McCormick (MKC) Q4 2021 Earnings Call Transcript

McCormick (MKC -0.38%)
Q4 2021 Earnings Call
Jan 27, 2022, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Kasey Jenkins

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

We'll begin with remarks from Lawrence Kurzius, chairman, president and CEO; and Mike Smith, executive vice president and CFO. And we will close with a question-and-answer session. During this call, we will refer to certain non-GAAP financial measures. The nature of these non-GAAP financial measures and the related reconciliations to the GAAP results are included in this morning's press release and slides.

In our comments, certain percentages are rounded. Please refer to our presentation for complete information. 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. Please refer to our forward-looking statements on Slide 2 for more information. I will now turn the discussion over to Lawrence.

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

Thank you, Kasey. Good morning, everyone. Thanks for joining us. Starting on Slide 4.

Our fourth quarter completed another year of robust and sustained growth. In 2021, we remained focused on growth, performance and people, driving another year of strong results and continuing our momentum. We drove record sales growth by executing on our long-term strategies, actively responding to changing consumer behavior and capitalizing on new opportunities, all while remaining forward-looking in an ever-changing global environment. The profit driven by our strong sales growth in 2021, while tempered by the well-known headwinds of higher inflation and broad-based supply chain challenges, was also strong.

Our 2021 operating performance underscored the strength of our business model, the value of our products and capabilities, and the resilience of our employees. We have a demonstrated history of managing through short-term pressures and did so again in the fourth quarter. And we expect to do the same through this inflationary environment using pricing and other levers to fully offset cost pressures over time. The breadth and reach of our global flavor portfolio ideally position us to fully knowing demand for flavor around the world and drive continued differentiated growth.

This has never been more evident than over the last two years as consumers adapted to the ever-changing environment. Our compelling offerings in our Consumer and Flavor Solutions segment for every retail and customer strategy across all channels create a balanced and diversified portfolio to drive growth and consistency in our performance. It also gives us significant flexibility to adapt to changing conditions, wherever they may arise, and continue on our growth trajectory. This is a significant differentiator in the dynamic environment in which we currently operate.

We are delivering flavor experiences for every meal occasion regardless of whether the occasion is consumed at home or away from home through our products and our customers' products. We are end-to-end flavor. Now turning to Slide 6 and our fourth quarter results. Our performance was at the high end of the guidance range we provided for sales and adjusted operating profit on our last earnings call and exceeded the guidance range we provided for adjusted earnings per share.

On our top line versus the year-ago period, we grew fourth quarter sales 11%. Both of our segments delivered strong growth with contributions from base business growth, driven by higher volume and pricing actions as well as new products and acquisitions. Our fourth quarter adjusted operating income and adjusted earnings per share both increased 6%, driven by growth from higher sales and CCI-led cost savings, partially offset by cost inflation. Let's turn to our fourth quarter segment business performance, which includes some comparisons to 2019 pre-pandemic levels, which we believe are meaningful, given the level of demand volatility from quarter to quarter experienced in 2020.

Starting on Slide 7. Consumer segment sales grew 10%, including incremental sales from our Cholula acquisition. The increase was driven by strong volume growth and the impact of pricing actions phased in during the quarter as we discussed on our last earnings call. Our Consumer segment organic sales momentum on a two-year basis was up double digits, highlighting how the sustained shift in consumer consumption continues to drive increased demand for our product and outpace its pre-pandemic level.

Our Americas sales growth was 13% in the fourth quarter, with incremental sales from our Cholula acquisition contributing 3% growth. Our total McCormick U.S. branded portfolio consumption, as indicated in our IRI consumption data and combined with unmeasured channels, grew 1%, following a 17% consumption increase in the fourth quarter of 2020, which results in a 19% increase on a two-year basis. As we previously discussed, in the year-ago period, elevated demand challenged our supply chain whereas in 2021 with the actions we took to add capacity and increase resilience, we were far better positioned and able to ship in line with consumption.

Demand has remained high, and we continue to realize the benefit of our U.S. manufacturing capacity expansion, although some products remain stretched by sustained high demand. Shelf conditions are improving as is our share performance with another sequential improvement in the fourth quarter, as we expected. We continue to see further improvement in our recent performance as we begin 2022.

Importantly, and as I just mentioned, we are better positioned than we were a year ago and are confident in our continued momentum. Focusing further on our U.S. branded portfolio, our 19% consumption growth versus the fourth quarter of 2019 was the seventh consecutive quarter that our U.S. branded portfolio consumption grew double digits versus the two-year ago period.

Our key categories also continued to outpace the center-of-store growth rates versus the two-year ago period. Household penetration and repeat rates have also grown versus 2019. And when consumers shop, they are buying and therefore using more of our products than they were pre-pandemic. Now turning to EMEA.

During the fourth quarter, we continued our momentum with strong consumption growth in key categories compared to the fourth quarter of 2019. For the full year, we gained market share in key categories and across the region. Similar to the U.S., our household penetration and repeat rates have also grown versus the two-year ago period. And when consumers shop, they are buying more than they were pre-pandemic.

And in the Asia Pacific region, our fourth quarter performance continued to reflect the recovery of China's lower branded foodservice sales last year as well as consumer consumption growth across the region. Turning to Slide 9. Our Flavor Solutions segment grew 14%, reflecting higher base volume growth in new products as well as pricing actions to partially offset cost inflation and contributions for our FONA and Cholula acquisitions. On a two-year basis, our sales also increased double digits with strong growth in all three regions.

In the Americas, our FONA and Cholula acquisitions made a strong contribution to our fourth quarter growth. Additionally, we continued to see robust growth momentum with our consumer packaged food customers as well as the recovery of demand from branded foodservice customers as more dining out options are open versus a year ago. We continued to execute on our strategy to shift our portfolio to more value-added and technically insulated products in the region, both through the addition of FONA and Cholula to our portfolio as well as the exit of some lower-margin business. Turning to EMEA, which has continued its strong momentum.

We are winning in all channels with double-digit fourth quarter growth to quick-service restaurants or QSRs, branded foodservice customers and packaged food and beverage customers. Recovery has been robust in the away-from-home part of the portfolio, and growth in our at-home offerings has been outstanding. Notably, for the full year, on a two-year basis, we have driven 19% constant currency growth across the portfolio. In APZ, our momentum with our QSR customers remained strong, driving double-digit growth versus 2020 as well as on a two-year basis.

As for the fourth quarter and in line with what we have said in the past, limited time offers and promotional activities can cause some sales volatility from quarter to quarter. Moving from our fourth quarter results. I'm pleased to share highlights of our full fiscal year, including an update on our Cholula and FONA acquisitions, starting on Slide 10. We drove record sales growth in 2021, growing sales 13% to $6.3 billion with strong organic sales growth and a 4% contribution from our Cholula and FONA acquisitions.

