McCormick CEO Discusses F3Q10 Results - Earnings Call Transcript

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


Greetings and welcome to the McCormick's third quarter 2010 conference call. (Operator Instructions)

It is now my pleasure to introduce your host Joyce Brooks, Vice President, Investor Relations, for McCormick.

Joyce Brooks

Good morning to everyone on today's call and to those joining us by webcast. The purpose of our call is to provide an update on our business, review McCormick's third quarter financial results, and share our latest 2010 outlook. We have posted a set of slides to accompany today's call at our Website,

In the room with me are Alan Wilson, Chairman, President and CEO; Gordon Stetz, Executive Vice President and CFO; and Paul Beard, Senior Vice President, Finance and Treasurer.

Alan will begin with the business update, followed by Gordon who will review our financial results and outlook. After that we look forward to discussing your questions.

As a reminder, our presentation today contains projections and other forward-looking statements, and 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.

In addition, certain information that we will present today are not GAAP measures. This includes information which excludes the impact of a significant tax accrual reversal recorded in the third quarter of 2010 and restructuring charges recorded in 2009. We present this non-GAAP information for comparative purposes alongside the most directly comparable GAAP measures.

Reconciliations of GAAP to non-GAAP measures can be found in this latest press release and in the presentation slides for our call.

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

Alan Wilson

Thanks, Joyce. Good morning everyone, and thank you for joining us. We're pleased to report another quarter of strong financial performance at McCormick. While the economy continues to be challenging, and consumers in many of our markets remain cautious, we achieved solid sales growth, exceptional margin improvement and a strong increase in profits.

With the range of conditions across our major markets, our pace of sales growth vary by market. While the benefits of product innovation, incremental marketing and expanded distribution have been offset in part by certain areas of weakness, we consider our year-to-date sales result a solid performance in today's environment.

During the same period, gross profit margin improvement has been tracking well ahead of our 50 basis point objective, with gross profit margin up 130 basis points year-to-date. Our margin improvement has made its way to the bottom line, more than offsetting higher brand marketing support and increased pension cost, and as a result, we have increased EPS at a double digit pace through the first three quarters when items affecting comparability are excluded.

This margin performance is being driven both by Comprehensive Continuous Improvement, our CCI program and a more favorable mix of business. McCormick employees have made excellent progress in increasing productivity. Throughout our operations, we are buying more effectively, applying tools and technology and streamlining processes.

We expect to surpass our initial goal to reduce cost by $35 to $40 million in 2010, and now project at least $45 million in cost savings. We have CCI champions in place in all major locations, and they already have a list of projects ready for 2011.

We are also seeing a more favorable mix of business being achieved in two ways. First, consumer sales growth outpaced that of the industrial business. With the inherently higher margin of our consumer business relative to our industrial business, this shift in mix is accretive to gross profit margin for the total company.

The second aspect of favorable mix is within our industrial business. For a fifth consecutive quarter, we have improved both the gross profit and operating income margins for this business when measured on a comparable basis. At the operating income line, industrial business margins reached 8.9% for the third quarter and an 8.1% year-to-date for 2010.

This is a result of stronger growth with higher margin products as well as the benefits of CCI-led cost savings.

In summary, we are making excellent progress toward our longer term goal of 9% to 10% operating income margin for the industrial business.

Next, I'd like to share our perspective on conditions in each of our primary markets and provide an update on our growth initiatives beginning on slide 7. In the Americas, we believe consumers remain cautious in their purchase decisions and meal choices. As you would expect, we've had good success in the past quarters as we stepped up our coupon and other brand value messages. And you'll see more of that in the fourth quarter.

Well, we have a lot more underway for the holiday period. In the U.S. we've gained good traction with our latest product introductions. Backed by a significant ad campaign in the second quarter and the plans again to run again in the fourth quarter, all varieties of recipe inspiration have made it into the top 40% of McCormick blends.

In 2011 we'll introduce World Flavors, six additional items that offer consumers a low-risk way to prepare (Restaurant-Sauvé) ethnic foods at home. Some retailers have recipe inspiration secondary placement in the meat section, and others have already accepted all six World Flavors.

Other new products in the U.S. build up our strong consumer franchise for grinders, salad toppings and grilling. In addition, we just introduced our Flavor Forecast - Holiday Edition! which is already getting a lot of attention in the media. And for the first time, we are going to run advertising for Thanksgiving that is distinct from our Christmas ads in the U.S.

In Canada, we revitalized our Club House brand recipe mixes in 2009, exceeding a 50% category share for the first time. In 2010 we are revitalizing our spices and seasonings with new labels, new varieties, and marketing support.

Another area of strength this year has been our sales of ethnic foods in the United States, especially Hispanic items which were up again in the third quarter. This is a business largely built on authentic Hispanic products and the imports of mayonnaise and other items from our joint venture in Mexico.

In 2010 we began to import tea from Mexico and recently added the El Bravo brand of Hispanic products to our portfolio. This was an $11 million acquisition completed in early September.

