McCormick & Company Inc (MKC) 2005 Q1 法說會逐字稿

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

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

It is now my pleasure to turn the floor over to your host, Ms. Joyce Brooks.

Joyce, 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 Web site, www.McCormick.com.

I'm Joyce Brooks, Assistant Treasurer for McCormick, and with me are Bob Lawless, Chairman, President and CEO, Fran Contino, Executive Vice President Strategic Planning and CFO, and Paul Beard, Vice President Finance and Treasurer.

Today, we will discuss McCormick's financial results for the first quarter ending February 28 and our outlook for 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 will turn the discussion over to Bob.

Thank you, Joyce, and good morning to everyone participating on today's call.

During our January earnings release and investor call, we stated our financial objectives for 2005, to grow sales 4 to 7% and earnings per share between $1.70 and $1.74.

At that time, we indicated that a significant portion of the earnings per share increase would occur in the second half of the fiscal year.

Today, we have reaffirmed these goals and continue to expect the margin expansion of profit increases for 2005 to occur in the third and fourth quarters.

A primary reason for this pacing of the quarters is our position with vanilla beans.

Recall that we had purchased a strategic supply of vanilla beans in 2003 to ensure an ongoing supply of quality product for our customers and to manage our costs for this raw material.

However, a larger than expected crop has caused vanilla bean costs to drop rapidly and, as projected, we are experiencing significant margin pressure, particularly in our industrial business.

We expect the significant impact of this situation to end in the second quarter.

As I discuss the performance of our business segments, you'll hear more about this situation and its effect on our first-quarter results.

I'm going to begin with a review of sales.

We increased sales 5.5% for the quarter. 3.2% was due to higher volumes, prices and product mix, of which 2.1% was added by the acquisition of Silvo.

Foreign exchange rates continue to benefit the Company and added another 2.3% of the sales increase.

In our consumer business, we grew sales 7.7%.

Sales increased 4% from Silvo, 2.7 from foreign exchange rates and another 1% driven by favorable price and product mix.

In the Americas, consumer sales rose 4.2% with 0.6% from favorable foreign currency exchange.

During the quarter, positive price and product mix more than offset a decline in volume.

We had some benefit from the price increase announced in the first-quarter for our U.S. consumer business.

Leading the positive product mix during the quarter were the introduction of the new Grill rub products, increased sales of grinders and a 10% increase in Zatarain's branded products.

The volume decline related to efforts by our retail trade customers to reduce inventory levels.

While these actions by our customers have an adverse effect on our sales in a particular period, we support the move to reduce inventory within the supply chain.

We last reported to you a sales impact from trade inventory reductions in the first quarter of 2003.

Our past experience is that this situation occurs in the first quarter of our fiscal year, as retailers work through any remaining build-up following the holiday period.

We do not expect any measurable impact from further trade inventory reductions in the U.S. during 2005.

Moving onto Europe, consumer sales in this region rose 16.2%.

The acquisition of Silvo in November, 2004 added 12.2% and foreign currency exchange added 6.9%.

The remaining decline of 2.9% is attributable to the continuation of a poor economy and difficult market conditions, primarily in France.

Discount retail chains continue to gain market share in the retail sector.

Sales of a limited selection of our spice and herbs are under pressure from low-priced products offered in the discount retail chains.

We've increased promotional spending behind these items to support our retail trade customers and maintain market share.

While this higher spending has reduced net sales, we've been successful in slowing the shift in sales to the alternative channel in recent quarters.

In the Asia-Pacific region, first-quarter sales decreased 3.6%, despite foreign currency exchange adding 2.2%.

As in the U.S., our business was affected by a reduction in trade inventories, both in Australia and in China.

We project strong sales growth for the balance of 2005 for this region, as we expand distribution in China and introduce new products.

The higher sales led to a 5.2 million increase in operating income for the consumer business, up 10.6 more than the prior year.

As noted in the press release, this follows an increase of 23% in the first quarter of 2004.

The as for the industrial business, we were frankly disappointed with the first-quarter results.

Sales increased slightly and operating income was down significantly.

In total, first-quarter sales rose 3%, of which 1.8% was foreign exchange and 1.2% higher volumes, pricing and product mix.

Industrial sales in the Americas increased 2.1% with a 1.4% increase in volume, price and product mix and a contribution of 0.7% from foreign exchange.

Lower pricing on vanilla decreased sales for this quarter and will have some impact on sales throughout 2005.

In the first quarter, this decrease was more than offset by higher sales to restaurant chains and foodservice distributors and higher sales of snack seasonings.

The impact on operating income of our vanilla sales in 2005 compared to 2004 was quite significant and accounted for a large portion of the decline in operating income for the quarter.

The performance of our industrial business in Europe was the other significant factor in the operating income decline.

In Europe, industrial sales increased 4% with a 5.7% increase from foreign currency and a 1.7% decline due to lower volume.

Recall that, in 2004, we began to eliminate lower-margin SKUs, bringing our year-end total to 2,750 SKUs for this business.

Our aim in 2005 is to reduce this number by at least 25%.

As a result, there will be some pressure on sales in the upcoming quarters.

Operating income in our European industrial business this quarter was down significantly.

This is due to a mix of customer purchases and product sales during this period.

Our ongoing management intention is on streamlining our business portfolio and improving results.

Between the consumer business and the industrial business, we've had some difficult conditions in Europe in recent quarters.

