Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Joyce Brooks - Vice President, Investor Relations

Alan Wilson - President and CEO

Gordon Stetz - Executive Vice President and CFO

Paul Beard - Senior Vice President Finance and Treasurer

Analysts

Ken Goldman – Bear Stearns

Jon Feeney – Wachovia Securities

Robert Moscow – Credit Suisse

Chris Growe – Stifel Nicolaus

Eric Katzman – Deutsche Bank

Eric Serotta – Merrill Lynch

Mitch Pinheiro – Janney, Montgomery, Scott

Andrew Lazar – Lehman Brothers

McCormick & Company Inc. (MKC) F2Q08 Earnings Call June 26, 2008 8:00 AM ET

Operator

(Operator Instructions) Welcome to the McCormick Second Quarter 2008 Conference Call. It is now my pleasure to introduce your host Ms. Joyce Brooks, Vice President of Investor Relations for McCormick.

Joyce Brooks

Good morning to everyone joining us today by phone and webcast for a review of McCormick’s Second quarter results and a discussion of the company’s business and outlook. With me today are Alan Wilson, President and CEO, Gordon Stetz, Executive Vice President and CFO and Paul Beard, Senior Vice President Finance and Treasurer. Following our remarks we look forward to discussing your questions.

As a reminder our comments on the Lawry’s acquisition continue to be limited because of the regulatory review that is underway. 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 and credits 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 Alan.

Alan Wilson

I’m extremely pleased to report strong financial results for McCormick’s second quarter. The sales results are evidence that our growth initiatives are resonating with customers and consumers and our pricing actions and profit performance demonstrate that we are effectively managing through an unprecedented period of escalating costs.

As we look to the second half of 2008 I have increased confidence in our ability to deliver a year of record results for the company. Our solid performance in the second quarter was broad based. At the top line we followed 11% in the first quarter with another 11% sales increase. This is ahead of the original 2008 sales growth goal of 4% to 6% as well as the upwardly revised projection of 5% to 7% sales growth set back in March.

We achieved the strong second quarter growth with a combination of pricing, favorable foreign exchange rates, favorable product mix and incremental sales from recent acquisitions. US customers responded to our marketing programs with increased purchases of reduced sodium Zatarain’s products and continued strength in our Gourmet items which now feature new flip top caps. With a new salmon seasoning and Grill Mates Grinder our grilling season is off to a great start.

By the end of the second quarter we crossed the 10,000 store mark with installations of our new merchandizing system. In addition to the positive impact on sales, this and other marketing initiatives recently helped us gain new distribution with a regional retail chain. As in the US increased marketing new products and improvements to our merchandising in the UK and France have received a positive reaction for both customers and consumers.

Our early read on new products in the US which include flavored pepper, crusting blends and cinnamon grinders is quite positive. We’ve met our goals in product placement at retail stores and have begun to launch print, sampling and other marketing support to gain consumer awareness and trial. In Europe we have introduced a new premium line of seasonings as well as a number of new barbeque items.

Looking ahead to the second half of 2008 we are re-launching our entire line of [Bandane] dessert items with greatly significantly upgraded packaging and I’ve already received a great response from retailers in France.

I want to point out that significant level of marketing support is planned for the third quarter to drive growth of the new US and international items I just mentioned as well as summertime favorites such as Grill Mates, Old Bay and Grinders. In our US Industrial business increased prices help offset the impact of higher commodity costs and we overcame weakness in the restaurant industry with new products sold to quick service customers and food manufacturers.

In International markets growth in industrial sales continued to outpace US growth with particular strength this quarter in a number of countries including the UK, South Africa, China and Australia. Increased demand by restaurant customers is a primary driver of these results. I wanted to provide an update on our February purchase of Billy Bee Honey in Canada.

Since acquiring this business the integration has progressed well and we recently announced that by April 2009 production would be moved from a stand alone leased facility and consolidated with another McCormick facility in Canada. Also in Canada after months of careful preparation our team successfully implemented SAP in June. Cost savings from SAP our restructuring program and other supply chain initiatives are integral parts of our effort to manage through a tough cost environment.

