McCormick & Company, Incorporated (NYSE:MKC) Q2 2023 Earnings Call Transcript June 29, 2023

McCormick & Company, Incorporated misses on earnings expectations. Reported EPS is $0.48 EPS, expectations were $0.57.

Kasey Jenkins: Good morning. This is Kasey Jenkins, Chief Strategy Officer. Thank you for joining today’s second 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. I would also like to welcome [Indiscernible] joining us on this call this morning. [Indiscernible] joined McCormick earlier this month as Vice President, Investor Relations. 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 the GAAP results are included in this morning’s press release and slides.

In our comments, certain percentages are rounded. Please refer to our presentation for complete information. Today’s presentation contains projections and other forward-looking statements. Actual results could differ materially from those projected. The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or other factors. Please refer to our forward-looking statements on slide two for more information. I will now turn the discussion over to Lawrence.

Lawrence Kurzius: Good morning, everyone. Thanks for joining us. To start, last night, we announced that Brendan Foley will become McCormick’s next Chief Executive Officer on September 1, and he is joining the Board of Directors immediately. I could not be more pleased with Brendan as my successor. I will continue to serve McCormick and all of its stakeholders as Executive Chairman of the Board once Brendan becomes CEO. This is a transition that we have been planning internally as part of an orderly multi-year succession plan, and it’s exciting to finally share the news with all of you. As many of you know, Brendan is exceptionally well qualified and prepared to lead McCormick. He deeply understands the importance of delivering continued strong growth, while doing the right things for people, communities, and the planet.

With our advantaged competitive positioning, supported by the growing demand for flavor and with our tremendous depth of talent, I have utmost confidence that McCormick, under Brendan’s leadership, will continue to drive differentiated growth and long-term shareholder value. Congratulations, Brendan. Now on to our earnings update. First, I’ll provide an overview of our second quarter results. Brendan will provide the business segment update, Mike will provide details on our financial results and 2023 outlook, and after your questions, I will have some final comments. Starting with our second quarter results. We’re pleased with our strong second quarter performance, which reflects sustained demand across our business and effective execution of our strategy.

We delivered double-digit constant currency sales growth. Our pricing actions are in place and, importantly, our volume performance improved. We continue to see top line momentum in our business, positioning McCormick for sustained growth. Additionally, we drove meaningful year-over-year margin expansion in both segments, underscoring our focus on profit realization. Our global operating effectiveness or GOE program, which includes the optimization of our supply chain cost structure, is yielding results. We grew adjusted earnings per share of 25% driven by significant adjusted operating income growth, and despite interest rate and tax headwinds. Year-to-date, cash flow from operations more than doubled driven by higher earnings, I just mentioned and working capital improvements.

Notably, we’re reducing inventory levels as planned. Both segments in all regions contributed with strong growth. Our results benefited from our recovery in China. And while the timing and pace of recovery in our China business was less robust than anticipated, it was still strong, and we are confident in the contribution China will provide to our results as the year progresses. Overall, we are pleased with our execution and results during the first half of 2023. Our year-to-date 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 growth trajectory as we enter the second-half of the year. As such, we are raising our adjusted operating income and earnings per share outlook for the full-year.

Turning to slide five. In the second quarter, we drove 8% sales growth or 10% in constant currency. Our constant currency sales growth reflected strong business performance, with an 11% contribution from pricing and a 1% decline in volume and product mix. Netted in this volume decline are net 1% volume increase from China recovery, partially offset by our Kitchen Basics divestiture and the exit of our Consumer business in Russia, and 1% decline attributable to pruning low-margin business. As examples, we exited direct store delivery, DSD, of our bagged Hispanic products in our Americas consumer segment and a private label food service line in EMEA. From a segment lens, both the Consumer and Flavor Solutions segments delivered strong sales growth in each region.

In the Consumer segment, we continue to have strong price realization and we drove a sequential improvement in volume performance. Flavor Solutions, our exceptional performance continued with our ninth consecutive quarter of constant currency double-digit sales growth. Our sales performance demonstrates the strength of our broad global portfolio and positions us well for continued top line growth for the balance of the year. I’d like to share a few highlights about our gross margin performance, which Mike will cover in more detail in a few moments. We drove significant gross margin improvement, reflecting the continued recovery of the cost inflation or pricing lagged last year. Cost savings from our CCI and GOE programs and the impact of strategic decisions we’ve made to optimize our portfolio, with a focus on driving margin improvement as we continue to prune low-margin business.

Our gross margin expansion in the quarter was partially offset by higher SG&A as we build back incentive compensation as planned. Our adjusted operating income increased by 35% versus the second quarter of last year or, in constant currency, 36%. This growth drove an adjusted earnings per share increase of 25%, which also reflected higher interest and effective tax rate. We remain confident that we have the right plans in place and are taking the right actions. We are halfway through the year. Our year-to-date results speak for themselves. We expect to continue driving profitable growth for the balance of the year. Demand is strong. We’re driving improvements in our margin profile and optimizing our cost structure effectively. I want to thank McCormick employees worldwide for their collective power is driving our success.

I’m proud of the tremendous job that McCormick team has done navigating the dynamic environment over the last few years. I’d like to recognize their energy and excitement for the business, which is coming through in our results. Now I’d like to ask Brendan to share the second quarter business updates for our segments.

Brendan Foley: Thank you, Lawrence. Starting with our Consumer segment, on slide eight. Our underlying performance was strong reflecting our price realization and continuing positive momentum in our consumption trends. We continue to see sequential improvement. 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 7%. The difference between our sales and consumption was attributable to the retail sell-through of discontinued items and listing fees for an increase in the new distribution and products. For example, our new Cholula and Stubs items and Tabitha brown line expansions. As anticipated, our alignment between consumption and shipments is normalizing.

As usual, we expect some business fluctuations from period-to-period. In spices and seasonings, both consumption dollars and units accelerated sequentially from the last several quarters with unit strength in core products such as straight fill spices and vanilla, as well as our seasoning blends, which provide consumers both convenience and flavor exploration. Lunch-to-date results of our Lawry’s everyday spice range continue to be positive. We are seeing incremental sales and profits of the category, and like the first quarter, over half of the purchases are from new buyers to McCormick and overall incremental to the category. We also continue to see consumers trade up from private label. As our proprietary research indicates, consumers still preferred brands, even when under economic pressure.

Our excitement and distribution for this product line continues to build. The renovation of our U.S. core Everyday Spice in their portfolio is rolling out according to plan and is a seamless transition for our retail partners as it fits into existing shelf spots. At the end of the second quarter we had about 30% of our SKUs on shelf, we will continue to rollout the product over the course of the year and our significant brand marketing campaign will be ramping up at the end of the third quarter. Our larger-size Super Deal herbs and spices continue to benefit the category and McCormick with 11% consumption growth in the second quarter as consumers continue to put more at home. Super Deal’s purchase cycle is similar to that of smaller sizes even though they are 3 times the volume.

