McCormick & Company Inc (MKC) 2005 Q3 法說會逐字稿

Good morning.

My name is Karen and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the McCormick & Company third-quarter earnings conference call.

All participants (technical difficulty) on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the floor over to your hostess, Joyce L. Brooks.

Ma'am, you may begin your conference.

Good morning.

Thank you for joining McCormick's teleconference.

Please note that today's event is being webcast and that following the call, an audio replay can be accessed at ir.McCormick.com.

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

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

Today we will discuss McCormick's financial results for the third quarter ending August 31st.

Bob will also comment on the earnings outlook provided earlier this month.

At the end of these 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.

I would now like to turn the discussion over to Bob.

Thank you, Joyce.

Good morning to everyone on the call and those listening via webcast.

Results for the third quarter were generally in line with our expectations.

Higher sales, a modest increase in gross profit margin, and tight expense controls added $0.02 of EPS when compared to the third quarter of 2004.

Below the operating income line, the negative effects of higher interest rates and an increase in the effective tax rate were offset by higher income from the Company's joint venture in Mexico and lower shares outstanding.

In response to a geographic change in the sourcing of income during 2005, we have adjusted the effective tax rate for 2005 upward to 32.7% from 32%.

As for unconsolidated income, our joint venture in Mexico continues to perform extremely well, with sales up 15% in this quarter.

I will comment on share repurchase activity later in my remarks, but would first like to discuss the financial results for our two segments.

First, the consumer business.

For this business, we grew sales 4.1%; volume, price and product mix drove 3.5% of the increase; and foreign exchange rates added 0.6%.

Of the 3.5% increase, sales from Silvo acquired in November 2004 added 3.2%.

We have been successful in driving consumer business sales this year with new products, pricing actions, new media advertising, a focus on Hispanic consumers in the United States, and other important initiatives.

However, consumer business sales in the third quarter were affected by three factors; timing of sales of products in the Americas, tough business conditions continuing in Europe, and third, streamlining actions to improve our profitability in the Asia-Pacific region.

In the Americas, consumer sales rose 2.8%, with 0.7% from foreign exchange rates.

The remaining increase of 2.1% trails the 5% increase we achieved last quarter.

Recall that the results for the second quarter of 2005 included the benefit of an earlier start to the grilling season and distribution of new products.

I'd also like to point out that this year's third-quarter increase in consumer business followed a sales increase of 13% in the third quarter of 2004.

That was driven by new product successes, effective marketing, and new distribution.

Year-to-date, consumer sales in the Americas are up 4.1%, with 3.5% of the increase from higher volume, price and product mix.

Grinders, Grill Mates, Hispanic items, and the introduction of new dry seasoning mix items are some of the success stories behind this increase.

Third quarter sales in Europe rose 7.7%, Silvo sales added 11%, and foreign exchange rate were slightly unfavorable with a 0.5% impact.

The remaining decrease from volume, price and product mix was 2.8%.

Market conditions continue to be difficult for this reason, particularly in France.

We have successfully been growing our sales of the value-added products such as desert items, pastes and grinders with our retail customers.

However, hard discounters continue to place pressure on our core ingredient items.

We continue to work with our customers to promote special packs and critical items to combat these pressures.

While we have made some progress in slowing the migration of sales to the alternate channels, the poor economic conditions in France are complicating this recovery.

In the Asia-Pacific region, consumer sales declined 1.5% in the third quarter.

During this period, foreign exchange rates had a positive impact of 6.1%.

While sales in Australia were strong during this quarter, steps to improve our profitability in China limited overall sales growth for the region.

With SAP in place for over a year, we are identifying additional low-margin items that we are deemphasizing from a promotional standpoint and, in some cases, eliminating.

In addition, sales were affected by a reduction in the number of distributors in China from 200 to 80, as we move to a higher-quality network.

While these steps are affecting the near-term sales, they will lead to a better position and more profitable business model for the long-term.

In line with the increase in total consumer business sales, operating income rose 3.7% for the third quarter.

