Lawrence E. Kurzius
Chairman and Chief Executive Officer at McCormick & Company, Incorporated
Good morning, everyone. Thanks for joining us. Third quarter sales increased 3% from the year ago period as anticipated. In constant currency, sales grew 6%, reflecting 10% growth from pricing actions, partially offset by a 1% decline from the Kitchen Basics divestiture, the 1% decline attributable to the exits of low margin business in India and the consumer business in Russia, and a 2% decline in all other volume and product mix. Our underlying third quarter growth reflects the strength of our broad global portfolio as well as the effective execution of our strategies and pricing actions, against the backdrop of a volatile operating environment. Using 2019 as a pre-pandemic baseline, third quarter sales grew at a constant currency three year compounded annual growth rate or CAGR, up 7%, reflecting the sustained momentum in our business across both our Consumer and Flavor Solutions segments.
Moving to profit. Adjusted operating income was down 12% or 11% in constant currency and adjusted earnings per share was down 14%. During the third quarter, supply chain challenges continued and recovery of certain constrained materials is taking longer than expected. We continued to incur elevated cost to meet high demand in our Flavor Solutions segment, while in our Consumer segment where demand moderated from elevated consumption trends more quickly than expected. We are experiencing lower than optimal operating leverage.
Across the supply chain, we remain focused on managing inventory levels and eliminating inefficiencies, though the normalization of our supply chain cost is taking longer than expected, pressuring gross margin and profit realization in the current period. Over the coming months, we will be aggressively eliminating supply chain inefficiencies. Importantly, as we had expected in the third quarter, our price increases are catching up with the pace of cost inflation in both segments. We began to recover the cost inflation that had been outpacing our pricing actions and other levers, most significantly in the Consumer segment. We expect this will continue into the next year as we plan to fully offset inflation over-time.
Before discussing our third quarter Segment performance in more detail, I'd like to comment on our supply chain plans, starting on slide five. We have a focused plan in slide that leverages the discipline of our established Comprehensive Continuous Improvement or CCI program to ensure that we are able to flexibly support customer demand both where it has been sustained at higher levels and where it has moderated, while eliminating inefficiencies and normalizing both our cost structure and inventory levels. Our actions are well underway. Our top supply chain priority remains keeping our customers in supply and supporting their growth. There are areas of our business that have sustained high levels of demand for an extended period and our supply chain has been pressured to meet this demand. We have several initiatives in progress that will increase our capacity, strengthen our supply chain resiliency and importantly enable us to service our customers, so they can grow their business. For example, we are investing an additional flavor solutions seasoning capacity, which will be online [Technical Issues].
And from a cost perspective, as we responded to demand volatility over the past several years, we have incurred additional costs above inflation, service our customers, and have seen inefficiencies develop in our supply chain. These are cost we have absorbed, we have not passed into customers and our pricing actions. We are targeting to eliminate at least $100 million of these costs with a significant benefit in 2023. We are moving aggressively to take these costs and inefficiencies out as well as normalized inventory levels that have built up. Some of our actions include investing to increase both manufacturing capacity and reliability and bottleneck areas to enable better customer service and repatriation of production from excessive use of co-packers. We're returning to more normal shift schedules and reducing our spend on expensive surge capacity. We are already seeing the benefit of lower overtime and temporary labor reductions. In this more normalized environment as well as through customer collaboration, we are already beginning to reduce expedited freight costs and less than truckload shipping costs as well as other transportation inefficiencies.
We are resolving raw material and packaging supply issues. For example, there were beyond the shortage of glass bottles and certain organic spices, which impacted supply of our US or mainline. A supplier facility closure announced in September broke the discontinuation of a component of our dry recipe mix packaging and through our quick qualification of alternative supply, we mitigated a major disruption during the fourth quarter. Long running shortage of French's mustard bottle will be resolved in the first half of 2023, as new molds come online at a second supplier.
