McCormick & Company Inc (MKC) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your McCormick & Co. third-quarter earnings conference call.

At this time, all parties have been placed on a listen only mode and will be open for your questions following the presentation.

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

Ma'am, the floor is yours.

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 Catino, Executive Vice President, CFO, and supply chain and Paul Beard, Vice President of finance.

Today we will discuss McCormick's operating results of the third-quarter ending August 31st and provide an update on business as we move into our fiscal fourth-quarter.

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 for 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 would like to start with the discussion of our results for the third-quarter.

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

As indicated in this morning's press release, there were some significant factors in the quarter that drove a strong sales increase of $80 million or 16.8 percent.

Excluding a positive impact of foreign currency exchange - primarily in Europe - we grew sales 12.9 percent.

As we've discussed before, acquisitions are an important part of our growth strategy and have had a strong contribution to sales in 2003.

In the third-quarter Zatarain's and Uniqsauces contributed $37.9 million in sales accounting for 7.9 percent of our increase.

The sales and profit performance of these businesses were in line with our expectations.

Let's discuss sales for each of our two segments starting with the consumer business.

For continuing operations, and excluding the impact of foreign exchange, we grew sales for our consumer business 23.2 percent.

This compares to a year ago period when consumer sales in local currency declined 1.5 percent.

For consumer sales in the Americas, this year's quarter was up 31.6 percent in local currency with about one-half of the increase from the Zatarain's business.

This increase compares to 4 percent decline in sales in the third quarter of 2002.

In 2002, customer purchases at the end of the second quarter in anticipation of our Beyond 2000 program implementation adversely affected sales in last year's third quarter.

In addition, we benefited in the quarter from new distribution with Dollar General and significant new product activity.

In the United States, our new product focus is on grinders, one step seasonings and grilling sauces.

Salt and pepper grinders is a $15 million category for the U.S. grocery channel and in the 18 months since their induction introduction our products have achieved a 60 percent share with an 80 percent ACD.

This product has an attractive price point and we see more potential for growth as we increase consumer awareness.

Household penetration of grinders in the United States is only 4 percent compared to 8 percent in Europe.

In 2004 we expect to extend this line with some new blends.

We are enhancing our 1 Step seasonings blends to focus our product on flavor varieties versus a specific meal (ph) solution created a broader range of product usage for the consumers.

Today we have reached 75 percent ACV (ph) and are focusing our marketing efforts on the six blends with the best potential for future growth.

Grilling sauces are a $244 million category in the United States and we've already captured the 3 percent share with our grill meat sausages.

Our ACB (ph) is 75 percent and we have an excellent consumer prepurchase rate.

Montreal Steak and Teriyaki are particularly -- particular favorites and there are plans for an additional flavor in the lineup.

We will grow these sales with increased trial and advertising, resulting in better household penetration which is only three percent.

Sales in Europe broke 9 percent in local currency.

This increase was due to incremental sales from Uniqsauces.

In addition, we have achieved some new distribution gains of existing products and are extending our product range in Spain, Italy, and other markets.

In 2003 our team in Europe has been aggressive with new product launches and the discontinuance of certain slow-moving items.

One range of products for salads takes advantage of rapid growth in the bagged salads in the European market.

A line of dressings, seasonings, and other complements for salads were introduced in the UK last year and have been adapted for other markets in Europe with new packaging and flavors.

In France these products are merchandised on a new display rack right in the produce section.

It is the first time we have secured placement outside of the spice and seasonings section for the new growth (ph) brand in this market.

New dessert items under the [indiscernible] brand-name include shake on sprinkles and grinder bottles for blends of chocolate, vanilla, and fruit.

An upscale line of ground pepper under the new program name features different countries of margin.

And new jars of herbs in an oil-base combines for all customers the convenience of dried herbs with the appeal of fresh herbs.

These are some key items launched this year in Europe and are some good examples of our commitment to bring attention and excitement to the category.

In Asia-Pacific region third quarter sales growth of 5.8 percent in local currency was driven primarily by an increase in China.

In China, we grew sales despite the initiative under way to rationalize our SKUs, eliminating some low margin items from our line and focusing on more value-added products.

Before I move onto the industrial business I'd like to comment on vanilla.

