McCormick & Company, Incorporated
Q4 2020 Earnings Call Transcript

Published: 28 Jan 2021

[Kasey Jenkins:]

Good morning. This is Kasey Jenkins, Vice President of McCormick Investor Relations. Thank you for joining today’s Fourth Quarter Earnings Call. To accompany in this call, we’ve posted a set of slides at ir.mccormick.com. Currently, all participants are in a listen-only mode. Following our remarks, we will begin a question-and-answer session. We’ll begin with remarks from Lawrence Kurzius, Chairman, President, and CEO; and Mike Smith, Executive Vice President and CFO. During our remarks, we will refer to certain non-GAAP financial measures. These include information in constant currency, as well as adjusted gross margin, adjusted operating income, adjusted income tax rate, adjusted earnings per share and adjusted leverage ratio that exclude the impact of special charges, transaction and integration expenses related to the acquisitions of Cholula and FONA, and for 2019, the net non-recurring benefit associated with the U.S. Tax Act. Reconciliations to the GAAP results are included in this morning’s press release and slides. As a reminder, we completed a 2-for-1 stock split at the end of our fiscal 2020. As a result, all per share amounts mentioned today will be also included in our 10-K, reflects the virtual access presentation of those amounts on a split adjusted basis. In our comments, certain percentages are rounded. Please refer to our presentation for complete information.

[Lawrence Kurzius:]

Thank you, Kasey. Good morning, everyone. Thanks for joining us. Starting on Slide 4. Our fourth quarter results completed a year of strong financial performance. We delivered strong results in 2020, despite great disruption proving the strength of our business model, the value of our product, our capabilities as a company, as well as the successful execution of our strategies. I am incredibly proud of the way McCormick has performed in this unprecedented operating environment. We drove outstanding underlying operating performance while protecting our employees and recognizing their exceptional performance, making important investments in our supply chain, and brand building to fuel future growth and supporting our communities through relief efforts. We’re also excited about the recent acquisitions of Cholula and FONA, two fantastic businesses that will continue to support differentiated growth and performance, positioning McCormick for success in 2021 and beyond. As seen on Slide 5, we have a broad and advantage global flavor portfolio with compelling offerings for every retail and customer strategy across all channels, the breadth and reach of our portfolio across segments, geographies, channels, customers, and product offerings creates a balanced and diversified portfolio to drive consistency in our performance during volatile time as evidenced by our fourth quarter and fiscal year results. The sustained shift in consumer behavior to cooking and eating more at home, our at-home consumption drove substantial increases in our Consumer segment demand as well as increases with our packaged goods company customers in our Flavor Solutions segment. On the other hand, we experienced declines in demand from our restaurant and other food service customers in the away-from-home products in our portfolio. The impact of this shift to more at-home consumption has varied by region due to differing levels of away-from-home consumption in each, as well as the pace of each region’s COVID-19 recovery. Taken together, these impacts continue to demonstrate the strength and diversity of our offering.

[Mike Smith:]

