McCormick & Company Inc (MKC) 2004 Q2 法說會逐字稿

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

At this time, all participants have been placed in a listen only mode and the floor will be opened for your questions following the presentation.

I would now like to turn the floor over to 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 web cast 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.

For this call today, the four of us are not in the same location, so please pardon any brief pauses in our responses during the question-and-answer period.

Today we will discuss McCormick's financial results for the second quarter ending May 31st and our outlook for the full year.

At the end of our remarks, we look forward to your questions.

Before we begin our discussions 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 for participating on today's call.

I will start the discussion with a review of our sales results by segments for the second quarter and discuss the operating income results related to these sales.

I'll then spend a few minutes on the financial impact of the items included in this morning's press release that were more one-time in nature.

From there, I'll move onto the balance sheet and cash flow before concluding with a few business updates and our outlook for the full year.

As indicated in this morning's press release, there were three key factors that led to a 12.9 percent increase in sales for the quarter.

First, higher volumes, prices and products mix led to an increase of 3.8 percent.

Second, our 2003 acquisition of Zatarain's contribute 5.1 percent of the increase.

And, third, foreign exchange rates continued to benefit the Company although at a lower rate in recent quarters.

During the second quarter foreign exchange added another 4 percent of the sales increase.

I would like to focus on each of our two segments beginning with the consumer business.

In the second quarter, we grew sales of our consumer business 20 percent.

Sales increased 11 percent from Zatarain's, 4.8 percent from foreign exchange, and 4.2 percent, primarily, from higher volumes.

We increased consumer sales in the Americas by 23.9 percent during the quarter.

Zatarain's added 17.5 percent of sales, and foreign exchange added another .6 percent.

Higher sales volume was the primary driver of additional 5.8 percent increase with positive category growth in new product activity.

Sales continue to benefit in the second quarter from distribution with Food Lion and Dollar General gain in 2003, vanilla pricing and increases with Grinders Seafood products, Hispanic products, and other new items.

We increased consumer sales in Europe 13.3 percent during the quarter with foreign currency exchange adding 11.5 percent.

Schwartz sales in the UK and Ducros sales in Belgium, Spain and Portugal and other markets increased from new product distribution and effective marketing support.

In France the spice and season category was affected this quarter by private label and economy products particularly with the penetration of the discount retail chains into this market.

In the Asia-Pacific region, second-quarter sales increased 14.6 percent with foreign currency exchange adding 13.2 percent.

Our business in Australia was relatively flat with continued competitive pressure offset by incremental volume from New Salad Solution products and a private label product line.

In China, sales increased from higher volume during the quarter.

Looking ahead to the second half for our consumer business, we were excited with our lineup of marketing plans in new products and expect a strong performance to continue.

Keep in mind that we will no longer have the additional lift to sales from the Zatarain's acquisition and that we expect the increase in foreign exchange to moderate.

Let us turn to our industrial business.

In the second quarter, we increased industrial business sales 6.7 percent with an increase of 3.4 percent primarily in price and product mix and a positive impact of 3.3 percent from foreign exchange.

Industrial sales in the Americas increased 4.7 percent in total with a 4.3 percent increase in volume, price, and product mix, and a contribution of .4 percent from foreign exchange.

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

The sales increase was driven by a number of new products as well as customer promotions or products that we flavor.

Demands for products supplied to restaurants through broad line distributors showed some recoveries following a difficult period in 2003.

New seasonings and compound flavors for food processors contributed to the sales growth this quarter.

Moving to our industrial business in Europe, the sales performance for 2004 has been somewhat uneven in the first half.

In the first quarter we reported increase of 26.4 percent with 14.7 percent from foreign exchange and 11.7 percent from higher volume, pricing, and product mix.

This was followed by a 12.5 percent increase in the second quarter consisting of a 13.6 increase from foreign exchange, offset by a 1.1 percent decline primarily from lower volume.

In the first quarter of 2004, we benefited from start up shipments for a significant new seasoning product line.

