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McCormick & Company, Incorporated Q1 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing

Participants

Corporate Executives

  • Kasey Jenkins
    Senior Vice President Corporate Strategy & Investor Relations
  • Lawrence E. Kurzius
    Chairman, President, and Chief Executive Officer
  • Mike Smith
    Executive Vice President and Chief Financial Officer

Presentation

Kasey Jenkins
Senior Vice President Corporate Strategy & Investor Relations at McCormick & Company, Incorporated

Good morning. This is Kasey Jenkins, Senior Vice President of Corporate Strategy and Investor Relations. Thank you for joining today's First Quarter Earnings Call. To accompany this call, we've posted a set of slides at ir.mccormick.com. We will begin with remarks from Lawrence Kurzius, Chairman, President and CEO; and Mike Smith, Executive Vice President and CFO, and we'll close with a question-and-answer session.

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. In addition, as a reminder, 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 statement on Slide 2 for more information.

I will now turn the discussion over to Lawrence.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Good morning, everyone. Thanks for joining us. Before I go to business, it is with great sadness that I mention the passing of Gus McCormick, who was one of the most beloved and admired leaders in McCormick's history. Gus's career at McCormick spanned 50 years, rising through the ranks across many functions, becoming President and CEO in 1987, and serving as Chairman of the Board for a total of 11 years until his retirement for the third time in 1999. As CEO, Gus focused McCormick on Flavor by divesting non-core businesses and driving category leadership in spices and seasonings, se7tting the course for McCormick to be the global leader in flavor. Notably, McCormick's market cap grew by 4 times under his leadership. Gus will not only be remembered for his enduring legacy of performance, but just as importantly for his deep commitment to the well-being of all McCormick employees. He truly made McCormick a great place to work by leading has biggest accomplishment as a CEO that's helping all McCormick employees have a better life. Today, as we reflect on his life and his contributions, we know that his legacy will live on. He has inspired many generations of McCormick leaders with this passion for people, focus on flavor and commitment to delivering shareholder value.

Next, I'd like to comment on the situation in Ukraine. First and foremost, we extend our deepest sympathies to the people of Ukraine and hope for an immediate end to the conflict and the suffering of innocent people. As we previously announced, we suspended our operations in Russia in mid-March. Our operations in Ukraine has been paused with the focus on the safety of our employees and their families. Our thoughts are with the people impacted by these tragic events, particularly our employees that we continue to support. To aid in humanitarian efforts, we're donating to the Polish Center for international Aid and the World Central Kitchen. I would also like to express my sincere appreciation to our EMEA employees, especially those in Poland for their many personal efforts in aiding their Ukrainian neighbors in need. Their actions epitomizes our power of people principles.

Now moving to Slide 4 and our business results. We delivered solid financial results in the first quarter, in line with our expectations, driven by the successful execution of our strategies and the engagement of employees. We are confident our strong year-to-date momentum will continue to drive strong performance throughout 2022. In the first quarter, we grew sales 3% and 4% in constant currency, on top of our 20% constant currency growth in the first quarter of last year, demonstrating again the strength of our product offering and broad global portfolio which drives differentiated growth and consistency in our performance.

Consumer segment sales while lapping high year ago demand continue to reflect the sustained shift of higher-at-home consumption compared to pre-pandemic level. Our Flavor Solutions segment growth was driven by outstanding growth with our packaged food and beverage customers, as well as robust demand from restaurant and other foodservice customers due in part to recovery from curtailed away from home dining in the year ago period. Through the breadth and reach of our balanced flavor portfolio, we are meeting the global demand for flavor and delivering flavor experiences for every meal occasion through our products and our customers' products, we are end-to-end flavor.

Adjusted operating income was down 14% or 12% in constant currency and adjusted earnings per share was down 13%. As anticipated, the profit driven by our sales growth was more than offset by the well known and anticipated headwinds of higher inflation and broad-based supply chain challenges. We have a demonstrated history of successfully navigating through volatile environment and we expect to do the same through this high current inflationary period using pricing and other levers to offset cost pressures, which is reflected in our 2022 profit outlook.

Now for more on our first quarter segment performance. Starting with the Consumer segment on slide 5, growth in the Americas was more than offset by lower sales in the EMEA and APZ regions. Total Consumer segment sales declined 2% against 35% consumer growth in the first quarter of 2021. Given the difficult year-over-year comparison, volume declines were reflected in each region. On a two-year basis, however, compared to the first quarter of 2020, each region grew sales by double digits. This growth highlights the strength of our categories and importantly, our products as consumers continue to cook more at home, demand for flavor continues to grow.

The pricing actions we've taken we're also reflected in each region's results and the elasticity impact we experienced has been lower than historical levels. As we look ahead and our additional pricing actions are phased in, the elasticity we experienced may change and this could be a cumulative effect, but we still expect the impact to be lower than historical level.

Turning to 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 2%, which follows a 15% consumption increase in the first quarter of 2021. This is the eighth consecutive quarter of double-digit consumption growth versus the two-year ago period. Demand has remained high and we continue to realize the benefit of the manufacturing capacity we added as well as our increased resilience. Our first quarter shipments were in line with consumption. However, some products remained stretched by sustained high demand.

Shelf conditions continue to improve as does our share performance with another sequential improvement in the first quarter as we expected. Versus last year, we are beginning to grow our spices and seasoning share and in recipe mixes, we had another quarter of considerable share gain, over 4 share points. We continue to see further improvement as we begin the second quarter and we are confident in our continued momentum.

In EMEA during the first quarter, we lapped high prior year demand, partially due to restrictions resulting from COVID resurgence of last year, while continuing our momentum with strong consumption growth in key categories compared to the first quarter of 2020. Our market share performance was stronger this quarter. We maintained our total EMEA region herbs, spices and seasonings share on top of strong gains in the first quarters of the last two years. Of note, Frank's RedHot has grown consumption 60% and gained significant share versus the two-year ago period.

And in the Asia Pacific region, first quarter growth was tempered by scaled down Chinese New Year celebration due to several cities in China imposing restrictions as a result of new COVID outbreak. These restrictions impacted our branded foodservice demand that is included in the Consumer segment in China.