Margin pressure from higher cost commodities and to some extent energy have continued. Through a combination of pricing actions, cost savings and favorable product mix we have effectively offset these increases. For the second quarter we were able to report a 9.6% increase in gross profit dollars which is just below our 11.2% increase in sales.

Those of you who have followed us closely since the restructuring program began late in 2005 know that we made excellent progress in North America during 2006 and 2007 and that a number of actions in 2008 are underway in Europe. We are working to complete a facility consolidation in France and recently announced changes to our direct store distribution network in the UK which will improve efficiency and increase our capacity to handle greater product volume.

The restructuring credit we reported this quarter was due to a gain on the sale of our plant in Salinas, California which was consolidated with other manufacturing facilities in 2007. The last comment I wanted to make at this point before turning it over to Gordon relates to one of my top priorities for McCormick in 2008, “Cash”. Our goal for 2008 is to deliver at least $300 million cash from operations. This is an increase of $75 million from our year ago results.

Through the first half cash from operations was up $101 million so we are well on our way toward a significant improvement from 2007. To discuss in more detail our cash flow and other financial results I’m going to turn it over to Gordon.

Gordon Stetz

I’ll provide some remarks on the total business and some color on our two segments. Second quarter sales were up 11.2% the currency impact was again favorable this period adding 3.9% to our sales growth. While higher pricing contributed significantly to the sales growth the combination of volume and product mix also had a positive effect that included the impact of new products and new distribution as well as 1.7% in incremental sales from acquisitions, Billy Bee in Canada and Thai Kitchen in Europe.

Alan stated that our gross profit dollars rose 9.6%. While this increase demonstrates our ability to pass through our higher costs it also illustrates the impact of today’s input cost environment on gross profit margin. Margin was 39% compared to 39.6% in the second quarter of 2007 a decline of 60 basis points. I would like to point out that this is a modest improvement from the 100 basis point gross profit margin decline we reported in the first quarter when we were still putting some of our pricing actions in place.

Excluding the restructuring credit we reported this quarter operating income rose 4.5%. This rate of increase was below the 11% growth in sales mainly due to an 18% increase in marketing support. The addition $4.8 million of marketing support funded incremental print advertising, interactive media and other programs designed to drive sales of our branded products.

I encourage you to take a look at a new part of our website launched in the second quarter called, “Spices For Health” where we provide consumers with information such as the antioxidant properties of many spices and herbs. In our McCormick Gourmet website now features cooking videos with Cat Cora, the first female Iron Chef and with Christopher Lee recently named one of Food & Wine Magazines best new chefs.

Below operating income lower interest rates led to a favorable variance in interest expense. In addition, interest income was favorable in the second quarter. EPS was also impacted by a carry over benefit from 2007 share repurchase activity. In 2008 we continued to curtail our share repurchase activity in anticipation of the Lawry’s acquisition.

EPS for the second quarter was $0.41 and on a pro-forma basis $0.39. This was a $0.04 increase from $0.35 in 2007 with $0.02 from operating income and $0.02 from the lower interest expense and increased interest income. Keep in mind that the impact from increased operating income includes the effect of greater marketing support.

Let me provide a few details about each of our business segments beginning with the Consumer segment. Across all regions consumer sales rose 12.1% with a favorable impact of 5% from foreign exchange rates and 2.6% from recent acquisitions. About 70% of the remaining increase came from pricing actions and 30% from favorable mix and higher volume.

In the Americas we grew consumer sales 11.4% with a favorable impact of 1.8% from currency and another 3% from Bill Bee. An increase of 6.6% had similar contributions from pricing and from favorable product mix and increased volume. Alan commented earlier about the role of new products, new distribution, marketing and merchandising in achieving these results. We are not seeing any measurable pull back by US consumers following our February price increase.

While our latest consumer take away analysis showed a pick up in private label purchases there was a nearly equal increase in consumer purchases of our branded products. In Europe consumer sales rose 12.6% with the majority of the increase 11% coming from favorable currency. In addition, higher pricing had a positive effect on sales as well as the 2007 acquisition of Thai Kitchen in Europe which added 2% this quarter.

