McCormick's CEO Hosts "A World Of Flavor" Investor Conference (Transcript)

| About: McCormick & (MKC)

McCormick & Company, Inc. (NYSE:MKC)

April 17, 2012 1:00 pm ET


Joyce L. Brooks - Vice President of Investor Relations and Member of Investment Committee

Alan D. Wilson - Chairman, Chief Executive Officer and President

Mark T. Timbie - President of North American Consumer Foods

Malcolm Swift - President of Europe, Middle East and Africa Operations

Ken Stickevers - President of USCPD Operations

Lawrence E. Kurzius - President of McCormick International

Angela Francolini - Chief Executive Officer and President

Charles T. Langmead - President of U S Industrial Group

Gordon M. Stetz - Chief Financial Officer, Executive Vice President, Director and Chairman of Investment Committee

James Radin -

Hamed Faridi - Chief Science Officer


Kenneth Goldman - JP Morgan Chase & Co, Research Division

Andrew John Kerr - SADIF-Investment Analytics S.A.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Thilo Wrede - Jefferies & Company, Inc., Research Division

Thomas Graves - S&P Equity Research

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Unknown Analyst

Andrew Lazar - Barclays Capital, Research Division

Joyce L. Brooks

In addition to our guests here at the New York Stock Exchange, I'd like to welcome those joining us now, by webcast, to McCormick's April 17, 2002 (sic) [2012] A World Of Flavor Investor Conference. And to begin -- well, let's go to the next slide there. Okay. As we begin, I'd like to remind you that during the course of our remarks, we'll be making certain forward-looking statements. And in that regard, I would like to refer you to the information on this page.

In addition, we've included materials in your binders and the online slides that provide a reconciliation of any non-GAAP information to our GAAP measures. So no further delay, it's my pleasure to turn the floor over to Alan Wilson, Chairman, President and CEO of McCormick.

Alan D. Wilson

Thanks, Joyce. I'll add my welcome to everyone who's joining us this afternoon. McCormick Brings Passion to Flavor. Flavor is the foundation of our business, and we have a simple mission: we're out to save the world from boring food.

Our headline for this conference is "A World of Flavor." In the past 12 months, we expanded our world, both organically and through acquisitions, making inroads in Eastern and Central Europe, Russia and India. And we expanded our supply of industrial customers as they grew globally in markets like the Middle East, Russia and parts of Asia. Today, annual sales of our business reached $3.7 billion in 2011. We have 9,500 employees worldwide.

Our brands reach consumers in more than 110 countries and we're serving customers, both consumer and industrial, from nearly 50 locations in 24 countries around the world. We like to say that every day, no matter what you eat, you can enjoy food that's flavored by McCormick.

With the current reach of our products and the global reach of our industrial customers like PepsiCo, McDonald's and YUM!, we're adding on the word everywhere. Our world of flavor is expanding not only geographically, but with a broader portfolio of flavors. We've entered new categories like mustards and basmati rice; expanded the boundaries of our regional products with innovations like Recipe Inspirations and frozen Zatarain's entrees.

And we're at the forefront of taste trends, the future of flavor. For more than a decade, we've demonstrated our thought leadership by publishing an annual Flavor Forecast. Last year, we had various forecasts across our major markets. In 2011, our chefs and other flavor experts from around the world created our first global Flavor Forecast, which is the theme for our reception this afternoon. Our Flavor Forecast has an excellent track record predicting flavor trends and is eagerly awaited by a growing following of customers and media.

Customers are demanding more flavor. In the U.S., our pantries average 40 spices and seasonings, up from fewer than 10 just a decade ago. Consumption of spices has grown almost 3x as fast as population growth. About 1/3 of us watch cooking shows regularly, and nearly 2/3 like to get creative with the foods that they cook.

In January 2012, Food Technology magazine published its report on what, when and where America eats, and indicated that 87% say taste is the most important driver of food selection. 69% like to try new flavors. This is up over 5% over the past 2 years. 53% are more likely to visit a restaurant that offers new or innovative flavors, and preference for spicy foods grew 9% among those ages 25 to 34 and 13% among ages 35 to 44 just in the past 2 years.

And there's a lot more room for growth. Did you know that half the steak and chicken that's prepared in U.S. homes is flavored with just salt and pepper or nothing at all? So we've got a lot of work to do and a lot of opportunity.

Outside the U.S., similar forces are driving consumer demand for flavor. Shown here are healthy category growth rates for spices and seasonings in international markets where we have a significant presence. Consumer trends in emerging markets are also in our favor. Our growing middle class is eating more protein, which is usually flavored in some way. These consumers are interested in brands that they can trust, in particular, the trust and convenience of spices and seasonings as a packaged food item rather than an open-air bulk purchase. These trends play to our strength, and as you will learn today, we're making excellent headway on our strategy to play in these important markets.

The greater interest in flavor from an increasingly affluent and connected world population is one of the major trends that we see for the food industry. Another is a continued rise in demand for products with healthy attributes, and McCormick is well positioned with a foundation in natural spices and herbs. Consumers want to increase their consumption of spices and herbs. This is in sharp contrast to many other food categories where consumers really are trying to cut back. You'll hear more today about the digital consumer searching for recipes, sharing information and shopping online and how we're connecting with them. And in both our consumer and industrial businesses, we have significant innovation underway to meet the rising demand for products, offering convenience and value, 2 product attributes that never go out of style.

While there are trends in our favor, we're not immune to the difficult economy, struggling consumers and volatile input costs. In each part of our business, we're taking steps to address these challenges and position ourselves for future success. These steps include innovation at all price points, managing the value of our brands, tactical pricing actions and optimal product assortment.

Regardless of the economic environment, we continue to deliver high performance. We have delivered consistently higher profit, even in this latest round of steep cost inflation. Shown here is our steady improvement in earnings per share on a comparable basis over the last 10 years.

Another metric we use extensively within our business is economic value added or EVA. Looking back over the same period, while EVA drops a bit immediately following an acquisition, over time, we've increased EVA and expects this measure of our business success to correlate to a higher share price.

Behind this success is our strategy for growth: to invest in our business and product development, brand marketing and in acquisitions; to drive sales and profits; and to fuel our investment with Comprehensive Continuous Improvement, our CCI program. Whether it's our CCI program, product development, supply chain operations or another vital role, each McCormick employee is a key ingredient to our success. We foster a culture of respect, recognition, inclusion and collaboration. In fact, McCormick is a pioneer in participative management, with a multiple management philosophy that dates back to 1932.

In our latest employee survey, we had an 87% participation rate, which is ahead of the 77% benchmark. And around the world, our employees are highly engaged and the catalyst behind our growth.

Our focus in today's conference is on our initiative to grow sales and profit. We'll share a snapshot of 2015 and how we're building on our momentum to expand our presence around the world of flavor. As we project out to 2015, we'll be operating in more regions, extending our portfolio of flavors into more categories and increasing the globalization of our organization and of our resources.

In both our consumer and industrial businesses, we're expanding our geographic footprint, further penetrating alternate channels, filling distribution gaps in developed markets and accelerating our growth in emerging markets, both organically and through acquisitions. We believe sales in emerging markets can grow to 20% of our business by 2015. And we're growing profitably in these markets by acquiring established brands and forming joint ventures with solid business partners.

Our flavor portfolio will be broader as we accelerate innovation. We've already begun with more than 200 new consumer products launched in 2011 and a strong pipeline of innovation in our industrial business. By 2015, we expect at least 10% of annual sales to come from new products launched in the past 3 years. Organically and through acquisitions, we anticipate that 75% of sales will be value-added products versus ingredients. This will have both greater growth potential, and in our industrial business, higher margins.

We're moving toward a more global approach to our organization and our resources in areas such as product development, supply chain and technology. We expect this to lead to superior consumer insights and greater customer intimacy, and it'll be embedded in our participative, high-performance culture globally. We've laid the groundwork for this growth with uniform system platforms including SAP. And with the divestment of non-core businesses and the streamlining of our industrial products and customers, we have a much more focused flavor portfolio. We have restructured the 4 manufacturing centers of excellence and eliminate redundancies, and we formed shared services and are rolling this out globally.

More recently, we're positioning McCormick as the foremost leader in flavor, and we're doing it globally. And in 2011, we expanded our portfolio of brands with Kamis and Kohinoor, and we've taken steps to foster a global perspective among our current and future business leaders by forming global and regional multiple management boards, creating new roles like Chief Science Officer and naming leaders responsible for our global supply chain and global customer relationships.

We're taking steps to better position ourself for the future. These include acquisitions. We have a robust pipeline of opportunities in both developed and emerging markets. We're equally excited about our innovation plans that you'll hear more about today, and we'll continue to develop our global resources, including people, systems and processes.

Our path toward 2015 aligns with our long-term financial outlook. We start with the top line with mid-single-digit sales growth. We're projecting operating income to grow 7% to 9%, and earnings per share to grow 9% to 11%. We expect a double-digit increase in total shareholder return.

Our confidence behind these goals is based on our track record over the past 5 years as shown here, with compound annual growth rates of 6% in sales, and on a comparable basis, increases of 9% in operating income and 10% in earnings per share.

We're confident in our ability to grow this business and increase shareholder value. In today's conference, we'll share with you how we're driving this growth, meeting an increased demand for flavor in markets around the world with investments, growth initiatives and an increasingly globalized approach to our business. We have a strategy to deliver high performance and a talented team committed to this success.

We're going to turn next to our 2 business segments and growth drivers. And that will -- and after that, we'll discuss our fuel for growth and other financial projections. Dr. Hamed Faridi will cap our remarks for sharing our vision of the future of flavor. Throughout the day, we'll allow plenty of time for an open dialogue to make sure that we're meeting your objectives for the day.

I'm going to turn it over now to Mark Timbie, our President, Consumer Foods Americas, and our Chief Administrative Officer. Mark will begin by outlining our overall product framework and a global view of our flavor categories. He will introduce our key growth initiatives. We'll then ask Malcolm Swift, President of Europe, Middle East and Africa, EMEA; and Ken Stickevers, President of U.S. Consumer Products, to provide insight into the initiatives that are driving our growth.

Lawrence Kurzius, President of McCormick International, with a responsibility for both EMEA and Asia/Pacific, will discuss our expansion in emerging markets and provide some wrap-up remarks. At that point, we'll move to your questions and have Angie Francolini, our Vice President of Global Consumer Platform Strategy, to participate. Mark?

Mark T. Timbie

Thanks, Alan. Our global Consumer Foods business has a leading portfolio of flavor brands. These brands are all powered by McCormick. Our passion for flavor and expertise in developing great-tasting products drives our differentiation in the marketplace. From flavors consumer crave like Old Bay, to big, bold grilling flavors in Grill Mates, each brand has a unique point of difference in our portfolio.

In 2011, the Global Consumer business sales accounted for 60% of the total company across our 3 regions: Americas, EMEA and the Asia/Pacific. We have a global focus on 2 core growth platforms: herb, spices and seasonings and recipe mixes plus a portfolio of regional flavors, branded leaders like Zatarain’s in the U.S., Vahiné homemade desserts in France and Billy Bee in Canada. Each of these is a top brand locally in its respective category with attractive growth prospects.

I want to start by explaining why we are excited about the growth potential of our 2 global platforms. Worldwide, herbs, spices and seasonings sold as packaged food is a $9 billion category. Importantly, we estimate that only half of herb, spices and the seasonings are sold as packaged food items. This means global sales of spices and seasonings are approaching $20 billion. In many emerging markets like India and Turkey, most are sold as a bulk ingredient, but are beginning to transition over time to packaged foods.

While we operate in a number of countries, here are the dollar sales of compound annual growth rates since 2006 across some of the key markets in our 3 regions. Clearly, the categories had healthy increases for the past 5 years in both developed and emerging markets. In developed markets, where we have leading position, we have played a major role in driving this growth through innovation and brand marketing. Euromonitor projects that across all markets, this category will grow another $1 billion by 2015, a projection that represents unit volume increase before any pricing.

Although we have a strong category share in our top markets, our share of this total global category is less than 20%. We have lots of headroom for growth. As illustrated here, the category is quite fragmented, with a share of the next largest competitor less than 5%.

Let's take a look at the details for some of our primary markets. In our 4 largest markets, the first 4 on the left, our category shares range from 42% to 59% and are well ahead of the next branded competitor. Private label in these 4 markets ranges from 18% in the U.S. to 40% in the U.K. While private label plays an important role in our largest markets, our brands are the category driver.

In addition, as many of you know, we have been a leading supplier of private label for many years in North America and participate in Europe as well, although these sales comprise less than 10% of our total consumer business sales. While we have seen some share increase for private label in the past 52 weeks, we have also increased sales of our brands.

Our other global growth platform, recipe mixes, is a $3 billion category, about 1/3 the size of herbs, spices and seasonings. This category also has some attractive growth rates. Euromonitor projects a 5% compound annual growth rate through 2015.

As with herbs, spices and seasonings, we have strong category shares. Private label penetration is much smaller in this category. In addition, we have attractive upside potential, particularly in Europe. We expect over time that our growth initiatives will bring our branded shares for recipe mixes up to those of our branded spice and seasonings. We'll also pursue opportunities to develop this business in other markets with brands like McCormick, Ducros and Kamis.

Looking beyond our 2 largest platforms, we have leading regional brands. In North America, Lawry's marinades, Billy Bee Honey and our Zatarain's brand and Thai Kitchen brand. In France, Vahiné homemade desserts. Our products in China, which include ketchup and jams, and Aeroplane gelatin in Australia. These are just a few examples of our brands that have strong consumer franchise and excellent growth opportunities, as you'll hear next from Malcolm and Ken.

