McCormick & Company, Incorporated Q4 2008 Earnings Call Transcript

 |  About: McCormick & Company, Inc. (MKC)
by: SA Transcripts


Greetings and welcome to the McCormick fourth quarter 2008 conference call. (Operator Instructions) It is now my pleasure to introduce your host Joyce Brooks, Vice President of Investor Relations for McCormick.

Joyce Brooks

Good morning to everyone joining us today by phone and webcast for a review of McCormick’s fourth quarter results and latest outlook. We have posted a set of slides to accompany today’s call at our website,

With me today are Alan Wilson, President and CEO, Gordon Stetz, Executive Vice President and CFO and Paul Beard, Senior Vice President Finance and Treasurer. Following our remarks we look forward to discussing your questions.

As indicated on slide two, please note that during the course of this conference call we may make projections or other forward-looking statements and actual results could differ materially from those projected. The company undertakes no obligation to update or revise publically any forward-looking statements whether as a result of new information, future events, or other factors.

In addition, information we present today which excludes restructuring charges and unusual items are not GAAP measures. We present this information for comparative purposes along side the most directly comparable GAAP measures. A reconciliation of GAAP to non-GAAP measures can be found in this morning’s press release.

It is now my pleasure to turn the discussion over to Alan.

Alan Wilson

Thanks Joyce, good morning everyone and welcome to this morning’s call. Our fourth quarter results were a strong finish to our record results in 2008. As shown on slide three we grew net sales 9%, exceeding $3 billion in annual sales for the first time due largely to our progress with acquisition and pricing actions to offset higher input costs, this result was well ahead of our initial projection of 4% to 6%.

We achieved a 12% increase in earnings per share on a GAAP basis and an 11% increase on a comparable basis excluding restructuring charges and other items as noted on slide three. This result also exceeded our initial projection for 2008 which was to grow EPS 8% to 10% on a comparable basis.

The key factors behind the EPS increase were higher sales, $31 million in cost savings, and a favorable mix with our consumer business growing at a faster rate then industrial. Taking a look at the fourth quarter our results were particularly noteworthy given the economic downturn during this period.

Our fiscal fourth quarter began on September 1 and coincided with the unfolding credit crisis. In the ensuing weeks this crisis was rapidly followed by a sharp decline in the stock market, a continuation of the housing slump, mounting job losses, and a general lack of confidence among consumers.

In this tough environment our fourth quarter financial results on slide four demonstrate the resiliency of our business. We grew sales 5% and 9% in local currency. Gross profit margin was at 50 basis points which was our best quarter of the year. As for earnings per share we indicated in November that we would record a non-cash impairment charge to reduce the value of our Silvo brand in the fourth quarter.

The charge we recorded lowered EPS by $0.15. Excluding the impact of this impairment charge as well as restructuring charges we increased earnings per share an impressive 12% in the fourth quarter. So what’s behind this resiliency?

There are two areas I’d like to emphasize today and will have more to say about this topic when we present at the Cagney Conference on February 18th. If you turn to slide five, we have a broad portfolio of customers and products that allows us to reach the consumer, even as they modify their shopping trips and purchases.

In our consumer business our US sales growth was led by alternative channels in 2008. We have an expanded presence in these value focused retailers and gained new distribution in the channel in 2008. Likewise we have seen an increase in sales of products that feature value priced meals along with convenience.

As an example of this in the US we grew fourth quarter sales of gravy mixes 8%, taco seasoning mixes 14%, and slow cooker seasonings 46%. Sales of our [el cuoco] brand and other Hispanic items which are value priced rose 14%. Examples outside the US include Australia where we introduced slow cooker seasonings. This introduction allowed us to double our market share of dry sauce mixes.

As many of you know we are a leading supplier of value priced private label spices and seasonings in the US, Canada, and Europe and have partnered with our customers to manage both brand and private label in the category for more then 25 years.

In the US we were able to increase sales of our branded products in the fourth quarter along with sales of private label spices and seasonings. Turning to our industrial business, the breadth of customers and products again provides some resiliency to the business in a tough economy.

Our industrial business had a strong year with food manufacturers. These customers were strengthening their brands with innovation around new tastes, health benefits, and more natural ingredients. McCormick is right at the intersection of great flavor, convenience, and health benefits.

With our expertise in pure natural and high quality herbs and spices we were becoming an increasingly important supplier to our strategic partners and growing our business with new customers.

