McCormick & Company Inc (MKC) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the McCormick fourth-quarter earnings release. (OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the floor over to Ms. 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 website -- 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, CFO and Supply Chain; and Paul Beard, Vice President of Finance.

Today we will discuss McCormick's operating results for the fiscal year and fourth quarter ending November 30th, and provide an outlook for 2004.

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 will start the discussion with a review of our sales results for the fourth quarter.

As indicated in this morning's press release, there were some key factors that led to a strong fourth-quarter sales increase of 11.8 percent.

First, our 2003 acquisitions of Zatarain's and Uniqsauces contributed 5.6 percent of the increase.

Second, foreign exchange rates continued to benefit the company, and during the fourth quarter, added another 4.2 percent of sales increase.

And a third, the combination of higher prices, product mix and volumes in our base business led to an increase of 2 percent.

I'll share some specific comments regarding the sales performance for each of our two segments, beginning with the consumer business.

In the fourth quarter, we grew our sales of our consumer business 17.9 percent.

Sales increased 13.1 percent from acquisitions and foreign exchange, and 4.8 percent from our base business in local currency.

We increased consumer sales in the Americas by 19.1 percent during the quarter.

Zatarain's contributed 10.2 percent of the sales increase, and foreign exchange -- 1.1 percent.

Sales from our base business contributed a strong increase of 7.8 percent.

There are several factors that drove this 7.8 percent increase, and I will start with category growth in the U.S.

For spices, seasonings and dry seasoning mixes, we measured category growth by combining our IRI customized database with sales from other channels including Wal-Mart.

On this basis, the unit increase for the category was 3 percent for 2003.

Another key factor behind the increase was new distribution.

Dollar General was at it early in 2003, and Food Lion Stores were changed over to McCormick-branded products during the fourth quarter.

We also had a positive sales impact in the Americas from higher pricing on vanilla extract.

We increased consumer sales in Europe 14.8 percent during the quarter.

Uniqsauces added 2.4 percent to the sales, and foreign currency exchange, 15.7 percent.

While the base business declined 3.3 percent.

This decline compares to a 6 percent increase in the fourth quarter of 2002.

In the fourth quarter of 2003, category growth in our largest markets of France and the UK was slightly positive, and overall, we maintained market share.

We also had the benefit of new distribution gains and the introduction of new products.

However, these modest gains were more than offset by the (technical difficulty) in the quarter by our withdrawal from a small amount of distribution in Poland and some lost business in Belgium.

In the Asia-Pacific region, fourth-quarter sales increased 14.4 percent.

Foreign exchange increased sales 16.5 percent, while a combination of higher volumes and unfavorable product mix led to a decline of 2.1 percent.

In Australia, our success with new product introductions was more than offset by tough competition in our dry seasoning mix and rice mix product lines.

In China, sales were impacted by our initiative to rationalize SKUs, eliminating some lower-margin items from our line and focusing on more value-added products.

This initiative, as you know, began at the end of 2002, and in 2004 is expected to have a positive impact on our gross margin.

In the fourth quarter, sales from our industrial business did not meet our expectations.

In total, sales rose 4.2 percent with a positive impact of 2.7 percent from acquisitions, and 3.1 percent for foreign exchange.

However, base sales in the local currency declined 1.6 percent.

If you recall, during our third-quarter conference call, we stated new products in the pipeline, as well as improved demand for our product supply through broadline distributors and warehouse clubs, were expected to improve sales performance in the fourth quarter.

As we look back on the fourth quarter, there were delays in some key new product launches and slower improvement in sales through distributors and clubs.

There were other factors affecting the fourth quarter industrial sales that I will discuss by region.

Industrial sales in the Americas increased 1.3 percent in local currency, with a contribution of 1.2 percent from foreign exchange.

In the Americas, sales in local currency were relatively unchanged in the fourth quarter.

This compares to a strong year-ago sales increase of 8 percent in the fourth quarter of 2002.

In the fourth quarter of 2003, as in the prior three quarters, sales were positively affected by strong product demand from restaurant customers, particularly quick service.

This sales increase was driven by a number of new products and our customers' promotion of products that we flavor.

This increase was offset by lower sales to food processors during the quarter.

Throughout 2003, theses sales have been adversely affected by lower pricing in response to lower raw material costs.

We passed through significant changes in raw material costs in our pricing, and can have periods where sales are affected positively or negatively.

As for vanilla, the higher price of vanilla extract for industrial customers was offset, in part, by reduced demand in the fourth quarter.

Industrial sales in Europe rose 13.6 percent this quarter, with 15.6 percent added by Uniqsauces, and 9.6 percent by foreign exchange.

The base business in local currency declined 11.8 percent.

This was a significant change from our sales increase of 3.7 percent for the base business and local currency through the first three quarters.

We also had a difficult comparison to a 6 percent sales increase in the fourth quarter of 2002.

While we ended the year with strong condiment sales, these were more than offset by lower sales of seasonings during this period, due, in part, by the timing of new product launches.

In the Asia-Pacific region, we achieved 12.6 percent sales growth, with a 7.6 percent gain from foreign exchange, and 5 percent from higher volumes.

