McCormick & Company Inc (MKC) 2021 Q3 法說會逐字稿

Good morning.

This is Kasey Jenkins, Vice President of McCormick Investor Relations.

Thank you for joining today's third quarter earnings call.

To accompany this call, we posted a set of slides at ir.mccormick.com.

We'll begin with remarks from Lawrence Kurzius, Chairman, President and CEO; and Mike Smith, Executive Vice President and CFO, and we will 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.

Thank you, Kasey.

Good morning, everyone.

Thanks for joining us.

Our third quarter performance demonstrates again that the combination of our balanced portfolio with the effective execution of our strategies to capitalize on accelerating consumer trends and the strong engagement of our employees have positioned us well to drive differentiated growth.

Remarkably, we delivered an 8% sales increase versus last year and 17% versus 2019.

Our third quarter results reflect a robust and sustained growth momentum as we delivered organic sales growth on top of our exceptional third quarter performance last year.

Our third quarter results also include strong contributions from Cholula and FONA.

Sales growth in our Flavor Solutions segment was broad based with the at-home products in our portfolio, flavors and seasonings, growing at approximately the same rate as our away-from-home product, which was primarily driven by a robust recovery from last year's lower demand from our restaurant and other foodservice customers attributable to COVID-19 restrictions and consumers' reluctance to dine out.

Our Consumer segment results reflect the lapping of the year ago elevated demand in the lockdown days of the pandemic from consumers eating and cooking more at home as well as a sustained shift to Consumer at-home consumption higher than prepandemic levels.

Taken together, these results continue to demonstrate the strength and diversity of our offering, the breadth and reach of our portfolio with compelling offerings for every retail and customer strategy across all channels creates a balanced and diversified portfolio that enables us to drive consistency in our performance even in a volatile environment.

Turning to Slide 5. Total third quarter sales grew 8% from the year ago period or 5% in constant currency.

Substantial constant currency sales growth in our Flavor Solutions segment more than offset slight constant currency sales decline in our Consumer segment, driven by the factors I just mentioned.

Adjusted operating income was comparable to the third quarter of last year, including a 3% favorable impact from currency.

The benefit of higher sales was more than offset by higher cost inflation and industry-wide logistics challenges as well as by a shift in sales between segments.

On the bottom line, our third quarter adjusted earnings per share was $0.80 compared to $0.76 in the year ago period, driven by higher sales and a lower tax rate, partially offset by cost pressures.

As we have stated previously, we expect growth to vary by quarter in 2021.

Importantly, we have delivered outstanding year-to-date performance.

Sales and adjusted operating income are up 13% and 9% year-over-year, respectively, both of which include a 3% favorable impact from currency.

And we've grown adjusted earnings per share 8%.

Year-to-date versus 2019, we've driven sales, adjusted operating income and adjusted earnings per share growth of nearly 20% across all 3 metrics.

I'd like to say a few words about the current cost environment's impact on our third quarter results as well as our outlook, which Mike will cover in more detail.

We stated in our July earnings call we are operating in a dynamic cost environment, and like the rest of the industry, experiencing cost pressures.

We're seeing broad-based inflation across our raw and packaging materials as well as transportation costs.

To partially offset rising costs, we have raised prices where appropriate.

But as usual, there is a time lag associated with pricing, particularly with how quickly costs are escalating.

And therefore, the phase-in of most of our actions is taking place during the fourth quarter.

Those pricing actions are on track, and we appreciate our customers working with us to navigate this environment.

In the last few months, inflation has continued to ratchet up, mainly with packaging and transportation costs.

We're experiencing the highest inflationary period of the last decade or even 2. We, along with our peers and customers, are also facing additional pressure in our supply chain due to strained transportation capacity and labor shortages and distribution.

These pressures not only impact costs but also negatively impact sales as the addition of further supply chain complexity makes it harder to get orders shipped and received by customers, and this pressure is amplified by continued elevated demand.

Overall, we have a demonstrated history of managing through inflationary periods with a combination of pricing and cost savings, and we expect to manage through this period as we have in the past.

Now let's turn to our third quarter segment business performance, which includes comparisons to 2019 prepandemic levels as we believe these will be more meaningful than the comparisons to 2020 given the dramatic shift in consumer consumption between at home and away from home experienced in the year ago period.

Starting on Slide 7. Consumer segment sales grew 1%, including a 2% favorable impact from currency and incremental sales from our Cholula acquisition compared to the highly elevated demand levels in the year ago period.

Our Consumer segment organic sales momentum on a 2-year basis was up double digits, highlighting how the sustained shift in consumer consumption continues to drive increased demand for our product and outpaces prepandemic levels.

Our Americas constant currency sales declined 1% in the first quarter with incremental sales from our Cholula acquisition contributing 3% growth.

Our total McCormick U.S. branded portfolio consumption, as indicated in our IRI consumption data and combined with unmeasured channels, declined 10% following a 31% consumption increase in the third quarter of 2020, which results in a 19% increase on a 2-year basis.

Demand has remained high, and we are realizing the benefit of our U.S. manufacturing capacity expansion, although some products remain stretched by sustained high demand.

Shelf conditions are improving, and we're seeing sequential improvement in our share performance.

That said, as I mentioned moments ago, the current issues related to logistics pressures continue to make it challenging for market leaders, like McCormick, to keep high demand products in stock, which has prevented us from making further progress in replenishing both retailer and consumer inventories in the third quarter.

Importantly though, we're better positioned than we were last year entering the holiday season and are confident in our holiday merchandising plans.

Focusing further on our U.S. branded portfolio, our 19% consumption growth versus the third quarter of 2019 was led by double-digit growth in spices and seasonings; hot sauces, both Cholula and Frank's RedHot; and barbecue sauce as well as our Asian and frozen products.

