MCCORMICK & CO INC Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Hurricane Helene: Thoughts with those impacted by the storm, monitoring the situation.
• Third Quarter Performance: Aligned with expectations, success in prioritized investments, volume growth despite challenges.
• Consumer Trends: Resilient but value-seeking consumers, cooking at home, focus on perimeter shopping, Gen Z interest in gourmet flavors.
• Areas of Success: Global consumer segment unit consumption growth, grilling portfolio outperformance, Cholula line growth, mustard market share gains, e-commerce growth, Flavor Solutions branded foodservice and flavors strength.
• Areas of Pressure: Hot sauce peer supply chain impact, QSR traffic softness in EMEA, APAC QSR traffic and geopolitical boycotts.
• Fourth Quarter Outlook: Excited for holiday season, merchandising and marketing plans in place.

Segment Performance

• Consumer Segment:
  • Americas: 1% volume growth, pricing investments offset by volume. Sequential volume improvement in core categories.
  • EMEA: Constant currency consumer sales increased 3% (4% volume, 1% pricing). Broad-based sales growth.
  • APAC: Constant currency sales flat due to China macro; outside China, volume-led growth.
• Flavor Solutions Segment:
  • Americas: Constant currency sales increased 3% (1% price, 2% volume, driven by branded foodservice).
  • EMEA: Constant currency sales decreased 9% (3% divestiture impact, 5% volume/mix, 1% price).
  • APAC: Comparable in constant currency, impacted by QSR traffic outside China.

Guidance

• 2024 Outlook:
  • Constant currency net sales: 0-1% growth, mid to high end of range expected.
  • Adjusted operating income: 4-6% constant currency growth.
  • Gross margin: 50-100 basis points higher than 2023.
  • Tax rate: ~21%, better than prior guidance.
  • Adjusted EPS: $2.85-$2.90, 5-7% increase vs 2023.
• Fourth Quarter: Expect volume growth in both segments, sequential improvement, pricing with slight negative impact, gross margin improvement, SG&A investments in IT and digital transformation.

Risks

• Hurricane Helene: Impact on operations and affected areas.
• China Environment: Continued challenge, worse than expected.
• QSR Traffic: Uncertainty affecting Flavor Solutions.
• East Coast Port Strike: Potential supply chain interruption if extended.

Question and Answer

• Q: Continued sequential volume improvement in consumer, especially Americas. Curious on volume lift from pricing actions.
  • A: Progress made, price gap management, brand marketing, innovation, distribution expansion contributing. Guidance reflects dynamic consumer environment.
• Q: Prepared foods business in Americas stabilizing. View on industry volume trends.
  • A: Customer plans performing as expected, Flavors business in Americas with high innovator customers, branded foodservice strength, but QSR traffic uncertainty.
• Q: Gross margin guidance, year-to-date up 125 basis points. Conservatism in guidance.
  • A: Q4 expected higher gross margin than Q3, supply chain investments, normalized Flavor Solutions mix, slight pricing impact.
• Q: Margin recovery in Flavor Solutions, driver of mix.
  • A: Portfolio migration to higher margin categories (Branded Foodservice, Performance Nutrition), CCI and global operating effectiveness program, leverage from business growth.
• Q: Hot sauce pressure, impact of mini trial sizes.
  • A: Peer supply chain impact, mini trial sizes driving trial of new flavors, innovation (Frank's RedHot Squeeze products) performing well.
• Q: Marketing and advertising ramp in Q4, durability of ROI.
  • A: Holiday season programming, strong holiday plan setup, ongoing brand investments driving results.
• Q: East Coast port strike impact.
  • A: Contingency planning in place, mitigated risks, monitoring daily, encouraging quick resolution.
• Q: EPS decline in Q4, core drivers.
  • A: SG&A investments in IT/digital transformation, tax and unconsolidated operations impact, timing of investments.
• Q: FX no longer headwind, discrete tax benefit.
  • A: FX impact reduced, tax rate improvement, guidance adjustment reflecting these factors.
• Q: Spices and seasonings in US, competitive positioning.
  • A: Broad offering, competitive with private label and smaller brands, growing TDPs, focus on healthy category growth.
• Q: Cash flow, working capital.
  • A: Fourth quarter strong cash flow, working capital use year-to-date due to contingency planning, expecting strong cash flow year.
• Q: SG&A step-up in 4Q, segment impact.
  • A: Across both Consumer and Flavor Solutions segments.
• Q: Unconsolidated operations growth, 4Q comparison.
  • **A: Strong performance in McCormick de Mexico, peso exchange rate impact translating earnings.