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McCormick (NYSE:MKC)
Q2 2020 Earnings Call
Jun 25, 2020, 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've 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. Reconciliations to the GAAP results are included in this morning's press release and slides.

In our comments, certain percentages are rounded. Please refer to our presentation for complete information. In addition, as a reminder, today's presentation contains projections and other forward-looking statements. Actual results could differ materially from those projected.

The company undertakes no obligation to update or revise publicly any forward-looking statements whether because of new information, future events or other factors. It is important to note these statements include expectations and assumptions which will be shared related to the impact of the COVID-19 pandemic. As seen on Slide 2, our forward-looking statement also provides information on risk factors, including the impacts of COVID-19 that could affect our financial results. It is now my pleasure to turn the discussion over to Lawrence.

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

Thank you, Kasey. Good morning, everyone. Thanks for joining us. The last few months have been an extraordinary period, and the global recovery from COVID-19 continues to evolve daily.

McCormick's commitment to maintaining critical food supply across all of our markets and supporting our communities has been constant during these turbulent times. Across the globe, we've committed financial resources to many organizations to support frontline healthcare workers, emergency responders and the restaurant and hospitality industries, including donating to food banks and causes in nearly 20 countries to ensure reliable access to foods to those most vulnerable during this ongoing pandemic. We're working through the challenges of today while keeping our focus on the long-term goals, strategies and values that have made us so successful. We have three priorities which we've spoken about since the first days of the crisis as we work through this period.

The first is to ensure the health and safety of our employees and the quality and integrity of our product. The second is to keep our brands and our customers' brands and supply and maintain the financial strength of our business. And the third is to make sure we emerge stronger from this crisis. As a company, we've seen all phases of the pandemic, from lockdown starting in January to various stages of recovery today.

Our businesses in China are fairly far along in recovery with the exception of the Hubei Province, one of our most highly developed regions in China, which is in the early stages of recovery as it was under an extended lockdown through April 8. Other businesses in Asia Pacific as well as EMEA are about two or three months behind China with variations by market, with some markets beginning early recovery late in the second quarter. In the Americas, which is also about two to three months behind China, restrictions began to loosen late in the second quarter with recovery currently in its early stages. Now, turning to Slide 5, let me highlight a few points on the current conditions we are seeing and their potential impact.

Our consumer segment was positively impacted early in the quarter by some initial pantry stocking in the Americas and the EMEA region and pantry replenishment in China. While these behaviors elevated consumption for a period, as the quarter progressed, strong consumption continued steadily across all regions. Our consumer survey data shows that strength was real incremental consumption driven by increased cooking at home. We believe a shift in consumer consumption to eating at home will continue, partially driven by the status of the restaurant and food service industries as well as consumer confidence with eating out and significantly influenced by an increased preference for cooking at home, which we believe will be longer lasting.

We don't expect the same level of consumption to continue for the balance of the year that we experienced throughout the quarter. However, we do expect consumption to remain at some elevated levels driven by the shift in consumer preference. Additionally, we would expect to benefit from consumers eating at home if we were to enter a recessionary period, consistent with our historical sales performance during past recessions. As our second half of the year begins, we continue to see elevated demand from our customers and through scanner data.

Turning to our flavor solutions segment. Let's start with our sales to packaged food companies, which historically represents roughly half of our flavor solutions portfolio. Early in the quarter, we experienced service and demand which tapered off throughout the quarter and performance varied by customer. We expect overall demand consistent with pre-COVID levels in our second half.

For our restaurant and other food service customers, we began the quarter with reduced demand as COVID-19 restrictions in most markets eliminated dine-in services and limited restaurants to carry out and delivery only. As we expected, this had a significant negative impact on our second-quarter performance, particularly in the EMEA region, as most restaurants completely closed. Late in the quarter, we began to see, and believe we will continue to see, a gradual recovery which, again, will vary by market. Quick service restaurants, or QSRs, are recovering quicker with the rest of food service building more slowly.

In China, QSRs are largely open and traffic has returned at fairly normal levels. In certain markets in the Americas and EMEA, indoor dine-in service are beginning to open on a limited basis and outdoor dining options have reopened. In EMEA, QSRs delivery and drive-through options began to resume in June, and they are seeing initial surges in demand. As we begin our third quarter, we are seeing our away-from-home demand beginning to come back.

Our restaurant and other food service customers who've experienced significant disruption are adapting their operating models, refining their menu offerings, focusing on core items and exploring alternative ways to drive demand to offset dine-in declines, and we're collaborating with them on their recovery efforts. Our global supply chain has been critical to our success during this period of volatility. It's an area of strength for us and one of the reasons we will come through this crisis strong. Our global sourcing organization has been a real differentiator, quickly executing contingency plans and placing critical materials where needed since our early involvement in China and ahead of any demand surge.

While we, of course, have experienced some raw material constraints, these had minimal impact on our ability to meet demand. Coming into the crisis, there is more finished good inventory in the system, both for us and our retailers, than there is today. The sustained level of consumer demand, coupled with our added safety and flexibility measures, has put pressure on our manufacturing operations and services stressed in some areas. As we enter our typically largest quarters, we're expanding our workforce and increasing manufacturing capacity through optimized scheduling, investments and partnerships.

By the end of the year, we will have added the equivalent of an additional plant of US manufacturing capacity. We have already passed the low points in our ability to meet demand and our service levels are improving weekly. We're positioning ourselves for continued success and confident of our capabilities and our ability to meet demand. I want to thank our supply chain employees for their remarkable efforts as well as our suppliers and customers for their partnerships in this challenging operating environment.

Given this evolving operating environment, while we recognize we've had strong performance thus far in 2020, we are not providing guidance due to the high level of uncertainty driven by the COVID-19 crisis for the balance of the year, including the variation in consumer comfort with respect to eating away from home versus at home and its impact on consumption level, the pacing of restaurant and food service locations fully reopening in our various geographic markets, and finally, the possible impact of any resurgences of the COVID-19 virus. We're focused on execution and remain confident in our ability to perform in this dynamic environment, as we have thus far, and continue on our growth trajectory. I'm incredibly proud of the way McCormick has performed in these unprecedented times. And as the crisis subsides, we will come out a better company by driving our long-term strategies, responding to changing consumer behavior and capitalizing on opportunities from our relative strength.

Now, I'd like to focus on our second-quarter performance and business updates on consumer and flavor solutions segments. We have a broad and advantaged global flavor portfolio, as seen on Slide 7, which continues to position us to meet the demand for flavor around the world and grow our business. The breadth and reach of our portfolio across segments, geographies, channels, customers and product offerings creates a balanced portfolio to drive consistency in our performance in a volatile environment, as evidenced by our second-quarter results. During the second quarter, the shift in consumer behavior to cooking and eating more at home, or at-home consumption, drove a substantial increase in our consumer segment demand as well as increases with our packaged food company customers in our flavor solutions segment.

On the other hand, we have seen a sharp decline in demand from our restaurant and other food service customers for the away-from-home products in our portfolio, which historically has represented approximately 20% of our total annual company sales. The impact of the shift to more at-home consumption varied by region due to differing levels of away-from-home consumption in each. While we may experience temporary disruptions in parts of our business, underlying consumer demand continues to underpin our growth. We are confident that the breadth and reach of our portfolio will continue to differentiate McCormick and position us for continued growth.

