McCormick & Company, Incorporated Q2 2022 Earnings Results & Report

McCormick & Company, Incorporated EPS Results

• Actual EPS: $0.48
• Consensus EPS: $0.65
• Beat/Miss: Missed by -$0.17
• One Year Ago EPS: $0.69
• EPS Beat Rate: 5 of last 8 quarters

McCormick & Company, Incorporated Revenue Results

• Actual Revenue: $1.54 billion
• Expected Revenue: $1.61 billion
• Beat/Miss: Missed by -$70.71 million
• YoY Revenue Growth: -1.30%

McCormick & Company, Incorporated (NYSE:MKC) is a global manufacturer and marketer of spices, seasonings, condiments, sauces, and other flavor products. The company serves consumers through grocery, e-commerce, and foodservice channels, while also supplying flavor solutions to food manufacturers and other commercial customers.

Its consumer portfolio includes McCormick spices and seasonings, as well as brands such as French’s, Frank’s RedHot, Lawry’s, OLD BAY, and Gourmet Garden. Its products are used in home cooking, restaurants, and packaged foods across a range of cuisines and meal occasions.

Founded by Willoughby M. McCormick in 1889, the company has grown from a spice business into an international flavor company. McCormick serves customers in North America, Europe, Asia-Pacific, Latin America, and other markets, with products marketed under regional and global brands.

McCormick is headquartered in Hunt Valley, Maryland. Brendan M. Foley serves as the company’s president and chief executive officer.

McCormick & Company, Incorporated Q2 2022 Earnings Call Transcript

Key Takeaways

• Sales declined 1% in Q2 (flat on a constant-currency basis); excluding a 4% drag from COVID lockdowns in China and the Russia/Ukraine exit, underlying sales would have grown about 4%.
• Escalating inflation and supply-chain pressures prompted multiple price increases in Q2, with further hikes planned so that pricing will begin to outpace cost inflation in late Q3 and Q4.
• Severe COVID lockdowns in China disrupted production, caused labor shortages and drove up logistics costs, leading to unrecoverable sales and profit impacts this fiscal year.
• Adjusted operating income fell 33% (32% in constant currency) due to higher costs and geopolitical disruptions; management expects gross-margin recovery in H2 as pricing catches up and cost-savings initiatives deliver.
• The Flavor Solutions segment delivered an 11% constant-currency sales increase, driven by strong pricing and volume/mix gains in both at-home and foodservice channels.

Presentation

[Kasey Jenkins, Chief Growth Officer at McCormick & Company]

Good morning. This is Kasey Jenkins, Chief Strategy Officer and Senior Vice President, Investor Relations. 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 Chief Operating Officer, 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 statement, whether because of new information, future events, or other factors.

[Kasey Jenkins, Chief Growth Officer at McCormick & Company]

Please refer to our forward-looking statement on slide two for more information. I will now turn the discussion over to Lawrence Kurzius.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Good morning, everyone. Thanks for joining us. I'd like to start by welcoming Brendan to this morning's call. In addition to his continuing role as president of our global consumer business, Brendan now has responsibility for our business worldwide in his newly appointed role of President and COO. At the end of our prepared remarks, I may ask him to weigh in on some of your questions. McCormick's long-term performance, including through the pandemic and other volatility, has been industry-leading and met or exceeded our financial objectives. Broadly, our results in the second quarter were in line with our sales and profit expectations despite certain global challenges, including a greater-than-expected level of high cost inflation and supply chain challenges, significant disruption in China from COVID-related lock-downs, and the conflict in Ukraine. As our second quarter progressed, the dynamics of these conditions intensified and negatively impacted our sales and profit results.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Before discussing our second quarter results in more detail, I'd like to comment on each of these, starting on page 5. Consistent with the rest of the industry, high cost inflation and supply chain are continuing challenges. To partially offset cost pressures, we've taken multiple pricing actions, and as planned, we are raising prices again. Inflation continued to escalate, and we've adjusted our upcoming pricing actions accordingly. We appreciate our customers working with us to navigate this environment. Additionally, our plans to mitigate cost pressures include our CCI-led cost savings, revenue management initiatives, and reducing discretionary spend where possible. We expect our pricing actions and other levers to begin to outpace cost pressures late in the third quarter, with higher costs and higher offsetting pricing actions than we expected on our last call, which further weights our 2022 profit to the second half of the year.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

We plan to fully offset cost pressures over time. In China during the second quarter, there was significant unanticipated disruption in consumption due to severe COVID-related lockdowns in Shanghai and other cities throughout China. China is our second biggest sales country, with operations in Shanghai, Guangzhou, and Wuhan. Our Shanghai operation produces approximately 40% of our total China sales, which are distributed throughout the country and supports both of our segments. As a reminder, our branded food service demand is included in our consumer segment in China. The lockdowns lasted roughly 75 days, with our Shanghai plant forced to close for 2 weeks at the onset, with employees living in the facility. Once we were able to reopen, we were impacted by lockdown-related labor shortages due to workers being quarantined. During April and May, we incurred significant incremental manufacturing and transportation costs to supply our customers.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

In addition, with restaurants largely closed and consumers unable to shop for extended periods in our strongest geographies, we experienced significant demand softness as well. Market conditions in China have also allowed very little opportunity to increase prices. While we're currently experiencing this short-term pressure, we continue to believe in the long-term growth trajectory of our business in China, but we will not be able to recover the sales and profit impact we experienced in this fiscal year. Finally, regarding the conflict in Ukraine, in mid-March, we suspended operations in Russia, and our operations in Ukraine were paused. These countries account for less than 1% of our overall business. We have recently decided to exit our consumer business in Russia. Now, for more detail on our second quarter results, starting with sales on slide 7.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Sales declined 1% from the second quarter of last year, including an unfavorable impact from currency. Our constant currency sales were comparable to last year, with growth from pricing actions offset by a decline in volume and product mix. The volume decline was impacted unfavorably by several discrete items, including a 1% impact from the China consumption disruption and the conflict in Ukraine I just mentioned, a 1% impact from the exit of low-margin business in India, and a 2% impact from lapping the U.S. trade inventory replenishments during last year's second quarter. Excluding these items, our sales performance would have been 4% growth, reflecting the strength of our broad global portfolio and effective execution of our strategies and pricing actions. While growth in both segments was impacted by the discrete items, they were more impactful to our consumer segment.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Notably, our growth in flavor solutions was outstanding. Comparisons to 2021 and 2020 remain difficult due to the dramatic shifts in consumer consumption between at home and away from home experienced in the second quarter of the last two years. Using 2019 as a pre-pandemic baseline, second quarter sales have grown at a constant currency compounded annual growth rate or CAGR of 6%. Moving to profit, adjusted operating income was down 33% or 32% in constant currency, and adjusted earnings per share was down 30%. The adjusted operating income comparison includes 7% unfavorable impact from the disruption to China's consumption and the conflict in Ukraine.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Although we anticipated the profit driven by sales growth in the second quarter would be more than offset by higher inflation and broad-based supply chain challenges, the impact was greater than expected due to continuing cost escalation. While this pressured second-quarter profit, we expect to mitigate this impact later this year. Now moving to second-quarter business updates for each of our segments. Starting with our consumer segment on slide 9, our second-quarter sales reflect the impact of our pricing actions in all three regions. In the Americas, our first wave of pricing was phased in during our fourth quarter of last year, the second wave during the second quarter in April, and the third wave will go into effect at the end of the third quarter. With the first wave, we saw a very low level of elasticity.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

