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Operator
Good morning and welcome to McCormick & Company second-quarter earnings conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Joyce Brooks.
Joyce, you may begin.
Joyce Brooks - IR
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 our website, 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 second quarter ending May 31st and our outlook for the full year.
At the end of our remarks, we look forward to your questions.
Before we begin our 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.
Bob Lawless - Chairman, President & CEO
Thank you Joyce.
Good morning to everyone participating on today's call.
I have two objectives for this call this morning -- first, to discuss how strong performance, particularly in our Consumer Business in the Americas, overcame some challenges we faced in the second quarter, and led to an EPS of $0.31.
My second objective is to share our outlook for the second half of McCormick's 2005 fiscal year.
As you read in the press release, based on less favorable foreign exchange outlook and a moderation in our Industrial Business growth projections for the second half, we have lowered our guidance for the full year.
However, even with reduction in the 2005 EPS, we are still targeting a significant increase in EPS for the second half of the year.
To give you confidence in our ability to achieve this result, I want to share the programs under way to achieve our sales targets and deliver improved margins.
I will begin with a review of the second quarter results.
In our last quarterly conference call on March 22nd, we projected EPS of $0.30, equal to our reported EPS for the second quarter of 2004.
In making this projection we anticipate another quarter of negative impact from vanilla.
Most of you are familiar with the situation related to vanilla, so I will be brief in providing some background.
In 2003 the Company purchased a strategic supply of vanilla beans 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 high-quality crop at the end of 2004 caused vanilla bean costs to drop rapidly, and we experienced significant margin pressure, particularly in our Industrial Business.
The EPS impact of vanilla for the first quarter was $0.03 to $0.04.
In the second quarter the impact was $0.02 to $0.03.
As expected, any additional impact of this situation will be minimal on a go-forward basis.
I'd like to comment on another factor that negatively affected the second-quarter results.
Recall that in the fourth quarter of 2004 we identified and corrected the operational accounting at our Industrial plant in Scotland.
Following this, we took a number of actions.
We strengthened our financial team in Europe with the transfer of Gordon Stets (ph) from the United States, several other additions and a few departures.
We then embarked upon an extensive review of the accounting records for our condiment operation in the UK.
As a result, we identified and recorded in the second quarter additional operational accounting adjustments related to our condiment operations that reduced EPS by $0.02.
This was recorded in cost of goods sold and affected both our Consumer and our Industrial Businesses.
We have completed our actions related to this part of our business and believe that no further adjustments will be required.
When you consider the $0.02 to $0.03 impact of vanilla and the $0.02 accounting adjustment, our underlying financial performance in the second quarter was quite robust.
I will now discuss these results, first for our Consumer Business and then for our Industrial Business.
In total, we increased sales 5.4% for the second quarter.
Contributing to this increase was higher volume of 4.5%, with 1.8% due to Silvo.
Foreign exchange rates contributed 1.8% and price and product mix had a negative impact of 0.9%.
In our Consumer Business, we grew sales 8.9%.
Higher volume added 5.1% with 3.6% coming from Silvo.
Foreign exchange rates added 2% and price and product mix added 1.8%.
In the Americas, Consumer sales exceeded expectations with sales up 5.3%.
This increase consisted of 2.8% in price and product mix, 1.8% higher volumes and 0.7% from favorable foreign exchange rates.
We had a benefit from the price increase announced in the first quarter for our US Consumer Business.
Volumes were achieve with an earlier start to the grilling season and the introduction of new Grill Mate rubs, Hispanic products, grinder blend and dry seasoning mixes.
We're gaining good trade acceptance for these items and the timing of our initial shipments was well ahead of plan.
If you recall, we reported a negative sales impact from inventory reductions made by our retail trade customers in the first quarter.
We had no material sales impact from trade inventory reductions in the second quarter.
In Europe, consumer sales rose 18.3%.
Silvo, acquired in November of 2004, added 11.8%.
And foreign exchange rates added 4.5%.
While difficult market conditions and a poor economy continued, primarily in France, we grew volumes of our base business 3.3%.
This was offset in part by a 1.3% decline in price and product mix, due largely to higher promotions.
There are 10 to 12 competitive spices and herbs that are carried in the discount retail channel.
To respond to this competitive initiative, we're marketing promotion packs and have increased our allowances on these 10 to 12 items.
As a result, we have had some success in slowing the shift in sales to this alternative channels in this recent quarter.
Our line of dessert aids under the Vahine label, continues to grow with new products and advertising support.
I am pleased to report that the Silvo business met expectations again this quarter and we have begun to expand this business in the Netherlands.
We recently introduced under the Silvo brand some of our more popular to Ducros and Schwartz seasoning blends.
In the Asia-Pacific region, second-quarter sales decreased 0.9% despite foreign exchange rates adding 3.2%.
Across all regions, and with the benefit of Silvo, we increased Consumer Business operating income 18.7% in the second quarter.
This was driven by higher sales and cost savings initiatives that more than offset the impact of lower vanilla margins and the operating account and the adjustment.
And during the quarter we increased advertising 6%.