Turning to Slide 6, our Flavor Solutions segment grew 12% or 14% in constant currency, driven by base business growth, new products and one month of incremental sales for our acquisition of FONA in December 2020. All three regions contributed to our growth, each with higher volume and product mix as well as the pricing actions to partially offset cost. Our first quarter Flavor Solutions results reflect similar market conditions across the region. As a reminder, our customer base in the Americas is skewed more to packaged food and beverage customers and in EMEA and APZ to quick service restaurant or QSR customers.

Our differentiated customer engagement and technical capabilities continue to drive outstanding growth both in base business and with new products, but our packaged food and beverage customers are at-home customer base. Our performance with these customers led our first quarter Flavor Solutions results with double-digit growth in flavors for Performance Nutrition and Health and market application, as well as savory snacks and our momentum with flavors for alcoholic beverages also continue. Our QSR momentum has been strong with core menu items and limited time offers driving first quarter growth, and other restaurant business continues to rebound.

Our first quarter results also reflect the lapping of curtailed away from home dining last year. Restaurants are benefiting from the shift to takeaway and delivery that was amplified by the pandemic. There has been a blurring between channel and most of the restaurant food being consumed off-premise. For instance, one in four dinners consumed at home is supplemented with a restaurant or other foodservice items. For our other institutional foodservice customers in our branded foodservice product category, we expected some recovery coming into 2022, and we saw that demand strengthened on our first quarter and drove growth in the Americas and EMEA region.

Now I'd like to share some comments on our momentum and the growth initiatives we have underway. Turning to Slide 7, 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 trend and the rising global demand for great taste was relevant today as ever, with the younger generation's fueling them at a greater rate. Our alignment with these trends in combination with the breadth and reach of our global portfolio and the successful execution of our strategy, sustainably positions us for future growth.

In this current dynamic global environment, we remain focused on long-term sustainable growth. We continue to experience cost pressures from higher inflation and broad-based supply chain challenges. To partially offset rising costs, we raised prices where appropriate late last year are currently facing an additional pricing actions and as costs have continued to accelerate, we will raise prices again this year where appropriate.

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 taking prudent steps to reduce discretionary spend where possible. Throughout our history, we have successfully grown and compounded our growth regardless of the environment, and plan to do so again in 2022 as we continue to accelerate our momentum and drive growth from a position of strength.

In our Consumer segment across our major measured market, we have gained millions of households over the last two years and had double-digit by rate growth, our brands have gained new consumers and we have driven increased usage at the same time. This performance combined with billions of additional at-home eating occasions from consumers cooking more at home has created a new baseline for growth. We are continuing to drive our Consumer segment momentum by accelerating flavor usage, including delivering all the demand for heat, building confidence in the kitchen and inspiring flavor exploration. We're also strengthening our consumer relationships at every point of purchase and creating a delicious healthy and sustainable future. We are fueling growth through our brand marketing investments category management initiatives and new products.

Our brand marketing is resonating with consumers, particularly as we connect with them online. And as we expand the capabilities of our marketing excellence organization globally, you're gaining efficiencies, executing with greater speed and shifting our investments to working dollars to drive greater effectiveness. Our U.S. spice aisle [Phonetic] reinvention is further driving our category leadership with growth for McCormick and our customers. This initiative is continuing this year with additional stores being implemented and we're also starting to build momentum with similar initiatives in Canada, the U.K. and France.

Our consumer new product innovation differentiates our brands and strengthens our relevance with our consumers. Our new products are focused on what's important to consumer such as freshness, modern packaging, convenient and flavor exploration, as well as affordability and value. 75% of global consumers find it more economical to cook at home and in the current inflationary environment it resonates even more now. Our products are already part of the consumer solution to manage inflation across their whole grocery basket. For instance, inflation is hitting the meat case hard and a little bit of our Flavor can make the lesser [Indecipherable] meat more palatable and makes the consumers wholly on [Phonetic] both more affordable and flavorful.

We have products at all price points that attract many types of consumers and households, as well as different income level. We continue to focus on assurance. We're launching new products that appeal to all types of consumers such as additional entry level price points for affordability, as well as value offerings, including larger sizes to meet the needs of price conscious consumers. And with our new products and recipes tailored to popular new appointed [Phonetic] such as air fryers and instant pots, we are providing consumers flavor inspiration and greater convenience when using our products.

In our Flavor Solutions segment, we plan to continue migrating our portfolio to more value-added products and technically insulated products, particularly our flavors product category. We're targeting opportunities to grow with our customers in attractive, high growth end markets such as alcoholic beverages, savory snacks and performance nutrition. We have been outpacing the market growth in these categories. They all contributed first to strong growth in our first quarter results and further migrated our portfolio.

Following a record year of new product growth last year, we are excited about our robust 2022 pipeline of culinary and smart innovation. We are leveraging our broad technology platform to develop clean label, organic and better for you solution to some of our customers' issues without compromising on taste. We're using Sage [Phonetic] our AI-enabled product development tool to develop consumer preferred flavor at an increased speed that have a track record for lasting longer in the market for our customers. And we are building a pipeline of opportunities to accelerate our global seasonings growth by expanding our mid-tier customer base being added the core supplier list and strengthening our leadership in heat.

We plan to continue to drive Flavor solutions growth through our differentiated customer engagement. We have a strong passion for creating a flawless customer experience. Across both segments, our strong sales and growth plans bolster our confidence in continuing our growth trajectory. We also recognize we are operating in a challenging global environment.

Before Mike reiterates our guidance in a few moments, I'd like to comment on some current conditions. We will continue to monitor the situation in Russia and Ukraine very closely and adapt accordingly. Cost inflation has remained persistent with recent escalation in some areas such as transportation costs and as such, we have raised our cost inflation guidance. It is now a mid-to-high teen increase. And in regard to COVID, as I mentioned earlier, there are new COVID restrictions being imposed in several cities in China. We are continually assessing the dynamics of these conditions as they involve. We recognize there will be some near-term impact, which we expect to mitigate later in the year, in part with additional pricing action. We are well positioned to deliver another strong year of growth and performance in 2022 through the effective execution of our strategy and with our robust operating momentum.