In pure-play e-commerce, we delivered triple-digit growth compared to 2019 with McCormick-branded consumption outpacing all major categories.

This is the sixth consecutive quarter our U.S. branded portfolio consumption grew double digits versus the same period 2 years ago, which reflects the continuation of consumers cooking and using flavor more at home and the strength of our brand.

Our key categories continue to outpace the center-of-store growth rates versus the same period 2 years ago, favorably impacting not only the McCormick brand, but our smaller brands as well.

Household penetration and repeat rates have also grown versus 2019.

And when our consumers shop, they are buying more of our products than they were prepandemic.

McCormick continues to win in hot sauce.

Across our brands, McCormick rose to be the #1 hot sauce manufacturer globally earlier this year.

In the third quarter, Frank's RedHot, the #1 brand in the U.S., was joined at the top of the category by Cholula, which we have driven to the #2 ranking.

Now turning to EMEA, which has continued its outstanding momentum.

We had strong market share performance in the third quarter versus last year, maintaining or gaining share across the region in key categories following our strong gains in the third quarter last year.

Compared to the third quarter of 2019, our total EMEA region, we drove double-digit consumption growth in herbs, spices and seasonings.

And turning up the heat, Frank's RedHot has grown consumption 75% and is gaining significant share versus the 2-year ago period.

Across the region, our household penetration and repeat rates have also grown versus the 2-year ago period.

Our year-to-date higher brand marketing investments in the EMEA are proving to be effective as evidenced by the metrics I just discussed as well as our achieving above-benchmark rates for reach, engagement and click-through, for instance, in our digital marketing.

In the Asia/Pacific region, third quarter sales were strong, reflecting our continued recovery from China's lower branded foodservice sales last year.

Our consumer product demand in the region declined due to lapping significant growth last year.

The region has also experienced supply chain challenges with ocean freight capacity constraints impacting the quarter's growth.

In Australia, we continue to see strong consumption growth versus 2019 with key brands recently trending back toward 2020 levels, with Frank's RedHot already higher than last year's elevated consumption.

Across all regions in our Consumer segment, we are continuing to fuel our growth with our strong brand marketing, new product launches and our category management initiatives.

We're making brand marketing investments across our portfolio to connect with our consumers, particularly online.

Early in the third quarter in the Americas, we began our search for the first Director of Taco Relations.

This was a dream opportunity for the over 5,000 applicants who showcased their taco expertise and enthusiasm for our product in their video application.

To date, we have garnered over 1 billion earned impressions related to our search.

And these will continue to grow upon the announcement of our new Director of Taco Relations next week on October 4 in celebration of National Taco Day.

We're not only creating buzz through our digital marketing, but also with our e-commerce direct-to-consumer new product launches.

In the Americas, we drove new, passionate users to our brands and digital properties with the launch of Sunshine All-Purpose Seasoning, a new product developed in partnership with social media influencer, Tabitha Brown.

Inspired by her joyful personality and health- and wellness-focused recipes, the salt-free and gluten-free Caribbean-inspired blend sold out in just 39 minutes, generating record sales from e-commerce-driven innovation and over 700 million earned impressions.

Our new product launches differentiate our brands and strengthen our relevance with consumers.

And with our global leadership position in hot sauce, we are in a perfect position to capitalize on consumers' rising demand for hot-and-spicy flavors through a global heat platform.

Our recent launches of Frank's RedHot frozen appetizers and Cholula wing sauces in the Americas as well as Frank's RedHot craft flavors in the EMEA have made strong contributions to growth in the third quarter.

Just in time for Halloween, EMEA is introducing dead-hot gift sets for e-commerce, featuring Frank's RedHot.

And in China, our recently launched ready-to-eat chili paste has the highest 30-day repeat rate of all McCormick direct-to-consumer products on Tmall.

Turning to category management.

Our initiatives are designed to strengthen our category leadership by driving growth for both McCormick and retailers.

These initiatives include simply changing shelf placement, for instance, increasing Cholula's velocity over 30% by changing its aisle placement at a large retailer, to reinventing the spice and seasoning aisle shopping experience.

In the U.S., we're anticipating a cumulative implementation of our spice aisle program since it began in 2020 at 10,000 stores by year-end.

Versus 2019 to remove year-over-year noise, sales through the beginning of August show retailers that have adopted the spice aisle changes are growing the category faster than those who have not.

And McCormick's branded spice and seasoning portfolio is growing solid mid-single digits faster in implemented stores versus stores which have not adopted the changes.

And in Eastern Europe, the rollout of our first choice bottle, which was perceived as premium in what was predominantly a sachet-only market, is elevating the spices and seasoning category and driving increased share in our Eastern European market.

Moving forward, we are confident that we will continue the momentum of our Consumer segment.

We have more consumers than prepandemic.

They have come into our brand, are having a good experience and are buying our products again.

We're excited about our growth trajectory and expect long-lasting growth from the sustained shift to consumers cooking more at home fueled by our brand marketing, new products and category management initiatives.

Turning to Slide 9. Our Flavor Solutions segment grew 21% or 17% in constant currency, reflecting both strong base business growth and contributions from our FONA and Cholula acquisition.

Our third quarter results include the robust recovery from last year's lower demand from our restaurant and other foodservice customers, many of which are lapping the curtailment of both away-from-home dining as well as strong continued momentum with our packaged food and beverage customers.

Notably, growth was driven equally from both the at-home and the away-from-home products in our portfolio.

On a 2-year basis, our sales also increased double digits with strong growth in all 3 regions.

In the Americas, our FONA and Cholula acquisitions made a strong contribution to our significant third quarter growth.

And we're executing on our strategy to shift our portfolio to more value-added and technically insulated products.

We continue to see outstanding growth momentum with our consumer packaged food customers through new products and base business strength.

Consumers' rising global demand for hot-and-spicy flavors is driving growth for both our customers snacks and for seasonings that flavor them.