With the second wave, we are seeing more price elasticity, although still below historical levels. While consumer spending has remained strong, consumers are now under significant pressure from broad-based inflation, notably fuel prices and other macro factors. As we look ahead and our additional pricing actions are phased in, the elasticity we experience may change, but we still expect the impact to be lower than historical levels. Overall, our pricing actions in EMEA and are on track, and our elasticity impacts are similar to the Americas. In EMEA and APZ, pricing timing varies by market within each region. In some markets, particularly in EMEA, there are regulatory guidelines on when we take pricing, which generally creates a lag in the timing of pricing compared to the Americas. In this unprecedented environment, however, we are taking additional actions in markets across EMEA.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Now for some further 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 1%. Over the last three years, since 2019, consumption has grown at a three-year CAGR of 7%, which highlights how the sustained shift in consumer consumption continues to drive increased demand for our products and outpace pre-pandemic levels. In the Americas, a sales decline in the second quarter included the impact of lapping a 4% overshipment of consumption to replenish retailer inventories in the second quarter of last year. Our second-quarter shipments this year were in line with our consumption change. Demand has remained high, and we are realizing the benefit of the manufacturing capacity we added, as well as our increased resilience. However, some products remain stretched by sustained high demand.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Shelf conditions continue to improve, as seen in our recipe mix share performance of another quarter of share gain. Our spices and seasonings share was pressured during the quarter by the shortage of certain packaging materials as well as certain organic spices. Some of these have been resolved and some will remain ongoing. We continue to use our category and revenue management capabilities to strengthen our spices and seasonings portfolio and optimize the category performance for both McCormick and our retailers. The strength of our brands and our category leadership has recently won us new distribution, which we will begin to realize later this year. In EMEA, we continue to have strong share performance in most categories and markets. During the second quarter, we lapped strong year-ago consumption, partially due to last year's COVID-related restrictions throughout EMEA, where restrictions extended longer than other regions.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Our Vahiné brand of homemade dessert products in France, a product line unique to our EMEA region, was most impacted as recently we've seen baking return to a more pre-pandemic baseline level. In other categories in the region, we believe there's been a step up in consumption. In the Asia Pacific region, in addition to the consumption disruption in China, second quarter growth was impacted by the exit of low margin business in India. At the end of last year, we decided to exit our rice business, the Kohinoor brand, to enable the region to focus on our higher margin core categories. Turning to flavor solutions on slide 10, our sales performance for the quarter was outstanding, with both pricing and volume growth contributing. We grew double-digit growth in both the at-home and away-from-home parts of our portfolio.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Looking at our Flavor Solutions growth over the past three years, since the COVID-19 restrictions caused dramatic second quarter comparisons in 2020 and 2021, our sales CAGR is 8%, largely driven by volume. Our pricing actions increased sales in all three regions. Broadly, pricing actions in the branded food service part of our portfolio follow the same cadence as those in each region's consumer business. In the rest of our Flavor Solutions business, pricing is based on contractual windows with automatic price adjusters in many contracts, and the timing is going to vary based on those windows. In this dynamic environment, though, with costs escalating so quickly, we are having discussions outside of those windows and passing costs through faster than usual. Higher volume also contributed to growth in the Americas and EMEA regions.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Demand has remained strong for certain parts of our business in these regions. Our supply chain is being pressured to meet this demand, and we are still taking on some extraordinary costs to service our customers. We appreciate our customers working with us through this pressure. In the Americas, where our customer base is skewed more to packaged food and beverage customers, our at-home customers, strong growth was driven by flavors for savory snacks as well as performance nutrition and health applications with these customers. In EMEA, our customer base is more skewed to quick service restaurants, or QSRs, and our strong QSR momentum contributed to growth in all markets, partially driven by expanded distribution. Branded food service growth was strong in both the Americas and EMEA regions, driven by restaurant and institutional food service customers.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Demand continues to strengthen in this channel, particularly as travel accelerates and restaurants benefit from consumers shifting to take away and delivery. Overall, our flavor solutions, sales demand, and growth momentum continues to be strong. Now let me expand on our growth platform and positioning in the current environment. Turning to slide 11, global demand for flavor remains the foundation of our sales growth, and we've intentionally focused on great fast-growing categories that will continue to differentiate our performance. We are capitalizing 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 rising global demand for great taste are as relevant today as ever, with the younger generations fueling them at a greater rate. McCormick is uniquely positioned to capitalize on this demand for great taste.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

With the breadth and reach of our global flavor portfolio, we are delivering flavor experiences for every meal occasion through our products and our customers' products. We are end-to-end flavor. We continue to make investments to sustainably meet the growing demand and to fuel further growth. In our global supply chain, we increased our capacity with our recently opened UK Peterborough Flavor Solutions manufacturing facility and have begun our expansion of FONA's footprint to support future flavor growth. We are also increasing our capacity in the fast-growing hot sauce category and investing in seasoning capacity to support increased demand and strengthen resiliency. As we've said, with the sustained level of high consumer demand, we're benefiting from the manufacturing capacity we've added. While we still experience disruptions in the supply chain, they are much more specific, mainly from a transportation and packaging supply standpoint.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