Restaurant traffic is getting back on track in China, leading to improved demand by quick service restaurants in the second half of 2003.

We also had good sales volume with our industrial customers in Australia.

In summary, our industrial sales results in 2003 were mixed.

We benefited from the addition of Uniqsauces and favorable foreign currency.

Our business with the restaurant customers in America was very strong.

We also increased sales of condiments in Europe.

And in our Asia-Pacific region, we achieved higher sales with a number of key customers.

Offsetting much of this gain were lower sales to food processors, and in particular, the effect of lower pricing related to raw materials.

Also in 2003, the higher prices for vanilla were offset by lower vanilla sales volume.

As for operating income, we had impressive increases leading up to 2003.

In ,2001 we increased operating income for industrial business 20.5 percent, followed by an increase of 20.4 percent in 2002.

Then, in 2003, we experienced lower sales increases in our base business, along with higher costs during a facility consolidation in Canada, an unfavorable mix of business, cost pressures from certain raw materials, and higher employee benefit costs.

This combination of factors led to an increase in operating income from the industrial business of only 2.7 percent in 2003.

As we look ahead to 2004, we expect our industrial business to get back on track with stronger sales growth and higher increases in operating income.

We are working to stabilize the profit impact of vanilla.

And the facility consolidation in Canada is now behind us.

In addition, we recently gained customer approval for some significant new products in both the Americas and in Europe.

With this momentum, we expect to have improved results from the industrial business in the first half of 2004.

I will comment more about 2004, but, at this point, I'd like to turn it over to Fran for a further discussion of our financial performance.

Thank you, Bob, and good morning.

In the fourth quarter, gross profit margin from continuing operations declined 10 basis points, following a gain of 80 basis points for the first nine months of 2003.

Factors that favorably affected gross profit margin in the fourth quarter included the sales growth in our branded consumer business; the addition of the Zatarain's business; progress with supply chain initiatives; and the net impact of higher pricing and cost for certain commodities.

Negatively affecting gross profit margin in the quarter were the lower margins of the Uniqsauces business, an incremental private-label business; as well as the higher costs of employee benefits; cost associated with our facility consolidation in Canada (indiscernible) expenses.

These higher costs, also affecting selling, general and administrative expenses, although, in total, for the quarter, this expense was 25.4 percent of net sales, compared to 25.9 percent of net sales in 2002.

As a percentage of sales, selling and marketing expenses were 50 basis points lower, and distribution expense was up slightly.

We reported 3.6 million in special charges for the quarter, compared to 2.9 million in the fourth quarter of 2002.

In 2003, the earnings per share impact of special charges was 3 cents, with 2 cents in the fourth quarter, and 1 cent in the second quarter.

The charges this quarter related to facility consolidations in Canada and the UK and position eliminations.

In the fourth quarter, we recorded a gain of 5.2 million for the sale of non-strategic royalty agreements.

We entered into these royalty agreements in 1995, and since then, have modestly benefited from tax credits and royalty income.

The 5.2 million gain had an impact of 3 cents on earnings per share for the company for 2003's fourth quarter and fiscal year.

The impact of this gain, and the 5.4 million interest income on the Ducros refund had a total EPS impact of 5 cents.

Joint venture income declined again this quarter, as compared to 2002.

Our joint venture in Mexico continued to have high soybean oil costs and competitive pressure, as well as an unfavorable currency impact.

Although the decline in net income has moderated since the first half of the year.

Another price increase to offset the soybean oil cost increase was recently taken.

This quarter, there was also a decline in the sales of our signature brand joint venture, due in part to the timing of customer purchases for the holiday season.

Looking at our overall profit results for the fourth quarter, the performance of our consumer business exceeded expectations, and more than offset lower industrial results.

Our 2003 acquisitions and positive foreign exchange positively affected results, while income from unconsolidated operations was below prior year.

Finally, we had an unexpected benefit from the one-time gain on the sale of royalty agreements.

For the fourth quarter, these were the primary drivers of our 17 percent increase in net income from continuing operations, and our 19 percent increase in earnings per share from continuing operations.

In addition to net income from continuing operations, the company also recorded several small adjustments in the fourth quarter that were related to the discontinuation in the third quarter of the packaging and UK brokerage businesses.

In the fourth quarter, in response to the FASB interpretation number 46, we also recorded the cumulative effect of an accounting change of 1 cent earnings per share related to our consolidation of the lessor of one of our distribution centers.

I will comment next on the year-end balance sheet and our cash flow in 2003.

Our November 30th balance sheet shows that inventory remained high at 363 million, compared to 284 million a year ago, although it had declined by 25 million during the quarter.

Most of the factors affecting inventory levels at the end of the third quarter also affected the November 30th balance sheet.

First, we added 54 million of higher-cost vanilla beans earlier in 2003 to ensure an ongoing supply and manage our costs for this raw material.

At year-end, 40 million of incremental beans were still in inventory, which we expect to use by the end of 2004.

Second, foreign currency exchange rates increased the valuation of inventory by 19 million, as compared to the year-ago measurement date.

Third, we had 8 million in incremental inventory related to new products.

