McCormick & Company, Incorporated (NYSE:MKC) Q4 2022 Earnings Call Transcript

McCormick & Company, Incorporated (NYSE:MKC) Q4 2022 Earnings Call Transcript January 26, 2023

Kasey Jenkins: Good morning. This is Kasey Jenkins, Chief Strategy Officer and Senior Vice President, Investor Relations. Thank you for joining today’s fourth-quarter earnings call. To accompany this call, we have 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 those 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 2 for more information. I will now turn the discussion over to Lawrence.

Lawrence Kurzius: Good morning, everyone. Thanks for joining us. Our fourth quarter concluded a challenging and volatile year that impacted our ability to deliver on our expectations and our financial performance. At the same time, we ended the year with positive momentum with consumer consumption trends and flavor solutions demand, stabilized service levels and supply and meaningful progress in starting to reshape our cost structure. While more work remains to be done, our confidence in our outlook for 2023 and beyond is strong. Our organization is focused squarely on executing on the priorities I just mentioned. All of which are important drivers in the successful execution of our strategies and the delivery of stronger results.

Turning to Slide 5, at our fourth quarter results, our sales declined 2% from the year ago period, including a 4% unfavorable impact from currency. In constant currency, sales grew 2% within our implied fourth quarter guidance range, but below our expectations. Greater-than-expected COVID-related disruptions in China unfavorably impacted our expected sales growth for both total McCormick and the Consumer segment by approximately 2%. Fourth quarter sales would have grown in the range of 4% in constant currency, excluding the impact of China on our results. We had anticipated even higher growth with fourth quarter restocking comparisons in the Americas Consumer segment further tempered our growth. As compared to last year, our fourth quarter constant currency sales growth of 2% reflected a 9% contribution from pricing actions partially offset by a 4% decline in underlying volume and product mix, an expected 2% volume decline from the Kitchen Basics divestiture and the exit of low-margin business in India and the consumer business in Russia and a 1% year-over-year volume decline from the China COVID-related disruption.

Despite tempered fourth quarter sales performance, our underlying sales strength positions us well to accelerate sales growth in 2023. In our Consumer segment, excluding China, consumption trends strengthened, particularly in the U.S., where our fourth quarter total branded consumption grew 6%. In our Flavor Solutions segment, our sales growth was outstanding, continued momentum across all regions. Consumers increasing demand for flavor, whether through our products or our customers’ product is those reflected in this performance and in our most recent proprietary consumer insights research. Our alignment with the long-term consumer trends of cooking at home, clean and flavorful eating and valuing trusted brands continues to deliver results.

This alignment, combined with our broad and advantaged portfolio, plus the fundamental strength of our category continues to underscore McCormick’s positioning for long-term differentiated growth in flavor. Moving to profit, our adjusted operating income decline of 10% or 9% in constant currency and adjusted earnings per share decline of 13% fell short of our expectations. Let me spend a moment on the differences to our expectation. Unfavorable product mix was a driving factor, particularly in our Consumer segment. This was primarily due to lower U.S. bites and seasoning sales stemming from fourth quarter inventory restocking comparison in both 2021 and 2022, which I will discuss in a moment. Our results also reflected lower-than-anticipated sales in China and an unfavorable product mix related to the sales mix between segments.

In addition, with two COVID-related plant shutdowns in China, we realized lower operating leverage. During the quarter, we made meaningful progress to lower our run-rate cost in flavor solutions with the reduction of elevated costs that we have been incurring to meet high demand in parts of our business. The impact of that progress was offset in the fourth quarter by unexpected discrete one-time issues. However, we expect to see positive benefits in our results going forward. Turning to Slide 7, we are committed to increasing our profit realization in 2023. In our last earnings call, we discussed normalizing our supply chain costs and increasing efficiencies while also strengthening our ability to service customers. To that end, we have targeted the elimination of $100 million of supply chain costs over the next 2 years.

We are also now taking streamlining actions across our entire organization targeting an incremental $25 million of cost savings. The combination of these actions, which is our global operating effectiveness program, is incremental to our comprehensive continuous improvement or CCI savings. Our CCI program has a well-established track record of success and we are leveraging its proven program discipline to drive results. We expect our global operating effectiveness program to drive annual cost savings of approximately $125 million, of which we expect to realize $75 million through the P&L in 2023, enabling increased profit realization. We can see the results coming through and we expect the impact to scale up as the year progresses. Now, let me share more details on our actions.

During last year, we transitioned to our global operating model allowing us to more effectively leverage our scale and drive cost reductions. As we further advance that model and streamline our processes, strengthen our collaboration and align our structure to work more efficiently, we are taking corresponding actions to streamline our workforce across the entire organization. We are making considerable progress on the streamlining actions we have underway. A large component of our streamlining actions is a U.S. voluntary retirement program, which is very far along with a targeted separation date of February 1. This will be followed by other actions, some of which will be involuntary. As always, we will care for employees in keeping with our shared value.

Moving to the supply chain. Our top supply chain priority remains keeping our customers in supply and supporting their growth. And while we expect continued volatility in global supply chain, we have strengthened our resiliency over the past few years to achieve this priority. As we responded to demand volatility over the past several years, we incurred additional costs above inflation, service our customers and have seen inefficiencies to develop in our supply chain. Some of these costs for investments and decisions made to support continued growth for both our customers and McCormick and some are the result of a buildup that can occur in periods of disruption. In 2022, with the service levels of focus the normalization of our supply chain costs and inventory levels has taken longer than expected.

As we stated on our third quarter call, during the fourth quarter, we began to implement initiatives to optimize our cost structure, increase our capacity and reduce inventory levels while strengthening our supply chain resiliency and ability to service our customers. Now for some details on these initiatives. First and foremost, while we continue to resolve some outliers, we have rebuilt and stabilized our service back to strong levels and at a high level of finished goods inventory on hand. Operating from this position enables us to maximize our performance, reduce our labor costs and pare back excessive use of co-packers within our operations. Starting with labor as we expect it to be the most significant driver of our cost reductions, during the fourth quarter, we reinstated more normal shift schedule with most locations now operating on a 24/5 pattern.

This allows us to eliminate inefficient and unpopular difficult to staff shifts. Additionally, as we move away from the industry-wide labor issues seen during the pandemic, we have stabilized absenteeism and turnover rates in our workforce and returned to more standard staffing by line. During the quarter, we optimized our leadership structure throughout our facilities and upgraded the talented key roles. Simultaneously, we are increasing the capability levels of our team. We are also accelerating automation, bringing for individual pieces of equipment to a completely automated line for a high-volume packaging format. We expect through these initiatives to reduce 10% of our Americas supply chain workforce. And over the past 3 months, we have already achieved half of the planned reduction.

