管理層發言
Good morning. This is Faten Freiha, VP of Investor Relations. Thank you for joining today's second quarter earnings call. To accompany this call, we've posted a set of slides on our IR website, ir.mccormick.com. With me this morning are Brendan Foley, Chairman, President, and CEO, and Marcos Gabriel, Executive Vice President and CFO. During this call, we will refer to certain non-GAAP financial measures. The nature of those non-GAAP financial measures and the related reconciliations to the GAAP results are included in this morning's press release and slides. In our comments, certain percentages are rounded. Please refer to our presentation for complete information. Today's presentation contains projections and other forward-looking statements. Actual results could differ materially from those projected. The company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or other factors. Please refer to our forward-looking statement on slide 2 for more information. I will now turn the discussion over to Brendan.
Good morning, everyone, and thank you for joining us. Our strong second quarter performance demonstrates the underlying strength and resilience of our business. We delivered robust sales growth, expanded underlying margins, and increased earnings. Our total results were supported by the McCormick Mexico transaction. Organic growth was driven by the accelerated momentum in Flavor Solutions, with growth across flavors and branded food service customers, highlighting the benefits of our diversified flavor-focused portfolio. Looking ahead, we expect to sustain the momentum in Flavor Solutions and increase reinvestment to improve Consumer volume trends in organic sales. Our enhanced margin profile and operational rigor position us well to deliver a virtuous cycle of growth through continued investment in our brands, capabilities, and innovation that drive long-term value creation. Our fundamentals remain strong, supported by our advantaged categories and disciplined execution, giving us confidence in our ability to deliver on our 2026 outlook.
Turning now to our results on slide four. In the second quarter, total sales grew by 14% in constant currency, reflecting acquisition contribution from McCormick Mexico of 12% and organic sales growth of 2%. As expected, organic growth was driven by pricing. In global Consumer, volumes were impacted by shifting demand patterns and increased price gaps in the Americas. Looking to the second half, we are implementing targeted actions to strengthen performance. We expect sequential volume improvement in the third quarter and volume growth in the fourth quarter, supported by refined revenue growth management initiatives, expanded distribution, targeted value-focused marketing, and innovation. In EMEA and Asia Pacific, we delivered sustained volume growth during the quarter, and we expect that momentum to continue for the remainder of the year. In Global Flavor Solutions, volume growth exceeded expectations, driven primarily by the Americas.
We benefited from growth across the Flavor Solutions customer base, including large CPG, private label, and high-growth innovators. In branded food service, growth was balanced across channels, supported by distributor volume recovery, sustained demand in non-commercial channels, and strong e-commerce performance. Overall, the quarter reflects solid execution and strengthening fundamentals. Let's move to slide five and let me highlight for the quarter some of the key areas of success. Starting with global Consumer. Across key markets, food categories continued to soften. Against this backdrop, we saw good consumption trends. In spices and seasonings, share gains in Canada, France, Poland, and China continued to support global performance. In recipe mixes in the U.K., we drove unit and dollar share gains for the last three quarters, supported by expanded distribution and customer wins. In Poland, new recipe mix launches under our Kamis brand are performing well.
Most recently, we expanded our recipe mix portfolio in France with the Ducros brand, further strengthening our presence in the category. In mustard, U.S. unit share gains were driven by enhanced distribution, and we delivered the sixth consecutive quarter of dollar share gains in Poland. In hot sauce in the U.S., we delivered dollar and unit share gains for the third consecutive quarter, supported by expanded distribution and innovation, including new Cholula sauces. We also drove share gains in the U.K. and Australia, reflecting strong execution and continued brand momentum across key international markets. We expanded total distribution points across the Americas, led by spices and seasonings, with incremental gains in condiments and sauces. Moving to Flavor Solutions. In Flavor Solutions, innovation plans across our customer base started to commercialize, leading to strong growth across large CPGs, private label, and high-growth innovators.
