McCormick & Company Inc (MKC) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the McCormick third quarter earnings review conference call.

At this time, all participants are in a listen-only mode.

Later we will conduct a question and answer session.

I would like to turn the call over to Ms. Joyce Brooks.

Ms. Brooks, you may begin.

Good morning and thank you for joining our teleconference.

Please note that today's teleconference is being Webcast and will be available for audio replay at the McCormick Web site, www.mccormick.com.

I'm Joyce Brooks, Assistant Treasurer for McCormick, and with me are Bob Lawless, Chairman, President and CEO; and Fran Contino, Executive Vice President and CFO.

The purpose of today's discussion is to share McCormick's operating results for the third quarter ending August 31, 2002 and an update on recent business activity.

Following our remarks we will respond to your questions.

Before we begin our discussion, please note that during the course of this conference call we may make projections or other forward-looking statements within the meaning of section 21-E of the Securities and Exchange Act of 1934.

Forward-looking statements are based on management's current views and assumptions and involve risks and uncertainties that could be materially affected by external factors such as competitive conditions, customer relationships and financial conditions, availability and cost of raw and packaging materials, governmental actions and political events, and general economic conditions including interest rates and currency rate fluctuations.

The company undertakes no obligations to update or revise publicly any forward-looking statements whether as a result of new information, future events or otherwise.

At this point, I will turn the discussion over the Bob.

Thank you, Joyce, and good morning.

Let me begin by stating that we've made good progress towards our goals through the first three quarters of 2002.

We've increased net sales 3.2 percent, gross profit margins 70 basis points, and earning per share 8.7 percent on a comparable basis, excluding goodwill and special charges.

We are particularly pleased with these results.

During the period when we implemented beyond 2000 for the first time in several of our U.S. operating units, experienced continued weakness in our packaging business and faced some challenges from our U.K. brokerage business.

In fact, through the first three quarters our core food businesses, consumer industrial have performed very, very well.

Excluding the impact of the U.K. brokerage business, we grew sales 4.6 percent.

And excluding the favorable impact of foreign exchange, 4.1 percent.

We improved gross profit margin by 100 basis points and increased operating income 12.7 percent on a comparable basis excluding goodwill and special charges.

As you will recall, at the end of the second quarter we projected a reduction in third quarter sales and earnings based upon customer purchases in the second quarter in anticipation of

implementation on June the 5th.

We also expected earnings to be impacted by incremental expenses related to

implementation and by continued weakness in our U.K. brokerage business.

In our June conference call we provided some background on the U.K. brokerage business and I would like to briefly cover this again.

This business came to McCormick through the acquisition of

in 1984.

This part of our business serves as a broker for several major consumer goods manufacturers.

It is not essential to McCormick's core business, but has been part of our U.K. business for the past 18 years.

We believe that the issues that arose in 2002 relate to the firm which provided distribution services for this business and our decision last year to out source customer service to the same firm.

We have now completed the transfer of customer service back in-house and moved the distribution function to a new firm.

However, as projected, the disruption to our business during the third quarter reduced earnings per share by one cent.

This followed an impact of two cents in the second quarter and brings us year-to-date impact of three cents because of

.

The sales buy-in related to

also had an impact inline with our expectations lowering our EPS in the range of two to three cents.

Interest expense was favorable this quarter adding one cent to earnings as a result of lower debt and lower ratings.

Income from unconsolidated operations was down six percent, primarily in Mexico joint venture due to foreign exchange and a more difficult economy.

Including Mexico, total sales for unconsolidated operations were down three percent for the quarter.

Our full year outlook for unconsolidated income remains relatively flat with last year.

The company's

joint venture was acquired with Ducros in 2000.

This

business performed very well in the third quarter as evidenced by the 56 percent increase in minority interest.

Let's take a look at each segment for the third quarter.

In local currency, sales in our consumer business declined 1.5 percent in the third quarter.

Our U.S. consumer business sales benefitted at the end of the second quarter as the number of customers purchasing an additional product on our

go live date of June the 5th.

Following this buying activity, sales for the U.S. consumer business declined 4.5 percent with the impact occurring in the early weeks of the third quarter.

Given the quarterly fluctuations, a year-to-date comparison eliminates the sales buy-in impact and provides better visibility.

Through August 31st, year-to-date sales in our U.S. consumer business were up 3.7 percent, driven primarily by higher volume.

