Good morning. This is Joyce Brooks of McCormick, Investor Relations. Thank you for joining today's fourth quarter earnings call. To accompany this call, we've posted a set of slides at ir.mccormick.com. We'll begin with remarks from Lawrence Kurzius, President and CEO, and Mike Smith, Executive Vice President and CFO, then open the line for questions. If you need to reach the operator at any time during the call, please press star zero. We also have Kasey Jenkins on the call, who moved into the role of Vice President, Investor Relations effective January 1st, in advance of my retirement later this year. During our remarks, we will refer to certain non-GAAP financial measures. These include adjusted operating income and adjusted earnings per share that exclude the impact of special charges, as well as information in constant currency.
Reconciliations of these measures to the GAAP results are included in this morning's press release and slides. 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 as a result 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's now my pleasure to turn the discussion over to Lawrence.
Thank you, Joyce. Good morning, everyone. Thanks for joining us. McCormick's fourth quarter results led to a record 2016 performance. On a constant currency basis, we met each of our long-term growth objectives for sales, operating income, and earnings per share, and achieved the top end of the range for sales and operating income. We exceeded $100 million in annual cost savings and delivered our fifth consecutive year of record cash flow, and we have great momentum heading into 2017. These financial results were driven by our growth strategies, our focus on performance, and our people. I want to recognize McCormick employees around the world and our leaders for their effort, engagement, and success. Together, we are effectively executing a balanced approach across the business, balancing between growing sales and improving productivity.
I'm going to begin this morning with our fourth quarter results, highlight key accomplishments of 2016, then share our business plans for 2017. After that, I'll turn it over to Mike, who will go into more depth on the quarter end results and the details of our 2017 financial guidance. Starting at the top line for the fourth quarter, we grew sales 4% in constant currency from the year ago period. Sales from our acquisitions of Gourmet Garden, a leader in chilled herbs, and Cajun Injector, a smaller business purchased later in 2016, added two percentage points of the increase. Across our base business, the strongest rate of constant currency growth this period was in our Consumer segment, led by the Americas and the Asia Pacific regions.
In the Americas, we had strong increases in our U.S. sales of McCormick and Lawry's brands of both spices and seasonings and recipe mixes, along with a double-digit increase in sales of Simply Asia brand products. In the Asia Pacific region, we grew constant currency sales in China by 9%, with increases in a number of McCormick brand categories, as well as our DaQiao brand of bouillon products. The primary area of weakness for the consumer segment was in the U.K., where a difficult retail environment has persisted throughout 2016. For our industrial segment, we grew sales 2% in constant currency. This period, pricing had a greater impact than in prior quarters, pricing that related to higher material costs, as well as the transaction impact of unfavorable currency rates.
We had a number of areas of strength during the first quarter that we expect to continue into 2017, including food service sales in the U.S., seasoning blends in Mexico, and sales in Southeast Asia, where construction will begin this year on a new facility in Thailand to accommodate our growth in that region. With higher sales and cost savings led by our comprehensive continuous improvement program, CCI, we grew adjusted operating income 6% in constant currency. Gross profit margin rose 60 basis points. At the bottom line, adjusted earnings per share of $1.27 was an 8% increase from $1.18 in the fourth quarter of 2015. This includes the impact of unfavorable currency rates, which was particularly significant this period for income for our joint venture in Mexico.
In summary, we overcame some economic challenges, like currency rates, and delivered a solid increase in sales and profit in our largest quarter of the year. For fiscal 2016, we had some excellent performance, starting with our financial results. As I indicated, we delivered growth rates that met our long-term constant currency guidance. We were especially pleased with nearly 6% constant currency sales growth at the top end of our 4%-6% long-term range. With significant improvement in our U.S. consumer business, we grew consumer sales in the Americas by 6% in constant currency. Excluding the impact of both currency and acquisitions, consumer segment sales in the Americas were up 4% in 2016.
Led by our CCI program, our fuel for growth, we reached a record $109 million of annual cost savings, exceeding $100 million for the first time, and are well on our way towards reaching our four-year, $400 million goal. Importantly, this significant effort is not hampering our sales growth and, in fact, is fueling our investments in brand marketing, product innovation, and acquisitions. We increased gross profit margin 110 basis points to 41.5% from 40.4% and achieved a 60 basis point increase in adjusted operating income as a percentage of sales. For the industrial segment, margins continued on a strong upward trajectory this year. Our combination of innovation, acquisitions, and customer intimacy continued to shift our portfolio to more value-added products. This progress, along with our cost reduction efforts, lifted adjusted operating income margin for our industrial segment to 10%, compared to 7% just three years ago.
2016 was the fifth consecutive year of record cash flow, ending the year at $658 million. Cash flow from operations is up at a 14% compound annual rate for the five-year period. At year-end, the board announced a 9% increase in the quarterly dividend, our 31st consecutive annual increase. Between the dividend and share repurchases, we returned more than two-thirds of our cash from operations to shareholders this past year. In the past five years, we've returned nearly $2 billion of cash to shareholders. Beyond our financial performance, we had ambitious growth plans for 2016 and a number of significant achievements. A key driver of sales growth was our brand marketing, which reached a new high of $252 million. Importantly, 46% of our advertising was in digital marketing.
With consumer interest in recipes, cooking tips, and how-to videos, our business lends itself particularly well to social media and other digital platforms. Digital is one of our highest returns on investment. As we shared on our September earnings call, L2 Research named the McCormick brand in the U.S. fifth out of over 100 other food brands in its annual Digital IQ ranking. This was our third consecutive year in the top five. Innovation is another important driver. 9% of 2016 sales came from new products launched in the last three years. This rate was particularly strong for our industrial business and driven in part by our work at the intersection of flavor and health.
