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McCormick & Company, Inc. (NYSE:MKC)

F1Q08 Earnings Call

March 27, 2008 8:00 am ET

Executives

Joyce Brooks - Assistant Treasurer

Alan Wilson - President and CEO

Gordon Stetz - Executive Vice President and CFO

Paul Beard - Vice President Finance and Treasurer

Analysts

Terry Bivens – Bear Stearns

Chris Growe – Stifel Nicolaus

Eric Katzman – Deutsche Bank

Jonathan Feeney – Wachovia Securities

Robert Moscow – Credit Suisse

Ann Gurkin – Davenport

Mitch Pinheiro – Janney, Montgomery, Scott

Matthew Levinson – Matthew Levinson & Associates

[Louis Toma] – Delta Partners

Andrew Lazar – Lehman Brothers

Operator

Greetings and welcome to the McCormick First Quarter 2008 Conference Call. (Operator Instructions) It is now my pleasure to introduce you to your host Ms. Joyce Brooks, Assistant Treasurer for McCormick.

Joyce Brooks

Good morning and thank you for joining this mornings teleconference. Today’s call is being webcast and a replay will be available at www.ir.McCormick.com. With me today are Alan Wilson, President and CEO, Gordon Stetz, Executive Vice President and CFO and Paul Beard, Vice President Finance and Treasurer. Following Alan and Gordon’s remarks we look forward to discussing your questions.

As a reminder because the regulatory review of the Lawry’s acquisition is underway our comments on this topic will be limited on today’s call. Before we begin our discussion please note that during the course of this conference call we may make projections or other forward looking statements and actual results could differ materially from those projected in our forward looking statements. In addition, information we present today which excludes restructuring charges are not GAAP measures.

We present this information for comparative purposes along side the most directly comparable GAAP measures. Please refer to this morning’s press release which is posted on our website for more specific information on these topics. As indicated in the press release the company undertakes not obligation to update or revise publicly any forward looking statements whether as a result of new information future events or other factors.

It is now my pleasure to turn the discussion over to Gordon for discussion of our financial results.

Gordon Stetz

Good morning to those on the call and those joining us by webcast. Two thousand eight is off to a good start with first quarter sales up 10.9% and earnings per share of $0.39. Excluding a $0.02 impact of restructuring charges earnings per share reached $0.41. On a comparable basis this was a 10.8% increase from $0.37 that we reported in the first quarter of 2007. We achieved sales growth in each segment and region of our business and higher operating income for both our consumer and industrial businesses.

Operating income excluding restructuring charges for the consumer business was up 11.3%. While we are pleased with that result in this period of higher and more volatile commodity costs we are pleased to report a modest increase in the operating income of our industrial business. Let me provide more details about each of these businesses beginning with the consumer segment.

Consumer sales rose 9.5% with a favorable impact of 4.2% from foreign exchange rates. Increase prices and higher volumes contributed about equally to an increase of 5.3%. In the Americas we grew consumer sales 8.2% and 6.7% in local currency. About one half of this increase was due to volume and product mix. Marketing support, innovation, our revitalization program and an early Easter holiday drove increases in spices and seasonings, Hispanic items, dry seasoning mixes, economy brands and our Club House brand in Canada.

The other half of the increase was from pricing actions. We had some carry over benefit of higher pepper prices taken during 2007 and a one month benefit of a 2008 pricing action that applied to a broad range of products. In Europe consumer’s business sales rose 11.7% and 2.6% in local currency. In the first quarter we had a carry over benefit from price increases taken in 2007 and incremental sales from the 2007 acquisition of Thai Kitchen in Europe.

In addition, our Schwartz brand in the UK is responding well to improved merchandising and advertising. We are expanding a successful UK campaign with print ads to other markets in Europe. Sales in the Asia/Pacific region were up 13.6% and 3% in local currency. While we continue to grow sales in China at double digit pace our consumer business in Australia had lower sales. In both Australia and China we are introducing improved merchandising systems which have met with success in the US and Europe.