Thanks, Lawrence, and good morning, everyone. I will now provide some additional comments on our fourth quarter performance and full-year results as well as detailed on our 2021 outlook. Starting on Slide 19, during the fourth quarter, sales rose 4% in constant currency. Sales growth was driven by higher volume and mix in our Consumer segment with volume index in our Flavor Solutions segment comparable to last year, pricing to partially offset cost inflation also contributed favorably to both segments. The Consumer segment sales grew 5% in constant currency, led by the Americas and EMEA regions. The sustained shift to at-home consumption and cooking more at home as well as consumers adding flavor at home to their restaurant carryout and delivery meals continues to drive increased demand for our consumer products, resulting in higher volume and mix in these regions. On Slide 20, consumer segment sales in the Americas increased 6% in constant currency versus the fourth quarter of 2019, driven by higher volume and product mix across many brands, including Simply Asia, Thai Kitchen, Frank's RedHot, French’s, Lawry's, Zatarain's, Gourmet Garden and Stubb's to name a few. Partially offsetting these increases with volume declines in McCormick branded spices and seasonings, and recipe mixes as well as private label products due to capacity constraints. In EMEA, constant currency consumer sales grew 10% from a year ago with strong growth in all countries across the region. The most significant volume and mix growth drivers for our Schwartz and Ducros branded spices and seasonings, our Vahine homemade dessert products and our Kamis branded products in Poland. Consumer sales in the Asia Pacific region declined to 10% in constant currency, driven by the lower branded food service sales, and a shift to a later Chinese New Year as Lawrence mentioned. Turning to our Flavor Solutions segment on Slide 23, we grew fourth quarter constant currency sales, 3% with growth in all three regions. In the Americas, Flavor Solutions constant currency sales grew 2% driven by pricing to cover costs increases, also partially by lower volume and product mix. Volume and product mix declined due to a reduction in demand from branded food service and other restaurant customers. Partially offsetting this decline was higher demand from package group companies with particular strength in snacks seasoning. In EMEA, constant currency sales increased 5% attributable to pricing to cover cost increases as well as higher volume and product mix. Volume and product mix increase driven by sales growth with packaged food company with strengthened snack seasonings partially offset by lower sales to branded food service and other restaurant customers. In the Asia Pacific region, Flavor Solutions sales rose 7% in constant currency, driven by higher sales to QSRs in China and Australia, partially due to our customers’ limited time offers and promotional activities. As seen on Slide 27, adjusted operating income, which excludes transaction costs related to the Cholula and FONA acquisitions, and special charges, declined 4% in the fourth quarter versus the year-ago period, with minimal impact from currency. Adjusted operating income declined in the Consumer segment by 2% to $221 million or in constant currency, 3%. In the Flavor Solutions segment, adjusted operating income declined 9% to $70 million or 8% in constant currency. Growth from higher sales and CCI-led cost savings were more than offset in both segments by several drivers. In the Consumer segment, an 18% increase in brand marketing from the fourth quarter of last year, unfavorably impacted adjusted operating income growth and in the Flavor Solutions segment, unfavorable product mix due to the decline of branded food service sales contributed to its adjusted operating income decline. Both segments were also unfavorably impacted by COVID-19 related costs and higher employee benefit expenses, including incentive compensation. As seen on Slide 28, gross profit margin in the fourth quarter was comparable to the year-ago period as we have planned. Adjusted operating margin declined 180 basis points compared to the fourth quarter of last year, driven by the net impact of the factors I mentioned a moment ago, as well as higher distribution and transportation costs. For the fiscal year, gross margin expanded 100 basis points driven by CCI-led cost savings and favorable product mix, resulting from the sales shift between segments, which more than offset COVID-19 related costs. Adjusted operating income increased 5% in constant currency and adjusted operating margin was comparable to last year. The Consumer segment grew adjusted operating income 16% at constant currency, primarily due to higher sales and CCI-led cost savings, partially offset by 7% increase in brand marketing, higher incentive compensation expense, and COVID-19 related costs. In constant currency, the Flavor Solutions segment adjusted operating income declined 20%, driven by lower sales, unfavorable product mix and manufacturing costs, COVID-19 related costs and higher incentive compensation expense with a partial offset from CCI-led cost savings. Turning to income taxes on Slide 29, our fourth quarter adjusted effective tax rate of 22.9% compared to 24.7% in the year-ago period was favorably impacted by discrete items. For the full year, our adjusted tax rate was 19.9% as compared to 19.5% in 2019. Income from unconsolidated operations declined 9% in the fourth quarter of 2020 and the full year was comparable to 2019. At the bottom line, as shown on Slide 31, fourth quarter 2020 adjusted earnings per share was $0.79 as compared to $0.81 for the year-ago period. The decline was primarily driven by our lower adjusted operating income, partially offset by the lower interest expense and a lower adjusted income tax rate. For the year, our 5% constant currency increase in adjusted operating income combined with a lower interest expense drove a 6% increase in adjusted earnings per share to $2.83 for fiscal 2020, including the impact of unfavorable currency exchange rates versus last year. On Slide 32, we summarized highlights for cash flow and the year-end balance sheet. Our cash flow from operations ended the year at a record high of more than $1 billion. A 10% increase compared to $947 million in 2019, primarily driven by higher net income. We finished the fiscal year with our cash conversion cycle down 9% versus our 2019 fiscal year end as we continue to execute against programs to achieve working capital reductions. We’ve returned $330 million of this cash to our shareholders through