In addition to our advantaged portfolio, several other key factors, as seen on Slide 8, were underlying McCormick's strength in the second quarter. First and foremost, consumers were finding comfort in the brands they trust, and we are here today for them as we have been for over 130 years. We've pivoted our messaging as needed and are connecting with our consumers to guide them and provide inspiration for their flavorful cooking. We've responded to the significant disruption by capitalizing on our capabilities across the organization, particularly our supply chain, sales force and marketing teams, as well as through our collaboration and partnerships both internally and externally.

We're all standing together to manage through this crisis. Now, let me cover the highlights of our second-quarter results, which speak to the value of our products and to our capabilities as a company. Our exceptional second-quarter performance was driven by the substantial increase in demand for our consumer products as consumers sought great-tasting experiences with rich, authentic flavor and healthy, high-quality ingredients when cooking more at home. Our ability to meet the increased consumer demand and navigate through sharp declines in the away-from-home products in our portfolio highlights our agility in responding to the disruptions we have all experienced while importantly keeping our employees safe.

Our results reflect our strong foundation and the effectiveness of our strategies as well as the engagement of our employees around the world. Together, we delivered considerable sales, operating income and earnings-per-share growth. Each metric grew double digits in constant currency. Starting with the top line.

Second-quarter sales increased 8% from the year ago period. In constant currency, sales grew 10% mainly attributable to the higher volume and product mix in our consumer segment, partially offset by the sharp volume declines in our flavor solutions segment. Adjusted operating income increased 21%, including a 2% unfavorable impact from currency, and adjusted operating margin expanded by 210 basis points. These results were driven by higher sales, favorable mix and savings from our comprehensive continuous improvement program, or CCI.

Our second-quarter adjusted earnings per share was $1.47, 27% higher than the year ago period of $1.16, driven primarily by our strong operating performance. Our second-quarter results were exceptional driven by our successful execution and enabled by the positive fundamentals we have in place to manage through this period of volatility. The investments we've made and the capabilities we have built, combined with our strong business model, prepared us to execute from a position of strength. We have confidence in our strategies, our underlying foundation is solid as we remain committed to our long-term growth objectives.

Now, let me spend a few minutes on our business updates, starting on Slide 10 with our consumer segment. Sales rose 26%, including a 2% unfavorable impact from currency. In constant currency, sales grew 28%, significantly fueled by the COVID-19 crisis. Our pricing actions and growth plans were in place, yielding results before the crisis.

And those plans have remained in place, although some adjusted and even strengthened, to execute in this challenging time that helped our consumers and customers navigate through it as well. In the Americas, our IRI data indicates our total McCormick US branded portfolio grew 55% during the second quarter, which is substantial and reflects the strength of our categories as consumers cooked more at home. And in the data just released this past Tuesday for the week ended June 13, scanner sales for total US McCormick-branded portfolio continued to be strong, growing 32%. While we expect consumption will not continue at this highly elevated level of our second quarter, you can see it is still strong, and we expect continued growth from an increase in consumer cooking at home to last for a period of time.

Turning to our shipments. In constant currency, the Americas sales grew 36% during the second quarter. The difference between the US IRI scanner sales growth and our shipments can be attributed to a few factors. First, depletion of inventories to meet the incredible surge in consumer demand.

Next, an increased level of pricing growth in the scanner data due to canceled promotions and channel shifts. And lastly, while we had significant growth in Canada, Latin America and private label sales, they paced behind the growth rate of US branded sales. Focusing on the US branded portfolio. Not only did our consumption grow, but we also gained share in nine out of 11 categories, including spices and seasonings, dry recipe mixes, hot sauce and mustard.

The growth rates in the majority of our categories are outpacing the total store and center-of-store growth rates. In fact, consumption in our portfolio during the second quarter grew twice the center-of-store rate. Our categories are not what consumers think about when stocking up. They are the categories consumers use to flavor the meals they cook at home.

New and renovated products also contributed to our second-quarter sales growth, such as our dry recipe mixes updated for instant preparation, offering an even more convenient solution, and our Frank's red hot mix sauces, introducing Frank's flavor to dipping and topping occasions. Later this year, we'll expand Frank's even further with the launch of frozen appetizers, chicken bites and dips. And earlier this month, we relaunched our Old Bay Hot Sauce with expanded distribution just in time to heat up the summer. With the retailer focus on keeping core items on retail shelves, there has been some slowdown in the sell-in of our new product launches.

But we're excited about the pipeline we will carry into next year, and those that we have launched have gotten exceptional new trials. We're growing our household penetration across our portfolio with a 16% increase compared to last year, which is millions of new households gained, and a significant amount of trials from those households was across multiple categories. Spices and seasonings, dry recipe mixes and hot sauces had the biggest gains, but even smaller brands like Simply Asia grew significantly. And our rate of repeat buyers increased 11% during the quarter, which is notable given that our repeat rate was already fairly robust.

During the quarter, we launched our new US McCormick brand advertising campaign, it's going to be great, which has the strongest scoring campaign in our consumer testing history. This TV and digital campaign is focused on consumer education of what to make, how to prepare it and build confidence in the kitchen, which is all even more relevant now as consumers cook more at home. We continue to design targeted media messaging to focus on cooking at home and drive growth. We're planning to increase our brand marketing investments in the second half of this year.

The speed and agility we gained with our marketing excellence organization has proved invaluable as we turn insights into action and can pivot to adjust our messaging even more efficiently and effectively to capture the moment. The team has rapidly generated insights, creating and deploying new videos and tutorials that range from easy weeknight meals using pantry staples to bread making and cocktails for virtual happy hours. This is critical to execute our plans to create deeper connections with our consumers by bridging their physical and digital experience, which is even more important today with consumers accelerating their online presence. Our consumers are looking for help and inspiration at the kitchen, and we are here for them, with one of the ways being our flavor maker app.

Organic search visits to our mccormick.com site were up over 200% in the second quarter versus last year, with consumers 18 to 34 years old driving the largest increase, searching for recipes and to learn to cook. The younger generation continues to fuel the demand for flavor, and we're executing on creative ways to connect with them. We're personalizing our interactions with consumers. As we have been all home together, our McCormick chefs invited consumers into their home kitchens through our new Cook With Us Instagram series, enabling one-to-one connection and putting a true face to McCormick.

Consumers are tagging McCormick with posts of their user-generated content, and we're engaging with them, including incorporating some of their content into our own ads and providing users a chance to win a personal virtual cooking class with one of our chefs. And finally, it is essential to McCormick to support our communities, particularly at times of uncertainty. Our marketing excellence organization has had tremendous success with their creativity and applied it recently to not only connect with consumers but to make a difference in their lives. Today, we partnered with actress Drew Barrymore and together hosted a virtual taco Tuesday night called #TacosTogether in the hopes of encouraging others to augment McCormick's $1 million donation and support the No Kid Hungry campaign, working to ensure children have reliable access to food during this ongoing pandemic.

TacosTogether garnered over 800 million impressions across the media landscape, exceeding our own expectations of our reach and importantly creating visibility to this vital cause. Overall, we are confident all the initiatives we have under way will continue our growth trajectory both with our valued existing consumers and those we are welcoming to our brands. Now, turning to EMEA. Our constant currency sales rose 26% with broad-based growth across the region and market share gains in the majority of our categories in our significant markets.

Growth in our Vahine brand in France was excellent, led by vanilla and baking products. Urban spice consumption was strong in all markets driven by consumers cooking more at home to discovering they need our products for great tasting, healthy flavor solutions. The U.K. dry recipe mix category is attracting new shoppers, and purchase frequency is increasing as consumers seek convenient solutions.

