MKC - NYSE

Good morning. This is Faten Freiha, VP of Investor Relations. Thank you for joining today's Third Quarter Earnings Call. To accompany this call, we posted a set of slides on our IR website, ir.mccormick.com. With me this morning are Brendan Foley, President and CEO; Mike Smith, Executive Vice President and CFO; and Marcos Gabriel, Senior Vice President, Global Finance and Capital Markets and Incoming CFO. 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. 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 Brendan.

Good morning, everyone, and thank you for joining us. Before we begin reviewing our financial results, I would like to address Hurricane Helene. Our thoughts go out to all those impacted by this devastating storm. We continue to monitor the situation closely. Now moving to our results. Our third quarter performance is aligned with our expectations, especially as we continue to navigate an evolving and complex consumer landscape. Our results demonstrate the success of our prioritized investments in the areas that we believe will drive the most value and improved unit share trends, drive volume growth and capitalize on our advantaged categories. As we have said, McCormick remains a growth company and our investments in 2024 are yielding results that support our confidence in delivering on our top-tier long-term objectives. We're excited to share our strategic roadmap and building blocks that support these long-term objectives at our upcoming Investor Day. This morning, I will begin my remarks with an overview of our third quarter results, focusing on the top line drivers. Next, I will provide perspective on consumer trends, highlight some areas of success and the areas that we continue to work on. Mick will then go into more depth on the third quarter financial results and Marcos will review our 2024 outlook. And finally, before your questions, I will have some closing comments. Turning now to our results on Slide 4. In the third quarter, sales were flat in constant currency, reflecting flat pricing, 1% volume and product mix as well as the impact of our canning divestiture. This quarter, we reached a meaningful milestone by delivering total positive volume growth despite the challenging environment. Our volume trends improved sequentially across both consumer and flavor solutions. Our results to date, coupled with our proven growth plans, fuel our continued confidence in our ability to deliver on the mid to high end of our constant currency sales growth guidance. In our Consumer segment in the Americas, we delivered solid sequential volume improvement for the third consecutive quarter, leading to 1% volume growth. Volume growth reflects our continued focus on accelerating innovation and alignment with consumer trends and expanding distribution. Our pricing reflects the continuation of our price gap management plans to support improved volumes as planned. In EMEA, we continue to drive positive volume growth across our major markets and core categories for the third consecutive quarter. We realized benefits from new product innovation and expanded distribution. In Asia Pacific, outside of China, we delivered strong volume-led sales growth as we continue to benefit from the rollout of our new consumer-preferred packaging for our core spices and seasonings portfolio as well as distribution gains. This performance was tempered by China, slightly more than we had originally expected. As we look ahead to the fourth quarter, we expect the environment in China to remain challenged and this is reflected within our guidance. Marcos will provide more color on this when he covers our outlook for the remainder of the year. Moving to Flavor Solutions. We delivered strong sequential volume improvement, primarily driven by growth in the Americas. In the EMEA, our volume trends were impacted by softness in our QSR customers' volumes. And in Asia Pacific, our results were impacted by the timing of customer promotions. From a profitability perspective, we delivered strong results relative to the prior year, as the third quarter benefited primarily from the timing of investments, which are shifting to the fourth quarter. As we look at the second half of the year, operating income results remained largely in line with our expectations and earnings per share results are slightly ahead due to a discrete tax item benefit. Let me now share our view on the state of the consumer, which has remained similar since we reported our second quarter results. Overall, consumers are resilient, but remain challenged. They are exhibiting value-seeking behavior making more frequent trips to the grocery store with smaller baskets and shopping just for what they need. They are also focused on reducing waste and stretching their budgets. Foodservice traffic remains soft across most restaurant types, particularly in QSRs. These trends are starting to benefit growth in food at home and this shift is driven by older generations as well as lower income households. Consumers overall continue to cook at home and they are increasingly shopping the perimeter for protein and produce. This further reinforces their demand for flavor and McCormick's categories, included spices and seasonings as well as condiments and sauces. Flavor is not something consumers are willing to sacrifice. Spices and extracts remain the number one center store growth category. From a value perspective, we are seeing several trends. Demand for larger sizes remains elevated. At the same time, there is increased demand for small or trial sizes as well as onetime use recipe mixes, highlighting that flavor exploration remains important to consumers and our plans need to match that demand with the right product offering. Gen