Although we are still assessing the damage from Hurricane Katrina to your Zatarain facility, we did accrue 1 million of the estimated cost in the third quarter.

I would like to point out that our 3.7% increase in operating income this quarter follows an increase of 25% in operating income for the third quarter of 2004, that we achieved with higher sales and emphasis on higher-margin products and significant cost-reduction efforts.

As we indicated in our press release in early September, our industrial business sales were expected to be flat in the second half.

Included in this projection was 2 to 2.5% decline in sales from lower pricing for vanilla.

In the third quarter, industrial sales declined 1%.

As expected, lower vanilla pricing decreased sales 2.8%.

Foreign exchange rates had a positive impact of 0.8%.

An impressive sales increase in the Asia-Pacific region was more than offset by weak sales in the Americas and in Europe.

With the impact of vanilla, industrial sales in the Americas decreased 0.7% despite a 1.1% favorable impact of foreign exchange rates.

In this region, we had a tough comparison to the third quarter of 2004.

If you recall, sales that quarter rose 9% in the Americas as a result of new product successes, driven largely by sales of coating systems to some of our largest restaurant customers.

While we continue to sell these coating systems during the third quarter of 2005, our customers have emphasized other menu items.

We did benefit from the sale of some of the new items, including grilling marinades, snack chip seasonings, and flavor systems for buffalo wings.

In Europe, sales declined 8.2% in the third quarter.

Unfavorable foreign exchange rates had a 1.4% impact.

Our actions to eliminate lower-margin SKUs decreased industrial sales by 2.5%.

The remaining decrease of 4.3% was the result of competitive pressure that led to lower pricing and fewer sales of certain low-margin products.

We again achieved substantial sales growth in the Asia-Pacific region.

Sales rose 14.9%, with 11.1% from higher volume and 3.8% from favorable foreign exchange rates.

Our customers in this market, particularly quick service restaurants, continue to expand their stores and dramatically increase sales.

In total, the decrease in industrial business sales led to a 0.8% decline in operating income for the quarter.

Next I would like to remark briefly on the balance sheet and cash-flow statement.

At the end of the quarter, inventories were down 5% from August 31, 2004, as a result of lower vanilla inventory and progress with supply chain initiatives.

Accounts receivables and prepaid allowance were also lower than the year-ago period.

Last quarter, our debt to total capital ratio increased, returning into 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 higher debt related to share repurchase during the quarter and lower shareholders equity.

As of August 31, 2005, the debt to total capital ratio was 45%, remaining within our target range.

Year-to-date we have repurchased 4 million shares for $140 million, up from $108 million in the prior year.

We expect share repurchases in 2005 to be $10 million greater than the 174 million spent in 2004, and most importantly, $65 million more than the 120 million we spent in 2003.

At the end of the 2005 third quarter, we had $6 million remaining of the $300 million authorization.

This will be completed shortly, and our fourth-quarter share repurchase activity will be primarily funded under the new $400 million authorization that the Board approved in June and that we mentioned in our second-quarter earnings release.

That summarizes my remarks about the third-quarter financial performance.

While that is the primary purpose of this call, I'd like to spend a few minutes on the outlook for the fourth quarter.

As you recall, in early September we communicated that we expected earnings per share for 2005 to be in the range of $1.58 to $1.62.

Today we reaffirm our EPS guidance for the year.

This means we expect our fourth-quarter earnings per share in the range of $0.67 to $0.71.

This compares to a result of $0.62 in the fourth quarter of 2004.

Fourth-quarter sales will be affected by a number of factors.

In our Americas consumer business, the new dry seasoning mix products, merchandising and marketing support is in place in 15,000 stores in the U.S., and has begun to drive increased sales.

Marketing programs for the broader line of spices and seasonings are being executed, and we look forward to a successful holiday period that will build upon the 6% sales increase achieved in the fourth quarter of 2004 for this part of our business.

Also in the consumer business, we commented a few weeks back on the reduced demand for Zatarain's brand and other consumer products in the Gulf region of the United States.

This will limit our consumer sales growth in the Americas.

