Categories Consumer, Earnings Call Transcripts

McCormick & Co Inc. (MKC) Q3 2020 Earnings Call Transcript

MKC Earnings Call - Final Transcript

McCormick & Co Inc. (NYSE: MKC) Q3 2020 earnings call dated Sep. 29, 2020

Corporate Participants:

Kasey Jenkins — Investor Relations

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Mike Smith — Executive Vice President and Chief Financial Officer

Analysts:

Andrew Lazar — Barclays Bank — Analyst

Kenneth B. Goldman — JPMorgan Chase & Co. — Analyst

Alexia Jane Burland Howard — AllianceBernstein — Analyst

Robert Bain Moskow — Credit Suisse — Analyst

Christopher Robert Growe — Stifel, Nicolaus & Company — Analyst

Adam L. Samuelson — Goldman Sachs Group — Analyst

Peter Thomas Galbo — Bank of America Merrill Lynch — Analyst

David Christopher Driscoll — DD Research — Analyst

Presentation:

Kasey Jenkins — Investor Relations

Good morning. This is Kasey Jenkins, Vice President of McCormick Investor Relations. Thank you for joining today’s Third 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 and, for 2019, the net non-recurring benefit associated with the US Tax Act. 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 impact of the COVID-19, that could affect our financial results.

It is now my pleasure to turn the discussion over to Lawrence.

Lawrence E. 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 COVID-19 situation continues to evolve daily. I’m incredibly proud of the way McCormick has performed in this unprecedented operating environment.

Starting on slide 4, let me highlight a few points on the current conditions we’re seeing and their potential impact. First, in our Consumer segment around the world, we are experiencing strong, sustained consumer demand, which is real incremental consumption and reflects the trend of consumers cooking more at home. In China, which is viewed as a leading indicator since their COVID-19 recovery is ahead of the rest of the world, the demand for food at home continues to be very strong. We see the same in Europe and of course in the Americas.

The significant shift to consumers eating more at home is persisting long enough that it has become a habit. Our proprietary consumer survey data supported by other research indicates the majority of consumers are cooking more from scratch, enjoying the cooking experience and adding flavor to their meal occasions. These new behavior, coupled with some consumer discomfort at dining out, are driving an increased and sustained preference for cooking at home. We believe this will continue globally and thus further benefit our Consumer segment.

Turning to our Flavor Solutions segment, where we have a very diverse customer portfolio, we are seeing varying stages of recovery. Starting with the away from home portion of the segment. With our quick service restaurant customers or QSRs, we are seeing strong signs of recovery. Their business models were already oriented to drive-through or carry out, not dining in. In China, QSR traffic has returned to near normal levels, and the limited time offers and promotions are driving demand. In the rest of the APZ region as well as EMEA and Americas, the focus has been on core menu items. But moving into the fourth quarter, we see limited time offerings beginning to reserve.

Across the rest of foodservice, while it has shown signs of recovery since our second quarter, the pace is much slower and varies by channel and market. As we have previously mentioned, we expect the recovery in this area of the business to be more gradual and take time, likely years, as restaurants and other foodservice venues such as stadiums and cafeteria continue to be largely closed or operating under capacity limitations. Consumers are reluctant to dine out and the restaurant industry has experienced significant pain.

From a food at home perspective, our flavor solutions growth varies by packaged food customer, but overall we are returning to pre COVID-19 levels as expected. New product opportunities which had slowed during the crisis and had been more focused on expansion of the core are beginning to gain increased momentum, and we’re excited about their contribution to growth next year.

In summary, for our total Flavor Solutions segment, business is gradually rebounding, but not yet to 2019 levels.

Moving to our global supply chain. Coming into the crisis, there was more finished goods inventory in the system, both for us and our customers, which was depleted early in the crisis. The sustained elevated level of demand, coupled with our added employee safety measures has challenged our manufacturing operations. Service has been stressed in some areas and inventory replenishment will take some time. The real pressure has been on our US manufacturing operations where we’ve had to suspend or curtail production of some secondary products to meet demand for our top-selling products.

While the rest of the world is also experiencing elevated consumer demand, they’ve not experienced the same level of manufacturing pressure given the capacity and capabilities we’ve built outside of the Americas in the past few years. In EMEA, where our supply chain is very well positioned to meet demand, we’ve gained distribution as other manufacturers have faced challenges.

For the Americas, as we said on our earnings call in June, we are expanding our workforce and increasing manufacturing capacity through optimized scheduling and investments, particularly around blending capacity as well as scaling up partnerships with third-party manufacturer. To be clear, this added capacity is still ramping up. This capacity just started to come online in August, and will continue to ramp up over the next few months and is targeted to be completely in place by the end of the calendar year. And by then, we will have added the equivalent of an additional plant for the US manufacturing capacity.

Of course, with this rapid scale-up, there are extra costs and short-term efficiencies, but we’re confident we’re implementing efficient long-term solutions. The investments we are making are not just to meet the higher demand for the balance of 2020 but to strengthen our supply chain resiliency longer-term and to support the Americas’ consumer growth we anticipate continuing into next year, driven by both sustained demand as well as retailer inventory replenishment. We’re making good progress. Our service levels continue to improve, and we’re confident in our capabilities and ability to meet demand, particularly during the holiday season. We’re positioning ourselves for continued success.

I want to thank our supply chain employees for their remarkable efforts as well as our suppliers and customers for their partnership in this challenging environment. The positive fundamentals we have in place have enabled us to manage through this period of volatility. The investments we’ve made and the capabilities we’ve, combined with our strong business model, prepared to us to execute from a position of strength. As the crisis subsides, we will emerge an even 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 third quarter performance, business updates on our Consumer and Flavor Solutions segments and our 2-for-1 stock split announcement.

As seen on slide 6, we have a broad and advantaged global flavor portfolio 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 third quarter results. During our third quarter, the shift in consumer behavior to cooking and eating more at home for 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 experienced a decline in demand from our restaurants and other foodservice customer 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 the different levels of away from home consumption in each, as seen on slide 6, as well as the pace of each region’s COVID-19 recovery. Taking together, these impacts continue to demonstrate the strength and diversity of our offering. While we may experience temporary disruptions in parts of our business, underlying consumer demand continues to underpin our growth.

Now let me cover the highlights of our third quarter, which was broadly in line with the trends we discussed in our earnings call in June. Starting with our top line, third quarter sales increased 8% from the year ago period. In constant currency, sales grew 9%, mainly attributable to significantly higher volumes and product mix in our Consumer segment with a partial offset from a low single-digit decline in our Flavor Solutions segment. Adjusted operating income increased 5%, including a 1% unfavorable impact from currency. These results were driven by higher sales; favorable mix, primarily driven by the sales mix between segments; and CCI-led cost savings, partially offset by higher costs, including those related to COVID-19.

Our third quarter adjusted earnings per share was $1.53, 5% higher than the year ago period of $1.46, driven primarily by our strong operating performance. With one quarter left in the year, we have resumed guidance and expect to deliver another year of strong profitable growth. Our results continue to be driven by the engagement of our employees and the successful execution of our strategy, and we are confident in our 2020 outlook, which will be covered in detail in a few moments.