In addition to delivering top tier financial results, we are also committed to doing what's right for people, communities and the planet. We recently released our 2021 purpose-led performance progress report which highlights our key initiatives and the progress we are making, including our recent announcements on the update of our science-based target to reduce greenhouse gas emissions by 2030, aligning with the United Nations 1.5 degree Celsius target as well as our commitment to net zero by 2050. As we move forward in 2022, we're excited to continue to share our progress and success on all our purpose-led performance goals.

Now for some summary comments of Slide 11 before turning it over to Mike. The combination of our strong business model, the investments we have made, the capabilities we have built and the power of our people, position us well to continue our robust growth momentum. We are in attractive categories and are capitalizing on long-term consumer trends that are in our favor. We are actively responding to changing market conditions, consumer behavior and customer needs, while remaining forward looking in an ever-changing environment. We have a strong foundation and are well equipped to navigate today's environment, responding with agility to volatility and disruption, while remaining focused on the long-term objectives, strategies and values that have made us so successful. Through the execution of our strategies that are designed to drive long-term value, we have grown and compounded that growth successfully over the years regardless of the environment. Our fundamentals that drove that performance and our momentum and outlook are stronger than ever. McCormick employees continue to do a great job navigating a dynamic environment. Their agility and teamwork drive our momentum and success and I want to thank them for their dedicated efforts and engagement.

Now, I will turn it over to Mike.

Mike Smith
Executive Vice President and Chief Financial Officer at McCormick & Company, Incorporated

Thanks, Lawrence, and good morning, everyone. Starting on Slide 13. Our top line growth continues to be strong. During the first quarter, we grew constant currency sales 4%, driven by pricing actions across both segments and incremental sales from our FONA acquisition. Consumer segment sales declined 2% in constant currency due to lapping high demand in all three regions last year with a partial offset from pricing. On a two-year basis, compared to the first quarter of 2020, constant currency sales grew 30% with double-digit growth in all three regions, reflecting the sustained shift to at-home consumption higher than pre-pandemic levels.

On Slide 14, consumer sales in the Americas increased 2% in constant currency, driven by pricing actions, partially offset by lower volume and product mix due to lapping last year's elevated demand. Branded products led the growth with strength in McCormick veterans, Stubb's, OLD Bay, Simply Asia, Frank's RedHot and French's, partially offset by a decline in private label. In EMEA, constant currency consumer sales declined 9% from a year ago, driven by lower volume and product mix and significantly in Vahine homemade dessert products due to lapping last year's high demand across the region. This decline was partially offset by pricing actions.

Constant currency consumer sales in the Asia Pacific region declined 6%, driven by the exit of some lower margin business in India. China's consumer and branded foodservice demand partially related to the Chinese New Year impacts Lawrence mentioned earlier also contributed to the decline. These declines were partially offset by pricing actions.

Turning to our Flavor Solutions segment in Slide 17, we grew first quarter constant currency sales 14%, including a 2% contribution from incremental FONA sales in December. As a reminder, we acquired FONA on December 30, 2020. The remaining increase was driven by higher volume and product mix, as well as pricing actions. Compared to the first quarter of 2020, constant currency sales grew 18% with double-digit growth in all three regions.

In the Americas, Flavor Solutions constant currency sales grew 12%, with FONA contributing 2% and the remaining growth due to both pricing and the combination of volume and product mix. Higher sales to packaged food and beverage companies with particular strength in snack seasonings led the growth, with the recovery of demand from branded foodservice customers also contributing. In EMEA, we drove 24% constant currency sales growth with a 17% increase in volume and product mix and 7% related to pricing actions. EMEA's growth was led by the robust recovery of demand from QSRs and branded foodservice customers. In the Asia Pacific region, Flavor Solution sales rose 5% in constant currency, driven by pricing actions and growth from higher volumes and product mix. This growth was driven by our QSR customers both in their core menu items as well as their limited time offers and promotional activities.

As seen on Slide 21, adjusted operating income, which excludes transaction and integration costs related to the Cholula and FONA acquisitions as well as special charges declined 14%, or in constant currency 12% in the first quarter versus the year ago period. Adjusted operating income declined 12% in the Consumer segment, with minimal impact from currency, and in the Flavor Solutions segment it declined 17% or 11% in constant currency. Both segments were unfavorably impacted by higher inflation and distribution costs. Both of which accelerated in the second half of last year, as well as incremental investment spending on our ERP program, which we expected to be higher earlier in 2022 versus 2021. CCI-led cost savings favorably impacted both segments.

In the Consumer segment, lower sales, partially offset by a reduction in COVID-19 related costs also contributed to the decline. In the Flavor Solutions segment, higher sales were more than offset by the unfavorable drivers I just mentioned, as well as costs related to supply chain investments, which will continue in the second quarter.

As seen on Slide 22, adjusted gross profit margin declined 260 basis points in the first quarter versus the year ago period. This was driven by the net impact of cost pressures we are experiencing and the pricing actions we have taken. We estimate the diluted impact of pricing to offset this dollar inflation increase was approximately 200 basis points in the first quarter. Additionally, the sales shift between segments also contributed to the margin decline.

Our selling, general and administrative expense as a percentage of net sales increased 20 basis points from the first quarter of last year due to higher distribution costs and the higher level of investment in our ERP program. This combined with the adjusted gross margin compression resulted in an adjusted margin decline of 280 basis points, in line with our expectations.

Turning to income taxes on Slide 23. Our first quarter adjusted effective tax rate was 19.7% compared to 22.7% in the year ago period, driven by a higher level of discrete tax items this year. Adjusted income from unconsolidated operations declined 30% versus the first quarter of 2021 due to the elimination of higher earnings associated with minority interest as well as higher inflation costs impacting our McCormick to Mexico joint venture.

At the bottom line as shown on Slide 25, first quarter 2022 adjusted earnings per share was $0.63 as compared to $0.72 for the year-ago period. The decrease was driven by our lower adjusted operating income.

On Slide 26, we summarize highlights for cash flow and the year-end balance sheet. Our cash flow from operations was an inflow of $18 million in the first quarter of 2022 compared to an outflow of $32 million in the first quarter of 2021. This increase was primarily driven by working capital improvements and lower payments for transaction and integration costs related to our Cholula and FONA acquisitions. We returned $99 million of cash to our shareholders through dividends and used $44 million for capital expenditures this quarter. 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 27. First, I would like to provide some additional perspective on some of the current conditions Lawrence mentioned earlier. As we have said, we are currently not operating in Russia and Ukraine. And while the impact is not fully known, our business in these markets is small with the combined sales across both segments totaling less than 1% of total company sales last year. Additionally, we have no manufacturing in either country. Any operating profit impact would include those related to the impact on sales as well as potential expenses stemming from the current situation.