Our markets in the UK and France are also benefiting from improved store merchandising, product innovation and marketing support. In several smaller markets we are working to improve our financial performance with changes in distribution systems, merchandising, product packaging and marketing.

We increased consumer sales in the Asia/Pacific region 17.4% and 4.2% in local currency. While we continue to grow sales in China at a double digit pace our consumer business in Australia was down slightly. In both Australia and China we are introducing improved merchandising systems which have been successful in the US and Europe.

Across all regions operating income for the consumer business was $55.8 million when restructuring charges are excluded. When compared to the second quarter of 2007 on this same basis this was an increase of $2.7 million or 5.1%. This was below the 12% increase in sales again due mainly to increased investments to grow our brands. We still expect to increase advertising this year with an even greater increase in our total marketing support which includes point of sale materials, sampling and other sales building programs.

Moving over to the Industrial business we continue to face steep increases and volatility in several commodities including flour, soy oil and cheese. Our US restaurant customers continue to be pressured by industry weakness. Despite these pressures we have been able to largely pass through the higher costs to our customers.

In the second quarter we grew industrial sales 10.1% and 7.6% in local currency. Higher pricing was the primary factor behind this increase. In the Americas the increase was 8.2% with 2% from favorable foreign exchange. Higher pricing in response to commodity cost increases more than offset a decline from product mix and volume.

We had success with a number of new products for snacks, beverages, poultry and side dishes. However, demand was down this quarter for some of our core restaurant products as customers shifted their emphasis to other menu items. We increased industrial sales in Europe 9.6% and 8.9% in local currency. Higher pricing drove two thirds of this increase and favorable product mix and volume provided the remaining one third.

Sales in the Asia/Pacific region rose 26.9% and 14.2% in local currency. Pricing had a minimal impact in the second 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 $21.6 million up from $21 million in the second quarter of 2007.

We were pleased to be able to offset the impact of higher costs and deliver a modest increase in profit for this part of our business. To summarize my remarks on the industrial business we have worked hard and had good success in minimizing the impact of this tough environment on our business in the first half of 2008.

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 15.4%. When measured in local currency the increase in receivables was 7.5% which was close to the 7.3% increase in sales in local currency. I am pleased to report that we have made progress in renegotiating payment terms with several customers in international markets.

Inventory was up only 7.5% of the $32 million increase $15 million was due to foreign exchange rates, $7 million to acquisitions and we estimate that another $13 million related to higher commodity costs. Debt to total capital ended the second quarter at 38% compared to 43.1% in the prior year. Although debt is about even with the year ago balance the weak US dollar has had a significant effect in lowering this ratio.

Cash from operations in the first half of 2008 was $93 million versus a negative $8 million in the year ago period. The primary factors behind this increase were lower payments for restructuring actions, strong collection of receivables, lower retirement plan contributions and the timing of tax payments. In 2008 we have used cash and increased debt to fund the $76 million acquisition of Billy Bee, $57 million of dividends and $40 million of capital expenditures.

That completes my remarks on our second quarter financial results and it is my pleasure to turn it over to Alan for our latest financial outlook.

Alan Wilson

While we had a strong first half 2008 has had its share of challenges. The future effect of the global economy on our business creates some uncertainty as does continued escalation and volatility in commodity costs and higher energy costs. To achieve these results in a tough environment is a reflection of the commitment and drive of our employees throughout the company.

I would like to provide our latest financial guidance that continues to exclude the acquisition of Lawry’s which is currently under regulatory review. We remain excited about the prospect of adding Lawry’s brand to our portfolio of products. Looking ahead to the second half we can expect to continue to grow sales as consumers react positively to our revitalization efforts, product innovation and marketing programs. We also expect to have incremental sales from the Billy Bee acquisition, new distribution and a continued benefit from our pricing actions.

As a result we are now projecting sales growth in the high single digits. This is up from 5% to 7% range we forecast at our last call back in March. Our pricing actions, cost savings and favorable product mix have offset much of the commodity cost increases to date. We expect these same factors to continue to provide an offset in the second half. As a result gross profit dollars and operating income dollars should also increase at a high single digit pace, although we expect continued pressure on margins.