And our new products are driving the category growth, with the Schwartz brand continuing to gain share and retaining the leading position we achieved last quarter. Our new product plans remain on track for the year across our EMEA portfolio, and we continue to work closely with our customers to ensure that elevated consumer demand will be met, even obtaining incremental placement for our branded portfolio with some retailers as other manufacturers face supply challenges. Our strong brand marketing campaigns and digital connections with the consumer contributed to our second-quarter growth and provided us with confidence for future growth. Early in the quarter, we quickly shifted to increased digital advertising search and social investments across key brands and markets using data-driven, real-time insights.

For example, we created a social listening dashboard to understand the changing needs and topics most relevant to our consumers during the COVID-19 crisis. With baking being the highest-trending topic during the crisis, we partnered with culinary websites and capitalized on over 600 pieces of user-generated, baking-at-home social content to increase our interaction with consumers. With health pricing given further relevance, we created cooking-at-home website sections with health and wellness landing pages, including healthy recipes and blogger content, combined with content from our BuzzFeed partnership, highlighting recipes and our products. For example, the 13 herbs and spices everyone should have in their cupboard.

Our execution of the baking and health campaigns drove over 20 million impressions each during the quarter. Moving forward, we'll continue to capture the momentum we have gained and our relevance with EMEA consumers through activation of similar programs, marketing campaigns highlighting product superiority, culinary partnerships and our new product launches. In the Asia Pacific region, our constant currency sales declined 13% driven by our China business in the Hubei Province, where our Wuhan operation is located, which had an extended lockdown into early April. The Wuhan disruption negatively impacted APZ consumer growth by 26 percentage points.

Declines in branded food service products, which are included in our consumer segment in China, outside of Wuhan also contributed to the sales decrease. Excluding these impacts, sales for the region would have increased, reflecting the increase in consumer demand across the region related to the increase in cooking at home. In China, the consumer business outside of Hubei Province is strong with some products in our condiment portfolio doubling or tripling their sales from the second quarter of last year. Convenient solutions are being sought by consumers, driving growth of our recipe mixes, world flavor and hot pot sauces as well as herbs and spices.

And we're leveraging our new product successes on our direct-to-consumer platform and accelerating our new product launches such as launching our squeezable healthy oil salad dressings in retail during our third quarter. In other parts of the region, which are lagging China from a recovery phase, we have broad-based growth and are gaining share in many categories. Across the entire region, we're also meeting the consumer online and have pivoted our marketing plans toward value and scratch cooking, whether it be through our Frank's RedHot TikTok fitness challenge in China, our chefs providing inspiration and instruction on social media across the region or through our Keep Calm & Carry On! Campaign in Australia for helping our consumers and augmenting the growth potential of the shift to cooking at home. In all regions, consumers' digital engagement has increased significantly during stay-at-home periods, and we've seen an acceleration of our e-commerce growth in all categories with second-quarter triple-digit growth, whether it be pure play, click and collect, or our own direct-to-consumer properties in all of our major markets.

We expect the shift to online shopping behavior to continue, and we're well-positioned for it through the investments we've made and continue to make in this channel. Our consumer portfolio and the plans we have in place are even more relevant today than they were before the crisis as we expect the increase in at-home cooking to continue, which further bolsters our confidence that we will drive future growth. Turning to Slide 12 in our flavor solutions segment. Constant currency sales for the second quarter were lower by 16% driven by the sharp declines in demand from restaurants and other food service customers as away-from-home dining was significantly curtailed due to the COVID-19 restrictions, with a partial offset from continued growth in sales to our packaged food customers.

Notwithstanding the COVID-19 impact, our underlying foundation is solid, and we've delivered strong sales growth and margin expansion over the last few years, most recently 5% sales growth in the first quarter of this year, and believe we would have continued our positive momentum. In the Americas, our sales declined 13% in constant currency as we experienced demand declines across both branded food service and restaurant customers. Branded food service had a more significant impact as our away-from-home customer base in the Americas is skewed more to that channel. And our quick service restaurant customers retained takeaway and delivery options, although with limited menus.

In flavor solutions, we're differentiated by our customer engagement. And while our plans always included strengthening our intimacy this year, they were accelerated with some pivots by the COVID-19 crisis. Through our culinary and marketing support, we've been helping our customers adapt to the changing environment and eventually the new normal. From a culinary standpoint, we've developed virtual tools and are collaborating with our customers to provide solutions such as modifying menus for carryout, reinventing many offerings with limited inventory and optimizing recipes for COVID-19 safety protocols.

And from a marketing perspective, we're leveraging the power of our brands like Frank's RedHot and Old Bay with strong promotional programs to help build menu excitement lastly, as many places will be moving away from tabletop condiments, we are pivoting to portion-controlled packaging for dining and carryout. We're also exploring other options to expand our portion-controlled offering further. In EMEA, where we had expected the most significant rate of decline from the COVID-19, our sales were 31% lower at constant currency than last year. Our away-from-home customer base in this region skewed more to QSRs.

And in late March, most of those customers completely closed their restaurants. Not even drive-thru or carryout remained open. As I mentioned earlier, many of the QSRs adapted their models and reopened in June, offering limited menus for delivery and drive-thru while dine-in remained closed. They've established aggressive recovery plans, and we are demonstrating our speed and agility by scaling our operations back up and meeting customer demand on an accelerated timetable.

In the Asia Pacific region, due to the COVID-19 lockdowns, closures at curfews across the region and outside of China, our constant currency sales declined 6%. China QSRs are largely open and we are seeing momentum gain, with one QSR even launching a limited-time offer, which added to our sales this quarter. Across the rest of the region, government COVID-19 measures varied as well as customers' ability to adapt. While QSRs remained open in some capacity, the focus was on core items.

For the balance of the year, we expect a reduce level from last year for our customers' limited-time offers, which are an important growth driver in this region. Moving forward, we continue to work with all our customers to manage through the recovery phase as COVID-19 measures are lessened. The strong and differentiated partnerships we've built with our customers enabled our robust collaboration to navigate through the second quarter. We will continue to do so.

We expect there will be a gradual recovery, as I mentioned earlier, and QSRs will recover more rapidly with the rest of food service building more slowly. Based on this, combined with our different mix of quick service restaurants and other food service customers between regions, we believe the pace of recovery of the away-from-home part of our business will vary from market to market. We are fully committed to helping all of our customers resume their operations and expect the demand to return as the crisis passes, similar to what we are seeing in China's recovery. The duration of this current period is uncertain.

The slow and evolving recovery process is dependent on many factors, including restrictions being lifted, venues fully reopening and possible resurgences. We have positive fundamentals in place to manage through this period of volatility. And with our confidence in the successful execution of our strategies, we will continue on our long-term growth trajectory in flavor solutions. Now, I'd like to provide a few summary comments, as seen on Slide 13, before turning it over to Mike.

At the foundation of our sales growth is the global and growing consumer demand for healthy, flavorful cooking as well as transparency around the source and quality of ingredients and the desire to buy heritage brands. This resonates even more today than ever before. Flavor continues to be an advantaged global category, and we inspire flavor exploration across all markets through all channels and are aligned with the consumers' demand for great taste, convenience, healthy options and digital engagement. Our alignment with these long-term trends, our breadth and reach and our execution of effective strategies position us well to meet increased consumer demand, both through our products and through our customers' products, to drive sales growth.

