McCormick & Company Inc (MKC) 2004 Q3 法說會逐字稿

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

At this time all participants have been placed on a listen-only mode and the floor will be open for your questions following today's presentation.

I would now like to turn the floor over to Joyce Brooks.

Ma'am, you may begin.

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, Finance and Treasurer.

Today we will discuss McCormick's financial results for the third quarter ending August 31st and our outlook for the final quarter of 2004 and the full year.

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'll turn it over to Bob.

Thank you, Joyce.

I'd also like to welcome everyone who's participating on today's call.

Before getting into any of the numbers I want to state that we're very pleased with the third quarter 2004 results.

While there's some variations in performance across different businesses, when you add it all up our employees delivered great sales, continued to improve margins, and strong double-digit EPS increase.

I'll start things off with a discussion of sales and profit for our consumer industrial businesses, then comment on other factors that affected net income and earnings per share.

After some remarks on improving -- on an improving balance sheet and higher cash flow I'll conclude with the latest outlook for the fourth quarter financial results.

As you all know this is always a critical quarter for McCormick due to the importance of the holiday season for our consumer business.

Each of our 2 segments contributed to an overall sales increase of 10%.

Of the 10% increase volume contributed 5.1%, foreign exchange 2.6%, and price and favorable product mix 2.3%.

For the consumer businesses a sales increase of 11.6% was the sum of 5.5% from higher volume, 3.2% from price and product mix, and 2.9% of foreign exchange.

Our business in the Americas led this great performance with an 8.2% volume increase and a price and product mix up 5%.

New products drove a portion of the volume increase and included the Zatarain's Ready-to-Serve rice product launched in early 2004.

We are already at an 85% ACV on this product and the product does not appear to be cannibalizing the sales of dry rice mixes.

In fact, all Zatarain's branded products were up an impressive 23% this quarter.

While we're speaking of Zatarain's I'd like to mention at this point that we've essentially completed the integration of this June 2003 acquisition.

At this time direct responsibility from this -- for this business will move from me to Alan Wilson, president of our U.S.

Consumer Business.

With this organizational change I'm also pleased to announce that Lawrence Kurzius, currently president of Zatarain's and some of you met at our investor conference in March, will be joining us here in Baltimore as Vice President of Sales and Marketing for our U.S.

Consumer Business reporting to Alan Wilson.

We share Lawrence's excitement about this move, a move that expands his opportunities to contribute to the company's growth.

David Deriga(ph), former Director of Marketing at Zatarain's, will assume the role of General Manager at Zatarain's and will report directly to Lawrence.

Back to the results.

Also adding to the volume for the Americas this quarter were higher sales of grinders, Hispanics products, GrillMates, and even vanilla.

In addition to the higher volumes from vanilla sales benefited from past vanilla pricing actions that drove almost half of the price and product mix increase in this region.

The pricing actions were in response to the increased cost of vanilla over the last 2 years.

As for the grinders, if you recall, this attractive and functional bottle originated under the DeKroll(ph) brand in France.

We had some early successes with the US introduction of the salt and pepper grinders and followed that up in 2004 with the new garlic pepper and pizza seasoning grinders.

In fact we expect U.S. sales of all grinders to be up 40% for this year as we continue to gain distribution and consumer trial.

Moving to GrillMates.

Our summer ads featured Joe Montana, McCormick's first celebrity spokesperson.

Not only did the ads drive sales they are our highest scoring ads in recent years for the US Consumer Business.

We continue to leverage the GrillMates name and early in 2005 will launch a range of dry and wet rub products that create a whole new way to add flavor to grilled meat, poultry, and seafood.

There's a final factor I want to mention that increased sales in the Americas, the addition of the food line business in the fourth quarter of 2003.

The third quarter of 2004 was our last quarter for incremental gain from this new distribution.

The dollar general business had no incremental impact this quarter as those stores were set with our products during the third quarter of 2003.

Let's turn to our consumer business in Europe.

We've been getting a lot of questions about the retail market there and I'd like to add our observations to what you've been hearing from other food manufacturers.

The situation varies by market and as we've mentioned the majority of our European consumer sales are to retail stores in U.K. and in France.

In the U.K. private label in our category is quite developed and has a market share of 40%.

As in the U.S. we produce a portion of this volume.

In this market the hard discounters are making few inroads.

However, pricing competition among what are now 3 primary real chain -- retail chains is vigorous.

