McCormick & Company, Incorporated (NYSE:MKC) Q1 2023 Earnings Call Transcript

McCormick & Company, Incorporated (NYSE:MKC) Q1 2023 Earnings Call Transcript March 28, 2023

Kasey Jenkins: Good morning. This is Kasey Jenkins, Chief Strategy Officer and Senior Vice President, Investor Relations. Thank you for joining today’s first quarter earnings call. To accompany this call, we’ve posted a set of slides at ir.mccormick.com. With me this morning are Lawrence Kurzius, Chairman and CEO; Brendan Foley, President and COO; and Mike Smith, Executive Vice President and CFO. During this call, we will refer to certain non-GAAP financial measures. The nature of these non-GAAP financial measures and the related reconciliations to GAAP results are included in this morning’s press release and slides. In our comments, certain percentages are rounded. Please refer to our presentation for complete information. Today’s presentation contains projections and other forward-looking statements.

Actual results could differ materially from those projected. The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or other factors. Please refer to our forward-looking statements on Slide 2 for more information. I will now turn the discussion over to Lawrence.

Lawrence Kurzius: Good morning, everyone. Thanks for joining us. We are pleased with the start of the year. We delivered solid first quarter results that reflect strong demand and early results from our actions to increase our profit realization in 2023. Our sales performance reflects the strength of our broad global portfolio and the effective execution of our strategies. Our global operating effectiveness, or GOE program, is yielding results with first quarter cost savings in line with our expectations. The progress we are making on gross margin improvement reflects the level of urgency with which we are addressing the pressure points from last year. These results, combined with the strong demand we continue to expect across our portfolio and our diligent approach to optimizing our cost structure, bolster our confidence in our plan and our 2023 full year outlook.

Turning to Slide 5. In the first quarter, we drove 3% sales growth or 5% in constant currency. Our constant currency sales growth reflected strong underlying business performance with an 11% contribution from pricing, partially offset by a 3% decline in underlying volume and product mix, a planned 1% decline from in basics divestiture and the exit of our consumer business in Russia, and an expected 1% year-over-year volume decline from lower consumption due to COVID-related disruption in China, which we expect to see a return towards normal consumption trends in the coming quarters. Our underlying first quarter sales performance positions us well for continued top line growth for the balance of the year. Our growth in the first quarter was led by outstanding performance in our Flavor Solutions segment with positive momentum continuing in all three regions.

In our Consumer segment, our underlying sales growth was led by the Americas region. Moving to profit. Our adjusted operating income was comparable to the first quarter of last year and in constant currency increased 2%. Higher interest expense and a higher effective tax rate more than offset our adjusted operating income growth in the quarter, resulting in a 6% decline in adjusted earnings per share. I’d like to say a few words about our gross margin performance, which Mike will cover in more detail in his discussion of our adjusted operating income growth drivers in a few moments. We drove considerable improvement in our gross margin performance in the first quarter. Our gross margin reflects the continued recovery of the cost inflation or pricing lagged over the last two years as well as cost savings from our CCI and GOE programs.

As we’ve said previously, in 2023, we plan to fully recover the inflation our pricing previously lagged as well as offset current year inflation through our pricing actions and other levers. Our gross margin also reflects the result of our diligence in optimizing our cost through our GOE program. This is progressing as planned and remains a key focus. We expect the impact of our GOE program to scale up as the year progresses, and we remain on track to realize $75 million of cost savings in 2023, which we will take to the bottom line because of our actions to normalize our supply chain costs and to streamline our organization. We remain confident that we have the right plans in place and are taking the right actions. It’s still early, but our first quarter results speak for themselves, and we expect to continue driving profitable growth at an accelerated rate for the balance of the year.

Demand is strong. We’re driving improvement in our margin profile and optimizing our cost structure effectively. Now let’s move to first quarter business updates for each of our segments as well as discussion of our growth plans. Turning to our Consumer segment on Slide 6. Our underlying performance was strong, reflecting the effective execution of our pricing actions and continuing positive momentum in our consumption trend, even with lapping the elevated at-home consumption in the first quarter of 2022 due to Omicron in the Americas and the EMEA regions. That performance was partially offset by the impacts related to the sale of Kitchen Basics, our exit of Russia and the COVID-related disruption in China. Beginning in the second quarter, the activation of exciting growth initiatives, as well as lapping the impact of last year’s COVID-related shutdowns in China and the exit of our consumer business in Russia, which we began to exit in the second quarter of last year, is expected to drive an acceleration of our consumer segment growth.

