McCormick & Company Inc (MKC) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the McCormick & Co. first quarter earnings conference. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Joyce Brooks.

Ma'am, you may begin.

Good morning and thank you for joining our teleconference today.

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;

Fran Contino, Executive Vice President, CFO and Supply Chain; and Paul Beard, Vice President, Finance and Treasurer.

Today we will discuss McCormick's operating results for the first quarter ending February 29th and update our outlook for 2004.

At the end of our remarks (technical difficulty) 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.

Good morning to everyone participating on today's call.

I'll start the discussion with a review of our sales results for the first quarter.

As indicated in this morning's press release, there were some key factors that led to a 17.9 percent increase in sales for the quarter -- first, higher volumes, prices and product mix in our consumer and industrial businesses led to an increase of 7.3 percent; second, our 2003 acquisition of Zatarain's contributed 4.7 percent of the increase; and third, foreign exchange rates continued to benefit the Company, and during the first quarter added another 5.9 percent of sales increase.

Let's turn to the sales performance for each of our two segments, beginning with the consumer business.

In the first quarter we grew sales of our consumer business 26.6 percent.

Sales increased 9.7 percent from Zatarain's, 7.7 percent from foreign exchange and 9.2 percent from higher volume, pricing and product mix.

We increased consumer sales in the Americas by 32.8 percent during the quarter.

Zatarain's added 16.3 percent of sales and foreign exchange another 1.5 percent.

Higher sales volume contributed to a strong 13.6 percent increase with positive category growth and new product activity.

We continue to benefit in 2004 from distribution gains with Food Lion and Dollar General in 2003.

Favorable pricing and product mix added another 1.4 percent.

Higher pricing on vanilla extract products in response to higher cost increases of beans increased our sales also.

We increased consumer sales in Europe 17.3 percent during the quarter, with foreign currency exchange adding 16.3 percent.

Sales were very positive in the UK with our launch of the new Schwartz brand products, including flavorful and convenient real pastes.

In France a weakened economy led to category declines in the spice and herb category during this period.

In addition, discount retail chains are penetrating this market, offering private-label and economy brands in which we do not currently participate.

To a lesser extent sales were impacted by our withdrawal in 2003 from our small operation in Poland and lost private-label business in Belgium.

Consequently, sales of Ducros brand product were unchanged from the year ago quarter, despite our progress in gaining placements for new products.

In the Asia-Pacific region first quarter sales increased 18.8 percent, with foreign currency exchange adding 19 percent.

Our business in Australia continued to face competitive pressure, but we reported an increase with incremental volume from new salad solution products and a private-label product line.

In China sales were affected by slotting allowances for new products including bag and season that were paid during the quarter.

These slotting allowances are recorded as a reduction of sales.

During 2004 we're working toward a transition to a more strategic network of distributors for our products in China.

This initiative, combined with the SKU rationalization in 2003, will lead to improved margins and accelerated sales growth in this market in the future.

Industrial sales are back on track following a period in the latter part of 2003 when sales did not meet our expectations.

In the first quarter we increased sales 9.7 percent, with an increase in volume, price and product mix of 5.6 percent and a positive impact of 4.1 percent from foreign exchange.

Industrial sales in the Americas increased 5.5 percent in total, with a 4.4 percent increase in volume, price and product mix and a contribution of 1.1 percent from foreign exchange.

In the first quarter strong product demand from restaurant customers continued, particularly quick service chains.

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

Demand for products supplied to restaurants through broad line distributors has not recovered from a difficult period in 2003, although sales to warehouse club customers increased.

Sales to food processors showed improvement over 2003 this quarter, particularly in the seasonings category.

Industrial sales in Europe rose 26.4 percent this quarter, with 14.7 percent added by foreign exchange.

Volume, price and product mix led to an increase of 11.7 percent with some significant new seasoning business.

In the Asia-Pacific region we achieved 13.8 percent sales growth, with 10.6 from foreign exchange.

Volume, price and product mix increased 3.2 percent, led by sales in Australia.

In China and other parts of Southeast Asia our business was impacted by the avian flu as many of our seasoning and coating products are sold to the restaurant industry and chicken processors.

At this time we expect the situation to stabilize as we progress through 2004.

In summary, we're pleased with our first quarter sales performance.

We've seen a nice recovery of sales in our industrial business and our consumer business in the Americas remains extremely robust.