We have responded to this situation with more competitive pricing on certain items in our range of products.

In France, private label share in our category is well under 10%.

This creates a greater opportunity for hard discounters to make inroads with lower quality spices and herbs at lower cost, especially with difficult consumer economy and in the unemployment situation in France.

While we're feeling some impact from this many of our products are not affected, products like dessert aids, which compromise one third of our sales, products like grinder bottles and specialty blends.

As for that portion of our business that is competing with this alternative channel we're employing multiple strategy, including marketing programs and new products, to participate in the growth of these alternative channels to help our current custers -- customers compete effectively.

In the midst of this challenging environment our Europe team worked hard to gain a 1% increase in volume and to maintain pricing and product mix.

We benefit from new product gains across a number of countries and from growth in product like our dessert aids.

On to our Asia Pacific region.

Our primary markets here are Australia and China, which in this quarter had 2 very different situations.

In Australia the sales mix was unfavorable with higher sales of private label and contract business.

In China, our marketing efforts focused on higher margin herbs, spices, and chicken seasonings rather than lower margin soy sauce.

Together these product mix changes offset and did not add sales for the quarter.

In total third quarter operating income margin for the consumer segment rose to 18.7% from 16.7% a year ago.

This increase is net of a 32% increase in advertising cost to $10.6 million for the quarter.

As mentioned in the press release we're able to use a portion of the proceeds from the lawsuit settlement that we discussed in our June 29th earnings release to help fund this higher marketing investment.

For the industrial business, a sales increase of 8.5% was a net result of 4.7% increase in volumes, 2.3% increase in foreign exchange, and 1.5% from products and product mix.

Here again the results varied across the different regions.

Starting with the Americas, we increased industrial sales 9% primarily from higher volumes.

This was a result of some outstanding new product successes including coding systems.

In fact, our year-to-date global sales and coating systems are up significantly in 2004 with the largest portion of this increase in our -- in the United States.

Most of our coating system are sold directly to restaurant customers.

With the sales of coating systems and other new products our overall sales to restaurant chains continue to be strong along with our sales to warehouse clubs.

The other way we participate in away from home eating is through a furd -- food service distributors.

Sales to the food service distributors have not been so strong and were somewhat disappointing this quarter.

If you recall our sales to food service distributors had a difficult performance in 2003 but had begun to show some recovery in the first half of 2004.

Despite some new customers that we gained we do not expect a strong improvement in the fourth quarter sales to the food service distributor channel.

However, we are encouraged by the plans for growth with these customers.

As a result we anticipate improved sales to food distripu -- distributors in 2005 and continued strength of direct sales to quick service restaurants, casual dining chains, and warehouse clubs.

In the third quarter we had a 1.2% increase in price and product mix in the Americas industrial business.

As we discussed previously, cost changes from meat or ingredients are passed through to many of our key customers.

When compared to a year ago cost for soy oil and cheese have been up significantly in 2004 and consequently we've been able to pass this through in higher pricing while maintaining our margins.

In addition to these increases vanilla prices are up substantially this year for our industrial customers in response to higher costs.

Moving to Europe, as we indicated in our last earnings call our initiatives to rationalize products and customers is placing pressure on our industrial sales in Europe and will do so again in the fourth quarter.

In the third quarter sales in Europe were up 9.6% with an increase of 11.1% from foreign exchange and a decrease of 1.5% from lower volume, net of some of the favorable price and product mix.

The rationalization effort in Europe follows the success of this initiative in the United States.

Our objective is to focus resources on value-added higher margin products, improve our market position for condiments, ingredients and other products in Europe, and increase the overall profitability of business in this region.

We're making good progress following the elimination of lower margin SKUs and the discontinuation of a small ingredient business.

In the quarter, the income margin benefit from these actions in Europe was offset by the lower profit mix of products sold in the quarter.

However, we are making progress and are convinced of this rationalization effort will improve the long-term industrial margins in this region.

In the Asia Pacific region performance was affect by the elimination of certain bulk ingredient sales.

Because of this action sales rose only 1.5% of which foreign exchange accounted for 2.5%.

Volume and product mix declined 1%.

If we exclude the impact of the bold ingredient sales in this comparison, volume, price and product mix for the Asia Pacific region are up 5.3%.

This is due to higher sales with quick service restaurant customers as well as new products for snack seasonings.