We continue to assess the full impact of this event on our employees and our facilities.

At this time, we have been in contact with 80% of our Zatarain's employees.

As for our production facility, we have successfully recovered the finished goods inventory.

We are working with our insurers to assess the damage to the offices and production areas caused by wind and rain.

While we expect to recover a portion of these costs and the cost of business interruption, the process will take a number of months to work through.

In the meantime, we are producing and shipping Zatarain's products from other McCormick facilities.

In Europe, the acquisition of Silvo will also contribute to higher consumer sales during the fourth quarter.

However, we expect tough business conditions to continue in this region.

In our industrial business, we also have some positive and negative factors that will affect the fourth quarter.

In the Americas, we expect a significant increase in sales of snack seasonings and improved sales to restaurants.

These increases will be offset partly by lower pricing of vanilla, our actions to reduce SKUs primarily in Europe, and the competitive pressures that affect our pricing and sales.

Across both businesses, there are clearly a lot of positives and negatives.

The net effect of our fourth quarter is positive, and we expect to achieve moderate sales growth in the 1 to 3% range.

I would like to comment further on the dynamics in our industrial business that are limiting our sales growth.

During this period, our customers have not launched significant new products from which McCormick is supplying a flavor, nor have they placed promotional emphasis on many important grocery store or menu items that we help flavor.

We believe that this situation is specific to this period, as we have a pipeline of new products lined up for launch in 2006.

Many of you have wanted more specific information regarding the delays in the new product introductions and promotion plans of our customers.

As we have explained, our customer partnerships prohibit us from being specific.

We know this is frustrating and diminishes the visibility of our business, so I'd like to provide a few general remarks.

We have been counting on fewer than five large customers to significantly drive industrial sales in the second half with new product introductions.

These customers include both restaurants and consumer product companies.

As you know, we focus on the leading chains in consumer product companies, so a change to their launch dates can have a meaningful impact to our forecast.

The reason for these delays vary, but include extended test markets, continued focus on other successful menu items, and the impact of limited-time menu offers.

These delays are not an indication of business difficulties for our customers, nor are they an indication of any breakdown in relationship between ourselves and our customers.

In fact, these new products are still active and planned for launched in the upcoming months.

As for promotional emphasis, I commented earlier about the effects of the strong coating systems sold in the second half of 2004, versus an emphasis on other menu items during this period.

Similarly, fewer of our products sold to consumer product companies are being emphasized this year versus last year.

The price competition we commented a few weeks back is affecting sales of certain products and comes from several firms that are aggressively working to build their share.

In some cases, we have met competitive pricing and in other situations, the margin was not acceptable and we chose not to compete.

However, we will work to regain this business.

In the past, customers who have switched to a low-price supplier often find them unable to meet their service and product requirements.

In addition, the action we are taking to improve the supply chain are important steps that will increase our ability to compete effectively against low-cost producers.

I hope these additional comments provide some assurance that our situation we are currently experiencing is an interruption to the sales growth of our industrial business over the past five years, growth that has an average of 5%.

At the end of 2005, we will complete a review of the industrial business and communicate our actions to you in early 2006.

These actions should provide further assurance that with some improvements, this is a business that will continue to be an important contributor to the future success of McCormick.

Turning back to the comments on our guidance for the second half, let me review our outlook for margin improvement.

We are tracking well against our $25 million cost savings goal for 2005, and look forward to sharing the final results with you in January.

These savings, together with the positive business mix, will give us enough of a margin lift in the fourth quarter to offset the year-to-date gross profit margin decline of 50 basis points that we reported today.

With our third-quarter result, our current outlook is a slight increase in gross profit margins in 2005.

In 2006, our role is to reduce costs another $30 million.

These savings, together with supply chain actions announced earlier in September, will continue to lower our costs, improve our margins, and generate fuel to grow our business.

In summary, third-quarter results met our revised expectations.

We are a few weeks now into the last and most important quarter of the fiscal year.

I can assure you that employees across McCormick are working hard to grow sales and lower costs, despite some continued challenges.