Across all of our consumer business growth platforms, 2/3 of the sales are composed of branded products where we have the #1 position.

Before moving to our growth initiatives, let me summarize some key points. We have a broad portfolio of high-quality flavor products. We are operating in strong categories in each of our 3 geographic regions, and we have leading category shares from which to build our business. This market leadership has us uniquely positioned for success.

We are pursuing 5 key initiatives to accelerate the growth of our brand global consumer business: elevate brand superiority; accelerate scalable innovation; drive core platforms globally; strengthen customer intimacy and expand our geographic footprint. Lawrence is going to cover the last one with a focus on our emerging market penetration.

But next, Ken and Malcolm are going to cover the first 4 and the activity underway throughout our Global Consumer business. Malcolm is going to kick it off with the importance of elevating our brand superiority to win in a challenging marketplace.

Malcolm Swift

Thank you, Mark. And good afternoon, everybody. I would turn straight away to our first strategy: to elevate our brand superiority. Consumers around the world love our brands. Just as home cooks in America trust the high-quality McCormick brands to flavor their meals, consumers in the U.K. turn to Schwartz for great taste, while Ducros is the favorite brand in France. In Poland, we have Kamis and in China, it's McCormick.

We want all McCormick brands, the products, the package and the experience to offer superior attributes where it matters to our consumers. I will begin by talking about master branding, how we are increasing the investment in our brands, how we are helping consumers realize greater value from our brands in these difficult economic times.

In Europe, we are leveraging our local strengths into a pan-European design and positioning, which we began to introduce last month. This harmonized architecture not only improves impacts on shelf, but also drives economies of scale and speed to market. In marketing our brands, this master brand architecture helps us to communicate our brand superiority more consistently.

Our master brand strategy extends to Asia as well. In China, we have used consumer insights to develop a brand look that is consistent and aligned with our global brand platform. We now have a distinctive brand treatment for Hao Mei Wei and have secured famous brand status in China. This distinctive status is assigned by the Chinese government to assure consumers of the brand's quality and is currently held only by 105 foreign trademarks.

Consistent investment support is another vital aspect of brand superiority. We are building and increasing brand loyalty and emphasizing what makes our products superior to our competition. As a percent of consumer business sales, our brand marketing support reached 8.5% of 2011 sales, up from 6.7% in 2007. Long term, we plan to continue this upward trend.

In order to optimize this spending, we measure the effectiveness of each type of brand marketing support, and we are now harmonizing this approach globally. In the U.S., we have achieved returns above the industry average for each major type of media. In EMEA, our 2 most recent campaigns have generated substantial sales uplift for new products in U.K. and France, as well as a halo effect for the brand. In China, our media tests have accelerated our sales growth significantly and strengthened our brand equity metrics. Our plan is to roll out the campaign to additional provinces.

One of the reasons our brands can maintain their strong brand loyalty is our significant share of the category advertising spend. In 2011, our share of voice for herbs, spices and seasonings was particularly high in these 5 markets, at or above 60%.

Brand superiority also means that we understand how consumers value our brands. Alan shared that 87% of U.S. consumers indicate that taste is the most important driver of food selection. However, the second driver is price at 79%. Frugality is the new consumer reality. To adapt, we are directing an increased proportion of our marketing to ads like those shown here, which ensure consumers know that McCormick brands offer great value.

Also in the U.S., we have emphasized the relative cost of saving the world from boring food. In markets around the world, our products are often just 10% of the cost of a meal, but 90% of the flavor. And as Western European economies continue to be challenging, we have started to bring more attention to the value dimension of our brands. Shown here in our French market is our larger value pack, which offers consumers better value per gram, and has been available for some time in a limited range of spices.

In addition, we are now offering small sachets for certain spices and herbs at lower price points to encourage consumers with limited budgets to purchase our brand. And here are examples of other value price packaging formats in markets such as Australia, Africa and the Philippines, designed to appeal to lower-income consumers who aspire to buy brand-leading quality.

I will now hand over to Ken, who will continue to talk about how we will elevate our brand superiority.

Ken Stickevers

Thank you, Malcolm. Given the endless information available online, we know that more than 70% of purchase decisions are now made before consumers walk into the store. Our goal is to reach them during this critical decision-making phase, as well as during and after the purchase decision, completing what we term, “the flavor life cycle”. We believe our unique combination of brands and superior flavor products are uniquely positioned to play an integral role in our consumers' lives.

Around the world, we are aggressively investing in upgrades to our master brand websites, establishing a significant social media presence and extending our ability to engage with consumers through mobile options. We have formed a strategic partnership with MyWebGrocer, a company that provides a web-based backbone infrastructure for approximately half of the retailers in the United States.

The great thing about our products is that we can truly flavor any meal. This allows for a unique partnership with our retailers. And in industry-leading way, we are turning inspiration into action. For example, we partner with customers through our relationship with MyWebGrocer to provide guidance on how consumers can flavor their meals. And then we provide guidance on a great way to flavor it with McCormick products. Because we flavor any meal, the possibilities are endless. It's a total meal solution for the consumer and a win-win for our retail partner, and of course, McCormick.

In addition, we are working with MyWebGrocer to develop a flavor print service that would deliver recipes based on knowledge of consumer's behavior and purchase history. We believe this is a breakthrough application of technology that would allow us to provide a service similar to Amazon's recommendation engine for recipes and McCormick flavor products. More to come in the back half of this year.

Interactive marketing offers a very personal way to elevate our brand superiority and has exceptional return on investment returns based upon our testing and analytics. As a result, we're aggressively shifting our marketing mix towards nontraditional vehicles, which includes interactive, shopper marketing and public relations, all powerfully effective tools to drive consumer engagement and offtake.

Our Global Consumer business is perfectly positioned to deliver the healthy flavors that more and more consumers are demanding. For example, many of our herbs and spices are a concentrated source of antioxidants. We also offer hundreds of salt-free products. In addition, consumers can find reduced sodium versions of many of our top-selling items in our portfolio. These salt-reduced options have largely delivered incremental volume and fueled growth in our core businesses. Our Simply Asia products and top-selling Zatarain's rice mixes offer gluten-free solutions for millions of consumers.

Staying in the U.S. for a minute, I want to update you on how we are building brand superiority with Hispanic consumers, the largest and fastest-growing demographic in the country. Given our long-standing venture in Mexico, Hispanic households are already familiar with McCormick, and as you can see, this brand awareness has translated to purchasing power as these consumers buy more McCormick seasoning products than any other brand by a significant margin.

We also have been tailoring our marketing programs while maintaining consistency with our brand equity. Our U.S. sales of Hispanic products exceeded $100 million in 2011. This does not capture the additional sales to Hispanic consumers of products like McCormick Black Pepper or Grill Mates. We expect our sales to this important consumer demographic to continue to grow in the future, fueled by investments in marketing, infrastructure and innovation.

Another example of how our unique brands and flavors are driving winning results is Zatarain's rice mixes. The product line celebrated its 25th anniversary and is now in full national distribution, a sign that consumers are embracing New Orleans flavor in a big way. Units sold at retail grew 9% in 2011, and we expect to reach $100 million in sales in 2012.

Now let's look at our second growth initiative, to accelerate scalable innovation. As Alan stated, we intend to step up the impact of new products on our sales. At McCormick, we view innovation as a key driver of top line growth and look for 1/3 of total company growth to come from sales of new products. In 2011, we stepped up our activity in the Global Consumer business with more than 200 new products launched, and we expect a similar level of activity this year.

Innovation starts with the consumer. In the U.S., we are placing more focus on consumer insights by conducting research with them early in the innovation process. This includes in-home meetings, where we can observe product interaction, as well as hosting focused groups and product brainstorming sessions. In EMEA, we have a team responsible for identifying our critical choices for growth, standardizing the way we select key projects and getting these projects moving quickly.

Consumer insights in the U.S. led us to our Recipe Inspirations, a product that appeals to novice cooks, and has a strong repeat purchase of more than 20%. Of those who tried the product, about 1/4 purchased full-sized bottles when preparing the recipe again. We view this as a concept that travels globally, just like our Grinders.

Malcolm Swift

Yes, following our U.S. launch, we introduced this product line into the U.K. and Canada in 2011. Our U.K. launch is our best product launch ever, with first quarter 2012 sales 40% ahead of budget in that market. And we are now driving this concept into additional markets. This is a good example of our ability to leverage scale and act with speed, with 5 markets launching using common recipes. We expect this concept to drive double-digit at least the next few years.

Ken Stickevers

Over the past decade, our colleagues in Canada did a great job appealing to more creative cooks, with the development of a consistent line of seasoning blends. We identified this as a development that could be scaled globally, and in 2010, launched Perfect Pinch in the U.S., line price blends, many of which are salt-free and customized to local taste. 36% of these users are new to the spices and herb category, and we are seeing a 26% repeat rate.

Malcolm Swift

While Perfect Pinch is a great name, it would not play well in the U.K., where to pinch something also means to steal something. However, I was pleased to steal the concept and embark on a multi-market launch, which includes the introduction of Perfect Shake in the U.K. market and Melange, Melan in France. We are accelerating a scalable innovation, and you can expect to see more examples of this in the future.

In France, Vahiné is one of the regional leaders on our growth platforms. It is a powerful brand in the homemade dessert category and a source of very successful innovation. In the latest 12-week period, unit sales were up 5% as a result of accelerated innovation. And this is driving not only our sales, but healthy category growth rates.

Aeroplane gelatin in Australia is another regional leader. A steady stream of innovation, including reduced sugar varieties, new flavors and in 2011, dairy-based Wobbles has led to a steady increase in sales and a category share that recently surpassed 80%, nearly a 20-point share gain from 2007.

Ken Stickevers

A regional leader in the U.S. is our very successful Extracts flavor and Food Color business that generates over $150 million in retail sales. Consumers use these products to flavor cakes, cupcakes and especially cookies. And as you can see, we plan to accelerate Extract innovation, expanding our range of flavors and extending successful packaging platforms to drive trial.

In North America, our La Grille and Grill Mates brands are regional leaders in grill seasoning and dry marinades. In order to appeal to the 76% of grillers that use wet flavor, we have launched Grill Mates BBQ Sauces, an all-natural product line which contains a full jar of our grilling rub in every bottle. Also new in 2012 are varieties of seasoning blends, dry marinades and a Slow & Low line that appeals to the 50% of grillers that slow cook at the grill. We continuously refresh the line with these types of products. 15% of 2011 Grill Mate unit sales in the U.S. came from new varieties launched in 2009 and 2010. We have identified the La Grille and Grill Mates brands with the potential to scale globally.

Malcolm Swift

Yes. And in that regard, we are introducing Grill Mates in selected European markets and executing our local model of doing one thing many times by introducing this product into 4 markets in 3 formats with harmonized recipes. Our focus will be on in-store execution, with targeted digital support to build awareness during this summer's grilling season.

Ken Stickevers

As I indicated earlier, we believe we are well positioned to lead several flavor categories with the growing Hispanic population in the United States. This includes recipe mixes. We have entered the market with authentic Hispanic recipe mixes which allow anyone to make an authentic meal in minutes. I'm particularly proud of high consumer test scores achieved as a result of collaboration between our U.S. and Latin America R&D teams.

We're extremely pleased with the strong growth of our Zatarain's frozen entrées. We have carved out a high growth and profitable niche in one of the largest grocery categories, a niche that satisfies consumers’ demand for uniquely flavored foods that nobody else in the space can provide. And with the 2012 introduction of our meals for 2, we expect the growth momentum to continue.

We're also very excited about extending another of our flavor brands, Thai Kitchens, to the frozen space with a unique brand and flavor profile. Product development and prototyping is complete, and we're expecting to launch in select retailers later this year, with additional expansion in 2013.

In discussing our growth initiative to accelerate scalable innovation, Malcolm and I have shared with you today some of our recent new product introductions and a few closed-end concepts. We have a lot more in the pipeline as we look ahead to 2013 and beyond.

Let's move next to how we are driving core platforms globally. As Mark mentioned earlier, we have identified 2 core consumer global platforms: herbs, spices and seasonings and recipe mixes. As we now make the transition to viewing our business through a global lens, we are sharpening our focus and allocating resources based on global opportunities. This is all about global might for the local fight. We have provided several examples of how we have grown our herb, spice and seasoning platform globally.

Let's take a look at how we will drive our recipe mix platform to be another strong avenue for global growth. In the U.S., we have begun to ship our restaged line of recipe mixes with new packaging and new shelf cuisine segmentation to make our products easier to find. We have also applied account level category management analytics to make sure we have tailored our item mix to regional taste. We're already seeing a sales uplift as the restage takes effect, and we believe this is just the starting point for leveraging this platform's long-term growth opportunity. With only 68% household penetration, there's still a lot of upside potential. The U.S. restage also includes 6 new items like Crispy Chicken Fingers and Southwest Chicken Quesadillas. These were selected based upon the most requested items in our consumer's interactive recipe searches.

Malcolm Swift

Our U.K. restage is driven by our new packaging architecture, which clearly segments by cuisine and improves on-shelf impact. We have plans to extend the U.K. restage to other parts of EMEA later this year. In addition, we will be exploiting our position as first to market for Slow Cookers, building on marketing concepts from Australia and key appealing limited edition ranges.

We are never ones to lose a sales opportunity, and for this reason, we included coronation chicken in our U.K. restage. This product celebrates a uniquely British dish on the occasion of Queen Elizabeth's Diamond Jubilee to celebrate the 60th anniversary of her coronation.

