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

Good afternoon. I'm Lawrence Kurzius, Chairman, President and CEO of McCormick & Company. Thank you for joining us. Please take note of our safe harbor statement in today's presentation. As you know, some of today's remarks include forward-looking statements and non-GAAP financial measures. Two years ago, at CAGNY, we highlighted our overarching focus on growth and our confidence in sustaining the momentum of our business and delivering differentiated results. While a lot has changed in the last 2 years, our focus and confidence has remained constant. Since then, we've grown sales nearly $1 billion, demonstrating the strength and diversity of our product offering and creating a new foundation for long-term sustainable growth. Through the execution of our long-term strategies, we have grown both sales and profit, compounding that growth successfully over the years, regardless of the environment. Our long-term fundamentals that drove our performance and our momentum and outlook are now stronger than ever. McCormick is end-to-end flavor, and I hope you leave today with a greater understanding of the differentiation created by the breadth and reach of McCormick's portfolio. And importantly, that you take away we are driving growth, we're focused on the future, and we're continuously adding value. McCormick is a global leader in flavor, operating in 2 segments: Consumer and Flavor Solutions, providing flavor and inspiring healthy choices across the globe. Our Consumer segment has leading brand shares in our key categories in many markets around the world. We have brands in nearly 170 countries and territories and sell products at every price point, ranging from premium brands to private label. Our Flavor Solutions segment is a culinary-inspired flavor business with a deep understanding of consumer flavor experiences created from real food and natural ingredients and underpinned by leading technology that develops consumer-preferred flavor solutions for our customers. Our 2 segments complement each other as we leverage our industry-leading global supply chain as well as our expertise in clean and natural flavor and our tremendous insights capabilities across both businesses. We are advantaged because we're different from other flavor companies. The breadth and reach of our global flavor portfolio ideally position us to fully meet the growing demand for flavor around the world and drive continued differentiated growth. Our compelling offerings in our 2 segments for every retail and customer strategy across all channels create a balanced and diversified portfolio to drive growth and consistency in our performance. It also gives us flexibility to adapt to changing conditions and continue on our growth trajectory. This is a significant differentiator in dynamic environments. We're delivering flavor experiences for every meal occasion through our products and our customers' products. We are end-to-end flavor. We are capitalizing on the growing consumer interest in healthy, flavorful cooking, trusted brands and digital engagement and purpose-minded practices. Our proprietary consumer survey data and external research indicates these long-term trends are as relevant today as ever and have even accelerated. Consumers have shifted to cooking more at home, particularly scratch cooking, with 88% of consumer survey planning to maintain or increase their level of cooking at home even when things return to normal. They are enjoying the cooking experience and believe home cooked meals are healthier. The shift is driving an even greater demand for flavor. The growing global demand for flavor is the foundation of our sales growth. McCormick is uniquely positioned to capitalize on the rise in demand for great taste primarily fueled by the younger generation. We've deliberately focused on attractive high-growth categories across both segments generating a long-term tailwind for growth. We're adding flavor to all at-home eating occasions no matter where the food was prepared. For instance, 1 in 4 dinners cooked at home is supplemented with an item prepared elsewhere, and we flavor it all. Consumers want to try new things in the kitchen and explore new flavors. There's been a 63% increase in consumers' repertoire of recipes in their home menu rotations since pre-pandemic. Our products and digital content are inspiring consumers flavor discovery and exploration. Consumers demand for hot and spicy is on fire, and they're seeking more than just heat. They want nuanced parings of flavor and heat. We have the perfect blend of flavor and heat across our portfolio. Our alignment with consumer trends and the rising demand for flavor, combined with the breadth and reach of our global portfolio and the successful execution of our strategies sustainably positions us for future growth. Now for the execution of our growth strategies in the Consumer segment. We are accelerating growth and driving undisputed leadership in our core Consumer segment categories with our brand marketing, new product and category initiatives. We're accelerating flavor usage, building confidence in the kitchen and inspiring flavor exploration. We're strengthening our consumer relationships and are creating a delicious, healthy and sustainable future. We consistently drove double-digit organic sales growth in our Consumer segment on a 2-year basis during 2021, led by our key categories. Across our major measured markets, we have gained households and had double-digit buy rate growth, continuing our momentum in the fourth quarter of 2021. Our brands are both gaining