We look forward to reporting record results in the fourth quarter of 2005.

To everyone on the call, we thank you for your interest, and now Fran, Paul, Joyce and I will look forward to your questions.

We're ready for questions.

(OPERATOR INSTRUCTIONS) Jon Feeney of Wachovia Securities.

One question.

Bob, I really appreciate you getting into a little bit more specific about the industrial customers, but it seems like a lot of the reasons, your delays you are citing are specific to restaurant customers.

Is that because restaurants customers of those top five are more important in terms of the product launch delays, or is this because you are comparing with a very successful coatings business in the second half that was restaurant-oriented in '04?

Well, we did have a very strong '04, got us in the second quarter of 2004, in all of our restaurant customers, but I wouldn't want to say it is just restricted to restaurant customers.

We are feeling the impact of some of the consumer products customers that we sell to also, especially the volatility in launching of their new products, so it is not any specific area except as you compare it to 2004.

It is very specifically aligned with the restaurant group.

Your comment that it doesn't relate, I guess, to any kind of struggling on the part of your industrial customers, these delays don't, are you basing that on -- is that just kind of a boilerplate commentary, like don't read too much into this because it's specific?

Or have you had a lot of conversations with these folks and they're telling you, look, don't worry about our business; the business is there?

I think both really, Jonathan; more the latter.

What I indicated in the previous conference call in September is that myself and our leadership team would do due diligence with our customers to really try to understand this volatility better, and we're trying to give you a brief update with the very little time that has elapsed on the result of that communication.

So I think the important thing to remember as I tried to share in the script is that these are delays to new product launches and not cancellations that we all should be worried about.

It is a phenomenon that is happening in 2005 in the third and fourth quarter.

It is unique, more unique that it has been in the last five or six years for us, and one -- and we are in that one camp -- expect these new products to be launched in 2006.

Fair enough.

Just finally, could you update us on the relaunch of the dry seasonings business in the U.S.?

I've done some channel checks and it does seem to be in place.

Are you seeing -- what's any initial thoughts on take-away and (indiscernible) reaction?

It is pretty early right now for take-away.

We're getting the stores in positions where we want them to be, getting the new products in, eliminating some of the SKUs.

So the program is evolving, as we said in the script, exactly as we anticipated.

Fourth quarter will be our first test.

We should see some lift during that period, and obviously through 2006.

Okay, thanks very much.

Terry Bivens of Bear.

Good morning, everyone.

As we look at the consumer business, Bob, it looks like if we take out the Silvo acquisition, the business was flat.

Is my math correct there?

Could you give us a little bit more color?

I have been looking for a bit stronger performance there.

I think, Terry, you have to look at the context of our consumer business; the third-quarter '05, third-quarter '04, third-quarter versus the second-quarter 2005.

Because I just don't want anybody to react to a one-quarter experience in our consumer business.

We were up 5% in the second quarter, we are up about 2% in the third quarter, and we are up 13% when you look at 2004 over 2003.

So we have got a tough comparison in the Americas as you look at that.

So I wouldn't read anything into that.

We did indicate in the conference call that because of the timing of Memorial Day weekend, we had some purchases for the grilling season that were in advance in the second quarter, and we knew that would be an impact for us in the third quarter.

So I'm very pleased with the performance in the consumer business in the third quarter.

Let me try it a different way.

Was there any part of the consumer business, particularly domestically, that did not come up to expectations?

I think if you specifically say domestically, the only negative we had was a little bit with Zatarain's.

But realistically in the quarter, no, it met our expectations.

If you were to move to Europe, once again, we continue to see the same difficulties in Europe, Terry, that we reviewed with you before.

Okay.

Here's my second question.

I have been getting a lot of questions about pull (ph) trade-down effect as you can imagine with higher fuel costs, the displacement from the hurricanes, etc.

If you look in the Nielsen numbers, it's pretty clear you guys are getting some positive pricing there.

The concern would be, is this sustainable?

Are you seeing any signs that perhaps the consumer might want to trade down and you may have to give up some of that price realization you seem to be getting?