dividends and we are very pleased that we fully paid off the term loans related to the acquisition of the Frank’s RedHot and French’s brands. Following the acquisitions of Cholula and FONA, we have a pre-synergy pro forma net debt to adjusted EBITDA ratio of approximately 3.9 times and we expect to delever to approximately three times by the end of fiscal 2022. Based on our demonstrated track record of debt pay down and our anticipated strong cash flow generation, we are confident that we will deliver on our plan. Our capital expenditures were $225 million in 2020 and included growth investments and optimization projects across the globe, including our ERP business transformation investment, and beginning of supply chain global infrastructure investments that Lawrence mentioned earlier. In 2021, we expect our capital expenditures to be higher than 2020 as we continue to spend all the initiatives we have in progress, as well as support our investments to fuel future growth. We expect 2021 to be another year of strong cash flow driven by profit and working capital initiatives. And our priority is to continue to have a balanced use of cash, funding investments to drive growth, returning a significant portion to our shareholders through dividends to paying down debt. Now, I would like to discuss our 2021 financial outlook on Slides 33 and 34 with a brief update on our ERP replacement program first. Starting with our ERP replacement program, we remain committed to this business transformation initiative and have recently completed our rephasing of the program. We are now projecting the total cost of our ERP investment to range between $350 million to $400 million from 2019 through the anticipated completion of our global rollout in fiscal 2023 with an estimated split of 50% capital spending and 50% of operating expenses. As such, the total operating expense impacts for the program to be incurred from 2019 through 2023 is estimated to be between $175 million and $200 million, slightly lower than our previous estimates. In fiscal 2021, we are projecting our total operating expense to be approximately $50 million, which is an incremental $30 million over fiscal 2020. And at this time, we are not anticipating any significant go lives in 2021. By the end of 2021, we will spend approximately $90 million of the total program operating expense. We are excited to continue moving forward with this some investment to enable us to further transform our ways of working and realize the benefits of a scalable growth platform. Moving to our 2021 outlook with our broad and advantage flavor portfolio, our robust operating momentum and effective growth strategies, we are well positioned for another year of differentiated growth and performance. In our 2021 outlook, we are projecting top line and earnings growth from our strong base business and acquisition contribution, which with earnings growth, partially offset by the incremental COVID-19 costs and the ERP investment, as well as the projected effective tax rate. We also expect that there will be an estimated two percentage point favorable impact of currency rates on sales, adjusted operating income and adjusted earnings per share. At the top line, we expect to grow the constant currency sales 5% to 7%, including the incremental impact of the Cholula and FONA acquisition, which is projected to be in the range of 3.5% to 4%. We anticipate our organic growth will be primarily led by higher volume and product mix driven by our category management, brand marketing, new products and customer engagement growth plans. As Lawrence mentioned earlier, we expect sales growth to vary by region and quarter in 2021, given 2020’s level of demand volatility and the pace of the COVID-19 recovery. But importantly, we expect we will drive overall organic sales growth in both of our segments. Our 2021 adjusted gross profit margin is projected to be comparable to 25 basis points higher than 2020, which reflects margin accretion from the Cholula and FONA acquisitions, as well as unfavorable sales mix between segments and COVID-19 costs. We estimate COVID-19 costs to be approximately $60 million in 2021, that’s compared to $50 million in 2020 and weighted to the first half of the year. Fiscal 2021’s COVID-19 costs are largely driven by third-party manufacturing costs, and of course, could vary based on demand fluctuations. Our adjusted operating income growth rate reflects expected strong underlying performance from our base business and acquisitions, which is projected to be 10% to 12% constant currency growth, partially offset by a 1% reduction from increased COVID-19 costs and a 3% reduction from the estimated incremental ERP investment. This results in a total projected adjusted operating income growth rate of 6% to 8% in constant currency. This projection includes low single-digit inflationary pressure and our CCI-led cost savings target of approximately $110 million. It also includes an estimated low single-digit increase in brand marketing investments, which will be heavier in the first half of the year. Our 2021 adjusted effective income tax rate is projected to be approximately 23% based upon our estimated mix of earnings by geography as well as factoring in a low level of discrete impacts. This outlook versus our 2020 adjusted effective tax rate is expected to be a headwind to our 2021 adjusted earnings per share growth of approximately 4%. Our 2021 adjusted earnings per share expectations reflect strong base business and acquisition performance growth of 9% to 11% in constant currency, partially offset by the impact that I just mentioned related to COVID-19 costs or incremental ERP investment and the tax headwinds. This results in an increase of 3% to 5% or 1% to 3% in constant currency. Our guidance range for adjusted earnings per share in 2021 is $2.91 to $2.96 compared to $2.83 of adjusted earnings per share in 2020. Based on the expected timing of some expense items, such as COVID-19 costs and brand marketing investments, as well as the low tax rate in the first quarter of last year, we expect our earnings growth to be weighted to the second half of the year. We have a strong start to the year, but recognized we are lapping in a very strong second quarter of 2020. In summary, we are projecting a strong underlying base business performance and growth from acquisitions in our 2021 outlook with earnings growth partially offset by incremental COVID-19 costs in the ERP investment, as well as a higher projected effective tax rate. I’d like to now turn it back to Lawrence for some additional remarks before we move to your questions.