This part of our business has been robust and provided an important offset to restaurant industry weakness. The second aspect of our resiliency on slide six is our ability to adapt. Our culture of participated management throughout the organization is a big factor in our adaptability. Our leadership structure is streamlined and efficient. We have just two business segments, both focused on flavor.

As a result our management committee can readily direct funds and resources to pursue compelling opportunities and address challenges. As an example of this we’re carefully evaluating our marketing priorities as we head into 2009 to fully support value priced items.

Since October I’ve been sharing my impressions of the economic environment with employees and asked them to maintain a focus on sales, carefully manage costs, and optimize cash and assets. We are curtailing expenses, actively managing our working capital, and diligently monitoring the credit status of our suppliers and customers.

I have a lot more to say about the capability and adaptability of our people and our business but nothing speaks louder then results. Our 2008 Annual Report is titled Taking Flavor To New Heights and I’d like to conclude the portion of my remarks with some of the heights we achieved in 2008 as shown on slide seven.

We completed our largest acquisition yet with the purchase of Lowry’s. I already mentioned passing the $3 billion mark in sales but its worth repeating. This is almost double our 1998 sales. For the consumer business we grew operating income 9%, excluding restructuring and impairment charges. Equally impressive given the tough economic and input cost environment, was a 6% increase in industrial business operating income excluding restructuring charges.

We increased marketing support to $127 million, a 13% increase from last year, and a 51% increase from 2003. We reduced costs by $31 million. This included $11 million of savings from our restructuring program taking the total annual savings for this program to $56 million.

We took five days out of our cash conversion cycle. With the introduction of McCormick Profit employees now have additional incentives to improve asset management. With the latest 9% increase our Board has tripled the quarterly dividend over the past 10 years. This was our 23rd consecutive increase and we’ve paid dividends every year since 1925.

We were extremely pleased to have successfully navigated the difficult economy and volatility we faced in 2008 and deliver strong financial results. We will face further challenges in 2009 but we are well positioned for growth and have good momentum heading into the year.

I’ll comment on our plans and guidance for 2009 but will first turn it over to Gordon for a few more detailed review of the fourth quarter financial results.

Gordon Stetz

Thanks Alan, let’s begin with a look at the total business, then I’ll move onto each of our two segments.

Starting on slide eight, fourth quarter sales were up 5.4% and 8.7% in local currency. This result included 6.6% of pricing and 2.1% of favorable volume and product mix with a strong contribution from the consumer business partially offset by lower volume and mix in the industrial business.

For the total company acquisitions added 4.5% to fourth quarter sales. This included Lowry’s and Billy Bee Honey products less a reduction in sales from the disposition of [Season All]. As Alan indicated we achieved a 50 basis point increase in fourth quarter gross profit margin versus 2007. There has been steady improvement in this performance measurement each quarter of 2008 as illustrated on slide nine.

In the fourth quarter we continued to offset higher costs with previously implemented pricing actions and productivity improvements in both segments of the business. A positive business mix also had a significant impact with the consumer business growing at a faster pace then industrial. Our acquisitions contributed to this shift between businesses along with the impact of more consumers eating at home, particularly in the US.

In November we let you know that a non-cash impairment charge of $28 million to $32 million would be recorded to reduce the book value of our Silvo brand. As shown on slide 10 the final amount of this charge was $29 million which reduced net income by $20.1 million and EPS by $0.15.

While the amount of the charge, $29 million, was within our projected range of $28 million to $32 million the tax rate we applied caused the EPS impact of $0.15 to be below the $0.16 to $0.18 per share range that we provided back in November.

We remain committed to the Silvo brand and are working to expand our distribution in this market. This impairment charge in the fourth quarter caused our operating income to decline by 4.8%. Excluding the impairment charge and restructuring charges in the fourth quarters of 2007 and 2008 we increased operating income 13.8% or $20.3 million driven by increased sales and higher gross profit margin.

Below operating income interest expense rose with the higher debt for the acquisition of Lowry’s offset to a large degree by lower interest rates. The tax rate was 29% for the fourth quarter and included the favorable impact of discrete tax items. This fourth quarter rate took our annual tax rate to 29.8%.

Following an increase in the third quarter income from unconsolidated operations declined $1.5 million mainly in our joint venture in Mexico. This business was impacted by higher soybean oil costs and a weakening Mexican Peso. Despite these pressures we were successful in growing our market share of a leading item, mayonnaise, by 250 basis points during 2008.