Sales of pure vanilla extract are almost 5 percent of our consumer business.

As we noted in the conference call last quarter, the supply of vanilla beans has dropped severely and the cost has escalated and continues to rise.

In response to this higher cost, a significant price increase was taken in the third-quarter on vanilla extract in the United States consumer markets of both the branded and private-label products.

Similar actions have or will occur in markets outside the United States.

Moving to our industrial business, sales rose 7.3 percent and when foreign exchange is excluded by 4.8 percent.

A large part of our industrial sales that occurred in America sales in total were unchanged vs. the year ago quarter.

During the quarter, sales were adversely affected by lower raw material costs in a particular cheese.

As you know we passed through significant changes in raw material costs in our pricing.

So while we maintain profit, we have periods where sales might blends affected possibly or negatively by this approach.

In the third quarter, sales in the Americas were totally unchanged.

However during this period a volume increase of 4.5 percent was largely offset by a production of 4.1 percent in lower prices and the impact of product mix.

As for the volume increase in the quarter, we continued to benefit from the promotional activity of our quick service restaurant customers whose menus and promotions are featuring products that use many of the seasonings, coatings, and sauces we supply.

In addition, we've had some terrific new product successes with family sauces, red toppings, marinades and salad dressings.

In this region, we continue to experience reduced demand from certain consumer product companies, particularly in the snack food seasoning area.

We're fortunate to supply many leading companies and as we look forward, we are confident that some of the new products in our pipeline will become marketplace winners for our customers.

Affecting our broad line distributors and warehouse club business the restaurants served through these channels have had slower traffic in recent orders.

We believe we are recovering as the U.S. economy improves and expect our sales through these channels to strengthen.

Another factor affecting this portion of our business is a reduction in our sales to U.S. foodservice.

Moving onto Europe, the impact of Uniqsauces led to sales growth of 26.5 percent in local currency.

We also benefited from increased sales of snack food seasonings and sales for our restaurant in the third quarter.

In the Asia-Pacific region we achieved 7.3 percent sales growth in local currency.

The impact of SARS on restaurant traffic has eased in China leading to improved sales to quick service restaurant in the third-quarter.

We also had strong sales to our quick service restaurant customers in Australia.

Looking below the net sales line gross profit margin from continuing operations had a gain of 150 basis points to 38.1 percent for the third quarter.

A primary driver of this gain was a strong sales growth in our branded consumer business, including the addition of Zatarain's business.

We're also making progress with supply chain initiatives in such areas of procurement, freight, and production forecast.

I'd also like to point out that last year's third-quarter margin was adversely impacted by higher costs related to our Beyond 2000 implementation.

Year-to-date gross profit margin for continuing operations was 38 percent - an 80 basis point increase over 2002.

Largely support in new product launches for our consumer business we increased promotion and advertising 27.4 percent during the quarter.

As noted in the press release, we had additional increases and expenses for employee benefits, fuel, and warehousing.

We reported 1.3 million in special charges for the quarter, which is a decrease from 2.8 million in 2002.

The earnings per share impact of special charges was approximately one cent in the third quarter of 2003.

I am pleased to report some better news this quarter from our joint ventures.

Compared to 2002 results, unconsolidated income was about even this quarter following a decline of 46 percent in the first half.

In fact, excluding foreign exchange, unconsolidated income would have increased nearly 10 percent this quarter.

Because our Mexican joint venture continues to experience competitive pressure, we remain cautious and are projecting fourth-quarter income from unconsolidated operations to be slightly below prior year results.

Looking at our overall results for the third quarter the performance of our consumer business exceeded expectations while the industrial results were below expectation.

With the net impact of these businesses - along with the improvement in our unconsolidated income - we achieved earnings per share from continuing operations of 28 cents, an increase of 16.7 percent over 2002.

In the third-quarter we reported an additional one cent of EPS from discontinued operations and a net gain on the sale of packaging in the UK brokerage business of seven cents for total EPS of 36 cents.

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

Our August 31st balance sheet shows the inventory remained high at $388 million compared to $298 million a year ago.

The factors affecting inventory levels at the end of the second quarter continued through the third-quarter.

Let me please review them again.