Next, turning to our capacity. We are supporting future growth and enabling better customer service by investing to increase both manufacturing capacity and reliability in constrained areas. These investments also enable the repatriation of the production we scaled up at co-packers while continuing to meet the elevated demand. In our Flavor Solutions segment, our flavors volume, including seasonings and flavor encapsulation, has been growing at a mid single-digit rate for each of the past 3 years and demand remains strong. Our investments in additional seasoning capacity as well as spring dry capacity with the expansion of bonus footprint are on track to be online during the second quarter. Meanwhile, in our Consumer segment, we have been using co-packers for targeted high-demand packaging format such as some of our large value sized items.

Now given the efficiencies gained and the investments already in flight, we have started to repatriate some of these formats. Overall, we are on track for co-pack spending in 2023 to be the lowest in the past 5 years. From an inventory perspective, we are executing on initiatives to return to historical safety stock levels which has been disrupted and raised by the supply chain issues of the last few years. We reduced both raw material and finished good inventory during the fourth quarter. While we are aware we have further progress to make, we are confident and encouraged by the results our initiatives are delivering so far. As we progress to a more normalized environment, we will realize additional benefits from these changes. For example, we expect to see reductions in expedited freight and less than truckload shipping costs and will streamline other transportation inefficiencies.

With the recent opening of our new Maryland logistics center, we are able to eliminate expensive external warehouse costs before even fully realizing the inventory reduction, accelerating the expense savings. With more efficient manufacturing and lower inventory levels, we expect low material losses. We have managed through various supply chain challenges over the last several years. I am confident in our disciplined approach to resolving the increased cost within our supply chain while prioritizing meeting our customers’ needs. The impact of our actions is expected to normalize our supply chain cost, enhance our efficiency and ability to meet demand, reduce inventory levels and ultimately increase our profit realization as reflected in our 2023 outlook.

Our global operating effectiveness program has considerable momentum and we look forward to sharing more on our progress with you after our first quarter of 2023. Now moving to fourth quarter business updates for each of our segments. Turning to our Consumer segment on Slide 8, sales performance in the quarter was impacted by factors mentioned previously, the Kitchen Basics divestiture, exits of businesses and COVID-related disruptions in China as well as trade inventory dynamics between years. These factors as well as lapping high COVID-related demand early in the year also impacted the full year performance. Importantly, on a 3-year basis, we have grown annual sales at a 5% CAGR, driven by the Americas region, but we are ending the year with positive momentum in our consumption trend.

Now for some regional highlights on sales and consumption. Starting with the Americas, during the fourth quarter of 2021 because we were restocking, shipments were higher than consumption and we are lapping that this quarter, which impacts our sales growth. As we entered the holiday season this year and having shifted fairly in line with consumption for the first three quarters of the year, customers did not need to replenish their inventory as much despite strong consumer consumption during the holiday season. We estimate our fourth quarter sales growth rate was unfavorably impacted 6% related to these restocking comparisons. We did not fully appreciate the level of fourth quarter restocking in 2021, especially of high-margin holiday herbs and spices and the resulting impact on our year-over-year growth and as such, had expected stronger sales growth this year.

That said excluding this impact, our underlying volume performance in the fourth quarter was better than in the second and third quarters. We have confidence that as we move out of the first quarter, the holiday season fluctuations this year between consumption and inventory levels as well as retailer restocking resulting from pandemic-driven dynamics will have normalized and we have an increased level of confidence in our visibility. Our total U.S. branded portfolio consumption growth was 6% this quarter, as indicated by our IRI consumption data combined with unmeasured channel was the strongest of the year. Our investments in brand marketing and stronger holiday merchandising proved to be effective. And with the stabilization of supply disruptions, restoration of our service levels continued and our fourth quarter service level was the best of the year, just shy of our pre-pandemic standards.

Our consumption dollar sales, unit and volume all accelerated sequentially and our total distribution points or TDPs have stabilized. In spices and seasoning, our fourth quarter performance was the strongest of the year. Consumers are responding to our value messaging, trading up to larger sizes and according to our consumer insights are learning to navigate the current environment. We are continuing to build distribution on the Lawry’s everyday spice range we launched last quarter and early results are positive. We are seeing incremental sales and profit to the category as consumers are trading up to this line for private label. In recipe mixes, we gained share for the fifth consecutive quarter and with improved packaging supply, we also gained share in hot sauce and mustard during the quarter.

Across the portfolio, our trends are continuing to strengthen in the first quarter of 2023. In EMEA, we ended the year with our strongest sales growth in the fourth quarter. Our effective pricing and new product growth accelerated versus the first three quarters with our fourth quarter price realization, the highest of the year and our volume decline, the lowest. Our strong consumption momentum continued and accelerated sequentially. In the fourth quarter and for the full year, we gained share versus last year and 2019 in the UK and Eastern Europe herbs, spices and seasoning. Those gains were somewhat offset by softer performance in France. In the UK, we are driving the hot sauce category with Frank’s RedHot continuing to gain share again in the quarter and for the full year versus last year as well as compared to 2019.

Additionally, in the UK, we advanced our recipe mix leadership during 2022 to the number one share position. As we entered 2023, we are confident in our continued momentum in the EMEA region. 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 lap after the first quarter of 2023 as well as the COVID-related disruption in China. Reflected in our outlook, we are expecting continued disruption into the first quarter of 2023 with an expected recovery after the Chinese New Year. While we are currently experiencing the short-term pressure, we continue to believe in the long-term growth trajectory of our business in China. Our brand marketing, new products and category management initiatives are driving positive momentum with more to come from 2023 and we look forward to sharing this and our growth plans at CAGNY in a few weeks.

Turning to Flavor Solutions on Slide 9, sales growth reflected pricing actions as well as higher base volume growth in new products. Our sales performance has been outstanding all year, led by double-digit growth every quarter in the Americas and EMEA regions, resulting in 12% growth for the full year. On a 3-year basis, we have grown annual sales at an 8% CAGR with strong growth in all three regions. Now for some regional highlights. Our Americas fourth quarter sales growth was the strongest of the year. Growth in flavors, including snack seasonings and flavors for performance nutrition and health end market applications, as well as branded foodservice products drove our fourth quarter performance as well as our strong broad-based growth for the year.

We continue to realize the benefits from the combined capabilities of FONA and McCormick with new products contributing approximately 30% more growth in Flavors in 2022 than last year. Demand continues to strengthen with branded foodservice restaurant and institutional foodservice customers and we are also expanding distribution and gaining share in both spices and seasonings and hot sauce. In EMEA, our strong fourth quarter performance in all product categories capped an outstanding year of 17% growth, including significant volume growth of 9% as well as pricing. We are winning in all markets and channels. Growth remains strong across our customer base led by the momentum with our quick-service restaurant or QSR customers, partially driven by expanded distribution and their promotional activities.

