McCormick & Company Inc (MKC) 2002 Q4 法說會逐字稿

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

At this time all participants have been placed on the listen-only mode, and the floor will be open for your questions and comments following today's presentation.

It is now my pleasure to introduce today's host Miss Joyce Brooks.

Ma'am, you may begin.

Good morning.

And thank you for joining our teleconference.

Please note that today's teleconference is being web cast 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 is Bob Lawless, chairman, president, and CEO, Frank Contino, executive vice president, CFO and supply chain, and Paul Beard, vice president, finance.

The purpose of today's discussion is to share McCormick's operating results for the fourth quarter in year evening November 30, 2002.

An update on recent business activities and our outlook for2003.

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 the securities 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 rate, and current -- currency rate fluctuations.

The company -- whether as a result of new information, future events, or other factors.

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

Thank you, Joyce.

And good morning to everyone listening to today's call.

Again, in 2002, we set several financial objectives early in the year.

I'd like to begin with the comparison of our actual performance to each of these goals.

Our target for net sales growth was between4 percent to 6 percent.

We achieved an increase of 4.6 percent due primarily to volume.

We also benefited from favorable currency exchange which contributed .9 percent.

Net of foreign currency exchange sales rose 3.7 percent.

When we exclude sales from our packaging business, we increase sales of our food businesses 5.4 percent in 2002 and in local currency 4.5 percent.

Through favorable raw materials, increase deficiencies in the supply chain, and increased sales of more value-added products, we improved our gross profit margin by 100 basis points to 36.9 percent.

This was ahead of our goal of 55 to 75 basis points for 2000 up (ph) our third objective was to increase earnings per share 9 percent to 11 percent.

This range was based on earnings per share excluding Goodwill and special charges.

We received increase of to $1.30 from $1.19 in 2002.

On a reported basis, 2002 earnings per share was$1.26, an increase of 20 percent over the 2001 result of 1.05 (inaudible) dollars.

In 2002, we also continued to pay down of debt related to the acquisition of due crow in August of 2000.

At the end of the third quarter, we had brought our debt to total capital back to our target range of 45 percent to 55 percent.

And ended the year at 49.2 percent.

Free cash flow defined as cash flow from operations after dividends and net capital expenditures was $60.9 million in 2002 compared to$38 million in 2001.

As projected 2002 capital expenditures, net of sales proceeds were around $100 million at $104.2 million.

Compared to $111.4 million in 2001.

Cash flow from operations exceeded prior year's cash flow by $19.1 million.

Higher net income and the impact of changes in operating assets and liabilities generated this level of cash.

As we have discussed, the primary reason for the higher capital expenditures in 2002 and 2001 was our investment in beyond 2000.

During the year, we put the backbone of the system in place and moved our largest U.S. business to this new platform, along with several other operating units in some key operating functions.

It has been more than six months since our go-live date, while the expenses incurred during this period were more than anticipated, we were able to minimize any disruption to our customers due to careful planning, extensive training, and a tremendous amount of effort by many of our employees.

During 2002,we began to turn around the performance of the two products portion of our packaging business.

Taxes (ph) were taken in 2001 and early 2002 to adjust our cost structure to the reduced demand for two products, supplies to health and personal care industry.

As a result of these actions, we increased operating income for our total packaging business, 3.5 percent, despite a 5.2 percent decline in sales.

In summary we're pleased with our results for 2002, strong sales in our food core businesses allows us to donate the necessary resources to B2K and to offset performance in our UK brokerage business.

We also benefit from an vine (ph) environment of foreign exchange and low interest rates.

Joint venture income was slightly ahead of our expectations with good results in Mexico and from our signature brands joint venture here in the United States.

Our margin improvement is our fuel for growth.

With 100 basis point improvement in 2002 we were able to increase by 7 percent our promotion in advertising spending in support of our brands and new product introductions.

We also increased our investment behind research and development by 16 percent directed especially towards products for industrial customers.

Again, in 2002, new products developed in the last three years accounted for 10 percent of our sales.

Now, for a few remarks on the fourth quarter.

We had had a solid performance with sales up 7.9 percent, gross profit margin up150 basis points, and net income up 13.1 percent excluding amortization and special charges.

I'd like to comment on the business segment results published in the press release.

We increased sales 6.7 percent for our consumer business in the fourth quarter.