Compared to last year's third quarter, snack seasonings grew high single digits, but strong growth in core iconic products as well as new products and the innovation pipeline continues to be robust.

Our confidence that FONA will accelerate our global flavors platform continues to be reinforced by their excellent performance with double-digit sales growth compared to last year.

Beverages are driving significant growth with particular strength in the fast-growing performance nutrition category.

And finally, in the Americas, branded foodservice contributed significant growth to the quarter as our demand for this channel has continued to strengthen as more dining options reopen.

In EMEA, we had strong growth versus both last year and 2019 across all markets and channels.

Quick service restaurants, or QSRs, are driving growth through increased promotional activities and limited time offers.

Our branded foodservice sales, with easing restrictions in the hospitality industry, increased at a double-digit rate versus the third quarter of last year.

And as packaged food and beverage company, our performance was strong on top of last year's strong growth with the hot-and-spicy trend fueling growth in snack seasoning, particularly through new product innovation.

Our sales growth in the Asia/Pacific region was partially impacted by the timing of our QSR customers' strong limited time offers and their promotional activities in the third quarter of last year, which increased restaurant traffic as COVID-19 restrictions lifted.

As we've said in the past, limited time offers and promotional activities can cause some sales volatility from quarter-to-quarter.

We recognize a part of our third quarter Flavor Solutions results were due to the comparison to low away-from-home demand last year.

Notably, our growth also include strong contributions from FONA and Cholula; robust growth with packaged food and beverage customers, both at the base business and in new product wins driven by our differentiated customer engagement and continuing momentum with QSRs.

Year-to-date versus 2019, we've delivered 13% constant currency growth, including FONA and Cholula, and 6% constant currency organic growth.

These results, combined with our effective growth strategies, bolster our confidence in the continuation of our robust growth trajectory in our Flavor Solutions segment.

Now on Slide 10, I'm excited to share some important purpose-led performance news.

Just a few days ago, we were named as a Global Compact LEAD company by the United Nations for our ongoing commitment to the UN Global Compact and its 10 principles for responsible business.

We are honored by this recognition for our commitment to sustainability and to be 1 of only 37 companies in the world and the only U.S.-based food producer to be included on this prestigious list.

Sustainable sourcing is a top priority, and we've been actively working on initiatives, such as our sustainability-linked financing partnership with IFC and Citi, which provides our urban spice suppliers in Indonesia and Vietnam with financial incentives linked to improvements in measures of social and environmental sustainability as well as our partnership with Heifer International on the launch of the Cardaforestry project, which aims to increase smallholder farmer resilience and improve the quality of cardamom and allspice in Guatemala.

In addition, LATINA Style Inc.

recently named us as one of the top 50 best companies for Latinas to work in the U.S. We are thrilled to be recognized for our continued efforts around diversity and inclusion.

We are committed to the long-term vitality of the people, communities and the planet we share and are proud of our impact in these areas.

We look forward to sharing more about these accomplishments as well as many others with you through our Purpose-led Performance Report, which will be issued early next year.

Before turning it over to Mike, I'd like to make some qualitative comments regarding 2022.

To be clear, we are not providing 2022 guidance at this time.

We are a growth company, and we expect to grow in both of our segments next year.

At the foundation of our sales growth is the rising consumer demand for flavor fueled by younger generations.

We've intentionally focused on great categories that are growing and generating a long-term tailwind.

We're capitalizing on the long-term consumer trends that accelerated during the pandemic, and we're successfully executing on our strategies and initiatives.

In this dynamic and fast-paced environment, we are ensuring that we remain focused on long-term, sustainable growth.

Recently, cost pressures have rapidly accelerated, and we're preparing for them to remain in 2022.

We plan to mitigate these costs, which we expect to fully offset over time through a combination of CCI-led cost savings, revenue management initiatives and pricing actions as needed.

In addition, we're taking prudent steps to reduce discretionary spend where possible.

We also expect the impact of COVID-19 to persist into 2022, which will create continued broad-based supply chain challenges.

We've successfully demonstrated in the past our ability to manage through inflationary environments and cost pressures.

Importantly, our strong growth trajectory supports our confidence in our long-term financial algorithm to drive continuous value creation through top line growth and margin expansion.

We have a strong foundation and remain focused on the long-term goals, strategies and values that have made us so successful.

Around the world, McCormick employees drive our momentum and success, and I thank them for their hard work, engagement and dedication, particularly in such a volatile environment.

And now I'll turn it over to Mike.

Thanks, and good morning, everyone.

For the reasons Lawrence mentioned, my comments will also include comparisons to 2019.

Starting on Slide 13.

Our top line growth continues to be strong.

We grew constant currency sales 5% during the third quarter compared to last year, with incremental sales from our Cholula and FONA acquisitions contributing 4% across both segments.

Higher volume and mix drove our organic sales increase with Flavor Solutions' growth offsetting a decline in the Consumer segment.

Versus the third quarter of 2019, we grew sales 15% in constant currency with both segments growing double digits.

During the third quarter, our Consumer segment continued to lap last year's exceptionally high demand.

Versus 2020, our third quarter Consumer segment sales declined 1% in constant currency, which includes a 3% increase from the Cholula acquisition.

Compared to the third quarter of 2019, Consumer segment sales grew 14% in constant currency.

On Slide 14, Consumer segment sales in the Americas declined 1% in constant currency, lapping the elevated lockdown demand in the year ago period as well as the logistics challenges Lawrence mentioned earlier.

Incremental sales from the Cholula acquisition contributed 3% growth.

Compared to the third quarter of 2019, sales increased 17% in constant currency, led by significant growth in the McCormick, Lawry's, Grill Mates, OLD Bay, Frank's RedHot, Cholula, Zatarain, Gourmet Garden, Simply Asia, Stubb's and El Guapo-branded products.