Regarding cost inflation, we are revising our outlook and are now projecting inflationary pressure in the mid-to-high teens, as compared to mid-teens increase in our previous guidance. We expect cost inflation to remain persistent, especially as it relates to transportation and we are continuing actions to mitigate these costs, including pricing. Again, as Lawrence mentioned, we recognize these dynamics will have some impacts on our results, certainly in the second quarter, but we continue to monitor impacts on the broader economy and will adapt as necessary. We are reiterating our 2022 sales and profit outlook that we previously shared in our January earnings call.

We are projecting strong top line growth in operating performance with earnings growth partially offset by a higher projected effective tax rate. We also expect there will be an estimated 1 percentage point unfavorable impact of currency rates on sales, adjusted operating income and adjusted earnings per share. On the top line, we expect to grow constant currency sales 4% to 6%. We expect pricing to be a significant driver of our growth with the volume and product mix to be impacted by elasticities, although at a lower level than we have experienced historically. We plan to drive growth through the strength of our brands as well as our category management, brand marketing, new product and customer engagement growth plans. Our volume and product mix will also continue to be impacted by the pruning of lower margin business from our portfolio.

Our 2022 adjusted gross margin is projected to range between comparable to 2021 to 50 basis points lower than 2021. This adjusted gross margin compression reflects the anticipated impact of a mid-to-high teens increase in cost inflation and unfavorable impact of sales mix between segments, a favorable impact from pricing and CCI-led cost savings. As a reminder, we price to offset dollar cost increases, we do not margin up. This has a dilutive impact on our adjusted gross margin and is the primary driver of our projected compression.

We expect to grow our adjusted operating income 8% to 10% in constant currency, which reflects our robust operating momentum, a reduction in COVID-19 related costs and our continuing investment in ERP business transformation. This projection includes an inflationary pressure in the mid-to-high teens, a low single-digit increase in brand marketing investments and our CCI-led cost savings target of approximately $85 million.

As we shared on our last earnings call, we expect our profit growth to be weighted to the second half of the year. During the second quarter, we are phasing in pricing actions and with cost continuing to escalate, we'll raise prices again as appropriate. While we plan to cover the cost pressures due to the recent acceleration of inflation, there will be a lag. And as a result, our profit will now be weighted to the second half of the year even more than originally expected. And as a reminder, we expect our ERP investment to be higher earlier in the year versus 2021.

Our 2022 adjusted effective income tax rate is projected to be 22% to 23% based upon our estimated mix of earnings by geography, as well as factoring any level of discrete impacts. This outlook versus our 2021 adjusted effective tax rate is expected to be a headwind to our 2022 adjusted earnings per share growth of approximately 3%. Our 2022 adjusted earnings per share expectations reflect strong operating growth of 8% to 10% in constant currency, partially offset by the tax headwind I just mentioned. This resulted in an increase of 4% to 6% or 5% to 7% in constant currency. Our guidance range for adjusted earnings per share in 2022 is $3.17 to $3.22 compared to $3.05 of adjusted earnings per share in 2021.

In summary, we are well positioned with our broad and advantaged flavor portfolio and effective growth strategies to continue to accelerate our operating momentum and drive another year of strong growth and performance.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

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. We delivered solid first quarter results, in line with our expectations with strong sales growth on top of our 20% constant currency growth last year. We are confident that the hard work and dedication of our employees will continue to drive momentum.

We recognize we're operating in a challenging global environment. Through the execution of our strategies, we've successfully grow long-term value over the years regardless of the environment. Our long-term fundamentals that drove our performance are stronger than ever. The strength of our business model, the value of our products and capabilities, our alignment with long-term consumer trends that are in our favor and the attractive categories we are in, provide a strong foundation for long-term sustainable growth. We're confident that our broad and advantaged flavor portfolio, our robust operating momentum and effective growth strategies will drive another year of strong growth in 2022 and build value for our shareholders.

Now let's turn to your questions.


Questions and Answers

Operator

Thank you. [Operator Instructions] And our first question today will be coming from the line of Andrew Lazar with Barclays. Please proceed with your question.

Andrew Lazar
Analyst at Barclays

Hi, good morning, everybody.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Good morning, Andrew.

Andrew Lazar
Analyst at Barclays

Hi, there. McCormick reiterated its its full year outlook despite a worsening inflation outlook and a still dynamic operating environment, and as you noted now requires a even more significant margin inflection in the back half of the year to stay within sort of your full year gross margin guidance. So I was hoping you could speak a little bit to what gives you the visibility to this playing out And I know you detailed some items on the last call, such as pricing and lapping, COVID costs, smoother cadence of ERP spend and CCI saves and such. So perhaps you can remind us of these and share if there are any additions or changes to the above? Thank you.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Thanks, Andrew. I'll start on this and then let Mike follow -- follow-up on and talk about those specific items, but -- but first of all I want to emphasize that first quarter is really right up the middle with our expectations and it all starts with strong demand and strong top line performance that we expect to see continued strong demand as we go through the year and as we go through the second quarter in particular, more pricing action goes into effect, which on top of that strong demand and with the relatively low elasticity that we're seeing will translate into both strong top line and strong bottom line growth in the second half of the year. This is aligned with the guidance that we talked about on our last call at the end of -- when we gave guidance for the year initially. Mike, you want to talk about those specifically.

Mike Smith
Executive Vice President and Chief Financial Officer at McCormick & Company, Incorporated

The thing that's really changed since the first quarter for the year end call when we talked about the inflation moving from mid, mid teens to mid-to-high teens, really there's been a bit of an acceleration, things our fuel cost that will impact the second quarter, but we see on an average across the year that cost inflation around the same, mid-to-high single teens, but didn't move forward into the second quarter. Pricing though is continuing to build as Lawrence said. For the full year, before we said on the last call, mid-to-high pricing impact were at the height, will be at the high end of that now. And actually in the second six will be in the low double-digit pricing impact range, which gives us more confidence about the second half profit realization.