First, we added $54 million of higher costs vanilla beans to ensure an ongoing supply and manage our costs for this raw material.

This supply of beans will carry us well into 2004.

Second, we had $14 million in incremental income related to new products.

Third, foreign currency exchange rates increased evaluation of inventory by $10 million.

And forth Zatarain's and Uniqsauces added $8 million to the inventory.

These factors accounted for all but $4 million of the increase.

These increases are more than offsetting our early successes and reducing inventory through supply chain initiatives.

It is these initiatives that will drive long-term inventory reductions across our businesses.

While we continued to generate strong cash flow from operations, a portion of these funds has been spent on strategic purchase of vanilla beans.

As a result, it is likely that free cash flow will be in a $75 to $100 million range for 2003 fiscal year.

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

Receivables at August 31st, 2003 were $284 million compared to 260 million at the end of a year ago third-quarter.

Of this increase, 14 million can be attributed to foreign exchange rates with the remainder due primarily to the addition of Zatarain's and Uniqsauces.

At August 31st, our debt to total capital ratio was 47 percent in 2003 compared to 54.3 percent in 2002.

The proceeds from the sale of the packaging business allowed us to reduce debt related to the Zatarain's acquisition and returned the ratio back to our target range of 45 to 85 percent.

Net capital expenditures this quarter were $9 million compared to $14.1 million in the third quarter of last year.

We have resumed our share purchase activity and repurchased 210,000 shares at a price of $5.5 million during the quarter.

At the end of a quarter $102 million remained in the $250 million authorization approved by the Board in March 1999.

If there are no major acquisitions in the upcoming months, we expect to complete this program in mid 2004.

Anticipating this completion, the Board yesterday approved a new authorization for the repurchase of $300 million of shares.

Without any significant acquisition activity, we expect this new program to extend into 2006.

In today's press release, we reaffirmed our guidance for results for continuing operations in 2003.

We are growing our core businesses with strategic acquisitions, effective marketing, exciting new products and some new distribution.

Adding to this growth, the benefit of positive foreign exchange, we expect to increase sales 9 to 11 percent, an increase from our previous guidance of 8 to 10 percent.

As for earnings per share, strong sales growth and margin improvement are more than offsetting difficult results from unconsolidated operations in the first half.

With a positive outlook for the fourth-quarter we continue to expect an increase in earnings per share at the upper end of our 10 to 12 percent range in 2003, which is $1.35 to $1.37 on a GAAP basis.

Know that this projection includes interest income related to the settlement of the (indiscernible) purchase price agreement as well as the impact of special charges.

Looking back on the first three quarters I'm pleased with both the business performance and significant accomplishments at McCormick.

The successful settlement of the (indiscernible) first price adjustment, the acquisition of Zatarain's and Uniqsauces, the divestment in the packaging in the UK brokerage businesses have been key events for this company.

We continually improve governance at McCormick and as it's stated and the press release announced, a new outside director and the resignation of two inside directors in advance of their upcoming retirement.

We welcome the addition of Margaret Murray Preston and look forward to benefiting from her financial expertise.

With these changes, for the first time in the company's history, there are now a majority of outside directors on our Board.

Our management team is focusing attention and resources on activities that really make a difference.

All employees throughout McCormick are excited about our progress, working on the right things, and giving confidence of our continued success.

We are a company that is now focused on growing our flavoring business.

We appreciate your interest and would now like to open up the floor for questions.

Thank you.

[Operator Instructions]

Chris Growe of A.G. Edwards.

Good morning.

Can you hear me?

Robert Moskow of CSFB.

(technical difficulty)

Hello, can you hear me?

Your line is live.

Hello, can you hear me?

Sir, your line is live.

I had a question about the stock repurchase process of 300 million - the dividend increase what was it?

Eight percent about?

I was wondering if you had considered increasing the dividend double-digit similar to a few other package group companies out there and perhaps allocating less towards your free cash flow towards repurchasing stock and wondered how you balanced off the two?

Is this Rob?

Yes it is.

It's Bob.

Obviously we weighed everything as we took it into consideration we did the mid year increase in the dividend which I think is closer is 9 percent.

This year we normally review dividend at year-end which we will do again.