As noted in the press release, this increase in operating income followed a 25% increase in the second quarter of 2004, which included the benefit of the Zatarain's acquisitions.
We had projected another tough quarter for the Industrial Business, although the decline in operating income was not as severe as the first-quarter result.
As I discussed earlier, vanilla again had a negative impact on our business and in particular our Industrial Business.
This business was also impacted by the accounting adjustment.
For the second quarter, despite a 2% increase in sales, operating income was down 4.2%.
The 2% sales increase was the net result of higher volumes that added 3.9%, unfavorable price and product mix, including vanilla pricing that lowered sales 3.5% and a 1.6% increase from foreign exchange rates.
Industrial sales in the Americas increased 2% with a 2.1% increase in volume and a 0.9% from favorable foreign exchange rates, offset in part by 1% of unfavorable price and product mix.
Lower pricing on vanilla drove this reduction.
The higher volume came primarily from new snack seasoning products and higher sales to food service distributors.
In Europe, Industrial sales increased 1%, with a 4% increase from foreign exchange rates.
Volume, price and product mix had a net decline of 3%.
Sales this quarter continued to be impacted by the initiative begun in 2004 to eliminate lower margin SKUs.
In the Asia-Pacific region, we achieved 4.4% sales growth with a net impact of 2.5% from higher volume, an unfavorable price and product mix and 1.9% from foreign exchange rates.
As stated earlier, operating income for our global Industrial Business was $27.7 million, down 1.2 million from 2004's second quarter.
Relative to the second quarter of 2004, the Industrial Business had the most significant impact from vanilla.
About $0.02 of the $0.02 to $0.03 EPS impact and a portion of the accounting adjustment in the UK condiment operation.
During the second quarter, we continued to invest in our capabilities with a 9% increase in research and development spending.
In total, operating income was 71.2 million compared to 69.7 million last year.
In the second quarter, interest expense was up $2.2 million due to higher rates and increased debt.
With the 2005 tax rate increased to 32%, income tax expense was also increased.
Income from unconsolidated operations was $3.8 million, more than double the prior-year income of 1.8 million.
Our joint venture in Mexico continues to benefit from more effective marketing, a new product launch of American-style mayonnaise, cost reductions and the favorable cost of soybean oil.
As we move into the second half, we are comparing to a more positive 2004 result and expect income from unconsolidated operations to be about even with the prior year.
So, for the full year we believe we will achieve a 30% increase, up from our prior guidance of 25% due to the excellent second-quarter results.
Minority interest rose 1.2 million from 0.8 million in the prior year, further indication that our Vahine dessert line in Europe continues to perform well.
In summary, increases in our operating income, income from unconsolidated operations and lower shares outstanding, together with higher interest and taxes led to an earnings per share of $0.31 for the second quarter.
During the second quarter, we recorded a special credit of $700,000 with an after-tax impact of $500,000 related to the streamlining actions announced in 2001.
This follows a special charge of 1.3 million with an after-tax impact of $0.9 million that we reported in the first quarter.
Year-to-date the net impact net effect on EPS of the first-quarter charge and the second-quarter credit rounds to 0.
These streamlining actions are now concluded, and we will record no further charges or credits related to these actions.
Next, I'd like to briefly remark on the balance sheet and cash-flow statement.
At quarter end, inventories were down 8% from May 31, 2004 as a result of lower vanilla inventory and progress with supply chain initiatives.
Prepaid allowances were also lower than the year-ago period, evidence our progress with retail customers to lower shelf prices for our branded products.
Receivables increased in line with sales.
As of May 31, 2005 our debt to total capital ratio rose from prior quarters to 45.3%, back within our target range of 45 to 55%.
We define total capital as debt, minority interest and shareholders equity.
This increase in the ratio resulted from the higher debt related to the share repurchase during the quarter and lower shareholders equity.
In the first half we repurchased 3.4 million shares for $121 million, up from $81 million in the prior year.
At the end of the quarter, we had $27 million remaining of the 300 million authorization and expect to complete this program in the coming months.
As you read in this morning's release, our Board approved a new repurchase program this week in the amount of $400 million.
In the absence of an acquisition, this authorization is expected to be completed by the end of 2007.
That concludes my remarks on the financial performance this quarter.
Let's turn to our outlook for the remainder of 2005.
During our January earnings release and investor call we projected sales growth of 4 to 7%d an earnings per share of $1.70 to $1.74.
At the 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 continue to project robust growth in the second half, but have lowered our EPS projection for the year to $1.66 to $1.70, which is a 9 to 12% increase from 2004.
So to reach a 9 to 12% projected growth rate for this year, we will increase second-half earnings per share 16 to 20%.
Before discussing what will drive this growth in the second half, let me discuss the reasons for the recent reduction in our outlook.
As we begin the second half we will continue to have challenges, such as tough consumer market in France, costs for fuel and resins that have increased beyond our initial projections for the year.
As we look to the second half, we had plans in place to overcome these and other challenges.
More recently, however, the dollar has strengthened and we have moderated our growth rates for our Industrial Business.