new consumers and we're driving increased usage at the same time. This performance combined with over 13 billion additional at-home eating occasions from consumers cooking more at home has created a new baseline for future growth. Our impressive growth over the last 2 years has been fueled by our significant brand marketing investments with our leading share of voice, engagement rates and ROIs that be industry norms by at least 2x, we are leading the flavor conversation. Our marketing excellence organization continues to differentiate McCormick. In North America, we create 80% of our content in-house, capturing insights real-time with scale and efficiency, execute with speed and shift our investment to working dollars to drive greater effectiveness, and we're expanding this capability globally. Consumers are spending millions of hours viewing our terrific digital content. We're building their confidence by teaching them to cook delicious meals and are inspiring them with relevant content at the moments that matter. Our content is resonating with consumers. Our breakthrough performance on earned impressions, even compared to the first year of the pandemic has contributed to double-digit consumption growth across our key categories over the past 2 years. We're further accelerating the use of flavor at home by focusing on what's important to consumers, such as freshness, modern packaging, affordability, value and flavor exploration. We're continuing our global rollout of our first-choice modern bottle design that reinforces freshness as well as modernized grinders, which are elevating our performance in markets where they've been launched. Most consumers find it more economical to cook at home. We're launching additional entry-level price points for affordability as well as value offerings, including larger sizes to meet the needs of price-conscious consumers. We're also expanding our portfolio with exciting new products to inspire flavor exploration. With convenient solutions, we make it easy to create a flavorful meal. We're also staying relevant with consumers by delivering solutions for their new behaviors. Breakfast and lunch at home are now more meaningful occasions with almost 60% of consumers planning to work at how more than pre-pandemic. In the U.S. alone, it is estimated that since 2019, 1 billion breakfasts have shifted to cook from scratch from grab-and-go or ready-to-eat, and we believe the trend is similar in other markets. We have content and products to create healthy, flavorful starts to the day. Cholula is the best thing to happen to eggs. And with lunch at home growing, we are ready to elevate the taste of billions of sandwiches with our classic condiments and are soon to be launched new patent-pending French's creamy mustard. And finally, consumers have increasingly invested in small appliances from air fryers to instant pots, and we have launched new products tailored to these appliances and are providing recipe inspiration and greater convenience using products across our portfolio. Our initiative to reinvent the in-store experience for U.S. spice and seasonings consumers is on track, and we're realizing the results. The category is growing faster in stores where retailers have already implemented changes and McCormick brands are growing over 600 basis points faster. We have accelerated velocities, increased items on shelf and improved performance further driving our category leadership. We're also starting to build global momentum with similar initiatives in Canada, the U.K. and France. We're driving leadership in our condiments and sauces as well. Condiments represent significant profitable top line growth opportunities, and we've deliberately focused on this category. The acquisitions of our Frank's RedHot and Cholula brands and the organic growth we've delivered has advanced McCormick to be the #1 hot sauce company in the world. Global growth in hot sauce is projected to outpace the total condiment category. The younger generation is driving that growth, and we plan to drive hot sauce to be the condiment of the next generation. We have the fastest-growing hot sauce brands with Frank's RedHot and Cholula over-indexing with younger generations, and we continue to gain share in the U.S. and international markets. Consumers want a more flavorful and approachable hot sauce, and we have the perfect blend of flavor and heat with our products. Our plans to drive hot sauce to by the condiment of the next generation includes staying contemporary and in the moment with our consumers. We're building brand relevance and hot sauce awareness through our brand marketing and e-commerce initiatives. What better way to promote Frank's RedHot than through football and chicken wings. I hope you enjoyed the big game earlier this month and earned our spoof cryptocurrency bone coin with our Frank's edible NFT campaign featuring Eli Manning. And we continue to elevate Cholula's awareness with the launch of our brand-new mother of sauce campaign. A drop of Cholula heat brings a motherlode of flavor. We're delivering on consumers' demand for heat and gaining new households with products across our entire portfolio for every level of heat consumers create. We have grown Frank's household penetration double digits over the last 4 years and have doubled Cholulas since its acquisition a year ago. We have expanded into new formats and categories and are continuing to blaze forward with new innovation, including a Frank's Nashville Hot Wings Sauce this year. Our e-commerce sales have grown 169% versus 2019, contributing approximately 20% of our Consumer segment's branded sales growth during that period. We're breaking through on search with great ROIs, generating a return of $3 for every dollar we spend. We're growing our consumer relationships with the constantly enhanced content on our highly rated flavor maker app which is driving engagement with its new meal planning feature, which consumers use for over 10 minutes on average. And we're growing our direct-to-consumer or DTC platforms with exclusive new products and partnerships. Consumers have a strong interest in health and wellness. 