McCormick & Company Inc (MKC) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the McCormick & Company second quarter earnings conference call.

At this time, all participants are in a listen-only mode and the floor will be opened for questions and comments following today's presentation.

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

Ma'am, you may begin.

Thank you.

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, Frank Contino, Executive Vice President Supply Chain and CFO and Paul Beard, Vice President of Finance.

Today we will discuss McCormick's operating results for the second quarter ending May 31st, provide some perspective on recent announcements and conclude with our guidance for 2003.

At the end of 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 will turn the discussion over to Bob.

Thank you, Joyce and good morning to everyone participating on today's call.

I'd like to start with a discussion of our results for the second quarter.

I'll begin at the top line with sales performance.

In our consumer business, we grossed sales in the United States with new product rollouts for one-step seasonings, salt and pepper grinders and our Grill Mate grilling sauces.

For current items in our U.S. market, sales of branded products such as blended seasonings and sauces were strong during the quarter.

This was offset in part by reduced sales of economy and private label products.

In Europe, the increase in consumer sales for the quarter was primarily in products acquired with Uniqsauces.

For both our Schwarz and Ducros brands, second quarter sales followed a stronger performance in the first quarter.

This is due in part to the timing of merchandising and promotional activity.

In the Asia Pacific region, we achieved double digit sales increase in China despite the SKU rationalization program underway that we previously discussed.

Across all consumer businesses, second quarter volume rose 7.9% and foreign exchange added another 7.1%.

Price and product mix had a negative impact of 4.6% driven largely by a product mix in Europe and the Asia Pacific region.

This is our first full quarter with Uniqsauces business and approximately one quarter of the volume increase related to this acquisition.

For our industrial business, sales rose 7.5% with a 6.4% increase in volume, and another 2.8% added by foreign exchange and a negative 1.7% impact from price and product mix.

Approximately one half of the volume increase was due to the incremental sales of the Uniqsauces products in this quarter.

In the U.S., sales to restaurant customers were particularly strong.

We are supplying seasonings, salad dressings and other new flavors for successful new menu items and are encouraged by the potential of these items.

Despite some new product wins with food processors, we experienced relatively flat sales during the quarter.

Sales to these customers were impacted by order timing as well as price reductions taken in response to the normal pass-through of certain material cost reductions such as dairy products.

Internationally, industrial sales were generally on plan with the added benefit of Uniqsauces.

Packaging sales for our tubes continue to rebound this quarter while demand for bottles was lower.

Looking below the net sales line, gross profit margin had a solid gain of 90 basis points to 35.8% in the second quarter.

This was driven by the strong sales growth at our branded consumer business and more value-added products within the industrial business portfolio.

We are also making more progress with supply chain initiatives in such areas as procurement, freight and forecasting.

I also want to remind that you last year's second quarter margin was impacted by poor performance related to the Jenks Brokerage business in the UK.

Largely in support of new product launches for our customer consumer business, we increased promotion and advertising 13% during the quarter.

Despite this increase, we achieved an increase of 8% of operating income due to higher sales and gross profit margin.

Special charges in the second quarter of 2003 were $1.2 million and had an earnings per share impact of approximately 1 cent.

This compares to special charges of $1.7 million in the second quarter of 2002.

Below operating income, the company benefited from lower interest expense and a lower tax rate.

We have reduced our tax rate for 2003 to 30.9% from 31.3%.

We also recorded $5.4 million of interest income in this quarter.

This was a portion of the $55 million dollar settlement of Ducros purchase price adjustment that we received and announced on April 29th.

Unconsolidated income was impacted again this quarter by our joint venture in Mexico.

As a background, this joint venture originated over 55 years ago.

Our partner [HERDEDGE] manages the manufacturer 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 product.

This business continues to experience profit pressure from aggressive competition and higher raw material costs.

A price increase taken in March offset a portion of the higher costs and has been followed by the competitors.

However, the business has had to increase promotional spending to contend with competitive brands of mayonnaise and other key products.

For the second six months, we expect income from unconsolidated operations to continue to be lower than prior year results.

Let me summarize our results for the second quarter.

The financial performance of our food business was on track with our plan.

In fact, we gained 4.6% in sales volume excluding the impact of Uniqsauces against a very tough comparison to 2002.

This was accomplished despite a reduction in sales to certain customers that are having financial difficulties.

As for the packaging business, lower bottle sales caused profits to be below last year.