In APV, we are driving further menu penetration with our QSR customers, realizing growth from strong performance of core menu item sweet flavor. We delivered solid growth in the APC region for the year despite the COVID-related disruptions in China. Across markets outside of China, we drove double-digit growth with contributions from both volume and pricing. Overall, Flavor Solutions demand has remained strong. And for certain parts of our business in the Americas and EMEA regions, our supply chain continues to be pressured to meet this high demand, driving extraordinary costs to service our customers. We appreciate our customers working with us and are encouraged by the results our collaboration is already beginning to yield. While our Flavor Solutions sales growth has been outstanding, we are not delivering profit growth in this segment.

We are committed to restoring Flavor Solutions profitability, recovering margin while ensuring we keep our customers in supply and driving growth for both McCormick and our customers. We are confident we will achieve margin recovery through three actions, effective price realization. Our price increases are only now catching up to the pace of inflation and we are beginning to recover the cost inflation or pricing live last year. The successful execution of the global operating effectiveness program I just mentioned, in particular, we expect the elimination of supply chain inefficiencies and the investments in capacity to have a significant impact in the Flavor Solutions segment. And finally, continued focus on driving growth in high-margin parts of our portfolio.

The strength of our Flavor Solutions portfolio and capabilities, including our customer engagement approach and culinary inspired innovation are driving our outstanding flavor solution momentum. We look to sharing more about our growth plan and margin recovery at CAGNY in a few weeks. Now some summary comments before turning it over to Mike. Turning to Slide 10, global demand for Flavor remains the foundation of our sales growth and we have intentionally focused on great fast-growing categories that will continue to differentiate our performance. We continue to capitalize on the long-term consumer trends that accelerated during the pandemic, healthy and flavorful cooking, increased digital engagement, trusted brands and purpose-minded practices.

These long-term trends and the rise in global demand for great taste are more relevant today than ever, but the younger generation stealing them at a greater rate. McCormick is uniquely positioned to capitalize on this demand for great taste with the breadth and reach of our strong global flavor portfolio we are delivering flavor experiences for every meal occasion through our products and our customers’ products and are driving growth. We are end-to-end flavor. We remain focused on the long-term goals, strategies and values that have made us so successful. We have grown and compounded that growth over the years, including through the pandemic and other periods of volatility. The strength of our business model, the value of our products and capabilities and the execution of our proven strategies by our experienced leaders while adapting to changes accordingly, give us confidence in our growth momentum and in our ability to navigate the dynamic global environment.

As we look ahead to 2023, we will focus on capitalizing on strong demand optimizing our cost structure and positioning McCormick to deliver sustainable growth and long-term shareholder value. The fundamentals that drove our industry leading historical financial performance remains strong and we are confident we are well positioned to drive profitable growth in 2023. I want to recognize McCormick employees around the world for their contributions in 2022 and the momentum they are driving in 2023. Now, I will turn it over to Mike.

Mike Smith: Thanks, Lawrence and good morning everyone. Starting on Slide 13, our top line constant currency sales grew 2% compared to the fourth quarter of last year. This growth was tempered by a 1% unfavorable impact from the Kitchen Basics divestiture, a 1% impact from the exits of low-margin business in India and the customer business in Russia and a 1% impact from China consumption disruption related to COVID restrictions. In our Consumer segment, constant currency sales declined 4% with the divestiture of Kitchen Basics contributing 1% to the decline and the combined impact of exiting the businesses in India and Russia as well as the China consumption disruption, contributing 3% to the decline. On Slide 14, consumer sales in the Americas declined 4% in constant currency.

Pricing actions in the region were more than offset by a volume decline, including a 2% impact from the Kitchen Basics divestiture as well as a 6% impact from lapping the restocking and retail inventory in the fourth quarter of last year and a higher level of retail inventories entering this year’s holiday season. Additionally, returning to pre-pandemic promotional levels also tempered our sales comparison to the fourth quarter of last year. In EMEA, constant currency consumer sales grew 2%. Pricing actions across all markets were partially offset by lower volume and product mix, including a 4% unfavorable impact from lower sales in Russia. Constant currency consumer sales in the Asia-Pacific region declined 22%, including a 23% unfavorable impact from the consumption disruption in China as well as the exit of low margin business in India.

Pricing actions in all markets across the region partially offset this unfavorable impact. Turning to our Flavor Solutions segment on Slide 17, we grew fourth quarter constant currency sales 14% primarily due to pricing actions with higher volume and product mix also contributing to growth in all regions. In the Americas, Flavor Solutions constant currency sales grew 13%, with pricing actions and higher volume contributing to the increase. Higher sales of packaged food and beverage companies with strength in snack seasonings, led the growth. Higher demand for branded foodservice customers also contributed to growth. In EMEA, we drove 16% constant currency sales growth, with 10% related to pricing actions and 6% behind the mix. EMEA’s Flavor Solutions growth was broad-based across this portfolio, led by strong growth with QSR and packaged food and beverage company customers.

In the Asia-Pacific region, Flavor Solutions sales grew 11% in constant currency with pricing actions and higher volume contributing to the increase. Growth was driven by higher sales to QSR customers, driven by strength in their core menu items. As seen on Slide 21, adjusted gross margin declined 410 basis points in the fourth quarter versus the year ago period. I will spend a moment on the significant drivers, highlighting the ones that drove more compression than we had expected. First, approximately 60% of this decline or 250 basis points is due to the dilutive impact of pricing to offset our dollar cost increases. Next, product mix was unfavorable as compared to the fourth quarter of last year, as well as compared to our expectations for the quarter.

First, in our Consumer segment. As mentioned earlier, lower U.S. spices and seasoning sales stemming from fourth quarter inventory restocking comparisons in both 2021 and 2022, as well as lower sales of higher-margin products in China due to the COVID restrictions negatively impacted mix. Sales shift between our Consumer and Flavor Solutions segments also contributed to the unfavorable product mix as compared to the fourth quarter of last year. The impact of the unfavorable product mix was higher than we expected due to the shortfall in consumer sales from what we had anticipated driven by both lower U.S. and China sales. Now for the impact of supply chain challenges on gross margins. In our Consumer segment, we experienced lower operating leverage because of the sales comparisons already discussed.

The impact, though, was greater than expected due to the China COVID-related plant shutdowns. In our Flavor Solutions segment, as we transition production to our new UK Peterborough manufacturing facility, we continue to incur dual running costs. We expect the unfavorable year-over-year impact of these costs to continue in the first quarter of 2023. And then for the balance of the year, expect them to be comparable to 2022. Additionally, we are still incurring elevated costs to meet high demand in certain parts of our business. While painful short-term, we know these investments to support our customers during periods of disruption are the right approach to drive long-term growth. That said, we did make progress on reducing the level of these costs in the fourth quarter.

