Thank you for joining us, everyone. This is Kasey Jenkins, Vice President of Investor Relations. We are pleased to discuss today McCormick's agreement to acquire the parent company of Cholula Hot Sauce. To accompany this call, we've 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, followed by a question and answer session. During our remarks, we will refer to certain non-GAAP financial measures. These include adjusted EBITDA, adjusted margins, adjusted EPS accretion, and our leverage ratio. Please refer to Slide 14 for a more detailed discussion of these non-GAAP financial measures. 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. As seen on Slide two, our forward-looking statements also provide information on risk factors, including the impact of COVID-19, that could affect our financial results. It is now my pleasure to turn the discussion over to Lawrence.
Thank you, Kasey, and thank you, everyone, for joining us. I'm pleased to announce that McCormick is reinforcing our position as a global flavor leader through the acquisition of Cholula. As you know, we are building the McCormick of the future through an overarching focus on growth. This acquisition accelerates McCormick's condiment growth opportunities with a complementary authentic Mexican flavor hot sauce. Starting on Slide three, as we continue to capitalize on the growing consumer interest in healthy and flavorful eating, Cholula, a brand known for authentic, bold, and spicy flavors, is a strong complement to our portfolio, providing consumers and our food service operators with an even more diverse product offering that will only strengthen our growth opportunities. Cholula's calendar 2020 sales are expected to be $96 million, with adjusted EBITDA expected to be $32 million.
Cholula has an attractive margin profile, which is expected to be accretive to both the consumer and flavor solution segments in fiscal 2021, excluding transaction and integration costs. I'm excited to share with you how the acquisition of the iconic Cholula brand fits with our vision of being a leading flavor company, meets our financial thresholds, and will drive shareholder value. Now, on Slide four, hot sauce is an attractive high growth category, and Cholula, as a beloved premium brand, is outpacing overall category growth in the U.S. and is the leading Mexican hot sauce brand. Cholula's products are proudly made in Mexico using high-quality ingredients and based on a 100 year old recipe comprised of a unique blend of fresh peppers and regional spices. The portfolio of six distinctive and authentic flavors is manufactured by strategic third-party manufacturing partners and reaches consumers through both retail and food service channels.
Turning to Slide five, we expect to continue to deliver differentiated results through the effective execution of our strategies. As we execute our strategy to accelerate our global condiments platform, the acquisition of Cholula is a meaningful addition to our portfolio and creates further growth opportunities. Cholula is highly complementary to our existing hot sauce portfolio and will broaden our flavor offerings to consumers and food service operators. Cholula builds on McCormick's strong condiment portfolio with significant brand equity and a differentiated traditional Mexican hot sauce taste profile. McCormick has the operational expertise and infrastructure to drive further growth of this iconic brand. Branded food service is a fundamental growth opportunity for Cholula, which McCormick is well positioned to capitalize on. We plan to both expand Cholula's distribution in its existing food service channels and increase new restaurant penetration. Importantly, we've demonstrated success in integrating brands.
We expect this to be a straightforward integration, as Cholula has only six flavors and less than 40 SKUs produced by two third-party manufacturers. Given Cholula's attractive margin profile, we expect immediate accretion in the adjusted margins of both the consumer and flavor solutions segments. As seen on Slide six, Cholula is distinguished by its iconic wooden caps packaging and by its unique blend of pequin and arbol fresh peppers that bring a great balance between heat and flavor. The brand's value proposition is based on authentic, differentiated flavors, makes Cholula the leading Mexican hot sauce brand, and adds a distinct new taste profile to McCormick. The hot sauce category is fueled by younger, multicultural consumers' growing desire for international and spicy foods, as well as healthy and flavorful eating. Cholula and Frank's complement each other through reaching a broader consumer demographic across a variety of dishes and meal occasions.
