Good morning. This is Joyce Brooks, Vice President of Investor Relations. Thank you for joining today's call for a discussion of McCormick's Q2 financial results and our current outlook for 2015. We started a bit early to coordinate with the General Mills call at 8:30 am. To accompany our call, we've posted a set of slides at ir.mccormick.com.
At this time, all participants are in a listen only mode. A question and answer session will follow our remarks. As a reminder, the conference is being recorded. With me this morning are Alan Wilson, Chairman and CEO Lawrence Kurzius, Chief Operating Officer and President Gordon Stetsz, Executive Vice President and CFO and Mike Smith, Senior Vice President, Corporate Finance. During our remarks, we will refer to 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. A reconciliation to the GAAP results is 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 2, 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 Alan.
Thank you, Joyce. Good morning, everyone, and thanks for joining us. McCormick's 2nd quarter results demonstrate the effectiveness of our sales and profit growth strategies and continued the momentum that we established in the Q1. While sales declined 1%, in constant currency, we achieved a 5% year on year increase. We achieved higher constant currency sales in both our business segments and across geographic regions, a very good performance from our business leaders and employees throughout McCormick.
Based on this broad based growth and our outlook for the second half of twenty fifteen, we reaffirm our projection for 4% to 6% constant currency sales growth for the fiscal year. In fact, this year's pace of acquisition activity gives us more confidence at the upper end of the range. Special charges along with currency lowered our operating income result. However, we grew adjusted operating income in constant currency by 7%. This is an improvement from the Q1 when adjusted operating income in constant currency rose 1%.
As we anticipated, profit growth is improving as our cost savings build and as additional pricing actions go into effect. This improvement supports our reaffirmed outlook for 6% to 7% adjusted operating income growth in 2015 on a constant currency basis. With a very favorable tax rate variance, 2nd quarter earnings per share exceeded our expectations. Earnings per share this period was $0.65 and excluding special charges grew to $0.75 from 0.64 dollars in the year ago period. In addition to the favorable tax rate, other positive factors included the increase in adjusted operating income, further growth from our joint venture in Mexico and lower shares outstanding.
The CPS result includes the impact of unfavorable currency. We've raised our latest earnings per share guidance to reflect the net impact of the favorable tax rate in the 2nd quarter and our estimated tax rate for the second half. Aside from this tax adjustment, we feel just as confident in our base business EPS outlook. Cash flow from our operations remained strong in $186,000,000 supporting our dividend program along with business growth strategies, including acquisitions. I want to recognize McCormick employees around the world for focusing on growth, driving high performance and engaging in our success.
Next, Lawrence is going to provide an update on each
of our 2 business segments. Lawrence? Thank you, Ellen, and good morning, everyone. As Ellen indicated, we delivered constant currency sales growth for both our consumer and industrial businesses with particularly good performance in several markets this quarter. Let's start with the consumer business.
Across our entire consumer business, although we reported a sales decline of 3%, in constant currency we achieved a 3% increase. I'll comment first on the strong results in certain international markets, then turn to the U. S. Market for more detailed remarks. China led our consumer business sales growth again this quarter with a double digit increase in constant currency.
We had strong demand for McCormick brand herbs and spices, condiments and seasoning blends, driven by our brand building activities, geographic expansion and great in store execution. We also grew sales with the introduction of our McCormick brand product Central China, part of the sales synergies from our Wuhan Asia Pacific Condiments acquisition. In Europe, Middle East and Africa, EMEA, economic and retail conditions remain challenging in parts of the region. However, in constant currency, we had strong volume driven sales growth this period, particularly in France, Poland and Russia. In France, we're benefiting from our brand marketing and have expanded Ducro brand sales to the discount retailer.
Distribution gains are also a primary sales growth driver for our business in Poland and Russia. And in Australia, consumer sales in constant currency rose at a double digit rate this period for new distribution and product innovation. Before moving to the Americas, let's take a look at our lineup of new products for the second half in our EMEA and Asia Pacific regions on Slide 7. One of our global initiatives is grilling. In EMEA, we are building out our barbecue products in the UK, France, Poland and other markets with dry seasonings, wet marinades and sauces.
And in France, Belgium, Spain and Portugal, recognizing the popularity of burgers, we are introducing restaurant quality burger seasonings in wet and dry sachets. Our Airplane Gelatin in Australia is an iconic brand with 90% category share and we are continuing to grow sales with new flavor varieties. Also in this market, we will be leveraging the authenticity of our Keene's brand into Curry recipe basis. Let's turn to the Americas. In this region, we're making further progress improving the performance of our U.
S. Consumer business. Consumer interest in flavor, simple and healthy ingredients and cooking with fresh product continues to drive strong category growth for spices and seasonings as seen in the latest consumption data with category sales up 5% in the quarter. The same data shows that sales of our McCormick brands, spices and seasonings rose 1%. This is an improvement compared to a 1% decline in the past 52 weeks.