Across all regions operating income for the consumer business was $67 million when restructuring charges are excluded. When compared with the first quarter of 2007 on this same basis this was an increase of $6.8 million or 11.3%. This increase outpaced sales growth of 9.5%. While we plan to increase our advertising in 2008 this expense was down $1.8 million in the first quarter due to the timing of our marketing programs. This expense reduction also contributed to the increase in operating income.

On a Dollar basis our pricing actions favorable sales mix and cost savings related to our restructuring program effectively offset the impact of increased raw and packaging material costs in the first quarter. We expect these factors to continue to provide an offset unless commodity costs continue to increase.

Moving over to the Industrial business, we were pleased with our financial results in the face of several challenges. This part of the business is under pressure from steep cost increases and volatility in several commodities including flour, soy oil and cheese. Also there is continued weakness in the US restaurant industry. In this tough environment we grew sales 12.8% and 9.6% in local currency. In the Americas the increase was 10.1% with 1.7% from favorable foreign exchange rates.

Higher pricing to offset commodity increases accounted for the majority of the increase. We have also achieved growth with snack seasonings, beverage flavors and new seasoning business for several food manufacturers. These food manufacturers are customers with whom we are developing relationships. This places them in the second tier below our top strategic customers. The sales increases in our international industrial business that we achieved in 2007 continued into the first quarter of 2008.

Industrial sales in Europe rose to 17.3% and 12% in local currency. Pricing contributed to about one half of this increase. Strong sales of snack seasonings and seasoning blends and condiments for the restaurant industry also contributed to the growth in the first quarter. Sales in the Asia/Pacific region rose 23.9% and 13.3% in local currency. Pricing had a minimal impact in the first quarter. Higher volumes and a positive sales mix resulted from increased sales of seasonings for chicken sold to restaurant customers and snack seasonings sold to food manufacturers.

Excluding restructuring charges operating income for the industrial business was $14.3 million up slightly from $14 million in the first quarter of 2007. With a 13% increase in sales this quarter compared to a 2% profit increase it is clear that our industrial business remains under pressure from higher commodity costs. However we have made progress getting higher prices in place in all regions are working more closely with our customers to contract future purchases of these raw materials.

Our level of collaboration is greater than in 2007. Also providing an offset to higher commodity costs are cost savings from our restructuring program as well as a more favorable business mix following our elimination of lower margin SKUs and customers. To summarize this portion of my remarks we are working hard to minimize the impact of this tough environment and have confidence that we can continue to grow sales and operating income in 2008 for our industrial business.

Next I’d like to comment on how the consumer and industrial results came together for the first quarter. Excluding restructuring charges operating income rose 9.6% adding $0.04 to earnings per share. Interest expense this quarter was up with a slight increase in debt and higher rates. This is offset by an increase in interest income during the quarter. A tax rate of 30.1% this year compared to a 29.4% rate in the first quarter of 2007 when the company had the benefit of a discrete tax benefit in Europe.

While we had the benefit of certain discrete items early in 2008 we continue to project a 31% tax rate for the fiscal year. As indicated in our January call the higher cost of soy oil is impacting our joint venture in Mexico and led to a decline of $1.1 million in income from unconsolidated operations for the first quarter. In this competitive market soy oil is a primary ingredient in mayonnaise which is the leading item for this business.

While we are consulting with our joint venture partner on ingredient purchases and product pricing if soy oil stays at this level it is likely that we will continue to report a decline in our joint venture profit throughout 2008. The reduction in joint venture income for the first quarter reduced earnings per share by $0.01. Given our acquisition activity we did not repurchase shares this quarter. However the carryover benefit from last year’s activity resulted in a 2.3% reduction in average shares outstanding on a diluted basis.

To recap our first quarter earnings per share results we achieved $0.39 in 2008 compared to $0.33 in 2007. Restructuring charges related to the restructuring program were $0.02 per share this year compared to $0.04 per share last year. The remaining EPS increase of $0.04 was due to higher operating income. A $0.01 decrease in income from unconsolidated operations was offset by a $0.01 increase from lower shares outstanding.