I think as we've said in the past, our goal is to get our dividend near the payout ratio and yield that we have expressed before and that is 2 percent and in the 35 percent range and that is a goal we have and are committed to but also we're committed to use of free cash flow to buy back share so I think we will balance both, as sort of the time evolves.

And then another question.

Can you give a little more color on -- you said new products are planned for Q4 to help boost sales in industrial and I was wondering if -- you mentioned a couple of items that seemed to blends already in place in Q3.

Do you have additional items for Q4 that are about to launch or is it kind of an extension of existing items that are already in place in Q3?

I think both, Rob.

The difficulty we have in our industrial portfolio is because of the company (indiscernible) agreements we have with our customers we can't share the exact activity or even product profiles that we're working on.

But our intent was to demonstrate to everybody that even though industrial had a difficult third-quarter, it is a very vibrant business and we see current products being accelerated in the fourth-quarter and also a large number of new products being worked on during fiscal 2003 that we see coming to fruition in 2003 and very early in 2004.

And you think those are going to be a positive to your mix as well?

Yes.

Thanks.

Congratulations and good results.

Chris Growe.

Sir, your line is live.

Can you hear me now?

I have two questions also relative to the industrial business - the first was - as prices are coming down for some of your input sounds like, should we see commensurate volume growth with that?

It sounds like this quarter when you heard about the volume growth [indiscernible] feel better about the business but should we see press more significant increases in volume as those prices come down?

My response -- the commodity prices that we have are price adjusters that move up-and-down so it really doesn't effect the overall volume we sell to them unless they use promotional activity and what you saw in the third-quarter was our customers using promotional funds to promote their products.

Firstly, and secondly, I think as time goes on, we're going to see - obviously - more profit move through in our industrial businesses as these prices settle out.

That was the second part of it.

Was the price decline - as you bring your price down to reflect this - completely offsetting the commodity cost declines or is there some margin creep in there as well?

No there is no margin creep.

And then in terms of just your overall costs for industrial sounds like sort of beyond the commodities fluctuating there was some operational (indiscernible) costs challenges - is that correct as well?

Yes there was.

We indicated - I think - in the conference call and in the press release we had some distribution costs this quarter.

Once again, we're building inventory in the industrial business for the goal (indiscernible) of SAP which is in January March and May of next year so there's some inventory build there which is some extra cost to the company, but distribution costs are up also in the industrial area.

That should come down going forward.

As we go forward, yeah.

Is that related to the SAP going live or just some something separate to that.

I am sorry?

Is it related to the SAP going live for the business or is it separate of that?

Separate event.

That's all I had.

Chris - just one last point I would make and it really pervades the whole company.

We've had employee benefit expenses and pension benefits that obviously impacted industrial and consumer businesses.

Sure - okay.

Matthew Levinson (ph) of Matthew Levinson and Company.

Good morning, gentlemen.

Are there any thoughts you'd care to share with us apropos the possibility of expensing stock options and do you have an estimate for pension expense in fiscal 04?

Currently under expensing stock options that's - I think we've shared before - we have a compensation study underway led by our outside directors to evaluate the whole process of stock options and other alternatives as incentives for the leadership team and employees at McCormick.

I really can't share much beyond that other than to say the process is underway and the outside directors will be the ones that will be writing us guidance and direction relative to the mixup options restricted to stock and whatever else they choose to use.

Any thoughts about pension expense in the next fiscal year - fiscal 04?

Pension expense will again increase in fiscal '04 as it did in '03, but not quite at the rate as it did in '03 but it will still be up again.

Percentage increase or lower percentage increase or lower dollar increase or...

We don't disclose either one, but pension won't be as big a factor on a comparative basis as it was in '03.

Thank you very much.

George Askew of Legg Mason.

Good quarter.

Good morning.

The following up on Chris's question about industrials.

How -- what -- you talked about vanilla within the context of your consumer businesses.

How much has the price increase in vanilla affected your industrial business, has it offset the decline in cheese for example?

And how much of the inventory build in vanilla is industrial related vs. consumer? [indiscernible]

Last one first -- we don't break our inventory out publicly, George, for -- between industrial and consumer, it is very hard on a commodity like vanilla.