Innovation activity remains strong, particularly in cereals, soft drinks, sports nutrition, and snacking. We are capitalizing on these tailwinds in beverage innovation, protein and better-for-you growth, premiumization, and continued customer diversification. In branded food service, improving foot traffic drove both volume and sales growth. We continue to see momentum across non-commercial channels, retail food service, and independent operators. Importantly, we delivered tabletop and front of house share gains across Frank's, Cholula, and McCormick. Let me now touch on some areas where we are seeing pressure, starting with global Consumer. In U.S. spices and seasonings, the category grew, but at a lower rate, reflecting consumers using more of what's in their pantry. Our consumption lagged the category within certain segments due to increased price sensitivity and increased competition, both private label and branded.
We are responding with focused actions to drive growth, including disciplined promotional and assortment strategies across channels, refined revenue growth management actions, targeted brand investment and expanded precision marketing to reinforce McCormick's quality and differentiation and consumer insight-driven innovation. We navigated a similar environment two years ago, and we have a clear understanding of the factors that impacted performance. We believe our initiatives position us to improve consumption trends and return to driving category growth. In recipe mixes, we have a strong core portfolio that spans multiple segments. We see opportunity to accelerate growth in Mexican flavors, one of the faster-growing segments in the category. We plan to realize this opportunity with innovation, expanded distribution, and focused brand investment behind authentic Mexican brands like Cholula.
Moving to Flavor Solutions. In Asia Pacific, primarily outside of China, and in EMEA, QSR customer volumes were pressured by softer foot traffic. Looking ahead to the rest of the year, we expect volume trends to improve in Asia Pacific, driven by customers' new products and limited time offers. Let me provide some more context on the state of the consumer. Geopolitical volatility, elevated fuel costs, and persistent inflation continue to weigh on consumer confidence. While affordability has been a consistent theme, the key shift this quarter, particularly given rising gas prices impacting budgets, was a more pronounced move towards value as consumers became increasingly selective and focused on maximizing their budget. At the same time, a majority of consumers claim that they save for small premiums or indulgences, which includes flavor exploration. Health and wellness trends continue to shape behavior, driving sustained growth in perimeter categories, at-home cooking, protein, and broader better-for-you categories across retail and food service.
Within this environment, flavor remains a powerful constant. At-home cooking continues to benefit from consumers seeking affordable, healthier meal solutions, and flavor is the primary driver of purchase across occasions. As a result, spices and seasonings remain the top performer in terms of center store growth. The continued convergence of value-seeking behavior and health trends reinforces the central role of flavor and underscores our advantaged position across our flavor-focused, diversified portfolio. Let's turn to slide six and to our growth plans for the remainder of the year that support our confidence in our ability to deliver on our top-line expectations. Starting with Consumer, we expect second half organic growth to be supported by improving volume trends. This improvement will be driven by expanded distribution, sustained renovation, refined revenue growth management to address increased price sensitivity in specific segments, including optimized price pack architecture.
In addition, we will accelerate innovation and increase brand marketing, including precision marketing designed to drive purchase intent and velocity across our core categories. Let me highlight some examples. We relaunched our seasoning blends line. Beyond new flavor introductions, we are optimizing price pack architecture to enhance value perception and improve accessibility at shelf, an important lever in today's value-focused environment. In addition, we continue to scale newer platforms, including our finishing sugars and finishing salts, with strong promotional tie-ins to globally recognized franchises including Bridgerton, Harry Potter, and Paris Hilton. These partnerships expand household penetration, engage younger consumers, and reinforce the role of flavor as an affordable way to elevate everyday meals. For French's Mustard, we have activated a promotional partnership tied to the release of the new Minions movie, turning the mustard green using all-natural colors because of one of the key characters in the movie.