I want to spend a few minutes on the quarter end balance sheet and our cash flow. At the end of the quarter accounts receivable were up 11.6% slightly ahead of the 10.9% sales increase. Inventory was up 9.1%. Of the $38 million increase $18 million was due to foreign exchange rates and we estimate that another $17 million related to higher raw and packaging materials costs. Additional increases were due to the acquisition of Billy Bee and some inventory build in advance of an SAP conversion in Canada.

Debt to total capital ended the first quarter at 40.6% compared to 43.2% in the prior year. Although debt is up slightly the weak US Dollar has had a strong effect on lowering this ratio. Cash from operations in the first quarter was $24 million versus a negative $75 million in the year ago period. If you recall accounts receivable at November 30, 2007 was high compared to the year ago comparison. In the first quarter of 2008 we had strong collections of these receivables.

Payments for restructuring actions and taxes this year were less than in the first quarter 2007. Also due to the over funded status of our pension plan in the US we did not make a $22 million contribution that had been made in the past few years. This quarter we used cash and increased debt to fund the $76 million acquisition of Billy Bee and $17 million of net capital expenditures. That completes my remarks on our first quarter financial results and it is my pleasure to turn it over to Alan for comments on the business and our outlook.

Alan Wilson

For the remainder of our remarks I’d like to briefly cover three topics. First the effect of higher input costs in a tougher economy in McCormick’s business. Second an update on our growth initiative including acquisitions along with our restructuring program, and third, our latest financial outlook for 2008.

As Gordon explained we’ve taken a number of pricing actions in response to higher input costs. In our consumer business higher pricing is in place for both brand and private label products. In our industrial business we’ve increased prices to pass through higher costs and are working more closely with our customers to coordinate the purchase of many of these largest commodities. Chuck Langmead and his team have done a great job achieving growth in the business while meeting the challenges of higher costs.

In the first quarter we were able to offset the Dollar impact of higher commodity costs with higher prices. This led to an 8.1% increase in gross profit Dollars. However when measured as a percent of net sales gross profit margin was down 50 basis points. Gross profit margin was also affected by an unfavorable mix of business with sales growth of the industrial business outpacing that of our consumer business.

As for the current economy the largest impact to our business continues to be weakness in the restaurant industry which has affected our industrial business. This impact began in the US in 2007 and it is continuing into 2008. In our consumer business we are seeing customers shift to lower cost retail channels with some pick up in sales of our economy brands but no significant gains in our sales of private label through the first quarter.

I’d like to comment next on our growth initiatives and restructuring program. We are revitalizing our core spice and seasoning products in markets around the world. New merchandising systems to improve the consumer shopping experience and retailers stocking activity is a key step in this revitalization. We improved merchandising first in the United States then in the UK, France and most recently China and Australia.

The largest of these efforts due to the number of store conversions is in the US consumer business which is part of Mark Timbie’s responsibilities. Due to the efforts of our sales and marketing team in this part of the business we are measuring a sales lift in the mid single digits following the installation of these systems and we’ve converted 9,150 stores at this time up from 8,500 in late January. Marketing programs are being further refined as we measure effectiveness.

We have moved to more print and interactive media in the US and are making similar moves in Europe. For the first time we will use a unified print campaign in both the UK and France. In the second quarter support for new products, crusting blends and flavored peppers will kick in. Based on the timing of our 2008 advertising plan we expect the reduction in first quarter advertising to be followed by higher spending in the second quarter. For the total year we estimate an increase of at least 10% in our 2008 advertising expense.

I would like to comment on our strategy to grow through acquisitions. In recent years we have successfully added a number of leading niche products to our consumer business in the Americas such as Zatarain’s and Simply Asia. In February we were pleased to announce the acquisition of Bill Bee Honey Products a leading brand in Canada. This is a terrific compliment to our savory and desert aid products in Canada and a great extension of the sweet products we market in Europe and the Asia/Pacific region. We view honey as a unique flavor and a healthy way to add sweetness to many foods and beverages.