Now let me spend a few minutes on our business segment updates. Starting on slide 8 with our Consumer segment. sales rose 15%, with minimal impact from currency, fueled by the change in consumer behavior. Research and trend data shows that not only are consumers cooking more at home, they are enjoying it, both from a flavor and family experience, and have even accelerated their use of spices, seasonings and condiments as the pandemic has progressed. Additionally, as at-home consumption from restaurant carryout and delivery is increasing, many consumers are adding flavor with spices, sauces or condiments they have at home. We believe these trends will last beyond the COVID-19 pandemic and drive continued growth.

Our Americas constant currency sales growth was 17% in the third quarter. Our total McCormick US branded portfolio, as indicated in our IRI consumption data, grew 28%, which is substantial and reflects the strength of our categories as consumers cook more at home. Our sales increase was lower than the US IRI consumption growth attributable to a few factors.

First, the service level pressures and product allocation from the supply chain challenges I mentioned previously. Next, the timing of the holiday program we offer retailers. We generally offer the program during our third quarter to encourage early in-store display and merchandising of holiday products. The impact of this program was included in our third quarter shipments in 2019. In 2020, though, with the elevated level of demand and focus on keeping core items on shelf, a portion of retailer purchases for this program has shifted to our fourth quarter. Notwithstanding this shift, we still expect another year of strong holiday execution. And lastly, increased level of pricing growth in the scanner data due to curtailed third quarter promotions and a channel shift, with grocery outpacing mass merchandisers and club stores.

Focusing on the US branded portfolio. Consumption in all key categories grew at a double-digit rate in the third quarter, with the majority of our categories continuing to outpace the total store and center of store growth rates. In fact, consumption in our portfolio during the third quarter grew 2.5 times the center of store rate, which is an increase from the comparison in the second quarter. While we do not expect consumption to continue at the highly elevated level of our third quarter, we do expect continued and long-lasting growth from the increase in consumers cooking at home. The most recent IRI scanner sales data for the week ended September 13 shows McCormick US branded portfolio consumption still growing over 20%, with continued strength in spices and seasonings.

We gained share in seven out of 11 categories during the third quarter, those which were less impacted by supply constraints, including hot sauces, stocks and broth, barbecue sauce, wet marinade and Asian products. While there was noise in the third quarter share numbers for categories impacted by supply such as spices and seasonings, dry recipe mixes and mustard, on a year-to-date basis, we’re relatively flat or gaining share in those categories too.

New products’ launch early in the — earlier in the year and such as Frank’s RedHot sauces, OLD BAY hot sauce and Stubb’s reduced sugar barbecue sauce have continued to get exceptional trial and contributed to the third quarter growth. The sell-in of our second half new product launches, however, has been slowed due to the focus on keeping core items on retail shelves, and these launches will now be further opportunities to fuel growth next year.

Our strong performance across household penetration and rate of repeat buyers continued in the third quarter across our portfolio. Our household penetration rate increased 8% compared to last year, driving a significant amount of trial for millions of new households across multiple categories. Spices and seasonings, dry recipe mixes and hot sauces had the biggest gain, but even smaller brands like Simply Asia and Thai Kitchen grew significantly. And our rate of repeat buyers increased 7% during the quarter, with double-digit repeat rates in many categories. These metrics increasing significantly both in our second quarter and third quarter indicates a high level of usage and speaks to the stickiness of our product. Consumers are coming into our brand, having a good experience and buying our products again.

With our high level of effective brand marketing investments, including planned increases in the fourth quarter and our initiative to deepen our digital connection with consumer, we are capitalizing on the opportunity to build long-term brand equity after trial and increase usage by existing consumers. We’re continuing to design targeted media messaging focused on cooking at home, teaching consumers how to use our products and providing a flavor inspiration.

And as the younger generation continues to feel the demand for flavor and everyone is accelerating their online presence, we’re executing on creative ways to connect with them. For instance, one way we are connecting with consumer is by helping them discover new ways to enjoy time-honored traditions. Take tailgating, for example. With football season now in full swing, we’ve partnered with former New York Giants quarterback, Eli Manning, to create the largest virtual homegating experience, having lucky fans interact with Eli to learn about his favorite Frank’s RedHot flavor snacks. The recent event garnered over 750 million media impressions across digital media platforms.

Moving from the football season for the holiday season. Our fourth quarter is an important one from a seasonal standpoint. Our consumer’s holiday dinners may be more important than ever this year, and we’re excited about helping make them memorable flavor experiences. In terms of brand marketing, we’re launching a holiday version of our It’s Going to be Great campaign which recognizes celebrations might be different this year in addition to our normal holiday promotional activities. And from a supply chain standpoint, we’re protecting our top-selling holiday products. We have confidence we are well positioned for a successful holiday season. Our 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 persist. We will continue to drive our category leadership and growth momentum through strong brand marketing, category management initiatives and new product innovation.

Now turning to EMEA. Our constant currency sales rose 23%, with broad-based growth across the region. Our largest markets drove double-digit total branded consumption growth, with market share gains across the region in our key categories. Importantly, we gained total EMEA region share in spices and seasonings and dry recipe mixes. In spices and seasonings, consumption was strong in all markets, driven by consumers cooking more at home and discovering they need our products for great-tasting healthy flavor solutions. Our brand marketing campaigns highlighting our product superiority and culinary partnerships, coupled with pivoting our digital messages based on real-time consumer insights, with topics most relevant to consumers with formats that resonate the most are driving spices and seasoning momentum.

In the UK, our Schwartz brand new dry recipe mixes such as One Pan meal seasonings offer a convenient and natural herb and spice blend for vegetarian options are attracting younger consumers to the category and driving new distribution gains as well as category growth. We achieved the leading UK market share position in dry recipe mixes at the beginning of the year, and we continued to gain significant market share in the third quarter. And with the momentum in baking continuing, combined with successful new product launches, we again had exceptional consumption growth in our Vahine brand in France, outpacing the homemade desserts category and gaining share.

Notably, Frank’s RedHot turned up the heat during the third quarter with over 40% consumption growth, driven partly by a successful digital grilling campaign as well as new distribution. We’re gaining millions of new households and driving repeat purchases. Our household penetration increased significantly across our major brands and markets during the third quarter compared to last year, with double-digit growth percentages in both the UK and France spices and seasonings category as well as in the UK dry recipe mixes and France homemade dessert category. And our rate of repeat buyers in these markets and categories also grew by double digits. Our strong brand marketing and digital campaigns, which we have increased in EMEA, provide us with confidence we will continue growing with our new consumer we’re welcoming to our brand as well as our existing value consumer.

Moving forward in EMEA, we’ll continue to capture the momentum we’ve gained and are excited with our growth trajectory following challenging market conditions over the past few years.

In the Asia-Pacific region, our constant currency sales declined 6%, driven by declines in branded foodservice products, which are included in our Consumer segment in China. Excluding those impacts, sales for the region would have increased, reflecting the increase in consumer demand across the region related to more cooking at home. In China, our consumer to business growth was strong, driven by consumers’ demand for convenient solutions, fueling our growth of recipe mixes as well as world flavor and hot pot sauces. Continued momentum in condiments also contributed to growth.