Those who tuned into our last fall know that we've been working closely with our team in Europe to address our issues.

We recently announced a change in the leadership of our financial organization in Europe.

Those who followed the Company in the late 1990s probably met Gordon Stetz when he handled Investor Relations.

Since that time, Gordon has led a strategic planning effort, acquisition activity, including the purchase of Ducrole (ph) and in recent years the financial team at our U.S. consumer business.

Effective immediately, Gordon will be leading the financial group in Europe and working with senior management team there as they manage through a tougher period of growth, assimilate the Silvo acquisition, and most importantly implement B2K.

We remain enthusiastic about our opportunities in Europe and are committed to applying the right resources immediately to achieve growth in this important region.

In the Asia-Pacific region, we achieved 9.1% sales growth with 2% from foreign exchange.

Volume, price and product mix increased 7.1% with increases in both Australia and in China.

In total, operating income for the industrial business was 16.2 million and as I stated earlier, down from the prior year due primarily to vanilla in the Americas and our sales mix in Europe.

In total, operating income was 58 million compared to 61.4 million last year.

Interest expense increased due to higher rates and as we noted in our January call, the tax rate is higher in 2005 at 32%.

Income from unconsolidated operations was 5.5 million, up from 3.3 million in the prior year.

We're pleased to report this increase following a poor performance that began in 2003 and continued through most of 2004.

This improvement was driven by significantly higher sales and income from our joint venture in Mexico.

More effective marketing programs and promotions, new products, reduced expenses and lower soilo (ph) costs are all contributing to be improved performance.

We continue to expect a strong performance from our joint ventures in 2005 and for income from unconsolidated operations to increase by at least 25% for the full year.

Earnings per share for the quarter were $0.26, which includes $0.01 of special charges related primarily to the streamlining actions announced in 2001.

Higher sales, increased unconsolidated income and lower shares outstanding were more than offset this quarter by our lower gross profit margin, higher interest rates, and higher tax rate.

At the end of the quarter, inventories were down from February 29, 2004 as a result of lower vanilla inventory and progress with supply chain initiatives.

Prepaid allowances were also lower, which is continued evidence of our progress in working with retail customers to lower shelf prices for our branded products.

Receivables increased due to higher sales and foreign exchange rates.

As of February 28, 2005, our debt-to-total capital was 41.4% compared to 42.2% a year ago.

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

We continue to track below our target range of 45 to 55%, despite a high level of share repurchase in the first quarter.

During the quarter, we used 45.2 million to repurchase to 1.2 million shares, up from 12.8 million in the prior year.

At the end of the quarter, we had 102.5 million remaining of the 300 million authorization.

We expect to complete this authorization in 2005 in the absence of a significant acquisition.

That concludes my remarks on the financial performance this quarter.

Our results for the first quarter of 2005 were below expectations.

While this was a disappointment, we remain enthusiastic and confident about our opportunities for growth at McCormick.

I'd like to briefly review some of the programs under way to drive sales and margins during the remainder of 2005.

Product innovation remains an important sales driver.

Our product lineup includes new grinder flavors and packaging, Grill Mates rubs, relaunched Hispanic products and liquid seasoning mixes in the U.S., Canada, Europe and China.

With industrial customers, we're excited about some new snack seasonings, as well as new condiments and seasonings for the restaurant and foodservice customers.

As our customers increasingly focus on health and wellness products, we are even more encouraged by the potential of our advanced flavor delivery capabilities.

Our marketing programs, including advertising of grinders and new media behind Hispanic items, started a few weeks ago here in the United States -- in Europe, our marketing emphasis on value-added products that do not compete with the hard discounters.

Our new distributor network in China is in place, and we aim to expand beyond our primary markets (indiscernible) penetration and profitability in the Beijing area.

Acquisition activity is underway to identify brands and businesses that are a strategic fit.

Silvo is off to a very good start with results on target for the first quarter.

We are poised to introduce new products under the Silvo brand in the second quarter, and we just announced the closing of a warehouse in Belgium to streamline our operations there.

We have our team in place to prepare for a successful implementation of B2K in Canada and in Europe in 2005 and 6.

In the U.S. where B2K is in place, we are aggressively pursuing supply chain savings across all functions.

We are on track to meet our $25 million cost reduction goal and expect these savings to both improve gross profit margin to 50 to 75 basis points and provide some offset to increases in selling, general and administrative expense in 2005.

As I stated at the beginning of my remarks, we expect a significant portion of this year earnings growth to occur in the second half.

As you look at the second quarter specifically, keep in mind that our 2004 earnings per share of $0.30 were affected by several factors.

First, we recorded $0.01 of special charges related to the 2001 streamlining actions; second, we had a $0.04 special credit related to the settlement of a class-action lawsuit; third, we recorded $0.02 in SG&A in connection with the reorganization of administrative and other functions in international locations.

These 3 factors had a net positive impact of $0.01 per share.

For the second quarter of 2005, including the impact of vanilla situation, we expect earnings per share to be approximately $0.30.

In summary, sales and profits for 2005 are off to a lower start than we expected.

The impact of vanilla situation, the European industrial business more than offset progress with sales and cost reductions during the first quarter.

However, as I look our programs for the year, including new product pipeline, marketing programs and supply chain initiatives, I am confident that we will deliver another strong year of financial performance and record results.

For everyone on the call, we thank you for your interest.

Now Fran, Paul and Joyce will look forward to your questions.