This year, approximately half of new product briefs for industrial customers in the U.S. had some type of health and wellness attribute, up from 40% in 2014. Innovation also played a role in recognition from a major industrial customer, with Yum Asia naming McCormick Supplier of the Year. For our consumer segment, we were proud to have our new herb grinders recognized as Innovation of the Year by the Grocery Manufacturers Association in the U.S. A new Product of the Year based on consumer votes in France. On the acquisition front, we purchased Gourmet Garden, a fast-growing leader in chilled herbs. We are off to a great start with this business. Retail consumption sales in our largest market, the U.S., were up 22% in the fourth quarter from a year-ago period.
In 2016, we established direct distribution for the brand in Canada. We have plans in 2017 to introduce Gourmet Garden in China. At the end of November, we signed an agreement to acquire Enrico Giotti SpA and completed this deal in December. Giotti is a leading flavor business in Europe with expertise in high-growth health and nutrition products, including a number of beverage applications. The addition of Giotti expands our flavor capability in our Europe, Middle East, and Africa region, EMEA, with complementary products and a number of new customers. Giotti supports our global industrial strategy to migrate our portfolio to flavor globally. A new production facility in Dubai was completed this year, opening up a direct supply for our industrial customers as they expand in the Middle East.
We're making great progress in Shanghai with the construction of a new, larger facility that we plan to move into and begin production in mid-2017. Our McCormick Science Institute celebrated its 10th anniversary and its progress in advancing the health benefits of spices and herbs. In 2016, we were pleased that the USDA included spices and herbs in the latest dietary guidelines for Americans and on an AARP My Plate for older adults. We're making measurable progress toward our 2019 sustainability goals. Just last week at the World Economic Forum in Davos, McCormick was recognized by Corporate Knights in their 2017 Global 100 Most Sustainable Corporations Index, ranking number 14 among all publicly traded companies with a market cap above $2 billion, and number one in the consumer staples industry. During 2016, DiversityInc.
listed McCormick among their Noteworthy 25, we reached a milestone with our 75th year of Charity Day. Our progress in 2016 gives us greater confidence in delivering another strong year of growth and performance at McCormick in 2017. We expect to increase sales at a rate ahead of our long-term 4%-6% constant currency objective, driven by our base business and innovation, including certain pricing actions. In addition, we have nearly a full year of sales from our acquisition of Giotti and an incremental impact from Gourmet Garden in the first part of the year. At the foundation of our sales growth rate is the rising consumer demand for flavor. Euromonitor's latest research projects that global sales of spices and seasonings will grow at a 5% compound annual rate for the next five years, up 4% in developed markets and 8% in emerging markets.
This is our largest category and accounts for about half of our consumer segment sales. We lead in this category, as you can see from our latest share information on slide nine. Our growth strategies are designed to build consumer interest and differentiate our brands. We're planning to increase brand marketing at a high single-digit rate this year, we'll continue to develop our digital programs to directly connect with consumers. Our purity message drove increased sales in 2016, particularly among millennial consumers, in 2017 will be launched in the EMEA region. There was a lot of groundwork done in renovating our core products in 2016, with non-GMO labeling on our U.S. everyday spices and seasonings, and a move to organic for our premium gourmet line.
In 2017, in the U.S., we're transitioning to clean label for our Zatarain's rice mixes, removing high fructose corn syrup from Lawry's marinades, we'll be converting our iconic black pepper and OLD BAY cans to a BPA-free recyclable package. In early December, we published our 2017 global flavor forecast, including predictions and ideas for modern Mediterranean cuisine, blanch or grilling, and out of the box breakfast ideas. First launched in 2000, our annual forecast is now eagerly awaited by our retail and industrial customers, along with food editors and bloggers. Before moving on to our new product pipeline, I want to comment on the recent retail scanner data trends for spices and seasoning in the U.S. For the fourth quarter, the category growth rate for spices and seasonings remained strong at 5%. McCormick brand spices and seasonings grew 2%. However, this was a growth rate in measured channels.
We had very strong fourth quarter sales growth in certain unmeasured channels, including club, e-commerce, and Hispanic retail chains. We estimate that these unmeasured channels added another two percentage points to McCormick's retail sales growth for spices and seasonings. The fourth quarter retail scanner data also reported an increase in sales of private label spices and seasonings. More than half of the increase this period related to the transition by a large retailer of their organic line from a competitive brand to a private label line. Heading into 2017, we continue to build on our category management capabilities and partner with our customers to maximize their sales and profit for the spice and seasoning category, to drive McCormick's share growth.
As an example, we recently used our pricing tools to minimize the volume impact of an early 2017 price increase in the U.S., a price increase that was taken to offset our cost inflation, driven in part by vanilla and garlic, as discussed in our September call. Turning now to innovation in 2017. Our plans include a robust lineup of new products for our consumer segment. Innovation is an important way to differentiate our brand and to drive growth. In the Americas, we are rolling out our Kitchen Basics bone broth, organic recipe mixes, and Zatarain's rice cups. Also under the Zatarain's brand, our team has developed new rice varieties, biscuit mixes, and hot sauce. For grilling, we have new varieties of Grill Mates seasonings and liquid marinades, along with Stubb's dry marinade mixes and larger size barbecue sauces.
In Canada, we have extensions of our La Grille products and plan to penetrate the natural retail channel with unpasteurized Billy Bee honey. In EMEA, we plan to launch gluten-free recipe mixes in the U.K., improved Vahiné brand packaging and dessert decorations in France, and barbecue marinades in Russia. Also in Russia, we are introducing our Vahiné line of dessert items. The dessert category there is currently growing at a double-digit rate. In Asia Pacific, we are rolling out recipe mix varieties in China and expanding our liquid cooking and dipping sauces. In Australia, we are introducing a Gourmet Garden resealable pouch of lightly dried herbs and seasonings. For our industrial segment, we have a robust pipeline of customized flavors for both packaged food companies and the restaurant industry. We also plan to further expand our branded product portfolio for broad line food service distributors.