To update everyone on Lawry’s we are continuing to work with the FTC on the regulatory review process and are still limiting our remarks regarding this business and the transaction. We remain excited about the possibility of acquiring the Lawry’s business and view it as an excellent addition to our US consumer business.

Turning to our restructuring program, those who have followed us in 2006 and 2007 know that many of our past actions occurred in the US and that much of the current activity involves our business in Europe. We have completed facility consolidations in the UK and changes are now underway in France. We have eliminated underperforming and lower margin SKUs in the Netherlands and Belgium and the change in our go to market strategy has improved the profitability of our businesses in Italy and Belgium. Under the leadership of Lawrence Kurzius employees in Europe, Middle East and Africa are making great progress with our restructuring program.

Let’s now turn to our financial outlook. While we had a strong first quarter 2008 is not without challenges. The effect of the global economy on our business is an area of concern as are commodity costs fluctuations. However, we expect sales to continue to benefit from higher pricing and favorable foreign exchange rates. We are also seeing good consumer response to our revitalization and marketing efforts and our product innovations.

In addition, sales of Billy Bee products are expected to add $25 to $30 million to 2008 sales. As a result we’ve increased our projected sales increase to 5% to 7% from 4% to 6%. Earnings per share in the first quarter exceeded our expectations due to excellent sales growth. We are on track to deliver cost savings related to our restructuring program and are moving toward a more positive business mix. We continue to pursue pricing actions and collaboration with industrial customers to counter higher input costs.

As a result, we are well positioned to grow profits in an environment of economic uncertainty and higher costs. A portion of this profit growth will be used to fuel increased marketing to drive our brands. We reaffirm our expectation to achieve earnings per share in our target range of $1.97 to $2.01. This includes an estimated $0.10 of restructuring charges and excluding these charges for both 2008 and 2007 is an 8% to 10% growth rate. I also want to reaffirm our outlook for $300 million and more in cash from operations.

Let me summarize. Employees throughout the company are providing the energy and talent behind our growth in delivering results. Gordon and I share the confidence of the entire leadership team that we are on our way to another record year and to increasing value for McCormick shareholders. To our shareholders and everyone on the call thank you for your interest and attention. We would now like to discuss your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Terry Bivens of Bear Stearns.

Terry Bivens – Bear Stearns

Alan you mentioned that you did have a bit of a negative gross margin affect from a little bit faster growth on the industrial side. How long do you expect that to continue?

Alan Wilson

As long as the commodity costs continue to be volatile we would expect to see that. Where we are right now is we are using a combination of pricing and productivity to offset the increased costs but we are only focused on recovering to the best extent that we can gross margin dollars, gross dollars not necessarily gross margin percentages.

Terry Bivens – Bear Stearns

I did understand you to say that your price increase is you felt did cover in terms of gross margin dollars the commodity push, was that correct?

Alan Wilson

That’s correct.

Terry Bivens – Bear Stearns

As you look into the second quarter a couple of quick questions. You mentioned maybe some acceleration on the consumer side due to the earlier Easter. Does that take away from the second quarter in any way?

Alan Wilson

We think it should pretty well wash itself out over the period. We do have a fairly heavy advertising investment towards the end of the second quarter. We think there will be some minor impact on an early Easter but not anything significant.

Operator

Our next question is coming from Chris Growe of Stifel Nicolaus.

Chris Growe – Stifel Nicolaus

I wanted to clarify, in terms of Lawry’s there really is no update. You’ve been through a second request, are you still fulfilling the request of FTC?

Alan Wilson

Yes, that’s exactly what’s going on. We’ve received a second request and we are in the process of answering that.