Notably, on a two-year basis, we grew sales 18%, reflecting a robust and sustained growth momentum in both of our segments. Our Consumer segment sales growth of 9% was driven by consumer sustained preference for cooking more at home fueled by our brand marketing, strong digital engagement and new products, as well as growth from Cholula. Versus 2019, we grew sales 20%, which reflects the continuation of consumers cooking and using flavor more at home and the strength of our brands. Our Flavor Solutions segment growth of 19% reflected the strong continued momentum with the at-home products in our portfolio, including a record year of new product growth and a robust recovery from last year's lower demand for away-from-home products as well as contributions from FONA and Cholula.

Notably, growth was driven equally from both the at-home and away-from-home products in our portfolio. On a two-year basis, we grew sales 15%, driven by the at-home part of our portfolio with demand for the away-from-home portion recovering to pre-pandemic levels. We have consistently driven industry-leading sales growth resulting in McCormick being named to the latest Fortune 500. We're proud of our sustained performance and for being included in this prestigious group of industry-leading companies.

At year end, our board of directors announced a 9% increase in our quarterly dividend, marking our 36th consecutive year of dividend increases. We have paid dividends every year since 1925 and are proud to be a dividend aristocrat. Finally, we continue to be recognized for doing what's right for people, communities and the planet. During the year, McCormick was named the United Nations Global Compact LEAD Company and awarded the inaugural Terra Carta seal from his Royal Highness, the Prince of Wales, for our industry leadership in creating a sustainable future.

And just last week, Corporate Knights ranked McCormick in their 2022 Global 100 Sustainability Index as the world's 14th most sustainable corporation, and for the sixth consecutive year, No. 1 in the food products sector. Moving to the one-year anniversary of our two fantastic recent acquisitions. Cholula and FONA are creating value, achieving synergies and delivering results according to our plans.

Importantly, we've achieved our one-year sales and earnings per share accretion expectations for both Cholula and FONA. I'd like to share some comments about the successful execution of our growth plans. And then in a few moments, Mike will cover in more detail our delivery on acquisition plans. Starting with Cholula on Slide 12.

The addition of this beloved iconic brand with authentic Mexican flavor is accelerating the growth of our global condiment platform. In our Consumer segment, we're unlocking Cholula's significant growth potential by using our category management expertise, leveraging e-commerce investments, launching new products, and optimizing brand marketing spend. We executed on initiatives this past year, including optimizing shelf placement and assortment; expanding into new channels; gaining momentum in e-commerce where Cholula had been under-penetrated; increasing awareness, both through brand marketing investments and brand partnerships such as with DoorDash; and leveraging promotional scale across McCormick brands. We are excited about the results our initiatives are yielding.

During 2021, we gained significant momentum on top of lapping elevated growth in 2020, adding over one million new households and growing Cholula's consumption 13% in 2021 versus last year. Cholula is continuing to outpace category growth and gain share. Combined with 19% total distribution point growth in the fourth quarter of 2021, it is clear our plans are driving accelerated growth. And notably, we drove Cholula to the No.

2 hot sauce brand in the U.S., joining Frank's RedHot, the No. 1 ranked brand, at the top of the category. We are just as excited about Cholula's performance as part of our Flavor Solutions portfolio. With our broad presence across foodservice channel, we have strengthened Cholula's go-to-market model through 2021.

We continued to build on Cholula's strong front-of-house presence, which builds trial and brand awareness beyond foodservice with significant double-digit growth of portion control packs as more restaurant meals are now consumed as delivery or takeaway. Leveraging our culinary foundation and insights on menu trends, we've also driven double-digit growth in our back-of-house foodservice penetration through recipe inspiration and increasing Cholula's menu participation. We are growing with big national accounts and smaller independent restaurants, as well as expanding distribution through leveraging the strength of our distributor relationships where Cholula was less developed. We are succeeding with new menu items, including both permanent ones and limited time offers.

Our momentum with Cholula is very strong. And we are confident our initiatives will continue to build on consumers' growing passion for heat and drive further growth of this fantastic brand. Now turning to FONA. The addition of this leading North American flavor manufacturer is accelerating the growth of our global flavors platform.

We are thrilled our first year of owning FONA has been a record year for the business, with double-digit sales growth compared to last year. Beverages, with particular strength in the fast-growing performance nutrition category, continued to drive significant growth for FONA up 15% compared to last year. FONA's new product wins and its pipeline potential have also hit record high, fueling future growth. We are continuing to drive growth and create new opportunities with our global footprint.

We are leveraging Giotti's infrastructure to expand FONA's flavors into the EMEA region. In our APZ region, the combination of our infrastructure, which includes our recent flavor capability investments in China and FONA's local application and flavor creation talent is unlocking further potential to accelerate flavor growth in that region. And just a few months ago, we began our expansion of FONA's footprint to increase our Americas flavor manufacturing capacity, an investment we planned as part of our acquisition model, enabling us to deliver the future growth we expect. By expanding our breadth and depth in developing flavors while also combining our infrastructures to provide greater scale as well as increasing our manufacturing capacity and technical bench strength, we are providing our collective customers with a more comprehensive product offering and fueling more opportunities for growth across our entire portfolio.

We are cross-selling products across our customer base, and we've also realized the benefit of our combination within our own portfolio. For instance, with FONA now leveraging McCormick's USDA savory flavors and developing flavors for pet food applications. The combination of our capabilities has created new opportunities to participate on briefs that capitalize on core strength across McCormick and FONA, enabling us to build a robust pipeline of opportunities, and importantly, win and grow with our customers. We are thrilled with both Cholula and FONA.

Our enthusiasm for these acquisitions, as well as our confidence that we will continue to achieve our plan, accelerate growth of these portfolios and drive shareholder value has only continued to strengthen. In summary, for 2021, we continued to capture the momentum we have gained in our Consumer segment and the at-home part of our Flavor Solutions segment. We have successfully navigated through the pandemic-related disruption in the away-from-home portion of our Flavor Solutions segment, and Cholula and FONA have proven to be fantastic additions to our portfolio. All of this reinforces our confidence for continued growth in 2022.

Global demand for flavor remains the foundation of our sales growth and we have intentionally focused on great, fast-growing categories and will continue to differentiate our performance. We are capitalizing on the long-term consumer trends that accelerated during the pandemic: healthy and flavorful cooking, increased digital engagement, trusted brands, and purpose-minded practices. These long-term trends and the rising global demand for great taste are as relevant today as ever with the younger generations fueling them at a greater rate. Our alignment with these consumer trends, combined with the breadth and reach of our global portfolio, and the successful execution of our strategies, sustainably positions us for future growth.

