McCormick & Company Inc

NYSE:MKC

Earnings Call Transcript 2020-Q3

[Kasey Jenkins, VP, IR]

Good morning. This is Kasey Jenkins, Vice President of McCormick Investor Relations. Thank you for joining today's Third Quarter Earnings Call. To accompany this call, we 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. [Operator Instructions] 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 operating income, adjusted income tax rate and adjusted earnings per share that exclude the impact of special charges, 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. In our comments, certain percentages are rounded. Please refer to our presentation for complete information.

In addition, as a reminder, 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.

It is important to note, these statements include expectations and assumptions which will be shared related to the impact of the COVID-19 pandemic. As seen on Slide 2, our forward-looking statement also provides information on risk factors including the impacts of COVID-19 that could affect our financial results.

It is now my pleasure to turn the discussion over to Lawrence.

[Lawrence Kurzius, Chairman, President and CEO]

Thank you, Kasey. Good morning, everyone. Thanks for joining us. The last few months have been an extraordinary period, and the COVID-19 situation continues to evolve daily. I'm incredibly proud of the way McCormick performed in this unprecedented operating environment.

Starting on Slide 4, let me highlight a few points on the current conditions we're seeing and their potential impacts. First, in our consumer segments around the world, we are experiencing strong sustained consumer demand, which has real incremental consumption and reflects the trend of consumers cooking more at home. In China, which is viewed as a leading indicator since their COVID-19 recovery is ahead of the rest of the world, the demand for food at home continues to be very strong. We see the same in Europe, and of course in the Americas. The significant shift to consumers eating more at home is persisting long enough that it has become a habit.

Our proprietary consumer survey data supported by other research indicates a majority of consumers are cooking more from scratch, enjoying the cooking experience, and adding flavor to their meal occasions. These new behaviors coupled with some consumer discomfort for dining out are driving an increased and sustained preference for cooking at home. We believe this will continue globally and thus further benefit our consumer segment.

Turning to our flavor solutions segment, where we have a very diverse customer portfolio, we are seeing varying stages of recovery. Starting with the away-from-home portion of this segment, with our quick service restaurant customers or QSR, we are seeing strong signs of recovery. Their business models were already oriented to drive through or carry out not dining in.

In China QSR traffic has returned to near normal level, and the limited time offers and promotions are driving demand. In the rest of the APZ region as well as EMEA and Americas, the focus has been on core menu items. So moving into the fourth quarter, we see limited time offerings beginning to resume.

Across the rest of the foodservice, while it has shown signs of recovery since our second quarter, the pace is much slower and varies by channel and market. As we have previously mentioned, we expect the recovery in this area of the business to be more gradual and take time, likely years, as restaurants and other foodservice venues such as stadiums and cafeterias continue to be largely closed or operating under capacity limitation. Consumers are reluctant to dine out and the restaurant industry has experienced significant pain.

From a food at home perspective, our flavor solutions growth varies by packaged food customer, but overall, we're returning to pre-COVID-19 levels as expected. New product opportunities, which had slowed during the crisis and had been more focused on expansion of the core, are beginning to gain increased momentum and we’re excited about their contribution to growth next year.

In summary, for our total flavor solutions segment, business is gradually rebounding, though not yet to 2019 level.

Moving to our global supply chain, coming into the crisis, there was more finished goods inventory in the system both for us and our customers, which was depleted early in the crisis. The sustained, elevated level of demand coupled with our added employee safety measures, has challenged our manufacturing operations. Service has been stressed in some areas and inventory replenishment will take some time.

The real pressure has been on our U.S. manufacturing operations, that we've had to suspend or curtail production of some secondary products to meet demand for our top selling products.

While the rest of the world is also experiencing elevated consumer demand, they've not experienced the same level of manufacturing pressure given the capacity and capabilities we've built outside of the Americas in the past few years.

In EMEA, where our supply chain is very well-positioned to meet demand, we've gained distribution as other manufacturers have faced challenges.

For the Americas, as we said on our earnings call in June, we're expanding our workforce and increasing manufacturing capacity through optimized scheduling and investment, particularly around blending capacity, as well as scaling up partnerships with third-party manufacturers.

To be clear, this added capacity is still ramping up. This capacity just started to come online in August, and will continue to ramp up over the next few months, and it is targeted to be completely in place by the end of the calendar year. And by then, we will have added the equivalent of an additional plant for the U.S. manufacturing capacity.

Of course, with this rapid scale up, there are extra costs and short-term inefficiency, but we're confident we're implementing efficient long-term solutions. The investments we're making are not just to meet the higher demand for the balance of 2020, but to strengthen our supply chain resiliency longer-term and to support the Americas consumer growth we anticipate continuing into next year driven by both sustained demand as well as retailer inventory replenishment.

We're making good progress. Our service levels continued to improve and we're confident in our capabilities and ability to meet demand, particularly during the holiday season. We're positioning ourselves for continued success. I want to thank our supply chain employees for their remarkable efforts as well as our suppliers and customers for their partnership in this challenging environment.

The positive fundamentals we have in place have enabled us to manage through this period of volatility. The investments we've made and the capabilities we’ve built combined with our strong business model prepared us to execute from a position of strength. As the crisis subsides, we will emerge an even better company by driving our long-term strategy, responding to changing consumer behavior and capitalizing on opportunities from our relative strength.

Now, I'd like to focus on our third quarter performance, business updates on our consumer and flavor solutions segments and our 2-for-1 stock split announcement.

As seen on Slide 6, we have a broad and advantaged global flavor portfolio, which continues to position us to meet the demand for flavor around the world and grow our business. The breadth and reach of our portfolio across segments, geographies, channels, customers and product offerings creates a balanced portfolio to drive consistency in our performance in a volatile environment as evidenced by our third quarter results.

During the third quarter, the shift in consumer behavior to cooking, eating more at home, or at home consumption drove a substantial increase in our consumer segment demand as well as increases with our packaged food company customers and our flavor solutions segment.

On the other hand, we experienced a decline in demand from our restaurants and other food service customers for the away-from-home products in our portfolio, which historically has represented approximately 20% of our total annual company's sales. The impact of this shift more at home consumption varied by region, due to the different levels of away-from-home consumption in each, as seen on Slide 6, 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 offerings, but we may experience temporary disruptions in parts of our business, underlying consumer demand continues to underpin our growth.

Now let me cover the highlights of our third quarter, which were broadly in line with the trends we discussed in our earnings call in June.

Starting with our topline, third quarter sales increased 8% from a year ago period. In constant currency sales grew 9%, mainly attributable to significantly higher volume and product mix in our consumer segment, with a partial offset from a low single digit decline in our flavor solutions segment.

Adjusted operating income increased 5%, including 1% unfavorable impact from currency. These results were driven by higher sales, favorable mix primarily driven by the sales mix between segments. And CCI-led cost savings partially offset by higher costs, including those related to COVID-19.

Our third quarter adjusted earnings per share was $1.53, 5% higher than the year ago period of $1.46, driven primarily by our strong operating performance. With one quarter left in the year, we have resumed guidance and expect to deliver another year of strong profitable growth. Our results continued to be driven by the engagement of our employees and the successful execution of our strategy. And we're confident in our 2020 outlook, which will be covered in detail in a few moments.