Heading into 2009 we are working with our partners on purchasing, marketing, and new product initiatives to support sales and profit but will face some continued pressures. We expect soybean oil positions and unfavorable foreign exchange rates for our joint venture in Mexico to cause a measurable decline in income from unconsolidated operations during the first half of 2009 which will level out in the second half.

So let me put these pieces together on slide 11 to bridge our fourth quarter EPS in 2008 to what we reported in 2007. For 2008 EPS was $0.62 which included $0.15 for the impairment charge and $0.07 of restructuring charges. Comparing the adjusted result of $0.84 in 2008 to $0.75 in 2007 the $0.09 increase was comprised of $0.10 from higher operating income offset by $0.01 of lower income from unconsolidated operations.

Now let’s take a look at the fourth quarter results of the two business segments beginning with the consumer segment. Across all regions on slide 12 we grew consumer sales 8.1% and 10.6% in local currency. Favorable volume and product mix added 7% including 6% from acquisitions.

The remaining increase of 3.6% was due to our pricing actions. The holiday season is an important time for our consumer business in the Americas. This year we supported our gravity feed merchandising displays for spices and seasonings with a new television ad, our relaunched website, and well executed promotional activity.

Consumer sales in this region grew 14.7% and 15.9% in local currency. Favorable volume and product mix added 12.6% to sales with 8.4% of the increase from acquisitions. Pricing added another 3.3%. As Alan mentioned much of this increase occurred with value priced retailers and included higher sales of dry seasoning mixes, private label, and Hispanic items.

In Europe, The Middle East, and Africa, consumer sales declined 9.9% and 4% in local currency. While pricing added 5% volume and product mix declined 9% which compares to a 5.9% increase in volume and product mix during the fourth quarter of 2007.

In Europe the growing economic recession and impact on consumer spending put pressure on our business in the fourth quarter. A slowdown in consumer purchases effected both the category and sales of our Schwartz and Ducros brands. In addition sales were effected by trade inventory reductions by retailers in France during this period.

Given the severity of the recession we believe our businesses held up fairly well. Our brands have maintained share and based on sales trends in the early part of 2009 we have seen a stabilization of category sales in the UK and France, our largest markets in Europe.

While we remain cautious given the economy in this region, our team in Europe is working to complete several restructuring actions, address higher cost through pricing, introduce new products, and optimize our marketing mix.

In the Asia Pacific region we increased consumer business sales for the fourth quarter 1.3% and 4.1% in local currency. Pricing added just 0.7% so most of the increase was from favorable volume and product mix. Sales volume in China rose at a double-digit pace. Volume and product mix in Australia had a slight decline with success from new products such as the slow cookers, offsetting lower sales of Aeroplane Jelly and low margin items that were discontinued.

Across all regions operating income for the consumer business was $145.5 million, when the impairment and restructuring charges are excluded as seen on slide 13. When compared to the fourth quarter of 2007 on this same basis, we added $14.7 million to operating income, an increase of 11.8%. This result included $2.6 million of higher marketing spending.

Taking a look at the industrial business on slide 14 we grew fourth quarter sales 1.1% and 5.9% in local currency. Higher pricing added 11.6% to sales more then offsetting a decline of 5.7% from unfavorable volume and product mix. Included in the 5.7% was a 2% benefit from acquisitions. As Alan indicated our industrial business in the Americas achieved good growth in sales to food manufacturers offset by lower sales to the food service industry.

In total sales rose 4.5% and 6.4% in local currency. Throughout 2008 we have collaborated with our customers to manage the impact of volatile commodity costs. In the fourth quarter increased pricing added 14.5% to industrial sales in the Americas and more then offset an 8.1% decline in volume and product mix which included a 3% favorable impact from acquisitions.

A slowdown in food service customer purchases also put pressure on our industrial sales in Europe, The Middle East, and Africa. While reported sales declined 16% in local currency the decrease was only 0.3%. Pricing added 8.1% while volume and product mix declined 8.4%. The impact of lower volume and product mix has had an unfavorable impact on our manufacturing efficiencies and we are aggressively pursuing new business in this region.

Our sales in the Asia Pacific region continued to be fueled by increased sales to the quick service restaurant industry in China as well as other Southeast Asian markets. We grew sales 17.7% and 16.6% in local currency, results that were close to what we reported for the first three quarters. Pricing had a minimal impact in this region.

Clearly our industrial sales are being effected by volatile costs as well as various industry dynamics. In a turbulent environment our operating income results deliver a clear picture that our industrial team is focused on higher margin business, expertly managing the price and cost equation, and delivering innovative flavor solutions to our customers.

