McCormick (MKC) Q2 2019 Earnings Call Transcript

McCormick (MKC -0.38%)
Q2 2019 Earnings Call
Jun 27, 2019, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Kasey Jenkins

Good morning. This is Kasey Jenkins, vice president of McCormick investor relations. Thank you for joining today's second-quarter earnings call. To accompany this call, we posted a set of slides at ir.mccormick.com.

[Operator instructions] We'll begin with remarks from Lawrence Kurzius, chairman, president, and CEO; and Mike Smith, executive vice president and CFO. During our remarks, we will refer to certain non-GAAP financial measures. These include information in constant currency as well as adjusted operating income, adjusted income tax rate and adjusted earnings per share that exclude the impact of special charges and, for 2018, transaction and integration expenses related to the acquisition of our Frank's and French's brands as well as the net nonrecurring income tax benefit associated with the December 2017 U.S. tax reform legislation.

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, which includes the 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 statement, whether because of new information, future events or other factors. As seen on Slide 2, our forward-looking statements also provide information on risk factors 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. Our solid second-quarter results were in line with our expectations.

And as we enter the second and most significant half of our year, we are confident in our growth trajectory and that we are well positioned to deliver strong results in 2019. Our successful execution of our strategies and engagement of employees around the world have driven sales, operating profit and adjusted EPS growth as well as operating margin expansion in both the second quarter and year to date. Starting on Slide 4. Our broad and advantaged global flavor portfolio continues to position us to meet the demand for flavor around the world to grow our business.

Among our second-quarter highlights across our portfolio, we drove growth in our consumer segment base business and through new products in all regions, including Zatarain's meal solutions and frozen entrées and U.K. rapid recipe mixes. In the Americas, Frank's RedHot sauce continues its strong performance, and we are also gaining momentum with Frank's internationally. In our flavor solutions segment, our Americas and EMEA regions drove significant growth in flavors, branded foodservice and condiments, with strong contributions from both new products and the base business.

We are confident our breadth and reach will continue to differentiate McCormick and will be the foundation of our sales growth as consumers' demand for flavor continues to rise. Now let me go to more detail on our second-quarter performance, as seen on Slide 5, as well as provide some business comments before turning it over to Mike who will go more in depth on the quarter end results and discuss our 2019 financial guidance. Starting with our top line for the second quarter. Second-quarter sales were comparable to the year-ago period, including a 3% unfavorable impact from currency.

In constant currency, sales grew 3% for the total company, with both segments growing sales in each of our three regions. This growth was attributable to higher volume and product mix as well as pricing and was entirely organic driven by the base business and new products as we had no acquisition impact in the quarter. In our consumer segment, sales declined 1%, including a 3% unfavorable impact from currency. In constant currency, sales grew 2%.

In our flavor solutions segment, sales grew 1% and in constant currency grew 4%. In addition to our top line growth, we grew adjusted operating income and expanded our adjusted operating margin. With our higher sales and cost savings led by our Comprehensive Continuous Improvement Program, CCI, we grew the second quarter's adjusted operating income 5% or 8% in constant currency and expanded our adjusted operating margin 80 basis points. At the bottom line, our second-quarter adjusted earnings per share of $1.16 was 14% higher than $1.02 in the second quarter of 2018 driven primarily by our adjusted operating income growth and the lower adjusted tax rate.

And this 14% adjusted earnings-per-share growth includes an unfavorable impact from currency. Our second-quarter results were solid, and we continue to expect another year of strong performance in 2019. We're reaffirming our sales outlook, and as Mike will explain in detail, we are updating our operating profit outlook and increasing our earnings per share outlook. I'd like to turn now to some business updates with a focus this morning on highlights from our consumer and flavor solutions segments and update on our business transformation activity and our business momentum that reinforces our confidence in the remainder of the year.

Turning on Slide 6 with our consumer segment. As I just mentioned, we grew constant currency sales 2%, with increases in each of our three regions. In the Americas, we grew constant currency sales 2% driven by higher volume and product mix. A late Easter, which delayed the start of grilling season, tempered sales growth for the quarter.

We estimate our consumption growth for the quarter, including both measured and unmeasured channels, was 2%. Our IRI data indicates U.S. spice and seasoning scanner sales for multi-outlets grew 2% for the category and 1% for McCormick branded. While the late grilling start slowed the category growth, it had a greater impact on our consumption.

We again had strong growth in unmeasured channels, including club, e-commerce and Hispanic retail chains. Our category management initiatives, effective marketing support, merchandising execution, expanded distribution and new products contributed to drive consumption growth across our Americas consumer portfolio. McCormick-branded dry recipe mixes and Stubb's barbecue continued their momentum of consumption and share growth. Zatarain's frozen items, both base business and new products, drove growth.

Frank's RedHot sauce continued strong performance with distribution gains, with total distribution points hitting a record high. And with our category management initiatives and focused marketing support, French's mustard grew consumption and share. We believe these actions will continue to drive consumption and sales growth in the second half of the year. Now turning to Europe, Middle East and Africa, the EMEA region.

Constant currency growth was driven by very strong promotional programs and targeted brand marketing across the region. Expanded distribution and new products were also growth drivers. We had broad-based growth across most of the region, including strength in Eastern Europe. We're excited by our continued momentum on new product launches and the successes we've realized to date with more flavors and varieties to come as well as further distribution expansion.