Beyond Hispanic products, we are extending our Simply Asia brand to dipping sauces and Zatarain's to frozen entrees which have gained distribution nationally with a leading Red House Club.

While not included in our consumer business results for the Americas, our joint venture in Mexico has grown sales at a double digit pace this year. And profit has more than double, due in part to some favorable soybean prices. On the industrial side of our business, in the Americas, product innovation for food manufacturers has been up in 2010 as evidenced by number of new seasoning blends and flavors in U.S. and Mexico.

On the Food Service side, sales were a bit weak in comparison to the third quarter 2009 which had the benefit of some large new product launches by quick service restaurants. We are encouraged by our 2011 pipeline of product innovation for these customers.

In Europe, Middle East and Africa, EMEA, our two largest markets are U.K. and France. In each of these countries, we've seen retail sales growth of our branded spices and herbs outpace private label in the most recent period.

Our innovations in marketing have emphasized differentiated products like Perfect Shake seasoning blends, Flavorful recipe mixes and Ducros grinders.

Perfect Shake is modeled on the success of our Perfect Pinch line in U.S. and has delivered double digit sales growth of seasoning blends in the U.K.

Incremental Marketing in the fourth quarter will be behind these types of products as well as our Vahine line of homemade desserts. Ready for launch as we had into 2011, our Schwartz recipe mixes for vegetables and a full range of Slow Cookers.

In France we are introducing four new Ducros grinders, seven additional Ducros herbs and spices, and three varieties of Pattiserie Vahine dessert mixes.

While we've had more steady sales growth in the U.K. and France, we continue to face slower consumer business sales in some of our smaller markets where the economy is particularly weak.

Industrial sales in Europe had been robust in 2010. This has been driven good growth opportunities with quick service restaurants, which have maintained traffic with value pricing and promotions. And our sales to food manufacturers have grown as some of these leading customers expand geographically into markets in Eastern Europe and the Middle East.

The last comment I wanted to make about EMEA relates to a joint venture agreement in agreement in Turkey. This is a market where we have operated successfully with an industrial joint venture partner since 1996.

Earlier in September, we signed an agreement with Yildiz Holding, a leading food manufacturer in Turkey. Together our goal is to build a leading brand of spices herbs and seasoning products in Turkey. We are excited about this opportunity to build a consumer business in a promising market.

Turning to Asia-Pacific region, during the third quarter, we were pleased to reach an agreement to purchase 26% stake in Eastern Condiment for approximately $35 million. We expect to close on this joint venture by the end of 2010.

Eastern is a leading brand of spices, seasonings, and other food related products in India and the Middle East.

Sales have grown more than 25% on average across the past three years and we are approaching $70 million annually. This is a great point of entry into an attractive consumer market. And when the complements are existing joint ventures which was four more than ten years ago to source and process spices in India.

China in South-East Asia offer substantial opportunities for growth in both grocery and food service channels. In our consumer business in china, we've introduced new products such as Thai chili sauce, expanded our distribution and increased our advertising campaigns, all supported by a new team of experienced brand marketers.

Our industrial team in this region, has gained new distribution to global food manufacturers most recently with Condiments, and continues to follow the steady growth of quick service restaurants.

We are a top supplier to these customers, adding flavor to a wide range of menu items, including beverages, ice-cream and chicken.

While the economy in Australia has been quite resilient, it's a tough, highly concentrated retail market. Our focus there remains in bringing innovations to these categories where we have a leading brand position.

For example, new products under our popular Aeroplane brand have taken our share of the gelatin category in Australia above 70%, and it's now approaching 80%. Across all regions, the Americas, EMEA, and Asia-Pacific, we are facing rising input cost including pepper, garlic and a number of others spices and herbs. We've already taken a price increase on pepper in the U.S. consumer business, and are evaluating additional increases in the Americas and international markets as we had in 2011.

The last topic that I would like to cover before turning it over to Gordon, relates to cash. Those of you who follow us closely know that cash flow typically begins to build in the third quarter and peaks in the fourth quarter of our fiscal year.

We've nearly completed a rapid pay down of debt related to the Lawry's acquisition and have resumed our share repurchase activity.

During the third quarter, we repurchased $32 million of shares, and in September, completed the $400 million share repurchase program authorized in June of 2005.

We are now repurchasing shares under the new $400 million dollar share repurchase program. Through the first three quarters, we spent $38 million on share repurchases and expect to continue at a steady pace into the fourth quarter, reaching at least $75 million of share repurchases for the fiscal year.

By year end, other uses of cash in 2010 are expected to include not only share repurchases, but dividends, capital expenditures, debt repayment and acquisitions with the purchase of El Bravo and the anticipated closure of the eastern joint venture.

To summarize, we're operating successfully in the midst of a tough global economy with consumers still under pressure in many of our primary markets. We're growing sales with effective marketing, entrée'ing new products and increased distribution. Our CCI program and business mix are improving margins throughout the business.