Turning to slide 15 you can see that we increased operating income excluding restructuring charges by $4.9 million. This is up an impressive 29.3% from the fourth quarter of 2007 when our pricing had not yet caught up with the higher commodity costs. Before turning it back over to Alan, I want to briefly discuss our year-end cash flow and balance sheet beginning on slide 16.

Beginning in 2008 we introduced McCormick Profit, a change to our incentive that rewards each operating unit for its effectiveness in managing its working capital. Here again the results are the best evidence I can give you of how our employees embrace this concept and found ways to improve our asset management in areas such as inventory and receivables.

Our cash conversion cycle for 2008 was 85 days. In a year when this concept was first introduced we are pleased to report that five days had been cut from this cycle as Alan indicated earlier. In 2009 we expect to take another three to five days out of our cycle. While the nature of our business inherently requires a large number of SKUs, our prospects are good for further improvements in our days of inventory supply as well as other components of working capital.

Throughout the fourth quarter our treasury team has done a great job of maintaining our access to commercial paper and backup credit facilities. Our strong cash generation in the fourth quarter has us off to a great start to lowering our debt to EBITDA ratio which rose in the third quarter as a result of the Lowry’s acquisition.

For the full year one of our primary goals was to generate cash flow from operations of at least $300 million. With lower payments for restructuring actions, strong collection of receivables, effective management of inventory, and lower retirement plan contributions, we achieved $315 million of cash flow from operations, up $90 million from 2007.

That completes my remarks on our fourth quarter financial results and its my pleasure to turn it back over to Alan for a look at our business heading into 2009.

Alan Wilson

Thanks Gordon, in 2009 we are confident that we will continue to grow our business despite a tough economy, strong dollar, and ongoing volatility in input costs as well as the overall market.

We look for our consumer business to have another good year. Our performance in the Americas and Asia Pacific region is expected to outpace Europe, Middle East, and Africa region. Top line sales will be driven by the integration of Lowry’s, product innovation, and further increases in marketing support.

Our 2009 consumer pricing is in place in our major markets which will help offset cost increases. In addition to Lowry’s a major focus for the US consumer business this year will be a comprehensive revitalization of our dry seasoning mix line with new packaging, merchandising, and marketing. Our industrial business is on track for solid growth in 2009.

Here too our business in the Americas and Asia Pacific region is expected to lead this segment’s performance. We have a robust pipeline of new products to provide our customers with innovative flavors to boost sales of their brands. Many of these items feature blends of natural herbs and spices that lead to a more natural ingredient statement.

Our industrial team continues to effectively manage cost volatility. We expect a further shift toward higher margin products to lead to improved profitability for this part of our business. Across both segments as shown on slide 17 we expect to grow sales 2% to 4%. Now there are a number of variables that will effect this range.

One is currency exchange rates, another big factor is the impact of sales as we’ve managed further commodity cost fluctuations with industrial customers. A range of 2% to 4% is based on our current assessment of currency rates and input costs. Based on this assessment we believe favorable volume and product mix will add 2% to 4% and acquisitions with seven months of Lowry’s another 3%. Pricing will have an estimated 2% to 4% impact.

At current rates foreign exchange would reduce sales approximately 7%. While our overall guidance is 2% to 4% our guidance for sales growth in local currency is a very healthy 9% to 11%. Moving down the income statement on slide 18 we have a goal to lower costs by $30 million in 2009. We have supply chain initiatives underway that are on track to generate an estimated $21 million in cost reductions.

Additional savings are expected as we complete the projects associated with our restructuring program in 2009. This should deliver an estimated $9 million in savings in 2009 taking our total savings for the restructuring program to $65 million from the original $50 million objective. We estimate restructuring charges in 2009 of $9 million to $11 million with an EPS impact of roughly $0.05.

These cost savings much of which will benefit gross profit margin along with favorable segment, product, and geographic mix, are expected to add at least 50 basis points to gross profit margin for 2009. Keep in mind that this was the level of increase we achieved in the fourth quarter and we have confidence in this projection based on current conditions.

On slide 19 following a 13% increase in 2008 we plan to increase marketing support another 20% or more in 2009, with 15% of this related to the incremental impact of Lowry’s. Our new marketing behind this brand begins in March and we look forward to previewing this with you at Cagney.