So it's -- we just don't share that information on a breakout.

As far as the first part, vanilla is impacting the profitability on the industrial business just like it is on the consumer business.

We're taking price increases on the consumer business to offset it.

And as everyone knows with the price increase in the business sector we're in there's sometimes a lag between costs and gains from a price increase.

On the industrial side, it is more we work through contracts with our customers.

And we end up, obviously, in a period like this or we put price increases through but it continues to be an additional lag and (indiscernible) impact profitability and once again we see that mitigating itself as we move into 2004.

Right - okay.

In shifting to the Zatarain's and Uniqsauces can you give us a sense of the seasonality of those two businesses -- will the seasonality of Zatarain's for example mirror your consumer business on the seasonality basis?

Not really, George, it is pretty consistent quarter by quarter both Uniq and Zatarain's.

There is an increase volume in the fourth-quarter but it's not to the same extents we have in our consumer business.

Good and then last question on the Dollar General business, that new customer win.

Can you give us any early read on the consumer take away there?

Just excellent.

We're real pleased with that - changeover is complete and we're seeing seen some measurements throughout our (indiscernible) that indicate that good brand draw which is good for us.

Good.

Thank you.

Congratulations.

Eric Katzman of Deutsche Bank.

Good morning, everybody.

A few questions.

I think on these calls you used to give us some kind of update on kind of the consumer trends in the U.S. vis a vis the category and kind of and also kind of market share numbers.

I wonder if you could kind of share that with us?

Let me deal with the second one, Eric, first from a market share perspective obviously we're increasing with the Dollar General being an increased account for us we picked up as we indicated two other smaller accounts.

So our marketshares continue to go up slightly.

In the U.S. and, basically, around the world.

We also indicated some increased distribution gains in France, which we acquired during the second-quarter, excuse me, third-quarter.

As far as category performance and our participation in the category, once again, we used to share that and there's one account we know that doesn't participate in that and that's part of why we withdrew from -- because we would give you numbers like our posted and IRI and they're really not inclusive numbers.

We would add to that whatever customer does and once again that's a rounding, but if I looked at the category today and once again you've got to break out herbs and spices vs. dry sauce mixes, the category continues to grow somewhere between zero and 2 percent in that area.

We continue to grow driven by new product anywhere from 3 to 5 percent.

And when you look at it as a whole.

Okay and then including the markets or the channels which (indiscernible) measured at the moment, where would you estimate your share is in U.S. consumer and in Europe?

I am hesitating in Europe - I will do Europe first, Europe I would say we're about between 20 -- I will give you a range because that's the best I can give you -- between 25 and 35 percent.

Okay.

And in the United States if you count the portion of private-label that we pack which is not measured under IRI in the area of 48 to 55 percent.

Okay, and then second question, somewhat unrelated.

It seemed like the tax rate was up about 100 basis points above what we were thinking.

Is that tied to the mix of consumer?

No, it really has to do with the breakout of the discontinued operations.

The tax rate will normalize at the rate that we previously talked for the full year.

So that was about 31?

Yes, 30.1.

It's just an aberration of the reclassification.

Does that mean in the fourth-quarter there's a bit of a pickup?

Unidentified Speaker Well, we fully expect our full year expected rate to be right around that 31 percent so it could blends a slight pickup.

Okay and then last question more of a longer-term question, I guess in the past before you divested the [indiscernible] Jenks business you had talked about the benefits of SAP, and the global purchasing initiatives delivering somewhere between 70 -- 70 plus basis points of margin a year for a few years.

Is that still reasonable on the new -- EBIT margin base?

I think my answer, Eric, would be that as we go through discontinued operations adding Zatarain's and Uniqsauces to our portfolio have vanilla impact in our business relative to 2004, I think the answer is yes but beyond that we really need to look at our strategic plans which are coming in now to give you a better vision, or a better update on what that means.

But gross profit is going to continue to be a focal point in the fuel for providing the expenses from marketing and new products.

Nothing has changed in that strategy.

This [indiscernible]

Okay.

Thank you.

John Mcmillin of Prudential Equity Group.

Good morning, everybody.