In China, McCormick is the #2 brand in recipe mixes. The category is in the early stages, with significant potential for growth as young professionals with limited time and cooking skills begin to prepare meals at home. Our range offers solutions for traditional Chinese meals and introduces Western cuisine favorites, which consumers can now make at home.

In the U.K., we launched Flavorful in 2008 as a premium recipe mix with fuller flavor and natural appearance. In 2011, we introduced this concept into Canada, and consumers in the U.S. and Australia will see it at retail later this year.

Let's now take a look at some of the advertising we are running to elevate our brand superiority, accelerate innovation and drive our core platforms globally.


Malcolm Swift

Let's now move to our fourth growth initiative, strengthen customer intimacy. Customer intimacy is the superior management of our customer relationships. We know that if we identify and understand the needs of our customers and provide them with superior service, we can develop mutually beneficial relationships, the key for long-term success.

We have to know our customers personally. We identify customer needs by building relationships at multiple levels and across different functions. The majority of our large customers are in the modern grocery trade channel, which continues to grow all over the world. As we expand our presence into new markets, we conduct independent research. For example, in Poland and Russia, to understand customer expectations over category, the brand and supplier base and the role of private label.

Retailers in the traditional channel are also very important to us, especially in our emerging markets where route to market can be complex. In China, India, Poland and Turkey, at least half our focus is on traditional channels, where we have plenty of resources on the ground.

We also identify customer needs by conducting specific shopper insight studies. To understand consumer's path to purchase, their shopping behavior to fixture and the role the store and the fixture can play in driving purchase behavior. Our unique combination of superior brands, along with customer and shopper understanding, makes us the natural category partner. And from this, we were able to develop category strategies which drive sales growth for McCormick and customer alike. This has led to much success in winning new distribution across multiple channels in developed markets.

We are exploring every opportunity to save our consumers from boring food, whether they shop in the modern grocery, discounters, warehouse clubs or local convenience channels.

Many of our customers in the modern trade already operate in multiple countries. In Europe, we have created an ability to work on a multi-country basis, leveraging our insights and relationships between markets. And this multi-market approach to customers is becoming increasingly global. For some time, we have had dedicated global resources for our largest customer, Wal-Mart, and we are confident of the value we bring to our customer relationships, both locally and globally.

Ken Stickevers

The importance to the retail of our largest category, herbs, spices and seasonings, is illustrated by this slide. This is the #4 category out of the top 50 in terms of profit per square foot. And with growth accelerating in the last 2 years, this combination of growth and profitability provides a win-win opportunity for McCormick and the retail.

We've significantly ramped up our category management capabilities with RichMix assortment tools. Our customers are beginning to recognize the power of the insights we're bringing to the table as a supplier of everything from premium gourmet to private label.

One way to emphasize the value of our brands is through trade spending, used to fund price promotions, display activity and feature adds. In 2011, we added resources to improve the effectiveness of our trade spending through detailed analytics by customer, by product line. In this example, we determined that a U.S. holiday promotion offering 30% off spice and seasoning products had a much better return for us and our customer than a 50% price discount.

Another example of mutual profitability we optimize the herb, spice and seasoning category for our -- an Australian retailer. We recommended an optimal range of 200 top-performing items down from 600. The retailer placed McCormick-branded items across the value spectrum along with on-shelf meal solution ideas. This drove sales growth to the brand and category, increasing profit for both us and the customer.

We've also raised the bar in terms of our in-store merchandising support by sharing best practices with global thematic displays. These new eye-catching displays, focused on critical eating occasions, provide tremendous impulse purchase opportunities for our customers and are driving growth around these critical times of the year.

We continue to be excited about our global growth potential, and we are working even more closely across business units to drive the right platforms with clear and prioritized global growth strategies.

It is now my pleasure to turn it over to Lawrence to discuss our fifth and final growth initiative.

Lawrence E. Kurzius

Thanks, Ken. And thank you, Malcolm. I'm going to wrap up our Global Consumer business with comments on an initiative where we are making rapid progress expanding McCormick's geographic footprint. In particular, I want to focus on our expansion in emerging markets. My comments in this section are going to touch on our industrial business as well since our 20% of sales goal for emerging markets spans both businesses.

As Alan said, emerging markets offer great growth opportunities for the growing middle class, increased consumption of protein, brand interest and the safety and convenience of packaged food. In these markets, we are leveraging our passion for flavor and trusted brands.

The trends in these regions are not only favorable for McCormick, but for our industrial customers too. These are largely U.S.-based customers that are also expanding rapidly with investments in innovation, marketing and acquisitions.

Our business and investment in emerging markets has a long history. We have been purchasing raw materials grown in these worldwide regions, approximately 40 different countries, for more than a century, and underpinning the opportunities we see in emerging markets are healthy economic growth rates.

In the past 20 years, we have established manufacturing operations in several emerging markets to provide a local source of supply. Our industrial business has served as a first point of entry as we support the global expansion of our strategic U.S.-based customers. This has provided the foundation and an infrastructure from which we can profitably launch a consumer business.

For consolidated businesses, we have achieved an 18% compounded annual sales growth in emerging markets since 2006. This rapid emerging market growth accelerate in 2012 to 50% as a result of our acquisition of Kamis and Kohinoor. And as evidence of this, our first quarter sales in emerging markets rose 73% year-over-year for the full impact of these acquisitions, along with the growth in China and other markets.

While most of my remarks this afternoon will be on our larger markets, we have smaller operations in some fast-growing countries that comprise 1/4 of our 2011 consolidated sales in emerging markets.

Our joint ventures offer another way to participate in emerging market growth. We have a long-standing successful joint venture in Mexico. More recently, we have partnered with local experts in India and Turkey who have established or have the ability to quickly establish an effective retail distribution network. We view this as a critical step in penetrating new markets.

In total, sales by McCormick's joint ventures in emerging markets grew at a 15% compounded annual rate since 2006. And in 2011, our income from unconsolidated operations, most of which are in emerging markets, was $25 million.

Let's take a look at another map. The previous one showed where spices and herbs are grown. This one shows those emerging markets where we have operations, subsidiaries and/or joint ventures. In addition to these countries, we have licensing agreements and export into approximately 30 more countries that together would count for roughly 1% more of sales in emerging markets.

Our goal for sales of consolidated businesses in emerging markets is to reach 20% by 2015. However, if we add all of these up now, our consolidated sales in emerging markets, our pro rata share of unconsolidated operations and the 1% from export, the total already approaches 20% of sales.

Let's talk about what's underway in each region, starting with the Americas. As I indicated, we have a joint venture in Mexico dating back to 1947. In this market, the McCormick brand is best known for mayonnaise, where we have a 60% share along with #1 rank in spices, seasonings and marmalades. Through innovation and marketing, this business continues to gain share and grew sales 12% to $382 million in 2011.

We also have an industrial business in Mexico that serves as a local source of supply for snack seasonings and other product, and in El Salvador, we have produced industrial products as well as branded consumer products for that country and other markets in Latin America.

In South America, we have industrial and consumer business relationships by our licensees and distributors. We're exploring opportunities and evaluating our current business model to more fully participate in the growth of this region.

Similarly, we are growing in EMEA through our existing business, joint ventures, licensees and acquisitions. As depicted here, Russia falls under the responsibility of our EMEA organization. We recently acquired Kamis, adding Poland, Russia, Ukraine and Romania to our map, countries where McCormick had virtually no branded sales. Strategically, Kamis is an excellent fit with our current brands, which have leading positions in the U.K., France and other parts of Western Europe.

Kamis brings another leading brand to our herb, spice and seasoning growth platform and gives us a leading brand of mustard. Among consumers in Poland, the Kamis brand is ranked in the top 10 among all brands in that country. This year, we expect at least $120 million in sales ahead of our initial projection with longer-term growth at a mid-single-digit rate, and this business is expected to add $0.06 to EPS in 2012.

Malcolm and his team have done a great job integrating this business into our EMEA structure, which we're able to leverage into this wider geography. The core integration plan has been completed on time and within our planned budget. Through consumer research, we have identified some immediate opportunities to improve customer assortment and category presentation, which should accelerate sales growth. And in the holiday period, we invested in advertising that led to an increased category growth and a higher share for the Kamis brand. Going forward, we plan to grow Kamis through new products, marketing and regional expansion.

Also complementing our business in EMEA is an important partnership in Turkey. Through this joint venture with Yildiz Holding, which owns Ulker, a leading food brand in Turkey, we launched a range of 42 herbs, spices and seasonings in the past 12 months. With distribution in 70% of major retailers, we have already gained a 10% unit share of the packaged spice and seasoning category and are the leading international brand. This joint venture with Yildiz has built on our industrial business in Turkey, where we have operated through a consolidated joint venture since 1996.

To round out our discussion of this region, we have made steady inroads in Africa with our industrial operations in South Africa, as well as a joint venture in that country. We have exported branded products into Africa for more than 30 years and to date, have products in 17 countries.

Let's move now to the Asia/Pacific region. We've been in China for more than 20 years and reported steady growth through 2011. Our outlook is equally bullish. Our initial entry was through an industrial business that today is growing in tandem with the rapid expansion of leading quick-service restaurants and other industrial customers. On the consumer side, we have developed a leading brand not only in spices and seasonings, but a number of other flavor products.

In China, we're growing sales through brand support, product innovation and distribution expansion. As shown earlier, this important market is fully aligned with our global initiatives around master branding, increasing the amount on effectiveness of our advertising and important product program such as recipe mix relaunch. To accomplish -- to accommodate this higher demand in both our consumer and industrial business, we're nearly doubling production capacity in 1 of our 2 facilities in China. While our growth in China has been more organic to date, we see some attractive opportunities to extend our product portfolio and accelerate our growth through acquisitions in this market.

India is an equally appealing consumer market and we are just getting started. Spice consumption in India is 5x that of the U.S., with these products used at every meal. But there is a potential for further growth, with organized retail being less than 5% of total food and grocery and a middle class that is projected to grow to 40% of the population by 2025.

In India, the retail infrastructure is complex, and having an effective route to market is a key to success. About 18 months ago, we formed a joint venture with Eastern Condiments, a leader in spices and seasonings. These products reach 150,000 retail outlets, up from 90,000 in just 1.5 years since we first invested in this business. With double-digit sales growth, the business has been profitable for a decade.

Toward the end of 2011, we entered into a majority stake investment in a joint venture with Kohinoor. Sales of this business are consolidated. Kohinoor is a leading brand of flavorful basmati rice and other food products, with a distribution network of 350,000 retailers. We have already built upon this with a new customer win in the modern trade channel. The venture includes what we believe to be an underutilized food production facility that has the ability to manufacture ready-to-eat meals, baked goods and sauces. We're developing an innovation plan for the first new products to be launched by the end of this year.

In other emerging markets in Asia, much of our business relates to joint ventures and supply of industrial products which Chuck and I will discuss in the next section of our presentation. Now I hope you can sense my excitement about our latest progress in these markets and have a better sense of our presence and direction for further growth.

We have capable business leaders on the ground, and each of these markets on a promising pipeline of acquisition and joint venture opportunities. McCormick has a long history of growth in emerging markets, and through careful assessment of opportunities with the right brands and best business partners, we are growing profitably. We're cultivating additional opportunities and relationships in emerging markets to build upon a strong footprint and accelerate our future growth.

Let me now turn to summarize McCormick's Global Consumer business. As you've seen from Malcolm and Ken, we have a clear set of proven strategies that we're executing again globally to successfully drive our growth. Mark showed the strong foundation supporting these strategies, strong brands with strong market shares, the growth of our core categories and throughout, we've shown the favorable demographic and economic trends which we are mining with consumer insights. These, coupled with our accelerating growth in new and emerging markets, are accelerating our growth as a global business.

As we prepare for your questions, let's take a look at some of the advertising from our emerging markets.


Joyce L. Brooks

Okay, we're going to turn to Q&A. And we'll be hearing shortly from the industrial team, finance and operations. We've got a consumer group here now so that would be the topic for questions. We've got microphones here so I'll call in anyone who wants to ask a question. Wait until you get the mic so that folks on the webcast can hear your question. Step forward. Ken?

Question-and-Answer Session

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Can you talk a little bit -- one of the regions we didn't see much of, unless I missed it, was the Middle East, what your strategy is there, whether you see it's a ripe opportunity or not? You certainly have a great global platform, but it's an area I didn't hear much about.

Alan D. Wilson

We'll let Mark take that one.

Mark T. Timbie

Great, thanks. The priority in our expansion in the emerging markets has been to some of the larger markets with the highest spice consumption and also to leverage assets and capabilities that we already have. So China was a great jumping-off point for us because we have a large industrial business there that gave us scale, infrastructure and a management team that allowed us to very effectively launch a consumer business. India is another market where we've had great experience through some longtime joint ventures, and so it was an area where we could leverage some existing assets and capabilities. And the same is true at Western Europe, where we were able to -- the big asset that we were able to leverage was the strength of our European management organization and central functional structure in Europe. In Middle East, we don't have those kinds of assets to leverage, and it's just not as a low-hanging fruit, perhaps, as some of the other markets. We do export significantly into the Middle East, both from our European -- well, from 3 areas: from Europe, from South Africa and even from some of our Asian business units. We've also got a industrial venture in Turkey that supplies quite affectively into the Middle East. So even though we don't have a physical presence with an office and a factory in the Middle East, we're able to effectively access the market.

Joyce L. Brooks

Okay. Andrew, over here?