However, the impact of that progress was offset by the unfavorable transactional impact of foreign currency exchange rates and some discrete issues we experienced in our Flavor Solutions operations during the quarter. While we recovered quickly from these issues, they still contributed significant unexpected costs to the quarter. Finally, partially offsetting the unfavorable drivers I just mentioned were our CCI cost savings. And of note, our price increases continue to catch up with cost inflation during the quarter for both segments. This was in line with our expectations and consistent with our performance. In 2023, we plan to fully recover the inflation or pricing has lagged over the last 2 years. Now moving to Slide 22. Selling, general and administration expenses for SG&A declined from the fourth quarter of last year with lower incentive compensation expenses, partially offset by higher distribution costs and brand marketing investments.

As a percentage of net sales, SG&A declined 270 basis points. The net impact of the factors I just mentioned resulted in a constant currency decline in adjusted operating income, which excludes special charges and transaction and integration costs of 9% and compared to the fourth quarter of 2021. In constant currency, the Consumer segment’s adjusted operating income declined 5%. And in the Flavor Solutions segment, it declined 26%. Turning to interest expense and income taxes on Slide 23, our interest expense increased significantly over the fourth quarter 2021 as well as over our third quarter of this year, both driven by the higher rate environment. Our fourth quarter adjusted effective tax rate was 23.1% compared to 21.3% 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 24, fourth quarter 2022 adjusted earnings per share was $0.73 as compared to $0.84 for the year ago period. The decrease was driven primarily by lower adjusted operating income with higher interest expense and a higher fourth quarter adjusted effective tax rate also contributing to the decrease. On Slide 25, we’ve summarized highlights for cash flow and the year-end balance sheet. Our cash flow from operations for the year was $652 million, which is lower than the same period last year. This decrease was primarily driven by lower net income and higher inventory levels. We returned $397 million of cash to our shareholders through dividends and used $262 million for capital expenditures in 2022.

Our capital expenditures included growth investments and optimization projects across the globe. In 2023, we expect our capital expenditures to be comparable to 2022 as we continue to spend on the initiatives we have in progress as well as to support our investments to fuel future growth. 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. With improving our gross margin, through our plan to normalize our supply chain costs and inventory levels, we will be better positioned to continue paying down debt and expect to de-lever to approximately 3x by the end of fiscal 2024.

Now turning to our 2023 financial outlook on Slide 26, our 2023 outlook reflects our 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 significantly higher interest expense and a higher projected effective tax rate. We also expect there will be minimal impact from currency rates. 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 we expect to be consistent with 2022 at low levels that we have historically experienced, but in line with the current environment. A 1% estimated benefit from lapping last year’s impact of COVID-related disruptions in China. Although we expect the impact will vary from quarter-to-quarter given 2022’s level of demand volatility. The divestiture of our Kitchen Basics business in August of last year and the exit of our consumer business in Russia during last year’s second quarter. And finally, the continued pruning of lower margin business from our portfolio. As always, we plan to drive growth through the strength of our brands as well as our category management, brand marketing, new products and customer engagement plans.

Our 2023 adjusted gross margin is projected to range between 25 to 75 basis points higher than 2022. This adjusted gross margin expansion reflects a favorable impact from pricing, cost savings from our CCI-led and global operating effectiveness programs, partially offset by the anticipated impact of a low to mid-teens increase in cost inflation. We expect cost pressures to be more than offset by pricing during the year as we recover the cost inflation or pricing lag last year. 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 global operating effectiveness program are expected to have an 800 basis point impact.

The savings from this program are expected to scale up as the year progresses. Next, the benefit of lapping the impact of COVID-related disruptions in China is expected to have a 300 basis point favorable impact. The Kitchen Basics divestiture is expected to have an unfavorable 100 basis point impact. And finally, an 800 basis point unfavorable impact is expected as we build back incentive compensation. The net impact of these discrete items is a favorable 200 basis points. This favorable impact, combined with expected 7% to 9% underlying business growth, which is driven by our improved operating momentum results in our adjusted operating income projection of 9% to 11%. In addition to the adjusted gross margin impacts I just mentioned, this projection also includes a low single-digit increase in brand marketing investments, and our CCI-led cost savings target of approximately $85 million.

Based on the anticipated timing of certain items, we expect our adjusted operating profit growth to be pressured in the first quarter, accelerated in the second quarter and returned to normalized cadence of delivery for the remainder of the year. The impact of cost inflation will be weighted toward the first half of 2023, with peak inflation in the first quarter. Also, in the first quarter, we expect continued pressure to sales and profit from COVID-related disruptions in China and then the benefit beginning in the second quarter from lapping last year’s impact. Additionally, the exit of our consumer business in Russia will impact the first quarter. As a reminder, we began exiting it during the second quarter of last year. Finally, related to profit timing, while we expect a minimal impact from currency rates, we project an unfavorable impact in the first half of the year and expected 3% unfavorable in the first quarter and a favorable impact in the second half of the year.

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 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% and based on 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 2020 earnings growth.

We expect our rate to be higher in the first half of the year compared to the second half. To summarize, our 2023 adjusted earnings per share expectations reflect strong underlying business growth of 8% to 10%, a 2% net favorable impact from the discrete items I just mentioned impacting profit, the global operating effectiveness program, the China recovery, the Kitchen Basics divestiture and the incentive compensation 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 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 would like to recap the key takeaways as seen on Slide 28. Our fourth-quarter sales performance despite challenges from the COVID-related disruptions in China reflects the underlying strength of our global portfolio and the continued execution of our long-term strategies. With the stabilization of service and our supply chain in addition to positive momentum and consumption trends, we expect an acceleration in consumer segment sales dollars and volume in 2023 and continued strong flavor solutions performance as the strength of our portfolio is net with outstanding demand across our customer base. We have strong growth programs, and we look forward to sharing them at CAGNY.

We are committed to increasing our profit realization. The actions we have underway to normalize our supply chain costs and increase our organizational effectiveness and efficiency are already yielding results. Our global operating effectiveness program is expected to deliver $125 million of cost savings. We expect the benefits of the program to scale up through each quarter of 2023 and continue to be accretive into 2024. While actively responding to the macroeconomic challenges we are facing, we continue to operate with the same discipline and commitment to execution as we have in any other operating environment. The fundamentals that have driven our historical performance remain in place, and we are as diligent as ever in driving value for our employees, consumers, customers and shareholders in both 2023 and beyond.

The compelling benefits 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. Before turning to your questions, I want to reiterate my confidence and driving the profitable growth reflected in our 2023 outlook. And now for your questions.

See also 14 Best Dividend Stocks To Buy and Hold and 10 Best Vanguard ETFs for Diversification.