[Lawrence Kurzius:]

Thank you, Mike. As Mike has shared our financial results and outlook in more detail, I would like to recap the key takeaways as seen on Slide 35. We delivered strong results in 2020, despite great disruption proving the strength of our business model, the value of our product and our capabilities as a company, as well as the successful execution of our strategies. We have a strong foundation. We’re confident in the sustainability of at-home consumption, ends with the investments we’ve made to strengthen our supply chain resiliency, we are even better positioned to capitalize on accelerating consumer trends. We’re excited about the recent acquisitions of Cholula and FONA, which reinforce our global flavor leadership and accelerate our condiments flavors growth platform. We’re confident these investments further position us for continued success. Our fundamentals, momentum and growth outlook are stronger than ever. Our 2021 outlook reflect another year of differentiated growth and performance while also making investments for the future. We’re confident we will emerge stronger from these uncertain times. Now, let’s turn to your questions.

[Operator:]

Thank you. And our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your questions.

[Andrew Lazar:]

Good morning, everybody. Thanks for the question.

[Lawrence Kurzius:]

Hey, good morning, Andrew.

[Andrew Lazar:]

Hi there, Lawrence. Thank you for the additional color in consumer, Americas around some of the capacity and service level dynamics that you were facing over the last couple of months or quarters. I guess, first off, I’m curious if those dynamics are in such a place now, where we should expect sort of shipments to start to outpace consumption, sort of in 1Q and 2Q, or if you expect still maybe, somewhat of a lag effect, because you’re still building the capacity and the service levels to where you want them to be. because I’m trying to just dimensionalize that sort of first quarter aspect. But more importantly, how to dimensionalize maybe, how big of a benefit to 2001 organic growth, just a rebuilding of inventory levels to the extent that needs to happen can be to organic growth? I’m going to just have a quick follow-up. Thank you.

[Lawrence Kurzius:]

Sure. Well, Andrew, we’ve been ramping up production as we’ve gone through the fourth quarter – certainly, through the third and fourth quarter as we talked about on previous calls and anybody that walks into the store can see that the shelves are pretty poor condition. There are a lot of holes in the shelf, particularly in spices and seasonings. The recipe mix is that, reflects the fact that we’ve had our secondary skews on suspension to protect the key holiday items and it’s really been those two categories that had the greatest impact that our other product categories have had a pretty good service through the third and fourth quarter and into this year. So that’s been our focus area. We have, starting at the beginning of January, begun reinstating those secondary items. And so they are coming back on, as we said in our prepared remarks about two thirds of them, have been reinstated and remainder coming in the coming weeks. So, I think we’ll see the shelves starting to get a lot better gradually over the next over the next few weeks. we still are allocating products. There’s a big bow wave of demand ahead of us as our customers want to rebuild their inventory. And frankly, everyone forgets about consumer pantries, being a bit fair during this time as well. So, we do expect there to be a benefit to this fiscal year and that we’re really thinking about it in terms of the first half in terms of the rebuild of tumor inventory. I also want to emphasize that this is an Americas problem. Our manufacturing has really been able to keep up with the demand in the rest of the world. Just the scale of our consumer business and the Americas is so great. Particularly, in the fourth quarter of the year, even in normal circumstances, we have to pre-build inventory to supply that a huge demand that comes through in those categories in the fourth quarter of the year; and coming into the fourth quarter, very much hand to mouth already due to the sustained demand. That’s why we were signaling that we were going to have surface issues through the fourth quarter. We knew that to be the case. as we’ll say, just commenting on current conditions and I don’t want to get too much into 2021, we’re almost two thirds of the way through our first quarter and the service levels that we are shipping to our customers while we’re always still allocating products. It’s the best service that we’ve had since the spring.

[Andrew Lazar:]

Got it. Thank you for that. And then a super quick follow-up, I found your comments very interesting around the trends you’re seeing in Australia, as restrictions ease, consumption of at-home items still remains elevated at this point. And some other companies have said similar things. I’ve also heard similar things be discussed around China for some companies as well, various restrictions of ease and I may have missed it. Are you seeing that same dynamic in your China business as well?

[Mike Smith:]

Yes, we are, but it’s not quite as clean in China. Because in China, they factually reinstated some restrictions, that’s not the same as it was a year ago, where there was a government lockdown. but the government is encouraging people not to travel, is encouraging people to celebrate Chinese New Year at home. Generally, in China when the government gives encouragement to do something to do it. And so I think that right now, for Chinese New Year, I’m not sure we can draw a lot of conclusions around the consumer behavior. It’s not quite as clean as in Australia, where COVID seems to be under control, restrictions have been lifted, and consumers are still making the choice without that government encouragement to continue to cook at home. In 2021, Chinese New Year is – later in the first quarter, so it will – after that have done, we’ll have a better read on it. Yeah, I think so.

[Lawrence Kurzius:]

Andrew, there are a couple of other companies I’ve commented on it and I’ll just say it again. Our consumer research, both the syndicated information that we get in our own proprietary research says consumers are enjoying cooking more at home. Three out of four consumers say it relaxes them and reduces their stress, fully up poorer consumers say they actually tend to cook more at home after the pandemic, then they are even now and with the added uncertainty around the vaccine timing and the take-up of the vaccine and do a variance emerging, I think that there’s a lot of reasonably consumptions going to be elevated this year, at least for quite some time.

