Earnings call: McCormick reports mixed Q4 results, optimistic for 2024

In their fourth-quarter earnings call, McCormick (NYSE:MKC) & Company, Inc. (MKC) revealed a mixed performance with top-line results falling short of expectations, citing shifts in consumer behavior and an increased search for value. Despite this, the company reported a 3% increase in sales, partly buoyed by favorable currency impacts. However, volume and product mix saw a 3% decline. McCormick's net income rose to $0.85 per share from $0.73 in the prior year, attributed to gross margin expansion and joint venture results. The company's operational cash flow significantly improved, and they returned substantial capital to shareholders. Looking ahead, McCormick is focused on driving volume growth and expects to see an improved financial position by the end of 2024, with projected constant currency net sales ranging from a 1% decline to 1% growth. The company is confident in its strategies to improve volumes, margin recovery, and long-term profitable growth.

Key Takeaways

• Sales increased by 3%, but volume and product mix declined by 3%.
• Net income per share grew to $0.85, up from $0.73 year-over-year.
• Cash flow from operations reached $1.2 billion, with $419 million returned to shareholders.
• Adjusted earnings per share for 2024 projected at $2.80 to $2.85.
• McCormick plans to drive volume growth and margin expansion in 2024.

Company Outlook

• McCormick aims for constant currency net sales to range from a 1% decline to 1% growth in 2024.
• The company expects gross margin improvement and adjusted operating income growth of 4% to 6%.
• Investments will prioritize driving growth while also returning a significant portion to shareholders and reducing debt.
• McCormick is optimistic about exiting 2024 stronger with improved volume trends and margin recovery.

Bearish Highlights

• Top-line results did not meet expectations due to consumer behavior changes.
• Volume and product mix experienced a 3% decline.
• Softness in the consumer business is expected to continue into 2024, particularly in the US and EMEA regions.

Bullish Highlights

• Strong volume growth in branded foodservice and recovery in Asia Consumer.
• Positive impact from currency contributing to sales growth.
• Investments in American spices and seasonings showing positive results.

Misses

• The company did not provide specific projections for market share or net sales growth.
• Expectations for the Chinese market are cautious, with a gradual recovery anticipated in the second half of 2024.

Q&A Highlights

• The company discussed strategies to rebuild the Flavor Solutions margin over time through initiatives and portfolio management.
• Transition of a large U.K. manufacturing facility expected to provide favorable tailwinds for Flavor Solutions' margin.
• Focus on higher-margin, growing categories in the flavor business to drive margins.

McCormick's efforts to optimize pricing and manage price gaps have led to recapturing buyers and driving profitable volume growth in certain product lines. The company's strategy includes narrowing price gaps, increasing promotions, and securing distribution wins. New products and expanded distribution have also contributed to sales growth, and McCormick plans to continue investing in brand marketing in 2024.

The company's CEO outlined five priorities for the upcoming year, aiming to strengthen global leadership, drive profitable growth, accelerate digital transformation, elevate people culture, and strengthen competitive advantages. With a comprehensive approach to managing their business, McCormick remains committed to long-term objectives and delivering profitable growth.

InvestingPro Insights

In light of McCormick & Company's recent earnings call, several metrics and insights from InvestingPro can provide a deeper understanding of the company's financial health and future prospects. According to InvestingPro data, McCormick's market capitalization stands at $18.52 billion, reflecting the company's sizable presence in the industry. The P/E ratio, a measure of the company's current share price relative to its per-share earnings, is 26.62, with a slightly more favorable adjusted P/E ratio for the last twelve months as of Q4 2023 at 25.37. This indicates that investors have high expectations of future earnings growth compared to the broader market.

The company's revenue growth over the last twelve months was 4.91%, a modest increase that aligns with McCormick's reported sales increase in their earnings call. This growth rate, while not exceptional, does suggest a level of resilience in their business model, particularly in the face of shifting consumer behaviors.

InvestingPro Tips highlight that McCormick has a commendable track record of raising its dividend for 38 consecutive years and maintaining dividend payments for 53 consecutive years, which could be a reassuring sign for income-focused investors. However, it's worth noting that three analysts have revised their earnings downwards for the upcoming period, which might raise concerns about future profitability. Additionally, the company's short-term obligations exceeding its liquid assets could indicate potential liquidity challenges.

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Full transcript - Mccormick & Co (MKC) Q4 2023:

Faten Freiha: Good morning. This is Faten Freiha, VP of Investor Relations. Thank you for joining today's Fourth 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 Kasey Jenkins, Chief Growth Officer. 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 will now turn the discussion over to Brendan.