We experienced the peak disruption in the third quarter of last year, and with every month, the supply chain continues to get better. We feel good about the progress we're making. We are strategically investing behind our brands to drive growth, including in brand marketing, as we did throughout the pandemic with our 3-year brand marketing CAGR approximating our consumer segment sales CAGRs for the same period. We're pivoting our messaging to emphasize to consumers how our products help them stretch their grocery dollar. For instance, we're launching a digital messaging highlighting the value of our product by making a great flavorful meal economically. We add flavor for only pennies per serving, and recipes like our 30-minute taco casserole are family and budget-friendly answers to what's for dinner. We continue to invest in new products. In our consumer segment, we are responding to new consumer behaviors, like increased at-home lunches.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

For instance, our new patent-pending French's Creamy Mustard is off to a great start. We're sensitive to the needs of price-conscious consumers, not just in these challenging economic times, but every day. Our portfolio includes branded items to accommodate consumers' needs and provide solutions for everyone at every price point, as well as private label products. Our new product launches include additional entry-level price point products for affordability and larger sizes of key high-usage items for better value. While we are still seeing strong consumer spending, we know that inflation is a significant concern for consumers, more so than COVID. We're leveraging our proprietary research, which served us well during the pandemic, to monitor for any signals of changing behavior. Our research continues to indicate consumers are going to cook as much at home or more than they did during the pandemic for many reasons.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

One of them is that they find it more economical. To the extent there is a recession, it further reinforces cooking at home, and we know from our past sales performance that our categories and brands perform well during recessionary periods. Now, for some summary comments on slide 13 before turning it over to Mike. 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, regardless of the environment. The long-term fundamentals that drove our industry-leading historical performance remain strong. 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 gives us confidence in our growth momentum and in our ability to navigate the challenging global environment.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Despite the pressures we experienced in the second quarter, we are well positioned and confident in delivering strong performance in 2022 and beyond while driving sustainable long-term value for our shareholders. McCormick employees continue to do a great job navigating dynamic environment. Their agility and their teamwork drive our momentum and success, and I want to thank them for their dedicated efforts and engagement. Now I'll turn it over to Mike.

[Mike Smith, EVP and CFO at McCormick & Company]

Thanks, Lawrence, and good morning everyone. Starting on slide 15, our top line constant currency sales were comparable to the second quarter of last year, reflecting 7% growth from pricing actions, offset by a 7% decline in volume and product mix. Excluding the 4% impact of the discrete items Lawrence mentioned earlier, our sales performance would have reflected 4% growth. Consumer segment sales declined 7% in constant currency. The impact from lapping the U.S. trade inventory replenishment, the consumption disruption in China, the exit of low margin business in India, and the conflict in the Ukraine contributed 6% to that decline. The remaining 1% decline was due to lower volume, partially offset by pricing actions. On a 3-year basis, our second quarter constant currency sales CAGR was 4%.

[Mike Smith, EVP and CFO at McCormick & Company]

On slide 16, consumer sales in the Americas declined 4% in constant currency, driven by lower volume and mix, partially offset by pricing actions. This decline is attributable to lapping trade inventory replenishment in the second quarter of last year. Over the past 3 years, constant currency sales in the Americas grew at a CAGR of 7%. In EMEA, constant currency consumer sales declined 11%, primarily due to lapping high year-ago demand driven by COVID-related lockdowns, the most significant impact of which was lower sales of Vahiné homemade dessert products. A 1% unfavorable impact from lower sales in Russia and Ukraine also contributed to the decline. Pricing actions in all markets partially offset the lower volume. Over the past 3 years, EMEA's constant currency sales grew at a 3% CAGR.

[Mike Smith, EVP and CFO at McCormick & Company]

Constant currency consumer sales in the Asia Pacific region declined 18%, including a 20% 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. On a three-year basis, APZ's second quarter constant currency sales CAGR was a 7% decline, driven by the China and India impacts I just mentioned. Excluding those impacts, sales grew at a 5% CAGR over the past three years. Turning to our flavor solutions segment in slide 19, we grew second quarter constant currency sales 11% due to pricing actions as well as higher volume and mix. This growth was partially offset by a 1% decline in sales related to the combined impact of the China disruption and the conflict in Ukraine.

[Mike Smith, EVP and CFO at McCormick & Company]

Second quarter constant currency sales for the last three years grew at an 8% CAGR. In the Americas, flavor solutions constant currency sales grew 12%, driven by both pricing and the combination of volume and mix. Higher sales to packaged food and beverage companies with particular strength of snack seasonings led the growth, with higher demand from branded food service customers also contributing to growth. Over the past three years, constant currency sales in the Americas grew at a CAGR of 8%. In EMEA, we drove 19% constant currency sales growth, with a 14% increase in volume and mix and 5% related to pricing actions. EMEA's flavor solutions growth, excluding a 1% decline related to the conflict in Ukraine, was broad-based across its portfolio, led by strong growth with QSR and branded food service customers.

[Mike Smith, EVP and CFO at McCormick & Company]

Over the past 3 years, EMEA's constant currency sales grew at a 10% CAGR. In the Asia Pacific region, Flavor Solutions sales declined 6% in constant currency. The decline was driven by a 7% impact from lower volume in China due to the COVID-related restrictions, partially offset by pricing actions in all markets across the region. APZ grew constant currency sales at a 3% CAGR over the past 3 years. As seen on slide 23, adjusted gross profit margin declined 550 basis points in the second quarter versus the year ago period. Realizing this is a sizable compression, I will spend a moment on the significant drivers. Let me start with the drivers we anticipated. First, nearly half of this decline, approximately 250 basis points, is due to the diluted impact of pricing to offset our dollar cost increases.

[Mike Smith, EVP and CFO at McCormick & Company]

We focus on gross profit dollars. This impact was more significant than in the first quarter because of the higher level of pricing in the second quarter. Product mix was unfavorable as compared to the second quarter of last year. In our consumer segment, as we mentioned earlier, we are lapping strong U.S. spices and seasonings growth related to the inventory replenishment. In our flavor solutions segment, sales growth in our away from home products was higher than our at home products, and we are lapping strong sales of beverage flavors last year. A sales shift between our consumer and flavor solutions segments also contributed to the unfavorable product mix. In our flavor solutions segment, as we mentioned in our last earnings call, gross margin was unfavorably impacted by start-up and dual running costs as we transition production to our new U.K. Peterborough manufacturing facility.