Now, let me spend a few minutes on our business segment update. Starting on Slide 8, with our consumer segment, sales rose 15% with minimal impact from currency, fueled by the change in consumer behavior. Research and trend data show that not only are consumers cooking more at home, they're enjoying it, both from a flavor and family experience, and have even accelerated their use of spices, seasonings and condiments, as the pandemic has progressed.

Additionally, as at home consumption from restaurant carryout and delivery is increasing, many consumers are adding flavor what spices, sauces or condiments they have at home. We believe these trends will last beyond the COVID-19 pandemic and drive continued growth.

Our Americas constant currency sales growth was 17% in the third quarter. Our total McCormick U.S. branded portfolio as indicated in our IRI consumption data grew 28%, which is substantial and reflects the strength of our category, as consumers cook more at home.

Our sales increase was lower than the U.S. IRI consumption growth attributable to a few factors. First, the service level pressures and product allocation from the supply chain challenges, I mentioned previously. Next, the timing of the holiday program we offer retailers. We generally offer the program during our third quarter to encourage early in store display and merchandising of holiday products. The impact of this program was included in our third quarter shipments in 2019.

In 2020, though, with the elevated level of demand and focus on keeping core items on shelf, a portion of retailer purchases for this program has shifted to our fourth quarter. Notwithstanding this shift, we still expect another year of strong holiday execution.

And lastly, increased level of pricing growth in the scanner data, due to curtailed third quarter promotions and channel shift with grocery outpacing mass merchandisers and club stores.

Focusing on the U.S. branded portfolio, consumption in all key categories grew at a double-digit rate in the third quarter, with the majority of our categories continuing to outpace the total store and centers for growth rates. In fact, consumption in our portfolio during the third quarter, grew 2.5 times the center of store rate, which is an increase from the comparison in the second quarter. But we do not expect consumption to continue at the highly elevated level of our third quarter. We do expect continued and long lasting growth from the increase in consumers cooking at home.

The most recent IRI scanner sales data for the week ended September 13, shows McCormick U.S. branded portfolio consumption still growing over 20%, with continued strength in spices and seasonings.

We gained share at seven out of 11 categories during the third quarter, those which were less impacted by supply constraints, including hot sauces, stocks and broth, barbecue sauce, wet marinade and Asian products. While there was noise in the third quarter share numbers for categories impacted by supply, such as spices and seasonings dry recipe mixes and mustard, on a year-to-date basis were relatively flat or gaining share in those categories too.

New products launched earlier in the year such as Frank's RedHot thick sauces, Old Bay hot sauce and Stubb’s reduced sugar barbecue sauce, have continued to get exceptional trial and contributed to the third quarter growth. The sell-in of our second-half new product launches however has been slowed due to the focus on keeping core items on retail shelves. And these launches will now be further opportunities to fuel growth next year.

The slow performance across household penetration and the rate of repeat buyers continued in the third quarter across our portfolio. Our household penetration rate increased 8% compared to last year, driving a significant amount of trial for millions of new households across multiple categories.

Spices and seasonings, dry recipe mixes and hot sauces has the biggest gain, but even smaller brands like Simply Asia and Thai Kitchen grew significantly, and their rate of repeat buyers increased 7% during the quarter, with double digit repeat rates in many categories. These metrics increasing significantly, both in our second quarter and third quarter indicates a high level of usage and speaks to the stickiness of our product. Consumers are coming into our brands, having a good experience and buying our products again.

With our high level of effective brand marketing assessments, including planned increases in the fourth quarter, and our initiatives to deepen our digital connection with consumer, we're capitalizing on the opportunity to build long-term brand equity after trial and increase usage by existing consumer. We're continuing to design targeted media messaging focused on cooking at home, teaching consumers how to use our products and providing a flavor inspiration. And as the younger generation continues to fuel the demand for flavor, and everyone has accelerated their online presence, we're executing on creative ways to connect with them.

For instance, one way we're connecting with consumers is by helping them discover new ways to enjoy time honored tradition. Take Tailgating for example, with football season now in full swing, we partnered with former New York Giants Quarterback, Eli Manning to create the largest virtual homegating experience, having the lucky fans interact with Eli to learn about his favorite Frank's RedHot flavor snacks, the recent event garnered over 750 million media impressions across digital media platform.

Moving from the football season to the holiday season, our fourth quarter is an important one from a seasonal standpoint. Our consumer's holiday dinner may be more important than ever this year, and we're excited about helping make them memorable flavor experiences. In terms of brand marketing, we're launching a holiday version of our 'It's Gonna Be Great' campaign, which recognize that celebrations might be different this year, in addition to our normal holiday promotion activities.

And from a supply chain standpoint, we're protecting our top selling holiday products. We have confidence, we're well-positioned for a successful holiday season.

Our portfolio and the plans we have in place are even more relevant today than they were before the crisis, as we expect the increase in at home cooking to persist. We will continue to drive our category leadership and growth momentum through strong brand marketing, category management initiative and new product innovation.

Now turning to EMEA, our constant currency sales rose 23% with broad based growth across the region. Our largest markets drove double digit total branded consumption growth with market share gains across the region in our key categories. Importantly, we gained total EMEA region share in spices and seasonings and dry recipe mixes.

The spices and seasonings consumption was strong in all markets, driven by consumers cooking more at home and discovering they need our products for great tasting, healthy flavor solutions. Our brand marketing campaign highlighting our product superiority and culinary partnership, coupled with pivoting or digital messages based on real time consumer insights, with the topics most relevant to consumers and formats that resonate the most are driving spices and seasoning momentum.

In the UK, our Schwartz brand new dry recipe mixes, such as One Pan meal seasonings offer a convenient and natural herb and spice blends for vegetarian options, are attracting younger consumers to the category and driving new distribution gains, as well as category growth. We achieved the leading UK market share position in dry recipe mixes at the beginning of the year, and we continue to gain significant market share in the third quarter.

And with the momentum in baking continuing, combined with successful new product launches, we again had exceptional consumption of growth in our Vahine brand in France, outpacing the homemade desserts category and gaining share.

Notably, Frank's RedHot turned up the heat during the third quarter, with over 40% consumption growth driven partly by a successful digital drilling campaign as well as new distribution. We're gaining millions of new households and driving repeat purchases. Our household penetration increased significantly across our major brands and markets during the third quarter compared to last year, with double digit growth percentages in both the UK and France spices and seasonings categories, as well as in the UK dry recipe mixes and France homemade desserts category.

And our rate of repeat buyers in these markets and categories also grew by double digit. Our strong brand marketing and digital campaign, which we've increased in EMEA, provide us with confidence, we will continue growing with our new consumer, while welcoming to our brand as well as our existing value consumer.

Moving forward in EMEA, we’ll continue to capture the momentum we've gained and are excited with our growth trajectory, following challenging market conditions over the past few years.

In the Asia Pacific region, our constant currency sales declined 6%, driven by declines in branded food service products, which are included in our consumer segment in China. Excluding those impacts, sales for the region would have increased, reflecting the increase in consumer demand across the region related to more cooking at home.

