McCormick & Company Inc (MKC) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, my name is Natasha and I will be your conference facilitator today.

At this time I would like to welcome everyone to McCormick's fourth quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer period. [OPERATOR INSTRUCTIONS].

Thank you.

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

Ma'am, you may begin your conference.

Good morning, and thank you for participating in McCormick's teleconference.

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.

Please note that today's event is being Webcast and that following the call an audio replay can be accessed at www.ir.mccormick.com.

To accompany today's call we have posted a series of slides at www.ir.mccormick.com and we'll reference these slides during our remarks today.

We hope you'll find this helpful.

Today we'll discuss McCormick's financial results for the fourth quarter ending November 30th.

We will then provide an overview and update on the restructuring plan, including our industrial business review.

Following that we will share our 2006 and longer term outlook for the business.

At the end of these remarks, Bob, Fran, Paul, and I 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'll now turn the discussion over to Fran.

Good morning.

And thank you for joining today's call.

I'll begin the discussion with a review of our fourth quarter 2005 results and some summary remarks about the year.

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

As projected sales were negatively effected by several factors as shown on Slide 3.

We had lower demand for our consumer products in the gulf region, both Zatarain's and McCormick branded products.

We also continued to experience difficult retail conditions for our limited range of higher volumes spice and herb products in France.

Sales growth of our industrial business was affected by lower vanilla pricing and further progress with SKU reductions in Europe.

As a result sales declined 1%.

We have estimated that the factors I just mentioned reduced sales approximately 3%.

Foreign exchange rates had a minimal impact during the quarter.

Incremental sales from the acquisitions of Silvo in November 2004 added 1%.

This leaves an increase of approximately 1% that was driven primarily by new products and effective marketing in our consumer business, and an increase in the sale of snack food seasonings and to food service distributors in our industrial business.

Gross profit margin for the quarter was 43.9%.

This was a significant increase from the 42.4% reported for the fourth quarter of 2004.

Recall that last year's margin was effected by an adjustment to the accounting in our industrial plant in Scotland, which reduced gross profit margin by 90 basis points.

The remaining increase of 60 basis points was driven largely by our success with cost-saving projects during 2005.

In fact, for the entire year we realized 33 million of cost savings from these projects, exceeding our goal of 25 million by more than 30%.

Of the 33 million, 21 million lowered cost of goods sold, and 12 million reduced selling, general, and administrative expenses.

With the cost savings that effected gross margin the pricing we took earlier in 2005 and a positive product mix we more than offset the higher cost of packaging and energy during the fourth quarter.

For the full year gross profit margin rose 10 basis points.

If you turn to Slide 4 you can see that we increased gross profit dollars 3% with sales growth and cost reductions more than offsetting the $15 million negative impact of vanilla in 2005.

Selling, general, and administrative expenses were down from last year due primarily to cost reductions and lower incentive compensation associated with our 2005 results.

Advertising in the fourth quarter was down more than $2 -- $2 million as we suspended some of our advertising for the Zatarain's brand following hurricane Katrina.

Bob will discuss our restructuring plan in a few minutes, but I would like to point out here that we recorded 10.5 million of special charges in the fourth quarter for restructuring actions.

Earlier in 2005, we recorded $600,000 of special charges related to our 2001 streamlining actions that were completed in 2005.

For business -- the full year and fourth quarter of 2005 special charges reduced earnings per share by $0.05.

Recall that the fourth quarter of 2004 included 3.8 million of special charges with an EPS impact of $0.02.

We have summarized some of the factors effecting EPS on Slide 5.

Below the operating income line, lower shares outstanding added $0.02 to EPS for the fourth quarter, while the negative effects of higher interest rates and an increase in the effective tax rate versus 2004 lowered net income and reduced EPS $0.04.

In summary, we have reported $0.65 of earnings per share in the fourth quarter of 2005, compared to $0.62 in the prior year.

To allow sufficient time for questions following our remarks, we have decided not to elaborate further on the business segment detail that we included in today's press release.

However, we are prepared to answer any questions on this topic at the end of our remarks.

My comments on the balance sheet and cash flow are summarized on Slide 6.

Our year-end balance sheet remains strong with debt to total capital of 40.7% below our 45 to 55% target range.

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

We were particularly pleased with the cash flow that we generated in 2005.

If you recall, in 2004, cash from operation had increased from past levels due to the reduction in our vanilla inventory.

In 2005, we generated cash from operations of $339 million.

Accounts receivable and prepaid allowances were significantly lower than the year-ago period.

The decrease in accounts receivable was primarily due to a large amount of collections made near year-end in France and in the U.K.

During 2005, we repurchased 5.4 million shares for $186 million, up from $174 million in 2004, and 120 million in 2003.

The current authorization of 400 million had 362 million remaining at the end of the fiscal year.

With our cash we also paid 86 million in dividends, up 12.1% from 77 million in 2004.

In November, the Board approved a 12.5% increase in the quarterly dividend paid in January to $0.18 from $0.16.

