# Fellow
SHAREHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/consumer-defensive-packaged-foods/NYSE_MKC_2017/NYSE_MKC_2017.mmd` · pages 3-9_

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Fellow
SHAREHOLDERS:

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2017 was a milestone year for McCormick. We delivered record financial results driven by both strong core business performance and acquisitions. The purchase of Reckitt Benckiser's Food Division ("RB Foods")…the largest acquisition in the company's history…strengthens our flavor leadership and advances our vision to bring the joy of flavor to consumers worldwide. We continue to differentiate McCormick through industry-leading growth.
McCormick's strategic imperatives of growth, performance and people have been a consistent focus for us. As we look ahead to the future of our company, we have refreshed McCormick's vision and mission and launched five principles to keep our culture contemporary and ensure our competitiveness. Our vision, to bring the joy of flavor to life, describes what we aspire to and what we want to become. Our mission, to make every meal and moment better, defines our reason for being and the value we deliver every day.

To support our refreshed vision and mission, we introduced five key principles that speak to our purpose, competitive advantage and ambitions. These principles are the foundation of our strategic imperatives. You can learn about our Passion for Flavor \( ^{TM} \) , Power of People \( ^{TM} \) , Taste you Trust \( ^{®} \) , Driven to Innovate and Purpose-led Performance principles starting on page 10. Through the integration of our vision, mission, principles and strategies, we are delivering top tier business performance, building for the future and doing the right things for people, communities and planet.

## We Are Delivering Top Tier Business Performance

We grew sales, operating profit and earnings per share in 2017. Our financial performance was another record year. We exceeded each of our long-term financial goals, which in constant currency are to grow sales 4% to 6%, adjusted operating income 7% to 9% and adjusted earnings per share 9% to 11%. We also delivered substantial cost savings, expanded adjusted operating margin and generated strong cash flow.

Net Sales rose 10% with minimal impact from currency rates. Incremental sales from our acquisitions of RB Foods, Giotti and Gourmet Garden contributed 6% to the sales increase. The remaining increase was driven by new products and base business growth from pricing actions, expanded distribution and brand marketing. Our consumer segment delivered strong sales growth of 8%. In constant currency, consumer segment sales also grew 8%. Our industrial segment achieved an exceptional rate of sales growth at 12%. Excluding the impact of unfavorable currency rates, we grew industrial segment sales 14%.

Operating income increased to \(702 million compared to \)641 million in 2016 driven by acquisitions, higher sales, favorable business mix and Comprehensive Continuous Improvement (CCI) led cost savings. Partially offsetting these benefits were transaction and integration expenses of \(62 million related to the RB Foods acquisition and an increase of \)6 million in special charges related to organizational and streamlining actions. Excluding these costs, adjusted operating income increased 20% to \(786 million compared to \)657 million in 2016. Excluding the impact of unfavorable currency rates, we grew adjusted operating income 21%. Our adjusted operating income margin increased 140 basis points, with expansion in both our consumer and industrial segments.

Our CCI program achieved \(117 million of cost savings, a record year. These savings generated fuel for growth funding increases in our brand marketing and new products as well as contributing to our adjusted operating margin expansion.

Our earnings per share increased to \(3.72, compared to \)3.69 in 2016. Transaction and integration expenses as well as special charges lowered earnings per share by \(0.54 and \)0.09 in 2017 and 2016, respectively. Excluding the impact of these costs, we grew adjusted earnings per share by 13% to \(4.26 compared to \)3.78 in 2016. We drove this growth, which includes the impact of unfavorable currency rates, with higher operating income partially offset by an increase in interest expense.

We have a long history of generating strong cash flow from operations and returning cash to shareholders. In 2017, we reached \(815 million of cash from operations. At the end of 2017, our Board of Directors authorized an 11% increase in the quarterly dividend. We are proud to be a dividend aristocrat having paid dividends every year since

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Total annual shareholder return has risen 12% or more for the past 1-, 5-, 10- and 20-year periods.

Dividends Declared

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McCormick has increased its dividend in each of the past 32 years. We have paid a dividend for 92 consecutive years.
1925 with increases in the past 32 consecutive years.

Our results reflect the effective execution of our strategies and the engagement of our employees around the world. Our performance continues to give us confidence that the momentum of our business is sustainable and we will continue to create shareholder value.

## We Are Building the McCormick of the Future

At McCormick we are differentiated with a broad and advantaged portfolio. As a global flavor leader, we are in categories that make it easy to enjoy delicious, memorable food experiences and are a natural fit for healthy eating. With leading flavor brands, trend-trackers, research chefs, flavor technologists and sensory scientists around the globe, we are the source home cooks and professional chefs alike turn to for flavor and culinary inspiration. Our expertise comes from a long heritage of developing high-quality flavors that have become part of families' traditions, food and beverage companies' flavor foundations, and chefs' top notes. We are uniquely positioned to access quantitative and qualitative insights about global eating habits which strengthens our deep understanding of the consumer experience of food and flavor.