In China, our consumer to business growth was strong, driven by consumers’ demand for convenient solutions, fueling our growth of recipe mixes, as well as world flavor and hot pot sauces. Continued momentum in condiments also contributed to growth.

In other parts of the region, we have broad based growth, led by Australia's strong consumption and share growth in branded spices and seasonings, particularly in Gourmet Garden, with high double digit rates of new consumers and repeat buyers, and Frank’s RedHot with over 50% growth during the pandemic.

Finally, in all regions, consumers digital engagement has increased significantly, as we continue to experience accelerated e-commerce growth in all categories, whether it'd be pure play, click and collect or our own direct to consumer property. The pace of growth has slowed from the second quarter, which was heavily impacted by more extensive stay at home period. But we again drove triple digit growth in the third quarter, as well as increasing our market share in several markets.

We expect the shift to online shopping behavior to continue, and we're well-positioned for it, through the investments we've made and continue to make in this channel.

Our consumer growth plans based on our strategies have been in place since the beginning of the year, and we're yielding the results before the crisis. And we've been able to leverage our initiatives to capitalize on the opportunity to help our consumers during this time and strengthen our category leadership positions, which further bolsters our confidence that we will drive future growth.

Turning to Slide 10 in our flavor solution segments, our sales performance improved substantially from our second quarter constant currency decline of 16%. Our third quarter constant currency sales were 1% lower than last year, attributable to lower demand from restaurants and other food service customers, and our Americas and EMEA region, driven by the decline in away from home consumption. Almost, fully offsetting this lower demand, with continued growth in sales for packaged food customers across all regions, as well as strong sales growth to quick service restaurants in China.

In the Americas, our sales declined 3% in constant currency, driven by demand declines across both branded food service and restaurant customers. With the branded food service impact more significant, as our away from home customer base in the Americas is skewed more to that channel.

We're continuing to work with our customers impacted by away from home consumption declines to manage through their recovery efforts. With our customer intimacy approach, we're collaborating to provide solutions, such as menu simplification and optimization, branded portion controlled packaging for dining-in and carryout, and condiment dispensing solutions for food service operations.

We're building menu excitement with strong promoters leveraging the power of our brand, driving wins for both our customers and us. We're excited about new distribution gains as well as upcoming menu participation and limited time offers, as the recovery momentum continues.

In EMEA, our sales growth 1% in constant currency, the significant rebound from a 31% decline in our second quarter. Our away from home customer base in this region is skewed more to QSR, and then the third quarter as they reopen with adapted operating model and resumed limited dine-in options, our demand from these customers rebounded, although it's still modestly below the third quarter of last year.

The recovery with other food service customers also began in the third quarter, as COVID-19 restrictions eased, although as expected, slower and not to the same extent as QSR.

Turning to our at home customer base, we had strong growth in our flavor sales of the packaged food company, similar to pre-COVID-19 levels, driven by the strength in their core iconic products, as well as the momentum from new products launched at the beginning of the year.

We're advantaged by our differentiated customer engagement in this evolving environment, which has driven continued wins with our EMEA flavor solutions customer. Whether it'd be quickly scaling up to meet aggressive recovery plans, collaborating on opportunities, or managing through demand volatility, we're responding with speed and agility, and further strengthening our customer relationships.

In the Asia Pacific region, our constant currency sales grew 7%, driven by China and Australia's growth of QSR customers. During the third quarter QSRs at these countries were largely open, and we're seeing momentum gaining in the core business and limited time offer and our customers’ promotional activities.

Government imposed COVID-19 restrictions and reduced levels of limited time offers continued to curtail growth in parts of the region. For the balance of the year, we expect a reduced level of our customers’ limited time offer and promotional activities versus last year to impact growth.

We continue across all regions to be fully committed to helping our customers manage through the COVID-19 recovery phase, of which the duration is still uncertain. The slow and evolving recovery process is dependent on many factors, including restrictions being lifted, venues fully reopening, and possible resurgences.

We have positive fundamentals in place to navigate through this period of volatility. We remain confident in the successful execution of our strategies driving long-term growth trajectory in flavor solutions.

Now before turning it over to Mike and beginning on Slide 11, I'd like to mention stock split we announced this morning and provide a few summary comments, including our 2020 outlook. I'm pleased with our announcement this morning of a 2-for-1 stock split, reflecting our sustained positive performance and outlook for continued growth. It has been 18 years since the last split of stock, which was in 2002, when the pre-split share price was $52.33. We believe this will provide greater liquidity and be appreciated by individual investors and employees.

And now in summary, as the foundation of our sales growth is the global demand for flavor, we're capitalizing on the growing consumer interest in healthy, flavorful cooking, heritage brands and digital engagement. These long-term trends have not only remained intact during the crisis, they have accelerated. And our alignment with them positions us well to meet increased consumer demand, both through our products and our customer products.

We're driving sales growth balanced with our focus on lowering costs to expand margins, and sustainably realize earnings growth. We have a solid foundation. And in an environment that continues to be dynamic and fast paced, we are ensuring, we remain agile, relevant and focused on long-term sustainable growth. We've delivered outstanding year-to-date results during a period of great disruption, proving the strength of our business model. Our strategies are effective and reinforcing our customers, they will continue to drive future growth.

Our 2020 outlook, which Mike will discuss in detail in a few moments, reflects the strength of our year-to-date performance and momentum we're carrying into our fourth quarter and 2021. We are exceeding the objectives we had in place at the beginning of the year, delivering stronger sales and underlying operating performance, while importantly also ensuring the health and safety of our employees, investing in our supply chain resiliency to meet growth we expect in 2021, recognizing the exceptional performance of our people throughout the COVID-19 crisis and supporting our communities through relief efforts.

Our growth expectation reflects our confidence in the sustainability of higher at home consumption trends. As we look to our fiscal 2021, we expect constant currency organic sales growth in both of our segments on top of the outstanding consumer segment growth this year.

I want to recognize McCormick employees around the world for driving our momentum and success, and thank them for their efforts, engagements and for adapting to this new environment.

It is now my pleasure to turn it over to Mike.

[Mike Smith, EVP and CFO]

Thanks, Lawrence, and good morning, everyone. I'll begin now by providing some additional comments on our third quarter performance, and then our financial outlook for the balance of the year.

Starting on Slide 14, during the third quarter sales were at 9% in constant currency. Sales growth was driven by substantially higher volume and mix in our consumer segment, partially offset by lower volume and mix in our flavor solution segment, pricing to partially offset costs inflation also contributed favorably to both segments.

Consumer segment sales grew 15% in constant currency, led by the Americas and EMEA regions. The shift to at home consumption and cooking more at home, as well as consumers adding flavor at home to their restaurant carryout and delivery has driven substantial demand for consumer products, driving higher volume and mix in these regions.

On Slide 15, consumer segment sales in the Americas increased 17% in constant currency, versus the third quarter of 2019. The increase was driven by significant growth across our branded portfolio, including higher volume and product mix of McCormick spices and seasonings, as well as Simply Asia, Thai Kitchen, Gourmet Garden, Frank's RedHot, Zatarain's, Stubb's, Lawry's and El Guapo products.