During 2005, we achieved increases in both EVA and ROIC due to higher earnings.

As we move through 2006 our restructuring actions will lower these financial measures, but we expect to be reporting further increases to you in 2007 and 2008.

To summarize 2005, I would like to share some final perspectives.

In 2005 we certainly faced a number of challenges at McCormick.

We had some price and profit pressure from the vanilla market and our inventory of higher cost beans.

Following an intense review of accounting at our U.K. condiment operation we recorded an adjustment that lowered margin and EPS.

And third, hurricane Katrina reduced product demand in the gulf region and caused some property loss in our Louisiana facility.

Looking back on our financial results we regard 2005 as an aberration in our long-term performance of sales growth, margin improvement, higher EPS and increased shareholder value.

While we are disappointed with the stock price decline, as you can see on Slide 7, the total shareholder return on McCormick shares still exceeds that of the S&P 500 Stock Index and the S&P Food Group Index on a five-year basis.

It is important to point out that despite our 2005 challenges, we made great progress on a number of fronts, as you can see on the next slide, which is number eight.

The first item on my list is cash, and as I described earlier, the cash we generated in 2005 was excellent.

We used this cash to fund a substantial number of shares repurchased and a dividend increase.

While we are on the topic of cash, I want to mention that we went to market in December issuing new 10-year $200 million notes at an attractive 5.2% rate, which will be used to refinance $197 million of notes with an average rate of 6.5%, which mature in 2006.

In our consumer business, we grew global sales of grinders 26%, and grilling products 21%.

In the U.S. sales of Hispanic products rose 20%, and now account for 7% of consumer sales in the Americas.

Our relaunch of the dry seasoning mix line was rolled out in the fourth quarter.

We reset 20,000 stores with new graphics, new merchandising, new products and new pricing, and are well-positioned for growth in this section in 2006.

While our industrial business did not have the big new product hits we rely on to deliver strong sales growth, we launched a number of new products in 2005 for our industrial customers.

For our food manufacturers we flavored new fruit snacks, cereals, beverages, meal kits, snack chips, and snack bars.

For our food service customers we developed and are supplying new bread toppings, dressings for wraps, sauces to top steak and grilled fish, and dessert seasonings to sprinkle on speciality coffees and teas.

For business, our consumer and industrial businesses 11% of our 2005 sales were from new products launched in the last three years.

Our B2K implementation continues to be successful and we have just about completed our preparations to implement B2K in Europe where we'll go live early in 2006.

Finally, as I have mentioned previously, we drove higher margins with 33 million in cost savings versus our goal of 25 million.

This follows 25 -- 24 million in savings in 2004.

We are proud of each of these achievements.

I hope they give you some visibility into the momentum that we maintained at McCormick during a tough 2005.

Thank you for your attention and now I would like to turn the discussion over to Bob.

Thanks, Fran.

As Fran stated 2005 was a difficult year for us at McCormick.

It was without doubt my most difficult year as CEO of McCormick.

Fran listed some of the accomplishments and progress during the year.

In addition to these, we made some important changes in our leadership team and our organization as announced last September.

These changes positioned us for some significant actions at the Company, actions that are already under way.

What I'll discuss next are a description of the major changes, and most importantly, how these changes will lead to a stronger, more profitable business.

For those of you who followed McCormick for a number of years, you know that we have had a major system and process initiative under way for the past 5 years.

In addition to improving our systems and processes, B2K was designed to enable us to better serve our customers and improve our ability to meet increased competition.

With the heavy investment of B2K behind us we expected that productivity improvements and a common IT platform would allow us to take some major steps in improving our supply chain and maximize the return on this investment.

By mid-2005, we had reached that point in time and announced in early September that significant actions to improve our global supply chain would be taken over the next three years.

In that same announcement, we also indicated that a comprehensive review of our industrial business was under way and that we expected this review to lead to additional actions to improve this business.

By November, we had further refined the supply chain actions and had identified some key initiatives to improve our industrial business.

All of these actions were put together in a comprehensive restructuring plan, which the Board approved later that month.

A good starting point for my specific comments on our restructuring plan would be the industrial business overview; the findings, the decisions, and most importantly the actions to be taken.

Following that, I'll give you an update on the supply chain improvements under this plan that will benefit both the consumer and the industrial businesses.

I'd like to state right upfront that the leadership of this Company continues to believe that the industrial business is an important part of McCormick's portfolio.

As the Company committed to bring great flavors to the marketplace our industrial business allows us to deliver flavors to consumers when they eat out or when they purchase and enjoy all types of foods and beverages found in the grocery stores and other retail outlets.

From our review we have determined that our basic strategy was sound, not broken.

Our strategy had been to broadly extent our flavor solutions, serving many customers, developing a wide variety of products, and filling our production capacity.

We provided extensive services and capabilities to all our customers.

For many years, we did a great job at executing against this strategy, and as a result, the industrial bid -- business had been an important contributor in achieving superior sales and earnings growth.

However, what drove that success had also over the years created some characteristics of this business that caused us to reassess some portions of this strategy.