In the second quarter, higher sales from this new seasoning product were offset by a reduction of sales related to an initiative to rationalize foodservice customers and SKUs following our 2003 acquisition of Unique Sauces.

The objective of this initiative is to focus our resources on value-added and higher margin products, improve our market position for condiments in Europe, and increase the profitability of this part of our business.

We expect that this issue will play some pressure on industrial sales in Europe during the second half of 2004.

In the Asia-Pacific region, we achieved a 12.4 percent sales growth with 7.5 percent from foreign exchange.

Volume, price, and product mix increased 4.9 percent led by sales in Australia.

In China and other parts of Southeast Asia, sales were up slightly as we saw some recovery of business that had been impacted by the avian flu.

Many of our seasonings and coning (ph) product are sold to the restaurant industry and chicken processors.

Looking ahead for the industrial business for the second half, as in the consumer expect business we expect the increase from foreign exchange for industrial business to moderate.

However, we are encouraged by new products in the pipeline, the continued strength of our business with restaurant customers, and the fact that we have completed the initial implementation of the B2K program in a majority of our U.S. industrial operations.

Moving below the topline, second quarter gross profit margin increased 140 basis points to 38.9 percent from 37.5 percent.

A number of factors favorably affected our gross profit margin in the second quarter.

Sales growth in our U.S. branded consumers business was particularly strong.

We got an additional lift from the incremental impact of Zatarain's business acquired one year ago in June.

We are seeing progress with supply chain initiatives against our 2000 cost reduction goal of $15 million.

And we also continue to benefit from the net impact of pricing actions.

While we're pleased with the second-quarter achievement in gross profit margin gains, we continue to believe that a 50 basis point improvement in gross profit margin is an appropriate expectation for 2004.

Some factors that created margin pressure in the first half will continue into the second half including lower production volume in our European operations, incremental lower margin private label business, and the higher cost of employee benefits, distribution, and other expenses.

In the second quarter, we increased advertising support to $13.4 million from $9.1 million a year ago.

This increase related primarily to new products.

In the second quarter, we had three significant items reported as selling, general and administrative expense and special charges in credits on the income statement.

The first item was the settlement of the class action suit against suppliers of flavor enhancers described in our March conference call.

We received $11.1 million of settlement of this claim and as a result of the settlement we are required to settle claims against McCormick, for a portion of this gross amount.

The net gain that we recorded was $8.7 million.

This amount was reported as a special credit and, given its nature, no portion was allocated to the business segments.

This additional cash will be used to fund sales growth and cost reduction initiatives in 2004 which brings me to the second item.

A plan was initiated to reorganize certain administrative and other functions in our international locations that will reduce our cost of operations.

In the second quarter of 2004, we recorded 4.3 million related to the expected reduction in positions.

This amount was included in our selling, general and administrative expenses with a 70 percent allocation in the consumer business expense and a 30 percent expense allocation to the industrial business.

The third item I would like to point out was a 2.2 million of special charges related to the streamlining actions announced in early 2002.

Specifically, these charges related to the consolidation of industrial manufacturing facilities in the United Kingdom.

This compares to .5 million of special charges recorded in the second quarter of 2003.

Other than these three items, operating expense as compared to the year-ago quarter, were impacted by higher distribution costs and anticipated increases in pension and other benefit costs and costs related to the B2K implementation.

Moving down the income statement, as you compare other income to prior year recall that last year in the second quarter, we recorded an income of $5.4 million for the portion of the two growth purchase price adjustments settlement related to the interest.

Taking a look of results from our joint ventures, income from unconsolidated operations was down approximately 25 percent, due primarily to results of Mexico and Japan.

We continue to be impacted by a difficult situation in Mexico where the increasing cost of soy (indiscernible) put a pressure on our mayonnaise margins, despite pricing actions.

During this period, despite increased prices, we're able to maintain market share.

At this time, our outlook is for continued market pressure in the second half of 2004.

In Japan, we have moved our business to a new distributor and, as a result, expect to build sales in this market over time.

We'll have some startup costs associated with the transition until a higher level of sales is achieved.