This is our fuel for growth and a driver behind higher profit, ensuring cash flow. As we head into our fourth quarter, we're well positioned for this important holiday period and on track for a record performance in 2010.

Let me conclude my remarks with a sincere thanks to McCormick employees around the world for their commitment and talent, their passion for flavor, and a demonstrated agility in managing our business and their ability to achieve great results.

Gordon, I'll turn it over to you at this point and join back in for Q&A.

Gordon Stetz

Thanks, Alan, and good morning everyone. We are extremely pleased with our latest financial results. Clearly, improved margins and higher profits were the headline news this quarter. We also had some areas of solid sales growth as well as parts of the business that remained under pressure.

For the total company, sales rose 0.4% and in local currency were up 1.5% due primarily to favorable volume and product mix. As indicated on Slide 15, in the Americas region, consumer business sales rose 4% and in local currency grew 3%.

Incremental sales from new products, particularly Recipe Inspirations drove favorable volume and product mix along with increased sales of Hispanic products and Lawry's items. Sales from the Sam's Club lead market and distribution gains for Billy Bee Honey in Canada also added to sales volume and product mix.

Spicing in this region was also favorable in the third quarter. While the Pepper increase that Alan mentioned had a minimal impact on sales, we had a favorable net sales impact from lower food productivity in comparison to the prior year period, although on a year-to-date basis we are about even with last year's coupon expense.

Consumer sales in EMEA declined 10% from the year-ago quarter with a 1% decrease in local currency. Sales in France remained strong this period with the Ducros brand outperforming the category. In our other large market, the U.K., we are growing sales with new products such as Perfect Shake and our Flavorful range, and we were recently awarded new distribution in the Convenience Store channel.

In the fourth quarter, our marketing focus will be on both the U.K. and France with an emphasis on new products and incremental brand support. The third quarter sales increases in our primary markets were offset again this quarter by lower sales in our smaller markets which account for about 20% of consumer sales in the EMEA region.

In the Asia-Pacific region, we had an excellent quarter with an 11% increase in consumer sales. In local currency, sales were up 7%. We grew volume and product mix in China through new products like Thai Chili Sauce, as well as greater market penetration and increased consumer demand. Sales in this market were up 15%.

Operating income, excluding restructuring charges for our consumer business was $96 million, an increase of 8% from the third quarter of 2009. We achieved this increase through CCI-led cost savings as well as higher sales. While brand marketing support was down $2 million this period, we have increases planned for the fourth quarter, and are on track for our targeted $20 million of additional spending for the fiscal year.

Turning to our industrial business, we delivered $30 million in operating income, excluding restructuring charges, an increase of 6%. And more favorable business mix and productivity improvements are leading to higher operating income and operating income margin, which was nearly 9% for the third quarter.

Let's take a look at the sales performance for this part of our business on Slide 18. Industrial sales in the Americas declined 1% and in local currency were down 2%. In response to lower commodity costs, primarily dairy ingredients, we passed through lower pricing for certain products during this period. This led to a price reduction of 3%.

We grew sales volume and product mix with new seasonings and flavors to food manufacturers in the U.S. and Mexico. The sales were largely offset by weak sales to food service customers in comparison to a period of strong new product launches by quick service restaurants in the third quarter of 2009.

As Alan noted, we have some promising products in the pipeline for these customers and are excited about their launch in 2011.

In EMEA, industrial sales declined 3% but in local currency grew 5%. Sales to quick service restaurants continue to be strong in this region, and we are growing sales of seasonings and other products to major food manufacturers as they expand geographically. In the third quarter, we also benefited from a recovery in branded food service products in the U.K. when compared to a period of weakness in the third quarter of 2009.

Industrial sales rose 10% in the Asia Pacific region with a 7% increase in local currency. This increase was led by excellent growth in China as a result of new product wins with quick service restaurants for chicken wing marinades, beverage flavors and other items. We also developed condiments for a major food manufacturer that we recently launched in this market.

For the total business, operating income rose 7%, excluding the impact of restructuring charges in the third quarter of 2009, as shown on Slide 19. Gross profit margin improvement was a significant part of this increase, up 180 basis points for the quarter, and up 130 basis points year-to-date. This was well ahead of our 50 basis point projection for the year, and an indication of the effectiveness of our CCI program and our efforts to achieve a more favorable mix of products and customers.

SG&A as a percent of sales rose 70 basis points, due largely to the higher cost of benefits. Turning to taxes, discrete tax items and a lower underlying rate added $17 million to net income. Of this amount, $14 million related to the reversal of a significant tax accrual for a closed tax year, which is a non-cash item.

This tax accrual was reported based on uncertainties about the tax aspects of transactions where the company reorganized its European operations and divested certain joint ventures. This reversal increased earnings per share by $0.10 in the third quarter. We are providing you with non-GAAP results that exclude the impact of the reversal of this $14 million tax accrual to allow for a better comparison to prior years, and as a more appropriate starting point for 2011 projections.

