McCormick & Company Inc

NYSE:MKC

Earnings Call Transcript 2020-Q4

[Kasey Jenkins, Vice President-Investor Relations]

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. [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 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.

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 Chief Executive Officer]

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.

Heading into 2021, I’m confident our operating momentum will continue. In our 2021 outlook, our continued underlying business momentum, and the Cholula and FONA acquisitions are expected to drive robust sale, adjusted operating income and earnings growth and fund our investments in business transformation.

This morning, I’ll begin with our fourth quarter results reflect on our 2020 achievements and then share with you some of our 2021 business momentum and plans. After that, I will turn it over to Mike, who will go and more depth on the quarter end fiscal year results, as well as the details of our 2021 guidance.

Turning to Slide 6, starting with our fourth quarter results, which were in line with the guidance we provided for sales, adjusted operating profit, and adjusted earnings per share on our last earnings call. On our top line versus the year-ago period, we grew total sales 5%, including a 1% favorable impact from currency. In constant currency, we grew total sales 4% with both segments contributing to the increase.

Adjusted operating income declined 4% as growth from higher sales and CCI-led cost savings were more than offset by higher planned brand marketing investments, COVID-19 related costs and higher employee benefit expenses. Our fourth quarter adjusted earnings per share was $0.79 compared to $0.81 in the prior year, driven primarily by lower adjusted operating income for the partial offset for lower interest expense.

Turning to our fourth quarter segment business performance, starting on Slide 7 in our Consumer segment, we grew fourth quarter sales by 6%, on constant currency 5% driven by consumers cooking and eating more at home. Our Americas constant currency sales growth was 6% in the fourth quarter. Our total McCormick U.S. branded portfolio, as indicated in our IRI consumption data grew 14%, which reflects the strength of our categories as consumers continue to cook more at home. Similar to previous quarters, our sales increase was lower than the U.S. IRI consumption growth, which is attributable to service level pressures and an increased level of pricing and scanner data.

As mentioned in our earnings call at the end of September, we expected service level pressures in the fourth quarter, due to the sustained increase in demand to protect our top selling holiday items. We had to suspend or curtail production on some secondary product, which importantly drove our strong holiday execution. In consistent with previous quarters, scanner data includes higher pricing growth due to the channel shift with grocery outpacing mass merchandisers and club stores, as well as some impact from the lower promotional activity.

Focusing on the U.S. branded portfolio, and spices and seasonings and other key categories, excluding dry recipe mixes, we grew fourth quarter consumption at double-digit rate, and again, increased our household penetration and repeat buyer rates. Our fourth quarter dry recipe mix consumption was impacted by supply constraint, it had double-digit growth for the year as its spices and seasonings and the other key categories.

In the fourth quarter, we continue to gain share and categories less impacted by supply constraints, including hot sauces, stocks and broth, barbecue sauce, wet marinades and Asian products. The majority of our categories continued to outpace the total store, and center-of-store growth rates, favorably impacting not only the McCormick brand, but smaller brands as well, such as Stubb’s, Lawry’s, Simply Asia and Thai Kitchen.

And in e-commerce, we had triple-digit pure-play growth as McCormick branded consumptions outpacing all major categories. But we do not expect consumption to continue at the highly-elevated level of our fourth quarter. We do expect continued at long lasting growth from the increase in consumers cooking more at home, the most recent IRI scanner sales data for the five weeks ending January 17. So, total McCormick U.S. branded portfolio consumption is still growing at approximately 11.5% with continued strength in spices and seasonings. Consumers are continuing to come to our brands, have a good experience and buy our products again.

In the fourth quarter, we increased our brand marketing investments in all regions as planned with the Americas messaging and promotional activities focused on a holiday proving to be successful. In our high level of effective brand marketing investments and our initiatives to deepen or digital engagement with consumers, we’re capitalizing on the opportunity to build long-term brand equity after trial, an increased usage by existing consumers. And with the manufacturing capacity, we’ve recently added, we are well positioned moving into 2021 and we’ll continue to drive growth through strong brand marketing, category management initiatives and new product innovation.

Now, turning to EMEA. Our constant currency sales rose 10% of the fourth quarter with broad-based growth across the region. Our largest markets continued to drive double-digit total branded consumption growth with market share gains across the region at several categories.

Spices and seasonings consumption was strong in all markets and our Vahine brand in France, again, had strong consumption growth and outpaced the homemade desserts category. In the UK, Frank’s RedHot drove the hot sauce category growth and gained share with over 50% consumption growth. In EMEA, our household penetration and rate of repeat buyers increased significantly across our major brands and markets during the fourth quarter and the full year compared to last year. Importantly, for the full year, we gained total EMEA region market share and spices and seasonings and dry recipe mixes.