Because of the situation in Mexico and our move to a new distributor in Japan, we currently expect unconsolidated income for 2004 to end the year approximately $2-$3 million below our 2003 results.

In summary, the net effect of continuing operations of the positive business results, the one-time items and unconsolidated results for the second quarter was 11.3 percent increase in net income, and 11.1 percent increase in earnings per share.

If you recall our guidance at the end of the first quarter we indicated the first- and second-quarter earnings per share would be similar.

With earnings in the second quarter of 30 cents, compared to 27 cents in the first quarter, we clearly exceeded our internal estimates.

This affords us a chance to consider additional investment opportunities during 2004.

I would like to point out a few things in the balance sheet next.

Our May 31st balance sheet shows inventory of $374 million compared to $358 million a year ago.

Several factors continue to affect our inventory levels.

First, we've purchased a strategic inventory of vanilla beans in 2003 to ensure an ongoing supply and manage our cost for this raw material.

At the end of the second quarter about 25 million of incremental beans were still in inventory which we expect to use by the end of 2004.

This is a $5 million increase over the vanilla bean inventory at May 31st, 2003.

Second, foreign currency exchange rates increased the value of inventory by $8 million as compared to the year ago measurement date.

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

And, fourth, an inventory build of $8 million in anticipation of SAP implementations that occurred at the end of second quarter.

These increases were partially offset by results of our B2K and supply chain initiatives that reduced inventory by $12 million.

We are confident that these initiatives will lead to increased levels of inventory reduction across our business in 2004 and, more importantly, beyond.

Receivables at May 31st were 314 million compared to 290 million a year ago.

Of this $24 million increase, $10 million can be attributed to foreign exchange rates.

The remaining increase in receivables below the rate of increase in sales for the second quarter.

Prepaid allowances relate primarily to our U.S. consumer business and continue to decline, ending the quarter at $80 million compared to $102 million on May 31st, 2003.

I might mention that our prepaid allowances have not been as low as $80 million in more than 10 years.

This is good evidence of our success as we work with grocery retailers to lower shelf prices for our branded products.

At quarter end, our debt to total capital ratio was 43.6 percent compared to 44.9 percent a year ago on May 31st, 2003.

We defined total capital as debt, minority interests, and shareholders' equity.

We are currently tracking a bit below our target range of 45-55 percent.

Last week, we received good news from Standard & Poor's when they advised us they raised our credit rating to an A from an A-.

Let's turn to cash flow.

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

In the second quarter, cash from continuing operation activities less next capital expenditures and dividend payments was $28.8 million compared to 1.7 million in the second quarter of 2003.

Inventory, receivables, and capital expenditures were several of the factors that contributed to the improved cash flow in 2004.

Note that we also made an annual contribution to our pension plan this quarter in the amount of $22 million.

A similar amount was contributed to the plan in the third quarter of 2003.

Net capital expenditures, capital expenditures less proceeds from the sale of fixed assets were 14.3 million the second quarter of 2004 compared to 20.6 million in the year-ago quarter.

Based on our current outlook, we expect net capital expenditures in the range of $80-$90 million during 2004.

We continue to repurchase shares in the second quarter.

During the quarter, we completed our $250 million authorization and began to buy back against the $300 million authorization approved by the board in September of 2003.

From both plans, we repurchased two million shares of stock at a cost of $67.9 million in the second quarter.

This increase from the 12.8 million of shares repurchased in the first quarter as a result of improved cash flow during the second quarter.

As we move into the second half of 2004, you can expect us to repurchase shares at a more moderate pace in the third quarter and to pick up the pace again in the fourth quarter.

At the end of the second quarter $241.6 million remained of the $300 million authorization.

I'd like to expand upon my comments in this morning's press release regarding our year-to-date progress in certain areas.

First, we have achieved excellent growth in our core business.

From the details I've shared since the beginning of the hour we've had measurable sales increases particularly in our consumer business in the Americas.

And we have succeeded in improving margins through supply chain initiatives, progress of the B2K program and more value-added products.