This type of culturally relevant activation brings excitement to the category and drives incremental traffic. In Flavor Solutions, we expect the momentum from the second quarter to be sustained for the remainder of the year. Our flavors customer pipeline remains healthy, and we are seeing growth across all customers. We are leveraging expertise in regulatory, R&D, and product development to help customers navigate growing health and wellness demands with innovation. We're partnering with large and emerging brands as well as private label customers to flavor energy, hydration, and protein-based beverages, as well as protein and fiber snacks and zero sugar drinks. Our win rate on health and wellness briefs remains strong, and we're focusing resources where we have the greatest opportunity to win across our four taste competencies: savory, heat, naturally sweet, and citrus and fruit. In fact, in the second quarter, a majority of the briefs were tied to health and wellness innovation and renovation.
Reformulation projects are increasing, particularly with large CPG customers, and we are beginning to see the benefit of this project activity launched to the marketplace. Finally, in branded food service, we expect to sustain the momentum from this quarter. The environment remains competitive and value conscious. Targeted investments in menu placements, innovation, and disciplined execution are expected to drive pockets of growth across customer channels. Before turning it over to Marcos, I'd like to provide a brief update on the Unilever Foods transaction on slide seven. Since the announcement on March 31st, we have made strong progress on integration planning. We have established a dedicated integration management office led by Andrew Foust, supported by 20 functional teams, to ensure a seamless transition. Andrew previously helped successfully lead our RB Foods, Cholula, and FONA integrations.
Unilever has established parallel teams. Altogether, there are more than 200 individuals fully dedicated to working across integration streams. From a separation standpoint, approximately 80% of Unilever Foods operates as a standalone organization, which reduces complexity. In addition, we are mapping integration plans country by country. This includes focusing on the 10 markets that represent nearly 75% of combined sales, where we have direct operational overlap in the top six. We expect TSA agreements generally up to two years post-close to ensure continuity across IT, distribution, and back-office functions. In addition, we are entering a second phase of detailed synergy planning. Based on the work completed to date, we remain confident in our previously announced targets for sales growth, operating margin, and adjusted EPS accretion. We expect mid to high single-digit adjusted EPS accretion within the first 12 months post-close and mid to high teens accretion in year three.
Looking ahead, we expect to deliver several key milestones in the coming months. By the end of July, we expect to announce the location of a secondary listing on a European exchange. By the end of September, we expect to share further detail on the operating model, cost synergies, and growth plans, and the scope of the transition services agreements. At the same time, we will continue to advance parallel work streams to support separation financial reports and regulatory filings. Importantly, we are advancing integration planning with rigor while maintaining disciplined execution in our base business. Now, over to Marcos.
Thank you, Brendan, and good morning, everyone. Let's start on slide nine and review our top-line results for the second quarter. Total net sales grew 14% in constant currency and included a 2% inorganic growth, with the balance driven by acquisition contribution. Moving to our Consumer segment on Slide 10, constant currency sales increased 20%, including a 1% increase in organic sales, with the remaining growth driven by acquisition contribution. Consumer organic sales in the Americas were flat, with pricing contribution of 3% offset by volume decline. Volumes were impacted by shifting demand patterns and increased price gaps. Looking ahead, we expect volumes to improve in the third quarter and to deliver volume growth in the fourth quarter. In EMEA, we grew Consumer organic sales 3%, driven by a 2% increase in volume and a 1% contribution from pricing related to targeted actions taken as a result of increased commodity costs.
We're pleased with the sustained volume growth for the tenth consecutive quarter in EMEA. Consumer organic sales in the Asia Pacific region increased by 3%. The increase was driven primarily by volume and reflects the continued gradual recovery in China. In addition, we delivered strong results outside of China, primarily in Australia. Turning to our Flavor Solutions segment on Slide 11, second quarter constant currency sales grew by 6%, reflecting a 3% acquisition contribution and 3% organic growth, driven equally by volume and price. In the Americas, Flavor Solutions organic sales increased 4%, reflecting a 2% price contribution and 2% volume growth. Volumes for the quarter were driven by strong performance across our flavors portfolio, including large CPGs and high-growth innovators, as well as robust growth in branded food service. In EMEA, organic sales were flat, driven by lower volume, reflecting soft QSR customers' volumes due to a decline in foot traffic, particularly in the U.K. In the Asia Pacific region, Flavor Solutions organic sales were flat as 1% volume growth was fully offset by price, with strength in China tempered by softer QSR volumes in Australia.
