Q2 2019 Earnings Call

June 27, 2019

Operator: Thank you for calling Income Conferencing. The next available operator will be with you momentarily. Thank you for calling Income Conferencing. The next available operator will be with you momentarily. Thank you for calling Income Conferencing. The next available operator will be with you momentarily.

Thank you for calling income comforting. The next available operator will be with you momentarily.

[noise].

You for calling income conferencing. The next available operator will be with you momentarily.

[noise].

Thank you for calling income conferencing. The next available operator will be with you momentarily.

[music] government I'm ever nameplates.

Mike Smith: Conference center. May I have your name, please?

Operator: Brian Healy.

Brian Healy.

Mike Smith: Your company name?

And your company name.

Operator: McCormick & Company.

Mccormick and company.

Yeah.

Okay give me one moment I'll join your line right to the Mccormick.

Mike Smith: Okay. Give me one moment. I'll join your line right through to McCormick.

Operator: Thank you.

Thank you.

Yeah.

Lawrence Kurzius: Organic sales in each of our three regions. This growth was attributable to higher volume and product mix as well as pricing and was entirely organic, driven by the base business, and new products as we had no acquisition impact in the quarter. In our consumer segment, sales declined 1%, including a 3% unfavorable impact from currency. In constant currency, sales grew 2%. In our flavor solutions segment, sales grew 1% and, in constant currency, grew 4%. In addition to our top-line growth, we grew adjusted operating income and expanded our adjusted operating margin. With our higher sales and cost savings led by our comprehensive continuous improvement program, CCI, we grew the second quarter's adjusted operating income 5%, or 8% in constant currency, and expanded our adjusted operating margin 80 basis points.

Excels at each of our three regions. This growth was attributable to higher volume and product mix as well as pricing.

Was entirely organic driven by the base business and new products as we had no acquisition impact in the quarter.

In our consumer segment sales declined 1%, including a 3% unfavorable impact from currency in constant currency sales grew 2%.

And our flavor solutions segment sales were 1% and in constant currency grew 4%.

In addition to our topline growth we grew adjusted operating income and expanded our adjusted operating margin.

With our higher sales on cost savings led by our comprehensive continuous improvement program CCRI.

We grew the second quarter's adjusted operating income, 5% or 8% in constant currency and expanded our adjusted operating margin 80 basis points.

At the bottom line, our second quarter adjusted earnings per share of $1.16 was 14% higher than one dollar two in the second quarter of 2018, driven primarily by our adjusted operating income growth and a lower adjusted tax rate and this 14% adjusted earnings per share growth includes an unfavorable impact from currency.

Lawrence Kurzius: At the bottom line, our Q2 adjusted earnings per share of $1.16 was 14% higher than $1.02 in Q2 2018, driven primarily by our adjusted operating income growth and a lower adjusted tax rate. This 14% adjusted earnings per share growth includes an unfavorable impact from currency. Our Q2 results were solid and we continue to expect another year of strong performance in 2019. We are reaffirming our sales outlook and as Mike will explain in detail, we are updating our operating profit outlook and increasing our earnings per share outlook. I'd like to turn now to some business updates with a focus this morning on highlights from our consumer and flavor solutions segments, an update on our business transformation activities, and our business momentum that reinforces our confidence in the remainder of the year.

Our second quarter results were solid and we continue to expect another year of strong performance in 2019, we are reaffirming our sales outlook and as Mike will explain in detail. We are updating our operating profit outlook and increasing our earnings per share outlook.

I'd like to turn now to some business updates for the focus this morning on highlights from our consumer and flavor solutions segments and update on our business transformation activities and our business the business momentum that reinforces our confidence in the remainder of the year.

Starting on slide six with our consumer segment as I just mentioned, we grew constant currency sales, 2% with increases in each of our three regions.

Lawrence Kurzius: Starting on slide 6 with our consumer segment, as I just mentioned, we grew constant currency sales 2% with increases in each of our 3 regions. In the Americas, we grew constant currency sales 2% driven by higher volume and product mix. A late Easter, which delayed the start of grilling season, tempered sales growth for the quarter. We estimate our consumption growth for the quarter including both measured and unmeasured channels was 2%. Our IRI data indicates US spice and seasoning scanner sales through multi-outlets grew 2% for the category and 1% for McCormick branded. While the late grilling start slowed the category growth, it had a greater impact on our consumption. We again had strong growth in unmeasured channels including club, e-commerce, and Hispanic retail chains.

In the Americas, we grew constant currency sales, 2% driven by higher volume and product mix, a late Easter, which delayed the start of grilling season tempered sales growth for the quarter.

We estimate our consumption growth for the quarter, including both measured and on measured channels was 2%.

Our IRI data indicates us spice and seasoning scanner sales through multi outlets grew 2% for the category and 1% for Mccormick branded.

While the lake drilling starts slowed the category growth it had a greater impact on our consumption.

We again had strong growth in unmeasured channels, including club E Commerce and Hispanic retail chains.

Lawrence Kurzius: Our category management initiatives, effective marketing support, merchandising execution, expanded distribution, and new products contributed to drive consumption growth across our Americas consumer portfolio. McCormick branded dry recipe mixes and Stubb's barbecue continued their momentum of consumption and share growth. Zatarain's frozen items, both base business and new products, drove growth. Frank's RedHot continued strong performance with distribution gains, with total distribution points hitting a record high. With our category management initiatives and focused marketing support, French's mustard grew consumption and share. We believe these actions will continue to drive consumption and sales growth in the second half of the year. Now, turning to Europe, Middle East, and Africa, the EMEA region, constant currency growth was driven by very strong promotional programs and targeted brand marketing across the region. Expanded distribution and new products were also growth drivers.

Our category management initiatives effective marketing support Merchandizing execution expanded distribution and new products contributed to drive consumption growth across our Americas consumer portfolio.

Mccormick branded dry recipe mixes and Stubbs barbeque continued their momentum of consumption and share growth.

Saturn's frozen items, both base business and new products drove growth.

Frank's Red Hot sauce continued strong performance of distribution gains, but total distribution points hitting a record high.

And with our category management initiatives and focused marketing support French's mustard grew consumption and share. We believe these actions will continue to drive consumption and sales growth in the second half of the year.

Now turning to Europe , Middle East and Africa, the EMEA region constant currency growth was driven by very strong promotional programs and targeted brand marketing across the region expanded distribution and new products were also growth drivers. We had we had broad based growth across most of the region, including strength in Eastern Europe . We're excited by our continued momentum on new product launches and the successes, we've realized to date with more flavors and varieties to come as well as further distribution expansion.

Lawrence Kurzius: We had broad-based growth across most of the region, including strength in Eastern Europe. We're excited by our continued momentum on new product launches and the successes we've realized to date with more flavors and varieties to come, as well as further distribution expansion. In the Asia Pacific region, we've built further momentum with Frank's and French's, particularly in China, India, and Australia. The foundation we continue to establish while still early days is driving results. Although growth in the region has been partially impacted by recent macroeconomic pressures in China, our fundamentals across the region remain strong. Turning now to slide 7. In our flavor solutions segment, our sales performance was strong. Our constant currency sales growth was 4% driven by higher volume and product mix on base business, as well as new products. We're continuing to win with our customers through new products, expanded distribution, and promotional activities.

In the Asia Pacific region, we've built further momentum of Frankson fringes, particularly in China, India and Australia. The foundation, we continued to establish while still early days is driving results.

Although growth in the region has been partially impacted by recent macroeconomic pressures in China are fundamentals across the region remains strong.

Turning now to slide seven and our flavor solutions segment. Our sales performance was strong our constant currency sales growth was 4% driven by higher volume and product mix on base business as well as new products.

We are continuing to win with our customers through new products expanded distribution and promotional activities.

Lawrence Kurzius: In the Americas, we drove constant currency sales growth of 3%. We had strong sales growth to quick service restaurants as well as in our flavor product category. Our flavor sales were driven by snack seasonings, partially due to new products and our customers' promotions, and by products that deliver the clean label and better-for-you attributes our customers are seeking. We also had strong branded food service growth driven by increased distribution with national and regional customers, promotional activity with operators, and expansion in emerging channels. In branded food service, we continue to realize the benefit of leveraging our full portfolio of McCormick spices and seasonings and Frank's, French's, and Cattleman's products across operators. Our strong momentum in EMEA was once again reflected in our second results. Sales growth was outstanding, 9% in constant currency, and was broad-based across the portfolio both from a product category and customer perspective.

In the Americas, we drove constant currency sales growth of 3%, we had strong sales growth to quick service restaurants, as well as in our flavor product category. Our flavor sales are driven by snack seasonings, partially due to new products at our customers promotions and our products that deliver the clean label and better for you attributes our customers are seeking.

We also had a strong branded food service growth driven by increased distribution with national and regional customers promotional activity with operators and expansion in emerging channels.

In branded foodservice, we continue to realize the benefit of leveraging our full portfolio of Mccormick, spices, and seasonings and Frank Francis and cattlemen's products across operators.

Our strong momentum in EMEA was once again reflected in our second quarter results sales growth was outstanding 9% in constant currency and was broad based across the portfolio. Both from a product category and customer perspective, we drove sales growth to quick service restaurants, partially due to their strong promotional activities and to packaged food companies with new products being a key driver.

Lawrence Kurzius: We drove sales growth to quick service restaurants, partially due to their strong promotional activities, and to packaged food companies with new products being a key driver. Turning now to slide 8. As we've previously discussed, most recently at CAGNY, we're making investments to build the McCormick of the future, including in our global enablement organization to transform McCormick through globally aligned innovative services enabling the business to grow. As technology provides the backbone for this greater process alignment, information sharing, and scalability, we're also making investments in our information systems. We have progressed our ERP replacement program and accelerated the transformation of our ways of working. This will enable us to realize the benefits of a scalable platform for growth sooner.

Turning now to slide eight as we've previously discussed most recently at Cagney, we're making investments to build the mccormick of the future, including in our global enablement organization to transform Mccormick through globally aligned innovative services, enabling the business to grow.

As technology provides the backbone for this greater process alignment information sharing scalability, we're also making investments in our information systems.

We have progressed, our ERP replacement program and accelerating the transformation of our ways of working this will enable us to realize the benefits of the scalable platform for growth sooner. We have estimated the total cost of our ERP investment to range between 150 and $200 million from 2019 through the anticipated completion of our global rollout in fiscal 2021.

Lawrence Kurzius: We have estimated the total cost of our ERP investment to range between $150 and $200 million from 2019 through the anticipated completion of our global rollout in fiscal 2021. The capital spend portion is estimated to be $90 to $120 million and program expenses $60 to $80 million. Mike will discuss this further in his remarks. Next, as we're at the midpoint of the year, I'd like to share a few comments about the momentum we're carrying into the balance of the year. Our largest quarters are ahead of us, and as we have remarked previously, our operating profit growth is weighted toward the second half of our year. As seen on slide 9, our confidence for the second half is bolstered first by our plans for a strong Americas fall and holiday season, partially driven by a significant increase in brand marketing.

The capital spend portion is estimated to be $90 million to $120 million and program expenses $60 million to $80 million, Mike will discuss this further in his remarks.

Next as we're at the midpoint of the year I'd like to share a few comments about the momentum we are carrying into the balance of the year.

Our largest quarters are ahead of us and as we have remarked previously our operating profit growth is weighted towards the second half of our year.

As seen on slide nine our confidence for the second half as bolstered first fire plants for a strong Americas fall and holiday season.

Partially driven by a significant increase in brand marketing.

