McCormick & Company - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered volume-led organic growth (+2%) but modest headline softness from FX; net sales were $1.606B (flat YoY) and diluted EPS was $0.60, with adjusted EPS also $0.60.
• Versus Wall Street, MKC modestly missed consensus on both EPS ($0.60 vs $0.64*) and revenue ($1.606B vs $1.614B*) despite reaffirming FY25 sales, adjusted operating income, and EPS guidance; currency was an ~2% EPS headwind and unconsolidated JV income declined due to MXN/USD moves.
• Segment mix: Consumer was flat on sales ($919M) with strong volume offset by price investments; Flavor Solutions rose to $686M with 3% organic growth, and adjusted operating income +28% YoY on mix, pricing, and CCI savings.
• Management emphasized brand marketing and technology investments, tariff mitigation via CCI and targeted pricing, and margin expansion building through the year; reiterated adjusted EPS $3.03–$3.08 for FY25.
• Near-term stock narrative: slight headline miss but guided margin build and reaffirmed FY25 outlook; catalysts include continued volume momentum, CCI-driven savings, and tariff mitigation plans.

What Went Well and What Went Wrong

What Went Well

• Volume-led organic growth (+2%), with Consumer volume +3% and Flavor Solutions volume +2%; global share gains across core categories and strong QSR innovation in APAC and Americas.
• Gross margin expanded +20 bps YoY to 37.6%, driven by CCI cost savings, supporting planned margin expansion through FY25.
• Flavor Solutions adjusted operating income up 28% YoY (33% constant currency) on product mix, pricing, and CCI savings; management highlighted wins with high-growth, health-focused customers and QSR LTOs.

Management quote: “Our continued volume-driven performance reflects the success of our prioritized investments... We achieved share gains in core categories across key markets and delivered volume growth in both the Consumer and Flavor Solutions segments.” — Brendan Foley, CEO.

What Went Wrong

• Headline EPS and revenue modestly below Street; FX was a ~$0.03 per share headwind and unconsolidated JV income declined YoY due to currency.
• Consumer segment adjusted operating income down 17% YoY (16% constant currency) from pricing investments (price gap management), elevated brand marketing and technology spend, and SBC timing.
• EMEA Flavor Solutions softness persisted (QSR traffic), creating regional drag despite sequential improvement; management expects quarterly fluctuations tied to customer timing.

Transcript

Faten Freiha (VP of Investor Relations)

Good morning. This is Faten Freiha, VP of Investor Relations. Thank you for joining today's first quarter earnings call. To accompany this call, we've posted a set of slides on our IR website, ir.mccormick.com. With me this morning are Brendan Foley, Chairman, President and CEO, and Marcos Gabriel, Executive Vice President and 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 statements on slide 2 for more information. I'll now turn the discussion over to Brendan.

Brendan Foley (Chairman, President and CEO)

Good morning everyone and thank you for joining us. We are pleased to start the year with solid first quarter results that are in line with our expectations. Our performance continues to demonstrate the success of our prioritized investments in the areas that we believe will continue to drive the most value and sustain our momentum for the remainder of 2025 and beyond.

McCormick remains a growth oriented company with robust plans that leverage the demand for flavor and the strength of our brands. Our strategies have proven to be effective by driving growth and compounding that growth over the years. With our strategies and best in class leadership, we are well positioned to continue on our trajectory and deliver on our near term and long term objectives with industry leading performance.

This morning, I will begin my remarks with an overview of our first quarter results focusing mostly on top line drivers. Next I will review how McCormick is positioned relative to an evolving consumer landscape. Then I will highlight some areas of success and the areas we continue to work on as well as our growth plans. Marcos will then go into more depth on the first quarter results and review our 2025 outlook.

And finally, before your questions, I will have some closing comments. Turning now to our results on slide 4, in the first quarter total organic sales increased by 2% primarily driven by volume and product mix growth and partially offset by pricing in line with our expectations. In global consumer organic sales growth was volume led, demonstrating continued momentum across key markets. We delivered robust volume growth in all three regions.

This sustained growth is supported by investments across our core categories including innovative brand marketing, accelerated innovation aligned with consumer trends, expanded distribution, and robust category management initiatives. As expected, volume growth was partially offset by price. In the Americas, price declined due to price gap management plans that were implemented in the second quarter of 2024 and a targeted incremental promotion related to seasonal recipe mixes in EMEA.

We took selected pricing actions to cover rising commodity costs and still maintain volume momentum for the year to go. We expect price in our global consumer segment to be flat. Now to the global flavor solutions segment where organic sales growth was also volume led. We delivered sequential volume improvement relative to the fourth quarter and are pleased with our results. Volume growth was driven by continued execution of our strategic priorities and waivers amid a challenging customer environment.

Faster growing customers partially offset larger CPG customer softness. In addition, QSR customer performance improved in Asia Pacific and the Americas led by innovation. Furthermore, across Asia Pacific, including China, we delivered strong volume growth as we partnered with QSR customers on new products and limited time offers. Consistent with prior years, we expect flavor solutions volume growth to fluctuate quarterly due to timing of customer activities.

However, on a full year basis we continue to expect to deliver positive volume growth. From a profitability perspective, we delivered results in line with our expectations as the first quarter was impacted by increased investments in marketing and technology as well as the timing of stock based compensation expense that shifted relative to the prior year. As we look to the year to go period, we remain confident in our operating income and earnings growth outlook on a constant currency basis.

Moving now to the macro environment including the current state of the consumer, there is increasing consumer uncertainty and concern over returning to more inflation and this has impacted consumer sentiment particularly in the last month. This prolongs the consumer context of 2024 where consumers, especially lower income consumers, are more cautious, exhibiting more value seeking behavior and tightening their budgets as many are worried about the future job security and rising costs.

We are seeing this not just in the U.S. but across our key markets. At the same time, we are all witnessing shifts in consumer preferences. They are becoming more health conscious and this trend is continuing to gain momentum. They are cooking at home more often and increasingly shopping a perimeter for protein and produce. As we look at growth in edible categories, unit growth is primarily driven by these perimeter categories.

