Good morning. This is Kasey Jenkins, Vice President of McCormick Investor Relations. Thank you for joining today's first quarter earnings call. To accompany this call, we've posted a set of slides at ir.mccormick.com. At this time, all participants are in listen-only mode. Following our remarks, we will begin a question and answer session. If you need to reach the operator at any time during the call, please press star zero. We will 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 adjusted operating income, adjusted income tax rate, and adjusted earnings per share that exclude the impact of transaction and integration expenses related to the Reckitt Benckiser foods or RB Foods acquisition, special charges, and income taxes excluding certain non-recurring impacts associated with the recently enacted tax reform, which we refer to as the US Tax Act, as well as information in constant currency. Reconciliation to the GAAP results are included in this morning's press release and slides. In our comments, certain % are rounded. Please refer to our presentation, which includes the complete information. 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 statement also provides information on risk factors that could affect our financial results. It is now my pleasure to turn the discussion over to Lawrence.
Thank you, Kasey. Good morning, everyone. Thanks for joining us. Our first quarter results were a great start to the year, delivering strong sales, operating income, and earnings per share growth, as well as significant margin expansion. Our successful execution of our strategies and engagement of employees around the world have driven these results across both of our segments. We are confident they will continue to drive strong results as we go through the year. McCormick's business platform is growing and advantaged, as seen on slide four. Across all regions and categories, McCormick is flavoring food and beverages. Among the first quarter highlights across our portfolio, we are pleased with Frank's RedHot and French's performance and the impact they have on our portfolio of condiments and sauces and branded food service.
Further progress has been made on expanding our Flavor Solutions portfolio with additional growth in flavors while pruning some low-margin business. We're also continuing to win with restaurant customers with new products in all of our regions. In our consumer segment, we continue to grow our underlying business in every region. We're confident that the breadth and reach of our portfolio continues to position us to fully meet the demand for flavor around the world and grow our business. Now let me go into more detail on our first quarter performance on slide five, as well as provide some business comments before turning it over to Mike, who will go in more depth on the quarter end results and our update to 2018 financial guidance.
As we said on our year-end earnings call in January and at CAGNY in February, we have confidence in our strategies and are well positioned to deliver strong results in 2018. You can see this beginning to come through in our first quarter performance with strong double-digit sales growth, operating profit growth, margin growth, and EPS growth. Starting with our top line for the first quarter, we grew sales 19% with a 4% benefit from favorable foreign currency. In constant currency, sales grew 15% for the total company, with strong results across both segments across each of our three regions. Base business growth, new products, and acquisitions, our three drivers of long-term sales growth, were all contributing factors. Incremental sales from our acquisitions, RB Foods, and to a much smaller extent, Giotti, contributed 12%.
In our consumer segment, we grew sales nearly 15% in constant currency, led by incremental sales from RB Foods, which contributed 13% growth. The Flavor Solutions segment grew sales 15% in constant currency, with incremental sales from RB Foods and Giotti contributing 12%. In addition to our top-line growth, our focus on profit realization drove additional adjusted operating income growth and adjusted operating margin expansion. With our higher sales, cost savings led by our Comprehensive Continuous Improvement program, CCI, and our portfolio shift to more value-added products, including the addition of Frank's and French's, we grew the first quarter's adjusted operating income 38% in constant currency, and our adjusted operating income margin expanded 250 basis points. Both segments contributed double-digit adjusted operating income growth and a triple-digit basis point expansion in adjusted operating margin.
At the bottom line, our first quarter-adjusted earnings per share of $1 was 32% higher than the $0.76 in the first quarter of 2017. Our strong growth in adjusted operating income and a lower tax rate drove this increase, partly offset by higher interest expense from debt related to the RB Foods acquisition, as well as higher shares outstanding. Our sales follow a seasonal pattern, with the first quarter generally the lightest in most of our product categories. Our strong results are in line with our expectations and the guidance we've provided, and our outlook for 2018 performance remains strong and unchanged. We do, however, now expect a greater sales impact from favorable currency rates, and we've recognized discrete tax benefits. As Mike will discuss shortly, we are raising our guidance for sales and adjusted EPS accordingly.
Now I'd like to turn to a business update, and let's begin with our Frank's and French's portfolio on slide six. We continue to be pleased with our progress and with the early results from Frank's and French's. On February 1st, we successfully cut over to our systems. We completed our transition services agreement with Reckitt Benckiser earlier this month, and we now have full control of the operations. We continue to be on track to achieve $50 million of cost synergies, realizing the majority by 2020. As we mentioned on our January earnings call, our 2018 synergies are pacing ahead of expectations. In the first quarter of 2018, both Frank's RedHot and French's Consumption continued to be impacted by the previous owner's planned reductions in trade support and promotional activities, which we mentioned on our January earnings call.
With that said, our first quarter Frank's and French's results are in line with our plans. We are off to a great start. We're excited about our planned programs, growth opportunities, and the impact we'll make on these brands, starting with the grilling season. At CAGNY last month, I shared some of our plans related to Frank's and French's, and I would like to reiterate a summarized version of them. We're increasing the fuel to drive Frank's RedHot. Despite being number one in hot sauce, we believe there remains significant upside for Frank's in awareness, trial, and household penetration. We'll strengthen working media and regional programs behind a proven, irreverent campaign to build awareness and trial. Frank's under-indexes on the store shelf. Utilizing our category management, we are already increasing distribution points.
We've had great acceptance of promotional plans by customers too, and we plan to drive core innovation on new flavors and expand beyond liquid flavor with a line of dry seasonings, recipe mixes, and refrigerated dips. There is an exciting longer-term pipeline of new concepts developing too. Frank's also had almost no e-commerce presence, and we're building this exciting brand into our e-commerce efforts as well. Re-energizing French's Mustard category leadership is already underway. We're launching a new consumer campaign that reinforces French's preferred flavor being the trusted family favorite and roots as a pure product, which we will support with increased working media. We're applying a category management focus to improve distribution and share of shelf, realign shelf pricing, and increase levels of quality merchandising. We already have some early wins with key customers.