Just to go back to Eric's category question because I'm a little confused - I understand Nielsen doesn't measure everything but if I looked at twelve week data that came out this morning and I know that doesn't include your private label, your unit share is off 120 basis points in the 1.8 spices 1.9 billion spices - total spice category.

Private label is up so you might be getting some mix.

Could you just address what we see in measured channels in those unit shares that I'm seeing and what it says about your overall product mix?

John, you have information I don't have as of this morning.

Last I looked at it -- I tend to look at a 52-week and a 26 week, because to me, that's the trendlines that our business operates on.

As you know if you try to evaluate the buying pattern with what we did last year with SAP and the buying patterns that are happening this year with, obviously, some issues in the marketplace we have one major customer that we had last year that we currently don't ship near the same level this year.

And that is a significant factor, not just for McCormick but for all other consumer product companies.

That volume is being dissipated around the United States but it's not being captured 100 percent.

So while you see category growth down, I think a lot of it is attributed to that.

I am talking about market share trends, because if nothing else, forget the numbers, it shows you (indiscernible) the negative product mix with more private label and with some market share losses in measured accounts.

I can't respond to that, John, all I can tell you nonmeasured accounts [indiscernible] up significantly - I can get back to you on that.

No, listen, your numbers - you know more about the category than me, I am just trying to [indiscernible]

(indiscernible) category is growing between zero and 2 percent.

That's the numbers we have and that is the number we're relating to in the United States as I look at category growth all in.

Yes, and I can see that just looking at this category at up one and then looking at nonmeasured.

What I can't see is your 3 to 5.

New products.

That's new products growth.

That are outside this total spice category.

Of course, yes, of course, John, most of it is not captured in the spice [indiscernible] category IRI Nielsen data that are -- the growing sauces, all these [indiscernible] products, the 1 Step seasonings are not captured.

The grinders are not captured in there.

But just in spice is your private-label business now growing faster than your branded business?

No it's not.

It's not.

Not on the 52-week and the 26-week I reviewed probably a week ago or two weeks ago, no. (indiscernible) twelve week phenomena, John, I just haven't got the data.

I'll get back to you.

Now just a second question.

I know rice hasn't gone up as much as vanilla has but to what extent -- since you (indiscernible) Zatarain's in you've see higher rice prices.

To what extent have you locked in those costs and to what extent might that impact some of your projections with Zatarain?

We have locked in some pricing for 2004 on rice and it has gone up, but as we stated in our press release and conference call, John, I'm extremely pleased with Zatarain's and it is nothing but upside for Zatarain's for us, it has impacted not at all.

So that's not had an impact.

No, not in all.

And just the last thing.

I'm trying to reconcile when you said you were going to sell your packaging business, you came out with a specific capital gain number and I guess the actual capital gain number was less than that and I am just trying to understand the transaction a little bit more in terms of why the capital gain came out less and what kind of procurement contracts you made to get maybe plastic bottles cheaper for a couple of years which help your earnings trends but reduced the level of capital gain?

Let me answer the second part of your question, John, and I think we said it in the press release when we sold packaging.

And we're really not at liberty to talk much about it.

We have a very favorable purchasing contract with the person with Kerr Group who bought our packaging business.

And we will just have to see how that plays out.

We just -- you have to take our word on that - it is a very positive negotiation we went through.

I'll ask Fran or Paul Beard or Joyce to answer the others.

I think there may be somewhat of a difference between what was originally discussed in terms of possible capital gains and what it had wound up as but part of that had to do with the 10 million of the purchase price comes over time and not immediately figured into the game as well as there is this give and take between the purchase price ultimately paid in the contract that we entered into.

So -- but it's well in line with what our financial objectives and [indiscernible] are and we think that going forward the impact on earnings and EVA is going to be positive for McCormick.

I guess my point, Bob, was if you take less of a capital gain but get a favorable procurement contract it's no different than what Campbell Soup did six or seven years ago with their -- by selling their can manufacturings, all it did was kind of put earnings in that weren't really earnings, they were just kind of a favorable deal getting less money up front.

John, I think that is taking it to a point where it goes beyond reality.

Our pricing for our packaging material will reflect market pricing and that's about all we really care to say about that.

Our pricing is not unreal.

It is market.

And that was our objective, to get our pricing to what market is.