Moving below the top line, first quarter gross profit margin increased 40 basis points to 38.7 percent from 38.3 percent.

Factors that favorably affected our gross profit margin in the first quarter included sales growth in our branded consumer business, the addition of 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 slotting fees associated with new products, lower production volume in European operations, incremental lower margin private-label business, as well as the higher (technical difficulty) benefits and other expenses.

Given first quarter results, our outlook for the year we believe that a 50 basis points improvement in gross profit margin remains an appropriate expectation for us in 2004.

We increased our advertising spend for the quarter to $13 million from 7.7 million in 2003.

A portion of the increase relates to the incremental Zatarain's business, as well as increase in support of new products and seasonal marketing events, primarily in the United States.

Other selling, general and administrative expenses were generally in line with sales for the first quarter.

While joint venture income increased, the result in the first quarter 2004 was well below that of two years ago.

Our joint venture in Mexico has responded to higher raw material costs with two price increases in the past twelve-month.

While competition has followed these increases, the business remains under pressure as soybean oil costs continue to increase rapidly.

Sales of our signature brands joint venture rebounded in the first quarter following a difficult fourth quarter.

In summary, net income from continuing operations increased 14 percent and earnings per share from continuing operations increased 17.4 percent.

I will comment next on the balance sheet at the end of the quarter and our cash flow during the quarter.

Our February 29th balance sheet showed that inventory remained high at $366 million compared to 325 million a year ago, an increase of $41 million.

Most of the factors affecting inventory levels at the end of the fiscal year also affected the quarter end balance sheet.

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

At the end of the first quarter 26 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.

And third, Zatarain's added an incremental $7 million to inventory.

These increases were partially offset by the results of our Beyond 2000 supply chain initiatives.

In fact, we achieved an inventory reduction of $11 million during the quarter with these initiatives.

We're confident that these initiatives will lead us to continue inventory reduction across our businesses in 2004 and beyond.

Receivables at February 29, 2004 were 325 million compared to 271 million a year ago.

Of this 54 million increase, 28 million can be attributed to foreign exchange rates.

The remaining increase in receivables was in line with our increase in sales for the quarter.

Prepaid allowances relate to our US consumer businesses and continue to decline, ending the quarter at $86 million compared to 114 million at February 28, 2003.

At quarter end our debt to total capital ratio was 42.2 percent compared to 44.4 at the end of November 30th and 49.9 percent a year ago on February 28, 2003.

We define total capital as debt, minority interest and shareholders' equity.

We're currently tracking a bit below our target range of 45 to 55 percent.

The decrease was primarily the result of increase in shareholders' equity.

Net capital expenditures -- that is capital expenditures less proceeds from the sale of fixed assets -- were 12 million in the first quarter of 2004 compared to 17.5 million in the year ago quarter.

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

In the first quarter cash from continuing operations, operating activities, less net capital expenditures and dividend payments, was outflow of $27.3 million.

In the first quarter of 2003 this same measure was an outflow of 57.9 million.

Inventory and prepaid allowances were the two primary factors that contributed to the improved cash flow in our first quarter.

We continued to repurchase shares in the first quarter.

During the quarter we repurchased 416,000 shares for $12.8 million under our stock repurchase program.

At the end of the quarter 9.6 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 sometime during the second quarter.

Anticipating this completion, the Board approved in September 2003 an additional 300 million share repurchase authorization.

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

As in 2003, you should 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.

I'll conclude with some business updates and remarks on guidance for the second quarter and the year.

First, an update on our 2003 acquisitions.

We acquired Uniqsauces during the first quarter of 2003, and over the past year have made good progress integrating this into our businesses.

We're rationalizing our condiment production facilities in Europe that will lead to savings in 2005 and are developing new condiment products for our consumer business that will be initially launched in the United Kingdom.

Zatarain's continues to perform ahead of expectations and we're excited about the launch of the new ready to serve rice mixes.

These products offer consumers heat and eat convenience and the great flavors of New Orleans.

We continue to achieve additional facings of current product offerings in markets outside of the Zatarain's southeast space and have supported the brand with television and other marketing initiatives.

Turning to Beyond 2000, we have implemented the new systems and processes in several US industrial plants during the first part of 2004 and have the next few lined up in the coming months.