Additionally, the pricing actions taken prior to COVID-19 in the first quarter, to partially offset increased costs also contributed to the growth. In the EMEA, constant currency consumer sales grew 23% from a year ago, with double digit volume and mix growth in all countries across the region.

The most significant growth drivers were our Schwartz and Ducros brands in spices and seasonings, our Vahine homemade dessert products and our Schwartz dry recipe mixes.

Consumer sales in Asia Pacific declined 6% in constant currency, driven by lower branded food service sales, as Lawrence mentioned. This decline was partially offset by increased consumer demand across the region, with growth led by China's recipe mixes, sauces and condiments, as well as Australia's brand new spices, seasonings and condiments.

Turning to our flavor solutions segment on Slide 18, third quarter constant currency sales decreased 1%, driven by declines in away from home products in the portfolios of our Americas and EMEA region.

In the Americas, flavor solutions constant currency sales declined 3% driven by a significant decline in sales to branded food service customers, in addition to lower sales to quick service restaurants, partially offsetting these declines were increase sales of packaged food companies and pricing to offset costs increases.

In EMEA, constant currency sales increased 1%, driven by pricing to cover costs increases, also partially by lower volume and product mix. Volume and product mix decline, driven by reduction in sales to branded food service customers, in addition to lower sales to quick service restaurant customers, partially offsetting these declines was sales growth with packaged food companies.

In the Asia Pacific region, flavor solution sales rose 7% in constant currency, driven by higher sales to quick service restaurants in China and Australia, partially driven by our customers' limited time offers and promotional activities.

As shown on Slide 22, adjusted operating income, which excludes special charges increased 5% in the third quarter versus the year ago period. In constant currency, adjusted operating income grew by 6% and was driven by substantial growth in the consumer segment, partially offset by a significant decline in the flavor solutions segment.

Adjusted operating income growth in the consumer segment was 18%, increasing to $209 million, or in constant currency was 19%, driven primarily by higher sales.

In the flavor solution segment, adjusted operating income declined 24% to $64 million, or 22% in constant currency, driven partially by lower sales, unfavorable product mix due to decline in branded food service sales, and an unfavorable impact to manufacturing costs resulting from the lower volume.

Both segments were also unfavorably impacted by COVID-19-related supply chain costs, including those related to additional compensation for our operations employees, safety and sanitation measures and scaling up to meet increased demand, as well as higher incentive compensation, which was driven by our strong year-to-date sales and operating profit performance. These unfavorable impacts were partially offset by CCI-led cost saving.

Gross profit margin expanded 70 basis points in the third quarter versus the year ago period, driven primarily by favorable product mix, resulting from the sale shift between segments and CCI-led cost savings with a partial offset from COVID-19-related costs.

Adjusted operating margin compression of 60 basis points compared to the third quarter of last year was driven by the net impact of the factors, I just mentioned, as well as higher distribution costs.

Turning to income taxes on Slide 24, our third quarter adjusted effective income tax rate was 19.3% as compared to 17.6% in the year ago period. Those years were favorably impacted by discrete tax items, principally stock option exercises.

Income from unconsolidated operations up $10 million in the third quarter was comparable to the year ago period.

At the bottom line, as shown on slide 26, third quarter of 2020 adjusted earnings per share was $1.53, that's compared to $1.46 for the year ago period. The increase was primarily driven by our higher adjusted operating income with lower interest expense, offsetting the impact of a higher adjusted income tax rate. This increase also includes an unfavorable impact from foreign currency exchange rates.

On Slide 27, we summarize highlights for cash flow in the quarter end balance sheet. Our cash flow provided from operations was $627 million for the third quarter of 2020, a 27% increase compared to $495 million for the third quarter of 2019, and was driven by higher net income.

We finished the third quarter with a cash conversion cycle at 36 days, down seven days versus our 2019 fiscal year end. We returned $247 million of cash to shareholders through dividends, and used $146 million for capital expenditures through the third quarter of 2020.

Additionally, we were very happy that during the third quarter, we fully paid off the terms notes related to the acquisition of the Frank’s and French’s brands, and ended the third quarter with a net debt to adjusted EBITDA ratio of 3.1 times.

We continue to project another year of strong cash flow. Our priority is to continue to have a balanced use of cash, making investments to drive growth, including through acquisitions, returning a significant portion to our shareholders through dividends and to pay down debt.

Let's now move to our 2020 financial outlook. As a reminder, we withdrew our 2020 guidance during our first quarter earnings call in late March. The operating environment over the past six months has continued to evolve, and while there still remains much uncertainty and many variables which can drive a range of possible outcomes, we recognize our year-to-date performance has been strong and we are currently in the last quarter of our fiscal year.

As such, we are resuming our 2020 guidance at this time based on the expectations Lawrence shared earlier this morning. Most notably, that the shift in consumer demand in at home consumption versus away from home will continue for the balance of the year, and even beyond.

We believe this shift will continue to favorably impact the consumer segment in our fourth quarter. While the away from home part of this flavor solutions portfolio has begun to recover, it will continue to be unfavorably impacted. We expect the impact of both segments will not be to the same extent that we have realized in the past six months.

Starting with the topline, we expect to grow sales at the upper end of a 4% to 5% range, which in constant currency is a range of 5% to 6%. This increase is expected to be entirely organic and reflects growth driven by new products, expanded distribution, fair marketing and pricing, which in conjunction with cost savings, is expected to offset anticipated mid-single digit inflationary pressures. It includes the net impact of the shift in demand due to COVID-19 and the consumers sustained preference for cooking at home.

Our 2020 gross profit margin is expected to be 75 basis points to 100 basis points higher than 2019, in part driven by our CCI-led cost savings and favorable product mix, partially offset by COVID-19-related costs.

Our adjusted operating income growth rate reflects the expected strength of our constant currency sales performance and underlying profit realization, partially offset by higher expenses related to COVID-19 and incentive compensation. We're projected to grow adjusted operating income by 4% to 5%, or 5% to 6% in constant currency. This includes our cost savings targets of approximately $105 million and an expected mid-single digit increase of brand marketing investments.

We are estimating our COVID-19 costs, which include expenses related to additional compensation for our frontline operations employees, safety and sanitation measures and scaling up to meet increased demand, as well as donations to relief organizations will be approximately $40 million to $50 million for fiscal year 2020, with the majority of this cost impacted gross profit.

Our estimated increase and incentive compensation is driven by our projected strong fiscal year sales and operating profit performance, and is consistent with our commitment to a pay for performance philosophy.

Our 2020 adjusted effective income tax rate is projected to be approximately 20%. Based on our year-to-date performance, including the impact of favorable discrete items and the estimated mix of earnings by geography. This outlook compares to our 2019 adjusted effective tax rate of 19.5%.

Our income from unconsolidated operations is also expected to be impacted by unfavorable currency rates, and as a result, we are projecting a mid-single digit decline.

Our guidance range for adjusted earnings per share in 2020 is $5.64 to $5.72. This compares to $5.35 of adjusted earnings per share in 2019, and represents a 5% to 7% increase, which in constant currency is a 6% to 8% increase.

In summary, we are projecting another strong year of underlying operating performance, while doing is right, by first protecting our employees and recognizing their contributions, second, by supporting our communities through relief efforts, and finally, by making supply chain and brand marketing investments to meet our expected growth into fiscal 2021.