[Mike Smith, EVP and CFO at McCormick & Company]

Of note, CCI-led cost savings partially offset the impacts I just walked through, and we are on track to deliver our expected savings of $85 million for the full year. In addition to the net impact of the anticipated items I just detailed, gross margin was also unfavorably impacted by the following items. As Lawrence discussed, cost inflation and supply chain pressures escalated during the second quarter, impacting our results more than expected, primarily related to transportation costs and faster turning materials. While we have adjusted our upcoming pricing actions to reflect that escalation and we plan to fully offset cost pressures over time, our second quarter gross margin compression reflects the usual lag associated with pricing. We expect pricing to begin outpacing the cost pressures later this year and continue into next year. Our cost recovery will vary by region and segment.

[Mike Smith, EVP and CFO at McCormick & Company]

Currently, our pricing lag is more significant in our flavor solutions segment. Lawrence previously mentioned we have incremental costs to meet strong demand for certain parts of our flavor solutions business, thus impacting our gross margin. Finally, as already mentioned, significant costs due to the COVID-related restrictions in China had an unfavorable impact to profit. Moving to slide 24. Selling, general, and administrative expenses were lower than the second quarter of last year, and as a percentage of net sales declined 20 basis points. The decline was driven by lower employee benefit and brand marketing expenses as well as discretionary spending reductions, partially offset by higher distribution costs. The decline in brand marketing investments was driven by China and Russia reductions. Importantly, across our other markets, we invested in brand marketing at a comparable level to last year.

[Mike Smith, EVP and CFO at McCormick & Company]

The net impact of the factors I just mentioned resulted in a decline in adjusted operating income, which excludes special charges of 33% compared to the second quarter of 2021. In the consumer segment, adjusted operating income declined 29%, and in the flavor solutions segment, it declined 40%. A 1% unfavorable impact from currency is included in each of these declines. Turning to income taxes on slide 25. Our second quarter adjusted effective tax rate was 18.6% compared to 22.2% in the year ago period, driven by a higher level of discrete tax items this year. At the bottom line, as shown on slide 26, second quarter 2022 adjusted earnings per share was $0.48 as compared to $0.69 for the year ago period. The decrease was driven by our lower adjusted operating income.

[Mike Smith, EVP and CFO at McCormick & Company]

On slide 27, we summarize highlights for cash flow and the quarter end balance sheet. Our cash flow from operations was $154 million through the second quarter of 2022 compared to $229 million through the second quarter of 2021. This decrease was primarily driven by lower net income. Cash flow from operations will be weighted to the second half of the year, similar to our profit growth. We returned $198 million of cash to our shareholders through dividends and used $102 million for capital expenditures through the second quarter.

[Mike Smith, EVP and CFO at McCormick & Company]

We expect 2022 to be a year of strong cash flow driven by profit and working capital initiatives, and our priority is to continue to have a balanced use of cash, funding investments to drive growth, returning a significant portion to our shareholders through dividends, and paying down debt. Now turning to our 2022 financial outlook on slide 28. As a reminder, last quarter, the conditions in Russia, Ukraine, and China were just unfolding, and cost inflation and supply chain challenges remain dynamic and fast-moving. Today, we have a better view of the macro environment and our guidance for the full year considers the greater impact from these items. In addition, and as noted previously, we have always expected our profit growth to be weighted to the second half of the year. We now expect it to be even more so.

[Mike Smith, EVP and CFO at McCormick & Company]

We are projecting strong top-line growth with profit impacted by the global challenges I just mentioned. We also expect there will be an estimated 2 percentage point unfavorable impact of currency rates on sales, adjusted operating income, and adjusted earnings per share, an increase from our previous estimate of 1 percentage point unfavorable. On the top line, we now expect to grow constant currency sales 5%-7%. We expect sales to be driven primarily by pricing, which will accelerate significantly in the second half versus the first half. While we anticipate volume and product mix to be impacted by increasing elasticities, we expect elasticities to remain at a lower rate than historical levels. Our volume and product mix will also continue to be impacted by the pruning of lower margin business from our portfolio, as well as the impact of demand disruptions in China and Ukraine.

[Mike Smith, EVP and CFO at McCormick & Company]

We plan to drive continued growth through the strength of our brands as well as our category management, brand marketing, new product, and customer engagement growth plans. We are now projecting our 2022 adjusted gross profit margin to be 200 to 150 basis points lower than 2021. Given the rapidly escalating cost environment, cost pressures have outpaced our pricing and future actions have been adjusted to reflect the higher cost level. This adjusted gross margin compression reflects the impact of a high teens increase in cost inflation, an unfavorable impact of sales mix between segments and favorable impacts from pricing and CCI-led cost savings. As a reminder, we price to offset dollar cost increases. We focus on gross profit dollars. This has a diluted impact on our adjusted gross margin and is the primary driver of our projected compression.

[Mike Smith, EVP and CFO at McCormick & Company]

We now expect to grow our adjusted operating income 2%-4% in constant currency. In addition to the gross margin impacts I just mentioned, this projection also includes our CCI-led cost savings target of approximately $85 million and brand marketing investments comparable to 2021, which reflects reductions in China and Russia. Considering the year-to-date impact from discrete items as well as our estimated mix of earnings by geography, we now project our 2022 adjusted effective income tax rate to be approximately 22%. This outlook is expected to be a year-over-year headwind to our 2022 adjusted earnings per share of approximately 2%. We are lowering our 2022 adjusted earnings per share expectations to a range of $3.03-$3.08.

[Mike Smith, EVP and CFO at McCormick & Company]

This compares to $3.05 of adjusted earnings per share in 2021 and represents a decline of 1% to an increase of 1%, or in constant currency growth of 1%-3%. This reflects our lower adjusted operating profit outlook and an expected $15 million benefit from the impact of optimizing our debt portfolio. In addition, we are well-positioned with our broad and advantaged flavor portfolio and effective growth strategies to continue our operating momentum and drive another year of strong performance.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Thank you, Mike. Now that Mike has shared our financial results and outlook in more detail, I'd like to recap the key takeaways as seen on slide 29. Our long-term performance has been industry leading and met or exceeded our objectives, including through volatile environments. The long-term fundamentals that drove this historical performance remain strong. Several discrete items unfavorably impact our sales comparison to the second quarter of last year. Excluding these impacts, our sales performance reflects the strength of our broad global portfolio, the effective execution of our strategies, and our pricing actions. Our sales growth momentum is strong. Persistent high cost inflation and supply chain challenges intensified as the second quarter progressed and unfavorably impacted our profits. Importantly, we expect to mitigate this impact in the second half of the year.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

We're confident that with a broad and advantaged flavor portfolio, effective growth strategies, and our ability to navigate challenging environments, we will drive another year of strong performance in 2022 and build value for our shareholders. Now let's turn to your questions.