In certain areas, we're working through the challenges in the marketplace and our joint venture in Mexico and the competitive environment in the spice and seasoning category in France.

But on the whole, we are extremely pleased with our business results and financial performance for the first half of 2004 with increased sales 15 percent and increased gross profit margin by 90 basis points.

The balance sheet continues to improve and our debt to total capital ratio is slightly below the lower end of our target range.

Our cash flow is well ahead of 2003, with 66.4 million of cash from operations compared to 12.6 million in the prior year's first half.

Let me update you on B2K.

In June of 2002, we went live with the backbone of the SSA (ph) system and also brought our U.S. consumer businesses onto this platform.

Our goal for 2004 was to move our U.S. industrial business onto the platform.

This involves some degree of system work and a lot of process development employee training.

I'm pleased to say that the majority of our U.S. industrial business including our technical innovation center completed the transition to B2K on June 1st.

While it has been a lot of hard work and has required some incremental inventory and other transition costs, we have completed the process with minimal impact for customers and service levels.

This success was the result of a well coordinated plan and dedicated effort on the part of many McCormick employees.

Even before this phase was completed we began work for the B2K program implementation in Canada and Europe which is scheduled to be completed in 2005.

The capabilities of the new technology and processes are a key ingredient in meeting our goal to achieve the annual cost reductions of $70 million by 2006.

Third, an update on acquisitions.

I am pleased to say that our 2003 acquisitions have exceeded our expectations.

Since the acquisition, Zatarain's sales have increased 13 percent as a result of better store penetration and new product placement.

I hope you have seen our new ready-to-serve rice products on the grocery shelves.

These are fully cooked rice items with the taste of New Orleans that can be heated in 60 seconds in a microwave.

To date, we have achieved retail distribution of more than 70 percent and began TV advertising in May to build consumer awareness.

We have a great team leading this business and are clearly off to a great start with this business and anticipate further growth domestically and, more importantly, internationally.

Our integration of Unique Sauces is in full swing with the consolidation of facilities and our initiative to rationalize foodservice products and customers.

And, finally, the 8.7 million of income from the settlement of the class-action lawsuit has created a great opportunity to boost our sales growth efforts with incremental marketing support and new product development.

We also have the opportunity to pursue cost reduction initiatives.

In this regard we have proceeded with the reorganization of certain international functions and expect to realize significant cost savings related to these actions.

Those are some key points I wanted to cover regarding 2004 progress to date.

I will conclude with an outlook for 2004.

We have grown sales 15 percent year-to-date from new product successes, effective marketing, new distribution and acquisitions, and have enjoyed favorable foreign exchange rates.

For the second half of the year, we expect to grow sales at a mid- to high single digit rate as we no longer have incremental benefit from 2003 acquisitions and we expect to benefit from foreign exchange to moderate.

This leads to sales projection for the full year of 2004 at a low double-digit rate.

Our target earnings for per share remained at $1.51 to $1.54 for 2004.

We will take the opportunity to invest additional income from higher sales, margin improvement and other sources and sales growth initiative, including incremental marketing support and new product development.

Foreign (ph) actions to reduce costs and streamline operations such as reorganization I mentioned earlier in my remarks.

And, finally, we are well on our way to exceeding the $100 million in cash from operations after net capital expenditures and dividends.

We are using this cash to repurchase shares while we continue to seek meaningful acquisitions.

Based on year-to-date results and outlook for the second half we're confident that 2004 will be a year of achievement and excellent financial performance.

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

(OPERATOR INSTRUCTIONS)

David Nelson, Credit Suisse First Boston.

Good morning.

Congratulations on great topline growth.

My question is on working through all these moving parts and non-recurring charges I guess I wasn't necessarily expecting the 4 cent benefit but also was not expecting the 2 cents increase for reorganization in SG&A.

Does that mean in keeping your guidance for the full year the same, does that mean you're actually lowering guidance for 2 cents?

Can you help me out there?

I'll ask Fran to answer that one.