These long-term behaviors have not only remained intact during the crisis but have been accelerated to even greater importance. No matter what, where or when people are eating and drinking, it's likely flavored by McCormick, and we are proud our McCormick brands are trusted by consumers and customers worldwide. We are continuing to drive sales growth balanced with our focus on lowering costs to expand margins and sustainably realize earnings growth. We have a solid foundation, and in an environment that continues to be dynamic and fast paced, they're ensuring we remain agile, relevant and focused on long-term, sustainable growth.

Our experienced leaders and employees are executing on our strategies, which are designed to build long-term value for our shareholders, while reacting to changes accordingly. We delivered exceptional second-quarter results during a period of great disruption, proving the strength of our business model. Our strategies are effective in reinforcing our confidence that they will continue to drive future growth. While we know the balance of the year will be impacted by an uncertain environment and ongoing challenges, we're confident in the strength of our underlying foundation and performance.

I want to recognize McCormick employees around the world for driving our momentum and success and thank them for their efforts, engagement and for adapting to this new environment. Thank you for your attention, and it is now my pleasure to turn it over to Mike.

Mike Smith -- Executive Vice President and Chief Financial Officer

Thanks, Lawrence, and good morning, everyone. I'll begin now by providing some additional comments on our second-quarter performance and then discuss some of our expectations for the balance of the year. Starting on Slide 15. During the second-quarter, sales rose 10% in constant currency.

Sales growth was driven by substantially higher volume and mix in our consumer segment, offset by significant declines in our flavor solutions segment. The consumer segment sales grew 28% in constant currency, led by the Americas and EMEA regions. The shift to at-home consumption and cooking more at home has driven substantial demand for our consumer products. Higher volume and mix primarily drove the increase with pricing to partially offset cost inflation also contributing.

On Slide 16, consumer segment sales in the Americas increased 36% in constant currency versus the second quarter of 2019. The increase was broad based with significant growth across the McCormick branded portfolio, both in measured channels and e-commerce, as well as in private label product. Additionally, the pricing actions we took late in the first quarter to offset increased costs also contributed to the growth. In EMEA, constant currency consumer sales grew 26% from a year ago with higher volume and mix in all countries across the region.

The most significant growth drivers were our Vahine homemade dessert products in France, our Schwartz and Ducros branded spices and seasonings and our Schwartz dry recipe mixes. Consumer sales in Asia Pacific declined 13% in constant currency driven by the extended disruption in Wuhan, which, as Lawrence mentioned, drove a decrease of 26 percentage points to the region's consumer sales. This decline was partially offset by increased consumer demand across the region, led by condiments in China and broad-based Australia growth as well as strong e-commerce growth. Turning to our flavor solutions segment in Slide 19.

Second-quarter constant currency sales decreased 16%, reflecting declines in the away-from-home products in our portfolio across all regions. In the Americas, flavor solutions constant currency sales declined 13% driven by significantly lower sales to branded food service customers in addition to quick service restaurants. Partially offsetting the decline were increased sales to packaged food companies and pricing to offset cost increases. In EMEA, constant currency sales declined 31%.

The decline was driven by a significant reduction in sales to quick service restaurant customers, in addition to lower branded food service sales, partially offset by sales growth with packaged food companies and pricing to offset cost increases. In the Asia Pacific region, flavor solutions sales declined 6% in constant currency. The decline was primarily driven by the COVID-19-related lockdowns and closures in countries outside of China. As seen on Slide 23, adjusted operating income, which excludes special charges, increased 21% in the second quarter versus the year ago period.

In constant currency, adjusted operating income grew by 23% and was driven by substantial growth in the consumer segment, partially offset by a significant decline in the flavor solutions segment. Adjusted operating income in the consumer segment grew 68% to $232 million. The increase in constant currency of 70% was driven by higher sales and CCI-led cost savings. In the flavor solutions segment, adjusted operating income declined 63% to $29 million or 61% in constant currency.

The decrease was attributable to lower sales and an unfavorable impact to manufacturing cost resulting from lower production volumes, with a partial offset from CCI-led cost savings. Gross profit margin expanded 230 basis points in the second quarter versus the year ago period driven primarily by favorable product mix resulting from the sales shift between segments and CCI-led cost savings, with a partial offset from higher manufacturing costs. Adjusted operating margin expanded by 210 basis points driven by the gross margin expansion. Turning to income taxes on Slide 25.

Our second-quarter adjusted effective income tax rate was 18% and was favorably impacted by discrete tax items primarily related to refinements to our entity structure. Our rate in the year ago period was 18.9% and was also favorably impacted by discrete tax items, principally stock options exercises. Income from unconsolidated operations was $10 million in the second quarter, a 7% increase from the second quarter of 2019. At the bottom line, as shown on Slide 27, second quarter 2020 adjusted earnings per share was $1.47 as compared to $1.16 for the year ago period.

The increase was driven by a higher adjusted operating income performance and lower interest expense. This increase also includes an unfavorable impact from foreign currency exchange rates. On Slide 28, we summarize highlights for cash flow and the quarter-end balance sheet. Our cash flow provided from operations was $356 million for the second quarter of 2020, a 13% increase compared to $314 million in the first half of 2019 and was driven by higher net income.

We continue to see improvements in our cash conversion cycle, finishing the second quarter at 36 days, down six days versus our 2019 fiscal year-end. We are projecting another year of strong cash flow. We returned $165 million of cash to shareholders through dividends and used $87 million for capital expenditures this period. In April, we raised $500 million through the issuance of a 10-year bond with a 2.5% interest rate.

We took the opportunity in a low interest rate environment to further bolster our liquidity position in a volatile marketplace. Our priority is to continue to have a balanced use of cash, making investments to drive growth, including through acquisitions, returning a significant portion to our shareholders through dividends; and to pay down debt. Let's now move to our outlook discussion and some of our expectations for the balance of the year, as seen on Slide 29. As a reminder, we withdrew the guidance that we issued in January during our first-quarter earnings call in late March, and we expected to resume guidance on this earnings call.

While we recognize we have had strong performance thus far in 2020, we still have our typically largest quarters remaining, and there continues to be a high level of uncertainty around the pace and shape of the COVID-19 recovery and potential resurgences of the pandemic, as Lawrence mentioned. We have been running scenarios based on various assumptions, and given the wide range of possible outcomes, we are not providing guidance at this time. I would like to, however, highlight some current expectations that provide assumptions to help with modeling for the balance of the year. First, we expect the shift in consumer consumption will continue and the increased preference for cooking at home will be sustained, although not at the same elevated level as the second quarter, favorably impacting our consumer segment.

In the flavor solutions segment, we expect the demand from our packaged food customers to return to the pre COVID-19 levels with continued variability by customer. We believe the away-from-home part of our flavor solutions portfolio is beginning to recover. We expect the performance to rebound gradually throughout the second half of the year, however not returning to the same level as last year. As discussed in our previous earnings call, we continue to project the COVID-19 impact in China will reduce our total global net sales growth by 1 to 2% for the year.

We continue to expect mid-single-digit inflationary pressures, CCI savings of approximately $105 million and a mid-single-digit increase in brand marketing investments. In the first half of the year, our gross margin was favorably impacted by a higher mix of consumer segment sales. We do expect this mix shift to continue but not to the same extent in the second half of the year. We realized incremental COVID-19 costs in the second quarter and expect them to continue in the second half of the year, more heavily weighted in the third quarter rather than the fourth quarter.