[Andrew Lazar:]

Great. Thanks very much.

[Operator:]

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

[Ken Goldman:]

Hi, thanks so much.

[Lawrence Kurzius:]

Hey, Ken.

[Ken Goldman:]

I wanted to ask – hey everybody. I think you’ve mentioned when you talked about the sales drivers – organic sales drivers for 2021, I think you mentioned volume and product mix, unless I missed it, I didn’t think I heard pricing. So, I’m curious, do you expect pricing to play any major role in your growth this year and as a corollary to that, how might you maybe, describe the willingness of your customers to kind of accept quite sites at this time?

[Lawrence Kurzius:]

Sure. Well, Ken, first of all, pricing is an ongoing discussion with customers. I don’t want to get too specific about pricing actions that haven’t been taken, because of customer and competitive reasons on the end. And so our comments on that are pretty limited right now. I’ll remind everybody on the call that 40% of our sales are the Flavor Solutions segment, and a great portion of that is based on a contractual relationship for this, a pass-through of pricing. I don’t think we have the same pressure on pricing as maybe, some other companies. Our outlook is for low single-digit inflation. We have a unique basket of commodities and input costs that are not an exact match to inflation or an exact match to our peers. We do use CCI as well. We are seeing cost inflations, freight is up, ocean freight in particular, is an emerging – current and emerging concern, but really, not prepared to talk about make too many specific comments about pricing right now. We do have some wrap from 2020 pricing actions and where we need to take pricing in 2021, we’re confident we can take it.

[Ken Goldman:]

Thank you for that. And then for my follow-up, you’re balancing a lot of things right now that some might consider outside, what might be the normal course of business, right? You’re undertaking an ERP implementation, or at least you’re starting to write, you’re integrating two acquisitions, you’re navigating through COVID. So, can you just help us think about how you and your team are maybe, balancing some of the balls in the air right now, or keeping them in the air and how you sort of allocate your time, your – to the day-to-day blocking and tackling of just selling core products. There’s a lot sort of going on right now with the company.

[Lawrence Kurzius:]

Well Ken, there is a lot going on, but I think that we can handle it. We have a strong ambition to grow. We’ve been choiceful about priorities. And so we suspended our business transformation in ERP activity last year in order to make sure that we could focus on dealing with the crisis and keeping people safe for quality and do all the right things for business continuity, and come out stronger, but that was a pause, not a suspension. We paused our activity and we think we’ve got the resources to ramp it back up. even during that pause, we spent some time re-scoping the aligning partners and we’ve actually come out of it with a stronger program and got a lot of data cleansing done that the folks, who’ve been through this before know that’s always an issue. And so we feel pretty good about our ability to handle that – handle the recovery of our business. And we really are actually quite thrilled about the two acquisitions that we made. We’ve added a great asset in each one of our segments. We think that this has been a great capital allocation decision and the integration of these are pretty straight forward, I think. Mike, do you want to comment on that?

[Mike Smith:]

Yes. I mean, the integration is growing very well. I mean, the Cholula obviously is more of a plug and play. It’s a lot of co-pack like we said. so that’s a pretty straightforward one and FONA has a great business and as I said before, it’s discrete teams focusing on them and helping integrate into our business. So, it’s not taking away from the base focus we need on the core business, if that’s kind of where you’re going at.

[Ken Goldman:]

Yes. I was just curious, but that’s a helpful answer. Thank you, gentlemen.

[Lawrence Kurzius:]

Thank you.

[Operator:]

The next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.

[Alexia Howard:]

Good morning, everyone.

[Lawrence Kurzius:]

Good morning, Alexia.

[Alexia Howard:]

Hi, there. So, my first question actually goes to e-commerce. I just wonder where you ended up for fiscal 2020 in terms of e-commerce as a percent of sales and has that slowed down at all in the later part of the year, I’m just wondering what the prognosis is in terms of growth on that side.

[Lawrence Kurzius:]

Well, we’ve had tremendous growth in e-commerce. As we went through the year, we’ve talked about this a couple of times and then told as everybody else and I know our own experiences anecdotally, are that many of us that shop on the e-commerce. if you take all three legs of e-commerce, as we think about it, CTC, pure-play and our click and collect type customer brick and mortar efforts, all of that was up well over 100% percent on a global scale. And while we don’t actually disclose the total percentage of our business, that is from e-commerce. On the consumer side, it’s less than 10%, but it’s up substantially from past years and continuing a long trend of shift by consumers to shopping with e-commerce.

[Alexia Howard:]

Right. And as my follow-up, as Ken mentioned, there’s an awful lot of uncertainty out there. We’re still living through these unprecedented times. If you think about your outlook for 2021, what do you think the biggest uncertainties off maybe, positively and negatively in terms of the risks in either direction? Thank you and I’ll pass it on.