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In other parts of the region, we have broad-based growth led by Australia’s strong consumption and share growth in branded spices and seasonings, particularly in Gourmet Garden, with high double-digit rates of new consumers and repeat buys and Frank’s RedHot, with over 50% growth during the pandemic.

Finally, in all regions, consumers’ digital engagement has increased significantly, and we continued to experience accelerated e-commerce growth in all categories, whether it be pure play, click and collect or our own direct-to-consumer properties. The pace of growth has slowed from the second quarter, which was heavily impacted by more extensive stay at home period but we again drove triple-digit growth in the third quarter as well as increasing our market share in several 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 growth plans, based on our strategy, have been in place since the beginning of the year and were yielding results before the crisis, and we’ve been able to leverage our initiatives to capitalize on the opportunity to help our consumers during this time and strengthen our category leadership position which further bolsters our confidence that we will drive future growth.

Turning to slide 10. In our Flavor Solutions segment, our sales performance improved substantially from the second quarter constant currency decline of 16%. Our third quarter constant currency sales were 1% lower than last year, attributable to lower demand from restaurants and other foodservice customer in our Americas and EMEA regions, driven by the declines in away from home consumption. Almost fully offsetting this lower demand was continued growth in sales to our packaged food customer across all regions as well as strong sales growth to quick service restaurants in China. In the Americas, our sales declined 3% in constant currency, driven by demand declines across both branded foodservice and restaurant customer, with the branded foodservice impact more significant as the away from home customer base in the Americas is skewed more to that channel.

We’re continuing to work with our customers impacted by away from home consumption declines to manage through their recovery efforts. With our customer intimacy approach, we are collaborating to provide solutions such as menu simplification and optimization, branded portion control packaging for dining in and carryout and condiment dispensing solutions for foodservice operations. We’re building menu excitement with strong promotions leveraging the power of our brands, driving wins for both our customers and us. We’re excited about new distribution gains as well as upcoming menu participation and limited time offers as the recovery momentum continues.

In EMEA, our sales grew 1% in constant currency, a significant rebound from a 31% decline in our second quarter. Our away from home customer base in this region is skewed more to QSRs and in the third quarter as they reopened with adapted operating model and resumed limited dine-in options, our demand from these customers rebounded, although still modestly below the third quarter of last year. The recovery with other foodservice customers also began in the third quarter as COVID-19 restrictions eased, although, as expected, slower and not to the same extent as QSR.

Turning to our at-home customer base. We had strong growth in our flavor sales to packaged food companies similar to pre-COVID-19 levels driven by the strength in their core iconic products as well as momentum from new products launched at the beginning of the year. We’re advantaged by our differentiated customer engagement in this evolving environment, which has driven continued wins with our EMEA Flavor Solutions customer. Whether it be quickly scaling up to meet aggressive recovery plans, collaborating on opportunities or managing through demand volatilities, we are responding with speed and agility and further strengthening our customer relationships.

In the Asia-Pacific region, our constant currency sales grew 7%, driven by China and Australia’s growth with QSR customers. During the third quarter, QSRs in these countries were largely open, and we’re seeing momentum gain in the core business and limited time offer and our customers’ promotional activities. Government imposed COVID-19 restrictions and reduced levels of limited time offers continue to curtail growth in parts of the region. For the balance of the year, we expect a reduced level of our customers’ limited time offer and promotional activities versus last year to impact growth.

We continue across all regions to be fully committed to helping our customers manage through the COVID-19 recovery phase, of which the duration is still 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 navigate through this period of volatility. And we remain confident in the successful execution of our strategies driving long-term growth trajectory in Flavor Solutions.

Now, before turning it over to Mike and beginning on slide 11, I’d like to mention the stock split we announced this morning and provide a few summary comments, including on our 2020 outlook. I’m pleased with our announcement this morning of a 2-for-1 stock split reflecting our sustained positive performance and outlook for continued growth. It has been 18 years since the last split of stock which was in 2002 when the pre-split share price was $52.33 [Phonetic]. We believe this will provide greater liquidity and be appreciated by individual investors and employees.

And now in summary, at the foundation of our sales growth is the global demand for flavor. We’re capitalizing on the growing consumer interest in healthy, flavorful cooking, heritage brands and digital engagement. These long-term trends have not only remained intact during the crisis, they’ve accelerated, and our alignment with them positions us well to meet increased consumer demand, both through our product and our customers’ products. We are driving sales growth balanced with a 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, we are ensuring we remain agile, relevant and focused on long-term sustainable growth. We’ve delivered outstanding year-to-date results during a period of great disruption, proving the strength of our business model. Our strategies are effective and reinforcing our confidence they will continue to drive future growth.

Our 2020 outlook, which Mike will discuss in detail in a few moments, reflects the strength of our year-to-date performance and the momentum we’re carrying into our fourth quarter and 2021. We are exceeding the objectives we had in place at the beginning of the year, delivering stronger sales and underlying operating performance, while importantly also ensuring the health and safety of our employees, investing in our supply chain resiliency to meet growth we expect in 2021, recognizing the exceptional performance of our people throughout the COVID-19 crisis and supporting our communities through relief efforts. Our growth expectation reflects our confidence in the sustainability of higher at-home consumption trends. As we look toward fiscal 2021, we expect constant currency organic sales growth in both of our segments, on top of the outstanding Consumer segment growth this year.

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. 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 third quarter performance and then our financial outlook for the balance of the year.

Starting on slide 14. During the third quarter, sales rose 9% in constant currency. Sales growth — growth was driven by substantially higher volume and mix in our Consumer segment, partially offset by lower volume and mix in our Flavor Solutions segment. Pricing, to partially offset cost inflation, also contributed favorably to both the segments.

Consumer segment sales grew 15% in constant currency, led by the Americas and EMEA regions. The shift to at-home consumption and cooking more at home as well as consumers adding flavor at home to their restaurant carryout delivery has driven substantial demand for our consumer products, driving higher volume and mix in these regions.

On slide 15, Consumer segment sales in the Americas increased 17% in constant currency versus the third quarter of 2019. The increase was driven by significant growth across our branded portfolio, including higher volume and product mix of McCormick spices and seasonings as well as Simply Asia, Thai Kitchen, Gourmet Garden, Frank’s RedHot, Zatarain’s, Stubb, Lawry’s and El Guapo products. Additionally, the pricing actions taken prior to COVID-19 in the first quarter to partially offset increased costs also contributed to the growth.

In EMEA, constant currency consumer sales grew 23% from a year ago, with double-digit volume and mix growth in all countries across the region. The most significant growth drivers were our Schwartz and Ducros branded spices and seasonings, our Vahine homemade dessert products and our Schwartz dry recipe mixes.

Consumer sales in Asia Pacific declined 6% in constant currency, driven by lower branded foodservice sales, as Lawrence mentioned. This decline was partially offset by increased consumer demand across the region, with growth led by China’s recipe mixes, sauces and continents as well as Australia’s branded spices, seasonings and condiments.