In this current dynamic and fast-paced environment, we remain focused on long-term, sustainable growth. As I mentioned earlier, we continue to experience cost pressures from higher inflation and broad-based supply chain challenges similar to the rest of the industry. To partially offset rising costs, we raised prices where appropriately last year and began to realize the impact of those actions in our fourth quarter sales growth. As costs have continued to accelerate, we are raising prices again where appropriate in 2022.

These pricing actions are on track, and we appreciate our customers working with us to navigate this environment. Additionally, our plans to mitigate cost pressures include our CCI-led cost savings, revenue management initiatives and taking prudent steps to reduce discretionary spend where possible. Throughout our history, we have grown and compounded our growth regardless of short-term pressures and plan to do so again in 2022 as we continue to accelerate our momentum and drive growth from a position of strength. Across our Consumer segment, our 2022 plans include continuing to build consumers' confidence in the kitchen, inspire their home cooking and flavor exploration, and accelerate flavored usage, including delivering on the global demand for heat.

We also plan to strengthen our consumer relationships at every point of purchase as well as create delicious, healthy, and sustainable future. With our investments in brand marketing, category management and new products, we expect to drive further sales growth. For our Flavor Solutions segment, the execution of our strategy to migrate our portfolio more technically insulated and value-added categories will continue in 2022. Our plans include targeting opportunities to grow with our customers at attractive, high-growth categories, continuing to leverage our broad technology platform to develop clean and natural solutions that taste great and strengthening our leadership in heat.

With our culinary-inspired innovation and our passion for creating a flawless customer experience, we plan to continue our new product momentum and drive further sales growth. Our achievements in 2021, our effective growth strategies, as well as our robust operating momentum, all bolster our confidence in delivering another strong year of growth and performance in 2022. We're looking forward to sharing more details regarding our 2022 growth plan in just a few weeks at CAGNY. In summary, we have a strong foundation and are well equipped to navigate through this ever-changing environment, responding with agility to volatility and disruptions, while remaining focused on the long-term objectives, strategies, and values that have made us so successful.

We are in attractive categories and are capitalizing on the long-term consumer trends that are in our favor. A combination of our strong business model, the investments we've made, the capabilities we've built, and the power of our people position us well to continue our robust growth momentum. Importantly, our strong growth trajectory supports our confidence in our long-term financial algorithm to drive continuous value creation through top line growth and margin expansion. Our fundamentals, momentum and growth outlook are stronger than ever.

McCormick's employees around the world have done a tremendous job of navigating this past year's volatile environment. Their agility, teamwork, and passion for flavor drive our momentum and success, and I want to thank them for their dedicated efforts and engagement. Now I'll turn it over to Mike.

Mike Smith -- Executive Vice President and Chief Financial Officer

Thanks, and good morning, everyone. Before I provide additional remarks on our fourth quarter and full year results, I would like to build upon Lawrence's comments on Cholula and FONA and highlight how we have delivered on our acquisition plans now that we have completed the first year. Starting on Slide 19. As Lawrence already shared, we have created value by driving sales growth according to our plans.

In addition, Cholula was margin accretive to the gross and operating margins in both of our segments and FONA was accretive to the margins in the Flavor Solutions segment. We are delivering against our synergy and onetime cost estimates, in fact, doing better than our acquisition plan. Starting with our original synergy targets. For Cholula, we have achieved the targeted $10 million to be fully realized by 2022.

For FONA, we are on track to achieve our targeted $7 million by the end of 2023. We are also achieving revenue synergies as expected. Our transaction and integration costs for Cholula and FONA are both lower than our acquisition plans. Early in 2021, we took the opportunity in a low interest rate environment to optimize our long-term financing following the acquisitions, raising $1 billion through the issuance of five-year 0.9% notes and 10-year 1.85% notes, and therefore, realized lower interest expense than we originally projected.

Additionally, our ongoing amortization expense is favorable to both of the acquisition models. In summary, we executed our year one acquisition plans in line with, and in some areas, better than our modeled including the adjusted earnings per share accretion we expected. Successful acquisitions are a key part of our long-term growth strategy. Importantly, we have a proven track record of driving value through acquisitions and increasing the performance of acquired businesses, and Cholula and FONA are adding to that history.

Now for our fourth quarter and full year performance, starting on Slide 20. Our fourth quarter capped off a year of record sales growth. During the fourth quarter, we grew constant currency sales 10%, with higher volume and product mix. Acquisitions and pricing each contributing to the increases in both segments.

Our organic sales growth was 6%, driven by strong growth in both the Consumer and Flavor Solutions segments. And incremental sales from our Cholula and FONA acquisitions contributed 4% across both segments. Versus the fourth quarter of 2019, we grew sales 15% in constant currency with both our Consumer and Flavor Solutions segments growing double digits. During the fourth quarter, our Consumer segment sales grew 9% in constant currency, driven by higher volume and product mix, pricing actions and a 2% increase from our Cholula acquisition.

The year-over-year increase was led by double-digit growth in the Americas and Asia/Pacific regions. Compared to the fourth quarter of 2019, sales grew 14% in constant currency, led by the Americas. On Slide 21, Consumer segment sales in the Americas increased 13% in constant currency, driven primarily by higher volume and product mix as the sustained shift to at-home consumption continues to drive increased demand as well as lapping last year's capacity constraints. Pricing actions and a 3% increase from the Cholula acquisition also contributed to sales growth.

Compared to the fourth quarter of 2019, sales increased 19% in constant currency, driven by broad-based growth across branded products as well as an increase from the Cholula acquisition. A decline in private label sales partially offset the branded growth. In EMEA, constant currency consumer sales declined 5% from a year ago due to lapping the high demand across the region last year. On a two-year basis, sales increased 5% in constant currency driven by growth in spices and seasonings, hot sauce and mustard.

Consumer sales in the Asia/Pacific region increased 11% in constant currency due to the recovery of branded foodservice sales in China or away-from-home products and higher sales of cooking at-home products across the region. Compared to the fourth quarter of 2019, sales were flat with growth across the region offset by a sales decline in India due to the exit of some lower-margin business. Turning to our Flavor Solutions segment on Slide 24. We grew fourth quarter constant currency sales 12%, including a 7% increase from our FONA and Cholula acquisitions.

The year-over-year increase was led by double-digit growth in the Americas and EMEA regions. Compared to the fourth quarter of 2019, Flavor Solutions segment sales grew 16% in constant currency. In the Americas, Flavor Solutions constant currency sales grew 13% year over year, with FONA and Cholula contributing 11%. Organic sales growth was driven by the recovery of demand from branded foodservice and other restaurant customers, higher sales to packaged food and beverage companies, with strength in snack seasonings and pricing.

