McCormick & Company, Incorporated (MKC) Earnings Call Transcript & Summary

Good afternoon, everyone. I'd like to welcome McCormick & Company back to our Global Staples Conference today. With us this afternoon for our virtual fireside chat, our Chairman, President and CEO, Lawrence Kurzius; and EVP and CFO, Mike Smith. Thanks very much to you both for spending some time with us here today. I'm sorry we're not doing this in person, of course, but we're thrilled to have you with us today. I was hoping we could maybe start off our discussion today, Lawrence, maybe a bit more broadly with the state of McCormick's business globally. The company is unique, right, not only with its split of business between food at home and food away from home, but also from a geographic standpoint, with approximately 30% of the company's sales occurring outside the Americas. That said, you've had a front-row view to this pandemic from the start in China. And I was hoping you could give us an update on what you're seeing now from a regional and segment perspective. And maybe how the response -- how it's response -- your response in this environment has had to evolve.

Great. Well, thank you, Andrew, for having us with you today. It's a pleasure to be here. You've hit a couple of things right there. Because of our broad portfolio and our global footprint, we have experienced the COVID-19 disruption from the beginning and also from a variety of perspectives, both geographically and from a channel viewpoint. From a consumer segment standpoint around the world, we're still experiencing strong sustained consumer demand, which is real incremental consumption, and it reflects the trend of consumers cooking more from scratch. In the Asia region where we can look at China as a leading indicator, given that they're a few months ahead of us in the recovery, we see that consumers are still just as nervous about COVID-19 as the rest of the world. And that the demand for food at home continues to be very strong even in that market. Here in the Americas, the latest Nielsen U.S. data shows consumption up 26% in the last 4-week period for McCormick, a continuation of early exceptionally strong demand driven by increased cooking at home. And even in EMEA, we're experiencing consumption growth that's similar to the U.S., especially in France and the U.K. and our supply chain has been better positioned there to keep up with this demand. So across the region, we've been experiencing market share gains in many of our core brands. If you've switched to Flavor Solutions, in that segment, we've got a very diverse customer portfolio, and we're seeing varying stages of recovery across that portfolio, starting with the away-from-home portion of it, which historically has represented about 20% of our total annual company sales. Specifically, with the quick service restaurants, or QSR, customers, we're seeing a good recovery in Asia Pacific, again, using China as a leading indicator. We're seeing a strong recovery of QSRs. Traffics return to near-normal levels. You can hear them talk about it, too. Some promotions are back in place to drive demand there as well. In both the Americas and in EMEA, we're seeing strong signs of recovery with our quick service restaurant customers. Also, it's especially impactful for us in EMEA where our away-from-home business SKUs more toward the QSRs. The rest of food service, however, is continuing to struggle across all regions. I'm sure we'll comment on this further on this call. We expect this to be the case for some time as restaurants and other food service venues like stadiums and cafeterias continue to be largely closed or operate under a limited capacity. So from a food-at-home perspective, with our packaged food customers, we see a lot of variability in their demand. Some are up solid double digits and some are down. It's very customer specific. But taken all together, we expect to return to pre-COVID growth rates on our custom flavor manufacturing products. Overall, in Flavor Solutions, business is gradually rebounding, but not yet to 2019 levels. So Mike, do you want to add to what I had to say there?