Chris Growe – Stifel Nicolaus

I thought you already responded to that. I was curious; there was some working capital improvements sequentially which were encouraging particularly on receivables. I know that’s been included in a lot of the bonuses for executives, that kind of thing for the year. Are there any working capital parameters you are putting out there so the benefit we could see to working capital for the year?

Gordon Stetz

What we’ve done is internally we’ve cascaded targets down to each of our operating unit general managers and we focused on areas that we think are opportunities in each of their respective businesses. What we’ve done publicly is restate that we believe our cash flow will return to levels prior to 2007 which is in excess of $300 million. Within that projection we’ve assumed certain improvements in working capital but we have not gone so far as to break it down by category right now.

Chris Growe – Stifel Nicolaus

I wanted to ask as well on the gross margin side, we’ve obviously seen even some more movement throughout the quarter and input costs even higher. Do you believe that your gross margin can still grow for the year?

Alan Wilson

As we’ve said we really are focused on trying to recover gross margin dollars at this point. We think if commodities stabilize we should start to see the impact of our productivity efforts help gross margin. At this point we are staying even with the combination pricing and productivity.

Chris Growe – Stifel Nicolaus

One last one relative to your Europe consumer business, it had an easier comparison in the quarter and it had been accelerating through the recovery and the growth in sales. It slowed a bit this quarter does that require more marketing investment to stimulate the sales growth in Europe?

Alan Wilson

We are continuing to increase our marketing investment in Europe. We are pretty happy with where our business is in the UK. We had a little bit of a slow down in France and we are putting some extra effort behind that.

Operator

Our next question is coming from Eric Katzman of Deutsche Bank.

Eric Katzman – Deutsche Bank

I have a few questions. First one, given that you have a fairly broad based view of what’s going on out there between food away from home and food at home. Can you talk a little bit about how much, I know it’s tough to measure, how much shift you are seeing from consumption at food service versus at home and how do you think that’s benefiting you in terms of the consumer business?

Alan Wilson

Food away from home we see the impact almost immediately. If someone doesn’t go out for dinner on Friday night those sales in restaurants are pretty quick. It takes a little bit more time or frankly with the turn rate of our products a lot more time to start to see the impact. We are seeing good volume growth in grocery channel. We expect that’s because more people are eating at home than are eating out. It’s not the quick turn that you expect to see. We decline quicker in restaurants and we see an impact in grocery at least on our items.

Eric Katzman – Deutsche Bank

Are you also seeing within the food at home consumption, you mentioned a little bit more in your economy brands but are you also seeing a shift by the consumer as a means of saving money shopping at less expensive or less price point oriented outlets.

Alan Wilson

We are certainly seeing a trend towards more of the outlets where costs and prices has been more aggressive. We are seeing a pick up in economy brands but our regular brands our every day brands are holding their own. We had good growth, for instance on Gourmet through the first quarter as well.

Eric Katzman – Deutsche Bank

Switching subjects for a second, it sounded like there may be a change going on in terms of how you are dealing with your industrial customers. I know that Bob and Fran, after the vanilla situation had implemented a quarterly adjustment. Am I to take your comments that not only is it now a quarterly price increase based on the commodity but also collaborating together to purchase inputs? How is that working?

Alan Wilson

We are collaborating with customers on the positions we are taking on these major commodities so that as we do that we both understand what’s happening. That’s been a fairly recent change towards the end of last year to really get closer to it. In a stable market we can handle less frequent price changes and we can deal better with what’s happening with commodities. When it’s unstable as it has been we really need that close collaboration, our customers are working very well with us.

Eric Katzman – Deutsche Bank

On the M&A front, I suppose with the private equity players out there being kind of knocked out of the business for awhile you have the benefit of purchasing stuff at a lower multiple. On the other hand it seems like there’s an increased risk given the input cost volatility. I know you can’t talk specifically about Lawry’s but is there a risk in making a purchase like that and not knowing exactly where their contracts are on high fructose corn syrup or whatever their main ingredient is?