Turning to our Flavor Solutions segment in slide 18. Third quarter constant currency sales decreased 1%, driven by declines in away from home products in the portfolios of our Americas and EMEA regions. In the Americas, Flavor Solutions’ constant currency sales declined 3%, driven by a significant decline in sales to branded foodservice customers in addition to lower sales to quick service restaurants. Partially offsetting these declines were increased sales to packaged food companies and pricing to offset cost increases.

In EMEA, constant currency sales increased 1%, driven by pricing to cover cost increases, offset partially by lower volume and product mix. Volume and product mix decline was driven by reduction in sales to branded foodservice customers in addition to lower sales to quick service restaurant customers. Partially offsetting these declines was sales growth with packaged food companies.

In the Asia Pacific region, Flavor Solutions sales rose 7% in constant currency, driven by higher sales to quick service restaurants in China and Australia, partially driven by our customers’ limited time offers and promotional activities.

As seen on slide 22, adjusted operating income, which excludes special charges, increased 5% in the third quarter versus the year ago period. In constant currency, adjusted operating income grew by 6% and was driven by substantial growth in the Consumer segment, partially offset by a significant decline in the Flavor Solutions segment. Adjusted operating income growth in the Consumer segment was 18%, increasing to $209 million or in constant currency was 19%, driven primarily by higher sales.

In the Flavor Solutions segment, adjusted operating income declined 24% to $64 million or 22% in constant currency, driven partially by lower sales, unfavorable product mix due to decline in branded foodservice sales and an unfavorable impact to manufacturing costs resulting from the lower volume. Both segments were also unfavorably impacted by COVID-19 related to supply chain costs, including those related to additional compensation for our operations employees, safety and sanitation measures and scaling up to meet increased demand as well as higher incentive compensation which was driven by our strong year-to-date sales and operating profit performance. These unfavorable impacts were partially offset by CCI-led cost savings.

Gross profit margin expanded 70 basis points in the third quarter versus the year ago period, driven primarily by favorable product mix resulting from the sale shift between segments and CCI-led cost savings, with a partial offset from COVID-19 related costs. Adjusted operating margin compression of 60 basis points compared to the third quarter of last year was driven by the net impact of the factors I just mentioned as well as higher distribution costs.

Turning to income taxes on slide 24. Our third quarter adjusted effective income tax rate was 19.3% as compared to 17.6% in the year ago period. Both years were favorably impacted by discrete tax items, principally stock option exercises. Income from unconsolidated operations of $10 million in the third quarter was comparable to the year-ago period.

At the bottom line, as shown on slide 26, third quarter 2020 adjusted earnings per share was $1.53. That’s compared to $1.46 for the year-ago period. The increase was primarily driven by a higher adjusted operating income, with lower interest expense offsetting the impact of a higher adjusted income tax rate. This increase also includes an unfavorable impact from foreign currency exchange rates.

On slide 27, we summarize highlights for cash flow in the quarter-end balance sheet. Our cash flow provided from operations was $627 million in the third quarter of 2020, a 27% increase compared to $495 million in the third quarter of 2019 and was driven by higher net income. We finished the third quarter with a cash conversion cycle at 36 days, down seven days versus our 2019 fiscal year-end. We returned $247 million of cash to shareholders through dividends and used $146 million for capital expenditures through the third quarter of 2020. Additionally, we were very happy that during the third quarter we fully paid off the terms notes related to the acquisition of the Frank’s and French’s brands and ended the third quarter with a net debt to adjusted EBITDA ratio of 3.1 times.

We continue to project another year of strong cash flow. 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 2020 financial outlook. As a reminder, we withdrew our 2020 guidance during our first quarter earnings call in late March. The operating environment over the past six months has continued to evolve, and while there still remains much uncertainty in many variables which could drive a range of possible outcomes, we recognize our year-to-date performance has been strong and we are currently in the last quarter of our fiscal year. As such, we are resuming our 2020 guidance at this time based on the expectations Lawrence shared earlier this morning, most notably, that the shift in consumer demand to at-home consumption versus away from home will continue for the balance of the year and even beyond. We believe this shift will continue to favorably impact the Consumer segment in our fourth quarter. While the away from home part of the Flavor Solutions portfolio has begun to recover, it will continue to be unfavorably impacted. We expect the impact for both segments will not be to the same extent that we have realized in the past six months.

Starting with the top line. We expect to grow sales at the upper end of a 4% to 5% range, which in constant currency is a range of 5% to 6%. This increase is expected to be entirely organic and reflects growth driven by new products, expanded distribution, brand marketing and pricing, which, in conjunction with cost savings, is expected to offset anticipated mid single-digit inflationary pressures. It includes the net impact of a shift in demand due to COVID-19 and the consumers’ sustained preference for cooking at home.

Our 2020 gross profit margin is expected to be 75 to 100 basis points higher than 2019, in part driven by our CCI-led cost savings and favorable product mix, partially offset by COVID-19 related costs.

Our adjusted operating income growth rate reflects the expected strength of our constant currency sales performance and underlying profit realization, partially offset by higher expenses related to COVID-19 and incentive compensation. We are projected to grow adjusted operating income by 4% to 5% or 5% to 6% in constant currency. This includes our cost savings targets of approximately $105 million and an expected mid single digit increase for brand marketing investments.

We are estimating our COVID-19 costs, which include expenses related to additional compensation for our front-line operations employees, safety and sanitation measures and scaling up to meet increased demand as well as donations to relief organizations, will be approximately $40 million to $50 million for fiscal year 2020, with the majority of this cost impacting gross profit. Our estimated increase in incentive compensation is driven by our projected strong fiscal year sales and operating profit performance and is consistent with our commitment to a pay-for-performance philosophy.

Our 2020 adjusted effective income tax rate is projected to be approximately 20% based on our year-to-date performance, including the impact of favorable discrete items and the estimated mix of earnings by geography. This outlook compares to our 2019 adjusted effective tax rate of 19.5%. Our income from unconsolidated operations is also expected to be impacted by unfavorable currency rates, and as a result, we are projecting a mid single-digit decline. Our guidance range for adjusted earnings per share in 2020 is $5.64 to $5.72. This compares to $5.35 of adjusted earnings per share in 2019 and represents a 5% to 7% increase, which, in constant currency, is a 6% to 8% increase.

In summary, we are projecting another strong year of underlying operating performance while doing as right, by first, protecting our employees and recognizing the contributions; second, by supporting our communities through relief efforts; and finally, by making supply chain and brand marketing investments to meet our expected growth into fiscal 2021. And while we are not providing guidance for next year, I want to note that we do expect constant currency organic sales growth in both our segments in 2021, as Lawrence mentioned earlier.

Additionally, I want to provide you a brief update on our ERP replacement program. We indicated in March that we were rephasing the timing of this program to focus on the challenging environment during the pandemic. We remain excited and committed to our global transformation initiative. While the environment is still challenging, we have continued to work on this program. The delay provided us an opportunity to do some re-planning, and as SAP has improved their product, our ramp-up will be on a new version with a broader suite of applications, allowing us to save an upgrade cycle as well. We have not completed our planning yet, but we do not anticipate any major go-lives in 2021. We will provide further updates on our ERP program on our earnings call in January.