We'll increase innovation, and we will go beyond the bun and reframe mustard as better for you with McCormick's proven ability to drive flavor and recipe trends with consumers. We'll leverage promotional scale across all of our brands, including the launch of our biggest grilling campaign ever for this summer. With a stronger go-to-market model in food service, we'll leverage the full portfolio across operators. Internationally, we're integrating the Frank's and French's portfolio into the McCormick global network, and we've seen early successes in several of our markets. We are well positioned to capitalize on the opportunities for growth and cost savings now. Our enthusiasm across the organization for this acquisition and our confidence that the combination of our powerful brands will deliver significant shareholder value only continues to strengthen.
In the consumer segment, we grew sales nearly 15% in constant currency, with incremental sales from RB Foods contributing 13% and our base business and new product growth contributing 2%, with growth in every region. In the Americas, growth was particularly strong, driven by the large impact of RB Foods brands, which contributed 20% growth. Our underlying Americas business grew almost 2% on both higher volume and mix and pricing, and we believe we undershipped consumer consumption due to trade inventory reductions. In U.S. spices and seasonings, our IRI data indicates scanner sales through grocery channels for the category and McCormick branded were both over 4%. Outside of grocery, a large retailer's decision to convert a control label to private label, along with related promotional and merchandising actions, which we discussed on our January earnings call, reduced McCormick's multi-outlet sales growth to 2%.
While this decision hurt our branded spices and seasonings share performance, it drove growth in our private label sales. We again had strong branded growth in grocery and strong growth in unmeasured channels, including club, e-commerce, and Hispanic markets, as well as in other areas of the portfolio. The environment remains dynamic, and we continue to work with our customers to optimize category performance. Overall, we continue to see good growth in our spice and seasoning brands in the U.S. market and know we have more room to grow. We remain confident in the initiatives we have underway to position us to continue our trajectory of long-term growth. In Europe, Middle East, and Africa, the EMEA region, growth was led by France, which had broad-based growth across their portfolio, branded and private label.
Our launch last year of organic core herbs and spices and homemade dessert products in France has been very successful. Our rate of sales is approximately 60% higher than a main organic competitor on both our Ducros and Vahiné brands. Our extension of Thai Kitchen into France to capitalize on the fast-growing ethnic food trend has also contributed nicely to growth. In the Asia Pacific region, our strong sales in China led consumer segment growth, driven by a strong Chinese New Year promotion as well as e-commerce growth. India has also continued their momentum on spices and seasonings. Across our consumer segment, we're differentiating our brands and building capabilities. In 2018, we are continuing to drive growth through additional investments in brand marketing, category management, and analytical capabilities, and of course, innovation and new products.
We have a robust global pipeline of consumer innovation and new products being introduced in 2018, as seen starting on slide eight. We're strengthening our spices and seasoning leadership through packaging innovation in the U.S. and in EMEA. In the U.S. this year, we'll launch digitally connected labels with new graphics. This graphics update contemporizes the look of McCormick red cap at the shelf and will be digitally scannable, allowing consumers, through their smartphones, to immediately connect to our own sites for information on everything from transparency and sourcing of our ingredients, to usage ideas and inspiration. Our Schwartz brand in the U.K. and Ducros brand in France will be launching our first choice packaging initiative, a major structural and design change. Consumers prefer the modern feel and functional design of the new glass bottle and closure.
It features the transparency and quality of the spices and herbs inside, while also utilizing a new closure that reinforces freshness use after use. We're expanding our organic range even further. In the U.S., we'll be launching organic black pepper and garlic products, and following our success in France, we'll launch organic products in the U.K. and Poland. We're introducing new flavors and varieties. Consumers are looking for easy ways to make their favorite dishes and explore new flavors. Seasoning blends are becoming more popular to deliver both this convenience and add a creative flair to any dish. Additionally, consumers are looking for the right sizes and packaging formats to take the risk out of experimenting with new flavors or to find value in something they already use.
Some examples of our launches to meet these demands include a line of all-purpose blends in the U.S. that combine a few simple ingredients into innovative seasonings, and in Canada, a similar line of Club House signature blends. With a fresh approach to black pepper, we're introducing a range of pepper items in the U.K. segmented by flavor and heat level. In China, we're strengthening our range of spices and herbs with the relaunch of our grinders. While in Australia, we'll be launching seasoning mixes to combine with meats and vegetables in a convenient one dish tray bake meal. For trial and value in the U.S., we're launching McCormick Gourmet Flavor Forecast seasonings in small size resealable pouches, as well as larger sizes of our popular Grill Mates rubs. We're also continuing to drive growth globally through e-commerce, across pure play with brick and mortar customers, and direct-to-consumer.
We're continuing to make further investments to drive content, expand resources to support acceleration, and develop programs and items tailored to this channel. We had strong double-digit growth in e-commerce in the quarter. Following the launch of China's direct-to-consumer storefront on Tmall, we're designing products for this platform, such as one pot rice cooker seasonings which will be available soon on the storefront. As we announced at the recent CAGNY Conference and shown on slide 10, we are re-introducing our industrial segment as Flavor Solutions, and I'd like to reiterate the key points for this change today. McCormick Flavor Solutions is a culinary-inspired flavor business. We have deep understanding of the consumer experience of flavor from real food and natural ingredients, and leading technology that delivers consumer preferred solutions for our customers. We are not a bulk herb and spice or commodity business.
We're one of the top global flavor suppliers to the food industry today. Our culinary approach to flavor development sets us apart. We have a world-class global culinary team of executive and research chefs, mixologists and culinary nutritionists who work closely with our customers and innovation teams. They excel at translating global trends into prototypes that meet the customer's unique requirements and deliver superior and differentiated flavor experiences. Our deep expertise in the consumer experience of real food and beverage is central to all of our innovation and our success. Starting with real food and beverage, our Flavor Solutions segment produces authentic, complex, natural flavor solutions that resonate with consumers. Flavor development at McCormick combines the art of creating iconic flavor authenticity with the science of delivering a superior eating experience. Today's consumers are demanding transparency and flavor that's natural and clean.