Now for some highlights by region, starting with the Americas. Our total U.S. branded portfolio consumption, as indicated by our IRI consumption data and combined with unmeasured channels, grew 5% in line with our shipments. As we anticipated, the dynamics between consumption and retail inventory levels have begun to normalize as we move beyond the holiday season impact, and we anticipate greater alignment between consumption and shipments going forward. Importantly, our volume performance in the first quarter was better than the fourth quarter on higher price realization. In spices and seasonings, both consumption dollars and units accelerated sequentially from the last several quarters, with strength in our seasoning blends, which provide consumers both convenience and flavor exploration.

Early results of our Lawry’s everyday spice range, our largest innovation launch sense pre-pandemic, continue to be positive. We are seeing incremental sales and profit to the category. Over half of the purchases are from new virus to McCormick and overall incremental to the category. Hot sauce remains on fire with double-digit growth of both Cholula and Frank’s RedHot in the U.S. and Canada. We continue to build excitement with our hot sauce brand marketing initiatives and reached the younger generation, most recently through gaming. And our big game campaign during the quarter, our flavor pack version of Fortnite, the Floor is Flavor, had players navigating an immersive chicken wing shaped island and a volcano that’s put Frank’s RedHot and included in partnership with TGI Fridays and DoorDash, a free chicken wings offer.

This was our best big game campaign, capturing over 1 billion impressions in North America. And with the resolution of the long-running shortage of French’s mustard bottles, we drove over 20% consumption growth for the second consecutive quarter. Our creamy muster launch last year continues to perform very well, with another flavor launch coming this year. Finally, in the Americas, we continue to drive double-digit consumption growth in e-commerce, led by spices and seasonings, but we’re realizing high returns on our investments, gaining new customers and growing with new products. For instance, McCormick Corn seasonings and Frank’s variety packs are both off to a great start following their online introductions earlier this year. In EMEA, we continue to have solid share performance of herbs, spices and seasonings in the U.K., Eastern Europe and Italy, somewhat offset by softer performance in France.

We’re continuing to gain share on Frank’s RedHot in the U.K. are building momentum with Cholula. We’re driving the U.K. hot sauce category growth. We’re taking meaningful progress across the region and expanding our distribution and gaining share in the fast-growing discount channel. Our investments in brand marketing, merchandising and new products are proving to be effective in driving growth. In the Asia Pacific region, growth for the quarter and the year was impacted by the exit of low-margin business in India, which we will have lapped after this quarter as well as the COVID-related disruptions in China. As we have moved past the Chinese New Year, we are seeing a return to normalization. We continue to expect a benefit beginning in the second quarter from lapping the impact of last year’s disruptions.

Outside of the China and India impact, growth in the region was driven by new products and brand marketing initiatives. Frank’s RedHot and Cholula performance was strong in Australia and extending the power of our brands, we have launched Old Bay into the Australian market and Cholula into Southeast Asia. As always, we continue to fuel our Consumer segment growth with the power of our brands as well as our brand marketing, new products and category management initiatives. We’re excited about the growth plans we’re executing and expect they will drive an acceleration of growth for the balance of the year. First, as we mentioned at CAGNY, we are completely renovating our U.S. core everyday spice of portfolio with consumer-preferred packaging as well as through leveraging new flavor seal technology.

The atmosphere in the bottle is nitrogen flushed to remove oxygen, which means visibly fresher flavor, brighter color and stronger aroma. The modern new Snap-type trademark lid seals in the aroma and freshness. We’re also printing the product names and an easy-to-read Best Buy date on the top. The new high-quality bottle and label design highlights the transparency and quality of our spices and herbs, and the bottle is made of 50% post-consumer recycled plastic, approximately a 20% carbon footprint reduction from the current package. We are really excited about these changes and so are consumers. Testing has confirmed 40% higher freshness per session, 2x higher preference and a 25% increase in loyalty among current buyers. The products began rolling out last month.