[Lawrence Kurzius:]

Well, I think the biggest uncertainty is, I mean, it’s also the most obvious one, is the pace of recovery from the pandemic and durability of the consumer coming out of it. And the – and really, it’s more of the recovery of the food service side that we wonder about then the – whether consumers are going to continue to cook at home. I think there’s – I think that there’s a pretty broad range of possible outcomes with, again, vaccine take up two variants that might come up. So, those are some pretty – I’d say, that’s the biggest uncertainty factor out there. We’ll say, we’re managing through this now on a much more, I’d say, managed and operational basis rather than in a crisis mode. So, I think we’re very well prepared for the possible outcomes in the market. Do you want to add anything, Mike?

[Mike Smith:]

I mean, we’re prepared for any environment. We have broadened diversified portfolio, just like we showed last year to have that kind of sales growth and performance. We can manage any environment. And I think there’s two bars as point as we think there’s consumers trends will be sticky although people will go out more to eat as the vaccine becomes more global, but we think we’ve created some habits that markets go away.

[Alexia Howard:]

Wonderful. Thank you, I’ll pass it on.

[Operator:]

The next question is from the line of Robert Moskow with Credit Suisse. please proceed with your questions.

[Robert Moskow:]

Hi, thanks. Good morning.

[Lawrence Kurzius:]

Hey, good morning, Robert.

[Robert Moskow:]

Good morning. I wanted to know about the guidance for the first half of the year. I think you said the earnings growth is going to be back half weighted. but when I look at the first quarter coming up, you seem to have a very easy comparison to a year ago in the core operations, which were down in sales and down in EBIT. I think I and others have a pretty outsized first quarter expectation fundamentally, because of inventory reloading and I guess improving performance in Flavor Solutions as well. So, can you help us think about first quarter a little bit too, you mentioned the tax rate, but other than that, is it actually going to be a strong start in first quarter?

[Mike Smith:]

Hey, Rob. It’s Mike, I’ll take that one. I mean, it’s a great point. I mean, we did highlight the first half, second half story. within the first half, there are two stories also; obviously, it’s an easy comparison, especially from a consumer perspective in the first quarter. I think we’re off to a strong start this year, as you would suspect, as you can see in some of the consumption data in the U.S. primarily. We also know we’re laughing a really strong second quarter. and I think it’s something as you look at your modeling, you want to adjust to those that assumption. tax rate, we know is a really tough comparison in the first quarter compared to last year, which we’ve highlighted, but in the first half, as we’ve talked about, we’re going to have COVID costs, it will be across both quarters, primarily in the first half significant investment in A&P as we drive our brands, as we recover really in the first quarter or two, but in the second quarter also. But yes, and also for the second half, as you think about it, our COVID costs are high in the first half. But we began to get them out of the business in the second half or as a year ago that’s when we were really ramping up on things that were expensive relative to COVID. And so, we’ll have the unwinding of that as a bit of a tailwind in the second half of the year as well.

[Mike Smith:]

And you’ll see things like ERP costs built throughout the year. So it would be, again, first half, second half could it be kind of more weighted to the second half.

[Robert Moskow:]

Okay. And a follow-up I was surprised to see Flavor Solutions positive in fourth quarter. And you mentioned it’s really driven by CPG. Is there a way to breakout, how much growth you’re seeing in CPG right now, and how much of a decline you’re seeing in the other half of the Flavor Solutions business, which is more food service oriented. And would you expect that relationship to continue in 2021?

[Mike Smith:]

Yes, I think, I’ll answer that one, Lawrence can add in there. I mean, we’re seeing – we’re not going to give you percentages, because it really varies by region based on the split of our package versus restaurant. But in the Americas, we’ve seen very strong CPG performance, mid-to-high single-digits offset by similar ranges on the branded food service on the restaurant side. But it’s the mix of the business in regions, which give you that. But overall being positive, we were very thrilled with that. I know a lot of people were surprised by that even though consumer grew very strongly.

[Lawrence Kurzius:]

If I were to point to one thing, or we were – maybe our sales performance for the fourth quarter was different than our expectations it would be in this area of Flavor Solutions, it was bit stronger across the board that we would have thought we gave that U.S. guidance.

[Robert Moskow:]

Okay. All right, thanks.

[Lawrence Kurzius:]

Thank you.

[Operator:]

The next question is coming from the line of Faiza Alwy with Deustche Bank. Please proceed with your question.

[Faiza Alwy:]

Yes. Hi, good morning. So, first I just wanted to ask Lawrence, you’d made a comment early on about the pricing disconnect that we’re seeing in Nielsen. So it just – I was wondering if you could expand a little bit on that, maybe clarify. And what I’m really trying to get out is, I think Andrew had asked the question around the – if there’s any quantification of what the inventory reload might be in the first half, that would be really helpful.