Andrew John Kerr - SADIF-Investment Analytics S.A.

On one of the slides, in the core U.S. urban spice market, I think the all-other-branded share was something around 25% or so. And I'm trying to get a sense of what the market share opportunity is in the for U.S. business from an organic perspective. Who -- what makes up that grouping? Is it all very small, primarily fragmented sort of players? Is there a need for all of those players to be around? I know it's been that way for a long time, but is there anything underway, structurally that would suggest that grouping should shrink? Is it from a distribution advantage perspective or maybe why has that group been around as long as it has and then I've just got a follow-up.

Alan D. Wilson

Ken, you want to take that one?

Ken Stickevers

Sure. That has been around for quite some time. Obviously, we don't necessarily believe that there's a reason for those to exist over the long haul, and we're doing a lot of work with our customers to talk about why we should have obviously a leading brand, as well as a private label business and then to maximize that from a total category perspective. The analytics show exactly what you're indicating, which there is not a reason to have all of those. Structurally, I think, over time, these will get squeezed out as the market evolves and develops. But they've been around historically and a lot of them are localized and still have fairly good relationships with key retailers.

Andrew John Kerr - SADIF-Investment Analytics S.A.

And then just as a follow-up, in the fiscal fourth quarter, you took a price increase in the core U.S. consumer business. I guess it was the first time in something like 10 years that you needed to take a price increase going into your key seasonal period. So I just wanted to get a sense, as you look back on that, just some of the key learnings from doing that, things that even surprised you more positively, more negatively? What did you learn from it?

Ken Stickevers

I think much like every other player in the industry, we all saw some softness in December, January. We're seeing that mitigate as we come out of that due to pricing, and we think also probably due to some other factors, economic issues as well as weather. The impact of that, we pretty much planned for that. We softened the blow, so to speak, with value-based promotions, and we're looking at things turning around in a positive direction as we move into the rest of the year.

Joyce L. Brooks

Let's go over to this side. How about Akshay?

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

My question's about one of the numbers you shared in the presentation, which is only 50% of all global herbs and spices, I believe, are sold in packaged format. Can you give us a sense of the potential for that number to move up presumably and maybe a flavor by region, maybe some regions, it's much higher or it's much lower?

Ken Stickevers

I think this is a great reason for our interest in some of the emerging markets that we have focused on in the recent time frame because some of these markets are evolving into -- in ways that support the growth of a packaged spice as opposed to open air bulk spice sale. So the 2 things that we see as catalyst for that kind of conversion are rising incomes, and we're certainly seeing that in many markets, and the emergence of a more modern trade which is more amenable. It's just easy for the modern trade to handle packaged products, so 2 markets that we have a great deal of interest in, in this area are India, where -- has the combination of very large population, high usage of spice and a growing middle class. And Turkey was also part of it because Turkey is, you can argue whether it's an emerging market, I mean, it's quite economically developed, but a lot of the sales of spice are still through the traditional channels and in an open format. If you saw the ad -- I don't know, you're probably not a Turkish speaker, but the ad emphasizes the freshness and cleanliness of -- and the flavor-preserving capacity of a sealed pouch, and a product that we've introduced in that market, Ziploc pouch and it's precisely to encourage that conversion.

Malcolm Swift

I think we should say, though, the research that we did in Turkey, there was a very clear consumer benefit to packaged goods. They saw that freshness and that quality being communicated by the modern trade packages.

Joyce L. Brooks

Okay. Any questions? Chris?

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

I had a question on the emerging markets. The first is just the 20% target for your consolidated sales, does that include any benefit from acquisition or is that just a raw -- just a organic figure?

Ken Stickevers

We see that as a combination of both organic and acquisition growth.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then my related question that would be that as you strive for 20% or whatever the number may be, just do you get a better sense of the investments it might take to achieve those sales, whether it be marketing, sales, distribution? Is there still a lot of investment that McCormick needs to make or would that -- a lot of that come from the acquisition or maybe you've already gotten that for all I know...

Alan D. Wilson

Yes, we'll still be making investments behind the businesses that we acquire. And the runway maybe a little longer for some of those, but we haven't changed our objectives. We want to be EVA positive by the second full year of the acquisition and let the acquisition pay its way. So we'll continue to invest in the business, but as we set our plans in place, we do expect that we'll be driving positive value pretty quickly after we make the acquisitions, even in the emerging markets. We may make a longer-term decision in certain markets, but generally, we haven't changed our objectives.

Ken Stickevers

If I could jump in on that also. Yes, certainly, we're making investments in marketing and plant expansion and so on, but I don't want to miss the point -- the chance to make a point, these businesses are profitable for us. We're making investments in businesses that are already profitable and we're not making investments that -- where we have to underwrite it with the profitability of the rest of the corporation.

Joyce L. Brooks

Okay. Thilo?

Thilo Wrede - Jefferies & Company, Inc., Research Division

What are the some of the hurdles that have kept you out of Latin American markets in a bigger scale and how will you overcome these hurdles?

Alan D. Wilson

Mark, do you want to take that one?

Mark T. Timbie

Yes. The Latin American market, we've been looking for some time. We have industrial presence down there. We've targeted Brazil like many others, but we need to find the right acquisition and the right entry strategy. We do export products in that, we could go that way, but we're looking for the right partner right now. And we are patient buyers and we've got to buy the right company, and we haven't found that yet.

Joyce L. Brooks

Okay. Tom had a question up here in the front row.

Thomas Graves - S&P Equity Research

Yes. I'd like you to speak to the long-term role of joint venture partners. Is it simply a short and intermediate way of getting into the country or you view it as the permanent relationship? I mean, it's conversely, at some point, do you envision taking out the joint venture partners and have it be wholly-owned?

Alan D. Wilson

We've had our joint venture in Mexico for 65 years, and so -- and it's been a great relationship for both of us. And it takes a lot of work and a lot of management, but our culture of collaboration and working together is one that puts us in a pretty good stead for effectively managing joint venture relationships. Ideally, as we enter new markets, what a joint venture does for us is allows us an expert in the market and distribution channels, but we make each indecision -- each decision kind of independently with the plan as to what we're going to do with that. I know that most joint ventures don't last the way that our venture in Mexico has, and -- but typically, we think about it as a way to enter the market and we are looking for a path to being able to consolidate the path to majority on most of those. But we're also happy as long as we're getting the returns to manage as the long-term joint venture.

Joyce L. Brooks

And Ann Gurkin, can you hand her the mic?

Ann H. Gurkin - Davenport & Company, LLC, Research Division

You've outlined a number of growth opportunities and innovations, and I was just curious, are you going to need to make changes in how you source spices to supply those innovations to that growth? And should we see any changes on the balance sheet in terms of needing to source more, take more inventory?

Alan D. Wilson

We'll talk a little bit about that in the operations and finance part, Ann. But I think we continually adapt our model. We've had a global sourcing organization, a global sourcing focus for a very long time. But we do what makes sense in the period and in the situation that we're in, so we're not averse to contract manufacturing items until they get to scale that we can invest in and looking for new sources and developing new regions for our products is something that we continually try to stay in the leading edge of. And I think that's something that we've done a great job with as we developed it.

Angela Francolini

And with our new product platforms, we look at them one at a time individually. So I use Recipe -- Recipe Inspirations as an example. We're supplying the U.S. -- in the U.S. and in Europe. We were able to scale that out to supply all pan-European countries plus Australia. So we are finding ways to leverage scale in our innovation efforts.

Joyce L. Brooks

Okay. Eric Katzman. Can you give him the mic? Pass it down the row.

Eric R. Katzman - Deutsche Bank AG, Research Division

I guess 2 questions. One, for the U.S. business, which is obviously the bulk of the business, many of us have been searching for reasons as to why the volumes have been so weak. We haven't heard anything different, although you had pretty good results last quarter. Can you tell us anything in the last couple of weeks from data that you've seen regarding what's happening here in the U.S.? That's the first one.

Alan D. Wilson

I think in general, we can talk about the trends are improving and we're seeing that. I'm not going to talk specifically about the last couple of weeks, but what I can also tell you is that we believe, and I hope you got the sense, there's tremendous opportunity. We just have a large number of assets that we can leverage in this company to take different brands and flavor profiles to different categories that may be a little tired and old and sleepy. You can take a look at what we've done with frozen foods, with the Zatarain's brand and rice mixes. You can take a look at what we've done with grilling and entered into obviously seasonings or spices, seasonings, marinades and now we're our going into liquid, right, with barbecue sauce. I think there's just a tremendous amount of potential in this company between our brands and our flavor profiles, and believe me, we've got some terrific R&D scientists and chefs out there that are really building some exceptional products that taste phenomenal. And that's, at the end of the day, what we're about. We make great-tasting foods with great brands, and we're entering these categories and we're having a lot of success. So I think that you're going to see a lot of positive momentum as we enter the summer and the fall.

Eric R. Katzman - Deutsche Bank AG, Research Division

Thanks for that lead-in, because my next question has to do with the conflict that's always been maybe under the surface between your industrial customers and consumer. So you're introducing frozen items. I don't know if, let's say, Nestlé or ConAgra are customers, but at what point does this become an issue? I mean, your shareholders have benefited from your success with this regard, but at some point, I would imagine that some of your industrial customers no longer see these as niche plays and a problem.

Alan D. Wilson

Yes, and that's a good topic that we have a lot of internal discussion about. As you know, we service most of the major food companies in some parts in our industrial business. And we've got some core categories where we've decided internally we're not going to go, but there are others that we've been able to migrate. So the Zatarain's frozen is a really good example of that, where we aren't bringing out another frozen lasagna. The Lord knows that the world doesn't need another frozen lasagna, but we're bringing very specialty products like the Zatarain's Blackened Chicken Alfredo and Smothered Chicken and some things that are really -- that really stand for New Orleans that is part of that niche. And we're not presenting any new conflicts as a result of doing that, where we already have Zatarain's rice mixes that are competing in some of the same categories. It's a fine line we walk, and we always have those discussions internally as to what we think would be an industrial customer issue and what we think we can migrate through. But there are those conflicts all the time.

Angela Francolini

And also I just want to emphasize, there's a lot of runway in our 2-core category. So if you think about the amount of growth potential that we have there, that's really going to be our focus, which is not an area of conflict.

Joyce L. Brooks

Okay. Rob Moskow. Here, over here.

Robert Moskow - Crédit Suisse AG, Research Division

Alan, I think McCormick's always talked about sharing platforms across geographies and we've heard it before, but it seems like something is accelerating now. I thought Malcolm and Ken did a good job of showing how much innovation has been shared across. Can you talk a little bit about how the organization is maybe structured differently or how there's -- the communication pathways have changed to cause that? And is that one of the reasons why you have 200 new products this year and 200 last year?

Alan D. Wilson

Yes, it's really an outgrowth of an initiative we did a couple of years ago to create a global multiple management board. And we asked them to tell us how we should better organize for growth. And what the recommendation was to create these global councils, both in our consumer and industrial business where we meet periodically, and this is the council that you see up here. And so they've really done a great job of one, understanding the data around our categories around the world; and then focusing and prioritizing initiatives that we can take globally. And it really is an outgrowth of our participative style. Do you guys want to add anything to that? Mark, you've got...

Mark T. Timbie

Well, I would say that in my new role as Chief Administrative Officer, I've had the benefit of being in every market around the world. And my job is simply to support those growth initiatives around the world, which -- I pretty much understand what they are. And because of that, I can help focus the corporate center resources in a way that's more productive and really support some of those growing markets that Malcolm has or anything Lawrence has that we do it. We work really well together as a team and I hope you see that. We sort of like each other and that's a good thing, and we work hard together to grow our businesses.

Alan D. Wilson

Yes. Structurally, from a background standpoint, Mark made up a good point. We have created global organizations and supply chain and IT that help to drive that, and then with Hamed's role of Chief Science Officer, it accelerates that innovation process even more and helps us share his learnings. But the key is the council here that makes it happen.

Angela Francolini

And I think the difference when you look at your categories through a global lens is it allows you the opportunity to take a look at all your investment options on a more broad basis and choose the ones that really are best able to drive the growth and the return. So we just have more to choose from.

Malcolm Swift

And there's a good phrase that we developed which is global fight -- global might for the local fight, and that works both at the global level between the geographies and in EMEA, since it works between the center -- central marketing function and delivering into markets in Europe.

Joyce L. Brooks

It's 2:20 now, so let's -- thank you for your questions. Let's stop, take a 15-minute break, come back at 2:35 and we'll start with the industrial group. Thanks.


Alan D. Wilson

Welcome -- welcome back from break. We're going to have plenty of time to talk as we go into the reception at the end of this, but now we're going to talk about our industrial segment, and we have the 2 McCormick leaders with global responsibilities for this business: Chuck Langmead's our President of our Industrial Foods Americas; and Lawrence Kurzius has responsibility for our Industrial business in the EMEA and Asia/Pacific. So I'll turn it over to Chuck.

Charles T. Langmead

Thank you, Alan, and good afternoon. To put our industrial global business in context of the total company, 2011 sales reached $1.5 billion across our 3 regions: Americas, EMEA and Asia/Pacific, accounting for 40% of total McCormick sales.

Beginning of 2006, we embarked on remodeling our Industrial business at McCormick. We took significant and broad-based steps to position this business for growth. First, streamlining products and customers. Second, lowering our cost base and consolidating our asset base and creating centers of excellence for manufacturing and supply chain. Third, realigning resources and developing capabilities to support the growth of our leading customers. The outcome of these changes is best illustrated in our financial results. Let's take a look.