This compares to 14 million at the end of the third quarter.

And fourth, Zatarain's and Uniqsauces added 7 million to inventory.

These increases are offsetting progress with supply chain initiatives to reduce inventory.

We are confident that these initiatives will lead to measurable inventory reductions across our businesses in 2004 and beyond.

Receivables at November 30th, 2003 were 347 million, compared to 303 million a year ago.

Of this 44 million increase, 30 million can be attributed to foreign exchange rates, with the remainder due to the addition of Zatarain's and Uniqsauces.

Prepaid allowances relate primarily to our U.S. consumer business, and have continued to decline in 2003, ending the year at 84 million, compared to 97 million at November 30th, 2002.

At year-end, our debt-to-total-capital ratio was 44.4 percent, compared to 49 percent in 2002.

This is just below our target range of 45 to 55 percent.

The decrease was primarily the result of an increase in shareholders' equity, due to the impact of foreign exchange rates.

During 2003, shareholders continued to benefit through share repurchase, as well as increased dividend payments.

For continuing operations, net capital expenditures -- that's capital expenditures less proceeds from the sale of fixed assets -- were somewhat back-loaded at 34.6 million in the fourth quarter of 2003, compared to 11.2 million in the year-ago quarter.

For the total year, capital expenditures, net of proceeds from the sale of assets, were 81.7 million, compared to higher capital spending of 93.9 million in 2002, related to beyond 2000.

Due to the nature of our business, we generate much of our cash in the fourth quarter of our fiscal year.

In the fourth quarter, cash from continuing operating activities, less net capital expenditures and dividend payments, was 125.3 million.

In the fourth quarter of 2002, this same measure was 141 million, with the decrease in 2003 due in part to the timing of capital expenditures.

For fiscal year 2003, cash from continuing operating activities, less net capital expenditures and dividend payments, was 50 million.

This was below our long-term objectives to generate more than 100 million annually, and also below our guidance at the end of the third quarter.

That cash from continuing operating activities, less net capital expenditures and dividend payments, would be in the 75 to $100 million range.

This was due to our strategic inventory purchases, and the timing of liability payments at year-end.

We aggressively repurchased shares in the fourth quarter.

During the quarter, we repurchased 2.8 million shares for $79.7 million.

At the end of the quarter, $22 million remained of 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.

In anticipating this completion, the Board approved, in September, an additional 300 million share repurchase authorization.

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

As in 2003, we expect our share repurchase activity in 2004 to be heavier toward the end of the year to coincide with the higher cash flow in the fourth quarter of our fiscal year.

Looking back on the sources and uses of cash in 2003, we generated sufficient cash from operations and other income, as well as the sale of businesses and the purchase price refund, to provide the primary funding for $203 million of acquisitions, $121 million of share repurchase, $82 million in net capital expenditures, and $64 million of dividends.

I would like to thank you for your attention, and will now turn the discussion over to Bob to comment further on our performance for the full year, and provide an outlook for 2004.

Thank you, Fran.

I would like to begin the part of this discussion by recapping the key events of 2003 that are included in today's press release, and really position us for 2004 and beyond.

First, we acquired Zatarain's, the leading U.S. brand of New Orleans-style products; and Uniqsauces, a condiment business based in the UK -- that benefits both our consumer and our industrial businesses.

I am pleased to say that through the fourth quarter, the Uniqsauces acquisition has met our expectations.

We are proceeding with the rationalization of the condiment production facilities in the UK, and have eliminated 30 percent of the less profitable SKUs.

As for Zatarain's, we are extremely pleased with our first six months following the acquisition of this business, and the financial performance has exceeded our expectations.

Second, we completed the sale of the packaging business and UK brokerage business operations that were non-strategic for the company.

Third, we settled the negotiation over the purchase price of Ducros, receiving a cash refund of $55 million.

Fourth, we announced two dividend increases during the year, increasing our quarterly dividend by 27 percent, to 14 cents from 11 cents.

Fifth, led by a strong increase in the Americas, our consumer business achieved strong sales growth from new distribution gains, new product activity, and more importantly, effective marketing.

We are particularly pleased in the fourth quarter to reach an agreement with Food Lion for distribution of McCormick-branded products.

While we are disappointed with the financial results of our industrial business in 2003, we are seeing tremendous improvement early in 2004 with the launch of new products in both the United States and Europe.

We continue to look for acquisition opportunities in the more value-added, higher-margin end of this business.

Next, through careful management of expenses and progress of supply chain initiatives, we increased gross profit margin by 50 basis points.

This follows 110-basis-point increase in 2002.

Since 1998, we've increase gross profit margin by about 10 percentage points.

In a year with this level of activity and accomplishment, we are particularly pleased to have delivered record financial results and performed well against our financial objectives.

In 2003, we grew sales from continuing operations 11 percent, driven by acquisitions, favorable foreign exchange, and the strength of our core businesses.

This is well ahead of our 3 to 7 percent objective.

In 2003, new products, new distribution and effective marketing each contributed to the core business sales, and I will comment on each of these three drivers.

First, new products.

As a category leader, we play a key role in building consumer interest in the category through our new products.