We're definitely heading in the right direction. For recipe mixes, our next largest category, we continue to gain share. In this latest quarter, the increase was 50 basis points and we marked the 20th consecutive month of share gain. We're achieving this through innovation as well as effective marketing for both new products and core items. Within the sub segment of taco seasoning mixes, we increased share of our McCormick brand 3 percentage points in the last 52 weeks and our share of chili seasoning mixes is up 4 percentage points.
We grew share of Zatarain's 5% this quarter versus the year ago period. Zatarain's rice mixes are outpacing the category growth rate and consumption of our frozen entrees rose 4%. Across all of our U. S. Brands, we are driving growth through accelerating innovation, building brand equity and through our category leadership at retail.
On the innovation front, I'll comment on 2 of our recent launches. I'm pleased to report that in less than 1 year, our McCormick Skillet sauces have exceeded a 10% share in this growing category, driven by the retail placement we have gained and our marketing support. The relaunch of our gourmet line began early in 2015 with greater variety of flavor seal technology that locks in flavor, color and aroma and packaging that has a more premium fresh appearance. In this sub segment of the spice and seasoning category, nearly 80% of retail distribution points are now converted to the new packaging and we've seen base consumption trends from McCormick Gourmet strengthen with consumption up 4% in the 2nd quarter. This gourmet initiative has also helped us expand the number of McCormick brand SKUs on the shelf existing customers, gain distribution with new customers and at other customers reduce the number of competitive brands they carry.
For the second half of twenty fifteen, we're excited about our renovation plans. These include extending our liquid recipe mixes platform with the introduction of slow cooker sauces. Flavors include smoky barbecued pulled pork and pot roast with caramelized onion and cracked black pepper. We will introduce additional gluten free recipe mixes including beef stew and fajita to build off the success of our initial varieties. And Kitchen Basic Stock Cubes, a convenient way to boost flavor for soups, stews and risottos with no MSG or artificial flavors, including Also in the Americas region, our launch plans in Canada include additional skillet sauces, gluten free recipe mixes and reduced sodium items.
And in Latin America, we were introducing mustard flavors and barbecue sauces. The second growth initiative in the U. S. Is building brand equity. We had particular success this quarter with our Grill Mates campaign, including excellent in store display execution, great new television advertising and a 2015 grilling flavor forecast.
2nd quarter sales of Grill Mates grew 9%, and we expect to maintain this momentum through the peak grilling season. Through digital marketing, we're connecting directly with consumers. We're moving up the list of go to places for online recipe. McCormick.com is now in the top 40 recipe destinations, up from 175th in 2012 with 30,000,000 annual visitors and 40,000,000 recipe views. We have the largest online grilling community and are connecting with passionate users of Old Bay, Zatarain's and other distinctive brands.
And behind the scenes, we have better alignment of our digital assets, not only in the U. S. But all around the world. We continue to strengthen our retail partnership to drive category growth and engage consumers. Call, Alan discussed a sharper focus on our retail price points and advanced analytic rigor around category management.
As we roll this out, several retailers have begun to partner with us on shelf price adjustments and we're very encouraged by the results for them and for McCormick. At the end of the Q3, we will be ready to launch a new comprehensive category management tool supported by additional internal resources and we expect these capabilities to accelerate our progress as it relates to pricing optimization. As you would expect, this is an account by account discussion. As the latest consumption data illustrated, we have reduced the category share decline for our brand, but we're not yet where we want to be. I believe we have the right actions and the right team in place to stabilize and then grow our share.
In tandem with these actions, we're driving growth for our recipe mixes as well as niche brands within our U. S. Portfolio such as Lowry's, Old Bay, Grill Mates, Zatarin's, Thai Kitchen and now Drogario and Alimentari. Before I move to our industrial business, I just want to recognize the great performance of our joint venture in Mexico. Despite an unfavorable currency rate, net income for this business rose 36% mainly due to sales growth and favorable costs.
Turning now to our Industrial business. We grew sales for this segment 1% and in constant currency a very strong 7%. These higher sales and our cost reduction initiatives led to a double digit increase in adjusted operating income in constant currency. EMEA led the growth this period with a double digit constant currency sales increase and volume and product mix up 9%. This part of our business has had exceptional sales growth for the past 3 years as seen on Slide 11.
Whereas our business with quick service restaurants has been a challenge in other regions during this period, we are winning in EMEA with product innovation and for the 3rd year in a row, are named new product supplier of the year in this region by a leading quick service restaurant customer. We also increased our share of business with quick service restaurants and are supporting the geographic expansion of those customers. Likewise, we're expanding into new markets along with food manufacturers we supply and as an example of broken ground on a new facility in the Middle East. In the Americas region, we're benefiting from an increase in consumer snacking, developing seasonings for snack bars, crackers, chips and similar products. At the same time, our customers are moving toward more simple ingredients and our foundation in spices and herbs has us well positioned.