While we have enjoyed some benefit from foreign exchange rates in the first half, as we move into the second half we're comparing to a 2004 period when the dollar was weaker.
As the dollar has recently strengthened, the now expect a less favorable earnings impact from currencies than previously projected.
As for the Industrial Business, while we're increasing sales in some areas, in particular snack seasonings, there are other new products in the pipeline that have not yet been launched by our customers.
We also have decided not to meet competitive pricing for some vanilla products as it would have lead to unacceptable margins.
In addition to these two factors, the additional operational accounting adjustments recorded in the second quarter have an impact on the fiscal year.
In the second quarter, these costs were overcome by strong consumer sales.
However, a portion of the higher sales related to early timing of new product acceptance and shipments that did not increase our projections for the full year.
Taking a look at the second half in particular, we're projecting a 16 to 20% increase in earnings per share.
In dollars and cents, this EPS in the second half will be in the range of $1.10 to $1.14 compared to $0.95 that we reported in the second half of 2004.
The increase is 15 to 19%.
The first thing I would like to point out is that our fourth-quarter EPS results in 2004 included $0.02 of special charges and a $0.03 correction to our operation accounting that together had an EPS impact of $0.05.
As I stated earlier, no special charges are projected for the second half of 2005.
We also had some incremental spending that we funded with the proceeds of the lawsuit settlement received in 2004.
This included some onetime programs such as marketing activities that will not be repeated in 2005.
This accounts for another $0.01 increase in 2005 EPS.
And lastly, EPS in the second half of 2005 will increase approximately $0.01 from the acquisition of Silvo, completed in November 2004.
Together, these factors -- the special charges, the 2004 correction to operational accounting, the 2004 incremental spending and the addition of Silvo -- should add $0.07 to our EPS in the second half when compared to the prior year.
This leaves us with a goal to grow our second-half EPS from our base business in an $0.08 to $.12 range or an increase of 8 to 13%.
There are two key drivers to this increase and I will discuss each of them.
First, sales, then margin improvement, including our cost savings programs.
Starting with sales for our US Consumer Business, the big news for the second half is in the dry seasoning mix category.
The seasoning blends consumers use to create product like tacos, chili, snack dips, gravy, sauces and marinades and more.
Our last significant update to this category was nearly 10 years ago.
At the time the changes were made led to double-digit sales growth for each of the following three years.
Based on recent consumer research we're making five major changes.
First, we have added innovative new products and line extensions.
Many of you have seen some new products we're launching.
These include innovative seasoning mixes that our pastes rather than dry mixes, seasoning blends to be used with slow cookers, low-sodium items and veggie steamers; 18 new items in total, with a similar number of slow movers to be discontinued.
We'll have some introductory allowances but no significant slotting analysis.
Second, an optimized product assortment that results in fewer out of stocks and encourage consumer browsing across purchases.
Third, redesign merchandise and point-of-sales materials that will make the section easier to shop.
Fourth, new package graphics; a contemporary look that will unify the entire brand.
And fifth, most importantly, a simplified pricing structure.
Trade reaction has been great, and by the end of June all customers will be working toward the new planogram.
As for consumers, dry seasoning mixes continues to be a relevant category.
In fact, two-thirds of households by nine dry seasoning mixes per year.
If we can get 50% of the households to buy just one additional package per year, it would result in 5% sales growth for this product line.
We're excited about these changes and the opportunity to position the dry seasoning mix section as the meal idea center, the preferred destination for consumers who want to add superior flavor to their meals.
Moving to grilling, the season is off to a great start.
Timing is critical to successes with the grilling season and our programs kicked in early this year.
We also introduced our new rub products early.
As a result, we have met our distribution targets and are seeing good consumer takeaway, especially with the dry rubs.
This month, new media ads to support the rubs begin to air, featuring our grilling spokesperson, Joe Montana.
I would like to point out that we continue to grow sales of grinders with an increase of nearly 50% in the first half.
And we're excited to be testing with Wal-Mart, the warehouse distribution of Hispanic bake spices and chilies.
This product line is being merchant in ethnic aisles at Wal-Mart.
Moving north, we began to introduce the Zatarain's line in Canada in May with good trade reception.
And grilling is moving well up there with a La Grill (ph) line up 20% in the first half of 2005.
In Europe, we have fewer new products this year as we focus on some specific growth areas, such as grinders, salad items and our Vahine desert line.
We have also upgraded our blends and packaging for the dry seasoning mixes.
In China, we're seeing good potential for higher sales as avian flu issue recede and we increase product awareness for our chicken seasonings.
We are relaunching our chicken flavor products, gaining new distribution for jams and into introducing innovative liquid seasoning mixes, intended to grow our sales and improve our margins.
As for our Industrial Business, I've outlined some of the factors that led us to lower our projections.
But there are some positives that I want to highlight.
First, snack seasonings.
Snack seasonings were a leading source of our sales growth in the first half and will continue to drive sales in the second half.
We've not only been successful at winning new seasoning products, but have gained some distribution from the competition as well.
We're growing sales not only in the US but in Latin America and in Europe.