Our Flavor Solutions segment provides simple, transparent solutions that deliver the results our customers need. We continue to work side by side with our customers to help them in their quest to reduce or eliminate MSG, sodium, sugar, fat, and artificial ingredients from their iconic products. Because our approach to clean is rooted in our expertise in the science of food and natural ingredients, the proprietary technology platform that we have built enables us to solve these issues without sacrificing the winning flavor profiles that make the product successful. For us, clean flavor really does mean clean flavor. Our strength in customer intimacy is also a key differentiator for Flavor Solutions. Innovation that really delivers against a customer's brand promise requires both a deep understanding of the customer's unique goals and challenges, and an exceptional ability to collaborate.
Whether we're partnering with a global or mid-tier customer, our focus is on ensuring best-in-class collaboration experience. It is for these reasons that new products are a significant growth driver. The Flavor Solutions segment grew sales 15% in constant currency in the first quarter, with incremental sales from RB Foods and Giotti contributing 12%. In the Americas, we increased sales of flavors with new products and continued momentum of our branded food service and Mexico snack seasonings growth. In our EMEA and Asia Pacific regions, we continue to win with our customers through new products and promotional activities, particularly with quick service restaurants. We're continuing to refine and optimize our portfolio, increasing our sales of higher margin flavors and exiting lower margin business. Across our Flavor Solutions segment, the migration of our portfolio to more technically insulated and value-added categories will continue in 2018.
We've already realized further results against this strategy in our first quarter, with flavor sales up double digits in North America. Beyond our strategies to drive sales growth, we'll continue to focus on profit realization, as is evident in our first quarter results. Now, I would like to highlight some recent news on slide 12. Our performance is not just evident in our financial results. We are also doing the right thing for people, communities, and our planet. We've been recognized as a leader in sustainability, named for the second year in a row, the number one ranked food products company on the Global Sustainability Index at the 2018 Davos World Economic Forum. In February, we were also recognized on Barron's inaugural 100 Most Sustainable Companies.
Our power of people principle embodies our commitment to our employees and our high-performance culture, rooted in respect for their contributions and our shared values. Keeping McCormick a great place to work is one of our priorities, along with remaining competitive in the marketplace. As such, we are investing a portion of the benefit of the US Tax Act into a bonus of $1,000 and wage adjustments for the majority of our U.S. hourly employees. Mike is now going to provide some more details on the financial results for the quarter and on our financial guidance. Before I turn it over to him, let me provide a few summary comments on slide 13. At the foundation of our sales growth is the rising consumer demand for flavor.
We are aligned with the consumer's increased interest in bolder flavors, demand for convenience, and focus on fresh, natural ingredients, as well as with emerging purchase drivers, such as greater transparency around the sourcing and quality of food. With this increased interest, flavor continues to be an advantaged global category, which combined with our execution against effective strategies, will drive strong results as we go through the year. We're balancing our resources and efforts to drive sales with our work to lower costs to build fuel for growth and higher margins. Our first quarter financial results across both our Consumer and Flavor Solutions segments were a strong start to the year. We have confidence in our fiscal year outlook and are well positioned to deliver another strong year in 2018.
Around the world, McCormick employees are driving momentum and success. I thank them for their efforts and for their engagement. Thank you for your attention. It is now my pleasure to turn it over to Mike.
Thanks, Lawrence. Good morning, everyone. As Lawrence indicated, we delivered strong growth with our first quarter results. I'll begin with a discussion of our results. Then follow with comments on our current full year 2018 financial outlook. As seen on slide 15, we grew sales 19%, including a 4% favorable impact from currency. Acquisitions, pricing, and higher volume and product mix each contributed to the increase. Both our Consumer and Flavor Solutions segments delivered strong top-line growth, with increases in all three regions within both segments. We have also started the year with significant increases in adjusted operating income and adjusted earnings per share, as well as significant operating margin expansion. The Consumer segment grew sales 15% in constant currency. Our acquisition of RB Foods contributed 13% of the sales growth.
On slide 16, Consumer segment sales in the Americas rose nearly 22% in constant currency versus the first quarter of 2017, with 20% of the increase from the acquisition of RB Foods. The remaining increase was driven by pricing related to the incremental impact of 2017 pricing actions and higher volume and product mix. EMEA consumer sales increased to 1% in constant currency. The sales growth was driven by growth in France, within both our branded portfolio and private label, as well as the acquisition of RB Foods. Partially offsetting these increases was an impact from the timing of trade promotional activities. We grew consumer sales in the Asia Pacific region 6% in constant currency. In China, sales increases were driven by successful Chinese New Year holiday promotions. Sales growth in India was led by increased sales from our new consumer spice mixes.
For the Consumer segment in total, we grew adjusted operating income 35% to $132 million. In constant currency, adjusted operating income rose 32% from the year ago period. The impact of sales growth and cost savings more than offset increases in brand marketing and freight costs. As Lawrence mentioned, we expanded our consumer adjusted operating margin compared to the first quarter of last year by 220 basis points. Turning to our Flavor Solutions segment and slide 20, starting with sales growth, we grew constant currency sales 15%. Our acquisitions of RB Foods and Giotti contributed 12% of the sales growth. In the Americas, RB Foods drove 17% of the 18% constant currency increase in the first quarter's Flavor Solutions sales. The remaining growth was driven by U.S. flavors and branded food service sales, as well as sales of snack seasonings in Mexico.