Q&A Session

Operator: Thank you. Our first question is from the line of Andrew Lazar with Barclays. Please proceed with your question.

Andrew Lazar: Great, thanks. Good morning, everybody.

Lawrence Kurzius: Hi, Andrew.

Andrew Lazar: Hello. I guess the question I’m getting, I think, most from investors this morning really has to do with the fiscal €˜23 operating profit guidance of 9% to 11%. I understand you’ve got incremental cost savings that are set to offset the incentive comp rebuild and you have some of the China recovery built in as well. But I guess, in what’s still clearly a dynamic operating environment, it still seems, I guess, aggressive to a bunch of folks we’ve spoken to this morning, especially given it’s expected to be a somewhat back-end loaded year from a profitability standpoint. So I was hoping, Lawrence maybe you could comment a bit on that and add some more color on the level of confidence around this. And then I’ve just got a follow-up. Thank you.

Lawrence Kurzius: Sure. This almost comes off of my final comments on the prepared remarks. We really believe that this is balanced guidance. It is certainly not aggressive. We have a due degree of humility after last year and have a balanced outlook considering risk. And we have a high degree of confidence in this guidance, including the operating profit guidance. It’s underscored by our strong consumer demand and the underlying demand from the consumer is quite strong coming out of fourth quarter is actually the strongest demand, consumer demand, that we’ve seen. And we continue to have tremendous demand from our Flavor Solutions customer. We have very strong programs that we did not talk about on this call, particularly on herbs and spices and we will be sharing those growth programs at CAGNY.

And so that is a foundation, underlying the performance on operating profit. We have very strong confidence in our ability to realize the cost savings that we described. These programs are being managed programmatically through the same team that manages our CCI program. And I believe that they are very much in our control and we’re quite confident about them. And I think that they more than offset the build of incentive comp. And maybe what some of the people you’re talking about haven’t fully considered is that we expect to cover not only this year’s cost inflation, but also recover all of the costs that we have lagged over the last 2 years our pricing actions early in the year. And as you know, pricing actions take time to sell in. So you would be correct in assuming that many of these conversations are either completed or well underway at this time.

Andrew Lazar: Great. That’s helpful. And that’s a good segue into my follow-up, which is with low to mid-teens inflation still to come and as you’ve talked about likely further pricing actions still ahead, I’m just trying to get a sense how that jives with the price gap issue that you’ve talked about previously in your core spice and seasonings category and the fact that pricing decelerated sequentially in fiscal 4Q in consumer versus 3Q? And I thought it was supposed to build and maybe that was mix versus actual price? Thanks.

Lawrence Kurzius: I am going to say a couple of words about that and I’m going to let Brendan follow me. First of all, on that pricing, I would not forget that the significant portion of it is going to be on the Flavor Solutions side of the business. It’s sort of confident when those have come up and allowed us to make some moves there. And so that is certainly a big part of the pricing equation. Our inflation outlook is higher actually on the Flavor Solutions inputs than on consumer input for the year. And so the pricing is similarly skewed more towards the Flavor Solutions side of it. I’m going to let Brendan talk about the price gaps and take it from here please.

Brendan Foley: Yes, it’s still €“ Andrew, just to build on and Lawrence has replied. I’ll just jump back to maybe, I think one of the points you brought up regarding private label. We are seeing price gaps narrow right now. And we certainly saw that in the fourth quarter, even leading into the first quarter. And we started to see that trade down moderate honestly, through the quarter. So that’s kind of an insight. And maybe that’s also a reaction just sort of the macro inflationary factors have seem to moderate also out there in the economy overall. Consumers are looking for brands, but they are also looking for value. And so it’s not necessarily the lowest price. Parts of our portfolio, we’re seeing really start to drive a lot of growth just on large sizes as we see consumers kind of look for that value.

We also €“ you should have called out, launched this Lawry’s everyday line of spices and we are starting to continue to build distribution on this, but the early results are really good, in fact, maybe better than what we expected. We’re seeing a lot of incremental category sales and profit coming from this line, those because consumers are trading up from private label. That’s kind of the source of volume that we’re seeing coming from this and it’s bringing in new consumers into the McCormick portfolio. So we are €“ we like the results so far that this is providing. But that’s certainly a good outcome, and it factors into how we think about next year. On pricing, just sort of comparing quarter-to-quarter, to your point, I think that’s probably more a function of the fact that we’ve been reinstating promotional activity that’s been, I think, called out previously.

We’re also lapping last year’s increases, which were higher on a relative basis. But also our volume is in the fourth quarter had an impact on that overall level of pricing, too. So we’ve covered that with regard to the restocking comparison, and that’s factored into that quarter-to-quarter view.

Andrew Lazar: Okay, thanks so much and see you guys in Florida.

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

Ken Goldman: Hi, good morning.

Lawrence Kurzius: Hey, Ken. Good morning.

Ken Goldman: Hi. Thank you. I wasn’t sure if I heard you correctly, and maybe you said this, maybe you didn’t. But you said that sales growth will be driven primarily by pricing. Does this mean you expect volumes for the year in €˜23 to be positive? And I guess, along those lines, I think you mentioned that you expect elasticity to not necessarily worsen in €˜23 versus €˜22? I think if I heard you right, you said it will remain kind of at today’s level, just curious why that is given that the consumer environment does seem to be eroding a small amount?

Lawrence Kurzius: Start with the last part of it, Ken. We’ve seen some moderation of elasticity as we’ve gone through the year. It looks like peak elasticity was around the time when gas prices were at $5 a gallon and above for most of the country and was really not so much a reaction to our price increase, but to the general level of inflation that consumers were experiencing and the high pressure on their wallet. So our outlook for 2023 seems that the similar environment carries forward and that we’re seeing elasticity in that range. We’ve also adjusted €“ we’ve looked at €“ we’ve seen where we’ve had greater elasticity and where we’ve got less elasticity, and we’ve reflected that in our future pricing actions. So I think that we’ve really been thoughtful around the question of elasticity.

We do expect the consumer to be under pressure in 2023. I don’t care whether you call it a recession or a soft landing. Consumers on the lower end of the income spectrum, not even €“ I’m not talking about the bottom, I’m talking about the lower half. I’m certainly going to have less money and are going to be careful with their budgets. We are reflecting that in our marketing programs already, and with some of the innovation that we’ve launched. It’s not all about buying the cheapest product that consumers are looking for value, and that’s really come through clear on our proprietary research and value has many components. It is true that our sales growth is driven primarily by pricing in 2023. And at the total company level, we expect volumes to be pretty much flat.

And so that would be an improvement in the trend line, but that’s going to vary tremendously by region and a good bit of the overall volume growth is going to come from recovery in China following this we expect following this quarter where we have that tremendous COVID impact right now during Chinese New Year.

Ken Goldman: You guys missed anything there?