Income from unconsolidated operations was again below our expectations for the quarter due to a challenging situation in Mexico.

And we got a one-time benefit from the interest income on the Ducros settlement.

As a result, earnings per share rose 17% versus the modest increase we initially projected for the second quarter.

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

On May 31st balance sheet shows that inventory increased to $385 million from $290 million a year ago.

There are several reasons for this increase, including several initiatives we have underway.

First, foreign currency exchange rates resulted in higher valuation for most of our inventory outside the United States.

Second, we have elected to carry a strategic inventory of vanilla beans in 2003.

Third, we've added inventory of new products to stock the shelves as we gain distribution.

Fourth, product for Uniqsauces is incremental in 2003.

The final factor relates to one of our streamlining actions announced earlier in 2002, which is the consolidation of our facilities in Canada.

In conjunction with this action, we increased inventory levels at this phase of the project.

These are the factors at issue that are causing to us carry higher inventory.

In the second quarter, we were also successful in reducing our inventory in our U.S. retail and food service businesses.

These inventories, as you know, were increased during our initial rollout of the Beyond 2000 project.

We also believe that our B2K and supply chain initiatives will drive long-term inventory reductions.

Foreign currency exchange rate also impacted receivables, which increased to $326 million from $277 million in 2002.

In addition, this balance was affected by incremental receivables related to Uniqsauces.

I'd like to point out that the foreign currency exchange rates have had significant impacts on our receivables.

A disproportionately large percent of our receivables are in Europe where collection periods are longer than in North America.

At May 31st, debt to total capital was 44.9% in 2003 compared to 56.6% in 2002.

The anticipated proceeds from the sale of the packaging business will allow to us reduce the debt related to the Zatarain's acquisition and bring our ratio back in the 45 to 55% target range.

We will also resume our share repurchase activity, which we suspended in anticipation of the Zatarain's acquisition.

Cash from operations was $43.8 million this quarter compared to $45.5 million in the prior year's quarter.

Net capital expenditures this quarter were $21.7 million compared to spending of $38.3 million in the second quarter of last year, primarily related to the expenses associated with B2K.

During the quarter, we repurchased 565,000 shares at a cost of $14 million.

And now have $107 million remaining on our current authorization.

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

Based on our current outlook, we are confident that the free cash flow for 2003 will exceed $100 million.

Please note that we are defining free cash flow as cash flow from operations less net capital expenditures and dividends.

I'd like to focus now on recent announcements at McCormick beginning with our acquisition of Zatarain's.

Zatarain's started as New Orleans base business in the same year as McCormick.

And the brand has similar heritage, reputation and loyalty among customers.

The business is run by a knowledgeable and hard working management team, which we have retained.

The business has had impressive growth of 15% or more over the last five years as the brand has been expanded geographically in the United States, beyond the stronghold in the southeast.

While we believe we can work to improve this penetration in the United States, we are also excited about expansion opportunities in the international markets and more importantly the food service industry.

Zatarain's is an ideal acquisition from McCormick.

Size, strength of the brand, superior margins and most importantly, opportunities for growth

We will continue to pursue acquisitions as an avenue of growth in both our consumer and our industrial businesses.

Our more recent news is regarding the sales of our packaging business.

We recognized for a number of years that the packaging business was not strategic for McCormick.

Many of you on the call today viewed it the same way and encouraged us to take action.

We commented early in 2002 that the business was under scrutiny following a downturn in the industry demand for tubes.

The first step was clearly to get this business back on track.

The packaging management team rapidly responded with effective cost reduction actions to bring margin of the business back on track.

This was followed by an aggressive pursuit of new product opportunities which we obtained with both existing and new customers.

By the end of 2002, the packaging business was gaining sales and operating with improved margins and we were ready to pursue the sale of these operations.

We've had a team working hard on this for several months and has successfully negotiated a wonderful agreement.

We believe that this agreement in the best outcome for all of those affected by the action, the management, employees of the business, the customers and McCormick's shareholders.

We achieved this result through the hard work of many at McCormick in both the packaging business and at a corporate level.

I'd like to express my appreciation to all those involved and acknowledge the role of Bob Davey.

Throughout this process, Bob led the packaging business with Don Perodi and Steve Rafter and together with Paul Beard and those at Corporate, negotiated this agreement.

As indicated in our press release, we expect to close this sale by the end of the third quarter.

Together, these two actions, that is the addition of Zatarain's business and the divestment of packaging have had a number of positive impacts.