Healthier and better for you trends as well as a desire to stretch budgets are fueling a continued interest in cooking from scratch, reinforcing the demand for flavor and for McCormick's categories, spices and seasonings remain the top growing center store category. As a result, consumption trends in our business remain strong. Ultimately, we expect the global consumer segment to continue to benefit from these secular trends and we have the plans and advantage portfolio to capitalize on them.

In our flavor solutions segment, we continue to partner with customers to launch new products or reformulate existing ones to fit healthier lifestyles. Furthermore, our exposure to faster growing customers allows us to win in several high growth categories, many of which are benefiting from the trends towards healthier eating. In the context of this environment, McCormick's trends remain strong.

Our volume driven first quarter results and continued strength in consumption trends demonstrate our ability to continue to successfully meet our objectives for the year. We continue to monitor consumer trends. Our focus remains on meeting consumers and customers where they are, delivering value, expanding our presence in growing channels including mass, club, and e-commerce, and delighting them with flavor as well as helping customers innovate to meet consumers' changing dietary needs.

We believe we have the right plans in place and we remain well positioned to capitalize on secular trends and continue to drive differentiated long term growth across both of our segments. Let's move to Slide 5 and let me highlight for the quarter some of the key areas of success across our global consumer segment. We successfully executed on our plans with increased investment and competitive focus towards driving growth.

We improved unit and volume share gains across our core categories in key markets. In the U.S. the vast majority of our categories are growing unit share. Let me provide some color on the categories globally. Starting with spices and seasonings in Americas, EMEA and Asia Pacific including China, we delivered strong volume growth. In the U.S. we drove unit and volume share growth outpacing private label for the third consecutive quarter.

In addition, we drove market share gains in Canada and China in recipe mixes. We continued to strengthen consumption trends in the Americas and drove unit and volume share gains in the first quarter. In the U.S. McCormick gravy and chili recipe mixes were a significant growth driver as they deliver on the value and convenience consumers are seeking. In addition, we are outpacing the total category in total new buyers as well as dollars per buyer.

In Canada, we drove dollar, unit, and volume share gains in mustard. We made great progress globally over the last four quarters and are pleased to see that our plans are driving great results. In the first quarter, we drove dollar, unit, and volume share gains in the Americas. In Poland, one of the top mustard consuming countries, our mustard consumption continues to grow and we are also realizing dollar share gains.

In addition, we are gaining dollar share in the U.K. in hot sauce. Our plans continue to yield great results. In the U.S., we drove positive unit share gains reflecting significant progress. Distribution gains as well as investments in differentiated brand marketing, including a strong Super Bowl activation and innovation, continue to fuel our performance. Outside of the U.S., we are gaining market share in France, the U.K., and Australia.

Additionally, we continue to make progress on total distribution points in the Americas. We significantly expanded TDPs across spices and seasonings, recipe mixes, and hot sauce in the Americas. In EMEA, we are seeing broad-based distribution gains in spices and seasonings and hot sauce. We are also gaining distribution in high-growth channels like discounters and e-commerce in Asia Pacific.

Our business in China is recovering gradually relative to the prior year. As expected, we delivered strong performance amid a continually challenged environment. Growth in our categories including spices and seasonings and condiments outpaced the market, which included the Chinese New Year Holiday. Moving to flavor solutions, we saw strength in our technically insulated high-margin product category Flavors. In Flavors in the Americas, we remain focused on being the partner of choice across our four Taste, Savory Heat, Naturally Sweet, and Citrus and Fruit.

As a result of this continued focus, we are winning new customers and gaining share. We outperformed the industry across many end categories including alcoholic and non-alcoholic beverages as well as snacking bars. Partially offsetting this is the softness we continue to see in larger CPG customer volumes. QSR trends improved in the Americas and in Asia Pacific. In the Americas, we are continuing to drive innovation with our customers driving volume growth amid soft foot traffic.

In China and Australia, our customers' new products and promotions are driving strong volume growth in Southeast Asia. Volume growth benefited from our customers lapping the impact of geopolitical boycotts in the prior year. Let me now touch on some areas where we are seeing some pressure. The areas of pressure are primarily in our flavor solutions business in the Americas and in EMEA.

Some of our CPG customers continue to experience softness in volumes within their own businesses. We continue to work on offsetting these trends through innovation and collaboration with customers and by winning new customers. The food service environment remains challenged. Our food away from home performance continues.

To outpace the industry. We are seeing flat performance in branded food service in the Americas as well as some of our customers are seeing softness in their volumes due to a slowdown in foot traffic. QSR traffic remains soft in the EMEA. We have seen this pressure impact our results for several quarters. It's difficult to predict QSR traffic.

However, we are collaborating with our customers as they focus on improving their volumes through innovation and value in aligned with consumer trends as outlined on slide 6. Our growth plans remain consistent to drive growth through category management, brand marketing, new products, our proprietary technologies and our differentiated customer engagement.

Our growth levers are supported and enhanced through data and analytics as we continue to accelerate our digital transformation. Our base business is strengthening across major markets and core categories and we have a number of initiatives in flight that will continue to drive this performance and differentiation. Let me focus on brand marketing as our plans across all categories are supported by our global brand marketing initiatives.

We are prioritizing investments to connect with consumers and fuel growth. Our differentiated brand marketing is driven by a combination of factors. In addition to maintaining a high share of voice, we are committed to having the best content in our categories. Content that inspires and educates consumers and reaches them at the right points on their path to purchase and on their flavor or diet journey. From flavor exploration to menu planning, to shopping and cooking, and even to eating and sharing the experience online.

In the first quarter, brand marketing spend increased against the high spend in the prior year. As expected, this increase was broad based and a key driver in supporting volume growth for this quarter as well as for maintaining our volume momentum for 2025. Through our efforts across multiple channels and by leveraging our digital capabilities, we are driving further household penetration and increasing buy rates across our core categories.