In the second quarter, we had particularly strong demand from these customers in Latin America with double digit sales growth in constant currency. We have a strong base in Mexico and are supporting customer expansion into South America. In Brazil, we cut the ribbon on a small R and D center this quarter to build our expertise in the local flavors. We also grew year on year sales to food manufacturers in the U. S.
This period and had a solid performance with sales of branded food service products. In addition, we had the benefit of sales from brand aromatics acquired early in March. Offsetting a portion of these gains was further weakness in our U. S. Sales to quick service restaurants.
In our Asia Pacific region, we're pleased to be seeing further recovery in base sales to quick service restaurants. As in the Q1, we had an added benefit of innovation and limited time offers and with export sales of products supplied by our facilities in China. Our outlook is for continued improvement through the second half of twenty fifteen for our industrial business in China. Thank you for your attention.
I'll turn it back over to Alan. Thanks, Lawrence. As Lawrence reported, we're driving solid performance across many parts of our business, demonstrating the effectiveness of our growth strategies and our strong execution. We're making steady progress with our initiatives and encouraged by 2015 results through the first half. Next, I'd like to provide a few updates from the time of our Q1 earnings call back in late March, starting with acquisition activity.
McCormick's business development team is having a busy year with great results. Back in February, we announced an agreement to purchase Dravetia and Alimentari and completed this purchase at the end of May. In early March, we acquired Brand Aromatics. And about a week ago, we signed an agreement to acquire 1 World Foods, seller of Stubs, the number one brand of premium authentic barbecue sauce in the U. S.
Stubs products also include marinades, rubs and skillet sauces. Annual sales of this business are approximately $30,000,000 and are growing at a double digit rate. Stubs is a perfect complement to our products, rounding out our range of grilling items under the Grill Mates, Lawrie's and McCormick brands. To maintain the authenticity of this brand, we plan to keep the business headquarters in Austin, Texas. We expect to maintain a double digit pace of sales growth near term through expanded distribution, increased household penetration and innovative flavors.
We anticipate significant cost synergies that will deliver at least $10,000,000 of incremental EBITDA by 2017. At an anticipated purchase price of $100,000,000 we expect Stubs to be another attractive deal for McCormick. Along with our efforts to build sales through acquisitions and the innovation and brand marketing activity that Lawrence discussed, employees throughout the company are making great progress with their efforts to eliminate costs. We reaffirm our goal to achieve at least $85,000,000 in cost savings this year. This will bring our cumulative annual cost savings to more than $400,000,000 since our 2,009 launch of McCormick's comprehensive continuous improvement program, CCI.
During the Q2, we announced additional reorganization plans in the EMEA region. These plans include the of certain additional activities to the recently established McCormick Shared Services Center in Poland. While we expect to record charges of approximately $25,000,000 related to these actions, there is a very good payback with estimated annual cost savings of $16,000,000 by the end of 2017. We've recently increased our resources to drive our CCI program and expect to continue our track record of productivity improvement throughout the organization. Let's turn to some recent leadership changes.
As announced in early June, we're pleased to have Maritza Montiel and Michael Conway joining our Board. Maritza is former Deputy CEO and Vice Chairman of Deloitte. During her 40 years at the firm, she led a variety of strategic initiatives prior to retiring in mid-twenty 14. Michael is President of Global Channel Development for Starbucks. He has responsibility for all commercial and business strategy functions and is driving aggressive plans to expand to emerging international markets.
Prior to Starbucks, Michael served in leadership roles at Johnson and Johnson Campbell Soup. Retiring from our Board is JP Bilbrey, Chairman, President and CEO of Hershey. He served as a Board of Directors since 2005 and we truly appreciate his participation and contributions to our success. Turning to our company leaders, Ciel Parrish, Senior VP of Human Resources, retired from McCormick after 32 years of exemplary service and 7 years as a member of our management committee. On Slide 17, we've listed the current members of the management which now include Lisa Manzone, who is promoted to Seals role, and also Brendan Foley, who joined us from Hines about a year ago and whose responsibilities have been broadened from Head of U.
S. Consumer Business to a North American role. We also announced in April that Nika Rimmer has joined the company. Most recently with Boston Consulting Group, Nika is responsible for shaping overall corporate strategies and working to increase EVA at McCormick. I'm confident that these latest changes will provide strong leadership for our business going forward.