Brendan Foley: Good morning, everyone, and thank you for joining us. Let me start by sharing what we will cover in the morning's call. I will begin with an overview of our fourth quarter year-over-year results, focusing on top-line drivers. Next, I will briefly reflect on our full year 2023 performance and share our plans and building blocks to improve volume in 2024. Mike will then go into more depth on the fourth quarter financial results and the details of our 2024 financial outlook. And finally, before your questions, I will share some closing comments, including our key priorities as I begin my first full year as CEO. Turning now to our results on Slide 4. I want to start by acknowledging that our top-line results for the fourth quarter did not meet our expectations, as volume trends decelerated relative to the third quarter. There was greater-than-expected pressure on the consumer that drove changes in their behavior, which impacted our growth. We did, however, see sequential improvement in several key areas within our portfolio, underscoring that our strategies and initiatives are working, as I will highlight in a moment. That said, we do recognize that consumers are exhibiting even more value-seeking behavior, they are increasing shopping trips, reducing basket size and making just-in-time purchases, creating further uncertainty in the consumer environment. I want to be clear that we are dedicated to improving volumes. We have refined our plans and are prioritizing our investments to drive impactful results, and return to differentiated and sustainable volume-led growth, and you should expect improvement over the coming year and into 2025 and beyond. Now let's go to our fourth quarter performance in more detail. Turning to Slide 5. In our fourth quarter, sales increased 3%, including a 1% favorable impact from currency. In constant currency, sales grew 2%, reflecting a 5% contribution from pricing, which was partially offset by a 3% decline in volume and product mix. As expected, the benefit from the China recovery was fully offset by the impact of our strategic decisions to exit DSD -- Direct Store Delivery, of our bagged Hispanic spices in the Americas, and the exit of a private label product line and the divestiture of a small canning business, which was part of our Giotti Flavor Solutions operations in EMEA. Starting with where results differed from expectations. In Americas Consumer, we expected volume declines in the prepared food categories that we participate in, like frozen and Asian. But the decline was greater than we anticipated due to the more challenging macro trends and was broadly consistent with the performance of these categories. For mustard in the Americas, extremely low price points in private label impacted our consumption and is driving down category dollars. We plan to improve our volume trends in 2024 by narrowing price gaps, increasing promotions and, importantly, through distribution wins. Recipe mixes in the Americas showed increased stress from crossing key price points due to previous pricing actions. We have a plan to address these to return to volume growth. In our flavors product category, some of our consumer packaged food group customers experienced greater softness in volumes within their own business, more than we expected in both the Americas and EMEA. Finally, our growth of quick service restaurants and Flavor Solutions was impacted by slower than expected restaurant traffic in EMEA and Asia Pacific. Within Asia Pacific, some of our customers are experiencing boycotts in Southeast Asia related to geopolitical events. We are monitoring the situation and anticipate continued softness in these customer's volume to continue into 2024. Turning to what met our expectations in the quarter; we drove volume growth for a second quarter in a row in America spices and seasonings. In branded food service, our growth was strong across the portfolio driven by volume. In Asia Consumer, our recovery from COVID-related disruptions in China was in line with the expectations we had at the beginning of the quarter. Outside of China, for the quarter, our volume growth was strong across all categories. In EMEA Consumer, consistent with the third quarter, pricing actions contributed to double digit growth, which pressured volumes. Now I'd like to further build on some of the initiatives within our growth levers, notably increased brand marketing, targeted price gap management, new products and packaging renovation, which have already proven to strengthen our volume trends in key areas. We have intentionally chosen our investments in these areas as we believe they will generate the most significant returns. We are confident our investments will continue to drive improved results in 2024, and we expect to invest more, positioning us further for success in 2025 and going forward. First, America's spices and seasonings is a priority investment area for us, given our category leadership and its profitable growth potential for both McCormick and our customers. Our initiatives are driving U.S. branded sales volume growth, which strength during the fourth quarter in holiday performance. And looking at consumption, we continue to sequentially improve share trends again in the fourth quarter both in terms of dollars and units. We continue to activate initiatives of price gap management, innovation, packaging and a meaningful step-up in brand marketing support for America's spices and seasonings. And the results have begun to materialize, demonstrating that we have the right plans and are taking the right actions to grow in this attractive category. The renovation of our U.S. core everyday herb and spice portfolio, which began in the second quarter of 2023, continues to roll out according to plan. At the end of the fourth quarter, we had shifted about 75% of our renovated SKUs. And notably, products that have fully transitioned on shelf experienced stronger velocity. We are pleased with our results to date, which increased our confidence that this renovation will be a strong contribution to our growth in 2024 as our customers' shelves continue to transition. We are making progress on restoring distribution that was lost due to past supply issues. We have secured wins and new distribution. We expect to largely start seeing the impact of our actions in our results mid-2024, coinciding with most of our customers' shelf resets. Overall, we have a robust set of initiatives in flight and anticipate making progress throughout the year. I would expect growth in share gains in units and volume to lead our trends. Spending a moment on spices and seasonings and other key markets. Similar initiatives as in the U.S. are driving volume growth and share gains in Canada, France and Australia. We also renovated our spice and herb portfolio in Southeast Asia, with the same innovative packaging as the U.S. and EMEA, and began shipping the new products in the fourth quarter. We are supporting this transition with increased marketing spend in the first quarter. Next, in branded foodservice, we achieved strong volume growth across all customer segments. Our foodservice operators continue to expand their value menu options, and they are turning to our products to deliver great taste for a fraction of their costs. We drove share gains in spices and seasonings as well as our hot sauce share of tabletop, with expanded distribution, new products, customer wins and increased menu penetration, as well as our expertise in heat. Heat continues to be a growth accelerator globally for total McCormick, outpacing the rest of the portfolio as customers and consumers alike continue to drive demand in this flavor profile. New products contributed to fourth quarter growth. For instance, in the U.S., our Cholula salsas in the Mexican aisle are building distribution and bringing new consumers to the category. And our branded food service items, Frank's Mild Wings Sauce and Frank's Nashville Hot continue to perform at. In the U.K., Australia, we are driving hot sauce category growth with Cholula gaining momentum on shelf. In the U.S., we secured new hot sauce distribution during the quarter. And in the first quarter, we are launching new Frank's RedHot dips and popular flavors in a squeeze bottle format, as well as our national launch of Frank's Dill Pickle. We are well positioned going into our Super Bowl merchandising period. In summary, our investments in the key areas I just highlighted favorably impacted both our volume and margin performance for the quarter. Moving to gross margin. We are pleased with our performance, which continued to improve as the year progressed. Our results reflect effective price realization, the optimization of our cost structure and favorable product mix, driven by our portfolio optimization and focus in key areas. While confident in our ability to return to our historical margin profile in the near term, we will use improvements in our profitability to fuel continued investments in our business to drive our top line. We are in a strong position to benefit from the virtuous flywheel of margin expansion given the work that's been done throughout the business, and we are able to intentionally focus our investments on areas that we expect will have the greatest impact on improving volume performance and driving sustainable profit growth. Reflecting on our full year 2023 performance, I am proud of the progress we made in advancing our business in the right direction and our team is focused on returning to our long-term growth algorithm, strengthening our margins, significantly improving our cash flow, paying down our debt and reducing our leverage ratio. All have put McCormick in a position of strength to further invest with a focus on growth. Our foundation is strong. We have proven and powerful brands, and the results we are seeing from our refined and strengthened plans provide confidence in the effectiveness of our strategies and investments. Our initiatives will take time to materialize, and we expect volume trends to improve throughout the year and volume growth during the second half, notwithstanding any new macroeconomic headwinds. The pace of margin recovery to historical levels will take time as our focus is on investing to drive sustainable sales growth to generate quality earnings for years to come. I also want to highlight on share performance, that we are approaching our plans differently with an even greater competitive posture and more intentionality towards driving growth in our key categories. Now, let me highlight some ways in which we will drive growth through category management, brand marketing, new products, our proprietary technologies and our differentiated customer engagement. Starting in our Consumer segment with category management, where a key capability is revenue management, we have been building our discipline in revenue management for several years and have a history of optimizing pricing on shelf to benefit both McCormick and the retailer. As you would expect, this has become even more important in recent years. In the current environment, we are taking a surgical approach to managing our price gaps to private label and branded competitors, accelerating our efforts across various products and are seeing results. In our spices and seasonings category, we selected individual items we believe would be the most responsive based on the elasticities we were experiencing. For instance, in our iconic Black Pepper and Vanilla product lines, our actions proved to be effective. We are recapturing buyers, increasing household penetration and are driving profitable volume growth that is outpacing the category volume growth in these product lines. As I mentioned earlier, across key price points in Americas recipe mixes and are also leaning into our revenue management execution in this category. For example, in the fourth quarter, we focused on gravy as a key holiday item, which drove results, contributing to our successful holiday season. We expect to see further results from our actions as we work through the portfolio. Across all markets, our diverse portfolio allows us flexibility to optimize our pricing effectiveness. We look at both our everyday price and our promotional returns as well as use innovation, including price pack architecture to drive growth. These investments we make in price gap management result in greater volumes and improved margins over time. Importantly, customers that are adopting our recommendations are seeing better category performance, and McCormick is driving volume and share growth in their respective businesses. We are prioritizing brand marketing connecting with consumers and fueling growth with our increased investments. We have a history of investing behind our brands and did so again in 2023. We plan for a strong start to 2024, with aggressive first quarter brand marketing investments which are well underway. We expect a significant increase for the year, concentrated to the first half. We will continue to invest across various channels. We plan to further drive household penetration and increase buy rates with additional focus in retail media. Our first quarter plans include an increased Christmas holiday campaigns in all regions, increasing our value-focused messaging for our everyday spices and seasonings and recipe mix in the U.S. Also, supporting our packaging renovations that I mentioned earlier in both the U.S. and Southeast Asia, and promoting our new products in EMEA. Turning to new products, which are a key growth driver in both our Consumer and Flavor Solutions segments. In the Consumer segment, our 2023 launches are expected to substantially contribute to growth in 2024. For instance, in EMEA, we are thrilled with the early results from our range of Schwartz seasonings and recipe mixes that we launched with Nadiya Hussain, a British celebrity chef, as we entered the fourth quarter. We are expanding our household penetration, bringing in new and younger households into the brand. The recipe mixes in this range contributed along with other new products and expanded distribution to our fourth quarter growth in U.K. recipe mixes, which was double the category rate. In Flavor Solutions, collaborating with our customers on innovation continues to be a key driver of success. Across the portfolio, our customers continue to focus on innovation to meet consumers' needs. We are winning in flavors with better-for-you products and on-trend flavors; and, in branded foodservice, with our heat platform and value-oriented products for foodservice operators. We are pleased with our 2023 performance from new products, which contributed to our sales growth and accelerate compared to the prior year, as we expected. Importantly, we have a strong lineup of new products spanning heat, freshness, value, convenience and flavor exploration in our Consumer segment for 2024, which we will share more about at CAGNY in February. And in Flavor Solutions, we are also carrying a robust pipeline of new products into 2024, positioning McCormick and our customers for success. We are leveraging our proprietary technologies and Flavor Solutions to support our innovation to win share in attractive high-growth categories and to attract new customers. In addition, with our differentiated customer engagement approach, we are intentionally targeting a mid-market customer base who are category leaders in high-growth innovators as well as diversifying our customer base to drive share gains across our portfolio and profitable growth. Our actions are yielding results. For instance, in the fourth quarter, our volume growth in performance nutrition significantly outpaced the market. And in the beverage category, we drove sales growth even though the category decelerated, partially by targeting high-value and high-growth segments within beverage. With our flavor leadership and continued investments, we are fully committed to vigorously fuel category growth with our differentiated portfolio. We have confidence in our plans, which we'll build throughout the year and yield volume growth during the back half of the year. We are dedicating more resources to categories where we have the right to continue to win. We are seeing our actions drive momentum and solid results in areas where we have focused. We believe that the execution of our growth plans will be a win for consumers, our categories and McCormick, which will differentiate and strengthen our leadership. Now before I turn it over to Mike to provide more details on our fourth quarter financial performance and 2024 outlook, I would like to comment on recent changes in our Board of Directors. Freeman Hrabowski who has served as a Director for 27 years, will be retiring from the Board as of the end of March. I am grateful for his service and contributions, which has significantly benefited McCormick, and we will miss him. I also want to welcome Terry Thomas, who has joined our Board. Terry brings extensive global consumer product industry expertise through his current role as Chief Growth Officer for Flowers Foods (NYSE:FLO), and his experience at Unilever (LON:ULVR) prior to that. I look forward to working with Terry and the contributions he will make to McCormick.