Excluding this and other discrete tax benefits, our underlying tax rate for 2010 is now 32%, based on the mix of earnings across our various tax jurisdictions and projected tax credits in the U.S. This is down from the rate of 33% that we provided in our June call.

Income from unconsolidated operations increased significantly again this quarter as a result of our McCormick to Mexico joint venture. This business grew sales 13% and effectively managed through a period of soybean oil volatility, a key ingredient for the leading product, mayonnaise. We believe income from unconsolidated operations could reach a record $25 million in this fiscal year.

As outlined on Slide 22, third quarter earnings per share were $0.76 compared to $0.57 in the prior year. On a comparable basis, excluding $0.10 from the significant tax item in the third quarter of 2010, EPS rose 17%. This was an increase of $0.09 and was due primarily to higher operating income, as well as $0.03 of higher income from unconsolidated operations and $0.02 impact from additional tax rate items, offset slightly by higher shares outstanding. Note that in the third quarter of 2009, we had minimal restructuring charges.

I'll comment briefly on cash flow. Year-to-date cash flow from operations was $145 million in 2010 compared to $195 million in the first three quarters of 2009. While higher net income added $53 million in 2010, this was more than offset by an increase in operating assets and liabilities.

McCormick profit continues to bring focus to working capital, and business leaders are rewarded not only for strong operating income, but also for their management of working capital. This focus has continued in 2010, as we work toward our 2012 goal to reduce the cash conversion cycle by another 10 days.

However, our inventory levels were up at the end of the third quarter. This was due in part to certain inventory positions we have taken, some build up of inventory prior to an SAP implementation in Asia and higher raw material costs. Working to lower our inventory levels is a particular focus for me and the rest of the organization heading into 2011.

As Alan stated, share repurchases total $38 million year-to-date. We also used cash largely for dividends, capital expenditures and debt pay down.

Let me wrap up with our latest outlook for 2010. Based on our strong year-to-date profit and margin performance, we are raising our guidance. Gross profit margin has been tracking well ahead of our 50 basis point objective, with a 130 basis point increase through the first three quarters. For the full year, we are projecting roughly a 100 basis points of improvement. This strong improvement is due in large part to our above target CCI-driven cost savings as well as favorable business mix.

On a comparable basis, which excludes the favorable tax reversal recorded in 2010 and restructuring charges recorded in 2009, we now expect to increase earnings per share in the range of 9% to 11%. This is up from our initial guidance of 6% to 8%, and right in line with our long term objectives. Keep in mind that our EPS guidance continues to include $20 million of incremental marketing programs and $15 million in higher pension expense.

For the fourth quarter, Alan outlined our latest marketing plans, which along with distribution gains and product innovation have us poised for a solid sales performance. While increased brand support, higher input costs and unfavorable currency exchange rate will effect EPS growth, we expect to be at or above the excellent profit performance achieved in the fourth quarter of 2009.

Let me summarize our remarks by stating that we are on track for 2010 to be a record year for McCormick, which is right in line with our long term profit growth objective. Alan and I look forward to sharing our fourth quarter results with you in January, along with our outlook for 2011.

Operator, we'll take the first question.

Question-and-Answer Session


(Operator Instructions) Our first question is coming from the line of Alexia Howard with Sanford Bernstein.

Alexia Howard - Sanford Bernstein

I just wanted to ask about the gross margin outlook. I think your guidance suggested there's going to be some downturn in the fourth quarter despite the very strong performance year-to-date. Could you maybe just give us an idea of what's driving that? In particular, the commodity outlook would be helpful.

Gordon Stetz

As we indicated in our last call, we had some pressures on a number of commodity items; pepper being one, garlic, some packaging items. So the impact of those we are expecting to start to feel into the fourth quarter and that's coloring our outlook as we look into how we perform this quarter.

Alexia Howard - Sanford Bernstein

And just a real quick follow-up, I was looking at the consumer takeaway data here in the U.S. and it looks as though the price gaps related to private label seem to be on the rise again. And I'm wondering whether you're seeing anything in terms of private label activity? It seems as though in other areas we're maybe seeing a little bit of a pull back in promotional activity. So I was a little surprised to see that, and I was wondering if you could give that too and what the explanation might be?

Alan Wilson

I think it was a reflection of increased promotion in private label and more of a reflection that in the quarter we were not promoting as heavily. And what I'll say is as we head into fourth quarter, we're back to similar levels that we had last year in the fourth quarter with both coupon activity and price promotion.


Our next question is coming from the line of Alex Bisson with Northcoast Research.

Alex Bisson - Northcoast Research

First on coupon activity, you mentioned presently that it was down; I assume that means you're issuing fewer coupons not that fewer being redeemed. Can you just talk a little bit about the decision to pull back on that?

Alan Wilson

Yes, that's correct. What we're seeing or what we've done in the third quarter, as you recall last year we were very heavy on coupon activity in the quarter. We dialed back that and focused more of our spending against TV advertising for things like grilling and recipe inspirations. And so that's a result that was a conscious effort in the fourth quarter again, because it's such an important part of our sales for the year we're back to a level that's more like what we did last year.