And household penetration remains greater than pre-COVID. We kicked off the grilling season at the end of the second quarter and early results are good. Frank’s RedHot and Cholula Hot Sauces, French’s mustard, Lawry’s Marinade’s, and McCormick mayonaisa, all delivered double-digit growth in the second quarter. With Stubs barbecue sauce, as well as Grill Mate’s seasoning blends and recipe mixes, following close with high-single-digit growth. We are expecting our new grilling products and strong promotions to heat up share performance. We’ve launched three new Grill Mates on-trend flavors, including Smash Burger and Garlic Butter, as well as Griller’s Choice Marinades, which you can use as three different flavors, all have had strong retailer acceptance.

We are really excited about our Stubs Real Smoke Rubs, which capture real authentic hardwood smoke flavor and Stubb Jalapeno and Honey Barbecue Sauce, which combines two trending flavor profiles and the nuance of heat and flavor that are Frank’s Smoke and Sweet Barbecue Wing sauce offers. We are fired up for the grilling season and expect the launch of our fire up brand marketing campaign in the third quarter to fire up consumer demand as well. Our expansion into the fast growing Mexican aisle with Cholula Taco recipe mixes and salsas based on authentic Mexican formulas is off to a great start following our Cinco de Mayo execution. During the third quarter, we are increasing our Cholula brand marketing investments to support our expanded portfolio.

Our third quarter brand marketing will also include increasing our investments for our McCormick Gourmet product line with our further for flavor campaign, highlighting our commitment to sustainability from farm to table. With our supply issues of this product line resolved, we are excited to be able to support this premium product offering for the first time in two years. And importantly, as we enter the second-half of the year, it is historically our most significant period. Finally, in the Americas, we continue to drive double-digit consumption growth in e-commerce, led by spices and seasonings. We are realizing high returns on our investments, gaining new customers, and growing with new products, such as our new Frank Dill Pickle hot sauce on our direct-to-consumer platform, which sold out in less than a week.

We will start to expand distribution in stores late this year. In EMEA, our second quarter was strongest quarterly sales performance in two years, our effective pricing accelerated to contribute double-digit growth and our volume performance improved sequentially. And in fact, we grew volume in the U.K. and Eastern Europe. Consumption data continues to indicate the consumer is holding up well in our categories and our share performance is solid. We are growing herbs, spices and seasonings share in Eastern Europe and in Italy, and our growth plans in France are also yielding results with improved share performance. We are excited about celebrating the 60th anniversary of our [Indiscernible] brand this year. We are scaling up our grilling activation in France, and partnering with key retailers to celebrate the brand’s anniversary and to spark another reason to celebrate around the grill.

In the U.K., we have also kicked off the grilling season and are building out our support and the discount channel featuring our Schwartz Grill Mates products. In both France and the U.K., we will be increasing our third quarter brand marketing investments to support grilling, as well as new products and to continue to emphasize our value messaging. Across the region, we are making meaningful progress in the fast growing discount channel, expanding distribution, and gaining share. Finally, we are gaining share of the U.K. hot sauce category. We continue to drive strong Frank’s RedHot performance and are accelerating our Cholula growth. With new distribution and e-commerce multi-packs, contributing significantly to our hot sauce growth. Overall, our investments in brand marketing, merchandising and new products are proven to be effective and are driving growth in EMEA.

In the Asia Pacific region, growth for the quarter reflected lapping the COVID related disruptions in China. While our business is recovering and our second quarter growth was robust, it was lower than our expectations as the pace of reopening is proving to be more gradual and consumer spending was pressured by broad-based economic pressures in region. We remain optimistic for a more normal operating environment emerging as the year progresses and we enter into 2024, driving sustainable growth as we executed on our strategies. Outside of China, new products and brand marketing initiatives drove double-digit growth in other markets with strength and branded spices and seasonings and Frank’s RedHot. Wrapping up to consumer update, we are fueling our growth with the power of our brands and increased innovation and brand marketing.

The supply issues we experienced last year are resolved, and we’re using our strength in category management to increase distribution and drive McCormick and category growth. Our year-to-date results bolster our confidence that we will continue to drive sales growth as we have in the past, before, during and after the pandemic. We believe the execution of our growth plans will be a win for consumers, customers, our categories, and McCormick, differentiating us even more and strengthening our leadership in core categories. Now turning to flavor solutions on slide 10. We are continuing our outstanding sales growth momentum in this segment. As Lawrence already mentioned, second quarter was our ninth consecutive quarter with double-digit constant currency sales growth.

We have previously shared our commitment to restoring profitability in this segment, and the second quarter is marketing an inflection point toward our objective to continuing to build our margin. Our growth was led by pricing actions in all three regions, we are priced to cover current year inflation and are continuing to recover the cost inflation our pricing lag the last two years. Recovery in the second quarter was even greater than the first. Now for regional highlights. Our Americas second quarter strong sales growth was led by our flavors product category. Within flavors, seasonings growth was strong, including volume growth related to new products, which is outpacing last year’s new product contribution, as well as our strength in our customers’ iconic products.

We are winning in seasonings with our heat platform, flavors for performance nutrition beverages, and health end market applications also contributed to our strong performance as we continue driving double-digit sales growth. We are winning with new products for existing and new customers. In branded food service, we continue to gain share in hot sauce, mustard, spices, and seasonings, with strength this quarter in Grill Mates and Lawry’s. Our grilling portfolio is firing up in branded food service just like in our consumer segment. Moving to EMEA, we continue to drive broad-based growth across the portfolio, led by higher sales to our quick service restaurant customers in the second quarter. Overall, our price realization accelerated again from last quarter.

Notably, we grew sales constant currency 15% in the quarter despite an impact from pruning low margin business as Lawrence mentioned earlier, and softness in some of our QSR impacted food and beverage customers’ volume within their own business. And in APZ, we also experienced recovery in China and are encouraged about the return to normal as growth was also driven by strong performance of our quick service restaurant customers’ promotions. Outside of China, we delivered double-digit growth with effective price realization, as well as solid volume growth driven by demand from QSRs. The strength of our flavor solutions portfolio and capabilities, including our differentiated customer engagement and culinary inspired innovation are driving our outstanding flavor solutions momentum.

The power of McCormick and FONA together continues to create exciting growth opportunities in the technically insulated and value-added part of our portfolio especially with our recent wins in Healthy Nutrition. And in branded food service, we expect new products, increased menu penetration, and culinary partnerships to drive continued growth. Our robust plans of flavor solutions bolster our confidence and continuing our growth trajectory and driving our flavor solutions leadership. Now, I’d like to turn it over to Mike to provide details on our financial performance.