We are anticipating a negative impact on our full-year financial results from foreign exchange rates. And finally, our income from unconsolidated operations is expected to be significantly impacted by the unfavorable foreign currency rates. And as a result, we are projecting a high to mid-single-digit decline. As Lawrence mentioned, we are focused on execution and are ready to perform in this dynamic environment as we have done thus far, no matter what the scenario.

We are confident that we will manage through this period of volatility and continue on our growth trajectory. 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 2020 expectations in more detail, I would like to recap the key takeaways as seen on Slide 30. Our second quarter played out during an extraordinary period, and our results speak to the value of our products and to our capabilities as a company. Our ability to execute during the volatility of the quarter highlights our agility, strong foundation and engagement of our people.

We will emerge a stronger company by focusing on our long-term strategies, responding to the changing consumer behavior and capitalizing on global and growing consumer trends, which have further accelerated during the crisis. We're confident in our ability to perform in this dynamic environment and continue on our growth trajectory. Our commitment to our long-term financial objectives has not changed. We are sustainably positioned for growth and will continue to deliver differentiated results.

Now, let's turn to your questions.

Questions & Answers:


Operator

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

Andrew Lazar -- Barclays -- Analyst

Good morning, everybody.

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

Hey. Good morning, Andrew.

Andrew Lazar -- Barclays -- Analyst

Hi there. Thanks for the question. On the outlook slide for the balance of the year, you talked about expecting elevated consumer segment demand for a period of time, and yet the sales for the -- to the packaged food players within your flavor solutions business to return to pre-COVID-19 levels. And on the face of it, those two would seem maybe a little contradictory because if there's elevated demand in your branded business, we would think we'd see elevated demand to other packaged food customers as well.

Is it something with your customer mix maybe in terms of the -- those customers in flavor solutions? Or is there potentially a little conservatism there if the broader sort of consumer packaged food landscape remains somewhat elevated on an ongoing basis, if you see what I'm getting at?

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

I do see exactly what you're getting at, Andrew. And by the way, for you and for all of the participants on the call, we're sitting here with face masks on. And so, if we're a little bit muffled and hard to understand, please let us know and we'll try to speak up. The mix of customers within that sector is one of the factors, and there is a tremendous variability between our different customers, some of whom are still up solid double digits and others of whom who are down.

There are a number -- for each one of them, there's a story that goes along with that. For some, they are also impacted by sales to service and convenience store channels that have been depressed and are not up to current performance. Others -- some of them are beverage manufacturers who also have sales that cut across both the at-home and away-from-home channels. And many, I'll say, if not all, have curtailed some of their innovation and a focus on a core group of items in order to meet the demand from the retail side of the business, which has also, in some cases, contributed to an impact on us.

We did see an initial big surge from those customers during the stock-up period and as they adjusted their supply chains, but we've seen that steadily settle as we've gone through the quarter. So, we do expect that to gradually return to a more normal rate. I'll also add, Andrew, that one of the things that's different about McCormick versus the rest of the industry is that for most of our products, herbs, spices, seasonings.

Mike Smith -- Executive Vice President and Chief Financial Officer

Condiments --

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

Condiments like mustard and RedHot -- Frank's RedHot, it doesn't matter whether the consumer cooked the product at home or if they purchased it at a restaurant through takeaway, and part of the new normal for food service broadly is going to be a greater proportion of it being for a drive-thru takeaway away from premise consumption. And Frank's doesn't care if you bought it at home or if you cooked it out.

Andrew Lazar -- Barclays -- Analyst

Well, that Frank's thick Buffalo Ranch sauce, I can tell you, is being consumed like it's water with my college-age son here at home. So, --

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

Well, thank you. We appreciate every --

Mike Smith -- Executive Vice President and Chief Financial Officer

Great salad dressing too.

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

Yeah. Makes a great salad dressing. The trial we've gotten on the new products we've launched has really been one of the long-term benefits that we've gotten from the crisis.

Andrew Lazar -- Barclays -- Analyst

Great. Thanks, everybody.

Operator

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

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

Hi. Good morning. Thank you. Hey, guys.

Two from me. One, you talked about -- I think the phrase you said was canceled promotions. Many companies we talked to are talking about promotions being delayed to the back half of the year. You used the word canceled.

It may just be semantics, but I was just curious if you feel those promotions will not necessarily come back in the back half of the year. So, I just wanted to get your color on what you're seeing from the environment on -- in the deal space -- deal bag space. And then the second question for Mike. Mike, you talked about the tax rate benefiting from entity structure refinements in the slides.

Can you just give us a little more color on what those are and how they might affect your tax rate going ahead? Thank you.

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

Ken, I'll take the first part of that on the promotional activity, and I will gladly --

Mike Smith -- Executive Vice President and Chief Financial Officer

You sure you don't want the tax question?

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

The -- I want to make sure that we're really clear on this point. We're definitely leaning into our brands through this crisis. Our brand-building activity through our engagement with consumers, our advertising, be it through traditional channels or through social and digital marketing, has not only not been curtailed, but we've ramped those up. Consumers are very interested in cooking right now, and we want to take advantage of that interest, get as much trial on our brands as possible, and it's part of us coming out of this as a stronger company.

The promotional matters are a little bit different now with the huge surge in demand. We've had to try to manage that demand. And so, curtailing our promotions and, in some cases, canceling promotions has been part of managing through that huge surge in demand. We have, in our US business, had a sustained surge and pull and growth in demand.

And I don't know what -- I don't really want to call it a surge because it's not pantry loading, it's consumption, over 50% across the quarter, and there just wasn't that much stock in our supply chain. So, we did, working with our customers, curtail promotions. And in some cases, they are genuinely canceled. I mean we cannot go back and repeat some Memorial Day grilling promotions that we canceled.

Those aren't going to happen. We are in a stronger, I'd say, supply position today, and we are reinstating our promotional activities. But through -- I would say through May, we largely suspended trade promotion activity.

Mike Smith -- Executive Vice President and Chief Financial Officer

From a -- yeah, from a tax perspective, Ken, I mean -- and just to take you back, I mean, our underlying tax rate globally is about 24 to 25%. That really goes up and down based on geographic mix. But we do give you when we have visibility to discrete items, such as some of these legal restructurings we do. And we talked about earlier in January even though it's underlying 24 to 25%, we said for the year it would be around 22% because of some of the things we're doing.

As a global company, through a lot of our global entities, we've been built through acquisitions. And as you make acquisitions globally, there's tax strategies that happen later on to take advantage of losses, gains around the world. So, we have a great tax team that works on these things. And it's -- you can probably teach a commerce class on this stuff, but it's very complicated.

But it's really taking advantage of some of the global infrastructure we have, and we give you insight when we know those things can happen.

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

Hey, Ken, before we --

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

Yeah, sorry.

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

Go ahead. Did you have any follow-up on the tax question? Because I want to come back to promotion for a second.

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

I hate to say I do, but I do. Just very quickly, Mike, I guess the implication is we should not be modeling anything necessarily unusual going ahead in terms of a reversal of that? Is that the takeaway?

Mike Smith -- Executive Vice President and Chief Financial Officer

No. Definitely not. No. 100% no.

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

Right. Just one more point on the promotion. So, even with that -- I mean, the lift that we're seeing in Nielsen and IRI and the share gains are coming in spite of the curtailment of promotion. I just wanted to put that point out there.

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

Yes. Very helpful. Thank you, gentlemen.

Operator

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

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

Hey. Good morning, Rob.