Moving to Slide 12, gross profit margin expanded 270 basis points in the second quarter, driven by accretion from McCormick de Mexico, the benefit of a tariff refund, surgical pricing, and savings from our comprehensive continuous improvement program, or CCI, partially offset by increased commodity costs. This tariff refund reversed tariffs the business absorbed in prior periods. For this quarter, it drove 140 basis points of margin expansion year-over-year. Underlying gross profit margin expanded 130 basis points, demonstrating the resilience of our business and the strength of our brands in a dynamic environment. Selling, general, and administrative expenses, or SG&A, increased relative to the second quarter of last year, driven by the impact of consolidating McCormick de Mexico and increased investments in technology and brand marketing. As a percentage of sales, SG&A was unfavorable by 90 basis points compared to the prior year.
For the quarter, adjusted operating income increased by 30%, or 27% in constant currency. This increase was driven by strong top line and gross margin expansion, partially offset by higher SG&A. Our second quarter-adjusted effective tax rate was 22.5% compared to 24.1% in the prior year, driven by a greater level of favorable tax items in the current period. Turning to segment operational results on Slide 13, Consumer-adjusted operating income increased 33%, or 31% in constant currency, with adjusted operating margins expanding by 140 basis points. This expansion was driven by acquisition accretion and the tariff refund, which primarily benefited the Consumer segment. These benefits were partially offset by increased inflation and higher logistic costs, driven by the Middle East conflict and tighter freight capacity, resulting from recent changes to U.S. federal regulations. Flavor Solutions adjusted operating income increased by 26%, or 22% in constant currency, and adjusted operating margin expanded by 210 basis points, reflecting our volume-driven top line and our continued focus on improving Flavor Solutions profitability in line with our 2024 Investor Day commitment.
At the bottom line, as shown on slide 14, second quarter 2026 adjusted earnings per share was $0.80, an increase of 16% compared to the year-ago period, driven primarily by increased adjusted operating income, partially offset by non-controlling minority interests. The tariff refund contributed approximately $0.07 per share. On slide 15, we've summarized highlights for cash flow and balance sheet. Cash flow from operations for the first half was $431 million compared to $161 million in the prior year, driven primarily by higher profitability and improved working capital. We returned $258 million of cash to shareholders through dividends and used $75 million for capital expenditures to expand capacity, advance digital transformation, and optimize our cost structure. We continue to expect strong performance in our cash flow from operations for the fiscal year. Our capital allocation priorities remain balanced.
This means funding investments to drive growth, returning cash to shareholders through dividends, and maintaining strong balance sheet. We remain committed to a strong investment-grade rating. At the end of this quarter, our leverage ratio was approximately 2.9 times, reflecting de-levering from the first quarter following the close of McCormick in Mexico. We expect to continue to make progress in paying down debt, positioning us well ahead of the Unilever Foods close. As previously noted, at close of Unilever Foods, we expect to have industry-leading operating margins of 21% and working capital benefits that support 100% free cash flow conversion from net income before any synergies. Post-close, we expect to continue investing in the business while driving margin expansion and delevering. Based on current estimates, after brand investments, costs to achieve synergies and dividends, we anticipate having $1.5 billion-$2 billion available to pay down debt within the first two years and delever two to three times.
