McCormick & Company Inc (MKC) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to your McCormick & Company first quarter earnings teleconference.

At this time, all lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Ms. Joyce Brooks.

Ma'am, you may begin

Good morning.

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 website www.mcCormick.com.

I'm Joyce Brooks, Assistant Treasurer for McCormick.

With me are Bob Lawless, Chairman, President, CEO, Frank Contino, Executive Vice President, CFO and Supply Chain and Paul Beard, Vice President, Finance.

Today we will discuss McCormick's operating results for the first quarter ending February 28th and provide an update on recent business activities and our current guidance for 2003.

Following our remarks, we look forward 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.

Please refer to this morning's press release for more specific information on this topic.

As indicated in the press release, the company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or other factors.

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

Thank you, Joyce.

Good morning to everyone participating in today's call.

Before I go in depth into the first quarter results, let me start with some perspective on this quarter and whether or not it met our expectations.

We realized that we had some tough comparisons for the first quarter of 2003.

Our first quarter of 2002 had exceptionally strong results in both the consumer and industrial businesses.

Consumer results were driven primarily by a U.S. price increase effective March 1, 2002, and customer purchases in advance of this increase.

As a result, operating income for this segment rose 19% last year on a comparable basis.

Likewise, we increased operating income under industrial business 19%.

In last year's first quarter was strong sales and a positive shift of product mix.

Given these tough comparisons we were expecting a low increase in sales and income from our core food businesses.

We expected the opposite from our packaging business where the performance last year was poor.

On the other hand, we did not anticipate the challenges of poor results from our Mexican joint venture.

In summary, for the first quarter, each of the three business segments had a financial performance generally in line with their expectations, while our income from unconsolidated operations dropped below our projection.

With that said, let me provide some details on the results this quarter.

We reported this morning that sales rose 7% in the quarter.

This 7% increase had a 4% impact from favorable foreign exchange rates, 2% from higher volume, and 1% from positive price mix.

Note that the incremental sales from the acquisition of Uniqsauces in mid-January drove about half of the volume for the quarter.

I'd like to discuss the performance in each of our three segments, followed by comments on results from our unconsolidated operations.

We increased sales 10.8% for our consumer business in the first quarter.

Foreign exchange had a favorable impact of 6.8%, with volume contributing another 2.5%, and 1.5% from pricing and product mix.

In addition to the comparison to an outstanding first quarter 2002, our U.S. consumer business results were impacted by three factors.

First, by higher promotional allowances than the first quarter 2002.

I am referring to the portion of these allowances classified as a reduction to sale.

These allowances increased with the national roll-out of one step and growing sauce products.

Also in the U.S. we're impacted by customer efforts to reduce trade inventory.

This last occurred two years ago in the first quarter of 2001.

While action to reduce trade inventory with a one-time reduction to sales, we support these steps, which improve the overall efficiency of the supply chain.

Third, sales were affected by the later timing of the Easter holiday in 2003.

We are seeing these sales come through now in our March shipments.

Looking beyond these factors, we're encouraged by the strength of our store takeaway in the United States.

Across all key channels of distribution, unit sales at retail were very positive in the first quarter.

We continue to implement our SKU realization program in China.

As we discussed previously, we're de emphasizing certainly lower margins and our brand of product lines such as ketchup and soi sauce.

In this quarter, this program reduced consumer sales for the Asia Pacific market was 3.7% in local currency.

First quarter operating income for the consumer business, excluding special charges, increased 5.3%, compared to an excellent performance a year ago.

As noted in the press release, profitability in 2003 was impacted by the sales mix with a lower percentage increase in the United States, as well as by less favorable production costs this quarter.

In addition, we increased promotion and advertising primarily in Europe to build sales of both new and existing products.

Our industrial business has fluctuated in recent quarters as a result of ordering timing and customer promotions.

Starting with the third quarter of 2002, sales increased only 2% and operating income was flat.

This was followed by an extremely strong fourth quarter with sales up 6%, and operating income up 49%.

This quarter, our industrial business growth was more modest with sales up 2.2%, and operating income up 3.6%.

Note this compares to a year ago first quarter when sales rose 8%, and we increased operating income 19% on a comparable basis, excluding goodwill amortization and special charges.

The first quarter 2003 sales increase of 2.2% has a positive impact of 1.9% from foreign exchange and 1.5% from pricing and product mix.

Volume declined 1.2% in the quarter, despite incremental sales from Uniqsauces products.