In the Asia Pacific region, our constant currency sales declined 10% driven by softness and branded food service products, which are included in our Consumer segment in this region. The food service industry is continuing to recover, but at a gradual pace. growth in China was also impacted quite a shift to a later Chinese New Year in 2021, which in turn impacted shipments at the end of our year. Excluding those impacts, consumer consumption in the region was strong, particularly at Gourmet Garden and Frank’s RedHot in Australia.

Turning to Slide 8, our sales performance in Flavor Solutions returned to grow in the fourth quarter. For the constant currency sales increase of 3% in all three regions contributed to the sales growth in both our Americas and EMEA region, we experienced increased demand from our consumer packaged food customers or at-home customer base, with strength in the base business as well as momentum with new products.

Also in both regions, we experienced demand declines and our away-from-home customer base for branded food service and restaurant customers. The net impact of this demand volatility along with pricing actions to cover cost increases drove EMEA fourth quarter constant currency sales growth of 5% and in the Americas, which is more skewed to branded food service growth of 2%.

In the Asia Pacific region, our constant currency sales grew 7% driven by Australia and China’s growth with quick service restaurant or QSR customers. But we continue to see momentum and limited time offers as a core business, partially driven by the customer’s promotional activities.

Moving from our fourth quarter results, I’m pleased to share our full fiscal year accomplishments, which not only highlight what we’ve achieved during 2020, but fuel our confidence to drive another year of strong operating performance in 2021. Starting with our 2020 financial results as seen on Slide 9, we drove 5% constant currency sales growth with 10% growth in our Consumer segment led by consumers cooking and eating more at home, partially offsetting this growth was at 2% constant currency sales decline in the Flavor Solutions segment. COVID-19 restrictions in most markets, as well as consumer reluctance to dine out reduced demand from restaurants and other food service customers.

We achieved $113 million of annual cost savings driven by our CCI program, our fuel for growth and there continues to be a long runway in 2021 and beyond to deliver additional cost savings. 2020 was the ninth consecutive year of record cash flow from operations, ending the year at over $1 billion, the 10% increase from last year. We’re making great progress with our working capital improvements. At year-end, our Board of Directors announced a 10% increase in the quarterly dividend marking our 35th consecutive year of dividend increases. We have paid dividends every year since 1925 and are proud to be a dividend aristocrat.

Now, I’d like to comment on some of our 2020 achievements beyond our financial performance. E-commerce growth accelerated significantly at 2020, which we were well-prepared for from our past investments and investments we activated early in the year. Our 2020 growth of 136% was outstanding with triple-digit growth in all categories, including pure-play, click and collect and our own direct-to-consumer properties. We expect the consumer shift increased online shopping to continue, and we are well positioned for the opportunities still ahead.

We continue to build long-term brand equity through our brand marketing investments, increasing of 7% in fiscal 2020, most recently with a double-digit increase in the fourth quarter, across all regions, which will continue to drive strong growth momentum into 2021. We designed targeted media messaging focused on cooking at home and connecting with consumers digitally more than ever in 2020. Our digital leadership was again, recognized as we were ranked as the number one food brand with the highest designation of Genius by Gartner L2 Research and their digital IQ U.S. ranking. This is the seventh year in a row, we were ranked in the top five food and beverage brands.

We continue to be recognized for our efforts for doing what’s right for people, communities and the planet. In 2020, we were recognized for the fourth consecutive year as a DiversityInc’s Top 50 companies. And earlier this week, Corporate Knights ranked McCormick in their 2021 Global 100 Most Sustainable Corporations Index as number one in the food products industry for the fifth consecutive year, as well as the number one U.S. company overall and globally, number six overall.

Finally, during the year, we continue to invest to expand our global infrastructure. In the Americas, we broke ground on a new state-of-the-art Northeast Distribution Center in Maryland, which will optimize their distribution network. In our EMEA region, we began construction on a new Flavor Solutions manufacturing facility in the UK to support the region strong and growing customer base. In China, we were investing in flavor capabilities to further drive Flavor Solutions growth. these investments will create both capacity and capability, which will further drive our growth momentum.

Turning to 2021. Mike will go over our guidance in a few moments, but I’d like to comment on a recent acquisition announcement and provide highlights related to our growth momentum in 2021 plans. Starting on Slide 11, an addition to the accomplishments I just mentioned, we have reinforced our global flavor leadership and accelerated our condiment and flavors growth platforms. There’s the recent acquisitions of Cholula and FONA. Cholula, an iconic brand in a high growth category, is a leading Mexican hot sauce and highly complements our existing hot sauce portfolio, broadening our flavor offerings to consumers and food service operators.