Longer term, we will target a leverage ratio of two to three times. Turning to slide 16 to review our 2026 financial outlook, which remains broadly consistent with what we shared on our last earnings call. A few call-outs. Starting with organic growth, we expect our Consumer Business volume to improve, driven by refined revenue growth management plans, new products, packaging renovation, expanded distribution, and increased brand marketing investments. In Flavor Solutions, we anticipate the volume momentum to continue, and for this segment to drive total volume growth for the year. Across both segments, we expect pricing to contribute more to organic sales growth this year compared to prior year. Our tariff cost assumptions, primarily related to the global 10% tariff, remain consistent based on the latest developments and our current knowledge. While we anticipate incremental year-over-year cost pressure in 2026, we remain focused on mitigating the majority of the impact.
In addition to the $28 million tariff refund in the second quarter, we expect an additional $3 million in the second half. For the full year, this benefit will largely help offset heightened inflationary pressures, including costs related to the Middle East conflict, which will continue to impact us for the remainder of the year. Turning to gross margin, first half performance exceeded our implied guidance and included most of the full-year tariff refund. This is a dynamic environment, and we continue to navigate several cost uncertainties. However, based on what we know today, we expect gross margins to expand by 100 to 120 basis points for the year relative to 2025. For the third quarter, adjusted operating income is expected to grow in the high single to low double digits year-over-year, supported by continued gross margin expansion. This will be partially offset by SG&A expenses due to the timing of ERP-related technology investments, the build-back of incentive compensation, and a significant increase in brand marketing investments.
Adjusted EPS is also expected to be impacted by the same items, as well as the lapping of a favorable tax rate in the prior year. Moving to slide 17, this slide summarizes the cost headwinds for 2026 and how we plan to offset them. Our guidance reflects strong underlying base business performance and growth from acquisition. To close, we remain confident in the long-term strength of our business and our ability to deliver on our 2026 outlook. Through disciplined execution, focused strategic investments, and continued productivity gains, we're driving sustained net sales and operating income growth, as well as generating strong cash flows to support our balanced capital allocation priorities.
Thank you, Marcos. I would like to close with three key takeaways on slide 18. Our fundamentals remain strong, supported by resilient long-term category trends, healthy and flavorful cooking, flavor exploration, and trusted brands, as well as the strength of our diversified flavor focus portfolio. In the second quarter, accelerated momentum in Flavor Solutions more than offset consumer trends. We delivered strong organic growth, expanded underlying margins, and increased profitability driven by disciplined execution and productivity initiatives, the McCormick de Mexico acquisition, and effective cost management in a dynamic environment. We are also taking focused actions to improve consumer volume trends, sustain Flavor Solutions momentum, and invest in innovation, brand building, and digital capabilities. We remain confident in our long-term value creation plans, including delivering our 2026 outlook and advancing integration planning for the Unilever Foods combination, which accelerates our growth strategy and reinforces our continued focus on flavor, one of the most advantaged categories in CPG.
The incremental growth is supported by industry-leading margins and a strong cash profile. To wrap up for the quarter, our performance reflects the power of our balanced portfolio, our leadership in flavor, and the agility of our teams around the world. I want to recognize all McCormick employees for their dedication and contributions. Their commitment and passion continue to drive our success. Now for your questions.
分析師問答
Thank you. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.
Great. Thanks so much. Good morning, everybody.
Good morning.
Good morning.
Good morning. The one key area, obviously, you highlighted in terms of weakness in the quarter was U.S. spices and seasonings, where I guess you experienced softening consumption trends and widening price gaps. I think McCormick went through something maybe somewhat similar several years ago and addressed it in some very specific ways. I guess my question is this time around any different than the last time? If so, how so? How does your approach several years ago inform how you plan to deal with this issue this time around?
Thanks for the question, Andrew. Our approach is broadly very similar to what we did over the last two to three years. The broad theme or the headline answer is that we're taking the same types of approaches that we did before. There might be one or two things that are a little different today than in the last two to three years, which is what we're seeing in the pressure we've talked about. It's happening in some very specific segments, not broadly across a category with many segments in herbs, spices, and seasonings. The second difference today is that consumer pressure is higher. We've seen inflation layered into consumer budgets. In the second quarter, we saw a spike in non-food inflationary pressure on the consumer. Is that temporary? Many might think it is, but it is different than more sustained pressure we saw before. What's the same is that what we've done in the past informs us strongly on what we'll do moving forward.