And while we are not providing guidance for next year, I want to note that we do expect constant currency organic sales growth in both our segments in 2021, as Lawrence mentioned earlier.

Additionally, I want to provide you a brief update on our ERP replacement program. We indicated in March that we will rephasing the timing of this program to focus on the challenging environment during the pandemic. We have remained excited and committed to our global transformation initiative. While the environment is still challenging, we have continued to work on this program.

The delay provides us an opportunity to do some replanning, and as SAP has improved their product, our ramp up will be on a new version with a broader suite of applications, allowing us to save an upgrade cycle as well. We have not completed our planning yet, but we do not anticipate any major go lives in 2021. We will provide further updates on our ERP program on our earnings call in January.

Finally, I would also like to mention that yesterday our Board of Directors approved a 2-for-1 stock split with one share of common stock, with common stock non-voting to be issued for each like outstanding share. The additional shares will be distributed on November 30, and trading is expected to begin on a split adjusted basis on December 1. The stock split reflects the confidence we have in our future, and we believe it will provide greater liquidity and allow the stock to be more accessible to a broad range of investors.

I'd like to now turn it back to Lawrence for some closing remarks before we move to your questions.

[Lawrence Kurzius, Chairman, President and CEO]

Thank you, Mike. Now that Mike has shared our financial results and 2020 outlook in more detail, I'd like to recap the key takeaways as seen on Slide 29. We've delivered outstanding year-to-date results during a period of great disruption, proving the strength of our business model, the value of our product and our capabilities as a company. Our foundation is solid and our strategies are effective.

Our 2020 outlook reflects another year of strong operating performance while doing what is right for our employees and communities, as well as making investments for the growth we expect in both segments next year. We're confident in our ability to perform in this dynamic environment and to continue delivering differentiated results and build long-term value.

And now I'd like to turn to your questions.

[Operator]

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

[Andrew Lazar, Barclays Capital]

Good morning, everybody.

[Lawrence Kurzius, Chairman, President and CEO]

Hi, Andrew. Good morning. Thanks for hanging in there for a very long script.

[Andrew Lazar, Barclays Capital]

No worries, no worries. My pleasure. So two things would be, first off, thanks for your thoughts around your expectations for organic sales into next year. I'm curious as we think about EBIT for next year, obviously, we're not in a position to give any kind of guidance, but maybe you can just cover off on a couple of the discrete items, puts and takes that we kind of know about? Meaning, I know covered, Mike $40 million to $50 million of COVID-related costs this year. Is all of that expected to not repeat next year or does a portion go into next year?

And then any way you can break out what the incremental maybe incentive comp cost is expected to be this year? And just any other things that are discrete, that we kind of know now that we should take into account as we think about sort of profit growth next year? And then I've just got a follow-up. Thank you.

[Mike Smith, EVP and CFO]

Hey, Andrew, it's Mike. I'll answer this, and if Lawrence has any comments, he can chime in. You referred to the COVID costs. Obviously, we talked about -- this year about $40 million to $50 million incremental costs in 2020. We expect some of those to continue, however, some of those we don't expect to continue. Some of the things like we're scaling up production, we're onboarding people, we've incremental co-packers in place now. We expect that to not impact us into next year.

However, some of the things we've done like PPE and other coverage for our employees, we do expect to continue. So it's a mix of that. However, we would be really -- a lot depends on the environment and continued resurgence. So, our January guidance will give you a lot more detail on that obviously.

[Lawrence Kurzius, Chairman, President and CEO]

But there is other -- in addition to what Mike said, there are costs that we incurred for temporary plant closure, like extraordinary sanitation that we do not anticipate happening again next year. And just bringing on all of this capacity has been done very quickly. And as a result, it's been brought on somewhat inefficiently in the short-term, and we would expect that efficiency rate to go up as we get into next year.

Now on incentive comp, Mike mentioned a word about that. I certainly hope that it doesn't -- it's not a tailwind next year. But if it's not, it's because -- if it is at the tailwind, it's because of continued extraordinary performance. We have a pay per performance philosophy. Our employees have really delivered this year, and so incentive comp, across the all levels of the organization is pretty much at the top of our program range. And so, it would take a really extraordinary performance to repeat that.

So probably it's going to be a tailwind as well, but in any case, the underlying business results that we delivered this year don't get paid for twice. Our plants pay for growth.

[Andrew Lazar, Barclays Capital]

Yes, it makes sense. And you mentioned capacity, and I want to dig into that a little bit. I'm curious if there's a way to sort of spread out a little bit, how much of the upcoming capacity that's coming online, is sort of internal versus stepped up use of third parties?

And really the reason I ask is that, I'd assume that McCormick would not be adding its own sort of internal capacity in any significant way unless it thought that some of these recently elevated trends were likely to persist somewhat longer-term, not at current levels necessarily, but longer-term in a way that you kind of felt like you needed internal capacity, as opposed to just the more -- as opposed to just accessing the flexibility of third-party manufacturing.

[Lawrence Kurzius, Chairman, President and CEO]

So, Andrew. It's actually -- it's a mix. So some of the capacity we've gained has been by adding people and changing our shift patterns so that we have more of our facilities operating on a 24/7 or 25/7 schedule, not just on some lines, but some cases on all lines. So that's one way we've added capacity. We have made some short, we've made some -- we've been able to make some investments in blending capacity that are internal.

And then we have brought on quite a lot of third-party, co-packing capacity that is an incremental cost that we would hope to absorb into our own facilities over the course of next year.

[Mike Smith, EVP and CFO]

And that's primarily with a strategic partner that we already did co-packing with also. So we're not creating a quality risk out there at all.

[Andrew Lazar, Barclays Capital]

Got it. Great. Thank you very much.

[Operator]

Our next question is from the line of Ken Goldman with JP Morgan. Please proceed with your questions.

[Ken Goldman, JP Morgan]

Hi, thank you. One clarification and then I have a broader question and just building on Andrew's question. You talked about no major go live for ERP in 2021. Is it fair for us to assume that obviously the costs will be delayed maybe until 2022 as well from that, or there are some costs that you'll incur in advance? Just curious on that first.

[Mike Smith, EVP and CFO]

Yes. I mean, we're continuing -- even though we talked earlier about delaying the ERP, we're still incurring costs this year, we're going to spend in 2020 around the same level as we did in 2019. So you can expect as we replan, this will have cost in next year. We're not prepared at this point to talk about the level of cost, but we just wanted to highlight the fact that, go lives, which are -- bring with them major costs aren't going to really happen until 2022. And we'll have more -- obviously the January guidance will sharpen the pencil for that.

[Ken Goldman, JP Morgan]

Okay, that's helpful. And then I wanted to poke around a little bit on your commentary about organic growth in the consumer segment next year. The markets right now are looking for – The Street looking for low-single-digit declines. So you're surprising to the upside, I think. And I wanted to ask, clearly, you have a very strong first quarter coming up, you should anyway, given that you don't lap against COVID. But after that there's some reasonably high bars to comp against.