Across all regions we increased operating -- operating income 12% for industrial business.

This was achieved with a combination of higher margin products and our cost reduction efforts.

The increase in operating income was net of increased R&D exspenesment(ph), again funded in part from the proceeds of the lawsuit settlement received in the second quarter.

We improved operating income margin for the industrial business by 40 basis points to 10.1% from 9.7% a year ago.

I'd like to move on from the results of our 2 segments and make some comments on our total company results.

We are making good progress towards meeting our $15 million cost reduction objective.

In fact, we have all the products in place -- projects in place to achieve our first year goal of our 3 year $70 million cost reduction program.

Savings on material purchases, production efficiencies, incoming freight and other areas are lowering our 2004 cost of goods sold.

These cost savings together with the shift to more value-added products and some benefit from the net impact of pricing actions increased third quarter gross profit margin by 90 basis points to 39% from 38.1% a year ago.

Year-to-date we've increased gross profit margins 90 basis points from a year ago and 170 basis points if you go back just 2 years ago.

Selling, general, and administrative expenses ended the quarter at 26.9% of net sales up 30 basis points from 26.6% last year.

I already mentioned our increase in advertising and research and development in the third quarter.

We also incurred some higher distribution costs resulting from higher sales volumes as well as fuel surcharges and the new transportation regulations in the United States.

I have no comments to make regarding interest expense or other income and expense other than to remind you that we had a 3 cent gain from the sale of an interest in nonstrategic royalty agreements in the fourth quarter of 2003.

You'll want to keep this in mind as you consider estimates for the fourth quarter of 2004.

Unconsolidated income was 3.2 million compared to 4.4 million a year ago.

Performance for our joint venture in Mexico was even this quarter as compared to last year, an improvement from the earlier declines that results from higher soy oil costs and competitive activity.

This third quarter performance was ahead of our expectations.

The decline in income this quarter was from signature brands dessert decorating business in the United States and consumer business in Japan.

Signature brands was affected this quarter by the later timing of some of the orders for Halloween and Christmas.

We expect that the timing of these orders and new product activity will lead to improved results in the fourth quarter.

As for Japan we have discussed in the prior quarter a move to a new distributor with an objective of building sales in this market over time.

We are working through a period of start-up costs associated with this transition until a higher level of sales is achieved.

At the net income line our positive segment results and cost reduction efforts more than offset a decline in unconsolidated income and led to a 15.3% increase in net income from continuing operations.

EPS from continuing operations was 33 cents, a 17.9 increase from 28 cents last year.

Last year's results included 1 cent of special charges from 2002 streamlining actions.

Excluding the 1 cent from 2003's third quarter EPS from continuing operations this year's result was an increase of 13.8%.

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

Our August 31st balance sheet shows inventory of $377 million, a decrease of 11 million compared to a year ago.

This was the first decrease in inventory that we've had for many quarters and I can tell you we're sure glad to see it.

Let me comment on several factors that affected inventory levels.

First, recall that we purchased a strate -- strategic inventory of vanilla beans in 2003 to ensure an ongoing supply and manage our costs for this raw material.

In the third quarter we used a large portion of these beans as we built inventory for the holiday season.

At quarter end vanilla bean inventory was down $19 million compared to a year ago and we'll be continuing to work down this inventory through the fourth quarter.

Second, foreign currency exchange rates increased the valuation of inventory by 14 million as compared to the year-ago measurement date.

And third, inventory in our industrial business increased 11 million as a result of strategic purchase and the remaining buildup from our SAP implementations in the U.S. earlier this year.

When these factors are eliminated from the overall decrease of $11 million the underlying reduction is $17 million.

This reflects success from our B2K and supply chain initiatives.

We are confident these initiatives will lead to further inventory reductions across our businesses over the next few years.

Receivables at August 31st were 326 million compared to 282 million a year ago.

Of this $44 million increase 19 million can be attributed to foreign exchange rates.

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

Prepaid allowances relate primarily to our U.S. consumer business and continue to decline, ending the quarter at $71 million compared to 92 million on August 31, 2003.

As I mentioned in our last earnings call 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 total debt-to-capital ratio was 44.4% compared to 47% a year ago.

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%.

Let me turn to cash flow.

Year-to-date net cash flow from continuing operations, less net capital expenditures and dividends payments, was a positive 7.6 million compared to a negative 70. -- 75.7 million in 2003.