Many of the segments where we implemented these programs continue to benefit even today. The strategic approach to solve these segments will be the same. One difference now is the digital landscape, which has evolved a lot even in the last two years. Our advertising and promotion gets more targeted as we think about the solutions to make sure we're winning with the consumer and meeting them where they are. This period reinforces the importance of speed, agility, and response. I'm pleased with how our team's responding. We're starting to read early results and we like what we see. It's having the impact we expect it to have.
Really helpful. Thanks for that. It might be hard to sort this out, but of the $31 million full-year expected tariff refund benefit, what portion of that do you think is being used for reinvestment behind the more competitive environment versus covering some of the higher, hopefully temporary cost inflation that you're facing? Thanks so much.
I'll answer that one, Andrew. The Middle East conflict is driving more inflation than we had contemplated. If you think about our guide, which is mid-single digit cost inflation, we're tracking toward the high end of that range, about 6% right now. We are going to use the majority of the tax refund to offset these higher costs. These tariffs hurt us last year; we're using the refund now to offset most of these costs. Importantly, our underlying gross margin is healthy. Even if you strip out the tariff refund, our gross margin was about 130 basis points up. That demonstrates resilience and gives us room to invest back in the business and drive top-line growth in the back half of the year.
Great. Thanks so much.
Thank you. Our next question comes from the line of Peter Galbo with Bank of America. Please proceed with your question.
Hey, good morning. Thanks for the questions.
Hey.
Brendan, if I can ask a variation on Andrew's question. Within Americas Consumer, you've been faced with a bit of a macro Whac-A-Mole. You're taking actions and using the playbook you used in the past. How do we gain confidence this is sustainable, that the actions you're putting in place will work this time and will be somewhat sustainable, that you can dampen some of this volatility for a relatively resilient category? Any additional thoughts would be appreciated.
I'm happy to do that, Peter. If you look back at the last two years when we were dealing with this before, we were able to demonstrate sustained improvement during that period. Those conditions were largely similar. One aspect to share with investors is that we have strong motivation to continue to perform in a healthy, volume-driven way. We'll work hard to create even more resilience if needed. You see that in our performance, whether it's underlying gross margin or increasing A&P behind the business, and continued focus on innovation, which is performing more strongly this year than last. Those are indicators of sustained focus and momentum across the portfolio. We'll go through periods with sharp inflections like the second quarter. Over a longer-term period, we demonstrate resiliency. The external environment is presenting new challenges, and one of our strategic focuses is to continue building resilience into the business. We don't know where we'll need it, but resiliency is important to us and to investors.
Thanks for that. Marcos, can I ask a clarification on the third quarter operating income expectations and how that bridges to EPS? There are below-the-line items different this year versus last year. Can you put guardrails around the EPS rate of decline for 3Q? That would be helpful. Thanks very much.
On Q3, we provided specifics in my prepared remarks. From net sales perspective, we believe we'll have solid net sales—continued momentum in Flavor Solutions, improving performance in Consumer, continued good momentum in EMEA and APAC. Gross margin expansion will continue. What is driving operating profit being high single digit to low double digit is timing of expenses within SG&A: ERP timing, incentive compensation, and brand marketing. That's the operating profit line. Regarding EPS, the biggest additional element is tax. The tax rate was about 16% last year. Normalization toward the full-year guide around 24% creates roughly a 700 to 800 basis point headwind. That's the key element to consider for EPS and below-the-line items.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Tom Palmer with JPMorgan. Please proceed with your question.
Good morning, and thanks for the question. I wanted to start off maybe following up on Pete's question on third quarter expectations. Two pieces: One, when thinking about the operating profit growth coming in lighter than consensus, how much was mismodeling on our part about SG&A timing versus some incremental costs to consider, including inflation? Thanks.