Robert Moskow -- Credit Suisse -- Analyst

Good morning. Thanks for the question. I was hoping you could zero in a little more on the inventory deloading that you saw in US retail. You mentioned that as one of the factors explaining the discrepancy between consumer -- consumption growth and shipments.

Do you have any sense of like how many weeks of inventory you're down versus normal? And what's the plan for the back half of the year? Are you going to try to reinstate inventory levels back to normal? Or is it just kind of like hand-to-mouth out for a while?

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

I think -- and so I'm going to say that first of all, this -- that inventory is not a plan by the retailer. Supply chain has been challenged to keep up with the surge in demand. It's been a challenge for us, primarily on manufacturing capacity, in the Americas. And it's been a challenging time for the retailers because of the surge in demand and their ability to actually receive product.

And for a good part of this quarter, they were prioritizing things like paper products and sanitation products, which are pretty bulky, and so all of their time and ability to receive has always allowed us to replenish inventories. But we're -- at least there's a one week delay between the purchase and the restock signal. So, there's certainly at least a week that's been taken out of trade inventories. And retailers definitely are wanting to get in better supply, you can see it in scanner data, because the points of distribution are down that's reflecting an -- out-of-stock situations.

So, we want to get that replenished, and we're working toward that. Our ability to service the demand was really good in the initial weeks. But as it continued at a sustained rate, it really dipped as we went through May. And we took a lot of steps to initially expand our -- just our logistics capabilities and capacity to meet the surge in demand and then shifted -- and then -- and as we de-bottlenecked that, our manufacturing capacity became the pressure point.

So, we've taken steps to add workforce. We have optimized the schedules. And by the -- really by the fourth quarter, we'll either be 24/7 or 24/5 at all of our facilities, not just in the US but around the world. We've made some short-term capital investments around blending capacity.

And we've brought on, frankly, some more co-manufacturer as strategic partners in order to meet the surge in demand. So we're really past the low point in our ability to service the customers, which we hit right around the end of the quarter, and our service has been improving week-by-week since then. And we think we're going to be in a -- that we're going to be in good position to meet the demand. And this inventory will be restored to the system, which it'll be a driver of some volume growth in the rest of the year.

But the real key is just what happens with consumer demand and how strong is that strong preference for cooking at home continues for the rest of the year.

Robert Moskow -- Credit Suisse -- Analyst

And if I can ask a follow-up to that. Is it the time of year right now where you start talking to retailers about merchandising for the holiday season? And what will you normally tell them that would be different this time versus what you might have told them in the past?

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

Yeah. That conversation is ongoing right now because, of course, retailers are concerned about supply for the holiday season. And that -- right now, we believe that we're going to be in a good position to meet a, say, fourth-quarter demand that is very strong, and that's what we're guiding our retailers to.

Mike Smith -- Executive Vice President and Chief Financial Officer

Yeah. The good news, Rob, is our holiday items tend to be longer runs and more efficient for us to produce. It's a different set than being produced now. So, that gives us some opportunity there.

Robert Moskow -- Credit Suisse -- Analyst

Got it. Well, lots of cinnamon. Alright. Thank you very much.

Operator

Our next question is coming from the line of Alexia Howard with Bernstein. Please proceed with your question.

Alexia Howard -- Sanford C. Bernstein -- Analyst

Good morning, everyone. Hi, guys. OK. So, two questions.

Firstly, given that a consumer would only use a little out of a full spice jar to make a single meal, what gives you the confidence that we won't see a sharp slowdown in sales in consumer once those shoppers have fully stocked up on the range of different prices that they need for their repertoire recipes for cooking on scratch? I guess I'm asking could there be a temporary onetime cliff at some point? And then my second question is more broadly, given Dr. Fauci's recent comments about how chronic health conditions have contributed to the disproportionate impact of COVID-19 on the African-American community in the US, how are you thinking about systemic issues like food deserts or food apartheid and the role that McCormick and the food system more broadly can play in addressing these problems with racial injustice?

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

Those are two very different questions, and that last question has a number of different facets to it. So, I'm going to try to tackle both of those. First of all, many of our products are single use. I mean a big part of the surge in demand that we're seeing is from our dry recipe mixes, for example, which would be a single-use product.

Our wet marinades are single use. And just the sheer level of increase in -- at cooking says that consumers are going through their spice supply. I mean it's not -- I mean, we've had a very high level of repeat purchase during the -- even during the second quarter. So, consumers -- we're getting certainly new trial, but we've had an 11% increase in repeat buyer rate at the same time that we've had a 16% increase in household penetration.

And you know how that works. Usually, when your penetration goes up, your repeat rate goes down for a period of time because you're bringing in lighter users. This has been -- I mean, there's a high level of usage. And we don't see any evidence at all that consumers have built inventory in their pantries.

It's just not a stock-up category. We're a usage category.

Mike Smith -- Executive Vice President and Chief Financial Officer

You don't buy three bottles of cinnamon.

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

People are worried that they're going to run out of cinnamon and so they buy three bottles the way they might three packs of toilet paper. And so, we believe that consumers are buying for their immediate use and consumption, and we do not believe that there's going to be any kind of consumer need to destock. And I'll go even further out on that that our own survey data, because we're doing a weekly tracker with consumers, so that most consumers only have a week or two of food on hand. And so, they are not stocked up on their food.

Now, on the question of food desserts and healthful eating and social justice, I want to -- I could make a speech on this, and I actually have quite a few times. But I'll try not to make too big a speech out of it. But first of all, our portfolio is generally advantaged in terms of health and wellness. Most of the products that we sell are inherently good for you in herbs and spices, for example, and are either low or no in things like salt, sugar and fat.

And they're available at a full range of price points and we sell in all channels. But we're really widely accessible to people, whatever their income level or wherever they're located. And even where they can't get to a store, our e-commerce and digital efforts allow access through delivery directly to their home. And in fact, in economically hard times also, we tend to outperform, which just shows that our products are valued.

And as we've gone through this crisis, we have always supported food banks. And as we've gone through this crisis, we've supported food banks in about 20 countries. And we introduced restaurant relief funds in cities like Baltimore and New Orleans, where we have significant operations ourselves and where those industries are meaningful employers and are really suffering. And our total support of food-related charities during this crisis has been about $2 million.

We've made a $1 million pledge early on, but we've substantially exceeded that pledge. Now, Alexia, there's a much broader issue of social justice, systemic racism, and McCormick, I believe, is one of the good guys on this issue. One of our foundational principles as a company is the power of people, and we're founded on the principle of respect for the individual and have long-standing programs to make sure that underrepresented groups have full opportunities for professional fulfillment within the company. And I think we set first internally an example with women and minorities and LGBTQ employees and other underrepresented groups to make sure that they are represented in McCormick's leadership all the way up to our very diverse set -- very diverse board of directors, which includes four women, two blacks, one North African and a Latina, so -- and we've been well recognized externally for this.

We're one of DiversityInc's top 50 in terms of employment opportunities for minority and women and other underrepresented groups. The second thing is that we've spoken out publicly and have really taken some public stands that have generated some not always favorable response back to me personally. But we've taken public stands, so both internal and external messages from the company and from me personally, against racism, discrimination, injustice and explicitly in support of Black Lives Matter. So, we have spoken out on this issue.

And beyond speaking, it's important to have action. And we have strong development programs for women, and especially in the US minorities, and we have committed incremental funding to combat racial injustice, provide food and healthcare, back to your original question, and other essential services to the black communities. So I hope that's a fulsome answer, and I'd be happy to follow up with you.