Inventory and prepaid allowances were 2 of the factors that contributed to the improved cash flow.

For the third quarter net cash flow from continuing operations let net cap -- less net capital expenditures and dividend payments was a positive 6.2 million compared to a negative 19.5 million in the third quarter of 2003.

Net capital expenditures.

Capital expenditures less proceeds from the sale of fixed assets were 16.8 million in the third quarter of 2004 compared to 9 million in the year-ago quarter.

Based on our current outlook, we expect net capital expenditures to end the year around $80 million.

We continue to repurchase shares in the third quarter, buying back 809,000 shares of stock at a cost of $27.7 million.

This brings our year-to-date repurchase to 3.2 million shares at a cost of $108.4 million.

At the end of the third quarter we have 211.4 million of the 300 million authorization remaining.

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

We plan to increase our fourth quarter share repurchase activity compared to what we did in the third quarter.

Let me conclude with our latest outlook for the year.

Year-to-date we've increased sales 9.4% with new products, new distribution, effective marketing, and our 2003 acquisitions.

We also had a 4% sales benefit from favorable foreign exchange rates.

For the full year we expect to gross sales at low double-digit rate.

At this time, a few weeks into the quarter now, we believe we're well positioned to grow sales in the important holiday season with the right products and strong consumer marketing programs.

Our EPS guidance for the year remains in the range of $1.51 to $1.54.

As we indicated at the end of the second quarter the 4 cent gain from the settlement of the class action lawsuit would be used to fund sales growth and cost reduction initiatives during 2004.

In that quarter recorded 2 cents of expense related to the reorganization of certain administrative and other functions in international locations til we reduce our cost of operations.

The remaining 2 cents is being used to increase investment programs such as new product advertising and product development costs.

As you heard from our results, some of this higher spending occurred in the third quarter.

The remaining portion will be spent in the fourth quarter.

As evidenced by our guidance for share repurchase we are well on our way to exceeding $100 million in net cash flow from operations after net capital expenditures and dividends.

While we're using this cash to repurchase shares we are also actively pursuing acquisitions.

In summary, I want to recognize the efforts and accomplishments of employees throughout this great company.

Together we're delivering great financial performance and are well on our way to achieving another record year of sales and profits for McCormick shareholders.

To everyone on the call today we thank you for your continued interest in our company and we'd welcome any questions you may have at this time.

The floor is now open for questions.

If you do have a question, please press star then 1 on your touchtone telephone.

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

If you are using your speakerphone please pick up your handset to provide optimum sound quality.

Once again, for any questions at this time please press star, 1 on your touchtone telephone.

Your first question is coming from Eric Katzman of Deutsche Bank.

Hi, good morning everybody.

Congratulations.

Good quarter.

Thanks, Eric.

I guess just a -- A few questions.

One, Bob, you kind of alluded to the issues in -- in France, in particular, as being a pressure point, a lot of the other consumer names have said as much.

I mean, do you see kind of an end in sight there, maybe speaking more from an industry perspective as opposed to your company?

I think, Eric, the -- all the manufacturers are working with the retailers in France to come up with strategies to combat, you know, this penetration through the alternate of channels.

It's going to take some time.

I mean, we're partnering, in our category, with the retailers and coming up with our programs which we think we can do quicker than maybe some of the other areas because of our leadership position in France.

But it's -- it's a fact of life with us now relative to the business environment in France.

And secondly, I think we need to see a little bit of positive enthusiasm in the environment in France from an overall unemployment stand -- stance and consumer confidence, and that will also turn people back to branded products.

This is a strong branded product market.

Has been for many years.

We expect it to continue to be a strong branded market and to consider this time period just a -- kind of a point in time, if you will.

Okay.

And then second, you kind of alluded to the food service market as being a bit slower than you thought.

I guess there's been kind of mixed -- mixed signals in food service.

Maybe you could kind of touch on that in the U.S.

Well, you remember last year and some of the difficulty we had in the food service area, especially with the distribu -- distributor channel, and I think we're seeing some softness overall in the food service distributor area relative to their supply to the areas they -- they provide the products.

I don't think it's systemic and something that's problematical, I think it's purely a point in time.

Okay.

And then, I guess, last question, is it -- you know, you're having success in -- in passing through the cost volatility while some of the other kind of companies in the industry who have been in categories that have traditionally had to pass through have seen pressure from retailers whether it's on the way up or the way down.