Volume accounted for 3.6 percent of the increase, foreign exchange 2.8 percent, and pricing a product mix, .3 percent.

Pricing actions in several of our consumer businesses around the world were offset in part by an increase in these promotional allowances in accordance with the ITF-0109.

Some of these allowances were in support of core items and others related to the introduction of a large number of new products in 2002.

Operating income for the consumer business excluding amortization and special charges declined 2.7 percent this quarter.

Promotion and advertising support to build brand awareness for core products such as Bag 'n Season and for the introduction of new items such as 1 Step seasoning was one factor.

Second income from the U.K. brokerage business was below 2001's fourth quarter.

Third, we had some higher costs related to B2K (ph) particularly in distribution on logistics.

When adjusted for these factors, the operating income for our consumer business Rose in line with the 6.7 percent increase in sales.

In the fourth quarter industrial business had a particularly performance.

We grew sales 9.2 percent with 5.9 percent of the increase from volume, 2 percent from positive price mix, and 1.3 percent from foreign exchange.

The positive price mix that drove sales had even more of an impact on operating I income.

Excluding amortization and special charges, we increased operating income 48.9 percent.

We had particular strength with U.S. foodservice customers, warehouse clubs, seasonings and flavorings sold to U.S. food processors, and with our customers in the European food service market.

Note that this quarter's results followed a flat performance in the third quarter were operating income on a comparable basis was even with 2001.

For all of 2002, operating income for this business on a comparable basis Rose 18.7 percent versus the prior year.

This follows a strong performance in 2001where we increased operating income on a comparable basis for our industrial business by 20.5 percent.

Fourth quarter sales for our packaging business showed some recovery against a weak fourth quarter in 2001.

With sales growth of 9.4 percent.

Through our streamlining actions, we improved operating income, excluding amortization and special charges, and achieved an increase of 103 percent over a very poor result the a year ago.

Before making some comments about the business, I'd like to comment on the company's pension plan.

The company has made contributions to the plan in each of the past five years to maintain a base funding ratio with our 2002contribution exceeding $20 million.

During the fourth quarter, our actuaries determined that our pension plan liability would exceed the market value of our assets on September 30th measurement date.

As a result, we recorded an additional pension liability on November 30th, 2002,balance sheet.

Based on our current actuary projections with, we expect our 2003 plan contribution to be less than the $20 million contributed in 2002.

As for pension expense, we expect this to increase again in 2003 along with insurance, healthcare, and other operating costs.

Pension can pens was $15.2 million in 2002 and we expect this to increase 60 percent in 2003.

Some of the pension expense increase as a result of the decline in the market value of our assets in 2002.

In addition we've changed certain assumptions for our U.S. pension plan following a careful review.

For 2003, we will use a discount rate of 7 percent, a return on investment rate of 9 percent, and a 4 percent salary scale and a new mortality table.

This compares to the previous assumptions of 7.25 percent for the discount rate, 10 percent for the return on investment rate, and 4.5 percent for salary scale.

While 2002 was a year of strong financial performance, it was also a year of terrific accomplishment at McCormick.

First, our progress was beyond 2000.

In the fourth quarter we turned the corner on implementation and are now pursuing optimization in those operating units on the platform.

Also in 2003 we're proceeding with the next phase of limitation with much more confidence.

Second, our increased activity around new products in overall marketing support.

We increased our new product introductions, including 1 Step seasonings and salt and pepper grinders in the U.S., shot seasoning blends in the U.K., simply seafood in Australia, and a microwave version of Bag 'n Season in China.

Our growing items in the United States and Canada led an increase in 12 percent in sales of these products across all our markets.

In our industrial businesses, new products introduced in the last three years again accounted for 15 percent of current year sales.

In 2002, we continued to have strength in sales to foodservice distributors and warehouse clubs.

For both restaurants and food processors, our value added seasoning sales were particularly strong up 8 percent for the year.

Third, we reached a new level of capabilities of the new opening of our new sensory era in Maryland.

Located in our technical innovations center we believe ours to be the best in the industry.

An ability to provide our customers with consumer preferred flavors.

The activity around new products continues to grow.

Customer visits to our technical innovation center have increased more than 25 percent since 1998.

Across all of our businesses, 10 percent of our 2002 sales came from new products developed in the last three years.