Haven't seen any of that to date, Terry, but in reality with everything that's going on between the European economy and the impacts, especially in the Gulf region of the United States, I think all of us in all businesses expect some turn-down a little bit because of the impacts.

But consumers trading off at this point in time, no, we don't.

Bear in mind too that 74% of our products are value-added, and there's not a lot of options to trade down to.

Understood.

Okay, great.

Thank you very much.

Chris Growe of AG Edwards.

I just had a quick one -- two questions.

The first one was on your corporate other line being down.

I think I had it down 22%.

Is that the cost savings coming through there, or is there something else at work in the corporate other line?

No, I think the corporate line reflects some SG&A reductions that we have taken and maybe some employee benefit costs related to annual incentives.

Are the cost savings that are flowing through, are those going through divisions, or are they coming through as one just big corporate line?

No, most of the cost savings flow right directly into the cost of goods sold line at the divisional level.

Okay.

Then just a quick one then really on the joint venture and sustainability of the Mexican joint venture earnings.

Obviously, it's had a very solid first nine months.

Can that continue in the fourth quarter?

I guess a similar question on your minority interest line, that was down this quarter.

Does that indicate any kind of weakness in profits for that business?

Wouldn't it have been up pretty nicely in the second quarter?

Let me comment on the joint venture, especially in Mexico, Chris.

Our commitment to everybody on this call and all shareholders worldwide was to get our Mexican joint venture back to performing the way it was in 2003, and I'm pleased to report it is.

There is no curtailment back in the fourth quarter that we see at this point in time.

It is meeting and exceeding most of our expectations in Mexico, and we expect it to continue in 2006 and 2007.

It is a much better-managed business today than it slipped into for that period of -- little bit of 2004.

As far as the minority interest, I will ask Fran to handle that.

We have been experiencing extremely strong sales activity in the first half of the year from those joint ventures that we consolidate and have this adjustment.

In the third quarter, that comparison again was a tough comparison to the third quarter of last year, and those parts of the businesses were slightly down.

So, therefore, the minority interest adjustment is down.

Then just a quick follow-up then, really to Terry's question, that is in the U.S. consumer business, I think it was last quarter you talked about 18 new products and a volume benefit coming through, as well as this early start to the grilling season.

I'm aware of the comparison, but we shouldn't necessarily read into the success of those new products, I think was your point, the success of the overall U.S. consumer business.

Is that the way I should read your comments to Terry's question?

I'm not sure I understood what you said there.

In the second quarter you had, it sounded like a whole load of new products coming in, 18 new products I think was the number you gave.

Correct.

And you had an earlier start to the grilling season.

Correct.

But that didn't sustain through the third quarter.

Well, what happened, as there is with any promotional items around the holiday periods, people buy in stronger and then replenish it.

It was replenished in the third quarter, and as you compare that to 2004, it was more of a level purchase pattern.

Understood, okay.

Okay, thank you.

Leonard Teitelbaum of Merrill Lynch.

I just wanted to return a little bit to some of the basics on the industrial side.

When you had your Analysts Day a couple of years ago, you had gone through and basically it was a handful of companies, did about 80% of the business in that division.

Could you kind of talk a little bit about the math behind it?

Has that changed at all, or is it still virtually a handful doing the bulk of the business there?

I think at the conference, Lenny, we would have said 15 customers represent about 75% of our sales.

That would have been the exact presentation that we made, and that is very consistent today.

All right, because I think at the time, one of the comments was with all the technology there, you needed to broaden that base out.

Is that still the game plan here, or what is your plans for broadening out the list of customers?

Every day, that is what we work on every day.

And I think part of the deep dive, Lenny, that I'm doing into the business with the team is to look at how can we accelerate the 15 to become 25.

And as we look at all the other smaller customers that we work with, what role do they play relative to the growth in the future.

That is the assessment we're going through right now.

Fair enough.

Second part, when you talk about some of the low-price competition, I presume that's on the ingredients side.

Could you give us an example of what that would be like, just so maybe we can keep this -- I can keep this thing in perspective?

