Lawrence E. Kurzius
Chairman and Chief Executive Officer at McCormick & Company, Incorporated
Good morning, everyone. Thanks for joining us. I'd like to start by welcoming Brendan for 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. Broadening 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 lockdown and the conflict in Ukraine. As our second quarter progress, the dynamics of these conditions intensified and negatively impacted our sales and profit results.
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 continue to escalate. 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 that we expected on our last call, which further awaits our 2022 profit to the second half of the year. 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 were distributed throughout the country and supports both of our segments. And as a reminder, our branded foodservice demand is included in our consumer segment in China. The lockdowns lasted roughly 75 days with our Shanghai plant forced to close for two weeks at the onset, with employees living in the facility.
Once we were able to reopen, we are impacted by lockdown-related labor shortages due to workers being quarantined. During April and May, we incurred significant incremental manufacturing and transportation cost to supply our customers. In addition, as the 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. 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 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. 1% impact from the exit of low margin business in India and a 2% impact for lapping the US trade inventory replenishment during the last year 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. 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. 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, but 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 for 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 experienced may change, but we still expect the impact to be lower than historical levels. Overall, our pricing actions in EMEA and APZ are on track and our elasticity impact 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 the markets across EMEA.
Now, for some further highlights by region, starting with the Americas. Our total US branded portfolio consumption as indicated by our IRI consumption data and combined with unmeasured channels grew 1%. And 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, as sales declined in the second quarter included the impact of lapping of 4% over ship of that 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. Shelf conditions continue to improve as seen in our recipe mix share performance of another quarter of share gain. Our spices and seasoning 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 for revenue management capability to strengthen our spices and seasoning portfolio and optimize the category performance for both McCormick and our retailers. The strength of our brand 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. Our Vahine brand of homemade dessert products in France, the product line unique to our EMEA region was most impacted as recently as we've seen baking return to more pre-pandemic baseline level. In other categories in the region, we believe there's been a step up in consumption.
And 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 expect to exit our rice business, the Kohinoor brand to enable the region to focus on our higher margin core category.
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. 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 foodservice part of our portfolio follow the same cadence as those in each regions consumer business.
And 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. Our volume also contributed to growth in the Americas and EMEA regions. Demand has remained strong for certain parts of our business in these regions. Our supply chain has been pressured to meet this demand and we are still taking on some extraordinary cost 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 and 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 foodservice growth was strong in both the Americas and EMEA regions driven by restaurant and institutional foodservice customers. Demand continues to strengthen in this channel, particularly as travel accelerates and restaurants benefit from consumers shifting to takeaway 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 have 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 the demand for great taste. But 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 at our recently opened UK Peterborough Flavor Solutions manufacturing facility, and then begun our expansion of bonus 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 strength resiliency.
As we've said, with the sustained level of high consumer demand, we are benefiting from the manufacturing capacity we've added. While we still experience disruptions in the supply chain, we are much more specific mainly from a transportation and packaging supply standpoint. We experienced the peak disruptions 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 three-year brand marketing CAGR approximating our consumer segment sales CAGR for the same period. We are pivoting our messaging to emphasize to consumers how our products help them stretch their grocery dollar. For instance, for launching a digital messaging highlighting the value of our products, we're making a great flavorful meal economically. We had flavor for only pennies per serving and recipes like our 30-minute Taco Casserole for 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 behavior, like increased at home lunches. For instance, our new patent-pending French's creamy mustard is off to a great start. We are 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 product 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 for leveraging our proprietary research, which serve 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. 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 performed well during recessionary period.
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. A long-term fundamental that drove our industry-leading historical performance remains strong. The strength of our business model, the value of our products and capability 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.
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.
And now, I'll turn it over to Mike.