The transition on store shelves will happen over the course of the year, supported with our highest spend brand marketing campaign of the past five years. Importantly, the new packaging fits right into the existing shelf stock. This is a seamless transition for our retail partners that we expect to drive category performance. This initiative, coupled with other new product introductions, I’ll mention in a minute, along with our stabilized service levels, will build total distribution points and market share improvement as we go through the year as we outlined last month at CAGNY. We’re also expanding into the fast-growing Mexican aisle with authentic Mexican flavor of Cholula in new formats. We are launching Cholula Taco recipe as well as sauces based on authentic Mexican formulas and crafted in Mexico using locally sourced fresh tomatoes and.

Retail acceptance has been strong and consumers will find these new products and the authenticity they are looking for on U.S. shelves soon. Product began shipping yesterday ahead of, and the rollout will continue over the course of the second quarter. We’re launching new products in the first half of 2023 to inspire consumers flavor exploration as well as the opinions consumers are looking for. In the Americas, we are kicking off the grilling season with new flavors including a Griller’s Choice marinate you can use as three different flavors. And we’re really excited about our new Stubs Master series made with technology from our FONA acquisition, these dry seasoning rubs capture real authentic hardwood smoke flavor. Leveraging the product successes of 2022, we are extending our Tabitha brown line into new flavors, formats and channels, and we’re also launching a French’s creamy roasted garlic mustard.

In direct-to-consumer, we continue to grow our platform with new innovative flavors as a testing ground and in the club channel, we’re launching a world flavors line. In EMEA, we’re enabling consumers to discover the authentic taste of America by introducing old Bay to the U.K. market as well as introducing a new line of products leveraging the French’s brand, including American favorites recipe. In the U.K., we also just launched Schwartz brand gravy, which are beating the top competitor on taste. In APZ, we’ve recently launched meal basis, a favorite Keane’s recipes and will be launching a Gourmet Garden SD lemon paste, both making consumers flavor exploration easier. In China, we’ve introduced new packaging for our Chicken Bullion product, a pouch with a resealable port cap that makes it convenient for consumers and extends the open product shelf life by locking up moisture.

We’re continuing to build our heat platform across all regions with the launch of new products, including in the U.S., Gourmet Nashville hot chicken season, Frank’s RedHot Dill Pickle hot sauce and a Cholula reserve crafted with 100% tequila and our flavor forecast of the year, Vietnam’s agent sale season. In China, we’re introducing iconic Chinese city spicy blend and then the U.K. Frank’s RedHot spicy recipe mixes. Across all regions, we’re increasing our brand marketing investments in 2023 and expect the most significant year-over-year increase in the second quarter. We will continue to support our brands with messaging on everyday use, value and the superiority of our ingredients and flavors and more specifically, with mustard supply issues resolved, we’ve launched a flavor on campaign for mustard or elevating our mother of sauce, Cholula campaign to support the launch of the new format and capitalize on.

And of course, with grilling season starting during the quarter, we plan to reach grillers with our just flame and flavor campaign. A robust growth plan gives us confidence in continuing to drive positive momentum. We believe they will all be a win for consumers, customers, our categories and McCormick, differentiating us even more and strengthening our flavor leadership in core categories. Turning to Flavor Solutions on Slide 9. Our sales performance in this segment continues to be outstanding. This was our eighth consecutive quarter with double-digit sales growth. Our first quarter growth was led by pricing actions in all three regions, which as we expected, accelerated versus previous quarters. Now for regional highlights. Our Americas first quarter strong sales growth was led by our Flavors product category.

Within Flavors, snack seasoning growth was strong including volume growth related to new products and strengthen our customers’ iconic products, partially fueled by their marketing as well as our improved ability to service our customers as we began to realize the benefit of the capacity we’re bringing online. Flavors for Performance Nutrition and health end market applications also contributed to our strong performance as we continue driving double-digit sales growth. We are winning with new customers and new products. Volume was tempered in the quarter by the pruning of some low-margin business. The impact of a very cold December on the away-from-home part of our portfolio and lower volume of alcoholic beverage flavors due to what must have been a drier January than last year.