Cholula's passionate fan base, with a particular affinity among younger and more diverse populations, adds an attractive demographic to McCormick's already devoted consumer base and is incremental to our Frank's loyal consumer base. Cholula's usage over-indexes to Mexican dishes, and Cholula is complementary to Frank's, even from a U.S. regional perspective. Frank's is more concentrated in the East, and Cholula in the West, which represents an opportunity in other parts of the country. Both Cholula and Frank's are among the fastest-growing brands in the condiment aisle, and the acquisition of Cholula enables us to provide an even more wide-ranging offering across the hot sauce category that addresses complementary cuisine types, consumers, and usage occasions. Moving on to slide seven. We have a proven playbook and unmatched expertise to effectively and efficiently unlock Cholula's significant growth potential.
Our operational expertise and infrastructure will allow us to elevate Cholula's brand awareness, increase availability of its products, and extend its product offering into new flavors, formats, and eating occasions to drive trial and household penetration. With only 4% household penetration today, there is considerable opportunity to welcome new consumers to the Cholula brand, in addition to increasing our penetration with Cholula's existing consumers. Using our category management expertise, which we recently brought to the condiment aisle through the Frank's and French's acquisition, we'll continue to collaborate with retailers on initiatives to optimize shelf assortment and placement in the fragmented hot sauce category. We also plan to accelerate Cholula's under-penetrated e-commerce business by leveraging the investments we've made in this channel, improving placement on the digital shelf, and bundling online promotions with other leading McCormick brands.
Our marketing excellence organization, with a history of achieving industry leading ROIs, will optimize Cholula's brand marketing spend and drive greater speed, agility, and effectiveness. We will activate more opportunities to connect with consumers through differentiated investments, particularly capitalizing on our digital leadership. We expect our category management, e-commerce, and marketing excellence, in addition to our insight-driven innovation capabilities, to accelerate momentum, expand distribution, and drive growth. We're confident in our capabilities, as this is a very similar playbook to the one we successfully executed with the addition of Frank's and French's to our portfolio in 2017. Next, on slide eight, McCormick's broad presence across all food service channels is expected to strengthen Cholula's go-to-market model. With tabletops and portion control packets, Cholula has a strong front of house presence, which is where approximately 40% of consumers have said they discovered Cholula.
There are further growth opportunities in the front of the house and opportunities to grow penetration in the back of the house as well. We're uniquely positioned to realize this benefit. McCormick's reach across customers, combined with our culinary foundation and deep insights on menu trends, expands the recipe inspiration and flavor solutions that we'll be able to offer operators. We plan to leverage Cholula's authentic Mexican flavor to provide a hot sauce brand that is complementary to Frank's and can be used in different meal types and occasions. For example, in menu offerings, Cholula will be applicable in more Mexican dishes and for Cinco de Mayo promotions, while Frank's is the staple for chicken, especially wings, and will continue to create opportunities for Super Bowl or March Madness promotions. Turning to slide nine.
Before Mike provides more detail on the financial impact of this transaction to McCormick, I would like to comment on our acquisition strategy and track record. Acquisitions are a key part of our long-term growth strategy, and we have a strong history of success in driving value through acquisitions because of our disciplined approach. We have a process of filtering opportunities against our acquisition pipeline strategy, strengthening our leadership position, expanding our capabilities and categories, and driving scale and globalization, as well as evaluating them against financial criteria. Our commitment to this discipline is evidenced in the acquisition of Cholula. It fits within our vision of being a leading flavor company, meets our financial thresholds, and we believe will deliver shareholder value. Turning to slide 10. In 2017, we acquired Frank's and French's and have continued to leverage our capabilities to drive growth.
We've accelerated Frank's growth every year by increasing brand support, expanding into different categories through new products, and extending points of distribution. We're also pleased to have returned the French's Mustard brand to growth. In food service, we continue to increase restaurant penetration with significant new menu participation. We're also gaining momentum in both French's and Frank's in many international markets. In addition, we realized the acquisition synergies ahead of pace and generated strong free cash flow to pay down debt. We have fully repaid the $1.5 billion in acquisition term notes and are on track to achieving our leverage objective of 3x net debt to adjusted EBITDA by the end of fiscal 2020. As seen by many of our brands on slide 11, we have a proven track record of value-enhancing acquisitions, and we expect Cholula will only add to that history.