Some of our new products contain sophisticated flavors that are based on advanced flavor delivery.
These are breakthrough technologies that we discussed in prior calls.
Advanced flavor delivery is not only helping with new products, but leading to significant cost reductions in our products.
Looking ahead to 2006, we're encouraged about our future opportunities with snack seasonings.
Customers are focused on snacks that have a wellness position with consumers.
There is a broader definition of snacks that open up new food categories for McCormick.
Among our customers, Frito-Lay continues to be the leader in this category, and I am pleased to share that McCormick has now been named Seasoning Supplier of the Year by Frito-Lay for a second consecutive year.
Sales to food service distributors in China are expected to grow at double-digit pace in the second half.
We will also benefit as the quick service restaurants continue to expand in China with new openings.
McDonald's will be adding 100 restaurants in 2005 and intends to reach 1000 before the 2008 Olympics.
In addition to this growth, we recently gained some destination in China from our competitors.
Long term our new product pipeline is robust and includes snack seasonings, beverage flavors and pet food flavors.
It is the delays in the launch of some of these new products that is affecting our near-term results.
To summarize my sales comments I will provide a financial protection for the second half.
We are projecting a second-half sales increase of around 4%, including the benefit from Silvo.
We're confident that our products and programs will deliver the expected sales growth for the second half.
Moving from sales to margin improvement, we are projecting stronger improvement in the second half as compared to the first half.
During the first half of 2005, gross profit margin declined 70 basis points.
In the second half we expect a significant turnaround in gross profit margin with an increase of around 150 basis points, leading to a total-year increase of about 50 basis points.
There are three factors behind this turnaround.
The first factor has to do with the first-half results.
As you know, we had a onetime situation with vanilla that lowered gross margin by approximately 80 basis points.
In addition, we had some sales mix issues in the first quarter related to our Industrial Business in Europe, and in the second quarter the adjustments to operational accounting.
Together, these lowered first-half gross profit margin by a similar amount.
So the underlying margin improvement in the first half, driven by cost savings programs and the strength of our Consumer Business, was approximately 100 basis points.
This leaves an increase from an underlying margin improvement of about 100 basis points in the first half to 150 basis points in the second half.
I will move on to the two remaining factors.
As stated, we had an objective to reduce costs by $25 million in 2005, and are on track to hit that number.
This is a number that builds as we progress through the year and will have a greater impact in the second half.
And second, while both our Consumer and Industrial Businesses are expected to deliver sales growth in the second half, we expect the Consumer Business to continue to grow at a faster pace, improving our overall mix.
Please note, this business mix added about 40 basis points of gross profit margin in the first half.
While it does not affect the cost of goods sold as much as operating expenses, we've also curtailed nonessential travel and capped management bonuses for 2005.
Importantly, we've decided to maintain the marketing support for our new products in the second half.
We have great momentum in many areas of our Consumer Business and do not want to jeopardize that in any way.
Although reductions here would close the gap in our EPS projection, we do not believe this would be best for the long-term interests of our shareholders.
In total, with the sales and issues we have in place and a turn around in gross profit margins, we believe that we can achieve an earnings per share growth of 16 to 20% across the next two quarters.
As we noted in the press release, we believe that the third-quarter EPS will be in the range of $0.36 to $0.37, a projection that is below the consensus of EPS estimates.
As you consider the third- and fourth-quarter projections, please keep in mind that last year's correction to operational accounting, as well as some of the 2004 special charges, were recorded in the fourth quarter of the fiscal year.
I have spent a fair amount of time on our outlook and I hope that my remarks provided a better understanding of our outlook for the second half.
We wanted to outline key programs in place to achieve significant growth, to view the second half of 2005 in comparison to the first half of the year and most importantly to remind you of some of the factors that affected 2004's results.
I'd like to summarize.
We have just completed two of the toughest quarters during my tenure as CEO of McCormick.
We faced significant challenges, including 5 to 7 impact of high-cost vanilla beans and a $0,02 impact from additional operational accounting adjustments related to the UK condiment operation.
Despite these difficulties, everyone at McCormick has remained focused on the business and achieved a level of profit growth sufficient to offset these issues.
As we begin the second half, the McCormick team looks forward to getting back on track with sales and profit growth.
We hope you share our confidence that 2005 will be another record year for this great Company.
To everyone on the call, I thank you for interest.
And now, Fran, Paul, Joyce and I will look forward to your questions.
Operator
(OPERATOR INSTRUCTIONS) Terry Bivens, Bear Stearns.
Terry Bivens - Analyst
Good morning everyone.
Bob, just on a couple of these more or less special items, you described the accounting adjustments as being finished at this point.
I wanted to be clear on that.
And you also described the effect of vanilla as being minimal going forward.
I guess I had been more under the impression that the vanilla issue would come to a close in the May period.
If you could address those?
Bob Lawless - Chairman, President & CEO
Let me address the vanilla.
There is some small residual effect that is going to appear in June, July and August, our third quarter, but it is very, very minimal and will not be an impact to us in our earnings.