We have increased revenue at a 5% compound annual growth rate, with sales reaching $1.5 billion in 2011, as I said earlier. This is nearly a 35% increase since 2005. An increase that has had minimal impact from acquisitions and includes a headwind in 2006 and 2007 when we were pruning back our SKUs and smaller customers.

During this same period, we have increased operating income margin by 150 basis points despite some periods of volatility. In 2007 and 2008, and again in 2011, our progress was interrupted by a spike in input costs. Because we generally pass-through cost increases to our customers on a cents per pound basis, gross profit, as a percent of net sales, is adversely affected during these periods of inflation.

In 2011, operating income margin declined 50 basis points, with this decrease largely due to cost inflation. In a less volatile cost environment, we fully expect to resume our upward progress toward higher margins for this business. I say this with a great deal of confidence as we have already parts of our business to date delivering margins above 10%.

Since 2005, on a comparable basis, we increased operating income at a compounded annual growth rate of 9%, faster than the 5% increase in sales. This is an outcome of our CCI program, along with a gradual shift in our portfolio mix toward more value-added products. We've accomplished this largely by developing more sophisticated flavor solutions, drawing upon the deep expertise of our flavor specialists.

Operating income exceeded $100 million in 2010 and reached $112 million in 2011.

Our profit margins vary with the complexity and technology behind our products. For example, a seasoning blend commands a higher margin than a bulk shipment of cinnamon. Shown here is the range of flavor solutions that we offer to our customers. One of our competitive advantages is this broad array, including seasonings, condiments and compound flavors.

Sales by customer are split about 50-50, with half to the leading food manufacturers and half to the food service industry. Our customers are leaders in their industry. McCormick sells to 8 of the top 10 restaurant chains, including McDonald's and Yum!, and 9 of the top 10 food companies, with our largest being PepsiCo. And we supply them from locations around the world. Depicted on this map are McCormick's own facilities, along with the industrial joint ventures and licensees that support our business. In addition, we reach customers locally through co-manufacturers and on-the-ground employees in satellite locations. Our most recent example is in Brazil.

Lawrence E. Kurzius

Our Industrial business competes with some very large international players, as well as smaller privately held businesses. McCormick has 3 significant points of differentiation versus our competition. First is our foundation of natural food products rather than chemicals and additives. We're foodies first, not just techies. Second, unlike most competitors, we run a branded food business and know how to protect, manage and grow leading brands. And third, as a result of our Consumer business, we are the experts in consumer flavor preferences. These differences allow us to create flavors for our industrial customers that consumers love. Given this direction, we are striving not just to meet customer demands but to anticipate and fulfill their needs. We are defining our right to win in the marketplace.

We compete on several bases. Industrials customers expect product superiority, intimacy and operational excellence from their suppliers. Later in our conference, you will hear more about product superiority from Hamed and operational excellence from Jim.

Our commercial focus is on customer intimacy. This is where we can excel. It is the best way to distinguish ourselves with our customers and drive success. Those of you who have visited our Technical Innovation Center in Maryland understand that we have developed the capabilities to accomplish this through ideation, culinary, nutrition, censuring [ph] and other skills, and are building them out globally.

We also expect to help our customers with their category development. We are leveraging our global capabilities and applying our high performance work organization to create joint value.

Finally, we are working towards branding our value proposition. To better describe the position we have achieved from within the industry, our passion for flavor that cuts across all parts of McCormick, the highly specialized nature of what we do and the deep expertise of our people.

Charles T. Langmead

McCormick's Industrial business has a clear path forward with 4 global growth strategies. We will grow through superior customer intimacy, category leadership with our customers, continued investment and capabilities that -- to drive that growth and consistent global delivery of those capabilities and services.

Let's start with superior customer intimacy. Customer intimacy requires tailoring our interactions to directly address customer needs. The first step is segmentation. This has been in place for the past 5 years, but continues to be a dynamic process. During this period, we have promoted customers to strategic status based on the value of their business. Each of our strategic customers has a dedicated, global, multifunctional account team.

To foster greater customer intimacy, we are expanding our flavor technology and innovation skills globally. In 2012, we are building a Technical Innovation Center for Asia to improve intimacy with customers in that region, and our TIC in the U.K. is expanding to include a flavor lab. We recently brought a U.K. food service customer to our innovation center where they saw the breadth of our capabilities. As a result, we have significantly expanded the range of products sold to this particular customer.

Success in this growth strategy means we are delivering practical solutions at a competitive value and ensuring a sustainable and successful business model.

Let me share with you evidence of our success. We are routinely recognized by our customers, informally as well as formally, with awards like those listed here, from quick service restaurants, food manufacturers and broad line service distributors.

In addition, we have had 100% retention of these strategic or critical customers. This high customer loyalty has been validated independently by customer's recommendation scores in the U.S. Shown on this chart is a preference from McCormick as a supplier versus an industry benchmark. Nearly 2/3 of customers strongly prefer McCormick compared to about 40% for the industry.

We have also had internal improvement with our top rating at 27% in 2011, compared to just 10% 3 years ago. As further evidence of success, we have increased our participation and win rates for product briefs. In the U.S., our win rates have doubled over the last 3 years, with food manufacturers, a -- with food manufacturers and we have bid [ph] as similar results internationally.

Here's what some of our customers say about McCormick regarding our standing within the industry, our innovation and insights and, most importantly, our people. McCormick's culture of participative management creates an inclusive environment that encourages ideation and facilitates great execution.

Lawrence E. Kurzius

As Chuck said earlier, we supply customers who are leaders in the food service business or packaged food manufacturers. We are category leader with these customers, and our second growth strategy is to build on this category of leadership. While category share is not as easy to measure as in our Consumer business, we know we are a leading supplier with many of our customers. These customers look to McCormick to help them manage their iconic brands. It's a position that involves a significant level of trust.

Our opportunities for growth are twofold. First, we are increasing our share with these customers by supplying it to new categories. With one customer, we've moved from seasoning for crackers to salad dressing, to flavors for dairy products. A quick service restaurant may start with chicken coating and move to condiments and then beverage flavors. Second, we're supporting these customers as they expand worldwide in both developed and emerging markets.

In developed markets, traffic in quick service restaurants has been strong. We've enjoyed significant growth with these customers, both from new products and from share gains, particularly in liquid flavors such as condiments, a category in which we are a leading supplier.

For example, we just won the supply of smoothie concentrates with a major quick service restaurant in Australia. Globally, we're emphasizing growth in our flavor and our seasoning business and we have attracted growth prospects in emerging markets.

Going into these markets with established customers reduces our risk. It builds our business profitably and allows us to maintain our leadership with these customers. In China, we supply more than 90% of sauces, condiments and similar products to a major quick service restaurant.

In 2012, our top QSR customers plan to open more than 800 additional restaurants in China, a 15% increase. We are now supplying our customers in India as we enter this market, leveraging a long-standing industrial joint venture.

There are a number of other areas where we're pursuing near-term growth opportunities with strategic partners, including Turkey, the Middle East, South Africa, South America and other parts of Asia.

Charles T. Langmead

Moving to our third strategy, we are investing in capabilities to drive mutual growth. Some wonder if we can still grow with our largest customers. The answer is definitely yes. In fact, we grew sales to our top 3 customers by nearly 30% in the past 3 years.

We are working on several new technologies right now to address challenges faced by our customers such as volatility of input costs and availability and stabilizing flavors in extreme processing conditions, like microwaving frozen snacks.

In addition, customers seek our help in achieving simple ingredients and productivity. Hamed will talk more about our capabilities later.

We are also leveraging investments made in our Consumer business. Zatarain's, Thai Kitchen and Lawry's are great brands, and we have begun to introduce them to the food service distributor channel, enhancing our return on these investments. We see the same opportunity with the Kamis brand.

Lawrence E. Kurzius

We're also investing in capabilities to meet demand for customized liquid favor solutions in Asia/Pacific. Products include smoothie sauces -- smoothie concentrates, coffee syrups, fruit toppings and sweet sauces.

As a result, as I indicated earlier, we are doubling capacity in our Guangzhou facility. In fact, we expect to be at capacity again at 4 years from now, based on our sales forecast. Site selection is already underway for a new plant in China.

Our fourth strategy relates to consistent global delivery of capabilities and services. We want to be one company to our customers across each of our regions. And we will work seamlessly, globally, to deliver consistency around the world. To do this, we have a safe and sustainable supply chain and share our best practices. McCormick is the taste you trust. This is a proven competitive advantage for us as a supplier of natural herbs and spices, as well as customized flavor solutions.

As I mentioned earlier, we are ensuring this delivery through multi-functional global teams that we have put in place for our top customers. This facilitates the transfer of technology across regions, providing our customers access in locations all around the world.

I'll turn it back over to Chuck to summarize.

Charles T. Langmead

Thanks, Lawrence. We have transformed our Industrial business, which is now delivering strong financial performance.

We have excellent strategic customer relationships with the leading food manufacturers and food service companies in the industry, and we're growing with them worldwide. And we are investing in technologies and facilities to ensure we will continue to be positioned to meet our customers' growing needs globally with superior customized flavor solutions.

As we get ready for your questions, let's take a quick look at products introduced in the past year that show how McCormick brings passion to flavor.


Joyce L. Brooks

Hope you recognized some of those products we just showed, at least the ones in Americas. Let's turn now to your questions on the industrial business. Alexia?

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Two questions. Can I ask, first of all, about the financial model for rolling out in emerging markets? If I think about the European packaged food players, they've got higher margins in emerging markets then they do in their -- in their developed markets at this point. Clearly, that's the end goal. Most of the U.S. packaged food companies, I think, a lower margin mentioned that you're already profitable. But how do you set the target for resource allocation? Is it a dollar investment that prepared to make? Is it a percentage margin that you managed to? Or are there ways of doing that?

Charles T. Langmead

Emerging markets. Yes, well, first of all, for the acquisitions that we've made so far in emerging markets, these has, actually not been dilutive to McCormick's margin overall. There's a mix of margins that are realizable and -- in emerging markets. And if you take a look at the bottom line contribution of the group that we just recently did in aggregate, they are right in line with our overall markets for our business. Yes, with that said, in some of the, most emerging markets, there tends -- gross margins tend to be lower. The consumer is more stressed and there is a lower gross margin that's realized. But there's generally a correspondingly lower cost in overall SG&A, and so the bottom line contribution can or still be quite attractive. So we've been quite disciplined buyers and the internal rate of return on these acquisitions that we've done in emerging markets are really in line with the IRR that we've expected in any of our acquisition activity in developed markets as well. But as the returns have been really quite comparable.

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Okay and then maybe as a follow-up question. You mentioned expanding into a range of different categories on the industrial side. I think we've seen other companies like Heinz, basically say that they may have gone too far in that direction at one point, and are having to ratchet back. How do you think about what which categories you wouldn't do? And how well matched your capabilities are for certain categories more than others?

Charles T. Langmead

Sure, thank you for the question, Alexia, I'll take that. We do a significant amount of research on the size of those categories, the positioning of our customers as they participate in those categories. Because again, our strategy is not to go out and look out for a lot of new clients. So what we're looking is inside of these great food companies that we have already built a long-standing relationship and trust with, and the products and categories they are enjoying growth in; and then we match that up to the skills inside of our own organization, the technical skills, the market knowledge that we have to make sure that we know that we can deliver value through those categories with our customers. So we do extensive amount. It's not a random thing. It certainly isn't things that just sound interesting. This is done -- and is done in collaboration with our clients.

Joyce L. Brooks

Any other questions? Akshay?

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

My first question is just on commodity cost management. You mentioned that as one of the initiatives. Can you just shed a little bit more light on that as to what you're doing there and what the primary objective is?

Charles T. Langmead

Really, the root of our process on commodity cost management starts with a collaborative discussions with our customers. In the Industrial business, when we did our transformation, started our transformation, we knew -- we needed to have agreements, relationship agreements in which we would pass through those rising commodities reasonably through the channels. So it's was something weren't doing prior to that with a great amount of discipline. It is now a discipline. So as commodities increase, not only are we informing and working with our clients ahead of with as much insight we could have to what's moving and changing but more importantly, passing that pricing through at the appropriate intervals with them by virtue of an agreement, that's how we will conduct our business together. So most of the commodity classes, those increases and decreases will go directly through, will be passed through in pricing.

Lawrence E. Kurzius

So generally, we will have a pricing, a cost pass-through protocol agreed with the customer, as part of our supply agreement which is reviewed periodically and we understand what the cost drivers are. And then in collaboration with that customer, we'll take back-to-back coverage on our contract some of the key commodities in order to protect the price, so the customer doesn't expect us to just accept the market price and pass them straight on through, and they want work, expect us to work with them to manage the cost. And so taking coverage for -- over the contract period is one way. And then we also look at our CCI initiatives also, in part, to help mitigate cost increases.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

And just a follow up on that, just in terms of your competition. I mean, can you just talk about who you consider to be your competition? We've talked to IFF, et cetera, and they don't necessarily think of you as competition. But can you just help define the competitive landscape in this segment? And maybe give us some perspective as to why are margins much lower in this business relative to your Consumer business?

Lawrence E. Kurzius

Go first.

Charles T. Langmead

First, let me ask you, did you say IFF doesn't consider us a competitor? That's good news.

Lawrence E. Kurzius

That's great news. Certainly, though we don't want to do anything to change their perception of that.