A portion of the 2002 increase comes from new products, such as the salt and pepper grinders, new Hispanic products and Grill Mates grilling sauces.

Consumer sales in Europe rose 2.8 percent and included the benefit of some new

label business in the U.K.

Sales in the Asia Pacific region were effected by strategic initiatives underway in China.

We're de-emphasizing some of our less profitable products in that market, such as ketchup and soy sauce, in order to focus on our core products such as spice and seasoning mixes, which have higher margin.

Excluding goodwill amortization and special charges, operating income for the consumer business was 3.9 percent below last year's third quarter.

Operating income was effected not only by lower sales, but also by startup costs related to

and core margins in the U.K. brokerage business.

Again, excluding goodwill amortization and special charges, operating margin for the third quarter was 12.4 percent, down 80 basis points from 13.2 percent in 2001.

However, when the U.K. brokerage business is excluded we had a 30 basis point increase in our consumer margins despite significant costs associated with the

conversion.

Following two strong quarters, the sales increase in our industrial business was more modest this quarter.

Sales rose 2.2 percent and the local currency 1.2 percent.

Performance by region varied.

In the Americas, sales in local currency were unchanged from the prior year.

As projected, sales to our food service customers were weak in the third quarter following some

buy-in at the end of the second quarter.

Sales to restaurants and other consumer products companies offset this decline led by sales of snack seasonings.

Year-to-date in the Americas we've increased sales in local currency by 5.1 percent.

In local currency industrial sales in Europe rose one percent due to the competitive marketplace and lower pepper pricing.

In Asia Pacific we continue to benefit as our strategic, multinational customers grow in these markets.

We grew sales in this region 11.6 percent in the third quarter in local currency.

In recent years we have improved our industrial business margins, particularly in Asia Pacific.

Despite the increases, in the third quarter lower sales in the Americas and higher sales in Europe and Asia Pacific reduced the overall operating margins for our industrial business.

Operating income was also effected by higher investment and product development aimed at potential new products and by implementation costs associated with

.

As a result, third quarter operating income had a slight decline of .3 percent excluding goodwill amortization and special charges.

On the same basis, however, year-to-date operating income was up 8.6 percent and operating margins rose to 10.6 percent from 10.2 percent in the prior years.

Sales in our packaging business continue to be weak and recovering of demand in the health and personal care industry remains slow.

This quarter sales declined 3.9 percent, but operating income rose 12.7 percent excluding goodwill and special charges.

Our operations have worked diligently to reduce costs and we're continuing to seek ways to temper the impact of lower production levels in our plants.

As a result, we are now operating at a better margin.

Excluding goodwill and special charges, operating margin for the quarter was 13 percent compared to 11.1 percent a year ago.

Let me comment on our progress with cash flow.

We define free cash flow as cash flow from operations less capital expenditures and dividends.

Because of the higher

capital expenditures in 2001 and 2002, free cash flow was and is expected to be in the range of $20 to $50 million.

In 2002, most of the capital expenditures related to

occurred in the first half.

In the third quarter, cap ex was only 16.7 million compared to 28.5 million in the same quarter last year.

Year-to-date, capital expenditures were 91.8 million.

Beginning in 2003, capital expenditures should be back to the level of depreciation which we expect to be around 75 million.

As a result, we project free cash flow to be 100 million or more in 2000 and beyond.

With our aggressive pay down of debt, we have reached our target range of 45 to 55 percent per debt to total capital earlier than expected.

At August 31st, our ratio was 54.3 percent.

In the recent financial press there has been reference to a potential purchase price adjustment in connection with our acquisition of Ducros, which took place in August of 2000.

This adjustment is referenced in our 2001 annual report acquisitions footnote.

The acquisition agreement which describes a purchase price adjustment procedures was filed as an exhibit to our Form 8-K dated September 15th, 2000.

The Form 8-K can be found on our Wed site.

In an announcement by

that it had signed a definitive agreement to acquire

,

stated that the payment to

stockholders would be increased by the amount up to 77 million Euros upon the resolution of purchase price adjustment claim against

, which is now in arbitration.

That is that the amount of our claim will result for less than 77 million Euros.

The purchase price to be paid to the

stockholders could be increased by an amount equal to the difference.

Also,

recently publicly disclosed that it has recorded a reserve of 40 million Euros for our claim.