We spoke at length in September conference call about the many new branded items launched in the United States and international markets.

In total, new products launched in the last three years accounted for 11 percent of our overall 2003 sales -- up from 10 percent in 2002.

For the consumer business, new products launched in the last three years accounted for 5 percent of our 2003 sales volume, and for industrial business, accounted for 16 percent of our sales.

We continued to devote additional resources to new product development, and in 2003 increased our funding for research and developed by another 6 percent.

Between our new products and recent acquisitions, sales from value-added products versus ingredients now account for nearly 70 percent of our portfolio, as it compared to 65 percent a year ago.

Second, we gained new distribution in 2003 with the addition of Dollar General and Food Lion in the U.S. and several small retailers in Europe.

While we sell to many of the largest customers in our key markets, we still have distribution-gaining opportunities for our seafood, produce and other seasoning and condiment products marketed in the perimeter of the store.

We are pleased in 2003 to achieve our first store location outside of the homes spice department in France, with our new salad items.

In 2004, we plan to market an array of new and existing products in the meat departments in France.

And third, as for effective marketing, we increased promotion and advertising spending 16 percent.

We continued to direct our marketing efforts to those products that offer taste and convenience to the consumer.

In the U.S., McCormick has sponsored ice-skating specials and other events that appeal to our target customers.

In Europe, we are preparing to roll out strong marketing support for the launch of the new products in 2003.

We have increased our ability to measure the results of our marketing support and our channeling fund to those programs with the highest returns.

As a final note, but important note on marketing, we have decided to move to open date coding for most U.S. products, and already have begun product shipments.

We believe that this initiative will help consumers identify older products and better manage product freshness in their pantry.

Led by our robust 11 percent sales growth in 2003, we achieved our objective to increase earnings per share 10 to 12 percent.

Earnings per share from continuing operations ended the year at $1.40 -- a 15 percent increase over 2002.

With the one-time gain of 3 cents in the fourth quarter of 2003, earnings per share increased at the top end of our target range.

Before turning to the outlook for 2004, let me comment on some recent changes in McCormick's leadership.

During the quarter, John Molin (ph) announced his retirement at the end of 2004.

As many of you know, John had the responsibility for many of our international businesses, both consumer and industrial.

We have announced that Mark Timby (ph) will have responsibility for all non-U.S.

McCormick consumer businesses.

Formerly with Tetley (technical difficulty) the company since 1996, and has held leadership positions in our U.S. and Canadian operations.

Let's turn to our outlook for 2004.

I'll begin with some activities under way at McCormick and factors that will influence our financial results in 2004, beginning with B2K and supply chain initiatives.

First, we continued with our implementation of Beyond 2000, or B2K.

On December 1st, we converted certain administration functions for the U.S. industrial business, followed by one of our production facilities on January 1st.

I am pleased to say that these conversions have gone very well.

We are extremely encouraged by this initial success, and anticipate minimal disruption to our business, as we complete the remaining phases for the U.S. industrial business.

Preparations for the conversion in Europe and Canada in 2005 are already underway.

While the heavy spending for this program is behind us, it is important to recognize that B2K is an important priority for the company, and we continue to devote some of our top managers to the project to ensure that the upcoming implementations are a success.

This is a significant investment for McCormick, and through 2003, 102 million has been capitalized, with an additional 28 million in capital expected.

Expenses related to the program were 18 million through 2003, with another 18 million anticipated for the remaining implementations.

Using the tools from B2K, there are significant efforts underway to gain efficiencies throughout the supply chain.

We have commented previously that teams in the U.S. are working on a number projects in areas such as freight, warehousing logistics, SKU rationalization and better forecasting.

In Europe, we are seeking factory efficiencies for our consumer line, and evaluating formulations and specifications to improve raw material efficiencies.

Margin improvement initiatives are being pursued in all of our businesses around the globe.

With B2K, supply chain initiatives and operational improvements, we have now projected the related cost savings, and included this in our financial planning for the next three years.

By 2006, we expect to reach an annual expense reduction of $70 million, with 15 million achieved in 2004, another 25 million in 2005, and the final 30 million in 2006.

These expense reductions will affect both cost of goods and operating expenses.

Our financial projections indicate that this level of savings will be sufficient to cover anticipated higher expenses and employee benefits, raw materials and other areas; invest in brand support, product development and other initiatives to grow the business; and together with our sales growth, meet our goals to increase earnings per share 10 to 12 percent, annually.

In 2004, another factor that will affect the financial projection is the full-year impact of the Zatarain's acquisition.

The sales and profits from this business will be incremental in the first half, and should add about 50 million to sales for the year.

Looking ahead, retirement benefits will continue to have an impact on our business.

For the U.S. pension plan, the company has made contributions in each of the past five years to maintain a 90 percent funding ratio.

For all of the company's pension plans, our 2003 contributions were 27 million.

And, at this time, we expect to make similar contributions in 2004.

As for the pension expense, we expect this to increase in 2004, along with insurance, health care and certain other operating costs.

Total pension expense was 22.1 million in 2003, and we expect this to increase approximately 45 percent in 2004.