Mike Smith: Thanks, Brendan, and good morning, everyone. Starting on slide 12, our top line constant currency sales grew 10%, compared to the second quarter of last year, reflecting 11% from pricing, partially offset with a 1% volume and mix decline. As Lawrence already mentioned, there were impacts to volume related to the China recovery, the Kitchen Basics divestiture, the exit of our consumer business in Russia, and strategic decisions we made related to optimizing the profitability of our portfolio. At the total company level, all these impacts netted out. In our Consumer segment, constant currency sales increased 7%, reflecting a 9% increase from pricing actions, partially offset by a 2% volume decline. Including in this volume decline are a net 1% increase from the recovery in China, partially offset by the Kitchen Basics divestiture and our business exit in Russia, a 1% decline from exiting DSD or Direct Store Delivery business for our Hispanic bag products in the Americas.

On slide 13, consumer sales in the Americas increased 4% in constant currency, with an 8% increase from pricing actions partially offset by a 1% volume decline from the Kitchen Basics divestiture, a 2% volume decline from the Hispanic product DSD exit and 1% underlying volume and mix decline. Our strong underlying sales growth was driven by the products in our grilling portfolio, Brendan mentioned earlier. In EMEA, constant currency consumer sales increased 9% with a 12% increase from pricing actions, partially offset by a 2% volume decline from exiting Russia and a 1% underlying volume and mix decline. Excluding Russia, sales growth was broad-based across all categories and markets. Constant currency consumer sales in the Asia Pacific region increased 28% driven by a 20% volume increase from China recovery and a 6% increase from pricing actions across the entire region, as well as 2% increase in all other volume and product mix.

Turning to our flavor solutions segment on slide 16, we grew second quarter constant currency sales 13%, reflecting a 14% increase from pricing actions partially offset by a 1% volume decline. Included in this volume decline are a net 1% increase from the recovery in China offset by a 1% decline from discontinuing a private label food service product line in EMEA. In the Americas, flavor solutions, constant currency sales rose 11%. Pricing actions contributed to higher sales across the customer base. Volume and product mix declined in the quarter as strong volume growth and seasonings was more than fully offset by the impact of pruning of low margin business. In EMEA, constant currency sales increased 15% with pricing actions partially offset by lower volume and product mix, including a 2% impact from discontinuing the private label product line I mentioned earlier.

EMEA’s Flavor solutions outstanding growth was driven by pricing and was broad-based across its portfolio, led by higher sales to QSR customers. Volume and mix outside the product discontinuation declined due to softness in some of our customers’ volume within their own businesses, mainly packaged food and beverage customers as well as QSRs. In the Asia Pacific region, Flavor solution sales grew 22% in constant currency with a 13% volume benefit in China due to lapping the prior year COVID-related disruption, an 8% increase from pricing actions and a 1% increase in all other volume and mix driven by Australia. As seen on slide 20, gross profit margin expanded 310 basis points in the second quarter versus the year ago period, reflecting our unwavering focus on increasing profit realization.

Favorable drivers in the quarter were our CCI and GOE programs. The continued recovery of the cost inflation our pricing lagged over the last two years as we planned, and favorable product mix in both segments. We offset current year inflation in the second quarter with our pricing. Notably, in flavor solutions, while we continue to incur some level of higher cost to meet high demand in certain parts of our business. We continue to make progress on reducing the level of these costs. And as we expected, the second quarter’s dual running costs we experienced in the U.K. were comparable to last year. We are very pleased with our gross margin expansion for the quarter and expect to continue to drive margin improvement in the balance of the year.

Now moving to slide 21, selling, general and administrative expenses or SG&A increased relative to the second quarter of last year as higher employee incentive compensation expenses and distribution costs were partially offset by CCI lead and GOE savings. Brand marketing increased compared to the second quarter of last year and we are expecting an even more significant year-over-year increase in the third quarter. As a percentage of net sales, SG&A increased 20 basis points. Strong sales growth and gross margin expansion partially offset by higher SG&A costs resulted in a constant currency increase in adjusted operating income of 36%, compared to the second quarter of 2022. In constant currency, the Consumer segment’s adjusted operating income increased 24% and the Flavor Solutions segment grew 66%.

Turning to interest expense and income taxes on slide 22. Our interest expense increased significantly over the second quarter of 2022, driven by the higher interest rate environment. Our second quarter adjusted effective tax rate was 22.3%, compared to 18.6% 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 23, second quarter 2023 adjusted earnings per share was $0.60, as compared to $0.48 for the year ago period. The increase was driven by higher adjusted operating income, partially offset by higher interest expense and a higher effective tax rate. On slide 24, we’ve summarized highlights for cash flow and the quarter end balance sheet.

Our cash flow from operations year-to-date was strong. $394 million in 2023, compared to $154 million for the first half of 2022. The increase was primarily driven by higher net income and working capital improvements, including lower inventory, as well as lower incentive compensation payments. We returned $209 million of cash to our shareholders through dividends and used $119 million for capital expenditures through the second 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 updated 2023 financial outlook on slide 25. 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 realize an unfavorable impact in the first-half of the year, and projected favorable impact in the second-half.

For fiscal 2023, we are reaffirming our sales outlook and as Lawrence mentioned, we are raising adjusted operating income and adjusted earnings per share, driven by our strong year-to-date performance, combined with the robust demand we continue to expect and our diligent approach to optimizing our cost structure. At the top line, we continue to expect 5% to 7% growth, driven primarily by the wrap of last year’s pricing actions combined with new pricing actions we have taken in 2023, we expect several factors to impact our volume and product mix over the course of the year, including price elasticities consistent with 2022 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. We estimate the Americas Consumer segment DSD exit and the EMEA Flavor Solution private label discontinuation to be approximately a 1% impact on the year, which began to impact us in the second quarter. 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 gross margin is projected to range between 50 basis points to 100 basis points higher than 2022, compared to our prior guidance 25 basis points to 75 basis points.

This gross margin expansion reflects a favorable impact from pricing, cost savings from our CCI led and GOE programs and portfolio optimization, 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 our pricing lagged for the last two years. Moving to adjusted operating income. First, let me walk through some discrete items and their expected impact to our 2023 adjusted operating profit growth. First, the cost savings from our GOE program are expected to have an 800 basis point impact. The savings from this program are expected to scale up as the year progresses. Next, the benefit of lapping the impact of COVID-related disruptions in China is expected to have a 300 basis point favorable impact.

The Kitchen Basics divestiture is expected to have an unfavorable 100 basis point impact. And finally, an 800 basis point unfavorable impact is expected as we build back incentive compensation. The net impact of these discrete items is a favorable 200 basis points. This favorable impact, combined with expected 8% to 10% underlying business growth, which is driven by our improved operating momentum, results in our adjusted operating income projection of 10% to 12%, compared to our previous guidance of 9% to 11%. In addition to the adjusted gross margin impacts I just mentioned, this projection also includes a low-single-digit increase in brand marketing investments and our CCI leg cost savings target of approximately $85 million. We continue to anticipate 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 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 the third quarter of 2023. The net impact of these interest related items is expected to be approximately 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 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 10% to 12% 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 resulted in an expected increase of 3% to 5% or projected guidance range for adjusted earnings per share in 2023 of $2.60 to $2.65. Before turning it back to Brendan, I would like to recap the key takeaways I’ve seen on slide 27. Our second quarter sales growth reflects sustained demand across our business and the effective execution of our strategies. Our pricing actions are in place and our volume of performance improved. We drove meaningful year-over-year margin expansion in both segments underscoring our focus on profit realization. Our cost savings programs are yielding results in line with our expectations.