More importantly, I think the vanilla piece is behind us, and what I tried to say for the third and fourth quarters especially in our Consumer and food service business, we should see some robust gains obviously in vanilla contributing to the gross profit margin and overall sales contribution.
Terry Bivens - Analyst
Okay.
As you look at some of the delayed Industrial, some of those launches you referred to, I guess my concern there, are you satisfied that these are simply delays as opposed to cancellations?
Bob Lawless - Chairman, President & CEO
Yes we are.
What I tried to convince everybody on the call this morning is that because of our investment in research and development over the last period of years, we have really distinguished ourselves from the competition and are getting our share of reefs (ph).
That is very consistent message we've conveyed.
What we have limited control over is when they launch these new products in the marketplace.
There's a number in the queue for the third and fourth quarters, as I addressed in this conference call script.
And there's a number in the queue for 2006.
We're excited about it.
We've got a significant competitive advantage.
We just have to wait until they evolve.
Terry Bivens - Analyst
Very good.
Thanks very much.
Operator
John McMillin, Prudential Equity Group.
John McMillin - Analyst
Good morning.
Bob, as you cut things like nonessential travel and management bonuses, and I don't know what else has been kind of curtailed, you have a highly ambitious 10 to 12% long-term earnings growth forecast.
As you kind of do these things to kind of help do fiscal 2005 earnings, doesn't that long-term goal become more challenging?
And aren't these cuts that we've now seen going to continue?
Bob Lawless - Chairman, President & CEO
No, I don't think so.
I tried to say in the script that we have had these onetime adjustments this year.
The underlying base business, as I tried to portray, in our Industrial, food service and Consumer are very strong and very robust.
We have the delays that we talked about with Terry.
But at this point in time, I think its way too premature to look at 2006 and adjust off our 10 to 12%, I sincerely do.
I look at what's gone on in 2005, and I look at the robustness in our base business today, especially our Consumer Business.
We are rebounding in Europe.
Once again it's not at the pace that we would all like, but it's turned around from a negative to a flat to slightly up for the Consumer Business.
That gives us real confidence for the future.
Food service business in North America continues to be robust and strong.
And our Industrial Business, once again, as I addressed earlier, has a lot of new products in the queue, most of which I can't share with you, but it gives us confidence that the range we're in for EPS for 2006, that 10 to 12%, would be way too premature for us to adjust off that.
John McMillin - Analyst
Currency and vanilla were contributors to your earnings in probably 2003 and 2004.
And we didn't hear much about them when they were kind of tailwinds went.
Now that they're headwinds, or becoming headwinds, we hearing more about them.
Is that a fair criticism?
I guess you have a policy of not giving quarterly guidance.
But this is the second quarter in a row where you are giving forward quarterly guidance.
Can you just explain the change and what the policy is going forward?
Bob Lawless - Chairman, President & CEO
You're quite correct.
When vanilla was priced around where it was today, it was a contributor to our corporation.
And that was very positive contributor to our corporation.
We made a conscious purchase in 2003 at the end, and I know most people on the phone call, including myself, will look back at that purchase and say if we had the visibility we have today, that wouldn't be the purchase we would make.
But vanilla is now back down where it historically has been, and it will be a contributor as we move forward.
I think we're looking at a small window of time hear that I will characterize maybe 15 months of where vanilla went up dramatically and went down as dramatically, and caught a lot of people in the industry in the situation we find ourselves in.
But you're quite correct.
It's on the way up, but we expect it to be a contributor in the future.
We've highlighted it because it was such a dramatic change in a raw material commodity, one.
And two, it was highlighted by a lot of competitors in the marketplace as being something that they saw also.
And that's the reason we brought attention to it over the last few months.
As far as the first-quarter and the second-quarter guidance that we provided, we just feel a responsibility to everybody on the call and all our shareholders when a consensus is significantly higher than what we see it to be based upon our best information at this point in time, we feel a responsibility to try to provide reasonable expectations for a range that we think is something that we can do.
That's the reason for the first two quarters.
There's no significant change of correction or philosophy in the Company.
John McMillin - Analyst
My only comment would be if it goes the other way I would also hope you would kind of give us (multiple speakers)
Bob Lawless - Chairman, President & CEO
I will guarantee you that.
That will be for sure (multiple speakers)
John McMillin - Analyst
Thanks a lot.
Thanks for answering my questions.
Operator
Stephen Weiss (ph), Mindflow Capital (ph).
Stephen Weiss - Analyst
Thank you very much.
Congratulations.
Good job.
I have a couple of questions for you.
A lot of your competitors in the industry have recently been implementing some new strategic initiative to reduce their raw material costs and commodity costs by establishing a better line of communication with their suppliers and opening up better collaboration.
I'm interested if you could provide some color today as to what you guys are planning on doing to reduce your raw material commodity costs to overall improve your cost of goods sold by opening up a better line of communication with your suppliers.
Bob Lawless - Chairman, President & CEO
As we've addressed really last year, we set forth a three-year savings program that amounted to about $70 million.
Most of that was to take costs out of our cost of goods and to some degree our SG&A line.