Mike Smith: Thanks, Brendan, and good morning, everyone. Starting on Slide 10. Our top line constant currency sales grew 2% compared to the fourth quarter of last year, reflecting 5% of pricing benefit, offset by a 3% volume mix decline. As Brendan mentioned, our volume performance was impacted by changes in consumers' behavior. In our Consumer segment, constant currency sales were flat, reflecting a 4% increase from pricing actions, offset by a 4% volume decline. The benefit from our recovery in China and the Hispanic product DSD exit to optimize margins netted to no overall impact for the total Consumer segment. On Slide 11, consumer sales in the Americas decreased 4% in constant currency with the DSD exit I just mentioned driving 2% of that decline. The remaining sales decline was due to lower volume and product mix in several areas of the portfolio, including, as Brendan mentioned, prepared foods, mustard and recipe mixes, which was partially offset by volume growth in spices and seasonings, which was driven by our investments. In EMEA, constant currency consumer sales increased 9%, with a 13% increase from pricing actions, partially offset by a 4% volume decline. Sales growth was broad-based across markets and categories. We remain at an elevated pricing environment in EMEA, and we expect volumes to improve as pricing wins in 2024. Constant currency consumer sales in the APAC region increased 31%, driven by a 26% volume increase, primarily due to the expected recovery in China. Outside of China, we also drove double-digit sales growth with strong volume and broad-based growth across all categories and markets. Turning to our Flavor Solutions segment on Slide 14. We grew fourth quarter constant currency sales 5%, reflecting a 7% increase from pricing, offset by a 2% decrease from volume and product mix. Our growth momentum in this segment was exceptional through the third quarter. And even with a deceleration in the fourth quarter, our sales growth for the year was strong. In the Americas, flavor solutions constant currency sales rose 6%, driven by pricing, as volume and product mix was comparable to the prior year. Sales growth was broad-based across the portfolio and led by branded foodservice. In EMEA, constant currency sales increased 2%, and with pricing actions contributing 14%, partially offset by a 3% impact from the divestiture of the Giotti canning business, a 9% decline in all other volume due to softness in some of our customers' volumes within their own businesses and a 1% impact from exiting a private label product line. In the APAC region, Flavor Solutions sales grew 5% in constant currency with a 6% contribution from pricing, offset by a 1% volume decline. Our business in China delivered strong growth. Outside of China, sales were negatively impacted by geopolitical boycotts in some of our quick service restaurant customers, as Brendan mentioned. As seen on Slide 18, gross profit margin expanded 320 basis points in the fourth quarter versus the year ago period. Drivers in the quarter included favorable product mix in both segments and our CCI and GOE programs, as well as effective price realization. Additionally, we lapped elevated costs related to some discrete issues and flavor solutions operations. Overall, we ended 2023 meeting the cost recovery plans we set as we entered the year. We are pleased with our gross margin expansion for the quarter and the year. Now moving to Slide 19. Selling, general and administrative expenses or SG&A, increased relative to the fourth quarter of last year as higher employee incentive compensation expenses were partially offset by CCI and GOE cost savings. Brand marketing also increased compared to the fourth quarter of last year, and we expect to invest further in 2024 to support our brands. As a percentage of net sales, SG&A increased 190 basis points. Sales growth and gross margin expansion, partially offset by higher SG&A costs, resulted in a constant currency increase in adjusted operating income of 11% compared to the fourth quarter of 2022. In constant currency, adjusted operating income in the Consumer segment was flat. And in Flavor Solutions, adjusted operating income increased $0.73 in constant currency. We remain committed to restoring Flavor Solutions' profitability. And in the fourth quarter, as expected, we drove significant margin expansion versus prior year in this segment. For the total company, we expanded our adjusted operating margin by 130 basis points in the fourth quarter and 100 basis points for the year, which reflects our commitment to increase our profit realization and positions us well to make investments early in 2024 to fuel top-line growth. Turning to interest expense and income taxes on Slide 20. Our interest expense increased significantly over the fourth quarter of 2022, driven by the higher interest rate environment. And quickly touching on tax, our fourth quarter adjusted effective tax rate was 22.3% compared to 23.1% in the year ago period. Both periods were favorably impacted by discrete tax items, with a more significant impact this year. Our income from unconsolidated operations in the fourth quarter reflects strong performance in our largest joint venture, McCormick de Mexico. We are the market leader with our McCormick branded mayonnaise, marmalade and mustard product lines in Mexico and the business contributed meaningfully to our net income and operating cash flow results. At the bottom-line, as shown on Slide 22, fourth quarter 2023 adjusted earnings per share was $0.85 as compared to $0.73 for the year ago period. The increase was attributable to higher operating income driven by gross margin expansion and the results from our McCormick de Mexico joint venture I just mentioned. On Slide 23, we've summarized highlights for cash flow and the year end balance sheet. Our cash flow from operations was strong in 2023, $1.2 billion, nearly double our cash flow of $652 million in 2022. The increase was primarily driven by higher operating income and working capital improvements, including lower inventory. We returned $419 million of cash to our shareholders through dividends and used $264 million for capital expenditures in 2023. Our 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, returning a significant portion to our shareholders through dividends and paying down debt. We remain committed to a strong investment-grade rating. We expect 2024 to be another year of strong cash flow driven by profit and working capital initiatives. We are well-positioned to continue paying down debt and coupled with ending 2023 and with a leverage ratio slightly above our 2024 year-end target of 3 times. We are pleased to be deleveraging faster than expected. Now turning to our 2024 financial outlook on Slide 24. Our 2024 outlook reflects our prioritized investments in key categories to strengthen volume trends and drive long-term sustainable growth, while appreciating the uncertainty of the consumer environment. We are well positioned with our cost savings programs to fuel investments for volume growth as well as generate operating margin expansion. The balancing of margin expansion and investments to drive growth is critical to our success, not only in 2024, but also into 2025 and beyond as we remain committed and confident in our long-term algorithm. Turning to the details. First, currency rates are expected to unfavorably impact sales, adjusted operating income and adjusted earnings per share by approximately 1%. On the top line, we expect constant currency net sales to range between a decline of 1% to growth of 1%. We expect a favorable impact related to the wrap of last year's pricing actions, most significantly in the first half, partially offset by our price cap management investments that will drive volume growth. We expect several factors to impact our volume and product mix over the course of the year. First, we expect to drive improved volume trends as the year progresses through the strength of our brands and the intentional and targeted investments we are making. Our initiatives will take time to materialize, and we are expecting to return to volume growth during the second half of the year, notwithstanding any new macroeconomic headwinds. We have made strategic decisions to optimize our portfolio for profitable growth that will also impact volumes during the year. We decided to exit DSD of our bagged Hispanic spices in Americas consumer and to exit a private label product line in EMEA Flavor Solutions, both will impact the first quarter. And we divested the Giotti canning business, which will impact us through the third quarter. We expect to continue to prune lower-margin business through the year as we optimize our portfolio, the impact of which will be reflected within the natural fluctuation of sales. And finally, in China, our food away-from-home business, which is included in APAC Consumer, is expected to be impacted by slower demand in the first half of the year, and as such, we expect China Consumer sales to be comparable to 2023 for the full year. While we recognize there has been volatility in demand in China, we continue to believe in the long-term growth trajectory of our China business. Moving to gross margin. Our 2024 gross margin is projected to range between 50 to 100 basis points higher than 2023. This gross margin expansion reflects favorable impacts from pricing, product mix and the cost savings from our CCI and GOE programs, partially offset by the anticipated impact of a low single-digit increase in cost inflation and our increased investments. Additionally, we expect to begin reducing our dual running costs related to our transition to the new flavor solutions facility in the U.K. in the back half of the year. Moving to adjusted operating income. We expect 4% to 6% constant currency growth. This growth is projected to be driven by our gross margin expansion as well as SG&A cost savings from CCI and GOE programs, partially offset by our investments to drive volume growth, including brand marketing. We expect our brand marketing spend to increase high single digits in 2024, reflecting a double-digit increase in investments, partially offset by CCI savings. And we expect our increased investments in brand marketing to be concentrated in the first half of the year and weighted more to the first quarter. Overall, based on the flow-through of our volume expectations and the timing of our investments, we expect our profit to be less robust in the first half and anticipate strong profit growth in the second half of the year. Our 2023 adjusted effective income tax rate projection of approximately 22% is based upon our estimated mix of earnings by geography as well as factoring discrete items. We expect our rate to be higher in the first half of the year compared to the second half of the year. We expect a mid-teens increase in our income from unconsolidated operations, reflecting the strong performance we anticipate in McCormick De Mexico. To summarize, our 2024 adjusted earnings per share projection of $2.80 to $2.85 reflects a 4% to 6% increase compared to 2023, or 5% to 7% in constant currency. As Brendan noted, we are dedicated to improving volumes. We are prioritizing our investments to drive impactful results and return to differentiated sustainable volume-led growth. We remain confident in the underlying fundamentals of our business and delivering on the profitable growth reflected in our 2024 financial outlook.