Partially offsetting this growth was a major customer's global realignment of our Flavor Solutions sales, effectively transferring those sales from the Americas to the EMEA region, and the elimination of some low-margin business due to the continued migration of our business to higher margin products. We grew Flavor Solutions sales in EMEA 12% in constant currency, with Giotti and RB Foods contributing 4%. We had solid growth with quick service restaurants and within our flavors category. Sales growth was also favorably impacted by the global realignment of the major customer sales from the Americas to EMEA, as previously mentioned. Asia Pacific region's Flavor Solutions sales grew 4% in constant currency. Led by strong new product sales to quick service restaurants in China, with a partial offset from the exit of low margin business in the region.
As shown on slide 24, adjusted operating income for the Flavor Solutions segment ended the quarter up 56% at $62 million, with a 4% favorable impact from currency. The increase was driven by the favorable impact of higher sales, a shift to more value-added products, and the impact of our CCI program, led to adjusted operating margin expansion compared to last year of 320 basis points. Across both segments, adjusted operating income, which excludes the integration costs related to the RB Foods and special charges, rose 41% in the first quarter from the year ago period, including a 3% favorable impact from currency. This increase includes the impact of increasing our brand marketing by 18% in the first quarter. As Lawrence mentioned, our focus on profit realization has driven significant margin expansion.
As seen on slide 26, in the first quarter, we increased gross profit margin 240 basis points year-on-year. While this expansion includes an accretion impact from the addition of the Frank's and French's portfolio, the core business was also a significant driver of the margin growth. Our portfolio shift to more value-added products and CCI-led cost savings continue to drive gross profit expansion across both our segments. Our Selling, General and Administrative Expense as a percentage of net sales was down year-on-year by 10 basis points from the first quarter of 2017. Leverage from sales growth, as well as CCI-led cost savings drove the decline, partially offset by the increase in brand marketing I previously mentioned, as well as absorbing increased freight costs driven by constrained carrier capacity.
With the gross margin expansion and SG&A leverage, adjusted operating margin expanded 250 basis points from the first quarter of 2017. Below the operating income line, interest expense increased to $27 million in the first quarter from the year ago period, primarily driven by the debt secured for the RB Foods financing. Turning to income taxes on slide 27. Our first quarter adjusted effective tax rate was 18.9% as compared to 27.9% in the year ago period, and included a favorable impact from the US Tax Act, which reduced the U.S. corporate tax rate from 35% to 21%. Our first quarter adjusted rate was lower than anticipated, principally due to the higher than anticipated stock option exercises, as well as the favorable impact of other discrete tax items. As a result, we now expect that our adjusted effective tax rate for the full year will approximate 23%.
There can be volatility in that rate quarter to quarter due to the impact of discrete items, such as stock option exercises and changes to our forecasted mix of earnings. Income from unconsolidated operations was $8 million compared to $7 million in the first quarter of 2017, a 16% increase led by our joint venture in Mexico. For 2018, we continue to expect our income from unconsolidated operations to be comparable to 2017. At the bottom line, as shown on slide 29, first quarter 2018 adjusted earnings per share was $1, up 32% from $0.76 for the year ago period, mainly due to higher adjusted operating income and a lower adjusted income tax rate, partially offset by higher interest expense and shares outstanding. On slide 30, we've summarized highlights for cash flow and the quarter end balance sheet.
Our cash flow from operations was an outflow of $21 million for the first quarter of 2018 compared to an inflow of $44 million in the first quarter of 2017. This change was driven by timing associated with certain working capital payments, as well as a higher level of interest payments. These interest payments associated with the financing of our RB Foods acquisition are more heavily weighted in our first and third fiscal quarters. We continue to see improvements in our cash conversion cycle, finishing the first quarter at 73 days, down three days versus our fiscal year end, primarily driven by our extended terms and inventory programs. We returned $68 million of cash to shareholders through dividends and used $31 million for capital expenditures this period.
We expect 2018 to be another year of strong cash flow. Our priority is to continue to have a balanced use of cash, making investments to drive growth, returning a significant portion to our shareholders through dividends, and to pay down debt. Let's now move to our current financial outlook for 2018 on slide 31. Our strong outlook for the year is unchanged, except for a more favorable impact of foreign currency exchange rates on sales, a lower adjusted income tax rate, and a lower net favorable non-recurring impact of the US Tax Act. We now estimate a favorable impact to the net sales growth rate of 2%, up from our original estimate of 1%. As I mentioned earlier, we now expect that our adjusted effective tax rate for the full year will approximate 23%.
Finally, related to our GAAP earnings per share, the net impact of two non-recurring items required by the US Tax Act, the favorable non-cash impact of the revaluation of our U.S. net deferred tax liabilities, less the unfavorable impact of our transition tax. This net impact is now expected to be a tax benefit in 2018 of approximately $298 million. Our previous sales growth guidance of 12%-14% included an 8% incremental impact of the RB Foods acquisition, underlying base business and new product growth of 3%-5% from higher volume, product mix, and pricing, as well as a one percentage point favorable impact due to currency. We now expect to grow sales 13%-15%, including our updated estimate of a two percentage points favorable impact from currency rates.
We expect a low single-digit increase in material costs, which combined with CCI and strategy execution on shifting to a more value-added portfolio, leads to 2018 adjusted gross profit margin that is projected to be 150-200 basis points higher than 2017. We expect to increase adjusted operating income 23%-25% from $786 million in 2017, which includes a one percentage point impact from foreign currency rates. Our cost savings target is approximately $100 million. We are planning to increase brand marketing at a rate above our sales growth. Our original guidance for 2018 adjusted earnings per share was $4.80-$4.90, an increase of 13%-15% versus our $4.26 adjusted earnings per share in 2017. This range of growth included an estimated one percentage point impact from favorable currency rates.
Based on our new effective tax rate estimate, we are increasing our adjusted earnings per share estimate to $4.85-$4.95, an increase of 14%-16% versus 2017, which includes an expected one percentage point impact from favorable currency rates. Overall, we expect currency favorability to be greater in the first half of the year than in the second half. For the fiscal year, we expect our higher profit and working capital initiatives to lead to another year of strong cash flow. In summary, we are projecting excellent growth in our 2018 constant currency outlook for sales, adjusted operating profit and adjusted earnings per share, following record double-digit performance across each objective in 2017. Our 2018 GAAP earnings per share range is projected to be $6.85-$6.95. There are several projected 2018 adjustments which are expected to drive our GAAP to non-GAAP reconciliation.