Lawrence Kurzius: We continue to optimize our brand marketing spend both in terms of working and non-working mix as well as in timing, increasing our effectiveness and getting more value out of each marketing dollar. We have intentionally skewed our brand marketing spend to be heavier later in the year to maximize our ROI and support a key holiday period. Additionally, we have robust brand marketing investments planned in support of the significant array of new products we've launched across all regions during our first half and are now gaining momentum in distribution. We have exciting additional new product launches in our second half. This new product lineup includes in the US street tacos following the successful UK street food launch, complete meal seasonings, a package of complementary seasonings for our consumers' protein, vegetables, and starch, and Thai Kitchen coconut milk in a resealable Tetra package.

We continued to optimize our brand marketing spend both in terms of working and nonworking mix as well as in timing, increasing our effectiveness and getting more value out of each marketing dollar we've intentionally skewed our brand marketing spend to be heavier later in the year to maximize our ROI and supporting key holiday period.

Additionally, we have robust brand marketing investments planned in support of the significant array of new products, we launched across all regions. During our first half and are now gaining momentum and distribution.

And we have exciting additional new product launches in our second half. This new product lineup includes in the USA Street Tacos. Following the successful UK Street food launch complete meal seasonings, a package of complementary seasonings for our consumers protein vegetables, and starch and Thai kitchen, coconut milk and a resealable tetra package.

Lawrence Kurzius: In EMEA, in addition to flavor and geographic extensions, we'll be launching premium grinders, and in China, we're launching a full range of thick texture salad dressings and light meal sauces. Our confidence is also driven by new distribution we've successfully secured, realizing the benefits of distribution gained throughout the first half of the year across both our consumer and Flavor Solutions segments. And in Flavor Solutions, we expect continued momentum and wins with our customers through new products and promotional activities. Finally, as we've mentioned previously, we will be lapping several one-time items which impacted us unfavorably in late 2018, such as the unusual fourth quarter impacts we had in the Americas consumer business, and our move to new global headquarters.

In EMEA in addition to flavor and geographic extensions will be launching premium grinders and in China. We are launching a full range of thick texture salad dressings and light sauces.

Our confidence is also driven by new distribution, we've successfully secured realizing the benefits of distribution gains throughout the first half of the year across both our consumer and flavor solutions segments.

And then flavor solutions, we expect continued momentum and wins with our customers through new products and promotional activities.

Finally, as we have mentioned previously we will be lapping several onetime items, which impacted us unfavorably in late 2018, such as the unusual fourth quarter impacts, we had and the Americas consumer business and our move to a new global headquarters.

Lawrence Kurzius: We're excited about our plans and confident in delivering strong sales growth in our second half as well as significant profit realization while continuing to invest in the business. Now I'd like to provide a few summary comments as seen on slide 10 before turning it over to Mike. At the foundation of our sales growth is the rising consumer demand for flavor. We are aligned with the consumer's increased interest in bolder flavors, demand for convenience, and focus on fresh natural ingredients as well as with emerging purchase drivers such as greater transparency around the sourcing and quality of food. With this increased interest, flavor continues to be an advantaged global category which combined with our execution against effective strategies will drive strong results.

We're excited about our plans and confident in delivering strong sales growth in our second half as well as significant profit realization, while continuing to invest in the business.

Now I'd like to provide a few summary comments as seen on slide 10 before turning it over to Mike.

At the foundation of our sales growth is the rising consumer demand for flavor.

We are aligned with the consumers increased interest and bolder flavors demand for convenience and focus on fresh natural ingredients as well as with emerging purchase drivers such as greater transparency around the sourcing and quality of food.

With this increased interest flavor continues to be an advantage global category, which combined with our execution against effective strategies will drive strong results.

Lawrence Kurzius: We have a solid foundation, and in an environment that continues to be dynamic and fast-paced, we are ensuring we remain agile, relevant, and focused on sustainable growth. Our experienced leaders and employees are executing against our strategies, which are designed to build long-term value for our shareholders. Our Q2 financial results across both our Consumer and Flavor Solutions segments contributed to a great first half of the fiscal year. Our fundamentals are strong, and we're confident the initiatives we have underway position us to continue our growth trajectory. We're balancing our resources and efforts to drive sales with our work to lower costs to build fuel for growth and higher margin while making the investments in our future. We have confidence in our updated fiscal year outlook, and we are well-positioned to deliver another strong year in 2019.

We have a solid foundation and in an environment that continues to be dynamic and fast pace.

We are ensuring we remain agile relevant and focused on sustainable growth.

Our experienced leaders and employees are executing against our strategies, which are designed to build long term value for our shareholders. Our second quarter financial results across both our consumer and flavor solutions segments contributed to a great first half of the fiscal year. Our fundamentals are strong and we're confident the initiatives we have underway position us to continue our growth trajectory, we're balancing our resources and efforts to drive sales for the work to lower cost to build fuel for growth and higher margin, while making the investments in our future.

We have confidence in our updated fiscal year outlook, and we are well positioned to deliver another strong year. In 2019, we remain excited as we enter a second half and continued to drive results around the world a karmic employees are driving our momentum and success and I. Thank them for their efforts and engagement. Thank you for your attention and it is now my pleasure to turn it over to Mike for additional remarks on our second quarter financial results and our updated 2019 outlook.

Lawrence Kurzius: We remain excited as we enter our second half and continue to drive results. Around the world, McCormick employees are driving our momentum and success, and I thank them for their efforts and engagement. Thank you for your attention, and it is now my pleasure to turn it over to Mike for additional remarks on our second quarter financial results and our updated 2019 outlook. Thanks, Lawrence, and good morning, everyone. As Lawrence indicated, we delivered solid second quarter results in line with our expectations. I'll begin with a discussion of our results and then follow with details of our full year 2019 financial outlook. Starting on slide 12, we grew sales 3% in constant currency. As Lawrence mentioned earlier, this was entirely organic growth driven by the base business and new products as we had no acquisition impact in the quarter.

Thanks, Lawrence and good morning, everyone.

As Lawrence indicated we delivered solid second quarter results in line with our expectations I'll begin with a discussion of our results and then follow with details of our full year 2019 financial outlook.

Starting on slide 12, we grew sales 3% in constant currency.

And as Lawrence mentioned earlier this was entirely organic growth driven by the base business and new products as we add new acquisition impact in the quarter.

Lawrence Kurzius: Both our Consumer and Flavor Solutions segments delivered top-line constant currency growth in each of our three regions. The Consumer segment grew sales 2% in constant currency. This growth was driven by all three regions and was attributable to expanded distribution, new products, and pricing. On slide 13, Consumer segment sales in the Americas rose 2% in constant currency versus Q2 2019. This increase was driven by higher volume and product mix including Zatarain's products, Frank's RedHot sauces, branded extracts, and our branded Hispanic products, partially tempered by the delayed grilling season start. In EMEA, constant currency Consumer sales were up 1% from a year ago. Higher volume and product mix were driven by new products, distribution gains, and promotional activities.

Both our consumer and flavor solutions segments delivered top line constant currency growth in each of our three regions.

The consumer segment grew sales, 2% in constant currency. This growth was driven by all three regions and was attributable to expanded distribution new products and pricing.

On slide 13 consumer segment sales in the Americas rose, 2% in constant currency versus the second quarter of 2018.

This increase was driven by higher volume and product mix, including veterans products, Frank's Red Hot sauces branded xtracs in our branded Hispanic products, partially tempered by the delayed grilling season starts.

In EMEA constant currency consumer sales were up 1% from a year ago.

Higher volume and product mix were driven by new products distribution gains and promotional activities.

Lawrence Kurzius: This growth was partially offset by a decline in private label, as well as pricing actions including those related to planned trade promotional activity for new products. We grew consumer sales in the Asia-Pacific region 3% with growth in India and Australia driven by our marketing programs, as well as expanded distribution. Additionally, China pricing actions were partially set by related volume impacts, as well as the macroeconomic pressures Lawrence mentioned earlier. Turning to our Flavor Solutions segment in slide 16, we grew Q2 constant currency sales 4% with growth in all three regions led by strength in EMEA. In the Americas, Flavor Solutions constant currency sales increased 3% with broad-based growth across the portfolio excluding a decline in bulk ingredients. New products, expanded distribution, and our customers' promotional activities all contributed to the sales increase.

This growth was partially offset by a decline in private label as well as pricing actions, including those related to planned trade promotional activity for new products.

We grew consumer sales in the Asia Pacific region, 3% with growth in India, and Australia, driven by our marketing programs as well as expanded distribution.

Additionally, China pricing actions were partly offset by related volume impacts as well as the macro economic pressures Laurence mentioned earlier.

Turning to our flavor solutions segment on slide 16.

We grew second quarter constant currency sales, 4% with growth in all three regions led by strength in EMEA.

In the Americas flavor solutions constant currency sales increased 3% with broad based growth across the portfolio. Excluding a decline in bulk ingredients you products expanded distribution and our customers promotional activities all contributed to the sales increase.

In EMEA.

Lawrence Kurzius: In EMEA, we grew flavor solution sales 9% in constant currency across both packaged food companies and quick service restaurants, partially due to their promotional activity. This growth was driven by new products, pricing, and base business volume growth and spanned all categories. In the Asia Pacific region, flavor solution sales in constant currency grew 2% versus the year-ago period as higher sales to quick service restaurants were partially driven by the timing of their promotional activities. Across both segments, adjusted operating income, which excludes special charges and, for 2018, the transaction and integration costs related to the acquisition of our Frank's and French's brands, rose 5% in Q2 versus the year-ago period, and, excluding the impact of unfavorable currency, rose 8%. Adjusted operating income in the consumer segment rose to $138 million, a 7% increase.

We grew flavor set solution sales, 9% in constant currency across both packaged food companies and quick service restaurants, partially due to their promotional activity.

This growth was driven by new products pricing and base business volume growth and span all categories.

In the Asia Pacific region.

Flavor solution sales in constant currency grew 2% versus year ago period as higher sales to quick service restaurants were partially driven by the timing of the promotional activities.

Across both segments adjusted operating income, which excludes special charges and for 2018, the transaction and integration costs related to the acquisition of our Franks and franchise brands rose, 5% in the second quarter versus the year ago period, and excluding the impact of unfavorable currency rose 8%.

Adjusted operating income in the consumer segment rose to $138 million, a 7% increase.

Lawrence Kurzius: Adjusted operating income in the Flavor Solutions segment rose to $77 million, a 2% increase. In constant currency, adjusted operating income increased 9% in the Consumer segment and 5% in the Flavor Solutions segment. In both segments, the increase was primarily driven by CCI-led cost savings, higher sales, and lower brand marketing expenses. The impact of these drivers in the Flavor Solutions segment was partially offset by an unfavorable transactional impact of foreign currency exchange rates, as well as unfavorable mix related to a sales shift in quick service restaurants from limited-time offers to core menu items. As seen on slide 21, in Q2, we increased gross profit margin 30 basis points year-over-year driven by CCI-led cost savings. Our selling, general, and administrative expense as a percentage of net sales decreased by 50 basis points from Q2 2018.

Adjusted operating income in the flavor solutions segment rose to $77 million, a 2% increase.

In constant currency adjusted operating income increased 9% in the consumer segment and 5% in the flavor solution segment.

In both segments. The increase was primarily driven by Cc I'd like cost savings higher sales and lower brand marketing expenses.

The impact of these drivers in the flavor solutions segment was partially offset by an unfavorable transactional impact of foreign currency exchange rates as well as unfavorable mix related to a sales shift in quick service restaurants from limited time offers to core menu items.

As seen on slide 21 in the second quarter, we increased gross profit margin 30 basis points year on year, driven by Cc led cost savings.

Our selling general and administrative expense as a percentage of net sales decreased by 50 basis points from the second quarter of 2018.