And I'm just curious to what extent is your confidence in this topline growth next year, informed maybe a little bit by the increase in capacity? And also the potential trade load that could bleed from this year into next. And I'm asking, because, obviously, we should continue to see great food at home trends next year. But maybe that guidance will be easier to digest, if it's built on, I guess something more than the expectation of just end demand growth. So hopefully that makes sense.

[Lawrence Kurzius, Chairman, President and CEO]

No, Ken, that makes a lot of sense. And that is a great question, because I think you've written about this. And I think that the Analysts community as a group, the consensus that's out there right now under calls, but we think the growth potential is and that's why we have commented on 2021 at this early stage, when we normally would really be focused completely on 2020.

Now, even before COVID-19 hit, consumers were cooking more at home, they were using more spices and seasonings and sauces to prepare fresher, healthier meals. They're moving to trusted inherited brands, we talked about this. The pandemic accelerated these trends, and other trends like e-commerce that already underpin our strategies, and that we were already capitalizing on. And consumers haven't been doing anything that is contrary to what they have been trending to do already, they're just doing more of it.

The data that we've gotten that we talked about in our prepared remarks, shows that most consumers are cooking more, they're enjoying it, they intend to cook more. And our brands have gained penetration in millions of households with a high level of repeat that shows strong satisfaction with the experiences that they're having. And we're not testing it in the U.S., we're seeing this play out globally. We've continued to invest behind our brands, and driving through the entirety of the crisis. And we've got a robust pipeline of innovation that includes some backlog from this year, but launch in 2021 too.

We've added a lot of resilience and capacity in the supply chain. And the market, frankly, has taken all of it. And we're still ramping up for more just to meet the existing demand for consumption. And as you noted, we have store shelves to restock, retailer inventory to replenish and a broad range of suspended SKUs to restart. So yes, we think that there's going to be some moderation, there are going to be a couple of periods and areas where there are tough comparisons. But we absolutely expect growth in our consumer segment next year for a very good reason.

[Mike Smith, EVP and CFO]

I think also to highlight the fact that we're upping our spend of brand marketing in the fourth quarter. We're going to have mid -- we've guided the mid-single digits for the year, which would imply 12% to 18% increase in the fourth quarter, because that advertising will drive growth in the first and second quarter. So we're really investing behind the brand at this opportunity.

[Ken Goldman, JP Morgan]

Very clear. Thank you.

[Mike Smith, EVP and CFO]

And I don't even need to talk about flavor solutions since everybody could see.

[Ken Goldman, JP Morgan]

No, no. Yes. I think we expect that to be up already. Thank you.

[Operator]

Our next question comes from the line of Alexia Howard with AllianceBernstein. Please proceed with your questions.

[Alexia Howard, AllianceBernstein]

Good morning, everyone.

[Lawrence Kurzius, Chairman, President and CEO]

Hi, Alexia.

[Mike Smith, EVP and CFO]

Good morning.

[Alexia Howard, AllianceBernstein]

Hi, there. So can we look out -- I think you mentioned promotional activity was reduced obviously, because of the constraints on supply over the last few months on the consumer side. As you look forward, are the retailers beginning to offer that spending back? I know spices and seasonings are not generally that heavily promoted. But I'm just wondering about the dynamic with retailers there, and whether they're likely to offer an elevated spend as we look out into the tail end of this year and into 2021?

[Lawrence Kurzius, Chairman, President and CEO]

Sure. Well, all that we've done, first of all, has been done in cooperation and collaboration with retailers. Pretty much through -- much of the third quarter and into fourth our promotional plans are actually in place. But what's different is that the product is on allocation in many cases. And so the amount that retailers can take on the promotion is limited, number one.

And then number two, we had a shift in our timing of our holiday program, normally, just because of the scale of the holiday program, we actually start deliveries in August to get displays up already, just to manage the surge. And as part of managing overall demand, we pushed about half of that off into Q4. So there's a timing difference there.

But, I think that for the most part, our promotional plans are back in place. Those comments are pretty specific to the U.S. and Canada. And the rest of the world, where we really haven't been constrained by supply promotional plans have gone forward as normal at this point.

[Alexia Howard, AllianceBernstein]

Great. And as a follow-up. As you've managed to delever to a little over 3 times net debt to EBITDA. How does that adjust your thinking on acquisitions? Obviously, there's a lot that you've got on your plates just operating within this environment. But in the past, you've been particularly bullish on the idea of doing further deals.

I'm just wondering how rich that set of opportunities looks right now. And how actively, you might be pursuing that and in which parts of the business?

[Lawrence Kurzius, Chairman, President and CEO]

So it has been our goal to deleverage to 3 times of EBITDA by the end of 2020. It looks like we're certainly there, that's a positive. And our goals for -- our acquisition strategy is unchanged, which is the acquisition support our growth strategies. And so, we've been signaling for a while that that we didn't feel that we actually had to literally get to report a 3.0 before we'd be back in the market. And so, we would say that we're open for business and the acquisition department.

[Alexia Howard, AllianceBernstein]

Great, thank you very much. I'll pass it on.

[Operator]

Our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your questions.

[Lawrence Kurzius, Chairman, President and CEO]

Hi, Rob, are you there?

[Operator]

And Mr. Moskow back to you.

[Robert Moskow, Credit Suisse]

Hi, can you hear me? Sorry about that. Yes, that was me.

[Lawrence Kurzius, Chairman, President and CEO]

That’s like the cliche of our time right now.

[Robert Moskow, Credit Suisse]

Yes, that’s happen to many. Yes, I agree with you. But unfortunately, no dogs barking in the background. But I did have just kind of a broader question about your margin structure. You're making investments in capacity this year, that will dilute your margins in fourth quarter. And then you have this big ERP program that will probably dilute margins next year.

Just big picture, like would you say that these investments are setting you up to service -- to become a bigger company to service a bigger demand? And if so, like when do you get back to a pattern of margin expansion and benefiting from all that scale that you've put out?

And I guess the second part is, do you get back then to your normal pattern of market expansion that's in your long-term algo?

[Mike Smith, EVP and CFO]

Hey, that's a great question, Rob. And I'll start it. No, that’s a great point. And as we went into this year, obviously when we had planned a $60 million-ish investment in ERP, that was going to be dilutive to our margin. However, we need to become a bigger company, increase our scale. ERP program drives efficiencies across the organization and really allows us to grow faster and make acquisitions faster.

It's hard to pin it down to one year investment and then you get back right away. But over a three or four year period where we look at our constant currency sales growth and our margins, and we see that really as our long-term guidance. One years, you're going to have some short-term ups and downs on it.

And there are stake levers we can pull to from an advertising perspective, spending more or less. CCI is a tool we've used in the past to lean into, when we've had investments to make. So I think in January you'll see a better picture for next year.

[Lawrence Kurzius, Chairman, President and CEO]

But, the investments that we've made in supply chain this year have really been extraordinary, because of the extraordinary circumstances. We've had an unprecedented increase in demand that has been sustained over time that we have really had to work and almost throw money at in order to meet. And it hasn't been done in the most efficient way. And I think that, as we've commented on the first question from Andrew, we would expect that some of those costs would come out.

[Mike Smith, EVP and CFO]

And you think about earlier this year, people have already forgotten the first quarter. China was such a shock to us and everybody, and the consumers there didn't get a chance to really buy. So that was a large first quarter impact for us, which really hurt our margins.