And fourth, we accomplished a number of management changes in 2002.

We expanded Chuck Langmead's (ph) responsibility for U.S. food service customers to include our global restaurant business.

For the first time, we have all channels at service a restaurant industry working together.

In Europe, we moved from a structure by country to a regional organization which improves customer relationships, brand support, and internal efficiencies.

This initiative was led by John Molen (ph) who heads up our European (ph) and Asian businesses.

In Asia/Pacific reason, Tapan Shackabartee (ph) will lead our industrial region.

Sharon Mirabelle's (ph) extensive background and various financial roles will enable her and her organization to identify synergies and best practices across our businesses.

In the fourth quarter, we aligned the functions of operations logistics and through (ph) feature sourcing with finance and global business solutions under Frank Contino.

And in December, we announced that Alan Wilson was promoted to president of our U.S. consumer businesses following Bob Schroeder's announcement he will retire at the end of 2003.

Each of these actions is designed to strengthen our organization, structures and more -- structure us more efficiently, enable us better to serve our customers.

With these actions, we're preparing our next generation of leaders for McCormick.

These accomplishments require careful planning, creativity, discipline, and a lot of hard work.

We at McCormick are -- McCormick are pleased to have made this progress and report a year of record sales and profits in2002. 2003 outlook, with our people, our strategies and our momentum, McCormick is well positioned for growth.

As we look to fiscal year 2003, we anticipate certain challenges and some significant opportunities.

We are cautious about the uncertainty in the global economy.

Many of our customers face fiercely competitive environments.

In the retail grocery industry, quick service restaurants, and even other food processors.

Not only in the United States, but in other parts of the Americas and in Europe.

There is constant pressure on the suppliers to contain costs.

In our own operations we're facing cost increases on a number of fronts, pension expense will increase 60 percent and reduce operating income approximately $10 million as a result of a decline in the market value of our assets and our assumption changes.

In 2003, we face further expense increases in insurance and healthcare.

Raw material costs have risen for basic industrial product ingredients such as so I oil and wheat.

While we have the ability to pass through some of these increases, there is a lack in timing that can cause short-term margin pressure.

For consumer products, we took a price increase in the United States one year ago and have none planned this year.

Pricing will occur selectively in other consumer markets in 2003.

As in2002, we believe it's prudent to provide an earnings per share projection of 9 percent to 11 percent.

Keep in mind that this range includes special charges.

Those special charges are expected to be at the same level in 2003 as they were in2002.

Sales growth should be in line with our long-term objectives of 3 percent to 7 percent and our free cash flow is projected to reach $100 million.

What are the opportunities of McCormick in 2003?

I'll group them into three areas.

First there's innovation and investment to increase sales.

Our opportunities to flavor food have no boundaries.

We can season food for grilling, stir-fry, baking, however you're cooking, add tastes to all kinds of products in the grocery store, frozen foods, cereals, yogurts, beverages and be that favor flavor when you eat out, on the go or buy a snack from a vending machine.

Our development expertise spans all areas of flavor and our sensory skills ensure our products are consumer preferred and likely to be marketplace in winners.

We have strong customer relationships that provide opportunities to move into new and growing areas such as flavored waters, or ethnic menu items.

Innovation and our consumer business led to a number of new products that were rolling out -- we're rolling out in2003 and supporting with marketing programs including growing sauces, 1 Step, (inaudble) and others I mentioned earlier.

We also I implemented a promotional management program that will improve the brand marketing spending as we move through 2003.

As we did in 2002, we will invest opportunistically behind our brands and product development in order to boost sales and maintain our competitive advantage.

Second, we will continue to improve margins.

The organization around supply chain management under Frank's leadership has identified over 100projects to improve efficiencies, reduce cost and working capital.

These include projects in areas such as in bound and outbound freight, our approach to manufacture and warehouse private label products and of additional global procurement activities.

We will identify and expand best practices in various functions under the shared service organization, which was established in 2002.

Our focus on developing and marketing value-added products, which enhance margins is ongoing.

Finally, as we have in recent years, we're carefully managing costs in all areas of our company.

The third area of opportunity is in our cash flow.

We expect free cash flow to reach $100 million in 2003.

Our first priority with this cash is to acquire businesses.