Once again, as we get SAP installed in Canada and Europe, we will refresh that for the next three years and create a new three-year savings goal.
So I think we've been maybe at the forefront of providing cost savings targets out to the marketplace for which we're comfortable achieving internally.
And the good news is last year we exceeded it, and this year we're commenting that we're going to be at the $25 million cost saving again this year.
Stephen Weiss - Analyst
You mentioned during the call that lot of your fuel cost and resin costs were a concern.
How are you working with suppliers on that?
Are you doing -- looking at cost modeling to reduce your overall total cost of ownership out of your supply chain?
What are you guys doing?
Bob Lawless - Chairman, President & CEO
We're trying to manage cost as best we can.
If we can kind of sum up -- put a lid on the oil prices increases, that will help us all relevant to fuel prices and resin costs.
And once again, it's just a matter of working with our suppliers and our freight consolidators to see if there's a better way we can look at buying resins and a better way we can look disturbing our products.
Stephen Weiss - Analyst
Also, what has been your supplier feedback?
Are they pretty receptive to this, with your initiatives?
It sounds like you guys on the ball with your initiatives.
What has been their feedback?
Bob Lawless - Chairman, President & CEO
feedback is good.
I think everybody in industry understands we have a huge issue, and we're all trying to figure out is it a systemic long-term issue in the industry relative to oil or is it just a little bit like our vanilla situation that we had for 13 or 14 months, and establish a strategy accordingly.
Stephen Weiss - Analyst
Final question, are you guys going -- regarding your supply base, are you going to be consolidating that, or are you happy with (multiple speakers)
Bob Lawless - Chairman, President & CEO
I think we've been working on that over the last three to four years.
Stephen Weiss - Analyst
Thank you very much.
Operator
Eric Katzman, Deutsche Bank.
Eric Katzman - Analyst
Good morning.
I appreciate the detail.
Let me first ask kind of a more general question.
It seems like whether you look at, I don't know, coffee or vanilla or soybean oil, what have you, there just seems to be much more volatility in underlying raw material costs, whether that's due to China or hurricanes, who knows what.
But when you kind of forecast out, whether it's this coming half or further into the future, are you going to start to assume that this volatility remains high?
I'm not sure exactly how you kind of deal with that, but it seems like it's just a fact of life.
Fran Contino - EVP, Strategic Planning & CFO
I think certainly part of our core competency is our ability to predict these things, particularly crop conditions and the impact that weather has on them.
If you consider all of the raw materials that go into our products, we've managed to the whole portfolio well.
I think and history of this Company, this dramatic decline in the vanilla prices is the single most significant drop that we've had in the history of the Company.
We tried to protect our customers by having the high-quality supply of vanilla on hand.
When the price dropped so dramatically I think some people delay purchases, and that's part of being in business, and we accept that responsibility.
But we had a full vision of what -- we knew the price would come down, but we didn't know it would come down for a two-month period quite as fast as it did.
And as we look at other items that we purchase that make up the raw ingredients for our products, we feel confident that our supply will be adequate to meet the demand.
Bob Lawless - Chairman, President & CEO
The only thing I would add is that especially in the case of vanilla, and I know you mentioned soybean oil also, but with vanilla, with the addition of additional manufacturing locations for vanilla and sort of the reduction of our dependence on Madagascar, it gives us confidence that this situation as it created itself, even though it is somewhat weather dependent, will not be created again in this type -- with this volatility.
And as we go forward, we've challenged obviously our global sourcing people to the more robust, visit the facilities more frequently and really get better visibility in the overall pricing structure for the future.
Eric Katzman - Analyst
Let's move on.
The tax rate in the full year and second half, can you kind of say that again, what you expect that to be?
Fran Contino - EVP, Strategic Planning & CFO
The tax rate of 32% is still the estimate that we have for the full year.
Eric Katzman - Analyst
And then, Bob, can you reiterate what you said about JV income in the second half?
I'm not sure I understood that or wrote that down correctly.
Bob Lawless - Chairman, President & CEO
The increase in the first half was about 50% and the increase in the second half we're saying is about flat with last year for the second half.
If you remember, McMex really became robust in the third and fourth quarter last year.
Eric Katzman - Analyst
Okay.
And then, third, or next one, is on currency.
Obviously it's going against you.
What kind of cushion have you built in, or have you just taken the current dollar-euro own exchange rate or dollar-pound and just said this is where it's going to be?
Or have you built in some cushion for the dollar continuing to strengthen?
Fran Contino - EVP, Strategic Planning & CFO
We're going into details that we don't usually discuss on the call, but our method of estimating -- of forecasting the remaining six months of the year includes our predictions as to what we expect the currencies to do, and certainly we don't change our forecast by the current rate every single day.
So we do have an estimate of what we expect it to be.
Eric Katzman - Analyst
I hope so.
And then last thing and I will pass it on.
I guess Sarbanes-Oxley is going to -- you'll have to sign that, which will probably answer the question.
But are you now, Fran, just absolutely done with accounting adjustment over in Scotland, and this is now behind the Company and we don't have to worry about anything else creeping up?
