McCormick & Company Inc (MKC) 2004 Q4 法說會逐字稿

Good morning, and welcome to the McCormick & Company fourth-quarter earnings conference call.

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

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.

Please note that today's teleconference is being webcast and will be available for audio reply at the McCormick website, www.McCormick.com.

I am Joyce Brooks, Assistant Treasurer for McCormick, and with me are Bob Lawless, Chairman, President and CEO;

Fran Contino, Executive Vice President - Strategic Planning and CFO; and Paul Beard, Vice President - Finance and Treasurer.

Today we will discuss McCormick's financial results for 2004, as well as our outlook for 2005.

At the end of our remarks, we will 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 like to begin by welcoming everyone who's participating on today's call. 2004 was a year of strong performance in sales and profit at McCormick.

Our cash flow exceeded expectations, and we made great progress in initiatives, gross sales and reduced costs.

I'm going to begin with general comments on the fourth quarter and a review of our segment performance.

Next, Fran will discuss the fourth-quarter financial results for the total Company.

I'll follow this with a discussion of McCormick's 2004 accomplishments and conclude with an outlook for 2005.

As you know, our fourth quarter is critical to our financial performance, and 2004 was no different.

This year, we achieved 29 percent of our annual sales, 41 percent of our net income and 65 percent of our net cash flow from operations in the last quarter.

It makes for an exciting finish to the year for us and for our shareholders.

We reported earnings per share of 62 cents for the fourth quarter.

This included 2 cents of special charges.

While this result brought our 2004 EPS to $1.52, within our range of $1.51 to $1.54 for 2004, it was slightly below our expectation for the fourth quarter.

Based upon our internal forecast, as we headed into the final quarter, we continued to increase our advertising support for branded products and development costs behind new innovative products.

Specifically, we increased these by $4 million in the fourth quarter versus 2003.

Most of our fourth-quarter results were in line with our forecast.

However, at year end, there were two items that impacted our financial results.

One had a negative impact, and the other a positive impact.

First, the Company identified and corrected the operational accounting in an industrial plant in Scotland.

Following a turnover of financial personnel in this facility, certain procedures were not properly followed for a period of time.

This situation was uncovered at year end, as a result of our internal control systems and procedures.

We have taken steps to correct the situation, and expect no further impact.

However, the adjustment increased 2004 cost of goods sold by $6.5 million.

As a result, fourth-quarter gross profit margin was reduced 90 basis points and EPS was reduced by 3 cents.

The second item was our tax rate.

As you know, we maintained a tax rate of 30.9 percent throughout 2004.

Based on our year-end review, the actual 2004 tax rate was 30.3 percent.

This rate was lower than 2003, due to the mix of earnings among the different taxing jurisdictions in which we operate and the settlement of tax audits for amounts less than accrued.

This rate change for the full year was recorded in the fourth quarter and lowered tax expense by $2 million and increased EPS by 1 cent.

Fran will comment further on EPS, but I wanted to first share with you the primary factors that impacted the 62 cents we reported.

For the consumer business, a fourth-quarter sales increase of 8.3 percent was the sum of 4.8 percent of higher volume, 2.9 percent of foreign exchange and 0.6 percent from price and product mix.

Of the 4.8 percent higher volume, 1.1 was added by the acquisition of Silvo at the beginning of November.

Our business in the Americas contributed to this great performance of sales increase of 5 percent, 5.2 percent of which came from higher volumes and 0.5 percent from foreign exchange.

New products drove a portion of the volume increase, along with more effective marketing during this holiday period.

In Europe, consumer sales rose 16.2 percent, with 10.4 percent of the increase as a result of foreign exchange.

Sales were also impacted by one month of Silvo sales, adding 4.9 percent.

When the foreign exchange and Silvo are excluded, the remaining increase for the fourth quarter is 0.9 percent.

We are pleased to achieve this modest increase in sales in the face of tough competitive conditions in France and, to a lesser extent, in other parts of Europe.

Keep in mind that only a portion of our products have been affected by hard discounters.

This retail channel carries a limited assortment of items that does not include products like our dessert aids, which comprise one-third of our sales in France, and other 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 strategies, including marketing programs and new products, to help our customers compete effectively in our category.

In Asia-Pacific region, we achieved sales growth of 10.1 percent, with 5.1 percent from (technical difficulty) and 5.5 percent from the net impact of volume, price and product mix.

Similar to the 8.3 percent increase in sales, we increased fourth-quarter operating income for the consumer business 8.2 percent.

During the quarter, cost reduction initiatives helped to fund a 25 percent increase in average (technical difficulty) and provided an offset to increases in fuel, employee benefits and other costs.

For the industrial business, a sales increase of 4.1 percent was the net result of 2.4 percent of foreign exchange, 1.8 percent increase in volume and reduction of 1.1 percent in price and product mix.

As with our consumer business, results varied across the regions.

Starting with the Americas, we increased industrial sales 3.7 percent, with 5 percent from higher volumes and 0.6 percent from foreign exchange.

This was offset by 1.9 percent from lower price and product mix.

Key drivers of the fourth-quarter volume increase included sales of coating systems and snack seasonings, as well as sales to warehouse clubs.

In Europe, as we indicated in previous calls this year, our initiative to rationalize products and customers has reduced sales volumes throughout 2004, and the fourth quarter was no exception.

This quarter, sales in Europe were up 3.9 percent, with an increase of 9.3 percent from foreign exchange and a decrease of 5.4 percent from lower volume, net of favorable price and product mix.

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

We are making good progress following the elimination of many lower-margin SKUs and the discontinuation of a small ingredients business.

In the Asia-Pacific region, an (technical difficulty) increase in sales (technical difficulty) the elimination of certain bulk ingredient sales.

Volume declined 4.3 percent, while price and product mix rose 10 percent.

Foreign exchange added 2.7 percent to sales.