That's a lot of brands.

Partially offset by a decline in private label.

In EMEA, constant currency Consumer sales declined 11% from a year ago, also due to lapping the high demand across the region last year.

Notably, this decline includes strong growth in our Eastern European market on top of their significant volume growth last year, which was more than offset by declines in the region's other markets.

On a 2-year basis, sales increased 10% in constant currency, driven by strong growth in our Kamis, Schwartz and Frank's RedHot branded products.

Consumer sales in the Asia/Pacific region increased 11% in constant currency due to the recovery of branded foodservice sales with a partial offset from the decline in consumer demand as compared to the elevated levels in the year ago period.

Sales increased 4% compared to the third quarter of 2019, including a sales decline in India, resulting from a slower COVID-19 recovery.

Turning to our Flavor Solutions segment and Slide 17.

We grew third quarter constant currency sales 17%, including an 8% increase from our FONA and Cholula acquisitions.

The year-over-year increase, led by the Americas and EMEA regions, was due to strong growth with both packaged food and beverage customers and in away-from-home products.

Compared to the third quarter of 2019, Flavor Solutions segment sales grew 16% in constant currency.

In the Americas, Flavor Solutions constant currency sales grew 19% year-over-year, with FONA and Cholula contributing 12%.

Volume and product mix increased driven by significantly higher sales through branded foodservice customers, together with growth from packaged food and beverage companies with strength in snack seasonings.

On a 2-year basis, sales increased 15% in constant currency versus 2019 with higher sales from acquisitions and packaged food and beverage companies, partially offset by the exit of some lower-margin business.

In EMEA, constant currency sales grew 19% compared to last year due to increased sales to QSRs and branded foodservice customers as well as continued growth momentum with packaged food and beverage companies.

Constant currency sales increased 23% versus the third quarter of 2019, driven by strong sales growth with packaged food and beverage companies and QSR customers.

In the Asia/Pacific region, Flavor Solutions sales rose 1% in constant currency versus last year and increased 8% in constant currency versus the third quarter of 2019, both driven by QSR growth and partially impacted by the timing of our customers' 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, was comparable to the third quarter of last year, including a 3% favorable impact from currency.

Adjusted operating income in the Consumer segment declined 10% to $188 million or in constant currency 12%, driven by the cost pressures from inflation and logistics challenges, partially offset by CCI-led cost savings.

These logistics challenges not only impacted costs but also negatively impacted sales.

In the Flavor Solutions segment, adjusted operating income rose 32% to $84 million or 27% in constant currency.

Higher sales, CCI-led cost savings and favorable product mix as we continue to migrate our portfolio more than offset the cost pressures in this segment.

Across both segments, incremental investment spending for our ERP program was offset by lower COVID-19 costs compared to last year.

During the quarter, we invested in brand marketing ahead of last year.

And notably, we have increased our investments 11% on a year-to-date basis.

As seen on Slide 22, adjusted gross profit margin declined 260 basis points, driven primarily by the cost pressures we are experiencing and the lag in pricing.

Our selling, general and administrative expense as a percentage of sales declined 110 basis points, driven by leverage from sales growth.

These impacts netted to an adjusted operating margin decline of 150 basis points.

In addition to the factors I mentioned a few moments ago, a sales shift between segments unfavorably impacted both gross and operating margins.

Turning to income taxes.

Our third quarter adjusted effective tax rate was 14.1% compared to 19.3% in the year ago period.

Both periods were favorably impacted by discrete tax items with a larger impact this year due to the favorable impact of a reversal of a tax accrual.

Adjusted income from unconsolidated operations declined 5% versus the third quarter of 2020.

Based on our year-to-date results, we now expect a mid-single-digit increase in our adjusted income from unconsolidated operations for 2021, up from our previous projection of a low single-digit decrease.

This improvement is driven by strong performance from our McCormick de Mexico joint venture.

At the bottom line, as shown on Slide 25, third quarter 2021 adjusted earnings per share was $0.80 compared to $0.76 for the year ago period.

The increase was primarily driven by a lower adjusted income tax rate.

As compared to the third quarter of 2019, our 10% increase in adjusted earnings per share was primarily driven by sales growth.

On Slide 26, we've summarized highlights for cash flow and the quarter-end balance sheet.

Through the third quarter of 2021, our cash flow from operations was $373 million, which is lower than the same period last year.

The decrease was primarily due to the payment of transaction and integration costs and higher use of cash associated with working capital.

This includes the impact of planned higher inventory levels to support significantly increased demand and to mitigate supply and service issues as well as buffer against cost volatility.

Through the third quarter, we've returned $272 million of this cash to our shareholders through dividends and used $190 million for capital expenditures.

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 2021 financial outlook on Slides 27 and 28.

With our broad and advantaged flavor portfolio, our robust operating momentum and effective growth strategies, we are well positioned for another year of differentiated growth and underlying performance, tempered by the higher inflation ahead of pricing and the logistic challenges we previously mentioned.

For 2021, we are projecting top line and earnings growth from our strong base business and acquisition contribution with earnings growth partially offset by incremental COVID-19 costs and ERP investment as well as a higher projected adjusted effective tax rate.

We continue to expect an estimated 3 percentage point favorable impact of currency rates on sales, and for the adjusted operating income and adjusted earnings per share, a 2 percentage point favorable impact of currency rates.

At the top line, due to our strong year-to-date results and robust operating momentum, we now expect to grow constant currency sales 9% to 10%, which is the high end of our previous projection of 8% to 10% and includes a 4% incremental impact from the Cholula and FONA acquisitions.

We had initially projected an incremental acquisition impact in the range of 3.5% to 4%.

We anticipate our organic growth will be led by higher volume and product mix, driven by our category management, brand marketing and new products as well as pricing.

We're now projecting our 2021 adjusted gross profit margin to be 150 to 170 basis points lower than 2020 due to the increase in cost pressures I mentioned earlier.