75% believe cooking at home allows them to prepare healthier, better-for-you meals, and we're here for them every day as a source for healthy eating. We have products across our whole portfolio, enabling healthy choices and digital content inspiring healthy cooking. We are meeting consumers at the intersection of flavor and health to help them meet their wellness goals. Almost 90% of consumers feel companies should have a greater purpose beyond making money, and they want to buy brands from those companies. We are increasingly highlighting McCormick's recognized leadership and sustainability in our consumer messaging as well as providing transparency through connected packaging and are grown for good sustainability sourcing commitment. We're also highlighting and expanding recyclable packaging. We're meeting consumers' demand to create a sustainable future. Now turning to our Flavor Solutions segment. We are driving our Flavor Solutions leadership by targeting opportunities in attractive high-growth categories as well as leveraging our broad technology platform. We're accelerating our growth with our culinary-inspired innovation and our passion for creating a flawless customer experience. Execution of our long-term strategy to migrate our portfolio to more technically insulated and value-added categories is delivering results. Since 2015, we have delivered a double-digit sales CAGR across our flavors and branded foodservice product categories equally driven by organic and acquisition growth, and we've made strategic decisions to prune lower-margin business. This has shifted our portfolio to 77% value-added products and with our CCI-led cost savings, expanded Flavor Solutions adjusted operating income margin by 300 basis points. Importantly, we continue to see a long runway for growth and margin expansion ahead. Now expanding on flavors, our most technically insulated and value-added category. We have grown our flavors product category to over half of our Flavor Solutions portfolio and are building to be 1 of the top 3 global flavor houses. We are advantaged by several differentiators. Our culinary foundation is at the heart of our passion for creating custom, on-trend flavors and a flawless customer experience. We have unmatched breadth providing iconic flavors across the globe in all categories and channels. And as a brand leader, we know the importance of brand, and we make flavors that deliver on a customer's brand promise. We are uniquely advantaged by the insights from our Consumer segment. We often have the same consumers as our customers, and we have insight into their preferences and demand for clean and healthy. We leverage those insights to help solve the challenges our customers bring to us as well as to spur their innovation further. That is a powerful and unique advantage to McCormick. And importantly, we are focused 100% on great flavor. Every day, we think only about flavor and how to make eating and drinking experiences taste great, whether for our consumers or for our customers' consumers. We developed culinary and consumer-inspired flavors for a wide range of applications across attractive categories. With the addition of FONA, our breadth and depth in developing flavors was further expanded. Performance nutrition and health were meaningful additions to our high-growth portfolio, increasing our breadth as well as our reach with new customers. We have several key enablers, including our deep expertise in applied science which drive our success in developing winning flavors for our customers' applications. Our consumer-preferred flavors are driving growth, both for our customers and for McCormick. We're targeting opportunities to grow with our customers in attractive, high-growth end market applications. For instance, alcoholic beverages, savory snacks and performance nutrition. We've delivered outstanding 3-year sales CAGRs in these categories, notably outpacing market growth. The capabilities we've built have further expanded with the acquisition of FONA are creating significant top line growth opportunities and will also further migrate our portfolio. And these categories are just examples. There are other exciting opportunities across our portfolio, such as plant-based protein, both in meat and dairy alternatives, where we are growing at least on pace with the category. Our product development tool, SAGE plays a key role in our innovation across our entire portfolio. SAGE combines our unrivaled repository of consumer preference insights with leading artificial intelligence providing our flavors with a great starting point in delivering fresh and new flavor ideas faster and enabling us to win exciting opportunities. For instance, with recent wins in high-growth hard seltzers. Our proprietary algorithm is a real competitive advantage as our customers strive for faster speed to market and shorter development windows as well as supplier-led innovation. With SAGE, the flavors we're developing at an increased speed are scoring higher in consumer preference tests and lasting longer in the market for our