Leading brands in new regions, niche brands in market where we have strong present and industrial business which expand our capabilities and sophisticated flavor solution sin a geographic reach.

Earlier this month we used $19 million to acquire Uniq (ph) Sauces, which complements our current business with the food service customers and quick service restaurants.

It also expands our retail offerings into some niche and wet products with good growth potential.

We are actively looking at further acquisitions.

With any additional cash we will repurchase shares. 100 $41 million remains on our $250 million authorization and absent any significant acquisitions, we expect to complete this current program at the end of2004.

To summarize, the company has effective strategies for growth.

We have set aggressive yet achievable financial goals for 2003.

We have great employees and leadership teams that's focused and energetic.

With respent (ph) organizational changes, we are better positioned to pursue growth (ph) opportunities to increase sales and improve operations in all our businesses.

In conclusion, I'm confident that 2003 will be another year of record sales and earnings for us at McCormick.

Thank you for listening to our comments.

And now Frank, Paul, Joyce, and I will be happy to discuss any questions that you may have.

Thank you.

The floor is now open for questions.

If you do have a question or a comment, you may press the number one followed by four on your telephone keypad at this time.

If at any point your question is answered, you may remove yourself from the queue by pressing the pound key.

Once again, that is one followed by four for any questions or comments at this time.

Our first question is coming from John McMillin of Prudential Securities.

Please go ahead with your question.

Good morning, everybody.

Morning, John.

Congratulations on 2002.

To what extent is that drop in consumer profitability, Bob, due to a lower product mix as you do more private label spices and less branded?

I think as we shared in the sales results, John, there was some product mix in there, but I think the important message relative to our fourth quarter in consumer is that we spent heavily in advertising and promotion for significant number of new products that were being launched in the fourth quarter, but more importantly, into2003.

You said volumes for the quarter were up 3.6and product mix was -

.3, John.

Even though you took pricing that would implement this year, again, I forget what the pricingaction was ...

We reached about 3.5 when you take it across all the line, John, which we did earlier in the year.

I got you.

So 3.5 is in there and then there's a negative impact from mix.

Mix and, John, two things on spending.

I'll just repeat, advertising and promotion spend SPG we had higherand logistic costs as a result of our (inaudible) B2K.

That is not expected to repeat in 2003.

Okay.

Just trying to understand the --certainly, these numbers are good.

I just -- you know, I know a lot has happened since you go kind of came out in may with your new five-year targets.

And you kind of raised a 9 percent to 11 percent growth rate to 10 percent to 12 percent.

And - but normally when companies raise growth rates for five years and to some extent, you know, claim good times ahead, usually that first year in the process they at least do the number.

So I think some of us are surprised even with these pension issues, but some of them had to be known in May.

If I can just hit one or two things that's kind of changed since you came out, and we're not talking about a big change, just 1 percent, but what change since May?

Glad to answer that.

It is about 1 cent a share is but the two items that didn't change for may but continued to be issues, one was (inaudible) brokerage business in the U.K. and continued slow performance of our two products business.

Contrast that also with B2K going live which we didn't predict the expenses as we shared in our conversation call.

The expense ...

Caller: Okay.

You probably want to leave something in the tank for the next four years.

But I'm just trying ...

I think it's a penny, and I -- once again, I would repeat two products, (inaudible) and extra spending on B2K are the reasons that we're not in the 10 percent to 12 percent range.

And maybe you hoped from may till now that those things would get better.

Yes, we did.

Good.

Thank you

Our next question is coming from Chris Grohof (ph) A.G. Edwards.

Please go ahead with your question.

Good morning.

I just had had a question for you to clarify for myself on your earnings guidance of 9 percent to 11 percent.

Would that be off a base of $1.26 per share?

If you're including charges.

For 2003?

For 2003.

Should I use a base of -- I back all those charges out.

I'm sorry.

I usually back out those charges to get the sort of the underlying earnings.

And I have it based on $1.30or $1.31.

Chris, this is Frank.

I really think it really depends on what the whole analyst community is going to do in the future as to how they're going to present predictions of earnings by -- for companies given what the S.E.C. is presently saying has to be reported in Q's and K's.

I guess the point that I'm making, we believe we're going to grow 9 percent to 11 percent whether you start with $1.30 or you start with $1.26, because we think the special charges is likely to be the same amount in both years.