Thank you, Brendan, and good morning, everyone. Today's earnings call is bittersweet for me as it marks my last one as CFO of this incredible company before I retire. Reflecting on my tenure of more than three decades, I am filled with immense pride and gratitude for our entire team and appreciate all of their contributions and efforts over the years. Lastly, I would like to thank all of you, our sell-side analysts and investors, for your time and engagement over the years. Your thoughtful questions and insights have been invaluable to me, and they reflect your commitment to understanding our business and long-term strategy. Now let's move to our results for the third quarter. Starting on Slide 8, our top line sales were comparable to the third quarter of last year, including the impact of the canning divestiture and reflect 1% volume growth, partially offset by pricing. In our Consumer segment, sales were comparable with the prior year as the 1% impact of pricing investments was offset by 1% volume growth, reflecting solid sequential improvement from the second quarter. On Slide 9, consumer sales in the Americas were comparable with the prior year. This reflects 1% volume growth offset by pricing investments and this volume growth was driven by our core categories. We continue to take a surgical and data-driven approach to managing price gaps and our investments are still expected to impact about 15% of our Americas consumer segment. In the EMEA, constant currency consumer sales increased 3%, driven by volumes of 4%, partially offset by pricing of 1%. Sales growth was broad-based across product categories in our major markets. We are pleased with the volume growth we delivered in EMEA and expect the momentum to continue through 2024. Constant currency consumer sales in the APAC region were flat, primarily due to the macro environment in China. Outside of China, we delivered volume-led growth that was broad-based across categories and markets. Turning to our Flavor Solutions segment on Slide 12. Third quarter constant currency sales were comparable to the prior year, reflecting a contribution from price, which was fully offset by a 1% impact of the divestiture of the canning business. In the Americas, Flavor Solutions constant currency sales increased 3%, reflecting a 1% contribution from price and a 2% increase in volume, driven by the timing of customer activities as well as strength in branded foodservice. In the EMEA, constant currency sales decreased by 9%, including a 3% impact from the divestiture of the canning business, lower volume and product mix of 5%, reflecting the impact of QSR customers volumes and lower price of 1%. In the APAC region, Flavor Solutions sales were comparable in constant currency with minimal contributions from both price and volume. As Brendan mentioned, our volumes in APAC were impacted by slower QSR traffic outside of China, most notably in Australia and Southeast Asia, where some of our customers remain impacted by geopolitical boycotts. This was offset by growth in China due to QSR customer promotions. As seen on Slide 16, gross profit margin expanded by 170 basis points in the third quarter versus the year ago period, driven primarily by favorable mix within our Flavor Solutions segment and the impact of our comprehensive continuous improvement program or CCI. Now moving to Slide 17. Selling, general and administrative expenses or SG&A decreased relative to the third quarter of last year, driven by lower distribution costs generated by our CCI program and lower employee-related benefit expenses. As a percentage of net sales, SG&A decreased 60 basis points. Adjusted operating income increased 15% as compared to the third quarter of 2023 or 16% in constant currency, with gross margin expansion and lower SG&A expenses both contributing. Operating profit benefited from a shift in the timing of our investments, which now will be reflected in our fourth quarter results. Marcos will address this shortly when he reviews our outlook for the remainder of the year. Adjusted operating income in the Consumer segment increased 8% with minimal impact from currency. In Flavor Solutions, adjusted operating income increased 31% or 32% in constant currency, reflecting our continued focus on restoring Flavor Solutions profitability. Our performance this quarter reflects our commitment to increase our profit realization and positions us well to make continued investments to fuel top line growth. And touching on tax. Our third quarter adjusted effective tax rate was 16.8% compared to 21.4% in the year-ago period. The tax rate benefited from the resolution of an outstanding tax matter dating back several years as well as our state sales mix. As a result, we now expect our tax rate to be approximately 21% for the year, which is slightly better than the 22% rate we had previously provided and reflects the discrete items I just discussed. Our income from unconsolidated operations in the third quarter reflects strong performance in our largest joint venture, McCormick de Mexico. We are the market leader with our McCormick branded mayonnaise, marmalades and mustard product lines in Mexico and the business continues to contribute meaningfully to our net income and operating cash flow results. It is important to note that in the fourth quarter, we will be lapping strong results in the prior year period for McCormick de Mexico. At the bottom line, as shown on Slide 20, third quarter 2024 adjusted earnings per share was $0.83 as compared to $0.65 for the year ago period. This increase was primarily due to our increased operating profit as well as the discrete tax benefits that I mentioned earlier. With that, let me turn the call over to Marcos, who will cover our balance sheet and outlook for 2024.

Thanks, Mike. On Slide 22, we'll summarize highlights for our cash flow and the quarter-end balance sheet. Through the first nine months of 2024, our cash flow from operations was $463 million compared to $660 million in 2023. The benefit from the increasing earnings year-over-year was more than offset by the impact of cash used for working capital, increased incentive compensation payments and timing of cash tax payments. We returned $338 million of cash to shareholders through dividends and used $189 million for capital expenditures. As a reminder, capital expenditures include projects to increase capacity and capabilities to meet growing demand, advance our digital transformation and optimize our cost structure. Our priority remains to have a balanced use of cash, funding investments to drive growth, return a significant portion to our shareholders through dividends and paying down debt. Importantly, we remain committed to strong investment grade rating and expect our leverage ratio to be below three times for 2024 with another year of strong cash flow driven by profit and working capital initiatives. Now turning to our 2024 financial outlook on Slide 23. Our outlook continues to reflect our prioritized investments in key categories to strengthen volume trends and drive long-term sustainable growth, while appreciating the uncertainty of the consumer environment. Turning to the details. First, currency rates are now expected to have a minimal impact on sales, adjusted operating income and adjusted earnings per share, a change from the previously anticipated unfavorable impact of approximately 1%. At the top line, we continue to expect constant currency net sales to range between a decline of 1% to growth of 1% and anticipate our results will be at the mid to high end of our guidance range. In terms of pricing, we anticipate about a 1% increase for the year, similar to what we said last quarter. In China, our food away from home business, which is included in APAC consumer, continues to be impacted by lower demand. And we now expect China consumer sales to be down slightly compared to 2023 for the full year, while we presently expect it to be flat, and this is reflected within our guidance. While we recognize there has been continued weak demand in China, we continue to believe in the long-term trajectory of the China business. Moving to adjusted operating income. We continue to expect 4% to 6% constant currency growth. Our 2024 gross margin is projected to range between 50 basis points to 100 basis points higher than 2023. This gross margin expansion reflects favorable impacts from pricing, product mix and cost savings from the CCI and GOE programs, partially offset by the anticipated impact of a low single-digit increase in cost inflation and our increased investments. In addition to our gross margin expansion, SG&A benefits from cost savings will be partially offset by investments to drive volume growth, including brand marketing. For the year, we continue to expect our brand marketing spend to increase high single-digits, reflecting a double-digit increase in investment partially offset by CCI savings. In terms of tax, we now expect our tax rate to be approximately 21% for the year, which is slightly better than the 22% rate we had previously provided and reflects the benefit of discrete items Mike mentioned earlier. We continue to expect mid-teens increase in our income from unconsolidated operations, reflecting the strong performance we anticipate in McCormick de Mexico for the year. To summarize, our 2024 adjusted earnings per share projection of $2.85 to $2.90 reflects a 5% to 7% increase compared to 2023 and we anticipate our results will be close to the high end of the range as we benefit from the improved tax rate. As we head into the fourth quarter, let me summarize some of the puts and takes to consider. We expect to drive volume growth in both Consumer and Flavor Solutions and sequential improvement from the third quarter. Pricing is expected to have a slight negative impact with the price investments in our Consumer segment, only partially offset by Flavor Solutions. We expect gross margins to sequentially improve from the third quarter and to be flat relative to the prior year, driven by price a comparable year-over-year Flavor Solutions product mix and planned supply chain investments to support growth. We expect our investments in brand marketing to ramp sequentially from the third quarter and anticipate an increase in SG&A year-over-year related to IT and digital transformation investments shifting into the fourth quarter and I will talk more about these investments at our upcoming Investor Day. As a result, our operating profit will likely be comparable with the prior year due mostly to the time of our investment. However, this remained largely in line with how we had expected our operating profit to perform for the second half of the year. As Brendan noted, we continue to prioritize our investments to drive impactful results. Our return to volume light growth underscores that we are moving in the right direction and we remain confident in the underlying fundamentals of our business and delivering on our 2024 financial outlook and long-term objectives over time.