Performance varied across our different markets and customer channels.

Sales to the food service customers continued to be strong in the United States.

However, the promotional activity of our quick service restaurant customers this quarter did not emphasize McCormick products.

As a result, sales to this customer group were relatively flat in the quarter.

Likewise, sales of snack seasonings were adversely affected by fewer promotional programs as well as lower cheese costs for which we lowered pricing.

Bulk ingredient sales were below prior year in the U.S. due to some unusually large purchases which occurred in 2002's first quarter.

Our packaging business continues its recovery with a solid performance against a weak quarter in 2002.

Sales grew 13.9% based upon higher volumes.

Orders for our two products have strengthened and regained new product wins with current and new customers.

Operating income rose 15%.

In addition to the higher volume, operating margins are better streamlining actions taken in 2002.

As we commented in recent quarters, this part of our business continues to be under close review.

I'll comment next on the situation in our joint venture in Mexico.

As background, this joint venture originated over 50 years ago.

Our partner Herdez manages the manufacture and marketing of many McCormick branded products in this market.

In addition to spices and seasonings, mayonnaise, marmalade and teas are sold, with mayonnaise being the largest selling products.

Our loading position in mayonnaise is periodically challenged by competition.

In the first quarter, our joint venture faced heightened competitive activity but was successful in maintaining market share.

We also had pressure from unfavorable foreign exchange with the peso in the first quarter, although this has improved slightly in the second quarter.

Also impacting the quarter were higher ingredient costs, particularly with soil oil.

A 6% price increase on mayonnaise has been taken and already followed by a key competitor.

Given these factors in our current outlook, we expect 2003 share of income from consolidated operations to be close to prior year results for the remainder of the fiscal year.

Our biggest risk for this forecast would be the deterioration in the exchange rate with the Mexican peso.

Before I wrap up my remarks on this quarter's financial performance, I'd like to comment on inventory and cash flow.

Our balance sheet shows that inventory increased to $347m at the end of 2003 from $282m a year ago.

There are three reasons for this increase.

First, is the additional inventory we carried in 2002 for our B2K implementation.

We expect to work off this inventory as we progress through 2003.

Second, the valuation of our inventory increased, primarily in Europe, as a result of the foreign exchange rate.

Third, the trade inventory reduction in our U.S. consumer business and last year's price increase buy-in resulted in comparatively higher levels of finished goods in our U.S. business.

Due largely to higher inventory, cash from operations had an outflow of $32m this quarter, compared to an outflow of $15m in the prior year's first quarter.

Net capital expenditures this quarter were $19m, compared to $35m in 2002's first quarter.

We also funded the Uniqsauces acquisition for $19m, and repurchased $20m of shares under the company share repurchase program. $121m remained on the purchase authorization at the end of the quarter.

As you know, most of our cash flow occurs in the fourth quarter.

We remain on track to achieve in excess of $100m in free cash flow in 2003.

Let me note that we're defining free cash flow as cash flow from operations, net net capital expenditures and dividends.

I would like to expand upon some business developments mentioned briefly in the press release.

First, I want to share some organizational news and initiatives.

Carroll Nordhoff Executive Vice President is retiring February 1, 2004.

Carol has contributed a number of ways to the success of this company and its enduring spirit.

As a member of the executive committee and board, Carol's leadership has influenced the direction of our strategies and the execution of changes at McCormick.

Carol has afforded the company sufficient time to allow the orderly transition of responsibilities prior to his retirement.

At this time, we've announced Bob Davey will assume Carol's responsibility related to research and development.

A broad organizational change is currently under way.

We're developing the structure for assured services in the U.S., consolidating select services that is were formerly held by our operating units.

These changes are transforming a number of key functions, bringing together groups and utilizing capabilities of the beyond 2000 technology to identify and expand best practices, improve service, standardize business processes and reduce costs.

Speaking of our beyond 2000 program, let me describe where we are in the process.

As we turn to our U.S. industrial business, our critical next step is the fifth GAAP analysis we’re identifying which systems and processes from our prior implementation, better industrial businesses and where we need to fill in the gap.

Following this analysis, we will prepare for go [life] later in 2003.

Overall, we continue to be pleased with the progress of the implementation of B2K and, more importantly, our prospect for improved margins and reduced working capital.

Turning attention to the top line, we have indicated that we expect to grow sales in 2003 at the top end of the 3 to 7% range.

In 2003 due to several successs and positive trends.

First, the Uniqsauces acquisition will add about 2% to sales.