Now, that might be a minor little difference.

Sure.

... on that base, but we believe that whichever number you ultimately start from, we're going to grow 9 percent to 11 percent.

And that would certainly fall in line your (inaudible) saying your charges would roughly be the same in '03 as they were in '02.

Yeah.

Okay.

The other question I had for you is onB2K.

If you could just quantify for me the costs you expect in '03, and I think, as I understand it, you'll have some savings coming through as well.

I just want to get an idea of how those two play out in the coming year.

We really haven't declared publicly the saving stream or the cost streams relative to an individual year except to say that we do have continuing expenses with B2K on the go life projects from 2002 and we're coming on stream with another group of businesses in 2003. (inaudible) so we haven't publicly disclosed yet what those numbers are.

Okay.

And then just a final question on private label.

I'm just curious, by your thoughts on how that business has been performing.

We can see some of the data but your data tends to be better than what we see.

Yeah, the IRI phenomenon which we experienced at the end of 2001 and 2002 because of a decision of one major customer is starting to erode out at end of 2002.

It will normalize itself in 2003.

But those increases from that customer still relevant to IRI.

But I don't need to explain the IRI phenomenon that goes on in the marketplace, except to say this, that we've done a lot analysis on IRI because it's a factor that you have in the public domain.

But if you look at the IRI measured products that are in our U.S. consumer business, it's about 50 percent of our business.

If you look at our total consumer business worldwide, it's about 25 percent.

And if you take the total company, it's between 10 percent and 11 percent of the total company.

So IRI is a nice measurement, but I don't think is reflective of how this company's performing.

So could you give me an idea of how (inaudible) in '02 and what you expect in '03 then?

Private label for us in '02, I mean, you're talking about our share of private label, Chris?

Yes.

Your volume purpose performance in share and I'm of course referring to the consumer business.

Right.

Our volume on private label in 2003 was up --2002 was up slightly.

And 2003 we don't expect anydifferential or change.

There's no phenomenon changing of private label for us.

Okay.

Once again, the major customer that has chosen to increase that particular piece of their business we don't do any work for in private label.

Okay.

Well, I appreciate that.

Thank you.

Our next question is coming from Eric Katzman (ph) of Deutsche Banc.

Please go ahead with your question.

Good morning, everybody.

Good morning, Eric.

Congratulations are in order.

Unfortunately, you seem to be kind of getting caught in the craft downdraft today.

But with regard to the charges, I think you mentioned that you -- the 4 cents to 5 cents of charges will be equal year to year.

What were the special charges for in 2002?

What made up the charges?

What was the reasoning?

Well, the total program that was announced at the year before pretty much had a number of items.

In 2002, a number of it had to do with our Canadian reorganization, if you remember, we elected to close a factory and remodernize and combine a couple factories, you know.

And so that was a portion of the charge in 2002.

We had some reorganization of our sales force in our consumer product it's division which was a portion of it.

And I think those are the major components actually most of it was in Canada for 2002.

And the 2003 charges, what are those going to be tied to?

Mostly international, Eric.

Most of those will be done in our international units, some in Europe and some in Asia.

But we were just haven't publicly disclosed what those are yet.

And the free cash flow that you're talking about of $100 million, that is after the -- whatever it ends up being, 10 million to $20 million cash contribution that you will have to make this year to your pensions?

Yes.

Yes.

Okay.

And then I guess last question, in terms of the overall managing of the business, Bob, you've obviously done a great job, but I guess as John pointed out earlier, you had some difficulties with U.K. brokerage and packaging, you know, may or may not improve depending where the economy goes in '03.

Can you once again kind of talk about your willingness to deal with that and whether it becomes a drag on results?

I'd be more than happy to, Eric.

First of all, in our commitment was we really need to repair these businesses, get them back to where the operating profit levels of historic -- of history kind of said they should be.

Secondly, what we indicated that these are under intense review and scrutiny relative to the portfolio.

And thirdly, they're not going to be a drag on earnings.

But, you know, it continues to just be something that our leadership teams focusing on and we're looking at many options at this point in time.

Okay.

Thank you.

Our next question is coming from David Nelson (ph) of CSFB.

Please go ahead with your question.

Good morning.

First thing about your gross margin expansion, was B2K and your SAP program, say we call it fifth -- excuse me, 50 basis points a year.