And from an inventory perspective, we are also executing on plans to return to historical safety stock levels, which were raised to protect against the supply disruption. We expect the impact of our actions to normalize our supply chain costs, increase our efficiency and ability to meet demand, lower our inventory levels, and importantly, increase our profit realization beginning in the first half of 2023.
We have managed through various supply chain challenges over the last several years with the peak disruption experienced in the third quarter of last year. Since then, there has been steady improvement, building progress and bolstering our confidence in our plan to enhance our operational performance and optimize our cost structure.
While we will always prioritize meeting our customers' needs, I'm encouraged by our disciplined approach to resolving the increased cost within our supply chain. We've continue to define and quantify specific actions within our plans since we shared we would be driving the elimination of the supply chain inefficiencies in our pre-announcement last month. We look forward to sharing more detail and progress with you in January when we provide our 2023 outlook.
Now, moving to third quarter business updates for each of our segments. Starting with our Consumer segment on slide six, and the status of our pricing actions. Our third quarter sales reflect the impact of our pricing actions in all three regions with an acceleration of effective pricing in the quarter versus the first half of the year, in line with what we expected. While there are pressure on consumers' cost of living from inflation, which heightened during our third quarter has resulted in higher price elasticity than we originally anticipated. Our elasticity has remained lower than historical levels and our most recent pricing actions, which in the US took effect as we began our fourth quarter, we focused on areas that are less elastic and did not take pricing on some products where we had seen the highest elasticity.
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 4%, in line with our shipments. And over the last three years, since 2019, consumption has grown at a three year CAGR of 8%, which highlights how the sustained shift in consumer consumption continues to drive increased demand for our products and outpace pre-pandemic levels.
In early August, we divested our Kitchen Basics business. We consistently grew this brand over the years, but as it was the only US brand we had in the stock and profile, our resources were better focused on core categories where we have leading brands. Demand has remained high with strong growth in the majority of our categories. Spices and seasonings has been one of our strongest categories in the past three years. And as a result, we are lapping all-time highs in consumption. This has created challenging comparisons in some product lines such as baking related items, which have returned to a pre-pandemic level unlike most of our categories. Grilling-related items were impacted versus last year by high meat prices, although grilling is still strong versus pre-pandemic.
Shelf conditions continue to improve as seen in our recipe mix share performance with the fourth consecutive quarter of share gain. Our spices and seasoning share was pressured by service-related distribution losses. The shortage of certain packaging items as well as certain organic spices, which has largely been resolved and some trading down by consumers who remain under pressure from broad-based inflation. We are using our category and revenue management capabilities to strengthen our spices and seasoning presence on shelf. The strength of our brands and our category leadership has recently won us new distribution, which we're beginning to realize now.
In EMEA, we continue to have solid share performance of herbs, spices and seasonings in the UK, Eastern Europe and Italy, somewhat offset by softer performance in France. We're continuing to gain share on Frank's RedHot in the UK and we're beginning to build momentum with Cholula, as we expand that brand into this market. For the quarter and year-to-date versus last year, as well as since 2019, we are driving the UK hot sauce category growth. Our Vahine brand of homemade dessert products in France, the product line unique to our EMEA region, as flows, we have seen baking return to a more pre-pandemic baseline level in EMEA too, again, unlike our other categories.
Turning to the Asia-Pacific region, last year the region experienced supply chain challenges such as ocean freight capacity constraints, and lapping that impact contributed to growth in the third quarter. Additionally, following an extended lockdown in the second quarter over to restrictions in Shanghai and some other cities throughout China eased as we began the third quarter, resulting in trade and pantry replenishments contributing to growth. Recently, several cities in Central China, which is the primary market of our Wuhan operations have experienced new COVID-related lockdowns and we are continually monitoring the situation. Overall, our China performance is on track with our expectations.
Across all regions in our Consumer segment, we are achieving the price realization we expected, and we are executing on our proven growth strategies, pivoting action plans as needed based on our consumer insights and the environment. We continue to invest behind our brands with increased brand marketing investments in the third quarter and have additional investments planned for the fourth quarter. In addition to our highly effective and inspiring holiday messaging, we've pivoted our digital messaging to emphasize value and show consumers how our products help them stretch their grocery dollars without sacrificing flavor.