On a two-year basis, sales increased 15% in constant currency versus 2019, driven by higher sales from acquisitions and packaged food and beverage companies, partially offset by the exit of some lower-margin business in other parts of the portfolio. In EMEA, constant currency sales grew 16% compared to last year due to increased sales to QSRs and branded foodservice customers, as well as continued growth momentum with packaged food and beverage companies. Constant currency sales increased 26% versus the fourth quarter of 2019, driven by strong sales growth with packaged food and beverage companies and QSR customers. In the Asia/Pacific region, Flavor Solutions sales rose 1% in constant currency versus last year and increased 8% in constant currency versus the fourth quarter of 2019, both driven by QSR growth and partially impacted by the timing of our customers' limited time offers and promotional activities.

As seen on Slide 28, adjusted operating income, which excludes transaction and integration costs related to the Cholula and FONA acquisitions as well as special charges, increased 6% in the fourth quarter versus the year-ago period with minimal impact from currency. Adjusted operating income in the Consumer segment increased 14%, or in constant currency, 13%. The higher sales and CCI-led cost savings more than offset cost pressures from inflation and logistics challenges. Brand marketing investments, as planned, were 10% lower in the quarter, following an 18% Consumer segment increase in the fourth quarter of last year.

For the full year, we increased our brand marketing investments 3%. In the Flavor Solutions segment, adjusted operating income declined 16% or 15% in constant currency. Higher sales and CCI-led cost savings were more than offset by the cost pressures in this segment, unfavorable product mix and costs related to supply chain investments. Across both segments, incremental investment spending for our ERP program was offset by lower COVID-19 costs compared to last year.

As seen on Slide 29, adjusted gross profit margin declined 150 basis points, driven primarily by the net impact of cost pressures we are experiencing and the phase-in of our pricing actions. Our selling, general, and administrative expense as a percentage of sales declined 70 basis points, driven by leverage from sales growth and the reduction in brand marketing I just mentioned. These impacts netted to an adjusted operating margin decline of 80 basis points, as we had expected. For the fiscal year, adjusted gross profit margin declined 140 basis points, primarily driven by the cost pressures we experienced in the second half of the year and the lag in pricing.

Adjusted operating income grew 6% in constant currency with the Consumer segment's adjusted operating income increasing 1% and the Flavor Solutions segment 23%. Both segments were driven by higher sales and CCI-led cost savings, partially offset by cost pressures and incremental strategic investment spending. Adjusted operating margin declined 80 basis points for the fiscal year, driven by the adjusted gross profit margin decline. Turning to income taxes.

Our fourth quarter adjusted effective tax rate was 21.3%, compared to 22.9% in the year-ago period. Both periods were favorably impacted by discrete tax items. For the full year, our adjusted tax rate was 20.1%, comparable to 19.9% in 2020. Adjusted income from unconsolidated operations declined 40% versus the fourth quarter of 2020 and 5% for the full year.

The elimination of higher earnings associated with minority interest impacted both comparisons unfavorably. Our adjusted income from operations was also unfavorably impacted by the elimination of ongoing income from Eastern Condiments following the sale of our minority stake earlier this year. For the fiscal year, this was partially offset by strong performance from our McCormick de Mexico joint venture. At the bottom line, as shown on Slide 32, fourth quarter 2021 adjusted earnings per share increased to $0.84 from $0.79 in the year-ago period.

And for the year, adjusted earnings per share increased 8% to $3.05 for fiscal year 2021. The increases for both comparisons were driven by higher adjusted operating income attributable to strong sales growth. On Slide 33, we summarize highlights for cash flow and the year-end balance sheet. Our cash flow from operations for the year was $828 million.

The decrease from last year was primarily due to the higher use of cash associated with working capital and the payment of transaction and integration costs. The working capital comparison includes the impact of higher inventory levels to support significantly increased demand and to mitigate supply and service issues as well as buffer against cost volatility. We've returned $363 million of this cash to our shareholders through dividends and used $278 million for capital expenditures in 2021. Our capital expenditures included growth investments and optimization projects across the globe.

For example, our new U.K. Flavor Solutions manufacturing facility, our ERP business transformation, additional hot sauce capacity in the U.S. and our new U.S. Northeast distribution center.

In 2022, we expect our capital expenditures to be higher than 2021 as we continue to spend on the initiatives we have in progress, as well as to support our investments to fuel future growth. We expect 2022 to be a year of strong cash flow driven by profit and working capital initiatives. And our priority is to continue to have a balanced use of cash funding investments to drive growth, returning a significant portion to our shareholders through dividends and paying down debt. Now turning to our 2022 financial outlook on Slide 34.

We are well positioned for another strong year of growth and performance in 2022. We are projecting strong top line and operating performance with earnings growth partially offset by a higher projected effective tax rate. We also expect there will be an estimated one percentage point unfavorable impact of currency rates on sales, adjusted operating income and adjusted earnings per share. On the top line, we expect to grow constant currency sales 4% to 6%.

As Lawrence mentioned, we are taking further pricing actions in 2022, and as a result, expect pricing to be a significant driver of our growth. We expect volume and product mix to be impacted by elasticities, although at a lower level than we have experienced historically. We plan to drive growth through the strength of our brands as well as our category management, brand marketing, new products and customer engagement growth plans. Our volume and product mix will also continue to be impacted by our pruning of lower-margin business from our portfolio.

Our 2022 adjusted gross margin is projected to range between comparable to 2021 to 50 basis points lower than 2021. This adjusted gross margin compression reflects the anticipated impact of a mid-teens increase in cost inflation, an unfavorable impact of sales mix between segments, a favorable impact from pricing and CCI-led cost savings. As a reminder, we price to offset dollar cost increases. We do not margin up.

This has a dilutive impact on our adjusted gross margin and is the primary driver of our projected compression. We expect to grow our adjusted operating income 8% to 10% in constant currency, which reflects our robust operating momentum, a reduction in COVID-19-related costs and our continuing investment in ERP business transformation. This projection includes inflationary pressure in the mid-teens, a low single-digit increase in brand marketing investments and our CCI-led cost savings target of approximately $85 million. Our cost savings target reflects the challenges of realizing commodity and packaging cost savings in the current inflationary environment.

Importantly, we believe there continues to be a long runway to achieve cost savings in 2022 and beyond. Based on the expected timing of certain items, we expect our profit growth to be weighted to the second half of the year. Our additional 2022 pricing actions are expected to be phased in during the second quarter. Cost inflation will have a more significant impact in the first half of 2022 as cost pressures accelerated in the back half of last year.