Brendan Foley: Thank you, Mike. Before moving to Q&A, I would like to provide some closing comments on Slide 25. Our business is moving in the right direction, we strengthened our margins, significantly improved our cash flow and are deleveraging ahead of expectations. From a top line perspective, volume trends improved sequentially through the third quarter, but fourth quarter performance was disappointing. Parts of our portfolio grew underscoring that our strategies and initiatives are working. In areas that were challenged, we know the drivers and are addressing those that we control. And combined with the initiatives we have in place, we fully expect we will drive improved trends and build to volume growth during the second half of 2024. We are committed to recovering our margins in both segments to historical levels, while making investments to drive sustainable top line growth. The fundamentals that have driven our historical performance remain in place. And we are as diligent as ever in driving value for our employees, consumers, customers and shareholders in 2024 and beyond. I am excited for the year ahead, which will be my first full year as CEO. I plan to drive an ambitious agenda with greater competitive posture and more intentionality that capitalize on our strong business fundamentals as well as the value of our brands and capabilities and have driven our past success. McCormick is a growth company, a global leader in flavor, with a long-term orientation and a strong culture. I am committed to advance our leadership and our differentiation. Our strategic pillars: growth, performance and people, remain consistent. I am energized to further incorporate my mark on our growth plans. In a fast-changing global environment, we need to build on our competitive strengths and opportunities to remain a differentiated market leader. As such, I would like to share the five priorities that the entire McCormick organization is rallying behind, as we enter 2024. First, strengthen our global leadership in core categories. That means, growing volume and market share in herbs, spices and seasonings and condiments, strengthening our leadership in heat and increasing the global scale of our flavors business and expanding our branded foodservice business. Second, drive profitable growth and higher returns on investments. We want to restore the operating margin we have lost the last several years. But importantly, do so in a measured way, using our cost savings and operating leverage to fuel top line growth in the near-term that will drive sustainable profits for years to come. Third, accelerate our digital transformation to enhance how we serve consumers and customers to work faster and more efficiently, and to strengthen decision-making by further leveraging data and insights. Fourth, continue to elevate our power of people culture and build the next generation of leaders and capabilities that will drive McCormick's success well into future years. And finally, all these contribute to our fifth priority, which is to strengthen and expand stem competitive advantages to make McCormick even more effective in the marketplace. Our advantages are critical to ensuring we deliver on our growth potential. Simply put, I am committed to harnessing the collective expertise of our talented McCormick team with a renewed sense of urgency and speed to deliver on these priorities, resulting in long-term sustainable profitable growth that will be industry-leading. While 2024 is an important year of investments, we are confident in our capabilities and enthusiastic about some early signposts of success. And we are committed to returning to the type of growth that investors expect from McCormick. The foundation has been laid and building blocks are in place, and I look forward to sharing more about them at CAGNY in February. As I said, I am excited for the year ahead and delivering on our long-term objectives. Finally, before turning to your questions, I want to recognize McCormick employees around the world for their contributions in 2023, and the momentum they are carrying into 2024, and reiterate my confidence that, together, we will drive the profitable growth reflected in our 2024 outlook. Now for your questions.

Operator: [Operator Instructions] Our first question comes from the line of Andrew Lazar with Barclays (LON:BARC). Please proceed with your question.

Andrew Lazar: Great. Thanks so much. Good morning everybody.

Brendan Foley: Good morning, Andrew.

Andrew Lazar: Great. Maybe to start off, given where you ended 2023 and coupled with your commentary on investing in the business, I guess, can you tell us a bit about how you're thinking about volume as you progress through 2024, and I guess how you would be positioned going into 2025?