Alex Bisson - Northcoast Research

And then Gordon is it possible to kind of parse out the increase in your inventory between kind of the increase in cost versus the increase in units and mix?

Gordon Stetz

I guess the best way to describe it Alex would be, there was not one particular item that I can point to as the increase. We mentioned a number of things; we had an SAP implementation in China particular. We talked about the upward pressure on raw material items. So there's not one item that I could point to in particular. So as a combination it's spread pretty evenly across all those events.


Our next question is from the line of Ken Goldman with JPMorgan.

Ken Goldman - JPMorgan

A question about innovation going into 2011. It seems like you had some pretty successful products in the Consumer business this year. I'm wondering what the pipeline looks like going into next year. And also what retail willingness is to accept new items. I mean given the economy and consumers caution still some of the new items are often accretive to mix. And some retailers, from my understanding in some other categories have pushed back on some new items that have maybe been at higher price, higher margin items. So I'm just curious how you think about both, your pipeline and retailer acceptance to that?

Alan Wilson

We feel really good about our pipeline both in the products that we're supplying from a consumer standpoint and the product that we're supplying to other consumer manufacturers. I think it is a mixed bag out there, but we're hearing from a lot of retailers that in order to grow they need innovation. In fact recent discussions that we've had with some of our large customers are that they really want to see more innovation, because that's how you get a growth.

Certainly, you've got to get the product mix and the price points right for it to be successful with consumers. And that is certainly a factor and I think we're still a bit in a mode where you want to make sure that what you do, you do right. And it's not just throwing a whole bunch of stuff out there to see what works. I think there's still a lot of scrutiny.

But I think we're kind of coming out of the mode where everybody kind of hunkered down and focused on small stuff. And are more working on a new product innovation. I think it's healthy for the business, it's healthy for the retailers, and it's certainly good for consumers.

Ken Goldman - JPMorgan

And can you give us an update on the Sam's Club tests?

Alan Wilson

Without getting into specifics on the customer, when we typically replace competitors products, our customers see good growth in sales. And I would say, we're not projecting what the customer's are going to do, but we're seeing results from those markets that we're pretty happy with.

Ken Goldman - JPMorgan

And one last one, on the tax rate, if my numbers are right, I think you've done close to 30% for the tax rate on a pro-forma basis for the first three quarters of the year. I think if I'm reading you right, you're guiding to a 32% tax rate for the whole year, so that implies a fairly hefty 34% to 35% tax rate in the fourth quarter. Is that right or are my numbers slightly off there?

Alan Wilson

We're guiding to a 32% underlying rate, which excludes a number of the discrete items that are holding that year-to-date breakdown of 30%. So we're saying, if the underlying rate is going to continue to be 32% absent for any of those discrete items.

Ken Goldman - JPMorgan

And, Gordon, for modeling next year, how do we think about the tax rate, or is it too early to do that.

Gordon Stetz

It's a bit too early. We'll certainly be able to provide you with all of that guidance in January, but it's a bit too early for us. And obviously with the uncertainty around a lot of the tax legislation, it's difficult call to make at this moment.


Our next question is from the line of Chris Growe with Stifel Nicolaus.

Unidentified Analyst

This is actually (Stephen Greg with Mandalay Research). A couple of questions, two months ago in the Wall Street Journal there was article mentioned, how e-commerce is going to revolutionize and shape the way companies do business in 2011. Can you provide some color as to what your plan on your e-commerce initiatives are going to be in the next couple of years and how do you plan to get there?

Alan Wilson

We're not getting too much into next year. Over the last couple of years, we have really increased the percentage of spend against things like social media and reaching consumers in different ways. And we're going to continue to beat that up. We're active on all the networks like Facebook and Twitter, and reaching directly to one-on-one with consumers.

In terms of how we're also dealing that with our retailers, we're working with them and making sure that our products for future and recipe, so before the consumer gets to the store they're thinking about our products. And so it's a combination of reaching directly to consumers with our marketing efforts and working with customers on shopper marketing to make sure that our brands are preferred.

In terms of direct sales to consumers through the internet, that's not something that we're aggressively doing. Certainly in areas where certain products aren't available, we make those available on the internet but it's not a heavy emphasis for us internally. I think I'm getting of what you're asking.

Unidentified Analyst

Is mobile going to be very important to you guys, are you guys going to try and make in a name albeit like Android will have, providing certain apps to allow customers to find your information much more effectively.

Alan Wilson

Yes, we've got an iPhone app that's active now. With recipes, we've done the same thing in Europe with our Schwartz brand and with some kind of fun things. So when you shake your iPhone on the Schwarz app you get different recipes that pop up. So we're doing a number of those kinds of things to try to reach consumers.

Unidentified Analyst

On a separate note, what I'm noticing on transportation cost, we're seeing (across-to-aboard) transportation costs are rising pretty dramatically as a percentage of revenue going up. What are you guys giving any attention to or putting any types of program in place to reduce transportation cost? And how are you planning to get there?