We will bring the debt to total capital back to our 45 to 55% target range and be in a position to pursue acquisitions and share repurchase.

While sales of the company will have a net decrease of approximately $70 million, we will have the opportunity to significantly grow the Zatarain's brand.

Gross profit and operating margins will increase as sales shift to a higher margin business.

McCormick will have the additional benefit of a multi-year supply agreement for the future purchase of packaging materials.

And perhaps most importantly, this action brings clear focus on flavor for the management this company.

In order to provide assistance in projecting the impact of these actions, we have posted information on our web site regarding the historical reclassification of the packaging business as a discontinued operation.

We have also updated our guidance in today's press release.

For continuing operations at McCormick, we expect sales to increase 8 to 10% and increase earnings per share at the upper end of our 10 to 12% range in 2003.

These objectives include the incremental benefit of Zatarain's, favorable foreign exchange rates, the distribution gains discussed in the first quarter earnings release, and income from the settlement of the Ducros purchase price agreement.

It also includes our year-to-date and projected income from our joint venture in Mexico.

We still expect to exceed $100 million in free cash flow in 2003 after capital expenditures and dividends.

In summary, as we look back 2003 is becoming an eventful year for McCormick.

We are pleased with the outcome of the settlement of Ducros, successfully completing a negotiation that had been underway for a long time.

With the acquisition of Zatarain's, we have demonstrated our ability to identify and add meaningful business to our portfolio.

With the sale of the packaging business, we have culminated a process of turning around and divesting a non-strategic part of our business.

While we have another six months ahead of us, and our two most important quarters, we firmly believe we're well positioned to meet our objectives and make 2003 another year of record performance for McCormick.

We appreciate your interest and now I'd like to open up the floor to questions.

Thank you so much.

Thank you.

The floor is now opened for questions.

If you do have a question, you may press the number 1 followed by 4 on your touch-tone telephone at this time.

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

Once again that is 1 followed by 4 for any questions or comments at this time.

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

Please go ahead with your question.

Good morning.

Good morning, Mitch.

A couple things, first, so I was for some reason cut off of the call twice.

I can't figure out if it's my phone or whatever, so I missed a couple of chunks of this.

When we talk $1.19 as 2002 continuing operating number, you're now, I guess, suggesting that the higher end of your EPS range for the year on a continuing op basis at the high, let's just say it's the 12% mark?

So somewhere in, you know, adding, you know, we'd be somewhere around $1.33, $1.34.

Is that the right area?

12% would be $1.33.

That's right, Mitch.

Okay.

And for the year, -- and do those -- and the 2002 continuing op does that include some -- does that include, like, the expected benefit of your interest cost savings from last year?

Does that have some implied?

The way --

Use of cash?

The numbers that are restated, Mitch, you take out the entire packaging business.

The only twist there is under GAAP, you have to have an allocated interest for that business and so the earnings of the packaging business would have been reduced by the allocated interest.

Okay, okay.

Mitch, the only comment I would make, too, is we're six months through the year and as we said in the press release and we've said earlier this year is that we have invested heavily in promotional advertising expenditures to launch the new products in the first half of 2003.

And as we move into the end of 2003, if there's an opportunity for us, we'd like to continue the strong investment through additional advertising, promotional expenditures.

Okay.

Okay.

And in the consumer business in the Americas, on the local currency was up four.

What percentage of that was new products?

Specifically, was any of the one-step and/or your new Grill Mates sauces in there?

Mitch, at this particular point in time it's pretty low.

Once again, as we said, we're gaining distribution with these new particular products at this point in time so we really haven't got the full consumer pull on trial.So it's low as a percentage of the 4% growth.

Okay.

And did you comment on the, of the 2% in Europe, is Uniqsauces part of that?

That is correct.

Is that all of that?

No, that's not all of it, no.

Okay.

Okay.

All right.

Thank you.

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

Please go ahead with your question.

Hi, good morning.

A few questions.

I guess, first Fran, what would the second quarter have been with packaging as discontinued operation in terms of -- and are you going to provide that income statement?

That should be out on the web site now.

We posted one set of reclassifications, financials last night and it's been updated this morning to include the second quarter.

Our 28 cents would be 26 from continuing and two from discontinued.

Okay.

So a total of two cents from packaging?

That's right.

Okay.

And then in kind of to fall back on what Mitch asked, the $1.19 includes the 3 cents charge, special charge, that you took last year.