I can give you an exact example.

We sell commodities in the marketplace.

Let's pick cinnamon.

We sell cinnamon all over the world as an ingredient to lots of customers, and that is a commodity.

That is bid out as a commodity.

We produce it.

We provide the specifications, and it is put out either an online auction or it's put out as a direct bid.

We compete; we have margin goals that we establish for the teams, and if we stay within the margin goals, we get the business.

If we get below that, we don't.

That is as simple as the ingredient business is.

Then the final question, I think Jonathan had asked it earlier, and we have been hearing that it is really profitability deferred, not denied, on some of the industrial, and you can't call the shot when the new products come out.

But is it centered more on one major customer that you had in your plans, Bob, or is it more than one, and is it a particular area or section of the foodservice business?

I would say it is five customers to seven customers, and really can't comment beyond that because of the relationships we have with our customers.

But it is not 50, but it is not a particular problem we have with one or two specific customers in a particular sector.

Okay, that is helpful.

Thank you very much.

Eric Katzman of Deutsche Bank.

Good morning, everybody.

I guess, Bob, just kind of following on some of the questions here with the industrial business.

Do you think that the reason why some of the customers on the bulk ingredients as you just described to answer Lenny's question, the commodity stuff, the real commodity stuff, do you think that some of the customers given all of the cost pressures that exist in the industry today, that they have chosen to move to a lower quality stuff, and basically that was what you didn't anticipate when the bidding was lost?

No, I don't think it is lower quality, Eric.

I think we have to make sure we put it in the context, this is a very, very small part of our overall global business, this ingredient sale.

I just think as I shared in the conference call that we had earlier in September, it is a capacity utilization situation that occurs in the marketplace, and it ebbs and flows.

It ebbs and flows with us, and it ebbs and flows with our competitors.

So I wouldn't want to share that there is lower quality in the marketplace out there, but as I said in the script specifically, we have experiences over the last couple of years where we have lost a bid to a lower-priced supplier where the quality expectations by our customers were not there, and they have come back to buy the product at our price.

That's factual.

Those are exact examples that happened.

So we don't know go in a compromised situation to bid to be the lowest-priced ingredient supplier out there.

We have standards of expectation from a profit standpoint and we stand behind them, because we deliver quality every day, as you know.

Second question, you have many customers on the industrial side that diversification historically has basically acted as a hedge against the new product volatility that you have seen at the moment.

But I guess again in response to Lenny's question, you said you were going to try to broaden from 15 to more and bigger customers.

Doesn't that kind of -- could that kind of result in just again more volatility, because you are relying on fewer and bigger and they can, therefore, if they pull a new product or delay a new product, that that kind of -- it just makes it that much more difficult to forecast regardless?

I'd have two comments, Eric.

One that I said in the previous conference call also is that one of the goals I personally have is to try to understand this volatility better than I currently do today.

And thus, I would hope as we move into '06 and '07 and '08, I don't have to use the word volatility anymore;

I can give specific explanations around the why volatility is happening in the marketplace.

But I think if you think about it, if you broaden your volumes into 35 large customers or 40 large customers, you can sustain some more volatility and variability better than if you only have 15.

And that is our philosophy and kind of the new strategy we are moving towards.

Last question.

On the last conference call, I think that there was a lot of questions about your long-term growth expectations for the business.

And in my kind of write-up, we took down our growth expectations, kind of sticking with the recommendation, but took down our expectations.

Maybe you're going to address this in 2006 early, but do you still feel, given what you know now a month later, that you are still comfortable with a growth rate that is low double digits?

Could you comment on that?

I really can't comment, Eric.

I don't want to be perceived as avoiding your question.

We are right in the process of reviewing our '06 budgets right now.

We're right in the middle of it, as I said in the conference call before.

At that particular point in time, we will do an evaluation of '06, and from that we will spring forward to our long-term plans.

It is under review; there is no question about it.

We shared that with you before.

And as we get better visibility of our business, we get better visibility of the restructuring plan.