Did you see any change at all in kind of the relationship with the retailers in the pass-through or has it been for, at least, in your category, pretty much status quo?

I think it's pretty much status quo, Eric.

I think what you to have do is go -- remember back almost 5 or 6 years ago.

When we implemented quest we took a very strong strategic stance about no price increases for 5 years.

So we're doing selective price increases as materials go up and we've been very declarative to what those areas are and as a result they're being -- being accepted in the trade.

And once again, I think as we shared in the second quarter conference call and inferred in this conference call, we're also taking promotion dollars, especially in the vanilla area, and promoting these products heavily to make sure the consumer demand stays strong.

And we're seeing that as a positive result.

Okay.

All right, I'll pass it on.

Thanks.

Thanks.

Thank you.

Your next question is coming from John McMillin of Prudential.

My congratulations, too.

Good morning.

Thanks, John.

You know, I think everyone's pleased with the quarter but, you know, the guidance of 61 to 64 is, Bob, a little bit below where everyone was for the fourth quarter.

And I know you had a 3 cent gain in the year-ago quarter but I think you also had a 2 cent charge so you're basically forecasting a quarter of not much growth and I'm just kind of looking for a few more reasons why.

John, just a minute to clarify make sure we're clear on the numbers.

Our 61 to 64 is the GAAP guidance, GAAP EPS, and we're currently projecting -- in the quarter.

I missed that.

Can you say that again, Joyce?

Sure.

Our quarterly guidance is 61 to 64 cents, as you indicated.

That's a GAAP EPS number and our current indication is that we will have 2 cents from special charges in the fourth quarter.

Okay.

I missed that.

And the way you're looking at the numbers, you might want to add that, you know, take that into account.

Right.

Okay.

That makes me feel better.

Yeah, if that helps.

And just the -- if we could kind of go through Europe a little bit.

I think, Bob, you said volumes were up 1% but then I guess you said down 1% later.

That might have been for a broader measure.

Can you just kind of go through those numbers one more time?

I think I misunderstood them.

I think what I said is Europe was up and France was down, John.

Oh, okay.

So that -- .

I think it specifically was commenting on the country of France the second time I referenced volume.

And that's what result to, you know, exactly the question Eric asked a moment ago relative to some of the challenges we're having with the trade and the discounters.

Good.

And I guess that Zatarain's acquisition was pretty early in June so there really was no acquisition benefit to sales in this quarter to speak of.

No.

No, not at all.

Just as I indicated, John, extremely strong performance under the Zatarain product line in the third quarter.

It was Okay, thank you.

Thanks, John.

Thank you.

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

Good morning.

Morning, Chris.

Hi, Just had a couple questions for you.

On the -- on the -- that same line of thought there on Zatarain's and on the U.S. consumer division these are much stronger sales numbers than what I expected, of course, and should be commended but beyond that they seem to be much stronger than what even IRI and IRS divest measure for this, but would suggest that your business is growing at.

Was there something unique possibly in the quarter that -- that drove this strong growth that maybe we're not seeing or capturing on IRI?

You know, John, , you know, once again, IRI doesn't capture all our business as you know.

If you go back to the last 3 quarterly conference calls we've had, you know, we've -- we've used this tool of SAP and we're getting a much, much more deep view relative to promotional expense.

And you may hear this from everybody but it's really applicable to this company.

And as a result of that we're taking our promotion dollars and much more selectively using these dollars because of knowledge and data we have with the trade and ourselves and funding these promotions and the results are bearing out in the numbers.

So I attribute it to 2 things.

Number 1, innovative new products exceeding our expectations, and secondly, our go-to-market strategy and execution is better than it's ever been.

Sure.

That's great.

The other question then was on Europe and just to kind of follow on.

But would you call the challenges in Europe competitive or more retail oriented challenges?

Competitive.

Not necessarily the retailers here or the hard discounters?

No, the retailers, the consumer retailers, you know, the big guys, we're all in it together.

We're trying to resolve this problem together and we're coming up with collaborative strategies.

As I commented earlier we're confident in our category we're -- we're going to have those strategies in place quickly and respond.

Okay.

And actually my last question then would be on just the question for 2005 really and that you've had a nice foreign exchange benefit and you've had some significant incremental investments in marketing do you envision having to use, for example, the cost savings that are coming through from the SAP system in 2005 to send back the high marketing without that -- quite that foreign exchange benefit you had in -- throughout '04?