[Operator]

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

[Analyst]

Great. Thanks very much. Good morning, everybody.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Morning, Andrew.

[Analyst]

Hi there. I guess first off, as you talked about, organic sales came in below where the Street was looking for it, though you raised the outlook for organic for the full year. I appreciate some of the items in 2Q you highlighted were discrete, but maybe you could talk a little bit about what gives you the confidence in raising the organic guidance for the full year. You know, are you expecting headwinds in 2Q to become tailwinds in the second half or better momentum in the underlying business? You know, the scanner data has not necessarily showed any meaningful inflection yet that I can see, at least on a year-over-year basis. I appreciate the multiyear, you know, CAGR of organic sales.

[Analyst]

I'm trying to get a better sense for the, you know, the underlying confidence in raising the full year organic to start with.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Well, sure, Andrew. Well, first of all, our plan, as we've shared at previous calls and conferences, has always been back-half loaded, and one of the factors driving that is the cadence of our pricing actions. You know, there is twice as much effective pricing in the second half of the year as in the first half of the year. As you can see, you know, right now, for the quarter, you know, our pricing contribution to sales was about 7%, and it's significantly higher going into the second-half of the year. That is a big driver of total sales.

[Mike Smith, EVP and CFO at McCormick & Company]

Will build third quarter, fourth quarter.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

It'll build, right. That's a driver of sales. It's also a driver on the operating profit and EPS lines as we go through. The second thing is that, you know, we did not expect the disruption that we had in China in the second quarter. You know, the extent of the lockdowns was a surprise to us and I think to everybody. China is a big contributor to us, and we expect a normalization of business in China as we go through the second half. Particularly, we really expect it to be normal by the time we get to fourth quarter.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Just our experience with the initial COVID lockdown a couple of years ago, you know, tells us that there, you know, that when we get normalization, you know, there's a significant surge in restocking, you know, by both the consumer and our trade channels. You know, we would expect a strong contribution from China in the second half of the year. Finally, for U.S. and EMEA, have less difficult comparisons going into the second half than they did in the first half of the year. You know, not lapping inventory replenishment that we talked about last year.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Also, not you know lapping you know some of the COVID lockdowns that were still in effect in EMEA, particularly in the second quarter. Finally, we expect continued strong underlying demand from our you know from our consumers and our customers and that we're continuing to see. Mike, do you have anything you wanna add to that?

[Mike Smith, EVP and CFO at McCormick & Company]

Brendan, do you wanna add something?

[Brendan Foley, President and CEO at McCormick & Company]

Yeah, I think I'd add that, we see a lot of strength in our flavor solutions business. We saw that in the second quarter, and we know that will continue in the second half. We certainly think that's gonna support, I think, really our outlook for the second half overall. Also, we're seeing a lot of new business come through, in the back half of the year, in both segments. We see a lot of strength coming through on that too. The growth momentum does look even stronger as we move towards the back half.

[Analyst]

Great. Just a quick follow-up. I don't think you mentioned it. I know you did last quarter, when you were talking about the core consumer business, private label had not yet really had much of a move one way or the other. I don't think you mentioned it this time around. I'm just curious what you're seeing there, anything of note, that we should be aware of. Thanks so much.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

You know, I don't think that there's anything of special note there. You know, we are seeing some trade down by consumers, not just in our category, but in other categories that we track. It, you know, it's no surprise that say consumers at the lower end of the income scale, particularly, are feeling a bit of pressure from inflation, not ours, but inflation across everything, you know. I mean, you know, gas prices are $5-$6 a gallon depending on where you live, and that puts pressure on consumers' pocketbook. I would say that it's still at a pretty low level, you know, particularly when we look at our brands and the elasticity that we're experiencing.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

It's still significantly below historical levels and it's not a particular concern.

[Analyst]

Great. Thanks so much.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

I'll tell you also, I'll add to that, our sales of private label products are certainly, you know, important part of our business, but not particularly surging.

[Analyst]

Yep. Thank you.

[Operator]

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

[Analyst]

Hi. Thanks so much. I just wanted to make sure I heard your commentary about pricing correctly, and that I'm doing some basic math right. You did about, I think, 6% pricing in the first half. You're saying that'll double in the second half. You also I think are implying that you need around 10% organic sales growth in the second half to hit your guide. Sorry to do the math on the call, and I apologize for putting you on the spot. Are you effectively saying that it's reasonable for us to model maybe, you know, 12% pricing overall in the second half with volume down around 2%? Is that kind of the gap here?

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Yeah, Ken, let me start with that. I'm gonna let Mike chime in on that. I think you're in the right neighborhood with those numbers. When I think about the cadence of our increases and the timing of their effectiveness, you're in the right neighborhood when you think about going from 6%-12% in the second half. I would add that, you know, again, our next pricing action in the Americas, our largest region, is in August. If you're thinking about phasing that, you should have that in mind as well.

[Mike Smith, EVP and CFO at McCormick & Company]

I'd also just add, you're gonna see it across both Consumer and Flavor Solutions pretty much in the same level.

[Analyst]

Oh, great. That's helpful. Thanks. Quick follow-up. You know, it sounds like you mentioned pricing will kind of phase in a little bit over the second half. In this context and given some of the other factors you've talked about, how do we think about the cadence of the gross margin improvement in the back half? Should we expect, you know, a substantial improvement in 3Q? Is it more 4Q weighted? Maybe any color you could provide there would be helpful as we think about modeling.

[Mike Smith, EVP and CFO at McCormick & Company]

This is Mike. Great question. Yeah. We see, you know, actually the cost peak year-over-year we see is third quarter, and a little bit of moderation in the fourth quarter. We see the pricing obviously growing, you know, second to third to fourth. I think what you'll see is, you know, some you know, still some gross margin challenges in the third quarter, but in the fourth quarter, the combination impact of that pricing and full benefit there and the cost. Also think about the fourth quarter is our strongest quarter overall from a volume perspective there. As Lawrence Kurzius said before, things like China, which we make really good margin on, as that recovers, you know, from third into fourth too, that should be a positive for four Q.