We get better visibility of SAP in Europe; try to gain a little bit better visibility of the economic recovery in France, better visibility of some of the disasters in the Gulf region in the United States, better visibility of our DSM relaunch, better visibility of this whole industrial turnaround and what that means from a strategy and growth standpoint.

As I sort of add all those up in the next three or four months, I think I will obviously have better visibility on what the long-term goal will be.

Fair enough, thank you.

Andrew Lazar of Lehman Brothers.

Good morning.

Bob, as you think about as you have discussed in delving into understating better than you have before the volatility in some of these key customers, has anything changed maybe even internally in the Company's ability to forecast with some of these customers or interact with them?

Have they become less interactive with you for some reason than others?

I'm trying to get an understanding of why the ability to forecast with these guys was quite good over the majority of the time that we have followed the name and became more difficult more recently.

Maybe it is just kind of the perfect storm of a lot of things that many of these customers going the same way or not, but I'm trying to get a sense have there been any change in your processes internally to do it?

Or do you think there is an opportunity -- could you think with a couple of key customers that you could be kind of all over what trends are happening there in a very close-knit way?

Well, let me respond, Andrew.

Internally, there has been very little change.

You know we put SAP and that gave us better visibility on a lot of areas in the S&OP planning processes, a new planning process that gives us, obviously, ability to link forecasting into production.

I just really can't answer your question yet, and the keyword in that is yet.

We are looking into that.

We're doing the deep dive around that.

Every question you just asked me, I've asked our team.

I don't have answers and responses from them at this particular point in time.

But I'd go back to what Eric and what Lenny were talking about.

Our goal is to take the 15 to 40, spread the risk and volatility amongst 40 large customers as opposed to 15 large customers.

That is part of the overall strategic look we're going to do in the industrial business, but I can't answer your question any better than I have already.

Then as you try and accelerate your move into a couple of additional strategic customers, what have been maybe the impediments previously to making that happen?

Because you have said that has always been your goal, is to kind of continue to get more of these big, strategic customers.

Has there been anything that has been an impediment to that before, or was McCormick just not as focused on it as you're going to be now?

I think the two answers would be, number one would be your last statement; we have not been quite as focused as we have, not been as aggressive and driven maybe.

Second is resource allocation.

We're specifically going to allocate resources to that particular growth strategy, to a greater degree than we did before.

Just last thing, I think as you've already mentioned, you are looking into what roles some of the more commodity-oriented or price-sensitive customers may play going forward.

The estimates you gave around how many customers account for what percentage of sales, is it more dramatic than that from a profit-skewing standpoint?

In other words, what I'm getting at is if you choose to cede some business that doesn't make sense for you, and that might very well be the right thing to do along the lines of like SKU rationalization and such from a margin standpoint, is that something we should expect to have a significant profit hit, even though that would be one-time in nature, if you will, to your business?

Or are those customers more volatile, and while they may contribute something, perhaps not all that profitable to begin with?

I would almost -- and once again, I have no data on it -- but I would expect the converse, Andrew.

I would expect sales down and profit up.

Okay, that's what I'm getting at.

I'm trying to see the profit skew.

I would view that 15% -- I'll answer both your -- 15 customers represent 74% of our sales and roughly about the same of our profit.

I don't have the data in front of me today, but as we look at all the other customers, the question becomes if you can eliminate, take some complexity out, we allocate for some resources, reduce some sales, increase profit, that is a good model to continue your growth plan on.

Okay, very helpful.

Thanks, Bob.

Ann Gurkin of Davenport.

Just returning on this ingredients business, given the heightened competition, do you think you need to reset your projected margin comfort range in that business as the world becomes more competitive?

I think what will reset that for us, Ann, will be the whole restructuring process that we talked about, consolidation, streamlining the supply chain.

It is going to naturally get reset over the next one to two years as we carry these initiatives forward.

So we will have a lower cost base to work from.

As far as margin expectations, no, I don't see it lowering our margin expectations.

We're going to make sure we have our factories loaded with the capacity we need to have and with profitable business, and the rest we will deal with a different way.