Lawrence Kurzius: This decrease was primarily driven by lower brand marketing investments, which as Lawrence mentioned earlier is partially driven by timing. Through our new marketing excellence organization, we are increasing our efficiency and speed as well as realizing brand marketing CCI through the creation of in-house services and consolidated media buys. As a reminder, while our first half brand marketing is lower than last year, we are planning to spend brand marketing comparable to 2018 partially by reinvesting our continued marketing excellence cost savings and non-working media spend reductions into working media. Therefore, we are planning brand marketing increases in our second half. SG&A leverage gained from CCI-led cost savings initiatives and a one-time global benefit plan alignment was offset by business transformation expenses driven by our ERP platform replacement. In fiscal year 2019, we expect the ERP expenses to be concentrated in our Q2 and Q3.

This decrease was primarily driven by lower brand marketing investments, which as Lawrence mentioned earlier is partially driven by timing.

And through our new marketing Excellence organization, we are increasing our efficiency and speed as well as realizing brand marketing CCIX through the creation of inhouse services and consolidated media buys.

As a reminder, while our first half brand marketing is lower than last year, we are planning to spend brand marketing comparable to 2018.

Partially by reinvesting our continued marketing excellence cost savings and nonworking media spend reductions into working media.

Therefore, we are planning brand marketing increases in our second half.

SGN a leverage gained from CCBI by cost savings initiatives and a onetime global benefit plan alignment was offset by business transformation expenses, driven by our ERP platform replacement.

In fiscal year 2019, we expect the ERP expenses to be concentrated in our second and third quarters.

The combination of the gross margin expansion and their overall SGN a leverage resulted in an adjusted operating margin expansion of 80 basis points for the second quarter of 2019.

Lawrence Kurzius: The combination of the gross margin expansion and the overall SG&A leverage resulted in an adjusted operating margin expansion of 80 basis points for the second quarter of 2019. Turning to income taxes on slide 22, our second quarter adjusted effective income tax rate was 18.9% as compared to 22.2% in the year-ago period. Our second quarter adjusted rate was favorably impacted by discrete tax items principally due to stock option exercises. As we have discussed in previous quarters, favorable tax rate impacts of option exercises are partially offset by payroll and social-related taxes which unfavorably impact operating profit. Considering the year-to-date favorable impact from discrete items, we now expect our full year 2019 adjusted effective tax rate to be approximately 21%.

Turning to income taxes on slide 22, our second quarter adjusted effective income tax rate was 18.9% as compared to 22.2% in the year ago period.

Our second quarter adjusted rate was favorably impacted by discrete tax items, principally due to stock option exercises.

As we have discussed in previous quarters favorable tax rate impacts of option exercises are partially offset by payroll and social related taxes, which unfavorably impact operating profit.

Considering the year to date favorable impact from discrete items, we now expect our full year 2019, adjusted effective tax rate to be approximately 21%.

Lawrence Kurzius: There can be volatility in that rate quarter to quarter due to the unpredictability of discrete items, changes to our forecasted mix of earnings, and interpretation of regulations continuing to be released clarifying the impacts of the 2017 US Tax Act. Income from unconsolidated operations was $10 million compared to $7 million in the second quarter of 2018, a 28% increase driven by excellent performance by our McCormick de Mexico joint venture. For 2019, we now expect a high single-digit increase in our income from unconsolidated operations. At the bottom line, as shown on slide 24, second quarter 2019 adjusted earnings per share was $1.16, up 14% from $1.02 for the year-ago period primarily due to growth in our operating performance including from our joint ventures and a lower adjusted income tax rate. This increase included an unfavorable impact from currency. The company continues to generate strong cash flow.

There can be volatility in that rate quarter to quarter due to the unpredictability of discrete items changes to our forecasted mix of earnings and interpretation of regulation is continuing to be released clarify the impacts of the 2017 us tax tax.

Income from unconsolidated operations was $10 million compared to $7 million in the second quarter of 2018, a 28% increase driven by excellent performance by our Mccormick to Mexico joint venture.

For 2019, we now expect a high single digit increase in our income from unconsolidated operations.

At the bottom line as shown on slide 24 second quarter 2019 adjusted earnings per share was one dollar and 16 cents up 14% from one dollar in two cents for the year ago period, primarily due to growth in our operating performance, including from our joint ventures, and a lower adjusted income tax rate and this increase included an unfavorable impact from currency.

The company continues to generate strong cash flow on slide 25, we summarized highlights for cash flow in the quarter end balance sheet.

Lawrence Kurzius: On slide 25, we summarize highlights for cash flow and the quarter-end balance sheet. Our cash flow provided from operations was $314 million through the second quarter of 2019 compared to $235 million in the first half of 2018. Our strong operating cash flow was driven by higher operating income and our continued working capital initiatives. As we execute against programs to achieve working capital reductions including inventory management programs, we continue to see improvements in our cash conversion cycle, finishing the second quarter down six days versus our fiscal year-end. A portion of this cash was used to pay down $88 million of acquisition debt as the company continues to focus on paying down debt.

Our cash flow provided from operations was $314 million through that through the second quarter of 2019 compared to $235 million in the first half of 2018.

Our strong operating cash flow was driven by higher operating income and our continued working capital initiatives.

As we execute against programs to achieve working capital reductions, including inventory management programs, we continue to see improvements in our cash conversion cycle.

Finishing the second quarter down six days versus our fiscal year end.

A portion of this cash was used to pay down $88 million of acquisition debt as the company continues to focus on paying down debt.

Lawrence Kurzius: As we have maintained our disciplined acquisition strategy with a focus on paying down debt, we finished Q2 with a debt-to-Adjusted EBITDA ratio below 4x, which is pacing us ahead of our target of 3x by the end of 2020. So as Lawrence mentioned during the Q1 earnings call, while our priority is paying down debt, it is also time for us to start exploring acquisition opportunities which represent a key part of our long-term growth strategy. Through the first half of fiscal 2019, we returned $151 million of cash to shareholders through dividends and used $54 million for capital expenditures this period.

As we have maintained our disciplined acquisition strategy with a focus on paying down debt. We finished the second quarter with a debt to adjusted EBITDA ratio below four times, which is pacing ahead of our target of three times by the end of 2020.

So as long as mentioned during the first quarter earnings call, while our priority of paying down debt. It is also time for us to start exploring acquisition opportunities, which represent a key part of our long term growth strategy.

Through the first half of fiscal 2019, we returned $151 million of cash to shareholders through dividends and used $54 million per capital expenditures this period.

Lawrence Kurzius: We expect 2019 to be another year of strong cash flow driven by profit and working capital initiatives, and our priority is to continue to have a balanced use of cash, making investments to drive growth, returning a significant portion to our shareholders through dividends, and to pay down debt. Let's now move to our current financial outlook for 2019 on slide 26. We continue to expect another year of strong performance in 2019 with our broad and advantaged flavor portfolio, effective growth strategies, and focus on profit realization. We are reaffirming our sales outlook and updating our operating profit and earnings per share outlook. We continue to estimate, based on prevailing rates, a 2 percentage point unfavorable impact from currency rates on net sales, adjusted operating income, and adjusted earnings per share.

We expect 2019 to be another year of strong cash flow driven by profit and working capital initiatives and our priority is to continue to have a balanced use of cash making investments to drive growth returning a significant portion to our shareholders through dividends and to pay down debt.

Let's now move to our current financial outlook for 2019 on slide 26.

We continue to expect another year of strong performance in 2019, with our broad and advantage flavor portfolio effect of growth strategies and focus on profit realization.

We are reaffirming our sales outlook and updating our operating profit and earnings per share outlook.

We continue to estimate based on prevailing rates, a two percentage point unfavorable impact from currency rates on net sales adjusted operating income and adjusted earnings per share.

Lawrence Kurzius: We also continue to expect the unfavorable currency will be greater in the first half of the year than in the second half. At the top line, we reaffirm our guidance to grow sales 1% to 3%, which in constant currency is a 3% to 5% projected growth rate. As a reminder, this will be entirely organic growth driven primarily by higher volume and product mix as well as the impact of pricing to offset an anticipated low single-digit cost increase. We continue to project our 2019 gross profit margin to be 25 to 75 basis points higher than in 2018 in part driven by our CCI-led cost savings.

We also continue to expect the unfavorable currency will be greater in the first half of the year than in the second half.

At the top line, we reaffirm our guidance to grow sales, 1% to 3%, which in constant currency is a 3% to 5% projected growth rate.

As a reminder, this will be entirely entirely organic growth driven primarily by higher volume and product mix as well as the impact of pricing to offset an anticipated low single digit cost increase.

We continue to project, our 2019 gross profit margin to be 25 to 75 basis points higher than in 2018.

In part driven by RCC I'd like cost savings.

We are now expecting our adjusted operating income growth to be 6% to 8% from $930 million in 2018, which in constant currency is an 8% to 10% projected growth rate remaining above our long term objectives and reflects our continued focus on profit realization.

Lawrence Kurzius: We are now expecting our adjusted operating income growth to be 6% to 8% from $930 million in 2018, which in constant currency is an 8% to 10% projected growth rate remaining above our long-term objective and reflects our continued focus on profit realization. Our cost savings target remains approximately $110 million, and we expect brand marketing to be comparable to 2018. Our updated adjusted operating income growth rate continues to reflect expected strong performance. The decrease from the outlook reached last year during our March earnings call reflects the impacts of a classification shift in our ERP spending, the operating expense headwind related to option exercises which partially offsets the tax benefit, and global developments including trade and economic conditions in selected countries.

Our cost savings target remains approximately $110 million and we expect brand market marketing to be comparable to 2018.

Our updated adjusted operating income growth rate continues to reflect expected strong performance. The decrease from the outlook. We should last shared during our March earnings call reflects the impacts of a classification shift in our ERP spending the operating expense headwind related to option exercises, which partially offset the tax benefit and global developments, including trade and economic conditions in selected countries.

Lawrence Kurzius: As Lawrence mentioned, we have progressed in our ERP replacement program, and while our estimated total 2019 project investment related to this business transformation has remained unchanged, we now expect a lower 2019 capital spend component and higher operating expenses than we had originally expected for 2019. Resulting from this classification shift, we are lowering our 2019 capital spend outlook to approximately $200 million, and our 2019 updated operating profit outlook reflects the increased expense. We are excited about this investment to enable us to transform our ways of working and realize the benefits of a scalable growth platform. We are increasing our guidance for 2019 adjusted earnings per share to be in the range of $5.20 to 5.30, which compares to $4.97 of adjusted earnings per share in 2018 and represents a 5% to 7% increase or, in constant currency, 7% to 9%.

As long as mentioned, we have progressed in our ERP replacement program and while our estimated total night 2019 project investment related to this business transformation has remained unchanged. We now expect a lower 2019 capital spend component and higher operating expenses than we had originally expected for 2019.

Resulting from this classification shipped we are lowering our 2019 capital spend outlook to approximately $200 million and our 2019 updated operating profit outlook reflects the increased expense.

We are excited about this investment to enable us to transform our ways of working and realize the benefits of a scalable growth platform.

We are increasing our guidance for 2019 adjusted earnings per share to be in the range of $5.20 to five that $5.30, which compares to $4.97 of adjusted earnings per share in 2018 and represents a 5% to 7% increase we're in constant currency, 7% to 9%.

Lawrence Kurzius: This increase reflects the impact of changes I previously mentioned, our updated adjusted operating income outlook, the expected increase in income from unconsolidated operations, and the projected lower adjusted effective tax rate. In summary, we continue to project strong growth in our 2019 constant currency outlook for sales, adjusted operating profit, and adjusted earnings per share following record double-digit performance across each objective in 2018 and while continuing to invest for future growth. I'd like to now turn it back to Lawrence for some additional remarks before we move to your questions.

This increase reflects the impact of changes I previously mentioned our updated adjusted operating income outlook expected increase in income from unconsolidated operations and the projected lower adjusted effective tax rate.