Alan Wilson

We don’t have a lot of information about that particular acquisition that we can share but as we look at things we look for areas where we can add value and in a case where we are buying something that’s highly synergistic we will have a pretty good handle on what the right commodity inputs are. I don’t think that’s as much a risk. We are continuing to be active in looking at acquisitions and evaluating to help grow out business all over the world.

Operator

Our next question is coming from Jonathan Feeney of Wachovia Securities.

Jonathan Feeney – Wachovia Securities

Gordon could you explain to me what kind of bottom line benefit you might be getting from foreign currency, how that might work?

Gordon Stetz

We don’t give a specific number on that. Obviously we’ve given you the top line benefit. The impact of foreign currency can read through obviously in the translation of the income statement. We also have dollar purchases abroad, a lot of the spice markets globally are dollar denominated and we will do forward purchases on those as well. Those can also be impacted by the weak dollar because those will start to rise in price as the dollar weakens. It can sometimes be just a neutral benefit on that side. As a result we really don’t get into detail on the EPS impact on it.

Jonathan Feeney – Wachovia Securities

Could you give us any more detail, you gave us a 4% currency effect on the top line, and how price and mix is represented in the other seven?

Gordon Stetz

In terms of the total sales of the company price was at least half of the total growth. FX was about 4% of it and the rest would have been volume mix.

Jonathan Feeney – Wachovia Securities

I know we talked a little bit about it on the last call some of the updated parameters after you lost some sku’s at a major customer last fall. Has there been any follow through, have there been any other customers looking to expand their private label programs at potentially your expense or the expense of your key brands in the face of the weakening consumer right now?

Alan Wilson

We haven’t seen a lot of that kind of activity. In most of our developed markets private label is pretty well developed. We haven’t seen any significant moves by major customers.

Jonathan Feeney – Wachovia Securities

That one major customer that did make a move, that continues as scheduled no changes there?

Alan Wilson

That’s right.

Operator

Our next question is coming from Robert Moscow from Credit Suisse.

Robert Moscow – Credit Suisse

I have a question about the shelving units that you are putting in. Are you seeing any kind of an inventory impact at retail when you do put those shelving units in? For example, is there any kind of de-loading at the customer that has to take place? Is that part of the reason that the consumer sales had been slow in ’07 but seem to be picking up now as you lap those comparisons?

Alan Wilson

There is a transitional impact as we go into such stores and the impact is we are starting to set a store the inventories will be drawn down a little bit. We have seen a little bit of that but because of the way we are setting the stores it shouldn’t be highly measurable because as soon as we get them set we start to see the impact on volume. I wouldn’t read into it that it’s a major issue. We are setting stores pretty well continuously and our wrapping up that program today. There is a little bit of a draw down as we get ready to set individual stores.

Robert Moscow – Credit Suisse

The spice and seasonings by store that section is pretty close to the condiments section, you see all kinds of brands like A-1 and salad dressings and what not and steak sauces, very fragmented. I’m wondering have you ever thought bigger picture about consolidation in the industry and whether or not McCormick would have even more clout by combining or doing any kind of M&A in that area of the store? Is it a very different type of business or is it the same type of business for the same buyers, what kind of clout would you get?

Alan Wilson

It varies by customer. Absolutely we look all the time at what the category adjacencies are and where we think we can add value with our brands. That’s a part of our new product innovation as well as our acquisition activity. We are always looking at the right category adjacencies but if you are talking specifically of condiments and salad dressings and things like that it really varies by the individual retailer even where it’s placed and what the buying relationship is. We think there are a lot of places in the store the McCormick brand can add value and we are looking always at how we do that.

Robert Moscow – Credit Suisse

Theoretically if you doubled your size through acquisition in that region of the store, would it vary by customer as to what it would get you or are you pretty certain it would get you a lot?

Alan Wilson

I think it would vary by customer because the metrics on a lot of these areas are different. We have a unique go to market proposal for the spice business and it really varies by the different categories in the stores what the expectations are on turns, on complexity and we really have to evaluate each of them on a case by case basis.