[Lawrence Kurzius:]

Okay. Well, I think those are two different questions. But on pricing there are two things that are happening in Nielsen that are, that make up look like there’s more pricing perhaps than there actually is. The first is that there has been a bit of a channel shift as we’ve gone through the crisis where I’d say regular – I’d say regular grocery has been stronger than other channels. And it tends to carry a higher price point as a result of that comes through as pricing inflation in the Nielsen data that is really a kind of artificial and that was one of the things that that was pointing to. And then the other is there’s still a reduced level of promotional activity that is happening. And not just for us, but across the board that comes through as a focus of price increase in the Nielsen data. As far as the inventory build, we’ve not really quantified it, but it stands to reason that there’s going to be a substantial catch-up on trade stock as we shipped to – we’ve shipped under consumption now for three quarters. And I think you can expect that we will –as our American supply chain catches up that will – you’ll start to see shipping above consumption. That consumption is still very strong. I mentioned that, our production was up 40% in December for our U.S. consumer business. And then the market took all of that and there’s still a blasted through, it’s – but we talk about inventories, if it’s not back room warehouse stock, it’s still, if it’s restocking the shelf itself that that’s part of that. I think that that’s going to be a gradual process as we go through the first half of the year.

[Faiza Alwy:]

Okay. Understood. And then I was wondering if you could talk a little bit about how retailers are thinking about, you’d mentioned shelf realignment last year, you’d spend a significant amount of time talking about that at Cagney. And I know some of those efforts were paused. How should we think about the timing of that as we go into this year?

[Lawrence Kurzius:]

Well, we do have a reinvention of the spice aisle and it’s an important category management program that is good – it’s a, win-win, it’s great for the customers, and it’s great for us. Although we didn’t make as much progress on that last year as we would’ve hoped when we were talking about it at Cagney. We were able to impact a little over 5,000 stores last year. So, we did continue that that effort, even with the pandemic going on and we would expect to get a like number of stores again in 2021, which is really between those the two years is quite enough really moves the needle. And so we’re continuing with those efforts that we think are important. This has also been a chance to rethink the assortment in the in the category. And so we’ve taken a look, as part of this to reduces the number of items in the store for their section. But we’ve also looked at the assortment that we offer and we skew rationalize out a part of the early long tail of products that we have to – about 250 items in the herb, spice, seasoning and recipe mix category to simplify our sort as well.

[Faiza Alwy:]

Great. Thank you so much.

[Operator:]

Our next question comes from the line of Adam Samuelsom with Goldman Sachs. Please proceed with your question.

[Adam Samuelsom:]

Yes. Thanks. Good morning, everyone.

[Lawrence Kurzius:]

Good morning, Adam.

[Mike Smith:]

Good morning, Adam.

[Adam Samuelsom:]

Good morning. I just want to maybe clarify a little bit at this point on a channel kind of inventory kind of restocking or getting your the shelf’s restocked, not necessarily in the backward – inventories restock. at the segment level – or at the company level, you’re guiding organic revenue growth about 1.5% to 3%, 3.5% a year, for the full year. We’ve talked about kind of there being some unfavorable segment mix. So, presumably we’re going to have expectations of the consumer business being a little below that and Flavor Solutions above that baseline. And the consumer business does have a tailwind of on this restocking benefit. As you think about the first half, because you’ve been under shipping consumption. Now, I understand the consumption comps get exceedingly difficult as you get into March, April, May, but I’m just trying to wrap my head around the idea that with some inventory, we’re thinking about image of our restock, we’re thinking about kind of flat to up 2% or so consumer growth. And I’m trying to make sure I understand what the moving pieces within that.

[Lawrence Kurzius:]

Well let’s try to address each one of those points, but our expectation is for our Consumer segment to grow in 2021, that independent of the acquisition that we made, many of our categories have been in full supply through the whole crisis, all of this discussion about inventory stocking it GDPs is predominantly in herbs by the seasoning of recipe mixes, the growth is going to vary from quarter-to-quarter. I mean, we’re going to lap some extraordinary consumption. So, well consumption is still running strong for us, the most recent period is still 11.5% and that includes the fact that we’ve got all of those gaps on the shelf. And that is really strong and quite elevated. I compare it to over 50% consumption growth in Q2 and I believe the number 40 something that has already some of the numbers up at the tip of my fingers right now. In Q3 and so we’re in a lockdown, and those are some pretty tough comps in the consumer business for the Americas, and not exactly the same numbers, but comparable peaks coming across EMEA, so that’s, going to be a bit of a headwind as we go pass those.