Thank you, Marcos. Before moving to Q&A, I would like to close with our key takeaways on Slide 24. We are pleased with our results for the quarter, especially as it marks an inflection point for total company volumes turning positive. This demonstrates that we are investing in the areas that drive the most value and reinforces our confidence in our plans and long-term objectives. We continue to execute on our strategic roadmap with speed and agility and in alignment with consumer trends, further capitalizing on our attractive categories across segments. In addition, our plans are yielding the expected results. We also continued to expand margins and manage our costs as we are investing in the business. These improvements are led by our favorable product mix and cost savings programs. Our results in the third quarter benefited from the timing of these investments and we continue to expect our second half operating profit results to be in line with our expectations. Our year-to-date performance coupled with our growth plans give us confidence in achieving the mid to high end of our projected constant currency sales growth for 2024. Finally, I want to recognize all McCormick employees for their dedication and contributions, particularly as we navigate this complex environment and reiterate my confidence that together we will continue to drive differentiated results and shareholder value. Now for your questions.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question today comes from the line of Andrew Lazar with Barclays. Please proceed with your questions.

Great. Good morning, everybody.

Good morning, Andrew.

Good morning.

Brendan, it's certainly nice to see the continued sequential volume improvement in consumer, especially in the Americas. I think pricing in consumer was a little less than a point and that was pretty close to where expectations were. But I'm curious if you're seeing the expected magnitude of volume lift right from some of these pricing actions and investments that you've made? And I guess, if you are, would there be a reason maybe to lean in even a little bit further right to keep the momentum going, given you've got some flexibility this year from things like tax rate and some below the line items?

Yes. Thanks, Andrew. Let me just maybe lead in with a couple of opening thoughts here. I mean, we do continue to make the right progress, and we're on track with where we expected to be. We turned the corner in our growing volume, which was obviously as we started the year, our goal in the second half of the year. I think importantly, we're outperforming private label and volume across all of our core categories and I do like the progress that we're making in Flavor Solutions especially in this last quarter in the Americas region. Having said that, we're never going to be satisfied. So I think that we still see an opportunity to continue strengthening our plans and execution in the back, the rest of '24 going into '25. But our programs are working and we believe they're delivering the growth that we thought that they would. Just to add context on all those levers that on top of that price gap management that you referred to that we think are really driving our business. It is increased investment in brand marketing and A&P just across all of our core categories. We've launched innovation that's really contributed meaningfully to our performance. And that's been an exciting part because that's a lot more innovation that we launched in 2022 and 2023 which was an important goal that we had here in '24. We're expanding distribution in our core categories. I think we had a really good quarter there in terms of performance as we expected it would start to build. And in terms of pricing, we maintain that price gap management program that we've talked about in the third quarter. It will continue to play out as expected in the fourth quarter too, but it's only a portion of our strategy, but it is yielding I think the results that we expected from that. And I just would add, we're also operating in great categories. So let's not forget that that's also part of the, I think, the strength behind our businesses that we do operate in really strong categories. I do want to say broadly at a global level, we also saw really good performance across the consumer segment at a global level, definitely in EMEA, Australia, Southeast Asia, we just saw broadly good performance, including our spices and seasonings category growing volume across the entire consumer segment for McCormick. Having said all of that, I think our guidance is appropriate, given the dynamic consumer environment. So we're confident in our plans and we will be at that mid to high end of our top line range. But we also have to really, I think, make sure that we reflect what's going on in the environment right now. Hey, China is slightly worse than we expected and it does remain challenging. So we're factoring that into our thinking. QSR trends continue to be a bit uncertain. And so that's kind of factored into our thinking too. And as we go into the fourth quarter, as all of you know, this is the biggest part of the year for us. So we want to make sure that we're balanced and we deliver on our expectations, but it is a big quarter for us.