Mike Smith: No, I think.

Ken Goldman: Just a quick follow-up and thank you for that. On the restocking, you mentioned that perhaps you hadn’t quite recognized at the time, how large the impact was the last couple of years, totally understandable given the volatility that everyone is going through. I’m just curious if the company is doing anything to maybe slightly improve its ability to quantify those dynamics maybe in a more real-time way. So that going forward, there is just fewer surprises from year-end.

Lawrence Kurzius: That’s a great question, Ken. I’m going to pass that straight to Brendan.

Brendan Foley: Yes. Thanks, Ken, for the question. Definitely, this environment, certainly volatile, made it tougher to read. But as we think about just moving forward, it’s definitely going through, I think this period of time has allowed us to kind of refine how we look at your restocking and just the fluctuations particularly coming out of the season between consumption and shipments. This has allowed us, I think, to kind of refine our view. Overall, we definitely had a pretty disciplined approach to it is even prior to the pandemic, but I think this is refine how we look at it in the tools that we use, the analytics that we apply. So we have a lot of confidence going into this next year, particularly as we exit the first quarter that just the fluctuations that we typically would see during the holiday season between consumption and shipments.

And then on top of that, this restocking comparison, things begin to normalize. I think is our view as we come out of Q1 providing just a little bit more stability in that read.

Mike Smith: Some of that is internal to me. Our supply chain is really operating at a much higher level now than it has an investment service perspective and stability. That’s another thing that gives us better insight into our sales.

Ken Goldman: Thank you.

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

Robert Moskow: Hi, thanks. I was hoping you could break down €“ I was hoping to break down your volume forecast by Consumer versus Flavor Solutions. Because I think one of the strange dynamics of 2022 is that at a time when consumers are trying to save money, volumes were weak in Consumer, but your bonds pretty strong in Flavor Solutions. So I am wondering how you think of €˜23 and is there a risk that because the consumer environment is so volatile that it might be very tough to determine what the trade down between like foodservice and retail might be?

Lawrence Kurzius: Well, I don’t think that we are giving or providing a split between the growth rates on consumer and flavor solutions. And I will say that we would expect higher growth on flavor solutions in 2023. We have €“ if nothing else, a higher level of pricing expected in the Flavor Solutions segment, and that alone is going to drive a higher increase year-on-year. Flavor Solutions is a bit of a portfolio itself. It includes branded foodservice, where we believe that we have gained significant share in North America, in particular, in our branded foodservice business with the number of wins as we have gone through the year. We have had tremendous growth on flavors and flavor seasonings, for our flavor solutions customers in the area of snacks, performance nutrition.

The health end market, we have had a very strong unit growth through the entire pandemic and continuing through €˜22, and we have seen no end of sight on that. We have been slightly capacity constraint in that area. And we have some significant new capacity that for longer term investments that are finally coming on line in the second quarter that opens up additional capacity for us that’s both for flavor with some expansion that we have done. And at bona or spray drying capability, and in snack seasonings, where we have been in the process of converting one of our plants from some low-margin products, the ability to run a snack seasonings and that conversion is effectively coming online. We are in the trial stages right now, should be online in second quarter.

So, a bit of a longish answer there, but I hope that covered it.

Robert Moskow: Okay. Can I ask a follow-up? You talked about the new plant that’s opening in the UK and the double costs, I guess that are involved in it. Why is it taking so long to get past these double costs?

Mike Smith: Hey Rob, it’s Mike. I will answer that. I mean I would say this, I mean we are taking €“ we have a very large actually footprint in one part of the UK and then the Petersburg plant, which we talked about is a massive facility. So, we are kind of doing this in a two-step process to make sure we service our customers properly. So, it’s different than when you are just building new capacity like we have talked about, where you are kind of adding on to a plant. We are actually closing a plant in a very difficult environment to close plants for a lot of reasons, moving it to a brand-new facility. So, that does take more time. The good news is we are kind of almost out of that after the first quarter. You think about the incremental costs we have talked about is in the first quarter after it levels out.

And as that production €“ the remaining production transfers over the rest of this year, €˜24 will be a really clean year. But when you are closing big plants and opening a big plant, they don’t take one quarter, it will take about a year, if you think about it, that’s what this one is taking around that much time.

Robert Moskow: Okay. Thank you.

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

Alexia Howard: Good morning everyone.

Lawrence Kurzius: Hi Alexia.

Alexia Howard: Hi there. Can we focus in on the flavor solutions business? You gave us the three reasons why margins should improve this year. I am kind of curious about timing on that. How quickly will the pricing kick in and the elimination of the capacity expansion costs, just a little bit on the timing. Thank you. And I have a follow-up.

Lawrence Kurzius: Yes. I mean I wasn’t really being specific on the dual running costs when I was describing the improvement in flavor solutions. In terms of the pricing, I don’t want to get overly specific on this because we are in customer conversations right now. And there is a certain amount of commercial tension in all of those conversations. But we fully expect, as I have said about pricing generally on the flavor solutions side of the business as well that we will recover all of the inflation that we are not only incurring into the New Year, but also the cumulative inflation that we collected €“ that we have experienced the last two. And I would say that our lag in getting that getting caught up is greater in flavor solutions than it has been on the consumer side. So, it’s going to be €“ it’s pretty meaningful and that’s an important element. We would fully expect to have that work complete early in the year.

Mike Smith: I think the other point, too, Alexia, a couple of things. We talked about inflation being weighted to the front of the year. First quarter is the highest inflation that impacts labor solutions as well as consumer. The other thing is our global operating effectiveness program. I mean there has been a lot of positive activity. The reality though is the first quarter is going to have the least impact and it’s going to ramp up really rapidly in the second quarter, third quarter and fourth quarter. So, the second quarter is going to be a big impact. The flavor solutions because a lot of the inefficiencies we have talked about over the last year have been in the supply chain area for flavor solutions. So, we do see more of that savings going to that segment, which will help.

Alexia Howard: Great. And then as a follow-up, the €“ I have to come back to it, but the share dynamics in the U.S. herbs and spices that we are seeing in the Nielsen data. It looks as though you are still losing market share. It doesn’t look like it’s private label anymore. I presume it’s smaller brands. When do you expect that to turn the corner? And what €“ can you give us any more color about what the dynamics are there? Thanks and I will pass it on.

Lawrence Kurzius: Alexia. I would love to answer that question, but I am going to let Brendan answer it.

Brendan Foley: Thanks Lawrence. Alexia, I just €“ as we look at our business, I think just first, remarking on the fourth quarter. I think what we were really feeling pretty €“ feel pretty good about in terms of the momentum we have talked about before is that we have seen sequential improvement not only across the total McCormick portfolio and consumer in the U.S., but also in herbs and spices. Fourth quarter is probably our best quarter of the year. We saw sequential improvement on not only sales, but also unit and also volume as we went through the second quarter all the way to the fourth quarter. So, that’s pretty good momentum going into the next year. Having said that, though, certainly, we saw a stabilization of where our share is right now and expect to improve that over the course of €˜22.