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In EMEA, we continue to drive broad-based growth across the portfolio, which was led by higher sales to our quick service restaurant customers in the first quarter. Overall, our price realization nearly doubled versus last quarter. And in APC, we delivered solid volume growth in the markets outside of China, driven by demand from quick service restaurants, or QSRs, for our products to heat up their hot and spicy offerings. Overall, labor solutions demand has remained strong, particularly in certain parts of our business in our Americas and EMEA regions. As we continue to bring additional capacity online and reduce both supply chain pressure and the extraordinary cost to service our customers, we appreciate their patience and collaboration. We’re continuing our positive sales growth momentum in Flavor solutions, and we’re committed to restoring profitability in this segment, recovering margin while ensuring we keep our customers in supply and driving growth for both McCormick and our customers.

We’re confident we will achieve margin recovery. In our January earnings call, we set our price increases had just begun to catch up with the pace of inflation and we were beginning to recover the cost inflation or pricing lag in the last two years. This is continuing at an even greater rates in the first quarter. And earlier, I discussed cost through our two lead program, which will contribute to the Flavor Solutions margin recovery. GOE will have a significant impact in the Flavor Solutions segment. And finally, we continue to focus on driving growth in high-margin parts of our portfolio such as the flavor product category volume growth I mentioned a few minutes ago in the Americas region. Now I’m excited to share the growth plans we’re executing on and expect will continue to drive our growth momentum.

We continue to fuel our Flavor Solutions segment growth using our differentiation, including our culinary foundation, our unique and powerful consumer insights advantage, our proprietary technologies and our passion for providing our customers with a differentiated collaborative experience. While we cannot get too specific about product development, following a strong year of innovation in 2022, we carried a robust new product pipeline into 2023. As we mentioned at CAGNY, we are specifically targeting opportunities to grow in high-growth end markets. Applications such as savory snacks, alcoholic beverages and Performance Nutrition and have outpaced market growth and as I just shared, our robust growth momentum continued in the first quarter.

As we expect it will the balance of the year, the capabilities we built for these categories are creating significant top line opportunities. The power of McCormick and FONA together continues to fuel greater opportunities for growth. This acquisition is exceeding our expectations. We’re capitalizing on opportunities to increase our sales to existing customers by cross-selling across our more comprehensive product offering and target new customers. We’re leveraging our global footprint and capabilities to drive future growth. We are currently in the process of expanding performance nutrition into Canada as well as localizing confectionery flavors in for our FONA customer. Finally, in branded foodservice, we have a robust 2023 innovation agenda, launching more than double the new items than in 2022, including Frank’s RedHot, Nashville Hot, a line of Cholula Street Tacos, McCormick culinary Global blend and a French’s portion control package.

Our plans include continuing to leverage our culinary partnerships, inspire menu ideas with our customers, win placement on away-from-home menus, including with quick service restaurants and drive growth with promotional activities. Our robust growth plans in Flavor Solutions also give us confidence in continuing our growth trajectory and drive our Flavor Solutions leadership. Now for summary comments before turning it over to Mike. Turning to Slide 11. Global demand for flavor remains the foundation of our sales growth, and we’ve intentionally focused on great fast-growing categories that will continue to differentiate our performance. We continue to capitalize on the long-term consumer trends, healthy and flavorful cooking, increased digital engagement, trusted brands and purpose-minded practices.

McCormick is uniquely positioned to capitalize on its demand for great taste, with the breadth and reach of our strong global flavor portfolio, we are delivering flavor experiences for every meal occasion. Through our products and our customers’ products and are driving growth, we are end-to-end flavor. The strength of our business model, the value of our products and capabilities and the execution of our proven strategies give us confidence in our growth momentum and ability to continue navigating the dynamic mobile environment. As we look ahead to the balance of the year, we will continue to focus on capitalizing on strong demand, optimizing our cost structure and positioning McCormick to deliver sustainable growth. We have robust growth plans in place including building momentum with our new products and heat platform and are delivering on our commitment to increasing our profit realization.

We are confident with the successful execution of our planned and concrete actions we will drive profitable growth in 2023. I want to recognize McCormick employees around the world as they drive our momentum and success. I want to also thank all of our customers, suppliers and investors for their collaboration and patients as we move beyond the unique environment we’ve been operating in since the onset of the pandemic. The fundamentals that drove our historical financial performance remain intact, and we are confident we will continue to not only deliver strong sales growth, but also drive total shareholder return at an industry-leading pace. Now, I’ll turn it over to Mike.