Operator

Our next question is coming from Ann Gurkin of Davenport.

Ann Gurkin – Davenport

I want to spend a little bit more time on the food service segment and your restaurant customers. When you first planned for ’08 the outlook for that segment are you needing to go back and revise that outlook for that segment given that the restaurants are so weak? Secondly, are you being approached by your customers to get more help on new items on the menu or helping to manage their menus or anything like that?

Alan Wilson

We are doing a lot of work collaboratively with customers on innovation and that’s a steady stream of what we are doing. We are also working with them on product formulations to help manage the cost volatility as well as respond to their needs for a value focus. We are working well with our customers and we consistently look at our forecast for what we think is going to happen because we have to do that obviously to manage our commodity positions.

Ann Gurkin – Davenport

Are you tempering the outlook for the segment at this point?

Alan Wilson

I don’t think we are tempering the outlook at this point.

Ann Gurkin – Davenport

Are you all going to need to raise prices again this year given what’s happened with commodity costs?

Alan Wilson

I think its two answers. In the consumer business based on our forecast we don’t anticipate that we will need to however if commodities get more volatile we’ll obviously look at that and make the decision when we have to. With industrial customers because we are working collaboratively on commodity positions as commodities change we’ll be passing through the cost changes.

Operator

Our next question is coming from Mitch Pinheiro of Janney, Montgomery, Scott.

Mitch Pinheiro – Janney, Montgomery, Scott

On the restructuring charges what exactly in this quarter where was the money spent?

Alan Wilson

The biggest part of the restructuring program now is centered in Europe. There are a number of activities going over there. The biggest one is a consolidation of facilities occurring in the south of France. There are also some changes in the UK that relates to a change in the route to market structure there.

Mitch Pinheiro – Janney, Montgomery, Scott

This will continue on an even basis through the remainder of the year?

Alan Wilson

In terms of the execution in Europe, yes. There are also things that we are cleaning up from the US such as some asset sales on some buildings and things that remain from the consolidations there. In terms of that number on the P&L I wouldn’t say that number is going to be even throughout the year. It could be offset by some gains on sales of assets that we are still in the process of trying to sell from prior consolidations.

Mitch Pinheiro – Janney, Montgomery, Scott

In terms of looking at your ad spending I think I heard you say that you expect ad spending to be up 10% for the year?

Alan Wilson

That’s right.

Mitch Pinheiro – Janney, Montgomery, Scott

It was down $1.8 million in the first quarter what do you expect to have a percentage increase in the second quarter?

Alan Wilson

I’m not sure that we have broken out the percentage increase but we do expect an increase in advertising the second quarter as we are getting ready for the grilling season in the US and beefing up our spending in Europe.

Mitch Pinheiro – Janney, Montgomery, Scott

When it comes to collaboration with industrial customers is it on a contractual basis or is it just a gentlemen’s agreement?

Alan Wilson

It varies by customer. Some customer we have very specific contracts on how we deal with this and protocols and other cases it’s as we see changes and we work with them. In our relationships with customers have tended to be collaborative by the way we go to market its just now we are collaborating even more on commodity positions.

Mitch Pinheiro – Janney, Montgomery, Scott

Is it the usual suspects in commodity positions, flour, soy oil or does it extend to other…

Alan Wilson

It tends to be major commodities. For us its flour, soy bean oil, cheese and those are really the big ones that impact us.

Mitch Pinheiro – Janney, Montgomery, Scott

Pepper prices seem to be moving up again.

Alan Wilson

Pepper is up again this year, I think it’s up about 20% in the first quarter. We have not taken additional pepper pricing in our consumer business because we took it last year. We are monitoring that and we’ll evaluate what we need to do through the year.

Mitch Pinheiro – Janney, Montgomery, Scott

It was half of your total sales increase this year or in the quarter was due to pricing. That’s roughly 5%. That seems more than the price increases that I was anticipating. I thought you would raise pepper last year 1% and then on average and then this year I thought I heard maybe 3% to 4% is that right though or even less 2% to 3%. Are you getting more pricing somewhere or is my math just…

Alan Wilson

I think what you are remembering are the price increases that we talked about for our North American consumer business. What’s impacting as much as anything are the commodity pass through in the industrial business.