With a lot of work and careful planning these conversions have gone very well and we're pleased with our progress.

Plans are underway for a 2005 implementation of B2K in Canada and in Europe.

A more recent event for the Company occurred just late last week when we received notification of a class-action lawsuit settlement in our favor.

This matter dates back to 1999 when a number of class-action suits were filed against manufacturers and sellers of a number of flavor enhancers.

The lawsuits related to the violation of antitrust laws.

McCormick as a purchaser of such products participated as a member of the plaintiff class.

We received notification just last Friday that we will receive a payment of approximately $11 million by the end of this month in settlement of this claim.

We're not yet certain what the net effect of this event will be to our financial results as there are a number of matters that will need to be resolved relating to this settlement.

Given our first quarter results and the recent news, let us turn to the outlook for 2004.

With our strong first quarter results from new products, new business and acquisitions, and a favorable outlook for foreign exchange, we will exceed our initial projection of sales of seven to nine percent.

Our expectation for sales growth is now in the low double-digits area.

We believe earnings per share continues to be on track to reach $1.51 to $1.54 during 2004.

Taking a look at earnings per share by quarter, we expect 2004 to follow the pattern of many past fiscal years at McCormick with a similar level of EPS from operations in the first and second quarters, followed by an increase in the third quarter and a significant amount of EPS in the fourth quarter.

For the full year we believe the higher sales and any positive net impact of the settlement will afford us the opportunity to increase our investment in our growth initiatives and meet any business challenges and still reach our EPS goal.

To summarize, we are extremely pleased with the strong start to our year.

With these early results for 2004 we're confident that we will achieve our financial objectives for the year and continue to build shareholder value through the future.

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

Thank you.

(OPERATOR INSTRUCTIONS) David Nelson, Credit Suisse First Boston.

Good morning and congratulations.

Your sales were up a lot, as you noted; earnings up a bit less and you were commenting on increasing your spending on marketing.

Could you be a little more specific on what your programs and initiatives are on spending back against your brands and new products?

I think as I said, David, and tried to stay in the text, we had aggressive new products launches in 2003, and thus in the first quarter of 2004 we increased our advertising and promotion dollars against those new product launches, both in Canada, the United States and to some degree in the United Kingdom.

So it's really around new product initiatives.

What programs are getting the most traction?

Quite frankly, most of them aren't.

The Grill Mates is extremely strong.

The Grinders are extremely strong.

As I mentioned, the pastes are extremely strong in the UK.

And in Canada the Grill Mates and salad products are extremely strong.

Grill Mates are still strong even though it's wintertime?

Exactly right.

Interesting.

Thank you.

Chris Growe, A.G. Edwards.

I have a couple of questions for you.

For the first what you talked about increased marketing investment.

I noticed a lot of new products coming down the pipeline.

Do you think you've gotten a good base, though, of marketing built up for the company where you're not going to need significant incremental investment?

Or is that going to just be a function of the new product activity in the business?

I would say you answered the question, Chris.

I think it's a function of the new product activity in the business.

And what we've demonstrated hopefully over the last two years as we have increased our marketing spend is that with the power of our brand, the consumer recognition of our brand, we can leverage the growth of that brand in the various markets in the world by increasing our advertising spend and promotions spend.

Once again, I think that really proves itself out in the first quarter with our US consumer sales increases.

With such strong sales in the first quarter really across the business, were you re-investing at that time through the quarter?

Or is there a point where it takes a longer time to get some of these programs in place?

With such strong volumes it seems like you could have had even better EPS, believe it or not.

As we said, we did invest in the quarter as part of our overall new product strategy and launches.

I guess one could say, yes, with the strength of the quarter it could have been better, but the new product launches and our focus on advertising and marketing continues to be something we're going to continue to invest in.

And one of the things that I said in the industrial business, we're also going to continue to invest in technology to support the growth of our industrial business too, which we did in the quarter.

And then in terms of the B2K investment this year, I noticed some investments still to come for industrial.

Is that heaviest?

I think you quantified this in your 10-K, but if it was roughly 18, $20 million going forward, is it heaviest in '04 then?

I missed the last part of your comment.

Is your heaviest investment for B2K over the next couple years in '04, this year?

No, the heaviest investment is behind us --

I'm saying of what's left.

Of what's left?

Yes.

Probably not.