Let me explain what I mean by that statement.

While we have been extremely successful in developing many new products for many customers, our customer base just in the U.S. had grown to 1,000.

Likewise, our focus on a broad array of flavor solutions led to an SKU count of approximately 4,000; again, just in the U.S.

Using information from SAP, we further analyzed our customers and our products.

A segmentation of our U.S. industrial business showed that sales were heavily weighted to the larger customers as illustrated on slide number nine.

In fact, about two-thirds of our total customers had annual purchases of less than $25,000.

These smaller customers had lower gross profit potential and were contributing only marginally to profit .

Regardless of the size each of our customers required a degree of support from technical resources, QA, logistics, and sales and administrative processing.

Frankly, there was very little differentiation between customers and these services were not fully reflected in our pricing structure in a consistent manner.

From a sales and marketing standpoint we were organized around the products, the various flavor solutions that we had available to serve our U.S. customers.

As a result, new product solutions were not delivered efficiently to our largest customers and further complexity was added to the business.

In summary, our industrial business had gotten too wide to provide the appropriate level of support to all our key customers.

As we look ahead, it is our strategic customers that will offer us the greatest opportunities to grow our industrial business, and we want to narrow our focus to these key customers and accelerate our opportunities for growth.

To achieve this end, we have identified three major areas of change, which we believe will accomplish this.

I would like to refer you now to slide number 10, which outlines the first area of change.

We will be aggressively rationalizing customers and SKUs.

Our objective here is to reduce complexity by eliminating underperforming customers and SKUs.

This will allow us to reduce the number of facilities we have and lower these and other fixed costs.

In the United States beginning in 2006, we have begun to use consistent criteria to identify a top 50 strategic account list, accounts with the highest growth potential.

For smaller customers, and even for certain products sold to large customer, we have already initiated aggressive pricing actions.

We will also be raising minimum order quantities.

And with clear segmentation we will become more selective in providing support services.

From these actions, we expect to reduce the number of U.S. industrial customers and SKUs by approximately 25%.

This could reduce our U.S. industrial sales by anywhere from 2 to 5%.

However, we expect no profit impact on the business as these products and customers have lower margins.

And with this reduced complexity we will lower costs and redeploy our internal resources.

These resources will be reallocated to those customers that only offer higher growth rates.

Growth with our strategic customers will result in increased profits and drive higher margins.

A secondary improvement is our go-to-market approach.

Please take a look at slide number 11.

We will move from five product-focused sales team, plus a separate food service distributor team to two customer-focused teams.

Each of these two sales teams will sale across all product platforms providing our customers with a single point of contact.

We will have more top-to-top interaction and support our customers with an appropriate level of resources.

As we redirect our focus to key customers from products our sales team will have better insights into growth opportunities, and most importantly, forecasting.

Forecasting will be further enhanced with the use of external data resources and internal data using B2K, which was fully implemented in our industrial business last year.

Third area of change relates to our product development resources on slide number 12.

Many of you on this call have seen our facility here in Maryland and know that we have additional resources and locations around the world.

Effective in 2006 we will focus our application and solution development teams exclusively on our strategic customers.

We will optimize our system and process for prioritizing technical resources against the best projects and report on a more reliable pipeline for measuring our success.

These actions will lead to a reduction in our workforce, which has already been announced and is being implemented.

The pricing and related actions to reach new margin targets are under way.

Efforts to improve our forecasting have also begun.

A balanced scorecard is being implemented to provide management with timely information to drive and sustain these business changes.

Extremely [technical difficulty] progress on multiple [technical difficulty] who currently purchase around 700 products.

This is down from 500 customers in Europe back in the year 2000.

In our Asia-Pacific region our customer count has been reduced to about 100 and we plan to take it even lower.

In both of these regions these actions have had a positive effect on operating income margin.

Please turn to slide number 13, and I'll summarize my remarks about the industrial business.

While strategic changes of this magnitude cannot happen overnight, I believe that by 2008 we'll have made great strides and our industrial business will begin to be significantly improved.

These are important steps that will reproduce in our industrial business for growth.

I am confident that we'll get back on track to increase our sales for this business 3 to 4% annually.

When compared to 2005, we expect to increase operating income margin for the industrial business 250 to 350 basis points by 2008.

Over the next three years we'll report back to you on our progress with these and other key metrics.

I'd like to comment next on supply chain actions that span both businesses.

Since the initial development of project B2K we expected to make major changes in our supply chain.

We are at a point today where we can proceed with these changes for three reasons.

First, with our progress implementing B2K we have created a more common set of systems and processes.

Second, we've achieved productivity improvements in recent years that did free up capacity.

And third, plan reduction in SKUs simplifies processes in many of our facilities.

We have indicated as part of these actions we'll be consolidating global manufacturing, rationalizing our distribution facilities, improving our go-to-market strategy and eliminating administrative redundancy.

We will also further reduce SKUs and inventory.

As these effect -- actions will effect our employees and customers I cannot be explicit about all our plans for the next three years.