We also expect our ERP investment to be higher earlier in the year versus 2021. As a reminder, we are also lapping a very strong business performance in the first quarter of 2021. Our 2022 adjusted effective income tax rate is projected to be 22% to 23% based upon our estimated mix of earnings by geography as well as factoring in a level of discrete impacts. This outlook versus our 2021 adjusted effective tax rate is expected to be a headwind to our 2022 adjusted earnings-per-share growth of approximately 3%.

Our 2022 adjusted earnings per share expectations reflect strong operating profit growth of 8% to 10% in constant currency, partially offset by the tax headwind I just mentioned. This results in an increase of 4% to 6% or 5% to 7% in constant currency. Our guidance range for adjusted earnings per share in 2022 is $3.17 to $3.22 compared to $3.05 of adjusted earnings per share in 2021. In summary, we are well positioned with our broad and advantaged flavor portfolio, our robust operating momentum and effective growth strategies to drive another year of strong growth and performance.

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

Now that Mike Has shared our financial results and outlook in more detail, I would like to recap the key takeaways as seen on Slide 35. We drove record sales growth in 2021. Our strong operating performance underscores the strength of our business model, the value of our products and capabilities and the resilience of our employees. We achieved our one-year Cholula and FONA acquisition plans.

Cholula and FONA have proven to be fantastic additions to our portfolio. We have a demonstrated history of managing through short-term pressures on driving growth, as we did in the fourth quarter. McCormick has grown and compounded that growth successfully over the years regardless of the environment. We have a strong foundation, we are in attractive categories and we're capitalizing on the long-term consumer trends that are in our favor.

We are confident that our broad and advantaged flavor portfolio, our robust operating momentum, and effective growth strategies, we will drive another year of strong growth in 2022 and build value for our shareholders. Now let's turn to your questions.

Questions & Answers:

Operator

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

Andrew Lazar -- Barclays -- Analyst

Great. Thanks, everybody. Good morning. I guess to start off, McCormick is essentially guiding to an on-algorithm year in what has obviously been described as a still pretty difficult industrywide operating environment.

I was hoping you could walk us through maybe some of really the key puts and takes in a little more detail that provide you with the visibility to achieve this. And maybe what I'm getting at is more detail on the dynamics still very much at play, as you mentioned, some of them in your first quarter. I think, basically, investors are trying to get a better handle on sort of the achievability of the full year in light of all of the difficult dynamics that are playing out in 1Q to try and get a sense of just how back end loaded the year is, and again, your level of visibility there. So any more detail on that would be helpful.

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

Great. Thanks, Andrew. Well, first of all, I don't think anyone should be openly surprised by the top line guidance. I think at the end of the third quarter, we indicated that we expect it to grow in 2022 and tried to indicate that we thought everyone's outlook for us was a bit pessimistic.

And you can see that we have a pretty upbeat view of where our sales are going. The underlying trends that support our business that we talked about in our prepared remarks are strong. The demand for flavor is not cyclical or obsolesced or pandemic related, but it's undergirded by real demographics with older generations fueling that demand. And we think that the consumption -- the shift in consumption at home that has happened in recent years is just a continuation of a long-term trend that supports our business from an underlying standpoint.

And all the things that we do in our strategies for brand building and so on continue to be supportive of growth. The year also includes a significant impact on the top line from pricing, which may be underestimated previously. And so that's going to factor into it. I guess the shape of the year, our fourth quarter is always the strongest part of the year.

The first quarter is also always the smallest part, and that may be compounded a bit this year by the fact that really the full impact of our pricing actions won't have gone into effect in the first quarter. The pricing actions that we took last year, of course, are in effect now, but the next round of pricing won't go into effect until as we -- till as we go through the second half -- till as we go through the second quarter and that's going to affect both the top line and the bottom line. I'll pass it over to Mike now for some comments on operating profit.

Mike Smith -- Executive Vice President and Chief Financial Officer

Yes. Just to highlight a little bit to getting that on sales in the first quarter, we're really comparing against a really strong first quarter of last year, where Consumer was up really dramatically. So there's going to be a bit of a segment mix challenge in the first quarter. Talking about the first half also, cost -- as pricing will grow during the year, costs, though, which we talked about in mid-teens increase will be in effect in the first quarter.

There will be a tough comparison there, too, because the pricing won't offset that. If you remember back to last year, we had low single-digit inflation earlier in last year that rose to the high single digit at the end of the year. Now at mid-single teens, that's a tough comp for the first quarter primarily and a bit in the first half. The other thing we have also is the ERP spend we talked about, and we can talk about that later a little bit.

But the timing of that -- last year, we had some minimal spending in Q1 also. So a bunch of drivers that we think the profit will be back loaded in the year would be a bit of a tough comp in Q1.

Andrew Lazar -- Barclays -- Analyst

Got it. And then I guess, lastly, with mid-teens inflation expected for the full year, sort of would suggest maybe, call it, high single-digit pricing would be needed to sort of protect profit dollars. And I guess that would imply maybe closer to maybe a mid-single-digit decline in volume for the year. Is that kind of broadly the right way to think about the balance? And what does that suggest in terms of elasticity and sort of comparing to historic levels? I think you mentioned you're building in some elasticity, of course, as more pricing kicks in, but maybe not to the extent that you've seen historically.

If you could just give us a sense of what's driving that thought process?

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

Yes. Sure, Andrew. I think that you've got the, at a high level, the shape right, but maybe too extreme on the end. I think that to characterize pricing, including the wrap from last year, to be more in the mid- to high range and for the volume impact at a total company level to be more flattish to low single-digit decline.

We have modeled in elasticity, but not at the rates that we have seen historically. But I do think that we're in new and uncharted territory versus all of the elasticity models, at least from the actions that we've taken so far. We assumed lower price elasticity and that's what we seem to be experiencing. If anything, we may be seeing slightly even less elasticity than we've assumed.

But we're conscious that with more than one price increase coming in, in a relatively short timeframe, that there may be a cumulative effect. So we have modeled in price elasticity. Mike, do you want to elaborate on that at all, if you have anything to add?

Mike Smith -- Executive Vice President and Chief Financial Officer

No. I think you have covered it well.

Andrew Lazar -- Barclays -- Analyst

Great. Thanks very much, everybody. 

Operator

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

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

Okay. Morning. Sorry. I was on mute.

Thanks so much. You're guiding to operating profit growing 200 basis points faster than sales, which is, of course, normal as per your algo. But I think, typically, you might expect gross margins to be a positive driver toward that, and this year, they might be a slight negative. So I guess the burden to grow operating profit falls harder on SG&A savings or leverage than usual this year.