Our year-to-date results combined with continued robust demand expectations and our actions to optimize our cost structure, bolster our confidence in delivering the strong operating performance projected in our enhanced 2023 outlook.

Brendan Foley: Thank you, Mike. Before we turn it over to Q&A, I would like to provide some additional comments. First, I would like to say, I am truly honored and excited about the opportunity to lead this great company with its rich and very promising future. Global demand for flavor remains the foundation of our sales growth and we have intentionally focused on great, fast growing categories. Our alignment with long-term consumer trends, healthy and flavorful cooking, increased digital engagement, trusted brands and purpose minded practices continues to create a tailwind for growth. McCormick is uniquely positioned to capitalize on this demand for great flavor. With the breadth and reach of our strong global flavor portfolio, we are delivering flavor experiences for every meal occasion.

We are the global leader in flavor from end-to-end for our consumers and our customers. As we look ahead to the back half of the year, we will continue to focus on capitalizing on strong demand, optimizing our cost structure and positioning McCormick to deliver sustainable growth and long-term shareholder value. We have compelling 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 successful execution of our plans and concrete actions, we will realize the profitable growth reflected in our updated 2023 financial outlook. The strength of our business model, the value of our products and capabilities and execution of our proven strategies further bolsters our confidence in our growth trajectory in both segments, particularly as the environment begins to normalize.

Remaining relentless with our focus on growth, performance and people combined with the compounding impact of our continued growth investments and alignment with consumer trends underscores McCormick’s position to deliver long-term differentiated growth. Our fundamentals remain strong and we expect to continue to not only deliver strong sales growth, but also drive total shareholder return at an industry leading pace. Importantly, I’d like to personally thank Lawrence for his mentorship and continued service to McCormick. On behalf of shareholders and employees, I want to recognize his outstanding leadership as CEO of this great company. Lawrence has been a transformational leader for McCormick, bringing our global flavor platform to life through his entrepreneurial spirit, innovated thinking, and growth oriented vision for company.

During his time as CEO, we have grown sales over 50% and market capitalization more than doubled, creating significant shareholder value. We have prioritized investing to drive future growth, increase our profit realization, improved cash flow from operations and have returned more than $2.5 million to shareholders. Lawrence is widely credited with embedding purpose led performance into McCormick’s culture by championing the company’s industry-leading sustainability efforts, driving a period of tremendous growth, performance, and expansion, including acquisitions of iconic brands like Frank’s RedHot, French’s, Cholula, as well as FONA, and successfully leading McCormick through the unprecedented global pandemic. This is an enviable track record, congratulations, and we look forward to your continued support as Executive Chairman.

Now for your questions.

Q&A Session

Operator: Thank you. At this time we’ll conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Andrew Lazar: Great. Thanks very much. First, I just wanted to congratulate both of you, Lawrence, and Brendan, on last evening’s announcement. I know McCormick puts a tremendous amount of effort into succession planning, and I’m sure this transition will go every bit as smoothly as previous ones.

Brendan Foley: Well, thank you, Andrew. That’s very kind of you to say that.

Lawrence Kurzius: And Andrew, thank you very much for that as well. I’m glad you mentioned that McCormick does this very well. McCormick pride ourselves of leadership development and succession planning, and the Board and I have been very thoughtful and deliberate in a multiyear process to get us at this point. Over the last few years, I’ve had a chance to partner with Brendan of many of our key initiatives, and his disciplined approach to delivering growth are leading the qualities you’ve come to expect McCormick bank of an ideal CEO for this company going forward. With the appointment to President last year, we were signaling this. And we have given all of you on this call and off this call, an opportunity to get to know Brendan and see his qualities first hand.

Andrew Lazar: Good stuff. Good stuff. I’ve got just two questions. First one would be McCormick essentially flowed through the second quarter EPS upside to the full-year, but also did not flow through any of the more significant upside in 1Q to the year. So I’m trying to get a sense whether this is simply some conservatism, or is there something in the back half of the year that change that requires either the need from our marketing or it’s really just McCormick being sort of opportunistic on the increased marketing in 3Q?

Lawrence Kurzius: Well, I’ll say that, first of all, we are confident in our outlook for the back half of the year. There’s a lot that’s exciting within the business, and we’re pleased with our execution so far this year. The biggest part of the year still is in front of us. Third and fourth quarter are two largest quarters of the year. And so while we are optimistic, we also want to be prudent about what is still in front of us. There are some puts and takes in the business overall. Our recovery in China has been a bit slower than we expected, and we have factored that into our guidance. Whereas, for the most part, everything else is moving in the right direction, and we’re quite positive. So we’re not trying to signal anything.

We did want to reflect the fact that we have had strong performance year-to-date and the increase in our guidance and to reflect — reflecting that strong performance, but we also didn’t want to get ahead of our — get over the tips of our skis.

Andrew Lazar: And then second, as we think about the back half of the year and McCormick starting to lap some of the pricing, would your expectations still be that volume would turn positive? And if so, what would be the key drivers that give you the sort of the visibility to that?

Lawrence Kurzius: I’m going to say a few words about that, and I’m going to let Brendan pick it up. But as we have been saying all along, we expect our volume performance to improve as we go through the year and to be stronger in the second-half versus the first-half. And that outlook has not changed. Given that we have slightly softer volumes in China in our outlook, we have a little bit less contribution from that part of the business. But in the second-half, overall, as a company, we’re expecting volumes to be very close to flat. Call it, plus or minus 1% and maybe we’re talking about numbers that are really not meaningful and well within the range of forecast there.

Brendan Foley: Just to build on that from a regional perspective, Andrew. In the Americas, yes, we’re performing pretty much as planned. I think you have to look at sort of volume and price together when we take a look at the profile. But we’re showing sequential improvement across the portfolio, and that’s been fairly consistent, sort of, month-to-month and quarter-to-quarter so far. And we also need to recognize that in the second quarter result, it does include, kind of, the exit of this DSD business, which when you take that out, I think it kind of underscores the warrants is kind of broader view of what we think is going to kind of unfold in the back half. But it is broadly an improvement versus the first. China, we think we’re going to have a strong recovery.

Also, pretty confident in that, although it’s a little bit less than just kind of a more gradual recovery than what we initially had planned for. So that’s probably a little bit different than what we had been thinking about previously. But nevertheless, it is still a strong recovery. And I would say, in EMEA, we’re pretty pleased with the performance on volume. And when you factor out the elements of Russia exit or overall, the underlying volume and mix when you exclude that was really actually pretty nice. So we’re pleased to see that we have some volume growth despite those things in the EMEA region. On to the whole idea of this just to provide more color on this DSD exit, I would say that this is a business that we’ve been trying to kind of improve over time.