Going even in the flavor solutions business, we talked about continuing to mix up there with portfolio management, this year has been a little tough because, food service, Frank food service, which is high margin, has been hurt by this COVID situation, whereas QSRs are recovering that has first and mixed perspective. But we see that over time recovering also.

[Robert Moskow, Credit Suisse]

Okay. And I actually do have a follow-up question. You said that Europe had already expanded capacity sufficiently to meet the 20% plus increase in demand, but the U.S. had not. Is there any reason that the capacity expanded in one region, but not the other?

[Lawrence Kurzius, Chairman, President and CEO]

Well, sure. Over the last several years, we've been building our capacity and capabilities in Asia Pacific first and in Europe second, as an area of investment focus. And actually, we had just turned to the Americas. This year, we announced a big investment in highly automated logistics center earlier this year, pre-COVID. And so, our investment cycle has turned to the Americas, but…

[Mike Smith, EVP and CFO]

It's not as we've ignored Americas. We've had investments along the way, but it’s the same region for us right.

[Lawrence Kurzius, Chairman, President and CEO]

And virtually all of our plants in Asia have been either new or renovated in the last several years. And we've made a number of big investments in expansion and automation in EMEA and we're just turning to the Americas. But even beyond that, it's just the scale of the surge of demand. I mean, the U.S. business is so big that even the same percentage growth turns into a massive amount of volume.

[Robert Moskow, Credit Suisse]

Got it. Okay, thank you.

[Operator]

Our next question is from the line of Chris Growe with Stifel. Please proceed with your question.

[Chris Growe, Stifel Nicolaus]

Hi, good morning.

[Lawrence Kurzius, Chairman, President and CEO]

Good morning, Chris.

[Chris Growe, Stifel Nicolaus]

Hi, good morning. I had a -- the question just to understand, you talked earlier in the call about pushing off some new product launches and how those could benefit 2021, I think was the implication. Is that a function of the retailer sort of acceptance of new products? Are you seeing that kind of pick back up?

And also just to understand how the capacity lines up for some of those new products? Are these largely third-party produced or has been new production capacity able to produce those products? Just want to get a sense of how this will play out in 2021?

[Lawrence Kurzius, Chairman, President and CEO]

Well, with the surge in demand, both we and the retailers really wanted to focus on the core items. For us, it is a certain supply and the retailers still have the challenge of bringing product in and just the logistics of the whole increase in consumer shopping in their total store. So there's been much more of a focus on core.

And the new items that we actually have launched early in the year got unprecedented trial. But the items that we had planned for the second-half really have been deferred into 2021 and add to that pipeline. I don't think our experience in that area is much different than what others set up. But we also had a big shelf initiative. We had a spice aisle reinvention program that we unveiled at Cagney and had a plan to get into thousands of stores. We have made that change in thousands of stores but nowhere near the magnitude that we expected. And so that's also going to be part of the program for next year.

On the flavor solution side of the business, also, our customers have tended to focus on their core items as well. And so innovation in that area has also been curtailed. Quick service restaurants trying to manage demand and their drive-through and take takeaway model have focused more on core items and are really only now getting back into limited time offers and promotional offerings.

And in our consumer food manufacturing customers are also just now ramping up their innovation programs. We have a lot of projects underway in that area that I think will be a benefit in that segment next year. But really, through the crisis the focus has been on core items both for us, our customers, both on flavor solutions and its retail.

[Mike Smith, EVP and CFO]

And some evidence of that, QSRs in APZ, in China and Australia are recovering faster. And more LTOs are coming out now, as we talked about this quarter. So we see that continue hopefully into next year.

[Chris Growe, Stifel Nicolaus]

Okay. Thank you for that. And I just want to quick follow-up if I could on the gross margin, and I guess to implied gross margin for the fourth quarter. It does indicate some less growth or even a bit of a decline in the fourth quarter based on the performance year-to-date. Are there residual COVID costs we have to keep in mind? Is it the co-packers? And also you have some costs around the new capacity, are those sort of the factors that play into the fourth quarter gross margin performance?

[Mike Smith, EVP and CFO]

Oh, definitely, Chris. We’ve talked at the last call, you're talking about $30 million split between the second and third quarter. Now we're saying 40 to 50, of which -- and we're considering the fourth quarter because of that unprecedented demand. So yes, those costs are continuing into the fourth quarter.

[Lawrence Kurzius, Chairman, President and CEO]

I'd say that's the biggest factor.

[Mike Smith, EVP and CFO]

Yes, that really is. And we're saying too early, but we've had some very favorable segment mix over the last couple of quarters. We're going to see a little bit less of that in the fourth quarter. But the primary thing is the COVID cost, as Lawrence said.

[Chris Growe, Stifel Nicolaus]

Okay, that sounds great. Thanks for your time this morning.

[Operator]

Our next question is from the line of Adam Samuelson with Goldman Sachs. Pleased proceed with your questions.

[Adam Samuelson, Goldman Sachs]

Yes. Thanks. Good morning, everyone.

[Lawrence Kurzius, Chairman, President and CEO]

Good morning, Adam.

[Adam Samuelson, Goldman Sachs]

Good morning. So I guess the first, it turns into a little bit of a question on the shifts on holiday sales into the fourth quarter in terms of the load in. But can you comment a little bit on retailer inventories and trade inventory in the U.S. right now, just given the surge in demand that we've seen? Just how do you think about that potentially being a tailwind into next year?

[Lawrence Kurzius, Chairman, President and CEO]

Yes. I think you only have to walk into a store to know that the cover is there. We have in the first sorry -- in second quarter U.S. demand was, the scanner was up 55% and in the second quarter, it was at 28%. Our latest Nielsen still has it running up over 20 -- sorry, our latest IRI still has it running up over 20% that we have struggled to keep up with that demand. You've seen that we've reported lower numbers and a lot of that gap represents inventory reduction.

So let's say that the shelf stocks are low, back room stocks are low to non-existent. There's a lot to rebuild. And as we go through the fourth quarter, we're ramping up capacity, but that's really meeting demand. The real rebuild of shelf stock, retailers safety stock, inventory in the whole, the normal level of inventory and the trade pipeline, that rebuild is going to happen next year, and it's going to take well into the year to get that back up.

[Mike Smith, EVP and CFO]

And that's what gives us further confidence on growth next year on the consumer side.

[Adam Samuelson, Goldman Sachs]

Okay, now that's helpful. And then I guess my second question was more on the --

[Lawrence Kurzius, Chairman, President and CEO]

And I don't think, we're not alone in that situation.

[Adam Samuelson, Goldman Sachs]

No, that's totally fair. My other questions was on the flavor solutions and especially thinking in the Americas with the volume mix that decline you reported. And maybe you can give a little bit more color by kind of your major categories branded food service, the flavors business the condiments coating, just how the different parts of your business are performing relative to that negative 5%? And where that's trending and some potential number?

[Lawrence Kurzius, Chairman, President and CEO]

Quick service restaurants are generally doing great. So they're very much in a recovery mode, depending on the geography, in some cases they're well into growth again, and other geographies, they're not quite there. But their model was already very oriented towards consumption away from premise, drive through and so on. So they've had a fast recovery, and really are irresponsible for the big swing that we saw in our EMEA, our region in particular for example or second quarter were down 31%, third quarter we're actually up 1%.