And that's helpful. Thank you. And then quick one is, I think you mentioned that your sort of prepared foods business in the Americas, which had been weaker was stabilizing and that trends in the sales that you make to other sort of packaged food manufacturers were starting to look a bit better, I think you mentioned. So I guess as it relates to the sort of the industry as a whole right where the big debate is when do we start to see some sort of better volume trends recover and whatnot across the space. Your view into that based on some of the businesses that you've got seemed to suggest maybe that's sort of starting to happen, albeit gradually. I'm curious to get your sense on your view into that aspect. Thank you.

Yes. I think and that certainly bridges off of our second quarter call. More or less, our customer plans were performing as expected, which was, we were expecting some improvement compared to the second quarter. And so we believe that largely did start to play out. Our Flavors business in the Americas region, we saw good results across those areas that we consider like high innovator growth customers. So that plays out in categories like Performance Nutrition or alcoholic beverages or nonalcoholic beverages, but we believe we outperformed the category broadly there. And then we did see strength in our branded foodservice business. And that also played into, I think, some of the improvement that we're seeing broadly across Flavor Solutions, the segment. Having said that, QSR traffic was weak and slower than probably we would have expected, but that's speaking back again to that level of uncertainty. However, having said that, we do see our customers being responsive to what's going on in the market and trying to drive volume growth et cetera. So we do think as we go into Q4, that trend should continue broadly that we see sequential improvement from the third quarter.

Thanks so much and see you in a couple of weeks.

Great.

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

Hi and Mike thanks again for everything and we appreciate all your help over the years. Two questions, if I can. Number one, I don't think you quantified, forgive me if you did, the timing of the activities of your customers, how much that benefited 3Q. I think it was largely in Americas Flavor Solutions, but just wanted to clarify that. And you did say that shift will be reflected in 4Q results. Just making sure we should kind of model all of that reversing in 4Q and then I have a follow-up.

Yes. This is Mike. Yes, as we said in the last call, there's a bit of a positive that was going to come into the third quarter from Q2 and that happened. It wasn't the biggest you know Brendan talked about the really good Flavor Solutions underlying performance and Branded Foodservice and other areas. But that did have a positive impact in Q3, which will kind of normalize in Q4 as we think about year-on-year comparisons.

Okay. And then for my follow-up, I know you're -- it's too early to talk about 2025, but I'll take a quick stab anyway. I guess the main question is, I'll give it a shot. Is there any reason to think at this time you won't be on algo? And the reason I'm asking is you have talked volume growth into next year. You kind of reiterated that a little bit today. You previously said you have the right level of investments in place, so I don't expect that to rise. You always have great CCI. So just trying to get a sense, is there anything you're seeing? Obviously, there's hot sauce, there's QSRs, there's China in general that could hold you back, but there's other positives happening as well. So just wanted to get that sense. And then while you're answering it, I'm just curious, what is the underlying EPS algo ex-M&A? I mean many years ago, you said that the combination of M&A and repo would contribute around 2% in the average year to EPS, but I wasn't sure how you broke that down today. So hopefully that makes sense. Thank you.

Well, that last follow-up question, I like to have maybe a few buried in there. So I'm going to do my best to remember everything, but I'm going to ask Mike and Marcos to help me out with this. Yes, we're not prepared to talk about '25 guidance at this point. So although in Investor Day, we feel like we'll share more context about how we're looking at the future and how we think about overall performance and what will drive our long-term volume growth, which is something that we've historically done. And so we'll spend some time talking about our view into what will be those drivers as we look from a long-term perspective. And when I think about what's going well in '24 and why should it continue in '25, it's just we believe that these are the right programs and the right things to do in our business. And these are things that we believe is part of just doing a good job and delivering growth within our categories. Mike, do you want to add anything else on the EPS question?

Yes, I would just add too, as we, if you go back to guidance early or late in January in CAGNY, the things we talked about making investments this year to really drive the second half volume growth, which we're attaining. We're happy with the performance, not totally satisfied, as Brendan said. We'd love to do more, but build that momentum into 2025. There's uncertainty in the economic market, as there always is, but we feel like we're well positioned. And I think you'll hear more from Investor Day, which would be in three weeks.

Yes, that's right.

Thanks so much.

Our next question is from the line of Peter Galbo with Bank of America. Please proceed with your question.

Hey, guys. Good morning.

Good morning, Peter.

Thanks for taking the questions. And Mike thanks again. Maybe to follow-up on Ken's question just around this year. The gross margin guidance, I think, we're getting questions this morning. Just you're up 125 basis points year-to-date. Obviously, you didn't move the gross margin guidance higher. And maybe there's some timing factors there. But just trying to understand if there's maybe a bit of conservatism in there as well and why that rate of change just wouldn't kind of continue through the fourth quarter.

Yes. If you think about it and some perspective here, we talked about this year in half a lot, first half, second half. And because, as you know, a quarter can such a small unit of measure, sometimes you get some moves. But so we try to keep it pretty high level in half this year. And we've seen really good sequential improvement first half into second half. And actually, by quarter, it's gone that way too. We see the fourth quarter actually higher gross margin than the third quarter, which is our normal trend. So we're really happy with that. Year-on-year, you always get a little mix sometimes that happens. We talk about normalizing mix versus last year in the Flavor Solutions side, not necessarily from third to fourth quarter, but from fourth quarter of this year to last year. Marcos highlighted some of the supply chain investments and I'll let him talk about that in a second. And there's a slight pricing quarter year-on-year comparison there that puts a little bit of pressure, not a whole lot. But why don't you talk a little bit about that?