The last topic I want to cover before turning it over to Gordon relates to the healthfulness of spices and herbs. Since its formation in 2007, the McCormick Science Institute, MSI, has supported scientific research and dissemination of information on the health benefits of culinary herbs and spices. In 2014, MSI in partnership with the American Society For Nutrition hosted a summit of researchers, government officials and health and wellness communicators to discuss the role of herbs and spices in a healthy diet. This message is beginning to resonate. In May, we were pleased to learn that the U.
S. Dietary guidelines advisory committee has recommended to the government that the 2015 dietary guidelines encourage use of spices and herbs as a flavor alternative to sodium. We're optimistic that this change will be made. In addition, Australia's healthy eating pyramid was recently updated and now on trend with spicy foods, fresh foods, ethnic cuisine, simple ingredients. This latest health news is just one more reason for consumers to turn to spices and herbs to add flavor.
It's now my pleasure to turn it over to Gordon for a financial perspective on our results and guidance. Thanks, Alan, and good morning, everyone. As both Alan and Lawrence indicated, we were pleased with our sales and profit results in the Q2 across our two segments and in both developed and emerging markets. On a constant currency basis, the underlying growth in sales was very strong at 5%. Our adjusted operating income excludes special charges and rose 1%, but if we also Taking a look at our consumer business, Slide 21 shows that we grew 2nd quarter consumer business sales 3% in constant currency, driven by higher volume and product mix.
Sales in the Americas rose 2% in constant currency from the Q2 of 2014 with contributions from higher volume and product mix as well as pricing actions mainly related to honey products in Canada. As Lawrence described, we grew U. S. Sales of recipe mixes, GrillMate and Zatarin's products. While still a small part of our business, sales in Latin America grew at a double digit rate this period as we expand distribution across a number of markets from our production base in El Salvador.
In EMEA, consumer business sales in constant currency grew 4% as a result of higher volume and product mix. Distribution gains were a major reason for the increase with wins in France, Poland and Russia. Our brand marketing and innovation are additional factors driving sales and we look forward to including sales of Drogaria and Alimentari in our results starting in the Q3. In constant currency, we grew consumer business sales in the Asia Pacific region 7 percent with a 9% increase in volume and product mix. Our sales in China continued to grow at a double digit rate year on year and Australia also delivered a double digit increase for the Q2.
We had some further pressure from basmati rice prices in India leading to lower pricing for the region this period. In total for the consumer business, adjusted operating income was $81,000,000 compared to $86,000,000 in the Q2 of 2014. In constant currency, adjusted operating income was comparable to the year ago period with the impact of sales growth and cost savings offset by the unfavorable impact of material costs, retirement benefit expense and product mix. Also in the second quarter, we recorded about $1,000,000 of transaction costs related to the acquisitions we have announced in 2015. Turning to our industrial business, we grew 2nd quarter sales a robust 7% in constant currency from the year ago period.
Pricing actions taken in response to higher material costs and higher volume and product mix, each added 3 percentage points and acquisitions another 1 percentage point of growth. In the Americas region, sales rose 5% in constant currency, mainly from pricing and the addition of brand aromatics. Volume and product mix were comparable to the year ago period as increased sales of snack seasonings, particularly in Latin America and higher sales of branded food service products were offset percent in constant currency with a 9% increase in volume and product mix. As Lawrence described, we are in our 3rd year of performance in this part of our business as we support the growth and geographic expansion of leading quick service restaurants and food manufacturers. We grew industrial business sales in the Asia Pacific region 4% in constant currency.
In China, we grew through innovation and export and the recovery continued from 2014 challenges with lower demand for major quick service restaurants. Adjusted operating income for the industrial business was $42,000,000 well ahead of $36,000,000 in the Q2 of 2014. In constant currency, the growth was even more impressive at 24%, with the benefit of higher sales in our CCI program more than offsetting the unfavorable impact of material costs and retirement benefit expense. Let's turn to Slide 31. Across both segments, adjusted operating income was $123,000,000 a 1% increase from $122,000,000 in the Q2 of 2014.
In constant currency, we grew adjusted operating income 7%. This is an improvement from the 1st quarter as increased cost reductions and additional pricing actions are providing a greater offset to material cost inflation. These same positive factors are impacting gross profit margin. While we were down 50 basis points year on year in the second quarter, this was a better performance than the Q1. Heading into the second half, we expect our cost reduction and pricing activity to continue to improve gross profit margin.
However, we now expect gross profit margin for the fiscal year to be comparable to 2014 rather than up slightly. As a percentage of net sales, our selling, general and administrative expense declined 60 basis points, even with the impact of transaction costs 2015 acquisition activity. Special charges of $19,000,000 in the 2nd quarter related primarily to the additional actions planned in EMEA that we announced in April. Below the operating income line, our effective tax rate was 16 percent, which was below our initial guidance and year ago quarter due to $13,000,000 of discrete tax benefit recognized in the Q2 of 2015. Based on our current outlook, including these benefits and our projected mix of our business across tax jurisdictions, our estimated effective tax rate for fiscal year 2015 is approximately 27% compared to our prior guidance of 27% to 28%.