As you mentioned, there were some other factors, ERP spending up in the first six versus last year. Investments in supply chain. We just announced some of the transition of production over to the Peterborough facility in the U.K. There are start-up costs that have hit us in the first quarter that will be more of that in the second quarter, really hitting the Flavor Solutions segment. So we do see some of those negative impacts in Q2, but really confident about the second six with some of the actions that we've identified.

Andrew Lazar
Analyst at Barclays

And then just quickly, you've talked about the capacity coming on line and I think you mentioned you shipped essentially closer to consumption this quarter, so sort of making progress there and we've seen that in the market share improvements, but it doesn't sound like you've yet had the ability to truly serve, really rebuild retailer inventories and I assume there is still some opportunity for that as you go forward through this year and perhaps you could update us on that. Thanks so much.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

I think that this is a work in progress. Supply chain continues to get better. It's not perfect as our some of our customers will provide us, but the disruptions that we are seeing are much more discrete and specific rather than third quarter of last year. It seems like everything was a problem. So supply chain has gotten better. Our ability to meet that demand has really gotten better. And although I did make that remark about some customers a minute ago, the fact is our customers tell us that generally we are performing better than our competitive set, and this is allowing us to to win new business. So really feel pretty, pretty good about how that has improved. And I think you'll continue to see the share performance consecutively as we have been for the last several quarters with our ability to supply, and that additional capacity coming on has really made the difference.

Andrew Lazar
Analyst at Barclays

Great. Thank you so much.

Operator

The next question is coming from the line of Alexia Howard with Bernstein. Please proceed with your questions.

Alexia Howard
Analyst at Sanford C. Bernstein

Thank you. Good morning, everyone.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Good morning, Alexia.

Mike Smith
Executive Vice President and Chief Financial Officer at McCormick & Company, Incorporated

Hi, Alexia.

Alexia Howard
Analyst at Sanford C. Bernstein

Can I ask first of all ask about the private label dynamics because we're looking at the level of price inflation really across the grocery store, and under normal circumstances you would expect to trade down to private label, but I know that you mentioned that your private label sales are actually down year-on-year. I'm just wondering what's driving that? Is it supply chain related? Is it retailer driven or is it simply that consumers are feeling -- still feeling reasonably flush and able to report the branded products? And then I have a follow-up.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Sure. I think two things. So first of all, we have not yet seen significant movement in private label as a trend in either direction. Some of the, some of the recent market data shows some increase and, but it's really slight and are in our category. There is a dynamic you have to watch out for private label. The costs are going up for everybody and it's driven by raw material, by packaging and transportation and the same penny cost increase that's impacting brand is also impacting private label. And so when you put that same amount of cost increase through to private label, the percentage increase is bigger and it creates an uptick of private label growing faster on a dollar basis, it's really, again it's that cost pass-through. So I want to make that, that clear.

The second point that I want to make though is that we are believers that there is a role for both our brand and private label, especially in the urban spice category and we provide both to our customers and the best competitive environment for us as a company, just both our brand and private label are gaining share, putting pressure on everybody else.

Alexia Howard
Analyst at Sanford C. Bernstein

Great, thank you. And as a follow-up. Obviously, Russia and Ukraine is a very difficult situation right now. Can you share what percentage of sales that is, do you -- I'm pretty sure it's fairly low. But what do you see as the risks around the world if the situation persists? And I'm, I'm really talking about when we've gone through previous commodity cycles, we've seen problems because of the in affordability of basic food stuff like bread in Egypt and so on. Would your supply chain, I mean given what you've seen in the past when we see these grain cycles, are there particular ingredients that you think might be more challenged? I'm just trying to get at the risks there. Thank you, and I'll pass it on.

Mike Smith
Executive Vice President and Chief Financial Officer at McCormick & Company, Incorporated

Hey, Alexia, thanks, it's Mike. I'll start the answer. We have said in our 8K, sales for Russia and Ukraine are less than 1% of our total sales. So that's and so that's, and it will have an impact in the second quarter obviously because that's when the crisis has unfolded. And as far as, as far as your question about broader impacts, primarily inflation, I think you've seen in the last couple of weeks and part of the reasons we've taken our inflation expectations up and discuss pricing is because of some of those impacts. I mean, from a commodity perspective, I mean our market basket is a lot different than a lot of other food companies. I mean, there are products that could be impacted. We source Mustard from that part of the world, but we have secondary sourcing capabilities there which we've moved to. So I think our global supply chain, one of the strengths we have, it's deep and has a long history and has alternative markets for a lot of our materials, and no one raw material makes up more than 5% of our total cost of goods sold. So I think that diversity really helps us.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

And I would say we're less those to the grain complex and most of our -- your companies would be. I think our concern and part of what we're considering in our inflationary outlook is cost of energy, which now it looks like it's going to remain higher than perhaps it might have otherwise.

Mike Smith
Executive Vice President and Chief Financial Officer at McCormick & Company, Incorporated

And that's what is through the packaging too like plastic, resins and I think like that.

Alexia Howard
Analyst at Sanford C. Bernstein

Great, thank you very much. I'll pass it on.

Operator

Our next question comes from the line of Anoori Naughton [Phonetic] with J.P. Morgan. Please proceed with your question.

Anoori Naughton
Analyst at J.P. Morgan

Hi, good morning.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Good morning.

Anoori Naughton
Analyst at J.P. Morgan

In light of some of the incremental cost pressures you're facing, the year-on-year decline we saw in the first quarter gross margin is a reasonable level of decline to think about in the second quarter as well or was -- or should we think about the first quarter is the low point in terms of progression?

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

I'd say between the first half and second half, you're going to have that that big change due to the pricing dynamic I mentioned before, some of the one-timers in the first six. If I were -- the things we've laid about, laid out as far as cost increasing versus our original expectations in the second quarter, I think it's probably a pretty good estimate that in that range of gross margin what we did in the first quarter is probably close. We do have additional [Indecipherable] supply chain investment cost like I talked about for dual running costs and things like that. So I don't think you're far out of the ballpark there.