Probably 2005 is going to see some expenditures in Europe because our European business obviously is a big part of our company.

But they will be all budgeted appropriately and planned appropriately.

My last question then is if you could just give us the category growth rate for your business here in the US and also for private label, how that did in the quarter.

We don't really have -- we look at the category on an annual basis and we reported in our January call a three percent growth rate in the US for the category.

Because of the complexity of the data with the Wal-Mart numbers and all it's not something we have been reporting to you each quarter on.

Did you see the private label do well in this first quarter?

Yes it did.

Thank you.

(OPERATOR INSTRUCTIONS) John McMillin, Prudential Equities.

Good morning.

I actually have a couple.

Good quarter.

I'm just trying to -- your last earnings guidance, which is the same, but when you gave the earnings guidance last time you said you expected a three cent to an approximate three cents worth of special charges for the year.

I appreciate the knowledge of $69,000 worth of charges in the first quarter, but do you still think that number is going to be around three cents per share for the year?

Based on what we know, we're doing at the present time in the UK and some other plans we still expect it to be three cents, which is not included in the 151 (multiple speakers)

But it includes this $11 million and how that will change?

I think as Bob said, that we haven't gotten to the point of understanding the impact of the $11 million on our financial results for the year.

So if there was anything that were to result from that, that would be incremental.

The 11 million is being evaluated at the present time as to what that will result in on the bottom line.

I caught that much, even though, Bob, I think you said you were going to reinvest it back.

As I mentioned to I think it was Chris or David, yes we're going to continue to invest.

But at a given point in time too we want to evaluate kind of the investment versus taking some to the bottom line.

I think as Fran says we're unable to do that since we just found this information Friday of last week.

If internal sales in the quarter rose 7.3 percent, can you break that out by volumes and then price and mix?

The price mix component, about 2.5 percent of that 7 (multiple speakers) percent.

Can you do it quickly by the consumer and industrial area?

I guess you gave the Americas number of 13.6 percent in volume, which is a wonderful gain.

But could you just give the entire consumer and industrial --?

Actually the number is very similar.

It's close to 2.5 percent for price and product mix impact for both consumer and industrial in the quarter.

I know in other areas of the food industry there's been some dramatic run ups in ingredient costs, and I guess I'm aware of what's happened to you in vanilla and your ability to offset it.

But is there any unusual changes in any of your other ingredient costs besides vanilla with all that's going on these days with China and so forth, if there is anything unusual?

There really isn't except for soybean oil, which I commented on last quarter and commented again today.

Soybean oil is -- and I mentioned McMex in Mexico is having significant impact in our Mexican joint venture, and I think we're at 20 year highs for soybean oil.

So the only other one we're dealing with right now is soybean oil.

We will see you Monday.

Thank you.

Andrew Lazar, Lehman Brothers.

Bob, looking at the strength of the top line in this quarter and knowing that some of that is driven by some of the new products, part of the plan I know has been with these new products try and garner some of the incremental space around the perimeter of the store; taking some of the new products out of the specific aisle, if you will, and getting secondary placements.

Can you give us a sense of how big part of this new product success that's been or if more that is still ahead of you, if you will?

I think what I tried to explain in the script was slotting fees were an important part of our first quarter activity, and thus when we go out of the main spice aisle we pay slotting fees whether it's Zatarain's products or whether it's in the UK or whether it's here in the United States.

So we're successful in getting out of the main spice aisle with a lot of the new products, and with that comes of course binding (ph) slotting fees.

And you'll see that is part of what impacted some of our net sales in the quarter.

Obviously the gross margin then, although I know some of that was obviously a negative impact on a gross margin.

That is correct.

Seeing the strength in sales, let's say, going into next quarter perhaps there's less of an impact around the slotting and maybe more of that flows through to the gross margin as well?

That is our expectation, yes.

Lastly, maybe Fran can just comment briefly on just the change in payables in the quarter would be helpful.

We're finding that more and more of our businesses are taking -- our operating units are taking advantage of discounts, and certainly that's a part of the factor that makes that comparison look like from our standpoint it is heading in the wrong direction.

But as we get more sophisticated on the receivable side, so are we taking advantage of operating benefits from more discounts taken.

So this is obviously part of more of a planned strategy -- the trade-off better now perhaps than you might have a year or two ago.

Right.

Thank you.

Godfrey Birckhead, SBK-Brooks.