In summary, we continue to project strong growth in our 2019 constant currency outlook for sales adjusted operating profit and adjusted earnings per share.

Following record double digit performance across each objective in 2018, and while continuing to invest for future growth.

I'd like to now turn it back to Lawrence for some additional remarks before we move to your questions.

Mike Smith: Thank you, Mike. Now that Mike has shared our financial results and outlook in more detail, I'd like to recap the key takeaways as seen on slide 27. We are delivering against our plans both for sales and profit realization and are confident in the momentum of our business. With our year-to-date results, we have a strong start to the year. Moving into our second half, we're confident in our plans including brand marketing support, new product launches, and new distribution which will drive further growth. Our 2019 outlook continues to reflect strong operating performance. And finally, we're sustainably positioned for growth and are continuing to deliver differentiated results while also investing to build the McCormick of the future. Now, let's turn to your questions.

Thank you Mike now that Mike has shared our financial results and outlook in more detail I'd like to recap the key takeaways as seen on slide 27.

We are delivering against our plans both for sales and profit realization and are confident in the momentum of our business with our year to date results. We have a strong start to the year.

Moving into our second half, we're confident in our plant, including brand marketing support new product launches and new distribution, which will drive further growth. Our 2019 outlook continues to reflect strong operating performance.

And finally, we are sustainably position for growth and are continuing to deliver differentiated results. While also investing to build the mccormick are the future now, let's turn to your questions.

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation turn will indicate your line is in the question queue.

Operator: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

You May press star too if he'd like to remove your question from the Q.

Per participant to think speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Our first question comes from the line of Andrew is our with Barclays. Please proceed with your question.

Lawrence Kurzius: Hi. Good morning, everybody.

Hi, good morning, everybody.

[Analyst] (Barclays): Morning, Andrew.

Andrew Lazar: Morning, Andrew.

Good morning, everyone.

Lawrence Kurzius: Good morning.

[Analyst] (Barclays): Hi. Lawrence, I know that last quarter was one of the first in probably a couple of years where McCormick actually gained share in the core spices and seasonings business in the US. And I know that's something that obviously you've been narrowing the gap quite a bit with the category and then flipped to gaining some share. I think your comment in Q2 was that the delayed, you know, the Easter delay around grilling season, I think you worded it, hit McCormick or affected McCormick at a greater rate than, let's say, the category. And so it looked like a little bit of a share loss. So I'm just trying to get a sense of why that dynamic would have played out for McCormick differently than, let's say, the category.

Andrew Lazar: Hi. Lawrence, I know that last quarter was one of the first in probably a couple of years where McCormick actually gained share in the core spices and seasonings business in the US. And I know that's something that obviously you've been narrowing the gap quite a bit with the category and then flipped to gaining some share. I think your comment in Q2 was that the delayed, you know, the Easter delay around grilling season, I think you worded it, hit McCormick or affected McCormick at a greater rate than, let's say, the category. And so it looked like a little bit of a share loss. So I'm just trying to get a sense of why that dynamic would have played out for McCormick differently than, let's say, the category.

Laurence I know that last quarter was one of the first in the probably couple of years, where Mccormick actually gained share in the core spices and seasonings business in the US I know that's something that obviously been narrowing the gap quite a bit with the category and then flip to gaining some share I think your comment into Q was that the delayed.

The Easter delay around grilling season, I think you were to hit Mccormick are affected Mccormick at a greater rate than let's say the category and so it looks like a little bit of a share loss I'm trying to get a sense of why that dynamic would have played out from mccormick differently than let's say the category and if there's any change in sort of the cadence of continuing to feel better about share gains going forward.

[Analyst] (Barclays): If there's any, you know, change in the sort of the cadence of continuing to feel better about share gains going forward.

Andrew Lazar: If there's any, you know, change in the sort of the cadence of continuing to feel better about share gains going forward.

Mike Smith: Right. Sure, Andrew. Well, first of all, it's not the Easter. It's not Easter. It's, it's the grilling season that was the issue. You know, Easter fell later in the calendar. We actually had a great Easter season. But the late Easter did compress the grilling season. And that compression of the grilling season impacted our grilling products. And seasonally, you know, our grilling season items, particularly our Grill Mates seasoning blends, are a big part of our business, at this time of year. You know, we didn't mention it in our prepared remarks, but it was also an exceptionally wet season. So, you know, the quarter was, I think, the fifth wettest on record. And May was the second wettest on record.

Right sure Andrew well first of all it's not that Easter.

It's not Easter it's the grilling season that was the was the issue.

Easter fell later in the calendar, we actually had a great Easter season, but the late Easter did compress the grilling season that compression of the grilling season impacted our growing products and seasonally.

Our grilling season items, particularly our grill mates seasoning blends.

Our aid.

Big part of our business at this time of year, we didnt mention in our prepared remarks, but there's also an exceptionally wet season. So yes.

The quarter was the I think the fifth wettest.

On record and May was the second wettest on record and just the combination of the slope of the delayed grilling season that could that compression of the grilling season, and some unfavorable weather was a headwind to our grill mates range.

Mike Smith: Just the combination of the slow growth of the delayed grilling season, that compression of the grilling season, and some unfavorable weather was a headwind to our Grill Mates range. So, you know, so that caused us to pace behind the category. I think the whole category was somewhat depressed by the compression of that grilling season. We're not the only ones who have a grilling range. You know, and so, but you know, we're the market leader and that Grill Mates range is a big part of our business at this time of year. So, you know, category was only up about 2%. We were only up about 1%, in terms of spices and seasonings, for the quarter. And we lost about 30 basis points of share.

So.

So that causes to pace behind the category I think the whole category with somewhat depressed by by the by the by the compression of that grilling season, we're not the only ones who have a growing range.

So.

But what were the market leader in that growth rates range is is a big part of our business at this time of year. So.

Category was only up about 2% we were only up about 1%.

In terms of spices and seasonings for the quarter and we lost about 30 basis points of share.

Mike Smith: You know, although we're getting into a stronger position from a share gain standpoint, you know, there are going to be some moving parts. I'd say that 30 basis points is not something that we are concerned about, that we've got a good, you know, strong underlying trend. And I also want to point out that the unmeasured channels, you know, are not captured in that. And we continue to have very strong growth in the unmeasured channel area that does not come through in that consumption data. You know, I'll also point out that private label also lost share. So, well, there've been a lot of concerns about private label in the market. You know, private label is becoming less and less of a factor.

So, although we're we're getting into a stronger position from a share gain standpoint.

They're going to be some some.

Moving parts I would say that 30 basis points is not something that we are concerned about that we've got a good strong underlying trend.

And and and also want to point out that on measured channels.

Or not captured in that and we continue to have very strong growth in the on measured channel area that does not come through that that consumption data.

You know I'll also point out that the.

Private label also lost share so there's been a lot of concerns about private label in the market.

Private label has become less and less of a factor so thats not upward that for next season.

Mike Smith: So that's not where that came in.

[Analyst] (Barclays): Great. Great. I really appreciate the added color. Thank you.

Andrew Lazar: Great. Great. I really appreciate the added color. Thank you.

Great Great I really appreciate the color. Thank you.

Operator: Thank you. Our next question comes from the line of David Driscoll with Citi Research. Please proceed with your question.

Thanks, Kim our next question comes from the line of David Driscoll with Citi Research. Please proceed with your question.

Okay, great. Thank you and good morning.

[Analyst] (Citi Research): Great. Thank you and good morning.

David Driscoll: Great. Thank you and good morning.

[Analyst] (Barclays): Hey, David.

Andrew Lazar: Hey, David.

Hey, good morning.

Lawrence Kurzius: Good morning.

Joe a few questions for me just on the on the operating profit guide down can you just talk about the the environment outside the United States and indeed, the impacts to your operating profit guidance and then just of a longer term question Laurence what it takes to get your sense as to the in home cooking trends and just I think they are quite positive right now, but wanted to get your sense as to as the U.S. unemployment rate remains very very low how do you see those in home trends continuing over the course of the kind of medium term do you think that the low unemployment would drive people out to the restaurants or do you really see in home cooking as a as a sustainable driver even with this very very low unemployment rate.

[Analyst] (Citi Research): Two questions for me. Just on the operating profit guide down, can you just talk about the environment outside the United States and the impact to your operating profit guidance? And then just a longer-term question, Lawrence. Wanted just to get your sense as to the in-home cooking trends and just I think they're quite positive right now. But wanted to get your sense as to as the US unemployment rate remains very, very low, how do you see those in-home trends continuing over the course of the, you know, kind of medium term? Do you think that the low unemployment would drive people out to the restaurants? Or do you really see in-home cooking as a sustainable driver even with this very, very low unemployment rate?

David Driscoll: Two questions for me. Just on the operating profit guide down, can you just talk about the environment outside the United States and the impact to your operating profit guidance? And then just a longer-term question, Lawrence. Wanted just to get your sense as to the in-home cooking trends and just I think they're quite positive right now. But wanted to get your sense as to as the US unemployment rate remains very, very low, how do you see those in-home trends continuing over the course of the, you know, kind of medium term? Do you think that the low unemployment would drive people out to the restaurants? Or do you really see in-home cooking as a sustainable driver even with this very, very low unemployment rate?

[Analyst] (Barclays): I'm going to let Mike take the front end of that.

Andrew Lazar: I'm going to let Mike take the front end of that.

I will let Mike take the front end of that yeah, I'll talk about that.

Lawrence Kurzius: Yeah. I'll talk about, you know, the change in operating profit guidance was really driven primarily by the shift from capital to expense in the ERP side of things. I mean, the global economic environment, as you mentioned, was a small piece of that. But, you know, I would just characterize things as volatile right now. I mean, we've talked about how we've had mitigation plans for Brexit and EMEA. That's on again, off again. It's been longer than we would have thought at this point. We had the Mexico scare about a month ago. We have significant business down there. And we had a China slowdown. You know, China had the slowest growth from a GDP perspective in 20 years in their Q1. So it's really volatile now.

Change in operating profit guidance is really driven primarily by the shift from capital capital to expense and the European side of things in the global economic environment as you mentioned, but it was a small piece of that but.

I would just characterize things as volatile right now I mean, we've talked about how we've had mitigation plans for Brexit in EMEA. That's on again off again, it's it's been longer than we would have thought at this point, we had the Mexico scare about a month ago. We have we have a significant business down there and we have a China slowdown in China have the slowest growth from a GDP perspective 20 years in their first quarter. So.

It is really volatile now we've got to consider that for our ongoing operating profit guidance for this year, but the real the real change versus our previous guidance due to just a classification shift on the year.

Lawrence Kurzius: We've kind of considered that for our ongoing operating profit guidance for this year. The real change versus our previous guidance is due to just a classification shift on ERP.

Mike Smith: Right. And as far as eating out trends, you know, this is a long-term trend. You know, unemployment has been very low for quite a long time. You know, I think that this cooking at home trend is more a characteristic of the millennial generation, and is not being driven by economic factors. It's being more driven by a desire for more fresh food, and a different kind of lifestyle. And so, you know, I think that the unemployment rate, I think that trend continues intact in the short, medium, and long term.

Right and as far as eating out trends. So this is a long term trend unemployment has been very low for quite a long time.

Yes, I think that this cooking at home trends as more a characteristic of the millennial generation.

Millennial generation.

And is not being driven by economic factors as being more driven by a desire.

For a more fresh food.

And and a and a different kind of a different kind of lifestyle.

And so I think that.

The unemployment rate.

I think that that trend continues in tech in the in the short medium and long term.

Thank you.

[Analyst] (Citi Research): Thank you.

David Driscoll: Thank you.

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

Operator: Thank you. Our next question comes from the line of Ken Goldman with JP Morgan. Please proceed with your question.