While we continue to expect a mid-single-digit increase in inflation for the year, it has moved higher and is now approaching a double-digit increase in the fourth quarter.

Overall, our projected adjusted gross margin compression reflects unfavorable impact from sales mix between segments, cost inflation and COVID-19 costs, partially offset by pricing and margin accretion from the Cholula and FONA acquisitions.

As a reminder, we price to offset cost increases.

We do not margin up.

Our estimate for COVID-19 cost remains unchanged at $60 million in 2021 versus $50 million in 2020 and is weighted to the first half of the year.

Reflecting the change in gross profit margin outlook, we are lowering our expected constant currency adjusted operating income growth.

Our adjusted operating income growth rate reflects expected strong underlying performance from our base business and acquisitions, projected to be 8% to 10% constant currency growth, which includes the higher inflation ahead of pricing and logistics challenges and partially offset by a 1% reduction from increased COVID-19 costs compared to 2020 and a 3% reduction from the estimated incremental ERP investment.

This results in a total projected adjusted operating income growth rate of 4% to 6% in constant currency.

This projection includes the mid-single-digit inflationary pressure as well as our CCI-led cost savings target of approximately $110 million.

It also includes an expected low single-digit increase in brand marketing investments.

Considering the year-to-date impact from discrete items, we now project our 2021 adjusted effective income tax rate to be approximately 21% as compared to our previous projection of 23%.

This outlook versus our 2020 adjusted effective tax rate is expected to be a headwind to our 2021 adjusted earnings per share growth of approximately 1%.

We are lowering our 2021 adjusted earnings per share expectations to 5% to 7% growth, which includes a favorable impact from currency.

This reflects our lower adjusted operating profit outlook and lower adjusted income tax rate as well as the higher adjusted income from unconsolidated operations.

Our guidance range for adjusted earnings per share in 2021 is now $2.97 to $3.02.

This compares to $2.83 of adjusted earnings per share in 2020 and represents 8% to 10% growth in constant currency from our strong base business and acquisition performance, partially offset by the impacts related to COVID-19 costs, our incremental ERP investment and the tax headwind.

I'll now turn it back to Lawrence.

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 29.

Our third quarter results reflect a robust and sustained growth momentum as we grow strong sales growth despite a challenging year-over-year comparison.

Year-to-date versus 2019, we have driven significant double-digit growth rates for sales, adjusted operating profit and earnings per share.

We have a strong foundation and a balanced portfolio, which drives consistency in our performance.

We expect higher at-home consumption will persist beyond the pandemic and are continuing the momentum we are gaining in away-from-home consumption.

We're confident the growth momentum of our business is sustainable.

As a reminder, McCormick has grown and compounded that growth successfully over the years regardless of short-term pressures.

Our strong growth trajectory supports our confidence in our long-term growth algorithm to drive continuous value creation to top line growth and margin expansion.

We're driving McCormick forward and building value for our shareholders.

Now let's turn to your questions.

(Operator Instructions) Our first question comes from the line of Andrew Lazar with Barclays.

Maybe to start out, at our recent conference and then again this morning, you alluded to cost and supply chain disruptions likely continuing into fiscal '22.

Others have made very similar sort of comments.

Of course, you'll have more pricing kicking in, among other actions, to mitigate some of the challenges.

I think you also had mentioned that ERP costs could be offset by COVID expenses coming down.

So I guess things remain very fluid, of course, and you're not obviously giving specific '22 guidance as of yet.

But I'm trying to get a sense of whether sort of an on-algorithm year, particularly on the profit side, would be too much to ask in fiscal '22 at this stage, all things considered, particularly given what I assume will be continued margin pressure at least through the first half of next year.

Right.

Well, first of all, Andrew, thanks for the opportunity to talk about a pretty high-level question right out of the gate.

In your question, you included a couple of my points that I would actually make to answer it.

Beginning with, just to be clear, I'm not going to give guidance for next year.

It's -- there are a lot of moving parts.

Things are fluid.

We are right in the middle of putting together our budgets for next year right now.

As we said in the call, our long -- we're very confident about our algorithm over the long term.

I'm just not ready to talk about it in 2022 specifically just yet.

But in our prepared marks, I did say we expect growth in both segments.

And so I'll start there and then I'll bring it back to profit.

Our -- McCormick is unique in that we've been differentiated by strong growth.

The underlying trends that support our business includes a demographic tailwind from younger consumers that has nothing to do with the pandemic.

And then many of the consumption trends, we believe, were reinforced and accelerated by the pandemic.

So we believe that going into the pandemic, our growth was differentiated already.

Through it, it's been differentiated.

And coming out, it continues to be differentiated.

We've made investments, including during the time of this pandemic, both organic and through smart acquisitions that put our portfolio more and more into high-growth categories like hot sauce and flavor.

And on top of this, we're going to have the top line benefit of pricing in 2022.

So we have confidence in strong growth going forward.

For operating profit, there are a lot of puts and takes.

Over the last few years, we've had rising ERP investment.

Over the last 2, we've had the shock of extraordinary COVID costs.

And right now we, as everyone else, not just in our industry but across business in general, are wrestling with decades-high inflation.

And we're -- that's an area where we're not unique.

The first 2 of these, rising European investment versus COVID costs, those should largely offset in 2022.

And I think that given the magnitude of the cost, as we've described them previously, everyone should have an expectation around those largely offsetting.

And versus the cost pricing is going to kick in.

Pricing has lagged, we -- our pricing in the U.S., largely going into effect in the fourth quarter in particular.

And so I would expect that we would see -- you should expect to see the benefits from that not just on the top line, but running through the P&L.

But remember, the math says that margins compress when we take pricing.

Our approach is to take pricing to pass through costs, and so both the numerator and the denominator go up.