So for those of us that were using $1.30 as a base, we would go use $1.23 or $1.22 or so, is that correct?

Yeah.

Okay.

All right.

And then, you know, I've had some questions already from some clients this morning about, you know, the growth rates off of the new base and kind of where earnings are going.

Perhaps you can kind of take this opportunity to talk about, you know, what kind of assumptions you made in terms of uses of the cash, how kind of conservative are you here because it seems like with Zatarain's adding 6 to 8 cents accretion and the packaging business maybe being less than that, we should assume that numbers here at least going forward still look pretty decent.

Yeah, you know, we'd like to sum it up by saying this.

On a lower sales base, we will make the same or more profit after all financing costs.

So net-net, these two transactions are accretive, and we'll probably be embellishing those details as soon as, for one, packaging becomes a closed deal and we have a better estimate of our overall plans for the future.

But on a net basis, these two transactions are accretive to the corporation.

And part of that is because you are going to get the supply agreement with packaging with the new owners is going to be pretty positive for you?

It will be a favorable impact of the new long-term supply agreement with packaging business.

Okay.

And then just, I guess, a last question here, you know, I know that the people have been negative on your stock are going to question about the income from the Ducros piece that's kind of flowing through the interest line.

But obviously, I mean that's obviously cash and we can count on that, correct?

That's correct.

And how long -- what kind of benefit are you getting from that this year and what assumptions have you made for that over time?

Well, first off, the interest, I want to make sure that everyone knows it's exactly 2 1/2 cents.

We have to round that up to 3 cents when we talk about it, but it's actually 2 1/2 cents, right in the middle.

And remember that $5.5 million of interest income is only one component of the $55 million cash that we received on the settlement.

By the way, with today's Euro rates that's closer to 57 or $58 million U.S. dollars.

We already have plans to reduce debt with those proceeds so there would be a very positive impact of receiving that cash.

Sounds like Ducros is the gift that keeps giving.

Okay, thank you.

Thank you.

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

Please go ahead with your question.

Good morning.

Hi.

I have a couple of questions for you.

For starters, is there any concern at all about FTC clearance here, this sale of packaging?

No, there is not.

Okay.

On the tax rate, is that sustainable now that you are looking at roughly 31% for this year?

Should we assume that for '04?

Yes.

Okay.

In terms of the America's region, pardon me if I missed it, but could you give a rough breakdown your, well, your U.S. business of volume and price mix?

For the quarter?

For the quarter, yes.

And you want America's consumer?

Yes.

The volume is up 6.7%, and the price is a negative 2, unfavorable 2.9%.

Okay.

And then my last question was, generally on the industrial side, we've heard a lot from other companies, you know, generally weak food service results.

I know you had, you know roughly 1% increase on the Americas side, but are you assuming that will continue through the year through 2003?

Yeah.

On the food specific food service side, we anticipate that continuing as a trend for the rest of the year, right, Chris.

You mentioned strength in the restaurant sector, though, was that offset --

We continue and once again, food service for us is the food service distributors which is impacted, as we said in the conference call script a little bit by some financial difficulties of one customer in that segment.

Okay.

And just the last question then.

If you could generally assess trade inventory levels, have you seen any big change there perhaps going down?

Retailers trying to get a little inventory out of the system for any reason?

I think there's trade inventory shifting going on because of some of the closing of distribution centers because some of our trade partners are in financial difficulties.

The answer to the question is, yes, there is lowering trade inventories.

Okay, thank you.

Thank you.

Our next question is coming from Carla Taylor of Kenwood Group.

Please go ahead with your question.

Hi, congratulations on the strong quarter.

I was wondering if you could comment on the possibility of increasing your interest in your Mexican JV to offset some of the cost pressures via high ownership?

No that's not something we're working on right now at all, Carla, but what we are doing as we indicated in the previous conference call, Mexico is under tremendous scrutiny right now relative to all aspects.

We've had people down there, we've had people back up there from their organization to really lend some of our expertise from the consumer business to help combat the competitive effort and really look at a way of taking more costs out of that business.

That's been our successful formula here at McCormick and we're going to leverage that through our Mexican joint venture.

Okay, thank you.

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

Please go ahead with your question.

Good morning.

Good morning, David.

Trying to clarify a couple things.

First of all, if we've gotten 2 1/2 cents worth of income here this quarter from Ducros, you know, a couple more quarters, let's call it 7 1/2 cents, that would be over half of your EPS growth this year, is that correct?