Yes. Thanks, Lawrence. Just a couple of things. Just a reminder, we began the year with growth plans based on our strategies, which were yielding results before the COVID crisis. And we've leveraged our initiatives to capitalize on the opportunity to help both our consumers and our customers navigate through this environment. A few examples, we were already planning to increase our brand marketing investments in 2020. As an example, with the campaign focused on consumer education of how to use our products and build confidence in the kitchen, which is even more relevant in the COVID-19 environment. And as needed with the agility we have built in our marketing organization, we were able to quickly pivot our messaging to target consumers' needs and help them in this environment. We'd also plan to strengthen our consumer connection every day during their digital flavor journeys. And with the increase of consumers online, we're even better positioned to do that now. We're gathering real-time insights and creating and deploying new content for our McCormick owned properties and providing solutions for them. Third, with the acceleration of the e-commerce channel by approximately 3 to 5 years, during this pandemic, as evidenced by our second quarter triple-digit growth, not only have our previous investments paid off, the investments we have planned such as making all touch points shoppable and our products just 1 click away have been even more valuable during this time. And in Flavor Solutions, we plan to strengthen our customer intimacy and by collaborating with our away-from-home customers during this period of pain to help them adapt to the changing environment, such as modifying menus for carryout, optimizing recipes for COVID-19 safety protocols, and we further differentiated our customer engagement. We've also had a couple of delayed initiatives, as we talked before, our spice and seasonings aisle renovation rollout when they're timing of some of our new products, there will be just opportunities to fuel growth next year. And regarding our ERP implementation, the delay provides us a chance to do some replanning, particularly as SAP has improved their products. So our ramp-up will now be on newer version with a broader suite of applications, which also allows us to save an upgrade cycle as well. So in many ways, our plans and parts of our portfolio are even more relevant today than they were before the COVID crisis, as we expect the continuation of increased cooking at home, which bolster our confidence that we will deliver future growth.

Great. Thank you very much for that. I'd like to focus a bit on recent consumer behavior and consumption. McCormick's talked about the preference for at-home cooking throughout this crisis. And while we'd assume some of this will moderate as things open back up eventually, I guess, what learnings is McCormick picking up from its survey work about at-home cooking and how consumers may or may not continue the at-home cooking habit for a longer period of time even after things normalize?

That's a great question, Andrew. We have some very robust data based on the U.S. and we believe that generally the results around the world are going to track similar. So a lot of what I've got to say, in terms of data is really data from the U.S. So if we start just with food habits and cooking from home, 85% of consumers in the U.S. are saying that the pandemic has changed their food habits, inspiring to cook, eat, shop and think about food in new ways. 60% of consumers are cooking from scratch more with real and simple ingredients. And 75% of consumers, even if they're not cooking more, 75% of consumers say they're enjoying the cooking experience more than in the pre-pandemic days. And for many, meal time has become family time, a real time, not screen time, where connections can be made to bring the family closer together and help provide structure to the day. And we believe that a lot of this behavior has persisted long enough that it is going to be the new habit. Now if you take the flip side of that, these insights with some of the consumers-related discomfort in dining at restaurants. So for example, 57% of consumers in our surveys are saying that they are not comfortable with the idea of eating indoors at a restaurant at all for the rest of the year. And 32% of consumers are even uncomfortable with the idea of eating outdoor at a restaurant any time for the rest of the year. And when you take that outdoor on top of that, outdoor is going to get hit with the reality of adverse weather as we get into the fall and the winter seasons. Those things taken together highlight that consumers are going to change their behavior to eat out less. Driven both by new behaviors, they're learning, as well as anxiety about dining out. And that's going to drive an increased and sustained level of cooking at home. It is driving it right now. Consumers are also increasing at-home consumption with restaurant carryout and delivery. So on top of not dining outlets, recent data says that 85% of restaurant transactions is actually for food consumed off-premise, taken back home. That's a lot of food being brought into homes. And our research is showing that, that food is often being flavored at home by the consumer. 1/3 of consumers report adding their own spices to these meals. Another 1/3 say they're adding or dipping in sauces or condiments that they have at home, which further fuels demand for McCormick's flavor products. As consumers stay more at home, we can't ignore the significant hurdles that creates on the other side, though, away-from-home dining. History has shown us that market disruptions in the food away-from-home space often have a lasting effect due to structural changes that take place as well as changes in consumer behavior. If we look to the last recession, which was the financial crisis of 2008, food away-from-home took a big dip. And it took -- and after over a decade, it still hasn't recovered to pre-recession levels. So we do think that there's some stickiness to these changes. The acceleration of the consumer preference to cook at home, the new habits being formed and the challenges to the whole food away-from-home industry, we believe that this is going to fuel a shift to higher food at-home consumption. That's likely to last for years.