Second, we've been successful in gaining new distribution from competitors in the United States, adding approximately 1% to 2003 sales growth, and another 1% in 2004 as the business is annualized.

This distribution includes the sale of certain brand of products and a line of private labeled products at dollar general stores.

Third, we have benefited in the first quarter from foreign exchange, and believe that the favorable rates will continue at least into the second quarter.

Despite the higher sales, our expectation for earnings per share remains in the 9 to 11% range.

Based on the first quarter results from our joint venture in Mexico, and the low contribution from Uniqsauces fails in this first year of acquisition.

I would like to comment specifically on the next two quarters.

In the second quarter, we expect earnings per share to be at, or slightly above, another tough comparison from 2002.

In the third quarter, we expect to report significant increase compared to the decline in income earnings per share that we reported in 2002's third quarter.

On a year-to-date basis through the first three quarters, we expect earnings per share to increase in line with our 2003 objective of 9 to 11%.

These projections are based on our current outlook for sales and margins in each of the three business segments, including significant support in the second quarter behind the U.S. roll-out of one step and grow mates growing sauces.

It also includes our expectation that income from unconsolidated operations will be unchanged from last year's in the next three quarters.

As for currencies, these projections are based on a favorable exchange rate for the European currencies and a stable Mexican peso.

Let me summarize.

Those who have been on the journey with us the past few years know we've encountered challenges before.

In 2001, it was weakness in demand packaging business products.

In 2002, our UK brokerage business had operational issues.

It appears that the first quarter performance of our joint venture in Mexico is our challenge for 2003.

You also know we worked through this kind of challenge and still met our financial goals.

We will do this again in 2003.

In recent years, our progress in growing sales and profits has certainly been reflected in our share price and higher market capitalization.

In fact, the market cap of this company today at $3.5b is 50% increase from March 2000, just three years ago.

As most of you know, just last week Standard & Poor's added McCormick to its S&P 500 index.

We are thrilled to earn the place among the leading companies in the United States.

Looking forward, we're enthusiastic about the opportunities for growth at McCormick.

We have a tremendous amount of activity in 2003, developing products for each of our three businesses, supporting our core products with merchandising promotion and advertising, gaining [inaudible] distribution, and implementing beyond 2000 supply chain initiatives and our shared services organization.

Together, these activities will make 2003 another record year for McCormick and set the stage for future successes.

Thank you for listening to our comments.

Now, Paul, Fran, Joyce, and I will be more than happy to discuss any questions you may have.

Operator, we're ready for questions.

The floor is open for questions.

If you have a question or comment at this time, press the number 1, followed by 4 on your touch tone phone.

I do ask that while you pose you question, you pick up your handset to provide optimum sound quality.

Please hold while we take our first question.

Our next question is coming from Chris Growe of A.G. Edwards.

Please pose your question or comment at this time

Thank you.

Good morning

Good morning, Chris

I had a couple questions.

The first was on the industrial side.

If you do see a slowdown on the overall food service business now with the war going on and the slowdown we've seen in general across food service.

We didn't see it in the first quarter.

Do you think we'll see it in the second?

You know, we don't see it on the food side of the industrial business.

It continues to be strong through the food service distributors.

As we have mentioned to you before, obviously, we service all of the military commissary on a worldwide basis.

We would anticipate no tail-off in food service.

If there was ongoing weakness in the unconsolidated income, that the base business could potentially overcome that through the year?

It seems you were hesitant to suggest that?

We feel the sales are going to be on the high side of our range.

Secondly, we're going to be in the range of 9 to 11% that we said for the year.

Which would suggest if we match on the unconsolidated line last year's performance, we're going to need some positive input from our core food businesses and our packaging businesses.

We see those coming.

Okay.

And on the SG&A side, probably more a question for Fran.

A percentage of sales was down.

I'm curious, is that, in part, B2K?

Are we seeing those benefits now?

What may be at work there?

A combination of things, Chris.

Our sales grew 7%.

Our SG&A expenses only grew around 6%.

That, naturally, would take you down a couple basis points.

You know, we have ups and downs in our SG&A line.

Our first quarter is our smallest quarter, and small increases or decreases sometimes have large differences.

I wouldn't get, you know, really concerned.

We think we're in line with what we were trying to accomplish in the first quarter.

Okay.

I guess just related to that for my last question would be, in terms of marketing.

You had some pretty strong increases the last few years and you have some new products this year.

Would that rougly grow in line with sales this year?