Cholula clearly aligns with our acquisition pipeline strategy and strengthens our position as a global leader in flavor. Based on our financial discipline and rigorous process of identifying and vetting potential targets, we're confident that Cholula will create value for our shareholders similar to past deals. We will continue to pursue acquisitions that are consistent with our pipeline strategy and that will drive further shareholder value. Now it's my pleasure to turn it over to Mike.
Thanks, Lawrence. I will now provide some additional comments on the key financial highlights of the transaction, which you can find on slide 12. Overall, we are very excited about this asset, as it supports our focus on growth and will create long-term shareholder value. McCormick is paying $800 million in cash for Cholula, which represents an approximate multiple of 25x Cholula's estimated 2020 adjusted EBITDA pre-synergies. The transaction includes tax benefits, which will provide future cash tax savings that we estimate at a net present value of approximately $43 million. In addition, we expect to achieve run rate cost synergies of approximately $10 million, which will be fully realized by fiscal 2022. When factoring in the tax attributes acquired as part of the transaction and anticipated run rate cost synergies, the multiple is approximately 18x .
We expect sales from this strategic acquisition to be accretive to our long-term organic sales objective as we build upon Cholula's successful track record. Similar to McCormick, Cholula's consumer demand accelerated during the COVID-19 pandemic, with momentum continuing at an elevated level, more than offsetting the negative impact of COVID-19 on food service demand. In fiscal 2021, we will be lapping the strong 2020 growth driven by the COVID-19 volatility. Beyond the COVID-19 pandemic, we expect mid to high single-digit sales growth. This asset also has a very attractive adjusted EBITDA margin profile, which we expect will be accretive to the margins in both of our consumer and flavor solutions segments. We expect transaction and integration costs will dilute McCormick's earnings per share on a split adjusted basis in fiscal 2021.
Excluding transaction and integration costs, we expect the transaction to be approximately 2% accretive to our fiscal 2021 adjusted earnings per share. We also anticipate approximately 2% accretion once the synergies are fully realized and excluding ongoing amortization expense. We expect to achieve cost synergies of approximately $10 million, which will be fully realized by fiscal 2022, with anticipated synergy opportunities in distribution, selling and marketing costs, as well as general and administrative expenses. We will leverage the proven processes from our Comprehensive Continuous Improvement program, or CCI, to ensure we achieve these cost synergies. We expect to incur approximately $35 million of transaction and integration costs. Upon closing, certain transaction costs will impact earnings per share in the applicable fiscal year. We also expect to incur increased annual amortization expense of approximately $5 million.
In terms of our capital structure, we expect near term financing of the transaction to consist of a combination of cash on hand and commercial paper to be optimized next year as we evaluate our 2021 bond maturity. As Lawrence mentioned, we are on track to achieve our leverage objective of three times net debt to adjusted EBITDA by the end of fiscal 2020, absent the closing of this transaction. Based on our demonstrated track record of debt paydown from the Frank's and French's acquisition and our anticipated strong cash flow generation, we are confident that we will deliver on our acquisition plan. We are committed to a strong investment-grade rating, to paying down debt, and to continuing to grow our dividend as we have for the last 35 consecutive years.
We will continue to focus on our ratings targets and expect to continue exploring future acquisition opportunities, which are a key part of our long-term growth strategy. The transaction is expected to be completed within this calendar year as the Hart-Scott-Rodino waiting period has expired. During our January earnings call, we will update you further on the financial impact to fiscal 2021. Finally, we are confident Cholula is a great strategic addition to the McCormick portfolio, which will help us drive faster growth while being accretive to margins, as well as generating increased cash and creating additional long-term shareholder value. I'd like to now turn it back to Lawrence for some closing remarks before we move to your questions.
Thank you, Mike. To conclude, I'd like to recap the key takeaways as seen on slide 13. We have a proven track record of creating value through acquisitions and accelerating performance of acquired brands. We believe this combination with Cholula will reinforce McCormick's position as a global leader in flavor by broadening our portfolio in the attractive high growth hot sauce category and thus accelerate our condiment growth. Additionally, it will also generate meaningful margin and earnings accretion. Finally, as we've continued to highlight, we're building the McCormick of the future with an overarching focus on growth. The acquisition of Cholula will continue to support differentiated growth and performance, positioning McCormick for success in 2021 and beyond. Now I'd like to turn to your questions.