And I kind of just wanted to quickly go over the drivers of your confidence that SG&A can be this helpful. I mean we do have marketing growing at a slower pace than sales, I appreciate that. And you, of course, have lower COVID costs there. But I was under the impression you'd also have maybe ERP implementation cost kind of offsetting those COVID cost reductions.

You did mention CCI savings will be less of a tailwind. So forgive the lengthy question, but I'm just not quite sure I get why operating income will be up so much unless there's something in the SG&A efficiencies that I'm just quite not getting yet.

Mike Smith -- Executive Vice President and Chief Financial Officer

That's a good question, Ken. I'll start off. You highlighted exactly what we're seeing. A&P is up low single digits.

We're continuing to invest in the business. Other SG&A is kind of flattish if you think about it. In a high -- we gave you our CCI number. And in a year where CCI is down versus the previous year because of the toughness of getting through CCI reductions and things like packaging costs and commodity costs, SG&A, there's -- we're driving hard on SG&A from a CCI perspective so you should see positives there.

COVID cost didn't only hit the gross margin line. There were COVID costs in the distribution side of things, which will go away in 2022. We're taking discretionary actions to really -- in a high-cost environment, we're doing the prudent things to make sure we can make our numbers. And I would say things like incentive comp, we've had two really strong years of that.

And we budget toward hitting our targets and we'd love to exceed it, but that is a part of the comparison too also.

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

There's other stuff on there too with the high top line growth and the flattish SG&A, that even with gross margin flat to slightly down, in that range, it's kind of -- you're going to get operating leverage that's going to drop through. 

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

Yes. No. That's helpful. Thank you.

And then quickly, I wondered if you can update us, maybe you said it and I didn't quite hear it, but where your customer inventories stand today as you estimate them to be versus what might be considered normal. And if your outlook, to any extent, assumes that any kind of inventory refill takes place this year. I know we've been waiting for something like this for all of our companies for a long time. I'm just curious what you're modeling there.

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

Well, we have not restocked our customers to the extent that we would have hoped in 2021. We had started to make some progress on that. And we ran into the same kind of supply chain disruptions that many of our peers and others and other industries have talked about. And so we actually pulled down customer inventories again in Q3.

And in Q4, with the high elevated demand, even though our supply chain was in much better condition, we were really able to ship to the consumption rather than restocks. So we think that there's still some restocking of customer inventories still to be done. I mean your own experience would probably tell you that if you went into the store, the conditions still aren't perfect, the backrooms and distribution channels, likewise, still have some gaps. So there's still more work to do in that area.

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

I live in New York City. The state of grocery stores here is always at a low level. So it's kind of hard to tell what's bad versus what's normal.

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

Sure. I will say, I don't want those comments to be misunderstood, I think that we saw a peak disruption of our supply chain in Q4 and we've seen steady improvement since then. Some of the feedback we've gotten from our larger customers is that we're in much better shape than some of our peer companies.

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

Thank you. 

Operator

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

Robert Moskow -- Credit Suisse -- Analyst

Hi. Thanks for the question. One follow-up for Mike. Is it fair to say that your COVID costs will be a benefit in 2022 of $60 million just comparing to $21 million? And then how do I compare that to ERP costs? Are your ERP costs going to be higher in 2022 compared to '21? Can you give us a rough estimate? And then secondly, on private label.

If you look back into history, private label does gain a lot of share during inflationary periods, especially in your category. Can you talk about what you've seen from your customers' demand for private label heading into 2022? And how do you expect it to perform in '22 in a rising price environment?

Mike Smith -- Executive Vice President and Chief Financial Officer

Rob, I'll take the first part of that and Lawrence will take the second. First, great question. COVID cost and ERP are big drivers on our P&L. COVID costs, we did talk about how two years ago we spent $50 million; last year, $60 million.

If you remember, we've highlighted a large chunk of that was co-packing cost. So as we -- our supply chain has improved over last year in the fourth quarter. We've eliminated most of those costs. But we still have underlying costs that, frankly, we're not treating as COVID cost anymore.

We're treating it as an ongoing business cost of labor, premium pay, things like that. There has been a continue into the future. So I'm not going to give you an exact number. It's not $60 million.

The significant part of that is going away in '22. Relating to ERP. If you remember from our third quarter call last year, we were talking about it at the time a decrease in COVID costs -- we expected a decrease in COVID costs in '22 offset by an increase in the ERP costs. That being said, what we're saying now is we're still spending significant amounts on ERP in '22.

We spent -- we had talked last year about spending in '21 around $50 million. '21 came in a little heavier than that. And in 2022, we're going to -- it's not a significant headwind, but it's still a significant investment. I'd say it's up slightly.

Wasn't big enough to mention in our guidance. Now what has changed since three months ago? One, elevated and strong demand. We're really happy with that demand. As we went through our planning process, which we always do in the fall, the combination of that elevated demand -- and as you know, our fourth quarter is really important to us and we have planned on significant go-lives in 2022.

One, to protect our customer service and to make sure we are prudent. The go-lives would have slid into the fourth quarter because you have to build inventories and things like that to get ready for these major go-lives. We made the decision to slide those major go-lives out into 2023. The end result of all those moves is roughly between '21, '22 and '23, it's about the same level of spend.

So it's very smooth. It kind of eliminates that noise between years, which would help you look at our underlying growth of operating profit over that time. But we're still really excited about the ERP investment, but we just made the decision as I just talked about.

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

Rob, so far, first of all, for the last couple of years, private label has actually underperformed in the category. You even heard on our remarks that although our fourth quarter was strong, the private label portion of it was actually not a contributor to that strength. And we're really not seeing consumers move to private label in our categories. And in fact, it's really moved more to brands than to private label.

In past times when there's been a recessionary environment, and I don't know that we're expecting a recession in 2022, but even in times that were more economically tough our products have done very well. Our products contribute pennies, a fraction of the cost of a meal and are actually part of the consumers' way to manage their total inflation basket. I mean if meat is going up 40%, one way you can stretch your grocery dollar is to buy less expensive cuts and use more herbs and spices and our recipe with it. So actually, we tend to do pretty well both in good and bad economic times.

And I'm confident that we've got a portfolio of products that touches the consumer at every price point. I know in our internal discussions around pricing, we've been very conscious of the lower income consumers and how to make sure that we're still able to meet their needs for flavor.

Robert Moskow -- Credit Suisse -- Analyst

OK. Got it. Thank you. 

Operator

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

Adam Samuelson -- Goldman Sachs -- Analyst

Yes. Thank you. Good morning, everyone. Yes. So I guess my first question maybe is around the fourth quarter and really turning to the Flavor Solutions business.

And I guess the operating profit and margin performance in that business, it contrasted pretty sharply with Consumer and I know this is a big Consumer quarter. But maybe if you could just talk about some of the profit and margin drivers in Flavor Solutions in the fiscal fourth quarter? And maybe in the '22 outlook, how we should think about the relative segment performance between Consumer and Flavor Solutions versus your total company? 