Alexia Howard -- Sanford C. Bernstein -- Analyst

Appreciate it. Thank you very much, and hope to catch up soon. Thank you.

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

Thanks, Alexia.

Operator

Your next question is from the line of Faiza Alwy with Deutsche Bank. Please proceed with your question.

Faiza Alwy -- Deutsche Bank -- Analyst

Yeah. Hi. Good morning. So, I wanted to first just follow up on the supply chain.

I think you had mentioned in your prepared remarks that there were some raw materials where you're seeing some pressure. So, just wanted to get more color on that. And then I have a follow-up.

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

Great. Well, I'll be glad to say that first of all, I don't want to create a misperception, so I'm really glad you asked that question. I think that global sourcing has actually been one of the bright spots for us and has been a real differentiator that has enabled us to win through this situation. We have very early insight into that sourcing might be a pressure point because of our operations in Wuhan, which -- so we saw this crisis coming right at the beginning, and we began developing contingency plans and alternative sourcing all the way back in January.

And I think we spoke about this on our year-end call and in some subsequent media the first week of February. So, this has been a real win for us. Any supply chain in any industry would have been challenged going through this. And so, there have been a rolling series of challenges, but I will say that our ability to source raw materials and packaging has not had a material impact on our service, and we think that we are very much advantaged in this area.

Mike, do you want to jump in?

Mike Smith -- Executive Vice President and Chief Financial Officer

Yeah. As we've talked in the past, we source over 14,000 raw materials and packaging items globally. So, -- and as Lawrence said, we really have not had any significant shortages in sales due to that.

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

And scale is an advantage on this. We are really the only, I would say, only company with the scale to be able to have the resources on the ground, in your -- in the actual sourcing areas for some of these raw materials, especially the most important ones. And that has proven invaluable as we've been able to work locally with local suppliers in emerging markets where many of our raw materials come from, work with the local suppliers, local logistics and local authorities to keep our raw material flowing.

Mike Smith -- Executive Vice President and Chief Financial Officer

And when you see headlines like when the COVID hit in India and they're shutting down the country, our global supply chain, they want to work with those people to get our product out. So, they have done a great job.

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

Yes.

Faiza Alwy -- Deutsche Bank -- Analyst

OK. Great. And then just the new US capacity addition that you had talked about. I'm curious if this is something that you had planned on doing that you were able to accelerate into this year.

And I guess the real underlying question is, how are you thinking about long-term demand outside of just what's happening with COVID right now and the lap next year? I mean, do you think you're creating sort of a new generation of people who enjoy cooking or have at least gotten comfortable with that? Just your perspective around long-term demand would be helpful.

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

Yeah. Sure. Well, on the supply chain side, I'll take that part first, we did not anticipate that we would have this much growth in demand this year. And so, these -- the things that we're doing in our US -- particularly in our US manufacturing to create additional capacity are all new things that we're doing in response to an incredible dynamic situation.

We do have a long-term capital plan. We do actually have spoken externally --

Mike Smith -- Executive Vice President and Chief Financial Officer

We talked at CAGNY about it, about putting the spice in the future.

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

Exactly. And that for the past three years, our focus from a capital standpoint has been building our capacity and capabilities in Asia and other emerging markets, but that beginning this year, we were pivoting back to Western Europe and the US specifically. And so, we do have some -- a number of big projects under way, and this will only accelerate our thinking of that space. As far as the demand creation goes, right now, we really believe that consumers are going to continue to cook at home more for an extended period of time, which is going to be constructive to our growth.

And further, the new normal for restaurants is going to involve more takeout consumption at home, as I mentioned in the earlier question. That's also going to be constructive for our consumer brands of herbs, spices, seasonings and condiments. The gains that we're getting in share in household penetration, which, by the way, translates to millions of new households, and the increased repeat rate that we're -- right now we're seeing all say that consumers are trying our brands, they like them enough to buy them again and they're clearly having good experiences that for many of them are going to be the new habit. Everybody who's been cooking at home more and found it to be easy, fun, and economical.

Faiza Alwy -- Deutsche Bank -- Analyst

Perfect. Thank you so much.

Operator

Thank you. The next question is from the line of Chris Growe with Stifel. Please proceed with your question.

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

Hey, Chris.

Chris Growe -- Stifel Financial Corp -- Analyst

Hello. Good morning. Thank you. Appreciate the time this morning and all the color you've given.

I just want to ask, first of all, two, I think, pretty easy questions. Have you rationalized your SKUs during this time? Are you focusing more on those core items? And then what has it done to shelf space was one of my questions. And then the second question was just the COVID-related costs in the quarter. And I think you indicated they were going to be peaking in the third quarter.

Just, does that mean they're higher than the second quarter in Q3? And then kind of how to think about what that -- if you can, that level of cost overall.

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

I'll take the first part of that and let Mike speak to the COVID costs. But the -- in terms of SKUs, we have prioritized our top-selling SKUs in order to maximize our throughput and service to the customer, which has meant that there's a group of, call them, secondary SKUs that have -- that neither -- where we've either suspended production or just have curtailed production to a more as-available basis. And we needed to do that to give us longer runs on the top seller. Again, we've done that in cooperation with retailers.

We are -- as our capacity grows, we're adding those back, but we did do some SKU management. Now, I'd say one of the learnings that we've got going through this, and which our retailers have gotten as well, is that SKU rationalization does bring some benefits in terms of efficiency and reduction of complexity. And so, I think that coming out of this, some of these SKUs, we'll probably not ever put back into service. And many retailers are also taking a look at their assortment and will probably carry a lower assortment going forward.

I think they're also not just evaluating their SKUs, they're evaluating the brands that they carry. I think that retailers are going to want to simplify that business, and they're finding that some of the small brands that they were carrying add unnecessary duplication and complexity and just plain aren't important. And I think that's contributing to the share gains that we're seeing. I think this is going to give us a lot more traction in the second half of the year, particularly with our category management initiatives and the aisle reinvention program that we've got for herbs and spices.

Mike, do you want to take --

Mike Smith -- Executive Vice President and Chief Financial Officer

Yeah. Chris, on the COVID costs, we estimate we're going to spend in the $30 million range from a cost of goods sold perspective for the year really split between the second and third quarter. We don't see a lot in the fourth quarter. All that's pretty uncertain now depending on the -- how long COVID lasts.

But I would just think that second and third quarter will be the biggest spend for things like essential pay we've had for our essential workers in the plants and DCs, paid leaves, a lot of PPEs we've had to buy, some small inventory write-offs. But think about it as second and third-quarter impact.

Chris Growe -- Stifel Financial Corp -- Analyst

And just to be clear on that, Mike, there was a comment about 3Q being larger than 4Q. But does that necessarily mean that 3Q is larger than 2Q? Or is 2Q sort of the highest level of the year and then they kind of -- still higher but lower in Q3?

Mike Smith -- Executive Vice President and Chief Financial Officer

I'd say they're roughly the same.

Chris Growe -- Stifel Financial Corp -- Analyst

OK, great. Appreciate all the color. Thank you so much.

Operator

Thank you. our next question is from the line of Peter Galbo from Bank of America.

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

Hi, Peter.

Peter Galbo -- Bank of America Merrill Lynch -- Analyst

Hey, good morning. Thanks for taking the question. Just one from me. Mike, in the press release this morning, there was quite a bit of discussion around fixed cost leverage and deleverage associated with the higher and lower volumes in the two kind of parent segments.