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 per share of restructuring charges. Excluding those charges for both 2008 and 2007 this is an 8% to 10% growth rate. Due primarily to our third quarter marketing programs I mentioned at the beginning of my remarks we are projecting a modest increase in earnings per share for the third quarter followed by a more significant increase in our fourth quarter.

Not unlike a number of other food companies we are meeting our 2008 profit objective with greater than expected sales growth. While we have not been able to improve margins we are pleased to be able to minimize the impact of today’s tough cost environment. This dynamic will be with us through 2008 and could easily extend into 2009. We remain confident that our business can increase EPS 9% to 11% annually in 2009 and beyond. In the near term at least sales growth may play a stronger role than margin expansion in achieving this result.

As a final remark to our financial outlook for 2008 I also want to reaffirm our guidance of $300 million or more of cash from operations. Let me summarize, I hope you could sense from comments this morning our enthusiasm about this business and the confidence in our ability to deliver strong financial results. McCormick employees around the world are making great strides through their key initiatives to drive sales and improve efficiency through our operations. Their focus and energy have created real momentum and are the reason for our confidence.

To our shareholders and everyone on this call thank you for your interest and attention. I look forward to reporting more great progress and solid results in the upcoming quarters. We’d now like to discuss your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ken Goldman – Bear Stearns.

Ken Goldman – Bear Stearns

It’s good to hear that you remain excited about Lawry’s. I know you can’t talk at all about it but my question is if unfortunately Lawry’s would fall through where would your focus be? Would it focus on replacing it with other acquisitions and maybe you could talk a little bit about how fertile that market is or would you really just turn to share repurchase. Just give us a little sense of what your backup plan is.

Alan Wilson

First we don’t expect that to be an issue but we would look at the other uses of cash. There are certainly other acquisition alternatives that are there but we would definitely be back into a share repurchase plan. Its pure speculation because we expect that not to be an issue.

Ken Goldman – Bear Stearns

Business with food manufacturers you touched on it a little bit can you describe in a little more detail how healthy that is, how you’re feeling about your work with the General Mills of the world and so forth and maybe what some of the trends are there.

Alan Wilson

Our business with food manufacturers is pretty healthy. If you recall that’s a big part of what we’ve done in our industrial restructuring is to reduce the number of customers in that area we are working with and really focus on fewer larger customers and we’re really seeing the results of that. Our business in that area was pretty strong last year and continues to be strong this year and the outlook looks pretty good.

Operator

Your next question comes from Jon Feeney – Wachovia Securities.

Jon Feeney – Wachovia Securities

I wanted to ask about the US industrial business specifically, it look like some that restaurant business has fallen off a little bit which is to be expected with all that’s going on with the economy. Is there a notable negative margin mix going on in that industrial business that’s hurting you as restaurants suffer and food manufacturers really don’t.

Alan Wilson

Margins are certainly under a good deal of pressure in that area because of the commodity costs. The commodity cost increases that we’re seeing are more geared to that customer base because that’s where the flour and soy bean oil are used. There’s certainly more of a margin compression based on commodity costs than there are in other parts of our business.

Jon Feeney – Wachovia Securities

On the grocery side you mentioned just about pacing private label, trade down has been an issue in some categories, not so much in others. Are there any other retailers out there in the pipeline that are making noise around store brands? I know you dealt with Costco a year ago, any concerns there?

Alan Wilson

Not anything significant that we’re seeing. Certainly every retailer is trying to differentiate themselves using their private label. We’re not seeing any large increase in activity and I think most retailers understand that they need a strong healthy brand to bring the innovation to help with their private label as well. We’re not seeing a significant increase in activity.

Jon Feeney – Wachovia Securities

Could you update us on the gravity feed shelving initiative, there’s not really much mention of it and I know we’re kind of getting to the end of the roll out but where do we stand, how’s it lifting your sales?