But we don’t never really get into the habit of sort of projecting what share will be in the future. So, we are not going to do that on this call necessarily, but we do expect to have improved performance in €˜23. And I think related to what those plans will be, we will talk a lot more about that at CAGNY. And so I think there will be a lot of great opportunity to kind of go deeper on what those plans and opportunities look like.

Lawrence Kurzius: We actually would have loved to have done that on this call and Kasey has insisted that we see some higher power. I know your question, Alexia, was about U.S. herbal and spices specifically. But if I could just step back, if I look at the fourth quarter, we gained share in hot sauce. We have gained substantial share in mustard what we finally are back in full supply. We had our, I think our fifth consecutive quarter in a row of strong share growth in recipe mixes, which €“ and everyone forgets those, but their profitability is right there with herbs and spices. And then in many of our international markets, we had share gains in urban spices specifically. So, when you look at the full picture, we have got €“ generally, as it has been the case all along, where we have had good supply, we have had the ability to grow our market share.

A lot of the share loss that you are seeing is due to TDP losses early in the year that are still being left. And I expect we have won some of those TDPs back and I expect us to continue to do so as we go through €˜23.

Alexia Howard: Very helpful. Thank you very much. I will pass it on.

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

Adam Samuelson: Yes. Good morning everyone.

Lawrence Kurzius: Good morning Adam.

Adam Samuelson: Good morning. Hi. So, I wanted to maybe hone in a little bit on the kind of net operating income growth guidance and where you shake out for 2023, because I am just trying to square the thought relative to where profit was in 2020 and 2021. Especially €˜21, you are still at the high end of the guidance range, $80 million, $90 million lower than you were last year, which there shouldn’t be an incentive comp kind of comparison issue in there and you talk about fully recovering pricing €“ cost inflation. Currency has been a little bit of a headwind. Divestitures kind of net sold a few things and volumes are lower. But I guess I am just trying to reconcile kind of where on an absolute dollar basis, we shake out for 2023, inclusive of the incremental restructuring and the cumulative effect of pricing relative to where the profit dollars were 2 years ago, or 3 years ago and how we should think about that at the company level moving forward?

I mean if we rebase somewhat through as we come through COVID, or is there an acceleration beyond 2024 and 2023 in profit growth to kind of get the long-term kind of EBIT CAGR back into that kind of mid to high-single digit range?

Mike Smith: Adam, this is Mike. Good question. I mean we put together the slide in the earnings deck to really walk you from the current guidance. And from a percentage basis, realizing it’s not dollars, but from a percentage basis, constant currency guidance to the underlying base growth. And if you think about it, you look at that underlying base for, once you take out all the kind of I hate to say one-timers, but things are really discrete items year-over-year, and some of which will continue into next year, like the global operating effectiveness program, as you talked about rebuilding there are profit getting back to our long-term profit algorithm by taking out these costs that have really come through during the pandemic.

So, I think there is a case for acceleration into the future. We are not talking about €˜24 or €˜25 right now. We need to nail €˜23. But if you look at that underlying base growth 4% to 6% net sales growth, which actually went out bolt-on M&A is at the high end of our guidance. So, really good underlying performance. We get back to the 7% to 9% operating profit growth. If you really if you think about the recovery of the pricing that we talked about, that allows us to really drive that 3 percentage point increase will get to that 7% to 9%. So, we feel good about that, along with our noble things like our normal CCI program and things like that, investing a bit more in advertising to grow the brand. So, that virtuous cycle we talk about is to get the operating profit and 1% leverage below there, we would love to pay down more debt.

That’s why we are driving hard on our working capital programs this year to get our inventories back down to where they need to be. So, we feel good about like Lawrence said before, it’s a prudent call. We feel really confident about it. And so I think hopefully that helps you understand the moving parts other than the discrete items, some of which the positives will continue into next year, even the net recovery in China, hopefully €˜24 is better than the €˜23. But we feel good about on base.

Lawrence Kurzius: I will add to that, that the guidance that we are giving is balanced and all we have been saying prudent. And just from €“ that’s our opinion. And as you have heard from some of the other questions, that there is somebody think that this actually might even be aggressive. But we have tried to give a balanced guidance here, but our teams are used to winning and have €“ we have very aggressive business plans, and we will do everything we can to not just recover, but exceed. We are used to starting every year-end earnings call with record €“ with the phrase record results. We were not able to do that this year, and we would like to get back on track with that low record of historic performance.

Adam Samuelson: Okay. I appreciate all that color. If I can just ask a follow-up on flavor solutions and just €“ I mean there is a meaningful portion of that business that’s selling into other food companies. And just want to get a sense if you saw or have experience or worried about any destocking amongst some of your food company customers who either have taken similar working capital kind of reduction actions as you are taking yourselves, or are kind of have counseled you to think about that potential moving forward in the context of a still fairly sluggish underlying consumption environment?

Lawrence Kurzius: I would say at this point, no. The fact is that our supply chain recovery, I believe and the feedback we get from our customers is generally ahead of the peers. And so many of them are still fairly hand to mouth right now and have a different set of dynamics. Many of them are still rebuilding inventory €“ sorry, rebuilding inventories in the store at the shelf and correctly getting items reinstated. And those in the area of snacking are just experiencing explosive growth.

Brendan Foley: If I could build on that, Lawrence. Adam, the other thing to consider regarding our flavor solutions business is a good part of that sales growth algorithm is a lot of new product and innovation activity for our customers as well as winning new customers and winning share in the market. And so that factors into how we think about our growth.

Adam Samuelson: Okay. Alright. That’s all helpful. I will pass it on. Thank you.

Operator: Our next question is coming from the line of Chris Growe with Stifel. Please proceed with your question.

Chris Growe: Hi. Good morning.

Lawrence Kurzius: Good morning.

Chris Growe: Hi. I had a question coming back to kind of the U.S. business overall, and Brendan had talked about kind of moderating and trade down in the U.S. I wanted to understand, do you attribute that to your promotional spending? Was that one of the factors that helped drive that? And would you expect promotional spending to be up in fiscal €˜23, because I am trying to square that with the need for more pricing. And can you accomplish the price points you need and also see kind of the value it seems like consumers are seeking here?

Lawrence Kurzius: Yes. I will say that the promotional activity isn’t all about discounting. And so a lot of the promotional activity that we have been able to reinstate is around merchandising activity, which includes displays and digital partnerships and all €“ and these things have very good ROI, and we are quite positive about it. I am going to give the floor here to Brendan though.