And what we see from it is that this is — the DSD portion that we delivered to store, we also have a warehouse and distribution delivery that we would handle. And that was a business that just simply wasn’t profitable, and we decided we need to exit, but it was a meaningful chunk, I think, out of the second quarter, about 2 points. So as we transition away from that business, it will probably be an impact for the rest of the year, but something that we have planned for.

Andrew Lazar: Thanks so much and congratulations again.

Lawrence Kurzius: Thanks, Andrew.

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

Ken Goldman: Hi, thanks and please accept my sincere congratulations as well, Lawrence, Brendan, and Kasey, too. Everyone’s moving up in the world, it’s great to see. I think I’m contractually obligated after yesterday to ask how you’re feeling about, I guess, your customers’ inventory levels in general? And if you’re sensing, you know, maybe any risk of a retail safety stock deload or anything similar as your supply chain continues to normalize and get back to where it was?

Lawrence Kurzius: Brendan, why don’t you take that one.

Brendan Foley: Ken, thanks for the question. We’re not experiencing anything unusual or significant trade inventory destocking. Honestly, there’s really how much drama in the quarter for us on this. The difference between our sales and consumption was more attributable to just the retail sell-through of the discontinued items, and the point I just made regarding DSD is an example of that. But also, we have higher listing fees this quarter just due to the fact that we’re launching more new products. And so I think you see that in lot of our dialogue in terms of Cholula or Grill Mates items for grilling or at Tabitha brown line, so we definitely had that. But as we anticipated, our alignment between consumption and shipments is normalizing. There’s not really anything unusual going on in this quarter.

Lawrence Kurzius: And I’ll underscore that our service levels have been pretty solid for quite a while now. So retailers have had plenty of time to adjust their stock levels and so on. So this actually seems like something over the past 1.5 years has already occurred for us.

Ken Goldman: Got it. Thank you. And then just as a quick follow-up, I wanted to ask a little bit about the commentary about Europe and the Consumer side. Maybe some of the softness you’re seeing with your — or sorry, the Flavor Solutions side. And just how you’re seeing that progress as we go into the current quarter, is it still worsening? Just trying to get a sense for how some of your larger customers, whether it be food, beverage or QSR are performing as the year progresses.

Brendan Foley: Hey, Ken, on the Flavor Solutions side of our business in EMEA, definitely, it’s been softer than what we would have expected, I think, mostly because we’re just seeing a slowing of consumer demand from our customers. And that would be both, sort of, food and beverage and — but I would say, it’s most coming through the quick-serve restaurant customer channel. And that — we think it’s really more of a reflection of what we see happening and what’s being reported, I think, in terms of overall inflationary impact in EMEA, specifically Europe. But definitely, as we kind of noted in the remarks leading into the call here, that is something that is probably more affecting our overall volume rate in the EMEA region.

Mike Smith: I think too, just to add a little color on the volume there. About one-third of that decrease in volume is due to the exit of that private label, the two service lines. So again, another portfolio optimization.

Lawrence Kurzius: Yes. And that it was actually contemplated in our plans for the beginning of the year. Maybe for customer relations reasons, we couldn’t be specific about that, but that is not a surprise to us.

Ken Goldman: Great. Thanks so much.

Operator: Thank you. Our next question comes from the line of Peter Galbo with Bank of America. Please proceed with your question.

Peter Galbo: Hey, guys. Good morning and congratulations again to Brendan and to Lawrence.

Lawrence Kurzius: Thank you.

Brendan Foley: Thanks, Peter.

Peter Galbo: Guys, thank you for the commentary, I guess, on the exit of DSD. I think it’s helpful, particularly in the context of some questions we’ve been getting this morning around the Consumer business. So appreciate that, I guess, maybe what I wanted to pick up on in Americas Consumer, specifically some of your comments around grilling. You do obviously have pretty easy compares from last year just given where kind of protein prices were. So curious just kind of what you saw coming out of Memorial Day, what you’re expecting over the course of the summer. Obviously, you have some specific things that you’re working on, but anything you can help with us there?

Brendan Foley: Thanks for the question, Peter. We’re off to a really good start on grilling for this summer season, and we definitely saw that as a good start in Q2. A lot of it’s really driven by just — if you think about we have a solid innovation plan, I think, for the grilling season, we’re launching some new grilling items. Plus we’re also in just really much healthier supply on mustard and Frank’s RedHot. And these are areas in Lawry’s marinades, where if we look at last year and before that, certainly we’re coming on top of now a period of where we just have really full supply, assured supply for our customers, and we’re turning back on normal promotional activity on the business. So we feel like all of those things put together, innovation, supply, getting back to the way you want to run a season on grilling, we have a really good start to the year.

And as we look at it kind of from a share standpoint, we really probably performed quite well kicking off in the second quarter. So all those things come together, I think, for a great start to the summer season.

Peter Galbo: Great. No, that’s helpful. And maybe just a question for Mike around kind of the gross margin guidance. Just where you’ve covered in the first-half of the year, kind of what it implies about the back half, maybe there’s some conservatism in there. But I did notice you kind of didn’t change the inflation guide, maybe just help us kind of think about that over the balance of the year?

Mike Smith: Yes. I mean, for the year, Peter, as you know, we did raise our guidance on gross margin, 25 basis points to 75 basis points to 50 basis points to 100 basis points. So we reflected some of the increased pricing realization we talked about in the call. We’re really, really doing well in our GOE program and realizing those savings and those ramp up in the second-half. The thing about the second quarter, that 300 basis point improvement, second quarter last year was our worst performance of the year. You’ll see improvements in the back half and basis points versus last year, but they won’t be as big as the 300 we had in the second quarter.

Peter Galbo: Got it. Mike, maybe, sorry go ahead.

Lawrence Kurzius: Go ahead. Finish this line of…

Peter Galbo: Sure. Yes, Mike, maybe though — understanding maybe not the same magnitude of year-over-year change, but sequentially, margins tend still improve in the back half of the year. So just curious kind of how you’re thinking about that?

Mike Smith: I mean, based on the mix of our business, generally, the back half does have higher margins, especially in the fourth quarter. Our implied guidance has high of almost 90 basis points improvement, lows 0s, so you get a little bit of a squeeze factor there. But if we continue to have success, and again, we see that ramp up in the second-half. China is going to have a really strong recovery in Q4, that’s a positive for us. We have scale over there and have good margins.

Lawrence Kurzius: I mean, we’re quite optimistic with continued gross margin improvement and operating profit margin improvement as we go through the year and going forward.

Mike Smith: I guess, Lawrence said, everything is moving in the right direction.

Peter Galbo: Got it. Got it.