The flip side of that and the slowest recovering or your traditional restaurant and food service customers, many of those are still closed or operating under capacity restrictions. In our survey data, over half of consumers still say they do not intend to eat inside at a restaurant this year. So, there's quite a path, a challenging path for them to recover.

And in fact, as we get into the fall weather with cooler weather, it's going to be hard for us to -- it's going to be -- it's hard to see how it has -- that's going to be another headwind for them as we get to that time period. And so those are the ones that are there going to be more challenged.

And our consumer manufacturers are pretty much back to normal that they've pretty much gotten back on track, and varies by customer, but as a group, in aggregate they're back to a more normal path. And in the Americas, I think if you were trying to dig a little bit beyond that, I think branded food service is a higher percentage of our total flavor solutions in the Americas compared to the rest of the world. That's a little bigger impact there.

[Adam Samuelson, Goldman Sachs]

Okay. That's truly helpful color. I appreciate. Thank you.

[Operator]

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

[Peter Galbo, Bank of America Merrill Lynch]

Hey, guys. Good morning. Thanks for taking the question. Mike, I just had a question around freight costs. We've been seeing a pretty sizable uptick. Both in the spot markets and just wondering if that's going to spill over into contract freight rates.

Just can you give us a sense of either as percent of sales or COGS, what freight represents? And maybe just in history, a couple of years ago, when freight was moving up, kind of how you guys managed it through the business?

[Mike Smith, EVP and CFO]

Yes. I mean, it's a good question. I mean, freight has spiked really recently, it's been up and down over the last 12 months. A couple years ago, there was a huge shortage of containers or trade and the whole industry was really hurt by that. And through our CCI program, we really manage those costs.

Within the last quarter, I can't tell you specifically what programs we have, to be honest, but distribution is one of those SG&A things that has been up, primarily due to internal warehousing moves and things like that just shipping product, but freight is a relatively minor total component of our cost of goods sold.

[Lawrence Kurzius, Chairman, President and CEO]

And definitely in the scheme of other products going on right now.

[Mike Smith, EVP and CFO]

I wouldn't think it's not a material impact in the quarter, but it does add a few a little bit of the headwinds. It's a good question.

[Peter Galbo, Bank of America Merrill Lynch]

Got it. Okay. No, that's helpful. And maybe just as a cleanup, the tax rate that 20% you gave, I mean, on a longer-term basis, I know you guys tend to talk about mid-20s, but it's been running in that closer to 20%, just as the stock has performed well. Just kind of help us think about that on a longer-term basis?

[Lawrence Kurzius, Chairman, President and CEO]

Yes, longer-term it’s still -- I'd say that what we said earlier this year 24% to 25%. Obviously, with the election coming up, we have no idea what's going to happen next year. So stay tuned for that one. But underlying the way the rules are written out 24% to 25%. And then periodically, we have tax planning initiatives. And then, as you said, with the stock performing very well and you get a really nice stock option favorability.

Now, that is all set up in the operating expense line, just partially so that does have a little bit of a headwind up there, but generally, it's good for the tax line.

[Peter Galbo, Bank of America Merrill Lynch]

Great. Thanks very much, guys.

[Operator]

Thank you. The next question is from the line of David Driscoll with DD Research. Please proceed with your questions.

[David Driscoll, DD Research]

Great. Thank you, and good morning.

[Lawrence Kurzius, Chairman, President and CEO]

Hey there, David.

[David Driscoll, DD Research]

I wanted to ask you one question on the fourth quarter, and then just one follow-up on your '21 commentary. On the fourth quarter, you appear to be implying within the full year guidance, a revenue slowdown versus the third quarter. And I just wanted to hear your description as to what are the qualitative factors here?

Do you expect the second wave of the virus to be impacting? Is that implied within the guidance? Or do you really just kind of take where we are today on viral impact and just extend that forward? And then are there any other key assumptions that go into that fourth quarter?

And then on 2021, I'm curious about whether or not you see this as your growth comments? Are these in your control? Is it this inventory situation that's just so significant in '21, that it underpins your confidence to make these growth comments? Because, of course, nobody knows about the vaccine, how many people will take it, what that will do to consumer behavior.

But I'm thinking that what you're trying to tell us today, as it doesn't really matter. There's so many underlying positives inherent to your business that are in your control, that you can still say that there would be growth in '21 in that consumer segment. Thank you.

[Lawrence Kurzius, Chairman, President and CEO]

I think for Q4, I'll start, and then I'll let Mike take it and let me come back to 2021 in a minute. For flavor solutions, we're pretty much looking at the status quo versus where we are right now, because the QSRs have largely recovered. And we see just a hard path forward for the rest of the restaurant side of the business. Given the uncertainty around resurgence, I mean, look what's happening in Europe, right now, cold weather coming in. There's probably going to be some good news on a vaccine. But the fact is, that’s probably not going to be widely available till sometime well into next year. So, there's a lot of uncertainty out there around that.

For the consumer side, demand continues to be strong. We've had all these gains and penetration trial consumers seem to be having a good experience cooking at home. And cooking at home behavior has really held up in a way that frankly, we've underestimated all year long. I mean, it's been stronger than we thought and every time we look at it, it's holding up stronger and longer than we thought.

So we're expecting some moderation next year, but we are also expecting quite a lot of it to stick. There are still a lot of uncertainties around 2021, which is why we don't give guidance this early. But we did see a growing disconnect between the expectations for growth of consumer that was going to be your so wide, we felt like we had to say something about it.

[Mike Smith, EVP and CFO]

Yes. And regarding the fourth quarter, I mean, we wanted to give some meaningful guidance, but also wanted to be prudent in a really uncertain environment. And there's variables to the high and the low end. We think the demand is there, obviously, as we see in the scanner data, but our ability to supply especially in the U.S. is really challenged. So we wanted to at least be proven from that perspective.

[David Driscoll, DD Research]

I appreciate the comments. Thank you.

[Lawrence Kurzius, Chairman, President and CEO]

Great.

[Operator]

Thank you. At this time, I'll turn the floor back to Lawrence Kurzius for closing comments.

[Lawrence Kurzius, Chairman, President and CEO]

Great. Thank you everyone for your questions and for participating on today's call. McCormick is a global leader in flavor, differentiated with a broad and advantage portfolio. In the volatile environment in which we currently operate, this balanced portfolio drives consistency in our performance. We have a growing and profitable business, delivering flavor to all markets and channels, while responding readily to changes in the industry and in the world, with new ideas, innovation and purpose.

One of the most significant risks that any company is being unprepared to respond with agility to a significant unexpected disruption. We've all been experiencing that disruption this year and McCormick continued to be well prepared, and not only manage through it but emerge stronger. With a relentless focus on growth, performance and people, we're confident our strategies continue to position us drive future growth and build long-term value for our shareholders.

[Operator]

Thank you, Lawrence, and thanks to everyone for joining today's call. If you have any further questions regarding today's information, please reach out to me. This now concludes this morning's conference call. Have a good day, everyone.