Finally, I would also like to mention that yesterday our Board of Directors approved a 2-for-1 stock split, with one share of common stock for common stock non-voting to be issued for each like outstanding share. The additional shares will be distributed on November 30. Trading is expected to begin on a split-adjusted basis on December 1. The stock split reflects the confidence we have in our future and we believe it will provide greater liquidity and allow the stock to be more accessible to a broad range of investors.

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I’d like to now turn it back to Lawrence for some closing remarks before we move to your questions.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Thank you, Mike.

Now that Mike has shared our financial results and 2020 outlook in more detail, I’d like to recap the key takeaways as seen on slide 29. We’ve delivered outstanding year-to-date results during a period of great disruption, proving the strength of our business model, the value of our products and our capabilities as a company. Our foundation is solid and our strategies are effective. Our 2020 outlook reflects another year of strong operating performance of doing what is right for our employees and communities as well as making investments for the growth we expect in both segments next year. We’re confident in our ability to perform in this dynamic environment and to continue delivering differentiated results and build long-term value.

And now I’d like to turn to your questions.

Questions and Answers:

Operator

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

Andrew Lazar — Barclays Bank — Analyst

Good morning, everybody.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Hi, Andrew. Good morning. Thanks for hanging in there for a very long script.

Andrew Lazar — Barclays Bank — Analyst

No worries, no worries. Our pleasure. So two things would be, first off, thanks for your thoughts around your expectations for organic sales into next year. I’m curious as we think about EBIT for next year, obviously we’re not in a position to give any kind of guidance, but maybe you can just cover off on a couple of the discrete items, puts and takes that we kind of know about, meaning, I think you covered, Mike, $40 million to $50 million of COVID related costs this year. Is all of that expected to not repeat next year or is a portion going to next year? And then, any way you can break out what the incremental maybe incentive comp cost is expected to be this year and just any other things that are discrete that we kind of know now that we should take into account as we think about sort of profit growth next year? And then I’ve just got a follow-up. Thank you.

Mike Smith — Executive Vice President and Chief Financial Officer

Hey, Andrew, it’s Mike. I’ll answer this, and if Lawrence has any comments, he can chime in. You referred to the COVID costs. Obviously, we talked about this year, about $40 million to $50 million incremental costs in 2020. We expect some of those to continue. However, some of those, we don’t expect to continue, some of the things like we’re scaling up production, we’re onboarding people, we have incremental co-packers in place now. We would expect that to not impact us into next year. However, some of the things we’ve done like the PPE and other coverage for our employees, we do expect to continue. So it’s a mix of that. However, we would be really — a lot depends on the environment and the continued research. And so, on January guidance, we’ll give you a lot more detail on that, obviously.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Right. But there’s other — in addition to what Mike said, there are costs that we incurred for temporary plant closure, extraordinary sanitation that we do not anticipate happening again next year. And just bringing on all of this capacity has been done very quickly and — and as a result, it’s been brought on somewhat inefficiently in the short term, and we would expect that efficiency rate to go up as we get into next year.

Now, on incentive comp, Mike mentioned a word about that. I certainly hope that it doesn’t constitute as a tailwind next year. But kind of — but it’s not, it’s because — if it isn’t a tailwind, it’s because of continued extraordinary performance. We have a pay-for-performance philosophy. Our employees have really delivered this year, and so incentive comp across the — all levels of the organization is pretty much at the top of our program range. And so, we’d take a — a really extraordinary performance to repeat that. So, probably it’s going to be a tailwind as well, but in any case, the underlying business results that we delivered this year don’t get paid for twice, and our plans pay for growth.

Andrew Lazar — Barclays Bank — Analyst

Yeah, makes sense. And you mentioned capacity, and I want to dig into that a little bit. I’m curious if there’s a way to sort of spread out a little bit how much of the upcoming capacity that’s coming online is sort of internal versus stepped up use of third parties. And really the reason I ask you it is that, I would assume that McCormick would not be adding its own sort of internal capacity in any significant way unless it thought that some of these recently elevated trends were likely to persist somewhat longer-term, not at current levels, necessarily, but longer-term, in a way that you kind of felt like you needed internal capacity as opposed to just the more — as opposed to just accessing — accessing the flexibility of third-party manufacturers.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Yeah, and so — Andrew, it’s a — it’s a mix. So, some of the capacity, we’ve gained has been by adding people and changing our shift pattern so that we have more of our facilities operating on a 24/7 or a 25/7 schedule, not just on some lines, but in some case on all lines. So that’s one way we’ve added our capacity. We have made some short — we’ve made some — we’ve been able to make some investments in blending capacity that — that are internal. And then we have brought on quite a lot of third-party co-packing capacity that is an incremental cost that we would hope to absorb into our own facilities over the course of next year.

Mike Smith — Executive Vice President and Chief Financial Officer

And that’s primarily with strategic partners that we already do co-packing with also. So we’re not creating a quality risk out there also.

Andrew Lazar — Barclays Bank — Analyst

Yeah. Got it. Great. Thank you very much.

Operator

Your next question is from the line of Ken Goldman with JPMorgan. Please proceed with your question.

Kenneth B. Goldman — JPMorgan Chase & Co. — Analyst

Hi, thank you. One clarification and then I have a broader question. I’m just building on Andrew’s question. You talked about no major go-live for ERP in 2021. Is it fair for us to assume that obviously the costs will be delayed maybe until 2022 as well from that or are there some costs that you’ll incur in advance? Just curious on that first [Speech Overlap].

Mike Smith — Executive Vice President and Chief Financial Officer

Yeah, I mean, we’re continuing, even though we talked earlier about delaying the ERP, we’re still incurring cost this year, and we’re going to spend to 2020 around the same level as we did in 2019. So you can expect that we replan this will have cost in next year. We’re not prepared at this point to talk about the level of costs, but we just wanted to highlight the fact that go-lives, which are — bring with them major costs, aren’t going to really happen until 2022. And we’ll have more [Speech Overlap] January guidance, we’ll sharpen the pencils for that.

Kenneth B. Goldman — JPMorgan Chase & Co. — Analyst

Yeah. Okay. That’s helpful. And then I wanted to hook around a little bit on your commentary about organic growth in the Consumer segment next year. The market’s right now looking for, the Street’s looking for low single-digit decline. So you’re surprising to the upside, I think. And I wanted to ask, clearly, you have a very strong first quarter coming up, as you should anyway given that you don’t lap against COVID. But after that, there is some reasonably high bars to comp against. And I’m just curious to what extent is your confidence in this top line growth next year informed, maybe a little bit, by the increase in capacity and also the potential trade load that could bleed from this year into next? And I’m asking because, obviously, we should continue to see great food at home trends next year. But maybe that guidance will be easier to digest if it’s built on, I guess, something more than the expectation of just end demand growth. So, hopefully that makes sense.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Okay. And that makes a lot of sense, and that is a great question, because I think you’ve written about this. And I think that the analyst community as a group, the consensus that’s out there right now under calls but we think the growth potential is, and that’s why we have commented on 2021 at this early stage when we normally would really be focused completely on 2020.