The food industry is going through a significant change as it adapts to a fast-evolving consumer landscape, and McCormick is well positioned to benefit from these trends. We are aligned with consumers' increased interest in bolder flavors, demand for convenience and focus on fresh, natural ingredients, and also with emerging purchase drivers such as greater transparency around the sourcing and quality of food. We continue to capitalize on the growing consumer interest in healthy, flavorful eating—we flavor fresh. By adding flavor through healthy choices, we are the natural complement to fresh, real food. For our U.S. industrial customers in 2017, over 60% of product development projects included health and wellness attributes like lowering sodium, artificial

"The RB Foods acquisition was made from a position of strength as our global flavor portfolio continues to drive growth and differentiate McCormick."

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Health and Wellness

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Liquid Products

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Spices and Seasonings

New product innovation remains an integral part of our growth with 2017 launches spanning our portfolio.

ingredients or calories. Our focus on growth by investing in our strategies, driving profit realization and strengthening our organization is at the foundation of building our future.

## Our flavor leadership is expanding

McCormick advanced to a leading position in condiments with the acquisition of RB Foods. We are very excited by the addition of French's and Frank's RedHot to our global portfolio, which

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Combination of powerful brands expected to drive meaningful growth synergies, such as in tabletop offerings for fast casual restaurants.

are now our second and third largest brands, respectively, behind the McCormick brand. McCormick now has leading positions in categories that consumers use most when flavoring fresh foods. Our one-stop shop for condiment, spice and seasoning needs, provides customers and consumers with an even broader and complete product offering. The addition of these iconic brands, with simple, high quality, clean ingredients, reinforces our focus on growth across both our consumer and industrial segments and provides further international and foodservice opportunities. We expect to grow these brands in new ways through our proven track record of insight-driven innovation and the ability to leverage our global footprint.

We are several months into integrating the business and driving plans to capitalize on the growth opportunities and realize synergies. Our enthusiasm for this acquisition and our confidence that the combination of our powerful flavor brands will drive significant shareholder value continues to grow. This confidence is also bolstered by our strong history of successfully integrating and delivering performance on other recent acquisitions.

## We are making investments for our brands, customers and consumers

We are driving sales and building our brand equity. We increased our marketing investment in 2017—up 39% over the past five years. In 2017, we expanded on the success of our North American purity campaign by introducing it in the EMEA region. This campaign emphasizes the flavor and quality of McCormick's spices and seasonings. Globally, digital marketing continues to be a significant portion of our media spend. We are achieving returns on investment higher than consumer product industry norms across display, search and social media spend. Our leadership in this area was rewarded again in 2017 with recognition as a top three brand by L2, a business intelligence service, in its Digital IQ Index. This marked our fourth consecutive year in the top five ranking of 100 food and beverage brands based on the effectiveness of our website, digital and social media

We continue to enhance our global brand marketing with investments in digital marketing.
as well as our advances in the rapidly growing e-commerce channel.

E-commerce is a significant growth opportunity. In 2017, we experienced a high double-digit sales growth rate in this channel. We expect a disproportionate amount of growth from e-commerce and are making investments to capitalize on this opportunity. We continue to add resources to enhance content, establish programs with key e-commerce retailers and to develop innovative packaging and products dedicated to the channel.

Breakthrough innovation...such as our new U.S. breakfast platform...is an integral part of our growth platform. 9% of our 2017 sales were from launches made over the last three years. Continuing to capitalize on health and wellness, we launched organic recipe mixes and organic honey in North America, organic core herbs and spices and homemade dessert products in France, and gluten free recipe mixes in the U.K. Expanding our liquid portfolio, we added Simply Better wet gravies, new flavors of Kitchen Basics \( ^{®} \)  bone

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In 2017, we acquired Giotti, a leading flavor business in Europe with expertise in high-growth health and nutrition products, including beverage applications. Giotti expands our flavor capability in our EMEA region with flavor manufacturing, research and development capabilities, complementary products and new customers.

broth and new varieties of Grill Mates \( ^{®} \)  liquid marinades. Gourmet Garden \( ^{®} \)  finishing drizzles were introduced in Australia offering consumers a closer to fresh alternative to flavor their grilled meals. In China, we launched new condiments such as black pepper sauce. We also increased our level of spice and seasoning new products. In the Americas, we launched a new "Super Deal" format that offers a better value in a large size format and new flavors. We also introduced a new range of Pasta Seasoning blends and premium garlic products. In the Asia Pacific Zone (APZ), we launched a Gourmet Garden \( ^{®} \)  re-sealable pouch of lightly dried herbs and seasonings in Australia and spice mixes in India.