In the Asia/Pacific region, we built further momentum of Frank's and French's, particularly in China, India and Australia. The foundation we continue to establish, while still early days, is driving results. Although growth in the region has been partially impacted by recent macroeconomic pressures in China, our fundamentals across the region remain strong. Turning now to Slide 7.

In our flavor solutions segment, our sales performance was strong. Our constant currency sales growth was 4% driven by higher volume and product mix on base business as well as new products. We're continuing to win with our customers through new products, expanded distribution and promotional activities. In the Americas, we drove constant currency sales growth of 3%.

We had strong sales growth to quick-service restaurants as well as in our flavor product category. Our flavor sales were driven by snack seasonings, partially due to new products and our customers' promotions and by products that deliver the clean label and better-for-you attributes our customers are seeking. We also had strong branded foodservice growth driven by increased distribution with national and regional customers, promotional activity with operators and expansion in emerging channels. In branded foodservice, we continue to realize the benefit of leveraging our full portfolio of McCormick spices and seasonings and Frank's, French's and Cattlemen's products across operators.

Our strong momentum in EMEA was once again reflected in our second-quarter results. Sales growth was outstanding, 9% in constant currency, and was broad based across the portfolio both from a product category and customer perspective. We drove sales growth to quick-service restaurants, partially due to their strong promotional activity, and to packaged food companies with new products being a key driver. Turning now to Slide 8.

As we previously discussed most recently at CAGNY, we are making investments to build the McCormick of the future, including in our Global Enablement organization to transform McCormick through globally aligned innovative services enabling the business to grow. As technology provides the backbone for this greater process alignment, information sharing and scalability, we're also making investments in our information systems. We have progressed our ERP replacement program and accelerated the transformation of our ways of working. This will enable us to realize the benefits of a scalable platform for growth sooner.

We have estimated the total cost of our ERP investment to range between $150 million and $200 million from 2019 through the anticipated completion of our global rollout in fiscal 2021. The capital spend portion is estimated to be $90 million to $120 million and program expenses $60 million to $80 million. Mike will discuss this further in his remarks. Next, as we are at the midpoint of the year, I'd like to share a few comments about the momentum we are carrying into the balance of the year.

Our largest quarters are ahead of us. And as we have remarked previously, our operating profit growth is weighted toward the second half of our year. As seen on Slide 9, our confidence for the second half has bolstered first by our plans for a strong Americas fall and holiday season, partially driven by a significant increase in brand marketing. We continue to optimize our brand marketing spend, both in terms of working and nonworking mix as well as in timing, increasing our effectiveness and getting more value out of each marketing dollar.

We have intentionally skewed our brand marketing spend to be heavier later in the year to maximize our ROI and support the key holiday period. Additionally, we have robust brand marketing investments planned in support of the significant array of new products we've launched across all regions during our first half and are now gaining momentum in distribution. And we have exciting additional new product launches in our second half. This new product lineup includes: in the U.S., street tacos following the successful U.K.

street food launch; complete meal seasonings; a package of complementary seasonings for our consumers' protein, vegetables and starch; and Thai Kitchen coconut milk in a resealable tetra package. In EMEA, in addition to flavor and geographic extensions, we'll be launching premium Grinders. And in China, we're launching a full range of thick texture salad dressings and light meal sauces. Our confidence is also driven by new distribution we've successfully secured, realizing the benefits of distribution gained throughout the first half of the year across both our consumer and flavor solutions segments.

And in flavor solutions, we expect continued momentum and wins with our customers through new products and promotional activities. Finally, as we've mentioned previously, we will be lapping several onetime items which impacted us unfavorably in late 2018 such as the unusual fourth quarter impacts we had in the Americas consumer business and our move to a new global headquarters. We're excited about our plans and confident in delivering strong sales growth in our second half as well as significant profit realization while continuing to invest in the business. Now I'd like to provide a few summary comments as seen on Slide 10 before turning it over to Mike.

At the foundation of our sales growth is the rising consumer demand for flavor. We are aligned with the consumers' increased interest in bolder flavors, demand for convenience and focus on fresh natural ingredients as well as with emerging purchase drivers such as greater transparency around the sourcing and quality of food. With this increased interest, flavor continues to be an advantaged global category, which, combined with our execution against effective strategies, will drive strong results. We have a solid foundation and in an environment that continues to be dynamic and fast paced, we are ensuring we remain agile, relevant and focused on sustainable growth.

Our experienced leaders and employees are executing against our strategies, which are designed to build long-term value for our shareholders. Our second-quarter financial results across both our consumer and flavor solutions segments contributed to a great first half of the fiscal year. Our fundamentals are strong, and we're confident the initiatives we have under way position us to continue our growth trajectory. We're balancing our resources and efforts to drive sales with a work to lower costs to build fuel for growth and higher margin while making the investments in our future.

We have confidence in our updated fiscal year outlook, and we are well positioned to deliver another strong year in 2019. We remain excited as we enter our second half and continue to drive results. Around the world, McCormick employees are driving our momentum and success, and I thank them for their efforts and engagement. Thank you for your attention.

And it is now my pleasure to turn it over to Mike for additional remarks on our second-quarter financial results and our updated 2019 outlook.

Mike Smith -- Executive Vice President and Chief Financial Officer

Thanks, Lawrence, and good morning, everyone. As Lawrence indicated, we delivered solid second-quarter results in line with our expectations. I'll begin with a discussion of our results and then follow with details of our full-year 2019 financial outlook. Turning on Slide 12.