Fran Contino - EVP, Strategic Planning & CFO
Well, Eric, the adjustments that were recorded in the second quarter are really a culmination of extensive internal audit that we conducted as a result of finding what we found in the fourth quarter.
You know we've made changes to personnel plus and minus.
We have had assistance from our external auditors as well, both internal and external.
We've jumped all over the situation.
It's very unfortunate.
We're not happy about it.
We do have a responsibility to sign and we feel confident that we've done everything as a company that we could possibly do.
And just from my personal observation and on the ground assessment I feel very confident that we're on sound ground going forward.
Eric Katzman - Analyst
All right, thank you.
Operator
George Askew, Legg Mason.
George Askew - Analyst
Just trying to understand a little more detail about the 4% sales growth in the back half of the year.
You mentioned that includes a Silvo.
I'm assuming that's about 1.8% again, perhaps at the back half of the year.
What is -- is currency neutral?
Is that your assumption for the back half of the year?
And the bounce is volume?
Fran Contino - EVP, Strategic Planning & CFO
Fairly neutral.
Bob Lawless - Chairman, President & CEO
Pretty much on sales.
George Askew - Analyst
On the Industrial side, and forgive me if you have said all you can say there, but I guess I'm curious why are Industrial -- are Industrial customers just pushing out the launch of these products?
Are there raw material cost issues or something that are delaying launches of products?
Are there channel issues?
Versus what you expected in the pipeline three our six months ago, what has really changed specifically with industrial customers to push the product launches out?
Bob Lawless - Chairman, President & CEO
I'm not sure a whole lot has changed.
We can't predict when the new products will be launch with our customers on a worldwide basis.
We try to do our best estimate.
That's what the business is all about.
But I don't think anything fundamentally has changed.
It becomes their philosophy and their strategy when they want to launch these new products.
And when they do, we're there and ready to provide and supply.
That's the good news.
George Askew - Analyst
How aggressively would you be willing to borrow or increase debt to fund your share buybacks here in the next 2.5 years?
Fran Contino - EVP, Strategic Planning & CFO
(multiple speakers) won't be necessary according to our projections.
If we have a major acquisition that would take some of our expected free cash flow, we will suspend the share buyback program.
George Askew - Analyst
Lastly, can you give us a sense of the acquisition environments, kind of what's gone on the last quarter or so and what you envision?
You have got plenty on your plate, obviously, but has there been any change in your appetite for acquisitions here in the last --?
Bob Lawless - Chairman, President & CEO
No change in our appetite at all for acquisitions.
Once again, it's the same philosophy and goes through the same model we've had for years we used for Zatarain's and Ducros.
George Askew - Analyst
Is the deal flow as good, better, worse, same?
Bob Lawless - Chairman, President & CEO
About the same.
George Askew - Analyst
Very good, thank you.
Operator
Andrew Lazar, Lehman Brothers.
Andrew Lazar - Analyst
Just looking again at the second half sales growth projection, how much of a factor is SKU rationalization in kind of a limiting factor to sales growth?
Maybe you can just quantify how aggressive you have been, maybe number of SKUs.
Do you have a certain target you want to get to and kind of a timeframe to get there?
Bob Lawless - Chairman, President & CEO
It will be a factor in the third and fourth quarter.
It will continue to be a factor in 2006.
I think what we've shared with everybody, as we get better visibility both in China and in Europe around the whole SKU rationalization process, we need to provide some guidance and direction as to the impact that will have on our overall sales performance.
But it is a factor, and it is built into our numbers in the third and fourth quarter.
Andrew Lazar - Analyst
So it's not de minimus; it is an issue and it is one that you hope to be able to quantify at some point?
Bob Lawless - Chairman, President & CEO
That's correct, yes.
Andrew Lazar - Analyst
Is the impact of your SKU rationalization already built into some of the plans that you have got around margin enhancement that you have already gone through?
Or could this potentially be in excess of that?
Bob Lawless - Chairman, President & CEO
I would say it's in excess of that.
Andrew Lazar - Analyst
So it's more -- think of it as more perhaps firepower on the margin side, perhaps as you go into next year?
Bob Lawless - Chairman, President & CEO
Right.
And the tool, and the enabler, and the reason I'm confident when I make that statement with Canada and Europe is we don't have SAP fully installed in those markets yet.
Andrew Lazar - Analyst
And the piece of it around SKU rationalization that you've done thus far in the US again related to the enabler of SAP, is there any way you can quantify perhaps what piece of the savings or the margin enhancement that that's driven?
Bob Lawless - Chairman, President & CEO
We don't specifically break that out.
Andrew Lazar - Analyst
Lastly, around the timing of what the efforts in Europe around SKU give you, is that and end of the year or kind of looking into next year kind of assessment, do you think?
Or (multiple speakers) have some perspective. (multiple speakers) Okay, thank you very much.
Operator
Paul Hudson (ph), Rombus Capital (ph).
Paul Hudson - Analyst
Can you talk about what you're seeing -- you mentioned resin and fossil fuel costs.
Can you tell me what you're seeing directionally out there in the market with resin and freight costs?