Okay.

In the industrial business, you talk about a 4.3% decline in sales.

In that number, did you lose any customer business?

No, nothing of any major nature, no.

Then you talked about, if I heard it correctly, you are looking to reduce cost by 30 million in '06?

That is correct.

Can you tell us how you'll allocate those savings?

Once again, some of it will be used to offset some of the higher costs we are incurring between fuel, pension costs and benefit costs, and some of the overall SG&A increases.

So it will be used as we have in the past as sort of a cost avoidance, cost elimination.

How about R&D, are you comfortable with your level of R&D spending and the returns you're getting, or do you need to step that up?

Yes, we're comfortable with the spending in R&D as a percent of sales for the business as it's focused on; very comfortable with that and don't see any dramatic increases there, no.

That's great.

Thanks very much.

Michael Allison of Morgan Stanley.

I just wondered if you could go through -- going to the previous announcement on September 7, the exceptional charges you are going to take, 100 to 130 million; how much of that will be cash versus non-cash and how it will be phased over time?

Actually, we are still formulating the details of that plan, Michael, and that will be -- those details will be given in connection with our year-end results.

So that will be along with all the other announcements in January?

That is correct.

Okay, thinks.

George Askew of Legg Mason.

Bob, I know it has only been three weeks since the call earlier this month, but have you seen some of the new products in the industrial pipeline break free in these past few weeks, or are we at the same place we were?

Probably the same place as we were before, George.

Nothing has really changed.

What I said in my fourth-quarter comments, they're very consistent with what I said before.

The important thing is that they are not lost; they are not business that have gone away, as I think Eric asked me.

So they are in our system and they will be launched in 2006.

Maybe this is just naive on my part, but it seems to me that the six-month or greater deep dive in industrial is kind of a long time, and again, perhaps I'm being naive.

Is part of the strategy there the fact that time is on your side, the fact that eventually the pipeline will break free as we want to -- perhaps you're going to push off -- or not push off, but the strategy, the redevelopment will take longer in part because time works to your benefit?

I don't think so, George.

There is significant pressure on me from our Board of Directors to get a better understanding of the industrial business and come up with a revised plan.

It is the number one priority I have right now personally, and you can imagine since it is my number one priority, it is one for a lot of other people too.

So we are going at it as fast as we can.

It is a complex business, George.

It has got a lot of large tentacles out there all over the world.

It's a global business, not just something we're doing out of Hunt Valley here.

So it's going to take some time, because what we want to do and what we are committed to do is relook at it from an overall strategy point, look at it from an overall objective and investment standpoint, and really focus on the areas to really make a bigger difference quicker in this business than we had planned to do in the past, but it is going to take time.

You are not naive, George, at all.

It is just complex and a big project.

Okay.

Are you seeing new industrial capacity enter the industry, perhaps out of Asia-Pacific or other markets?

Are there new entrants?

Not really, no.

We all have seen continued consolidation as you read the newspaper and there's little, wee ingredient acquisitions in Europe and the United States.

So there is continued consolidation of people buying up small, little players.

And then one question on the consumer side.

Clearly you are doing your dry seasonings repositioning refresh this year.

As I recall, you did a refresh of the spice category in, I think it was UK a couple of years ago.

That is correct.

When was your last refresh of the spice category in the U.S., and could we anticipate something like that in the next year or two?

1987, and the answer is yes.

Okay, good.

The answer is yes, George.

Thank you very much.

(OPERATOR INSTRUCTIONS) Gayle Alexander (ph) of Darphil Associates.

Could you give us some feel whether your high-cost vanilla is now out of your inventory?

The answer is yes, it is.

Yes, we are buying low-priced vanilla today from the countries that we purchase around the world, and it is entering obviously our cost deck third quarter, fourth quarter, and as we move into 2006.

Could you give me a feel, vanilla is how much of your commodity sales?

No, I can't at this point.

I thank you.

Good luck.

There appear to be no further questions at this time.

I'll turn the floor back over to management for any closing remarks you may have.

Thank you.

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