This is based on an underlying rate of approximately 29%. Keep in mind that in the absence of any further discrete items, we expect an unfavorable variance in the next two quarters with a tax rate of 29% versus 21.4% the Q3 of 201425.9 percent in the Q4 of 2014. Income from unconsolidated operations rose 19%, led by our joint venture in Mexico, which continues to have a strong financial performance as Lawrence described. This increase is net of an unfavorable currency impact. At the bottom line, adjusted earnings per share for the Q2 of 2015 was $0.75 As you can see on Slide 34, this was an $0.11 year on year increase led by the lower tax rate along with increases in our adjusted operating income, unconsolidated income and lower shares outstanding.
Turning next to Slide 35, we've summarized highlights for cash flow and the quarter end balance sheet. Our cash flow from operations this period was $186,000,000 compared to $182,000,000 in the first half of twenty fourteen. During the first half of twenty fifteen, we used $70,000,000 of cash to acquire nearly 1,000,000 shares of McCormick's stock occurring mostly in the Q1. Given our activity to date, we continue to anticipate a 1% reduction in shares in 2015. At quarter end, we had $46,000,000 remaining on our $400,000,000 authorization.
The Board approved a new $600,000,000 share repurchase authorization in March. During the Q2, we used a combination of cash and short term borrowings to acquire Brand Aromatics for $63,000,000 and make the initial payment of $49,000,000 to acquire Dragoria and Alimentari. Likewise, we expect to use a combination of cash and short term borrowings for the acquisitions of Stubs later this quarter. Consistent with past practice, we have curtailed our share repurchase activity in order to return to our target debt to adjusted EBITDA level of 1.5 to 1.8. Our balance sheet remains sound.
We are generating strong cash flow and we believe we are well positioned to fund investments to drive growth, including future acquisitions. I'll wrap up with our latest financial outlook for fiscal year 2015. We reaffirm our expectation to grow sales 4% to 6% in constant currency. The 3 acquisitions we have announced should add at least 1% of growth this year, giving us greater confidence in achieving the upper end of our range. We continue to estimate that currency will reduce our sales growth rate by 5 percentage points in 2015.
We reaffirm our expected 6% to 7% constant currency growth for adjusted operating income from a 2014 base of $608,000,000 in adjusted operating income. We continue to anticipate unfavorable currency rates to reduce operating income growth by 3 percentage points. For operating income on a reported basis, we expect a 4% to 5% decline from $603,000,000 in 2014. This includes a $54,000,000 estimated impact from special charges. We expect adjusted earnings per share of $3.47 to 3 point $3 increase from the previous guidance reflecting the latest tax rate estimate.
This new range excluding an estimated $0.12 headwind from currency dollars headwind from currency is an increase of 7% to 9% from $3.37 in 2014. On a reported basis, we expect earnings per share of $3.18 to $3.25 compared to earnings per share of $3.34 in 2014. This range assumes a $0.29 impact from special charges. As you consider the financial projection for the second half versus the year ago period, keep in mind the projected headwinds from a higher tax rate, unfavorable currency and our plans to increase earnings per share of $0.95 in the Q3 of 2014. However, our projection is to increase 4th quarter adjusted earnings per share from adjusted earnings per share of $1.16 in the Q4 of 2014.
For fiscal year 2015, we continue to expect another year of strong cash flow. This will provide funding for our dividend, our acquisition activity, some debt pay down and future share repurchase activity. Let's turn now to your questions, then some closing remarks from Alan. Operator, we're ready for the first question.
Thank you. We'll now be conducting a question and answer session. Thank you. Our first question is coming from the line of Ken Goldman with JPMorgan. Please go ahead with your question.
Hey, good morning everybody. The shift to e commerce in China, it's hurt a lot of consumer companies lately. McCormick seems to be bucking the trend. Just curious, despite the seasoning category, is it not being hit by the channel shift as much as others? Or is McCormick benefiting from that channel shift?
I'm just curious for your thoughts here because it does seem to be a little of an anomaly versus what we're seeing elsewhere.
Hi, Ken. This is Lawrence. I'll take this question if you don't mind. We do participate in the e commerce sector in China, but I'll tell you for us it's still a developing segment of the market, a developing channel just like it is for everyone else. The big difference I think in our business in China for our consumer segment is that we're a lot less dependent on the modern trade than many of our peer companies.
With the acquisition of Wuhan Asia Pacific Condiments, we got a strong foothold in the central part of China, great penetration in the more traditional segment of the market. And we're experiencing really broad based growth on both our McCormick brand and on our acquired brands across China. And we recognize that there's been some slowdown in economic growth in China, but our categories continue to do well and our brands in particular had really broad based growth in this quarter and we don't really see any change in that trend.