On the SG&A side, that's how we've been modeling the cadence of our spend in the back half of the year. We shifted some expenses into Q3: more brand marketing, ERP program hitting Q3 versus a year ago, and incentive compensation building back. I don't think there's a change versus our internal expectations. We are seeing more inflation due to the Middle East conflict; we're using the tariff refund to offset most of it. It's driving gross margin expansion, which is positive. We upgraded full-year gross margin expansion to 100 to 120 basis points. Overall, this is in line with our expectations—it's the phasing of SG&A expenses that matters.
Okay. Thanks for that. On Flavor Solutions, sales can be lumpy. You noted tailwinds including reformulations, previously expected more in 2027. Two questions: First, any lumpiness to keep in mind when thinking about the strength of the second quarter? Second, what's driving faster reformulations and should we think about that continuing to build? Thanks.
Flavor Solutions performance is strong and broad-based. At the beginning of the year, we expected improvement to layer in progressively; the second quarter showed even more strength. The pipeline scope is healthy across many customer segments and has amplified. Reformulation projects are increasing, particularly with large CPG customers, and we're starting to see them commercialize a little faster than initially predicted. There's also a market acceleration of health and wellness innovation, with more activity from private label and high-growth innovators. We saw more beverage innovation in away-from-home this quarter, and I expect that to continue. We are gaining share in this part of our business. Branded food service also benefited from small traffic growth in specific segments. Overall, the food industry is innovating and we're benefiting from it.
Great. Thanks for the detail. Very helpful.
Thank you. Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.
Hey, great. Thank you, and good morning, both Brendan and Marcos.
Good morning.
Brendan, following up on Tom's question: When you stack up reformulation, innovation, and health and wellness activity, for how long would you expect that to translate into the favorable spread between Flavor Solutions and end-market consumption? Is this a moment in time with duration, or something more durable into the future?
Because much of this aligns with consumer trends, I view it as more durable. The food industry has always been effective at innovating to meet consumers, and this is evidence of pipelines starting to materialize. We see durability tied to where consumers are going.
Thanks. You spoke to anticipated outcomes of integration planning, including secondary listing by end of July and more detail by end of September. Could you shed more light on the work behind the scenes to reach those outcomes and how day-to-day work is organized alongside general business operations?
We have dedicated resources at McCormick and Unilever Foods prosecuting integration planning. I'm encouraged by the collaboration and esprit de corps between the two teams. The work is disciplined and rigorous, organized by function and specific activities, progressing in parallel with timetables that we're hitting. We did a recent checkup and are where we want to be on the timeline. This gives me confidence. I'm even more excited about the combination after interacting with Unilever Foods employees; their energy and passion reinforce our enthusiasm. Operational clarity and rigor between the base business and integration teams is clear, which gives me confidence we can continue as we progress toward close.
Great. Thank you very much. Appreciate it.
Thank you. Our next question comes from the line of Robert Moskow with TD Cowen. Please proceed with your question.
Hi. Thanks for the question. Brendan, you've navigated price gaps and tried to regain market share in spices and seasoning before. I remember it took longer than a couple of quarters previously. The guidance implies sequential improvement in the back half. Is there enough time to execute what you want to execute to get volume positive in the Americas? Quick follow-up after this.
Thanks, Rob. It did take a little longer when we were in this position before. Back then we implemented programs more slowly and had significant customer dialogue. Today, the dialogue with customers is faster and there's recognition of what we need to do to course-correct. Our ability to implement quickly with speed and agility is stronger now, and the digital landscape gives us more capability. We also have more gross margin flexibility to invest in the right areas. I'm encouraged by the speed of our response and we're starting to see it in the marketplace. We have a greater understanding of the levers and confidence when we implement them.
Okay. My follow-up is on the seasonings subcategory. Brands like Grill Mates and Lawry's are losing share to up-and-coming emerging brands. When you talk about price gaps, is that related to that at all? Is there something else in terms of brand positioning relative to those competitors you'd like to address?