Can you help us for the rest of the year please on income from unconsolidated operations?

I think if there was one surprise beyond the larger sales than we had expected it was that.

As I said in the script, with the continuing increase in soybean oil for our Mexican joint venture, which is the largest component of our unconsolidated income, it puts tremendous pressure on our Mexican business.

The competition is still there and the consumer purchases obviously seem to be slowing a little bit.

So at this particular point in time our Mexican business is under tremendous pressure.

It is still our hope and our view that our Mexican business is going to be equal to or slightly below what it was in 2003.

Okay.

So in building our models we should probably have 2004 about the same as '03?

That's what I've been using anyway.

At this particular point in time that would be the advice we would provide you.

And the tax rate is still going to be about 31 percent?

Yes.

Thank you very much.

(OPERATOR INSTRUCTIONS) Art Cecil, T. Rowe Price.

I wonder if you could talk a little bit further about the insurance settlement of $11 million with respect to your earnings guidance of $1.51 to $1.54.

And you said that there is still a lot that you need to understand.

Could you maybe indicate what it is that you need to understand about how that might be used as an earnings component this year?

If I knew it and I had details, you know I would gladly share it with everybody on the conference call, but since we found this out Friday evening we're just right now at a point of analyzing what all the expenses are associated with this, what all the activities we have to pursue relative to this.

And all I can indicate is that as we get better visibility on this we will provide you everything we can.

So if you have to pay lawyers there won't be anything left.

Is that what you mean?

I did not say that, Art.

Let's say the $11 million is pure and straightforward for the most part, and maybe you have a -- do you have a tax rate you have to apply to settlements like this?

It would just be ordinary.

So that's about a nickel a share.

I'm curious -- in other words, in $1.51 to $1.54 there wasn't any allowance for the settlement of this case.

Is that right?

That is correct.

So there will be some benefit from this settlement; it's a question of whether it's a penny, two pennies or five pennies, I suppose.

Is that fair?

That a fair assumption.

We're not prepared to make that at this point in time until we -- as I mentioned to John, with John's question, we want to look at what the alternatives are for investments in the business, we want to look at what we can do from a technology standpoint and we accelerate the B2K process in Canada relative to this.

There's many options available to us with this type of settlement.

So largely whatever you have is going to be spent back to move the operations forward?

No question, that will be it.

On the sales growth update, Bob, originally seven to nine, which is kind of the long-term number and now let's say you're three to four percentage points faster than that.

Could you kind of breakdown where that increment is coming from for the year?

Is it that the new products are doing better?

Is it that the currency is stronger?

Is there any one thing in particular that is allowing you to add 3 or 400 basis points to your sales guidance?

First of all, our long-term goal is three to seven percent, which (multiple speakers) an average of five, just to clear that.

But if you take the year, two percent is going to come from Zatarain's --

This is two percent versus last year or versus the original plan?

Versus last year.

Which is in the original (multiple speakers)

I'm just trying to find out what's increment.

You are now adding 3 or 400 basis points to the original sales guidance, and I'm wondering where the --

The increment is some foreign exchange, some increased performance in our US consumer business and successful new product launches that are a little more buoyant than we anticipated they would be.

One last thing, Bob.

On the Americas consumer volume up 13.6, category growth if it's running at 3 percent would suggest between that new products and the new accounts that you've got roughly 10 percent volume increment from those factors.

Is that --?

We outpaced the category growth too.

The category grew three percent; our business, I believe we said, grew five to six percent.

So we're greater than the category on the base business.

And then the other growth is exactly as you addressed between new products and distribution.

Thanks a lot.

At this time there appear to be no further questions in the queue.

I'd like to turn the floor back over to the presenters for any closing remarks.

This concludes today's call.

In our investor conference next week we will discuss many of today's topics in more detail, including brand strategies, progress with new products, B2K and supply chain initiatives and new business opportunities.

If you cannot attend the conference we encourage you to hear more about our prospects for growth via the webcast at www.mccormick.com.

A telephone replay of today's call is available through midnight tomorrow by dialing 877-519-4471 and the access code for that is 4547447.

You can also listen to a replay on our website after 2 PM today.

If you have any further questions or points to discuss regarding today's information or the upcoming conference, please contact us at 410-771-7244.

Thank you.

That does conclude today's teleconference.

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