We grew sales 3% in constant currency, and as Lawrence mentioned earlier, this was entirely organic growth driven by the base business and new products as we had no acquisition impact in the quarter. Both our consumer and flavor solutions segments delivered top line constant currency growth in each of our three regions. The consumer segment grew sales 2% in constant currency. This growth was driven by all three regions and was attributable to expanded distribution, new products and pricing.

On Slide 13, consumer segment sales in the Americas rose 2% in constant currency versus the second quarter of 2018. This increase was driven by higher volume and product mix, including Zatarain's products, Frank's RedHot sauces, branded extracts and our branded Hispanic products, partially tempered by the delayed grilling season start. In EMEA, constant currency consumer sales were up 1% from a year ago. Higher volume and product mix were driven by new products, distribution gains and promotional activities.

This growth was partially offset by a decline in private label as well as pricing actions, including those related to planned trade promotional activity for new products. We grew consumer sales in the Asia/Pacific region 3%, with growth in India and Australia driven by our marketing programs as well as expanded distribution. Additionally, China pricing actions were partially offset by related volume impacts as well as the macroeconomic pressures Lawrence mentioned earlier. Turning to our flavors solutions segment on Slide 16.

We grew second-quarter constant currency sales 4%, with growth in all three regions led by strength in EMEA. In the Americas, flavor solutions constant currency sales increased 3% with broad-based growth across the portfolio, excluding a decline in bulk ingredients. New products, expanded distribution and our customer promotional activities all contributed to the sales increase. In EMEA, we grew flavor solutions sales 9% in constant currency across both packaged food companies and quick-service restaurants, partially due to their promotional activity.

This growth was driven by new products, pricing and base business volume growth and spanned all categories. In the Asia/Pacific region, flavor solutions sales in constant currency grew 2% versus the year-ago period as higher sales to quick-service restaurants were partially driven by the timing of the promotional activities. Across both segments, adjusted operating income, which excludes special charges and for 2018, the transaction and integration costs related to the acquisition of our Frank's and French's brands, rose 5% in the second quarter versus the year-ago period and excluding the impact of unfavorable currency, rose 8%. Adjusted operating income in the consumer segment rose to $138 million, a 7% increase.

Adjusted operating income in the flavor solutions segment rose to $77 million, a 2% increase. In constant currency, adjusted operating income increased 9% in consumer segment and 5% in the flavor solutions segment. In both segments, the increase was primarily driven by CCI-led cost savings, higher sales and lower brand marketing expenses. The impact of these drivers in the flavor solutions segment was partially offset by an unfavorable transactional impact of foreign currency exchange rates as well as unfavorable mix related to a sales shift in quick service restaurants from limited time offers to core menu items.

As seen on Slide 21, in the second quarter, we increased gross profit margin 30 basis points year on year driven by CCI-led cost savings. Our selling, general and administrative expense as a percentage of net sales decreased by 50 basis points from the second quarter of 2018. This decrease was primarily driven by lower brand marketing investments, which, as Lawrence mentioned earlier, is partially driven by timing. And through our new marketing excellence organization, we are increasing our efficiency and speed as well as realizing brand marketing CCI through the creation of in-house services and consolidated media buys.

As a reminder, while our first half brand marketing is lower than last year, we are planning to spend brand marketing comparable to 2018, partially by reinvesting our continued marketing excellence cost savings and nonworking media spend reductions into working media. Therefore, we are planning brand marketing increases in our second half. SG&A leverage gained from CCI-led cost savings initiatives and onetime global benefit plan alignment was offset by business transformation expenses driven by our ERP platform replacement. In fiscal year 2019, we expect the ERP expenses to be concentrated in our second and third quarters.

The combination of the gross margin expansion and the overall SG&A leverage resulted in an adjusted operating margin expansion of 80 basis points for the second quarter of 2019. Turning to income taxes on Slide 22. Our second-quarter adjusted effective income tax rate was 18.9% as compared to 22.2% in the year-ago period. Our second-quarter adjusted rate was favorably impacted by discrete tax items, principally due to stock option exercises.

As we have discussed in previous quarters, favorable tax rate impacts of option exercises are partially offset by payroll and social-related taxes, which unfavorably impact operating profit. Considering the year-to-date favorable impact from discrete items, we now expect our full-year 2019 adjusted effective tax rate to be approximately 21%. There can be volatility in that rate quarter-to-quarter due to the unpredictability of discrete items, changes to our forecasted mix of earnings and interpretation of regulations continuing to be released clarifying the impacts of the 2017 U.S. Tax Act.

Income from unconsolidated operations was $10 million compared to $7 million in the second quarter of 2018, a 28% increase driven by excellent performance by our McCormick de Mexico joint venture. For 2019, we now expect a high single-digit increase in our income from unconsolidated operations. At the bottom line, as shown on Slide 24, second-quarter 2019 adjusted earnings per share was $1.16, up 14% from $1.02 for the year-ago period, primarily due to growth in our operating performance, including from our joint ventures, and a lower adjusted income tax rate. And this increase included an unfavorable impact from currency.

The company continues to generate strong cash flow. On Slide 25, we've summarized highlights for cash flow and the quarter end balance sheet. Our cash flow provided from operations was $314 million through the second quarter of 2019 compared to $235 million from the first half of 2018. Our strong operating cash flow was driven by higher operating income and our continued working capital initiatives.