The amount we have claimed as a purchase price adjustment is approximately 155 million Euros.

We have no idea how the 40 million or 70 million Euro amounts were developed.

This adjustment procedure has been underway for more than a year and is currently in litigation.

We cannot offer any guidance on the timing or eventual outcome except to say that we've properly calculated the adjustment in accordance with the acquisition agreement and we are continuing to aggressively pursue the claim through arbitration.

While any adjustment to the purchase price resulting from the arbitration proceedings would result in a cash payment to us, the adjustment would reduce the purchase price for Ducros and therefore would be recorded as a decrease in goodwill.

The adjustment would have no current impact on McCormick's net income.

I'd like to comment on a recent organization change in the company and conclude with our comments on the fourth quarter.

McCormick has had success in increasing margins with an emphasis on higher margin products and through a number of proven initiatives.

As a further commitment to improving our margins, we announced an organizational change last Friday.

Many of you know that Fran Contino currently leads our finance and global business solution functions at McCormick.

We are expanding Fran's responsibilities to include strategic sourcing, operations and logistics.

We believe that together, these functions are critical to achieving the highest level of customer satisfaction and most importantly, cost optimization.

There are significant opportunities to be gained in these components of supply chain together at a time when the capabilities of

are unfolding.

In the last four years, Fran has successfully championed a number of key initiatives at McCormick.

I am convinced that Fran's leadership will bring focus to the knowledge, capabilities and drive of our key managers and employees and they will continue to grow gross profit margin and operating profit margins.

As you know, our fourth quarter's our largest in terms of sales and profit.

A successful fourth quarter at McCormick is the key to a successful year.

And we're poised to have a strong fourth quarter.

In regards to our

program, we've gotten past the critical implementation period.

Employees in many parts of our organization work through numerous integration issues.

We were able to minimize the impact of customer service during this period and our team has worked diligently to resolve many key issues and most importantly, refine our processes.

At this time we expect minimal disruption to our operating units involved in this first implementation of

.

We are approaching the 2003 conversion of our industrial business and 2004 conversion of our international businesses with greater confidence.

Based on our current outlook for the fourth quarter, actions taken to adjust our packaging operations to lower volume should result in a stable performance.

The U.K. brokerage business results will likely be weak again this quarter.

As we've said, each of these businesses remain under close review.

During the upcoming holidays consumer interest in our products reaches a peak.

Shoppers are loading their carts with products like spices and extracts for the holiday baking, gravy and sauce mixes for a special meal, chili and taco mix for a quick meal on a school night.

In markets around the world we are ready with the right products, effective merchandising and strong grant support.

For example, we will advertise our 'Bag'n Season' line throughout the United States in the fourth quarter.

The TV ads will feature the convenient preparation and quick cleanup of 'Bag'n Season.'

We know from past experience that this is a product line that responds well to advertising.

We have several new products in the stores this season. 'One-Step' seasonings are now in most of our customer stores here in the United States. 'One-Step' seasonings are designed to provide a meal in 30 minutes that will require just a few ingredients and most importantly, will taste great.

Customers have responded enthusiastically with their initial orders since our first shipments in mid-August and we've already reached our target sales for the year.

In the U.K. we launched a new product under the Schwartz brand called 'Shotz.'

in a small

that serves two, these seasoning blends are designed for 18 to 30 year olds who perceive cooking to be hard work. 'Shotz' come in fun flavors like sweet

, dry, sizzling salmon, seven pepper steak.

In our industrial business we're actively pursuing a broad array of growth opportunities with our strategic multinational customers.

These include many new development projects, geographic expansion and a broad array of flavor solutions.

We are working to provide our restaurant and food processor customers with consumer preferred flavors - flavors that will build their sales in a tough, competitive environment.

Sales to our food service customers, broadline distributors and warehouse club stores have particularly good momentum going into the fourth quarter.

Given all these factors, our sales in the first weeks, we are projecting a strong performance in the fourth quarter.

As a result, we expect to meet our full year objective of four to six percent sales growth, 57 - 50 to 75 basis points of gross margin improvement and nine to 11 percent of EPS increase, when measured on a comparable basis, to exclude goodwill amortization and special charges.

We are indicating that we have more confidence at the lower end of the EPS range.

This is based on the sum of our current fourth quarter projection and our year-to-date EPS result of 75 cents.