First, approximately $23 million for the integration expenses related to RB Foods, which is in line with our previous estimate. Second, approximately $18 million of special charges related to previously announced organizational and streamlining initiatives. As I mentioned a few minutes ago, the net impact of two non-recurring items required by the US Tax Act is currently expected to be a tax benefit in 2018 of approximately $298 million. The total net impact of these adjustments is anticipated to be a $2 favorable impact to our GAAP earnings per share for fiscal year 2018. Finally, before we move to your questions, let me recap the key takeaways from our remarks this morning. With our first quarter results, we have a strong start to the year for both our core business and our Frank's and French's portfolio.
We are delivering against our plans for both sales and profit realization and are confident in the momentum of our business. Our updated outlook reflects a more favorable impact on sales from foreign currency and the benefit of a lower first quarter tax rate on our full-year adjusted earnings per share. This reaffirms our strong 2018 outlook for our underlying sales, adjusted operating income and adjusted earnings per share growth. Let's turn to your questions.
Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your questions.
Hi, thank you for the question. I was hoping to get a little bit of an update on revenue synergies. I think EMEA was up about 1% as a result of RB Foods. Lawrence, would you consider that revenue synergies? If so, can you help us quantify it? Is it $8 million or $9 million or so? Secondly, on the bonuses that are being given to hourlies, was that part of your original guidance? Can you give us a sense of how it affects operating income for the year? Thanks.
Hey, Rob. Well, first of all, good morning. Regarding the RB, we don't have anything new to report on RB. We're really tracking right on our plans for RB, both from an internal budget standpoint and from the model that we built when we bought the business. We hit a couple of important milestones this quarter, as we mentioned on the call, with the transfer to our systems. We put the business on our SAP systems and with the end of the transition services agreement that really gave us control of the business. Regarding the 1% in EMEA, again, I struggle with calling it a synergy. We built a certain amount of growth into our plans for RB, and we're still confident in getting those. I think that we're on track with that.
On the international part of the business, the biggest, I'd say, net positive story that we had for the quarter outside of the U.S. business was in Mexico
Where we transitioned the business to our longstanding joint venture partner down there and have gotten off to a very strong start. I wouldn't say that the EMEA, I would say is more of what we had originally planned for the business. It's part of its wrap of the existing business that was there, and their sales team just starting to get traction on that. Regarding the hourly bonuses, that original guidance did not contemplate that, but our current guidance does reflect the full impact of tax reform, including that. When we gave that initial guidance, the Tax Reform Act was still new. We were deciding how we were going to use it.
We said we would make investments in growth and in making ourselves more competitive, and that we'd use the majority of the benefit, though, to pay down debt, which would mean dropping it down to the bottom line into cash. That is still our plan. Nonetheless, we thought that this was a good and prudent action for us to take as well. Mike, do you want to elaborate on that at all?
I think as you said, it's included in our guidance and I'll leave it at that.
Just quantitatively, I think I said $7 million. Is that roughly the new expense that we should be thinking about in the guidance?
No, way less than that.
Way less. It's not material.
Okay. All right. Thank you.
Our next question is from the line of Alexia Howard with Bernstein. Please proceed with your questions.
Good morning, everyone.
Hi, Alexia.
Hello there. I just wanted to ask about what are the risks to the margin expansion from here? Compared with a lot of the maybe more U.S.-centric food companies, you seem to be defying gravity on margin expansion across many pieces of the business. Is it that your commodity costs are a little bit more favorable, or are there other more favorable dynamics, I guess, with operational leverage from volume expansion? Also more specifically, what are the risks to margin expansion going forward given the more challenging retailer environment, particularly in the Americas? Thank you, and I'll pass it on.
Hey, Alexia, it's Mike. I'll take the first crack at it. As we mentioned, a significant part of the margin expansion was due to RB Foods. The accretion we're getting from that has come through our P&L, and we really like that. Our underlying business has been strong, as you alluded to. We've had really good CCI performance. That is our fuel for growth, as we talked about, and last year we hit $117 million, and we're off to a strong start in the first quarter of fiscal 2018. We've also seen a shift, as we talked about, a shift to some higher value products across our portfolio, especially on the McCormick Flavor Solutions side of the business. If you think about it, we had mid-single digit inflation last year, we took pricing mid last year.
We've had some positive wrap that's happened in the first half of 2018. That's helped the margins on the core business. As far as risk going forward, we have low-single-digit cost increases this year. We have low-single-digit pricing planned. The environment, as you alluded to, is more difficult than it has been in the past from a retailer perspective. It's a lot more fact-based selling. We feel that all these price increases are justified and are supportable. Frankly, most of our pricing impact this year is from pricing actions we implemented in 2017.
Great. Thank you very much. I'll pass it on.
If I could just elaborate on that, I don't want to miss the fact that there's been portfolio migration. We've had great growth in the high margin end of our business, and we've actively discontinued some low margin business. We have a strong overall growth rate this year, we're taking advantage of that to use this as an opportunity to get rid of some low margin business, which has a slight dampening effect on the sales line, but which really runs through, and you can just see it in the margins that we're achieving. We think this is pretty sustainable.
Great. Thank you very much. I'll pass it on.
Our next question comes from the line of Ken Goldman with J.P. Morgan. Please proceed with your questions.
Hi, good morning.
Good morning. Is that Ken?
Hey, guys. There's been a lot of discussion lately, obviously, about maybe the balance of power between manufacturers and retailers in the food at home industry. You guys obviously have some of what I would consider the best brands in food at home. If you look at a couple of different things, right, we had a deload, your pricing this quarter was up by the lowest amount, by my model anyway, in over 7 years. If you look at your LTM receivables as a percentage of sales, they've been creeping up too, even before the RB deal. I guess I'm just trying to get a sense in your opinion, I know we've talked about this a little bit in the past, but are these trends, these factors, are they somewhat one-time in nature?