customers. Consumers are demanding transparency and clean and natural flavor with ingredient statements they can recognize and pronounce. We're leveraging our broad technology platform to meet this need for innovative, authentic, clean and natural flavors. Many of our new product briefs include health and wellness attributes like reducing or eliminating sodium, sugar fat. And in categories with challenging off notes and functional ingredients like plant-based and performance nutrition, where our technologies play a critical role. We're using our proprietary technologies and our unrivaled understanding and access to trusted natural ingredients to solve our customers' issues without sacrificing the winning flavor profiles that make their products so successful. Developing clean label, organic and better-for-you solutions, while also delivering a full sensory experience is the essence of what we do so well. Our technology platform is a key contributor to our deep penetration and global advantage in seasonings, which in many cases, have flavor technology embedded in them. Our customers recognize us as a leader in seasonings and the differentiated solutions we create for them with our technologies. Seasonings are important in the migration of our portfolio to more value-added products, but just as importantly, they are integral to the flavor of our customers' iconic products. We're accelerating our global seasonings growth with our culinary-inspired innovation. We've expanded our mid-tier customer base, increased our already high win rate, and we continue to be added to core supplier list, all building a greater pipeline of opportunities. We're also strengthening our heat leadership, which is one of our fastest-growing flavor profiles. Over 40% of our 2021 new product sales related to hot and spicy including the seasoning that leverages Frank's RedHot, which drove winning performance for our customer. Our customers are winning with healthy and sustainable solutions we create for them both through the flavors we develop and the shared commitment for the future. Customers increasingly want to do business with companies that are aligned with them on purpose. We have purpose integrated into everything we do and are providing our customers with quality, great tasting flavor solutions with a responsibility to people and the world around us. Our customers turned to McCormick, in part because of our robust sustainability program and the actions we're taking. For instance, our grown for good sustainable sourcing standard or soon to be completed U.K. Flavor Solutions net zero manufacturing facility. Our leadership in sustainability creates opportunities for further growth as part of our customers sustainable supply chain. Lastly, in Flavor Solutions, an important differentiator for McCormick is our passion for creating a flawless customer experience. Our culinary foundation, unrivaled insight and technology enablers are all part of that experience as are our people. With our agile end-to-end collaborative approach, we provide our customers unparalleled access to our expert functional talent, talent that is working on flavor every day and only on flavor. We are committed to building exceptional relationship-driven partnerships to co-create tailored solutions with our customers through these partnerships, both McCormick and our customers are winning. Now I'll turn it over to Mike Smith, Executive Vice President and CFO, for comments on performance.

Good afternoon, everyone. We continue to be differentiated by our top-tier growth objectives. When you compare our long-term constant currency objectives to our packaged food peers, McCormick is best-in-class for both sales and adjusted earnings per share growth. We deliver top-tier financial performance while doing what's right for people, communities and the planet. We have laid out a series of commitments and clear performance targets for 2025 in accordance with the United Nations sustainable development goals and just recently announced our climate commitment goal to achieve a 1.5-degree Celsius greenhouse gas emission reduction by 2030 and net zero by 2050. McCormick continues to be recognized as a leader in sustainability, named by Corporate Knights in their 2022 Global 100 Most Sustainable Corporations Index as the #1 most sustainable corporation in the food product sector. We have also been named a DiversityInc Top 50 company and United Nations Global Compact lead company and awarded the inaugural 2021 Terra Carta Seal for sustainability leadership in our industry. Turning to the strategic investments we are making in our supply chain to meet our growing demand, which incorporate principles related to sustainability. We are investing in sourcing initiatives, which will expand our presence at [ Origin ] and deliver a differentiated and sustainable supply of spices and herbs. These investments will further expand our strongest competitive advantage, our global sourcing. In manufacturing and distribution, we are expanding our capacity and capabilities, increasing our agility and resiliency and optimizing our efficiencies and customer responsiveness. We're confident our global supply chain investments will enable us to deliver the future growth we expect. We are also investing for future growth with acquisitions, which are a key part of our long-term growth strategy. We use a disciplined approach to identify and evaluate potential targets, filtering the opportunities against our acquisition pipeline strategy, strengthening our leadership positions, expanding our capabilities and categories and driving scale and globalization as