I don't think we're lowering guidance at all.

In fact the net effect of all of the unusual items in the quarter was 1 cent.

And as we had mentioned that we have lowered our expectations for our unconsolidateds in the second half of the year.

So, actually, the business from continuing operations that we consolidate is right on target.

Okay.

I'll follow up with you afterwards.

Thank you.

Eric Katzman of Deutsche Bank.

Good morning, everybody.

I guess the first question is kind of following up on David's.

You know, would you have spent the money back into the business if you hadn't gotten in the first place.

Eric, we have been working on reorganization of our business on a worldwide basis as we shared with you before, probably, for the last 12 to 15 months.

We would have incurred these expenses because the future benefit far exceeds any charges that we would incur at this point in time so it is an ongoing process as we look at our business on a worldwide basis.

Okay and then the 151 to 154 GAAP number.

That excludes I think if I remembered in the last call like 3 cents a share of expected charges?

That is correct.

And then I think this is kind of a second time in a row, Bob, where you've mentioned weakness in France.

I think last quarter it was Ducros and now it's kind of -- now you're talking about continued weakness as a result of, I guess, the discounters.

Can you kind of go into that a bit more?

Because that is a pretty big and important business for you.

It's the same phenomena, Eric.

It's the spice and herb business in France under the Ducros brand name that is being impacted by three things.

One is, the French economy continues to have softness; secondly is, encroachment by other discount retailers that are impacting the major trade partners that we are with; and, thirdly, an overall general nervousness on the trade part, relative to what the impact might be with the discount retailers.

So it's the same phenomena that's been there in the past.

What we're working through is a program obviously to mitigate this and come up with a strategy that allows us to continue our growth plans through new products, which are continuing by the way, but we're looking to accelerate new product innovation and new product distribution gains because of this phenomena in the French market in spices and herbs.

All right.

I will follow up.

Thank you.

John McMillin of Prudential.

Good morning, everybody.

Just a follow-up.

Your 151 to 155 guidance is a GAAP guidance.

Right?

Yes.

So it includes the 4 cent gain and these 3 cent charges, it includes everything?

Includes everything.

Your expectations for the year is this might net out to something like equal where the 4 cent gain might be fully offset or you expect any more items the second half?

No.

We don't.

And, Bob, when you gave guidance after the first quarter call, did you know this 4 cent gain was coming?

Well as we said in the quarter conference call in March, John, we said we had just received word of the settlement, relative to the class action suit of flavor enhancers.

At that particular point in time we had no visibility relative to what expenses would be a result of that or what gain would be a result of that.

What did currency add to bottom-line earnings in the quarter?

We don't measure currency gains on the bottom-line but some might believe that it corresponds to the sales percentage.

There are things that offset it, depending on your foreign exchange transaction gains or losses that you have in the period.

So I would say in general it's somewhat less than the sales gain percentage.

But we don't usually disclose that amount because we don't have a high degree of confidence in calculated.

Can you just try to break out in terms of the guidance for the second half between the third and fourth quarter normally in the third quarter you earned a little bit more that you did in the second quarter maybe 3, 4, 5, 6 cents and then you kind of pour it on in the fourth quarter.

Can you just kind of give a little more specific quarter-to-quarter guidance?

Sprinkle it on.

I think the current consensus estimates that are in the street are reflective of the way we expect the year to come out.

And then, Bob, I guess you've been kind of beating on Burnes Phelp (ph) for a couple of years but it does look like -- I don't know what you've heard but it does look like a sale of beleaguered businesses are in the offing.

What impact if any would that have on McCormick?

Honestly depends on who it goes for, just kind of what you hear from Down Under?

I don't hear much at all, John, in a relative to it there was a lot of action early on but quite honestly I've heard nothing recently, relative to the consummation of the sales.

You might in a week or two.

(inaudible)

Excuse me? (MULTIPLE SPEAKERS)

Wasn't me, John.

Thanks a lot, John.

Ann Gurkin of Davenport.

Just wondered if you would expand on your comment, Bob, about considering additional investment opportunities in '04?