Yeah.

I would think, Chris, that's a fair assumption.

Once again, it is phased, as I indicated in my comments, it is phased more heavily the first half of the year than it is the second half of the year because of the launch of new products both in the United States and Europe.

That's great.

Thank you.

Thank you.

Our next question is coming from David Nelson of Credit Suisse First Boston.

Please pose your question or comment at this time

Good morning.

Good morning, David

Just a broader topic of how some of our customers book trade spending.

I'm hearing that one area under review is the longer term contracts, the kind of contracts you might have with a retailer that might go three to five years in length.

Are you hearing anything from your customers about changing the nature of your arrangements?

Not at this point in time, David, no.

Most of ours go out three to five years.

We really aren't hearing anything relative to that.

That's the way we continue to do business and plan to do business.

Okay.

In the release you talk about less favorable production costs.

Is that referring to energy?

Could you be more explicit?

Well, in the first quarter, we have, certainly, some production costs that we incurred in the first quarter as a rollover of the variances that came out of the production that we had at the end of the year.

If you remember the year before comparison, remember when we had the strong sales in the first quarter of last year, as people were anticipating the price increase, the protection was full and production variances that flowed in the first quarter were favorable last year.

So, then when you compare that to this year, you know, it's a slight negative effect.

So production costs per unit is really what you're referring to?

Right

Okay.

Thank you very much.

Thanks, David.

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

Please pose your question or comment at this time

Good morning.

Hi, Mitch

What was the reasoning behind the finished goods inventory being up?

Is that just what you mentioned, Fran?

Well, there's really a couple factors.

Number one, with the strong Euro in town, probably a full third of the inventory increase was just [that fast]..

When you compare February to February, we have a build-up of inventory in our U.S. businesses that is went live with B2K.

That's another large factor.

You know, that, plus some trades, holding back some of the sales at the end of the first quarter, that, you know, adds up to a 20 some% increase in inventory, which is unusual

Can you quantify sort of, say, you know, weeks of inventory held by the trade or some measure?

It really isn't, Mitch.

It varies by class of trade that we deal with.

So we really can't give you weeks of inventory.

I think as I said in my coments, you hear trade deloading a lot in the marketplace today.

We haven't heard it or felt it since 2001.

It hasn't been a phenomenon with the way we do business because we're on -- a lot of our customers are on vendor managed inventory.

As a result, it tends to flow through the system quickly

So are you saying, also, it's not just the retailer, but it's in the other channels as well, food service and QSR and --

No.

I meant the consumer side of the business.

I'm sorry.

I apologize.

Are you seeing any changes in the other channels?

No, we're not.

No.

What about -- how does the other JBS or nonconsolidated businesses do outside of Mexico?

How did Japan do in particular?

Japan did okay in the first quarter?

It was up?

It met our particular forecast for the quarter.

Our signature brand joint venture in Florida had a timing issue relative to promotional expenses.

It was down slightly in the first quarter, but nothing of anything major nature, no.

Two more things.

Europe, the consumer side.

It was up, I believe, 7% in local currency.

How much of that was acquisition?

Well, the Uniqsauces acquisition for the quarter added very little.

We had an extremely strong quarter with the Ducros business.

Especially the [devahenay] business.

Once again, we did spend significant advertising and promotion dollars in the first quarter in Europe.

Okay.

Last, are there any raw materials sourcing issues or things you have to deal with relative to the events around the world?

Any issues that you have to be careful of?

Any impact in raw material pricing at all?

No.

As a result of the conflict that we're currently in in Iraq, the answer is no, Mitch.

We, as we said in the first quarter conference call, and it is some part of the inventory build, we've brought in extra material, especially in countries in that area where we do business.

We did that late last year and early in the first quarter, anticipates what's going on today.

There is one commodity we have, which we addressed also in the first quarter conference call, that is, you know, causing us some increase in our particular costs.

And that’s [Pannella].

Thank you.

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

Please pose your question or comment at this time.

Yes.

Good morning

Good morning, George

You mentioned that food service on the industrial food service business on food is holding in.

Snack seasonings was flatish, it sounds like, with little promotional activity.

Could you give us some forward visibility there?

Going into summertime, I would think that the lack of promotional activity would reverse itself.

We anticipate it will, George.

Once again, it's part of the anomaly of our industrial business that we experienced the latter part of 2002 and currently experienced in the first quarter of 2003.