well as evaluating them against stringent financial criteria. Importantly, we have a proven track record of driving value through acquisitions and increasing the performance of acquired businesses, including our most recent acquisitions, Cholula and FONA. The addition of Cholula, an iconic brand with authentic Mexican flavor increased our breadth and reach in the hot sauce category. We are unlocking Cholula's significant growth potential by leveraging our operational and category expertise. In 2021, we increased household penetration and total distribution points, while growing consumption ahead of the category. In branded foodservice, we drove double-digit growth in both front and back of house as we expanded distribution and penetration. Our momentum with Cholula is very strong, and we are excited about our growth opportunities as we build upon consumers growing passion for flavor and heat. The acquisition of FONA was another step to scaling our global flavors platform, accelerating our growth and further migrating our portfolio. We are realizing the benefit of our combined portfolio and capabilities as well as creating further opportunities by leveraging our global footprint and expanding our capacity. We are thrilled FONA had a record year with double-digit sales growth in 2021, hitting record highs in new product wins and building a strong pipeline, fueling future growth. We have created value with accretive sales and margin from Cholula and FONA. We've executed our 1-year acquisition plans in line with and, in some areas, better than our models, including the adjusted earnings per share accretion we expected. Our enthusiasm for both these acquisitions as well as our confidence in continuing to achieve our plans has only gotten stronger. Our successful strategy execution has driven differentiated results across both our segments. Our constant currency operating performance over the last 5 years, ending with 2021 has been outstanding. We grew sales at an 8% CAGR in each segment as well as at the total company level. We grew adjusted operating income in our Consumer and Flavor Solutions at 10% and 30% CAGRs, respectively, resulting in an 11% growth for the total company. This performance reflects strong base business performance, growth from acquisitions and a portfolio shift to higher-margin products, while also making strategic investments such as in brand marketing. Our focus on profit realization is reflected in our results over the last 5 years. We've expanded our adjusted operating income margin by 210 basis points, with strong contributions from both segments. This expansion has been driven by our comprehensive continuous improvement program, or CCI, continued portfolio optimization and accretion from acquisitions. In 2022, we expect to expand our adjusted operating margin. CCI-led cost savings, continued portfolio optimization and lower COVID-19 related costs are expected to be tailwinds to driving expansion. We took pricing actions late in 2021 to partially offset significant cost inflation. And as costs are continuing to escalate, we are raising prices again in 2022. There will be a dilutive impact to our margins as we price to offset dollar increases. But importantly, we expect to fully offset cost inflation over time through the combination of our pricing actions, revenue management initiatives and reduction of discretionary spend where possible. We're continuing to focus on profit realization. Given there is variability in our business and the global environment, we evaluate our performance against our constant currency long-term objectives over several years. A review of our 6-year compounded annual growth rates, which includes our 2022 guidance projects that our sales and adjusted operating income growth rates are expected to exceed our objectives and our earnings per share performance is expected to be in line. We have a demonstrated history of managing through challenging environments and driving growth and we expect to do the same in 2022. We continue to have a balanced approach to capital allocation. Our priorities are to fund investments to drive growth, both organically and through acquisitions, to return a significant portion of shareholders and maintain a strong balance sheet. The investments we have made over the past 5 years have driven the outstanding sales and profit growth I've just reviewed. We continue to use our strong cash flow to grow our dividend and are proud to be a dividend aristocrat. And importantly, our balance sheet is strong. We have converted 95% of our net income into free cash flow, and our return on invested capital currently exceeds a weighted average cost of capital in this market by more than 2x. This has all translated into value creation. The successful execution of our strategies has generated a 5-year shareholder return of 18% as of the end of January. This exceeds the average return for the broader market, our flavor house peers, and it significantly exceeds the packaged food index. To conclude, we are continuing to accelerate our momentum and drive further growth as we successfully execute on our long-term strategies, actively respond to changing consumer behavior and our customers' needs and capitalize on opportunities from our relative strength. We have driven strong operating performance while remaining forward-looking and have created a new foundation for long-term sustainable growth. McCormick is end-to-end flavor. And with the breadth and reach of our portfolio, we are well positioned for continued success, delivering differentiated results and creating long-term shareholder value. Thank you.