Note that our guidance at the lower end of the range is still in line with the current 2002 fiscal year consensus of $1.30 when compared to the prior year result of $1.19.

Looking at just the fourth quarter on a comparable basis, our guidance indicates that we expect EPS to increase approximately 12 percent above the prior year of 49 cents.

We believe that 12 percent EPS growth in our largest quarter will be a strong finish to our 2002 fiscal year.

Let me summarize and conclude.

Three things give me confidence that 2002 will be a record year for McCormick.

First, the continued strength of the flavor business and our leading position in key markets.

Second, incremental margin improvement through the supply chain optimization and higher margin new products.

And, most importantly, our capable, hardworking, enthusiastic employees worldwide.

Thank you for listening to our comments today and now Fran, Joyce and I will be happy to discuss any questions that you may have.

Thank you so much.

Thank you.

We will now begin the question-and-answer session.

If you have a question, you will need to press the one on your touch-tone phone.

You will hear an acknowledgement that you have been placed in queue.

If your question has been answered and you wish to be removed from the queue, please press the pound sign.

Your questions will be queued in the order that they are received.

If you are using a speakerphone, please pick up the handset before pressing the numbers.

Once again, if there are any questions, please press the one on your touch-tone phone.

One moment please.

Our first question comes from

from A. G. Edwards.

Please state your question.

Good morning.

Good morning,

.

Good morning.

I have a couple questions.

First off, I wonder if you could help me on the consumer division - I guess, more so the America's division.

If I look at that business, I think you had a four percent in this quarter - a four- percent sales decline.

Was there any pricing involved in that and then, perhaps, you can tell me how the volume did in the same regard?

As you know,

, we took a price increase earlier in the year.

Right.

And that basically flowed through the system.

So there's no pricing.

It's all volume.

And once again, if - you know, the result of the third quarter is directly co-related to the impact in the second quarter volume, relative to

.

So, I'm still confused.

Are the price increases in - earlier in the year - is there - there is no - technically no pricing in this quarter?

No, there's not.

OK.

And then the other question is on the prepaid allowances.

I heard it was down, sequentially, by about $15 million.

What is it work there, in that regard?

We - early on in the year, I think we mentioned on this - first quarter and second quarter conference calls we had some contracts that we had negotiated where prepayments were made.

Obviously, when you compare third quarter this year versus third quarter last year, it was less - much less activity.

Right.

Purely a factor of timing.

OK.

And then, I guess, along those same lines, working capital, if you could address that.

I think, if I look at it from a receivables and inventory standpoint, it was up pretty

in each case.

Well, actually, as you have been following the foreign currencies, two of our currencies have strengthened against the dollar.

A large part of the increase is actually, on a comparative basis, is from the

movement of the pounds and the euro.

Other than that, there's nothing ...

Purely translation then, really.

Yes, you'll also note is that the payables went the other way also.

Right.

OK.

That makes sense.

Thanks so much.

Our next question comes from

from

.

Please state your question.

Yes.

Hey, good morning.

Good morning,

.

Good morning,

.

In the industrial - third quarter of the industrial business, what were some of the - up two percent or so - what was the reasoning behind that again?

I mean, having trailed down from that, you know, plus six, plus seven area you had been trending?

You're talking about sales ...

Sales.

... in the U.S.?

Yes.

Yes.

Well, actually, for the entire ...

OK.

For total - but if we look to the sales in the Americas, which I think we said in the quarter were flat, two of our units were units that went live in June 5.

And one of the units had a large buy-in in the second quarter.

So that deflated our U.S. sales.

In fact, there was a decline in sales there.

But it was more than made up by strong sales for the quarter in restaurants and snack food seasonings.

But, in general, around the world, the sales in the third quarter were lower.

But as we also reported, on a year-to-date basis for the entire group, sales are up 5.1 percent, which, you know, is right at our goal.

So ...

, it's Bob.

Just another comment I would make.

As we start to prepare for

'03 in industrial, some of the early on expenses hit in the third quarter for industrial business.

Just like they did a year ago in our consumer businesses.

So there is nothing systemic wrong with our industrial business that would cause us any concern.

OK.

I guess my confusion was when you had mentioned that you'd be - that the industrial business is going to go through the

conversion in '03, I wasn't sure why there was a buy-in in this year's third quarter - or, you know, in the second quarter.

Remember food service business, distributor and clubs in our industrial P&L.

OK.