Charles T. Langmead

First a general statement about competition. Anyone that sells flavor seasonings, anything that flavors food, I consider it a competitor. The degree of the threat to the great business relationships that we enjoy in the Industrial business really comes around what they offer and what they can offer to innovation and consumer sustainability of their icon products in the marketplace, which we monitor with our customers and understand. So we believe we do the best job as a food company that has great brand product insight and great consumer insights. And we don't think that any single competitor really has that collective value that proposition that what we have. It's not to be in anyway to be cocky about, not recognizing competition. Competition is out there. But we believe we have a value proposition that is unique in this business sector. And then the second part of your question was?

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Perspective on why the margins business, this margin profile was so different with consumers that can specifically do with single adds just adding [indiscernible]

Charles T. Langmead

Sure. I'm doing going to answer that this way. One, parts of the Industrial business, parts of our Industrial business have very strong margins that are very comparable to our consumer margins. So we know, in certain aspects of the product array that we sell, and the value recognized by our clients in those products, we can command margins that are very, very good for our company along with other parts that need to be strengthened in margin. And it's probably the perception of the industry as to how much they regard a product category as a commodity or as a value-add. Our job is to value-add everything we sell.

Lawrence E. Kurzius

I would also add that our returns on our Industrial business are quite strong, and are actually comparable to our Consumer business, because there are fewer assets tied up in the business. So the asset turnover is much higher on our Industrial business than it is on our Consumer business, and as a result, the rate of return on that business is really quite good.

Charles T. Langmead

It's a great point. And internally, we measure this business on an ROI basis, as well as a profit basis. I'm not saying that we're not trying to improve the margins of the Industrial business, that's been our stated strategy, and we believe we can do it through a combination of getting the portfolio right and continuing to drive our business to a higher percentage of value added, because there's a broad range of different businesses that are within this industrial segment, including ingredients where we're selling 50-pound bags of pepper and cinnamon at a fairly low-margin to branded food service, which is very similar profile to our Consumer business.

Joyce L. Brooks

We have a question in the back? Thank you. We'll get you next.

Unknown Analyst

I guess, just a follow up on what you just said. The -- it sounded like that this point last year, the or -- what was being highlighted was essentially the 9% to 10% in margin on Industrial business by the end of fiscal year '13, which therefore, in turn, would take us to 16% to 17% total company margin. A lot's happened within that year. I just want to make sure that, are we still on that path? Is that still part of that strategy or could margin potentially be lower by the end of fiscal year '13 because we're making more of a push in emerging markets? Just any color that you have in that.

Charles T. Langmead

Yes, our push isn't necessarily driving the lower margins. It's the commodity volatility. And we would have achieved our objective if it had -- in a stable commodity environment. So we believe that it is achievable, that we can get to double-digit growth. We're not laying a timetable out, but we believe that it is achievable in this business.

Lawrence E. Kurzius

If I can add also, I would not -- the -- I think in your question there was an assumption that emerging market margins are lower than developed market's margins, and I would say that, that might not be a good assumption.

Unknown Analyst

Okay. So, is this on? So then, just a quick follow-up, if we're, if that's the case then, if we're now at 10% total sales in emerging market, is it a fair assumption to then assume that we're at about 10% of operating profits as well? And I just ask because a number -- most food companies, with this strategy break out their international, you don't. So any additional color on that would be great.

Joyce L. Brooks

We don't disclose the international. We have said that our business in the U.S. is a more profitable business, largely because of scale that we have. And that really holds true for consumer and industrial. Yes, there's one back there. Sure, thanks.

Unknown Analyst

One of the things that seems to have been happening in the restaurant industry, and even a little bit in consumer, packaged goods is the increase in limited time, products and promotion, and I wonder what effect that has on the dynamics of your Industrial business?

Lawrence E. Kurzius

Sure. Internationally, we do an enormous amount of limited time officers -- limited time offers for the quick service restaurants in, I'll speak to China specifically on this. When you've got a 90% share of the total wet products business to one of those customers that, almost by definition, has you doing a lot, and I think it's our ability to innovate that has earned us the right to have that amount of business. It's also given us the chance to experiment in some interesting product adjacencies that have turned out to be fruitful for us to enter in a bigger way, such as things like coffee syrup, beverages syrups, the smoothies. A lot of the work that we've done in this area has come about through some of the limited time offers, which give us a chance to experiment with new products and new capabilities and really build an expertise.

Charles T. Langmead

So in the U.S., it's great observation, because it actually has been happening, as you mentioned. And in the restaurant side, I'll take that first. It creates churn, admittedly, for our product development folks to bring those flavors quickly to the market. Now the fact that they want them quick because the restaurateurs are trying to get, they refer to it as "butts in the seats", particularly as they all try to navigate, have been navigating the recession. And so we can do that very effectively, very quickly. But yes, it's certainly more activity for us, as in fact they're trying to do 100 different things to bring these combo meals, and special tastes and favors quickly to keep consumers interested in their brands. And then on the consumer manufacturing companies, clearly, they've been line extending their core iconic brands and we've been right there with them. And in fact, the positive outcome on our -- that we're at least seeing in the U.S. is, it is driving innovation that's starting to stick with the consumer, and it's actually helped us get more sustainable product successes in the marketplace with them, too. They don't like doing it either, but I think that it's such a component of how all of us manage through the recessionary environment to keep interest in brands and brand concept restaurants and such.

Lawrence E. Kurzius

Just another point on the quick service restaurants, in particular with the limited time offers, and added -- we would love to do them because they're more profitable. And we earn a higher margin on the limited time offers than we do on the ongoing base business, where the customer has, over many years, found a way to work down the cost and optimize the formulas, sometimes resulting in a product that has a lower margin to us. The limited time offers, on the other hand, we get in with a product that's differentiated, it's going to drive traffic in the restaurants and they're willing to pay for it.

Joyce L. Brooks

Okay, can you come up here, Ken, to your question?

Kenneth Goldman - JP Morgan Chase & Co, Research Division

This is for both the consumer and industrial, and maybe for you, Alan. Consumer intimacy is, I think, you only spoke on both of your roadmap wheels, both consumer and industrial. So a couple of questions behind that. A lot of your peers in manufacturing are arguably going the other way, right? They're outsourcing some of the relations they have with customers, at least that's been the trend. So is there something you're seeing in the market that's maybe driving you in the other direction, if that's even the right way to think about it? Question 2, is there, for some reason, is this there -- more critical now than previously, is there a reason you're highlighting it now in your roadmap? Then maybe you didn't -- maybe you did it before, and I just missed it, but I'm curious about that? And then this is probably just semantics, but you call it strengthen customer intimacy on the Consumer business and you call it superior customer intimacy on the Industrial business. Is there anything we should read into the different words choice there?

Alan D. Wilson

Yes, there's no subtleties. There's 2 different councils that, they came up with the words and we let them do that. But the thought is, customer intimacy has been an industrial strategy for, Chuck, 12 years?

Charles T. Langmead


Alan D. Wilson

And it's recognizing kind of who McCormick is and the collaboration that we bring. We just created that as a consumer strategy this year. But it was -- but it has been a practice for a very long time. And the way we went to market very much was in the Consumer business, more trade-driven for a long time than consumer-driven and we tried to migrate it. So we recognized we've got to balance our customer relationships with our consumer insights. And so the thought is, that it is something that as a company we have a core confidence in and that we want to continue to develop because it is, it's just part of our strategy and our culture. Lawrence, you sit on both those councils, is there anything...?

Lawrence E. Kurzius

I do. This is really an important point because the customer intimacy, it sounds like something that's pretty fuzzy, I know, slapping people on the back and taking them out to lunch and sending flowers to the guy's wife on his birthday, and that's not what it's about at all. It's really about really understanding your customers, having a deep relationship within multiple points of contact within their organization. And when I look at some of the successes that McCormick has had over the years, many of those has, in fact, been driven just by the fact that we had a better relationship with the customer, a better understanding of their needs and we're better able to meet their needs. And the flip side of that, when I look at some of the misses that we've had over the year, sometimes it's really been a breakdown of that same thing, that same customer intimacy, where we had a customer intimacy failure. And so we wanted to recognize it as an explicit strategy that we drive within our organizations to make sure we don't have those misses and we capture that as an opportunity. Plus, I think the companies that are walking away from it, I mean, power to them, I wish them well, I hope that, I think they're making a mistake, and I hope they leave a big vacant space for us.

Alan D. Wilson

Yes, I would say in our Consumer business, we have adapted our go-to-market model a little bit where we had moved pretty aggressively from a direct selling force to more of a broker force, and we've started to move back. And it's always striking that right balance between effectiveness and efficiency. And we believe that there are -- there's a lot of strength in us really owning those high level relationships. And then there's a retail administrative work that is better done by somebody else. So we're migrating back a little bit from the broker model, but we're not going completely away from it.

Charles T. Langmead

I’ll add one more thing, because I love this subject. In Industrial, we usually use the term, achieve customer intimacy, when we really were starting our transformation. And now it's superior. Why? We get followed. And our customers say, well, you 2 or 3 other flavor companies in here, and they're being customer intimate, too. So it's really to get and activate the industrial organization around always being better. And always understanding what it means to be better in customer intimacy, not just the relationship level, but what do we need to do now to take this relationship to another level of trust and confidence for the next generation of products.

Joyce L. Brooks

We're going to end this segment of the Q&A at this point. Thanks for those questions, and we'll let Chuck and Lawrence step down and Alan will introduce the next section.

Alan D. Wilson

Thanks, Chuck and Lawrence. We're going to move next into a discussion of our operations, financial strength and some other forward projections. And for that discussion, we're going to have Gordon Stetz, our Executive Vice President and Chief Financial Officer, who I think most of you know; and Jim Radin, our Vice President of Global Supply Chain, who you've met in our 2010 investor conference. So with that, I'll turn it over to Gordon.

Gordon M. Stetz

Thank you, Alan, and good afternoon. We just reviewed the key initiatives to drive top line sales growth across our 2 business segments. At a high level, these initiatives fall into 3 avenues: base business growth, product innovation and acquisitions.

We expect these 3 avenues to contribute equally to long-term 4% to 6% annual sales growth. For the past 3 years, we have grown sales an average of 5% annually, with acquisitions contributing about 1/3 of the increase. Innovation across both businesses has been an important contributor to our success. Historically, we have been in an 8% to 10% range of sales from products introduced in the past 3 years. By 2015, we anticipate new products to be contributing at a rate of 10% to 12% of sales.

Acquisitions has also been integral part of our growth. While acquired brands have added 1/3 of our sales increase since 2007, as illustrated here, this favorable impact has varied year-to-year. Beyond sales growth, here are the other components of our long-term financial outlook as outlined by Alan earlier.

We expect a 7% to 9% increase in operating income and are leveraging cash for acquisitions or share repurchases. And our long-term goal is for 9% to 11% earnings per share growth and double-digit total shareholder return. In order to get from mid-single digit sales growth to a 7% to 9% increase in operating income, we are improving our gross profit margin. And we have delivered an increase over the long term in part by improving our mix, acquiring strong consumer brands and developing more value added flavor solutions for industrial customers.

In addition, we have driven margin management, margin improvement, by carefully managing our costs. However, this improvement has been interrupted twice in the past 5 years during periods of volatility and sharp increases in material costs.

In a year with steep cost inflation, we can still deliver higher operating income as a result of our pricing actions. 2011 is an excellent example of this. Excluding the impact of currency and acquisitions, we grew sales 7% above our 4% to 6% range as a result of price increases.

We reported a 6% increase in operating income. However, if we exclude $11 million of transaction cost related to our acquisition activity, we grew operating income 8%, squarely within our target range.

Throughout this more turbulent period, we have reported a steady increase in operating income on a comparable basis, adjusted primarily for restructuring charges incurred from 2006 through 2009. Note that during this period, we increased our investment in brand marketing each year.

Let's turn to our growth strategy that Alan reviewed at the beginning of our remarks. As I just said, and as Mark illustrated, we have been investing in growth with incremental brand marketing support. We've also invested in R&D and accelerated our growth with the acquisition of great brands. We are fueling this growth with CCI, Comprehensive continuous Improvement.

James Radin

Most of you think about CCI in terms of annual cost savings, and we've certainly had excellent performance in this area since the program began in 2009. In fact, we have exceeded the annual targets set each year by more than 20%, reaching $156 million in cost savings through 2011. This is one indication that there might be more behind our CCI program than just cost cutting. CCI is an ongoing initiative, not only to reduce cost, but to improve productivity and enhance overall business performance.

It cuts across all levels, all locations and all functions of the company, harnessing the power of our people. Our global network of CCI champions are applying successful strategies to new geographies. This is particularly important as we enter into new markets. Whether it's from our Global Sourcing team, our Shared Services group or the hundreds of plant level Continuous Improvement teams, the results certainly stack up. We have freed up thousands of hours of factory capacity, absorbed back office activities of acquisitions and identified more sustainable packaging solutions and alternative origins for raw materials.

We get questions like when does it end? Are you running out of ideas? And does it get tougher? Well I'd never say that it gets easier, but you can see that we continue to deliver strong benefits.

As shown here, we've been at some form of productivity improvement for a long time. Even during our restructuring program a few years back, we had an underlying turn of activity. Looking forward, the benefits will continue to flow for many years to come.

We see a long runway for the CCI program. Our capital investment efforts include many high-return projects: faster, more reliable and more highly automated production. This is increasingly attractive in regions with rising labor costs.

Acquisitions bring new opportunities. For example, we expect to lower cost by over $3 million by moving the production of Lawry's marinades in-house from a co-packer. Our process reliability improvements have reduced shifts, avoided capital spend and engaged our employees.