What I can do is share the scope of these actions and some early steps we have announced to date.

On slide number 14 you can follow my comments.

Let's begin with the consolidation of global manufacturing and the rationalization of distribution.

To date, we have announced several plant closures.

As announced on January 10th we'll be closing a major manufacturing facility located in Salinas, California.

Most of our consumer reproduction we've moved to our Hunt Valley plant here in Maryland and our London, Canada plant will become a primary backup facility.

Industrial production will be moved to several other existing facilities.

We will also close our Hunt Valley condiment manufacturing facility moving this production to South Bend, Indiana.

Both of these actions will be completed very early in 2007.

We have also announced the closure of a smaller production facility in Belgium.

In addition to the announced closure other facilities worldwide are being reviewed.

As for our go-to-market strategy, we're able to share at this time some changes in our U.S. consumer business.

First, we'll be revitalizing our entire line of spicing and seasonings.

This will be the first comprehensive change to this product line since we went from cans and bottles in the late 1980s.

This revitalization will improve products, packaging, merchandising and more.

We'll be rolling this out to our retail customer stores beginning in 2006.

At the Consumer Analysts Group of New York Investor Conference in mid-February, we'll have more to share about this major initiative.

Separate from this effort we have identified more than 450 SKUs that will be discontinued in 2006 and 2007.

This is about a 10% reduction for our U.S. consumer business.

The targeted items are slower moving and are outside of our strategic focus.

As we phase these items out, we will make room for some new innovative products.

We have taken steps to more effectively and efficiently sell and service our U.S. customers and to improve our competitive advantage within our product categories.

To this end, we brought together what had been separate sales organizations for McCormick brands, Hispanic products, and the Zatarain's brand.

The new organization has a key owner of customer relationship, better aligned with our brokers and seamless coverage of the center of the store and the perimeter area.

We have also established a single point of contact for Dollar stores and other emerging channels.

With this new organization we are able to increase the number of employees devoted to our large customers allowing us to fully pursue customer-specific opportunities.

In Europe we'll also be improving our go-to-market approach in several markets.

We have launched our plan in Spain to move from 44 independent distributors to one national distributor with excellent systems and capabilities.

While I have shared a lot of information here, there are many projects still ahead, and we will continue to update you each quarter.

Let's take a look at the financial impact of these actions and our projected savings for the restructuring plan on slide number 15.

The total pre-tax charges are projected to be 130 to $150 million.

Following the 11 million recorded in 2005, we expect to record up to 85 million during our fiscal 2000-year.

The remaining portion will occur fairly evenly between 2007 and 2008.

We estimate the cash portion of these charges to be 85 to $100 million.

This will occur in proportion to how the charges will be expensed, with the requirement of about 60 million in cash during 2006.

Much of the cash will be related to employee severance.

As indicated in the press release, we expect to reduce the number of positions globally by 10 to 13%.

A significant number of effected employees have already been advised.

As for the 50 million in annual savings that we project, we'll certainly realize some portion of this -- some -- we realize some portion of this prior to 2008.

In 2006, we expect to realize at least 10 million and estimate that another 30 million will be realized in 2007.

These savings are in addition to our ongoing savings programs.

We expect to drive margin improvement and increase earnings per share, as well as invest a portion of these savings in sales growth drivers, such as, brand advertising.

Let me summarize my update on our restructuring plan.

We have been building the systems, processes, and organization and leadership that allows us today to move forward with this plan.

This broad initiative will significantly effect both consumer and industrial businesses.

The actions we're taking are both domestic and international and they touch many functions across our organization.

Our actions have been carefully planned over the past year, and we are confident we will successfully manage our business during a period of change and reach our desired results.

This plan is one of the most important steps we have taken to continue the journey we began in 1998.

The Board and executives of McCormick are fully committed to the plan and are confident that it will result in a stronger, more streamlined company.

The last topic I want to cover is our financial outlook.

The restructuring plan that is under way will effect our financial results in a number of ways.

In addition to the charges we will record, sales growth will be effected as we eliminate underperforming customers and SKUs over the next three years.

We have projected the impact of this plan on our financial outlook and have set the following annual goals for the next three years.

Through gross sales, 3 to 5%, and to increase earnings per share 8 to 10%, excluding the impact of special charges, and in 2006 stock options -- excuse me, stock compensation expense.

Slide number 16 shows that reaffirming our past components of sales growth, new products, distribution, acquisitions, growth of the base business, and the contribution of each one.

We validated this by analyzing our sales growth during the past five years and examining our growth prospects going forward.

Innovative new products are driving sales for both the consumer and industrial businesses.

Actions like the revitalization of the dry seasoning mixes and beginning in 2006 our spice and seasoning product line will drive not only market share but category growth.

Acquisitions will continually be a part of our growth strategy.

Our focus during the next few years is more likely to be on the consumer business, rather than the industrial.

However, as we look at the next three years we have added in a factor of 1 to 2% for the annual impact of customer and SKU reduction.

In the past years we have demonstrated this kind of level of sales growth along with margin improvement can drive EPS increase of 10 to 12% or more.