Anoori Naughton
Analyst at J.P. Morgan

Great. Thank you. That's helpful. And then I just wanted to switch to ask about pricing in consumer on EMEA. The pricing remained like fairly muted in the quarter. So can you walk us through what to expect from pricing in this region as the year progresses and what some of the challenges are needed to taking pricing here?

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

I'd say that, we've said we're going to take pricing as appropriate and so different regions are going to have different levels of the inflationary impact and different levels of pricing and different timings in which those those pricing action might take effect and so I don't -- and then within -- even within the regions, they're going to be differences from country to country, especially in the region [Speech Overlap] within our segments. Certainly, I can say though that broadly we have our current pricing actions, or pricing actions that we've spoken about are very much on track. We have pricing I think as we going into effect in second quarter in several markets. I know your question was about the EMEA, but there'll be more specific about our U.S. consumer business because increases are going into effect this week for the, for the year for the next round.

On the Flavor Solutions segment, broadly the branded foodservice part for the portfolio moves with consumer pricing and the rest of the Flavor Solutions business pricing is based on contractual windows and the timing is going to vary tremendously based on the windows of reassessing the pricing, And I'd say that in EMEA and APZ, the pricing actions are on track and are going to be phased in through the first half of the year. So is a on -- pricing is always an ongoing discussion and we would not get too specific, I've really been quite specific just now for both customer and for competitive reasons.

Mike Smith
Executive Vice President and Chief Financial Officer at McCormick & Company, Incorporated

Yeah, I think you'll see the same trends across the regions that pricing will build during the year.

Anoori Naughton
Analyst at J.P. Morgan

Got it. Thank you.

Operator

Your next question is coming from the line of Robert Moskow with Credit Suisse. Please proceed with your questions.

Robert Moskow
Analyst at Credit Suisse Group

Hi, thanks for the question. I guess it's in two parts. I wanted to confirm what I heard about the level of pricing you think, Mike, that will show up in your P&L by the end of the year. I thought I heard you say low teens, but I could have gotten that wrong. Is it scaling up that much. And then the second part is, I think Lawrence you said that you're operating from a higher baseline because you brought in a lot of consumers to the franchise and the category has expanded perhaps structurally, but the category is declining in the U.S. modestly, it's declining a lot in Europe from what I can tell. Is there a risk here that as consumers regain more mobility and they're getting it very quickly right now, that the consumer category might not be at the right baseline, that there might be a lower baseline out there than what you would expect? Thanks.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Well, first of all, good morning, Rob. But I think we'll start with [Speech Overlap] What I said and just to be clear. We had given guidance that pricing for the full year was going to be mid-to high single digit based on with the new, based on the, we'll move into the high end of that based on the price, based on the recent cost increases or is it at a single-digit, mid-to-high single digit. We move to high based on some of this recent cost inflation I talked about primarily impacting the second quarter. What I said about first half-second half. In the second half, if you look at that in particular back to Andrew's question, we are going to see low single, low double-digit price increases which are cumulative was coming through for the third and fourth and quarter. So it builds during the year to my point before, not for the full year but for the second six.

Robert Moskow
Analyst at Credit Suisse Group

Okay, that means, that's a big, that's a big price increase in the back half of the year.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Well, I think what you're lapping and you're lapping last year and the Americas particularly, pricing in the fourth quarter of last year. So, you do get that cumulative impact of several price increases, three of them actually.

Robert Moskow
Analyst at Credit Suisse Group

Okay. And then the risk to the baseline.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Well, of course it was elevated demand because consumers were forced to stay home and cook and we never expected all of it to remain, but we do believe that consumers have moved to a higher level of consumption and higher level of cooking at home structurally. All of our research point in that direction. The logic of people stop cooking at home, and starts to working from home in part, lunch is going to be a meal occasion. That is, that is more at home. Breakfast, because of work from home, people are actually cooking breakfast that if you did more ready to eat solutions and -- and so there is kind of both the qualitative and the quantitative work that point to say consumption at home is going to continue to remain elevated I mean, 88% of consumer say they are going to cook as much at home or as much or more at home than they did during the pandemic. To the extent there is economic pressure on us from a recession, that also reinforces the whole cook at home and that we know, in particular, our category and our brands performed well during recessionary periods during both in the last two recessions the, our brand growth was right in line with our long-term, long-term guidance. And we are seeing a difference in our consumer business in the U.S. versus Europe. But the biggest factor there is actually that Europe has, in our European business we have a significant component that is taking on, particularly with our [Indecipherable] brand in France. And so you can see baking return to more of a baseline level. But we do believe that there has been a step up in our other category.

Mike Smith
Executive Vice President and Chief Financial Officer at McCormick & Company, Incorporated

Yeah, I mean just look at total McCormick consumer in the last two years, and we were lapping a really tough quarter last year in Q1, we're up 30% in two years constant currency consumer sales. That's pretty amazing. That's is a step up that Lawrence is talking about [Speech Overlap]

Robert Moskow
Analyst at Credit Suisse Group

Yeah, and maybe one last follow-up if I could. If pricing is up low double digit, let's say it's like 12% in the back half of the year, it's probably not unheard of to expect a volume decline of like negative 5, negative 6. Is that close to how you're thinking about elasticity? Number one. And if volume is that -- down that much, does that have any implications for your fixed cost leverage or what does it do to your, the rest of your P&L if anything?

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Well, I'm just going to get too specific on our, on our exact elasticity modeling. But we do model elasticity. These price increases are really outside the range of those models and the environment is different from the environment in which those models were built. So I think that all of us are now little bit unchartered territory right now. But -- but we've assumed a level of elasticity. And so far so good in the sense that elasticity that were actually seeing is actually at the low end of what we've -- what we've been modeling. So that gives us some encouragement. And again, elasticity is partly based on substitutability and everything is going up. And so even though our prices are going up, the consumers' perspective of it and a relative frame of reference it, it's been a context for all the substitutes and everything that the products are used on, its going up as well.

And again, as we tried to say in our prepared remarks and what we've seen from urban consumers in the past is that our products are a very small part of the cost of their meal and and in many cases are part of them solving their whole grocery basket infection problem. If they've got it, meat going up 40%, the increase on spices fails by comparison and using even more space to substitute a lower cost out of meat is a real behavior that we've seen in the consumer.