Much of this increase relates to our changes in the U.S. pension plan assumptions for the discount rate to 6 percent from 7 percent, and the actuarial assumption for return on investment to 8.5 percent from 9 percent.

I will comment on a few more factors that will affect 2004 financial projections.

We expect favorable foreign exchange rates in the first part of the year -- that in 2004 we'll incur about 7 million of expense, or 3 cents, for special charges related to the streamlining actions announced at the end of 2001; a tax rate of 31 percent; a slight increase in unconsolidated income; and the share repurchase of around $100 million in the absence of an acquisition, for a net reduction in shares outstanding of about 2 million shares.

Taking into account all these factors I have reviewed, our expectation for 2004 is to grow sales 7 to 9 percent, and earnings per share 8 to 10 percent, or $1.51 to $1.54.

This sales growth exceeds our 3 to 7 percent objective, and includes the benefit of Zatarain's and the benefit from some foreign exchange.

The EPS growth line is in line with our target range of 10 to 12 percent when the one-time gain received in the fourth quarter of 2003 is excluded.

If you exclude the benefit in 2003 of the $5 million in interest related to the Ducros purchase price refund, our EPS growth for 2004 would be more in the 12 percent range.

Our guidance for 2004 EPS is currently in line with the analyst consensus, as reported by First Call, when the impact of special charges is considered.

As you consider EPS for 2004 by quarter, keep in mind the impact of the other income the company received in the second and the fourth quarters of 2003.

As for cash flow, as Fran stated earlier, our goal is to generate over 100 million in free cash flow from operations after net capital expenditures and dividends on an annual basis.

Based on our current projections, we expect to generate a total of 350 to $400 million over the next three years.

We are using this cash for strategic growth initiatives, including acquisitions, as well as dividends, capital expenditures and share repurchases.

In 2004, we expect to have net capital expenditures of around $80 million, and again, in the absence of acquisitions, to spend in excess of 100 million in share repurchase.

As Fran stated earlier, the share repurchase will be skewed toward the fourth quarter.

We are excited about our business and opportunities as we begin 2004.

Each day our employees are expanding their capabilities with better tools and increasing their effectiveness throughout the organization.

Following the events of 2003, our management team is more focused than ever, and enthusiastic about our customer base, product range and geographic reach.

We are actively pursuing opportunities for growth with new customers, new products, and into new regions with strategic acquisitions.

I am confident that we will continue to build shareholder value, and that 2004 will be another record year for McCormick.

To everyone on the call, we thank you for your interest, and we would now like to discuss your questions.

(OPERATOR INSTRUCTIONS).

John McMillin, Prudential Equity Group.

Good morning, everybody.

Congratulations on these numbers.

I am just trying to go through and get all the identified items to the extent we can, under Regulation G out there.

Basically, in this quarter, you reported 61.

You had a 2 cent special charge offset by a 3 cent non-operating gain.

And that is really it?

Correct?

That would be correct for the fourth quarter.

Can you walk me -- and what did currency add to the quarter, on our EPS basis?

We don't have a number for that, because we've got some transactions offset to what you see in the sales line.

Can you just walk me through, Joyce, through the year number as well?

Sure.

We reported a GAAP EPS from continuing operations of $1.40.

Special charges for the year were 3 cents.

And, as you said earlier, that gain in the fourth quarter from the sale of the royalty (technical difficulty) was also 3 cents.

So they net out?

Yes.

Well, that 7.8 percent base gain in your America's consumer business is really a wonderful number.

Was the bulk of that, Bob, distribution?

Were the categories growing faster?

Were people cooking more?

Or, you have just been able to grow your business?

I think, John, it's a combination of the three things I tried to share.

One is distribution gains.

But once again, the Food Lion conversion was just taking place in the fourth quarter.

So, that it is not significantly incremental with Food Lion.

Dollar General, yes, it was.

If you remember back to the first quarter of 2003, we launched a number of new products.

We invested heavily in the first quarter of 2003 throughout the year, and we saw some significant gains in the fourth quarter in the new product launches from earlier in the year.

We also saw strong category growth.

And once again, that came from a variety of channels, either mass markets, dollar stores, or the consumer grocery stores.

You know, you offset that and layer that against the strike in California, where we saw some negatives in the southern part of California.

So, it was a confluence of a number of things that came together.

And, I just quite honestly think we're really hitting on a number of cylinders on our U.S. business that I think everybody on the call today has been waiting for.

Okay.

Well, congratulations.

Thanks.

Eric Katzman, Deutsche Banc.

Good morning, everybody.

You gave us a lot of numbers here.

I guess, as good as the Americas business was that John pointed out, the industrial business was as disappointing.

I guess, Bob, you kind of mentioned why that business should turn around.

But then, again, you had some pretty good optimism just three months ago.

So, why should we believe that industrial is going to be a better business this year, when only three months ago what you had projected did not come out to be true?

Good question, Eric.

The industrial business was a disappointment; there is no question about it.

But, I guess as I have visibility in '04, and mainly the new products, as I talked about in Europe and the Americas, it gives me tremendous confidence that our industrial business will rebound.

You know, the phenomenon of the raw material pricing strategies that we have with a lot of our major customers -- where we had significant decreases, and thus had to decrease our prices -- was greater than we anticipated.