When they promote these items, with us being a major supplier to the restaurant trade, it has a significant impact, most positively when they do it and negatively when they don't.

We anticipate it coming back.

We, -- yes, we do

Beyond 2000, can you give us more clarity on what the go live date might be in industrial?

Actually, there will be several days.

We won't go live with the entire industrial business in one day.

We will be phasing it in latter part of 2000, maybe even some will go into the early part of 2004.

Everything seems to be on schedule.

Lastly, can you give us a comment on the UK food brokerage business?

Is it fixed it?

Is it rebounding or easy comparisons?

It matched last year's, George.

The earnings this year were about the same as they were last year.

That's really -- last year's first quarter was not that bad in the brokerage business it started to deteriorate rapidly in the second and third quarters.

Right.

In the next couple quarters you should see year-over-year gains?

That's correct

Good.

Thanks.

Our next question is coming from Andrew Lazar from Lehman Brothers.

Pose your question or comment at this time.

Good morning.

Morning, Andrew.

You talked about a number of issues in the consumer business.

Sales are up strongly, you know, 10.8%.

We only had around 5% or so operating income growth.

Is there anything else, aside from some of the issues you talked about, whether it is the production costs, that would have impacted that?

Because it would seem like with that kind of consumer number, usually it flows through to be a stronger profit number.

I think what we tried to address, Andrew, was heavy spending in the promotion and advertising line both in the United States and Europe.

I know you're addressing just the U.S.

Correct.

With the launch of the one step and the growing sauces a national basis, I think we shared at the year-end conference call in January, we knew this first quarter was going to be heavy in promotion and advertising.

We've been arranging this for six to nine months.

That's really the main focus.

The other is what Fran described with the production variances we had this year versus last year

And some heavier distribution costs we're still in the process of sending in a down there is ward direction.

We're in expectations with where we thought we would be

One last thing.

You talked about some new distribution.

First off, is this your first foray into the dollar store channel?

Thark.

That is correct, Andrew.

We're very pleased with that.

That will commence shipping with us in the June, July, August area.

The other distribution gains we got, we're not privileged to share the accounts yet.

We will do that at an appropriate time

Great.

And in the dollar stores, I thought it was notable you said it was across your port follow, meaning branded and private label.

I'm wondering if the mix of those things with was kind of, essentially, you what you would expect from other accounts or, if by some reason, doing business in a dollar store is different economically for you somehow, one way or the other.

I'm not going to say different economically.

It’s a different mix.

Stronger private label relative to the sales rather than the branded products.

Once again, dollar stores pick the branded products that they feel they need to for their clientele.

Right.

In the economics, as you noted before, not much of a difference from an economic stand point.

No

Despite the mix difference.

No

Thanks very much.

Thanks, Andrew.

Our next question is coming from Bill Knobler (ph).

Good morning.

Good morning, Bill.

A couple questions.

On the comment about Uniqsauces, if I understand what you said when you were talking about your expected sales gain for the year, you were saying that, alone, would add two 2 percentage points or, roughly, $40m, $45m in sales, correct?

In that range, Bill, yes.

Also, I guess, you also said on the acquisition because, I guess, first year, et cetera, very little impact to profitability but more next year, but it sounded like it's an accretive acquisition even this year?

Yeah.

It's about flat this year.

Okay

You're absolutely right.

It's accretive, very definitely accretive next year, yes.

Okay.

I just wanted to clarify what you again indicated on sales.

You said uniquesauce 2%, new distribution 1% this year, 1% more next year, and, also, a benefit in foreign currency.

So it sounds like those three things alone would give you, perhaps, 4 percentage points before volume growth everywhere else or anywhere else.

If the currency holds, you're absolutely right, Bill.

We're hesitant on the currency because we indicated for the second quarter we envision that, but we sure can't predict the currency for the third and fourth quarter.

Hopefully some of the conflict in the world is over and we'll see where the currency settles out.

Last queation.

You bought $20m worth of stock in the quarter.

How many shares did you buy?

About?

About 850,000 shares, about.

About 850,000.

Did we lose everybody?

At this time there are no more questions that I show.

I'd like to turn the floor back over to any speakers

Okay.

This concludes today's call.

Telephone replay of the call is available through midnight tomorrow by dialing 877-519-4471.

The access code is 365-7901.

You can also listen to a replay on our website at McCormick.com after 2.00 today.

If you have any further questions or points to discuss, please contact us at 410-410-771-7244.

Thank you.

))OPERATOR: Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time.

Have a nice day. --- 0