Obviously, the deload is. Has it really become, is this indicative to some extent of how much more difficult it is to manage these customer relationships than it used to be? I'm just trying to get a sense of how much the world continues to change, because it feels like every week we're hearing about more and more maybe manufacturers unable to pass on pricing.
Well, there's always an appropriate amount. I think we've used the word commercial tension in the discussion of pricing with customers. I would say that the environment, it's pretty challenging, for any kind of general price increase, you're going to get a lot of pushback. That's pretty hard. Now, the reason there's not that much pricing in our quarter is that most of the pricing that we've got, as Mike mentioned, is a wrap. The pricing that we've taken has been more of a surgical nature that has been justified by commodity increases. Our commodities are different than everybody else's commodities. Those increases have been fairly specific and we've really been able to get the pricing away. I'm not saying that it was easy. I'll say just the opposite, that these are challenging conversations with the customer.
We're still able to get the pricing that we need to get to cover commodities. On the industrial side of our business, we tend to operate with transparency on cost so the customer understands where the cost is coming from. Many of our longer-term customers, their exposure to commodity is really booked back-to-back. We'll take coverage of the physical commodity to back up their needs. Really, the pricing discussions across the full spectrum of our business, while challenging, are pretty well managed. The deload that we mentioned really has nothing to do with pricing or balance of power. In the U.S. in particular, trade inventories did come down during the first quarter. I'm talking about in the consumer side of the business. I think others have commented on this. It's no secret that everyone's trying to be more efficient with their working capital.
We certainly are, our customers are as well. Especially around the end of a fiscal year, there's a lot of pressure on customer inventories as they're trying to, I'll say, dress up their year-end numbers. That falls into our first quarter, which is our lowest volume quarter of the year. It does have a meaningful impact. We estimate that actually, the customer inventory drawdown in the first quarter of the year was about a 2% headwind on our consumer business, which means that versus the actual consumption, it took up about half of the growth that we would have otherwise seen. I'd say that we're not overly worried or surprised by that.
We saw a similar pattern last year, where in the first quarter of the year, there was a strong drawdown of trade inventory, and then relatively flat for the rest of the year. I would hope to see a similar pattern this year. Now, Rob, you mentioned something about receivables I didn't really understand.
I can follow up with that afterward. It's not a big deal. I just had one quick follow-up, and that's a very helpful answer. When you said it was about 2% of consumer, was that total consumer or Consumer Americas? If it was total consumer Sorry?
Consumer Americas.
Consumer Americas. Okay. Thank you very much.
Ken, just one follow-up on your point on pricing, where you talked about it being a low pricing quarter. Last year's mid-single-digit price increases really were driven a lot by vanilla, and we saw a lot of vanilla in the second half of the year. First quarter, we don't sell a lot of vanilla, so that's the reason for the percentage is a little less than it might have been last year.
Thank you.
The next question today comes from the line of Jonathan Feeney with Consumer Edge. Please proceed with your questions.
Hey, good morning. Thanks very much.
Hey, Jon.
You've had some pretty impressive growth in the Flavor Solutions business. I know part of that, going back historically, has been strength in your one key, but several quick-serve customers. Overall, it seems like you're gaining a little bit of share and certainly emphasizing that a little bit more. I'm wondering, Lawrence, about the competitive landscape. When you talk about the new capabilities you're bringing to customers, are you typically winning new business from other players? Or as you move up market, not to just the coatings and ingredients where maybe people have thought of your business historically to more flavor systems, where are you sourcing that business? Is it competitors, or is it new business wins? Thank you.
Hey, Jonathan. For us, it's new business wins, but there's no such thing as a white space out there. Those new business wins from us are definitely coming from other competitors. Flavor is a growing business, so I expect that flavor on the industrial side is growing as well. We're definitely winning new business. Even within our existing customer base, I believe we're continuing to win. The new customers that we've added, we're definitely gaining share in that part of the business. We really wanted to call it out because I think that this has been something that's been underappreciated. For the last three years, we've made a real concerted effort to be more of a value-added flavor supplier, more of a flavor house, and to migrate away from some of the legacy commodity business that was in that industrial business.
Yes, I believe these are share gains. Mike, do you want to-
Thank you.
Our next question comes from the line of Chris Growe with Stifel. Please proceed with your question.
Hi, good morning.
Morning, Chris.
Morning, Chris.
Hi. I just wanted to ask, and just to be clear on a bit of a follow-up from an earlier question, it sounds like you expect the inventory levels to remain at these low levels going forward. This is the second year of a reduction, though, early in the year. Are they too low? We've heard this from other companies that at times they're reaching down to quite low levels in relation to the shelf being fully stocked. Are you seeing any issues with that at retail right now?
That's a good point. I think with individual customers, they very often do overshoot and come back. I don't want to get too caught up in individual customer anecdotes. When you roll it all up together, the general trend of trade inventories is downward. Everybody's applying new technology and putting greater emphasis on trying to be more efficient. There is a general downward trend. Just looking back at our historical data, seeing that the impact tends to be biggest in our first quarter. Again, it's the combination of most customers having their year-ends then, and it's our lightest seasonal quarter of the year. That is a factor, but we don't generally see it coming back over the course of the year. There is a downward step in inventory. How low is too low for the industry? I don't know.
Once the inventory's taken out, it's out. To continue to have the same impact, they've got to take out another chunk of inventory. We think that this is a long-term trend and, frankly, it's not a surprise to us. We think that it's actually healthy for the industry.
There's been a lot of consolidation in the industry, too. Some recent bankruptcies too, that takes out inventory in the supply chain and it really drives us to drive our CCC favorable. We're doing the same thing.