As we execute against programs to achieve working capital reductions, including inventory management programs, we continue to see improvements in our cash conversion cycle, finishing the second quarter down six days versus our fiscal year-end. A portion of this cash was used to pay down $88 million of acquisition debt as the company continues to focus on paying down debt. As we have maintained our disciplined acquisition strategy with a focus on paying down debt, we finished the second quarter with a debt to adjusted EBITDA ratio below four times, which is pacing us ahead of our target of three times by the end of 2020. So as Lawrence mentioned during the first quarter earnings call, while our priority is paying down debt, it is also time for us to start exploring acquisition opportunities which represent a key part of our long-term growth strategy.

For the first half of fiscal 2019, we returned $151 million of cash to shareholders through dividends and used $54 million for capital expenditures this period. We expect 2019 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, making investments to drive growth, returning a significant portion to our shareholders through dividends and to pay down debt. Let's now move to our current financial outlook for 2019 on Slide 26.

We continue to expect another year of strong performance in 2019 with our broad and advantaged flavor portfolio, effective growth strategies and focus on profit realization. We are reaffirming our sales outlook and updating our operating profit and earnings per share outlook. We continue to estimate, based on prevailing rates, a two percentage point unfavorable impact from currency rates on net sales, adjusted operating income and adjusted earnings per share. We also continue to expect the unfavorable currency will be greater in the first half of the year than in the second half.

At the top line, we reaffirm our guidance to grow sales 1% to 3%, which in constant currency is a 3% to 5% projected growth rate. As a reminder, this will be entirely organic growth driven primarily by higher volume and product mix as well as the impact of pricing to offset an anticipated low single-digit cost increase. We continue to project our 2019 gross profit margin to be 25 to 75 basis points higher than in 2018, in part driven by our CCI-led cost savings. We're now expecting our adjusted operating income growth to be 6% to 8% from $930 million in 2018, which in constant currency is an 8% to 10% projected growth rate, remaining above our long-term objective and reflects our continued focus on profit realization.

Our cost savings target remains approximately $110 million, and we expect brand marketing to be comparable to 2018. Our updated adjusted operating income growth rate continues to reflect expected strong performance. The decrease from the outlook last year during our March earnings call reflects the impacts of a classification shift in our ERP spending, the operating expense headwind related to option exercises, which partially offset the tax benefit, and global developments including trade and economic conditions in selected countries. As Lawrence mentioned, we are progressing our ERP replacement program.

And while our estimated total 2019 project investment related to this business transformation has remained unchanged, we now expect a lower 2019 capital spend component and higher operating expenses than we had originally expected for 2019. Resulting from this classification shift, we are lowering our 2019 capital spend outlook to approximately $200 million, and our 2019 updated operating profit outlook reflects the increased expense. We are excited about this investment to enable us to transform our ways of working and realize the benefits of a scalable growth platform. We are increasing our guidance for 2019 adjusted earnings per share to be in the range of $5.20 to $5.30, which compares to $4.97 of adjusted earnings per share in 2018 and represents a 5% to 7% increase or in constant currency, 7% to 9%.

This increase reflects the impact of changes I previously mentioned, our updated adjusted operating income outlook, the expected increase in income from unconsolidated operations and the projected lower adjusted effective tax rate. In summary, we continue to project strong growth in our 2019 constant currency outlook for sales, adjusted operating profit and adjusted earnings per share, following record double-digit performance across each objective in 2018 and while continuing to invest for future growth. 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. Now that Mike has shared our financial results and outlook in more detail, I'd like to recap the key takeaways as seen on Slide 27. We're delivering against our plans both for sales and profit realization and are confident in the momentum of our business. With our year-to-date results, we have a strong start to the year.

Moving into our second half, we're confident in our plans, including brand marketing support, new product launches and new distribution, which will drive further growth. Our 2019 outlook continues to reflect strong operating performance. And finally, we are sustainably positioned for growth and are continuing to deliver differentiated results while also investing to build the McCormick of the future. Now let's turn to your questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Andrew Lazar with Barclays.

Andrew Lazar -- Barclays -- Analyst

Hi. Good morning, everybody. Lawrence, I know that last quarter was one of the first in probably a couple of years where McCormick actually gained share in the core spices and seasonings business in the U.S. And I know that's something that obviously you've been narrowing the gap quite a bit with the category and then flipped to gaining some share. I think your comment in 2Q was that the delayed -- the Easter delay around grilling season, I think you worded it, it hit McCormick or affected McCormick at a greater rate than, let's say, the category, and so it looked like there was a little bit of a share loss.

I'm just trying to get a sense of why that dynamic would've played out for McCormick differently than, let's say, the category and if there's any change in sort of the cadence of continuing to feel better about share gains going forward.

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

Right. Sure, Andrew. Well, first of all, it's not Easter. It's the grilling season that was the issue.

Easter fell later in the calendar. We actually had a great Easter season, but the late Easter did compress the grilling season, and that compression of the grilling season impacted our grilling products. And seasonally, our grilling season items, particularly our Grill Mates seasoning blends, are a big part of our business at this time of year. We didn't mention it in our prepared remarks, but it was also an exceptionally wet season.

So the quarter was, I think, the fifth wettest on record, and May was the second wettest on record. And just the combination of the slow -- the late grilling season, that compression of the grilling season and some unfavorable weather was a headwind to our Grill Mates range. So that caused us to pace behind the category. I think the whole category was somewhat depressed by the compression of that grilling season.