We expect our innovation of more value-added products, along with our acquisitions and CCI cost savings, to drive further progress toward a higher profit margin for our industrial segment. Our business leaders will have more to share on market dynamics and these growth plans at McCormick's April 4th Investor Day. Beyond our strategies to drive sales growth, we have plans to increase profit and margins. Led by CCI, we expect to achieve approximately $100 million in 2017 cost savings. With these cost savings and higher sales, we expect to grow adjusted operating income 9%-11% in constant currency. This is ahead of our long-term objective of 7%-9%. We plan to increase adjusted earnings per share right in line with our long-term constant currency objective of 9%-11%.
As indicated, Mike will provide more details on our financial guidance and additional remarks on the financial results for the quarter. Next, I'd like to recap some recent announcements about McCormick's board of directors. Effective next week, I will assume the role of chairman from Alan Wilson. Alan will remain a member of our board. I'm honored to have been named chairman, and I thank Alan for his outstanding leadership during his term in this role. Along with his retirement from McCormick in December, Gordon Stetz retired from our board. We recognize and appreciate Gordon's 29 years of service to the company, including his time as CFO. Just yesterday, we announced the election of Gary Rodkin to our board. Gary is the former CEO of ConAgra, and many of you know him from this previous role.
We believe he will further strengthen the great group of leaders that comprise our board. Let me summarize. We made great progress in 2016 with our growth strategies and delivered strong financial performance. McCormick is uniquely positioned as a global leader in flavor, a business that is on trend with today's consumer and healthy eating. We're driving strong momentum with our strategies to grow sales, balanced with our CCI program and other efforts to build fuel for growth and higher margins. As we kick off the new year, I look forward to my second year as CEO of this great company and a new role as board chairman. Our leaders and employees are fully engaged and focused on our growth strategies, and I have confidence in our ability to deliver the aggressive but achievable financial objectives we have set for 2017.
Thank you for your attention, and it is now my pleasure to turn it over to Mike. Mike?
Thanks, Lawrence, and good morning, everyone. As Lawrence indicated, our fourth quarter financial results were a strong finish to the year. I'll begin with some additional perspective on these results and discuss in more depth our 2017 financial guidance. On a constant currency basis, we grew sales 4%. Pricing, acquisitions, and higher volume and product mix each contributed to the increase as seen on slide 14. In constant currency, both our consumer and industrial segments delivered solid top-line growth. Consumer segment sales in the Americas rose 7% in constant currency versus the fourth quarter of 2015, with two percentage points of the increase from our acquisitions. The greatest increase in sales this period was in the U.S., with broad-based growth across several brands, as Lawrence indicated. EMEA consumer sales declined 3% in constant currency. As in previous quarters, we grew sales in constant currency in France and Eastern Europe.
However, a deflationary retail environment in the U.K. has continued, and our fourth quarter results in that market have been affected. This includes a reduction in the number of Schwartz brand products by a large U.K. retailer, which has been rationalizing its portfolio to gain space for general merchandise. We grew consumer sales in the Asia Pacific region 10% in constant currency. Sales from Gourmet Garden added six percentage points of this growth. In China, we grew sales 9% in constant currency, led by higher volume and product mix across a broad range of product categories. These increases were offset in part by a double-digit decline in India, resulting from our decision toward the end of 2015 to discontinue certain low-margin products. For the consumer segment in total, we grew adjusted operating income 8% to $183 million.
In constant currency, adjusted operating income also rose 8% from the year ago period. The impact of sales growth and cost savings more than offset higher material costs. Turning to our industrial segment on slide 19, we had solid sales results this quarter. We grew industrial sales in the Americas 2% in constant currency, led by sales of branded food service products in the U.S., where we've gained share with a leading customer. In Latin America, we're growing sales of snack seasonings and other products supplied from our operation in Mexico. In Canada, we took pricing to pass through higher material costs that include the impact of currency, this was offset by weaker volume for industrial products in that market. Year-on-year, EMEA industrial sales declined 10% but grew 4% in constant currency. We had solid pricing-led sales growth with packaged food customers and quick-service restaurants.
Industrial segment sales in the Asia Pacific region were comparable to the year ago period in constant currency. Growth in Southeast Asia and Australia was offset by a sales decline in China, which was impacted by a large customer's decision to diversify their supply chain, as we've mentioned in previous quarters. As we indicated in our September call, we expected our growth in the industrial segment adjusted operating income to slow from a double-digit percentage increase in the third quarter. In the fourth quarter, adjusted operating income declined 2% on a constant currency basis. This compares to a 62% year-on-year increase in the fourth quarter of 2015. Throughout 2016, our industrial segment profit has fluctuated quarter-to-quarter, driven largely by sales mix across regions, customers, and products. For the fiscal year, we are very pleased with our industrial performance.
With adjusted operating income up 12% in constant currency and a record 10% margin. This follows a 24% constant currency growth rate for fiscal year 2015. We believe our growth initiatives, including acquisitions like Brand Aromatics and Giotti, will lead to further margin improvement for our industrial segment. Across both segments, adjusted operating income, which excludes special charges, rose 5% in the fourth quarter from the year ago period. Excluding the impact of unfavorable currency, we grew adjusted operating income by 6%. For the fiscal year, the increase in adjusted operating income in constant currency was 9%. We increased gross profit margin 60 basis points year-on-year to 44% in the fourth quarter.