Just another question if I could, in relation to, you discussed more value-added products, I think in relation to the gross margin performance. I'm just curious about the private label performance versus the brand performance for McCormick. Have we lapped that conversion of that large customer to private label? Is that an ongoing negative for the business? Is it due to their promotional efforts or due to the actual still lapping of that label change?
Well, first of all, that label change, we have not lapped it. That was a label change that really happened mostly over the last quarter. It started in the fourth quarter and was fully in effect, really, I want to say maybe not even fully in effect for this quarter. It might've been only partially in effect for December. No, we haven't lapped it. Two things happened there. First was the conversion from a control brand to private label. For us, that was financially neutral. That control label already had a margin structure that was comparable to our private label. You know we're a large supplier of private label in herbs and spices. This is a profitable business for us. It does not have the same gross margins as brands, but it has a decent operating margin, and the impact of that label change was really neutral.
The part that hurt is that there was a decision by the customer to do some extraordinary pricing and merchandising on that product. To the extent it traded down consumers from brand to that label, it was a negative for both for us, and frankly, it was a negative for the customer's profitability as well, which they fully understand at this point.
Then if I just from a higher level, private label versus branded for McCormick overall and what that meant for your gross margin. Was mix a factor from that benefited your gross margin there?
Overall, it's a slight detriment, as Lawrence mentioned, but it has a lower gross margin. From an operating profit perspective and a working capital efficiency perspective, it's not that far from a bottom-line operating profit for the consumer. It absorbs a lot of overhead in our plants. We only do private label for the large customers. We don't do a lot of boutique-type private label. It's good business for us, not only in the U.S., but we do in EMEA also.
Okay. Thank you.
Our next question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.
Yes, thanks. Good morning, everyone.
Morning.
Maybe first, just on the point on mix within the portfolio, and you talked about that being a clear tailwind to the results this quarter. Any clarity or color you could provide by business line or region where that was a particularly notable benefit, or was that pretty broad-based across the whole business?
No, I think, Adam, if you look how we described in Asia-Pacific as an example, exiting some low-margin business there. Trying to make sure we optimize our portfolio. We're focusing more on flavors globally for Flavor Solutions. A very clear example we talked about in Asia-Pacific, we walked away from very low-margin business, and we wanted to use those resources to move up the value chain for other product lines. That's a consistent message across Flavor Solutions, but Asia-Pacific is one we specifically highlighted.
Okay. That's helpful. Then just a question in consumer in EMEA. I know the U.K. business has been challenged there for some time, given a whole host of dynamics, but any update there? I didn't really hear any color on the U.K. business in the consumer discussion.
Sure. Actually, for the U.K. business, that business has stabilized. I know that for a great deal of last year, it was a drag on EMEA performance. We actually had slight growth in the U.K. this last quarter. It wasn't so spectacular that we were going to call it out, but it's no longer a drag on the business as it was. We're optimistic that we've got that business on track.
Okay, great. That's very helpful. I'll pass it on.
The next question is from the line of Brett Hundley with The Vertical Group. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my questions. I just have a two-part question on your Flavor Solutions business. The first part of it, maybe for you, Mike, we estimate EBITDA margins for that business, somewhere near 14.5%. The previous management team was really loath to talk about where margins could go over time. You guys don't have to give a number this morning, but have you guys updated your thoughts and beliefs on what type of margin structure might be possible for this business? Rather, if there is continued growth opportunities, just especially relative to what some of your ingredient peers are doing, in the overall pursuit of 20% EBITDA margins over time. That's the first part of my question.
The second part of my question, there was a transaction announced yesterday where one of the largest flavor and fragrance producers is buying a natural-based ingredient company. The multiple paid was well over 20 times forward EBITDA, and it really showcases just how much more established F&F companies are willing to pay for market positioning and elevated revenue growth prospects. Your Industrial Flavor Solutions business is attractively positioned. It's also really interwoven into your consumer platform in many respects.
I guess my question is, are there select areas of your Flavor Solutions business, maybe the 50% that's more leveraged to food and beverage peers, but are there select areas of your Flavor Solutions business where McCormick might be willing to take advantage of heightened strategic demand from other ingredient entities and divest these assets into financial capital that could be used for debt paydown or consumer uses or anything like that? Thank you.
Hey, Brett, I know you directed this to Mike. This is Lawrence. I'm going to start on this, and I'm going to just mention two things. I'm going to start on the second one and then let Mike talk about the EBITDA margins. Of course, we're aware of that transaction. We are currently out of the market. This would've been a target that would've been on our list of possible targets as well, I would say on the list of the usual suspects. As we said, we're not doing any transactions right now because we're going to pay down the debt from the one that we just did. We're certainly aware of the asset and the valuation that was paid for, I think it was 24 times.
We're also kind of pleased to see a bunch of deals being done since we've bought RB Foods at higher multiples than we paid for that. It just shows the demand in the market for assets that are growing. As far as us, we see our business as being a broad flavor business, both consumer and industrial. We get a benefit of scale from having both of those businesses. They are well intertwined, and at this time, we're leaning into growing that flavor business with the intent of making it an even bigger, stronger part of our business and not with the eye to building something that we would be divesting. We do constantly look at our portfolios for opportunities and right now, really what we're thinking more in terms of pruning the low margin businesses rather than selling off the high margin businesses.
Yeah, as far as the EBITDA margin, I wouldn't say we're loath to giving a target, but we're not going to give a target. We've talked about the portions of the Flavor Solutions portfolio have really nice consumer-like margins, the flavor side of the business, the food service side, and you've seen with the RB Foods assets how accretive that is. As we continue to migrate that portfolio, you should see continued increases there. From an ROIC perspective, it actually right now is pretty close to consumer ROIC because it's a higher working capital efficiency, but you should see improvements there going forward. We do have internal targets.
I'll say, there was a long period of time, for those of you who have followed us for a long time, where there was a goal of getting this up to a 10% margin. We've gotten well past that. I'm talking about operating profit margin. We've gotten well past that, and, while we haven't set a long-term target for it, we continue to see opportunities for that margin to improve.