Thank you for that. I guess, sticking with consumer behavior, many have described this crisis as the greatest CPG trial experiment of our lifetime. And McCormick too, as discussed on the last call, I think your 16% jump in household penetration, which we know is generally a key precursor to brand development. I guess, what can you tell us thus far about how this is playing out for McCormick in terms of repeat purchase? And what this might mean for how sticky some of this recent trial by new or relapsed users could be?

Well, we did see quite an increase in household penetration in the second quarter, Andrew. As you mentioned, it was up 16% versus the prior year, and that's off of a base of 60%, very substantial. And it was up double digits across all of our top categories. So very broad-based gains in household penetration. With that 16% household penetration or repeat buy rate also increased 11%. And in third quarter, we're continuing to see strong performance across both penetration and repeat. Looking more broadly than the U.S. and EMEA, our household penetration and repeat rate also have increased, both in the U.K. and in France, our largest consumer markets in Europe. Generally, when household penetration goes up, your repeat rate goes down for a period of time because you're bringing in lighter users. With both of these metrics increasing significantly for us, it really indicates a high level of usage and speaks to the strength of our products. The things that we sell are primarily ingredients. They are not things that consumers stock up on. These are really usage categories, not entry stocking categories. It's not like toilet papers that people are afraid they might run out. And for spices and seasonings, consumers aren't buying a bottle of cinnamon and taking a year to use up, they're coming back and buying more. Everything you can hear about cooking behavior reinforces that. Many of our other products also are single use. So our dry recipe mix are single use or wet marinades are single use. So once the consumer uses them, they're going to come back. And consumers aren't afraid they're going to run out of condiments, either. They're buying them. They're using them up and then they're going back and buying it again. They're also using them -- they're using at home -- lunch at home is especially incremental. I'm sure Frank's being used on everything, at every meal. But think about all the French's mustard being used on sandwiches that are now being made at home during lunch time, when consumers are dining in when they might have been out before. We believe consumers are buying for their immediate use and their consumption. They're coming into the brand. They're having a good experience, they're buying our products again and again, I think that really points to a stickiness in the behavior and the relationship with the brand. Mike, you want to provide some additional perspective on some of the initiatives we're taking to retain these consumers.

Yes. As Lawrence already mentioned, we believe many of these habits relating to cooking at home are going to be long lasting. We're going to continue our brand-building activity through our engagement with consumers and our advertising, whether it'd be through the traditional channels or through social and digital. As a reminder, about 2/3 of our global advertising spend is on digital. And digital is an area where we excel. We've continually been recognized by Gartner L2 Research in their digital IQ rankings. In 2019, for the sixth consecutive year, we were named in the top 5 ranking of over 100 food and beverage brands on the effectiveness of our website, digital, social media, e-commerce and mobile platforms. We were ranked #1 for food and the only food brand to earn the title of Genius, their highest designation. We're targeting media messaging, but a focus on consumer education, helping them to learn how to use our products, teaching them how to make things, how to prepare and building their confidence in the kitchen. And we believe many of our new consumers are from younger generations. For example, millennial households are a driver of recipe mix growth, as they seek convenient flavor solutions. While in spices and seasonings, we've seen significant growth in generation X consumers with larger households, typically raising Gen Z teams as we all have. Since the beginning of the COVID crisis, we've been seeing increases in both traffic and time spent on our McCormick.com property, with the largest session increases coming from consumers aged 18 to 34, the less experienced cooked and our target audience. These consumers are online looking for ideas and inspiration, whether one of our chefs is live streaming from their kitchen on Facebook or grilling, or, Cook With Us, Instagram series. We are at home with consumers providing inspirational ideas and knowledge. We're connecting with those consumers.