Operating income for the industrial business was slightly affected by the operational accounting adjustment recorded at the end of the fourth quarter.

Operating income of $28.2 million included a reduction of 6.2 million related to this adjustment.

Compared to the operating income of 28.9 million in 2003, the remaining 2004 increase was $5.5 million.

This was attributable to higher sales and the impact of cost reduction actions in the fourth quarter of 2004.

In addition, in the fourth quarter of 2003, the industrial business in the US had higher expenses related to the conversion of B2K.

Operating income margin was 9.3 percent for the quarter, a decrease of 60 basis points versus 2003.

The operational accounting adjustment that was recorded led to a decrease in industrial operating margin of 200 basis points, while the results of higher sales, cost reductions and product mix increased operating income margin 140 basis points.

This increase included a 19 percent increase in research and development, funded in part from the proceeds of a lawsuit settlement received in the second quarter, as well as improved margins in this business.

Before I turn it over to Fran, I would like to review an organizational change made in October.

If you did not catch Fran's new title and Joyce's introduction, it is Executive Vice President - Strategic Planning and CFO.

Fran has assumed responsibility for the strategic planning process, and will lead our efforts in the global rollout of B2K and other initiatives, including SKU reduction and improved cash flow.

In order to further integrate our supply chain organization and provide enhanced focus to our strategy, Jerry Wolfe was promoted to a new position of Vice President - Supply Chain.

For those of you who met Jerry at our analyst day about a year ago, you know that he has led our B2K program as Chief Information Officer, and that he has an extensive background in supply chain processes.

We have expanded Jerry's responsibility to lead the development and implementation of our overall supply chain strategy and drive the return out of our B2K investment.

With that, I'll turn it over to Fran.

Thank you, Bob, for your comments.

I'd like to move on from the results of our two segments and comment on total company results.

During the fourth quarter, gross profit margin was 42.4 percent.

This was a decrease of 90 basis points from the fourth quarter of 2003.

As Bob discussed, the operational accounting adjustment decreased gross profit margin in the quarter by 90 basis points.

We also continued to experience higher costs for fuel, employee benefits and other expenses in the fourth quarter.

These were only somewhat offset during the quarter by the sales growth of our branded consumer business and cost reductions driven by our supply chain initiatives.

In anticipation of continued cost pressure in 2005 from these areas, as well as packaging and certain ingredients, we announced a price increase for our US consumer business that became effective December 13th.

While the pricing action varied by product and product line, the weighted average increase was in the 3 to 4 percent range.

As you consider the impact of this on our fiscal-year 2005 results, I also want to advise you that we expect the sales impact of this price increase to be partially offset by a decrease in vanilla pricing, which was announced earlier this month.

In total, these pricing actions should have a neutral impact on gross profit margin.

For the full year, we increased gross profit margin 30 basis points.

This is a lower increase than in recent years.

Cost reductions of $15 million added 60 basis points to gross profit margin during 2004, and the strength of our US consumer and Zatarain's sales had a favor (ph) impact, as well.

However, as we moved through the year, higher costs for expenses such as employee benefits, fuel and other expenses had a significant impact.

As we look to 2005, we expect to increase gross profit margin by 50 to 75 basis points.

While the impact of the pricing action is expected to be neutral to margin, our cost savings goal for 2005 is 25 million, and many of the projects to achieve these savings will impact cost of goods sold and are already underway.

This will be a leading driver behind gross profit margin improvement in 2005.

Selling, general and administrative expenses ended the quarter at 24.7 percent of net sales.

This is down 70 basis points from last year, despite the higher advertising and research and development expenses Bob discussed earlier.

Also higher this year were distribution costs, which were up 50 basis points as a percent of net sales during the fourth quarter.

As a percentage of sales, the reductions in SG&A occurred in selling, promotion and administration expense.

These fourth-quarter reductions were driven in part by cost savings initiatives and reduced SG&A $9 million in 2004.

Special charges this quarter were 3.8 million, and related to streamlining actions announced at the end of 2001.

The amount recorded related to facility consolidations, joint ventures and position reductions.

We know expect to complete these actions in 2005, with a remaining charge of approximately 2 million and EPS impact of 1 cent.

Operating income rose 6.1 million to 127.5 million in the fourth quarter, despite the 6.5 million impact of the operational accounting adjustment and a $4 million increase in advertising and research and development costs.

Interest expense was slightly up, as a percent of net sales, as we financed the $74 million acquisition of Silvo with short-term debt, and actively repurchased shares throughout the fourth quarter.

Our income was significantly below prior year, when we recorded 5.2 million for the gain on the sale of an interest in the non-strategic royalty agreements.

If you recall, this added 3 cents to EPS in the fourth quarter and fiscal year of 2003.

Because of the actual 2004 tax rate was adjusted at the end of the year, the fourth-quarter tax rate was 29.4 percent.

We currently expect the 2005 tax rate will increase 1 to 2 percentage points from 30.3 percent.

This projected increase in the 2005 tax rate relates to forecasted rates in our various taxing jurisdictions and the treatment of net operating loss carryforwards in international locations.

Fourth-quarter unconsolidated income was 6.3 million, compared to 6.6 a year ago.

Performance for our joint venture in Mexico was slightly ahead of last year, an improvement from the earlier declines that resulted from higher soy oil costs and competitive activity.

Income from signature brands was down in the quarter, negatively affected by a decline in the category sales for cake decorating products in the United States.

For Japan, we continue to work through the transition to a new distributor, with an objective a building sales in this market over time.

We expect to see an improved performance in 2005.

Across all unconsolidated joint ventures, we expect a significant improvement in income for fiscal year 2005.

Minority interest for the fourth quarter of 2004 was more than twice that of the prior year, reflecting the success of our Vahine line of desert aids in Europe, part of the 2000 Ducros acquisition.