Alan Wilson

We’re still seeing the same impact that we’ve talked about something in the mid single digits. Obviously there’s a lot of variety depending on the individual customer and an awful lot going on in the analytical base as things change. We’re very happy with it, we are wrapping up our installations, and we’re well over 10,000 stores now and are kind of finishing up the dribs and drabs that are out there.

Jon Feeney – Wachovia Securities

Those 10,000 stores would those be roughly percent of ACV would that be?

Alan Wilson

Total ACV that would be about a third but it would be a little over 60% of our volume.

Operator

Your next question comes from Robert Moscow – Credit Suisse.

Robert Moscow – Credit Suisse

The fundamentals in the quarter were just a little lighter than I thought but I thought your guidance for the second half of the year was pretty robust. Can you tell me in the second half what kind of visibility you have, are customers buying in heavily into your merchandising ideas for the coming season, what kind of commitments have they made to you?

The second question is going to be a little different, what kind of visibility do you have about the Lawry’s business are you meeting with Unilever on a monthly basis, are you getting business updates on that business?

Alan Wilson

I’ll answer the second one first because it’s real easy to answer. We are having very little in terms of conversation on the business, we’re just not allowed to from a regulatory standpoint. We are certainly tracking data that’s in the public domain. That’s about all I’m comfortable talking about Lawry’s.

We do feel pretty good about our merchandising efforts for the second half of the year. Obviously every year, this year is not different in our consumer business the holiday displays and promotions are a critical part of our business. We tend to perform very well with that, its an important category for our customers, it’s obviously an important time for us and we put a tremendous amount of emphasis on that both internally and with our customers and we feel pretty good about our plans for the year.

We do have a good tracking on how that’s going and we just reviewed in our consumer business yesterday and feel pretty good about it.

Robert Moscow – Credit Suisse

Is there anything specific that you’re doing in the second half this year? I remember last year you actually pulled forward a lot of sales into third quarter to try to get ahead of the game for merchandising. Do you have the same strategy this year or are you different?

Alan Wilson

We have a similar strategy this year and we expect that to be successful and already have some commitments from the same customer base that we have. That is a display specific program and feel pretty good about it. Also just to remind you we’re continuing to increase our spend on advertising and promotion and we will see that in the second half. We’re doing both from a retailers standpoint a good effort on displays as well as the investment in advertising and promotion with consumers.

Robert Moscow – Credit Suisse

Does that mean if we’re forecasting third and fourth quarter that in years past fourth quarter has been the much bigger of the two I imagine it will be again but do you think the growth third quarter to third quarter, fourth quarter to fourth quarter will be comparable to last year. Do you see any big mix shift between third and fourth this year?

Alan Wilson

As we said we expect the third quarter to have a lower growth this year because of our advertising and promotion spend and a higher increase in the fourth quarter.

Robert Moscow – Credit Suisse

What about the sales?

Alan Wilson

We expect sales to be pretty robust in both quarters.

Gordon Stetz

Obviously foreign exchange has been helping us in the first half of the year and the comps on the foreign exchange get different in the fourth quarter. The impact on the fourth quarter from FX we would expect to be less.

Operator

Your next question comes from Chris Growe – Stifel Nicolaus.

Chris Growe – Stifel Nicolaus

I want to ask one follow up quickly on the Lawry’s and then I had one other question. On the Lawry’s transaction the fact that you’re now under review is there an explicit timeframe that you should expect to hear back on that review or is it just sometime soon, is that the hope?

Alan Wilson

As we said, we expect this to be done in the second half of the year and now that we’re in the second half of the year it’s progressing as we would expect but there’s not a specific timeframe.

Chris Growe – Stifel Nicolaus

I wanted to ask you mentioned increased distribution in the consumer business in the US and I’m curious was there one large customer there, maybe perhaps when you’re getting back into there, can you discuss it in any more detail?

Alan Wilson

Sure, its WinCo, it’s a customer that we’ve really never had in the Pacific Northwest and it’s a great growth customer and we’re very pleased to be able to offer their consumers our products and the consumers are responding.

Chris Growe – Stifel Nicolaus

Relative to the European consumer business that had seen some much better underlying growth excluding foreign exchange which seemed to slow this quarter. I wonder if you could talk about the trends in that business, maybe what happened so sequentially to have that business slow.