Our holiday campaigns across our regions proved successful. Our marketing campaigns in the Americas highlight our everyday value, innovation and point of difference to consumers and are supporting our volume growth and driving share gains. Our Frank's Super Bowl activation campaign with Paris Hilton was very successful. We gained new buyers and media and consumer sentiment was incredibly positive.

To wrap up our growth plans, although we are navigating in a difficult environment, we remain confident in the long term health of our business and in our fundamentals and in delivering our 2025 financial outlook on both near term and long term objectives. We remain focused on investing behind our growth levers to continue to drive differentiated performance. Now over to Marcos.

Marcos Gabriel (EVP and CFO)

Thank you Brendan and good morning everyone. Starting on Slide 8, our total organic sales grew 2% for the quarter. This increase was volume led with more than 2% volume and product mix growth partially offset by pricing. Moving to our Consumer Segment on Slide 9, organic sales increased 1% as volume growth of 3% was partially offset by a 2% impact of price investments. Consumer organic sales in Americas was flat 3%.

Volume growth was offset by price investments. Volume growth was strong across our core categories and was driven by our investment in brand marketing, innovation and category management. In terms of pricing, the decline primarily reflects the price gap management investments that were mostly in place in the second quarter of 2024 as well as incremental and targeted promotional activities.

In EMEA, we grew consumer organic sales 4% driven by a 2% increase in volume and 2% increase in price. The volume growth was broad based across product categories in our major markets. We're pleased with the strong sustained volume growth in EMEA. As Brendan mentioned, we took selective pricing actions in EMEA to offset commodity costs. Consumer organic sales in the Asia Pacific region increased 3% driven by 2% increase in volume and 1% contribution from price.

This growth reflects the gradual recovery we expected in China. We're pleased with our performance and expect these trends to continue through 2025. Turning to our Flavor Solutions segment on slide 10, first quarter organic sales increased 3% driven by volume growth of 2% and a 1% contribution from price. In the Americas, Flavor Solutions organic sales increased 4% reflecting 3% price contribution and 1% volume growth.

Our results reflect the strong performance with faster growing flavor customers and improved QSR growth which were partially offset by soft CPG customer volumes. The price contribution is primarily related to currency in Latin America. In EMEA, organic sales decreased by 4% including a 2% decline from price and a 2% impact of lower volume and product mix reflecting the impact of soft CPG and QSR customers volumes.

In the Asia Pacific region, Flavor Solutions organic sales increased 15% with volume growth of 16% driven by QSR customer promotions, limited time offers as well as new products partially offset by pricing. Moving to Slide 11 as expected, gross profit margin expanded by 20 basis points in the first quarter versus the year ago period, driven primarily by the benefit from our Comprehensive Continuous Improvement Program or CCI.

Selling, general and administrative expenses or SG&A increased relative to the first quarter of last year driven primarily by a shift in timing of our stock-based compensation expense from the second quarter into the first quarter as well as increased investments in technology and brand marketing. As expected for the quarter, adjusted operating income declined by 5%. Excluding the impact of currency, adjusted operating income decreased by 3%.

This decline was driven by the increased adjustments I just mentioned. Our fourth quarter adjusted effective tax rate was 22% compared to 26% in the year-ago period. Our tax rates this past quarter benefited from discrete tax items. Our income from unconsolidated operations in the first quarter declined 18% primarily due to the strengthening of the US dollar against the Mexican peso.

Turning to our segment operational results on Slide 12, adjusted operating income in the Consumer segment decreased 17% or 16% in constant currency. The decrease was primarily due to pricing and increased CCI costs including brand marketing and technology investments, partially offset by cost savings generated by our CCI program. Looking ahead, we expect consumer adjusted operating income margin expansion to normalize in the year to go period.

In Flavor Solutions, adjusted operating income increased 28% or 33% in constant currency, driven by product mix, pricing, and CCI-led cost savings, partially offset by increased SG&A costs. We continue to make progress in expanding operating margins in line with our objectives. The bottom line as shown on Slide 13, first quarter 2025 adjusted earnings per share was $0.60 as compared to $0.63 for the year ago period.

This decrease was primarily due to the SG&A increase I mentioned earlier, as well as the increased impact of currency on our operating profit and unconsolidated results, partially offset by a more favorable tax rate. The impact of currency on adjusted earnings per share is about $0.03 per share. On Slide 14, we have summarized highlights for cash flow and balance sheet.

Our cash flow from operations for the first quarter of 2025 was $116 million compared to $138 million in 2024. The decrease was driven primarily by higher cash used for working capital, partially offset by lower incentive compensation. We returned $121 million of cash to shareholders through dividends and used $37 million for capital expenditures.

Note that the timing of capital expenditures would fluctuate on a quarterly basis depending on the phasing of initiatives, including 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. This means funding investments to drive growth, returning a significant portion of cash to shareholders through dividends, and maintaining strong balance sheet.

We remain committed to a strong investment grade rating and expect to continue to deliver strong cash flow in 2025 driven by profit and working capital initiatives. Now turning to our 2025 financial outlook on Slide 15, we are maintaining our guidance for the year. Our outlook continues to reflect our prioritized investments in key categories to strengthen volume trends and drive long term profitable growth while appreciating the current level of uncertainty in the consumer and macro environment.

First, let me address tariffs. As you know, the situation remains fluid at this time. We plan to offset costs related to U.S. import tariffs on China with our CCI savings and some very targeted price adjustments. Our focus remains on safeguarding the health and competitiveness of our brands, sustaining the growth momentum in our business, and maintaining transparency with our customers.

We don't believe our current planned actions will be material to the total business or will have a significant impact on our volume mix outlook for the year. That said, due to continued uncertainty on this topic, our outlook does not include any additional impacts from tariffs that could potentially be implemented this year as things evolve. We'll provide updates on our outlook within our typical reporting cadence.