We are focusing our innovation efforts to meet the needs of consumers concerned about their budgets. In the Americas, we have launched a new Lawry's branded opening price point range of everyday 10 spices. And our large-sized format Super Deal is one of the best performing product lines as consumers are looking for greater value. This format size is approximately a 40% better value per ounce than the smaller sizes. We've also launched large-sized resealable pouches of top-selling items in markets across all regions.
In terms of category management, we are collaborating with our customers to ensure the right assortment and price points on shelf to optimize category performance and increase profitability for our customers. And as always, we have a strong merchandising program plan for the holiday season. We are confident in our brand marketing investments, innovation and category management initiatives, which will continue to drive strong growth.
Turning to Flavor Solutions on slide eight. Our sales performance for the quarter was strong with growth led by our pricing actions in all three regions, with an increase in our effective pricing versus the first half of the year as we expected.
Now for some regional highlights. In the Americas, strong growth was driven by snack seasonings, savory flavors and branded foodservice products. Demand continues to strengthen the branded foodservice restaurant and institutional foodservice customers, as mobility and strong summer travel continue to fuel consumption. And importantly, we also are expanding distribution.
In EMEA, growth remained strong across our entire customer base. Our third quarter growth was led by strong quick service restaurant or QSR momentum in all markets, partially driven by expanded distribution and our customers' promotional activities. And we're seeing an acceleration of demand in branded foodservice as customers shift to more economical format. Our full spectrum of solutions across price points is driving growth. We are winning in both regions with our new product momentum and Americas growth for new products contributed approximately 25% more growth in flavors in the third quarter and the year-ago period, driven by beverage, savory snacks and performance nutrition flavors. We're continuing to win share in these categories. And in EMEA, our third quarter new product launches accelerated versus earlier in the year. And for the full year, we expect new product introductions to outpace 2021. We are fueling future growth.
In APZ, we're driving further menu penetration with our QSR customers, winning new limited time offers as well as realizing growth with strong performance of their core menu items we flavor. In many cases, we are the heat in their spicy offerings. Overall, Flavor Solutions has remained strong, and for certain parts of our business in the Americas and EMEA regions, our supply chain continues to be pressured to meet this high demand. And as I said earlier, we are still taking on some extraordinary cost to service our customers. We appreciate our customers working with us and we see light ahead.
Now, some summary comments before turning it over to Mike. Turning to slide nine. Global demand for flavor remains the foundation of our sales growth and we have intentionally focused on great fast-growing categories that will continue to differentiate our performance. We continue to capitalize on the long-term consumer trends that accelerated during the pandemic, healthy and flavorful cooking, increased digital engagement, trusted brands and purpose-minded practices. These long-term trends and the rising global demand for great taste are more relevant today than ever with the younger generations fueling them at a greater rate. McCormick is uniquely positioned to capitalize on this demand for great taste. With the breadth and reach of our strong global flavor portfolio, we are delivering flavor experiences for every meal occasion through our products and our customers' products and are driving growth. We are end-to-end flavor.
We remain focused on the long-term goals, strategies and values that have made us so successful. We have grown and compounded that growth over the years, including through the pandemic and other periods of volatility. Our solid track record of achieving our long-term objectives highlights the resiliency of our business through a variety of market conditions, as well as our focus on sales growth and profit realization. Long-term fundamentals that drove our industry-leading historical performance remained 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 give us confidence in our growth momentum and in our ability to navigate the global dynamic environment. The compounding benefits of our relentless focus on growth, performance and people continues to position McCormick to drive sales growth and balanced with our focus on lowering costs to expand margins, realized long-term sustainable earnings growth.
The teamwork of our McCormick employees drive our momentum and success and I want to thank them for their dedicated efforts and engagement.
And now, I will turn it over to Mike.