FONA, a leading North American manufacturer of flavors and presets the scale of our global flavors platform with the addition of its highly complementary portfolio to our Flavor Solutions segment, expanding our breadth and accelerating our portfolio migration more value added and technically insulated products. We’re excited about the 2021 growth contributions we expect from Cholula and FONA, which closed at the end of November and December respectively. For both acquisitions, our transition and integration activities are progressing according to our plans and the alignment of our organizations is underway to deliver on opportunities quickly and to aggressively drive growth.

We have a proven playbook and unmatched expertise to effectively and efficiently unlock Cholula’s significant growth potential. In our Consumer segment, we will leverage our operational expertise and infrastructure to elevate Cholula’s brand presence, increase the availability of its product and expand its product offerings into new flavors, formats, and eating a cadence to drive trial and household penetration. Building our enthusiasm is an outstanding momentum Cholula carried into 2021, continuing to outpace category growth with strong consumption.

In our Flavor Solutions segment with our broad presence across all food service channels, we’ll be focusing on strengthening Cholula’s go-to-market model. There are opportunities to expand a little as distribution and its existing food service channels, as well as increased new restaurant penetration, which we are uniquely positioned to realize and drive growth. McCormick’s reach across customers combined with our culinary foundation and deep insights on menu trends expands to the recipe inspiration and Flavor Solutions that we offer operators.

Turning to FONA, which in addition to accelerating our portfolio migration will be the cornerstone for accelerating our Americas flavor platform. By expanding our breadth and depth and developing flavors, while also combining our infrastructures to provide greater scale and increase our manufacturing capacity and technical bench strength. We’re providing our customers with a more comprehensive product offering, bolstering our competitive position and creating more opportunities for growth.

With the addition of FONA, we’re advancing our health and wellness portfolio. we’re expanding our research and development capabilities and technology platform with additional proprietary encapsulation methods. We’re putting expertise in favoring health and performance nutrition products across a variety of applications.

Our clean and natural platform is meaningfully enhanced with the addition of FONA’s predominantly natural portfolio, as well as their expertise, particularly in citrus fruit flavors. Combination of our technology platform and capabilities will provide a long runway for growth, enabling us to remain at the forefront of flavor development and expand our ability to create better for you, and consumer-preferred flavor solutions across a diverse range of applications for our customers.

Our complimentary customer basis of global and mid-tier customers provides growth opportunities for our collective portfolios. FONA’s customer centric culture is very similar to ours and with the combined power of our organizations; we’re well positioned to reach a broader customer base deepening existing customer relationships by cross-selling and establish inroads with new customers while driving innovation.

Customer response to the acquisition has been favorable as they recognize our combined power increases our customer value proposition. We’re confident we’ll deliver on our acquisition plan. This confidence is bolstered by our proven track record of successfully integrating and increasing the performance acquired businesses such as our acquisition of Frank’s and French’s. Acquisitions are a key part of our long-term growth strategy in both Cholula and FONA will add to our strong history of creating value through acquisition.

Now, I’d like to briefly comment on the conditions we’re seeing in our markets, their potential impact and our 2021 organic growth plans starting on Slide 14. Global demand for flavor remains the foundation for our sales growth. we’re capitalizing on the growing consumer interest in healthy flavorful cooking, trusted brands, as well as digital engagement and purpose-minded practices. These long-term trends have only accelerated during the pandemic. Our alignment with these consumer trends combined with the breadth and reach of our portfolio sustainably positions us for a continued growth. These underlying trends, current market conditions, and a robust 2021 plan position us well to successfully execute on our growth strategies in both segments.

Starting with our Consumer segment. Around the world, we continue to experience sustained elevated consumer demand, which has real incremental consumption and reflects the trend of consumers cooking more at home. Across our APZ region, consumer demand continues to be strong. In China, consumer consumption remains strong, and we continue to see recovery in food service, which in China is in our Consumer segment. As well as optimism about the Chinese New Year Holiday, which was significantly disrupted last year by the COVID-19-related lockdown. And in Australia, either with restaurant restrictions eased and away-from-home demand increasing, at-home consumption has remained elevated. In EMEA, many of our largest markets have recently implemented more restrictive COVID-19 measures, further fueling at-home consumption and we’re seeing sustained levels of demand. And of course, we see the same as in the Americas.