And, you know, they buy significant volumes.

OK.

How about commodity costs?

What - anything to note there?

There's really nothing of note.

We call them really neutral at this point in time.

But the one phenomena that we've experienced throughout '02 and will go into '03 is significant increases in vanilla.

And that's driven by the instability in Madagascar.

Supply is not a problem, but, once again, vanilla prices are going up rather dramatically.

Other than that, pretty much neutral.

OK.

How about - any sort of market share data that you can share on the - on your dry seasoning mixes and overall spice categories?

There really isn't much change from a market share perspective here in the United States.

I would say Ducros continues to increase market share in France, Belgium and Italy.

And Schwartz continues to increase market share with the securing of a private label contract in the United Kingdom.

But pretty stable here in the United States.

OK.

Well, thank you.

Our next question comes from

from Deutsche Bank.

Please state your question.

Hi.

Good morning, everybody.

Good morning,

.

I guess the first question is can you quantify what the impact was of

, in terms of expenses?

Last year, as it started to hit consumer on a per share basis, I think you indicated, in total, it should be about three to four cents this year.

And then, as you roll it out in '03 and '04, what should be the expenses associated with that?

And I assume it's a - it should diminish over time.

Well, actually,

, the U.S. consumer business has now achieved its highest level of expense in the year 2002.

The increase in 2003 will be minimal because ...

Yes, but I'm talking about in total on a consolidated basis.

OK.

As we go into 2003, there will be slightly higher expense as we bring up the rest of the industrial business as -

.

But again, we've begun to charge all the units, even the ones who haven't gone live with the backbone portion of the development of this project.

And that reads through in depreciation.

So, there will be some incremental increase.

I expect it to be no more than a penny and maybe two.

But it would be between a penny and two for next year.

And we've had some additional spending this year - more than we expected - during the period of stabilization.

And we would call that a penny as well.

So, 2002 - maybe your total cost was four cents over the year and 2003 is a penny or two?

Yes.

I think it's pretty close.

OK.

And then, I guess, Bob, to the extent that you're talking about - I guess, grooming the next group to, you know, run the company in four or five years - not that Fran hasn't done an excellent job.

But why wouldn't you have, I guess, given the sourcing and other responsibilities to, you know, somebody who you are grooming for the - for the future to maybe take over once you retire?

I think,

, the people reporting into Fran are part of that next level of leadership in the corporation.

And with Fran's familiarity, obviously, with

and the whole cost optimization piece that needs to carry on, I just felt very comfortable providing - putting it under Fran to get maximum impact, but most importantly, quick impact.

OK.

And then, I guess, last question.

Now that you're at your, you know, debt to capital targets with, you know, maybe some possibility that you get a cash inflow, which would reduce it even more, depending on how the arbitration goes with

, could you discuss your view on share repurchases?

Do you intend to bring that forward?

You had been saying it wouldn't start until 2003.

I think the first thing we'd like to use cash on,

, would be acquisitions to really drive growth in the corporation and, you know, expand our portfolio.

We've commented everywhere we've had an opportunity that we - our acquisition strategy is much more aggressive today.

That's the good news.

The bad news is we can't share any of it until we actually consummate a deal, which we haven't at this point in time.

But, you know, without an acquisition, we obviously look at buying back shares.

I still think that will start in '03, if our cash position is not altered by an acquisition.

OK.

Thank you.

Our next question comes from

from Prudential Securities.

Please state your question.

Good morning, everybody.

Good morning,

.

Good morning,

.

Fran, congratulations.

Thank you.

Can you break down the sales increase of

in the quarter?

I don't know if you've done it for just - for the volume price currency.

I think it was done by division, but I'm not sure it was done for the company.

Yes.

Do we the new sheet?

Yes.

Well, the 1.7 for the total company - there's a positive foreign exchange in that number of 2.1 percent.

So when you take that out, it's a slight decline.

And within that there's some positive volume and a little bit of negative price mix.

A plus volume and a negative price mix in the quarter.

And again, to follow

, why would there be negative price mix when you've taken pricing?

That would have to do more with the mix of businesses within the quarter.

The U.S. retail is down.

... being weak and, you know, some of the other parts of the business

.

OK.

And the drop in corporate expenses from 8.2 million to 6.5 - that's - percentage-wise it's a big drop.

What's behind that number?

Again, as we report, it's mostly a timing that may have gone into the second quarter.