Our business model supports this level of increase.

However, more recently the impact of the vanilla market, our initiatives to reduce SKUs in Europe and China, and an accounting adjustment were factors that had caused us to trail this goal.

We believe an objective to increase EPS 8 to 10% annually through 2008 recognizes that we're in a period of change, due to our restructuring plan.

This also provides for head wins for factors, such as, foreign exchange rates and escalating energy costs.

At a target of 8 to 10% we'll have some flexibility in managing the business and more importantly pursuing opportunities to invest and initiatives to drive additional growth.

Again, this goal excludes the impact of special charges we will record and effect that stock compensation expense will have on our 2006 EPS when compared to 2005.

Now, I'll comment specifically on 2006.

We are looking for sales growth in our target range of 3 to 5% this year.

But would point out to the lower end of that range as we're moving aggressively to streamline our industrial business.

Also effecting 2006 sales will be a price increase in our U.S. consumer business effective this month that average 4% and a similar increase for products sold to food distributors in the United States.

This is expected to add about 1% to total company sales.

I also want to mention that we expect foreign exchange rates to have a negative impact of 1 to 2% for the full year, which will occur primarily in the first half.

Moving to earnings per share, you can find some of the key income statement assumptions on slide number 17.

We expect gross profit margin to increase by at least 100-basis points.

In 2006 we'll benefit favorable product mix and cost savings activity.

We are also comparing 2006 to 2005 when gross profit was significantly impacted by vanilla as Fran described earlier.

Selling, general, and administrative expenses will increase at a higher-than-normal rate due to the expensing of stock compensation plan costs associated -- excuse me, stock compensation plan, costs associated with B2K implementation in Europe, and a return to the normal incentive compensation levels.

On an EPS basis the total stock compensation expense projected for 2006 is $0.11.

Special charges will be approximately $85 million and we're projecting an EPS impact of about $0.42.

Based on our anticipated debt structure and higher rates interest expense should be up approximately 10% from 2005.

We expect our effective tax rate to be 32%, compared to 32.7% in 2005.

As for unconsolidated income we had a terrific performance in 2005 and expect to maintain that higher level of income in 2006.

That leaves shares outstanding.

On a diluted basis, we expect to continue the same pace of share repurchase leading to a reduction of 2%.

As we have stated, a significant acquisition would likely cause us to suspend share repurchase activity.

These assumptions lead to an earnings per share projection of $1.21 to $1.24 for 2006.

Turning from sales and EPS to cash.

We expect to continue at our track record of generating significant cash from this business.

A portion of the funds related to our restructuring plan, estimated at about $60 million for 2006.

Capital expenditures will be about $90 million, slightly higher than 2005 due to some additional requirements required -- related to the restructuring plan.

With the impact of the restructuring charges and stock option expense, we expect the first quarter 2006 EPS to a range from $0.03 to $0.05.

If you take a look at slide number 18, we have provided a reconciliation of our 2005 first quarter EPS to the mid [inaudible] of our first quarter EPS range for 2006, which is $0.04.

We are estimating a $0.19 increase in special charges and about a $0.05 of stock compensation expense.

We will be recognizing nearly one-half of the estimated annual EPS stock compensation expense in the first quarter due to the expensing requirements of the new accounting announcements that relate to retirement eligible employees.

Our business results in the first quarter will reflect growth and sales and improve margins in both the consumer and industrial businesses, which will add an estimated $0.03.

In 2006, we'll not experience another $0.03 to $0.04 from the unfavorable impact of high vanilla costs in our industrial business that occurred in the prior year's first quarter.

EPS will be negatively effected by two other factors that we have split out here.

Cost related to the implementation of B2K, and second, an increase in our 2006 spending during this period to drive our sales of branded products.

We will increase our advertising of Zatarain's for the Mardi Gras Holiday and boost Super Bowl support for our broad line of products.

Together these actions will add an estimated $0.03 to our operating expense.

The last experience we projected in comparing EPS for these two quarters is a net decrease of $0.01 for the impact of negative foreign exchange rates, increased interest expense, a higher effective tax rate, and lower shares outstanding.

I want to comment that we expect the negative impact of foreign exchange to be greater in the early part of 2006 and in the first quarter, to reduce sales by approximately 2%.

That concludes my remarks on the financial outlook.

Before summarizing my remarks I want to make sure everyone is up-to-date on recent changes to McCormick Board of Directors.

We mentioned earlier in 2005 Bob Davey's retired from the Company and the Board.

Ned Dunn who has served as a Director since 1998 will also retire from the Board at the end of this current term.

Late in last year we welcomed John Bilbrey, President of Hershey International to our Board.

We have conveyed a lot of information this morning, and I hope that our remarks and accompanying slides were helpful.

We hope you can see that we're working on a transformation plan -- we've been working on a transformation plan for some time, and are now in the implementation phase that will drive improved margins and operating income over the next three years.

I'm very excited about the changes at McCormick and this next step in our journey.