I'll provide a bridge of 2004 earnings per share for the quarter to the prior year.

Earnings per share of 62 cents increased 1 cent versus EPS from continuing operations in the prior year.

This 1 cent increase was impacted by the following factors.

The first was a decrease of 3 cents from the operational accounting adjustment.

The second factor was an increase of 6 cents from other factors affecting operating income.

Third, in the fourth quarter of 2003, we reported a 3 cent gain on the sale of non-strategic royalty agreements.

Other factors had a net positive impact of 1 cent, and included fewer shares outstanding and a lower tax rate.

I would like to comment on inventory, receivables and a few other balance sheet items next.

Our November 30 balance sheet included $350 million of inventory, a decrease of 13 million compared to a year ago.

Several factors affected the change in inventory.

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

During 2004, we used 28 million of this inventory.

As we move into 2005, we will be using the remaining supply of these beans.

However, there has been a good vanilla bean crop, and the cost of vanilla is coming down from record levels.

At the same time, demand in our industrial business is lower, and some customers have begun to incorporate vanilla flavors in their products.

As a result, we will have some profit pressure during 2005 that will occur primarily in the first half.

We have considered the impact of this situation in our gross profit margin and EPS guidance for 2005.

I wanted to provide that update on vanilla, and will now return to the inventory discussion.

The second factor affecting inventory was foreign currency exchange rates.

These rates continue to increase the valuation of inventory, and in the fourth quarter led to an increase of $14 million, as compared to the year-ago measurement date.

And third, Silvo added 9 million of incremental inventory.

When these factors are eliminated, the underlying reduction in inventory is 8 million.

This is the net impact of success from our supply chain initiatives and some residual stockbuild relating to B2K conversion and other strategic inventories.

Our team is committed to further reduce inventory, and believe that this area will be an important source of cash in the next few years.

Receivables at November 30th was 408 million, compared to 345 million a year ago.

Of the 63 million increase, 21 million was attributable to foreign exchange rates.

The remaining increase is in line with the sales increase at the end of the year, and includes the acquisition of Silvo.

Prepaid allowances relate primarily to our US consumer business and continue to decline, ending the quarter at 57 million, compared to 71 million at the end of the third quarter and 84 million on November 30, 2003.

This significant decline is good evidence of 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 40.9 percent, compared to 44.4 percent a year ago.

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

We were below our target range of 45 to 55 percent, due to an increase in shareholders' equity.

In fact, the impact of foreign exchange alone on shareholders' equity lowered this ratio by 2.6 percent at year end.

Let's turn to cash flow.

For 2004, we generated net cash flow from continuing operations less net capital expenditures and dividend payments of 205.6 million, compared to 56 million in 2003.

The change in inventory and other assets and liabilities were the two largest factors in the increase.

Contributing to a lesser extent were higher net income, lower net capital expenditures and lower prepaid allowances.

Net capital expenditures -- that is, capital expenditures less proceeds from the sale of fixed assets -- were 67 million in 2004, compared to 81.7 million in 2003.

At 67 million, net capital expenditures was below our 2004 guidance of 80 million, due to changes in the timing of software development and capitalization.

Based on our current outlook, we expect net capital expenditures for 2005 to be around 80 million.

We actively repurchased shares in the fourth quarter, buying back 1.9 million shares of stock at a cost of 65.4 million.

This brought our full-year repurchases to 5.1 million shares, at a total cost of $173.8 million.

At the end of the fourth quarter, we had 147.7 million of the 300 million authorization remaining.

Without significant acquisition activity, we expect to complete this authorization in 2006.

You can expect that our repurchase of shares will be weighted toward the fourth quarter, when a significant portion of our cash is generated.

Looking back at our sources and uses of cash in 2004, we generated sufficient cash from operations, the proceeds from the exercise of stock options and other sources to fund several key initiatives -- first, 174 million of share repurchase; second, 77 million of dividends, which represented a 20 percent increase versus 2003; and, third, the acquisition of Silvo for $74 million, a great addition to our lineup of leading brands in Europe.

I would like to thank you for your attention, and will turn back over to Bob.

Thanks, Fran.

For the full year, Fran just discussed the strongest area for performance, which was cash flow.

Let me briefly summarize our year-end sales and EPS results.

Sales for 2004 reached a record $2.5 billion.

The 11 percent increase was ahead of our initial projection of 7 to 9 percent set one year ago.

We added 4 percent with higher volumes, 2 percent from the incremental impact of Zatarain's in the first half and Silvo in November and 1 percent from positive price and product mix.

We exceeded the sales goal primarily as a result of continued favorable foreign exchange rates, which added 4 percent of the increase.

As for the EPS -- with the benefit of a solid financial performance, favorable foreign currencies, the lawsuit settlement -- we authorized higher advertising and product development activity for the latter part of the year.

With the operational accounting adjustment reported at year end, our 2004 EPS was $1.52.

As a result of investments in the business, we believe we have built momentum for our brands and new products as we head into 2005.

I like to take a moment at this point and share some of the accomplishments at McCormick during 2004.

As I said earlier, we reached 2.5 billion in sales and reached 1 billion in gross profit dollars.

In early November, McCormick first hit a market cap of $5 billion.

We acquired the Silvo business and, since 2002, have acquired businesses that added nearly 200 million to sales.

Focusing more specifically on sales for a minute, we made good progress in a number of areas.

We launched new products during the past three years that added 13 percent to the 2004 sales.

This is up from a level of 10 percent in recent years.

Our percent of sales from value-added products versus ingredients exceeded 70 percent for the first time in 2004.

We increased sales of the Zatarain's brand 20 percent, with expanded product penetration and new items.

Worldwide sales of grinders grew 36 percent.

A large portion of the grinders sales are pepper, and it's interesting to note that in the US, we are increasing our total pepper sales in what had been a rather flat category.