David, the 2 1/2 cents we got in the second quarter is a one-time event.

Okay.

That --

I thought that was interest income on the $55 million?

For the 2 1/2-year period it took us to get it.

Okay.

It was a one-time shot.

Okay.

And then, in terms of accretion, you're guiding to $1.33 now versus, it had been $1.45 before?

That's correct.

So I'm having trouble in terms of seeing how the sale of packaging is accretive if we have that sort of EPS --

You have to understand that we're taking, I mean, we still have the earnings of packaging, it's just that they're treated on a different light so the number --

Okay.

So it's below the line.

Is really talking about continuing operation.

Okay.

Thank you.

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

Please go ahead with your question.

Hello, everybody.

Just two questions on the quarter.

Fran, when you said you expected at the start of a quarter a modest earnings per share increase, did you factor in the purchase price adjustment, the expected purchase price adjustment?

No, we didn't know about that at the time.

So, if you take this 2 1/2 cents out --

Yeah.

You basically did what you said you did?

Exactly.

Okay.

And just in terms of I'm just trying to get sales.

If you take the 5% out for currency, which is, you know, roughly 27, $28 million.

Uh-huh.

And just try to get some internal sales numbers, then Uniqsauces was what, about $10 million?

Six.

Six did you say?

Six.

I said six, John.

Okay.

I'm just trying to get an internal sales number.

So basically, if I strip out $34 million, you know, sales weren't up much for the quarter in apples to apples basis, it was up --

Between 2 and 3%.

2 to 3%, John, based upon the second quarter of 2002, where we had the buy-in for B2K especially on the consumer and food service side.

And industrial was high in that quarter, also.

You know, we think that the unit volumes that we talked about, you know, just now in the conference call are impressive given the fact that we just have a really tough comparison to last year.

Okay.

I was just trying to get the internal sales number.

You're right with the number, John, of 2 to 3%, but if you just use that in isolation, we've got to compare that to the second quarter of 2002, which was an extremely strong quarter on the consumer and food service side because of B2K.

And if you average those two years, be closer to 5 or 6% for both periods which we're pretty pleased with.

Okay.

And I know you are nice enough to give us accretion numbers for acquisitions, and I know there's a lot of moving parts, but the dilution you expect from this packaging divestiture alone would be what?

About 2 to 3 cents.

Okay that's all?

Once again, John, we have to, you know, take into consideration, you know, the financial benefits of the multi-year supply agreement that we got.

When you add it all together with the cash in the multi-year supply agreement, then --

I don't mean to play devil's -- we're kind of going -- I don't mean to play devil's advocate.

I do think to take a capital gain or purchase price adjustment in the first paragraph of your press release and talk about an offset tied to a Mexican joint venture.

Your Mexican joint venture is part of McCormick forever.

It's an operating factor.

I just think the talk of that as an offset to a purchase price agreement, you know, it just kind of leaves me feeling the wrong way.

I don't know.

I mean it's more of a comment than a statement.

If Eric can make comments, I can.

I think, John, we're a large global company and we have lots of parts.

Granted, the one-time adjustment, you know, does not relate to our ongoing business, but we're fortunate to have that come in a period when we're having, you know, a tough period with the competitive environment in Mexico.

It wasn't intended to mean that one offsets the other.

And again, I see your point if you see mine.

As you look to '04, you're making some projections here, Bob, about, you know, can you just kind of help us with an EPS target?

I mean, all of us have to kind of come out with numbers, where you feel like '04 might come in putting all of the -- I mean, you've got your moves all set up.

As we indicated, John, was at the high end of 10 to 12% range.

Once again, as I said before, until we get better visibility of our '04 expenses and budgeting process, that's what we're prepared to provide at this particular point in time.

And it's at the high end of the range.

And I think Mitch said that was 11, 12%, that's the high end of our range.

And that's for '04?

That's for '04, yes, John.

Thanks a lot.

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

Please go ahead with your question.

Yes.

Kind of a couple of detail things.

The UK brokerage business, can you give us a bit of an update of that a year from the time of trouble?

It was about flat for the quarter, George.

Okay.

Once again, it's under tremendous scrutiny right now.

Okay.

Was there a SARS impact in Asia particularly on the industrial side?

I didn't hear.

SARS in Asia.

Yes, there was on the fast food side and the restaurant side, yes, there was.

Uh-huh.