Thank you.

The floor is now open for questions. (OPERATOR INSTRUCTIONS).

Eric Katzman with Deutsche Bank.

Good morning.

Bob, you know, I've been following the Company for a long time, been recommending it for a long time.

It seems like, in the last few quarters, you know, it's been very kind of let's say uncharacteristical for McCormick.

You've had some one-time gains like this credit a year ago that helped you with the quarter even though you disclosed it.

You know, there was an accounting issue in Scotland last quarter.

Now you missed due to vanilla, even though it was your choice to buy in $50 million worth, but now you're paying for that.

I guess, you know, to what extent is some of this -- I don't know -- due to, you know, external factors that you just can't control, like what's going on in Europe?

But to what extent is it really kind of, I don't know, management kind of resting on the laurels and that's why you're having to make some changes in Europe?

I guess maybe you could answer that that first.

Sure, Eric.

Let me deal with the vanilla first and I will come back to the other part of your question, Eric.

I mean, as I said, at the end of 2003, we took a conscious decision as a company because of supply and quality concerns and bought into vanilla, $53 million worth of vanilla.

At that time, our best intelligence would suggest that would last throughout 2004 and we would move into 2005 with the new crop and our inventories would be where we desired them to be.

Two phenomenas (sic) happened.

One, because of plantings in other countries and higher crops in Madagascar, the prices dropped unbelievably.

Unpredicted by us?

Yes.

But it is what it is today.

That situation created a tremendous drop in selling prices of vanilla, one, and two, created a lack of demand in the fourth quarter, which we talked about in the January conference call.

You add all that together and it created a situation that we carried into 2005 -- (technical difficulty) -- than we anticipated.

As I said in the conference call script, vanilla is the most significant contributor and impact in our earnings for the first quarter and will be in the second quarter.

We anticipate the impact in the first quarter to be 3 to $0.04 per share in that area and we anticipate the impact in the second quarter to be in that area.

Once again, that's a combination, if you do the math, between lower selling prices, lower volumes, obviously lower costs and obviously we have a situation with higher-cost vanilla.

So the vanilla situation kind of is what it is.

We're trying to manage through as rapidly as we can, as the best we can, and we are being as declarative as we possibly can relative to the issue.

If I could move to Europe for a moment, I think I was very candid in the January conference call.

Europe was a surprise, obviously, to Fran and I, a significant surprise to us.

We believe we have that situation under control at this particular point in time.

We made organizational changes with Gordon Stetz, who most of you on the call know, and Gordon is not just a financial CFO;

Gordon has got the experience in SAP, which gives us comfort that he will oversee the SAP.

He's done the Ducrole (ph) acquisition, so he understands the intricacies of Ducrole.

He does speak the French language, and he will bring oversight to that team over there that we think is something that's needed on an ongoing basis.

Lastly, he has a sense of urgency created by myself and by Fran to get at this very quickly, and the support of the Corporation.

Having said that, during that first quarter, we also an impact on our industrial business in Europe, which as you know has some cyclicality around our customer purchases.

Once again, you could comment, Eric, it's bad luck, it's bad consumer -- customer situations in the marketplace, but it is what it is relative to the first quarter in our industrial business in Europe.

We are applying resources to it.

At this particular point in time, we've not lost any market share, and we're just working through the volume fluctuations and we anticipate, as I said, this to come back some during the second quarter, which will be mitigated by the vanilla, and stronger in the third and fourth quarters.

I wouldn't want to construe, at this point in time -- and I will close with this, Eric -- that we are in a situation where we are complacent about the past.

As a result, we don't have our eye on the ball.

I would hope people, with the January conference call and this conference call, understand we take this seriously, it's driven a lot by vanilla, and I can't correct the vanilla situation at this particular in time to any degree better than we currently are.

Okay.

Then just as a follow-up and then I will pass it on, did you say correctly -- because you were talking pretty quickly but -- but in the Americas, in consumer, that volumes were down and that that was a result of trade inventories?

That is correct, Eric, yes.

Trade deloading during the first quarter was evident at 3 or 4 of our major customers.

Okay.

Given that you are I guess, you know, category manager for the bulk of the industry, given your share, and your kind of read on what's happening at retail as a result of that, why shouldn't we view that the results in the fourth quarter from consumer -- which I think sales were up like 7% -- as really kind of a taking from the first quarter?

We didn't read it as that.

Obviously our customer purchases during the fourth quarter are to protect themselves during the holiday season.

If you looked at our volume increases in 2004 over 2003, and that being the strongest quarter, it wasn't really out of the question or extraordinary.

This has nothing to do with the fact that your biggest competitor is now owned by a new player?

That is correct, Eric.

No, that is not.

There is none of that at all.

All right, thanks.

Terry Bivens with B.S.

I think that was meant to be Bear Stearns.

Good morning, everyone. (LAUGHTER).

That was quite an intro there, isn't it?

Let me compose myself here for a second.

Bob, back on the issue of inventories, take away -- maybe the take-away number might shed some light on it.

Do you have a take-away number for your February quarter in the U.S. consumer business?

Not at this point I don't, Terry, no.

But you clearly think that that situation comes to an end with Q1 and should not be visible at all in Q2?

That is correct, Terry.

How about in China and Australia?

Should those deloadings continue into the second quarter?

We don't anticipate them to be continuing into the second quarter it either place, no.

It's really a first-quarter phenomenon.