I think we would spend some of the money behind marketing, some behind R&D, and take some to the bottom line.

Okay.

Thank you.

Thank you.

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

Good morning.

Good morning, Andrew.

Bob, just following up on your answer on the go-to-market strategy.

You've mentioned, I think, more recently that McCormick was going to continue to look harder at kind of its -- its sales structure, you know, in terms of, you know, trying to get better sort of in store execution, in your shelf placements, merchandising.

Have any changes been made there yet?

Or have any thoughts you can share with us at this point cause it seems that that is a key part and kind of realizing what you're trying to do around the promotional efficiencies and -- and the perimeter sort of locations that you're looking at to go after more aggressively.

Well, from a macro standpoint we haven't made the big inroads relative to merchandising and how we go, you know, to market.

It's just more effective use of dollars being -- being won, Andrew.

And secondly, I think alignment with our brokers, alignment with our regional teams we're better today than we were last year and the year before in the go-to-market strategy.

So, are we getting -- getting at what we talked about on the macro level?

We're better merchandising, better satellite displays?

The answer is yes.

Are we where we need to be?

No, long way to go.

And then just lastly.

Broader question.

I'm just -- you know, as you think about your -- your business and you're doing a lot more as you've talked about in terms of focusing where you kind of spend your time, your resources, you know, your dollars, you know, the role that that kind of private label plays for you is very different than many of the other companies we all follow.

And I'm just curious, I mean, how do you think about that?

Is that, you know, does that -- does that come into play in generally speaking when you think about where you put your resources going forward and how you're going to allocate them?

Not really from a resource standpoint.

You know, our private label business is something that, you know, we've done for the last 7 or 8 or 9 years and I know it's a very different strategy than a lot of people have.

When we produce most of it where we choose to participate it's profitable for us and we're going to continue that as one of our 3 or 4 strategic legs in our business on a worldwide bases.

It's a good part of our business.

We tie it in, as you know, from the whole category management standpoint.

Our go-to-market strategy in the way in Canada, U.K., France and here in the United States, the way our category is managed, you know, we have this one player that manages this total category and we think private label is part of that category.

And it allows us to help with the private label growth and obviously manage that in concert with pricing with the branded products.

Thanks a lot.

Thanks.

Thank you.

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

Yes, good morning.

Very nice quarter.

Thanks, George.

Question on Zatarain's.

The 23% growth was just, obviously, terrific, is -- can you help us understand was there any pricing going on there?

Was it mostly distribution and volume?

I think it's exactly what you said the last 2.

There's no pricing, but once again if you think back to the 3 legs of the stool that we've communicated consistently on why we bought Zatarain's, one was to increase distribution here in the United States, which we've done.

Secondly, increase some international distribution, Canada and the U.K., which we've done.

Leverage our technical capabilities, come up with new products more quickly which we've done on the Ready-to-Serve.

And you add all that together and we continue to be pretty proud of this acquisition.

And then I think testimony to the leadership under Lawrence Kurzius is that we're moving Lawrence into a very senior position in our U.S. consumer business.

Yes, absolutely.

Do you think -- I mean, is there a risk that momentum is -- is -- is lost with this transition, or -- or I assume that's a key -- a key thing that you're keeping your eyes on with this management change at Zatarain's.

No, we won't loose any momentum.

No.

Lawrence is still the key guy -- key go-to guy.

Those of you on the call that know me know I won't lose sight of that.

No, it's not going to lose any momentum at all.

Are there international opportunities that you're eyeing beyond Canada and U.K.?

We are, just can't share them with you at this time, George.

Okay.

Eric asked about the questions a moment ago about pass-throughs and it seemed primarily geared toward retailers.

Can you kind of respond on an industrial basis to the extent you've got pricing agreements for passing along higher costs to your industrial customers, are you -- are those contracts being honored?

Are you seeing those costs being able to pass through?

Or are you getting some push back?

No, no, they're being passed through.

As the prices go up pass-through and, you know, the converse is true, too.

As these raw material prices, you know, come down we all -- we have to be very cognizant, especially on the industrial side, the reverse.

So that's part of the challenge of, you know, if you only look at our industrial business from a top-line sales standpoint between, you know, variability and promotional activity with our key customers, 1 and 2, the pricing initiatives when raw material prices go up it's positive on the sales line, when it goes down it's negative.