Mike Smith: Thanks, Lawrence, and good morning, everyone. Starting on Slide 14. Our top line constant currency sales grew 5% compared to the first quarter of last year. This growth was tempered by a 2% unfavorable impact from the Kitchen Basics divestiture, the exit of the consumer business in Russia and lower consumption due to the COVID-related disruption in China. In our Consumer segment, constant currency sales increased to 1%, reflecting a 9% increase from pricing actions, partially offset by a 3% volume decline related to the Kitchen Basics, Russia and China impacts I just mentioned as well as a 5% decline in all other volume and product mix. On Slide 15, consumer sales in the Americas increased 4% in constant currency, including a 2% decline from the Kitchen Basics divestiture.

Growth was broad-based across all product categories, driven by pricing actions, partially offset by lower volume. Lapping elevated demand due to Omicron in the first quarter of last year contributed to the volume decline. In EMEA, constant currency consumer sales declined 2%. Pricing actions were more than fully offset by lower volume and product mix, including a 4% unfavorable impact from the lower sales in Russia. Lapping elevated demand due to Omicron in the first quarter of last year contributed to the volume decline. Constant currency consumer sales in the Asia Pacific region declined 8%, driven by a decline in volume, partially offset by pricing actions. The combination of lower volume in China due to COVID-related disruptions and the exit of lower-margin business in India drove an 11% reduction in volume.

Turning to our Flavor Solutions segment on Slide 18. We grew first quarter constant currency sales of 12%, reflecting a 13% increase from pricing actions and a 1% decline in volume and mix. In the Americas, Flavor Solutions constant currency sales rose 12%. Pricing actions contributed to higher sales across the customer base, which skews to packaged food and beverage companies as well as branded foodservice customers. Volume and product mix declined in the quarter as strong volume growth in snack seasonings and flavors for Performance Nutrition and health applications was more than fully offset by the impact of pruning of low-margin businesses and lower volume of away-from-home products as our customers’ business was impacted by cold weather.

In EMEA, constant currency sales increased 17%, with pricing actions partially offset by lower volume and product mix. EMEA’s Flavor Solutions outstanding growth was broad-based across its portfolio, led by higher sales to QSR customers. First quarter volume declined, driven primarily by softness in some of our packaged food and beverage customers volume within their own businesses. In the Asia Pacific region, Flavor Solutions sales grew 5% in constant currency with pricing actions partially offset by lower volume and product mix. Volume and product mix declined as the impact of scale back QSR activities in China due to COVID-related disruptions more than offset QSR volume growth outside of China. As seen on Slide 22, gross profit margin declined 80 basis points in the first quarter versus the year ago period.

This is an improvement from our performance last year. While more work needs to be done, we are pleased with our progress and are confident in the actions underway to continue driving further improvement over the balance of the year. Gross margin in the quarter was impacted by several drivers. First, we’re still incurring elevated costs in Flavor Solutions to meet high demand in certain parts of our business. While painful in the short term, we know making these investments to support our customers is the right approach to driving long-term growth. That said, we continue to progress on reducing the level of these costs in the first quarter. Also in Flavor Solutions, we incurred dual running costs related to the transition to our new U.K. Peterborough manufacturing facility.

We expect the balance of the year costs to be comparable to 2022 and a sales shift between our Consumer and Flavor Solutions segments as compared to last year unfavorably impacted gross margin. Partially offsetting the unfavorable drivers I just mentioned were our CCI-led cost savings as well as the cost savings from our GOE program that Lawrence discussed, and which were in line with our expectations. Finally, end of note, we offset current year inflation in the first quarter, which we expect will be the highest of the year through our pricing actions. And as Lawrence said, we continue to recover the cost inflation or pricing lagged over the last two years as we planned. While the net of these impacts drives gross profit dollar growth, there is level of dilution that tempers the actual gross margin percentage.

Now moving to Slide 23. Selling, general and administrative expenses, or SG&A, were comparable to the first quarter of last year. Higher distribution costs were offset by CCI-led and GOE cost savings as well as lower planned brand marketing and employee benefits expenses in the quarter. For the year, we continue to expect both brand marketing and employee benefits expenses to be higher than last year. As a percentage of sales, SG&A declined 40 basis points, driven by leverage from sales growth. Higher sales, partially offset by lower gross margin, resulted in a constant currency increase in adjusted operating income of 2% compared to the first quarter of 2022. In constant currency, Consumer segment adjusted operating income increased 6%, and in the Flavor Solutions segment, it declined 11%.