How much do you think is coming from supply chain efficiencies in the B2K programs and how much from mix?

It's Bob, David.

Yep.

I would respond that on the industrial side of our business, significant portion of the gain on the gross profit margin is mix because we said we're going to de-emphasize the lower end of the value chain.

Yes.

The savings from B2K as a project yet as we shared with you, really start to accrue '03, '04, '05, and '06.

So historically, you haven't seen many gains from B2K.

We should start to see some in '02 but more importantly o--excuse me '03 and '04 and '05 and '06.

Let me go back ...

Look at the overall supply chain and that's global procurement synergies et cetera.

That's where a significant amount of it has come in the last two or three years.

On a goo-forward basis where do we expect it to go from?

Continuing industrial, a lot more from B2K and a little less from global procurement strategies.

Well, just to pursue that a little further, please, on the mix, notice when IFF released results a couple of days ago, their flavorings business was down 2 percent.

Are you taking share there?

Is that why you seem to be doing better?

What are you seeing there, please?

We're not losing any share, David.

And as I said in the conference call script, our value -- some of the investments we've made over the last two or three years in technology and some of our capabilities here and the United Kingdom have allowed us to increase our partnership with our major customers.

I would say of the new products that are being launched in the marketplace in whatever sector you want to talk about were we're getting more of our fair share of those new product launches.

That's directly attributable to obviously our people but more important to the technology changes and the sensory lab that we put in.

So you're taking share there.

On the B2K, I had in my notes from last quarter B2K was going to cost you2 cents in '03.

So what you're saying is it's it may cost you 2 cents but it's a net positive in '03?

It really depends on how you want to do the calculations.

You know, just from a pure cost standpoint, if you were just looking at the cost side, not the benefits side, incrementally, it will probably cost us another couple cents and the reason for that is the heavy capital expenditures that we've had in the last couple of years now begin to roll in and depreciation.

Okay.

So even though some of the day-to-day expenses are on the decline, the depreciation rolls in and probably costs another couple cents.

Now, if you want to attribute benefits either in the procurement area that Bob talked about or some of the supply chain initiatives, you know, it's a different effect.

But we just are not able to gives pecific guidance there.

Okay.

Would you repeat for me, please, how much cap ex was going up this next year.

It's going down.

Cap ex is going down.

Okay.

$23 million.

That explains it.

Thank you very much.

Our next question is coming from Leonard Teitelbaum of Merrill Lynch.

Please go ahead with your question.

Good afternoon.

Hi, Lenny.

Can you tell us what you have invested in B2K, which always sounds like a sandwich I ought to be ordering someplace, but ...

It's a rock band.

Or that.

Can you tell me how much you've got invested in that, please?

Well, I think to date, you know, just in round numbers, it's near 100.

Okay.

And what kind of a payback are you looking for in that?

Oh, the -- you know, internal rate -- we haven't really disclosed this, but the internal rate of return is much above most things we spend in capital.

All right.

So let's assume that you're looking to get it back in under 5 and probably 3.

As a guess on my part.

We start rolling this in 4, 5, and 6op.

Obviously that's got to be in your growth rate at some point in time.

Are you looking at that as an insulating factor to the growth rate, or is it all rolled up in a 9 percent to 11 percent or 10 percent to 12 percent?

It would all be rolled up in the 10 percent to 12 percent, Lenny.

And don't forget, you got to add in there the Canadian SAP, the European SAP and the Asian SAP launches.

So once again we're still on a journey with SAP.

So to say it's all incremental, you really have to net out the expenses against the gains.

Okay, but the pay billion back on the hundred -- you've already said it's rolled.

I'll follow that up offline.

Let me turn just briefly to the raw material procurements.

How much of it is dollar denominated?

The raw material acquisitions -- sorry.

Let me rephrase that.

How much is dollar denominated?

In terms of our raw ingredients there is a portion that's dollar denominated.

Again, we heretofore have not published that.

But to -

Well, you know where we're going here.

If we have some foreign currency problems on the sales and revenue line, that's one thing.

My concern is if we haven't contracted out beyond are we going to be seeing some gross margin pressure because we're buying with a ...

No, as we have commented on the previous calls, the one thing that we do hedge at McCormick is our U.S. dollar purchase commitments in the future in those countries where we buy some of our raw materials in U.S. dollars.