Our other brands are seeing great consumer response to our new websites, print campaigns, and television ads. Note that much of our 2008 marketing increase included ad production while in 2009 we will allocate a greater share to working media. We are also providing guidance for a tax rate of 31%, a decline in income from unconsolidated operations during the first half, and a slight increase in shares outstanding as we continue to curtail our share repurchase program while paying down debt in 2009.

On a GAAP basis our guidance for EPS is $2.24 to $2.28. Excluding an estimated $0.05 of restructuring charges this range is $2.29 to $2.33 as seen on slide 20. On a comparable basis with 2008 excluding impairment and restructuring charges as well as items related to the Lowry’s acquisition this is a 7% to 9% growth rate.

This projected range reflects the downward pressure that a strong dollar will apply to EPS. Excluding this impact our 2009 growth rate would be at the high end of our long-term goal to grow EPS 9% to 11% annually. Accretion from Lowry’s is a big reason for this performance.

On page 21 as you think about our 2009 financial projections, we are looking for further progress in generating cash from operations. In addition to increased net income we expect to reduce our cash conversion cycle another three to five days. These improvements to cash flow from operations will be offset by higher pension plan contributions in 2009. Based on the current funded level of our retirement plans we expect to contribute $50 million to $70 million in 2009 compared to approximately $20 million in contributions in 2008, an increase of $30 million to $50 million.

We will use cash to continue to pay down our debt, keep the dividend increasing in line with our profit growth, and fund $90 million in capital expenditures which is close to our level of depreciation.

Let me summarize, our business remains solid in this period of economic downturn, volatile costs, and consumers that are under pressure. With our breadth of products and customers our industry knowledge and our ability to adapt we are managing through the issues we face and identifying and pursuing opportunities for new products, expanded distribution, and acquisitions.

I am excited about our prospects for long-term growth and confident that 2009 will be another strong year for McCormick. To our shareholders and everyone on the call, thank you for your interest and attention.

We’d now like to take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Ken Goldman – JPMorgan

Ken Goldman – JPMorgan

On your confidence level in the amount of pricing you’re going to get in currency this year and I’m wondering how much have you locked in if at all some of your exchange rates through hedging and how much, I know you talked about locking in a bunch of pricing, but how much of that really is still up in the air if you do get a little more pushback from retailers and from some of your industrial partners.

Alan Wilson

In pricing, our pricing is pretty much in place for 2009 and obviously we’ll see what happens with input cost pressures to see whether we take additional pricing or pass through reductions to our industrial customers. If you recall the contracts that we have with industrial customers, we take positions on major commodities and then we pass those through either up or down and obviously we expect later in the year as commodity costs decline to be passing some of those things on. That’s all factored into our guidance.

Gordon Stetz

From a currency perspective we hedge only the transactions that we need dollars for, mostly on our commodities that are dollar denominated that we buy forward. The guidance that we have provided on the FX impact on our net sales line is a translation impact based on current exchange rates and we are not hedged so to the extent that rates move either up or down from there that could effect that guidance.

Ken Goldman – JPMorgan

Cheese obviously has plummeted in the last couple of weeks, that’s factored into your guidance, just wondering maybe you’ll have to pass on, take some higher cost in the near-term without being able to pass them on, if you could talk about how that might help you or hurt you in the first quarter.

Alan Wilson

Specific to dairy as you can recognize we’re managing positions on different commodities based on our view of where things are going to go. We shouldn’t expect to see a significant impact based on a short-term change in commodities because of the collaborative agreements that we have with customers to manage positions.

So what I’m saying there is for the most part we’ve talked to our customers, we’ve managed a position and as prices changes over time we’ll modify pricing with it, but the customers agree with the position that we take and we’ve priced based on that and we factored that into our guidance.

Gordon Stetz

I just want to make one correction on the numbers I provided in my remarks, I stated that the fourth quarter operating income for our consumer business rose $14.7 million, when in fact the increase was $15.4 million as noted on slide 13, I just wanted to make sure that people knew that the slide was correct.


Your next question comes from the line of Chris Growe – Stifel Nicolaus

Chris Growe – Stifel Nicolaus

I wanted to ask, you’ve got a pretty substantial hit from foreign exchange factored into your guidance for 2009 but I was just curious if you consider the FX drag in 2009 your underlying growth, organic growth is pretty good bit above your long-term guidance, is there anything maybe in the Lowry’s accretion or something that could be helping you in 2009 or just the confidence in the business that let’s you get that higher underlying growth rate.

Alan Wilson

Lowry’s is certainly a factor in that direction and if you can look at it, we expect to see some still good momentum in our core business with Lowry’s adding to that.