Mike Smith -- Executive Vice President and Chief Financial Officer

Adam, this is Mike. I'll take that. Yes. Fourth quarter, Flavor Solutions did have a bit of margin pressure.

I mean similar to consumer, obviously, the cost last year came ahead of our pricing actions. So that did -- obviously, that impacted Flavor Solutions. But as we catch up into the first quarter and second quarter, that should be solved. But they did increase very quickly for us.

I mean there's pass-throughs, contractual agreements. So there's timing elements to a lot of our Flavor Solutions business. That being said, one of the -- you've seen also the great volume growth and sales growth we've had in Flavor Solutions over the past couple of years, and we're making strategic investments such as the U.K. flavor manufacturing plant.

Those investments have costs associated with them. So in the fourth quarter, as we're starting to bring that plant live into next year and you should expect in early 2022 also a bit of a drag early in the year of Flavor Solutions, you'll see a bit of that due to the strategic investments of which the U.K. flavor manufacturing plant is just one. And we did have a little bit of unfavorable mix in the quarter.

Even though we were pruning -- continue to prune some of our lower-margin business, there was a bit of a hard comparison versus 4Q of last year. 

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

I'll say if there's an area where we still have some ongoing, I'd say, extraordinary costs, I'd say Flavor Solutions might be a little bit more impacted by that, where we've had -- just because of supply chain disruption and workforce disruption where we've had a bit more incremental cost for things like overtime premium pay and so forth.

Adam Samuelson -- Goldman Sachs -- Analyst

OK. And then maybe just continuing in Flavor Solutions and I'm thinking about as part of the bridge in '22, right, at the company level, being tight on SG&A is clearly a key element of hitting the total company profit growth targets. In contrast in Flavor Solutions, a big part of the growth has been to remix the portfolio up into some of these higher-value segments, which obviously come with higher gross margins, but also typically will have a higher SG&A burden in terms of the R&D and the technical sales associated with that. Just are you still able to make both the facility and the head count investments necessary on the Flavor Solutions side to support those -- the growth there?

Mike Smith -- Executive Vice President and Chief Financial Officer

Oh, definitely. I mean, I think, as I alluded, we're making those investments. And there will be timing impacts. Like I said, first half of this with some of these investments for some of our strategic things.

But we recovered those things by the end of the year. And we feel very good about the ability and acquisitions like FONA continue -- and the growth profile of those businesses give us more confidence over time of the positivity of those investments to Flavor Solutions.

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

And then I'll just remind everybody, our Flavor Solutions tend to be a bit lumpy as well driven by the activities of some of our large customers.

Adam Samuelson -- Goldman Sachs -- Analyst

That's helpful. I'll pass it on. Thank you. 

Operator

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

Chris Growe -- Stifel Financial Corp. -- Analyst

Thank you. Good morning. I have just a couple of questions for you here. I was just curious, the level of inflation that we're seeing this year, kind of mid-teens inflation, was more than I expected.

And I just want to get a sense of how much was it in 2021, what were you kind of up against this past year, just to get a sense of the kind of total amount of inflation. And then also just to understand, I don't know, I've heard it about, is there any more inflation in Flavor Solutions versus Consumers or one is going to require more pricing as we move through the year?

Mike Smith -- Executive Vice President and Chief Financial Officer

Hey, Chris, it's Mike. I'll answer that. I mean, last year, we started out the year, as you remember, low single digits and we transitioned into mid-single digits around -- I think around the third quarter call. In the fourth quarter call, we talked about the fourth quarter costs were up high single digits, which made the whole year high end of the mid-single-digit range is one of the key things I'm saying here.

So just to remind you where we were. This year is the mid-teens really driven by large commodity packaging and freight increases that we've all seen. From a Flavor Solutions versus Consumer, they're both impacted by all this. I mean, ocean freight, which is a big item for us, as you think about our peers, we get a lot of our products from Asia, other parts of the world where shipping containers and things like that, that ocean cost has gone up a lot.

That impacts both the Consumer and the Flavor Solutions very equitably. Other items like pepper, garlic, things like that, we use on both sides. So I'd say it's roughly the same overall materially.

Chris Growe -- Stifel Financial Corp. -- Analyst

OK. Yes. That's helpful. Thank you.

And the other question I had was just -- you talked a little bit before, I think it was to Rob's question, about third party -- using third parties to manufacture your products and that kind of thing. It sounds like you've gotten out of a lot of that. And I know that was a gross margin drag throughout the past couple of years and I think a lot of what you call COVID cost. So just to be clear, that's something that will largely go away in 2022? And I guess related to that -- well, go ahead.

Go ahead.

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

Yes. It's the incremental portion that's going to go away. We always have a certain couple co-packing and that makes sense for our business for a variety of reasons. I'd say, we're more in line with the historical level of co-packing.

It's that incremental co-packing at a time when everybody was looking for the capacity, that was -- that created all of those premium costs that we absorbed ourselves and -- which we've gotten out of the business.

Chris Growe -- Stifel Financial Corp. -- Analyst

OK. I guess what I'm hopefully getting to is, I guess, then, are you able to produce at the level of demand growth today? That's something that every company has been struggling with and I'm just curious kind of where McCormick stands on that now. I guess as you pull back on these incremental third parties you're indicating, you do have the internal capacity to meet demand, is that right?

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

Yes. That is right, Chris. And I would say that the challenge has always been in the Americas, first of all. So we've been able to meet the demand throughout the entire pandemic in the rest of the world.

It's been an Americas demand, we're just between the scale of the business and the sheer elevation of demand. And the fact that our capital investments had for the previous number of years been directed toward building capacity overseas, that left us a little under-invested in the U.S. It gave us a real challenge in the early days of the pandemic. But we've done an enormous amount of work to increase our U.S.

manufacturing capacity and confident that we've got the capacity to meet that demand. That's why that co-packing expense has gone away. That's a root of the improvement in our service to our customers, the restoration of product on the shelf, the recovery of share. This -- our supply chain has always been a competitive advantage from global sourcing to operating excellence.

And I'd say that although it will never be good enough to my satisfaction, it has come a long way and I say it's a competitive advantage again.

Mike Smith -- Executive Vice President and Chief Financial Officer

So we continue to work with our vendors. We struggle with the same challenges that all of our peers have with supplying bottles and things like that. And there will be sporadic challenges along the way, but not broad-based.

Chris Growe -- Stifel Financial Corp. -- Analyst

OK. That's helpful. Thanks for your time. 

Operator

Our next question comes from the line of Peter Galbo with Bank of America. Please proceed with your question.