Yes. So you think about the gross margin and the puts and takes between Q3 and Q4. We're thinking about Q4 as more of a normalized Flavor Solutions product mix than Q3. So we think about it that way. We're also thinking about some of the supply chain investments that we had planned for the year around building capacity, particularly around the heat platform that we have continued to invest in the platform will be impacting Q4 more so than the rest of the year. So that is an impact there. And also, I would say that in a little of pricing, we're going to have a slightly negative pricing in consumer going into Q4 offset by partially offset by Flavor Solutions, but there's going to be a little bit of that negative impact through pricing as we continue to invest back in the business to drive top line growth. So there are some elements between Q3 and Q4. As Mike said, some puts and takes between the two quarters. I think if you look at the second half profitability it's very much in line with what we expected before.

And you'll hear us today talk about Investor Day about 10 times, but this heat investments that we're making in supply chain, I think you'll be excited to see the potential, as we've talked about in the past on heat, but it's really driving a lot of our growth, which is great.

Okay. Great. Thanks for that. And then maybe just pivoting. Brendan, I wanted to ask you on China specifically. I think maybe you spent some time there earlier this year and the market at least seems to be rewarding China exposed stocks in the past week or so on the back of some of the macro there. Just curious kind of get your perspectives on if there is some kind of stimulus policy in China, how you're thinking about improved consumer demand or improved consumer psyche there. Any perspectives would be helpful. Thanks very much.

Sure, Peter. On China, we do expect the environment there. It's going to remain broadly challenged. And we do expect our business probably to be down slightly in '24. So just for the sake of clarity, I mean, that's the outlook that we're looking at for the balance of our year. But when you reference, I think, this latest news on stimulus, I'm just not in a position to sort of predict the impact of that. I will say though in previous actions that have been taken in terms of in the country regarding stimulus, I don't know that they've necessarily had a material impact on our sort of the consumption in our business. And so at this moment, right now, we believe that they'll just continue to make sequentially good progress. It's just not the speed we thought it might happen. And by the way, we didn't plan on a lot, I think, this year in China to begin with. So it's just a little bit, it's more muted than we expected. And I think given the latest economic news out of the country, we're still waiting to see what kind of impact that might have.

Great. Thank you.

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

Good morning, everyone.

Good morning.

Good morning.

Hi. So can I ask about the margin recovery in Flavor Solutions. I think you mentioned that it may have been driven partially by product mix. I'm just wondering how much more runway there is for continued improvement on that side and specifically what the mix driver was?

Yes, Alexia. You think about our long-term journey on Flavor Solutions and we've talked about portfolio migration in the past and more recently. And as you think about the things that are higher margin within that portfolio, Branded Foodservice, as Brendan mentioned, had a really good quarter gaining share, driving growth some of the categories within flavors, which we're gaining share in Performance Nutrition and things like that again lean to the higher margin side of things. So it's a little indication of a proof point of our vision to move these margins higher as we migrate the portfolio. Considering with the CCI, as someone mentioned CCI before again another bedrock. We've taken you know we approved Flavor Solutions margins in the last two years through our CCI and our global operating effectiveness program, continue that CCI journey there. We'll talk about that more at Investor Day too. So, yes, I think we're very positive on Flavor Solutions longer term. Quarter-to-quarter, it's going to, we've talked about this business sometimes being lumpy. I think we've got to come up with another word since I'll be leaving, but volatile. But again there is a room for margin improvement here.

And also just add to that, Mike, for me as we continue to grow the business, we'll see leverage coming through the P&L and that is also going to impact our margins going forward.

Great. Thank you. And then just a follow-up. You mentioned Branded Foodservice being a big driver of the margin improvement on the Flavor Solutions side. Is that because traffic is improving in the quick service restaurants as their value menus are picking up? Or is it something different that's happening? I think you mentioned share gains? Just trying to get a flavor for what's happening on the Branded Foodservice side and what's driving that? Thank you.

Alexia, to give you a flavor of that, just to repeat the pun a little bit. The drivers on Branded Foodservice have less to do with traffic trends. In fact we see them quite subdued still at this point in time, and they have been for the last even in the second quarter when we reported, we saw just depressed trends from a traffic perspective in most sort of segments within foodservice. The driver of our growth seems to be or it is gaining share, gaining more tabletop placements on things like Frank's RedHot. And just broadly, I think winning in the marketplace with our full platform of both spices and seasonings and also condiments and sauces. And so we like the programs that we drive and that we run. And often what you'll see, I think, in that business is we're doing a lot of limited time offers with our brands. So brands like Cholula or Frank's RedHot tend to be brands that we've seen operators like to use as leverage as ways of driving interest and excitement on their menu because those are obviously flavors that are quite appealing to consumers. And so we're seeing that part of our Branded Foodservice business pick up even a little bit more because we've been running a lot more of those types of programs and promotions with our customer base. So it's really doing well in a tough marketplace, I think, is broadly the answer I would give.

Perfect. Thank you very much. I'll pass it on.

Next question is from the line of Max Gumport with BNP Paribas. Please proceed with your question.

Hey, thanks for the question. Just to follow-up on Flavor Solutions margin. So you had a very strong quarter, up 300 basis points year-over-year. I think it's the highest margin we've seen for that segment since the pandemic started. And by our math and the few assumptions we're making, it would seem like the guidance for the full year implies you have a pretty big step back in 4Q in Flavor Solutions margins. It sounds like product mix is one headwind you're seeing on the horizon, although it wasn't clear to me if you're saying product mix was abnormal in 4Q '23 and it's a tough compare or abnormal in 3Q '24. I mean you take a step back towards a more normal mix in 4Q '24. But I'm curious if there's any other factors you're seeing on the horizon? Or this is really just some conservatism for the volatility and lumpiness of the segment? Thanks.