Could you define that a little more?

I can define it around advertising and marketing expenditures, Ann, to drive our consumer business sales and obviously additional technical investments to drive our industrial businesses and that's a strategy we've employed for the last three or four years.

And those are areas we see an opportunity for increasing spending as we have funds available.

Would it include acquisitions if that came along?

Naturally but that would be a different type of expenditure under the cash.

Free cash flow.

And the balance of the money you received in the settlement.

Are you going to spend that?

Is its skewed any one way or the other like advertising, marketing?

It is not at this point in time.

Innovation or whatever you have earmarked?

No.

Not at this point in time.

Andrew Lazar of Lehman Brothers.

Good morning, Bob.

With some of the credits that you've received and have talked about I guess more importantly really the progress you're seeing on the gross margin side, I think that puts a premium as you know on feeling like you can reinvest a lot of this behind marketing programs and such that you have a high degree of confidence you'll get a return on.

I know you're doing a lot of work around sort of being better able to judge your returns on that promotional effectiveness.

Could you give us a little bit more your level of confidence and comfort that you can invest this additional sort of money in the gross margin progress.

You know, really effectively so you're getting really a great return on it as opposed to just putting more behind things that maybe you don't get the return on?

I guess my easy answer to that is we're not going to invest in anything that doesn't bring somewhat of a great return.

Hopefully, over the last two or three years, we've been able to demonstrate as we've taken money out of the gross profit line we've invested it in advertising and better and more effective promotions.

And that's why creative buoyancy in our consumer business, especially in North America, and as you look at our industrial business growth and gross profit margin increase we've invested behind technology.

So we think those two platforms along with investments in B2K, obviously, the SAP conversion of our Company are really three areas that allow us to take money out of the supply chain and then reinvest it back in the business and it gives us great confidence.

That is why we're not modifying our sales target, long-term sales target of 3 to 7 percent, our gross margin improvement of 50 to 75 basis points per year and our earnings per share growth of 10 to 12 percent.

It gives us confidence that we have the fuel and the visibility of where the fuel is going to come from to drive our business.

And then, just one last follow-up.

With the credit is all of that reflected as that sort of gain in this quarter that no more of it comes in the back half?

That's correct.

George Askew of Legg Mason.

Good morning.

On the vanilla market you indicated that you still have about $25 million inventory of your vanilla bean advanced by strategic purchase.

Can you clarify sort of how the market has -- the status of the vanilla market today and looking out beyond the next two quarters, how would you approach your strategy for vanilla in the next fiscal year?

I think, as we shared in the last quarter conference call, I think Fran summarized it well.

The strategic purchase that we acquired in 2003 are designed to provide us product supply and, more importantly, quality to the end of 2004 and we're working on our 2005-2006 strategy as we speak.

But as we have said we do see some softening during those time periods of the bean crisis.

And that is the reason we made the strategic purchases.

So, the commodity will be available, quality will be back to the quality levels they were in 2001 and 2002 is our hope and vision and, three, we will pay a lower price for those over time.

Okay.

Good.

And on the Unique Sauces acquisition, you mentioned that you were, that there's a little bit of pressure on sales there because you are cutting it sounds like less profitable customers.

I mean how should we -- will we see an impact to margins in that business as a result of this?

No.

What we've done and we shared it not on the last quarter conference call but prior to that at the one in January is that we are culling out SKUs and taking out less profitable customers.

At the same time we have re-organized that whole business, and thus, margins are going up and profitability's going up.

So it's been a two-pronged strategy.

Right.

Okay, right.

Great.

Thank you very much.

Terry Bivens of Bear Stearns.

Good morning everyone.

Two questions.

I guess the latest bills I've seen include tax relief on repatriation of foreign earnings in most of the bills.

Just bearing in mind what you said this morning on your European operations.

I guess the last time you guys talked about this, you felt that any tax relief there would be or any tax, I guess, would be substantially offset by foreign tax credits.

Is that still the way you're thinking about?

It is the way we think about it under the current rules and legislation.