Lawrence Kurzius: Peter, you know, I’m not sure that we — I know that you’ve got some interest in the DSD exit, so I just want to spend a second with you and elaborate on that. This is a range of very — there are a lot of units, but they’re very low value. We’re talking to sell a bag spices and dried peppers in settle bags that largely moved through unscanned channels, and we’ve had a DSD business in that, that we’ve banged our head against for a long time and we’ve chosen as part of optimizing our portfolio, improving the profit performance to exit that part of the business, we still sell those same brands through the warehouse to major customers where — because of the difference in the distribution channel, the margins are attractive and worth — and the business is worth staying in. But the DSD portion of it was just not a moneymaker. It’s a lot of units, but not a lot of value.

Peter Galbo: Got it, very helpful. Thank you, guys.

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

Alexia Howard: Good morning, everyone, and congratulations all around. Thank you so much for everything to all of you. Okay, first question, regaining lost distribution in U.S. retail channels. It seems to me that there were a number of smaller retailers that ended up — you ended up losing distribution during those supply chain disruptions. As you start to rebuild that distribution, what innings are we in? And are you able to quantify how much of a tailwind that could be over the next year to 18 months?

Brendan Foley: Well, Alexia, thank you for the question on TDPs and overall distribution. First of all, I’d like to say, we continue to make really good progress year-to-date. And as we look at our performance and our trends and all the different metrics we might look at, we’re happy to see that come through as a positive, especially in the second quarter. And we do expect to see continued progress as we go into the back half. We have some significant improvements that we know will start to come online just because as customers reset their shelves, and those things start to happen. A lot of the wins that we get through category management and all of that really important effort we put forth in terms of help the retailer guide the category.

We know that there’s going to be some helpful improvements coming through on that as we go to the back half. I’m reluctant to kind of quantify all that as we think about that into the back half of ‘23 and all the way into ‘24. But this is an effort, as we’ve said before, that we’re going to continue to be working on over the course of not only this year, but also next year. And as we look at overall distribution, we know that we’re not going to get all of that back in terms of rough points, because almost half of that was discontinuations originally. So we feel really good about our progress right now on an overall distribution points, and it should continue to improve as we go through ‘23 and also in ‘24.

Lawrence Kurzius: And Alexia, as I said on our last quarterly call, we have a tremendous amount of innovation. And on top of that, the restoration of our U.S. Everyday spice line starting to hit the market in Q2 and building through the second-half of the year. All of those hands on the shelf give us opportunities to get a more advantageous set and to get a greater amount of distribution on the shelf. We have a number of major customer wins that we talked about in the first quarter that are actually going on shelf in Q3, which should further build on TDP. So we’re pretty confident continue to see improvement in those areas we have through the year.

Mike Smith: And then with our brand marketing, we’re going to be mid-single-digit increase in the second half. A lot of that’s going to go into the third quarter that are willing to support those plans.

Alexia Howard: Great. And as a follow-up, can you just give us an overview of the one-time costs that are going to be eliminated by 2024? I seem to remember you have two plants running in the U.K. as you transition there, there’s co-manufacturing costs here in the U.S. Just a sort of idea of how much more there is to come out that’s onetime from recent events?

Mike Smith: Okay. Let me think about that. So you’re referring to — we have dual running costs in our EMEA region, due to our new large facility over there. I feel — I think, I’m pretty sure I said in the last call, we’re around $20 million for this year, which is about the same as last year. We’re still going to have some cost next year, because it’s going to go into the first and second quarter, the transition, because these are large manufacturing facilities. So if I were winging it, I’d say half of that is going to go away, but I’m going to be off, depending on the exact timing.

Alexia Howard: Great.

Lawrence Kurzius: And of course, our GOE program continues next year.

Mike Smith: Yes, yes. We’ll see a nice wrap into 2024 from that.

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

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

Steve Powers: Great, good morning. And congratulations to everyone as well from me. Two questions both related to Flavor Solutions. The first one, in part as a follow-up to the topic that Ken Goldman had raised, just around inventory dynamics. We’ve heard various discussions of potential customer destocking from a Flavor Solutions perspective, as well from different pockets of the industry. I was just curious to see if that’s at all impacting you or if you expect it to impact the business over the second half of the year?

Brendan Foley: Steve, thanks for the question. As it relates to our Flavor Solutions business, when we look at overall, our volume mix profile on it, taking into account, sort of, the exit discussions that we’ve already had and other impacts, we think our volume profile right now reflects, kind of, the categories that we choose to really focus in on like performance nutrition and seasonings and health and nutrition. These are areas that we still see a lot of healthy growth in and those have been intentionally, kind of, area of growth and focus for us. And so I don’t know that we’re — and I won’t be able to comment specifically on any particular customer activity, but we believe our volume profile, kind of, reflects more of that composition of our business. And I’m not sure that we’re seeing any broad restocking discussions that we have with customers at this point in time.

Lawrence Kurzius: I’ll also agree that a lot of customer wins and believe we’re gaining share in this space, and so that is a positive contributor for us as well.

Mike Smith: A lot of our growth in flavor solutions comes from innovations too. And those are the things that really drive volume and margin in Flavor Solutions.

Steve Powers: Okay. Great. Great. And then my second question, actually, a good segue, is on the margin front. Just because you continue to trend well ahead of at least our expectations year-to-date on Flavor Solution’s margin recovery. And I guess if you think about that forward, maybe I was wondering if you could just frame for us how much or whether you expect further progress on that front in the second-half. And then any updates as to how the progress you are making here year-to-date influences how you think about that build back to pre-pandemic levels or higher as you look out over the longer term?

Mike Smith: Yes. I mean I’d say, one, we’re very pleased with our margin progress. As we stated on the call, a lot of — everything is moving in the right direction, the GOE program, portfolio optimization, things like that are helping both the Consumer and Flavor Solutions side. Like I said in the last call, pre-pandemic, we were — our Flavor Solutions margins were a little over 14%. We don’t look at that as a ceiling, however. Longer term, with portfolio migration, we think we will go higher. Short term-wise, we have strong belief we’ll get back to 14%. It’s not going to be this year, but we’re going to see sequential improvement. And quarter-to-quarter, there will be lumpiness based on run cost and good running cost, things like that. So — but we had a really good second quarter. It was an easy comp, compared to Q2 of last year, but we’re pretty bullish on Flavor Solutions’ recovery.

Lawrence Kurzius: And I will just add to that, just if I can step it up to the total company level, it’s hard not to be excited about the 280 basis point expansion in operating margin that we had this quarter. We’re really moving in the right direction in both of our segments in a big way. And we’ve all seen that we raised OP guidance for the year, it’s a long time, on the back of that margin improvement. And we’re very pleased and — we’re pleased with our progress in this area.

Steve Powers: Great, thanks for that and congratulations again.

Operator: Thank you. Our next question comes from the line of Max Gumport with BNP Paribas. Please proceed with your question.