Worldwide sales of grilling products -- seasoning, sauces and marinades -- increased 8 percent.

We converted more than 5,000 stores in the United Kingdom to new packaging and merchandising of Schwartz-branded spices and herbs, and did it in only two months.

Throughout Europe, we achieved 8 percent growth of dessert aids with new products and distributions.

On the industrial side of the business, we increased sales of coating systems by more than 30 percent, primarily with sales to the quick service restaurant customers.

And as for advances in productivity, we completed the rollout of B2K in the US, with a lot of effort from but minimal disruption to our industrial business.

Productivity, as measured by sales per product development professional, increased more than 25 percent in 2004.

In China, we substantially improved our distributor network and streamlined our business to 75 well-qualified distributors from 250 distributors in 2003.

We spoke earlier in the year about progress with SKU reduction related to prevac (ph) displays in the United States.

We are also making strides with SKU reduction in our European industrial business.

In 2004, we lowered the number of SKUs 15 percent from more than 3,250 to less than 2,750.

And in 2005, we will get this number well below 2000.

And we improved the quality of incoming raw materials for industrial products that led to a 36 percent reduction in defects during 2004.

That's a long list, but we wanted to give you a sense of the breadth of initiatives that are underway and the significant progress we have made.

It's the tremendous focus, talent and energy of McCormick's 8,000 employees that led to this level of achievement during 2004.

I'd like to conclude with our outlook for 2005, and will begin with some of the activities underway at McCormick and factors that will influence our financial results.

First, we are moving international with our B2K implementation.

After completing the rollout of this program with our US industrial businesses mid-year in 2004, we began to develop the plan for Europe and Canada.

These plans are now well underway, and we expect to complete the conversion of these businesses in 2006.

To date, we have spent $120 million in capital and $33 million in operating expenses on B2K.

We expect to spend approximately 25 million more of capital and an additional 15 million in operating expenses, as we complete this program.

This is a significant investment, and we expect a significant return.

With the power of B2K and the identification of supply chain initiatives, we set some goals for cost reduction early in 2004.

Our goal was to reduce annual operating costs by 70 million by 2006, and achieved the first 15 million of this goal in 2004.

As we indicated, we have exceeded this first-year goal, and already have plans for a large portion of the $25 million of cost reduction that we had planned to achieve in 2005.

With this improvement in margin, we should be in a position to invest in marketing and product development to drive sales growth again in 2005.

While we face cost challenges in the areas of the fuel, packaging materials, raw materials, employee benefits and a higher tax rate, we have the ability to offset a portion of these increases with pricing actions we have announced.

We are excited about the results of our promotional efforts and the higher advertising in support of new products, as well as existing products.

I will mention just a few of the items in the 2005 new product lineup -- rubs for grilling, new grinder flavors and improved bottle, new liquid forms of seasoning mixes, expanded products in the perimeter of stores in Europe and a relaunch of our US Hispanic products.

In the support of our US Hispanic business, we just produced our first-ever television ad, shot specifically for this demographic group, and began to air in December.

We also have begun to run television advertising for our grinders here in the United States.

For our industrial business, we have appointed a number of developers to work on advanced flavor delivery.

This is an emerging area of great interest to our customers, and one for which we are working to distinguish ourselves from the competition.

Advanced flavor delivery focuses on several technological challenges.

First, enhancers -- these are flavors that work with the inherent flavor to improve the intensity, aftertaste or other aspects of a product -- perhaps a diet drink powder or various food products for retail and foodservice.

Second, maskers -- these are flavors that mask the taste or flavor offnotes that might be caused by the addition of calcium, soy protein or other ingredients.

As a sidenote, an article in Progressive Grocer on January 11 indicated that the market for food that includes the health benefit of pharmaceuticals is expected to grow at least 7 to 8 percent annually.

And third, replacers -- these flavors that can be substituted for cheese, tomatoes, sour cream or many other ingredients, replacing not only the taste and aroma but also other attributes such as richness perception.

We are evaluating the potential of advanced flavor delivery for our industrial customers, as well as within our consumer business.

While we have devoted resources to these more advanced technologies, we are working each day with our customers to develop great new seasonings, condiments and other value-added products.

Also affecting sales and profits in 2005 will be the acquisition of Silvo.

It has been nearly 90 days since the acquisition, and we are very pleased with the integration progress to date.

As we stated in the press release announcing this acquisition, annual sales are projected at $50 million.

About 46 million of this will be incremental in 2005.

We also indicated that we expected 1 cent add to EPS from this acquisition.

Acquisitions will remain an area of focus for the Company in 2005, as we have previously stated.

With our initiatives to grow sales and improve margins in 2005, we believe we are well-positioned for a strong financial performance that is in line with our long-term objectives.

For 2005, we expect to grow sales in the range of 4 to 7 percent.

Earnings per share should be the range of $1.70 to $1.74.

As noted in our press release, this GAAP EPS number includes an estimated 1 cent from special charges, as we conclude the streamlining action announced at the end of 2001.

We also noticed (ph) in the press release that we expect to achieve a significant portion of our earnings increase in the second half of the year.

Due in part to the vanilla situation that Fran mentioned, we expect earnings per share to be up slightly in the first two quarters.

For the full year, any profits that put us ahead of the 10 to 12 percent EPS objective we plan to invest in advertising, product development and other growth initiatives.

Our increasing free cash flow was extraordinary in 2004.

Over the next three-year period, we think a realistic expectation is to generate approximately $450 million in free cash flow.

This will be driven by higher net income and continued programs in approving our working capital.

I know you will say our goals are aggressive, but we feel they are achievable.

With this kind of performance, we believe we can maintain a position as one of the top performing food companies.

I hope in our remarks this morning we provided a clear understanding of 2004 results, shared some highlights of the past year but, most importantly, communicated our enthusiasm and initial expectations for 2005.