Alan Wilson

We have a transportation management system that helps us optimize our routes. And as we're working with our customers on making sure that we're doing everything we can to minimize those increases, certainly as things change we consistently look at our network to make sure that we're doing it as effectively and efficiently as possible. But just like in some of our commodity costs we are seeing some transportation costs go up.

Unidentified Analyst

You have about a percentage what you're seeing go up in the last year, have you guys have any metrics or anything?

Gordon Stetz

I'm sorry, say that again.

Unidentified Analyst

Have you run any number to see, what have your costs gone up this year on a percentage basis of revenues? Have you guys run those numbers?

Gordon Stetz

We haven't shared any of those metrics, but I'll say it certainly has been rising as you've heard across through other industries. And it is certainly something that we take into our outlook as we give guidance into the fourth quarter.

Unidentified Analyst

Okay. And in terms of reducing those, you said, I know you have system that is kind of helping with that.

Gordon Stetz

Yes, that's the way how we try to optimize. We optimize through route management, that's our primary vehicle.

Unidentified Analyst

And final question going forward. Obviously you guys had a great quarter. We're still looking at possible recession where companies are looking at really highly control cost. How are you guys going to be in 2011 really looking at your supply chain operations? I know you just had the SAP implementation in China. But how are you guys looking at supply chain operations to overall reduce costs and transportation and raw materials and the like to make sure overall you're improving the bottomline?

Gordon Stetz

Well, our CCI program, Comprehensive Continues Improvement has really geared it all back. And a lot of the $45 million in savings we're projecting this year is a combination of supply chain as well as product sourcing and SG&A savings. We have a very similar effort and a pipeline of projects that are built against next year as well.

As you may recall, we shared $150 million savings objective in our Analyst Meeting this year. We are well on track to hit that over the next couple of years. And it's a big part of our algorithm. It's very much about reducing our cost. Reinvesting that money back into the business to help grow sales, and that's been our algorithm for quite a while.


Our next question is from the line of Andrew Lazar of Barclays Capital.

Andrew Lazar - Barclays Capital

One, year-to-date, I think your organic sales is running maybe just a bit below sort of the 2% to 4% organic target that you'd set in sales for the year. Is 2% to 4% organic still the right target for the year at this stage based on what you've got planned in the fourth quarter from a merchandising perspective? Or is that something we have to reconsider?

Alan Wilson

We're holding that guidance. Obviously our fourth quarter is our biggest and most important quarter of the year. We feel very positive about our plans for the fourth quarter. Obviously we've got to execute those. But we're bullish on our fourth quarter.

Andrew Lazar - Barclays Capital

And I know that, I guess in the fourth quarter coming up you've intimated that inflation is going to peak up a bit, perhaps run a bit ahead of pricing. And that you're considering potentially some additional moves where it makes sense and it's justified. It may be too early, but what type of read are you getting on, let's say the areas where you've taken some pricing like in pepper around volume or consumer reaction.

And does that make you more or less willing to take some more action, especially because you raised your productivity targets which can help you offset some of that? I'm trying to get a sense of viewing the industry or in a place where when and if it's justified, if it can be kind of done judiciously given everyone's raised productivity?

Alan Wilson

Pricing is something that we give a lot of thought before we raise it again, because as somebody pointed out earlier those price gaps between the brand and private label are very important to us.

What we've seen in, it's really a read to consumer reaction on pepper. We just announced and implemented the increase over the last couple of weeks. But we take that very carefully to make sure that we understand the tradeoff between recovering cost by raising prices and the impact on volume.

And as we're looking at what we're going to do over the next year, we're considering all those things. What we have to do to recover cost. Offset obviously by our savings programs and then the impact that we'll get on volume and then the investment we'll need to make in advertising and promotion to keep the consumers coming.

So it's something that we very tightly consider. We were successful in getting the pepper price increase through. And we're going to watch certainly volumes, it's something that we're really sensitive to.


Our next question is from the line of Robert Dickerson with Consumer Edge Research.

Robert Dickerson - Consumer Edge Research

I just had a quick question on just the free cash flow. And obviously it sounds like you're saving some of the cash in the short term for the SAP implementation in Asia. But I know before you had mentioned that you were expecting about $45 million in anticipated contributions into pensions for the year. Is that still correct?

Alan Wilson

Yes, that's correct. And a lot of those largely done already and reflected in the cash flow.

Robert Dickerson - Consumer Edge Research

And then still as we look at the balance sheet now and we see a bit of a ramp in inventories just in Q3. Is that solely do you think from Asia?

Alan Wilson

As I said earlier, it's a combination of factors as we've described. It's partially that, it's certainly the raw material cost pressure. It's securing supply for the fourth quarter. A little bit of it quite frankly, if we could have been better on our own forecasting, and so that's where our teams are focused. We're making investments. We've got profit fees.