I guess just is there any way to dimension for us how much of the margin improvement or the deleverage was due to that fixed cost leverage as we think about it going forward? The volumes will obviously still be up in consumer but maybe not as much, and just that could help us from a modeling perspective on the margins.

Mike Smith -- Executive Vice President and Chief Financial Officer

OK. Peter, I'll answer this. Peter, you've read the book by Charles Dickens, A Tale of 2 Cities. This is really the tale of two segments.

From a consumer perspective, obviously, with those huge volume increases, we've got a lot of great fixed leverage. On the other side, flavor solutions, we did not. For the company, it was really not that positive overall. What you're seeing at the gross margin line, a good -- over half of that increase is due to the segment mix as consumer has higher margins than flavor solutions at the gross margin line and the operating margin line.

So, I wouldn't -- it all depends on over the next six months what happens with that consumer demand and flavor solutions demand. But I would -- it was not a significant impact overall for the company from a fixed leverage perspective, especially as we had some of the additional manufacturing-related COVID costs in Q2.

Peter Galbo -- Bank of America Merrill Lynch -- Analyst

Got it. No, that's helpful. Thank you.

Operator

Thank you. Our final question today comes from the line of David Driscoll from DD Research. Please proceed with your question.

David Driscoll -- DD Research LLC -- Analyst

Great. Thank you. Appreciate you sneaking me in here before it concludes.

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

[Inaudible]. Hang in there, Dave. That's right.

David Driscoll -- DD Research LLC -- Analyst

[Inaudible]. OK, I'll try to make it a good one. I do want to follow up on the margins. I want to say that the biggest variance that I think that happened in my model versus your actuals and consensus for that matter was the differential on margins, Mike.

So, I want to go back over it, right? Sales up 8%, operating income up 21%. Specifically in that consumer segment, margin's up 600 basis points, maybe a little more than that, and volume up 25%. So, I really like this volume leverage point that was just brought up a second ago, and I know you blended it with the whole company. But if we just stay focused on the consumer segment for a moment, is it fair that the consumer segment was benefited by substantial volume leverage? I know where the volume leverage probably works the other way in the other segment, but I'd just like to talk about consumer for a moment.

Would it be fair to say that that's the No. 1 point driving the consumer margin improvement? And then, honestly, the real point of all of this is to try to understand how to project forward. Your quarters have a lot of seasonality in terms of margins. If you were to get the same 25-point pop to volumes in Q3 in consumer that you got in Q2, could we just add 600 basis points to the consumer margin? Or are there some funny seasonal effects that would reduce those types of leverage? I just get worried about the seasonal pattern on your margins and how we might think about these factors given such tremendous impacts in the current quarter.

Sorry for the long question.

Mike Smith -- Executive Vice President and Chief Financial Officer

Yeah. No, generally -- and I'll answer this and then Lawrence can add to it. Generally, we build margins throughout the year, and I'll speak about consumer now. I mean the fourth quarter is generally our highest-margin business due to the holiday items.

Second quarter was pretty extraordinary. There was a lot of leverage coming through the consumer due to the huge increases, I mean, double-digit -- high to mid double digit, meaning 50% in some cases, of increases. I'd be a little careful, though, because things -- like if you look at A&P, for example, A&P for the company was up 1%, a couple more percent for consumer. Now that being -- and we're going to heavy-up more in the second half, but -- to get to that mid-single-digit guidance we've given.

However, even though we didn't spend a huge percentage, things like working media are up double digits globally. Some of our CCI savings are coming through in A&P, so we're actually really leaning into A&P. But you'll see that A&P line increase in the second six. So, that will take 600 basis points down by some number.

We had really good product mix in the quarter as well as segment mix within the consumer side. Good product mix, too. I'd just be a little careful about trying to take the second quarter and expand it out to the year.

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

I also want to emphasize that we're not giving guidance because there's so much uncertainty, and I don't want to sort of run away with saying too much about gross margin here because that's getting us into an area of maybe providing more guidance than we are prepared to. But certainly, the mix between the segments, to the extent that there is more consumption at home and less away from home, is going to be a benefit to our margins, and correspondingly, that we'll have leverage on the -- or deleverage based on those volume trends.

David Driscoll -- DD Research LLC -- Analyst

And then, guys, if I could just sneak in one last one. Sorry, go ahead.

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

No. No, that was good. Go ahead.

David Driscoll -- DD Research LLC -- Analyst

OK. Now the other one, just because this is -- I think it's reasonably important and hard to model. In your EMEA business, you've talked about the impact of QSRs and that in Europe, it was just all but shut down in this past quarter. Where does it stand today? And do we -- is it reasonable to think that those quick service restaurants are going to be doing plenty of drive-thru and take-outs? And so that business sees -- your business sees a substantial improvement because you're just not in total lockdown like you were in this past quarter? So I feel like there's a big variance coming right there, but pull me back if that's something --

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

No, no, we're not pulling you back. I think we've pointed to that. And actually, I thought we've tried to get that clear in the remarks but may not -- our remarks were extraordinarily long, and I apologize for that. The restaurant -- the quick service restaurants in Europe did completely close down at the end of March.

The -- I mean, I'm not speaking out of school or there are customers, and so I don't want to get into guiding for their business. But all of their CEOs have been out publicly saying that they were closed. So, that's out there. But they also all reopened in June heavily toward drive-thru and pickup, but they have pretty much all reopened in the month of June.

So, I would expect to see that better in the third -- in our third quarter. And I'll say the challenge -- I'll just mention, when we talk about supply chain, this is one of the challenges that we've had and where we've had to really be nimble and responsive because they shut down with a few days' notice to us, completely idling a facility, and then they literally started back up with about a week's notice to us and so we had to get cranked up, and we've worked our way through it with them.

David Driscoll -- DD Research LLC -- Analyst

Really appreciate the comments. Great job on the quarter, by the way. No one said it, but the results are stellar. Thank you.

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

Thank you.

Operator

Thank you. At this time, I will hand the call back to Lawrence Kurzius for closing comments.

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

Great. Well, thank you, everyone, for your questions and for participating in today's call. And I realize that it did go a bit long, and I thank you for your patience. McCormick is a global leader in flavor, and we're differentiated by the broad and advantaged portfolio which continues to drive growth.

We have a growing and profitable business with a balanced portfolio that drives consistency in our performance in the volatile environment in which we currently operate. We deliver flavor to all markets and channels while responding readily to changes in industries and the world with new ideas, innovation and purpose. One of the most significant risks to any company is being unprepared to respond with agility to a significant, unexpected disruption. We're all experiencing that disruption now, and McCormick is well prepared to not only manage through it but to emerge from it stronger.

With our relentless focus on growth, performance and people, we're confident our strategies will enable us to become even better positioned to drive future growth and build long-term value for our shareholders.

Kasey Jenkins

Thank you, Lawrence, and thanks to all for joining today's call. If you have any further questions regarding today's information, please reach out to me. This concludes this morning's call. Thank you, have a good day, and I hope everyone stays healthy and safe.

Duration: 86 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

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

Robert Moskow -- Credit Suisse -- Analyst

Alexia Howard -- Sanford C. Bernstein -- Analyst

Faiza Alwy -- Deutsche Bank -- Analyst

Chris Growe -- Stifel Financial Corp -- Analyst

Peter Galbo -- Bank of America Merrill Lynch -- Analyst

David Driscoll -- DD Research LLC -- Analyst

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