The actions that are under way have been well planned, comprehensive and global.

I'm confident in our ability to execute these plans, and make this Company better positioned to grow sales, improve margins, achieve higher profits, and most importantly, increase value for our shareholders.

To everyone on the call I thank you for your interest and attention and now Fran, Paul, Joyce and myself will look forward to answering any questions you may have.

Thank you.

Operator, we're ready for questions.

[OPERATOR INSTRUCTIONS].

Your first question comes Terry Bivens of Bear Stearns.

Hi, good morning, everyone.

Good morning, Terry.

Morning, Terry.

You guys laid out a pretty detailed plan for how you can, I think, correct some of the things that have happened on the industrial side.

Bob, I wanted to ask you about the consumer side.

The one thing that surprised me a little bit is it sounds like you have some pretty ambitious plans there to kind of reposition the line a bit; if I'm seeing this correctly.

Granted in the fourth quarter and through some of this year, we obviously had some trouble in the Zatarain's regions over in France.

But I guess my question would be, did you also see something else in your consumer line that dictated this move?

Why did you do it, in other words?

And what kind of sustainable consumer growth do you think is realistic for us to look at going forward?

Terry we have been working on the revitalization of our consumer business, which I think we've shared with everybody on this call, for about three years.

Right.

In 2005 we implemented our -- a reconfiguration of our dry sauce mix line throughout the country, and that's completed, and with appropriate advertising, and marketing, and merchandising we are seeing positive results from that reconfiguration.

Right behind that we knew coming was a total revitalization of our spice and seasoning lines.

And I think some of you were aware we're in market-test stores, one of them being Baltimore here, with a whole new merchandising concept for a line that has been very difficult to merchandise over the last 15 or 20 years.

So this has been part of a longer term plan that we put together and an implementation of it is just in sort of the initial phases right now.

Combined with that we want to allocate increased advertising, and merchandising, and marketing dollars over '06, '07, and '08 to make sure that we don't jeopardize any of the growth opportunities and potential we put in our plans and that's why the increases in those expenditures as we look to go forward.

But there's nothing special going on other than just good planning over three years, Terry, and it's now a coincidence it's being implemented with the over restructuring of the Company.

Yes, okay.

I just thought maybe you were going a step further, but I guess maybe not.

Maybe this was just the implementation.

It sounded like you were going to take a further step there.

Let me just --.

Well, the only step we're doing, Terry, is taking SKUs out of the business simultaneously, if that's what you meant.

I mean we're continuing to look at how we make this consumer business more profitable in the past.

So by relaunching the dry sauce mix, and spice and seasoning, taking SKUs out of the business, and obviously with the closing of a major facility, that's all designed to improve the profitability in consumer and create additional funds to drive sales growth that we expect to be equal to or above our range as we get the momentum going sort of late 2006, mid-2007.

Okay.

And just one last follow-on, and I'll yield the floor.

Clearly it sounds like there may be a higher level of marketing there.

It sounds like you have some -- one would assume some interesting merchandising opportunities you can look at there.

How should we think about margins?

What would be the way to look at consumer margins as opposed to, the very specific look you have given us on what to expect from industrial?

I think as you look at 2006, Terry, once, again, we are just starting the spice revitalization.

DSM's just been finished the latter part of 2005.

I think as you look at 2006 the margin would be similar on the consumer business.

But as we get into the restructuring process and the savings start to accrue from some of those actions, we're seeing increase in margins in '07 and '08.

Unfortunately at this time we're just not ready to commit to what those increases would be.

Okay.

That's it for me, thank you.

Thanks, Terry.

Your next question comes from John McMillin of Prudential Equity Group.

Good morning, Bob, Fran, Joyce --.

Good morning, John.

When is the price increase, the 4% U.S. price increase, when does it go into effect?

The end of this month.

Was there any buy-in associated in the fourth quarter?

No.

No, there was not, John.

No.

Will there be in this quarter?

I don't anticipate very much at all, John, today, no.

In the environment of today, no.

Okay.

And then just -- there clearly are some positives to your restructuring plan.

But the three negatives that I have heard, and I just want to comment what they are and have you make comments back to me.

But, one person said, Well, if you take their sales gold and you take the bottom end of its 3%, and you take the top end of the acquisition benefit, you are left with 1% on the bottom end of organic sales growth.

And that includes 1% potential pricing, so you are kind of left with -- on the low end, no volume growth expectations, which clearly hasn't been the way you have run the Company in the last five years.

How would you comment to that, other than to point out that I'm taking low end numbers the whole way?

Well, first I'd comment you are taking low end numbers all the way, John.

You know I'd have to do that.

Well, that's often what analysts do.

Yes, I know, I understand that, John.

Truly understand that.

And I think what we're trying to explain to do is if you are taking the total Company, and I assume you are taking the total Company?

Yes.

We're going through a major skew rationalization at this particular point in time, in the industrial and consumer, especially in the United States.

What we're trying to do is get some visibility around what that might be.

We're in the preliminary phases of trying to identify customers that we're going to retain and product categories we're not going to participate in, in the future.