As we discussed in our September earnings call, the increase was at a lower rate than the first three quarters of 2016 due to rising material costs, but it was still positive, and we ended the year with 110 basis point increase. Our selling general and administrative expense as a percentage of net sales was even with the fourth quarter of 2015, including the impact of higher incentive compensation this year. The tax rate on a U.S. GAAP basis this quarter was 29.7%, similar to the rate in the year ago period. Looking ahead to 2017, we expect the tax rate to be close to 28%. This includes our estimate of a favorable impact from the adoption of a change in the accounting for taxes related to equity awards. Income from unconsolidated operations was $12 million, compared to $10 million in the fourth quarter of 2015.
Both periods had a small impact from special charges attributable to minority interest in our joint ventures. Excluding this impact, the year-to-year performance was comparable. We were pleased with this result, given the significant currency headwind for our joint venture in Mexico. In 2017, we expect our income from unconsolidated operations to be about even with 2016 due to further continued currency pressure. At the bottom line, fourth quarter 2016 adjusted earnings per share was $1.27. This was a $0.09 increase from the year ago period, mainly as a result of higher adjusted operating income and lower shares outstanding. As a reminder, this year-to-year comparison includes the unfavorable impact from currency on both consolidated and unconsolidated income. On slide 28, we've summarized highlights for cash flow and the year-end balance sheet.
Cash flow from operations ended the year at $658 million, up from $590 million in 2015. Higher net income and working capital improvement were the main factors driving this increase. For the fiscal year, our cash conversion cycle was better than the year ago period, and we are putting programs in place, such as the rollout of extended payment terms with our suppliers to achieve further reductions. Our capital expenditures were $154 million, in line with our initial guidance and a step up from prior years due to major construction in Shanghai and Dubai. In 2017, we expect to spend $170 million-$190 million, with completion of our Shanghai plant and construction in Southeast Asia to support our growth in that market. We returned 70% of cash flow from operations to our shareholders through dividends and share repurchases.
At fiscal year-end, $327 million remained on the current $600 million share repurchase authorization. Based on our current plans for 2017, we expect to reduce shares outstanding by approximately 2% from fiscal year 2016. As always, this is subject to change depending on our acquisition activity. We expect 2017 to be another year of strong cash flow, providing the funds for continued investment in our growth strategies. Our debt leverage is low, and we are well positioned to finance these investments. In the course of my comments and Lawrence's, we've already shared some remarks on 2017. Let's put this all together and discuss our guidance on slide 29. We are well positioned for another strong performance with our on-trend categories, effective growth strategies, and progress with CCI.
As Lawrence indicated, our financial objectives for 2017 are at or above our long-term goals for sales, operating income, and earnings per share on a constant currency basis. At the top line, we expect to grow sales 5%-7%, excluding an estimated 2% unfavorable impact from currency rates. The incremental impact of acquisitions, a partial year for Gourmet Garden, and nearly a full year for Giotti are projected to add approximately 2% of the sales growth. We anticipate a combination of pricing, higher volume, and product mix to contribute 3%-5% of growth. We expect to increase adjusted operating income 8%-10% from $657 million in 2016. In constant currency, our estimated rate of growth is 9%-11%. Our cost savings target is approximately $100 million. We are planning to increase brand marketing at a high single-digit rate.
We expect our pricing actions to largely offset a mid-single digit increase in material costs, leading to 2017 gross profit margin that is projected to be comparable to 50 basis points higher than 2016. Our guidance range for adjusted earnings per share is $4.05-$4.13. This compares to $3.78 of adjusted earnings per share in 2016. Excluding the impact of currency rates is an increase of 9%-11%, right in line with our long-term goal. For the first quarter of 2017, the company expects earnings per share to be comparable to $0.74 of adjusted earnings per share in the first quarter of 2016 as a result of a planned double-digit increase in brand marketing, a higher tax rate, and the timing of our pricing actions. For the fiscal year, we expect our higher profit to lead to another year of strong cash flow.
Before we move to your questions, let me recap the key takeaways from our remarks this morning. With our fourth quarter results, we delivered a year of record sales, profit and cash. We're executing on an effective and balanced strategy to drive both sales and lower costs. Our CCI program is driving higher margins of profit and generating fuel for growth. We are confident that this strategy and our people will lead to another year of success and growth in 2017 for McCormick and its shareholders. Operator, let's take the first question.
Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants 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 Andrew Lazar with Barclays. Please proceed with your questions.
Morning, everybody.
Morning, Andrew.
Hi, just two questions from me. First one, I guess you had just mentioned that in the first quarter, one of the headwinds is timing of pricing actions. I'm just trying to get a sense of, is that e xpected volume elasticity that comes in the first quarter because of pricing, or just the fact that pricing maybe doesn't take full effect until we move through the latter part of the year?
Andrew, this is Lawrence here. Good morning.
Good morning.
The pricing impact in the first quarter is because the price increase that we've taken to reflect inflation on some specific raw material is only in effect for a portion of the first quarter. That price increase has been put in place, and is in effect now. Here we are in the middle of the quarter right now, so we only get a partial price impact for that first quarter. We do expect some volume elasticity. We've modeled that in, but the real difference on the impact of the pricing is the effective date of the price increase, which is January.
Got it. Okay, thank you for that. Then, past couple of quarters, I know you've had a slide typically in the slide deck that kind of compares the McCormick brand in the core spice and seasonings category versus the category. It kind of showed sequentially the gap in growth or the market share differential was narrowing pretty significantly as you went through the year in 2016. Can you comment a little bit about how that share gap might have looked in the fourth quarter and maybe some of the pieces that impacted that and sort of your expectation around, I guess, market share in your core category in 2017, particularly in light of some of the pricing that you're taking?