It's kind of a rolling average hedge program that we look at carefully on the -- on a daily basis.

And we're really trying to protect ourselves, not only against last year, but against our budget.

So even though we might be missing some opportunity, we're not going to get hurt either, you know, when the currency goes in the opposite direction.

I think that's excellent strategy.

Just to finish up on one thing, then I'll get off.

The 9 percent to 11 percent, again depending on whatever base we use, does include the increase in pension and the extraordinary charges you talked about here.

There's nothing excluded from that growth rate.

That's right.

That is correct, Lenny.

We thank you much.

Have a good day.

Thanks.

Our next question is coming from George Askew (ph) of Legg Mason.

Please go ahead with your question.

Yes, hi, good afternoon.

Hi, George.

I wonder if you could give us the latest thinking on your timetable forgo-live for the other phases of B2K.

The comment I would make here is our go-live in June of 2002 was a big event because we really went live with our whole platform and then we added on some of our consumer business units.

Our next rounds of go live will be a little dress dramatic and we will -- less dramatic and we will phase it over time.

We will be able to go a plant at a time or a unit at a time and we already are doing the fifth gap analysis as to planning the timing of that.

So I think we'll go live probably as early as three or four months from now with a very small plant, but the rest of it will evolve towards the back end of the year and maybe the beginning of next year.

Okay.

Good.

I mean, characterize -- what --you know, as of the end of the fiscal year '02, what ending do you think you were in with B2K and what inning will you be in a year from now?

What inning?

What inning.

A third inning or a third of the way through.

I would say we're in the fourth inning if you're going to use a baseball analogy.

Internationally we haven't come up to the plate yet.

And overall, is it safe to say second, third inning?

That's a fair comment, third inning.

... and a year from now, are you at halfway done or ...

We hope to be halfway done.

That would be the vision.

Okay.

Good.

The Uniq (ph) Sauces acquisition, it seems like that in and of itself recognizing that you probably will not have owned it, you won't have owned it for the full 12 months for fiscal '03, but that in and of itself could probably add a point and a half of top-line growth, I think, based on some of the work I've done.

I mean, is that a fair assumption?

And then ...

Yeah, it's a fair assumption.

Okay.

Are we -- how should we look at, you know, top-line?

I know the 3 percent to 7 percent includes acquisitions.

I think if you -- obviously you can add the Uniq (ph) Sauces in there.

And we talked about our base businesses growing where they're going to grow.

We need to be in the middle to the higher part of the sales growth line.

Yeah, okay.

Good.

The past you talked about being -- your business being basically 60 percent value added.

Which I know is an approximation, I believe.

You know, after the end of the '02 fiscal year, can you revise that number for us?

Is it now 65 percent or ...

I think you hit the number right on the head, George.

We had an extremely strong fourth quarter, as I said, in the food service area, service of (inaudible) distributors and with our industrial, especially in the high-end flavors and the seizings component.

So the answer is more like 65.

And it should continue to increase every year.

Someone asked me a question earlier, I mean, that's part of the overall mix transition going on in McCormick.

When you look back three or four or five or six years ago.

I guess there was a question earlier about sort of taking care of under performing businesses.

Potential divestitures and whatnot.

It sounds like the goal is to fix it first, get a good economy behind us, and then sort of reassess.

Is that a way -- one way to look at it?

I would say the -- you know, the first comment is fixit first is very appropriate, and but I think the second two are kind of simultaneous with each other.

Okay.

Good economy and reassess, which is what we're doing, evaluating all the options we have.

Okay.

Okay.

Good.

Thank you.

Thanks, George.

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

Please go ahead with your question.

Yeah, good afternoon.

Hey, Mitch.

Could you give any sort of guidance on how you expect to do by operating segments on a sales basis for '03?

I couldn't hear that.

I couldn't hear you, Mitch.

I apologize.

Could you give us some sense of what the sales growth will be by operating segment?

I guess we -- consumer is in the area of 3 percent to 6 percent.

Industrial continues to be in the 5 percent to 8 percent.

Okay.

And packaging is probably 2 percent to 4 percent.

That probably should add up to about 4 percent to 6 percent.

Okay.

Now, in terms of packaging, I mean, how do you feel about -- I mean, we should I guess given your improved sort of realignment of your cost structure with your revenue, that should have some pretty nice upside in '03.