Consumers cooking more from scratch and adding flavor to their meal occasions is a key long-term trend, which has accelerated during the pandemic. Our proprietary consumer survey data supported by external research indicates consumers are enjoying the cooking experience and feel meals prepared at home are safer, healthier, better tasting and cost less. And while there has been great advances in vaccine development and distribution, there’s a significant amount of uncertainty regarding the pace of vaccination in the upcoming months.

We believe the consumer behavior and sentiment driving an increased and sustained preference for cooking at home, will continue globally and will persist beyond the pandemic further driving consumer demand for our products, fueled by robust marketing, differentiated new product and our strong category management initiatives. Our categories across the globe experienced the sustained elevated level of demand for most of 2020, because of this shift in consumer preference, which coupled with added employee safety measures that initially reduced manufacturing capacity deplete its finished goods inventory levels, both for us and our customers and challenged our operations.

The real pressure has been on our U.S. manufacturing operations, where the latter part of 2020, we added significant capacity. We ended the calendar year with considerable incremental capacity through the expansion of our workforce, scaling up partnerships with third-party manufacturers and other measures in line with our previously shared plan. In December, our Americas consumer production output was approximately 40% higher than last year.

Currently, service levels are improving and the restoration plants have begun on most of the secondary items, which were suspended in order to meet the significant demand for our top selling product. We’ve now resumed shipping approximately two thirds of the products, which had been suspended, but the balance to be added over the next several weeks. And we expect shelf conditions to improve considerably over the next few weeks. We’re continuing to work through a stabilization period and inventory replenishment will progress through the first half of the year.

Our category management initiatives are designed to drive growth for both of our – both our customers and McCormick. Now, I’d like to thank our customers for their partnerships and working together with us on long-term solutions. We’re confident we’re well positioned for success in 2021 and have implemented the efficient long-term solutions, and strengthened our supply chain resiliency longer-term to support continued growth.

Also in the U.S., in 2020, we began our initiative to reinvent the in-store experience for spices and seasonings consumers by introducing new merchandising elements, to improve navigation and drive inspiration. Our rollout will continue in 2021 and with increased cooking at home expected to continue, this initiative is even more exciting to drive both category and McCormick branded growth.

Turning to global brand marketing. We continue to increase our investments across our entire portfolio, which have proven effective and achieved high ROI. We will continue to connect with consumers online, turning real-time insights into action by targeting messaging focused on providing information and inspiration. For instance, with tips, tricks, new recipes and products, keep the meals exciting and cooking easy. We expect our brand marketing investments combined with our valuable brand equities and strong digital consumer engagement will continue to drive growth with existing consumers and the millions of consumers gained in 2020.

New products are also integral to our sales growth. In 2020, 7% of our total McCormick sales were from products launched in the last three years. In our Consumer segment, new product innovation differentiates our brands and strengthens our relevance with consumer. Our 2020 launches provide significant momentum going forward with exceptional trial. Overall, the selling of our new product launches and big-bet innovation from our Flavor Solutions customers, slowed in 2020 due to the focus on keeping core items on the retail shelf.

Moving into 2021. We’re excited about the strong pipeline, both we and our Flavor Solutions customers are carrying into the year. In our Flavor Solutions segment, we have a diverse customer base and I’ve seen various stages of recovery from a food at home perspective our Flavor Solutions growth varies by packaged food customer. But overall, as we mentioned, last quarter, we’ve returned to pre-COVID growth rates. We’re carrying our growth momentum, packaged food customers into 2021, driven by strength and their core iconic product, as well as new products and bigger bet innovations in 2021.

In our away-from-home portion of this segment, our restaurant and other food service customers are still impacted by government imposed COVID-19 restrictions in those markets. Some areas, our restaurant customers, including quick service restaurants have been faced with an increase in restrictions due to case resurgences. Although the impact has not been as significant as of the beginning of the crisis, given many customers have adapted their operating models for delivery carried out. The recovery of our branded food service customers continues to be slow and is also impacted by COVID-19 resurgences.

Overall, there is significant disruption experience in 2020. Recovery has begun and we’re expecting it to continue in 2021. As QSR customers are oriented less to dine in, their recovery will be at a faster pace than the rest of the restaurant and food service industry. We had positive fundamentals in place to navigate through this period and are excited about the recovery momentum. We were advantaged by our differentiated customer engagement and Flavor Solutions, and plan on driving further wins for both us and our customers in fiscal 2021.

With our customer intimacy approach, we will continue to drive new product wins, collaborate on opportunities and solutions, manage through recovery plans and importantly, further strengthen our customer partnerships. Additionally, the execution of our strategy to migrate our portfolio to more technically insulated and value-added categories, we’ll continue in 2021. With top-line opportunities gained from our investments to expand our flavor scale or momentum in flavor categories, as well as the opportunities from our FONA acquisition, we expect to realize further results from this strategy.