That is number one.

And number two, some of the promotions that we anticipated, especially in the food processor area, did not come to fruition.

Offset that against a strong restaurant business -- strong restaurant business was encouraging.

Layer on top of that, we had some continued disappointment in our foodservice broad line distributor segment.

So, when you put all that together, they were surprises that kind of caught us in the fourth quarter.

But, I must mention that I am really invigorated about 2004.

And I guess to answer your question at the bottom line, Eric, is that I believe 2004 will be a great year for our industrial business, and I have tremendous visibility on growth opportunities.

Okay.

And then, you've had a fair amount of M&A, both buying and selling the businesses in '03.

Would you characterize that as being a -- given the pipeline, you are always looking at various acquisitions around the world.

Would you characterize '03 as being above normal?

And, the way you're looking at what you are seeing in terms of books in '04 is less robust?

Or, should we see a fair amount of news coming out, in terms of these private companies that you may buy or divisions of others?

Our whole acquisition strategy, obviously, evolves over time, and it is something that we just cannot share.

But, if you look at our activity between the divestiture of the non-core packaging business and Jenks Brokerage, layer on top of that acquisition of Uniqsauces in Europe, and then layer on top of that a Zatarain's, we are pretty excited about 2003 and what it can position us for the future.

That's what I said in my earlier comments in the conference call.

We view 2003 as a repositioning and a restructuring of McCormick, relative to our portfolio, and as we go forward, and bringing in a Zatarain's into our portfolio -- which I mentioned is currently exceeded our expectations -- is positive.

We will have that momentum for the first six months with Zatarain's in 2004, but then we are on normal comparisons.

But, as I said on the industrial business, we continued to aggressively pursue acquisition opportunities at the value-added end of that particular portfolio.

And the last question is on the JB (ph) income line.

I think you said it should be flattish for '04.

But again, I had thought that either a quarter or two ago you had said that that business was starting to improve.

But now, again, it was down year-over-year.

Maybe you could give a little more color there.

Sure.

The words I used was "up slightly," Eric, relative to 2004 over 2003.

Once again, the pattern of signature brands in the fourth quarter -- once again, that was purely a timing of purchases through the fourth quarter, and we will see that accrue back to us in 2004.

Our (indiscernible) joint venture is still incurring issues, relative to soybean oil pricing.

As Fran said in his comments, we have taken another price increase.

That is in the process, right now.

We expected that to mitigate some of the cost, but that is going to take time over the first and second quarter.

The competitive situation is still there; it has not mitigated at all at this particular point in time, and we continue to spend promotion dollars to keep our share.

That is why we are in a situation where we are not losing share.

We do not have fundamental business issues.

Our business model is still sound.

But, it is a competitive situation.

And "up slightly" is what we feel is appropriate for 2004.

And currency, obviously, will be a small issue in 2004 over 2003.

Okay.

Thank you.

David Nelson, Credit Suisse First Boston.

Good morning and congratulations.

Could you go back through the pension expense again, please?

Sure.

It sounded like it was going to be up quite a bit, and I wanted to make sure I understood that.

Right, we just indicated that our expense in 2003 was 22.1 million.

And we would have a 45 percent increase.

So, almost 10 million of an increase in 2004 for pension expense.

And that was due to --?

Some of it was driven by the discount rate.

We went from a 7 percent to 6 percent.

And then, we also reduced our expected rate of return from 9 to 8.5 percent.

And, how much did that affect EPS projection?

$10 million -- .

I can do that.

I will do that.

Obviously, we've got all of the cylinders clicking, and I hate to focus on the one that isn't -- just trying to understand better the pushback you were getting from the industrial business.

Was it mostly on pricing?

And I'm just trying to understand the promotions that did not click there.

Was it new products that did not come to market quick enough?

Or, just didn't resonate with your industrial customers?

Well, David, let me try to give it to you one more time.

The industrial business, as we said in the third quarter -- and Eric was very appropriate to comment about our expectations for the fourth quarter.

Some of the timing of the promotions just did not realize and come to fruition the way we anticipated with our major food processors.

Secondly, the broad line distributor business -- there is a particular situation that we were all dealing, and that was an impact to us in the fourth quarter.

And the pricing of the raw materials, obviously, as we decreased pricing, we decreased the sales component to that.

What I want to make sure I leave everybody with is -- we do not have a fundamental business proposition issue with our industrial business.

You know, there is some cyclicality in timing of promotions.

We still have all of the major customers we had before.

We still have all the business we have before.

And I am really excited about 2004, about the new business opportunities, especially in Europe and the United States with some major customers.

So, I am really not negative at all, relative to industrial business.

I'm disappointed on the quarter, and I shared that with you.

But, on a go-forward basis, which is what I think we all need to look forward to today, is that I continue to be excited about 2004 and the industrial business -- back to normalized growth that we experienced back in 2001 and 2002.

I didn't mean to belabor it.

What I'm trying to rectify is -- companies some of us follow, like Kraft and General Mills, have had trouble with new product introductions, generating sales growth.

And I would think they would welcome your ideas for innovation.