Are you seeing that abate at this point?

A little, yes, we are.

Okay.

And then I believe in the first quarter, you had indicated that the snack segment, snack seasonings business in the industrial business was flatish as I recall.

And correct me if I'm wrong there, but can you give us an update on that?

Was there seasonality that's picking up there as we go into the summertime?

There's two factors that you've got to consider here.

One, it has to do with the types of products that our customers promote if they're promoting the types of products that we supply the seasoning, certainly we'll do better.

And, you know that goes up and down.

But another factor is, cheese, which is a factor, or an ingredient, is being -- is probably at a low point in terms of costs at the present time.

And since our industrial business is based on cost plus, that's not a factor of why the sales are down.

Even though the units may not be down but sales value is down.

I got you.

So volumes there are hanging in?

Well, it's a combination of both factors, but I think the cost is certainly as large as the other factor.

Okay.

And then you mentioned your higher inventory tied to vanilla.

Can you just expand on that a little bit and what you are seeing in the, you know in the vanilla market and the sourcing?

Well, we indicated in the last conference call, George that vanilla pricing had gone up.

The costs are going up.

It was a supply and demand situation.

We see continued escalation in the costs of vanilla and as a result, we've decided to take some inventory and to do two things.

One, make sure we have inventory for our customers and two, make sure we have the highest quality inventory to provide our customers.

Can you give us a little bit of visibility?

I mean, do you feel like you've effectively hedged yourself against those higher costs for the rest of the fiscal year for example or is there a way you can quantify that inventory?

Well, I think we're prepared to say that a very large amount of our inventory increase, I mean period over period, I guess our inventory increased about 95 million and some 25 or 30 million is a result of vanilla.

That's two factors.

The price was much higher than it was last year.

The cost is much higher than it was last year.

But as Bob said, we've made sure that we can honor our commitments to our customers through the spring of next year.

And as a result, I wouldn't call it a hedge against the pricing.

What we're more concerned about is that we are the source of high-quality vanilla for all of our customers that need vanilla and the manufacture their products.

Gotcha.

Excellent.

Okay, nice quarter.

Thank you.

Once again, for any further questions or comments, you may press the number 1 followed by 4 on your touch-tone telephone at this time.

Our next question is coming from Gary Gilbin of C.L.

King and Associates.

Please go ahead with your question.

Yes, hi.

Just a couple of clarifications, please.

The 2002 restatement to reflect the packaging as discontinued op, does that reflect application of the $133 million up-front proceeds against that or, you know, is it, should we think of it as a pro forma thing or have you only subtracted the interest that was used in supporting the packaging business?

Yeah, the 133 doesn't affect it at all.

The generally accepted accounting principles require an allocation of interest to the discontinued business.

So it's just an allocation of the interest we already had.

Okay.

So that sort of base from which to build the earnings growth rate and projection is really, it would be reasonable to think of it as something that could be higher because you haven't really applied the cash proceeds in that presentation?

No, but I think numbers that we're talking about on a going forward basis with the accretion does give effect to, you know, the financing costs associated or the interest income associated with those proceeds.

Okay.

I see.

Thanks.

And then what is your stance on repurchases at present price levels?

Well, we have a stated objective of where we like our debt to total capital to be and based on the cash flows that we have coming from the rest of our business, the $55 million and the proceeds from the sale of packaging we're probably in a position that we can resume our stock purchase programs sometime in the near future.

And, you know, at this price, we can still continue to buy.

Okay, great.

And just a final.

You said in your prepared remarks what the amount of repurchase was and the proceeds used for that in a quarter, but, you know, like others, I had some transmission problems.

I didn't get the numbers.

107 million to purchase from the authorization we have.

Okay.

But I thought you said that you purchased a certain number of shares.

In the quart quarter, we did, yes.

We repurchased 565,000 shares at a cost of $14 million.

Okay, thanks.

That's what I didn't hear due to technical problems.

Thank you very much.

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

Please go ahead with your question.

Good morning.

Good morning, Andrew.

Bob, I just want to take a quick step back from some of the recent transactions and really just get back to the core sort of U.S. retail business and just get a sense from you on, you know, the health of that, you know, the category as a whole, if you've seen any changes there, plus or minus and I think you mentioned in your remarks about your value and private label business being off this quarter.

Just, if you can get back around that for a little bit of extra information?

Sure.

Once again, we also said, Andrew, because of some of the financial difficulties with some of our customers --

Right.