Brendan Foley: Well, Andrew, thanks for the question. Let me start by commenting on how we ended 2023 from a volume perspective. While the fourth quarter was below our expectations, there were bright spots, because our actions are working in a number of categories that are critical for us. And for the challenging area, you know what the issues are, and I'm pleased with the speed and urgency with which the team is addressing them. I guess just to step back, pre-pandemic, we consistently drove volume growth across our business in both segments. And the macro dynamics of the last several years disrupted this. And so we see 2024 as an important moment to get back there as soon as we can. We do have a bias towards even greater investment on the business. And as I've said, we're approaching our plans differently with even greater competitive posture, greater intentionality towards driving volume growth and share in those key and really attractive categories. I think where we stand at this point in 2024 is we appear to be moving beyond those macro dynamics. Yet at the same time, we recognize the uncertainty of the environment, and therefore, I'm taking a cautious view on that outlook. From a consumption standpoint, we do expect to exit 2024 in a stronger position than how we exited in 2023. And importantly, though, we're also entering 2024 in a position of strength in terms of our ability to invest in the business and expand margins. So we're able to intentionally focus those investments on areas that we expect will have the greatest impact on improving volume performance and driving sustainable profit growth. We expect our volumes to improve as we progress through the year and to drive the volume growth during the second half. This momentum is expected to continue into 2025, notwithstanding any new surprises on sort of the macroeconomic headwinds that might be out there. And I believe our investments will drive quality earnings growth and will put us on a trajectory of -- on that long-term algorithm. So those are the -- that's the way we're thinking about exiting '23, how we're thinking about '24 and as we go into '25.

Andrew Lazar: Thanks. And then I guess a good segue to that is, how is that you're able to make investments to drive the top line and yet still improve margins. I was hoping you could help us a bit with that perspective. Thank you.

Brendan Foley: Well, as I said, we're entering '24 in a position of strength after navigating these dynamics over the last several years. And I'll turn it over to Mike just to give some context, and I'll wrap it up with a few other thoughts.

Mike Smith: Yes. Good morning, Andrew. Yes, as you saw from our results, we ended the year with strong operating margin performance, and for the full year, up 100 basis points. A big key to our recovery was recovering the cost increases through pricing. Obviously, 20% cost increases two years ago, over 10% last year, there was a big job to do that. So we're able to do that in 2023, which helped our margins. Our CCI and GOE programs, we've talked about a lot, really performed and give a strong momentum, frankly, into 2024. 2024, as you think about this year, we're showing some margin improvement about 80 basis points. And with low single-digit inflation, and you think about four or five years ago when we had low single-digit inflation, CCI really works for us. You take a little bit of pricing and we're having some pricing wrap in 2024 and then you can decide what to do with. And CCI, some of it drops to the bottom line through margin improvement, we're making those increased revenue price cap investments, which we've always done some degree of that, but also our brand A&P up -- double digits is another way we're using CCI this year. So it's kind of a sweet spot for us at low single-digit inflation environment as we think about it. And the portfolio optimization we've talked about last year, which -- a bit of that continues into this year. So, again, helping drive our margins up. We want to recover over time the gross profit margins we had pre-pandemic, but we're doing it judiciously.

Andrew Lazar: Thanks so much.

Brendan Foley: Mike said on sort of this portfolio optimization, we really do see that working. So we did make a couple of intentional moves as you know. That's really, I think, allowing us to invest even more in the part of the portfolio, which we know will be the strongest. And then we did make a lot of targeted investments in '23. So that's yielding results. We like where that's going. And it's achieving high ROI, and that's carrying us into '24. So I do believe this intentional investment in those categories that are core to us will really be the biggest drivers of profitable growth. And we should see that margin accretion from that mix of sales. So we really do believe we're operating in a position of strength there.

Andrew Lazar: Thanks so much.

Operator: Thank you. Our next question comes from the line of Ken Goldman with JPMorgan (NYSE:JPM). Please proceed with your questions.

Ken Goldman: Hi. Good morning everybody.

Brendan Foley: Good morning.

Ken Goldman: Hi. I wanted to ask about Consumer Americas. In particular, you spoke today about managing price gaps, maybe a bit more tightly ahead. We started to hear from some other food producers that in the U.S., maybe some promotional lifts aren't working quite as well as expected. I guess I was just curious if this is a dynamic you've experienced as well. And I really am trying to get a sense just how much more investment is needed to narrow the price gaps you mentioned. And if in general, really consumer behavior in the U.S. is, in some way, more difficult to navigate than what it's been in past challenging times or kind of pretty much what you expect to see as consumers tighten their wallets a little bit.

Mike Smith: Okay. Let me kick off and -- a couple of questions in there. The first, I think, had to do with just promotional lifts and what we're seeing. And I'm not necessarily trying to compare to the comments of other companies. But what we're seeing right now in our business today is we're not seeing huge declines or sort of reduced significant lifts of promotion. But there's an important consideration there, which is we're really a heavy base business. We don't have a ton of, if you think about our percentage of consumption. We're in the 90% range in terms of base consumption and the rest is really coming through promotions. So we're not overly reliant there. And I would just say that it's probably an area that I don't know that it's fair to draw a correlation between our performance and others. Now price gap management, in terms of how we're approaching that, we're looking across our portfolio. And just in the case of like spices and seasonings, it's a really broad portfolio with many subcategories underneath there. And each and every item -- you take compare black pepper to Montreal Steak they all have different price elasticities and where the consumer is to go. And so we have been surgically looking at this at a SKU level to make sure that we're doing the right thing to really drive overall growth in volume and unit consumption. And so that's allowed us to really, I think, be very, very sharp about how we drive this investment in a targeted way to make sure that we're starting to drive volume growth. In 2023, we saw a lot of improvement in parts of our business where we started to apply this. And I think like I said on the call, a good example was Black Pepper or Vanilla, and we started to really see the -- not only the volume of the unit share gain. And so that gave us really, I think, a lot of kind of stair-step into those investments. And that's the way we're going to do it in 2024 too. We're expanding that investment. We're going to continue to look at the line, we assess it. Honestly, every month and taking a look at where we see the individual products perform across the shelf. And then we decide what we need to do from a revenue and category standpoint. But I wanted to put on top of that, we're applying more A&P to the business, too, at the same time. And I think that's really important. We are seeing really good performance from A&P and it encourages us to continue to spend more on the business. And so you'll see more of that from us, I think, going forward. I'm not sure if I captured all your questions there, but let me know if I did.

Brendan Foley: I think to maybe one point. As we get the price differentials right, the advertising is even more effective. And that's important. And we're happy with the ROIs on our A&P, but it gets even better when you have the right price differential, as we've seen with Black Pepper, Vanilla and other categories.

Ken Goldman: No that’s helpful. Thank you. And just a very quick follow-up, I wasn't quite sure I picked up on what you think the most important tactics may need to be to get momentum rolling in your China Consumer business to the extent you want. And maybe how quickly some of those actions can start to take effect.

Brendan Foley: On China, and just a little bit of context here, our food away from home business, which is included in Asia Pacific Consumer, it definitely will – we expect to see slower demand, especially sort of in the first half of the year. But we do expect overall China sales in 2024 to be comparable to 2023. But maybe for some more additional context, Mike and I spent a week in China in early January, just actually a few weeks ago just visiting our teams there and assessing dense conditions. And I would say, broadly, our outlook for the Chinese consumer does remain cautious. There's a number of indicators that kind of point to this. There's high unemployment with young adults, low consumer confidence. We see consumers with a reluctance to spend. And uniquely in our business, we tend to serve the smaller independent restaurants, particularly in Central China, and we see them losing traffic to larger chains and QSRs, because they're really driving either really strong value or they're winning on just even more store growth overall. And so we see this playing out in the retail category there, especially with the modern trade. Just to share a quick anecdote, as we were there, I took one afternoon just to walk around and actually I forgot the pack a tie, So I had to go buy a tie and go to an apartment store. What struck me was really a lot of movement in people outside than on the streets. And I want to go get a cup of coffee. It's kind of empty. Go to the department store, not spoke with anybody almost. And so there's just not really a lot of active spending. We see a lot of people out and about the mobilities there, and it's returned, but we're not seeing the spending. And I think it's broadly sort of an example of what we are observing as we were in the market there. Having said that though, like we do in other regions, we do have plans to really address the change in trends with the Chinese consumer. And we do expect our Flavor Solutions business to be a bit stronger this year just due to the QSR trends. But we do expect a gradual recovery in China, starting probably more in the second half of 2024. And the exact pace of growth will really be determined by how that macroeconomic parameter kind of plays out and consumer confidence plans over the next few quarters. But we really do continue to believe in the long-term growth trajectory of this market and are working to strengthen those plans as we go through 2024.