Turning to interest expense and income taxes on Slide 24. Our interest expense increased significantly over the first quarter of 2022, driven by the higher rate environment. Our first quarter adjusted effective tax rate of 21.8% compared to 19.7% in the year ago period. Both periods were favorably impacted by discrete tax items with a more significant impact last year. At the bottom line, as shown on Slide 25, first quarter 2023 adjusted earnings per share was $0.59 as compared to $0.63 for the year ago period. The decrease was due to higher interest expense and a higher first quarter adjusted effective tax rate. On Slide 26, we’ve summarized highlights for cash flow and the quarter end balance sheet. Our cash flow from operations for the first quarter was $103 million compared to $18 million in the first quarter of 2022.

The increase was primarily driven by lower incentive compensation payments. We returned $105 million of cash to our shareholders through dividends and used $62 million for capital expenditures this quarter. We expect 2023 to be a year of strong cash flow, driven by our profit and working capital initiatives. Our priority is to continue to have a balanced use of cash, funding investments to drive growth, returning a significant portion to our shareholders through dividends and paying down debt. We remain committed to a strong investment-grade rating, and we have a history of strong cash generation and profit realization. Now turning to our financial outlook on Slide 27. Our 2023 outlook reflects our continued positive top line growth momentum and with the optimization of our cost structure, increased profit realization.

We expect to drive margin expansion with strong sales and adjusted operating income growth that reflects the health of our underlying business performance as well as the net favorable impact from several discrete drivers. We expect our adjusted operating profit growth will be partially offset below operating profit by higher interest expense and a higher projected effective tax rate. We also expect there will be a minimal impact from currency rates, although there will be a timing aspect as we project an unfavorable act in the first half of the year and a favorable impact in the second half of the year. At the top line, we expect to grow sales 5% to 7%, driven primarily by the wrap of last year’s pricing actions combined with new pricing actions we are taking in 2023.

We expect several factors to impact our volume and product mix over the course of the year, including price elasticities, which are consistent with ’22 at lower levels than we have historically experienced, but in line with the current environment. A 1% estimated benefit from lapping last year’s impact of COVID-related disruptions in China, although we expect the impact will vary from quarter-to-quarter given 2022’s level of demand volatility. The divestiture of our Kitchen Basics business in August of last year and the exit of our consumer business in Russia during last year’s second quarter, and finally, the continual pruning of lower-margin business from our portfolio. As always, we plan to drive growth through the strength of our brands as well as our category management, brand marketing, new products and customer engagement plans.

Our 2023 adjusted gross margin is projected to range between 25 to 75 basis points higher than 2022. Adjusted gross margin expansion reflects a favorable impact from pricing, cost savings from our CCI-led and GOE programs, partially offset by the anticipated impact of a low to mid-teens increase in cost inflation. We expect cost pressures to be more than offset by pricing during the year as we recover the cost inflation or pricing lagged the last two years. Moving to adjusted operating income. First, let me walk through some discrete items and their expected impact to our 2023 adjusted operating profit growth. First, the cost savings from our GOE program are expected to have an 800 basis point impact. The savings from this program are expected to scale up as the year progresses.

Next, the benefit of lapping the impact of COVID-related disruptions in China is expected to have a 300 basis point favorable impact. The Kitchen Basics divestiture is expected to have an unfavorable 100 basis point impact. And finally, an even 100 basis point unfavorable impact is expected as we build back incentive compensation. The net impact of these discrete items is a favorable 200 basis points. This favorable impact, combined with expected 7% to 9% underlying business growth, which is driven by our improved operating momentum, results in our adjusted operating income projection of 9% to 11%. In addition to the adjusted gross margin impacts I just mentioned, this projection also includes a further low single-digit increase in brand marketing investments and our CCI cost savings target of approximately $85 million.

We are anticipating a meaningful step-up in interest expense, driven by the higher interest rate environment, which will impact our floating debt. We estimate that our interest expense will range from $200 million to $210 million in 2023 and spread evenly throughout the year. As a reminder, in 2022, we realized an $18 million favorable impact from optimizing our debt portfolio, which we will lap in 2023. The net impact of these interest-related items is expected to be approximately an 800 basis point headwind to our 2023 adjusted earnings per share growth. Our 2023 adjusted effective income tax rate is projected to be approximately 22% based upon our estimated mix of earnings by geography as well as factoring in a level of discrete impacts.