Fran Contino - EVP, Strategic Planning & CFO
Directionally they're going up.
Paul Hudson - Analyst
How should we think about that as a portion of your cost of goods sold?
Is it material, something we should be focused on?
Or is it really not --?
Bob Lawless - Chairman, President & CEO
It's not material, the reason -- the only reason we highlight it is because it's a factor that really is impacting the whole food industry because we are obviously large users of freight.
And for in our case we're a large users of resins for all our plastic containers.
Paul Hudson - Analyst
Okay.
And when you talk about -- you mentioned it looks like you pulled forward to sales from 3Q to 2Q because some of the newer products were introduced earlier.
Can you give us a sense for how -- quantify that for us?
Bob Lawless - Chairman, President & CEO
I wouldn't characterize it that we pulled sales forward.
What we did was accelerate the launch of some new product items in the marketplace, especially the grilling products, into early May that we traditionally would have done in the middle of June.
It's not really significant from a sales standpoint.
Paul Hudson - Analyst
And last question.
On the Industrial products that you're seeing some delays on, what categories are being delayed?
Is it mostly snack foods?
I think you mentioned that.
Bob Lawless - Chairman, President & CEO
No, snack is pretty much characteristic right on the plans that we anticipated.
It's more the other segments that we participate in.
Paul Hudson - Analyst
Can you give us a general idea?
Bob Lawless - Chairman, President & CEO
I'd rather not at this point.
Paul Hudson - Analyst
Okay.
Great.
Thank you.
Operator
Ann Gurkin, Davenport.
Ann Gurkin - Analyst
I just have one question left.
If I understood correctly in your comments, in Europe increased promotions had a negative impact on pricing and mix.
And I was just curious if you see this stepped-up level of promotion, is this going to be a permanent stepped-up level or is this kind of a onetime thing?
Are we going to see this continue in the back half?
Bob Lawless - Chairman, President & CEO
It's not onetime, but once again it's really -- as we have said, it's a strategy really to combat the hard discounters that are penetrating the French market.
We used a fairly aggressively -- it's only over 10 to 12 items.
So once again that's not a significant item of expense for us.
We just want to indicate that we are responsive to that competitive threat in Europe.
Ann Gurkin - Analyst
Will this level of promotion continue in the second half?
Bob Lawless - Chairman, President & CEO
To some degree, yes.
Ann Gurkin - Analyst
Thanks.
Operator
Alton Stump, Longbow Research.
Alton Stump - Analyst
I just had question on currency.
I know it was discussed previously.
I think you mentioned that you're assuming a neutral currency environment for the second half of the year.
I guess I'm wondering with these very difficult comparisons, especially in the fourth quarter, how you guys could not have a negative currency assumption in your top line number for second half of the year.
Fran Contino - EVP, Strategic Planning & CFO
It will not be negative to the fourth quarter of last year.
It could be slightly, depending on where your productions are for the currency.
But based on our best estimates we expect it to be fairly neutral.
Alton Stump - Analyst
So can you give me an idea sort of -- right now obviously with the euro at about 1.20 per dollar, are you looking at that to go up by the end of your fiscal year?
Fran Contino - EVP, Strategic Planning & CFO
We're not going to get into a discussion of a currency-by-currency analysis.
We operate in about 25 different currencies, five major.
And our prediction for the basket of currency movements in all of our operations around the world indicates that it's going to be fairly neutral in the fourth quarter.
Alton Stump - Analyst
And then just one more thing.
In terms of your 4% top line guidance, I guess I had assumed a little bit better assumption, given that the top line comps a little bit easier versus second half '04 in comparison to the first half of the year.
Can you give me an idea of why that 4% number is so low?
Bob Lawless - Chairman, President & CEO
I think we tried to say in the call two things.
One was continuation of the SKU rationalization we have.
That will impact it.
And secondly is some softness and delays in our Industrial new product launches.
Those were the two areas that we see different today than we saw earlier in the year.
Alton Stump - Analyst
So are those two things going to accelerate then in the back half of the year versus the first half of '05?
Bob Lawless - Chairman, President & CEO
They're going to accelerate versus the first half of '05, yes.
Yes they are.
Operator
Matthew Levinson (ph), Matthew Levinson Associates.
Matthew Levinson - Analyst
If I could make another address at the foreign currency issue, assuming that currency values remain as they are today, would it be reasonable to expect some sort of ForEx drag in fiscal '06?
Fran Contino - EVP, Strategic Planning & CFO
Again, we look at a longer-term projection from various sources of people who predict currencies.
And we would characterize '06 as being very similar to '05 on an average rate basis for both years at the present time based on our present analysis.
Matthew Levinson - Analyst
Thank you very much.
Operator
(OPERATOR INSTRUCTIONS) It appears we have no further questions, sir.
Joyce Brooks - IR
This concludes today's call.
A telephone replay of the call is available through midnight tomorrow by dialing 877-519-4471 with an access code of 6055418.
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Operator
This does conclude this morning's teleconference.
Please disconnect your lines at this time and have a great day.