Another factor there,

, is last year some of the

expenses were at a corporate level and this year we're in the implementation mode, so those are getting charged more so back to the segment.

Yes.

OK.

And the drop in SG&A - the percent of sales.

And that just - is that just the retail business as well - loss retail?

That's one ...

That's one - that's the main factor,

.

Yes.

When you look at - within the brand support, it's slightly below last year's third quarter.

That's going to be up a little bit over last year's fourth quarter so there's, you know, timing of events and new product support.

With

implementation in the United States, our aggressive pursuit of new product, kind of promotions, et cetera, was not as aggressive as it was in previous years.

But as I said in my conference call comments, we anticipate the fourth quarter, on a worldwide basis, to accelerate that because we have a number of new products in the marketplace.

And just, Bob, if you could comment to this point, which has been made by a couple of bysiders.

But, you know, you've had a great five years and I think you've highlighted it.

And even in recent years, it's been one quarterly earning surprise after another - to the point when you report earnings that are just simply on target, like you did today, there's a touch of disappointment and, you know, and certainly, to the extent you're guiding to the low end, there may be some disappointed by, you know, spoiled shareholders that are just used to surprise.

But some people say to me, you know, we've all seen this movie before.

A company takes two price increases, private label gains and suddenly earnings targets become tougher to achieve.

Can you just kind of address that?

I know you have in the past, but just kind of do it again?

Love to do it,

.

I guess, let me start - and I'll try to make it as quick as I can.

We didn't take price increases for five years, so I don't think I would call us as a company of normal.

We took two percent last year and selected five percent this year.

And we publicly stated on a go forward basis, we have no price increase there in the consumer or food service side.

So, I don't think it's the same story as everybody else.

I look at the last four years and the performance of the company and I know you challenged me, quarter to quarter, all of you do, relative to a penny here and a penny there.

Once again, we run the company for the long-term.

We look long-term for the corporation and the growth.

We anomalies this year, which you've all remind us - with the

buy-in in the second quarter, which created a second quarter that looked very different and a third quarter that we projected to be exactly where we said it come out to be.

All along we've talked about being in the range of nine to 11 percent.

I just remind everybody nine to 11 percent is $1.30 to $1.32 - two cents.

With our fourth quarter and the largest quarter we have ahead of us.

Secondly, with some increased advertising, as Joyce and I both commented on.

Mexico, some softness relative to the currency, not of our business base.

We just feel at this particular point in time that the low end of the range is where we see this business going at this particular - and as we view the fourth quarter ahead of us.

We're not apologizing for nine percent EPS growth.

We think that's still pretty strong in the marketplace.

We're excited about what the future is and, as a result of that, if you take, for example, and I know you've all done that and I applaud it - if you take, for example, the impact of

, which you can criticize me on and I accept full criticism - and Tubed Products and some

expenses this year.

Without those - and if you just kind of add those particulars out of the earnings for the year, you're going to see a food business I think is still one of the best performing in the industry in the United States.

Albeit, I accept full accountability for the anomalies at Tubed Products and the anomalies at

.

But at the end of the day, we've got a food business we think is performing very well and I think, for the future, it's nothing but up.

And as you begin to model 2003, and I know you don't give specific guidance until January, would you think more at the low end of that nine to 11?

, I don't think we're ready to comment at this particular point in time except to say that nine to 11 still continues to be a good range for our corporation as we look to move forward.

And, you know, once again, if you think both the process we've been on, the cost optimism, gross profit margin,

implementation going to cost optimization, some of the restructuring that we did in '01 that we said would impact '03, it would be my hope that it would be at the higher end, not the lower end.

Great.

Thank you very much.

Thanks.

Our next question comes from

from

Capital.

Please state your question.

Thank you.

I just was hoping to - two questions.

One - the prepaid allowance has declined sequentially and that was good.

I was wondering, is that a product of some of the contracts that you were currently on maturing or just get into more detail on why that declined.

I guess when you compare one year to the next and, really, prepaids are rolling.

And I think it's two things.

Number one - as we talked about a lot of the flow through of

, which we started five-and-a-half years ago, continues to impact it - the first quarter was up because we had some contract negotiations.

And we should see a continuing trend, over time, on prepaids, flat or down slightly.

OK.

Thank you.

And then, just a housekeeping item.

What was cash flow from operations in the quarter, please?