And so the fraction gets a little bit smaller.

So while we do expect that pricing to come in, it would be reasonable to expect some level of margin compression.

Nonetheless, with the pricing action and other steps we'll take to offset cost and the top line growth that we expect, I think it's very reasonable to expect solid operating profit growth next year.

I'm not ready yet to say if it's exactly on algorithm.

Right.

Appreciate that color.

That's helpful.

And then one very quick follow-up, and it may be tough to parse out.

In the quarter, though, is it -- are you able to sort of break out what impact some of the supply constraints may have had on overall sort of company organic growth?

I think organic growth was up about 1%.

I don't know if some of the supply constraints were significant enough that it would have meaningfully changed what organic growth looked like in the quarter.

It actually did have an impact on the fourth quarter.

I think we're -- sorry, did I say fourth?

I misspoke there.

That's -- it's third quarter.

And we haven't quantified that and I'm not prepared to, but it was material.

We normally would not have a backlog at all.

And to have the idea of having a backlog of orders is unprecedented.

We have a backlog that's measurable in days, and so it did have a -- it definitely had an impact.

It would have been our hope to actually continue to rebuild trade inventories as we went through the quarter, which has not yet been fully recovered, and we were not able to do so.

We really wanted and planned to ship more.

These logistics challenges are very real.

It is -- we've gone from a very strategic discussion just now to a very tactical one.

But just simply getting product out there has been a challenge in the face of the -- what is still very high demand at the same time that we're having these logistical challenges.

I'd say that the trade channels are still a bit starved for inventory.

Plus, you'd notice, we did narrow our range on sales to the high end of the range.

So we have very strong confidence in the fourth quarter.

Our next question is from the line of Ken Goldman with JPMorgan.

Just on pricing, are there any geographies or categories or brands where maybe getting the pricing you hoped for has been a little more challenging than in others?

And I guess I'm curious, where are you in your, I guess, journey, so to speak, of taking incremental pricing to offset some of the newer or more severe headwinds you're facing?

I'm trying to figure out if you're still having conversations with customers.

Do you feel most of the heavy lifting is done there for maybe some of the second rounds?

That would be helpful.

Well, first of all, I won't say that there is a particular problem.

These actions always have some degree of commercial tension in them.

And so I don't want to get too specific there.

It's not so much that they're ongoing conversations with customers.

I think that there are some new conversations to be had.

All of our actions on pricing are on track, particularly for the U.S. The price increases that we talked about earlier in the year, that's been sold in.

There is a time lag, though, especially with how quickly costs have gone up.

Inflation has accelerated since we launched those pricing plans.

And so there's more work to do in that area in 2022.

The phase-in of most of our actions is happening in Q4, and we would expect to see the benefit of that in 2022.

And I think I'd point you back, Ken, to historical perspective here.

We've had high inflationary periods in the past in the 2008, 2009 time frame, 2011, 2012 where we successfully put in pricing and actually both onto U.S. Consumer during one of those time periods.

And we're able to pass through the pricing.

We also pull a lot of other levers, whether it's CCI, discretionary spending to get to Andrew's point about getting back on algorithm from a profit perspective.

Next question comes from the line of Robert Moskow with Crédit Suisse.

I think this question will sound like Ken's question, maybe a different tack though.

Is the conversation different with retailers on how to take pricing or how to think about pricing in the latest -- in relation to the latest acceleration?

Because I think some retailers out there consider the supply chain disruption to be temporary.

The labor challenges will go away.

And as a result, does that mean you have to shift more towards, I don't know, more variable actions on promotions or packaging changes rather than a straight-up list price increase?

Well, again, I've got to say that I can't get specific about any one particular customer.

Certainly, the pricing actions that we just took, we had a lot of company going out there.

And so I think retailers, what they heard from us was similar to what they heard from others.

I'm not so sure -- we have not gotten that kind of feedback that retailers think that these increases are transitory.

There's been some discussion about inflation not continuing to escalate, but there hasn't been any discussion about just not being a reset of pricing levels.

And I think that there's broad recognition of that.

And I will say that I was on a call with Chairman Jerome Powell yesterday where he was saying very much the same thing.

And so I think that the outlook is that these costs are not transient.

They are here to stay, and they're eventually going to have to find their way through in the form of pricing that gets to the consumer and the belt tightening across the entire supply chain, including us as a supplier to our customers.

Okay.

Great.

So what you're saying is it's similar types of conversations.

There's no different types of pushback on the second round compared to the first round.

It's a similar conversation.

Yes.

I'm not differentiating between the 2 right now.

I think if I go much further than that, I'm getting into specifics that are a bit too granular and too prospective.

Okay.

Anything else you want to tell us about what Jerome Powell said?

Or do you want to leave it at that?

Just like us, he's got to do it in a public forum, so it's all out there.

The next question is coming from the line of Adam Samuelson with Goldman Sachs.

So I guess on the inflation dynamics, you've highlighted specifically logistics and packaging.

And I just want to be clear, is that more on the ocean freight side?

Is it domestic trucking?

All of the above?

And beyond those 2 discrete buckets, is there anything notable in terms of your own wage rates?

And are you seeing pressures in your own labor force domestically given the rise in -- given the broad-based labor pressures you're seeing?

Hey, Adam, it's Mike.

I'll take this, and Lawrence may add a few comments.

I mean like we said on the call, it is -- you're right, it's 80% to 90% of it is really logistics, transportation, packaging, things like that.

So we have a really good line of sight to our commodity costs in the fourth quarter, obviously.

It's really both ocean freight, but also domestic freight.

And you've actually seen after Hurricane Ida, some of the domestic rates have gone up again.

So that's part of the new news that I think we're all experiencing in the U.S. in particular.

You've seen globally in the U.K. natural gas challenges and things like that, too, and trucking challenges.

So it's both getting it here and getting it to customers.