Another area where we are pleased with our progress is sustainability. Since 2005, we have set goals and had a robust program around sustainability. In the first phase of this program, we reduced water usage, electricity, greenhouse gas emissions and solid waste by at least 17% on a per unit basis and we have set goals for the next 5 years.

Here's a photo of the new solar power generation system that is on the roof of our distribution center in Belcamp, Maryland. This is our second installation in Maryland and is the largest in the state. I'm pleased to say that after the first year of operation, the facility has been confirmed to be grid-neutral. In fact, the power it produces is slightly more than what it consumes. That's the first in the state of Maryland.

Another example is from our eastern joint venture partnership in India. In Adimali, we incinerate scrap coconut shells. This cogeneration unit produces fuel for our processing systems, electricity and the byproduct, pure carbon powder that's then sold for the production of carbon filters. These are just 2 examples of our global sustainability work, which also contributes to CCI.

Quality goes hand-in-hand with sustainability. In the U.S., we were the first spice company to earn the highest possible Safe Quality Food Certification; Level 3. And our largest plants in the U.K. and France are ISO 14001 environmentally certified. We take pride in being the taste you trust. Based on our runway, you can expect us to target at least $45 million of cost savings from CCI annually.

Gordon M. Stetz

CCI is not only fuel for growth, but it has been vital in helping us manage through a period of steep cost inflation. Let's spend the next few minutes discussing what has driven these costs higher and what we regard as a core competency at McCormick, our global sourcing of spices and herbs.

While spices and herbs are just 1/4 of our cost of goods sold, there's been increased volatility in the cost of these materials. We recognize that there's more limited published data on the cost of spices and herbs compared to inputs like dairy ingredients or soybean oil, which are important to our custom flavor solutions business. We realize that this can be a point of frustration for analysts, and I've asked Jim to provide some insight into these important materials and how we manage risk.

James Radin

Sure, Gordon. Spices and herbs are typically grown by small farmers in locations around the world. We've been in these markets for years and have deep local relationships that are key to our global sourcing efforts and the starting point for our quality and food safety standards. Many of these markets are the same emerging markets where we are currently establishing or acquiring branded businesses.

We're not overly reliant on any one raw material. No one spice or herb, or other ingredient for that matter, represents more than 5% of our cost of goods. However, just as with other food commodities, these ingredients can be volatile. Because of broad-based trends across spices and herbs we faced a double-digit increase in 2011 material cost, which we expect to be followed by a high single-digit increase in 2012. Some of the factors that contributed to this increase are clearly short-term in nature, such as weather and other growing conditions or political instability.

From this chart, you can see across the 30-year period that pepper costs have some cyclicality. However, we believe other factors may lead to a more sustained increase. Farmers are planting other less labor-intensive crops, such as cassava, rubber and palm, with a general competition for acreage. And there's a growing demand for high-quality spices and herbs in emerging markets. For example, we've seen an increased consumption of garlic in China.

The strength of our global sourcing team and our direct supply chain is a clear advantage, giving us insight into plantings, growing conditions and likely price movements. We have years of experience working with strategic suppliers to help increase yields and protect quality.

Also, through our corporate responsibility program, we are providing needed support to their communities. We've also helped develop secondary sources for many crops. Given the cost trends that Gordon just outlined that are putting new pressures on commodity cost, we're pursuing initiatives across the supply chain to ensure we continue to be able to obtain consistent, high-quality raw materials at a competitive cost over the long term.

Gordon M. Stetz

In addition to our global sourcing capability, we proactively manage risk with strategic inventory. This graph illustrates a significant increase in McCormick's 2011 inventory. While both finished goods and raw materials rose due to material cost inflation, we also increased our strategic inventory nearly $50 million. This action provides the means to hedge spices and herbs and is one we will take in periods of steep cost inflation.

Now this action certainly affected some excellent progress we have made on improving our cash conversion cycle. A reduction of 12 days between 2007 and 2010 was followed by an increase of 9 days in 2011 due in large part to the strategic inventory we built. We are still working at improving this metric, particularly in the area of inventory.

James Radin

Last year in North America, we reorganized our planning teams into a consolidated North American organization. We completed the application of a new planning system and continue to refine and improve our business processes, which integrate our sales and operations efforts. We're beginning to see the benefits in finished goods levels in this geography. As we roll these solutions out globally, we expect our performance in this metric to improve.

During 2011, the increase in strategic inventory mapped some of this early progress. In the past 3 quarters, we have reduced the number of finished good units in our U.S. Consumer business. Going forward, we expect finished goods to reduce at a measured pace with little impact on other business metrics.

The use of cash within the supply chain will always be a balance of appropriate capital investment, which is reflected in our increased returns on fixed assets along with margin preservation and service protection. Our financial partners provide excellent analytics to ensure that we make the most positive EVA decisions in a very unpredictable global marketplace. Our operating units are fully on board with this objective.

Gordon M. Stetz

They are fully on board and being measured on their progress. One of the first steps Alan and I took in 2008 was to put into effect McCormick Profit, allowing us to reward business leaders for managing both operating income and working capital. While I won't put a specific goal out there, we expect to achieve a reduction in our cash conversion cycle in 2012 and over time to get back below 80 days and even closer to 70. We recognize that 70 days is not best in class, and we are not likely to achieve best in class due to the nature of our business, but it is a strong improvement from past levels. We are committed to this objective and believe it is doable.

Working capital is just one component of cash. Here's a look at our significant cash flow from operations and our improvement over the past decade even with the recent increase in strategic inventory.

As with our cash conversion cycle, we expect to see improvement in this performance measurement in 2012. Over the last few years, we have invested in our business as we executed our strategy to expand our global footprint and grow our categories. We will continue to make acquisitions and fund capital projects to deliver on our growth objectives. At the same time, we have and will remain committed to delivering shareholder return through dividends and share repurchases.

We have paid out more than $625 million in dividends during the past 5 years, more than 1/3 of our cash flow from operations. McCormick has paid dividends every year since 1925 and increased the dividend in each of the past 26 years. This earned us a place among S&P's dividend aristocrats, a group of approximately 50 companies in the S&P 500 with this consistent record of dividend increases.

We are managing our capital expenditures, directing these funds toward those projects across our global operations with the highest returns. One example is the expansion underway in China that Lawrence described in another production of our Lawry's marinades, which is being moved into our U.S. condiment plant from a co-packer.

Between the remaining uses of cash, acquisitions and share repurchases, we have some offsets. After acquiring a business, we will curtail share repurchases until our debt-to-EBITDA ratio is back in our target range of 1.5x to 1.7x. Historically, our share repurchases have generally been accretive. We have illustrated this by showing you the average share repurchase price each year compared to the year-end stock price.

Beyond cash, we look to economic value added, EVA, as a measure of our effectiveness in asset utilization and building shareholder value. As Alan showed at the beginning of our presentation, we have seen a strong correlation between increased EVA and a higher price from McCormick shareholders.

To summarize, Jim and I would like to leave you with these key takeaways from our remarks today. Through CCI, we are generating McCormick's fuel for growth. Because of the bottom-up nature of this program, the breadth of our approach and our champions, we have a great track record and a long runway for the future.

Our global sourcing is a core competency and advantage in the marketplace. While it has led to some near-term increases in strategic inventory, we are looking for future improvements in cash flow and our cash conversion cycle. We have a balanced approach to our use of cash and are committed to maintaining a strong balance sheet to give us the flexibility to make future investments. Thank you.

Joyce L. Brooks

All right. We'll move to Q&A. As we do that, there is an evaluation form in each place, and I would invite you to fill that out in the last 30 minutes that we've got here. We appreciate any of your feedback. Andrew?

Andrew Lazar - Barclays Capital, Research Division

Gordon, I think we've talked about this a little bit in the past around some of the CCI targets that you've got and you've been delivering. And while you've over-delivered on your initial targets pretty much each year, the numbers that you lay out, at least relative to kind of what we see in the broader food space around cost saves each year as a percent of cost to goods, are relatively low, here in the more than 2% range versus some of the group rate, 3% to 4% or 4%-plus. And I know we talked there were some definitional, I think, differences in the way you think about how you define it, maybe a little bit tighter versus some of your peers that maybe defining a bit more loosely to put it nicely. But is -- do you think that's the only difference? Because as you talk about, maybe some structural inflation in some of your key commodities going forward, it would seem like that number maybe ought to be larger. That's a comment on that.

Gordon M. Stetz

I'll certainly say we push ourselves every year to achieve as much as we can in the CCI arena. And the process is such that we have a 3-year time horizon where we have visibility to the projects over that 3-year time horizon. I'll just reiterate. I don't want to use this as the primary answer but certainly, our CCI is net of costs associated with delivering those, so this is not a gross number. Anything that we do that requires an investment in depreciation or cost associated with an efficiency is netted against those numbers. We’ve challenged ourselves really based on your question, Andrew, and we've used some third-party calibration we brought in a couple years ago. And really, if you do adjust for some of the things we don't count, which would include productivity gains, these are -- the things that we measure are purely year-over-year cash flow savings that you can bank in the P&L. And as I've said often times in discussions with yourselves, I'm a tough grader and it has to foreshow up on our bridge. And if somebody's showing me from an operating unit a CCI number, I have to know where that number is and where it's going. But things like efficiencies and leveraging scale, where we're all sudden able to produce perhaps double the capacity on our line because of a high-performance work system, that doesn't get captured in that CCI number because it only occurs when you actually sell through the volume. So I think once we calibrate that versus some of the external advice, we're not too far out. But that's not to say we're not always trying to and pushing ourselves to do more. Jim, I don't know if you want to add anything to that.

James Radin

Yes, the other exclusion that we have are synergies from acquisitions, and that takes up a reasonable amount of resource as well, so all the acquisitions that we spoke about today and Lawrence covered, particularly in different locations around the world. Anything that's built into that model for the valuation has to be delivered to deliver the model requirements as opposed to be counted in CCI. So cost avoidance, we don't count. If we have advantaged positions from our commodity purchasing groups versus the market, those aren't counted as well. So we think based upon the outside help that we got over the past 2 years that we're one, as Gordon said, tough scorekeepers, honest scorekeepers, and one of the measurements for me is none of the business unit presidents come to me and say, "I can't find it in my P&L." They can find it. We can account for it and therefore, we're comfortable with the way we do the accounting.

Joyce L. Brooks

Passing right behind you, Chris Growe.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Just a quick follow-up if I could to Andrew's question then on those savings. Is it getting more expensive to achieve those savings the further you go along in this process? Are there incremental costs more than you've had historically and that you kind of embedded in those numbers you gave us?

James Radin

I'll take that one. The results sometimes can be, I'll use the phrase, could be a little bit lumpy, because we do take the onetime costs when we incur them and they get netted off versus the savings. So if you have a longer program that's going to run in 18 months execution, you may have a onetime cost in 2011. You get the majority of the benefits starting to flow in 2012, right? But I wouldn't say they're any -- they're becoming more expensive, no.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

I want to ask a follow-up if I could somewhere along those lines. But in relation to your through 2015 your outlook, do you have embedded in that assumption, a high-level inflation continuing through that time?

Gordon M. Stetz

Not what's occurred in the recent past. We certainly anticipate an inflationary environment, but what we experienced in 2011 was pretty severe. So it's more of a moderating outlook.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

And the -- I'm sorry, one more question. But in relation to the working capital reduction that you foresee, should we see that come off more quickly, say, in like 2013 as you get -- if you don't have a high inflationary adjustment...

Gordon M. Stetz

Certainly, as we -- you saw in the beginning of the year, in the first quarter, we had progress. And there's 2 events obviously, one is the great work that Jim and his team have done on the new organization and the tools that they're using and we're starting to leverage and learn. And we started to see that improvement towards the end of the fourth quarter of last year and then beginning in the first quarter, we saw an improvement in cash flow from operations as the inventories started to improve a bit or at least the rate of increase wasn't as great. Also, in a moderating environment, obviously the cost pressures that you have and that year-to-year increase that's created by those cost pressures start to level off. And then suddenly, that usage of cash that you had from investing in the higher cost suddenly starts to go away and the cash that you're generating from that income and growth starts to fall right down the operating cash flow. So if there's a moderating outlook, we would certainly expect cash flow from operations to improve.

Joyce L. Brooks

We'll pass along to Eric right down the row there.

Eric R. Katzman - Deutsche Bank AG, Research Division

We've done a fair amount of work on free cash flow of late and it shows that the industry has actually deteriorated. You guys have, for a long time, operated on EVA and that seems to have helped things. But kind of maybe following up on Chris' question, to the extent that these contracts in industrial have changed over time, but it seems like every couple of years there's another ingredient that becomes a problem and you either have to buy forward or you can't capture. You get hit on the working capital side for a period of time. How does -- I guess how does the mix of the business, whether it's the contracts on industrial or more JVs in emerging markets, how does that affect your cash flow going forward, Gordon?

Gordon M. Stetz

I would say that that's less of an issue versus the volatility of the commodity cost environment. That's really what interrupts that steady stream of cash flow improvement year-to-year because that impacts both the Industrial and the Consumer businesses. When we start to see spikes in commodities on pepper, we use it in both of our businesses. And so whatever investment we make either in the higher cost or for taking a strategic position is really is a result of both of those businesses. And so when you look at that chart and we achieved about $416 million in cash flow from operations in 2009, what interrupted that nice steady increase was that spike in commodity cost that started in '10 and accelerated into '11. So there's a lag effect. The idea is obviously if you're doing the right things from a branding and a margin protection, you'll preserve margin ultimately through the industrial pricing mechanisms or through the consumer investment. And then as that moderates, the cash flow improves, and that's our expectation.