Thank you. We'll now be conducting a question and answer session. If you'd like to ask question today, please press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star two, if you'd like to remove your question from the queue. If you're testing using speaker equipment, it may be necessary to pick up your handset before pressing the question key. Thank you. Our first question is from the line of Ken Goldman with JP Morgan.
Hi, good morning, and thank you.
Good morning, Ken.
Good morning. I have two questions, if I may. First, you mentioned that the Hart-Scott-Rodino period had expired. I'm not an antitrust expert, but it's certainly a good sign. What does that indicate about where you are in the process with the government? I just want to make sure there's no additional meaningful regulatory or similar hurdles down this path.
Hey, Ken. It's Mike. I'll answer that one. I'm not a lawyer, but we did file early on the basis of a non-binding offer because we wanted to be in a position to complete this transaction on a timely basis. The waiting period has expired, and as we said in the script, that we're ready to close this calendar year. Really nothing significant in our way at this point.
Thanks for that. Unless I missed it, I didn't hear a comment on how the quarter was going so far. You have less than a week to go, if my timing's right. Yep. Is there anything you can tell us along those lines or are willing to today? I know it's not the subject of the call, sometimes companies volunteer to do that just when they do report major news like this.
No, Ken.
Mike, I'll let you take that.
Hi, this is Mike again. At this point, we wanted to focus on this acquisition. As you say, we're at the end of the quarter, but Thanksgiving's a big holiday for us, a lot of things happening. Our fourth quarter is our biggest quarter. We'll, in the January call, report our earnings and our guidance for next year, as we traditionally have done. We did say, however, though, depending on when the transaction actually closes, we could have some transaction costs hit in 2020.
Right. Okay. Thanks so much.
The next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.
Hi. Thanks and congratulations.
Thanks, Rob.
It's a great brand.
Good morning.
Yeah. Good morning. Some questions about how you're integrating this. Do they have a sales operation, and will you fold that into your food service selling operation? I know that you restructured food service selling when you bought RB. I would imagine there's some pretty big synergies there. Is that where the synergies are? Then I have a follow-up.
Mike, do you want to take the synergy question?
Yeah, I'll start off and then you can fill in.
Yeah.
The synergy we feel, similar to RB Foods where we had $50 million of synergies which we're able to achieve early, we have about $10 million of synergies here, and they come across the P&L, manufacturing, supply chain, SG&A. Things like A&P, which I know the previous owner has invested in, and we have a marketing excellence program so we can get CCI out of that. We have a pretty good program across all lines of the P&L. As far as structure, maybe Lawrence, you could take that as how that will kind of fold into our both consumer and our flavor solutions business.
We expect that through the integration period that we will retain the group. The management team at Cholula is a group that was brought in specifically by L Catterton to run that business, and so we don't expect that they're gonna stay with the business long term. We largely expect that the non-A&P portion of SG&A will not be incremental to our P&L beyond much more than a year. We have a very robust organization in terms of scale, and there are plenty of opportunities for people at Cholula to fit into that organization without incurring incremental cost, just as the normal kind of turnover that we experience in a typical year.
Okay, maybe I'll follow up.
Much like the acquisition of Lawry's, we would just expect minimal, very low level of incremental SG&A. There's a good bit of synergy there.
Got it. Also, I noticed that there was no mention of international opportunities for Cholula. I think with RB, you did mention that as one of the selling points of the deal. Can you give us an update on how the RB brands did internationally and whether or not they met your expectations and is there an opportunity here for Cholula?
Well, if I could speak to both, I'll say that the RB brands have certainly met our expectation for international. We continue to expand Frank's, and I'd say that the pleasant surprise in RB was on French's, where there seems to be more, I'll say, latent brand equity internationally than we had anticipated, and so maybe a bit more upside there, more driven by that. For this particular brand, 95% or maybe even more than that of the sales are in the U.S. There's a little bit of distribution in Canada. Surprisingly, virtually nothing in Mexico, even though it's a Mexican style, a Mexican made hot sauce. In our modeling, we did not build in any meaningful international sales, and I think that that's one of the potential upsides in our model.