Thanks. Yes, I'd say it's more balanced, honestly. I mean again quarter-to-quarter, you're going to get some variability here. If you look back at the fourth quarter last year, as I mentioned before, the kind of compare and mix, it's normalizing. Supply chain investments, I think, honestly, if you think about it, supply chain investments, the things we're doing on heat Marcos talked about, impact Flavor Solutions. It's a smaller sales base too, so you probably get more of a gross margin impact. But for the year, going back to your comment, we're on plan. We're happy with the margin improvement there.

But overall, I mean, our operating profit should -- margin should improve for the full year versus last year. So we are going to continue to make that sequential improvement in terms of operating margin. So we've increased margins by 200 basis points 2023 versus 2022 and that will continue to drive operating margin up for the full year as we had planned before.

Great. Thanks. And then turning to hot sauce in the US. So it sounds like it remains a challenge. You're still seeing pressure from peers' trial size package offerings. It sounds like also that you're pleased with the initial reaction to your own trial size packages. But can you just give us an update on what you're seeing there? What you expect from your action plans over the coming quarters? Thanks very much. I'll leave it there.

Yes. Max, yes, thank you for the question on hot sauce. Hot sauce is an attractive category. There's new competition always entering the category. So that's something that we sort of deal with all the time. And but we as I said in the prepared remarks, we really do like the underlying health of our base business and just continued strong consumer loyalty. And this is also part of our portfolio that's also receiving a fair amount of increased investment. But there is one thing that's really, I think, impacting from a share perspective, just two particular things going on in the marketplace. A peer of ours is lapping a big supply chain constraint from the prior year, which hasn't affected our business as much, but definitely affect theirs. And so we're seeing that volume return back under their label. But also, we're seeing a lot of surge in unit volume from these mini trial sizes, which we were able to participate in or begin to participate in the third quarter. Our units are holding up well in this category too. So there is a fair amount of noise going on in the hot sauce category. And so when we look at those minis, just to give you some more perspective around that, we're seeing a lot of pickup in velocity. What it's doing is it's helping us drive trial on new flavors. I think we have sriracha in there, and we also have a creamy buffalo sauce. Both were super good. But at a dollar, these are really low price points for consumers to just really, it lowers the barrier to trial. And so we've seen a nice pickup in velocity on those mini trial sizes and expect that obviously to be a positive part of our portfolio or that brand assortment that we'll have moving forward. I also do want to draw attention to. We have strongly acceptance on our overall innovation like our Frank's RedHot Squeeze products that are coming out, Frank's Dill Pickle Hot Sauce. These are items from an innovation perspective and then kind of rolling out in the market in the back half of this year and we like the performance that we've seen there. So we'll continue to work through that. We believe we'll have better performance as we move towards the end of 2024 sequentially improved versus the third quarter. But this is an area that we get a lot of attention to and it's an exciting area in the store.

Thanks very much. Very helpful.

The next question is from the line of Steve Powers with Deutsche Bank. Please proceed with your question.

Yes, hi, good morning.

Good morning, Steve.

Just the first question on the planned ramp in marketing and advertising support that you called out and that's implied in the fourth quarter guidance. I'm curious as to sort of how much of that is just more intense programming around holidays and sort of specific to stimulating 4Q demand versus maybe more everyday programming that has maybe a more durable ROI in '25?

Well, when you think about the fourth quarter and our posture walking into the fourth quarter, I think maybe a good way to think about it is, we still have the same level of programs and activity that's been driving our business results. And we expect that will continue in its strength going into the fourth quarter. So we're not pulling back or anything like that. But we like the progress and the results that we're getting across the portfolio with those investments and those plans and programs. It's also our big holiday season quarter. And we really do believe we have very strong holiday plan setup with our customers. And so this is an area that we expect to have really good performance in the holiday. And so that obviously is a tick up when you think about it sequentially from the third quarter and that's something to be expected.

But some of this, as you mentioned, every day we talked about Frank's RedHot Sauce early in the year turning that on every day, so that's a change we made earlier this year.

Okay. That's helpful. Thank you for that. And then I know this is very new, but the dock workers' strike that's in news this morning. I guess from your perspective, I'm assuming that if it's relatively short lived, the impact is relatively manageable. But from the outside, how long if this extends, how long before this becomes a more material issue for you based on your current visibility inventory levels?

Thanks for the question on this, Steve. On the East Coast port strike, from an inbound supply planning perspective for us, we've been contingency planning on this on the potential for this since like April of this year. We really have been thinking about this as maybe something that could happen. And so we've been planning our actions around that possibility. We've also coordinated mitigation plans with our domestic suppliers because they might be counting on inbound supply coming from outside the United States. So we believe we've mitigated most of those risks with the strike now officially occurring. But we believe we're broadly covered. We are monitoring it daily, though, just to make sure that we don't have any interruption of supply, but we feel like we planned for this. Overall, though, we encourage both sides to work through this as productively as they can and with pace because this is something obviously that we don't want to see have a long extended event. But that -- those were our thoughts right now on that and we're going to watch it closely like everyone else.

Okay. Thank you very much. Appreciate it.