We're not the only ones to have a grilling range, so -- but we're the market leader in the Grill Mates range. It's a big part of our business at this time of the year. So category was only up about 2%. We were only up about 1% in terms of spices and seasonings for the quarter, and we lost about 30 basis points of share.

Although we're getting into a stronger position from a share gain standpoint, there are going to be some moving parts. I'd say that 30 basis points is not something that we are concerned about, that we've had a good strong underlying trend. And I also want to point out that the unmeasured channels are not captured in that, and we continue to have very strong growth in the unmeasured channel area that does not come through that consumption data. I'll also point out that private label also lost share.

So while there had been a lot of concerns about private label in the market, private label is becoming less and less of a factor. So that's not [Inaudible] that came in.

Operator

Our next question comes from the line of David Driscoll with Citi Research.

David Driscoll -- Citi Research -- Analyst

Thank you and good morning. Two questions for me. Just on the operating profit guide down, can you just talk about the environment outside the United States and the impact to your operating profit guidance? And then just a longer-term question, Lawrence, wanted to get your sense as to the in-home cooking trends. I just -- I think they are quite positive right now.

But wanted to get your sense as to -- as the U.S. unemployment rate remains very, very low, how do you see those in-home trends continuing over the course of kind of medium term? Do you think that the low unemployment will drive the people out to the restaurants? Or do you really see in-home cooking as a sustainable driver even with this very, very low unemployment rate?

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

I'm going to let Mike take the front end of that.

Mike Smith -- Executive Vice President and Chief Financial Officer

Yes. I'll talk about -- the change in operating profit guidance was really driven primarily by the shift from capital to expense in the ERP side of things. In the global economic environment, as you mentioned, was a small piece of that. But I would just characterize things as volatile right now.

We've talked about how we've had mitigation plans for Brexit and EMEA. That's on again, off again. It's been longer than we would have thought at this point. We had the Mexico scare about a month ago.

We have significant business down there. And we have the China slowdown. China had the slowest growth from a GDP perspective in 20 years in their first quarter. So it's really volatile now, and we kind of consider that for our ongoing operating profit guidance for this year.

But the real change versus our previous guidance is due to just a classification shift on ERP.

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

And as far as eating out trends, this is a long-term trend. Unemployment has been very low for quite a long time. I think that this cooking-at-home trend is more a characteristic of the millennial generation and is not being driven by economic factors. It's being more driven by a desire for more fresh food and a different kind of lifestyle.

And so I think that the unemployment rate -- I think that, that trend continues intact in the short, medium and long term.

Operator

Our next question comes from the line of Ken Goldman with JP Morgan.

Ken Goldman -- J.P. Morgan -- Analyst

Thanks. Good morning, everybody. Two questions for me. And if you addressed this, forgive me, I have a couple earnings this morning.

But number one, you're looking for a very big jump in the tax rate in the second half, but historically, you've consistently -- I would -- I think it's fair to say over-guided when it comes to taxes, just to be conservative perhaps and which is great. But just to be aligned with history, why shouldn't we model a little bit of a lower tax rate than what you've guided to for the second half? And then my second question is I wanted to get a sense, the economic conditions you mentioned in China, was that more on the foodservice side, on the retail side? I just wanted to get a little bit more color on exactly what the headwind is there.

Mike Smith -- Executive Vice President and Chief Financial Officer

It's Mike. I'll talk about the taxes. I mean we talked about this in the past. I mean you're right generally.

We guide to an underlying tax rate based on regulations and things. It has gotten a bit volatile the last couple of years when the accounting rules changed around stock option -- discrete items, stock option exercises. What we try to do is lay out the underlying. And if there's discrete items like that, that happen, that is a favorable to us, and we've seen that through the first half of the year.

I mean one of the things with our stock appreciation over the last couple of years, there's been significant stock option exercises a lot by retirees. And that does also drive some unfavorable from an operating profit perspective, and it puts more shares out there, too. So it isn't all something to drop to the bottom line from a tax perspective. But second half, if you do the squeeze, there's 24% to 25%, that is the underlying tax rate.

And as we know, with the GILTI tax and other things that are still uncertain from the federal government, it could go either way. But I'd look to the past a bit, but we've had, in the last year, real significant discrete items from stock options, which may or may not continue.

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

And that's retiree stock option exercises. I'll add some color to that. The -- so on China, that's a really good question, Ken. The slowdown -- there is an economic slowdown in China.

As we all know, we suspect that the official figures are probably optimistic and that maybe the slowdown in China is even greater than would appear from the government statistics that are released. I'm saying that as nicely as I can. And it is the case that we're seeing the biggest impact in the restaurant sector. In China, our consumer business includes a foodservice component because they share a common distribution channel, particularly in the traditional trade and in the smaller markets and that -- those foodservice-related items are where we're seeing some impact.

And anecdotally, we're certainly getting a lot of feedback from our organization in China that foodservice and restaurant sales that are slow. Over in our flavor solutions side of the business, our customers are more focused on core products as a result because they're trying to drive value to the restaurant and bring people in. So I think that the economic conditions are having a greater impact on foodservice and restaurant consumption than on the true retail part of the business where our retails-related items continue to show very strong growth, and our e-commerce business, which is consumer oriented, continues to show really strong growth in that area. There is another compounding factor, and that is this African swine fever.