What we expect is to drive continued strong growth in retail, building household penetration, and capitalizing on a growing interest in hot and spicy foods, especially by younger consumers. In restaurant, Cholula is a tremendous front of house brand, and we expect to continue building that. They're curiously under-penetrated in e-commerce and, of course, this is something we're quite good at, and we see that as a third significant growth opportunity.
Hey, Rob, we think the model's based primarily on the U.S., as Lawrence said, because we think there's a large amount of opportunity there. We will use the RB infrastructure we've put in place with that acquisition to help us drive Cholula in our markets such as Australia, U.K., and Mexico.
Okay, great. I'll pass it on. Thanks.
Thanks, Rob.
The next question's from the line of Alexia Howard with Bernstein. Please proceed with your questions.
Good morning, everyone.
Morning.
Hello, Alexia.
Hi there. Can I ask about the top-line momentum at Cholula? I mean, is this a brand that could be twice the size that it is? What's the magnitude of the distribution gains and revenue opportunity that you see? I mean, you've talked about e-commerce and opportunities to move regionally in the U.S. and different channels, but is this something that really could be meaningfully larger than it is today? And how fast is it growing historically?
Well, Cholula has had mid-single digit growth leading up to the COVID crisis. It went through the pandemic as many brands did, including many of ours. They had a strong surge on the consumer side of the business that has accelerated their penetration. 2020 is a little bit of an abnormal year if you look at the Nielsen. We expect to grow in the mid to high single digits for the Cholula brand and see quite a long runway of growth. I'm not sure how high up is. I mean, hot sauce as an entire category is growing in mid-single digits. Frank's is one of the fastest growers, so is Cholula. I think that there's a large opportunity. I hesitate to quantify just how high up is, but it's a lot bigger than it is today.
I think we'll follow the same playbook we have with Frank's and French's, and we can go into other categories, platforms. It allows us a lot of flexibility. Mexican cuisine is on trend with younger consumers and Hispanic, obviously.
Great. Thank you very much. I'll pass it on.
Next question's from the line of Andrew Lazar with Barclays. Please proceed with your questions.
Good morning, everybody.
Morning, Andrew.
Morning.
Hi. My sense is this brand under the owners prior to L Catterton, it really wasn't much of a core business for them. Obviously, when Catterton purchased this and brought in the management team to run it, my assumption is some pretty interesting early learnings on what this brand was sort of capable of. I'm curious if you have just maybe a couple of those learnings, maybe that the current management team kind of saw pretty early on with this business and maybe where they had some of their initial success, and to tell us kind of where the opportunity that remains, which it seems like it's sizable, where the opportunity that remains for you to take it to the next level.
I think that Catterton, so I don't want to get too specific for competitive reasons, in part, but certainly the owner before Catterton, this was really a sideline non-core business and a little bit of a hobby. Catterton brought a lot of professionalism to the business. Some really brilliant marketing thinking and some rigor around market research and consumer insights that they benefited from and that we will benefit from as well. They did some interesting things with price pack architecture that I think that we will leverage back into our brands as a great case study. They did a few interesting things with large restaurant operators that we'll leverage. I don't want to get too specific more than that.
Understood. It's also not that often you see a brand like this, to your point, that has so few sort of current flavor variants and so few SKUs on the shelf. It seems like that's where some of maybe the closer in opportunity could be sort of akin to what you've done with the Frank's brand in terms of package sizes, flavor variants, maybe some different formats and such. I know you've gone into a little bit about that, but maybe a bit more about what you were able to do or what you saw in the Frank's business along those lines that maybe has some similarities to where you can go with Cholula.
Right. One of the things that we've been able to do with Frank's is extend it beyond hot sauce. We have actually done Frank's frozen buffalo wings, which just seemed like a natural. We have launched as part of our innovation programs some Frank's frozen appetizers that have done really well. We've leveraged the Frank's flavors into the seasoning category and recipe mix category, which are core categories for us. We've leveraged Frank's with our flavor solutions customers, where we've done even some co-branded products using the Frank's underlying flavor in a way that's really proprietary. The branding really adds value to our flavor solutions customers' product. We can do the same with Cholula. If you just think about authentic Mexican food positioning here in the U.S., there are a lot of opportunities, I think, to extend this brand.