From a wage rate perspective, we've taken actions just like other companies have to try to aggressively attract talent in our manufacturing facilities and DCs with retention bonuses and other actions like that.

So I think to Lawrence's point, these labor rates aren't going to go back down.

These are -- these have been a reset of cost level that may not escalate further.

That's to be seen.

But it's not -- we're not going to have deflation on labor rates.

Right.

And I'll tell you -- I'll just add to that, that the cost increases that we're talking about are -- these are not things that are unique to McCormick at all.

The biggest increases have been on package materials and on transportation costs, followed by raw material and labor.

And I'd say that we look a lot like everybody else in that regard.

Okay.

That's helpful.

And then if I could ask a more longer-term margin question, and it's really in the Flavor Solutions business.

And I guess I'm thinking to the kind of a couple of years pre-COVID in that business, and you've done a -- through acquisition and internal initiatives, have done a lot of heavy lifting to get the margins in that business to the kind of 14%, 15% level from about 10% back in 2015, 2016.

And we're now back in the 13% to 14% range.

I'm just trying to think about where that business can go from here once we maybe get through some of these price cost imbalances in the near term?

Do you think there's a lot more room on mix to really push that business higher?

Are there investments in technology and R&D on the flavor side that you've got to accelerate to temper that?

I'm just trying to think about that being a driver of earnings growth maybe beyond some of the shorter-term inflationary pressures that we're experiencing right now.

Adam, we're going to have to bring you in to help write some of our IR materials.

The -- we have great confidence in the margin trajectory of our Flavor Solutions business.

We're really changing the portfolio.

The big driver of our margin improvement over time has been the shift in the portfolio to more value-added, technically insulated products.

We've made organic investments in that part of the business.

We've done acquisitions in that part of the business to accelerate the growth.

And as the portfolio continues to shift in that direction, it's going to drive a -- kind of a really, a structural improvement in margin.

Those are just categories that command a better margin, and it's going to mix the business up.

And at the same time, we've made the decision to get out of some of the lower-margin stuff, some of which is really low margin.

And we found graceful ways of exiting some of that without getting on the wrong side of the customer relationships.

So I'd say our long-term outlook for continued expansion of our Flavor Solution is one of the things that underpins our confidence in our long-term algorithm.

And I think like the FONA acquisition has even given us more confidence in continuing to migrate that portfolio with really combining their technical expertise with ours.

And I'll just chime -- there's been -- a number of the notes are going to try and parse it -- organic sales out from acquisition and so on.

Yes, we're going to -- we're reporting 100% of what we sell on FONA as acquisition related.

But we have grown that business tremendously since we bought it.

And we're very...

Same with Cholula.

And same with Cholula as well.

But your question specifically is about Flavor Solutions, and that's really part of that portfolio migration.

Next question is coming from the line of Chris Growe with Stifel.

I just had a question for you, if I could, in relation to pricing.

Just to understand, would you expect that your pricing would offset your inflation once all your pricing is in place?

I'm going to say that all of the levers that we're going to pull will.

But part of what CCI does is offset inflation to an extent.

Part of it offsets cost increases.

And part of it, we bring in to reinvest in the business in other ways, and part of it makes its way to the bottom line, and that's the intent.

So expecting that over time, we will recover all of the costs through all of the levers.

It won't be 100% through pricing.

That's okay.

Yes.

I understand.

And the other question I was going to say was just as you get into -- is it expected that you would have a lot of these levers pulled by, say, first quarter of '22?

I know you've got some pricing going into place in the fourth quarter.

I'm not trying to get to an exact time or guidance for next year, just to understand the time frame around pulling all these levers.

I think that I don't want to get too deep into talking about 2022.

I did want to give guidance for the year.

And I don't want to give guidance for any of the quarter.

But I do think -- but I think that this is something that's going to unfold over time.

We've taken pricing actions.

We've said that inflation has continued to accelerate.

So there's more to go.

And I think that to think it's all going to be in place in Q1 is probably not...

Yes.

And also, you realize that there's a lot of focus on the U.S. timing, but this happens around the world at different time points based on local.

So we'll have a lot more to say in the January call.

Understood.

Okay.

And I had just one other question and it's just more to understand kind of this inventory situation, we'll call it, I guess and rebuilding.

We can debate IRI or Nielsen data, but it shows like your U.S. sales down 11%.

And again, we can debate that number.

I see your Americas business, again, not a perfect representation totally, the U.S. being down 4%.

Is that gap the sort of inventory build you expected for this quarter year-over-year knowing that you were shipping below inventory -- below consumption a year ago?

Or is there more inventory build to come, I guess, is what I'm trying to get to.

Consider to math go -- looking back 2 years, so look at the undisturbed 2019.

Last year, you're right, we weren't shipping to consumption.

Demand was extraordinarily elevated.

And if you strip out the acquisition, demand -- consumption is up 19%.

Our shipments are up 13%.

So just this right math on that would suggest we undershipped by about 6 percentage points, which is very substantial.

We did that same math in Q2, and it was -- we were ahead by 4%.

So it would look like we've unwound some of the inventory build that we did.

But in 2019, we had a holiday terms program in place, which we normally would do.

I mean normally in the third quarter, we're starting to build trade inventories for the heavy fall season.

And so that would have been part of the underlying demand.

So when you net that all out, we think we're pretty close to even on shipping versus the true change in consumption.

But that includes not being able to build for the trade inventories for the holiday as we would have hoped.

And so we do think that we're a bit -- that as I said on one of the questions earlier, that the trade channel right now is a bit starved for inventory in the U.S.

Now we think of that as really sloshing between third and fourth quarter, and it's still going to end up getting captured within the year.

So it doesn't much change our outlook for the full year.

It makes us anticipate a pretty strong fourth quarter.

But to bring it back to where we are in rebuilding, we're not as far along as we would have hoped.