Before turning to your questions, I want to recognize the efforts and accomplishments of the McCormick employees around the world.

It is their efforts that resulted in another year of record financial performance and gives me great confidence in our ability to build shareholder value in the future.

Thank you.

We are ready for questions now.

(OPERATOR INSTRUCTIONS).

David Nelson, Credit Suisse First Boston.

Tax rate for '05 -- you said that was going up 2 percentage points, just to clarify?

Between 1 and 2.

And then, on the vanilla costs, as that is offsetting the price increase of 3 to 4 percent against gross margin, does that imply that you are giving back in price more than you are gaining in cost?

No.

Actually, because the cost of vanilla came down so rapidly from record highs of 250 back to nearly 20 or 30, the timing is a little mismatched, and that is why we have predicted some pressure on our earnings for the first two quarters, which are small.

But we expect it all to be absorbed by the end of the year, based on our projections of how we're going to utilize the vanilla.

You still expect 50 to 75 basis points in gross margin for the year, right?

And all that is factored into that, yes.

That's correct.

It sounds like the acquisition environment might be getting better.

Could that be implied from what you said?

I think, David, we are going to continue to be aggressive in the acquisition area, as we have shared before.

But we really can't comment specifically, but it's an area of focus.

And that's why we keep the range of 4 to 7 percent sales growth, as we look at acquisitions on a worldwide basis.

Is there a number for how much options affected earnings in '04 and then projected for '05?

We have number for '04, which is 11 cents.

We don't have an '05 projection at this point for you.

Price mix was down in industrial.

Why was that?

As you know, David, what happens with commodities -- as commodities go up in price, we have pass-throughs, and as prices go down, we have to give back some price.

So that ended up being the net factor in the area.

Some lag?

Okay.

And I guess I was intrigued, given what we're hearing from others about how bad things are in Europe and especially in France, how well you seemed to manage through not just the environments with hard discounters, as you mentioned, but the sort of cozy price decreases.

Could you comment at all on any particulars of how you managed through that?

I think, as we said in the call script, David, that a significant portion of our business in France is Vahine, which is the dessert aids brand, and that is really not an area of focus by the hard discounters.

And thus, through increased promotion and advertising, we ended up with a very good year.

Once again, as we have said before, the hard discounters in our category really focus on 10 to 12 items.

And that has an impact, but our European team is working with our customers to combat that.

So we feel very pleased -- I know it doesn't sound great from a growth standpoint -- to be up almost 1 percent, and the environment over there in our category we are pleased with.

And we look for opportunities in '05, driven by new products, specifically to differentiate ourselves from the competition.

And if you look at the model we put in place in 1996 and 1997 in the United States and look at where we have come from selling ingredients to value-added products, we are on that same journey in Europe to convert from selling ingredients to more value-added products and thus higher margins.

John McMillin, Prudential Equity Group.

Fran, I'm happy to hear about your promotion.

Just in terms of the timeline between -- I don't know, Bob, if you would call it fraud.

Was it just an error in accounting?

No; it was nothing to do with fraud, John.

As I said in my discussion, it was an accounting area that we caught during our year-end process.

We fixed it, we've taken the appropriate action and we are moving on from there.

Once again, I think it's important to note, since we did have a Board meeting yesterday, an audit committee meeting yesterday, a meeting with our outside auditors, all areas have signed off on our results and signed off on our action that we took relative to this adjustment.

So from our perspective, John, it's really behind us.

Fran is leaving tonight for Europe, Bob Davey is in Europe right now, and I'm leaving Sunday -- so focus and attention around this and the impact is at the highest level of McCormick right now.

In terms of the timeline, when you found out about this, then did you go look for tax savings?

Or were these tax savings going to come anyway?

Tax savings were going to come anyway, John.

We found this out very late in our overall year-end process.

Hopefully, you think it's a fair question to ask.

It's just that --

I think the fair question to ask, John, in the conference call script is we spent an incremental $4 million in promotion, advertising and new product development in the final quarter.

Going into the fourth quarter, we had just robust confidence in the year.

This surprise obviously is not well-taken by the senior management of this company.

So it was a surprise to us, but we are comfortable with the restorative action we have taken and we are moving on from it.

And that's why we're confident about 2005.

So to try to connect the dots on any singular item, I don't think we should try to do.

It is an issue.

Am I happy?

No.

Does everybody know I'm not happy?

Yes.

When we look at marketshare trends in Nielsen, in a category that's, I guess, about close to 2 billion that's reported on Nielsen spices, seasoning and extracts, and your numbers over the years have been quite good.

So I don't want to make too much to do about a 12-week number ending Christmas.

But it did show some marketshare declines of over 1 point in dollar share, and obviously it excludes Wal-Mart.

But just in terms of the decision to raise pricing when, let's say, it appears to me that marketshare trends are not as good as they have been, what went into that decision?

Do you feel -- because that's how some companies in the past have gotten into trouble, by hitting that price lever a little bit too much.

Kind of what went into that decision, and what risks do you think might be involved?

Sure, John.

I'd be more than happy to comment.

I never beg to differ with data, but I feel responsible to comment on IRI data, which is what we use, and our competitors' branded marketshare is between 3 and 4 percent.

What they have on private-label, I'm not prepared to comment on, but it's 3 to 4 percent branded marketshare.

And if you look at the growth over the last 13 weeks as reported to IRI and the database we work from, we believe we are gaining share.

Bear in mind, we got Food Lion last year, and that's in the numbers.

So I sure don't want anybody on the call to feel that there has been an erosion of marketshare from us to the competition because of some activity in the marketplace.

That's just not factual at this point, according to IRI.

As far as the price increase is concerned, we have been very selective of how we've done our price increases over the last seven years.

Remember, we went five years without a price increase.

Then we had one.

Then we had a selective one.