Turning now to the details of our outlook, currency rates are still expected to have a one point negative impact on both net sales and adjusted operating income and 2 points on adjusted earnings per share. At the top line, we continue to expect organic net sales growth to range between 1-3% and for growth to be volume led. In the year to go, we expect to deliver total volume growth across both segments and for total pricing to be flat to slightly positive, primarily driven by flavor solutions.

For China, our outlook assumes a gradual recovery and we expect China consumer sales to improve slightly year over year. We saw this come through this past quarter and we expect it to continue for the rest of the year. Our 2025 gross margin is still projected to range between 50-100 basis points higher than 2024.

This gross margin expansion reflects favorable impacts from product mix and cost savings from our CCI program, partially offset by the anticipated impact of a low single digit increase in cost inflation. Consistent with historical trends, we expect our gross margin expansion to build throughout the year. In addition to our gross margin expansion, we expect SG&A benefits from cost savings be partially offset by investments in technology as well as brand marketing to drive volume growth.

For the year, we expect our brand marketing spend to increase in the high single digits, reflecting a double digit increase, partially offset by anticipated CCI savings. As a result, our adjusted operating income is expected to grow 4-6% in constant currency. Similar to our gross margin trends, we expect growth in our operating income to build throughout the year.

This remains a balanced outlook that gives us the flexibility to continue to invest in the business and while expanding margins in line with our 2028 objectives. In terms of tax, we expect our tax rate to be approximately 22% for the year compared to 20.5% in 2024 where we benefited from a number of discrete tax items that are not expected to repeat in 2025.

We expect our income from unconsolidated operations to decline in the mid teens range in 2025, reflecting the strengthening of the US dollar against the Mexican peso, which is impacting the results of our largest joint venture, McCormick de México. To summarize, our 2025 adjusted earnings per share projection of $3.03-$3.08 on a reported dollar basis reflects currency headwinds and the impact of the increased tax rate relative to the prior year.

On a constant currency basis, adjusted EPS is still expected to grow between 5% and 7% to wrap up. Our continued volume growth underscores that our plans are yielding results and sustaining this differentiated performance. Looking ahead, our cost savings programs will continue to fuel our investment and drive margin expansion, and we remain confident in the underlying fundamentals of our business and in delivering on our 2025 financial outlook, near term and long term objectives.

Brendan Foley (Chairman, President and CEO)

Thank you, Marcos. Before moving to Q&A, I would like to close with our key takeaways on slide 16. While the environment has gotten more challenging and consumer sentiment has been impacted, we have managed through these environments in the past and we expect to navigate through this successfully as we continue to refine and align our plans.

The long-term trends that fuel our categories, consumer interest in healthy, flavorful cooking, heat flavor exploration, and trusted brands continue to be strong and, importantly, consumer interest in cooking is growing. 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 and driving category leadership. Our results demonstrate that we are investing in the areas that drive the most value and we expect to maintain this momentum.

We also expect to continue to expand margins and manage our cost as we are investing in the business. These improvements are led by our favorable product mix and cost savings programs. Our performance historically and over the last few quarters coupled with our growth plans give us confidence in achieving our near and long term objectives.

Ultimately, we believe the execution of our growth plans will be a win for consumers, customers, our categories and McCormick, which will continue to differentiate and strengthen our leadership. Finally, I want to recognize all McCormick employees for their dedication and contributions and reiterate my confidence that together we will continue to drive differentiated results and shareholder value. Now for your questions.

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, you may press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please hold for the first question. Thank you. Our first question will be coming from the line of Andrew Lazar with Barclays. Please proceed with your questions.

Andrew Lazar (Managing Director)

Great.Thanks so much. Good morning everybody.

Marcos Gabriel (EVP and CFO)

Good morning, Andrew.

Brendan Foley (Chairman, President and CEO)

Good morning, Andrew.

Andrew Lazar (Managing Director)

I think on last quarter's call you had guided to operating profit in fiscal first Q to be sort of flat to slightly down. As you mentioned, operating profit fell about 5% in the quarter. Decline was heavily weighted obviously to the consumer segment. I think you mentioned pricing, stock based comp, and brand investments, I think a lot of which were anticipated previously.

I am just trying to get a better sense for what drove maybe the stronger than forecast operating profit decline, particularly in consumer. Was it a timing shift relative to initial expectations or sort of what drove that? More importantly, I guess what now gives you the confidence in sort of reaffirming the full year? Thanks so much.

Brendan Foley (Chairman, President and CEO)

Okay Andrew, let me kick it off. I'll have Marcos handle maybe more directly the question on operating profit at a high level. Q1 was roughly in line with what our expectations were. In fact, we had planned for Q1 to be sort of a different quarter than what the rest of the year will look like. I think you kind of see that play out in a lot of our prepared comments. There are timing elements that were called out before, like you mentioned, that certainly impact that. We do remain confident in the year to go period. It is really supported by strong sales performance. Marcos, you want to.

Marcos Gabriel (EVP and CFO)

Yeah, sure. Andrew, on the operating profit, I mean you mentioned minus 5% decline in Q1 adjusted for currency was minus 3%. On a constant currency basis, three. A couple of timing related items as we mentioned on the call. One is the shift of the stock based compensation from Q2 into Q1 and I feel normalized for that, ROP would be essentially flat for Q1.

Also, we had some timing in terms of brand marketing and technology investments hitting in Q1. We're going to continue to have some of those investments on the back in the future quarters of the year, but a little bit of timing between Q1 and Q2 there as well. In the consumer space specifically we had to lap the price gap management investments that we put in place in 2024. That was a headwind that's going to go away.

If you think about it on the consumer operating profit decline of 16%. I mean two thirds of it will go away in the next quarter, which is the pricing and the stock comp shift. FX was a bigger headwind. I mean, we're trying to focus on the things that we can control. It was a bigger headwind. Now we're seeing FX moderating a little bit going forward. That's where we're keeping the guidance as it is. In terms of the guidance question, yes, we do have a lot of confidence in the guidance that we put out there.