Even before COVID-19 hit, consumers were cooking more at home, they were using more spices and seasonings and sauces to prepare fresher, healthier meals; they were moving to trusted and heritage brands; we’ve talked about this. The pandemic accelerated these trends and other trends like e-commerce that already underpin our strategies and that we were already capitalizing on. And consumers hadn’t been doing anything that is contrary to what they have been trending to do already, they’re just doing more of it. The data that we’ve got — we talked about on — in our prepared remarks shows that most consumers are cooking more, they’re enjoying it and intend to cook more, and our brands have gained penetration in millions of households with a high level of repeat that shows strong satisfaction with the experiences that they’re having and we’re not just seeing it in the US, we’re seeing this play out globally.

We continue to invest behind our brands and driving it through the entirety of the crisis. And we’ve got a robust pipeline of innovation that includes some backlog from this year for launch in 2021 too. We’ve had a lot of resilience and capacity in the supply chain, and the market frankly has taken all of it and we’re still ramping up for more just to meet the existing demand for consumption. And as you noted, we have store shelves to restock, retailer inventory to replenish and a broad range of suspended SKUs to restart. So yeah, we think that there is going to be some moderation. There’re going to be a couple of periods and areas where there are tough comparisons, but we absolutely expect growth in our Consumer segment next year for very good reasons.

Mike Smith — Executive Vice President and Chief Financial Officer

I think also to highlight the fact that we’re upping our spend in brand marketing in the fourth quarter. We’re going to have mid — we’ve guided to mid-single digits for the year, which would imply a 12% to 18% increase in the fourth quarter because that advertising will drive growth in the first and second quarters. So we’re really investing behind the brand at this opportunity.

Kenneth B. Goldman — JPMorgan Chase & Co. — Analyst

Very clear. Thank you.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

And I don’t even need to talk about Flavor Solutions because everybody…

Kenneth B. Goldman — JPMorgan Chase & Co. — Analyst

No, no. Yeah. I think that — I think we expect that to be up already. Thank you.

Operator

Our next question comes from the line of Alexia Howard with AllianceBernstein. Please proceed with your questions.

Alexia Jane Burland Howard — AllianceBernstein — Analyst

Good morning, everyone.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Hi, Alexia.

Mike Smith — Executive Vice President and Chief Financial Officer

Good morning.

Alexia Jane Burland Howard — AllianceBernstein — Analyst

Hi there. So can you — you mentioned promotional activity was reduced obviously because of the constraints on supply over the last few months on the Consumer side. As you look forward, are the retailers beginning to put that spending back? I know spices and seasonings are not generally that heavily promoted. But I’m just wondering about the dynamics with retailers there and whether they’re likely to up elevated spend as we look out into the tail end of this year and into 2021.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Sure. Well, although what we’ve done, first of all, is spend in cooperation and collaboration with retailer, I’m pretty much through the — through much of the third quarter and into the fourth, our promotional plans are actually in place. What’s different is that the product is on allocation in many cases. And so the amount that retailers can take on the promotion is limited, number one. And then number two, we had a shift in our — the timing of our — of our holiday program. Normally, just because of the scale of the holiday program, we actually start deliveries in August to get displays up early, just kind of — just to manage the surge. And as part of managing overall demand, we push that — about half of that off into Q4. So there is a timing difference there. But I think that for the most part, our promotional plans are back in place. Those are — those comments are pretty specific to the US and Canada, and the rest of the world, where we really haven’t been constrained by supply, promotional plans have gone forward as normal at this point.

Alexia Jane Burland Howard — AllianceBernstein — Analyst

Great. And as a follow-up, you managed to delever to what, a little over 3 times net debt to EBITDA. How does that adjust your thinking on acquisitions? Obviously, there’s a lot that you’ve got on your plates just operating the business in this environment, but in the past you’ve been simply bullish on the idea of doing further deals. So I’m just wondering how rich that — that bit of opportunities look right now and how actively you might be just doing that and in which parts of the business.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

So, it had been our goal to deleverage to 3 times EBITDA by the end of 2020. It looks like we’re certainly there. That’s a positive. [Speech Overlap] and our — the goals for our acquisition strategy is unchanged, which is that acquisitions support our growth strategies. And so, we’ve been signaling for a while that we didn’t feel that we actually had to literally get to report 3.0 before we’ll be back in the market and — and so we would say that we are open for business in the acquisition department.

Alexia Jane Burland Howard — AllianceBernstein — Analyst

Great. Thank you very much. I’ll pass it on.

Operator

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

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Hi, Rob, are you there?

Operator

Hi, Mr. Moskow…

Robert Bain Moskow — Credit Suisse — Analyst

Hi. Can you hear me? Sorry about that. Yeah, that was — that was me. So…

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

That’s like the cliche of our time right now.

Robert Bain Moskow — Credit Suisse — Analyst

It’s happened to many. Yeah, I agree with you. But fortunately, no dogs barking in the background. But I did have a just kind of a broader question about your margin structure. You’re making investments in capacity this year that will dilute your margins in the fourth quarter. And then you have this big ERP program that will probably dilute margins next year. Just big picture, like would you say that these investments are setting you up to service — to become a bigger company, to service bigger demand? And if so, like when do you get back to a pattern of margin expansion and benefiting from all that — that scale that you’ve put out? Just kind of a — and I guess the second part is, do you get back then to your normal pattern of margin expansion that’s in your long-term algo?

Mike Smith — Executive Vice President and Chief Financial Officer

That’s a great question, Rob, and I’ll start it. No, it’s a great — a great point. And as we went into this year, obviously, when we had planned the $60-ish million investment in ERP, that was going to be dilutive to our margins. However, we need to become a bigger company, increase our scale. The ERP program drives efficiencies across the organization and really allows us to grow faster and make acquisitions faster. It’s hard to pin it down to one year — one year investment and then you get back right away. But over a three to four year period where we look at our constant currency sales growth and our margins, we see that really as our long-term guidance. One year’s — you’re going to have some short-term ups and downs on it. There’re levers we can pull too from an advertising perspective, spending more or less. CCI is a tool we’ve used in the past to lean into when we had investments to make. So I think in January, you will see a better picture for next year.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

But the investments that we’ve made in supply chain this year have really been extraordinary because of the extraordinary circumstances. I mean, we had an unprecedented increase in demand that’s been sustained over time. We have really had to work and throw money at in order to — in order to meet and — and it hasn’t been done in the most efficient way. And I think that as we commented on the first question from Andrew, we would expect that some of those costs would — would come out.

Mike Smith — Executive Vice President and Chief Financial Officer

And if you think about earlier this year, people have already forgotten, the first quarter, China was such a shock to us and everybody. And consumers there didn’t get a chance to really buy, so that was a large first quarter impact for us which really hurt our margins. And even in the Flavor Solutions business, we talked about continuing to mix up there with portfolio management. This year has been a little tough because foodservice [Indecipherable] foodservice, which is high margin, has been hurt by this COVID situation whereas QSRs are recovering [Indecipherable] from a mix perspective. But we see that over time recovering also.

Robert Bain Moskow — Credit Suisse — Analyst

Okay. And actually I do have a follow-up question. You said that Europe had already expanded capacity sufficiently to meet the 20 plus percent increase in demand, but the US had not. Is there any reason that the capacity expanded in one region but not the other?