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

Great. Thanks so much. Just two quick ones. I guess first one is just kind of wanted to get maybe a little bit more color on Q4 because I think kind of around midpoint of the EPS implied guide, it looks like it's down about 15% year-over-year. But at the same time, it sounds like maybe sales could be a little bit better sequentially like relative to what we're seeing in Q3 and then the comments around gross margin, seems like gross margin a little bit more normalized, but still better than Q3, maybe flat year-over-year. So kind of what's implied, everything we're talking about, right, is like SG&A should be up a decent amount. And then I guess there is a little bit of implied tax rate headwind, but then also like income from unconsolidated clearly has been up like 50% year-over-year, year-to-date versus the mid-teens guide. So I'm just trying to kind of gauge like what's the core driver of that year-over-year absolute EPS implied decline in Q4 and it sounds like it's SG&A. Thanks.

Yes, I think you kind of walked the P&L very well highlighting kind of the squeeze there. We talked about the SG&A investments we're making and that was a timing shift in some of the supply chain investments. Just to touch on tax and unconsolidated really briefly and I'll let Marcos then cover a little bit of the other stuff. But the tax, so a little bit of a headwind after some pretty large favorables that we talked about in the call, which were more timing related, but we did call the tax rate down for the whole year by 1%. But unconsolidated, really great performance by McMex continues. We're lapping a really great performance in the fourth quarter of last year, but also the pace that hits the value pretty significantly. So I think that's part of the reason that it may look wonky to you on that line. But maybe I'll turn it to Marcos to talk a little bit more about the P&L.

Yes, yes. So we talked about the top line, I mean, sequentially improving from Q3 into Q4. We gave the mid to high double the range in terms of the full year. But that means if you think about Q4, it's going to improve both in Consumer and Flavor Solutions from Q3. The same applies to gross margin. Even gross margin is going to continue to improve sequentially from Q3 into Q4. If you compare with prior year, it's going to be flat, given the reasons that I mentioned before in terms of the investments that we're making in supply chain, the normalization of the mix a bit on the Flavor Solutions side, and some of the pricing that within Consumer that's going to be partially offset by Flavor Solutions. So that's how we see the gross margin coming into Q4. On SG&A, we had some investments that shifted from Q3 to Q4 as well, particularly around IT and digital transformation. As you know, we have a digital transformation journey across the company. I'm going to be commenting more about that at the Investor Day. But we see some investments in Q4 around digital marketing. In terms of data analytics, we are putting a hub around data analytics to serve the business as well as some efficiencies across manufacturing. Some of the investments that we're making in terms of digital transformation that is really kind of a lending in Q4. So that's a little bit of that impact that you see. But operating profit is going to be comparable to last year, so for Q4. And those are kind of the puts and takes that we see from Q3 to Q4.

I think the other thing, Rob, I mean, if you get to the fourth quarter, again, it's one quarter out of four. It's the biggest quarter. Again, it's a little bit of a squeeze play. So we've already, in essence, narrowed the sales by going mid to high earlier in the year, we've kind of said zero to 1% in essence. We've never gone below 1% of the spread in the fourth quarter. So it's just you get a little bit into that, you get a math exercise. So the range is maybe a little bit more than you'd like. But I think you've understood that in the past.

Yes, yes, yes. All very helpful. Very clear. And then maybe just one easy follow-up. I just I heard you kind of mentioned a couple of times throughout the call kind of that, let's call it, more little IT, digital transformation spend, right? I mean, it doesn't sound like that's like the lion's share of like what's coming in Q4. Maybe there's some timing shift. And I also respect the fact that you're not talking '25 and probably don't even want to talk long-term. That's for the Investor Day. But is there like something more to that? Is that like a, yes, I mean, there could be a little bit more of kind of an investment program around kind of a bigger piece of kind of where we're viewing the digital IT side and that could be ongoing for a little bit or is that like, no, that's just a Q4 thing? That's all. Thanks.

Yes, we're going to be talking more about our digital transformation journey at the Investor Day, Rob. And in Q4, particularly around continuing to drive investments that can sustain our top line performance, digital marketing is one of them that we're going to be continuing to do that in Q4 particularly and others as I mentioned in the call. So it's too early to get into specifics for 2025. We're going to impact the long-term plans as part of the Investor Day and we're going to be covering all our digital transformation program at that point.

All right. Great. Cool. See you there. Thank you so much.

Okay. See you.

Thank you. The next question is from the line of Robert Moskow with TD Cowen. Please proceed with your question.

Hi, thanks. Maybe I'll just clean up a couple of things. The FX no longer being a headwind and also this discrete tax benefit. When you add all that together, is that like an $0.08 benefit versus your prior expectations? You raised guidance by $0.05. I'm just wondering if I'm doing the math right or if it's not material.

Well, there's a lot of circularity in anything when you look at these things with other programs too, incentive comp and things like that. So we've kind of moved it in essence due to the tax reason due to FX kind of that $0.05 really reflects that.

Okay. And another question on third quarter, did brand investment increase high single-digit in third quarter similar to your guidance for the year? I don't remember hearing about it in the comments.

We've talked about this again in halves, Rob. I mean the first half heavy investment. Second half, we talked about moving the dollars up third and the fourth, which we're doing. So we haven't really talked about if it's up quarter-on-quarter.

Okay. So just the guidance is for the halves, not for the quarters?

Well, actually for the year.

For the year overall?

It gives insight into the half, yes.

Okay. And then finally, as you head into 2025, it would appear that there's not a lot of room for additional pricing. But I believe that the long-term algo includes some pricing assumptions. And given we've been in this hyperinflation environment for a couple of years, and now it's kind of come to a screeching halt, is there any reason to think that the pricing lever is kind of off for until further notice? And how do you think about that in terms of your long-term algo? Thanks.