Max Gumport: Hey, thanks for the question. And congrats, everyone. I want to return to the gross margin question with regard to the second-half. So it was nice to see the better-than-expected gross margin expansion in the quarter. And when I look at the updated guidance range, it would seem to imply that, versus pre-pandemic basis, so whether that means fiscal year ‘18 or fiscal year ‘19, that we actually see some reversion in your progress towards gross margin recovery? I’m trying to tie what’s implied by that guidance range versus what we’re hearing in terms of cost savings ramping up, pricing catching up to inflation, supply chain improving. All of which I would have thought could lead to gross margins continuing to move closer to pre-pandemic levels as we go through the year. And I do recognize that 3Q and 4Q are big quarters for you, and there’s probably some prudence embedded in this outlook. But I just wanted to get some clarity on that point? Thank you.

Mike Smith: Yes. I mean what you have to remember, Max, is when you’re pricing to cover costs over a multi-year time you’re going to have a large dilution impact just due to the math. And we said before, I mean, that has been a large headwind last year, but I think we quantified in the 200 basis point to 300 basis point range as the margin line. We haven’t talked about it much this year, but we’re still having some of that. We will get that back over time as we said, through our CCI programs, more normal cost inflation in the future. So it’s hard to compare the four years ago to gross margin at this point, but a lot of that is dilution, but we see an upward trajectory as we see in the second quarter. That’s the important thing.

What makes me really excited is even with over — we’re catching up on the pricing we’ve under recovered the last two years. Even with that, that is a negative dilution impact. Even with that, we’re showing gross margin impact, a positive based on the GOE program or the CCI programs. So that really gives us confidence going forward.

Max Gumport: Got it. Understood. And then turning to the recovery in your TDPs and U.S. spices and seasoning, so it’s been nice to see that, and the scanner data that we all track and it does seem to be approaching, sort of, flat year-over-year performance. But we’re not seeing a pickup in dollar share yet as significantly. And I would think there should be some natural act, because as you get the distribution points, maybe then you can start to advertise and bring back the brand building more fully as you’ve flagged today. Is that the right way to think about it? Should we start to see a more full improvement in dollar share as we move through the year in terms of the trends?

Brendan Foley: Yes. Just like we’ve seen in our current trends, Max, the sequential sales unit, and volume improvement across the portfolio and even specifically within spices and extracts in Americas, we do think that reflects, kind of, those long-term tailwinds of our categories, but also our growth plans. So we continue to invest in brand marketing, really focused category management and innovation. And that allows us to kind of focus on those volumes and that sustainable growth, and also get that compounding effect of those investments. So yes, I do expect that profile to improve as we go through the back half. As you called out, reasonably the improvement in TDP, we should also then start to see an improvement overall as we think about dollar share.

And so that is a reasonable thing I think to look out for. What is driving our performance right now and we think will, as we continue moving forward, is increased distribution, brand marketing, category management and innovation, and we also see a similar trend on this in Europe. So these are areas that we continue to put a lot of focus up against. And I would say our outlook is — as everyone has said so far this morning, I guess, I’m going to say it, too. Everything is moving in the right direction. So we feel that same way about our external performance off shelf.

Lawrence Kurzius: And I don’t want to miss that there are big — as noted, I don’t want anyone to miss it. And we’ve got share gains in Europe, we’ve got share gains in — I don’t know if you guys mentioned it, in Australia and Asia. And we have share gains in our other categories, the spices, and seasonings, certainly in the U.S. is certainly an important area of focus and justifiable. So we’re confident that we’re going to get there. We’re following the same playbook, as we’ve said at CAGNY, that we did for recipe mixes and believe that we’re going to get to the same with that.

Max Gumport: Great. Thanks very much.

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

Adam Samuelson: Yes, thank you. Good morning, everyone. And let me add my congratulations to Lawrence, Brendan, and the whole team. I guess just first, making sure — there’s a lot of ground have been covered today. If you think about some of the cadence of earnings and margins, just the headwinds on a year-on-year basis from, kind of, from incentive comp, how much of that has actually been realized in the first-half as we think about layering that into the back half of the year? And then, again, maybe coming back to this question on gross margins, the sequential cadence. I mean, historically, second-half gross margins would be higher than the first particularly in the fourth quarter, given that’s your biggest volume quarter.

It doesn’t seem to imply — so the guidance doesn’t seem to imply much gross margin improvement in the second-half from where you were in the second quarter? And I’m just trying to make — is that just mix between the different business units or just conservatism? Is there something on price cost and mix in there that we’re missing? I’m just — usually, there’s a bigger step up certainly in the fourth quarter, it doesn’t seem to be implied even at the high end of the guidance range?

Mike Smith: Yes. Like we said last call on SG&A, I mean, on incentive bill back, it’s mostly in the second-half. But the second quarter, if you remember back to the second quarter of last year, it was really difficult quarter, as I mentioned before. So we were obviously making adjustments to incentive comp there. So some of that did come through in Q2, but the majority of it is second-half back loaded. As far as gross margin, I think — just at a very high level, I mean, we talked a lot about gross margin on this call. We’re optimistic, but prudent. I mean we’ve got a lot of things that are — we’re putting points on the board in the GOE program. Pricing — I’d say pricing realization is going to be highest in the first quarter and second quarter it’s going to ramp down.

So that’s a little bit of that. And we’re still having low to mid-teen cost inflation that we haven’t moved on, so that’s coming down. But at the end of the day, from a gross margin perspective, we’re going to show improvement. And again, we’re being prudent.

Lawrence Kurzius: Yes. And I want to be sure we’re differentiating — because your question, actually, I’m confused a little bit. Our gross margin in our underlying business is always higher in third and fourth quarter. That’s a mix of the business, and that’s the natural state. I think you’re asking — it sounds like you might be asking about that. We’re expecting that relationship still holds, and we are expecting to continue to have improvement versus prior year in both those quarters as well.

Adam Samuelson: Thanks you, Lawrence. And certainly — versus the 37.1% in the second quarter. And I appreciate that, that gets you higher year-on-year versus where you were last year in the second-half. And I guess, 100 basis points for the consolidated company, kind of, you do the back into the second-half gross margin percentage, it doesn’t really get you much above 37% for the second-half of the year in total, and the quarters will mix a little bit. So — but usually, you would think that the gross margin percent would be higher by 4Q, that’s the…

Mike Smith: The gross margin change in the first-half, we were favorable, up 113 basis points to last year. The second-half guidance implies 40 basis point to 50 basis point improvement at the midpoint. So we’re showing improvement. Remember that second quarter last year, we had a really positive 300-some basis points increase in Q2. So that’s a bit of why it’s over 100 basis points in the first-half. But 50 basis points improvement, we’re happy with that.

Adam Samuelson: Okay. I’ll leave it there and pass the line. Thank you.

Mike Smith: Great, thanks.

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

Matt Smith: Hi, good morning and congratulations. Wanted to ask a follow-up question on the Consumer business in the Americas or more specifically in the U.S. We’ve seen elasticities improve in recent periods in measured channel data, and now you’re ramping up new product activity and marketing along with what sounds like some positive distribution tailwinds. So how should we think about elasticity in the second-half? With consideration to the commentary on your outlook talking about elasticities overall in line with the prior year, which are a little softer than the trends we’re currently seeing in the U.S.?