Right. Everyone has remarked on this, the scanner sales show a widening gap, especially in the fourth quarter, where the category grew at about a 5% rate and McCormick Brands, through scan channels, grew at about 2%. That's to about 100 basis points decline in market share during that time period for our spices and seasonings business. As I commented in our remarks, we actually had very strong sales in unmeasured channels during that same time, so we believe that the scanner sales understate our performance. We had strong sales in certain club and Hispanic targeted customers and in e-commerce. We believe that the measured scan data for the period understates our performance. I'll also comment, as we said in our third quarter call, that we were putting vanilla on allocation for the holiday season.
During the holiday season, which is also the peak baking season and peak demand period for vanilla, in advance of the price increase that we were taking on vanilla, we had that product on allocation. Actually, we feel that our underlying business strength is even stronger than not only what is showing through the scan sales, but also in our reported sales. Mike, do you want to comment on that further?
I think the other thing to remember, we talked about this a lot in the third quarter call, the transition to the new gourmet organic items was a negative impact in the third. We had it reset for the holiday period, but there was a small impact in the beginning of the quarter. A couple of factors worked against us, but should provide some tailwind next year also.
Got it. For 2017, is your hope that shares are basically more or less in line with the category, or is that overly optimistic on my part?
I have been hesitant to pin us down on a specific quarter for share gain because it has been a long road, but we continue to work toward a situation where we are not only matching the category growth, but where we're exceeding it and are gaining share, and certainly that is our goal to get there over the course of 2017.
Thank you. See you in April.
Thanks.
Our next question comes from the line of Dave Driscoll with Citi. Please go ahead with your questions.
Great. Thanks a lot. Good morning, everyone.
Morning, Dave Driscoll.
Morning.
Wanted to ask, so Andrew Lazar was asking a little bit about price volume elasticity on the first quarter. Could you broaden this out more towards the year? I think you've got something like three points of pricing expected on the year, and then it looks like, I think zero to two points of volume. Would just like to hear your thoughts, a little bigger picture on mid-single digit inflation, the last time we saw it in the price volume elasticity. And then just a second question to follow up on the unmeasured channel benefit. I think you guys were great about how you explained what happened in the data, but maybe what I'm sure everyone would like to know is that benefit from the unmeasured channels, is that something we should expect going forward?
It probably sounds reasonable, but I think we need to hear you say that, if that's okay.
Yeah. Hey, Dave Driscoll, good morning. This is Mike Smith. Regarding the price increases related to the mid-single digit cost increases, you're right, there's about 3% price increase, pricing impact on sales. We built in about zero to 2% on volume mix. What we saw last year, when we had these new category management tools, we put in a pricing last year a little lower, but we were able to, really from elasticity perspective, didn't really see volume degradation. We're pretty confident this time, while there are some pretty significant increases on vanilla and garlic, and that's the difference, I think, if you look back in history with our mid-single digit price increases a couple of years ago, that was spread across the line. This is really specific against 2 of those subcategories. There will be some impact in there, we think, in downsizing by consumers and things like that.
Across the whole line, we don't see a price increase, so we shouldn't see price elasticity or volume elasticity there. We feel confident with these tools we have and the fact that it's focused, that's a positive for us in 2017.
For the unmeasured channels, the gains that we had in unmeasured channels really reflect real distribution gains that we've achieved, so we'd expect them to be sustainable over time.
Great. Thank you so much.
Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your questions.
Good morning, everyone.
Hi, Alexia.
Hi. You mentioned the point about the gourmet line in U.S. consumer being somewhat challenged in the third quarter, but the sets were realigned by the holiday season. Was that line back to sort of solid year-on-year growth in the fourth quarter, and what's the outlook for this year? I have a quick follow-up.
Alexia, I'm not sure I got all of your question on the last part of it. The transition on gourmet was much more difficult than we anticipated due to the retailers wanting to flush through the old UPC codes before they took on the new ones. I think if we were doing this over again, we would've worked harder to maintain the same codes on the product because it just made for a complicated execution. The scan data continues to show a decline on our gourmet business through the fourth quarter. Nielsen is showing a much more radical decline than our custom IRI database is showing, and the Nielsen database is also showing a decline that's out of line with our shipment experience, and we believe that there may be a data issue there where they're not picking up all of the new codes as we make the transition.
We think that the Nielsen data in particular is overstating the softness in gourmet. In gourmet, we picked up real distribution. We gained distribution and substantial share of shelf in four out of our top 10 customers. We know that the consumers are buying the new organic gourmet items at a higher rate than the previous items in the places where the transition was completed and where we are able to measure it. We're confident that this is going to be a real win for us as we go through the year in 2017, particularly as we lap these periods in the second half of the year where we were in transition.
Great. As a follow-up, obviously, we don't know where the new administration policies are going to lead.
As far as the border tax goes, can you give us any indication of what proportion of your COGS are imported and any commentary about how that could affect you if it were to happen? Thank you, and I'll pass it on.
I will let Mike answer that question specifically, but I'll say that the tax code changes are really uncertain at this point. There are a lot of ideas that are being chatted about in the press. There is nothing on the table, and even our new president himself has made contradictory statements about border tax. We're a long way from knowing what the final tax proposal is going to be. I'll say that as a company, we support a broad-based tax reform that makes our business more competitive on a global basis. To the extent that overall rates go down, it's certainly a good thing for us.
A large number of our iconic raw materials are imported products that are grown within a few degrees of the equator. Regardless of what our tax policy is, we're not going to be able to move the equator into the United States, so those are going to continue to be imported products. To the extent that there's a border adjustment that includes those items, that's a negative for us. Historically, agricultural commodities that can't be grown in the United States have enjoyed a tax preferential treatment. We would hope that that would continue forward, but a lot of how that policy plays out is still very much unclear. Mike, do you want to comment on Alexia's?