Versus our 2022 adjusted effective tax rate, we expect this outlook is to be a 100 basis point headwind to our 2023 earnings growth. To summarize, our 2023 adjusted earnings per share expectations reflect strong underlying business growth of 8% to 10% and a 2% net favorable impact from the discrete items I just mentioned impacting profit, the GOE program, the China recovery, the Kitchen Basics divestiture and the employee benefit cost rebuild, partially offset by the combined interest and tax headwind of 9%. This results in an expected increase of 1% to 3% or a projected guidance range for adjusted earnings per share in 2023 of $2.56 to $2.61. We are projecting strong operating performance in 2023 with the continued top line momentum, significant optimization of our cost structure and strong adjusted operating profit growth as well as margin expansion.

While this performance is expected to be tempered by interest and tax headwinds, we remain confident in the underlying strength of our business and that with the execution of our proven strategies, we will drive profitable growth in 2023.

Lawrence Kurzius: 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 29. Our first quarter sales growth reflects the strength of our broad global portfolio and the effective execution of our strategies. Our underlying business performance was driven by our pricing actions and strong ongoing demand. Our first quarter progress on margin improvement reflects the level of urgency with which we are addressing the pressure points from last year. We are committed to increasing our profit realization, and our actions are yielding results on optimizing our cost structure and recovering the cost inflation or pricing lag last year. We expect our progress to scale up as the year progresses.

We have robust growth plans in place, including building momentum with product innovation and renovation and are driving improvement in our margin profile. We expect to drive profitable sales growth at an accelerated rate in the balance of the year and have bolstered confidence in delivering our outlook for 2023 in building shareholder value. The compounding benefit of our relentless focus on growth, performance and people continues to position McCormick to drive sales growth. This coupled with our focus on recovering cost inflation and lowering costs to expand margins, will allow us to realize long-term sustainable earnings growth. Now for your questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. Thank you. And our first question comes from the line of Ken Goldman with JPMorgan. Please proceed with your question.

Ken Goldman: I was just curious how 1Q came in versus your internal expectations. I guess, post in a broad sense, and maybe if anything specific stands out in terms of drivers. I won’t ask if you considered raising guidance. I assume it’s a little early in the year. But if the quarter was above what you would forecast, were there specific reasons that stand out. And I guess, is there any reason to think some of those drivers can’t continue into 2Q and beyond maybe?

Lawrence Kurzius: Ken thanks. We are off to a solid start on the year. That is for sure. And we’re really pleased with the start of the year. We had good sales growth and we made excellent progress on our plans for improved profit realization. Most of our team that we have planned for the years in place and our GOE program is beginning to show results. And as I said, we are bolstered in our confidence — in our guidance, in part because the quarter did come in a little bit better than we planned. There’s no one specific thing that stands out. But overall, it was a little bit better. We had a sense of that confidence already when we spoke at CAGNY. And — from where we were at that time, it came in pretty much as we thought.

Mike Smith: And as you said, Ken, the first quarter to your March Madness, I think we put some points on the board, and we’re going to continue focusing on growing the business. And as Lawrence said, we’ve made real good progress on our cost agenda to it, which is great.

Ken Goldman: Got it. And then sort of along the same lines, but maybe more specifically, Flavor Solutions volume, they were down slightly in the first quarter, but was our hardest comp of the year. It was high pricing. It seems that they’re doing pretty well in the scheme of things. Just curious how to think about modeling volumes for Flavor Solution into and for the rest of the — 2Q rather and for the rest of the year, just given that there may be a little more moving pieces than usual. You have that pricing. And then you guys mentioned some headwinds in 1Q, maybe some lower sales to CPGs in EMEA, for example. So I just wanted to get a sense of that kind of cadence as we go through the year as far as you can tell now.

Lawrence Kurzius: Sure. It was strong performance. In our guide for the year, we’ve said our volumes are going to be flattish overall. And I’d say our expectation by segment is maybe a little bit — a little bit positive in Flavor Solutions, a little bit negative in the Consumer. But overall, all of it within kind of a plus or minus one range versus flat. And so I think that’s a good way to think about it. We do expect to see strong pricing impact the year as we go through the whole year on Flavor Solutions.