Thank you very much. Over the last couple of years, one of the main, I think, investor concerns was around McCormick's market share performance in its key spices and seasonings business. And while McCormick certainly showed improvement from where it was when it started on its endeavor to correct this, McCormick is now gaining share. You've previously discussed consumers looking for comfort and brands they know and trust as part of the reason that bigger brands are currently sort of winning in the marketplace. While some, I think, think bring brand success is more tied to simply having advantaged supply chains and really just better availability on their shelf right now. So I guess, once things begin to normalize, do you feel that McCormick can continue to hold on to or even continue to gain market share moving forward? And what actions can or is McCormick taking to sort of fortify these share gains?

Andrew, again, this is a great question. We have had strong share growth in the second quarter. But in the third quarter, we're going to see some noise in those share numbers. To put things into perspective, coming into the crisis, there was a lot more finished good inventory on hand for us and stock for the retailers than there is today. And as this inventory has been depleted, we've had to put product on allocation, and that means both the consumer and the customer have been limited in how much they can buy as we try to fairly support the market. And of course, we're comparing to unconstrained periods a year ago. As we work through the supply challenges and continue to improve our ability to service customers, we're going to continue to drive our leadership position in our categories through strong brand marketing, keeping our portfolio relevant to consumers through innovation and our category management initiatives. In terms of brand marketing, with consumer interest and cooking at a level we haven't seen in a long time, opportunity to build long-term brand equity capture trial and increased usage by consumers already in the market is right now. And we're continuing to make brand marketing investments to teach consumers how to use our products, as we commented on earlier, and to support our new products and to keep those messages as relevant to their needs in real time as we can. And through our category management initiatives, we're able to work with retailers in terms of increasing the efficiency and the reduction of complexity on the shelf. Many retailers are taking a look at their assortment. They're probably going to carry a lower assortment going forward. They're not just evaluating their SKUs, they're evaluating the brands they carry and they're finding that some of the small brands result in unnecessary duplication and supply chain complexity for them and just aren't worth it. While our new product launches may be lighter this year due to retailer focus on the basic supply of core items, our brands really haven't suffered from that. And longer term, we see innovation from the leading brands as being more important than ever. And we're excited about the strong pipeline that we're going to carry into next year to deliver against consumer demand for convenience, value, heat and flavor adventure. I think it's important to mention that at the foundation of our sales growth is a rising global consumer demand for healthy, flavorful cooking, digital engagement and heritage brands. During this crisis, these long-term trends have not only remained intact, but they've actually been amplified and accelerated. And as a recovery from the crisis progresses, we just don't expect consumers to snap away from these trends because they're trends that we're already in place. And you're right, Andrew, during this crisis, consumers are finding comfort in the brands that they trust. We're here today for them as we have been for over 130 years as McCormick. Even our Frank's brand is celebrating its 100th anniversary this year. Mike, do you have anything you wanted to mention?

Just 2 quick points. I don't think anyone knows what the new normal might look like or when that will be. But as we've already discussed, consumers are tending to cook more at home, and we recognize the part of the population is actually experiencing a recession right now. In a recessionary period, the research has shown consumers tend to cook more at home. And history shows us that our portfolio performs well during these recessionary periods. In fact, our total Consumer segment in constant currency sales growth had 4% growth in 2001 and 3% in 2009 during those recessionary periods. And value is an important area for us from an innovation standpoint. We have products at every price point. So while consumers may be cutting back in other areas, they can reward themselves a little bit with the foods they consume at home.

Thank you for that. 100 years for Frank's, that's pretty remarkable. If the usage rate of my 2 college-aged kids who are home for a couple of months is any indication, another 100 is in the bag. I'll just leave it at that. With fiscal 4Q, obviously, such an important quarter from a seasonal standpoint, I assume McCormick now has a pretty good idea of what retailer programs in the spice and seasoning aisle could look like by now. I'm trying to get a sense if the planned programming looks different maybe in any way than previous years? And if so, how so?