I mean, top line is coming as we expected. We will continue to see growth in both segments, consumer and flavor solutions for the full year. In the consumer, you're going to see growth all quarters and across all regions for the balance of the year. Pleased with the flavor solutions performance this quarter driving not only top line but also profitability. As you saw, profitability was up 240 basis points on the back of CCI, product mix, and as well as the top line that drives leverage through the P and L.

So happy there as well. Gross margin will build throughout the year as I said on the call, 50-100 basis points on the full year basis on the back of the CCI program. We want to invest back in the business as we said before in terms of H and A, particularly brand marketing, and we feel confident about expanding margins for the full year. Between 4-6% operating profit growth for the full year primarily driven by the flavor solutions segment.

Andrew Lazar (Managing Director)

Thanks so much. Appreciate the color.

Operator (participant)

Our next questions are from the line of Peter Galbo with Bank of America. Please receive your question.

Peter Galbo (Director and Head of US Consumer Staples Equity Research)

Hi, good morning guys. Two questions on the Americas consumer business and Brendan, I'll toss the first one to you. I think you mentioned that the price gap management, the incremental price gap management in the first quarter was maybe seasonal or tied to a seasonal business and the expectation is that the consumer price will be flat going forward.

I'm just wondering if on an underlying basis within Americas, if that pricing still has an opportunity to be negative given some incremental investments and maybe that you saw good returns on the promo around the holidays and so you look at that as we get into grilling season and then you're offsetting that possibly with EMEA. I just want to understand kind of the pieces underneath the flat price for consumer comment at a total company level relative maybe to the geographies.

Brendan Foley (Chairman, President and CEO)

Okay, so thanks Peter. First of all, let me just kick off with overall, we had very really strong sales performance throughout the company in both segments. Specifically, though thinking about consumer, that's where most of your question focused on. We delivered really strong volume growth across the business across all regions up 2.6%.

We really think that that was indicative of the type of strength that we had been communicating on in the prior quarters. There was a price element obviously, as you called out specifically in Americas in Q1, and a lot of that had to do with we did target an incremental promotion on a recipe mix business. I'm not sure if everyone felt the cold weather that most of the country felt, but that's really good for chili volume and gravy.

We saw an opportunity, really a great opportunity to just continue to drive that business even harder during the first quarter because it's a great time of year for those specific products. We really see it actually in a lot of our volume and share performance in that segment of our business. That's what really drove a lot of it.

It was sort of one of those you reserve the flexibility to be able to spend across the business where we feel like we need to. That might have been sort of the one element that was, if you could say, incremental to what the price gap management plans and programs one would have expected. As we look to the rest of the year, we do not really see price having much contributions in terms of it being super positive or super negative across the portfolio globally. But I would say, that is definitely going to be the case in the Americas.

We are going to be maintaining the price investments in the prior year. There is a little bit of pricing that is going to come through in EMEA to deal with some commodity pressures that they are feeling. You will see a little bit of that. They will be growing volume. That is kind of one perspective, I think, on how to think about the first quarter and then what to expect the rest of the year. Volume growth in the Americas is really the fundamental driver. I think you saw that strength in our consumption. You are also seeing it in the actual sales results.

There might have been a little bit of a gap from a standpoint of our consumption and our sales, but that's really typical dynamics for us in the first quarter as we would typically see that after obviously a very strong holiday period that we had. So I'll stop there to see if I've addressed your question, but happy to take on more.

Peter Galbo (Director and Head of US Consumer Staples Equity Research)

No thanks, Brendan. I think that's very helpful context and maybe just as a follow up, I think we've gotten a few questions this morning just around again in Americas consumer kind of shipment versus consumption. Just whether there were any dynamics you saw from a carryover perspective on inventories out of Thanksgiving or any timing shift related to Easter, just that you're thinking about again as we contemplate the ship consumption. Thanks.

Brendan Foley (Chairman, President and CEO)

Yeah, let me go. Let me add some more context on shipments to consumption. We have very few concerns about our shipment versus consumption profile. Just to give you some more context, first of all, we had a really great holiday program resulting in really strong consumption not only in Q4 but also in Q1. We have a really strong consumption profile kind of underpinning really our sales growth over the past two quarters, consumption and the outpacing in Q1 of sales is a typical dynamic that we see on inventory patterns across our business over the last decade or so.

That's just something that we typically expect. There's probably two other variables though that I think one could say is a little bit incremental or new in this quarter. The first one is we're not really seeing any early Easter shipments like we did last year because Easter is falling later in April. There isn't really anything happening in Q1 with regard to Easter like it might have the year before.

We do have strong innovation plan for the year. We got an early kickoff on that this year, which means a little bit more slotting spend. Whatever increases we had in slotting comes into the first quarter because it matches with the shipments of the item. That is one indication that obviously we're off to a good start on innovation. Some of that spend comes into the first quarter and that was a little bit heavier than it was the prior year.

But I don't look at those two things as structural problems. Those are just cycles that we go through. It's really quite normal. I think it looks the profile is what we expect. If you combine Q4 and Q1 together into one number, it's exactly where we'd want to be.

Peter Galbo (Director and Head of US Consumer Staples Equity Research)

Great. Thanks so much, Bennett.

Operator (participant)

Our next questions are from the line of Alexia Howard, Bernstein. Please receive your question.

Alexia Howard (Analyst)

Good morning everyone.

Marcos Gabriel (EVP and CFO)

Good morning, Alexia.

Alexia Howard (Analyst)

Hi there. So can I focus on the growth of sales in Flavour Solutions? I'm wondering if you can quantify or at least comment on how much these new high growth customers are adding to your sales or your volumes in that segment, and then by contrast how much the QSRs benefited also in there. Offsetting that, you had the CPG customer weakness. How big was that compared to some of the other dynamics? And then I have a follow up.