Rob, I'll open up with maybe a couple of thoughts here and then ask Mike to wrap it up. But in our long-term algorithm, I think, we've always talked about there very well might be a little bit of price in those long-term objectives. I don't think we're in a position to say today like whether or not anything has sort of materially changed in our outlook there. But as we deal with sort of the near end 2024 perspective, I mean, clearly, we've made some decisions there in order to make sure that we get back to healthy top line, sorry, healthy volume growth pretty quickly. Predicting the future from an inflation standpoint or how it will play out pricing, I think, it's a bit challenging unless we're speaking just in broad terms regarding the long-term algorithm. Mike, do you want to add anything there?

Yes. I think too there's been a lot of focus, deservedly so in things like price gap management this year for us and others. I think of these things as long-term revenue management, category management initiatives, which we've really invested in and continue to drive. And some of the things Marcos talked about in fourth quarter investment continue to get closer to understanding cannibalization of product lines, innovation, how it impacts, what price does. So I think we think we're really close to best-in-class in this area and really going to continue that into next year. So I think you always have to have that pricing tool in your toolbox because commodities may go up or down, freight costs may go up because of the dock price -- the dock strike. We don't know that right now. So you have to have that lever. And we've been really good with our customers about making sure we pass on cost increases versus margin -- keeping margin. And we've been very, I think we won a lot of trust from both our Flavor Solutions and Consumer customers there. And we'll look at that into the future. I'm sure Marcos will carry that banner going forward.

What I would add is that, in addition to that, pricing is a lever that will continue to be part of our long-term algo. I mean we have -- we look at P&L holistically right? And we think about our CCI program working for us and it has been working for us over the last so many years, and will continue to work for us in the future. So that is kind of the first lever that we go about is like using the CCI as a way of funding the investments that we need to continue to drive top line growth. So it's always a mix about all these levers about a little bit of pricing, the CCI coming through the top line, it's very important to top line volume coming through. So all those levers, we kind of manage from a more holistic standpoint, I would say.

That's great. Thank you very much.

Thank you. The next question is from the line of Adam Samuelson with Goldman Sachs. Please proceed with your questions.

Yes. Thank you. Good morning, everyone. A lot of grounds has been covered. I wanted to maybe come back to spices and seasonings in the US if I may. I think you kind of you alluded to your consumption growth outpacing private label in the quarter. But notably didn't necessarily say the category isn't really what we would see in Nielsen either. And I'm wondering if you could talk about kind of the share environment in that category. And maybe outperforming private label, but there are some smaller brands that continue to grow pretty rapidly. And just how you think about the competitive positioning and how maybe the assortment or price points in that category maybe still have some adjustment to do or if there's adjustment needed to respond to some of the smaller brands which are growing.

Adam, from a perspective of that category, what we're seeing right now is we're doing quite nicely especially from a volume perspective across that part of our business. And on checkout whether or not we're growing share in that particular metric. But what we're seeing broadly in the category is, as we have a very broad offering across the category, we think we compete quite well with all different forms of competitors in what is an attractive category for people to enter. And so that is something that I would just give you. We always have sort of dealt with smaller competitors and at the same time private label. So this doesn't feel like we have any sort of really new dynamic going on as we kind of take a look at the performance of the third quarter. What you're seeing is McCormick really focused on capturing what is healthy category growth in the consumer and making sure that we're growing both unit and volume measures across our business. Now we're also growing TDPs or total distribution points, across this part of our, well frankly, across all of our core categories. But we're also seeing a nice distribution point gain across the whole portfolio, so we believe that's also helping us. But these are the perspectives I think I would share right now in terms of our third quarter performance and as we go into the fourth quarter.

Okay. That's helpful. And if I could just ask a quick follow-up just on cash flow. I know last year there was -- working capital was a big source of cash for the full year. Just year-to-date, it's been a decent sized use of cash. I know fourth quarter is generally a big working capital reversal. Is there an expectation that working capital is a source or use of cash for the full year once the book is closed?

Yes, fourth quarter is our strongest cash flow quarter, as you know. It's interesting. We talked about some of the drivers of why we're a little short year-to-date versus prior year. One of those drivers is working capital. And Brendan alluded to the port strike, and part of that is due to us, some of our contingency planning that he mentioned to make sure we were ready. So that should naturally hopefully unwind, but we're still expecting a strong cash flow year.

All right. That's helpful. I'll pass it on. Thank you.

Thank you. Our final question is from the line of Tom Palmer with Citi. Please proceed with your question.

Hi. Thanks for the question. I wanted to ask on the SG&A step-up here coming in 4Q. Is there a particular segment where we're going to see this most apparently? And I'm really just trying to get kind of operating profit on a segment basis. You got flattish overall, but is there one area where maybe we'll see more growth than the other?

Not specifically. It's going to be across both segments, Consumer and Flavor Solutions, yes.

Okay. Thanks. And on the unconsolidated operations, what maybe the answer is just a little conservatism. But the level of growth this year, close to 50%. I know the comparison is a lot tougher in 4Q. But when we look at the run rate of the past couple of quarters, is there anything notable to call out that could trigger incremental earnings pressure or again, is the reiteration just more with respect to thinking about last year's 4Q being so strong?

Well, I think it's that and I mentioned before the FX, I mean, the pesos dancing around 20 now versus 17.5 this last year. So that's a pretty material impact as we translate their earnings back to our P&L.

Great. Thank you.

Thank you. And at this time, I'll turn the floor back to management for closing remarks.