Mike Smith
Executive Vice President and Chief Financial Officer at McCormick & Company, Incorporated

I'm less worried about the fixed cost in their supply chain. I mean, we've managed ups and downs all the time. So if there happens to be some volume decrease, there has been a large investment and capacity in the last couple of years and we've gotten out a lot of co-pack cost from COVID. So we would absorb that.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Yeah, and I would say we're still, in order to meet the high level of demand, maybe the volumes came down a little bit, i actually not even benefit us.

Robert Moskow
Analyst at Credit Suisse Group

Oh, interesting. Okay, all right, thank you.

Operator

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

Adam Samuelson
Analyst at The Goldman Sachs Group

Yes, thank you. Good morning, everyone.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Good morning.

Adam Samuelson
Analyst at The Goldman Sachs Group

Good morning. So I was hoping to dig in on the flavor solutions growth a little bit and really trying to think about the performance in some of the different buckets and very different comp play out in that part of the business than in the consumer segment where you were still lapping some easier foodservice and quick service comps a ear ago. Those get notably tougher. You're packaged food customers, especially North America might kind of or probably roughly a lot of the same demand elasticity questions that Rob and others have been asking about already. So I'm just try to think about how we should think about the volume growth? Whether it's by region or by the different type, different parts of that business over the balance of the year.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

I'll start off to say that flavor solutions growth for the total company was really strong and for Americas and EMEA it was likewise really, really strong, and even Asia Pacific where the growth was a little bit lighter, I'm not going to complain about the amount of growth that we recognize over there as well. The food away from home component slightly trailed food at home overall, but those results were really different by, by region. Our whole flavor and seasoning business has really been robust in the Americas. And that drove a lot of, a lot of the growth and foodservice restaurant recovery has continued to be -- has continued to be strong and branded foodservice is now reopening. So we're seeing solid growth there. I mean, it's hard to what's not. I mean, I can't, I couldn't tell you was not growing. Yes, not only there is the secular trends that we're winning business and answer thing. We talked about the FONA acquisition, that is unlocked across the Flavor business and some of the high-growing categories we talked about it a CAGNY. So I think you're seeing a lot of good trends across Flavor Solutions.

Adam Samuelson
Analyst at The Goldman Sachs Group

Right, no I get that. I'm sure and I think about this on the go forward, the comp play out and volumes is somewhat very different from an activity level than your consumer business and I'm trying to think about especially if there is risks of maybe a bit slower economic growth, especially in EMEA, you've got COVID lockdowns in Asia or in China, specifically. Just how do we, how do you, how are you thinking about that business as we go the balance of the year?

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Well, I think, I mean, all companies are struggling like this, but I think in times when other, say packaged food companies are trying to come up with innovation, maybe take cost out, where our products are such a small percentage of the total product base so as the consumer. That's actually an opportunity for us to work with them. So, I'm less concerned about some of the elasticity there seeing things like that you've said. We're small component just like on the consumer side of that meal, whether you're branded foodservice or whether you're buying a snack seasonings and I was trying to specifically as this we are watching, this what I'd say it's within the -- there are always puts and takes and pressures within the business. I'd say that what we're seeing at least so far it's within that range.

Adam Samuelson
Analyst at The Goldman Sachs Group

Okay. And then if I could quickly follow-up on the commodity cost inflation point and I appreciate your basket looks very different than a lot other food companies. You guys also are also much more diverse in terms of the spices seasonings herbs that are going to have a lot of emerging market kind of growers, very small holder farmers. Could you talk about the contracting of that? How much, just when you actually will agree to price with those growers through the year, Just they're going to be facing some pretty dramatic input cost inflation, I'm wondering how that will impact the price that you're paying for that basket of commodities that really more in fiscal '23 events as we think about their costs flowing up to you.

Mike Smith
Executive Vice President and Chief Financial Officer at McCormick & Company, Incorporated

Yeah, I think most, that's the impact we've talked about especially recently is more on the transportation and the packaging side. There is exposures to the resins and oil costs and things like that. And for commodities, we have long history relationships with partners and joint ventures that secure commodities over time and you can look at our balance sheet, we have more raw materials now than we did last year. So that's part of the way we, we protect our future supply.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Right and I think that we could get into too much detail here. I would say that our global sourcing and our boots on the ground and are long relationships with producers in these markets and kind of both the strategic partnership, in some cases are multi-generational, that's really advantage to us in this area and this actually been an area that I think that we've demonstrated tremendous competitive advantage that is giving us some buffer. I think that others are probably experiencing greater cost inflation pressure for some of these same components. It's an area where scale really matters.

Adam Samuelson
Analyst at The Goldman Sachs Group

Okay, all right. That's all helpful. I'll pass it on. Thanks.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Thanks, Adam.

Mike Smith
Executive Vice President and Chief Financial Officer at McCormick & Company, Incorporated

Thanks.

Operator

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

Steve Powers
Analyst at Deutsche Bank Aktiengesellschaft

Yeah, hey, thanks, and good morning. Perhaps building on your comments in response to Alexia's question on private label and Rob's questions as well, it seems there is an increased focus in your comments this morning on entry price points for affordability, maybe that's just limited the private label, but generally and value offerings such as the larger pack sizes. I guess I just want to validate that I'm picking up on a fair evolution and tone since the start of the year, number one.

And then number two, maybe some comments around how that's altered your outlook for volume versus product mix alongside the increases in price, and clearly you've, you have all to the top line outlook and you've dimensioned the incremental pricing anticipated so we can solve for the difference. But within that, I'm curious how you're thinking about volume versus mix trade-offs? It sounds like you expect the response of the skew more towards mix versus the unit volume decline, but I just, again want to only validate that love some incremental thoughts.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

I'll start with this, there is a lot to unpack. I mean, the nice thing in our Consumer businesses, whether you're buying recipe mixes or bottles of spices or Frank's RedHot sauce, the margins are very solid. So we have a really broad portfolio products are Flavor things, but really high margin business across the board. So I don't think, I don't think there's going to be an impact there from a shift. I mean, you may see in previous recessions, like we talked about, I don't think we're shifting a message. I think we've talked about very consistently in recessionary periods such as 2001, 2009, our products did really well. We show volume growth and pricing growth that we need to. So there may be a shift in products from Gourmet to recipe mixes because people are going down the value chain, but the margins are there and the use of a one packet via dry seasoning mix versus a bottle actually helps us in some way. So I think the fear that you're raising is unfair.