Brendan Foley (Chairman, President and CEO)

Thanks for the question, Alexia. We did have a good quarter on flavor solutions overall. In fact, I would say in two out of our three regions we have volume growth mostly in the Americas and Asia Pacific. Just to give you a little bit more context and detail, I'm not going to be able to sort of quantify each individual segment within or kind of categorize each volume and give it a framing on numbers, but I'll give you some context in terms of what we saw in the quarter.

We did very well with those high growth sort of innovator customers that are a lot of emerging segments, many of them attached to health and wellness and We continue to see strong growth from them. We also continue to acquire new customers there. It's not only volume, but it's also gaining share that's helping us there and it allows us to diversify our sales mix and our portfolio. We also saw strength in the QSR business, even if there is weak traffic in the industry. What was driving that is we had some innovation wins execute in the quarter.

We also won some new customers there too. In the Americas region it was the QSR customer base and the small, high innovator customers that we have in flavor that were really driving and offsetting any of the weakness that we saw with larger CPGs. In Asia Pacific, it was a lot of QSR performance that drove the business, increased customer promotions and limited time offers, certainly contributed to some strong numbers. We were lapping the geopolitical boycotts from a year ago. That also improved volume performance in Asia Pacific. EMEA, on the other hand, definitely saw continued weakness, although we see sequential improvement quarter to quarter.

It still is soft in terms of traffic with QSRs and so that one, that region was down. But underlying all of this, there is a softness with larger CPG companies, I would say not just within the Americas, but also in Europe. We're seeing that in Europe too. That's consistent with what you're hearing, I think, from other company reports. And so we're seeing a little bit of that in our performance.

I would say though, when we look at it a category to category, we tend to still outperform what's going on in. the broader market, but nonetheless the volumes are weaker.

Alexia Howard (Analyst)

Great. A quick follow up. It's probably too early to say anything, but RFK Jr seems to be pursuing an agenda of driving out artificial additives across packaged food and probably in the restaurant sector as well. As I said, it's probably too early to tell because he's just turned up on the scene. Are you seeing any uptick in reformulation efforts on the part of your CPG or restaurant customers in the US?

Brendan Foley (Chairman, President and CEO)

Yes. With regard to colors, just let me first provide some context on the McCormick portfolio, our consumer portfolio. We do not really have a lot of usage of color in our products, as you might expect, at least very, very few overall. Now, with respect to formulations, we are seeing more activity on that definitely. Now, reformulation activity has always been a part of the work that we do with our customer base and we've been doing that for quite some time.

We are seeing a tick up in reformulation activity. That would align with what you're seeing being written out in the news media regarding what we're hearing from the new administration. It isn't just colors, it's also sodium we've always been working on sodium. It's also about just working on trends that are certainly positive, like hydration, functional foods, high protein. We're seeing reformulation activity across our customer base, but also a lot of new product activity, too.

Alexia Howard (Analyst)

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

Operator (participant)

Thank you. The next question is from the line of Ken Goldman with JPMorgan. Please proceed with your questions.

Ken Goldman (Co-head of Americas Equity Research)

Hi.Thank you. Understanding the situation changes daily or sometimes hourly. What should investors be looking for in terms of key tariff risks ahead as well as, I guess, related headwinds and actions that the company will take in response? I know these are myriad in nature, but anything you're really keeping an eye on that we should also be following, I think would be helpful.

Brendan Foley (Chairman, President and CEO)

Well, it's just in case it might have been missed. There are known tariffs already that we have accounted for in our forecast and our guidance for the year. Those were specifically the ones that were levied on China. Those are already factored into our thinking right now. Overall, Ken, as it relates to anything moving forward, it is difficult to sort of project on what will be the areas that we have to focus on because we're not exactly sure how exactly these might come through.

We are certainly, like you just said, staying very close to what the latest news and the latest potential plans might be. We are thinking through a number of scenarios there in terms of how that might get applied. There is obviously a lot of variability on how one might think through these tariffs just based on what might be recent reports, but we're staying close to what everyone else is learning too.

I think from a broader standpoint, I would just say these are situations that we dealt with in the past and we expect to be able to deal with them successfully moving forward too, depending on where the tariff might be in terms of country or on type of raw ingredient or finished good. I mean, this is quite varied, I would say, and as you might expect, complex. We're prepared to work through it when we know exactly what will happen.

Ken Goldman (Co-head of Americas Equity Research)

Okay, Thank you. A quick follow up. I recognize that giving quarterly guidance is not always your practice, but just in light of some of the moving pieces in the first half and some of the conversation about pricing and SBC shift, how would you like us to sort of think about directionally EBIT and EPS in 2Q either relative to 1Q or versus a year ago? I think any help you can get or we can get in sort of narrowing, that would be useful. Thank you.

Brendan Foley (Chairman, President and CEO)

I'm going to maybe kick it off and then ask Marcos to add more context to this, but kind of back to my opening remark. We always saw Q1 as being a very different quarter than the rest of the year. I think that would be the picture that we continue to paint. We felt like we'd made that kind of clear when we closed the fiscal year in 2024. Marcos, you want to add a question?

Marcos Gabriel (EVP and CFO)

Yes, Ken. It is difficult to give quarterly guidance, as you can imagine, especially in this dynamic environment today that we are in these days. You should see a continued momentum in terms of, you know, our top line growth will continue, as I mentioned, between Q3, Q2 and Q4, the margin, gross margin will build progressively.

You will see, you know, the bulk of our profitability comes in the second half of the year, which is, you know, second half is bigger than our first half. You should see more of the gross margin impacting, you know, the second in a positive way, impacting the second half versus the first half. That will flow through the P&L to operating profit as well.

Continue to invest in SG&A every quarter and that is proving to be positive in terms of the volume that we're getting out of those investments that we're making. Profitability will continue to build as well in line with the gross margin build. You should see some of the flip and timing related items that impacted in Q1 as a tailwind into Q2 but then continue to build gross margin and operating margin through the balance of the year.