Alan Wilson

There’s a couple things going on in the business, the business in the UK and France are performing fairly well and business in some of the smaller markets are performing a little less well. We also made a change in our go to market there which has a negative impact on sales as we move from a direct force to a distributor force in one of the countries which will dilute net sales but have a positive impact on our profits.

Chris Growe – Stifel Nicolaus

You mean going forward or you mean just in this quarter?

Alan Wilson

In this quarter and going forward.

Operator

Your next question comes from Eric Katzman – Deutsche Bank.

Eric Katzman – Deutsche Bank

Following up on Rob Moscow’s question regarding the fiscal third quarter guidance, last year you pulled in a fair amount of business and I’m wondering how much of the difficult comp is due to that versus the A&P spend?

Alan Wilson

It’s really more the A&P spend; we expect the early shipment of displays to be similar to this year as it was last year.

Eric Katzman – Deutsche Bank

The early display is not a one time deal; you think it’s now more of an ongoing situation and willingness of the retailers to take that in early?

Alan Wilson

The retailers that took it were very happy with the program and we were happy with the results as well. It’s kind of built in our base now and one of the ways we’re helping to get products on the shelf faster for the holidays.

Eric Katzman – Deutsche Bank

In terms of the US and the competitive dynamics, Tone’s is still out there and then you’ve got all these smaller players that we have a tough time following at best. Can you talk a little bit about how, if you hear, the smaller players in the business are doing given the higher working capital and raw material cost volatility situation.

Alan Wilson

I think it’s a tough environment for everybody out there. We’re certainly seeing no downturn in competition or competitive activity from our standpoint. As you know it’s a really fragmented category with lots of players, a lot of regional players and we’re not seeing any slowdown in their activity. I can’t speak as to how their internal measures are going but we’ve not seen any up tick but we also haven’t seen any increases or decrease in the activity.

Eric Katzman – Deutsche Bank

You mentioned something about how you had negotiated better account receivable terms with some customers in Europe and I think that that’s been a long term problem for the company in terms of working capital and cash conversion cycle. Can you talk a little bit more about that and does that mean that working capital should be a little bit more of a source versus a use?

Gordon Stetz

The answer would be yes. The only caveat would be the pressure from commodity costs on the inventories but it goes back to the McCormick profit initiatives that we started this year. I have to applaud the operating units that have embraced this in terms of looking at the drivers of their working capital and trying to understand the relationships between their actions to drive sales and profit and how they can also manage the balance sheet effectively. It’s been embraced by our operating units and the expectation is that they continue to do better under this metric.

Eric Katzman – Deutsche Bank

What percentage of the overall business is now being run on SAP, however you want to define that?

Gordon Stetz

The majority of the business, off the top of my head probably about 75% to 80% we just went live in Canada as we mentioned in the script June 1. The major operations are now up on SAP we still have to do some of the smaller units around the rest of the world.

Operator

Your next question comes from Eric Serotta – Merrill Lynch.

Eric Serotta – Merrill Lynch

On the consumer business I know this quarter you talked about some gains by private label that were offset by continued gains in your branded business. I’m wondering whether you could drill down a bit more into your branded business, I believe last quarter you talked about actually stronger growth in the Gourmet and higher end type items within the branded business and in the base spices and seasonings piece. What were the trends like this quarter?

Alan Wilson

The Gourmet business grew in the mid single digit and it was because of some increased advertising as well as the launch of some new products we did really well with the Gourmet sea salt in this period. We’re still seeing core gains that are doing pretty well as well and our dry seasoning mix business is also doing very well.

Eric Serotta – Merrill Lynch

Are there plans for another restaging of the dry seasonings mix business?

Alan Wilson

We are just in the last stages of revitalizing the spice and extracts category and the answer is yes, we are working on a revitalization of the DSM category which we’ll start to see next year.