This caused -- starting to show up as a meat shortage and rising meat prices in China, which puts cost pressure on the whole foodservice sector there. Of course, that bleeds over to all the alternative meats as well and with the resulting price impacted the consumer who's going through different foodservice outlets. So that's a little bit of a longish answer, but it is more foodservice than retail.

Operator

Our next question comes from the line of Alexia Howard with Bernstein.

Alexia Howard -- Sanford C. Bernstein -- Analyst

Good morning, everyone. So two questions. The first one on the consumer Americas business and the fact that it was, I guess, negatively affected by the shorter grilling season, maybe the wet weather hit things a little hard this time as well. Does that mean we would expect to go back to a more normal level of sales growth starting next quarter? Is there anything sort of out there that would say it wouldn't sort of start to get back to a more normal level next time? And then a more specific question on the EMEA flavor solutions business. Obviously, very strong this time around.

Was that largely based on -- you mentioned the QSR promotions, but were there also new contract wins? I just wanted to get an idea of whether that strength is likely to be sustainable.

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

OK. Those -- thanks, Alexia. We did -- you started your question before we could say hi. The consumer Americas specifically -- first of all, I don't want to apologize too much for the organic growth that we're having there.

Some of our peers are reporting right around us see quite a differential between what we're reporting and what they are. I think that we did have solid organic sales growth, and I don't want us to lose the thread of thought on that. But we are expecting a stronger second half to the year than the first half. And I think that we've been trying to signal that all year long, right from the guidance that we gave at the beginning of the year and even in our remarks at the end of first quarter.

Our marketing spend is deliberately skewed to the second half of the year, whereas the strongest ROI -- our new product launches in the first half, we get the benefit of that in the second half. We have more new products that we're launching in the second half of the year as well. We are going to be lapping some Americas anomalies in the fourth quarter that we don't expect to repeat. So overall, we are expecting higher organic sales growth in the Americas as we go through the second half.

If I could shift gears over to the EMEA flavor solutions business, it's both. So this is a continuation of the strong trend that we saw in the first quarter in that business. In terms of the constant currency growth, it's actually exactly the same as it was in the first quarter, and it's driven by the same factors. We have -- we do have some new customer wins, but we also have strong growth with our existing customer base there.

Operator

Our next question comes from the line of Robert Moskow with Credit Suisse.

Robert Moskow -- Credit Suisse -- Analyst

So the guidance for the year has always involved or required a lot of operating leverage, a little bit less now with the operating income down 1%. Can you talk a little bit more detail about the transformation spending that you're doing, the ERP and how -- can you give us some specific details on how that can release more cost savings going forward? You mentioned some efficiencies, but are there any headcount implications heading into the next two years from what you're doing with ERP?

Mike Smith -- Executive Vice President and Chief Financial Officer

This is Mike. I mean this is a three-year initiative, and we're in year one of the three years. And we laid out the capital and the expense portions of that, that we'll realize over the three years. We did talk about the shift, and it's really primarily a lot of our expenses happening in the second and third quarter of this year that will shift to more of the capital side of things.

But really, we're focusing on this business transformation of ERP as really a growth initiative. And it will give us efficiencies, no question, as we standardize processes around the world, as we do things one way around the world. It's really to make sure we can focus our resources on growing the business, bringing in acquisitions much easier. We -- in the past, as we brought in acquisitions, it's been tough, and it takes a lot of effort from the organization.

So I think that's something I'd focus from a growth perspective as we continue to get more and more scale to be a bigger company. This is really an investment in our business to get us to the next level.

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

I'll add to that a little bit, Rob, and that is that this is linked also to our Global Enablement program, where we're simplifying our processes, aligning them globally so we can centralize them. And that definitely both enables us to be more agile and grow. And it also does absolutely result in cost savings because we get -- we do get a benefit from that scale. So this is a technology-enabling part of that Global Enablement project.

As part of this, we are also -- as a technology upgrade, we are making the migration to the next generation of SAP S/4HANA. The whole industry is going to have to go to that. Most -- some of us have, but most of us have not yet started that journey. It is -- if you are doing it on a pretty brisk pace as we are, minimum of a 3-year project -- SAP goes out of service in 2025.

We want to be well ahead of that curve, and we see this as an opportunity rather than as a cost that we have to bear down the road.

Robert Moskow -- Credit Suisse -- Analyst

OK. A quick follow-up, though. I thought I heard you say that you're in a better position to make acquisitions now. Can you -- did I hear that correctly? And if so, what capabilities are you focused on acquiring?

Mike Smith -- Executive Vice President and Chief Financial Officer

As we move down toward the three times debt to EBITDA, I think that was what we were saying, as we get closer to our commitment, that allows us to start looking at acquisitions.

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

Exactly. We're not -- and the kind of acquisitions that we would look for will be consistent with what we've done and messaged in the past, great flavor businesses, great consumer brands that build our consumer flavor business, flavor solutions businesses that add flavor capability and capacity. And those will be the main areas.

Mike Smith -- Executive Vice President and Chief Financial Officer

And businesses that grow.

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

And of course, businesses...

Mike Smith -- Executive Vice President and Chief Financial Officer

We obviously don't do without growth.

Robert Moskow -- Credit Suisse -- Analyst

Got it. So three times is really the trigger?

Mike Smith -- Executive Vice President and Chief Financial Officer

No.