Thank you for the comments.
The next question comes from the line of Rob Dickerson with Deutsche Bank. Please proceed with your questions.
Great. Thank you very much. Just one quick question, then a couple of follow-ups. The seasonality on the RB business, I know you said before, I think, Q4 was obviously the most heavily weighted for the year. Can you give us any perspective as to what the breakout would be Q1, Q2, Q3, just for sales?
This is Mike. Q1 is the lowest quarter. It's a little less than 20% of the total year. About 20%? Yeah, about 20%, a little over 20%, in that range. The fourth quarter is the strongest. The second or third quarter, obviously, the grilling season, they're roughly comparable after that. They'll increase from this base. It's not that different than our core business.
Okay.
Heavily backloaded. For Cattlemen's, too, it's kind of the same trend.
Okay, cool. Perfect. In terms of tax rate on 2019, I know 2018 changes because of the, I guess the one time we saw this quarter, so the 23% essentially implies you still get 24% for the remainder of the year, then what you put in the K, the 25%-26% on 2019, I'm assuming that still holds.
Yeah, I would go with that right now. There's so many moving parts with this US Tax Act, and as the Department of Treasury goes into it and issues technical adjustments, we'll reassess it then.
Okay, perfect. Just last question. In terms of the implied organic for the year, the 3%-5%, correct me if I'm wrong. I know you did 2.2% in Q1. The comps get a little bit more difficult for the year. It sounds like the inventory reductions are one time in nature, but it's not like you wind up accelerating shipments then based off of consumption go forward. I'm just curious to kind of get to that 3%-5%, with more difficult compares, but a 2.2% in Q1, what drives the implied acceleration? Is it just it's better innovation? It's volume driven? Doesn't seem like there's a ton of pricing coming, any color on that would be helpful. I'll pass it on.
Well, I'll start, and I'll pass to Mike. It pretty much follows the same shape as last year. Last year we had a very modest growth in the first quarter and then accelerated as we went through the year and ended up with a solid organic growth. I'd say that this year looks pretty much the same. In our look at the year, there's no extraordinary hockey stick or anything like that. It's pretty much shipping to consumption. New products generally have an impact later in the year. Fourth quarter, the biggest quarter, as we've talked about, having a 2% increase in the first quarter, which is our smallest quarter, can easily be offset by having a strong third and fourth. We're comfortable with the outlook.
Fair enough. Thank you.
Thanks, Ed.
Thank you. Our final question today is from the line of Akshay Jagdale with Jefferies. Please proceed with your question.
Thanks for the question. I wanted to also ask about the base business. You mentioned the conversion, but I wanted to ask about the promotional aspect. I know one or two large retailers had specifically been reacting to the hard discounters with certain promotions that were expected to go away. Can you give us an update on that? Just related to the U.S. business, I want to make sure I understand your commentary on inventory. Yeah, inventories are coming down over time, and that will continue. Relative to consumption, though, you haven't been, over a long period of time, your consumption generally has matched shipments, right? There's no material gap there that is widening or even if there is a gap, right? Over time, shouldn't shipments just match what people are consuming? And I want to make sure there's no change there.
If you could just comment on the retailer promotions on some of the private label items and where that's trending. Thank you.
Sure, Akshay. Well, first of all, regarding the retailer promotion that you're talking about, you really highlighted one customer. It's a non-grocery customer. We don't like to say names of customers on calls, so I'm not going to say the name, but everyone probably knows who that is. It's the exact situation that we talked about on the January call. There was a control label product that we sold them. They converted it to private label. Again, as we've already said, I won't dwell on it again, that was really financially neutral to us. Then there were some heavy promotions that were run on that. To the extent that traded brand down, that was a negative. Traded consumers down from brand, that was a negative for us. It was a financial negative for the retailer.
They did this as part of an overall storewide program that included many other product categories to be price competitive against what they perceived as a strong threat from discount retailers who were entering the market. It was not specifically targeted at us or at our category. The team at the customer who's responsible for that category and its P&L has heard our category management story and understand what the impact of that decision was on category profitability, and they've read it through in their own numbers as well. We told them what was going to happen beforehand. They went ahead anyway. They now know what the impact really was, what we said it would be. So they're reconsidering how that moves ahead. That promotion is winding down, I would say.
If you were to visit that customer store, you would find that special pricing and promotional display is very much the exception on a store-by-store basis rather than the rule. We think it was transitory. Might happen again. It goes to the customer strategy for their overall business and not to the strategy on the spice category. We think we have that largely behind us. On the slow inventory, it was the Americas inventory that we were talking about. There was and has been a reduction in customer inventories over time and had a more pronounced impact on the last quarter. We had seen it in previous quarters, it just hasn't really been worth talking about.
In the customer's fourth quarter, they're driving probably the largest reduction, and when that's up against our first quarter, which has our lowest volumes, it turns into a meaningful percentage, and that was why we felt it was worth commenting on this call. Mike, do you want to add anything?
In the question about consumption over time, we should be shipping the consumption over time generally.
Okay. I'll pass it on. Thank you.
Hey, thanks, Akshay.
Thank you. I'll now turn the floor to Lawrence Kurzius for closing remarks.
Great. Well, thanks, everyone, for your questions and for participating on today's call. McCormick is a global leader in flavor, and we're differentiated with a broad and advantaged portfolio, which continues to drive growth. We are responding readily to changes in the industry with new ideas, with innovation, and with purpose. With a keen focus on growth, performance, and people, we continue to perform strong globally and build shareholder value. I'm pleased with our strong results to start the year, and I'm confident in our continuing momentum for growth in 2018 and look forward to reporting to you on shareholder value we will continue to create.
Thank you, Lawrence, and thanks to you all for joining today's call. If you have any further questions regarding today's information, you can reach us at 410-771-7140. This concludes this morning's conference call.