As I mentioned, there are specific segments to address, which could align with what you called out. Price gaps can be part of it. These advantaged categories attract more competition, including private label. We saw more competitive promotional activity in Q2 that likely affected results. There's also a consumer component. We have a handle on it and know what we need to do.
Okay. Thank you.
Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.
Good morning, everyone. Can we start by examining the operating margin outlook for the combined McCormick-Unilever deal? 21% at close is already high relative to other food companies. Getting to 23%-25% is even higher. From the outside, if marketing spend is healthy at 7%-8% and gross margins are in the low 40s, that implies remaining SG&A outside marketing is surprisingly low. Is this doable long term, or has the belt been tightened so much that it will be problematic after the combination?
Thanks, Alexia. As we look at the future margin profile, we intend to continue investing in the business at increasing levels. We want investors to know we will support ongoing investment. We don't see the future SG&A as unusually low. We'll provide more context through the integration process and as we report more detail in coming quarters. Based on our internal modeling and conversations with Unilever Foods, this isn't an unusual SG&A profile.
You hit the key points, Brendan. Operating margin has been driven by gross margin expansion. The team has continued to invest in brand marketing. We don't feel SG&A is at a low place today. The 21% operating margin is the starting point before synergies. Layering synergies gets you to 23%-25%, and we feel confident about that profile.
Great. That's helpful. Quick follow-up on Flavor Solutions: Regarding branded food service channels seeing improved foot traffic, can you be more specific about which channels are recovering? Also, there's a big snacking/beverage customer that has been struggling; you mentioned growth across customers—does that mean that headwind is gone? Thank you.
For branded food service, segments with more growth than the total food service industry include QSRs—especially in the Americas—fast casual dining, and non-commercial channels. Those are the areas where we have focus and where our brands resonate. The food service market experienced some deceleration in Q2 due to consumer budget pressure, but growth is happening in areas where we are focused. The pressure hasn't fully gone away, but we are seeing pockets of recovery where we have exposure.
Thank you very much. I'll pass it on.
Thank you. Our final question this morning comes from the line of Max Gumport with BNP Paribas. Please proceed with your question.
Hey, thanks for the question. Returning to 3Q profit commentary: After 1Q results, you had signaled 3Q would be above the low end of your 2026 guidance range. Now 3Q indicates high single digits to low double digits. You mentioned SG&A timing. Was there a shift in your view of SG&A, with a shift from 2Q into 3Q related to ERP and incentive comp timing, or incremental brand marketing investment versus what was initially planned? Thanks.
When we put out the guide at the beginning of the year, we guided the full year, not by quarter. The range of 15%-19% was for the full year. In terms of phasing, some spend is shifting between Q3 and Q4. We're investing more heavily in brand marketing in Q3 than Q4, although Q4 brand marketing dollars will still be strong. Year-over-year, Q4 2025 had very strong brand marketing, so year-over-year comparisons in Q4 won't be as significant. Those are the main points.
That covers it. Maybe too fine a point, but you said 2Q would be at the low end of the 2026 guidance range and 3Q would be better, so it looks like a change in tone. Thanks. Quick one on cash flow: First half was much better than last year. You talked about working capital improvements—can you expand on what's generating those improvements and sustainability?
We're very pleased with first half cash flow of $431 million and the leverage position of about 2.9 times at quarter end. Even after the McCormick de Mexico acquisition, we incurred $750 million of additional debt and have a playbook of acquiring and paying down debt quickly. Working capital improved across inventory days, payables, and receivables—primarily inventory days and payables are the main drivers supporting the improvement. We expect to continue making progress on working capital and delevering.
Okay, great. Thanks very much. I'll leave it there.
Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Ms. Freiha for any final comments.
Thank you. Thank you, everybody, for joining today's call. If you have any additional questions, please feel free to reach out to me. This concludes our conference call for this morning. Thank you.
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