on the innovation side.
Relative to let's say like.
Special organic pepper.
Well I will say that that is a wide ranging question and I could go absolutely bump while the answer here.
Hello.
We have gotten rid of some cost when I say, what we've said, we're putting the business I mean, some of it's not visible as we talked about on a previous question, but some of it is kitchen basics.
For example is a brand that well, it's a great brand we liked it a lot.
Only thing we had in that aisle.
Hard for us to bring our category management tools to bear on it then.
And it was a little bit of an orphaned there it was a bit of pressure both from leading brands and from private label.
And that in and we didn't see a good path to.
To grow it.
Good returns for US we were just the wrong owner of that brand and so we've thought about other parts of our portfolio that way, but things that we've gotten out of it tended to be pretty small though.
That's a good example of one of the one on.
One of the bigger things that we've done most of the other things we've gotten out of have been small or would be less familiar to you because they are in a different region.
Ill.
The world, but.
But.
The innovation that we will do is.
Differentiated.
It brings.
Brings more differentiation to our brand.
Flavors blends that are hard to duplicate.
Bone of technology into some of our innovation as we have won.
The true taste.
Technology that we're using.
<unk> rubs.
And I think we just set a tough act to follow and the renovation that we're doing on our core herbs and spice brands is going to be very differentiating just versus private label versus other brands.
Yeah to be able to.
Have that.
Oxygen free atmosphere that is going to bring freshness to the.
The market.
A better appearance and aroma for consumers and it's going to be very differentiating and.
Difficult to follow up quickly.
That's for sure.
And.
And a lot of the.
The things that we're doing around that renovation are either trademarked are patented.
And I think I mean, I think that everything you'll look at whether it's the pruning of our portfolio for the migration of our portfolio.
Higher value or technically insulated products on the flavor side to the innovation that we're bringing in our brands serves to differentiate us extend our leadership.
And close the gap between us and private label to be more of a discussion around total value.
Costs and benefits.
Just about the cheapest price and we really love the categories, we're in whether it's SME or <unk>.
<unk> got hard.
Things like that so it's.
We've intentionally pick these categories.
Alright got it good answer there.
Thanks, a question and that is our final question.
Right.
Okay.
No.
I was waiting for the moderator to possibly say something but that's okay. That's necessary.
Mccormick's alignment with consumer trends and the rising demand for flavor in combination with the breadth and reach of our global portfolio and our strategic investments provide a strong foundation for sustainable growth. We are disciplined on our focus on the right opportunities and investing in our business. We're continuing to drive further growth as we successfully.
<unk> 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 you Mark and thank you to everybody for joining today's call. If you have any other question.
Follow up.
Please feel free to contact me. This concludes this morning's call. Thank you and have a great day.