[Analyst]

Great. Thank you so much.

[Operator]

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

[Analyst]

Yes. Hey, thank you, and good morning. You gave a good deal of bottoms-up color on the incremental headwinds facing the business. I think I'm clear on that, but I just wanna play it back from the top down, 'cause your overall sales outlook hasn't really changed despite the more adverse currency. You're now expecting a marginally lower tax rate, a marginally lower share count, slightly less brand marketing. While the expected cost inflation is higher at the high teens level, it's not outside the bounds of the prior outlook. I guess just I wanna isolate and see if you could better define what is exactly driving the reduced operating profit and EPS outlook.

[Analyst]

It feels like it's the updated outlook on China, Russia, Ukraine, and supply conditions above and beyond the normal cost inflation. I just wanna confirm that, and if there's a way to quantify or rank order those factors, that'd be great.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Hey, Steve, this is Lawrence. I think some of the little things that I think we're gonna wanna come back and talk about some of those marginal changes that you talked about. On the big picture item, you've got it exactly right. In fact, this was part of what we were trying to message at your recent conference. You know, the big change, you know, here are the things that were external factors that surprised us, and that is what's flowing through. I'll let Mike walk through the actual bridge on that, but that's it.

[Mike Smith, EVP and CFO at McCormick & Company]

Yeah. If you think about our guidance, you know, we're coming down $0.14. You know, if you think about, you know, from a China, Russia-Ukraine perspective, that's $0.11 right there. Then FX, as you said, we're going up 1%, you know, that's $0.03 there. So there's your $0.14. Now we're recognizing that the cost inflation, which you mentioned, you know, we had mid- to high double-digit. We actually moved that to high double-digit. So, you know, 1%-2% more cost during the year, driven by transportation, packaging, things like that. So that did hurt us in the second quarter. However, we're dropping a bit of that through the rest of the year, but we have pricing that's to help mitigate that.

[Mike Smith, EVP and CFO at McCormick & Company]

Below the line, some of the things you talked about, tax is a little bit of a help. You know, some of the interest expense things are gonna help offset that. The big drivers are the external factors. The one thing I wanted to just correct you on brand or just give you insight, brand marketing is now flat. However, that is really driven by the reduction in China, Russia, Ukraine, and FX. We're still, you know, spending up in our big markets to drive growth. Does that help?

[Analyst]

Okay. That's helpful. Yeah, that's perfect. Just a quick follow-up to follow up on, I think Ken's question, just the cadence of gross margin recovery. Is there anything that you would call out in the second quarter as truly transitory? Is there any headwind that you experienced in the second quarter that is kinda unique and discrete to the second quarter that doesn't carry over at least directionally?

[Mike Smith, EVP and CFO at McCormick & Company]

Yeah.

[Analyst]

I'm trying to get a sense if there's anything behind you.

[Mike Smith, EVP and CFO at McCormick & Company]

The one thing I'd say, you know, and you're new to our business, but the China business to us is very material. It's our second-biggest market. We have three large manufacturing facilities. You know, the shutdown really put a lot of pressure on our cost there, a lot of extra costs for transportation, loss absorption, things like that. As that business recovers, obviously, that goes away. I think the other thing, too, is if you think about some of these costs that came up rapidly, like transportation and packaging. I mean, fuel costs, if you go back to March, gasoline prices in the quarter versus March were up 25%. That stuff rolls through the P&L very quickly. You know, pricing will catch up on that.

[Mike Smith, EVP and CFO at McCormick & Company]

You know, a one-month lag in pricing could be $30-$40 million of impact, which is like 10 cents a share. You know, we're mitigating that as quickly as we can, but, you know, sometimes we see that as kind of stabilizing now. Going forward, like I told you, third and fourth quarter, where we see our cost outlook. I think that is as to your point about what is transitory, what is not, I think that gets most of it.

[Brendan Foley, President and CEO at McCormick & Company]

Steve, I would really-

[Mike Smith, EVP and CFO at McCormick & Company]

Yeah

[Brendan Foley, President and CEO at McCormick & Company]

Underscore that timing aspect. You know, one month difference on the effective date of our price increase would have a different conversation. You know, it would be $0.11 or $0.12 of EPS on the quarter. Of course, those price increases are in effect. You know, those price increases are in effect. I'm just saying if they'd been one month earlier, that's what the difference would have been.

[Mike Smith, EVP and CFO at McCormick & Company]

Yes. Yes.

[Brendan Foley, President and CEO at McCormick & Company]

That's one reason why we're pretty confident that we're gonna catch up with the cost.

[Analyst]

Understood. I just wanna play back just real quick what Mike's point on China. Like, I get it that China was, you know, uniquely detrimental to 2Q, but I don't think you're saying that that's 100% transitory. That doesn't. You know, as of June first, that's not behind you, right? That it gets better, but it's not, you know.

[Mike Smith, EVP and CFO at McCormick & Company]

Yeah, that's why I said, you know, that's gonna really help us in the fourth quarter more. It still-

[Analyst]

Fair enough.

[Mike Smith, EVP and CFO at McCormick & Company]

Yeah. There's different levels of openings that are happening now that will happen throughout the quarter.

[Analyst]

Understood. Okay, thank you very much.

[Operator]

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

[Analyst]

Hi. Thanks for the question.

[Mike Smith, EVP and CFO at McCormick & Company]

Hi, Rob.

[Analyst]

Hi, Lawrence. You know, in your opening remarks, you said that your research shows that consumers will continue just to cook as much at home as they did during the pandemic, if not more. Just anecdotally, I find that this year, that's not the case. You know, people are regaining mobility, returning to the workforce, what have you. You can see it in your numbers, too. Do you have any, like, kinda real-time insight into how consumers are behaving this year, in light of the fact that, you know, your category in the U.S, you know, it's much weaker than other packaged foods categories have been tracking?

[Mike Smith, EVP and CFO at McCormick & Company]

Brendan, I'm gonna let you take that one.