Our VP of supply chain is all over this. So it's an area of focus. And as we shared with everyone during the investor conference, this is the area we look for over the next two to three years for improvement and our performance to give us the next level of improvement on our cash conversion cycle.

Robert Dickerson - Consumer Edge Research

Just another question following up a little bit to Andrew's question on the topline. It sounds like you are staying with the 2% to 4% organic growth target for the year which would imply that you are obviously expecting a strong fourth quarter. But could you just comment on just a little bit how we should look at the data that obviously we all see on a scanner basis, because since 2007 you've still continued to loose some dollar share and track channels.

And I'm not sure that could just be because of a shift to more demand in track channels or if it's because the pricing is too high. I'm just trying to get a little bit of clarity so that I can understand better how to read a loss in share in those channels relative to what we're not seeing in other channels.

Alan Wilson

Just keeping that in perspective, generally what everybody is looking at is a very small portion of our overall sales. The scanner data that you're talking about covers only spices and herbs and people have ignored our share gains in dry season mixes. You are only looking at about half the store population in the U.S. because it doesn't cover warehouse clubs, dollar stores mass market like Wal-Mart and others.

And it doesn't include all the sales that we had to Hispanic stores or Zatarain's Products and so it's capturing a smaller portion of that. Now we're not happy about share losses in any channel. And our teams are working aggressively to make sure that we both continue to grow our share in the grocery channel and that we drive sales and volume through that.

Because that's something that we are very, very sensitive to. But again, I don't want to put too much emphasis on what represents a smaller percentage of our sales as we look at those. But we certainly look at it and monitor it and take actions to correct it when we see downturns.


Our next question is from the line of Robert Moskow of Credit Suisse group.

Robert Moskow - Credit Suisse

I was concerned heading into the quarter also because of the Nielsen data because it showed a sequential deceleration in measure channels. And I was wondering the U.S. consumer business turned out better than I thought. Can you give us a sense of how much of that might have been from new products that you shipped to the trade and may be just hasn't been picked up yet by Nielsen?

Alan Wilson

It's hard for me to say what's in that Nielsen database. We're in our (light house) and we have a custom database that captures the McCormick branded products which include Lawry's Old Bay, Lawry's and Zatarain's and all those sorts of things.

So it's hard for me to calibrate what we're seeing in Nielsen. I think directionally, what you saw was correct in those channels but it missed so much of the rest of the product mix and customer mix that it's indicative of a trend. But it's not necessarily indicative of what's happening.

Robert Moskow - Credit Suisse

Okay. So zero then, Alan, from new product shipments. Just filling up pipeline, you think it all would have been captured by retain by now?

Gordon Stetz

Our Recipe Inspirations for instance should be scanning by now because we started shipping.

Alan Wilson

Yes, Recipe Inspirations are scanning, but what I don't know is that on the Nielsen database.

Robert Moskow - Credit Suisse

Marketing, you maintained the guidance to have marketing up $20 million year-over-year, which is a nice increase but also you have $0.07 of upside. Often you decide to reinvest that upside into marketing to some degree. And you say that you are not happy with market share trends in some of these channels.

So why not put more into marketing in the fourth quarter instead of dropping it all at the bottomline?

Alan Wilson

We are going to look at opportunities to do that. Again, we want a balanced measure of our spinning. And want to make sure that our spins are all efficient. And as you can figure now, we're two months away from the end of the year, and most of our plans are pretty well locked an loaded.


(Operator Instructions) Our next question is from Mitch Pinheiro with Janney Montgomery Scott.

Mitch Pinheiro - Janney Montgomery Scott

Just so I understand in the industrial business, you have prices down in the third quarter. But with pepper and other commodity costs heading higher, should we expect higher price increases in industrial in the fourth quarter or the pass-through still continuing?

Alan Wilson

There is a bit of a lag effect with how we pass-through commodities in the industrial business, because it's based on the coverage and the positions that we have. So what we're seeing right now is the impact, at least in this quarter, the impact of diary costs that were reduced versus this time last year, and it's based on the positions that we work with our customers to take and pass-through.

I think over time, as commodity costs go up you'll start to see the pricing impact of that as we pass those through.

Mitchell Pinheiro - Janney Montgomery Scott

I guess this quarter, the margins in the industrial segment reached 9%, and in light of your long term goal, I guess back in May you throw up a 9% to 10% sort of target for 2013. But I know quarterly, there's some variance per quarter, but you're almost at that low end of your target range.

So does this mean that perhaps the long term goal could be on the low side, or are there other structural factors that I don't see or we should consider?

Gordon Stetz

Well, there are still some things to think about there, because as commodities go up, and we pass those through, we'll recover the dollars, but we won't necessarily recover the margin. That's kind of the impact we saw in 2008 and 2009. Part of the margin increase we're seeing now is we're passing through lower costs, but we're also not passing margin down.

So we're seeing a little bit of help in margin in that. I would say that we're happy with the progress on margin so far in our industrial business. And we certainly feel good about the fact that we've got momentum that will continue to build as we improve the mix of that business and focus on more and more value-added products and as we continue to manage our costs.