Ken Goldman: Thanks so much.

Operator: Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.

Alexia Howard: Good morning everyone.

Brendan Foley: Good morning.

Mike Smith: Good morning.

Alexia Howard: Okay. So your sales algorithm for 2024 is obviously below where it would normally be at minus 1% to plus 1%. Can you quantify how much of a headwind are these deliberate decisions to exit the DSD business, to divest canning, to exit low-margin business in Europe? We just want to get a sense for how much is you choosing to exit versus what the underlying numbers are?

Mike Smith: Hi, Alexia, yes, it's around 1% for Q1, but then it really Peters out the rest of the year. So very small the rest of the year. But 1% for Q1 as we lapped the decisions we made last year.

Alexia Howard: Got it. Okay. And then the market share trends in U.S. measured channels are obviously what everybody seems to have their eye on right now. Do you have a view, given your price gap management and the marketing spending investments, the innovation pickup, when we might start to see that improve sequentially and when we might even start to see that turn positive again? Just wondering how long it's going to take to start to see those benefits in the share line.

Brendan Foley: Well, Alexia, thanks for the question. We never really project exactly what to expect and share, because there's just a lot of dynamics that might happen at the shelf. But I would point to how we're talking about volume and our outlook on volume as we think about the first half, the second half and as we expect to kind of grow volume in the back half of the year. That certainly will have an influence on what we see play out in share performance. But we tend not to sort of specifically tell you. I don't think that there is a specific quarter I can tell you when that's going to happen.

Alexia Howard: Okay. Thank you. I’ll pass it on.

Operator: Thank you. Our next question comes from the line of Max Gumport with BNP Paribas (OTC:BNPQY). Please proceed with your question.

Max Gumport: Hi, thanks for the question. With regard to cadence on the top line, it sounds like you've got volume trends that could improve as you go through the year with even growth in the second half. But then you've got the impact of last year's pricing actions which will wane as we go through the year. Would you expect those two factors to roughly offset each other, such that organic net sales growth is relatively consistent through the year? Or is there any net sales cadence we should be keeping in mind? Thanks.

Mike Smith: I mean the pricing, Max, is really focused on the first half a bit more in the first quarter based on the timing of our pricing. I mean, the volume growth is sequential across both segments. And as you know, based on our fourth quarter performance, Flavor Solutions is exiting the year a little better trajectory than -- or at least based than Consumer. So as you model those things, you think about sequential improvement to get to that zero to negative two volume growth kind of the first half, second half story. And then pricing is really heavily weighted to the first half, primarily the first quarter.

Max Gumport: Thanks. And then as a follow-up, you've characterized your outlook as embedding a more cautious view regarding 2024, a few times now. It sounds like much of that conservatism is around your underlying assumptions on volume. You talked about the value-seeking behavior in the U.S. and flat sales growth in China. But I was hoping you could dive a bit deeper into some of those more cautious use you're taking and also they're impacting your gross margin commentary as well? Thank you.

Brendan Foley: Well, good morning, Max, I'll maybe kick it off with some context around your question on sales and consumption and sort of the state of the consumer, and I'll pass it over to Mike for commentary on -- I think you had a question there with regard to margin. But I think we are taking a cautious view with regard to where the consumer is right now. And that's really informed by what we saw in Q4. We just saw a little bit more shifting, particularly as you think about how the quarter played out and if you think about consumption trends, we saw consumers really pulled back in September and October, and then really wait until right before the holidays to really make a lot of their purchases. And we even see -- saw similar indications leading up to Christmas. So, what's underneath that, I think, is people were certainly holding off there, making a lot more trips to the store, buying a lot fewer items and units. And maybe even smaller units actually started to come true, I think, from a consumer trend standpoint. And I think we just have to acknowledge that this is a little bit different than what we saw in the summer. It was a little bit more pronounced. Certainly, it affected our trends as we kind of been really clear about. And so it's prudent for us to just take a cautious view where the consumer is going to be going here in early 2024. And so we felt like it was best to recognize that in our outlook, particularly as we think about the first half of the year. But we're also going to be putting in more investment in the business, more A&P. So we expect also to be able to meet the consumer where they are right now and really try to focus on our game plan, which is to drive volume growth. Mike, do you want to add...

Brendan Foley: Yes. Would you mind repeating the margin question, I didn't quite get that.

Max Gumport: I was wondering if the conservatism that you discussed that really is just focused on the commentary you just discussed on volumes or if it applies to gross margins as well, that there's some -- more cautious outlook embedded in the gross margin guidance as well?

Brendan Foley: Yes. I mean we're confident in our CCI and GOE programs. I mean we've baked -- low single-digit inflation environment, like I said before, which we have good line of sight generally for the rest of the year, gives us more confidence there. First quarter is going to be our highest cost increase. And we see it petering down after that and our pricing is going to be the highest in the first quarter, too. Generally, I think what I'd say, if you think about last year with our GOE programs, we met our targets. Actually, we exceeded a bit our external targets. We were a bit prudent because -- but we met our internal target. So I would say being prudent is the word of the day. And love to over-deliver if we could. But we also realized in this environment, making investments on price gap management and A&P is really important. So we'll assess that as the year goes on.

Max Gumport: Great. Thanks very much.

Operator: Thank you. Our next question comes from the line of Steve Powers with Deutsche Bank (ETR:DBKGn). Please proceed with your question.

Steve Powers: Hi. Thanks very much.

Brendan Foley: Good morning Steve.

Steve Powers: So -- good morning. So it sounds like at the enterprise level, pretty minimal pricing in the back half. I think that implies, as I listened to the commentary and kind of do the math and think about the price gap management, I think that implies negative pricing in the Consumer business at least in the U.S. in the back half. I wonder if you can talk about that, how deep those kind of above-the-line investments may need to be or how you're thinking about that. And whether there's a risk that at the enterprise level pricing actually, this negative, as we flow through the year in pursuit of this volume recovery.

Mike Smith: Yes, Steve, it's Mike. I'll take that. And if Brendan has any comments, he'll layer then in. I mean we talk about pricing for the full year being around 1%, and that includes our price gap management, too. So don't miss that point. And as you think about the first quarter, as I said before, that's the majority of the lapping of last year's pricing. First quarter, first half, that's where a lot of the price activities come through, so less so in the second six. So I'd say that for the full year, we're comfortable with pricing at one, I don't know what math you're looking at to make it negative, but I don't see that, honestly, for the full year. And from a -- and really by segment, too, you've got to think about it too. I mean Flavor Solutions is going to be a bit higher than 1%. Consumer is going to be a little bit lower from a pricing perspective. So we're managing it very closely. And we're comfortable with the full year guidance.