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

You can say that's a trigger, but we've said we've always committed to that is that we're going to get to three times by the end of 2020. And as we get -- as we're closing in on that, we're not going to start working on deals once we get to three. Right now, we've got a debt-to-EBITDA ratio that starts with three, and we're on track to end up with...

Mike Smith -- Executive Vice President and Chief Financial Officer

Yes. The back end of the year, Rob, is all heavy cash flow. By the end of the year, we will be in sight.

Robert Moskow -- Credit Suisse -- Analyst

Yes. Yes. I thought -- OK. Thank you.

Operator

Thank you. Our next question comes from the line of Adam Samuelson with Goldman Sachs.

Adam Samuelson -- Goldman Sachs -- Analyst

Yes. Thanks. Good morning, everyone. So a question on the flavor solutions business and really centered on the margin side.

Can you quantify the transactional FX headwind that you're facing there? I'm just -- and the spirit of the question is the first half organic growth from the business is a little bit north of 5% and margin on a year-on-year basis are up 10, 20 basis points. And I'm just trying to think about the operating leverage within that mix. Doesn't seem like it's a headwind, especially when you talk about the bulk ingredients business being down. So I'm just trying to make sure I'm understanding kind of some of the costs or margin pressures that are hitting you there and how to think about that going forward.

Mike Smith -- Executive Vice President and Chief Financial Officer

So I think you can think about it in a couple of factors that are actually hitting us in the flavor solutions side. The transactional FX, as you said, which has been hitting us the last six months of last year and the first six months of this year. We'll get into a more favorable FX comparison in the second 6, so that should be an acceleration there. We're also, as Lawrence mentioned, in Asia, particularly in China, as -- we kind of have a negative mix issue right now as the QSRs are focused more on their core products versus the LTOs, or limited time offers.

We make more margin obviously on limited time offers. So -- but we see that -- again, that ebbs and flows. And as the economies recover, we think we'll go back to more LTOs, and we're actually seeing a little bit of that in some of the areas. So I see an acceleration of our operating margin on the flavor solutions side in the second half as those clouds go away.

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

Yes, particularly that FX is going to be less unfavorable in the second half now. We'll -- I'll temper both of our remarks with the caveat that this has really been a volatile environment, and we're -- but the FX outlook that we have right now, we should be getting into comparisons that are pretty close year on year.

Adam Samuelson -- Goldman Sachs -- Analyst

OK. And then just quickly on the JV, you took up the range for earnings growth in that line item. Is that just a reflection of the first half performance where you're above the high end of the kind of upper single-digit growth? Or is the full year, is the back half actually improving there, too?

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

Yes. If I can jump in on that, so we're having really strong sales growth in our mix JV, and that's falling through to profitability. So the performance year-to-date there has been really good. We have positive outcomes.

And so originally, our outlook on our JVs as a group was flat. We're in this pretty strong place right now, and so we have a -- it's a little bit of both. We have great results here to date, and we expect that to continue. And I also wanted to really call this out because [Inaudible] we don't talk about the unconsolidated operations, but those are real operating results.

We are not passive operators of our unconsolidated JVs. And just in the last few weeks, both Mike and I have been down there multiple times. These are businesses that we're actively engaged in...

Mike Smith -- Executive Vice President and Chief Financial Officer

And doing very well.

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

And doing very well.

Operator

Our next question comes from the line of Chris Growe with Stifel.

Chris Growe -- Stifel Financial Corp. -- Analyst

All right. I just had two questions, if I could. I want to follow up on an earlier discussion of obviously a bit of a delay in the grilling season. I guess I wanted to be clear.

Is that something if you get back, you get those sales back, say, starting in Q3, that this sort of pent-up demand by consumers that got pushed out of it? Is that the way to look at it? Or is it more of potential for loss sales given promotional changes there?

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

No. I think that -- if I could -- I know you said you had two parts. I'm going to just jump in and answer. I think the consumption that didn't happen, didn't happen.

It was -- that compression is also something that we've had discussions about with our customers as well, so -- and so there was lost merchandising activity. The customers couldn't get their Easter promotions down fast enough to get the grilling promotion display materials up. And what the consumers didn't consume -- because remember, we talked about through the scanner that the Grill Mates, the grilling part of our seasoning business is the part that was slow, and that's consumption that is -- that's really lost.

Mike Smith -- Executive Vice President and Chief Financial Officer

But it's something we planned internally. Everyone knows when Easter was going to hit, we move some advertising into the third quarter. You're going to see a nice up spend in the third quarter, which hopefully will continue to drive good consumption.

Chris Growe -- Stifel Financial Corp. -- Analyst

OK. Great. And then in relation to the gross margin, how would you characterize cost inflation and pricing? Are those two roughly estimates? I know you did mention that CCI was the main driver of your gross margin improvement. And maybe related to that, in terms of the CCI savings, are they more gross margin focused this year versus SG&A? Or if you have any color there, just would be interested in that.

Mike Smith -- Executive Vice President and Chief Financial Officer

Yes. I wouldn't say from a CCI perspective, we haven't seen a large shift between cost of goods sold CCI or SG&A CCI. I think from a pricing perspective and a cost perspective, as we said at the beginning of the year, this is a relatively benign environment for us, low single-digit cost inflation. And we take up some pricing where we needed to do that this year, but it's a relatively benign size.

So the CCI is able to work for us better to drop through to the operating profit margin.

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

And we have some ongoing discussions on price on specific items as well that are always in progress.