Thank you.

Cash flow from operations in the third quarter was 18.3 million.

Great.

Thank you very much.

Our next question comes from

from Legg Mason.

Please state your question.

Yes.

Hi, all.

You indicated, Bob, that

would have a little bit more of an impact here or an additional impact in the fourth quarter.

Is it - would it be comparable the third quarter, kind of a penny share or is it ...

No, it's very minimal,

.

OK.

My intent, in the comment, would be that it's not - it's not accretive at this particular point in time, but very, very minor.

OK.

OK.

Good.

What are the next, you know, go live dates for

that we should be focused on?

You mentioned industrial was coming up.

I think industrial will come up fall of next year - somewhere in that range.

We have - actually, we're - we'll be working on that in the next month or so, trying to come up with the exact date.

We're going to get the executive group from the industrial businesses together and we're going to come together with what would be best to be minimal disruption to that business and the optimal time to go live.

Right.

OK.

And then, I appreciate the update on the Ducros purchase price adjustment - arbitration.

I know that there's a court date, apparently, in France in mid-October.

And the

deal, I guess, closes at the end of the year approximately.

Can you give us a sense of timing of what - when you think this arbitration might sort of come to a head, if you know?

, I would love to do that for you.

But, you know, we're two years into it now and, I think as I said in my comments, we're very comfortable with our position.

We're following the contract as explicitly negotiated by the two parties.

And we're confident.

But timing - I just can't give you any better guidance than I gave you in the conference call script.

OK.

OK.

And finally, acquisition activity - you said you were turning up the heat a little bit on that front.

You know, you've talked about, in the past, your criteria there - can you, you know, has that criteria expanded?

Would it include some opportunities, maybe, of a private label side or how, you know, is there change there?

No real changes,

, in really the scope or the priorities.

Industrial's got its set of priorities and consumer has its set of priorities as we reviewed with you before.

But really no change in that.

OK.

Good.

Thank you.

from A. G. Edwards is online with a follow-up question.

Please state your question.

Thank you.

Good morning again.

Just two quick follow-ups.

The first would be how do you feel the trade inventory levels are right now, given that you've had a bit of buy-in in advance of the price increase and in advance of the

.

Do you feel that they are comfortable levels right now?

Very good level right now,

.

Good question.

OK.

Very good levels right now.

We monitored it, obviously, in June, July and August coming out of the buy-in.

And we feel very comfortable leading into our big fourth quarter.

OK.

And the other follow up was just sort of a general question and that is, you know, we've heard more and more about, in this uncertain economy, the consumer trading down.

And I just wonder is you're seeing any kind of pickup in private label that would denote that trend.

We do not.

And, you know, we pack a significant amount of private level for the country.

There is - there was that phenomena late last year and early this year, which we talked about previously.

And, once again, that seems to have stabilized that particular account and as we've said before, we're working very actively to get them back into the branded folds, which will be a journey for us.

In your view, though, the - say, full price branded products seem to be doing pretty well overall.

They are.

Yes.

OK.

That sounds great.

Thank you.

Thanks.

If there are any additional questions, please press the one on your touch-tone phone.

from Deutsche Bank is online with a follow-up question.

Please state your question.

Bob, I know you don't want to be pinned down on '03, but to follow up on

question, I mean, I - just kind of - correct me if I'm wrong here, but if I look into '03, you basically have lower cap ex, so you have an accelerating precash flow.

You've got the restructuring savings coming from the hit you took or the action you took in 2001.

You've got lower, kind of incremental MIS spending on

.

And you have some of the benefits coming through from - I guess, from the savings from - that SAP should and the global purchasing should start to generate.

Are those kind of some of the factors that are kind of leading you to say that that's why the company should perform to meet your expectations on the higher end?

I think that would be a great summary,

.

I don't think I could do it quite as well as you did.

That would be perfect, you know, right now.

You know, once again, another year with Ducros, expanding a fourth quarter where we're going to increase our advertising, we had a whole list of new products which launched in '02, which will all bear fruition in '03 on a worldwide basis.

The industrial business continues to be strong.

Once again, the announcement with Frito Lay and Pepsi that just made their announcement relative to nutritional.

That's a huge opportunity for our corporation because, obviously, that gives an incentive and gives us - a result of our partnership, a chance to use our technical capabilities.

And our

favorable comparison to

, favorable comparison to Tubed Products.