Chris Growe – Stifel Nicolaus

As I’m looking at 2009 I’ve been concerned with the outlook for industrial, is the robust growth in the food manufacturers enough to offset this weak restaurant environment, can you say if your forecasting profit growth in the industrial division for 2009?

Gordon Stetz

We generally don’t give guidance by segment, but certainly our industrial teams are working hard to grow the business. It’s a volatile environment so the expectation is that they’ll take advantage of the opportunities within their segment and grow their business as best as they can in this environment.

Alan Wilson

One dynamic that we’re seeing with our industrial business which we expect to see, is as companies are looking at their supply base, they’re starting to put more of a premium on the financial stability of their suppliers as well as the standards of food safety that companies deal with and that plays really well to our industrial position.

We don’t give specific guidance on our divisions, but we do expect that we’ll continue to grow that business.

Chris Growe – Stifel Nicolaus

You talked about how you had both private label and branded growth in the US consumer division in the quarter, IRI has indicated, I realize its not a perfect measure, but some improvement especially in December for private label, are you seeing any change in trend there especially in the US or private label.

Alan Wilson

Yes, we’re definitely seeing private label go up in core grocery. What we’ve finding in our business is that customers that are pricing and merchandising right are getting very good growth in brand. We’re also seeing some emphasis on private label but what we’re seeing more then anything is remember we’ve got about 50% of the share and private label has a little less then 20%, there is an all other category that we are seeing being hit as the economy changes.

We’re still pleased with how we’re hanging in, obviously we’d like to be growing our brand faster, but it is hanging in pretty well. And I wouldn’t drive too much into a four week metric. We tend to look at things on a longer timeframe and if you look over 12 and 52 you’ll see better results for the McCormick brand.

I’d also say on something we are seeing is very positive growth in our dry seasoning mixes. Those provide quick and easy meal solutions to consumers at a pretty low price point so we are definitely seeing strength and growing share in that category.


Your next question comes from the line of Eric Katzman – Deutsche Bank

Eric Katzman – Deutsche Bank

I just want to make sure I understand the pricing mechanism in industrial I think you noted that in the industrial, slide 14, that in Americas pricing was up 14.5% and I thought the stuff was priced on a one quarter lag basis and over the last six months pricing has been coming down, now I realize the profit improvement in industrial is tied to the lag but I don’t, its not exactly clear to me why prices are up so much given commodity costs are headed in the other direction.

Alan Wilson

If you think back to where we were last year we were in a lag, commodity costs had gone up significantly and our pricing had not caught up to it and that’s why we saw the reduction in our industrial margins that we saw last year. When that happened we’ve changed the way we’re dealing with customers. We’re working a lot more collaboratively so we’re working with them to take positions on major commodities and the positions we take are really up to the customers specifically to say we’re either going to take long or short positions.

And then we pass through those positions so in some cases we’ve taken longer positions because the customers want us to and in other cases we’ve taken shorter positions and it depends on market and customer so I wouldn’t necessarily read a one quarter impact in commodity costs into what’s going to happen in our business just be assured that what we have is a collaborative approach with customers so we’re not going to get hurt or helped by a decline in major commodities.

Eric Katzman – Deutsche Bank

So I guess you’re saying is some of the contracts have changed from the last time we talked about this.

Alan Wilson

That’s right. And that was a reaction to the volatility.

Eric Katzman – Deutsche Bank

In terms of the industrial business I guess a year or two ago when you had your Analyst Day you talked about the McCormick institute and you were focusing on some of the health benefits of the various spices and seasonings, haven’t heard much about that since then, maybe it’s a bit longer term but is that driving any share advances that you’re making with your biggest customers.

Alan Wilson

What we’ve, we continue to fund and are still very excited about what we’re finding in the McCormick Science Institute, and you’ll start to see if you haven’t already a campaign around the seven super spices that have high antioxidant levels and its more of an education campaign. There is a little bit of marketing on the internet as well as some print ads that go with it. But we are seeing actually pretty good momentum in those core spices that are in that seven super spices.

So for instance cinnamon is one of those and we’ve seen mid to high or single-digit growth in cinnamon so there is some additional push behind it. The other thing its helping us with is traction with our industrial customers, we’re having a lot of discussion with our industrial customers as they look at ways to improve the health benefits of their products and so we’re working again collaboratively with them to bring that education.

We funded a number of studies and publish the results as we get the studies done.