[Brendan Foley, President and CEO at McCormick & Company]

Yeah, sure. Good morning, Rob. You know, I guess just to, you know, react to some of the thoughts you just shared there. We're seeing through a lot of our research, also what we're seeing in, you know, secondary research out there is that there's still a heavy level of sustained cooking at home, you know, in the data, overall. Whether we're researching it or we're getting it from some of our our suppliers there, we definitely see a sustained level of eating at home. You know, overall, I would say that the consumer hasn't really, you know, changed that much. Now, you know, as far as performing in our categories, we're seeing it play out in a number of our categories, a recipe mix, hot sauces.

[Brendan Foley, President and CEO at McCormick & Company]

We still have a lot of strong, you know, sort of, consumption growth there. We certainly still see it play out. You know, certainly there are categories like, you know, meat, where you do see some decline, you know, going on there. That might affect an item or two here, but we definitely still have a very balanced portfolio where we're seeing still a lot of at-home consumption going on. Frankly, historically, as you know, you go back, Rob, a long way with us, if a recession does occur, that will drive more people cooking at home. That bodes well, I think, for our broad portfolio. Our research, I would say, is recent in the last, you know, 30 days, is telling us that there is still a sustained level.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Yeah.

[Brendan Foley, President and CEO at McCormick & Company]

Okay.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

You know, I mean, look at our flavor solutions business. I mean, clearly food service is strong. You know, restaurants have reopened. People are not forced to cook at home, but there still seems to be a strong preference in that direction. Actually, you know, as we went through the first half, you know, we saw in the early macro data that there was a return to dining away from home and a reduction in cooking at home. But in recent weeks, that has started to turn back the other way, probably driven by economic pressures on consumers. You know, cooking at home is more economical. It would.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

I think for a variety of reasons, you know, we're still pretty optimistic on the whole, retention of cooking at home behaviors. You know, there are some pockets that are different. You know, baking was really largely driven by kids being at home from school. You know, we've seen in baking related items return to kind of pre-pandemic levels. You know, that certainly is part of our European story where our Vahiné brand is a big factor. Overall, you know, the general cooking at home trend persists. All of those new meal occasions, you know, that are food at home occasions now because of people working remotely, you know, continue to support that strong consumption.

[Analyst]

Okay. Maybe a follow-up for Brendan. You know, as you're talking to the trade about the holiday seasons and the price increases and, you know, consumer behavior, what's the reception been like as the price increase is well understood for the reasons why? And are they eager to, you know, merchandise aggressively during the holiday season?

[Brendan Foley, President and CEO at McCormick & Company]

Yeah. I think the way our conversations are unfolding with customers and looking at the holiday season is one where you're still looking at, I think, improvement in supply across the season. That is, you know, I think one of the things that underpins really a lot of optimism and strength as we go into the back half, especially as we go into this holiday season. We are certainly communicating a strength in our ability to supply and drive, you know, the holiday promotions and, you know, displays and everything else. I would say, you know, the conversations with customers have been rather, you know, positive and strong, and the outlook, you know, remains pretty healthy, underpinned by supply. I would say one of the important factors there.

[Brendan Foley, President and CEO at McCormick & Company]

With regard to pricing, I mean, I think, you know, we work a lot with our customers, you know, in making sure that, you know, we're both driving category growth. That is a big part of our conversations as well. Again, I think those conversations, and we appreciate the partnership and working with our customers on that. But the outlook, I think remains very healthy.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Again, I'll just underscore that while we don't want to get too specific on discussions about pricing because there is, you know, customer and competitive considerations there, and there is always some natural tension in those discussions. Our customers know that we've taken a long-term perspective on our relationship with them, that we are transparent in the reasons for pricing. You know, they themselves, you know, are continuing to experience inflation that's very broad-based on some of the same factors that we are. Those conversations continue to be quite constructive.

[Analyst]

Very helpful. Thank you.

[Operator]

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

[Analyst]

Good morning, everyone.

[Brendan Foley, President and CEO at McCormick & Company]

Good morning, Alexia.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Good morning.

[Analyst]

Hi there. Can I ask about just the global supply chain dynamics? You obviously are sourcing ingredients from many different places around the world, probably more so than other large packaged food companies. I'd just be curious to hear sort of what you're seeing in terms of global supply chain, domestic supply chain. Where are the real pain points for you now? Is there any light at the end of the tunnel?

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Oh, sure, Alexia. This is actually I'd say our worst disruption on supply chain really was third quarter of last year, and has continued to get better incrementally every month. We're not out of the woods by a long shot in terms of normalization, but the really broad scale disruptions that we were experiencing a year ago are behind us and the disruptions are really much more discrete factors. I'd say our global sourcing of raw materials from points all around the world for our various markets around the world has been one of our strengths through the whole pandemic experience and the post-pandemic time and continues to be a strength.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Our challenges have been more on either predominantly local packaging issues and specific packaged materials from very specific suppliers, so some of whom continue to be sore points. Just in areas where there's still some areas where even though we've added a lot of capacity, the demand is still extraordinary and we're, you know, pressed to, you know, meet the needs of our customers. Again, those would be in a few very specific areas.

[Analyst]

Very helpful.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

So a lot those-

[Analyst]

Just as a quick follow-up, there was a comment in the press release about unfavorable mix in Flavor Solutions. How important was that? Because obviously the profit decline was very marked this quarter. What drove that? I'll pass it on.

[Mike Smith, EVP and CFO at McCormick & Company]

Yeah, I mean, this mix, I mean, unfavorable mix was one of the factors. If you think on a quarter-to-quarter perspective, look back a year, really strong performance in some of the higher margin categories. Kind of, and this year, the strongest performance was in the away from home versus the at home. So a little bit, you know, between those two categories, just, you know, we mixed down a little bit, nothing to be concerned about. As we've talked about, flavor solutions can be lumpy based on the products we sell and things like that, but that's part of the reason.

[Analyst]

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

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Next caller, question. Yes.

[Operator]

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

[Analyst]

Hi, yes. Thank you. Good morning, everyone.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Hi, Adam.

[Analyst]

Hi. I was hoping to just maybe try to understand the second half kind of framing, maybe from a different light, because it would seem like the full year guidance implies second half operating margins up about 250 basis points year-over-year. I get that there's an incremental pricing actions that benefit and that price-cost balance will probably flip positively, presumably in the fourth quarter. Also that's a dilutive impact to percent margins. Just trying to get a sense of how, notwithstanding some of the discrete things in the May quarter, specifically the China impact in particular, but we've got volumes that demand elasticity that would suggest volumes aren't gonna get better. You, between businesses, Flavor Solutions is probably growing faster than Consumer.