In summary, we continue to capture the momentum we have gained in our Consumer segment at positive fundamentals in place to navigate through the Flavor Solutions recovery, and are excited about our Cholula and FONA acquisitions. All of which bolster our confidence for continued growth in 2021. We expect sales growth to vary by region and quarter in 2021, given 2020s level of demand volatility and the pace of COVID-19 recovery. But importantly, we expect we will drive overall organic sales growth in both of our segments.

Our fundamentals momentum and growth outlook are stronger than ever. Our achievements in 2020, our effective strategies, our robust operating momentum, reinforce our confidence and delivering another strong year of growth and performance in 2021. Following an extraordinary year in 2020, our 2021 outlook reflects both our strong underlying based business performance and acquisitions, driving significant sales growth as well as strong operating income growth, even considering extraordinary COVID-19 costs and our business transformation investments, which highlights our focus on profit realization. Our top tier long-term growth objectives remain unchanged and we’re positioned for continued success.

Importantly, McCormick employees around the world drive our momentum and success. During 2020, our employees demonstrated and advanced their skills, agility and resiliency during a highly challenging time. Now, I’d like to thank them for their dedicated efforts and engagement, as well as adapted to this new environment.

Now, Mike will share additional remarks on our 2020 financial results and 2021 guidance.

[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, Chairman, President and Chief Executive Officer]

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. [Operator Instructions] And our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your questions.

[Andrew Lazar, Barclays]

Good morning, everybody. Thanks for the question.

[Lawrence Kurzius, Chairman, President and Chief Executive Officer]

Hey, good morning, Andrew.

[Andrew Lazar, Barclays]

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, Chairman, President and Chief Executive Officer]

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, Barclays]

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, Chairman, President and Chief Executive Officer]

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, Barclays]

Great. Thanks very much.

[Operator]

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

[Ken Goldman, JPMorgan]

Hi, thanks so much.

[Lawrence Kurzius, Chairman, President and Chief Executive Officer]

Hey, Ken.

[Ken Goldman, JPMorgan]

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, Chairman, President and Chief Executive Officer]

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, JPMorgan]

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, Chairman, President and Chief Executive Officer]

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, JPMorgan]

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

[Lawrence Kurzius, Chairman, President and Chief Executive Officer]

Thank you.

[Operator]

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

[Alexia Howard, Bernstein]

Good morning, everyone.

[Lawrence Kurzius, Chairman, President and Chief Executive Officer]

Good morning, Alexia.

[Alexia Howard, Bernstein]

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, Chairman, President and Chief Executive Officer]

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, Bernstein]

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, Chairman, President and Chief Executive Officer]

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, Bernstein]

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, Credit Suisse]

Hi, thanks. Good morning.

[Lawrence Kurzius, Chairman, President and Chief Executive Officer]

Hey, good morning, Robert.

[Robert Moskow, Credit Suisse]

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, Credit Suisse]

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, Chairman, President and Chief Executive Officer]

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, Credit Suisse]

Okay. All right, thanks.

[Lawrence Kurzius, Chairman, President and Chief Executive Officer]

Thank you.

[Operator]

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

[Faiza Alwy, Deustche Bank]

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, Chairman, President and Chief Executive Officer]

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, Deustche Bank]

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, Chairman, President and Chief Executive Officer]

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, Deustche Bank]

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, Goldman Sachs]

Yes. Thanks. Good morning, everyone.

[Lawrence Kurzius, Chairman, President and Chief Executive Officer]

Good morning, Adam.

[Mike Smith]

Good morning, Adam.

[Adam Samuelsom, Goldman Sachs]

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, Chairman, President and Chief Executive Officer]

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 [ph] 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, Goldman Sachs]

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 [ph], 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, Chairman, President and Chief Executive Officer]

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, Goldman Sachs]

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, Bank of America]

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

[Lawrence Kurzius, Chairman, President and Chief Executive Officer]

Hey, Peter.

[Peter Galbo, Bank of America]

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, Chairman, President and Chief Executive Officer]

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, Bank of America]

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

[Lawrence Kurzius, Chairman, President and Chief Executive Officer]

For the last quarter...

[Peter Galbo, Bank of America]

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, Chairman, President and Chief Executive Officer]

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, Bank of America]

Thanks very much guys.

[Lawrence Kurzius, Chairman, President and Chief Executive Officer]

Great. Thanks.

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

[Lawrence Kurzius, Chairman, President and Chief Executive Officer]

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, Vice President-Investor Relations]

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.