Okay. Thank you. And then one follow-up. In general, you're looking for a nice improvement in the gross margin as the year progresses at least on a year on year basis. I just want to make sure I understand if we had to sort of rank what are the factors that are going to help that margin?
How much might we attribute to currency versus pricing so forth? Just want a little bit more color if possible on what some of those factors might be?
Yes. We're looking for sequential improvements in the gross profit margin and it's going to be a combination of CCI, which will be obviously continuing to progress as we go through the year. The pricing actions primarily on the industrial side of the business, which as you know those pricing mechanisms get readjusted periodically based on the commodity basket. So those will continue to readjust periodically throughout the year. And then obviously, our 4th quarter tends to be more heavily weighted to our consumer business.
So you'll get some benefit of business mix as we approach the
Q4. Thanks, Gordon. Our next question is coming from the line of Alexia Howard with Sanford Bernstein. Please proceed with your question.
Good morning, everyone.
Good morning, Alexia.
Can I ask about the trends in operating profit growth on the consumer side? It's been pretty flat for the business as a whole in the last couple of quarters on a constant currency basis. Are you expecting an improvement going forward? And what are the puts and takes there? And particularly, I don't know what you can say about the Consumer Americas business, but how has that been moving and how is it expected to shape up for the rest of the year?
Thank you.
Hi, Alexia, it's Gordon. Again, what we're expecting the raw material cost pressures as we mentioned in the conference call has been primarily across both businesses. The consumer business savings are starting to ramp up as we progress through the year. So those benefits we anticipate to be more heavily weighted to the back half of the year. The operating margins are also being impacted by our brand marketing expenses.
So as we mentioned in the call, we do have some increase in our brand marketing expenses. Some of this is going to be particularly weighted to Q3. And then finally, we're looking just for the continued consistency of growth in
volume to leverage our scale.
So again, by the consistency of growth in volume to leverage our scale. So again, by the Q4, anticipating our guidance anticipates a good Q4 for our consumer business, particularly the U. S. Consumer business. So with the combination of CCI, scale and the timing of our brand marketing, we good margin performance by the Q4.
And just as a quick follow-up, in the U. S. Consumer business, do you expect the price realization to improve through the course of the second half? Would you expect to get a little bit more of a benefit from year on year pricing being a little bit more stable than it has been in the past? Thank you.
We really haven't taken any pricing in the U. S. Consumer business there, but we do expect a different mix as we're selling more branded items and less of the value items. Great.
Thank you very much. I'll pass it on.
Our next question comes from the line of David Driscoll with Citigroup. Please go ahead with your question. Great. Thank you and good morning.
Good morning, David.
Wanted just to ask your impressions of the U. S. Spices and seasoning category and the market share trends over the course of time. You guys mentioned this in your script, but could you just spend a little bit more time on the share declines here? And what should we expect going forward?
Is this a multiyear trend where you'll just progress very slowly to try to getting the share declines to stop to get back to neutral. And I'm just trying to get your sensitivity on when you see these kinds of share declines, how the business wants to respond to it, how significant they are to you? You've got top line growth, but share declines are always something that we look at quite closely. And I'm trying to get a sensitivity here on your concern level on this and then how it should progress
forward. We're obviously very focused on stabilizing and growing share. Our intention is to actually be the driver of growth in our categories. We are seeing share improvement and have for 20 consecutive months in our recipe mixes. We're seeing in some of our other brands like Zatarin's where we're seeing share improvement.
And we're seeing share improvement in some of our other markets. So our core focus is on the U. S. Consumer business where the core spices and seasonings represent a little less than 15% of our total company sales. So I want to keep in perspective, But we are very focused on regaining and driving share in those core items.
We think the things that we're doing, like working on the pricing of the high price sensitive items at retail is a good mix. We're helping our retailers profitability of the category and that McCormick drives that profitability. So we feel like we're doing a lot of the right things, but it's going to take some time.
Yes, David, this is Laurence. If I can just add to those comments, we've really been out in front of this since CAGNY in 2014 where really we were stepped up and said that we had lost some share in both of our core growth platforms in the U. S. To some smaller competitors and put in place some initiatives to tackle it. I think we did a lot of the heavy lifting last year and we're really actually pleased with our sales progress in both the Q1 and the second quarter of this year.
We're not gaining share yet in spices and seasonings. We are in recipe mixes and really have turned that around quite strongly. And in portions of our spices and seasonings business, we're seeing some great progress. Our gourmet relaunch which is a part of turning around our spices and seasonings category growth is generating great early results. We're really winning the grilling season this year.