Lawrence Kurzius: Hi. Thanks. Good morning, everybody.

Hi, Thanks, good morning, everybody.

[Analyst] (Barclays): Hey. Good morning, Ken.

Andrew Lazar: Hey. Good morning, Ken.

Good morning, Ken.

Lawrence Kurzius: Two questions for me. And if you address this, forgive me. I have a couple of learnings this morning. But number one, you're looking for a very big jump in the tax rate in the second half. But historically, you've consistently overguided when it comes to taxes, I would say. I think it's fair to say, just to be conservative perhaps, and which is great. But, you know, just to be aligned with history, why shouldn't we model a little bit of a lower tax rate than what you've guided to for the second half? And then my second question is, I wanted to get a sense the economic conditions you mentioned in China, was that more on the food service side, on the retail side? I just wanted to get a little bit more color on exactly what the headwind is there. Thank you.

Two questions for me and if you addressed this forgive me I have a couple of learnings this morning, but number one.

You were looking for a very big jump in the tax rate in the second half, but historically.

You've consistently I would say I think it's fair to say over guided when it comes to taxes just to be conservative, perhaps in which is great, but just to be aligned with history why shouldn't we model a little bit of a lower tax rate and what you've guided to for the second half.

And then my second question is I wanted to get a sense the economic conditions, you mentioned in China.

Was that more on the foodservice side on the retail side I just wanted to get a little bit more color on exactly what the headwind is there. Thank you.

Hey, Ken it's Mike I'll talk about the taxes.

Mike Smith: Hey, Ken. It's Mike. I'll talk about the taxes. I mean, we've talked about this in the past. I mean, you're right. Generally, we guide to an underlying tax rate, based on regulations and things. It has gotten a little bit volatile the last couple of years when the accounting rules changed around stock option excess discrete item stock option exercises. And what we try to do is lay out the underlying. And if there's discrete items like that that happen, that is favorable to us. And we've seen that through the first half of the year. I mean, one of the things with our stock appreciation over the last couple of years, there's been significant stock option exercises, a lot by retirees. And, you know, that does also drive some unfavorable from an operating profit perspective.

I mean, we've talked about this in the past I mean, you're right generally we guide to an underlying tax rate based on regulations and things have gotten a little a bit volatile. The last couple of years when the accounting rules changed around stock option exercise discrete items stock option exercises and we try to do is lay out the underlying and if theres discreet items like that that happened that is a favorable to us and we've seen that through the first half of the year I mean, one of the things with our stock appreciation over the last couple of years. There has been significant stock option exercises a lot by retirees and.

That does also drive some unfavorable from an operating profit perspective, and it puts more shares out there too. So it isn't all something that drops to the bottom line from a tax perspective, but the second half. If you do this we use is 24% to 25% that is the underlying tax rate.

Mike Smith: It puts more shares out there too. So it isn't all something that drops to the bottom line from a tax perspective. But, you know, second half, if you do the squeeze, you know, it's 24% to 25%. That is the underlying tax rate, and, you know, as we know, with the GILTI tax and other things that are still uncertain from the federal government, you know, it could go either way. But, I, you know, I'd look to the past a bit. But we've had in the last year real significant discrete items from stock options which may or may not continue.

And as we know with the guilty tax and other things that are still uncertain from the federal government.

You know it could go either way, but I I look to the past a bit but we've had in the last year real significant discrete items from stock options, which may or may not continue and the retiree stock option exercises.

[Analyst] (Barclays): The retiree stock option exercises.

Andrew Lazar: The retiree stock option exercises.

I can add some color to that.

Lawrence Kurzius: I can add some color to that. On China, that's a really good question, Ken. The slowdown, you know, there is an economic slowdown in China that, you know, as we all know, we suspect that the official figures are probably optimistic and that the slowdown in China is even greater than it would appear from the government statistics that are released. I'm saying that as nicely as I can. It is the case that we're seeing the biggest impact in the restaurant sector. In China, our consumer business includes a food service component, because they share a common distribution channel, particularly in the traditional trade and in the smaller markets.

The China, that's a really good question Ken.

The the slowdown as there is an economic slowdown in China.

As we all know we suspect that the official figures are probably optimistic on that and the net.

The the slowdown in China is even greater than it would appear from the government Statistics center for lease up saying those nicely as I can.

And.

And it is.

It is the case that we're seeing the biggest impact in the restaurant sector.

In China, our consumer business includes food service component.

Because they share a common distribution channel.

Particularly in the in the traditional trade and in the smaller markets and that and that foods. Those foodservice related items are where we're seeing some some impact and anecdotally were certainly getting a lot of feedback from our.

Lawrence Kurzius: And those food service-related items are where we're seeing, you know, some impact. And anecdotally, we're certainly getting a lot of feedback from our organization in China that it's food service and restaurant sales that are slow. You know, over in our Flavor Solutions side of the business, our customers are more focused on core products as a result because they're trying to drive value through their restaurant and bring people in. So, you know, I think that the economic conditions are having a greater impact on food service and restaurant consumption than on the true retail part of the business where our retail-related items continue to show very strong growth.

Organization in China that that.

Food service and restaurant sales that that are slow.

Over in our flavor solution side of the business. Our customers are more focused on core product as a result, because they're trying to drive value through the restaurant and bring people in.

So yes, so I think that the economic conditions are having a greater impact on.

Food service and restaurant consumption, Dan on the and on the true retail a part of the business where are.

Retails.

Related items.

Continued to show very strong growth and and our ecommerce business, which is consumer oriented continues to show a really strong growth in that area is another compounding factor and that is this African swine fever.

Lawrence Kurzius: Our e-commerce business, which is consumer-oriented, continues to show a really strong growth in that area. There's another compounding factor. And that is this African swine fever. It's, 'cause it's starting to show up as a meat shortage and rising meat prices in China, which puts cost pressure on the whole food service sector there because, of course, that leads over to all the alternative meats as well, and with the resulting price, you know, price impact to the consumer who's going through, you know, different food service outlets. So, that's a little bit of a long-ish answer, but it is more food service than consumer than retail. Very helpful as always. Thank you.

This call is starting to show up as that meet shortage and rising meat prices in China, which puts cost pressure on the whole food service sector there.

Because of course athletes over to all the alternative meats as well.

And.

It was the resulting price price impact to the consumer who is going through different foodservice outlets. So so.

A little bit of a long a chance or.

But it is it is a more foodservice and can and retail.

Very helpful as always thank you.

Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.

[Analyst] (Bernstein): Good morning, everyone. So two questions. The first one, on the Consumer Americas business and the fact that it was, I guess, negatively affected by the shorter grilling season, maybe the wet weather, hit things a little hard this time as well. Does that mean we would expect to go back to a more normal level of sales growth starting next quarter? Is there anything sort of out there that would say it wouldn't sort of start to get back to a more normal level next time? And then, a more specific question on the EMEA flavor solutions business, obviously very strong this time around. Was that largely based on you mentioned the QSR promotions? But was it also new contract wins? I just wanted to get an idea of whether that strength is likely to be sustainable. Thank you. And I'll pass it on.

Alexia Howard: Good morning, everyone. So two questions. The first one, on the Consumer Americas business and the fact that it was, I guess, negatively affected by the shorter grilling season, maybe the wet weather, hit things a little hard this time as well. Does that mean we would expect to go back to a more normal level of sales growth starting next quarter? Is there anything sort of out there that would say it wouldn't sort of start to get back to a more normal level next time? And then, a more specific question on the EMEA flavor solutions business, obviously very strong this time around. Was that largely based on you mentioned the QSR promotions? But was it also new contract wins? I just wanted to get an idea of whether that strength is likely to be sustainable. Thank you. And I'll pass it on.

Good morning, everyone and so two questions. The first one on the consumer Americas business and the fact that it was.

I guess negatively affected by the shorter grilling season, maybe the wet weather.

Things are a little higher this time is as well.

I mean, we would expect to go back to a more normal level of sales growth. Starting next quarter is there anything sort of out there that would say wouldn't sort of start to get back to a more normal level next time, and then and more specific question on the EMEA flavor solutions business, obviously very strong this time around with that largely based on you mentioned the QSR promotions, but also new contract wins.

I just wanted to get an idea of whether that strength is likely to be sustainable. Thank you and I'll pass it on.

[Analyst] (Barclays): Hey. Those are thanks, Alexia. And good morning. You just started your question before we could say hi. The consumer, Americas, specifically, first of all, I don't want to apologize too much for the organic growth that we're having there. Some of our peers are reporting right around us. And we can see quite a differential between what we're reporting and what, you know, what they are. You know, I think that we did have, you know, solid organic, you know, sales growth. And I don't want us to, you know, lose the thread of thought on that. But we are expecting a stronger second half to the year than the first half.

Andrew Lazar: Hey. Those are thanks, Alexia. And good morning. You just started your question before we could say hi. The consumer, Americas, specifically, first of all, I don't want to apologize too much for the organic growth that we're having there. Some of our peers are reporting right around us. And we can see quite a differential between what we're reporting and what, you know, what they are. You know, I think that we did have, you know, solid organic, you know, sales growth. And I don't want us to, you know, lose the thread of thought on that. But we are expecting a stronger second half to the year than the first half.

Thanks, Alexia good morning, we just you've got sort of your question before we can say on.

The the consumer Americas, specifically first of all I want to apologize too much for the organic growth that we're having there have been some of our peers are reporting right around us and we see quite a differential between what we're what we're reporting and with what you know what they are.

I think that we did have solid organic sales growth I don't want us to lose lose the threat of a thought on that.

But we are expecting a stronger second half to the year than the first half and I think that we've been trying to signal that all year long right from the guidance that we gave us at the at the beginning of the year uneven in our remarks at the end of first quarter.

[Analyst] (Barclays): And I think that we've been trying to signal that all year along right from the guidance that we gave at the beginning of the year and even in our remarks at the end of Q1. You know, our marketing spend is deliberately skewed to the second half of the year where it has the strongest ROI. You know, our new product launches in the first half; we get the benefit of that. In the second half, we have more new products that we're launching in the second half of the year, as well. We are going to be lapping some Americas anomalies in Q4 that we don't expect to repeat. So overall, we are expecting higher organic sales growth in the Americas as we go through the second half.

Andrew Lazar: And I think that we've been trying to signal that all year along right from the guidance that we gave at the beginning of the year and even in our remarks at the end of Q1. You know, our marketing spend is deliberately skewed to the second half of the year where it has the strongest ROI. You know, our new product launches in the first half; we get the benefit of that. In the second half, we have more new products that we're launching in the second half of the year, as well. We are going to be lapping some Americas anomalies in Q4 that we don't expect to repeat. So overall, we are expecting higher organic sales growth in the Americas as we go through the second half.

Our marketing spend is deliberately skewed to the second half of the year were has the strongest.

ROI.

Our new product launches in our first half would get the benefit of that in the second half we have more new products that we're launching.

In the second half of the year.

As as well we are going to be lapping some.

Americas anomalies in the fourth quarter that we don't expect to repeat so so overall, we are expecting higher.

Organic sales growth in the Americas.

As we go through the through the second half if I could shift gears over to the EMEA flavor solutions business.

[Analyst] (Barclays): If I could shift gears over to the EMEA flavor solutions business, it's both. So this is a continuation of the strong trend that we saw in Q1 in that business. It, in terms of the constant currency growth, it's actually exactly the same as it was in Q1, and it's driven by the same factors. We do have some new customer wins, but we also have strong growth with our existing customer base there.

Andrew Lazar: If I could shift gears over to the EMEA flavor solutions business, it's both. So this is a continuation of the strong trend that we saw in Q1 in that business. It, in terms of the constant currency growth, it's actually exactly the same as it was in Q1, and it's driven by the same factors. We do have some new customer wins, but we also have strong growth with our existing customer base there.