You took every one of my talking points.
No.
Just to reiterate, it is very speculative now, and we stand close to it. We do manufacture in the U.S. We're one of the good guys from that perspective, so we would hope any policy change would take that into consideration.
Thank you very much. I'll pass it on.
Our next question is from the line of Ken Goldman with JP Morgan. Please go ahead with your questions.
Hi. Thanks, good morning, everyone. One quick clarification for me, if I can. I think in the press release, you guided for brand marketing to be at mid-single digits, but it's high single digits in the prepared remarks in the slides. Can you just confirm it is high single digits for 2017?
Ken-
It is high single digits in 2017.
You may be thinking of first quarter, where we are guiding to double digits.
I was too.
All right. I'll go back and check. I thought I read mid-single digit for the year, but I'll go back and check. My real question is I just wanted to get a sense, and I really appreciate the clarity on the growth in club and e-com, adding 2% to retail sales growth and so forth. I also wanted to just to make sure, as you head into price increases or as companies head into price increases, sometimes there can be a little bit of a buy-in ahead of time.
Was there any of that you experienced that benefited the fourth quarter and maybe will be a little bit of a reversal in the first quarter? I'm just trying to get a sense of h ow close your shipments were to your measured takeaway, both in Nielsen channels and otherwise, and what we should expect the reverberation to be, if any, in 1Q?
Mike, Ken, this is Lawrence here. I'll start. I think we mentioned that the price increases were really concentrated on the items where we were experiencing commodity increases. The biggest increases were on the vanilla and garlic items. As we said on our third quarter call, as I remarked a little while ago, the vanilla was on allocation through the fourth quarter in advance of that increase to prevent any kind of forward buy, partly because we were trying to protect our cost position on the product and make sure that we were able to get the pricing to reflect the higher commodity costs. Mike, you want to
Yeah, we did.
We actively made sure there was no buying into the fourth quarter.
Great. Thank you very much.
Ken, I'll go back and comment. You're right, the slides and our comments today, prepared remarks, do say high single digit. The press release does say mid single digit. It's high single digit that we are guiding to for the brand marketing increase.
Thank you. Our next question is from the line of Evan Morris, Bank of America. Please go ahead with your questions.
Good morning, everyone. Just first, a quick follow-up on the 1Q outlook. You gave the cadence for earnings for the year, for the quarter. Can you talk a little bit about sales, what your expectations are there? Should they be more or less in line with your full-year outlook or ahead? Can you just help frame that?
Slightly lower because of the pricing impact, as we talked about. We're still seeing very healthy growth, both in the consumer and the industrial side.
Okay. Just your sales growth for the year, your underlying sales growth implies an acceleration sequentially. I guess, one, should we expect a sequential improvement in both segments? Just trying to understand and break down a little bit what's the key driver behind the acceleration. Is it new products? Is it a step up in demand that you're seeing in certain markets or across certain products such as clean labeling, GMOs? Just talk about that and just, I guess, really more the sustainability of these as you think about moving forward of the acceleration.
Mike. From a segment perspective, it's relatively balanced. Both of our segments are implementing pricing. Industrial is a little ahead of consumer from that perspective, but generally balanced throughout the year. We're really focusing heavily on acquisitions, as you know, is a big component of a third of our growth algorithm, but also innovation. We talked about it in the call where we moved from 8% to 9% our new products developed in the last three years. We have an exciting, in line with our long-term growth algorithm, a lot of great new products that will help drive that growth in 2017.
I'll also add that we have confidence in the underlying momentum of our business in the Americas, where we're coming off of a pretty strong year and see a good forward visibility on momentum into 2017.
I guess just from some of the changes that you've made to your line then, again, the labeling, removing certain artificial ingredients. Are you seeing a lift, and can you quantify the benefit that you're starting to see from these actions?
We're definitely seeing a lift. I don't think we're ready to quantify those specifically just yet, but we absolutely know that consumers, particularly millennial consumers, are interested in more transparency around the labeling of their products and understanding what's in the foods that they eat. Things like non-GMO labeling, organic labeling, just making the package transparent so they can see what's inside, are all quality cues to millennial consumers. We have gained household penetration among millennials which has been an important goal of ours. The product changes are part of that. Are the changes in our advertising campaign and the increases that we've made in digital marketing. I don't think we're ready to comment specifically on the lift from non-GMO labeling in particular.
On the change in organic, the gourmet products to organic in the retailers where we have made the full transition, we are definitely seeing an increase in offtake and velocity, though.
Okay. I guess just asking the question more directly, given, again, some of these initiatives. The acceleration in sales in the underlying business or the guidance really ahead of your long-term growth rate, is this sustainable? Is this, you think, more of the new norm in the outlook given some of these new product initiatives and the demand pull, or is this just more of a one-year thing because of a lot of the new products that are coming into play?
Well, I'll say our long-term guidance is for 4%-6% top-line growth. Our guidance for this year in constant currency is higher than that. I don't think we're making a change in our long-term guidance at this point, but we're definitely calling out that we expect a strong top-line growth this year.
Yeah, we feel good. Coming off last year, constant currency sales growth was 5.5%. That's at the high end of our 4%-6%. That gives us more bullishness going into 2017 also.
Perfect. Thanks. I'll pass it along.
The next question comes from the line of Akshay Jagdale with Jefferies. Please proceed with your question.
Good morning.
Morning, Akshay.
Hi. I just wanted to follow up on the market share question. Thanks for the clarification on the measured versus unmeasured. Your organic sales growth guidance of 3%-5%, you said is balanced across both segments. Let's say the midpoint's 4%. If the category is growing at 5% and you're growing at 4%, that assumes that you're going to continue to lose a little bit of share, including the unmeasured channel. Am I reading that incorrectly? I have a follow-up.