Exactly and can you give us a little -- a couple of data points as to when, you know, we'll see some of the vanilla pricing as a specific commodity, you know -- I mean, do we -- can we anticipate when we'll see tougher comparisons there the next 12 months?

It'll be the latter part of the year.

Latter part of '05?

'05.

Okay, okay.

Then lastly, you referenced new products.

I believe it was within GrillMates that you referred to the new products kind of in -- for '05, you didn't tell us a lot, but it sounds like it's sort of a technological leap.

One, is that true and two, is it applicable to consumer and industrial, or is it more of a consumer focus?

It's a consumer product right now that we're launching here in the United States as part of the test and -- and, you know, it will be a full national launch in the concept of the test and then we'll further launch into Europe as we -- we gain success in the United States.

So, it's just part of our increased strategy on GrillMates to make sure that when someone pulls a piece of meat, produce, chicken out of the -- out of the refrigerator that they -- they look to us as the company that can flavor, either through a marinade, either through a rub or either through a pour-on, all of their particular flavoring needs.

Okay.

Terrific.

Thanks again.

Thanks.

If there are any further questions at this time, please press star, 1 on your touchtone telephone.

Your next question is coming from Robert Moscow of Credit Suisse First Boston.

Hi.

A question about your -- your packaging contract.

After you divested those assets I remember there was some kind of a supply agreement.

Have you benefited -- has your pricing been about flat as a result of that agreement year-over-year and do the terms change in -- in future years?

No, it's pretty consistent -- it's pretty consistent as part of the negotiation that we went through with Pure Plastics.

Okay.

So your -- your packaging costs have -- have not gone up year-over-year this year?

Not this year, no.

Okay.

Do you expect that to change next year with -- ?

I think as long as oil stays at $50, yes, it will change.

Okay.

Thank you very much.

Thanks.

Thank you.

Your next question is coming from Mitch Pinheiro of Janney Montgomery Scott.

Hey, good morning.

Good morning, Mitch.

Just a -- a -- make sure I'm doing my calculations correct.

When I look at your divisional operating profit, it was about $88 million and -- which implied about a 14 million of unallocated corporate which was up about, I have 6 million from a year ago.

Is there anything driving that, if my numbers are correct?

I think, you know, two things.

Number 1, SAP expenditures would be 1, which we've talked about all along.

Employee benefits would be 2, and those would be the big 2 chunks, and distribution costs would be 3.

Employee benefits in the areas that we've discussed, you know, throughout the year in pension and healthcare.

And these -- and they're not -- and these are -- these are expenses that aren't allocated to either the consumer or industrial?

I mean, they're corporate benefits?

There's some expenses that we -- we -- we traditionally have not allocated back to the units, and I think one of the areas that contributes to that is some of our B2K costs that are non allocable.

Okay.

So it's -- so it's jumped around a little bit.

I mean, it was like, you know, 13 million in the first quarter, it fell to 7, back up to, let's say, 14.

Is there any -- any feel for what happens in the fourth quarter?

You know, with -- with the fourth quarter being our largest quarter, you know, some of the impacts that -- that you see, especially in the first 2 quarters, is not really reflective.

You really to have look at these -- these costs on an annual basis.

Right.

Where I think it will -- it will be more comparative.

Okay.

All right, thank you.

Thanks, Mitch.

Thank you.

Your next question is a followup coming from Eric Katzman of Deutsche Bank.

I don't know if this question was asked.

I may have missed it.

But, you know, there were some, I guess, questions earlier after the acquisition of Tones, Berns Philps old business, have you seen any change at least initially or signals that Spice Island Durkey(ph) is going to behave differently in the market?

We have not, Eric, no.

No, there's been no change at all and, you know, as I said in the second quarter conference call we've set our strategies.

Our U.S. consumer businesses, I think, right now are firing on most of its cylinders and we're pretty pleased with the strategies and initiatives, we're just going to carry on with those.

Are there -- most of the contracts, I guess, in the industry switch over in the springtime given the seasonality.

Are there any, you know, bigger contracts that are coming due this -- this coming spring which you either view as opportunity or concerned about?

We really -- we really can't share that and, you know, once again, it's a timing and volume thing depending on purchases.

With our fourth quarter being our largest quarter we just really just remain silent on that.

Okay.

All right, thanks.

Thanks, Eric.

I'm showing no other questions at this time.

Okay.

Well, this concludes today's call.

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