Okay.

Just looking at consensus, I mean, if you look at what we had this quarter, consensus I think is 32 for the second quarter, so we've got basically a nickel to make up to get to kind of $1.73.

Hopefully my numbers are right, but that shows basically a 22% gain over the back 2 quarters.

You're comfortable with that?

Well, Terry, this is Fran.

The first thing that we want to point out is that the $0.32 that's out there on the First Call is the consensus.

It's isn't in line with what our internal projections were, so we don't look at it as though we have to make up $0.05 to make our full-year estimate.

That's true for the second quarter and for the first quarter.

We didn't have numbers as high as the Street had it for us. (multiple speakers).

Okay.

I see your point.

So in your budget, you've assumed the back half is as strong as now indicated all along.

that is correct, Terry, and I think we shared that a bit in the first-quarter conference call in January.

We know we have third and fourth quarters that are strong.

They are our biggest 2 quarters, and we've a number of programs we've put in place and vanilla is behind us at that particular point in time from a cost standpoint.

Just one last one, just in terms of the French situation, I know that's causing problems not only for you guys but for others.

I guess what I'm curious about there is, I guess Fuchs is supplying both (indiscernible) at this point.

Is that true?

That is the best information I have at this time, yes.

I mean, when do you see a turn there?

Nestle was a little bit I think somewhat pessimistic on that front.

I'm just wondering, when do you think that might improve, given the steps that you've outlined today?

I think, Terry, there's 2 comments I would make.

One is, bear in mind in our category, there's just 10 items that are in the discounters, and we're having promotion programs against those items with our major retailers, and we're seeing some impact of that.

So I am more positive about our reaction to the discounters along with our customers' than I am of the second item, the economy in France -- because of what has gone on over the last 2 or 3 years with cutting the work hours from 40 to 35 and struggling to get back to 40, the price decrease phenomena that they are imposing upon manufacturers -- I think there is a situation in the country where the economic conditions and the consumer confidence is having as much impact on business -- everybody -- as much an impact as the hard discounters are.

I think the hard discounters is a phenomenon we're going to work through much more quickly, but I think the whole economy in France is still with us most of 2005.

Okay, all right.

So then getting to the numbers you've outlined to your yearly goal assumes then that France continues to perform in the kind of weak fashion we've seen.

Would that be accurate?

That is correct.

Okay, great.

I will yield the floor.

Thank you very much.

John McMillin with Prudential Equity.

Good morning, everybody.

I don't want to split hairs here, but the charge that you've announced was 1.3 million pretax, if I'm not mistaken.

What was it after-tax?

Was it just assigned a normal tax rate?

Yes.

Well, if you -- again, I was just talking about the difference between a penny, but I get your earnings at $).025.6, which does run-up to 26, but 0.9 divided by 1.40 equals another 6.6 of $0.01, so I agree that that rounds up to $0.01 but I don't know how we kind of round up to 20 -- what is it?

A 27 operating number?

John, we report our earnings, as we have for the last year and a have, on GAAP EPS.

We reported $0.26 and you pointed out that there was $0.01, albeit with rounded, of special charges.

We didn't report the $0.27.

Okay, and I'm not just -- I'm just trying to -- because I can't get there and now you're basically confirming neither can you.

We don't report our earnings, you know, excluding special charges, is what I'm confirming.

Again, I'm not try to get the feds after anybody;

I'm just trying to make sure my numbers add up or that I'm missing something.

Well, as you pointed out in the beginning of your math exercise, that if doing the math the way you did it gets you to something less than $0.26.5, you've rounded down to 26.

If it was a couple tenths of $0.01 more, it would be 27, so I mean you you're really talking about like a fraction of a penny.

I didn't want to be contentious.

I was just trying to get the right operating number.

Bob, just -- we heard Bob Davie last -- I guess it was May -- kind of describe the growth prospects in industrial.

I guess I understand the vanilla.

It would seem to me you also benefited as vanilla initially went up and you had inventory.

If you could kind of address that?

But in terms of if anything has kind of changed from what Bob said last May in terms of now, because you know some of the industry issues between now and then have gone beyond vanilla.

That is correct, especially in Europe, John.

Yes.

There's no question about it; the volatility of purchases and the irregularity of purchases in Europe, especially for industrial customers, is a new phenomena for us one, Two, -- and I said it in my conference call script -- we are taking SKUs out of that business every quarter and will continue to do that, because that's right for our company, it reduces complexity, but it does have an impact on the sales line and to some degree on the profit line.

So it's a combination of the 3 things.

You know, Bob did address back then about the SKU production;

Bob did address, as we talked about in the conference call script, a lot of positiveness, John, around the snack seasoning and the restaurant chains and the global expansion in China and especially in Thailand, in Australia.

What we did not anticipate at that point in time, like we did not anticipate the vanilla decrease, was an impact on our European business relative to our industrial customers and the variability aspect of that in a small quarter, in the first quarter.

As far as vanilla helping you let's say this time a year ago?

It was helping us a little bit this time a year ago, yes it was.

That's correct, John.

Yes.

But once again, on the industrial business, it's a competitive situation that is very different than the retail, John.

Just my last question on vanilla -- it would seem to me that you were hoping that some of the inventory you had in October would have been sold in the November/December time period.

Is that correct?

That is correct, John, yes.

I think I said that in the January conference call.