And we just think the environment we are in today, because of the increase in benefits, the increase in overall costs in our business -- that an average price of 3 to 4 percent is very appropriate.

Please bear in mind, as we have said before, the high-volume items are probably going to go up from 0 to 1.

The lower-volume items are probably going to go up from 5 to 6.

And vanilla, as you know, is coming down very significantly.

So I think the strategy is solid.

I think the timing is appropriate, relative to raising our prices to offset some of the costs we've incurred over the last two or three years that we have not offset with pricing actions but have used cost savings initiatives to offset those.

Terry Bivens, Bear Stearns.

Just in terms of this charge -- because, clearly, the stock is getting trashed over it -- non-cash or cash?

Did it flow through the P&L?

How do we look at it economically?

It flows through the P&L, but it's non-cash.

And, Bob, I guess, one thing -- one follow-up from John's question is that you seem to indicate everybody is hopping on the jet to go to Europe.

Are they all going over to Scotland?

Because the implication of that would be that maybe this is a little bit more serious.

No;

I don't want anybody to perceive it's more serious, Terry.

I want people to take it that we are taking this particular action relative to Paisley, Scotland to do a thorough review of our European operations.

But I wouldn't want to take it anymore than that.

My intent is to make sure people don't view this as leadership at McCormick taking this as a regular event that happened, and it's small.

This is a big event for us.

I am concerned about it, and I'm going to ensure I understand it thoroughly and understand and make sure financial controls are in place relative to the future.

Well then, from that, can we take that you're confident we won't see anything like this again going forward?

Yes.

Well, then, I guess the fair question to ask would be why the stock is getting so trashed over this particular thing.

But I'll pass it on.

I really don't know, Terry.

I can't comment on the stock price.

We are real happy with the year we've had, except for the one little operational adjustment.

And I tried to portray that with Fran in the conference call script.

There's total visibility about our growth.

I am excited about 2005.

We have the right programs in place.

We're not changing our strategy.

We're going to continue to invest in the business to grow, and we have sure proven by investing we're going to grow.

Free cash flow is going to increase significantly, and we're going to continue looking for acquisitions that make strategic sense to us as a company.

Just one more thing, too.

Had we not -- let's assume for a minute this charge did not emerge.

Would your guidance, you think, have been slightly more robust in absolute terms off a larger base, or should we not make that assumption?

Well, we don't think that the charge had anything to do with what our prospects looked like in 2005.

And that reflects, I think, the stronger prediction that we are making for 2005 relative to our longer-term goals of increases in EPS of 10 to 12 percent.

The reason why we feel strong is because the adjustment that we're talking about has nothing to do with going-forward operations.

In fact, even with this charge in our operations for 2004, our operating income has increased significantly over any measure you might want to look at.

We are very disappointed with the charge, but our results would have been just that much better, which is really a reflection of all the reinvestment we have made to make our strong sales increases and all the cost reductions that we were able to achieve to head off that not only higher fuel costs, but even a charge like this -- not that we expect this to happen in the future.

We are very unhappy with it.

But we're kind of pleased that we still had really strong gains in operating income, despite it.

But Terry, maybe I'll just summarize.

Hypothetically, if you use the example you did -- and obviously, it's not pertinent to the reality.

But hypothetically, if we'd had the 3 cents and you do the math, the answer is, for '05, our EPS range would have been higher.

Yes.

Leonard Teitelbaum, Merrill Lynch.

It's nice to see an accountant make good.

Some of us are still trying.

Congratulations, Fran.

Let me just pursue this one more time.

Isn't this going to be a prior-period adjustment, and you captured it all in Q4?

Part of it would apply to the prior period.

That's correct, Lenny.

But it's not material enough to restate (multiple speakers).

Well, that was going to be my point.

Should we, for modeling purposes, go back and maybe take a penny out of Q1, Q2 and Q3 for comparative purposes, or just let it roll to Q4?

Obviously, it applies to some period.

We're not going back and providing that guidance on those periods.

That might be an approach you want to take.

But we like to believe on, an annual basis, that these things are going to happen.

We don't want any special treatment for the 3 cents.

It is what it is, and your approach might be appropriate as you look forward to 2005, but --

Well, my point being is that your guidance for a slightly up first half, I guess, is presumed off reported numbers for Q1 and Q2?

Yes, that's true.

That's true.

So, depending on, I guess, your attitude on how you want to make it look -- because we have all -- those of us who come from the profession have all had reclassification problems, et cetera.

And I don't want to get -- obviously, you don't want to get into the detail, but let's leave that part of it alone for a minute.

Second of all, Bob, I thought you had bought about $50 million worth of vanilla in '04, had used it -- and were going to use it all up this year.

Obviously, that was wrong on my part, and you've got about half of it left to go?

Not about half.

We have about a third left, Lenny.

And once again, you are absolutely right in your assessment, and that's what we portrayed.

We brought it in advance, and expected to have consumer -- in our consumer foodservice and industrial business draw it out as per the forecast.

And we didn't sell as much as we anticipated -- as we would.

Now, are we going to have selling vanilla at a loss in the first half of the year?

No.

Second of all, if we have to look at -- let's just say for modeling purposes, going forward, you have given us your gross target, if you will, and if you gave it breakdown, I unfortunately did not get there.

But first of all, let me ask it this way -- what is your ForEx assumption going into '05 -- or for '05, I mean?

Flat with this year?

Flat to slightly up.

So from this point forward, our gain in both industrial as well as consumer is really going to be volume and price and not ForEx.

Is that the best way to start out?

That's a good way to look at it, Lenny, yes.

In that case, are we still going to have the, let's say, culling of the product line or culling of our SKUs in the industrial section?

Frankly, that's where I think I was a little bit too aggressive, thinking where we would be on that industrial side, and that's my error.

What is the outlook for that division, let's say, in terms of revenue and income, to the extent you can give us while everybody is hitting the lifeboats here on the stock?