In our industrial segment, our on-trend and better-for-you new products were a significant driver of our 2017 industrial segment sales growth. As our customers move their portfolios to more natural and better-for-you they want to ensure that taste is not compromised. Our distinctive food first approach, our deep understanding of food and the use of natural ingredients like herbs, spices, and extracts, competitively differentiates us.

In 2017, we progressed on increasing our capacity to support our growth in APZ. We completed the construction of a new, larger facility in Shanghai to accommodate increasing demand in China. In Singapore, we opened a new regional headquarters and Technical Innovation Center (TIC). This TIC enables us to leverage the immense potential the region offers, focusing further on customer intimacy. We also began construction in Thailand on a new regional manufacturing facility to expand production capability and deliver on both segments' growth plans in Southeast Asia.

## Our margins are improving from CCI and a portfolio shift

Along with our focus on sales growth, we are also focused on profit realization and in driving operating income growth at a faster rate than sales. In 2017, we increased adjusted operating income margin by 140 basis points driven by both our CCI program and a portfolio shift in our industrial segment.

Our CCI program has a two-fold objective. It generates fuel for growth to fund investments in brand marketing and additional sales initiatives, and also drives margin improvement. Early in 2016, we set a four-year goal to achieve $400 million of cost savings through greater productivity. We are well on our way to achieving this goal with a total of $226 million delivered in the first two years, with $117 million realized this year. Our efforts in this area are paying off.

In 2017, we continued to expand our industrial margins with the strategic migration of our portfolio to more technically insulated and value-added categories, flavorings and branded foodservice. Complex flavors are protected by proprietary research and technology while our foodservice business carries the value of our brands. This portfolio shift has been a significant driver in increasing the industrial segment's operating income margin by 190 basis points in 2017. Giotti, our most recent industrial acquisition completed in December 2016, further migrates the portfolio towards value-added categories and positions us for incremental sales growth through the expansion of our flavor solutions across Europe. In addition to Giotti, we are continuing to expand our industrial margins through the rapid growth across other flavor categories, such as in savory, and in branded foodservice, including Frank's RedHot and French's.

## We are strengthening our organization

We are strengthening the organization with a cultural shift to faster decisions, more personal accountability and actionable insights. Our growth agenda has highlighted the need for simpler, more standardized and efficient global processes to provide a platform to grow while realizing the advantage of our scale. In 2017, we announced our Global Enablement organization. This organization is reinventing our business processes and executing a step change in working globally and cross functionally.

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Management Committee

Left to right: Malcolm Sujft, Nneka Rimmer
Mike Smith, Lawrence Kurzius, Brendan Foley, Lisa Manzone

## We Have the Right People and the Right Culture

Our success is driven by our people and our deep culture, which began with C.P. McCormick's introduction of the Power of the People. This culture engages all employees through our Multiple Management philosophy of encouraging participation and inclusion. Our high performance culture is a key differentiator in today's highly competitive talent market. Leveraging the knowledge, skills and talents of a diverse workforce are essential to successfully achieving McCormick's growth and objectives. We have approximately 11,700 employees around the world that are united by a passion for flavor. Together, with our winning ways of working, we are driving growth opportunities, addressing business challenges, and developing our people including future business leaders. On behalf of the executive team, I would like to thank McCormick employees for their hard work and tireless pursuit of excellence.

At the core of our culture is our commitment to creating a diverse and inclusive global workforce that is as wide-ranging as the people who trust and love our products. We encourage diversity globally through leadership goals related to women globally and people of color in the U.S, our annual Diversity and Inclusion Day activities, our robust Supplier Diversity program and employee ambassador groups. In 2017, we were recognized by DiversifyInc on their 2017 Top 50 Companies for Diversity. This is a highly competitive award which highlights successes and best practices that promote the growth and advancement of underrepresented groups in the workplace. This marks McCormick's first time on the list and this recognition is a testament to our continued emphasis on embracing and leveraging diversity and inclusion globally.

This past year we also made changes to our management structure and our Board of Directors. Nneka Rimmer was named Senior Vice President of Strategy and Global Enablement and joined the Management Committee. Two new members of our Board of Directors, Gary Rodkin, former CEO of ConAgra and Tony Vernon, former CEO of Kraft Foods, both bring deep consumer product industry expertise to further strengthen our already impressive Board of Directors.

## Our Growth Momentum Continues

I am incredibly proud of where McCormick is as a company and our continued growth trajectory. In 2017, we performed exceptionally well delivering record financial results. We're responding readily to changes in the industry with new ideas, innovation and purpose. We continue to perform stronger globally across our broad portfolio, with a keen focus on growth, performance and people. Our people remain our brightest asset, and bring our best attributes to bear as we define the future and continue to bring the joy of flavor to life. I am confident in our continuing momentum for growth in 2018 and beyond and look forward to building the value of your McCormick investment.

Sincerely,

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Lawrence E. Kurzius
Chairman, President and
Chief Executive Officer