And we're confident that we'll do more than just stabilize our share in this that will return to share growth and will be a driver of the category in the U. S. We won't be satisfied with our results ourselves until we do.
Is it still a price gap issue? Or do you think you have that under control?
I think that we've thought about our pricing and really our thinking on pricing has evolved as our understanding of this issue has matured with their greater analytic capability. So when we spoke about this at CAGNY in 2014, our focus was on price gaps versus private label and versus key competitors. And having conversations with retailers about those price gaps with the aim of narrowing them either by reducing the prices on McCormick or frankly by raising the price on some competitive items that were irrationally priced in some cases below the retailer's private label. But as we have gone through 2014 and we've developed greater understanding of pricing dynamics, we came to realize that the price gaps actually mattered less than absolute price points on about a dozen key items. So our initiatives this year has been focused more on managing the absolute price points on those key items.
And it does not involve additional pricing action or promotional activity on our part, it's really the way we allocate the promotional spending that we're already doing with the customers to direct it to the most productive place. And then finally, I think in my prepared remarks, I mentioned a comprehensive category management tool. And this is really the next step in our evolution on this to have an even stronger analytic capability that allows us to understand and model the cross elasticities of the entire category to optimize it for the retailer.
Very helpful. I'll pass it along. Thank you. Our next question is coming from the line of Akshay Jagdale with KeyBanc. Please go ahead with your question.
Good morning.
Good morning.
One quick one. Just in terms of your guidance for this year, how much of the M and A related charges are included in your constant currency fee EBITDA or operating income guidance?
We mentioned about $1,000,000 related to the consumer acquisitions that is already absorbed in those guidance numbers.
Okay. Thank you. And just can you talk a little bit more broadly about the consumer environment? Obviously, there's been some talk about lower gas prices helping consumer spending. We really haven't seen it on broad data that we look at.
But how would you characterize the health of the consumer here in the U. S? And maybe talk a little bit about China because all the indicators that we're seeing point to a little bit of slowdown there, but your business is actually doing quite well. So can you talk about those two topics broadly? Thanks.
Sure. We're still seeing a bifurcated consumer with some level of growth in premium and our gourmet brand is an example of that and niche categories. So there is some growth. We're seeing some recovery in food service with people eating out. Other hand, there is a vast number of consumers who are still stressed economically.
And so we are and we're competing in the value segment to try to capture that. In China, as Lawrence said, there has been some slowdown in economic activity. We're encouraged because we're still we're pretty broad based. We're in the traditional trade. We have our presence in the modern trade and we're participating in the emerging and fast growing e commerce.
But we are still long term believers in China. We're continuing to make investments there and are bullish on our prospects.
Thank you. I'll pass it on.
Our next question is from the line of of Jonathan Feeney with Pathalos Research. Please go ahead with your question. Good morning. Thanks very much. Hi, Jonathan.
Thanks.
I just wanted to understand a little bit about
it seems like particularly as
it relates to EMEA, you've come back a few times with some business reviews around these restructuring charges. And I guess it seems to me like maybe you're just trying to get your hands around some new cost opportunities that kind of make sense in a changing context whether that's currency or some of the effects currency might have on the market. Could you tell me about that process a little bit because you've come up with some new charges now a couple of times now, I guess in the past 6 months sort of seen more opportunities to take special charges for restructurings. And maybe where we stand, Jimmy, should we expect more of
that in the second half
of the year, year, more opportunity to do that? Thanks. Any perspective on that would be great.
Yes. It's I'll really point to and this is specific to Europe. It's a continuation of the journey of the shared service structures and leveraging scale where we have opportunities to do that. You mentioned a couple of charges. The first charge was primarily our first truly shared service opportunity, which we went to Poland with and it was focused primarily in the financial end of things.
The current activities are again related to an extension potentially of other activities into those into the same shared service center. So it's broadening shared service. It's the same journey we've gone on here in the U. S. The North American initiative that we took more recently was again more of an extension of shared service activity into our North American shared service.
And also in both cases, it's looking at span of control, faster decision making and how we can delay our decision making to be more responsive in a very, very competitive market. We do these things very, very analytically and thoughtfully. To say that what we would never do anything again would be probably a misstatement. But at the same time, we have to execute what we've already discussed. And as a result, I just didn't we need to get done the charges that we already announced this year and execute against those programs.
Okay. Thanks very much.
Thanks, John.
Our next question is from the line of Robert Moskow with Credit Suisse. Please go ahead with your question. Hi, thank you. Hi, Rob. Good morning, Rob.
Good morning. On gross margin erosion, I guess it's kind of hard to see how all this trade activity and the pricing action in, why is that not helping you get your gross margin up? Like why is the gross margin continued to kind of erode a little bit? It doesn't appear to be hurting the year, but I would have thought by the end of the year maybe do you expect to be back on track in terms of boosting gross margin?