Operator

Our next question comes from the line of Rob Dickerson with Deutsche Bank.

Rob Dickerson -- Deutsche Bank -- Analyst

Just kind of an overview question on guidance in the back half given all the questions that have already been asked. So it seems like what you're saying and kind of what I'm hearing is there was maybe a little bit extra spend on the ERP system upgrade, I guess, right? I guess the shift to..

Mike Smith -- Executive Vice President and Chief Financial Officer

It's a shift, Rob. It's going from capital to expense. If you noticed, we talked about it in the script. Our capital range was $200 million to $220 million.

We've shifted that down to $200 million now for the year. So capital is down, expense is up. Think about it that way.

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

It's the same money.

Mike Smith -- Executive Vice President and Chief Financial Officer

Same cash.

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

On the fixed notes, right?

Mike Smith -- Executive Vice President and Chief Financial Officer

Right.

Rob Dickerson -- Deutsche Bank -- Analyst

Right. So -- and I mean at times, I actually am very ignorant. I do admit that. So could you just explain that simplistically so everybody on the call can understand?

Mike Smith -- Executive Vice President and Chief Financial Officer

Yes. OK. That's fine. I mean I can talk for hours about the accounting around this, but I won't.

But it's -- one of the things when we came into the year and as Lawrence talked about in the January call, we were starting to engage our system integrator to look at the scope of the project, the timing. And we had an estimate of what the total cost would be over this couple of years. And based on what we knew at the time, based on the phases of the project and what is capital -- what is expense from an accounting perspective, we took our best crack at it. Once the system integrator got in and put the plan together, we realized that, OK, there's a little bit more expense upfront than we thought, a little less capital based on the work that they're doing on the ERP design, the implementation, all that sort of stuff.

So that's where -- what you see here. Total cost is going to be about the same. It's just a shift between the two based on the accounting rules and better in preparing right now.

Rob Dickerson -- Deutsche Bank -- Analyst

OK. Good answer. And then just secondly and simplistically, it sounds like what you're saying is in the back half, right, given -- I guess sounds like there's been a little margin mix. Pressure is not a lot, but like you said, it kind of -- restaurants relative to kind of base core retail in Asia, let's ignore the ERP piece for a second.

But then in the back half, maybe some of that loose ends we'll see, but it's also there's FX reversal, not a full reversal but less of a headwind. And then it also sounds like maybe that you're coming out of this kind of late, wet post-Easter grilling season that maybe, with marketing dollars, you can improve velocities and hopefully also improve some margin mix. Because when I just look at the guide, right, and you talked about some of the shift in the grilling season in the quarter or what happened in China, but quite frankly, your top line is actually still pretty strong, and you're exactly in line for the most part where you were relative to Q1 on a tier stack basis. So it is -- it seems like it's more of a margin expansion expectation in the back half versus a big top line acceleration relative to the first half.

Is that a fair summary?

Mike Smith -- Executive Vice President and Chief Financial Officer

Yes. I think you got that right, Robin. You remember the fourth quarter, some of the challenges, we're going to have a really favorable mix in the back half compared to 2018 based on what we saw last year. And the other thing, someone mentioned CCI before, CCI built during the year, so that does help margin also.

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

Right. And Rob, I'm glad you made a point about the sales growth being solid. And look, take just a step back on the whole overall picture because like last quarter, this was really a solid, no-drama quarter. We put together two pretty undramatic solid performances year-over-year.

We had solid sales growth in this quarter, nearly 3% in constant currency, which compares very strongly to our peers. Through the first half, a little over 3.5% on all of -- sales growth, constant currency, all of it organic. And as we've signaled all year, we expect a stronger second half. We've had good operating profit growth and margin expansion.

It's actually in line with our algorithm. And quarter-by-quarter, we're putting together a strong 2019. We're very confident in our outlook on the second half. And I think that -- so it's a some really good points you raised.

Operator

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Kurzius for any final comments.

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

Great. Thank you, everyone, for your questions and for participating on today's call. McCormick is a global leader in flavor, and we're differentiated with a broad and advantaged portfolio which continues to drive growth. Growing a profitable business and operate in an environment that's changing at an ever faster pace.

We're responding readily to changes in the industry with new ideas, innovation and purpose with a relentless focus on growth, performance and people. We continue to perform strong globally and build shareholder value. Our second-quarter financial results, both across our consumer and flavor solutions segment, was strong. We have confidence in our fiscal year outlook, and we're well positioned to deliver another strong year in 2019.

Kasey Jenkins

Thank you, Lawrence, and thanks to all for joining today's call. If you have any further questions regarding today's information, you can reach us at (410) 771-7140. This concludes this morning's conference call. And for all of you in the U.S., enjoy your 4th of July holiday next week.

Grill some.

Duration: 60 minutes

Call participants:

Kasey Jenkins

Lawrence Kurzius -- Chairman, President, and Chief Executive Officer

Mike Smith -- Executive Vice President and Chief Financial Officer

Andrew Lazar -- Barclays -- Analyst

David Driscoll -- Citi Research -- Analyst

Ken Goldman -- J.P. Morgan -- Analyst

Alexia Howard -- Sanford C. Bernstein -- Analyst

Robert Moskow -- Credit Suisse -- Analyst

Adam Samuelson -- Goldman Sachs -- Analyst

Chris Growe -- Stifel Financial Corp. -- Analyst

Rob Dickerson -- Deutsche Bank -- Analyst

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