Eric R. Katzman - Deutsche Bank AG, Research Division

And then if I could just follow up. On the consumer side, obviously, you can kind of control your own destiny because it's your brands and hopefully you work with the retailer. But on the industrial side, I was going to ask this last -- the last section. But are all of the raw materials now in the industrial contracts basically on a pass-through? So in 6 months when, I don't know, Vietnamese cinnamon is up a gazillion percent, are we going to get surprised? Or is it -- and it's just like maybe things like packaging and energy that are not? Because I've kind of been surprised a couple of times on the wrong side of things as I followed the company over the years.

Gordon M. Stetz

Yes, and I think that's a fair statement. I think in particular, the third quarter of last year I think was a time when the operating income actually declined in the industrial arena, and that was a period where we did see commodity costs inflation. We had an expectation, as we started that year, high single digit and we ended last year in the low double digits. And one of the businesses that got impacted was in the Q3 for sure in the Industrial business. Generally, those pricing mechanisms, and Chuck and Lawrence can shout out if I'm not completely accurately describing this, but the pricing mechanisms generally in an environment where you don't have everything rising all at once, there's a component of the cost structure that is a combination of flavor caps or certain spices and herbs that really is this flavor component that we're generating. And then the headline items, maybe it's a wheat or it's a dairy or a soy, are the ones that were typically part of those protocols. And what occurred last year was that 30%, I'll call it, of that flavor, that formulation that all went up at once. Typically, you'll have one item go up, another item go down and net-net, it's benign. So that have us reexamine those pricing protocols and have some more discussions with our customers around not only the headline items, where we will collaborate with them, but also some of this 30%, which is the less visible ones to them. And we've gone back and we've worked a lot of those pricing protocols, and you can see that in the margin performance of the business.

James Radin

Yes, the simple answer is major commodities are generally passed directly through, minor commodities aren't necessarily part of the protocols. And generally, that works out okay, but we had an anomaly last year where everything went up.

Joyce L. Brooks

Let's go over here to Rob Moskow.

Robert Moskow - Crédit Suisse AG, Research Division

I was wondering if you could do a quick postmortem on the Lawry's acquisition. I noticed that you talked a lot about global brands today, and Lawry's really doesn't fit that profile. So what's the strategy now for Lawry's? How much marketing investment is it getting? And does it achieve the objectives that you put into it or not?

Gordon M. Stetz

Lawry's has been a great acquisition. It was highly synergistic. We didn't have any resources or any costs, and we just loaded it on top of an existing infrastructure and we continue to grow the business. And Lawry's has a positioning that is different than McCormick in it's got regional strength that McCormick doesn't necessarily have on some items. So what we try to do is make sure that we're using Lawry's tactically in the U.S. market to offset against what we may see as other competition and also to bring some of the best of our innovation into Lawry's as well. So we're not necessarily looking to try to establish the Lawry's brand name outside the U.S. We think it's predominantly a U.S. business but there's some export, and then try to bring innovation, specifically in areas like dry seasoning mixes and marinades where we can leverage that different positioning. I would say that we've exceeded our expectations in terms of returns on that acquisition, so we're pretty happy with it.

Joyce L. Brooks

Okay. Ken, over here.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Two quick ones. I didn't see cheese listed in your top inputs. I thought I might have seen it in there. Is there -- is it related to the pass-through that it's not listed there, or was it just not as big as I thought because I know you had talked about it in the past as being one of your more sizable ones. And then second question is on CapEx versus D&A. I think if I read that chart right, CapEx had trailed D&A for, or at least not been ahead of it for each of the last 5 or 6 years. At some point, doesn't that have to flip and you have to kind of rebuild some of the depreciation that's been taken?

James Radin

Yes, I'll take the question about cheese and yes, it is a major spend for us. And for the Industrial business, a good piece of that is passed through. Obviously for a consumer, it wouldn't be, it’s used for both sides of the business. In terms of the question...

Gordon M. Stetz

Generally, in CapEx, we target about 3% of sales and clearly, it's run slightly behind that more recently. It has not been a strategy where we've been milking our assets. It's really a matter of the projects that are in front of us, the return profile of those projects and the resources that we have to execute successfully against those projects. There will be a little bit of pressure. There's been a couple things we talk about in terms of capacity expansions that we have in the pipeline, China in particular. But generally, we still believe we can achieve a CapEx number around 3% of sales.

Joyce L. Brooks

We're going to end the Q&A at this point and move to the last portion of our presentation, which Alan will introduce.

Alan D. Wilson

Yes. As we approach the end of our session today, we wanted to share with you some thoughts in the future of flavor. It's fitting to have Dr. Hamed Faridi with us for this discussion. In September of 2011, McCormick created the position of Chief Science Officer to recognize our global commitment to and our relentless focus on flavor and inspiring healthy choices.

We're pleased to name Hamed to this role. He's led our technology efforts at McCormick for the last 15 years. He's a renowned author on food science and technology. He's lectured at conferences and research institutions in 21 countries and has served on the boards of professional and trade associations in North America and in Europe. Hamed?

Hamed Faridi

Thank you, Alan. What a pleasure to share with you this afternoon our talk about the future of flavor. I want to spend the first portion of my remarks on McCormick's investment in this future and then turn to where we believe it is heading.

We have made substantial technology investments over the last 2 years. R&D spending at McCormick is up nearly 30% from 5 years ago. In addition, for the past couple of years, nearly 10% of the total corporate capital expenditure was allocated to upgrading our technical facilities and instrumentation around the world. We believe this level of expanding is in the top quadrant of all food, beverage and flavor companies.

In the past 2 years, we have expanded our facilities and capabilities in the U.S., United Kingdom, South Africa and in 2012, in China and Mexico. We now have a global product development footprint that spans 14 countries and 5 continents, and we are developing winning products tailored to each market's taste and trends.

Across these locations, we have more than 400 highly talented innovators working in close collaboration with our sales and marketing teams and key customers. Their job is to interpret marketplace insights to fill an expanding pipeline of a high-quality, complex flavored products, products that are tough to duplicate and that carry a high margin. We call these products technically insulated.

Our main focus is the consumers' eating experience, from the time they see the item on the shelf or on menu to the time of consumption. Focusing on the consumer as a higher authority has allowed us to develop a technology platform around the consumer science that is second to none. We are the top leader in turning that knowledge to competitive advantage and successful new products. In 2011, we conducted over 10,000 consumer and sensory tests in our R&D facilities around the globe.

Thanks to these investments, we are uniquely positioned at the forefront of flavor. We have access to retail shelves and multiple channels around the globe through our own brand as well as those of our industrial customers. This access provides our innovators quantitative and qualitative data about global eating habits wherever and whenever the eating occasion occurs.

Further distinguishing McCormick, we have one of the broadest flavor application platforms in the industry. We are enhancing our capabilities to support business expansion into new categories with technology initiatives. One result of our investment program is our leading capabilities in all natural flavor creation. This capability is generating excellent new business opportunities across both our business segments. We have developed hundreds of clean-labeled products with our internal toolbox.

You heard from both of these businesses about accelerating our innovation. In addition to roughly doubling the number of new consumer products launched, customer visits into our U.S. technical innovation center were up nearly 80% in 2011.

The number of new products is half the equation. The other half is the rate of success. The quality and high consumer acceptance rate of our products, flavors like Grill Mates, Slow Cookers, Vahiné Patisserie, is critical to achieving category leading positions. And as Chuck and Lawrence showed, our industrial customers have recognized our superiority in innovation.

With our global expansion, the effectiveness of both our innovation program and global technology transfer are key areas of focus. My mission is to build a network of R&D professionals that redefine the industry standard for excellence in every one of them with a highly advanced technology toolbox and research assets.

To accomplish this, we are innovating how we innovate. We are addressing all areas of our organization, leveraging best practices to maximize our performance and potential. We are investing in our people and creating a city [ph] of facilities around the globe such as our new flavor lab in the U.S. Equipped with advanced robotics, high-density shelving, ergonomics and fully integrated inventory management, this lab has been described by experts as the most advanced in the world.

Our robots have the capacity to do the job of at least 10 flavor technicians. My plan is that in the next 5 years, we will move more and more of our routine work to the robotics environment.

And we have built McCormick Global Science Network, a digital database on spice and herbs and other materials and it will populate it with a wealth of information on health and wellness, colony trends, consumer purchasing behavior and preferences across our global market accessible to over 500 users.

McCormick R&D of the future will be a network in digital environment. Our one global lab facing the customer and consumer, regardless of where we operate.

Let us turn now to view of the future. You heard about a number of global trends today, 2 of which are particularly important for McCormick: the rising global demand for flavor and the health and wellness megatrends.

Flavor is first. Taste remains the #1 reason that consumers choose what to eat. Each day, we are learning more about the emotional connection we have with food. Based on analytical models, our industry-leading consumer and scientists are successfully predicting consumer response and consumer acceptance, driving increased new product success.

The McCormick flavor forecast, a project led by our culinary research scientists, is the industry's definitive resource on flavor trends and our first time in 2012 offers of global perspective. In a few minutes, you will have the chance to try some of these dishes made, based on the 2012 forecast.

We are making incremental investment on long-term R&D with high potential paybacks. For example, our encapsulation technology, which is protected by 11 U.S. patents, reduces the cost of flavor per use while increasing the flavor authenticity, shelf life and visual impact. The loss of flavor during manufacturing of food goes from 75% for a compounded flavor to 40% for traditional spray dry [ph] flavor to around 15% for the same flavor when it's protected by our patented encapsulation process. The reduction of cost per use, therefore, can be substantial. We are focusing on developing also technologies to minimize loss of color and flavor during processes of herbs and spices.

Turning to health and wellness. As Alan pointed out, spice and herbs are one of the rare foods that people want to eat more often. It makes their food taste better. The International Food Information Council reports that nearly 2/3 of U.S. adults are interested in learning about what to eat instead of what not to eat. This is also an opportunity connecting our products to the U.S. dietary guideline for Americans.

Every aspect of American diet touched by these guidelines, from eating more vegetables to consuming less salt, could be enhanced by a higher level of spice and herb and healthy flavoring in the diet. Through the McCormick Science Institute, the fund research are leading research centers around the world to advanced scientific understanding of these health benefits of culinary spice and herbs.

Over the past 5 years, the institute has funded 17 clinical trials and research studies. Recent studies have provided new insights, including red pepper's positive impact on society, ginger's reduction of muscle pain after exercise and cinnamon's ability to increase overall antioxidant capacity of blood.

The formation of the institute was a long-term investment for the company. Today, it is a shining example of Alan's challenge to us on taught leadership. The published studies have created a lot of buzz around the health benefit of spice and herbs as shown by citations at Google and PubMed. When it comes to health benefits of spice and herbs, practically all the news is good news.

In our own operations, we have recently added a molecular biology lab MDs and nutritionists to develop flavors with healthy attributes. These top-notch scientists are discovering more good news on the national goodness of spice and herbs.

Two years ago, I talked to you about the list of attributes that would define the food and food of the future, including natural, convenient, good value, cuisine for wellness and increasingly, local and sustainable. Examining that list now, we have to say they were and remained pretty much the same.

Today, we must add one more to that list: the digital consumer. As billions more consumers come online, the food and flavor preferences of that digital world will have a profound impact on demand. Our net worth and digitalized R&D capability will not only enable us to connect with our own community, but to successfully reach and most importantly, connect with the consumer of the future.

The future of flavor is a great test for McCormick, and we are building a flavor capability to collect on it. We are building a technology program second to none to deliver the highest quality, on-trend products. We have highly talented and motivated innovators around the globe working in the new state-of-the-art facility. Our culture is highly conducive to creativity. We have one of the broadest application platform, a leading capability in natural and healthy ingredients and are in the process of reinventing an innovation program that will raise the bar for the industry.

We have just expanded our reach into markets with billions of consumers, significantly increasing our wealth of information on culinary trends and consumer preferences, and we have deep knowledge of consumer behavior to interpret that information and turn it into winning products.

Thank you, and I will now turn it over to Alan.

Alan D. Wilson

Thanks, Hamed. I'd like to thank all of our leadership team for participating in today's conference. We've got a great group that shares a vision for the future and are working together to drive our business forward. You'll have time for more discussion with them and our chef, Kevan Vetter, during our tasting reception in a few minutes. At this time, I'd like to recognize Joyce and her team that put this together and thank the New York Stock Exchange for hosting this.

McCormick shareholders, from our newer shareholders to those who've held the stock for more than 20 years, have enjoyed a return ahead of the broad stock market and the food group. Behind this result is our power of people. Employees throughout McCormick are truly engaged in our success, whether they're involved in supply chain, operations, interacting with customer's or developing new products. Together, we're delivering high performance, and we share passion for flavor.

Flavor is the center of our business. We're committed to making food taste great and inspiring healthy choices. People all around the world trust us to help them create memorable food experiences, whether it's inside or outside the home.

You heard today about the key growth initiatives in our Consumer business and our custom flavor solution business that are propelling us forward. As I said in my opening remarks, by 2015, this company will have a larger geographic footprint, a broader flavor portfolio and a more globalized organization and resources.

We have a strong foundation an effective strategy and an exciting future. We see an increased demand for flavor all around the world. Our leadership team is taking a global approach to meeting this demand of investments, growth initiatives and superior resources to drive our business. And we have a strategy to deliver high-performance and a talented team that's committed to our success. I'm confident that we'll continue to build value for our shareholders.

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