Steve Powers: Okay. Okay. Fair enough. I guess in Flavor Solutions, can you help just maybe a little bit more perspective on what you're assuming both in terms of Flavor's customer volume trends and restaurant traffic, both in the U.S. and overseas, where you've seen some softness to late? Just want to a little perspective there on that segment.

Brendan Foley: Sure, Steve. Our growth momentum in Flavor Solutions was pretty exceptional, I think, throughout the year in 2023 with double-digit growth in the first three quarters and slight volume growth there. But even with the deceleration in the fourth quarter, we had pretty strong organic growth throughout 2023. And we do expect to continue to make really good progress there. Although, we’re not going to be in double digits, I think, in 2024, but still making really good progress. To give you maybe more of a regional consideration, as I think through the portfolio. In the Americas, we continue to drive strong branded foodservice volume. And in flavors, particularly in a number of the categories that we tend to have some strong performance and like performance nutrition and beverage, we see continued strong performance in volume. And I think that we would expect that to continue into 2024. Across the rest of the flavor product category, a lot of our growth was impacted by the softness of our customers' performance in the market with regard to units and volume. And we saw a little bit more drop than we would have expected, not inconsistent with our own consumer business. And so while we're disappointed in that softness, we still believe our results are pretty good in this area. I think that's the chance of that continuing to 2024, probably likely. In EMEA, as we mentioned in our third quarter call, that our customers there are, both for packaged goods and also quick serve restaurants, are experiencing softness in their volumes within their business, too. And we anticipated that in the fourth quarter. However, there's even maybe a little bit more than what we expected. So almost like a similar theme to what I said about the U.S. And so we expect some softness related there as we enter in Q1. But we're optimistic, again, that we'll continue to sort of improve every quarter as we go through 2024. And then in Asia Pacific, our growth that was impacted by slower than expected restaurant traffic. Some of that really had to do with just unrelated matters, but some boycotts issues that we're seeing in Southeast Asia. But we saw some nice performance in China, so I would expect that to continue in 2024 and some trends. So that's just some context around Flavor Solutions.

Steve Powers: Okay. Thank you very much. I appreciate it. I’ll pass it on. Thank you.

Brendan Foley: Okay.

Operator: Thank you. Our next question comes from the line of Adam Samuelson with Goldman Sachs (NYSE:GS). Please proceed with your question.

Adam Samuelson: Yes. Thank you. Good morning everyone.

Brendan Foley: Good morning.

Adam Samuelson: Good morning. I wanted to come back to the consumer segment and maybe at a higher level. As we think about where the business and the specific categories are today versus where they were pre-COVID. Obviously, there's enough number of consumption and occasion changes in terms -- and distribution changes with inflation through the pandemic. But where are we today in your business and your key categories, as you think about price elasticity, as you think about price gaps and where there actually has been a lasting consumption change versus consumer behavior pre-pandemic.

Brendan Foley: Well, with so much has changed since 2019, I think that -- if I think about the entirety of all the different levers and variables that you were talking about, whether it's price elasticity or volume and where the consumer is, there's been reasonably enough significant change that. As we take a look at our categories, we're taking a look at in terms of how they're performing today and where we need to go in order to drive volume growth. And as we said earlier, that's a component of increased A&P. A lot of that advertising focused on talking about value. Parts of our portfolio, we know that price gap management can have a really effective impact on turning around unit volume trends. And so I think that's an indication of where the consumer is right now. If you look at unit volume performance, either in our business or probably the category, pricing has had an impact, and we have to acknowledge that. Having said that, though, if I compare our business organically, and product mix, compared to 2019, our total organic volume is about the same as 2019. We haven't really lost significant volume or on product mix since pre-pandemic. And so I think that's one sort of consideration to have is, while there's been a lot of change in many ups and downs, I think, if you think about all these macro dynamic impacts we've been going through, we find ourselves in a similar volume position as we were in 2019. I don't -- I think I might have provided the context that you're looking for.

Adam Samuelson: Okay. No, that's helpful. And then, as we think about Flavor Solutions moving forward, just how do you think about -- you see the competitive position of the portfolio today, what you're seeing from your customers, the categories you're in and the competitive set, do you feel like you have the breadth of portfolio? Do you think that the categories that are growing with your customers or you're properly positioned to participate there? Or do you think that, as you look at kind of the -- your peers, that there's room to narrow the growth gap?

Brendan Foley: Well, as I think about our competitive posture in Flavor Solutions, I feel really good about it. It starts with having great capabilities in technology and a great team. And I think we do have a differentiated approach towards driving growth, particularly in flavors and seasonings in that part of our business. From a technology standpoint, we continue to win and sort of there's -- a lot of categories that we operate in there that we're targeting because they're positive and high growth. And we also tend to get a good mix of large customers and moderately in small-sized customers who tend to be characterized by much even higher growth. As we think about that as a portfolio mix of customers, we're seeing a lot of strength coming from that. And I would just point to our Boeing (NYSE:BA) trends throughout '23. And as we think about '24 to be an indication of how we think we're performing relative to the market there overall. And so those are some indications. Now, the other one on top of that would be heat. And we continue to see growth through heat. We continue to see that as a as the part of that portfolio, if you will, it tends to grow at an even higher rate just due to where consumers are. And we talked a lot about heat extensively in terms of how popular it is. And so that's another reason to believe that we feel like we're competitively poised in this part of our business. It's an exciting part of our business. It's an exciting part of our business. It's one that's receiving a lot of increased investment, too, as we think about building capacity, technology and really growing to global scale.

Adam Samuelson: Okay. I appreciate the color all. I will pass it on. Thanks.

Operator: Thank you. Our next question comes from the line of Matt Smith with Stifel. Please proceed with your questions.

Matt Smith: Hi. Good morning. Thank you for taking my question. I wanted to dive in a little bit on the guidance. If we look at it from a high level, it includes roughly 80 basis points or so of operating margin expansion. Can you talk about the expansions for each business as we look at fiscal 2024? Is Flavor Solutions expected to have an outsized contribution again as margin continues to recover there? And can the margin expand in the Consumer business, even as you step up investments to manage price gaps and absolute price points?

Mike Smith: Hi Matt, its Mike. I mean they're not materially different between segments to be honest. So the 50 to 100 basis points at the gross margin line and approximately 80 at the OP margin line. To your point, there are some price gap management items within the Consumer business, but there's also portfolio optimization, the GOE and CCI numbers which hit both segments. So I would say not materially different.

Matt Smith: Thank you for that. And a follow-up on the price gaps and absolute price points that you're talking about managing. One thing we're seeing in the U.S. measured channel data is that the share losses McCormick is seeing in spices and seasonings, only about 1/4 of that is going to private label. Can you talk about the branded environment? Are you seeing a pickup in competitive pressure there? Or is this really a product of price gaps that you believe you can manage to?

Brendan Foley: Largely, I think it's a product of price gaps that we can manage to. But I think your observations would align with ours in that it isn't strictly an issue regarding private label or other branded competition. I think it's really an attractive category that has always received new competitors and new entrants. And so we look broadly when we think about competition in that part of our portfolio, as being -- and at the shelf is both watching those gaps versus private label and also branded competitors.

Matt Smith: Thank you. I will pass it on.

Operator: Thank you. Our next question comes from the line of Robert Moskow with TD Cowen. Please proceed with your question.

Robert Moskow: Hi. Just a couple of follow-up questions hi there Brendan and Mike.

Brendan Foley: Good morning Rob. Hello.

Robert Moskow: Yes. In the past, you used to give a global flavor category growth rate, and I remember it being around 4% to 6%. Do you still keep track of that globally? And do you know where it is right now? And just -- and then I have a follow-up.