Thank you so much.
Next question is from the line of Faiza Alwy with Deutsche Bank. Please proceed with your questions.
Yes. Hi. Thanks. Good morning.
Morning, Faiza.
Two questions from me. One, on the top line. I'm more interested in the overlap between Frank's and Cholula, and how you intend to maybe run those two brands, what maybe the niches might be. I know you touched on this a little bit. Would love to hear more in your diligence, what were some of the differences you saw? Secondly, just on margins. How sustainable are the high margins at Cholula? I think you mentioned that there's third-party manufacturing, and I wonder if there's a plan to bring that in-house over time. You also mentioned potentially increased marketing. I'm curious on how you think about the margin opportunity beyond the initial synergies. Thanks.
Faiza, I'll take the first part of that question and let Mike talk about the margins.
Yeah.
In terms of the consumer overlap between Frank's and Cholula, these two brands are highly complementary to each other. The usage occasions and the consumer mindset around consumption are quite different and the two complement each other more than the other brands in the category do. I think that they'll work together very well. We've got a track record of working with multiple brands in the same category to address different consumer occasions and need states. I think that we're gonna be able to do that, and we'll find that it's possible for us to grow both of these at a high rate in a complementary way. Mike, you wanna take the margin question?
On the margins, Faiza. Obviously, Frank's and French's was also a very high margin business, and we got the same questions back then. We've been able, through our synergies and CCI programs, to keep the margins high. As far as third-party manufacturing, they have strategic suppliers. That's something we would look at. However, it's a low capital model right now, which drives ROIC obviously, so we'd have to balance that out and take a look at that over time as we learn more. I just want to make sure you heard us right on A&P. The previous owner has made significant investments in A&P to raise the brand. We didn't say we're gonna increase that necessarily. We said we would probably use our marketing excellence teams to really focus on areas that makes better sense for us and drive synergies that way also from our CCI program.
Okay, understood. Thank you.
Our next question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.
Hi, yes. Thanks. Good morning, everyone.
Morning, Adam.
I was hoping to just clarify the 2020 performance a little bit. You can see pretty sharp acceleration in the sales data at retail and Nielsen. Just in aggregate, help us understand what this business has actually done this year from both top line and EBITDA perspective.
Yeah, Adam, this is Mike. Just to put it in perspective, they're about two-thirds consumer, about a third food service. Obviously, food service, just like our food service piece of the business, which is 20% globally for us, has been hurt due to this pandemic. Their consumer side has done very well, obviously, as our consumer side has done. We normalized their EBITDA to make sure we took out any plus or minuses from this when we did our modeling. We were modeling this going forward based on their recovery keeping at mid-single digits to high single digits on both flavor, excuse me, food service and consumer. I think, just as you model, think about it that way.
Okay. All right. That's helpful. Then just on the plans going forward, when I pull up the ACV, it's already fairly high in the high 60s base per Nielsen. So is the opportunity less about just doors itself and more just optimizing the footprint on shelf and number of SKUs and the different sizes and flavor SKUs than just more doors?
Adam, I think that some of it's more doors. There is an opportunity. 60% for a brand like Cholula is still low, there's a great opportunity to build distribution. More than that, it's the household penetration gains and consumption rate that we expect to continue to build, as well as innovation beyond the existing product.
Okay. All right. I appreciate the color [response] . Thank you.
Our next question comes from the line of Chris Graff with T. Rowe. Please proceed with your question.
Hi, good morning.
Morning, Chris.
I just had a question just to follow on Adam's question there. Do you expect then fiscal 2021 sales to grow off of that $96 million base? I'm not looking for a number, just to understand, is there a unique COVID benefit this year? I realize you have some offset in food service. Is there a kind of adjustment that we need to make to fiscal 2021?
I think if I was thinking about-
So we expect-
Go ahead, Mike.
No I'm fine.
I was gonna say, I'll just say the top line and then I'll let you take it away. We do expect it to grow next year.