Eric Serotta – Merrill Lynch

The impact of the pull forward of sales from the fourth quarter to the third quarter, my understanding was last year in order to incent customers to take the product early you offered some more favorable receivables terms that led to ballooning receivables balance at the end of the third quarter and you then collected those in the fourth quarter. This year do you still have to offer customers those incentives to take the product early are they taking it earlier because they’re seeing better listings from the earlier merchandising?

Alan Wilson

The program this year is the same that it was last year and should have a fairly similar impact. On the other hand one thing I would point out that even though receivables went up this is product that have to build. It’s either going to be in our inventory and show up there or its going to be in the customer’s inventory with an extended receivable. The overall impact on cash is not that significant.

Operator

Your next question comes from Mitch Pinheiro – Janney, Montgomery, Scott.

Mitch Pinheiro – Janney, Montgomery, Scott

Can you talk about commodity coverage for where you are now for maybe ’09?

Alan Wilson

We generally don’t divulge our commodity cost positions. We work with our customers clearly on the industrial side to make sure that the pricing mechanisms are in line with the coverage but in terms of a detailed position of where we have our commodities we generally don’t talk about that.

Mitch Pinheiro – Janney, Montgomery, Scott

You talked about collaboration with your larger customers as far as purchasing is there a percentage of your business that is done with greater collaboration now that you could share or give us some indication as to how much is more closely tied with one another?

Alan Wilson

I’m not sure how to break out a percentage of that but the things that we’re working on are the large commodities like soy bean oil, flour and dairy that have a big impact on a fairly small group of customers. I don’t have the data to break it out more specifically than that. Those are the key areas where we’re working collaboratively.

Mitch Pinheiro – Janney, Montgomery, Scott

Staying on the commodity topic, there’s always a lag, commodity costs rise and then pricing goes into effect. Has the lag shortened or is there any way you can talk about that?

Alan Wilson

I think our data would say right now that from a pure commodity standpoint that we are pretty well on time with the increases because of the way we’re working collaboratively there’s much much less of a lag than there was last year.

Mitch Pinheiro – Janney, Montgomery, Scott

As far as your ad spending I think I had in my notes that on a full year basis you expected advertising to be up 10%. Am I correct there?

Alan Wilson

Yes, that’s right.

Mitch Pinheiro – Janney, Montgomery, Scott

Has the first half, second half mix, first half was it up greater than 10% or less than 10%?

Alan Wilson

It was less than 10%. If you recall from the first quarter it was actually slightly down in the first quarter and this quarter now has caught us up and obviously the third quarter which we talked about will start to put us on that path towards that 10% growth for the year.

Mitch Pinheiro – Janney, Montgomery, Scott

Would it exceed 10%?

Joyce Brooks

We did share in our remarks that sales promotion and advertising together we expect to increase for the fiscal year at rate greater than 10%. Besides media we’re doing some sampling programs and point of sale material and other kinds of programs behind our brands.

Mitch Pinheiro – Janney, Montgomery, Scott

As far as your shelving initiative you talked about revitalizing the dry seasoning mix areas is there a part two to the shelving initiative are there any learning’s that you have that you’ll re-implement in the existing base and then does that play a part in any dry seasoning mix revitalization?

Alan Wilson

We’re learning all the time with this and certainly as we go forward we’ll be doing tweaks to continue to improve it. There are certain segments that are not as well presented in the set so we’re working on that. We’re working on getting the planograms right. Our big initiative has been to get the stores set over the last two years and now on the S&E its more continuous improvement and response.

On the dry seasoning mix business it was about three and a half years ago that we revitalized it and its time for a new refresh its just part of the cycle and we’re excited about some of the things that we have but we’re absolutely taking the learning’s from the spice and extracts business and the consumer insights that we have an applying those in the dry seasoning mix category. It’s just a part of the cycle. We do this about every three or four years with each of the categories.

Mitch Pinheiro – Janney, Montgomery, Scott

Some of your new products certainly went more premium whether it’s your sea salts and that type of product, have you seen any consumer reaction perhaps negatively given the economic pressures to the higher end or can you talk about that a little bit.