[Mike Smith:]

I think we have talk about a lot of Flavor Solutions business being a little lumpy, because it’s based on customer demand and things like that consumer will be lumpy this year, because of the quarterly comparisons so much happened last year by quarter, that you’re going to have to – we’re going to help you through that, but we’re giving broad guidance for the year, which makes it a little difficult because most of us have already forgotten 2020.

[Adam Samuelsom:]

Okay. And then I have a quick follow-up just talked about low single-digit kind of raw material cost inflation. Maybe this is more for Mike, just maybe go through some of the key buckets in terms of there’s freight packaging any specific pockets of on the actual raw materials that are leading more concerning from the inflationary side that we should be focused on that?

[Mike Smith:]

Well, as far as financial , we have a broad market after the things, which were very different than our peers. And you have the normal big volume items somewhere up and somewhere down. But nothing stands out particularly, I mean, we all know everyone in the industry is getting hit recently by ocean freight and other freight strength. That’s in – that’s in our market basket. So, we say low single-digits, we don’t break it out, but 70% of our costs are really it’s really raw material and packaging. So that’s, but there’s, there’s nothing I would say that is crazy at this point.

[Lawrence Kurzius:]

I think the bigger impact, frankly, is the incremental and extraordinary expenses for dealing with the COVID crisis that, right now running through our business that we expect to get out right as we get the second half.

[Adam Samuelsom:]

Okay. So that’s really helpful. I’ll pass it on. Thank you.

[Operator:]

Thank you. The final question is from the line of Peter Galbo with Bank of America. Please proceed with your question.

[Peter Galbo:]

Hey guys. Good morning. Thank you for taking the question.

[Lawrence Kurzius:]

Hey, Peter.

[Peter Galbo:]

Lawrence, maybe just to go back to Andrew Lazar’s question, around China, I guess maybe what’s underappreciated is the idea that organic growth and consumer probably realize at least to some extent on China food service, making a pretty remarkable comeback. We’ve heard about some retrenchment there recently, I think in your prepared remarks, you said as well, can you just maybe give us a look into how you’re thinking about that recovery of your China food service customers for the balance of 2021 and then I have a follow-up.

[Lawrence Kurzius:]

Well, I’ll speak broadly about China. I’m expecting that we’re going to have a very strong recovery in China. China had a very strong response to the COVID crisis with a very comprehensive lockdown. Consumers did not have a chance to shop, and so the results in China the first and second quarter last year were really depressed. And so I expect to see a very strong rebound from that as we lapse those numbers. And additionally, I think there’s a little bit of a benefit from Chinese New Year being slept with later this year than last year, some of our Chinese New Year volumes that would normally ship at the end of our fiscal year actually is falling into fourth quarter. So that’s going to be also adds a favorable comparison.

[Peter Galbo:]

Got it. Now that’s helpful. And Mike, maybe just…

[Lawrence Kurzius:]

For the last quarter...

[Peter Galbo:]

Right. And Mike maybe just one cleanup, I don’t know it’s been in your outlook there, if you would given on interest expense, but just anything that would be helpful.

[Mike Smith:]

No, I mean, obviously you can calculate. We talked about our assumptions on the acquisitions for – in the models. So that’s an incremental cost in 2021, and we’ll get a natural decline in some other base parts of the portfolio is we aggressively pay down that last year.

[Lawrence Kurzius:]

But overall interest is off obviously. And, Peter, it’s related to your question. We spent up on A&P in the fourth quarter and every region of the world, including in China to make sure that our consumer business was off to a strong start. The A&P is not test for immediate business performance but for long-term brand building and China was one of the markets that we invested additional A&P and in the fourth quarter of last year, that will help us get a good start on 2021.

[Peter Galbo:]

Thanks very much guys.

[Lawrence Kurzius:]

Great. Thanks. Thank you. I will now turn the floor over to Lawrence Kurzius for his closing remarks.

[Lawrence Kurzius:]

Well, I’d like to thank everyone for your questions and for participating on today’s call. McCormick is differentiated by the breadth of reach of our balanced portfolio, which drives consistency in our performance during volatile times, I am incredibly proud of the way McCormick performed during 2020, we drove outstanding, underlying operating performance, storing unprecedented times. I’ll prioritize in the safety and health of our employees and supporting the communities in which we operate. We expect to drive even further growth as we continue to execute on our long-term strategies, actively respond to changing consumer behavior and capitalize on new opportunities from our relative strength. Our investments provide a new foundation for growth, enhancing our agility and our relevance with consumers and customers, which positions as well for continued success and long-term shareholder value creation.

[Kasey Jenkins:]

Thank you, Lawrence and thanks everyone for joining today’s call. If you have any further questions regarding today’s information, please feel free to contact me. This concludes this morning’s call. Have a nice day.