[Analyst]

That's an FX headwind at the corporate level. I'm just trying to understand kinda how do we get to that magnitude of % margin improvement in the back half.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Adam, I'm gonna start, and I'm gonna let Mike pick it up. Again, I want to let us underscore that there's a big change in the relationship between pricing and cost as we go through the year and in the second half, price increases begin to overtake the cost increases. Rather than trailing, we're recovering the cost increases. That's gonna be a big factor, you know, between the continued strong demand and having, you know, twice as much effective pricing in the second half as the first half. That is going to be a really big factor. Mike, you want to talk about-

[Mike Smith, EVP and CFO at McCormick & Company]

Yeah. There's other factors, too, Adam. I mean, really, you know, we talk about pricing as a way to offset costs, but we have other levers when we talk about revenue management or CCI-led cost savings. We're, you know, we continue to lean hard on driving additional cost savings in this inflationary environment. And we see continued strong demand driving that, you know, high margin products, helping us there. There's a lot of reasons to believe. To your point, though, I mean, between third and fourth quarter, I mean, the fourth quarter is where a lot of this comes to fruition from, you know, getting to a positive margin change year-on-year.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

I'll add, we don't expect COVID lockdowns to repeat in China. That's a wild card. You know, we, you know, we've been surprised there before. You know, that could happen again. We're not expecting that, but that was a big unfavorable in the first half, particularly in the second quarter, you know, that we expect to correct and normalize as we go through the second half.

[Analyst]

Okay. So maybe just to help clarify that, as we think about the year to date, second quarter or year to date kinda performance, what's been the realized CCI savings year to date relative to the 85 that you talked about for the full year? First, I don't think I heard a specific number in terms of what the realized cost inflation has been year to date, just relative to that high teens number that you've targeted or you've expected for the full year. I guess just any way to help dimensionalize some of the. You gave the brand marketing piece, but other SG&A, just where that magnitude of kind of tightening the belt strings there and how much that can contribute in the second half.

[Mike Smith, EVP and CFO at McCormick & Company]

This is weighted to second half, Adam. That's all I'm gonna say.

[Analyst]

Okay. All right. I appreciate that color. I'll pass it on.

[Operator]

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

[Analyst]

Hey, guys. Good morning.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Good morning.

[Analyst]

Taking the question. Lawrence, I just wanted to circle back actually to Andrew's question around private label and going back to the slides. You know, you do have a section here talking about, you know, more entry price points, and I'm just curious, is that a response to what you see as impending, you know, more share shifting to private label, and so you feel like you need more entry price points, or is it something else? You know, you talked about inflating cost baskets and maybe in other categories like proteins. I notice here you're talking about entry price points on things like Grill Mates and Lawry's, which tend to be more tied to protein. Just curious to kinda get the thoughts around, you know, that-

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Yeah. Well, that really doesn't have anything to do with private label. What it has to do with is our concern that consumers may be under pressure, as we, you know, we're seeing some early signs that consumers are maybe feeling some economic pressure. You know, it's no secret that things like gas prices are up. Our retailer customers are talking about consumers, you know, feeling some pressure and we have some concern that between the inflationary environment and the high risk of inflation. Sorry, said the wrong word there.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

The high risk of recession, as we go, you know, into the second half, and even into 2023, that we wanna be able to make sure that consumers, especially in the, you know, kind of lower half of the income scale, are still being served and have access to our categories. You know, our goal is to have products that appeal to consumers at every price point, across the whole category. You know, between our new product launches, our brand marketing and our brand marketing activity, we are taking a tone that tries to address that pressured consumer. I know we're kinda hitting time, and General Mills is probably talking right now.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Brendan's got a lot of color that he can add on this question, and I'd like to give him a chance to.

[Brendan Foley, President and CEO at McCormick & Company]

Well, I think, you know, Lawrence, I think you hit it largely right. We're trying to make sure that our portfolio and our assortment is really geared towards, you know, what consumers are starting to, you know, face. It could very well be, you know, price points that are lower in terms of, you know, smaller sizes. I would say, though, also, there's another dynamic on the other end which is happening, which is we actually see even more consumers switching to larger sizes, looking for more value. That it's playing out really on both ends.

[Brendan Foley, President and CEO at McCormick & Company]

Those are things that we're reacting to and making sure that we drive even more distribution and items in our assortment that you know serve those needs and those price points that consumers are looking for.

[Analyst]

Got it. That's helpful. Maybe just a quick one. Lawrence, you did mention, I think, that packaging tightness was impacting a certain couple of categories in U.S. spices and seasonings. Just any more color there? What specifically brands or categories we should be looking at, just if that starts to improve, what we see in the

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

I don't wanna get too specific 'cause I also don't really wanna call out our suppliers with whom we're trying to have a constructive.

[Analyst]

Sure.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

-relationship or our competitors either, for that matter. You know, we've had some trouble with the glass for our organic spices in our gourmet range that I think we have resolved now. We've had some ongoing challenges on some other more the rigid container kind of packaging, and mostly in the U.S., frankly.

[Analyst]

Got it. All right. Thanks so much, guys.

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Thanks.

[Operator]

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

[Lawrence Kurzius, Executive Chairman of the Board at McCormick & Company]

Thank you. McCormick's alignment with consumer trends and a 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're disciplined and are focused on the right opportunities and investing in our business. We're 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 are well-positioned for continued success and remain committed to driving long-term value for our shareholders.

[Kasey Jenkins, Chief Growth Officer at McCormick & Company]

Thank you, Lawrence, and thank you to everybody joining today's call. Apologize for those that we didn't get to. If you have any further questions, please reach out to me today. This concludes this morning's call. Thank you very much. For those of you in the U.S., have a wonderful holiday weekend. Grill a lot. For those of you in Canada, happy Canada Day, and everybody else, have a great weekend.

Participants

Executives

• Brendan Foley, President and CEO
• Lawrence Kurzius, Executive Chairman of the Board

Analysts

• Kasey Jenkins, Chief Growth Officer at McCormick & Company
• Mike Smith, EVP and CFO at McCormick & Company
• Analyst
• Analyst
• Analyst
• Analyst
• Analyst
• Analyst
• Analyst