That had an impact on the quarter, also.

Yep, yep.

But to do a comparison between '03 and '02, as I talked with John about, you know, we had a strong second quarter in 2002 because in the consumer business because of the buy-in.

This particular quarter is strong driven by new products and some new customers that we acquired in the first quarter and some continued strength in our branded products and the categories we participate in.

Once again, minus some of the difficulties associated with our customers that are struggling at this particular point in time.

Right.

And the volume of the products themselves continue to be very strong.

And in terms of I'm assuming, you know, a view of the sense of where the category's been and given you've posted strong volumes, is that basically you are continuing to take share pretty consistently?

We're taking share gradually.

As we mentioned before, we start to ship to Dollar General stores some in the second quarter but mostly in the third and fourth quarters.

That's a positive gain for us.

And we mentioned in previous calls two other smaller chains that we acquired distribution from.

So it continues to be a journey, if you will.

Right.

And then I know that you start to lap the modest price increase that you took last year.

I know that's not pricing meaning it's not a big part of your sort of growth plan going forward.

Has the competitive environment allowed its pricing essentially been let's say flatish as a category?

Have there been any other moves?

[INAUDIBLE] is a fair comment.

Once again, we took one last year.

But once again, we've just about lapped that.

Right.

Once again, the third quarter, as you look toward the third and fourth quarter, you know, we have once again lower comparisons and better comparisons versus our business in the third quarter last year.

Thanks a lot.

Okay.

Our next question is coming from a follow-up, Chris Growe of A. G. Edwards.

Please go ahead.

Thank you.

I just had a follow-up question for you relative to your earnings guidance and some of the comments you've made.

Do you expect any additional charges this year to come through in the next, say, couple quarters?

Charges for what?

You pick it, Fran.

Restructuring, or whatever it may be.

No.

Okay.

Unless you're talking about the streamlining actions that we've been incurring special charges?

Yes.

And like the $1.2 million this year.

Will there be more of those to come for the remainder of the year?

Our guidance was the level of special charges in 2003 would be similar to the level we had in 2002.

So, you know, there will be some additional impact going forward for the total year.

That's already baked into the guidance that we give.

Okay.

What I'm getting at is, like if you had a, I was using $1.23 from a year ago and I'm trying to understand what the guidance is for this year based on the growth rates you've laid out for the year.

If we said it was $1.19 a year ago and that grossed 12% to $1.33 --

You can apply our guidance to either number.

I see.

That's what I was getting at.

[INAUDIBLE] similar levels, yeah.

Great.

Thank you.

Our next question is coming from Eric Katzman of Deutsche Bank, another follow-up.

Please go ahead with your question.

Frank, can you just kind of give us an outlook in terms of on a, you know, go-forward basis assuming that packaging is the last big adjustment here to the portfolio, what's going to be CAPEX, what's going to be depreciation and amortization, just help us there?

I think, you know, both of those numbers should settle in about the 80 range.

Okay.

So they should roughly equal each other is what you are saying?

Yes.

Okay.

And then obviously packaging, I guess, was a, you know, a bit more of a working capital intensive business.

Is that fair to say, and therefore, should you get some extra cash flow benefit from better working capital management?

I don't think so.

I think it certainly, as you know had lower margins.

We'll get an uplift in all of our comparisons, you know, in terms of our margins.

It was labor intensive, and sometimes needed large amounts of capital, But other than those, I think the working capital improvements are really going to come from the rest of our business.

Okay.

And then just kind of follow up on Chris' question and I guess John's question.

Just so I'm clear here, even though I know this quarter is kind of one, seasonally small and two, not indicative of what's going to happen in the future, but you had the 2 1/2 cents from the Ducros catch up and then you had a 1-cent hit from the special charge.

Is that all in -- that's all in the 28 cents reported, right?

Well, the 1-cent from the special charge, you've got to understand, there was approximately 1-cent in the year before as well.

Yeah.

But it's all in there.

It's all in the 28 cents.

Okay.

All right.

Thank you.

There appear to be no further questions at this time.

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

Well, this concludes today's call.

A telephone replay of the call is available through midnight tomorrow night Monday by dialing 877-519-4471 with an access code of 3657901.

You can also listen to a replay on our website after 2:00 P.M. today.

Please note that McCormick's third quarter earnings release is currently scheduled for September 24th.

And if you have any further questions or points to discuss regarding today's information please contact us at 410-771-7244.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful weekend.