Well, we are doing lots of work in innovation, let me assure you that.

We have lots of projects in the pipeline, and I think Fran addressed that in his comments, David.

Once again, we don't get into specific customers, relative to performance and new products except to say that in that particular segment, we had some volatility in that fourth quarter.

Understood.

Thank you very much.

Chris Growe, A.G. Edwards.

Thank you.

Good morning.

I just have a few questions for you.

I wonder if you could give us sales breakout for the divisions, just for consumer and industrial on volume and price?

Is that possible for the quarter?

Yeah, I think the visibility -- maybe we should try to do that off-line, Chris, because we don't have the acquisitions pulled out of our numbers here. (indiscernible) call you and follow-up on that.

That is fine.

Sure.

And then, to what extent have you built in a strong Euro benefit in 2004?

Any ideas where that will shakeout in your numbers for 2004?

Well, if the Euro continues at the levels that it is presently, that is quite a significant increase over what the average was for all of 2003.

So all-in-all, we expect it to come back towards the latter part of the year.

So, that currency could be up as much as 8 to 10 percent for the year, which -- but, just a portion of our business is traded in Euros.

It could affect our sales growth, for instance, anywhere from 1 to 2 -- even, if it stays where it is, maybe even 3 percent.

Okay. (multiple speakers)

-- with all that built in to our sales growth projection by the way.

Say that again -- I'm sorry.

We don't have the higher end of what I just said built in to our sales -- we have some currency, but not -- we don't expect it to stay where it is today.

That is what I am kind of getting to.

If there is incremental upside, if you will, from the Euro or other currencies, would that be viewed as a spending opportunity, perhaps, to (indiscernible) some of the new brands and new products?

Or, with some of that flow-through, what would the early expectation be for that incremental currency benefit?

Probably a combination of both, Chris.

I think we really evaluate it as we go forward.

As I said in the script, we are committed to continue increasing our spending in marketing and advertising and promotions and technology and R&D.

So that is factored into our 2004 plans that we have today, and if we have extra money and we can see a benefit in value-added to drive new products, then we will use it appropriately.

If not, it flows to the bottom line.

And on the inventory side, I know there is, obviously, the vanilla increase.

And also, I assume foreign exchange played a part as well.

Is that the best way to rationalize the increase in the inventory?

Or, is there something beyond that as well?

I think the only additional piece that Fran addressed was the acquisitions of Zatarain's and Uniqsauces.

But the big two pieces, Chris, were foreign exchange and the vanilla strategic purchase we made in the third quarter.

These increases are so large it does not give us an opportunity to brag about the progress we are making on inventory reduction, as a result of having a full year under our belt and doing better planning in our U.S. consumer business.

But, we will talk more about that later in 2004.

But, we have made progress.

I will look forward to that.

My last question would be if you could talk about -- if you did, I missed it -- marketing spending, overall, for 2003, if that was up?

And is that promotion-driven or more consumer-driven, etc.?

I think the total was 16 percent of an increase for that spending.

That is total marketing?

Promotion and advertising.

Okay.

Okay, thank you.

Art Sefill (ph), T. Rowe Price.

Good morning.

Are you guys staying warm?

You bet.

You mentioned, I think, in your discussion, Bob -- and this might not be important -- but related to the gain on the non-strategic royalty agreement.

You referred to it as unexpected, and I am wondering what made it unexpected.

I will let Fran answer that, Art.

In connection with that agreement, the agreement was with a party that had the ability to call our participation.

And, they did that.

So, we did not anticipate that happening, but they called it, and we sold it, and we had the gain.

Okay, so it was last-minute; and it was not your call, it was theirs?

That is entirely correct.

On the private-label, you talked about having, I believe, some incremental private-label business.

I am not sure if that was just the fourth quarter or the full-year.

But, as far as incremental private-label, is that a function of more of the growth in the category?

Or, was it a function of you taking on some new accounts?

It came with the new accounts we got, Art.

I see, okay.

And then, does the prepaid allowance number at November 30th fully reflect any arrangements that you made with Food Lion?

That is correct.

It did.

Yes.

As far as new products are concerned, my understanding was that products introduced in the last three years represent 5 percent of consumer sales currently, and 16 percent of industrial sales currently.

What makes in harder for new products to have an impact on the consumer side than on the industrial side?

On the consumer side, it is purely timing.

And, from an expenditure standpoint, from marketing, Art.

We phase those and launch those.

I think secondly, too, is that we launch most of my new product on the consumer side throughout the world in the first and second quarters.

With our fourth quarter being such a large quarter for us, that is not an area we look at.

So, it is really preparing them in the first and second quarter, and getting them ready and launching them.

In 2003, we had a fairly significant number of new launches here in the United States and less on the international scene.

But, these numbers that you gave us have to do with introductions over the last three years -- is that right?

That is correct.

Not just the first or second quarter?

That is correct.

I am just wondering -- if I had to guess what that percentage would have been for consumer, I would have guessed something higher than 5 percent as the contribution from products introduced over the last three years.

That seems like a small number.

Are you disappointed in that kind of performance?

No, I am not really disappointed in that over the last three years.