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Over — so, over the last several years, we’ve been building our capacity and capabilities in Asia-Pacific, first, and in Europe, second, as an area of investment focus and actually we just turned to the Americas. This year, we announced a big investment in highly automated logistics center earlier this year, but pre-COVID. And so — so our investment cycle has turned to the — turned to the Americas, but…

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Mike Smith — Executive Vice President and Chief Financial Officer

It’s not to say we’ve ignored Americas. We’ve made investments along the way all the while, but let’s just say, region-wise.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Right. And virtually all of our plants in Asia have been either new or renovated in the last several years, and we’ve made a number of big investments in expansion and automation in EMEA, and we’re just turning to the Americas. But even beyond that, yes, it’s just the scale of the surge of demand. I mean, the US business is so big that — that even the same percentage growth turns into a massive amount of — amount of volume.

Robert Bain Moskow — Credit Suisse — Analyst

Got it. Okay. Thank you.

Operator

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

Christopher Robert Growe — Stifel, Nicolaus & Company — Analyst

Hi, good morning.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Good morning, Chris.

Christopher Robert Growe — Stifel, Nicolaus & Company — Analyst

Hi, good morning. I had — my first question, just to understand — you talked earlier in the call about pushing off some new product launches, and how those could benefit 2021 I think was the implication. Is that a function of the retailers’ sort of acceptance of new products? Are you seeing that kind of pick back up? And then also just to understand how the capacity lines up for some of those new products — are these largely third-party produced [Indecipherable] new production capacity able to produce those products? Just want to get a sense of how those will play out in 2021.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Perfect. Well, with the surge in demand, both we and the retailers really wanted to focus on the core items. So for us, it is the surge in supply and the retailers still had the challenge of bringing product in and just the logistics of the whole the increase in consumer shopping in their total store. So — so there was — there has been much more of a focus on core. And the new items that we actually had launched early in the year got unprecedented trial, but the items that we had planned for the second half really have been deferred into — into 2021. And add to that — add to that — add to that pipeline. I don’t think our experience in the area is much different than what others set out. We also had a big shelf initiative. We had a spice aisle reinvention program that we unveiled at CAGNY and had a plan to get into thousands of stores. We are — we have put — made that change in thousands of stores but nowhere near the magnitude that we expected. And so that’s also going to be a part of the program for next year.

On the Flavor Solutions side of the business also, our customers have tended to focus on their core items as well, and so innovation in that area has also been — been curtailed, quick service restaurants trying to manage demand and their drive-through and takeaway model have focused more on core items, and are really only now getting back into limited time offers and promotional offerings. And our consumer food manufacturing customers are also just now ramping up their innovation programs. They’ve a lot of projects underway in an area that I think will be a benefit in that segment next year, but really through the crisis, the focus has been on core items, both for us, our customers, both on Flavor Solutions and its retail.

Mike Smith — Executive Vice President and Chief Financial Officer

And some evidence of the QSRs in APZ in China and Australia are recovering faster and more LTOs are coming out now, as we talked about this quarter. So we see that continue hopefully into next year.

Christopher Robert Growe — Stifel, Nicolaus & Company — Analyst

Okay. Thank you for that. And I just want a quick follow-on, if I could, on the gross margin and I guess the implied gross margin for the fourth quarter. It does indicate some less growth or even a bit of a decline in the fourth quarter based on the performance year-to-date. Are there residual COVID costs to keep in mind? Is it the co-packers? And also you have some costs around the new capacity. Are those sort of the factors that play into the fourth quarter gross margin performance?

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Definitely, Chris. We’ve talked — at the last call, we were talking about $30 million split between the second and third quarter. Now we’re seeing $40 million to $50 million, of which we’re — and we’re considering the fourth quarter because of that unprecedented demand. So, yeah, we will — those costs are continuing into the fourth… I’d say that’s the biggest factor.

Mike Smith — Executive Vice President and Chief Financial Officer

Yeah, that really is. And we’re saying to you a little bit. We’ve had some very favorable segment mix over the last couple of quarters. We’ll see a little bit less of that in the fourth quarter. But the primary thing is the COVID costs, as Lawrence said.

Christopher Robert Growe — Stifel, Nicolaus & Company — Analyst

Okay. That sounds great. Thanks, all, for your time this morning.

Operator

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

Adam L. Samuelson — Goldman Sachs Group — Analyst

Yes. Thanks. Good morning, everyone.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Good morning, Adam.

Mike Smith — Executive Vice President and Chief Financial Officer

Good morning.

Adam L. Samuelson — Goldman Sachs Group — Analyst

Good morning. So I guess the first, it turns us into a little bit of the question on the shift on holiday sales into the — into the fourth quarter in terms of the load-in. But can you just comment a little bit on retailer inventories and trade inventory in the US right now, just given the surge in demand that we’ve seen? Just how do you think about that and how you think about that potentially being a tailwind into next year?

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Yeah. I think you only have to walk into a store to know that the cupboard is bare. We have — in the first — sorry, in the second quarter, US demand was — the scanner was up 55% in the — in the second quarter. It was — it was 28% — latest Nielsen still has that burning up over 20% — sorry, the latest IRI still has it running up over 20%. We — we have struggled to keep up with that demand. You’ve seen that we’ve reported lower numbers, and that gap over — a lot of that gap represents inventory reduction. So let’s say that the shelf stocks are low, back room stocks are low to non-existent. There is a — there is a lot to rebuild. And as we go through the fourth quarter, we are ramping up capacity, but that’s really meeting demand. The real rebuild of shelf stock of retailers safety stock of inventory in the whole — the normal level of inventory into trade pipeline, that rebuild is going to happen next year, and well — it’s going to take well into the year to get that back up.

Mike Smith — Executive Vice President and Chief Financial Officer

And that’s what give us further confidence on growth next year on the Consumer side.

Adam L. Samuelson — Goldman Sachs Group — Analyst

Okay. No, that’s helpful. And then I guess my second question was [Speech Overlap]

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

I don’t think — but I don’t think we’re not alone in that situation.

Adam L. Samuelson — Goldman Sachs Group — Analyst

No, that’s totally fair. My other question is again Flavor Solutions and especially thinking in the — in the Americas, with the volume mix that you — decline reported. Any way to give a little bit more color by kind of your major categories, branded foodservice, the flavors business, the condiments coating, just how the different parts of your business are performing relative to that negative 5% and where that’s trending in September?

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Yeah, I mean — quick service restaurants are generally doing great. So they are — they are very much in a recovery mode. Depending on the geography, in some cases, they are well into growth again and at other geographies, they are not quite there. But — but their model was already very oriented towards consumption away from premise, drive-through and so on. So they’ve had a fast recovery and really are responsible for the big swing that we saw in our EMEA region, in particular, for example where second quarter, we’re down 31% and the third quarter, we were — we’re actually up 1%.

The flip side of that and the slowest recovering are traditional restaurant foodservice customers. Many of those are still closed, are operating under capacity restrictions. Consumers — in our survey data, over half of consumers still say they do not intend to inside at a restaurant this year. So there is quite a path — a challenging path for them to recover. And in fact, as we get into the fall weather, cooler weather, it’s going to be hard for us to — it’s going to be — it’s hard — it’s hard to see how — it’s going to be another headwind for them as we — as we get into that time period. The — and so those are the — those are the ones that are going to be more challenged.