It's both so this is a continuation of the strong trend that we saw in the first quarter in that business. It on terms of the constant currency growth its actually exactly the same as it was in the first quarter.

And it's driven by the same factors. So we have we do have some new customer wins, but but we also have a strong growth with our existing customer base there.

Great. Thank you very much I'll pass it on.

[Analyst] (Bernstein): Great. Thank you very much. I'll pass it on.

Alexia Howard: Great. Thank you very much. I'll pass it on.

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

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

Hi, good morning.

[Analyst] (Credit Suisse): Hi. Good morning.

Robert Moskow: Hi. Good morning.

Lawrence Kurzius: Hey, Robert.

[Analyst] (Credit Suisse): Good morning. So, the guidance for the year has always involved or required a lot of operating leverage, a little bit less now with the operating income down 1%. Can you talk a little bit more detail about the transformation spending that you're doing, the ERP, and how can you give us some specific details on how that can release more cost savings, you know, going forward? You mentioned some efficiencies, but are there any headcount implications, heading into the next few years from what you're doing with ERP? Thanks.

Robert Moskow: Good morning. So, the guidance for the year has always involved or required a lot of operating leverage, a little bit less now with the operating income down 1%. Can you talk a little bit more detail about the transformation spending that you're doing, the ERP, and how can you give us some specific details on how that can release more cost savings, you know, going forward? You mentioned some efficiencies, but are there any headcount implications, heading into the next few years from what you're doing with ERP? Thanks.

Hey, Robert.

So the guidance for the year has always.

Involved.

Our required a lot of operating leverage.

A little bit less now with the operating income down 1%.

Can you talk a little bit more detail about the transformation spending that you're doing the ERP and how can you give us some specific details on how that can release more.

Cost savings.

You know going forward.

You mentioned some efficiencies.

But are there any head count implications heading into the next few years from from what you're doing with ERP. Thanks.

Mike Smith: Hey, Rob. This is Mike. I mean, this is a three-year initiative. And we're in year one of the three years. And you know, we laid out the capital and expense portions of that that we'll realize over the three years. We did talk about the shift; it's really primarily a lot of our expense is happening in the Q2 and Q3 of this year. Then it will shift to more of a capital side of things. But really, we're focusing on this business transformation of ERP as really a growth initiative. And it will give us efficiencies, no question, as we standardize processes around the world, as we do things one way around the world. But it's really to make sure we can focus our resources on growing business, bringing in acquisitions much easier.

Hey, Rob This is Mike I mean, this is a three year initiative, we weren't we're in year, one or three years, we laid out the capital and expense portions of that that will that will realize over three years. We did talk about the shift in its really primarily a lot of our expense is happening in the second and third quarter of this year.

That will shift to more of a capital side to side of things, but really we're focusing on this business transformation of ERP as really a growth initiative and it will give us efficiencies no question as we standardize processes around the world as we do things one way around the world that's really to make sure. We can focus our resources on on growing business bring even bringing acquisitions much easier. We've in the past as we brought in acquisitions, it's been tough and it takes a lot of effort from the organization. So I think thats something I'd focus from a growth perspective, as we continue to get more and more scale to be a bigger company. This is really an investment in our business and get us to the next level I'll add to that a little bit.

Mike Smith: We've, in the past, as we brought in acquisitions, it's been tough. And it takes a lot of effort from the organization. So I think that's something I'd focus, you know, from a growth perspective. And as we continue to get more and more scale to be a bigger company, this is really an investment in our business to get us to the next level.

[Analyst] (Barclays): I'll add to that, a little bit, Rob. That is that this is linked also to our global enablement program where we're simplifying our processes, aligning them globally so we can centralize. And that definitely, you know, it both enables us to be more agile and grow. And it also does absolutely result in cost savings because we do get a benefit, you know, from that scale. So this is the technology-enabling part of that, global enablement, global enablement project. You know, as part of this, we're also this technology upgrade. We are making the migration to the next generation of SAP, S/4HANA. The whole industry is going to have to go to that. You know, most you know, some of us have, but most of us have not yet started that journey.

Andrew Lazar: I'll add to that, a little bit, Rob. That is that this is linked also to our global enablement program where we're simplifying our processes, aligning them globally so we can centralize. And that definitely, you know, it both enables us to be more agile and grow. And it also does absolutely result in cost savings because we do get a benefit, you know, from that scale. So this is the technology-enabling part of that, global enablement, global enablement project. You know, as part of this, we're also this technology upgrade. We are making the migration to the next generation of SAP, S/4HANA. The whole industry is going to have to go to that. You know, most you know, some of us have, but most of us have not yet started that journey.

Rob and that is that this is linked also to our global enablement program, where we're simplifying our processes aligning them globally. So we can centralize and that definitely.

Both enables us to be more agile and grow and it also does absolutely result in cost savings as we get it we do get a benefit from that scale. So this is a technology, enabling part of that global enablement Global enablement project.

As part of this we are also a technology upgrade we are thinking the migration to.

The next generation of Sep as for Honda.

The whole industry is going to have to go to that most some of some some of US have most of us have not yet started that journey. It is.

[Analyst] (Barclays): It is, if you're doing it on a pretty brisk pace as we are, a minimum of a three-year project. There, you know, SAP goes out of service in 2025. You know, we want to be well ahead of that curve and see this as an opportunity rather than as a cost that we have to bear down the road.

Andrew Lazar: It is, if you're doing it on a pretty brisk pace as we are, a minimum of a three-year project. There, you know, SAP goes out of service in 2025. You know, we want to be well ahead of that curve and see this as an opportunity rather than as a cost that we have to bear down the road.

If you're doing it on a on a pretty brisk pace as we are.

Minimum of a three year project.

S&P goes out of service in 2025, we want to be well ahead of that curve.

See this as an opportunity rather than as a as a cost that we have to bear down the road.

[Analyst] (Credit Suisse): Okay. A quick follow-up, though. I thought I heard you say that you're in a better position to make acquisitions now. Did I hear that correctly? And if so, what capabilities are you focused on acquiring?

Robert Moskow: Okay. A quick follow-up, though. I thought I heard you say that you're in a better position to make acquisitions now. Did I hear that correctly? And if so, what capabilities are you focused on acquiring?

Okay, a quick follow up though I thought I heard you say that youre in a better position to make acquisitions now.

Can you it did I hear that correctly and if so what capabilities are you focused on acquiring.

From a debt as we move down towards the three times debt to EBITDA I think that was that we were saying were as we get closer to our commitment that allows us to start looking at acquisitions.

Mike Smith: From a debt, you know, we, you know, as we move down toward the 3x debt to EBITDA, I think that was, what we were saying. We're as we get closer to our commitment, that allows us to start looking at acquisitions.

[Analyst] (Barclays): Exactly. I don't think, you know, we're not, and the kind of acquisitions that we would look for would be consistent with what we've done, and messaged in the past. You know, great flavor businesses, you know, great consumer brands that build our consumer flavor business, you know, flavor solutions, businesses that add flavor capability and capacity. And those would be the main areas. And businesses that grow.

Andrew Lazar: Exactly. I don't think, you know, we're not, and the kind of acquisitions that we would look for would be consistent with what we've done, and messaged in the past. You know, great flavor businesses, you know, great consumer brands that build our consumer flavor business, you know, flavor solutions, businesses that add flavor capability and capacity. And those would be the main areas. And businesses that grow.

Exactly.

No we're not.

And the kind of acquisitions that we would look for would be consistent with what we've done.

Messaged in the past.

Great flavor businesses.

Okay, great great consumer brands that a that build our consumer flavor business.

Flavor solutions businesses that had a flavor capability and.

Capacity.

And those would be the main or businesses that grow and of course business, obviously don't don't do it our growth.

Mike Smith: Business and, of course, businesses that obviously don't do it our growth.

[Analyst] (Credit Suisse): Got it. So three times is really the trigger.

Robert Moskow: Got it. So three times is really the trigger.

Got it so three times is really the the trigger.

[Analyst] (Barclays): I wouldn't say that it's a trigger. But we've said what we've committed to is that we're going to get to 3x by the end of 2020. And as we're closing in on that, you know, we're not going to start working on deals, once we get to 3. You know, right now, we've got a debt to EBITDA ratio that starts with 3. You know, it's and we're on track to end up with, you know.

Andrew Lazar: I wouldn't say that it's a trigger. But we've said what we've committed to is that we're going to get to 3x by the end of 2020. And as we're closing in on that, you know, we're not going to start working on deals, once we get to 3. You know, right now, we've got a debt to EBITDA ratio that starts with 3. You know, it's and we're on track to end up with, you know.

Well I would say that if they trigger but we've said we've always committed to this is that we're getting we're going to get to three times by the end of 2020 and as we get as we are closing in on that we're not going to start working on on deals.

Once we once we get to three.

Right now we've got a debt to EBITDA ratio that starts with three.

And we're on track to end up with.

Mike Smith: Yeah. The back end of the year, you know, Rob, is heavy, heavy cash flows. And by the end of the year, we'll be through. Will be in sight.

Yes back the back end of year as you know Rob heavy cash flow by the end of the year will be.

Three will be insight.

[Analyst] (Credit Suisse): Yeah. Yeah. That's what I thought. Okay. Thank you.

Robert Moskow: Yeah. Yeah. That's what I thought. Okay. Thank you.

Yes, yes, well I thought okay. Thank you.

Thank you. Our next question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.

[Analyst] (Goldman Sachs): Yes. Thanks. Good morning, everyone.

Adam Samuelson: Yes. Thanks. Good morning, everyone.

Yes, thanks, good morning, everyone.

Lawrence Kurzius: Good morning, Adam.

[Analyst] (Goldman Sachs): Hey. Morning, Adam.

Adam Samuelson: Hey. Morning, Adam.

Yes, Hey, good morning, Adam.

[Analyst] (Credit Suisse): So, a question on the Flavor Solutions business, and really centered on the margin side, and just, can you or anyone who quantified the transactional FX headwinds that you're facing there? Just, in the spirit of the question is, first half organic growth in the business is a little bit north of 5%. And margins on a year-over-year basis are up 10, 20 basis points. I'm just trying to think about the operating leverage within that mix. It doesn't seem like it's a headwind, especially if you talk about the bulk ingredients business being down. So I'm just trying to make sure I'm understanding kind of some of the cost or margin pressures that are hitting you there and how to think about that going forward.

Robert Moskow: So, a question on the Flavor Solutions business, and really centered on the margin side, and just, can you or anyone who quantified the transactional FX headwinds that you're facing there? Just, in the spirit of the question is, first half organic growth in the business is a little bit north of 5%. And margins on a year-over-year basis are up 10, 20 basis points. I'm just trying to think about the operating leverage within that mix. It doesn't seem like it's a headwind, especially if you talk about the bulk ingredients business being down. So I'm just trying to make sure I'm understanding kind of some of the cost or margin pressures that are hitting you there and how to think about that going forward.

So a question on the flavor solutions business and really centered on the margin side and just.

Okay, and when you quantified the transactional.

FX headwinds that they are facing there just in the spirit of the question is.

First half organic growth in the business is a little bit north of 5% and margins on a year on year basis are.

10, 20 basis points and I'm, just trying to think about the operating leverage within that mix doesn't seem like it's a headwind.

Especially if you talk about the bulk ingredients business being down so I'm just trying to make sure I'm understanding kind of some of the cost or margin pressures that are hitting you there and how to think about that going forward.