We had greater expectations in the fourth quarter for vanilla both on the industrial and consumer side, but as I said, as the prices started to drop dramatically, both sides of the equation decided to purchase less.

But it doesn't reflect, let's say, a more sophisticated client base.

I know you don't want to criticize your client base on this call, but it doesn't reflect any kind of changes in your consolidating customer base or some kind of structural change?

No, John, not structural at all.

You know, vanilla went from -- you know the numbers -- (multiple speakers) -- 2.40 to 30.

That phenomena in any marketplace with any commodity is very difficult for us to manage through in a couple or 3-month period.

Well, Gordon is a good man.

He will do well.

Thanks.

Thanks, John, I appreciate your support.

Leonard Teitelbaum with Merrill Lynch.

Good morning.

Let me just pick up a couple of things.

You know, I don't think we've put this vanilla situation to bed.

To me, it was a tactical move that you made, not a strategic move.

It turned out, I guess that, it is what is.

I think, just to pick up on John's question a little bit, I was kind of under the impression that we were going to get that thing emanated in the quarter even if we had to cut price to move it out.

Is it just that you are just unwilling to do so and want to stretch it out longer, or that's just the way the market evolved?

I would say it's the way the market evolved.

Lenny.

I mean, the prices have come down dramatically in the quarter.

Once again, the carry-over from January was greater than we anticipated.

Maybe if I could comment one thing, Lenny -- we believed it was a strategic purchase to satisfy our customers' need, both on the consumer and industrial side.

Since we are the largest purchaser of vanilla in the world, we did have visibility of the quality issues and visibility of supply.

Being the largest, we then protected them by buying inventory in at a price lower than the maximum amount vanilla got to.

So we viewed it as strategic; it didn't work exactly as well as we would have anticipated, but we didn't anticipate the -- (multiple speakers).

Yes, my hangup is not with that.

I mean, all the past (indiscernible), there is going to be a shortage in the crop; you had the inventory and that was I think done for the right reasons, just that the market ran away from it and that's the way it is.

I would just -- my only comment was basically how far out this thing will go and are we going to be done with it this quarter or are we going to be carrying it for the rest of the year I think is my biggest concern.

(multiple speakers) -- done in the second quarter, Lenny.

Right.

Now, it was my understanding, in the conversation when you were informed of the price action of the stock that before you guys went over to Scotland you might want to kind of check to pick up some shares.

If I look at the numbers ,that really wasn't done, certainly if it was a very minimal amount.

Now you're off pretty good again today.

Does this mean that you're going to take a look at your share repurchase authorizations and start to act on them sooner rather than later?

Well, Lenny, we bought $45 million in this quarter versus 12 a year ago, and we have about 100 million remaining.

I think you know we had the situation last quarter during the conference call where the stock went down and then went back up fairly rapidly.

We were prepared to move and purchased stock and we're in the same situation right now.

Now if I take a look at the shares outstanding in the quarter, if these numbers are right, you know, you were down about 1.3 million.

Are you going to be down?

Should we look for this trend to continue or is this going to be it until the fourth quarter or later in the year?

Well, it really depends on our timing, again, of our share repurchase.

We try to match our share repurchase to the fourth quarter, when we receive the largest amount, biggest portion of our cash flow from operations.

But we certainly are already thinking about, you know, the other quarters as to how we might accelerate some of those purchases.

All right, because I think John brings up a good point and I'm not going to get into the math behind it so much, but the operating income is going to be, based on the way you've set the promos, etc. -- but I think we still have to take a look at what that divisor is.

I'm obviously pushing very hard for continued and aggressive share repurchase.

Now, having said that, could you talk a little bit more -- and I got on the call late, so if I was covered earlier, forgive me -- could you talk about what some of your container costs are?

We heard General Mills.

They're getting smacked up again today -- did say that they had hedged their fuel costs in through -- at least through midyear.

Could you talk a little bit about that packaging, fuel and other transportation costs, please?

Well, transportation costs, Lenny, are not going up.

We are hedging come some, just like everybody else is in the marketplace today, but with the price of oil going up at the rate it is, those are an impact but they're built into our estimates.

We are expected to find those cost savings and it was part of the price increase justification that we had, which we announced earlier in the year in the consumer business.

So as we had vision for the future, we used the cost increases in fuel.

From a packaging standpoint, obviously it will have an impact on our plastic bottles at some particular point in time.

I don't know that today.

It will have an impact on glass at some point in time.

We're going to be expected to manage through those at this point in time.

Now just your -- Fran, Terry's question was, don't you have a "nickel" to make up?

That's street expectations, I appreciate, but given your -- the guidance that you've just announced, no matter what base you're using, it's still going to call for one hell of a good Q4, which it always does, but also a good Q3.

I know that you've scrubbed these numbers pretty hard.

What foreign currency impact are you looking for in those numbers?

We basically project our future based on kind of the actual experience to date.

So if the dollar what to get stronger, that would change.

Could it change it dramatically or just not that much?

Well, it's going to change it but you've got to remember that our European operations, which is the biggest part, is still small compared to our total.

Well, that was my point.

Is it going to be a material change, or -- (multiple speakers)?

No, I think it could affect us one way or another, a penny up ,a penny down but it's not going to be, you know -- (multiple speakers).

All right, I will hold the rest of my questions for off-line.

Thank you very much.

George Askew with Legg Mason.

Yes, good morning.