Is that part of the plan?

Once again, you know, George, of the two businesses, the (inaudible) business had an extremely good year, so we're talking about the packaging business.

Right.

Really the two component.

And we expect that to have improved earnings '03 over '02, yes.

But are we going to see a dramatic increase?

Because the bottle business really did have a good year.

Okay.

How about the -- in the non-consolidated businesses?

Once again, there, you know, as we talked about the positives earlier with someone about currency relative to Europe, we had the negative drain with the Mexican peso, and I think if you do comparative analysis we were about9.2 last year and today we're 10.86.

Obviously currency because of the size of Mexico and are unconsolidated and an area of concern at this particular point.

So what we're trying to say is, flattish to maybe up slightly.

Okay.

Are there any businesses in the unconsolidated that makes sense for consolidation?

Not at this time, no.

Okay.

Okay.

And last question, in terms of your sales assumptions, what is the -- what is your foreign currency sort of assumption that built into these numbers?

Particularly on the euro.

Let's just say this.

We take a conservative approach built into our estimates, as you no doubt know, the European currency a particularly the Euro and pound which are important to us have spiked up at the weakening of the dollar.

I can assure you that our budgets and our projections are not up at those rates.

Okay.

Actually, one final thing.

You mentioned that little cautious on the -- with some of your, I guess, quick serve customers or -- and others in that area as they would start to push back on suppliers to help their own margins.

I mean, is that something - is that something that is -- that you're able to -- do you work with these customers on that or are you able to stand firm?

I mean, how's -- what's the competitive environment?

We really don't share too much of that, Mitch, as you know.

But part of the investment in technology allows us to get a competitive advantage.

Obviously when you come and look at our sensory capabilities and what we can do for our customers and we expect a return for that particular expenditure with our customers.

So I think to some degree, as we've developed these strong partnerships, we're able to sort of weather through any storms relative to push-back on costs.

So I don't consider it to be a major issue at this particular point.

Okay.

Okay.

Thank you.

Thanks.

Once again, if there are any further questions or comments, you may press one followed by four at this time.

Our next question is a follow were upcoming from Eric Katzman from Deutsche Banc.

Just a follow-up on the $100 million free cash flow number.

I assume that that doesn't include any potential benefit from the due crow whatever it was 70 or80 million dollars resolution?

That is correct, Eric.

And where do we stand with that and what would you use that cash for if it did come in?

We are still in negotiations.

The process continues and there's really nothing more to update you on from the last time we talked about it, which would have been in September.

If the cash would come through, we could use that and it may be very timely to fund our B2 expenses in Europe.

Okay.

All right.

Thank you.

Our next question is a follow-up coming from George Askew of Legg Mason.

Please go ahead.

Yes on Uniq (ph) Sauces once again.

At there point, what are the chances that Uniq (ph) Sauces can be accretive to earnings in '03?

And have you -- what kind assumptions have you made the that -

We haven't taken any accretion at all in '03.

Once again, there's many factors going on over there, as I've -- I addressed in the press release with capabilities et cetera.

So there's many programs under way over there, and we would just like to stay with accretive in '04.

Okay.

All right.

Thanks.

Our next question is coming from Matthew Poulin (ph) of Clovis capital (ph).

Good afternoon.

I just have one question for you sort of from a cash flow generation standpoint.

I've noticed over the last two or three years your sort of ratio from cash flow operations from net income has declined slightly.

It's still over one so that's obviously a positive.

But I'm just trying to figure out and reconcile how you sort of get to that $100 million in free cash flow, you know, providing that ratio doesn't sort of improve in 2003.

Well, I think there are a number of ways that - the three primary drivers of the increase will be an increase in cash generated from earnings.

Correct.

From improvement in our working capital, that group of accounts in our balance sheet that comprises our working capital.

Right.

And a lesser capital expenditures.

Okay.

I mean, those three areas will fuel that increase.

Okay.

I apologize.

I missed how much is capex going down in 2003?

$23 million.

Okay.

So for about, what, 105 to ...

70 some, 80, in that area.

Okay.

That explains the difference then.

Perfect.

Thank you.

Thanks.

There appear to be no further questions.

I'll turn the floor back over to you for any further remarks.

Well, this concludes today's call.

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