Mike Smith: So I think, if you think about it, there's a couple of factors that are actually hitting us on the flavor solution side. The transactional FX, as you said, which has been hitting us the last six months of last year and the first six months of this year, we'll get into a more favorable FX comparison in the second six. So that should be an acceleration there. We're also, as Lawrence mentioned, in Asia, particularly China, as we kind of have a negative mix issue right now as the QSR is focused more on their core products versus LTOs or limited-time offers. We make more margin, obviously, on limited-time offers. So but we see that, you know, again, that ebbs and flows. And as the economies recover, we think they'll go back to more LTOs.

Well I think.

Do you think about it a couple of factors that are actually.

Hitting us in the flavor solution side of transactional FX as you said, which has been hitting us the last six months of last year in the first six months of this year, we'll get into more favorable FX comparison in the second six so that should be an acceleration there.

We're also as Lawrence mentioned in Asia, particularly China as as it were kind of at a negative mix issue right now as as.

The QSR is focus more on their core products versus Ltos are limited time offers we make more margin obviously I'm limited time offers.

So, but we see that again that ebbs and flows and as they as economies recover we think it will go back to more LT OWS and we're actually seeing a little bit of that.

Mike Smith: We're actually seeing a little bit of that in some of the areas. I see an acceleration of our operating margin on the Flavor Solutions side in the second half as those clouds go away.

And some of the areas. So I see an acceleration of our operating margin on the flavor solution side in the second half as those clouds go away, particularly that FX is going to be less unfavorable in the second half now with all of that.

[Analyst] (Barclays): Yeah. Particularly, that FX is going to be less unfavorable in the second half now. We'll, I'll temper both of our remarks, with the caveat that this has really been a volatile environment. You know, but with that FX outlook that we have right now, we, you know, we should be getting into comparisons that are pretty close to year-on-year.

Andrew Lazar: Yeah. Particularly, that FX is going to be less unfavorable in the second half now. We'll, I'll temper both of our remarks, with the caveat that this has really been a volatile environment. You know, but with that FX outlook that we have right now, we, you know, we should be getting into comparisons that are pretty close to year-on-year.

For both of our remarks.

With the caveat that this is really kind of volatile environment.

And.

Yes were still.

But.

FX outlook that we have right now we should be getting into comparisons that are that are pretty close to a year on year.

[Analyst] (Credit Suisse): Okay. And then just quickly on the JV, you took up the range for earnings growth in that line item. Is that just a reflection of the first half performance where you're above the high end of the kind of upper single-digit growth? Or is the full year or is the back half actually improving there too?

Robert Moskow: Okay. And then just quickly on the JV, you took up the range for earnings growth in that line item. Is that just a reflection of the first half performance where you're above the high end of the kind of upper single-digit growth? Or is the full year or is the back half actually improving there too?

Okay, and then just quickly on the the JV.

Took up the range for earnings growth in that line item is that just a reflection on the first half performance, where you're at or above the high end of the kinda upper upper single digit growth or is the full year at the back half actually improving there too.

[Analyst] (Barclays): Yeah. If I can jump in on that. So, you know, we're having really strong sales growth in our VecMex JV. And that's falling through to profitability. So, you know, the performance year-to-date there has been really good. And we have positive outlook on that. So, you know, so originally, our outlook on our JVs as a group was flat. You know, we've, you know, we're in a pretty strong place right now. And so, you know, it's a little bit of both. We have great results year-to-date. And we expect that to, you know, continue. And I also wanted to really call this out because a lot of times, we don't talk about the unconsolidated operations. But those are real operating results. We are not passive operators of our unconsolidated JVs.

Andrew Lazar: Yeah. If I can jump in on that. So, you know, we're having really strong sales growth in our VecMex JV. And that's falling through to profitability. So, you know, the performance year-to-date there has been really good. And we have positive outlook on that. So, you know, so originally, our outlook on our JVs as a group was flat. You know, we've, you know, we're in a pretty strong place right now. And so, you know, it's a little bit of both. We have great results year-to-date. And we expect that to, you know, continue. And I also wanted to really call this out because a lot of times, we don't talk about the unconsolidated operations. But those are real operating results. We are not passive operators of our unconsolidated JVs.

Yes, if I can jump in on that so you know we were having really strong sales growth in our.

Mix, JV and and that's falling through to profitability. So so the performance year to date, there has been up and really good and we have positive outlook on that so weve. So originally our outlook on.

On our JV fees as a group was flat.

We're in a pretty strong place right now and so we have a.

It's a it's a little bit of both we have great results here to date, and we expect that to.

To continue and.

We also wanted to really call us out because a lot of times, we don't talk about the the unconsolidated operations, but there was a real operating results were Bert we are not passive operators of our unconsolidated jvs.

[Analyst] (Barclays): You know, and just in the last, you know, few weeks, you know, both Mike and I have been down there multiple times. You know, these are businesses that we're actively engaged in and doing very well and doing very well.

Andrew Lazar: You know, and just in the last, you know, few weeks, you know, both Mike and I have been down there multiple times. You know, these are businesses that we're actively engaged in and doing very well and doing very well.

And just in the last few weeks, both Mike and I have been down there multiple times. These are these are businesses that were actively engaged in.

And doing very well and doing very well.

[Analyst] (Credit Suisse): Okay. Hey, I appreciate the call, Rob. I'll pass it on. Thanks.

Robert Moskow: Okay. Hey, I appreciate the call, Rob. I'll pass it on. Thanks.

Okay.

Appreciate the color I'll pass on thanks.

Thank you. Our next question comes from the line of Chris growing with Stifel. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Chris Grohe with Stifel. Please proceed with your question.

Hi, good morning.

[Analyst] (Stifel): Hi. Good morning.

Chris Growe: Hi. Good morning.

Lawrence Kurzius: Hey, Chris. Good morning.

Hey, Chris morning, Hi, I, just had two questions if I could I wanted to follow up on an earlier discussion of obviously, there's a delay in the grilling season, I guess I wanted to be clear is that something you think you get back can you get those sales back say starting in Q3 that this is sort of a pent up demand by consumers that got pushed out a bit is that the way to look at it or is it more of a potential for loss sales given promotional changes there. So I think that if I could I know you said you had two parts I'm going to just jump in and answer I think you know with the consumption that didnt happen Didnt happen.

[Analyst] (Stifel): Hi. I just had two questions, if I could. I wanted to follow up on an earlier discussion of, obviously, a little bit of a delay in the grilling season. I guess I wanted to be clear. Is that something you think you get back? You get those sales back, say, starting in Q3, that there's this sort of pent-up demand by consumers that got pushed out a bit? Is that the way to look at it? Or is it more of the potential for lost sales given promotional changes there?

Chris Growe: Hi. I just had two questions, if I could. I wanted to follow up on an earlier discussion of, obviously, a little bit of a delay in the grilling season. I guess I wanted to be clear. Is that something you think you get back? You get those sales back, say, starting in Q3, that there's this sort of pent-up demand by consumers that got pushed out a bit? Is that the way to look at it? Or is it more of the potential for lost sales given promotional changes there?

[Analyst] (Barclays): No. I think that if I could, I know you said you had two parts. I'm going to just jump in and answer that. I think, you know, with the consumption, that didn't happen, didn't happen. You know, it was, you know, that compression is, is also something that we've, you know, had discussions about with our with our customers as well. So, you know, so there was there was a lost merchandising activity. The, the customers, you know, couldn't get their Easter promotions down fast, fast enough to get the grilling promotion display materials up. And, you know, the what, what, what the consumers didn't consume because remember, we talked about through the scanner that the Grill Mates, you know, you know, the grilling part of our seasoning business is the part that, that is was slow.

Andrew Lazar: No. I think that if I could, I know you said you had two parts. I'm going to just jump in and answer that. I think, you know, with the consumption, that didn't happen, didn't happen. You know, it was, you know, that compression is, is also something that we've, you know, had discussions about with our with our customers as well. So, you know, so there was there was a lost merchandising activity. The, the customers, you know, couldn't get their Easter promotions down fast, fast enough to get the grilling promotion display materials up. And, you know, the what, what, what the consumers didn't consume because remember, we talked about through the scanner that the Grill Mates, you know, you know, the grilling part of our seasoning business is the part that, that is was slow.

You know it was a kid that compression.

This is also something that weve.

You know had discussions about whether with our customers as well so and so there was there was a loss the merchandising activity. These are the customers couldn't get their Easter promotions down fast fast enough to get the grilling promotion.

Display materials up and.

What what the consumers didn't consume because remember we talked about through the scanner the grill mates.

The grilling part of our seasonal businesses the part that.

[Analyst] (Barclays): You know, that's consumption that is really lost. But it's something we planned internally. Everyone knows when Easter was going to hit. We've moved some advertising into the third quarter. You're going to see a nice upspend in the third quarter, which, hopefully, will continue to drive good consumption.

Andrew Lazar: You know, that's consumption that is really lost. But it's something we planned internally. Everyone knows when Easter was going to hit. We've moved some advertising into the third quarter. You're going to see a nice upspend in the third quarter, which, hopefully, will continue to drive good consumption.

<unk> was slow that's consumption that is.

That is that's really that's really lost.

But it's something we planned internally everyone knows when Easter is going to hit we've moved some advertising into the third quarter, you're going to see a nice up spend in the third quarter, which both we will continue to drive good consumption.

[Analyst] (Stifel): Okay. Great. Thank you. And then in relation to the gross margin, well, how would you characterize cost inflation and pricing? Are those two roughly offset each other? You did mention that CCI was the main driver of your gross margin improvement. And maybe related to that, in terms of the CCI savings, are they more gross margin-focused this year versus SG&A? Or if you have any color there, just would be interested in that.

Chris Growe: Okay. Great. Thank you. And then in relation to the gross margin, well, how would you characterize cost inflation and pricing? Are those two roughly offset each other? You did mention that CCI was the main driver of your gross margin improvement. And maybe related to that, in terms of the CCI savings, are they more gross margin-focused this year versus SG&A? Or if you have any color there, just would be interested in that.

Okay, great. Thank you and then in relation to the gross margin.

How would you characterize cost inflation and pricing are those two roughly offset each other you did mentioned that cc I was the main driver of your gross margin improvement and maybe related to that in terms of the Ccs savings are they more gross margin focus this year versus us today or do you have any color. There just would be interested in us yeah, I wouldn't I wouldn't say from CCBI perspective, we have a large shift between cost of goods sold CCRI or ESG in HCC I.

Mike Smith: Yeah. I wouldn't say from a CCI perspective. We haven't seen a large shift between cost of goods sold CCI or SG&A CCI. I think from a pricing perspective and a cost perspective, as we said at the beginning of the year, this is a relatively benign environment for us, low single-digit cost inflation. And we've taken some pricing where we needed to do that this year. But it's a relatively benign side. So the CCI is able to work for us better to drop through to the operating profit margin.

I think from a pricing perspective.

Cost perspective, as we said at beginning of year. This is a real it relatively benign environment for us low single digit cost inflation and we we've taken some pricing where we needed to do that this year, but it is a relatively benign side. So the CCRI is able to work for us better drop through to the operating profit margin and we have some.

[Analyst] (Barclays): We have some ongoing discussions on price on specific items as well, that are, you know, always in progress.

Andrew Lazar: We have some ongoing discussions on price on specific items as well, that are, you know, always in progress.

Ongoing discussions on price on specific items as well that that are.

That are always in progress.

[Analyst] (Stifel): Yes. Okay. Got it. Thanks so much.

Chris Growe: Yes. Okay. Got it. Thanks so much.

Yes, Okay got it thanks, so much.

[Analyst] (Barclays): Yeah.

Andrew Lazar: Yeah.

Yes.

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

Operator: Thank you. Our next question comes from the line of Rob Dickerson with Deutsche Bank. Please proceed with your question.

Hi, great. Thank you so much more I guess.

[Analyst] (Deutsche Bank): Great. Thank you so much.

Rob Dickerson: Great. Thank you so much.

Lawrence Kurzius: Hey, morning, Rob.