Alan Wilson

Not to disappoint, if you think about the whole trade down impact people are trading down from restaurant meals and they aren’t necessarily giving up the idea that they want to have a nice meal. We’re benefiting in that segment somewhat. On the other hand, because we cross so much of the food segment with the things we’re offering as people trade down from higher end steaks at home to tacos and chili and maybe a cheaper cut of meat. We’ve got our slow cookers and our bag and season line that helps to attack that.

We think we’re well positioned to help consumers with wherever they’re going. We’re not seeing a significant trade down at this point in fact we’re seeing consumers not completely walking away from some indulgence. We’re helping provide fairly inexpensive indulgence.

Mitch Pinheiro – Janney, Montgomery, Scott

Last question is on you unconsolidated operations, can you talk about that a little bit, it was flat in the quarter obviously soy oils go to be having a big impact there. Are there any other factors happening in the unconsolidated?

Alan Wilson

The biggest impact really is the cost of soy bean oil and our Mexican joint venture that’s a big part of the cost structure for mayonnaise and is putting a good deal of pressure on the margins there.

Gordon Stetz

That’s pressure that we would expect to continue through the back half of the year as well.

Operator

Your next question comes from Andrew Lazar – Lehman Brothers.

Andrew Lazar – Lehman Brothers

On productivity and costs saves with the multi year restructuring program starting to wind down this year I was wondering if there was any way you can give us a sense or a metric on how to think about the magnitude of what your ongoing productivity projects look like. Some companies think about it as a percent of cost of goods, incremental cost saves every year or other ways but I want to get a sense now that that piece is winding down how we think about the incremental cost saves opportunity going forward?

Alan Wilson

We haven’t established an external metric to communicate. It’s in the D&A of all of our operations in fairness we probably should start to find a way to help you understand that. I will say that the plants every year look at their per unit cost and seek productivity improvements to offset inflation. Likewise there’s targets in SG&A at each of the operating units to try and grow that less than sales, less than inflation in some cases we try to hold it flat depending on the initiatives.

It’s many and varied across the businesses. I don’t have a single metric that I could communicate to you but we do have the activity through the organization and we do roll it up internally and monitor it to see how we’re doing relative to the cost increases.

Andrew Lazar – Lehman Brothers

Anything going forward that you deem appropriate in thinking about that obviously would be helpful. The last thing would be on the retail side of your business when you think about pricing that you’ve been taking in context with productivity and all the other things you’re doing do you feel like you are appropriately pricing to where the underlying commodity costs of some of your key commodities are rather than to where you may be covered such that when that coverage rolls off you’re in a good place with respect to fiscal ’09 and such from a pricing standpoint given there is some sort of a lag as there always is with pricing?

Alan Wilson

The dynamic in pricing is we work with customers to help them understand the impact of pricing because as you well know we’re at a decent premium to competition and to private label in the market and so we’re really sensitive to maintaining a premium that’s not too high. We want to make sure we stay very relevant to the consumers and especially in a tough time like this. The way we tend to think about it is to manage against that and to help offset the cost increases.

Obviously what you’re seeing is we’re not pricing to margin right now. We are trying to price to recover costs and we think that’s responsible in the environment that we’re in.

Operator

Your next question comes from Robert Moscow – Credit Suisse.

Robert Moscow – Credit Suisse

Could you give us guidance on interest expense for the year it was down about $2 million sequentially quarter over quarter is that trend going to continue or where are we at?

Gordon Stetz

Excluding any impact from the pending Lawry’s acquisition we would expect that similar benefit and trend to continue through the back half of the year.

Robert Moscow – Credit Suisse

Between $12 and $13 million a quarter maybe?

Gordon Stetz

That’s probably about right. Obviously depending on what rates do that’s probably about right.

Operator

There are no other questions in the queue at this time.

Joyce Brooks

This concludes today’s call. Through July 3rd you may access a telephone replay of the call (Instructions). If you have any further questions or points to discuss regarding today’s information please give me a call.

Operator

Ladies and gentlemen this does conclude today’s teleconference. Thank you for your participation you may disconnect your lines at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: McCormick & Company, Inc. F2Q08 (Qtr End 5/31/08) Earnings Call Transcript
This Transcript
All Transcripts