So I'd say, we're not setting a new goal out there, but we're real happy with where we're at.

Mitchell Pinheiro - Janney Montgomery Scott

Obviously, your new product activity with your large industrial customers helped your margin mix, especially in the early years. Is there any way you could frame what you think is sort of new product activity this year versus last year from your meaningful customers? I mean, is new product activity up at a double digit rate or any way you can give us some color on that?

Joyce Brooks

Yes, this is something unusual. This is something we usually measure toward the end of the year, and we reported that Q1 in January.

Alan Wilson

I would say, as a trend, new product activity to consumer manufacturers is up versus this time last year. But if I look at it on a quarter-to-quarter basis, we had some new product introductions in quick service last year that have now lapped a year. And so there's an awful lot of moving parts in the pipeline.

So I'd hate to give you a bad number based on that but just in general, our new product activity with consumer manufacturers is really strong when you see the pipeline for quick service. But so far this year, I think our quick food service was a little stronger last year.

Mitchell Pinheiro - Janney Montgomery Scott

Okay, last question. So, just with guidance, the low end of the guidance range would suggest flattish profit growth in the fourth quarter I believe. And I'm just trying to just understand what would be the key factor that would determine where you are in the range.

Gordon Stetz

Obviously, the sales and margin mix would probably be the two biggest factors, Mitch. And this being our largest fourth quarter, this is the quarter where those two factors can be very significant.

Mitchell Pinheiro - Janney Montgomery Scott

Should it be at the low end of your guidance range? It would just mean that sales are just softer.

Alan Wilson

Sales softer and the mix of the overall business, both in the products and in the overall portfolio is not quite as strong, and likewise, on the upper end we had stronger sales and a better mix in the whole portfolio.


Our next question is from the line Eric Katzman with Deutsche Bank.

Eric Katzman - Deutsche Bank

Just a couple of questions. I guess we've been kind of dealing with this IRI, Neilsen issue for over 10 years I would say, and how it's not really relevant to the bulk of your business. But if you look over the entire business, including international, industrial, all the other products that you guys have been successful in, is it probably fair to say that IRI Neilsen measures in terms of what people look at spice and seasonings, is that probably less than 10% of your business today?

Alan Wilson

I think we kind of calculated it based on preparing this call. We think it's something around 10%. It's a little more than that but not a lot more.

Eric Katzman - Deutsche Bank

Then the second question I guess has to do with, I think Ken from JP asked this. I was kind of surprised about his question on new products and kind of that he's hearing from retailers, I guess not wanting to get new products. I guess in this environment given that promotion really hasn't worked for most companies in terms of driving consumption, certainly the retailers are not happy with the deflation and the impact that it's had on their businesses and ultimately their stock, it would seem to be, maybe you're indicating this with the new product stuff, but it seems to me that if anything, they want to go the other way.

Gordon Stetz

That's more where we're seeing a lot more energy in product innovation and acceptance by retailers to get back to growth than necessarily where we were. And I'm comparing it to where it was a year ago, where there wasn't as much receptivity of new products. And now I'm seeing actually as much a pull from retailers for new products, at least in the categories where we're servicing.

Alan Wilson

And I would also think that within that effort, it's probably, they would want you to have somewhat let's say stealth kind of mix/price improvement as to what's coming on to their shelf. I mean, what's the value to them putting out new products if they are even lower priced, which again would kind of lead to deflation which is what they don't want.

Gordon Stetz

There's certainly a lot of discussion on making sure the price points are right on new products. And we're conscious of that as well. There is certainly a push. When you have something that's new to the world, the consumer doesn't necessarily have a basis of comparison.

Our Recipe Inspiration is a great example of that where if you look at it on a per ounce for the spices, its fairly significant, but if you look at it on an absolute price point versus buying five or seven bottles of spice, it's a real value to the consumer. So it's a way of making sure you're delivering value, and taking the opportunity to improve margins along the way. The ringbacks are pretty good.

Eric Katzman - Deutsche Bank

And then, I don't know if you're going to be able to answer this, Alan. But obviously with Unilever buying Alberto Culver, there are some assets in there were you I'm pretty sure publicly talked about a desire to have some of those seasoning blends that they own. They got out of Lawry's and that was very accretive to you. Is it fair to say that that's another possible acquisition in addition to all the JVs you seem to be kind of putting together?

Alan Wilson

We don't really want to comment on any potential acquisitions out there at this point. Certainly, anything that's available in our space would be something that we'd be interested in having a look at.


There are no further questions at this time. I would like to turn the call back over to Ms. Brooks for closing comments.

Joyce Brooks

I would like to thank everyone for participating in today's discussion. Through our teleservice, you may access a telephone replay of today's call by dialing 877-660-6853. The account number for the replay is 309 and the ID number is 354090.

You can also listen to a replay on our website later today. If anyone has additional questions regarding today's information, please give me at 410-771-7344. This concludes our call.

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