I hate to beat the vanilla horse to death here, but you know, clearly your strategy was around securing supply, securing quality vanilla, but also, as mentioned before, you took on risk for your partners' benefit.

To what extent have you been able to pass along some of this incremental vanilla cost to your partners, or has McCormack kind of taken the brunt of the price decline here in the last couple of months?

I think your latter statement is correct, George.

You know, with the price decline in the marketplace from what I said to John, from 240 to 30, at this point in time, there is lower-cost alternatives out there with good quality, so to retain the distribution we have, we've had to lower our costs -- lower prices, excuse me.

It seems like that you're -- I mean, were your partners paying your costs on the way up and they are paying your costs on the way down here, or are you guys having to sort of suck it up here as things turn negative?

I'm not going to talk about it on the way up or the way down, George.

Just to say we are the supplier and they are the customer.

Okay.

On the industrial business globally, you know, clearly you've talked about doing an acquisition of Flavor House in Europe or Asia.

To what extent -- and my sense is that your customers are asking for you to beef up some of those capabilities globally on the industrial side, on the flavor side.

To the extent that you haven't been able to secure that acquisition or beef up those capabilities to date, are you losing contracts internationally?

Are you losing business or market share on the industrial side for not having that flavor capability?

No, we aren't, George, no.

I think, as we've said before, the customers that we are with and currently have strategic partnerships, we are expanding on an international basis with them.

What it doesn't permit us to do is penetrate some of the new customers that we currently have no business with in some of the international markets.

That's what increased capability in Europe and Asia would allow us to do.

Okay.

Then lastly, can you just remind us, for the 2005 EPS guidance, what is the special charges impact and what quarters will we see that in?

We recorded, George, $0.01 in the first quarter.

That was actually some completion of the actions that were occurring in '04 related to organization changes, facilities consolidation.

The remaining activity is related to those 2001 streamlining actions involved joint ventures.

That's a little harder, because there's a partner there, for us to project the timing and amount.

It's possible we could have some additional special charge during the year, but we don't really have a projection for you at this time.

It will still probably round to $0.01.

Okay, so the $1.70 to $1.74 range is -- may have $0.01 of special charges -- (multiple speakers)?

Correct.

Chris Growe with A.G. Edwards.

Good morning.

I just have a couple questions for you.

Just to kind of clear up this vanilla thing, in rough terms, as a percentage of your sales, would vanilla be 5% of your sales if you include consumer and industrial?

Is that a good number to use?

It's less than that, Chris.

Less than that, okay.

The other point -- other question, a quick one, is that, on the industrial side, do you expect profit growth in that division for the year in 2005?

Yes, I do.

Okay.

In terms of your gross margin goals, are those still intact for 2005?

Or, you've had obviously a tough first quarter and once again, it would imply some pretty big gross margin gains in the second half.

Is that reasonable as well?

It's reasonable, yes it is, Chris.

As you say, it's been tough in the first quarter and we're going to have some toughness in the second quarter, but we anticipate having significant gains in the third and fourth quarter.

I guess, as I'm thinking about the third and fourth quarter at what's really going to drive that growth so significantly year-over-year, my initial thought was pricing in the Americans where you've taken pricing, but as I understand, the vanilla price the decline will offset the majority of the pricing you've taken here in the U.S., correct, in consumer?

To some degree, yes, to some degree, but I think the key thing that's going to drive it is the supply chain initiatives that we talked about earlier.

The $25 million, once again, starts to really kind of embed itself in the business in the second, third and fourth quarter.

Okay, and that mostly comes through on the gross margin side I assume?

Mostly gross margin this year.

Is there -- the last question -- an anticipation then in U.S. consumer for some private label to kind of tick up here as you raise prices?

Is that an expectation that you have, that we should watch for, for example in the coming quarters?

We are hearing that in some other categories as well.

Pricing -- I'm not sure I understood, Chris.

The pricing private label go up or stay down?

Well, as you take U.S. consumer prices up on the brand side, are you taking private label up as well?

That is correct.

Okay, so there won't be much of a change in the price gap between those?

That's what we're doing our very best to manage, yes.

I understand very well.

Ann Gurkin with Davenport.

Good morning.

I was just wondering if you could review a little bit of your criteria for the effectiveness of promotions in your consumer business?

Are you happy with the timing, the returns, the amount you're spending on promotion versus advertising?

Can you just walk through a little bit of that?

I sure can, Ann.

As we said in the January conference call, a lot of the drivers of the 2004 performance was enhanced promotion dollar effectiveness.

Once again, that's driven by a real analysis over the last 15 to 18 months with the SAT being the tool that allowed us better visibility on really where we were getting a better bang for our dollar.

That's going to continue, 2005 and 2006, as we look at our promotion dollars.

Again, if you looked at a journey we're on as far as promotion analysis and promotion effectiveness, I think our U.S. consumer folks would say, if it's a 1-to-10 ten spectrum, we've probably come from a 1 to a 4, at the end of 2005 might be around a 6.

As far as effectiveness of the dollars that we're really analyzing and looking at and getting a bang for the buck -- with our customers and with the consumers.

Then can you spend a little time talking about China and your growth opportunities in China, whether it's partnering with, say, restaurant chains or going in on your own, or doing joint ventures?

Can you talk about that growth?

Industrial, I think if you looked at our first-quarter announcements, industrial continued to be very strong in China.