Okay.
We expect both segments to grow. Obviously, depending on the pace of recovery, lapping a strong consumer business this year might be a little more difficult, and it might be easier from a food service side, but a lot depends on what happens in the next three months.
Got it. Thank you. Just a quick follow-on. I'm just curious, in terms of the channel penetration and the breakdown of sales looks a lot like your own sales, and you indicated a revenue growth profile for each segment that's roughly mid to high single digits. Is there one channel you think in particular that's under-penetrated by the brand? It sounds like both should see some improvement, I'm just trying to get a sense of one over the other, if there's one that looks like a bigger opportunity here in the short term or maybe didn't get quite the focus under L Catterton's watch there.
Yeah. I'll tell you an under-penetrated and an over-penetrated, if you will. E-commerce is tremendously under-penetrated.
The previous owner, that was not a focus for them. Just, I mean, L Catterton, there's only so many things they could do. There's a tremendous opportunity for e-commerce growth. I'd tell you that, Cholula is heavier in food service than we are at McCormick as a company. I mean, it looks like our split between consumer and flavor solutions. Our flavor solutions is a broader, more diverse business.
Yeah
A huge component that's flavor house type business. In terms of actual food service penetration, it's a bigger part of their business. It's similar to the penetration that the RB Foods assets had when we bought them, more than McCormick as a whole. They've had an outside impact on the food service side from the pandemic.
Yep, understood. Okay. Well, thank you for the time this morning.
Great. Thanks, Chris.
Our next question is from the line of Rob Dickerson with Jefferies. Please proceed with your questions.
Great. Thanks a lot. I guess just the first question, in terms of the opportunity with retail and food service, would you say, if we think forward three years, you would expect the mix of the business, both food service and retail, to kind of remain about the same? Kind of the expansion distribution opportunity is similar, or could there actually be more in food service? That's the first question.
I think that if you're thinking about modeling, I think you should assume they're close to the similar split. If anything, there might be some acceleration on the consumer side. I think if you're thinking about them being pretty close, I think that's about right.
Okay. Great. It sounds like the margin profile is somewhat in the same ballpark, regardless of the channel.
That's right.
Not a material difference. Yeah.
Okay, cool. I guess just in terms of the transaction cost, sounds like that's more of a Q1 event, given just when you expect to be able to close. Obviously, some companies exclude those and call them one time. I feel like historically, you don't, you include them. It would seem like there would be either kind of this Q1 hit on the transaction cost, and then for the rest of the year, it's essentially kind of in line with what you're saying in terms of the top line and the accretive piece, assuming some run rate of synergies.
No, Rob, this is Mike. No, actually, if you go back to the RB Foods transaction, we did segregate transaction integration costs on a separate line. That is excluded from adjusted EPS. we would do the same.
for this acquisition, too.
Of course, it would be in there for GAAP, but.
Oh, yeah, exactly.
As far as the timing goes as to whether it's a Q1 event, we're saying we expect to close by the end of the year. We are still in our Q4, and it'll either be a Q4 or a Q1 event.
I got it. I guess just coming back to some of your prior comments for next year. I know Ken kind of asked it up front. Focus of the call is obviously on the acquisition, not next year. I did want to ask, I think on your last call, you had made a comment that you would still expect both segments to hopefully or potentially grow organically in fiscal 2021. Would you say those comments still hold, or we need to wait until you report your Q4?
I think at this point-
At the risk of sounding like-
Yeah.
I was going to say, at the risk of sounding like we're giving guidance, I want to be clear, we're not giving any additional guidance on 2020, which includes any change. We're not changing it.
Yeah. I just refer you back to the earnings call just in all clarity.
Okay. All right. Fair enough. Thanks a lot. Appreciate it. Happy Thanksgiving.
Thanks to you, Rob.
Happy Thanksgiving to you.
Our next question is coming from the line of Peter Galbo with Bank of America. Please proceed with your questions.
Hey, guys. Good morning. Thanks for taking the question.
You're welcome.
Just wondering, in terms of the food service exposure, if you could give us any help, just how it compares kind of quick serve versus kind of full service, maybe versus just your overall U.S. portfolio?