Operator (participant)

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

Robert Moskow (Managing Director)

Hi there. Thanks for the question. Brendan. I wanted to follow up to Andrew's question at the top of the call. You described the results as roughly in line with your expectations and I'm just trying to drill down a little bit more into the organic growth for consumer versus organic growth for flavor solutions. Just based on tone heading into the results, I would have thought that flavor solutions would be a little weaker, consumer would be stronger.

Given everything you said about the shift to scratch cooking, the desire for more fresher foods and the flavors that are used to prepare them, this is kind of the reverse in first quarter. I want to know if that was also in line with your expectations or not. And then more specifically on the Chile promotion, is that a profitable promotion? It obviously drove a lot of volume. You said it was incremental. Did it grow profit? Thanks

Brendan Foley (Chairman, President and CEO)

Sure. Thank you. Rob, let me go to the top of your question. In terms of expectations overall, I do think that Flavor Solutions is a little bit stronger than what we would have expected. I think it really came through more in the QSR volume performance overall. I think that was one part of your question. But then from a consumer standpoint.

I'm looking at volume and it was really quite good. The Americas was up, I think, 2.9%. We talked about shift to consumption obviously as being a dynamic there that we typically expect. Overall we felt like, and as you see the consumption, we think it was quite strong overall and in fact a nice continuation from what we saw in Q4. Now the holiday season obviously has a lot more demand going on in it, but we see a continuation of the Strength that we have.

China, I would say we were looking for gradual improvement and we were pleased with the performance of China in the first quarter. As we look at our performance versus the Chinese New Year in the market, we believe that we slightly outperformed there. That was. We planned on growth. We called it slight growth. I would say that 3% that we saw was pretty good in terms of the challenging marketplace that is and where consumer sentiment is at that point in time.

So just to give you context on the consumer side, I would say quite pleased with the performance of volume in the Americas and as well as in China, EMEA also performed well too. Now we see a little more pricing coming through in EMEA as a result of some commodity pressure that they're feeling, but we are still growing volume in the context of having a little bit more pricing. That is the profile there. Now with respect to the incremental promotional recipe mix, when we look at price, overall revenue management, price gap management, all of those things, we certainly take a very hard look at whether or not they're smart from a profit perspective.

So I can tell you that our team, when they execute these programs, they're doing because they know that they're strategically good for the business, they build loyalty, and they're also financially smart. We're pretty pleased with the performance, I think, overall in the first quarter. Just to kind of help bridge, if there was any slight disappointment in the consumer number, I would just say we felt like that number was pretty strong.

Robert Moskow (Managing Director)

Great. That's helpful. Thank you.

Brendan Foley (Chairman, President and CEO)

Okay. I want to make sure I caught all the points of your question. Okay, great.

Operator (participant)

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

Max Gumport (Director of Equity Research)

Hey, thanks for the question. Recently, packaged food players, particularly those with exposure to snacking, some of whom are your key customers in flavor solutions, have been observing prolonged softness and attributing it to the consumer feeling financial pressure. It sounds like you'd acknowledge some of those pressures, but you also seem to be attributing much more of this to changing consumer preferences as well, which is supporting some of your key categories in the consumer segment.

I was hoping you could provide a bit more color on these changing consumer preferences that you're seeing and also how you would think about parsing out the weakness that we're seeing in snacking between the consumer feeling financial pressure versus the consumer changing their preferences for eating. Thanks very much.

Brendan Foley (Chairman, President and CEO)

Thank you for the question, Max, as it relates to sort of snacking trends and are the drivers related more towards affordability or the drivers related to health and wellness trends? Like a lot of things in life, it's a lot of both things. I think probably it's hard to parse that out. Let me tell you what I think we're seeing in terms of snacking trends.

There is a little bit more softness, but we're seeing pockets of growth also in snacking too, especially within those value added segments. Protein based snacks and better for you options are in many ways part of the snacking category as well. We see growth in those areas. I don't know that snacking by itself is the issue. It's just people are looking for other opportunities and other options as they consider snacking as part of the repertoire throughout the day.

We also, in terms of our own performance, believe that we're gaining market share in a number of these areas from competitors. It has helped offset what we believe to be maybe a little bit of temporary weakness as we're looking at the snacking category. It is more dynamic than maybe just one version of it. That would be one context I would give from a consumer perspective specifically on snacking.

Now, if you think about just broadly the state of the consumer, Max, we think consumers continue to be resilient, but they're definitely still in a challenging environment. As many of us have seen, consumer sentiment has been impacted, especially over this past month, primarily related to concerns over rising inflation potentially.

I think our view is that this prolongs what we saw, as we thought about the back half of 2024, that the mindset of the consumer may not be shifting all that much towards the positive. Just still remaining resilient but challenged. They're still cautious about how they spend their money on food and beverage and they're continuing that value seeking behavior.

In our own categories, what we're seeing is some people are maybe trading down to smaller units, but we're also seeing a lot of growth in our larger units actually. So it tells me that people are looking for value. They're also putting a lot of focus on the value per ounce that they're spending. So I think consumers are quite savvy, as we all know, and they're trying to make their dollar stretch as much as they can, which is another reason why they go into the perimeter of the store to make scratch meals, et cetera.

They see them as healthier, but they also see them as cheaper. I think both of these, you started with the snacking segment, but I'm going to end just more broadly. What we're seeing in our own categories is consumers are sort of blending both and it's hard to parse them apart.

Max Gumport (Director of Equity Research)

Great, thanks very much. I'll leave it there.

Operator (participant)

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

Steve Powers (Equity Research Analyst)

Hey everybody, good morning. Thank you. Brendan, I was hoping you could talk a little bit more about what you're seeing in Europe and I guess in the EMEA segment as it relates to consumer volume growth there as well this quarter. You've got some pricing coming through because of the commodity backdrop, but at the same time you cited other CPG companies in Europe kind of facing parallel dynamics as we're seeing here in the U.S. with consumer weakness.

As you think about the progression of demand in Europe over the balance of the year, I guess how are you sort of thinking through the scenarios there? Is there incremental investment that may have to be put into place in Europe as well as the year goes on to offset some of that demand weakness?