Once again, we're going to grow as our customers grow in China and once again, we are all aware of the 2008 Olympics in Beijing and that's going to be the journey we're on with our major customers that are going to participate in the Olympics during that time period.

So the industrial is going to continue to be buoyant.

Foodservice will continue to be buoyant as a result of the buildup to the Olympics.

On the consumer side, we've been repositioning, eliminating SKUs, downsizing our distributors and we are really poised to take off and sort of over the next 12 to 15 to 20 months in the China marketplace on the consumer business. (multiple speakers) -- innovation of new products and expansion and distribution.

Andrew Lazar Lehman Brothers.

Just two quick things -- one, as you sort of pare down your customer list, if you will, around the industrial business to those kind of key partners that you talked about at your analyst meeting, does that ultimately help?

I would think that would help reduce volatility to some extent in the industrial business as you go forward.

The second thing is, with respect to vanilla, you talked about supplies coming from additional countries with plantings.

Is that ultimately also kind of really what you want going forward?

Because you've always been kind of held hostage to some extent about what's going on in Madagascar.

Is this the beginning of alternate sources, which maybe reduced the volatility of that commodity going forward?

Let me comment on the first on our industrial customers.

As we've pared down and focused on our top customers, Andrew, the volatility with some of them still continues because, as you know, there's promotion periods for them like there are in our consumer business.

When the promotions are on and using products that we supply on a worldwide basis, obviously the volume follows.

If they don't promote them and promote other products, the volume is less.

It doesn't mean we lose any distribution, but the key thing is -- and I will come back to our January conference call -- the key thing on industrials for me is that 22 percent of our sales in 2004 were new products launched over the last 3 years.

So how we are trying to mitigate the volatility is have more menu items, especially in the restaurant area, that are either promoted or regular every day.

I think we're working very diligently at doing that.

If you look at vanilla for a moment, the high-quality vanilla has and continues to come from Madagascar but there's alternative sources out there, and that's why prices come down so fast.

There is a supply and demand situation worldwide on vanilla.

That was driven by a number of factors as the price went up.

Is that something structurally, though, that could -- is a positive over time?

Because there's typically not been as much of an alternative source?

I think the answer to that is yes.

Yes, it gives us many more alternatives.

How we come forward with the vanilla strategy is something we are working on today.

Lastly you talked about -- I think you used the word "mix" in terms of some of the impact in industrial in Europe.

I understand the SKU reduction and all of that, and the volatility.

Was there something else there going on with respect to product mix specifically, or did I read that wrong?

It really goes back to, as Bob said, our large customers, what they are promoting, their purchase patterns around those promotions.

We are supplying the quick-service restaurant industry (indiscernible) snack seasonings, (indiscernible) snack chip companies so there's a broad range of different types of business that we supply.

Evan Morris with Banc of America Securities.

Good morning, everyone.

Just a couple of questions here -- just really trying to reconcile the balance of the year, particularly the back half.

I know this 3 to $0.04 per quarter impact from vanilla is going to go away up to the fiscal second quarter.

Does that reverse in any way and become an incremental positive additive in the back half, or is it just a negative that goes away as we are just looking at the vanilla issue?

Well, I think ,if you look at the pricing structure, and we've been able to retain most of our distribution, Evan, as we look to the third and fourth quarters, especially the fourth quarter where we sell a significant amount of our volume on the consumer side and the industrial side, we have cautious optimism that we're going to sell more this year than we did last year and the year before because the price is going to be down.

We are also optimistic that our consumers will trade up from the 1-ounce to the 2-ounce to the 4-ounce sizes.

So the answer to your question is yes.

Okay.

I guess as you just look at the cost savings that are going to flow through, you mentioned earlier that the benefit is going to start to hit in second, third and fourth quarters.

I guess if you can sort of break that down a little further, and how much of that I guess has already hit, how much of that do you expect in the second quarter and then what's the benefit that you're looking for in the back half just from the cost savings realizations of that 25 million?

We're not really prepared to break down that down, Evan, at this point in time except to say that a small amount has hit in the first quarter because it is our smallest quarter.

Okay but is it safe to say a third, a third and a third, or again, you just --?

We would probably rather not disclose that at this point.

Keith LaRose with Bradley Foster and Sargent.

Good morning.

I have a fairly microlevel question, and I'm a bit new to the name, so -- but I'm very interested in just a few comments surrounding -- you know, I walk into a Wal-Mart in Connecticut and the price of a McCormick brand ginger, 0.8 of an ounce at $1.97 at Wal-Mart, and I walk into a Stop N Shop locally and it's $3.79, and black pepper 2 ounce is $0.97 at Wal-Mart, and $1.99 at the local Stop N Shop.

Can you just -- for a layperson that takes a look at that price discrepancy, can you help me out with that a bit?

We've talked about this for a number of years.

It's the basic philosophical -- (technical difficulty) -- that our retail customers desire to get at the retail shop.

Once again, Wal-Mart has a very different philosophy relative to mark-up than a Stop N Shop would or that an Albertson's would or a Safeway would.

So you're going to see those price discrepancies in Wal-Mart Supercenters especially as you compare them to other stores.

It's just not unique to our category; it's pretty much prevalent in virtually every category in the supercenter, as you compare it to a regular retail grocery outlet.

It just -- it's a philosophical decision that our customers make.

Are you saying that you are -- so your price into those customers is --.

Identical.

Identical.

I guess that's really the point.

Now, what enables you through time, and you feel like that is something that can continue?