It would be less skewed to quick serve than our existing food service business. It would be more broad-based and oriented towards more of the kind of the whole Mexican cuisine group and less in fast food.
That's one of the opportunities.
Fast food is the wrong word. Less than quick service, right.
Got it. Okay. No, that's helpful. Mike, maybe you meant this in your comments, but maybe I heard it wrong. Are there any sourcing opportunities in the synergy guide? Like whether it's, I don't know, acquiring peppers more efficiently, anything on the raw material side to think about?
Oh, yeah. If you just look at our normal CCI program, a good chunk of that comes from our procurement teams over time. I think it's something we have assumptions in there on that. As I said before, we look at the whole P&L, so no stone left unturned.
Great. Thanks very much, guys.
Next question is from the line of David Driscoll with DD Research. Please just give your question.
Great. Thank you. Good morning, and congratulations on the transaction.
Thanks, David, and good morning to you.
Fantastic brand. A personal favorite. Wanted just to ask, Lawrence, could you pull this together? What is hot sauce revenues after you do this deal at McCormick and what's the rate of growth of this? I think it's fairly important to your overall story, but can you just give us some numbers?
Well, we're building a platform around condiments broadly, and hot sauce is the fastest-growing portion of that larger category. That's why it makes sense for us to be acquiring these brands. I actually don't have those numbers at my fingertips, David. Mike, do you have that?
No, I don't. I think, obviously, in some of our investment materials, we show pie charts of the consumer business and how much is condiments, and then you have to make an assumption that some of the branded food service and the flavor solution side is condiments too. You're right, it's getting more significant, but it's still part of a piece of the pie overall.
Mike, I feel like it's important not just from the sales profile, but this margin profile is just terrific.
Right.
It would be helpful maybe on the earnings call if you guys would dimensionalize those items, because I think it's important to your longer-term story. Lawrence, can you talk a little bit more about household penetration? You said 4% for Cholula. What's the Frank's household penetration to maybe give us some kind of mark out there as to where Cholula could head to?
Right. Well, Frank's household penetration is , did we not have that in the prepared remarks?
I'd say we didn't say what it is, Lawrence, but I'd roughly say it's close to the share, if we're 20%-25% and they're 9%-10%, it's approximately.
Yeah. They both have.
Pretty close.
Tremendous upside penetration. Their household penetrations are low compared to the awareness of the brands and the strength of the brands. The brands do so well because the loyalty is so high to these particular brands. Gaining new consumers really consumers have a long lifetime value, high lifetime value.
Okay, I believe this is true, that roughly 80%-ish of Cholula sales are the original flavor. I just want to hear your thoughts about these flavor proliferation. You actually said that you want to add more stuff, sometimes when I see these brands, I think the mistake made is not focusing on the original and just getting that message home because that original product is just so darn good, and it's not out far enough in terms of the total households.
Yeah, I agree.
just wrong about that?
No, I think some of the innovation ideas that we have are not necessarily just flavor extensions.
My broader point about pushing the original, is that the right way to think about what you do day one?
Well, sure. Look at what we've done with Frank's. Basically, we've grown the Frank's original, and there's the two powerhouses in Frank's are the original and the buffalo wing sauce.
Right.
The buffalo sauce, and we have driven those hard. I think you remember the first thing that we did when we bought Frank's was to optimize the retail distribution. We actually cut back on some of the flavors and some of the distribution on some of the flavors in order to get more of the original SKUs out there, especially the small size to create a low-risk entry point for consumers and the larger size for the real loyalists to get value. We swapped out some of the slower-moving flavors. Well, places where some of their flavor extensions were just not performing as well as we thought that these items would be, and it's been all part of building the brand. Yeah, focus on that core flavor profile is really important.
Okay, guys. I really appreciate the comments. Congratulations again. Thank you.
Thanks, David.
Thanks, David.
At this time, I'll turn the floor back to Kasey.
Thank you, everyone, for your questions today and for participating in today's call. If you have any further questions regarding the information, please reach out to me. This concludes our call today. We wish you all a good day, and we wish everyone a very safe and happy Thanksgiving.