Brendan Foley: We do. I mean we look at that annually. And it's part of our strategic planning process. And so yes, we do spend time making sure we understand how that's performing. But I think your 5% to 7%, I think, is -- or actually you said 4% to 6%, but I would tell you it's generally around those same numbers. We tend to think about it is 5% to 7% at a global level.

Robert Moskow: Okay. So the global demand for flavor really hasn't changed. It's just that -- but your top line guide is around zero. So is the message here today that nothing's really changed in the consumer demand for flavor? Because it sounds like you're also saying there's a lot of trading down going on or cautious consumer spending, so I thought that would mean that the category is a little bit weaker, too.

Brendan Foley: No, I would urge you not to take away that as an indication that the category is weaker. This is still a very attractive category. Also appreciate that the category at the global level has also gone through a lot of inflation in pricing and similar factors, but we still see this as a very attractive category for the total company. And so that is not the view that we take, particularly with the data that we look at. And so I think maybe that got at the heart of your question.

Robert Moskow: Yes, certainly. And then the follow-up is, you said that you shipped 75% of your new packaging to retailers so far. But do you have any way of quantifying what percent of the ACV has implemented your resets? I thought some of it would happen in 2023. It sounds like a lot will happen in mid-2024. But are you quantifying that way?

Brendan Foley: It's harder to quantify because it's – we know how much we're shipping out in terms of our total portfolio that's getting this new package. And so as I said, that number is at 75%. And that, we feel that's – we're pretty accurate about that. But now the reflection on shelf, as all this inventory is flowing in on shelf, that's happening on a lag to that 75% number. We expect it to just continue to increase through the first half of the year. I think through the first half of the year, we should largely be caught up to that number to specific standpoint, too. If you walk into a store today, you're going to see on the shelf some in the old package, some of the new package, and that's just maybe an indication of how you might think about flow-through overall. However, I will tell you that as we do look at specific accounts and locations where we know we're seeing a lot of that flow through already have occurred, we are seeing a nice pickup in velocity as we would have expected to be the case, because we've seen this package perform in EMEA in a similar way. And it really does deliver on the SKUs for freshness for consumers and really kind of takes it up a notch in terms of the overall benefit and offering that we're providing consumers. So we feel pretty good about that. What you'll also hear us talk about is we're going to start to move other parts of the product line into this package, too, beginning in the back half of 2024. So we're not done. But this part of our line that we've been speaking about since mid-last year is still in the process of flowing through on shelf.

Mike Smith: That gives us belief in the sequential building of volume during 2024 into the second half, as you alluded to.

Robert Moskow: Right. I'm sorry, one last question. I appreciate the plan to increase brand building this year. Can you tell us how much it increased in 2023 when it was all said and done?

Brendan Foley: I think we were, Rob, if I'm not mistaken…

Mike Smith: 3% to 4% range, yes.

Brendan Foley: 3% to 4% range for 2023. Know that underneath that, we tend to see working media grow a lot faster than that, because we're also offsetting it with other productivity and taking out more nonworking investments. But 2023 is in that range. Now 2024 though, is in the double-digit range. And we feel really good about that where we're putting that investment.

Robert Moskow: Okay. Thank you.

Operator: Thank you. Our final question this morning comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Rob Dickerson: Great. Thanks so much. Maybe if we could just touch quickly on kind of Q1, because I think kind of throughout the call, I've heard you say maybe slightly higher cost relative to the full year in Q1 and then also feel like A&C is a little front half loaded. And then I think maybe volumes, given -- hopefully, they improved of the year, would imply that there be a little bit more pressure in Q1, especially given the divestment. So, just curious if there are certain moving pieces to Q1 that you would clearly like us to consider. So that's the first question.

Mike Smith: Yes, that's great. Let me take that one, Rob, and maybe summarize it all for you. And as you've pointed out, the sequential improvement in volume we see from the fourth quarter, also considered, Consumer starting at a slightly lower place in flavor solutions. So as you model that, build that into your model and build throughout the year. Pricing actions are primarily first -- the lapping of that primarily first half related. Maybe concentrated, I'd say, in the first quarter. However, cost in the first quarter, we're still seeing high single-digit inflation. It does go down to averaging of low single-digit inflation for the year, but there is a spike -- not a spike, but the highest level will be in the first quarter at high single-digit inflation. We get a bit of favorable product mix in the first quarter due to some of the initiatives we're talking about. But we're also seeing some of the negatives from an investment in price gap initiatives in Q1 primarily. So, as we think about pricing, a bit of that will be offset within the price gap management activities. GOE had a little bit of favorability to the wrap from last year in the first half, a bit in the first quarter too. And then as you mentioned, brand marketing up double digits in the first quarter is something that we're really driving toward. And not to forget tax, sometimes we do with tax. It's 22% for the year, but we see a higher tax rate in the first quarter and getting better as the year goes on. And don't forget, unfavorable FX throughout the whole year of about 1%.

Rob Dickerson: Okay. Perfect. That's very helpful. And then quickly, just on Flavor Solutions. Clearly, if we look back a few years ago, we speak to the margin recovery now kind of coming out of the post-pandemic cost inflation environment, really kind of the main driver of kind of your somewhat depressed margin now relative to history, still from Flavor Solutions, maybe a little less so. I mean, clearly, you're not optimize or maximize on consumer, but there is a little bit more pressure on Flavor Solutions. So, I'm just curious, I remember going back 15 years or so, right, and there was a strategy to increase that margin in Flavor Solutions that didn't happen, but then it actually really did happen. And now it's just not happening again. So I'm kind of curious, as you think longer term, right, kind of margin profile of McCormick, kind of given the initiatives you've been discussing even today, on improving that side of the business, what kind of does get you back there, right? I mean it's just volume and mix? Or it just seems like that recovery has maybe been a little bit slower? That's all.

Mike Smith: Hi Rob, it's Mike. I'll start and Brendan can add. You're right. We've been on a journey with Flavor Solutions. I can remember, it wasn't 15 years ago, but we were at a 6% OP margin. And we really, through focused cost initiatives, portfolio management, we're able to get that to over 14% pre-COVID, pre-pandemic. And we had aspirations for higher because our peers in the flavor industry are higher than that. And we still do aspire to those higher numbers. Obviously, COVID, the pricing costing relationship, that took over 300 basis points as we priced to cost. We did margin up that took -- that's over a 300 basis point impact on our margins there. So we've said we're going to build that back overtime through initiatives like CCI and things like that. We've had early success. I mean with the pricing initiatives we had last year in 2023, we took our operating margin from 8% in 2022 to 10% and 2023, granted still below where we were, but we see positive movement this year as we think about our total margin. I said both segments will see positive operating margin improvement. And we're in the process -- for Flavor Solutions, it's a pretty large number. As we are transitioning our large U.K. manufacturing facility, 2024 and 2025, you'll see some favorable tailwinds there which will help Flavor Solutions' margin. But to your point, and Brendan talked about, the focus on those great growing categories in the flavor side of the business, those are generally higher margin, they're stickier. That is our strategy that will help us drive our margins going forward.

Brendan Foley: The only thing I'll add on top of what Mike just said with regard to just that constant focus against improving margin. We're also -- as we continue to shift customers to higher-margin product lines, more insulated technology, et cetera, it allows us to continue to grow margin too. But I think Mike pretty much nailed it there. And that's our outlook on it. It's still pretty positive. And it's just going to take us a little bit longer, as we've been calling out really ever since, I think, last year.

Rob Dickerson: Super. Great. Thank you, guys.

Operator: Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Ms. Freiha, for any final comments.

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

Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

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