I think, you know, as Wal-Mart continues to expand in the marketplace here, we over-index at Wal-Mart, one, and two, as it continues to expand in the marketplace and open Supercenters, obviously expansion with Wal-Mart is going to continue to offset any declines in the other retail area.

If that's your question -- I'm not sure I answered your question.

No, you did.

John McMillin with Prudential Equity.

Hello, again.

You know, the brand that Wal-Mart is selling is (indiscernible) seasonings, so you sell that at the identical price per pound that you sell to the supermarket?

No, that is not what Wal-Mart sells.

That's what they sell in their mass merchandiser outlets, John, with a limited number of items but if you go into their supercenters and go into the food part of the mass merchandisers, they do sell branded McCormick products, especially the supercenters.

But (indiscernible) season is a private label, their own brand that obviously they sell at a discount to the branded.

All right.

The decision to give quarterly guidance for the second quarter, I mean, I guess you are following a policy that some quarters you give quarterly guidance, some you don't.

Am I mistaken?

What's kind of the reasoning behind this?

Well I guess, John, our reasoning behind it is that the general consensus in the marketplace has had us around $0.32 for the quarter.

With the impact of vanilla that we know already in the second quarter, we felt it was prudent to bring it more in line with where we think the internal forecast is for our second quarter.

So if we are too high, you will tell us; if we are too low, you won't?

Again, I don't mean to be funny.

I just mean that -- I'm just making a point, I guess.

Well, we haven't had to deal with that issue up to this point, John.

That's a good point.

Just in terms of, you know, you say these numbers were short of your expectations but we were a little bit higher.

What kind of -- you were building in an industrial decline, I would assume, but can you give us a rough idea of how short these first-quarter numbers were from your internal expectations?

A penny or two, John, if you want EPS.

It was driven by the industrial.

I mean, what I tried to share in the script in the conference call is, you know, the industrial surprise.

You know, your business is strong enough; your franchise is strong enough.

You can kind of offset a penny or two in this quarter, maybe a penny or two inventory hit in the next quarter.

But you understand the big picture of why your stock has done so well in the last 5 years relative to a peer group that may have spent the 1990s trying to offset a penny or twos and kind of pressing second halves too much and then suddenly they find a double-digit rate very difficult to achieve.

Why won't this happen to you?

Well, John, what I tried to convince everybody -- the phenomena we tried to explain is a little different.

Vanilla is very unique and it's a real situation, and it's greater than we anticipated.

That would be one.

That is over after the first and second quarters, and we see obviously opportunities, as Evan mentioned, in the third and fourth quarters relative to the vanilla.

The second is that the disappointment in the first quarter in industrial -- which we don't anticipate perpetuating itself for the rest of the year.

So, that gives me confidence to say that, since our forecast was built around a softer first quarter and a softer second quarter and more buoyant third and fourth quarters, it gives me confidence that we can execute because it's part of our original business plan we had.

Okay, well, thanks for answering the question.

Matthew Levison (ph) with Matthew Levison (ph) and Associates.

Good morning, gentlemen.

I have a couple of questions.

I noticed, on the balance sheet, a fairly significant buildup of short-term debt.

It would seem to indicate that you would be contemplating a financing at some point.

I wondered if you would care to share your plans.

Actually, you have noticed an increase in short-term debt, but we wouldn't call in a buildup.

In fact, we struggle to maintain a total debt level within our debt-to-total capital ratio goal that we have of 45%.

I understand that.

So the short-term debt that we show, you know, actually represents some of the long-term debt that's coming due --.

I understand that.

-- within the next year.

In fact, we've already plans in place to refinance that debt.

So the real increase that you're seeing in the balance sheet that you're looking at really represents the reclassification of the long-term debt into the short-term portion.

Yes, I observed that decline.

Okay, you do have plans to refund that?

Absolutely.

Okay.

Could you offer an estimate for what you think interest expense will be this year?

I think what you saw in the first quarter, that kind of amount is what you'll see for the next remaining quarters of the year.

So just annualize the first quarter?

Okay.

For the sake of argument that exchange rates were to remain where they are today, at what point would you expect this little benefit to sales, if you will, from foreign exchange to peter out?

Actually, I think, in the fourth quarter, it's going to peter out.

Okay, but not before that?

Well, the rates all during last year continued to rise ratably over the entire year, so I think by the time -- if they stayed where they are now, we would probably lap (ph) in the fourth quarter.

Thank you very much.

(OPERATOR INSTRUCTIONS).

We have a follow-up question from Eric Katzman with Deutsche Bank.

I may have missed this, but the industrial improvement in the second half, is that tied to new products that your industrial customers have -- I mean, have already planned on rolling out and seeing that I think you usually are, in some cases, 2 years ahead in terms of working with the customers on R&D and new product launches that you know are going to hit?

That's correct, Eric.

That's exactly the cycle it goes through.

You know, and once again, that's part of the cyclicality that we talk about in the industrial business, because the one being the promotions on and the promotions off; the other is the actual launch date of new products that we know are in our system today is difficult to predict.

Is most of that dependent upon what happens here in the U.S.?

Because it doesn't sound like there's, whether due to economic malaise or other reasons, but the new product effort in Europe is really quite robust at this time?

Right.

To a small degree, it would be Europe; the main part would be the United States and China.

Okay, thank you.

(OPERATOR INSTRUCTIONS).

It appears we have no further questions.

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