Yeah, I think, Akshay, it's Mike. You have to be a little careful because the category as we talk about it in that share is really our spices and seasonings business. It's like half of our business in the U.S. There's a much broader business with things like dry seasoning mixes, and Zatarain's, Thai Kitchen, industrial.
International.
Yeah. You're trying to parse it down. It's a big part of our business, but it's not more than half of our business.
Yeah, what I'm trying to understand is intra-quarter, as we follow your business, one of the things that obviously we look at is market share, and there's been somewhat of a disappointing trend despite all the initiatives you've taken in that regard. For the U.S. business, how important is it to look at market share, and when do you think you'll be able to reverse those measured channel market share trends?
We continue to work towards, again, not just matching the market, but exceeding the market growth rate. I'm reluctant to be pinned down on a specific quarter, but this is a goal that we're working towards and that we expect to get to in 2017.
In terms of what gets you there, obviously, you've done a great job consistently increasing your marketing spend. You're ratcheting that up a little bit again next year. Is new products as a percentage of sales going to be greater than 9%? Are there any other moves on execution that will help you reverse this trend on market share? Thank you.
Well, I think there's a series of activities and programs that we have in place that are driving our business and that we expect to generate market share gains. Part of it is the renovation of our core business. Part of it is innovative new products. Again, 9% is the middle of our target range globally for new products. We aim to have 8%-10% of our sales from new products introduced in the last three years. We would expect that rate to continue. We continue to increase our investment in marketing expenditures, A&P, delivered against the consumer. We continue to shift that to the most effective channels. We said in our remarks that digital's now up to 46%. Actually, in the U.S., it's over 60.
We're trying to drive our business with the consumer and, in particular, with the younger consumers entering into the market and the millennial consumer. We think we got a great tailwind from the millennial generation also, where we index well. We're very confident that we're going to get there.
Thank you. I'll pass it on.
Our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.
Hi, thank you. You mentioned a big customer in the U.S., I guess it's a mass customer, that transitioned its organic line or an organic competitor of yours to private label, and that caused private label to increase. I think you also mentioned in the U.K., another customer, I guess, transitioned away from Schwartz and I think to lower priced products. Lawrence, have you thought through what the trend there is? Are these just one-offs or is there a risk that the category gets devalued more in 2017, as private label, in these two markets, gets a bigger share of shelf? Thanks.
Oh, hey, Rob. Good morning, by the way.
Good morning to you.
That's really a great question, a great point. The moves that these customers have made toward private label have tended to devalue the category in their stores. Although we didn't comment on it, we did see a couple of retailers put heavier promotional emphasis on some private label products during the holiday season, which also devalued the category for them. We're able to go back to those customers and show them, particularly with the tools that we have and with the kind of dialogue we have with customers today, precisely what the missed opportunity was for them and, generally, that they've lost category profit and, in particular, these customers actually lost category share versus their peers who did not make these moves. I think that the situation in the U.S. is a bit different than the situation in the U.K., though.
The big customer in the U.S. who transferred this brand to a private label did so as part of a broader effort on organics that went well beyond our product category. It really wasn't specific to the herb and spice category, or targeted against us specifically. It was part of a broader multi-category initiative, I think is really more directed at making them competitive versus the natural food channel, rather than trying to do anything specific in the spices category. In Europe, the big customer in the U.K., this is part of a deflationary environment in the U.K. That particular customer, again, has a particular strategy that goes well beyond spices and herbs, That did impact us and was a drag on our performance in the EMEA.
Broadly in EMEA, we're still seeing good growth and good gains in other markets, The U.K. is in a difficult spot right now.
Can I ask a follow-up on that?
Sure.
Oh, go ahead.
Go ahead.
I guess my follow-up, this big customer in the U.S., when you say it's a broader initiative, are they trying to put their own brand on more organic items in the store? Is that what's happening?
They're trying to put their own private label brand on more organic items in the store. That's correct.
Okay.
While I don't want to say the customer, you probably know who it is.
Baldemort? Okay, thanks.
Our next question is from the line of Jonathan Feeney with Consumer Edge Research. Please go ahead with your question.
Thanks very much. Good morning.
Morning.
Just two questions. It's been a long time since I did freshman algebra. Can you give us what % of your U.S. spices and seasoning sales are going to these unmeasured channels, roughly speaking? If you can give detail around what's the club I know there's only one or maybe two club stores where we don't have data, so just the blanket one's probably the easiest number to give. My second question is looking to your 2017 guidance, when you consider Giotti, what contribution would you be expecting as you think about that number from acquisitions, considering the lapse and distribution gains and everything else? Thanks very much.
We don't get into data by channel that discreetly. It's definitely less than 10% of our sales. We talk about our e-commerce sales for the food category being less than 2%, so you can plug some numbers in and make it work that way. From a Giotti perspective, we bought that business in mid-December. As most of our acquisitions, during that first year, because we have to make investments in things like SAP and integration costs, we don't look at that as being accretive to EPS. Frankly, it's a little bit of a drag in the first quarter as we integrate it. Look for it to be relatively neutral in 2017.
I'm sorry. I'm purely talking about sales. I understand the accretion part.
Yeah.
Can you give me a sense of how much it's going to contribute to sales? Not just Giotti, but any leftovers from non-comparable acquisitions you made, and distribution gains perhaps on recent acquisitions in 2017.
Yeah. We talked in the script about 2%. 2%. 2%.
2% for full year 2017. I thought that was just a 2016 number. That's 2017?
Mm-hmm. Yep.
Thanks so much.
The next question comes from the line of Brett Hundley with The Vertical Group. Please proceed with your question.
Hey, good morning. Thank you for the question.