Brendan Foley (Chairman, President and CEO)

Thanks, Steve. Well, in Europe specifically, let me step back. We do a lot of proprietary research throughout the year, frequently throughout the year. We are trying to understand consumer sentiment not only with cooking and shopping and value and inflation, et cetera, many topics, but we do this almost every quarter and that helps us understand what the sentiment of the consumer is, especially let's say comparing Europe to the U.S. or other big markets that we operate in.

What is striking to us is the similarity that we are seeing from a U.S. consumer sentiment broadly with European and so very similar trends in terms of, hey, I'm cooking from scratch more often, I'm eating at home more often than I did. I'm looking for value overall. We see growth in discounters as an example of that, which we're gaining distribution in.

We also see performance of e-commerce really accelerating too. People are looking for that convenience overall, and that's accelerating quite nicely in that marketplace. We're seeing somewhat of a similar parallel, if you will, behaviors and sentiment from a consumer standpoint. The worry of inflation is just as high there as it would be here in the U.S. That's coming through in the data that we're looking at. I don't know that I could pinpoint something uniquely different in Europe that's happening in the US right now.

Steve Powers (Equity Research Analyst)

Okay, maybe if I could just follow up. As we see net positive pricing flowing through your business this quarter and over the course of the year, as expected, is what we're really seeing in there is sort of commodity based pricing offset by promotional investments and the like, or is the need to invest in value not quite as strong as the U.S. Despite those dynamics?

Brendan Foley (Chairman, President and CEO)

The commodity inflation that we're experiencing there is not broad based. It's very targeted on specific items. As you know, like for example, we have a homemade desserts business in France. They're very, very specific items are receiving some inflation there. Think about this as quite targeted. Still, having said that, we're focused on making sure that we have the right price points on shelf.

It is not necessarily through promotions only, but it is also through just sort of that making sure like price gap management that we are getting to the right price point on the shelf. I do want to illustrate that is more of a targeted issue from a commodity standpoint, not broad based.

Andrew Lazar (Managing Director)

Yeah, understood.Thank you so much.

Brendan Foley (Chairman, President and CEO)

Sure.

Operator (participant)

Our next question is from the line of Tom Palmer at William Blair. Please receive your questions.

Tom Palmer (Analyst)

Good morning and thanks for the question. Maybe just to start out, I wanted to clarify an element of Ken's question from earlier. I appreciate the sales momentum and the expectation for gross margin to build as the year progresses. I wanted to just clarify on SG&A, given some of the timing items that were called out in 1Q. I think traditionally SG&A dollars in the second quarter are quite a bit higher than we see in the first quarter. Does this still hold this year or was there enough pull forward of some of these items into Q1 that will be a bit more balanced?

Marcos Gabriel (EVP and CFO)

It is going to be balanced between Q1 and Q2. We should look at those two quarters together. Tom, as you think about the SG&A line, there's a shift into Q1 and negative shift into Q1 as I explained. That is going to be a tailwind into Q2. Brand marketing technology will continue across both quarters. Q1, you saw some of that a little bit more heavily than anticipated, but it is going to come back in Q2 as well.

We're going to continue to invest on the back of those two items. I would look at it as the combination of Q1 and Q2 for more of a normalized view on SNA.

Tom Palmer (Analyst)

Okay, thank you.I wanted to ask, on Canada, we've seen headlines about weaker sales for US Brands. Are you seeing any of that at this point? Just any refresher on your exposure to Canada? Thank you.

Brendan Foley (Chairman, President and CEO)

In Canada, we actually had a really, just like in the U.S., a really robust quarter in terms of consumption and performance there. I mean, I'm familiar with what you're referring to in terms of what we've seen written in the press, but currently we're not experiencing any sort of difficulties there. Honestly, as we look at our performance from a consumption and sales standpoint, we're pretty happy with it.

Operator (participant)

Okay, thank you. Thank you. Our final question is from the line of Matt Smith with Stifel. Please just use your question.

Matthew Smith (Director of Food & Tobacco)

Hi, good morning. I wanted to follow up on Americas QSR trends or QSR trends more broadly. You called out traffic or weaker traffic trends, but volumes were actually up. Can you talk about the drivers of growth that more than offset that traffic weakness and your expectation for the rest of the year in terms of industry traffic trends and your ability to outpace the industry traffic? Were some of the limited time offers and menu benefits more short term or do those continue and allow you to outperform the traffic trends we're seeing for QSR? Thank you.

Brendan Foley (Chairman, President and CEO)

You know, we've often described this business as lumpy variability, quarter to quarter. One of the variables that drives that is things like customer promotions and limited time offers because they may or may not continue for either a short period of time or a long period of time, difficult for us to fully predict. That is one element in terms of what we saw is just particularly when you think about Asia Pacific, just a lot more heightened activity.

In fact, I would say QSRs in Asia Pacific have been doing pretty well for the last couple of quarters and so they've been growing stores but also accelerating on traffic overall. In fact, I think the store growth itself is one other contributor to overall performance there, which is not a same store sales type metric overall.

The other items that for us, if we win more business or we get innovation, that becomes incremental to the prior year and that enables one to sort of overcome whatever might be the trends with traffic going on in the industry. We saw more of that happen in the Americas region and that is an example of something that isn't necessarily short term, but rather it's something that we continue to sort of improve our sales mix by either winning new customers or getting new products overall or selling them new products, if you will. That's the other context there which is equivalent to gaining share, if you will.

Matthew Smith (Director of Food & Tobacco)

Thank you, Brendan. I'll pass it on.

Brendan Foley (Chairman, President and CEO)

Sure.

Operator (participant)

Thank you. I'll now turn the call back to Faten Freiha for closing remarks.

Faten Freiha (VP of Investor Relations)

Thank you all for joining today's call. If you have any further questions regarding today's information, please feel free to contact me. This concludes our conference call for this morning.