Mike Smith
Executive Vice President and Chief Financial Officer at McCormick & Company, Incorporated

Yeah, we're not trying when we talk about, we offered this full range of price points all the way from super premium to mid tier to entry price point. And at time when we and everybody are taking pricing actions, we also want to make sure our products are accessible to lower income consumers and value conscious consumers and that's all really trying to provide reassurance in that area. It's not anticipation of some change or, its not a shift in strategy or focus growth.

Steve Powers
Analyst at Deutsche Bank Aktiengesellschaft

Okay. Okay, fair enough. Thank you very much.

Operator

Thank you. Next question is from the line of Chris Growe with Stifel. Please proceed with your questions.

Chris Growe
Analyst at Stifel Nicolaus

Hi, good morning.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Hi, Chris.

Chris Growe
Analyst at Stifel Nicolaus

Hi, Just had a couple of quick questions. I think these have become pretty much follow ups at this point, but just to be clear on a couple of points. But given the higher inflationary outlook you mentioned, you do have more pricing coming online in the second quarter. Is that new pricing or is that pricing that was expected to pick up from some of your actions I think you put in place in the fourth?

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

All I can say, this is pricing that has been planned. We, with these price increases in order for them to be effective now were presented before our last call, I can assure you that. So so these are, these are not new. And the additional pricing that we're planning later in the year was planned, the magnitude of that pricing was still flexible and that we're locking that in now.

Chris Growe
Analyst at Stifel Nicolaus

That makes sense. Like I don't know, Okay, got it. And then, I just want to be clear on the cost inflation that accelerates in the second quarter. Even though prices accelerate, it sounds like it's still going to be some, some extra cost, whether it be ERP and the new and the facility costs in

Peterborough that would be factors that would keep the gross margin from improving much sequentially, but the second half should show that improvement as more the pricing comes through. Is that the way to think about that relative between pricing and inflation?

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Yeah, I think we, in the second half as I said, for the reasons you mentioned, but also the fact that, that cost acceleration for the fuel costs and things like that into the second quarter, in addition to some of the things we made out the forward some of the supply chain. So, yes, you're right.

Chris Growe
Analyst at Stifel Nicolaus

Okay, and I just a question. Okay, sorry.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

I would just say I think you got it.

Chris Growe
Analyst at Stifel Nicolaus

Okay. One quick question on Flavor Solutions. You talked about some strategic investment spending. Is that related to future demand or is that related to Peterborough, for example, or things you're moving around. I'm just curious what that is referred to.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Specifically reflecting, majority of related to Peterborough start-up costs and redundant running cost there.

Chris Growe
Analyst at Stifel Nicolaus

Okay, thanks so much.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Which is a great new facility of net carbon zero and manufacturing and running, its going to be [Speech Overlap] there is a start-up cost.

Operator

Thank you. Your final question is from the line of Peter Galbo with Bank of America. Please proceed with your question.

Peter Galbo
Analyst at Bank of America

Hey, good morning, Lawrence and Mike. Thank you guys for fitting me in.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Good morning.

Peter Galbo
Analyst at Bank of America

Just wanted to circle back, I think to some comments you made, maybe a few years ago around China and make sure some of the numbers we're working with are still okay. But I believe in the past you've disclosed that China is sub 10% of the business and I think about half of that business is away from home just as we're thinking about 2Q impact with potential lockdowns.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

You're right about less than 10%. It's, I think that's close enough [Speech Overlap] I mean, you have to remember that it was in our Consumer business we have, there is products we sell that are used for both in foodservice that we classify them as part of consumer, which is little different than other parts of the world just because the fact that can be used in both channels.

Peter Galbo
Analyst at Bank of America

Right, okay. Okay. And then maybe just as a follow up, Mike, and I know we've kind of gone over this on the cost inflation side and pricing. But I just, on reconciling the gross margin guidance specifically for the year given the kind of the whole you're working out of in 1Q, some of the lasting impacts in 2Q and not margining up when you take price in the back half of the year. Just how do you kind of still get to a flat to down 50 basis points gross margin number as you're looking at it internally? Just can you help us there. Thanks, very much.

Mike Smith
Executive Vice President and Chief Financial Officer at McCormick & Company, Incorporated

I think you have to remember, the first quarter is historically the smallest quarter. So, and the back half of the year is traditionally our biggest quarters, so there you get the math going nd that helps us, as you know, we have increased volumes and and pricing and things like that. We've talked about, that helps fill some of that gap you're talking about. I mean, we're always looking at, we talked, we talked, at CAGNY we talked on earnings call about the things are going to help us whether it's CCI. People forget about the reduction in COVID costs. We spent $60 million in COVID costs last year, of which some of that still remains in underlying business, but that was a, that's a big tailwind for us to help offset some of the segment mix we've talked about, the pricing compression that we've talked about which is the main driver. So there is other things we're doing whether it's rev management, the shift to higher margin products both in the Flavor Solutions side and consumer that we're intentionally doing. So there is a lot of things, there is a lot of put and take -- puts and takes within that 0% or 50% -- or 50 basis points for the full year, but we're one quarter in and it's just too early to move. And things will move in that range to as things change with Ukraine, Russia, commodity cost, pricing, so we're comfortable with where we are right now. [Indecipherable]

Peter Galbo
Analyst at Bank of America

No. Thanks. Thanks very much.

Operator

Thank you. I'll now turn the floor Lawrence Kurzius for closing remarks.

Lawrence E. Kurzius
Chairman, President, and Chief Executive Officer at McCormick & Company, Incorporated

Great, thank you. McCormick is differentiated by the breadth and reach of our balanced portfolio which is positioned us for sustainable growth. We're very proud of our solid first quarter operating performance. We're disciplined and are focused on the right opportunities and investing in our business. We're continuing to accelerate our momentum and drive further growth as we successfully execute on our long-term strategies, 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
Senior Vice President Corporate Strategy & Investor Relations at McCormick & Company, Incorporated

Thank you, Lawrence. Thank you to everybody for joining today's call. If you have any further questions regarding today's information, please feel free to contact me. This concludes this morning's call. Have a nice day.

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