Once again, it is a balancing act on the international front.

Australia did not do much in 2002 or 2003.

China -- we are calling out SKUs, as we have said, in China.

So our new product activity is really at a low end of the web.

And the United States continues to be pretty strong.

So, no, I am not disappointed.

Should it be higher?

Yes.

But, it doesn't need to be higher to be affordable.

Okay, so if you looked at the U.S. figures alone, they would be higher these aggregate worldwide (multiple speakers) --?

That is correct.

We just don't release those.

I got you.

Thank you very much.

Leonard Teitelbaum, Merrill Lynch.

Good morning.

Really kind of following up on Art's question a little bit.

I was going to ask one along the Zatarain's question.

I guess, Bob, when I take a look at the company, the growth rate is truly impressive; there is no question about that.

But, when you look at the acquisitions -- and let's just say it was Zatarain's.

What are you looking for this type of activity to add to the topline once you get it all integrated?

Or, to the operating income line, in terms of a percentage?

Are we looking at Zatarain's to add 2, 3 percent to the topline?

You know, a third of the growth, or 10 percent of the growth, in the -- (multiple speakers)

We don't have a specific -- obviously, we know what it is from a contribution standpoint, but we do not have a particular goal in mind that it does.

The new products -- we expect new products to contribute in the area of 1 to 2 percent, each year, of our total sales growth as a company.

We have shared that with you before.

And, would acquisitions, then -- one would assume would, perhaps, add more than that?

That is correct.

And that is about as far as you care to go on it?

Right.

Thank you for your time.

George Askew, Legg Mason.

Yes, good morning.

Zatarain's -- you said it is doing better than expectations.

Can you give us a little bit of feedback on what is happening there?

Is it more distribution?

Is it greater penetration into existing distribution of Zatarain's?

Could it be an international opportunity?

Things of that nature.

You know, George, you answered my question. (laughter).

It is all of those, plus a very strong effort on new products.

We have just launched a new product -- a rice in a retort package, which is just hitting the market right now, which we expect to be a tremendous contribution in 2004.

So, it's just sort of a confluence of everything we talked about.

And, I would say the bottom line for me on Zatarain's is the team we acquired, led by a President and CEO that is executing right at the top end of the range, in combination with our U.S. sales and marketing teams.

Are you seeing the growth there under the McCormick ownership accelerating beyond what it was before that?

No, not beyond, but almost up to.

Okay.

You mentioned, on the industrial side, some of the weakness with food processors.

You talked about it being around some of the new product activity.

Can you correlate any of that weakness with food processors to the low carb diet trends that we are seeing?

We cannot, at this particular point in time -- no.

We just haven't seen any impact in our business relative to that phenomenon in the marketplace.

You know, bear in mind what we do -- we provide flavor, and flavor is the good part of most of the diet.

So, we are excited about -- as people shift to alternate forms of eating, we are excited about what contribution we can make to the flavor part of that.

So, we don't view it as a negative, George.

Good.

Okay.

And then lastly, kind of give us a sense of what this open date coding initiative is really all about.

Is it going to be consumer-branded and private-label products?

Is it going to be a "use by" date on the bottle?

How does it really work?

And how much of your business will be impacted?

We're currently doing it in the U.S., George.

Currently, it is only branded, and it is a "best by" date.

And, we have done our research -- appropriate research -- to do that.

And we have talked about that for years and what that would mean.

And some of the challenges are there at the retail level, which we understand and we need to play a role in that.

But, we are optimistic about that.

I think you have all heard me talk about the vision, relative to the pantry, in some of the opportunities I think we have in the consumer's pantry on a worldwide basis.

And I think this gives us an opportunity to use our marketing dollars in advertising over the coming years to try to convince people that "best before" dates are now current in our particular category.

Will it vary by specific product?

Yes.

Okay.

Good.

Thank you.

(OPERATOR INSTRUCTIONS).

John McMillin, Prudential Equity Group .

Your 10 to 12 percent earnings growth goal has become high on the street, and you have certainly done these kind of numbers, Bob, in the last five years.

But, increasingly it is becoming more difficult.

And you could argue that, as you look to this year with the Zatarain's accretion and with currency -- I think, while your operating numbers are coming in line with forecast, it was, I think, some hope for more further surprises.

Obviously, you have had some pension increases.

But, do you still think this is kind of a realistic goal, given the state of the food industry?

I do in our category, John.

As I look at 2004, I do.

We commented on Zatarain's and commented on how it is exceeding our expectations.

Commented on the industrial business and some of the expectations I have in 2004 versus 2003.

I think we are in the range, John.

And the cost initiatives that Fran talked about are starting to come to fruition.

Some of the B2K supply chain investments we have made -- some of those things flowing through in 2004.

I am very bullish on the 10 to 12.

I am.

Okay.

Thank you.

I am showing no further questions at this time.

I'd like to turn the floor back to management for any further or closing comments.

This concludes today's call.

Thank you for participating.

A telephone replay of the call is available through midnight tomorrow by dialing 877-519-4471, and using the access code of 413-3440.

You can also listen to a replay on our website, www.McCormick.com after 2 PM today.

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 day.