You can get to a 1% sales number.

We're much more optimistic on that as we get through 2006 have the skew rationalization behind us, have the momentum from the DSM and the spice revitalization, have our focus on major U.S. customers -- U.S. industrial customers that give us growth opportunities, focus our R&D expenditures on those major growth opportunities, I would contend we're going to be in a higher end of the three to five and lay our acquisitions on top of that.

Right.

And the second thing I have heard is that, is the criticism that you really have not had a handle on your industrial business, when Bob Davey left or announced plans to leave there was a suggestion that everything was fine.

And clearly it wasn't.

And now the plan to focus on big customers -- I mean, when we do that on Wall Street it often means lower margins, lower commissions.

Sometimes these bigger guys push back.

How would you kind of handle -- comment to that criticism?

John, I -- one of the things we want to be careful of is that we had excellent growth in our industrial business from the year 2000 to 2004.

We had some one-time situations -- now their financial adjustments I understand; their vanilla I understand.

And we had softness in new product launches.

But what I tried to indicate in the script is that the basic strategy on how we're going to grow our industrial business and not changing, our focus on how we're going do it is going to go from product portfolio to customers.

We have done a lot of research over the last 12 to 15 months and maybe unlike Wall Street we think we can grow in the flavor business by providing more capabilities, more resources and more marketing focus with the large customers, and narrow the scope rather than have the breadth we had before and divert resources that could be more effectively applied to the big customers.

And that's good.

In effect we have done that already, John, if you look at that slide where our top 10 customers contribute significantly to the sales growth, we've been doing that already.

What we're going to do is take that model and expand it to the next 40 customers and we're going to pay much less attention to the next 600.

And then just finally the other comment I have gotten is just on first quarter guidance.

If you strip out everything, stock option expense, charges, you view vanilla as kind of something you have got to manage, but it does look like some kind of $0.23, $0.24 quarter is flat, kind of at best.

Meaning that if you are going to do 8 to 10% in this fiscal year it's more of a back-end story, but I do understand you have got easier comparisons, especially if you get in the third quarter.

But it does look like you are presenting a business plan that's a little back-end loaded.

I don't think it's back-end loaded, John.

I mean we had a quarter last year which was $0.26.

And this year, if you back out the options and the special charges it's $0.28.

Now, the thing that we have to contend with in the quarter is that we're reinvesting back into the growth strategies of promotion and advertising, plus we have the additional expenses of just before going live of our B2K program in Europe, that is driving up the cost.

Also, as the chart indicated FX and interest is going, in outstanding -- sure it's going in the opposite direction.

So I mean we have to take those things into consideration, but our basic operating results are actually up.

Even considering the vanilla and the other issues.

So we're kind of pleased with the strong performance in our -- the way our first quarter is shaping up.

A lot higher than -- and it reflects continuing growth in both our consumer and some revitalization of growth in our industrial business that we're anticipating in the first quarter.

Those numbers I gave you are anticipating -- or what we gave you are anticipating all those things.

I got you.

Thanks a lot.

Thanks, John.

Your next question comes from Jonathan Feeney of Wachovia.

Good morning, Bob.

Good morning, guys.

Good morning, Jonathan.

Just one question.

I mean thanks for all this detail about this restructuring, particularly, in the industrial business.

I think it's terrific.

You are clearly streamlining the business here.

But I guess what I'm not really hearing is any kind of update in terms of what the actual competitive landscape, and what you are hearing from your customers as far as -- and I'm not talking about any specific customer.

I know you have some sensitivity there.

But what is going on with the overall innovations.

And what's the -- is the industrial opportunity shrinking, rising, rising at a grater rate?

And specifically I'm hearing that -- from a couple of your competitors that the industrial business is kind of flat, innovation customers are a little bit -- still a little bit gun shy after the kind of Atkins waterfall innovations to get going, and that might be as much as anything, your problem, not so much, any misexecution on your part.

Could you comment on that or just give -- at least give us some kind of update as how customers are feeling from what you can see?

Sure, Jonathan.

Once again we're in the early stages of relaunching this.

So as a result of dialoguing with customers, and specific customers we're just not prepared to release any of those conversations.

But we put a lot of due diligence around the whole customer strategy and we feel very comfortable that what we are able to do with 10 we can duplicate with 50 over time.

So the strategy is solid and sound.

The customers have been identified.

The team has been allocated.

And we're working on that particular implementation right as we speak.

Secondly, the whole innovation piece, one of the things Fran didn't mention in the first quarter, we're seeing strong innovation in the marketplace.

And I think that's because in 2005, as we addressed, innovation had been pulled back a little bit.

That's what we related to you in the latter part of 2005.

So innovation for us continues to be an important growth vehicle for the 10 customers and moving to the top 50 customers.

From a competitive standpoint you know we compete in two different landscapes.

One is with a lot of private companies out there, which obviously there's very little information on.

And one is high-end flavor companies.

And you have read the information on the flavor companies these days, high-end flavor companies.