Hi, Brett.
Good morning. I just wanted to revisit the market share topic. There's been further consolidation in the U.S. retail spice area recently, I'm actually wondering your thoughts on whether or not that provides any opportunities or risks as it relates to your pursuit of category growth. I guess I'm wondering that as well, just because it seems like brand support spend is a little bit more front-end weighted this year versus last year.
When you talk about further consolidation, I assume you're talking about the purchase of the ACH brands by B&G. ACH was already a pretty good marketer of their brands. Their Weber brand in particular was a well advertised, well-supported business. I'm not sure that we see any particular new threat. It's hard to know what B&G would do with those brands, typically they've bought underloved, under-marketed businesses and we would not characterize this as one of those. There's the Spice Islands brand that they also own, is one of the gourmet brands that is not organic that's on the shelf right now, I would say that they've probably lost some distribution as we've gained placements on the shelf. We do have an acceleration of our brand spend and the marketing spend in the first quarter of the year.
I also caution you that that's our smallest quarter of the year, a big % is not as many dollars as, say, the smaller % in the fourth quarter would be.
Okay. If I could-
Just real quick on the A&P spend. We've mentioned the Purity campaign, which has been really successful in North America, so we're spending there in the first quarter. We've expanded that to Europe. In the first quarter, some of that increase is also related to the U.K. and some of those markets, too.
I appreciate that, Mike. The other thing I wanted to squeeze in real quick was your new spring product lineup. That was announced in April last year, and it comes in January this year. We've seen some other packaged food companies talking about just innovation schedules picking up overall. I'm wondering if that has meaning this time of year, and as well, the new products that you're bringing this year tend to be more focused on product areas outside the spice rack, it seems. I'm curious how that might affect contribution margin potential as we think about your new product lineup.
Generally across our branded categories, gross profit and operating profits generally within the same range. So whether it's a dry seasoning mix, a spice and herb, a vanilla, so there's really no hit from that perspective from these new products. We've really made a focus the last couple of years of making sure new products don't degrade margins. We're really focusing on engineering them up front, making sure they hit the right price points right away, and then supporting them with A&P.
Obviously, we're quite excited about these new products, or we wouldn't have spoken about them. In the U.S., kind of coming from Zatarain's originally myself, I love the new Zatarain's items that extend that brand and does do so at a very attractive margin. Our Vahiné expansion in EMEA is also expanding a great brand, and again, the margins on our Vahiné business are comparable to our spices and herbs. The wet sauces in China that are being launched take advantage of the squeeze pouch format that we developed for our ketchup and Thai chili sauce products in that market. I'm really quite excited about them. The team over there is quite excited about it. Our rate of innovation in China is pretty low.
A lot of the business has been built by continuing to build distribution and household penetration on existing items and a relatively low rate of new product. This is a big introduction for them, leveraging a very efficient manufacturing facility and a package format that we can scale. Those would be quite attractive margin items for that business, a little bit below our global average, but still quite a good contributor to that region.
Thanks for the color, guys.
Thank you. Our final question is from the line of Steven Strycula with UBS. Please proceed with your question.
Hi, good morning.
Morning, Steve.
Morning.
Two quick questions for you. First would be a modeling one. Just wanted to get a sense of the gross margin cadence, how the first quarter should trend versus the full year, just given the cadence of price increases, and then I've got a more operational question as a follow-up.
If you think about it, I'd like to talk about the price increase, the fact that we'll get about a half a quarter impact will put some negative pressure on the first quarter compared to the remainder of the year.
Okay. Then related to the European business, particularly the consumer business, you spoke about, I think a little bit on Rob Moskow's question, but just want to get a sense as, are you seeing across the big four retailers just decreased display space for spices in general? Is it more of a greater allocation of private label, reduction in weeks of supply at key retailers? And then should we be modeling this to kind of persist for the next three quarters, or is it just more contained to a one-time correction in the fourth quarter?
Well, first of all, when you say four retailers, I think you're talking about the U.K. business rather than our-
Yes
EMEA business. In the U.K., private label has always been a bigger factor. It's probably the highest market share private label market that we operate in. This is a kind of a deepening of that trend. This move is by one particular retailer. Other retailers in that same market, of course, each of them sees what the other does. That particular market is a challenging market for us. Again, that's just one country out of the whole continent. We have very good trends in our other markets in that region.
Okay, great if I could sneak one-
Eastern Europe.
Okay, thanks. Can I fit in one small tax question? I might have missed it when Mike was speaking earlier. For the full year, I think you said guided to around 28%, and the first quarter would be higher. Can you kind of just recap or flush that out as to kind of like the magnitude of first quarter versus balance of the year?
Yeah, the underlying tax rates that we see generally, and this depends on where you make your money in the U.S. or overseas, but generally 29%-30%. We talked about this new accounting standard we're adopting this year, which is a slight favorable, which gets us down into the 28% range. A lot of times, your discrete tax items, they'll be very variable during the year. In the first quarter right now, we don't see a lot of those, so you could suggest 29%-30% is probably the right tax rate for the first quarter. A lot of factors go into that tax rate, and with this new accounting standard, you're probably going to see some variability across the industry as far as taxes, and it'll make it a little more difficult to forecast, quite frankly.
All right. Well, thank you.
Thank you. I'll now turn the floor over to Lawrence Kurzius for closing remarks.
Thanks, everyone, for your questions and for participating on today's call. We're driving growth at McCormick. Our experienced leaders and engaged employees are executing on a strategy designed to build long-term value for our shareholders, and we look forward to continuing to report to you on our progress.
Thanks, Lawrence, and thanks to everyone for joining today's call. If you have further questions regarding the information today, you can reach us at 410-771-7244. That concludes this morning's conference.