Yes. We expect gross margin as we talked about the impact of raw material costs this year, we said it would hurt us earlier in the year. We're forecasting mid single digit material cost inflation. And the CCI program that was hitting us right away in the beginning part of the year. The CCI was going to take some time for us to help offset that.
So our expectation is as we progress through the year, gross margin will have a sequential improvement such that by year end, we should start we should see We anticipate further sequential I'm sorry, Q1 We anticipate further sequential I'm sorry, Q2 versus Q1. We expect further improvement in Q3 versus Q2 and then again improvement in the Q4. So it's a function of the timing of raw material costs and the timing of our CCI.
Gordon, like what's the factor that caused you to have to lower the guidance for the year? What fell below expectations in the first half?
Price realization is the same and CCI savings is the same. It's a tweak on the business mix candidly. And the offset was obviously in the favorability of SG and A. But there's it's we were up slightly, now we're comparable. It's not a what I would call a major change to our full year guidance.
But the terms of the fundamentals of how we see this playing out that has not changed.
It's weak in the mix. Secondly, on the acquisition of Stubs, is that providing any contribution to operating profit for the year?
It's pretty neutral based on acquisition integration costs and the transaction costs that we've already mentioned.
Okay. And then lastly, one of your biggest or I guess your biggest customer had been very promotional on its private label side. Has that eased off at all? And has that allowed you to compete or to perform better at that retailer?
Hey, Rob, this is Lawrence. I think what you're referring to is actually not private label, but it's a control brand that is a McCormick brand that we sell them. They've had a big that's had a pretty big impact on us in the first part of the year. But we do see as they lap the activity that started really last year that it's backing off considerably.
Does that mean that it's kind of continuing at a steady state? Or is it
Actually the ACV, the large displays is about half its level that of the peak. We're still going to see some year on year comparison, but it is it's greatly reduced from its peak. It's not steady state. Yes.
Right. So they're merchandising it less.
Thanks. Yes. Thanks.
Thank you.
Our next question is from the line of Eric Kapsner with Deutsche Bank. Please go ahead with your questions.
Good morning, everybody.
Good morning. Hey, good morning, Eric.
Good morning, Eric. Thank you. I guess, two questions. On China Industrial, there was limited time offers that helped you in the Q1. Did those roll off in the second as you had expected?
And is that business kind of on track or on plan with what you had thought? And then a bigger picture question for Alan. The company has gotten more aggressive with M and A this year, 3 deals. And the latest one Stubs in barbecue, I think the company's challenge in M and A has been potentially some kind of conflict with industrial customers who may be in the same business. Are you concerned about all of that any of that?
Or is there still enough runway based on the M and A you see to not have any conflicts arise within your industrial customers? Thank you.
Let me take the industrial question first on or the acquisition question first and I'll have Lawrence talk about China Industrial. We always analyze for deals what the competitive overlap is going to be. We know that we need to be in parts of the categories that are growing faster and we see opportunities for this. In this case, in the case of barbecue sauces, we saw very little competitive overlap and we saw the opportunity for us to really participate in more of the premium and higher price part of the category that's growing. And so it's brand that has no high fructose corn syrup and has carved out a very nice free from all the stuff that consumers don't seem to want right now.
So that one fits very well for us and we see some other opportunities like that that don't impact or overlap with our critical customers. So we've expanded our horizons in terms of the kinds of acquisitions that we're considering. And I'll have Lawrence talk about China Industrial. Yes. Eric,
on our China Industrial business, the growth that we're experiencing there partly reflects a recovery of the quick service restaurants and partly reflects a gain in share that we've achieved with those same customers. So while the limited time offers are important, there's a steady stream of innovation that these customers are doing that cycles through our business continuously. I'd say that the key underlying trend this year has been a recovery in the quick service restaurants themselves and a gain in our share with those customers. Okay. Thank you for that.
I think yes, I think what we ought to do since we're coming up on the hour is I'd like to turn it over at this point to Alan for closing remarks and we'll welcome any further questions. We'll take those offline.
Sure. Great. Thanks for all your questions and participating in the call today. Consumer demand for flavor is rising and driving demand for our products. Our geographic presence and product portfolio are expanding and aligned with the move towards healthier eating, fresh ingredients, ethnic cuisine and bold taste.
And we're driving growth through innovation, marketing and acquisitions. In 2015, we're seeing the benefits of our stepped up cost reduction activity and we'll continue to pursue ways to improve our productivity and profit as we grow the top line. We look forward to reporting you on our continued progress in the upcoming quarters, and we hope everybody goes out and grills on the 4th July weekend. Have a great weekend.
Thanks, Al, and thanks everyone for joining us today. For any additional questions, please give us a call at 41071724 4. That concludes this morning's call.