Should we look for something more flattish for '05, considering there may be some further rationalization to go, or are we going to get some normal growth out of that business?

We're going to get normal growth out of there, Lenny, in the area of 4 to 6 percent of topline sales growth, as we said before.

But once again, I go back to Fran's announcement, and what we have talked as a leadership team at McCormick -- we're going to cull out SKUs throughout this business on a continuing basis for the next 2 to 4 years.

We're going to cull out the unprofitable ones, and fortunately we are replacing them with more profitable ones, as evidenced especially in the industrial business by the growth of our new products over the last three years at 15 to 20 percent.

So how the math works out, from a topline sales perspective -- we are predicting in the 4 to 6 percent range.

But SKUs are a critical component of creating free cash flow, getting the less profitable ones out -- and that's throughout the world, not just the United States or Europe -- and at the same time, spending money on research and development to drive innovations and drive new products with our customers.

That I understand, Bob.

But I was thinking like, for example, you're getting rid of bulk.

We've got some pressure from vanilla.

And I'm just wondering whether that is going to skew the results for '05, as we continue that process or if we are done with it.

Let's speak first to the bulk sales.

We're done with that particular project in Europe, yes.

Okay.

That's what I wanted to know.

Exactly.

And on the consumer area, we have got our price increase plus basically Silvo coming in on the top line, then.

That's correct.

And the pressure on margins for the first half here basically really just brings (ph) into the pull-through of the inventory cost?

That's right, vanilla, yes.

I'll try and figure this thing out and follow up offline.

George Askew, Legg Mason.

On this adjustment, I apologize for raising it again.

But is this an entirely FY '04 issue?

Is there a risk that it could have been an '03 issue, as well?

Some part of it included periods in '03, as well.

And does it have anything to do with, for example, the acquisition of Uniqsauces, maybe the integration there or any systems?

Or is it kind of a people process sort of issue?

And maybe that's premature to ask, given your (multiple speakers).

I think, George, what I would say is that's a little premature.

Once again, we are going through the sort of complete investigation phase of the how-to now.

It's just premature, really, on that.

But we did indicate it was personal error.

The signature brands -- if I recall, after the third quarter or during the third-quarter conference call, it was -- some of the weakness in signature brands was attributed to the timing of some buying patterns there, ordering patterns from your customers.

At least, I seem to recall that.

Yet you noted in this call that there was the weakness in that category, cake decorating category.

Can you kind of expound on that a little bit?

Saw some real weakness in the fourth quarter, George.

Everything you reiterated for the first three quarters is as we related it.

But we anticipated some volume increases, especially during the holiday seasons, for those products because that's a big volume time for the cake decorating and dessert products.

And it didn't materialize to the level we thought.

The only comment I would make on the whole unconsolidated piece for 2005 -- and I know we said it in the conference call script -- but we are real comfortable where Mexico is going in 2005.

I know that has been a point of discussion over the last 15 to 17 months, but we see real positive increases in 2005 in Mexico and in Japan.

And we see some small improvement in signature brands, resulting in our unconsolidated income going up rather substantially in 2005.

I was going to ask about that.

You mentioned that competition subsided.

Can you sort of give us a post-mortem on that?

I think the big thing is the cost of the soybean, the whole cost stack, George, which we got under better control -- used some of the skills we have in our global sourcing group from a purchasing perspective, and really focused our promotion and advertising dollars more effectively on those areas where we are under target by competition.

The team has done a tremendous job relative to what I call that turnaround of our Mexican business.

Ann Gurkin, Davenport.

I'm sorry is this has been asked.

What is your opportunity for pricing in Europe, given the competitive environment?

Opportunity for pricing in Europe is limited at this point, Ann.

And then additional discussion on health and wellness trends, the increase in R&D spending -- was that skewed more towards those type of products, or --?

I think on the conference call script, Ann, I focused on AFD -- advanced flavor delivery.

That's what we are really focusing on, sort of the flavor enhancers and the maskers, which is really pervasive of all industry.

That plays into that trend?

Is that what you're saying?

Well, it's in the trend, yes.

It's one of the areas we're focusing and not specifically the only area we're focusing on.

And do you see new products over the next couple of years more in that area, or --?

I see some, yes.

I see some.

Once again, we continue to stay in our core area with our core customer group we have on a worldwide basis.

Eric Katzman, Deutsche Bank.

I guess, looking into '05, I guess I'm trying to get the swing factors here right.

The tax rate's going to hurt you by about 3 cents.

The absence of the accounting catch-up or charge, whatever you want to call it -- that's a positive swing of 3 cents.

You said the acquisition is going to add a penny.

I assume, because you're not going to do any share repurchases towards the end of year, that means that share repo isn't going to really add all that much.

So you're looking for, if we take, let's say, the high end of the range, $1.75 versus $1.55 operating in '04, that you're looking for like 19 cents a share improvement just on operations?

Is that a fair --?

I don't think Fran said, Eric, that there would be no purchases.

I think he said there would be less purchases in the first two quarters and more as we move through the year end.

So there is going to be some contribution from share buyback, for sure, for the year.

But in essence, the businesses are going to drive our earnings per share growth next year, yes, driven a lot by unconsolidated, Eric.

So unconsolidated after-tax is obviously a pretty big swing factor?

Big swing, yes.

And I guess the 450 million, I think, was the number you threw out for three-year free cash flow.

Just so definitions are correct, Fran, that's after CapEx and after dividend?

Correct.

And with your debt -- I guess, turning it to Bob, -- with the debt-to-capital ratio already below your long-term target and the stock off 7 percent today, why, if you're so confident, would you not -- I don't know, rebalance the capital structure a bit here, and be more aggressive on share repo now, as opposed to waiting?

Well, Eric, let me answer your question.

I did not anticipate, going in today, our stock to be down 7 percent.