I think the Congress has introduced bills in the past that have talked about taxing unremitted earnings.

I think if such a bill passed, it would have far-reaching impact on all of corporate America.

We don't anticipate that happening.

But if it does, in addition, to have an impact on McCormick they will -- a lot of other companies that would be greater impacted.

Okay, yes, I was just looking here in the last annual report.

I think it's close to 180 million.

I am just wondering, obviously, if you're seeing any potential upside there?

No, I don't think there's any upside but I think that the Congress has to think very carefully before they would ever consider such legislation.

It would put American companies at a significant disadvantage.

Okay.

Thinking carefully I guess would be new for them.

And, then, just one last one.

Fran, I guess we all do our calculations but as you do your share repurchase, is there a certain stock price that you see share buyback being accretive to and then perhaps not beyond?

Yes.

We calculate that on a very regular basis and at the present time, the price that we've determined for which we would not buy back would be in excess of $40.

Okay.

Very good.

Thank you.

(OPERATOR INSTRUCTIONS) John McMillin of Prudential.

The consumer business came in a little bit higher than my expectations on earnings.

But that was offset by a little lower numbers on the industrial side.

Were these numbers below your expectations -- if I'm looking -- I'm at an airport -- they look to me like operating income in that area came in below a year ago levels.

Was that your expectation, Bob, going into the quarter?

Let me deal with the sales part, John, and then I'll ask Fran to deal with the operating income because it has the one-time charges allocated against it.

I think what I tried to do was strip those out.

Yes I think from a sales perspective I was comfortable where industrial came in.

And I, once again, with our new product activity and our new distribution that we had quite honestly on the consumer side it was right where we expected it to be.

I would have been disappointed in anything less.

Fran, if you could comment on the -- sort of on the operating profit income?

Yes, the industrial operating profit was impacted in a greater percentage from some of the special charges that we incurred during the quarter than the consumer business was.

And if you added back those charges the industrial operating profit is well in line with -- actually it's above their sales business.

So we continue to be pleased except for the unusual or special charges that were reported.

Much of the 2.2 million relates to the European industrial reorganization that Bob referred to so when you add that back the OP is in line.

So in terms of what change I have to make to try to get an operating income from operations, the addition to industrial earnings would be what?

It would be at 2.2 million that relates to restructuring the special charges line.

It also includes about $1 million of the 4 million that we referred to in the European reorganization.

We're trying to report numbers on a GAAP basis.

Yes I know you are.

We do a statement though, John, in the press release that higher sales and the improved margins for the quarter for the industrial business led to an increase of $3 million or 13 percent.

Got it, okay, thanks a lot.

(OPERATOR INSTRUCTIONS) Eric Katzman.

Deutsche Bank.

Fran, I guess I have to ask you as a former accountant, I mean, how are you distinguishing between a 1 cent special charge and 2 cent kind of reorganization expense?

Why isn't it either all a charge or all an expense?

I think the accounting literature basically says that when a company records a restructuring charge, it's a culmination of a plan that was approved at the highest level that the accounting and reporting for such can be on a single line.

Although the reorganization in our European operation, this $4 million charge, sounds like a restructuring, in an isolated -- from an isolated viewpoint, it's really too small to be called a plan and in the future, if we have such items that heretofore would have been qualified for restructuring charges, we think that they will just be included in the GAAP operations and the way we will communicate that to you is by disclosure.

I think that's what the SEC would recommend as well for companies to do.

Okay and then the, I guess the GAAP -- kind of going back to John in my question, I mean the GAAP guidance of 140 -- 151 to 154, I thought that previously you had said there should be about 3 cents of charges, specific restructuring charges, through the year.

We got 1 penny this quarter.

That estimate still holds.

In other words if you just isolate on what the special charges not including the 8 million from the settlement.

Okay so, in other words if we exclude the settlement and the spending associated with the settlement, you still have 3 cents worth of charges that you would have taken, regardless?

That's correct.

That's correct, yes.

I am showing no further questions at this time.

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