[Analyst] (Deutsche Bank): I guess, hey, good morning. Just kind of an overview question on guidance in the back half, given all the questions that have already been asked. So it seems like what you're saying, kind of what I'm hearing is, you know, there was maybe a little bit extra spend on the ERP system upgrade, I guess, right, that I guess the shift to HANA you're talking about before.

Rob Dickerson: I guess, hey, good morning. Just kind of an overview question on guidance in the back half, given all the questions that have already been asked. So it seems like what you're saying, kind of what I'm hearing is, you know, there was maybe a little bit extra spend on the ERP system upgrade, I guess, right, that I guess the shift to HANA you're talking about before.

Hey, good morning.

I'm just kind of a overview question on guidance.

In the back half.

Given all the questions have already been asked.

So.

It seems like what you're saying kind of what I'm hearing is.

Yeah, there was maybe a little bit extra spend on the ERP system upgrade I guess right, but I guess the shift I know you touched championship Robbins go and it's gone from capital to expense. If you notice that we've talked about it in the script. Our capital range was 200 200 to 220 Weve shifted that down to 200 now for the year. So capitals down expenses up I think about it that way the same money same thing happened one is in cash.

Mike Smith: It's a shift it's a shift, Rob. It's going it's going from capital to expense. You, if you noticed, and we talked about it in the script, our capital range was $200 to 220. We've shifted that down to $200 now for the year. So capital's down. Expense is up. Think about it that way.

[Analyst] (Barclays): It's the same money.

Andrew Lazar: It's the same money.

Mike Smith: Same yeah. Same cash.

[Analyst] (Barclays): One is same cash. One is expense.

Andrew Lazar: One is same cash. One is expense.

One of the six right right. So so and I mean at times I I actually I'm very accurate.

Mike Smith: Right. Right.

[Analyst] (Barclays): Right.

Andrew Lazar: Right.

[Analyst] (Deutsche Bank): So, and I mean, at times, I actually am very ignorant. I do admit that. So could you just explain that simplistically so everybody on the call can understand?

Rob Dickerson: So, and I mean, at times, I actually am very ignorant. I do admit that. So could you just explain that simplistically so everybody on the call can understand?

I doing that so could you just explain that simplistically its everybody on the call could tell you yes, okay. That's fine I mean, I can talk for hours about the accounting around this but I won't but its a.

Mike Smith: Oh, yeah. Okay.

[Analyst] (Deutsche Bank): I have a question.

Rob Dickerson: I have a question.

Mike Smith: That's fine. I mean, I could talk for hours about the accounting around this. But I won't. But it's, you know, the, you know, one of the things when we came into the year and, as Lawrence talked about in the January call, we were starting to engage our system integrator to, you know, look at the scope of the project, the timing. And we had an estimate of what the total cost would be over those couple of years. And based on what we knew at the time, based on the phases of the project, and what is capital, what is expense from an accounting perspective, we took our best crack at it.

One of the things when we when we came into the year NIM as Mark talked about the January call. We were starting to engage our system integrator to to look at the scope of the project the timing and we had an estimate of what the total cost would be over the over this couple of years and based on what we knew at the time based on the phases of the project and what is capital what is expense from an accounting perspective, we took our best crack at it once the system integrator got in and and put the plan together, we realize that okay. If theres a little bit more expense upfront than we thought little less capital based on the work that they're doing on the ERP design implementation all that sort of stuff. So that's where what you see here total costs are going to be about the same it's just a shift between the two based on the accounting rules.

Mike Smith: Once the system integrator got in and put the plan together, we realized that, okay, there's a little bit more expense upfront than we thought, a little less capital, based on the work that they're doing on the ERP design, the implementation, all that sort of stuff. So that's where what you see here, total costs is going to be about the same. It's just a shift between the two based on the accounting rules and better information now.

And better prepare enough now okay.

[Analyst] (Deutsche Bank): Fair enough. Okay. Good answer. And then, just, secondly and simplistically, it sounds like what you're saying is in the back half, right, given I know it sounds like there's been a little margin mix pressure, not a lot, but like you said, in kind of, you know, restaurants relative to kind of base core retail in Asia. Let's ignore the ERP piece for a second. But then in the back half, maybe some of that loosens. We'll see. But it's also, there's an FX reversal, not a full reversal, but less of a headwind. And then it also sounds like maybe as you're coming out of this kind of, you know, late, you know, wet post-Easter grilling season that maybe with marketing dollars, you can improve velocities and hopefully also improve some margin mix.

Rob Dickerson: Fair enough. Okay. Good answer. And then, just, secondly and simplistically, it sounds like what you're saying is in the back half, right, given I know it sounds like there's been a little margin mix pressure, not a lot, but like you said, in kind of, you know, restaurants relative to kind of base core retail in Asia. Let's ignore the ERP piece for a second. But then in the back half, maybe some of that loosens. We'll see. But it's also, there's an FX reversal, not a full reversal, but less of a headwind. And then it also sounds like maybe as you're coming out of this kind of, you know, late, you know, wet post-Easter grilling season that maybe with marketing dollars, you can improve velocities and hopefully also improve some margin mix.

Good answer and then just secondly, and Simplistically.

It sounds like what you're saying is in the back half right given that it sounds like there's been a little margin mix pressure is not a lot, but like you said it and kind of you know.

Restaurants relative to kind of base core retail and Asia.

Lets ignore the ERP piece for a second but then in the back half maybe some of that loosens, we'll see but it's also great said FX reversal not a full reversal, but less of the headwind and then it also sounds like maybe.

Yes, you are coming out of this kind of feed of late.

Wet post Easter grilling season, maybe with marketing dollars you can improve velocities and hopefully also improves the margin mix because when I just look at the guide right.

[Analyst] (Deutsche Bank): Because when I just look at the guide, right, we could talk about some of the shift in the grilling season in the quarter or what happened in China. But quite frankly, your top line's actually still pretty strong. And you're exactly in line, for the most part, where you were relative to Q1 on a year stack basis. So it seems like it's more of a margin expansion expectation in the back half versus a big top line acceleration relative to the first half. Is that a fair summary?

Rob Dickerson: Because when I just look at the guide, right, we could talk about some of the shift in the grilling season in the quarter or what happened in China. But quite frankly, your top line's actually still pretty strong. And you're exactly in line, for the most part, where you were relative to Q1 on a year stack basis. So it seems like it's more of a margin expansion expectation in the back half versus a big top line acceleration relative to the first half. Is that a fair summary?

We did talk about some of the shift in the grilling season in the quarter or what happened in China.

But quite frankly your top line is actually still pretty strong and your big exactly in line for the most part where you were relative to Q1 on a two year stack basis. So it is it seems like it's more of a margin expansion expectation in the back half versus a big topline acceleration relative to the first half is that a fair summary, yes, I think you got that right. Robyn you remember that the fourth quarter. Some of the challenges we're going to have really favorable mix in the back half.

Mike Smith: Yeah. I think I think you got that right, Rob. And remember, the fourth quarter and the challenges, we're going to have really favorable mix in the back half, you know, compared to 2018, based on what we saw last year. And the other thing that someone mentioned, CCI before, CCI builds during the year. So that does help margin also.

Overall compared to 2018.

Based on what we saw last year and the other thing that someone mentioned.

Before she got build during the year. So that does help margin also right and you know probably I'm glad you made the point about the sales growth being solid and.

[Analyst] (Barclays): Right. And you know, Rob, I'm glad you made the point about the sales growth being solid and took just a step back on the overall picture, because you know, like last quarter, this was really a solid, no-drama quarter. We put together two pretty undramatic, solid performances, year-over-year. We had, you know, solid sales growth in this quarter at nearly 3% in constant currency, which, you know, compares, you know, very strongly to our peers. You know, through the first half, we're a little over 3.5% on all of sales growth, constant currency, all of it, organic. As we've signaled all year, we expect a stronger second half. We've had good operating profit and growth and margin expansion. It's actually in line with our algorithm.

Andrew Lazar: Right. And you know, Rob, I'm glad you made the point about the sales growth being solid and took just a step back on the overall picture, because you know, like last quarter, this was really a solid, no-drama quarter. We put together two pretty undramatic, solid performances, year-over-year. We had, you know, solid sales growth in this quarter at nearly 3% in constant currency, which, you know, compares, you know, very strongly to our peers. You know, through the first half, we're a little over 3.5% on all of sales growth, constant currency, all of it, organic. As we've signaled all year, we expect a stronger second half. We've had good operating profit and growth and margin expansion. It's actually in line with our algorithm.

And the.

And look to took just to step back on the on the whole.

Overall picture because.

Like last quarter this was really a.

Solid no drama quarter, we've put together two pretty undramatic solid performances year to year, we had solid sales growth in this quarter at nearly 3% in constant currency, which compares very strongly to to our peers I'm seeing it through the first half from a little over 3.5% on all of the sales growth constant currency all of it organic.

And as we've signaled all year, we expect a stronger second half we said good operating profit growth and margin expansion, it's actually in line with our algorithm and a quarter by quarter, we're putting together a strong 2019 and very confident in our outlook on the second half and I think that.

[Analyst] (Barclays): You know, quarter by quarter, we're putting together a strong 2019. We're very confident in our outlook on the second half. I think that those are some really good points you raised.

Andrew Lazar: You know, quarter by quarter, we're putting together a strong 2019. We're very confident in our outlook on the second half. I think that those are some really good points you raised.

So it's a really good points you raised.

Guys. Thank you very much I appreciate it.

[Analyst] (Deutsche Bank): Guys, thank you very much. I appreciate it.

Rob Dickerson: Guys, thank you very much. I appreciate it.

Thank you and ladies and gentlemen. This concludes our question and answer session I will turn the floor back to Mr. Christian is for any final comments.

Operator: Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Kurzius for any final comments.

Lawrence Kurzius: Great. Hey, thank you, everyone, for your questions and for participating on today's call. McCormick is a global leader in flavor. We're differentiated with a broad and advantaged portfolio, which continues to drive growth. We have a growing and profitable business and operate in an environment that's changing at an ever-faster pace. We're responding readily to changes in the industry with new ideas, innovation, and purpose. With a relentless focus on growth, performance, and people, we continue to perform strong globally and build shareholder value. Our Q2 financial results, both across our consumer and flavor solutions segments, were strong. We have confidence in our fiscal year outlook. We're well-positioned to deliver another strong year in 2019.

Great Hey, Thank you everyone for your questions and for participating on today's call karmic as a global leader in flavor and we're differentiated with a broad an advantage portfolio, which continues to drive growth, it's growing and profitable business and operate in an environment that is changing at an ever faster pace are responding readily to changes in the industry with new ideas innovation a purpose for the relentless focus on growth performance in people, we continue to perform strong globally and build shareholder value.

Our second quarter financial results, both across our consumer and flavor solutions segments was strong we have confidence in our fiscal year outlook and we are well positioned to deliver another strong year in 2019.

[Company Representative] (McCormick & Company): Thank you, Lawrence. Thanks to all for joining today's call. If you have any further questions regarding today's information, you can reach us at 410-771-7140. This concludes this morning's conference call. For all of you in the US, enjoy your Fourth of July holiday next week. Grill some.

Kasey Jenkins: Thank you, Lawrence. Thanks to all for joining today's call. If you have any further questions regarding today's information, you can reach us at 410-771-7140. This concludes this morning's conference call. For all of you in the US, enjoy your Fourth of July holiday next week. Grill some.

Thank you Lauren and thanks to all for joining todays call. If you have any further questions regarding today's information you can reach us at 4.07717140. This concludes this mornings conference call and for all of you in the U.S. enjoy your fourth of July holiday next week.

Real stuff.

Q2 2019 Earnings Call

Request a DemoDemo

MKC

McCormick & Co

Earnings