Our next question is from the line of Steve Powers with Deutsche Bank.

And you might have just -- I think you sort of addressed this in response to Chris' question, but just to play it back.

So when we think about your intention to fully offset pressures over time and appreciating that there's a rolling process to this, I think -- I don't know if, Chris -- if you were speaking to Chris, your response specifically on pricing or just all the offsets.

But I guess what I'm trying to get a sense for is just on those rolling offsets, when do you think you hit run rate, your run rate achievement of those offsets?

Is that a middle of next year type of time line?

Or is it more realistic to think that it progresses all the way through, and it's not until the -- closer to the end of '22, where you hit the full offset run rate?

Just trying to get a sense, order of magnitude, the pacing of your effort.

Yes.

I mean obviously, I mean, a lot depends on the future cost environment, too.

And that's -- I mean we put in pricing in the U.S. to -- it's going to partially hit in the fourth quarter, like we said last quarter.

The full impact is going to be in 2022.

Now if costs continue to accelerate, we'll have to address that with other actions.

But it's -- I think it's speculative at this point to try to call '22.

And the timing by quarter and then by halves.

Okay.

No, okay.

Okay.

Fair enough.

Can I ask just a cleanup on tax?

And appreciating the discrete benefits you've now realized in '21, and I'm not asking for 22.

Just on a normalized basis, how should we think about your -- sort of the tax run rate for the business going forward?

And if you have any color on cash taxes versus GAAP taxes, that would be great as well.

No, it's a great question.

And obviously -- and we talked about this.

Actually, our 10-Q discloses the amount.

We talked about kind of an underlying rate of 24% to 25% based on the country mix, the underlying tax rates that we have and our expectations for the year.

And generally, what happens and what happened this quarter, there are discrete either programs that our tax team runs, there are acquisitions in the past that we clean up some of the assumptions or estimates, or there's statute of limitations that drop off where we've tended to realize some discrete tax benefits.

So it's exactly what happened this quarter.

But under the current tax regime, with GILTI and FDII and all these things globally, it's 24% to 25%.

Obviously, we're all waiting to see what happens in Washington to see what future rates are.

And I'd say our cash taxes are pretty close to that, too.

We pay our fair share.

Our next question is from the line of Rob Dickerson with Jefferies.

Great.

Just wanted to touch on private label for a second given -- I think you still operate that side of the business a bit as well as brands.

Obviously, there's been kind of ongoing discussion kind of where state of that overall industry kind of sits as we kind of get through the pandemic.

I'm just curious kind of given some of the comments around, let's say, trade inventory not exactly where you want it to be going fall date and to the pricing forthcoming, I'm just kind of curious what you've seen or heard from the retailers as of late around demand for kind of your private label products versus brands.

And then just kind of how you think about price gaps as you kind of enter this pricing phase?

That's the first one question.

Generally, across all categories, private label is -- it's lost share through the pandemic and brand as a group have gained.

And in the recent results that we just announced, our brands were strong.

Private label is one of the soft points.

When it comes to pricing, the costs are going up for every raw materials, packaging, labor and transportation, and that applies to private label as well.

And so it's pricing actions that we're going forward for our -- include the private label products that we manufacture.

And I would expect that in many cases, just because they are priced at a lower price point, that they may see a higher percentage inflation rate because the same dollars costs going through, it's going to be a bigger percentage.

Okay.

Fair enough.

And then just quickly, we've obviously heard from a lot of different companies that.

So far, elasticity measures look great, right, relative to history given some of this elevated demand.

I'm just curious, again, I know you're not giving '22 guidance, but you have to have some thoughts as to kind of what you might be baking in on the elasticity side.

And kind of what I'm hearing is that there's growth expected in those segments next year.

And pricing coming, I'm kind of assuming that the answer here is that there could be some incremental distribution gains to offset some elasticity, demand remains elevated.

So just kind of any comments around that kind of volume side versus the price side and where you think elasticity can shake out.

Sure.

The demand remains elevated.

Our categories that we're in, were already growing before the pandemic and continue to grow through it.

And there's -- we've talked endlessly about the underlying demand for flavor growing.

The younger consumers are fueling that.

And as we've gone through the pandemic, we've gained household penetration, and usage rates are up.

And we haven't talked about it much, but we -- I think we had a comment about it in the prepared remarks, that the purchases per purchase occasion are up a lot.

And so consumers are buying more of our products, and we expect that to continue to be the case.

So I'd say our outlook is -- continues to be positive for strong sales growth.

And if you look at consensus sales for next year that are out there, they're pretty anemic.

And I guess we're trying to gently suggest that there's a reason to reconsider that.

Our final question is a follow-up from the line of Robert Moskow with Crédit Suisse.

Just very quickly, Lawrence, I think you quantified on a 2-year basis, Americas, shipments, up 13%; consumption, up 19%.

And doesn't that also include your private label business being down in that 2-year period?

So therefore, the gap isn't really 600 basis points.

It might be a little bit less?

It's a very small number overall compared to our branded portfolio, the change less -- definitely less than 1% differential.

Less than 1%.

Yes.

At this time, I'll turn the floor back to management for closing remarks.

Oh my gosh, we're out of questions.

Great.

Thanks, everyone, for your questions and for participating on today's call.

McCormick is differentiated by the breadth and the reach of our balance portfolio, which has sustainably positioned us for growth.

We're very pleased with our outstanding year-to-date operating performance, which proves the strength of our business model, the value of our products and capabilities as a company.

Looking ahead, we expect to drive even further growth as we continue to execute on our strategy, actively respond to changing consumer behavior and capitalize on new opportunities.

Thank you for your time this morning.

Thank you, Lawrence, and thank you to everyone for joining today's call.

If you have any further questions regarding today's information, please reach out to me.

This concludes this morning's call.

Have a good day, everybody.