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

Hey, guys. Good morning. Thank you for taking the questions. Mike, I guess we're getting some questions this morning just on trying to square the gross margin guidance just given the level of cost inflation, and I know you spoke about ocean freight and commodities.

I guess, one, is that cost inflation line just only pertinent to cost of goods? Does it include outbound freight, which I think you guys captured in SG&A? And maybe how we should think about just the cadence of gross margin throughout the course of the year.

Mike Smith -- Executive Vice President and Chief Financial Officer

Well, first, outbound freight is considered cost of goods sold for us. So very similar to our peers. I mean, if you look at our gross margin, we're guiding comparable to down 50 basis points. The whole impact of pricing mid-single teens inflation is a big drag on that.

So we're thinking of a 250 basis point dilution just because of pricing to cover costs from a timing -- but that's offset. The good -- positives are CCI savings, continuing to prune lower-margin business and the COVID costs we've talked about previously. Next year has a little bit of a segment mix headwind, as you know. And -- but I'd say from a timing perspective, as we talked about, the timing of our pricing coming in -- the second pricing impact in the second quarter, it will build during the year cost, which will be with us a full year.

So the first quarter will be heavily impacted, as we talked about, and the first half a bit of that, too. So it's a bit of a first half/second half play as we've talked about from a gross margin perspective.

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

I'll also just chime in that we have great brands that we invest behind in most of our categories. In most of our markets, we're not only the share of voice leader in terms of speaking to the consumer, but in many cases, we have close to 100% of the share of voice. We've got a great position on the shelf. We have done a lot to build loyalty with consumers, keep our brands relevant and we believe that we've got the pricing power to pass these costs through and continue to drive growth in the future beyond that.

Chris Growe -- Stifel Financial Corp. -- Analyst

Got it. OK. Thanks very much. And Lawrence, maybe just a separate question.

I know there's nothing in the at least initial outlook as it relates to M&A. But I think there's been some headlines, obviously, about some potential brands that could be nice adjacencies for you guys that could come to market. Just how you're thinking about M&A this year, where maybe you think the target leverage ratio needs to be before you think about taking on another deal?

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

Well, there have certainly been some exciting headlines in what it's supposed to be a boring industry. So there is a lot going on out there. Yes, I would say that we always are alert to strategic assets to which we apply our financial discipline. We've got a great track record of buying great assets and integrating them.

We're still coming off a fairly recent acquisition of two very good assets, Cholula and FONA, that have performed very well for us, but that we still have got to pay for. And so right now, our primary focus is on deleveraging and building more dry powder. I won't -- I'm not going to say never, but that's our primary focus right now.

Chris Growe -- Stifel Financial Corp. -- Analyst

Thanks very much, guys. 

Operator

Thank you. Our final question today comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Rob Dickerson -- Jefferies -- Analyst

Oh, great. Thanks so much. Good morning. So just to clarify, look, as we got through '20 and obviously fiscal '21, right, demand has been strong for in-home baking.

You benefited, obviously. I mean, it seems like, as you said, kind of in the call that elasticity models are probably a little bit all over the place just kind of given where we are in terms of strength in Consumer and increasing prices. And so I mean, it sounds like your perspective from here is that consumption level, even with an increase in price and potentially, let's say, an increase in our ability as we get through the year, really shouldn't be kind of waning that much, right? Like the feel demographically with the incremental purchase rate, let's say, repeat from millennials that even if prices go up, maybe private label doesn't take them much share and kind of overall demand seems to be somewhat stable. I just kind of want to get clarification on that demand piece just given mobility and trade down risk.

That's all.

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

OK. Well, I mean I'm taking this as a primarily very U.S.-centric question. But we do expect that the shift in consumption to more cooking at home and that consumer behavior to stick to an extent. We've never said that all of it's going to stay.

But we do expect that a significant portion of that is going to stay and that this has been a step-up in our category. I mean consumers are still working from home, and it looks like work-from-home is going to be a permanent part of the work environment. Our own proprietary research with consumers say that only a tiny fraction, I mean, less than 10% expect to cook less at home than they do now. Most expect to cook more.

And so based on what we see happening in society, what consumers are saying and what we are still experiencing from elevated demand says that demand is going to continue to be strong. And I would just say also that we are in categories that we've chosen to be in that are strong to begin with. And there's been strong underlying growth of all of the flavor categories that we're in over time. And the increment that has happened from the shift in consumption during the last two years really has accelerated growth by maybe a year or two of those categories.

So it's not as extraordinary as everyone thinks. It just had that much to follow on.

Rob Dickerson -- Jefferies -- Analyst

OK. Yes. That's fair. And then quickly, just, Mike, just on free cash flow.

I think you said you expect it to be up year over year, kind of a good strong free cash flow year. Capex seems to be up a little bit year over year, however. And then we saw free cash flow kind of down a little bit last year relative to the prior, call it, three, four years. So just when you say kind of good, strong free cash flow year, is that -- obviously, you're implying it's up year over year, but maybe it's a little bit more in line with the prior few years.

Just trying to get a little bit more sense of clarity on kind of how you're viewing free cash flow, and that's it.

Mike Smith -- Executive Vice President and Chief Financial Officer

Yes. I think that's fair, Rob. I think this year, with the significant build in inventories to protect our customers and sales, some of the transaction costs we talked about earlier in the year from M&A has put a little drag on that. But as we see into the future, some of those things get solved.

So back to previous year levels, if it makes sense.

Rob Dickerson -- Jefferies -- Analyst

Makes sense. All right. Great. Thanks so much.

Operator

Thank you. At this time, we've reached the end of the question-and-answer session. I'll turn the floor back to Lawrence Kurzius for closing remarks.

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

Great. Thanks, everyone, for your questions and for participating on today's call. McCormick is differentiated by the breadth and reach of our balanced portfolio, which has sustainably positioned us for growth. I'm incredibly proud of McCormick's 2021 accomplishments.

We drove strong performance while remaining focused on growth, committed to people and driven by purpose during another dynamic year. We're disciplined in our focus on the right opportunities and investing in our business. We are continuing to accelerate our momentum and drive further growth as we successfully execute on our long-term strategies, actively respond to changing consumer behavior and capitalize on opportunities from our relative strength. We are well positioned for continued success and long-term shareholder value creation.

Thank you for your time this morning.

Kasey Jenkins

Thank you, Lawrence, and thanks to everybody for joining today's call. If you have any further questions regarding today's information, please feel free to contact me. This concludes this morning's call.

Duration: 75 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

Adam Samuelson -- Goldman Sachs -- Analyst

Chris Growe -- Stifel Financial Corp. -- Analyst

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

Rob Dickerson -- Jefferies -- Analyst

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