Add all those together - yes.

I feel OK about '03.

I really do.

And like, what can throw it off?

You said raw material cost environment is fairly benign with maybe the exception of vanilla.

So the raw material cost situation looks OK.

I would - I would say the only other wildcard in there is the whole pension and benefits increases in America today, to get a handle on that.

You know, once again, we're not there yet, but that's going to be an increase.

But, as we said before, we're expected to offset those increases with - Fran's going to do that with his new assignment, relative to supply chain.

So, that will neutralize those.

But, you know, I don't see anything right now,

.

I really don't.

And just as, seeing that you said the free cash flow - your priority would be to use - would be - would be to continue to make acquisitions.

Can you just kind of review what that - what your thoughts are on, you know, M&A, dilution and if you're looking at stuff, just in general.

I mean, are the multiples that are being demanded out there for those businesses neutral if you spent the money, accretive at the moment, slightly dilutive - maybe you could just give a - kind of an update there.

I think neutral to slightly dilutive would be the range we would be in at this particular point in time.

But, once again, we said slightly dilutive and EBA positive very quickly thereafter.

And once again, if we don't make acquisitions, as we've said,

, we will commence buying back stock.

We still have the 140 million-share authorization from the board, so there's no approvals needed, relative to the board of directors.

Hundred and forty million dollars.

I see.

Hundred and forty million dollars.

I'm sorry.

Yes.

I'm sorry.

All right.

Thank you.

from Prudential Securities is online with a follow-up question.

Please state your question.

What did currency add to earnings in the quarter?

You gave it to sales.

We're - yes.

We commented on sales, but really, less than 10 cents.

Ten cents, maybe,

.

And as you go through this January negotiation period with retailers that, you know, the supermarkets aren't exactly thriving right now - at least their stocks aren't.

And they're trying to extract as much as they can.

Is this kind of a normal - will, you know, will early 2003 kind of be a normal period of renegotiation for McCormick or is it less contracts coming up?

I know you're reluctant to talk about that file.

But is it kind of just of a normal period?

Because you didn't list that to

in terms of risks.

I would say normal to low,

.

Normal to low period of activity, relative to the first, you know, three.

OK.

OK.

Thank you.

If there are any further questions, please press the one on your touch-tone phone.

Our next question comes from

from

.

Please state your question.

How do you folks expect to handle

?

I think we're taking a look at it right now.

We're still studying it and haven't made a decision.

But we don't expect the impact to be too significant on us.

Do you need further explanation?

In your footnotes, I apologize that I didn't pick it up, but I think you're obliged to mention what those costs are in your annual report and 10-K.

For 2001, can you refresh me on that?

How much earnings cost it was last year?

Yes.

Well, actually, you've got to remember we had a stock split, so ...

Right.

... we have to adjust the number for that.

Sure.

But it is ...

Divide by two.

Yes.

And let's see if I can find that for you.

What page is it?

It's probably - yes.

It's on 43.

The pro forma earnings per share adjusted for the stock options,

, is $1.88.

And what was the reported number?

Let me flip to that - 209.

So ...

So it'd be about five cents a share?

In - yes.

Yes.

That's right.

Yes.

About five cents a share.

OK.

And, you know, I guess the other, you know, thing we're waiting for is something that the accounting regulatory group is looking at, so we're, you know, kind of waiting for what the next announcement is going to say before we would take any action on this.

Are you leaning, Joyce, one way or the other on this or - it's kind of a 50-50 bet at this point?

Well, let me further comment on that five cents.

It's under present guidance that we understand.

In year one, when we record this, it would be more like two cents.

Then it would build to that five cents over a period of time.

OK.

OK.

We're - we participate, as you know, at

through Bob Lawless' leadership and with other industry groups and we're just taking a look at what other companies are doing ...

Right.

... having some dialogue about it, some debate.

And, you know, we're going to do what we think is most appropriate and in the benefit of our stockholders.

OK.

, just to backtrack, the correct stock adjusted number, with adjusted number is 10 cents.

Well, just a word from shareholder, I think you'd be - do well for yourselves if you - if you did do it.

Because then you're, you know, super pure that way.

But, you know, anyway, thank you very much.

Thank you.

Sure.

Thank you.

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Once again, if there are any additional questions, please press the one on your touch-tone phone.

At this time, there are no further questions.

OK.

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