And our consumer manufacturers are pretty much back to normal. That –they’ve pretty much gotten back on track. It varies by customer, but as a group in aggregate, they’re back to a more normal path. And in the Americas, I think you were trying to dig a little bit beyond that. I think branded foodservice is a higher percentage of our total Flavor Solutions in the Americas compared to the rest of the world, just a little bigger impact there.

Adam L. Samuelson — Goldman Sachs Group — Analyst

Okay. That’s truly helpful color. I appreciate it. Thank you.

Operator

Thank you. The next question is from the line of Peter Galbo with Bank of America. Please proceed with your questions.

Peter Thomas Galbo — Bank of America Merrill Lynch — Analyst

Hey guys, good morning. Thanks for taking the question. Mike, I just had a question around freight costs. We’ve been seeing a pretty sizable uptick both in the spot market. And just wondering if that’s going to spill over into contract freight rates. Just can you give us a sense either as a percent of sales or COGS what freight represents? And maybe just some history, a couple of years ago when freight was moving up, kind of how you guys managed it through the business.

Mike Smith — Executive Vice President and Chief Financial Officer

Yeah. I mean, it’s a good question. Freight has spiked real recently. It’s been up and down over the last 12 months. So, a couple of years ago, there was a huge shortage of containers of freight and the whole industry was really hurt by that. And through our CCI program, we really managed those costs. Within the last quarter, I can’t tell you specifically what programs we have to be honest, but distribution is one of those SG&A things that has been up primarily due to internal warehousing news and things like that, just shipping product. But freight is a relatively minor total component of our cost of goods sold.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

And especially in the scheme of [Speech Overlap] going on right now.

Mike Smith — Executive Vice President and Chief Financial Officer

Yeah, in the scheme of other [Speech Overlap] it’s not a material impact in the quarter, but it does — it does add a few — a little bit of a headwind. So, good question.

Peter Thomas Galbo — Bank of America Merrill Lynch — Analyst

Got it. Okay. No, that’s helpful. And maybe just as a cleanup, the tax rate, that 20% you gave. I mean, on a longer-term basis, I know you guys have talked about mid-20s, but it’s been running in that closer to 20% just as the stock has performed well. Just kind of help us think about that on a longer-term basis.

Mike Smith — Executive Vice President and Chief Financial Officer

Yeah. Longer-term, it’s still — I’d say that what we said earlier this year, 24% to 25%. Obviously, with the election coming up, we have no idea what’s going to happen next year. So stay tuned for that one. But underlying the way the rates — the rules are written now, 24% to 25%. And then periodically we have tax planning initiatives. And then, as you said, with the stock performing very well, you got a really nice stock option favorability. Now, that is all set up in the operating expense line, just partially so that it does have a little bit of a headwind up there, but generally it’s good for the tax line.

Peter Thomas Galbo — Bank of America Merrill Lynch — Analyst

Great. Thanks very much, guys.

Operator

Thank you. The next question is from the line of David Driscoll with DD Research. Please proceed with your questions.

David Christopher Driscoll — DD Research — Analyst

Great. Thank you and good morning.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Hi, there.

Mike Smith — Executive Vice President and Chief Financial Officer

Hi, David.

David Christopher Driscoll — DD Research — Analyst

I wanted to ask one question on the fourth quarter and then just one follow-up on your ’21 commentary. On the fourth quarter, you appeared to be implying within the full year guidance a revenue slowdown versus the third quarter, and I just wanted to hear your description as to what are the qualitative factors here. Do you expect a second wave of the virus to be impacting? Is that implied within the guidance or do you really just kind of take where we are today on viral impact and just extend that forward? And are there any other key assumptions that go into that fourth quarter?

And then on 2021, I’m curious about whether or not you see this as — your growth comments — are these in your control? Is it this inventory situation that’s just so significant in ’21 that it underpins your confidence to make these growth comments? Because, of course, nobody knows about the vaccine, how many people will take it, what that will do to consumer behavior. But I’m thinking that what you’re trying to tell us today is, it doesn’t really matter; there are so many underlying positives inherent to your business that are in your control that you can still say that there would be growth in ’21 in that consumer segment. Thank you.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

The — you know what, I think for Q4, I’ll start this and let Mike take it and let me come back to 2021 in a minute. For Flavor Solutions, we were — we’re — we’re pretty much looking at status quo versus where we are right now because the QSRs have largely recovered. And we see just a hard path forward for the rest of the restaurant side of the business. Given the uncertainty around resurgence, I mean, look what’s happening in Europe, right now.

Mike Smith — Executive Vice President and Chief Financial Officer

Cold weather…

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Cold weather coming in. There’s probably going to be some good news on a vaccine. But the fact is, that’s probably not going to be widely available till sometime well into next year. So, there’s a lot of uncertainty out there around that.

For the Consumer side, demand continues to be strong. We’ve got all these gains and penetration. Trial consumers seem to be having a good experience cooking at home. And the cooking at home behavior has really held up in a way that frankly we’ve underestimated all year long. I mean, it’s been stronger than we thought and every time we look at it, it’s holding up stronger and longer than we thought. So we’re expecting some moderation next year, but we are also expecting quite a lot of it to stick.

There are still a lot of uncertainties around 2021, which is why we don’t give guidance this early. But we did see a growing disconnect between the expectations for growth of consumer that was going to be so wide, we felt like we had to say something about it.

Mike Smith — Executive Vice President and Chief Financial Officer

Yeah. And regarding the fourth quarter, I mean, we wanted to give some meaningful guidance, but also wanted to be prudent in a really uncertain environment. And there’s variables to the high and the low end. We think the demand is there, obviously, as we see in the scanner data, but our ability to supply especially in the US is really challenged. So we wanted to at least be proven from that perspective.

David Christopher Driscoll — DD Research — Analyst

I appreciate the comments. Thank you.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Great.

Operator

Thank you. At this time, I’ll turn the floor back to Lawrence Kurzius for closing comments.

Lawrence E. Kurzius — Chairman, President and Chief Executive Officer

Great. Thank you, everyone, for your questions and for participating on today’s call. McCormick is a global leader in flavor, differentiated with a broad and advantaged portfolio. In the volatile environment in which we currently operate in — operate, this balanced portfolio drives consistency in our performance. We have a growing and profitable business, delivering flavor to all markets and channels, while responding readily to changes in the industry and the world, with new ideas, innovation and purpose.

One of the most significant risks that any company is being unprepared to respond with agility to a significant unexpected disruption. We’ve all been experiencing that disruption this year and McCormick continued to be well prepared and not only managed through it but emerged stronger. With a relentless focus on growth, performance and people, we’re confident our strategies continue to position us drive future growth and build long-term value for our shareholders.

Kasey Jenkins — Investor Relations

Thank you, Lawrence. And thanks to everyone for joining today’s call. If you have any further questions regarding today’s information, please reach out to me. This now concludes this morning’s conference call. Have a good day, everyone.

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