Brendan Foley: Yes. I mean Chris, I think as we go into €˜23 and how we look at it, just to build off of where Lawrence is going, a lot of that promotional spending is getting back into driving the categories with our customers. And the feedback we are getting from them is welcome, frankly, in that regard because we want to keep driving up better overall growth. Can you just remind me the front end of your question, though, was in regards to what?

Chris Growe: Just that there is €“ you have seen a moderating and trade down and you have had an increase in promotional spending. So, I was trying to understand, is that driving that moderating and trade down? And then can you accomplish that if you are trying to get prices higher?

Brendan Foley: I think you are seeing a confluence of a number of things happening in the quarter where some of those macro factors that we may have spoken about before, like the price of gas, etcetera, those seem to have moderated. So therefore, broadly, we think that has an impact. So, also the reinstatement of promotions probably during, obviously, a very important season like the holiday would have also a year-over-year impact there, too. But I think there is a couple of things we would like to add is we got more aggressive in Q4 for a reason. We called that out in the third quarter. And part of that includes also a lot of focus and an increased A&P around value messaging. And we have seen a lot of great response from that. And so I think there is a number of things playing in here, Chris, that lead us to believe that we have got good momentum going into €˜23.

Lawrence Kurzius: I will also say that our proprietary consumer survey shows that between May and December, when we have talked with €“ we ask consumers about their mechanisms for coping with higher pricing. Trading down to private label and store brands was the item that had the biggest decline in terms of the consumers who certainly were doing that. And so I think that matches up well with what we are seeing through the scanner and our other data.

Chris Growe: Okay. That’s helpful. Thanks for all of that color there. Just one other quick follow-on or question will be that inventory was kind of a moving factor year-over-year and you had a big increase last year in inventory. Did you build less inventory, I guess overall or should I say that maybe better that did inventory move lower in the fourth quarter than you expected? Is that the unique factor around the inventory move in the quarter?

Mike Smith: We did start making progress on our inventory in the fourth quarter, as you mentioned both in the raw material and finished goods side, which was really a focus with our global operating excellence for efficiency program. One of the outputs of that is reduced inventory too as you stabilize your supply chain. And we have very aggressive targets for this year. And again, it goes back to creating more cash to help drive our debt down.

Chris Growe: How about at retail?

Mike Smith: Progress is just starting.

Chris Growe: How about at retail as well, did retail inventories move lower in the fourth quarter?

Lawrence Kurzius: No, Chris. I would say that’s not really the relationship we are trying to describe here. We feel like inventories simply retailers had done a lot of restocking in the fourth quarter just 1.1 . And they just happen to have more on hand as we are going to the holiday season. But I don’t believe we are trying to say that they are executing the holiday season differently than they have as normal.

Mike Smith: Yes. And just in the normal ebb and flow of things. Remember, our fiscal year end stands in the middle of the holiday season. So, coming in the first quarter, retailer inventories are always high. We always ship below consumption in the first quarter. That’s like a normal seasonal pattern. And I think that we are well set up for that. Just given the rapid amount of change, we are just being cautious about that. And in our remarks, we have said we expect normalization after Q1.

Chris Growe: That makes sense. Thanks so much for that color.

Lawrence Kurzius: Thank you.

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

Max Gumport: Hi. Thanks for the question.

Lawrence Kurzius: Max, you’re welcome.

Max Gumport: On the call, you gave some helpful details on the puts and takes to consider with regard to the cadence of your EPS in FY €˜23. If I have it right, it sounds like the first quarter will be pressured as a result of peak inflation, cost savings ramping up throughout the year, a continued impact from COVID-related disruptions in China and a higher tax rate among other impacts. Can you help give us a sense for how dramatically these factors could hold back your first quarter EPS?

Mike Smith: Yes. I mean I think on top of that, the highest commodity cost increases in the first quarter. I think the first quarter is always our smallest quarter. If you think about the cadence of, Max, in our history, fourth quarter are the most sales and most profit comes through because of the holiday season. Except for China, which is actually inversed. China’s first quarter is their biggest quarter because of the Chinese New Year. So, that’s another factor that’s going to put pressure on our first quarter this year because of the COVID issues. But I would hesitate to say we get round number is what it’s going to be, but it’s going to be a difficult first quarter. For all the factors, you named four or five of the factors right on our list.

I added the China impact also into that. So, as well as FX. FX is flat for the year, Max, but in the first quarter, it’s about a 3% negative year-on-year. So, that’s another reason that the first quarter is going to be the most challenging, but for all the reasons you mentioned with the global operating effectiveness, the recoveries and it will be strong for the rest of the year.

Max Gumport: Great. Thanks very much. I will leave it there.

Lawrence Kurzius: Great. Thanks.

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

Peter Galbo: Hey guys. Good morning. Thanks for taking the question. I will keep it pretty quick. I guess just as I think about the operating income bridge, the incentive comp piece of that, that’s kind of an 800 basis point headwind as you rebuild that function. Like how flexible is that, or how discretionary is that? And the reason for the question is, let’s say, if something in the plan that you have, the year goes wrong outside of your factors, right, China take longer to reopen or destocking take longer or restock gets stronger in the U.S. Like can you pull that piece of the puzzle back more as a means to kind of still hit the operating income target, or is that pretty much you have to €“ you are committed to spending that at this point?

Lawrence Kurzius: Well, Peter, our incentive comp pays for growth. And we fell short of growth in 2022. And so that’s reflected in a very low incentive comp that we didn’t take back and confidence to the P&L. As we went through 2022, in 2023, it starts a New Year. And so we are starting with the expectation that we are going to hit our goals. And of course, as we over or under achieve, we will adjust incentive comp as we go through the year.

Mike Smith: Yes, it’s very formulaic. The majority of our incentive competence based on McCormick profit, which is basically our operating profit less a capital charge we call kind of light EVA model to make sure all of us are held accountable for capital improvement. So, it’s really focused a lot on operating profit and a bit on EPS, too, very formulaic. We pay for growth.

Peter Galbo: Great. Thanks very much guys.

Operator: Thank you. At this time, I will turn the floor back to Lawrence Kurzius for closing remarks.

Lawrence Kurzius: Great. Thank you. McCormick is aligned with consumer trends and the rising demand for flavor in combination with the breadth and reach of our global portfolio and our strategic investments provide a strong foundation for sustainable growth. We are disciplined in our focus on the right opportunities and investing in our business. We are continuing to drive further growth as we successfully execute on our long-term strategy actively respond to changing consumer behavior and capitalize on opportunities from our relative strength. We continue to be well positioned for continued success and remain committed to driving long-term value for our shareholders.

Kasey Jenkins: Thank you, Laurence and thank you to everybody for joining today’s call. If you have any questions regarding the information, please feel free to contact me. This concludes the call for today.