Operator

Our next question is coming from Matthew Levinson with Matthew Levinson & Associates.

Matthew Levinson – Matthew Levinson & Associates

You stated that Australian sales were down and I wondered if you could give me somewhat more detail about this because everything we understand is that the economy there should be quite strong.

Alan Wilson

We are not the number one spice and seasoning supplier in Australia and it’s a very concentrated market with just a couple of large customers. We are seeing the impact of a large customer there that consolidated their category and that’s impacting our business. We have plans to re-launch specific products there and we feel pretty good about our plans.

Operator

Our next question is coming from [Louis Toma] with Delta Partners.

[Louis Toma] – Delta Partners

I’m trying to understand the implications for Billy Bee for your guidance. You said that the acquisition will add about $25 to $30 million for the fiscal year ’08 is that correct?

Alan Wilson

That’s correct.

[Louis Toma] – Delta Partners

It looks like it increases the range of your guidance by about a percentage point if you look at the mid point. Are you accounting for the Billy Bee acquisition in that? Is that the primary driver to the increase?

Alan Wilson

That’s certainly the primary driver. Obviously the FX has been a little stronger in terms of affecting the top line growth as well but it’s also contributing to our confidence in raising the estimate.

[Louis Toma] – Delta Partners

Do you expect Billy Bee to have an EPS contribution for fiscal ’08?

Alan Wilson

What’s baked was in our current guidance but it will have a positive impact of about $0.01.

Operator

(Operator Instructions) Our next question is coming from Andrew Lazar with Lehman Brothers.

Andrew Lazar – Lehman Brothers

An either/or question it may not be completely fair as you have to answer one way or the other. I am curious if you had to choose an operating environment in which to operate McCormick’s business one would be an environment with very little, if any cost inflation and therefore not a whole lot in the way of pricing power. Sort of like we’ve seen the last 10 years or so. Or something that’s more like today’s world which admittedly is challenging, its very volatile from an input standpoint but you are getting a lot more pricing through as an industry. Somewhere in between would probably be ideal but if it had to be one or the other I’m curious how you’d think about answering that?

Alan Wilson

That a real easy answer from my standpoint. I would take the stable cost environment because of several things. One is in a stable cost environment even though it’s very difficult to get pricing you have the opportunity to gain through productivity and that helps drive margin. The second thing is the consumer behavior is a lot more predictable because the consumer today is under tremendous amount of pressure and they are seeing inflation on a lot of fronts and on top of that are seeing pressure from an income standpoint. At any point I would take a healthy, fairly stable environment with the ability to innovate and drive margin over the situation where things are more volatile and unpredictable.

Andrew Lazar – Lehman Brothers

On some of the agreements that you are trying to work out in the industrial side more collaborative purchasing in going through with various customers. Does it require either more hedging or taking larger positions from an inventory standpoint on certain ingredients that you might otherwise have done. If so, does that impact your working capital outlook or is it impactful to that?

Alan Wilson

It will have some impact on working capital but we are baking that in. We think we will get the improvement. That’s more because the commodity prices as opposed to the volumes. Where we are working with customer we are also working with them on forecasting their needs it’s not like we are bringing everything in. It’s a little different on spice and herb commodities where we made decisions on longer short positions based on what we think is going to happen. In some of those cases we may have to add volume in order to protect price. That’s a decision we make on an EBA analysis all the time.

Operator

There are no further questions at this time I’d like to hand the floor back over to Ms. Brooks for any closing comments.

Joyce Brooks

Thank you, this concludes today’s call. If you have any further questions or points to discuss regarding today’s information please give me a call.

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Source: McCormick & Company, Inc. F1Q08 (Qtr End 02/29/08) Earnings Call Transcript
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