Eric Katzman – Deutsche Bank

On slide 18 you talked about the gross margin improvement of 50 basis points I guess there’s some supply chain and restructuring stuff there and pricing, how much of that is due to Lowry’s?

Gordon Stetz

A good portion of that is due to Lowry’s. We are going to get benefits clearly from the initiatives that we listed there. There’s also pressures from cost [inaudible] that they’re going to offset that as well. So Lowry’s is going to be a good portion of that improvement due to the mix shift.

Eric Katzman – Deutsche Bank

So that was the last point?

Gordon Stetz

Yes, continued shift towards higher margin business, Lowry’s would be the biggest component of that but within the portfolios as well our employees continue to work towards higher margin value added products. But Lowry’s is going to be a significant contributor to that.


Your next question comes from the line of Mitch Pinheiro – Janney, Montgomery, Scott

Mitch Pinheiro – Janney, Montgomery, Scott

One little housekeeping, will the timing of Easter have any impact in your Q1 or Q2 this year being a little later then last year or is it, I didn’t know if last year there was any impact?

Gordon Stetz

Yes, it was definitely about an early an Easter as we could have seen and this year its much later. We haven’t factored in I don’t think a significant shift between quarters. We may see some but I don’t think its going to be significant enough to really talk about.

Mitch Pinheiro – Janney, Montgomery, Scott

As far as the industrial business goes, several years ago you talked about you had a 6% operating margin and I think by 2010 you would have seen maybe that increase to about the 9% area and you’ve been stuck in that 6% range for a little bit here for reasons which you’ve talked about, is 9% operating margins in the industrial business out of the question for 2010. I know that’s looking beyond the current year but I’m just trying to get a sense for whether there’s still this plan in place to improve that piece of the business on the profitability side.

Alan Wilson

If I could figure out where we’re going to be, where anybody is going to be in 2010 I’d make some real good investments. Our objective is to continue to drive and grow our margins in that business and I’m really pleased with the progress that we’ve made in a number of our markets. We still have some specific challenges with our European business but I would say that we expect that we can continue to drive and grow margins.

Obviously in the volatility we’ve had starting in late 2007 continuing now and what we are seeing for 2009 and the broad general economy is going to put some pressure on that. I would say what we’re doing, our objectives haven’t changed, but what we’re having to do is manage much more close in to the economic environment.

Mitch Pinheiro – Janney, Montgomery, Scott

Has the fact that you’ve changed to that collaborative type of cost plus in industrial does that also effect the margin potential in the business. It certainly quiets down the volatility.

Alan Wilson

It quiets the volatility on the major commodities. We expected over time, the way we were going to grow the margin is by more of mix shift to higher value products and we still expect to be able to do that on a lot of those items where commodities are a major factor, those aren’t necessarily the kinds of products that are going to be driving our margin development. Those are good core items that have volumes that sustain themselves year after year.

But they aren’t going to necessarily be the source of growth or the source of margin improvement.

Mitch Pinheiro – Janney, Montgomery, Scott

How would you characterize the new product activity in the industrial segment.

Alan Wilson

The pipeline is still pretty good. I wouldn’t say its as big as we would like to see it. We see our customers just like we are focused in our communications and our development efforts right now in products that bring value to consumers and some of the more premium innovation is still continuing, its not completely gone but I think there is more of a shift to value as opposed to necessarily premium.


Your next question comes from the line of Ann Gurkin – Davenport

Ann Gurkin – Davenport

Just wanted to get more details regarding Lowry’s as you’ve worked with that business, are you making any changes in how you go to market with that brand, can you update us on your strategy there?

Alan Wilson

As you probably heard a large part of our increase in our marketing spend is going to be against Lowry’s. As we talked when we bought the business nobody has talked to the consumer about that brand in a while. We’re starting to do that. We’ve created some marketing campaigns behind it. We’re evaluating and are changing some of the positioning and tightening up the positioning on the brand so you’ll see in the coming months and we’ll talk about that at Cagney on what we’re doing with it. But we’re revitalizing the brand. We’re very excited about it.

Ann Gurkin – Davenport

Just in terms of overall marketing spending, can you comment on how the returns have been versus the spending you put through in the back half where maybe its been then expected or inline or any commentary and then as you go out to 2009, you commented on a 20% are you getting a greater lift on that investment now given that you’re probably getting buys for your marketing dollars.

Alan Wilson

Its harder to read in the volatile economy that we are in. I would say that one of the things that we are doing with our marketing mix and you’re starting to see that I think from a lot of companies is to focus communications on value. So we are talking to people about how our dry seasoning mixes for instance can feed a family of four for under $8 or $10 and we’re seeing more and more lift from that kind of thing.