As we leave this meeting, I can assure you Fran and I will be having a meeting relative to changing strategies.

You want to change the script that quickly?

Once again, I just got the stock price brought into me.

I did not realize -- when we came into the call, we weren't down 7 percent.

But we did not anticipate this.

That's something that, in our wildest dreams, we had not predicted or forecasted relative to releasing a year like we had.

We did have an issue in Scotland, yes;

I readily admit that.

But from my perspective, it's behind us, we are moving forward, and we are not modify -- we're increasing our free cash flow, spending more on advertising and new products.

I just don't quite understand it.

But I can assure you, Fran and I will be having a meeting right after this.

And then, just lastly, again kind of looking at the year-over-year kind of change, am I understanding it correctly that the pricing that you're taking in consumer -- you basically think over the year that is going to offset the hit you're taking on vanilla?

In the United States, yes.

In the US?

Yes.

Okay.

And the price increases are only in the US?

That is correct.

But vanilla is a global issue?

That is correct.

So, net, vanilla is still a hit?

No, I don't think so.

No, because it's very small inside the United States, Eric, I think, as you know.

Matthew Levison (ph), Matthew Levison & Associates.

It was stated in the call that some of your customers have shifted from using vanilla to vanilla flavoring.

Is this business lost permanently?

And, reading newspapers, one has to ask whether any of the regions from which you source product were affected by the tsunami?

Let me answer the last one first.

The regions that were affected by the tsunami are not -- most of our crops are inland and not on the coast, so we had no crop damage at all worldwide.

Secondly, we did not mean to mislead you when we said some of our industrial customers are converting from vanilla to vanilla flavors.

We provide the vanilla flavors as part of our flavor business, so I apologize for misleading you.

Andrew Lazar, Lehman Brothers.

Just two quick clarifications on the pricing.

You said there will be an average of 3 to 4 percent to the sales line in '05.

Is that net of any impact -- I mean, I guess I'm not clear.

Is vanilla pricing coming down ultimately, going to be some downward pressure on the top line?

So is it 3 to 4 net of that, or not?

Well, the 3 to 4 percent is the level of the price increase on items besides vanilla for the US consumer business only.

And what we are saying is that price increase is going to be offset by decreases in vanilla during the year.

So there really is no net impact to the sales line from these pricing actions, nor do we expect any significant impact on the margin piece -- some from vanilla in the first half, like we talked about.

And then, just with respect to the pricing, how is it being or was it phased in?

Was it just an immediate -- was there kind of a check cut, if you will?

I'm trying to get a sense of how quickly it will be phased in, or maybe that is already done.

That's already done, Andrew.

It has been announced.

So you would not look for any shifting of volume one quarter versus another?

No.

It's all within the first quarter.

It's all within the first quarter.

Evan Morris, Banc of America.

I missed the first part of the call, so I apologize if you have already answered some of these.

But, one, can you talk about the magnitude of the increase in this unconsolidated line?

You mentioned that would be one of the big drivers of EPS.

We don't specifically comment on it, Evan.

I think in the double-digit area is the best I can do at this point.

Okay.

Double-digit increase.

And looking at the cost savings, you obviously came in ahead of target this year.

You are maintaining your $25 million target for next year and 30 for '06.

One, I guess, where did those incremental cost saves come from, and why shouldn't we believe that the 25 and 30 now are conservative?

Can you kind of walk us through there?

Most of it came from the supply chain initiatives we had in place that we've talked about over the last couple of years.

A big mobilization factor is the B2K process, the SAP system.

We are starting to see benefits accruing through that, as we anticipated we would.

And that's part of why it continued to roll in greater than we anticipated or predicted in 2004.

You could make the assumption in 2005 it's going to be greater, but with the projects we have in the queue, as we look forward through the year, we are pretty comfortable in that $25 million range.

(OPERATOR INSTRUCTIONS).

Mitchell Pinheiro, Janney Montgomery Scott.

A couple of quick questions.

One, if I did my math right, it looks like unallocated expenses were up about $8 million in the quarter year over year.

Any particular factor driving that?

Actually, Mitch, that's a function of expenses that, for whatever reason, are unallocated to the units, one of which was some B2K costs in this year that we kept it at corporate.

It was sort of similar to Q3 levels, but --

I should also point out that for '04, this is the year that we had to comply with Sarbanes-Oxley and report on internal control, and we kept those costs in corporate, as well.

It's a pretty significant number.

In terms of industrial, you have talked about club stores and -- geez, I forget the other factor already.

But you did not mention restaurants or foodservice.

How did you do in that segment?

Restaurants were up, Mitch.

We had a good year.

The foodservice distributor piece -- once again, it was a reasonable year but not a good year.

And once again, we're anticipating '05 to be better as we rebound with some new, innovative products in sort of the distributor line.

So restaurants were up in the fourth quarter?

Yes.

And just finally, I guess, in terms of weighting of your joint ventures, could you just refresh my memory -- Mexico, Japan and signature in terms of their weighting?

The big part of that net income line is Mexico, Mitch.

That's the biggest piece.

That is where the biggest gain is going to be, 2005 over 2004.

Back in 2002, it looks like you did about, I think, in the low 20 million area.

Is that an achievable level -- because it exes (ph) out, I think, a lot of the issues with Mexico.

Is that --

I think what we would comment, Mitch, most of the Mexico issues are behind us.

A lot of the Japanese issues are behind us.

I think, to use a double-digit range for growth of net income in the unconsolidated area, I think, is fine.

There appears to be no further questions at this time.

This concludes today's call.

A telephone replay of today's call is available through midnight tomorrow by dialing 877-519-4471, and the access code for that is 547-8496.

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

If you have further questions or points to discuss regarding today's information or any future events, please call us at 410-771-7244.

Thank you for your participation.

This does conclude today's teleconference.

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