I was just trying to understand the transaction -- thank you.

John what you might be seeing in the gain loss calculation - we also have the Jenks transaction in there so you get some negative - some of the Jenks transaction that is drawing down some of the gain on packaging.

I think the 9 cents that we've projected is still a good number for the packaging.

And by the time you get to 10-Q, all those details will be disclosed in the [indiscernible].

Thank you very much.

Marshall Jaffe of Ashup (ph).

Hi.

This might be a bit of a blue sky question but I wonder how much of your unit volume growth might be attributable to the state of Atkins dieters, supposedly 1 out 50 American adults are on some kind of low carb diet and would seem the things they emphasize would be conducive to spice and seasoning usage.

I hope you're right.

We haven't actually put that together yet from a strategy and analysis standpoint but all we do know is that as people go on these special diets -- it doesn't matter which diet you go on you need food that tastes better than not eating the plain chicken and the plain beef.

So we really can't respond to that.

I take it you're not contemplating any kind of partnership or arrangement with...?

No, that is true.

Okay, thank you.

Andrew Lazar of Lehman Brothers.

Good morning.

Just two quick things.

One - just a broader question on mix, Bob.

You've got a couple of things kind of working in various directions in your business and part of it might be a channel mix implication as you go with certain products into dollar stores and such and you've also got a lot of new products and things you're doing which are coming in at higher price points and better value after the consumer.

As you kind of look, it really is more of a forward-looking question - you're into '04 and beyond - does your work and modeling suggests that the positives and pros to mix can pretty consistently if nothing else at least make up for it if not exceed some of the other issues let's say that are from channel and otherwise so you will get positive mix on a go-forward basis pretty consistently?

That's the whole new product strategy we have, Andrew, that's exactly why we focus in our discussions on value-added new products in our lineup of products for 04, 05, and 06 are deemed to be higher margin and the reason they are deemed to be higher margin, need to be higher margin we need marketing and advertising spending behind these products and thus it is going to shift the mix [indiscernible] shift to respond to John's previous questions - it is going to shift the mix out of the measured into the nonmeasured and it's also going to shift our mix to value-added product and higher margin products.

Right and I understand that's kind of a strategy in where you're going but obviously as you see some of the opportunities which are opportunities in whatever it might be channels like dollar stores where perhaps it's a smaller range of SKUs that are or maybe some of it non McCormick branded.

You have all these various things going for and against you, but essentially you're accounting for all the strong growth that you're seeing in some of these nonmeasured channels and are able to account for that in your best guess with all the things you're doing around the new products?

I think, and an answer, Andrew, too, that we look at a lot is and I know measuring sales and IRI is a critical component and part of the evaluation of all companies, but we view this as positive operating profit growth.

Even if the sales are mitigating a little bit or the mix is, as John suggested, maybe in the last 12 weeks to private-label, it had no impact on the operating profit on the bottom line for U.S. consumers.

Right.

And I realize it's all a balance and [indiscernible] to go after extraordinary growth and dollar stores for instance.

Even if it is a different product mix so to speak than traditional retailer - I am just [indiscernible] bring all these things together as you plan and do your sort of strategic planning going toward you're pretty confident it more than makes up for it is what I am getting at.

Correct.

It will.

And just one follow-up because I want to completely understand it and I apologize.

When we look at the operating profit fees in the quarter and industrial there were a couple of things you highlighted in the quarter that impacted the operating profit.

I guess -- what was the biggest piece?

Was it the distribution costs and if so, why does that actually start to mitigate just so I'm clear and as we get into the last quarter and into early next year?

I don't think the distribution piece was the biggest.

I think there's several pieces (indiscernible) distribution pension benefit increases.

Distribution mitigates as we start to go live with SAP we take down the inventory sort of more rapidly, the end of this fourth quarter and beginning of the first-quarter 2004.

So as I look at -- at least profitability in industrial at least for the fourth quarter you know, realize there will still be some of that in there for the remainder of the year?

That's correct.

Thank you.

[Operator Instructions].

Ladies and gentlemen, there appear to be no further questions from the phone line at this time.

I would like to turn the line back to management for any closing comments.

Well, thank you.

This concludes today's call.

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This does conclude today's conference call.

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