Brendan Foley: I think, first of all, it’s important to call out that our base case has been for the Consumer to be under pressure in 2023, and we expect that to kind of continue. And although broadly speaking, the Consumer has held up better-than-expected. Yet, there is still pressure out there. Having said that, though, as we look at our own price elasticities and performance off shelf, it remains pretty consistent with what we saw in the first quarter and in the fourth quarter, most recently. And so we’re not seeing a big deviation from where we’ve been. And in fact, I would say we had a retail price increase come through in early April, and we still see very consistent trends with regard to price elasticity. We don’t see any examples right now of it yet or planning to getting worse.

But then also, I’m not sure that we’re indicating so far that it’s getting measurably better. But these are consistent trends that we’re planning on for the rest of the year, because we are still on our base case of a pressured Consumer.

Lawrence Kurzius: I would say though that there’s a good, solid sustained demand from the Consumer. And as you take that with the — I think, really robust and compelling growth plans that we’ve got in the second-half, we’re — we’ve a good reason to believe that we’re going to continue to see volume improvement in our U.S. business specifically as we go through the year.

Matt Smith: Okay. Thank you for that. And if I could ask one more on a follow-up on the recovery you’re seeing in China. It contributed growth in the quarter, but you’ve talked about how it lagged your expectations and it’s progressing more slowly. But could you talk about the momentum in the business exiting the quarter? Did you see sequential improvement through the quarter? And how does the current consumer environment, compared to year-ago levels, which were more normal in the second quarter?

Brendan Foley: Well, I think in terms of — did we see a sequential improvement or any sequential changes as we went through the quarter? No, I would say that, largely, as we observed, kind of, the performance in the quarter in China, the one thing that was obvious is they’re dealing with higher unemployment. And Consumer spending isn’t as robust as maybe many and all of us were planning on, yet still being a strong rebound, but we weren’t seeing any sort of different performance throughout the quarter, I would say, it was pretty much consistent. And our view, once we saw the quarter open up, it sort of held that way throughout the end of the second quarter. I think your question though — in the back half of your question, maybe you meant on sort of how we’re thinking about the third quarter.

And recall last year though, that was a big rebound period in recovery with China in the third quarter. So we don’t expect that same level of recovery in the third quarter this year just, because we’re comparing up against that. But we expect those same trends to kind of flow through into the third quarter. And then again, when we get to the fourth, it’s going to be different yet again. So we’re going to be comparing against a very challenging period with respect to COVID lockdowns, et cetera. And so that is likely to feel more like the second quarter.

Mike Smith: Yes. So maybe in summary, Q3 is a tough comparison on China, because it’s a strong recovery last year. Q4 is an easier comparison because they were locked down in the fourth quarter last year.

Lawrence Kurzius: And we just actually had our China management team here in the office a couple of days ago, and we spent quite a lot of time with them talking about the roller coaster ride that they have been on as the economy reopened, lockdown, reopened, lockdown, reopen. And that creates a lot of noise in the year-to-year comparison. We all — the question about how robust the recovery in China was going to be? It’s really strong. I don’t want anyone on the call to think otherwise. Our question all along has been is the recovery going to — is the performance going to — is the growth is going to start with a two or three or four? Right now, it looks like a three, not a four. And — but — so we have actually tempered our — not just captured it in our results today, but we’ve also tempered our outlook a little bit for China that is considered in our guidance, I would say it.

Matt Smith: Okay, thank you for that. I’ll leave it there and pass it on.

Operator: Thank you. Ladies and gentlemen, our final question comes from the line of Robert Moskow with TD Cowen. Please proceed with your question.

Robert Moskow: Hi, thank you for getting me in and Lawrence and Brendan, congratulations to both of you. Especially you, Lawrence. It’s really been a pleasure working with you all these years.

Lawrence Kurzius: Thank you so much, Rob. And welcome back by the way. Congratulations to you.

Brendan Foley: Congratulations to you.

Robert Moskow: Yes. Well, we’re — I’m a little jealous of you. So — but — I got to be honest. But I wanted to follow-up on, Brendan, what you said about what your consumer research says about preferences for brands versus private label. I think you said the consumers prefer brands. The market share data shows that private label is growing and has been growing every year for the last couple of years, I think. And I want to know if your data is showing the same thing in terms of market share and how do you reconcile those two things together in the U.S.?

Brendan Foley: Well, I mean, I think we have to acknowledge that there has been some trade down to private label, especially more recently. And — but also, it has moderated, especially I think in our own categories, as we see more pricing on shelf coming from private label. Those gaps narrow, and so therefore, sort of, the unit growth and trends, sort of, decelerate and we’re seeing our own unit trends show sequential improvement. But going back to sort of the idea of research and what consumers are telling us and what we’re — we keep finding and it keeps you reinforced with consumer feedback is they’re looking for value, not necessarily the cheapest path of smaller items. And we do see consistently consumers do prefer brands.

And a lot of what we’ve been trying to do when we think about just the mix between private label and brand recall, we’re also in the private label business with our customers. So we see a role for private label in our categories. And so we are obviously supported from a category management standpoint that both provide a range of offerings for the consumer. Right now, we are pushing a lot on value. We’re really focused on the growth of our line sizes. We’re seeing consumer shift there more and more as they look for that greater value, and it’s definitely showing through in our trends. But it’s not dilutive to us or to the retailer. We’re not seeing as many signs of trade down right now as maybe we saw during sort of the hype of this inflationary period that we’ve been going through.

If I were to go back to over several years, a little bit harder to comment on category by category, but we typically see this happen during inflationary or recessionary times for private label. It certainly seems to — appears to gain share. But then again, we’re not hitting sort of the highs that are different from what we’ve seen in previous periods. So that’s our perspective on it, but we are certainly, kind of, have our foot in both parts of the category.

Robert Moskow: Great. Thank you.

Brendan Foley: Thanks, Rob.

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

Lawrence Kurzius: Thank you. Well, before we end, I’d like to let all of you in the analyst and investor community know, I have appreciated the opportunity to tell you about McCormick, our great company, and for the insights and the perspective you’ve provided me, which helped shape our strategies and clarify our messaging. You have all really helped me be a better CEO. Whether you have a buy, a hold or sell on us and whether you’ve even held our shares, our many interactions have been transparent, constructive, and always mutually respectful. I want to thank you all, and I’m confident McCormick is well positioned for continued success with our alignment to consumer trends, the breadth and reach of our portfolio, as well as our strategic growth investments. We have a strong foundation for sustainable growth and remain committed to driving long-term value for our shareholders.

Kasey Jenkins: Thank you, Lawrence, and thank you to everyone for joining today’s call. If you have any further questions, please feel free to contact me. And as we enter the summer season and for some of you in the U.S., the 4th of July, and Canada have to make energize, fire up those grills with the McCormick products. This concludes this morning’s conference call.