We are evaluating our shift into more promotion and premium kinds of events as opposed to purely print and TV advertising. We’re not walking away from the internet recipe campaigns or any of those sorts of things but we are shifting more of our communications towards value right now.

Ann Gurkin – Davenport

And what you’ve spend in the back half of last year, can you comment on what kind of lift you’re seeing from that.

Alan Wilson

I think we saw good results in our fourth quarter and so we’re committed to that. That’s such an important time for us and I think in these economic times we feel its important that we continue to talk to consumers and have the McCormick brand out front and center not just McCormick brand, but also the Zatarains’s brand our other brands to make sure that people know what, remember that they are good brands, remember that they like the value that they bring.

And its important that we keep that out. I would say we would expect to get better value from our marketing spend as well as marketing cost continue to come down. Our objective is to maintain our weights and be pretty flexible with how we target our campaigns.


Your next question comes from the line of Andrew Lazar – Barclays Capital

Andrew Lazar – Barclays Capital

On the gross margin you’re expecting in terms of the expansion for 2009 do you expect that to be relatively even in terms of the way it flows or are there various things around first half, second half that we ought to keep in mind.

Gordon Stetz

If you recall the industrial business margins can vary, not the dollars, but the margins can vary based on commodity cost positions. So to the extent that there are any downward movements in commodity costs, industrial margins could expand. And whatever forecast you believe on commodity cost right now that could be an impact.

Lowry’s obviously too we had the benefit of Lowry’s in the fourth quarter of 2008 we’ll get continued benefit through the first part of 2009 so that comparison will help as well.

Andrew Lazar – Barclays Capital

On the organic sales growth rate that you’re looking for in 2009 its 4% to 8% or so, just taking a look at the pure volume and the pricing that you’re expecting and again I’m just thinking about that from a top down perspective in this kind of macroeconomic, just trying to get a sense of your level of confidence around that. That’s obviously a pretty healthy move forward in the environment we’re in.

Alan Wilson

We wouldn’t have put these out if we didn’t feel like we could do them at this point and we have seen good momentum behind a number of our items even in the tough economy we’re benefitting I think from the shift of people eating more at home and cooking more. We expect that to continue. We don’t have new pricing that we’re going to be trying to roll out and be faced with any difficulty so we put this out with the idea that we think it’s a good range of where we see the business as we sit here today.

Andrew Lazar – Barclays Capital

With some of the new contracts that you’ve structured in the industrial business, I’m curious if in your consumer business in some of the more basic or commodity oriented items, pepper or things that prices may move around a bit more with commodity move then some of your other items, I’m curious if there’s any role for more of a pass through type of contract situation like you’ve done in industrial with some of your items in consumer again to prevent some of the low lows or high highs.

Alan Wilson

Because of the broad nature and the large number of ingredients that we manage other then something like pepper and vanilla we’d find it really hard to do. But again because, and what we’re seeing in commodity movement by the way on those items is we’re seeing some stuff going down and some stuff going way up as farmers shift their focus from growing say basil to wheat and so we’re dealing with a broad market basket.

We did take pepper up specifically two years ago when it started to surge. We’ve managed how we’re passing those things through to customers. We don’t want to necessarily get into an immediate pass through up and down on it because a lot of our cost base is based on what kind of inventory positions we take.

And we think we’re at a competitive advantage because of the global sourcing teams that we have out there looking at crop conditions and helping us make those decisions so it’s not something that we’ve really considered for our consumer business.


Your final question is a follow-up from the line of Eric Katzman – Deutsche Bank

Eric Katzman – Deutsche Bank

Just to clarify I think that you said that the cash impact of the pension is going to be an incremental $50 to $70 million in 2009?

Gordon Stetz

No, $30 to $50 million.

Eric Katzman – Deutsche Bank

How much are you assuming in terms of expense on the income statement.

Gordon Stetz

The expense impact for 2009 is not going to be material and it’s a function of our valuation date. Our valuation date for the 2009 expense is set at September 30. As you well know at September 30 the rates were higher so the discount rates on the liability were higher and we had yet to experience the more severe drop in the overall market on the assets.

Our expense for 2009 was set prior to that, 2010 clearly depending on what happens with market conditions and rates, could be some headwinds for us but we’ll have to see that when we establish the new valuation.


There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Joyce Brooks

This concludes today’s call.

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