Obviously, there's a competitive situation out there.

And me reading the announcements that have been presented in the marketplace it sounds like everybody has got excess capacity and realigning capacity with opportunity for the future.

But we sure don't view any of this information in the marketplace as negative to our opportunities for growth in industrial.

Having said that, we're just reorganizing and realigning and getting ready to go on the new strategy for the top 50 customers.

Okay.

Thank you.

Okay.

Thanks, Jonathan.

Your next question comes from Chris Growe of A.G. Edwards.

Good morning.

Good morning, Chris.

I just had a question for you quickly on the fourth quarter and then some other broader questions.

But just so I'm clear and to get the modeling squared away, this is the second quarter in a row you have had pretty substantial benefit from lower, I guess what I call "corporate expense."

Is that the cost savings flowing through?

I had attributed those to the divisions, but is that maybe coming through more like a corporate line?

I think it's a combination of items, certainly a reflection of more cost savings, and the way we allocate costs back to our units.

But it also reflects on a comparative basis quarter-over-quarter that there's less incentive compensation in that quarter as well.

Okay.

Because the fourth quarter is our largest quarter.

Sure.

I think I would only add, Chris, those of you that follow us we're heavily compensation -- compensation driven around performance, and obviously compensation this year is not aligned with compensation that we have had in the last three years.

Okay.

And then --?

It doesn't get any lower.

So somewhat of a catch up it sounds like in the last couple quarters of the year then?

That is correct.

Understood, okay.

And then the -- I wonder if you would talk about the European consumer business.

And it was actually a little better than I expected.

I think down one on an underlying basis.

Shall we expect an increase in promotion in that business still in '06?

Is that a business that's getting worse before it gets better in your view?

No, I don't think it's getting worse, Chris.

I think it's staying about where it is.

We have said for the last couple of quarters in our categories -- and I only speak to our categories -- we're seeing moderation relative to the hard discounters and the items that they're having.

We're seeing competitive activity with our major customers through increased promotion dollars that we're allocating.

And as a result we see moderation, and in talking with our leaders in Europe we see opportunities for growth, not in the first and second quarter, but as we move through 2006 on value-added products for us.

Okay.

That's new products you are referring to Bob then, right?

That is correct.

Yes.

Okay.

And then my last question just is relative to your U.S. consumer business you mentioned another price increase.

You have had several price increases now in the last several years and I'm just curious if there's any related volume effect that you're concerned by with that business?

And I know historically you have taken some of that pricing benefit and sort of spent it back, if you will, in the form of promotion or lower pricing.

And I'm curious if that should be the same -- you have the same goals of this price increase?

I think if you go back seven years, Chris, and you almost have to do that -- for five years we took no price increases.

That was coming out of the transformation to the new quest programs, et cetera.

The last two years we have taken price increases, and basically what we have done is to -- taken those to offset our costs.

Driven by logistics, distribution, warehousing, and energy costs; pension and benefit costs.

Is what we're trying to do is cover those costs along with the cost-savings opportunities that Fran addressed earlier.

Okay, so this is -- do you expect any related volume weakness though, Bob?

It would seem like after several price increases here that that would be in order.

I'm just curious what your thoughts are?

No, I don't -- I wouldn't characterize it as several, Chris, if I could just mention that.

Because several to me is we have done it five or six years in a row like some of the other major consumer products manufacturing companies.

We're very judicious about price increases because of the -- we just try to keep that spread between branded and private label.

But from a volume perspective, once again, our volumes are holding very strong, except for the Southwest part with hurricane Katrina.

Sure.

There's impact there and we've commented on what that impact is.

Okay.

Okay, thank you.

Thanks.

Your next question comes from Eric Katzman of Deutsche Bank.

Hi, good morning, everybody.

Good morning, Eric.

A few questions, Fran, maybe first you mentioned, I think, that you had operating cash flow for the year of -- where is my number here -- well, whatever it was.

With the cash cost of the restructuring, do you expect cash flow from operations to be down in '06?

No, actually cash flow from operations -- well, it will be down from the extent that the earnings -- that number starts off with net income.

So to the extent that we have a $60 million charge against that income, it will be lower, yes.

Okay.

So -- and then -- and so -- but on a cash basis you are including the cash cost, right?

Because the cash cost is less than that of the charge.

Exactly.

Right.

Oh, okay.

And then also one of the problems that the Company has had, not just in '05, but over a longer period of time, has been seemingly an inability to control working capital.

I think inventory levels and receivables have always been a lot higher than competition across -- broadly across the food industry.

Do you think that this restructuring will address a lot of that?

And is the complexity that was built up in the business, kind of evident in the working capital numbers?

I'll comment initially, Eric, I think anything changes in working capital that I would address has been all part of a plan.

But there is no question about it when you take a look at what we're doing on the industrial business and complexity inventory SKUs, as we have said all along, there is going to be a reduction in inventories in the Company over the next one, to two, to three years.

We haven't provided visibility around that because we haven't converted the skew rationalization into actual inventory dollar reductions.

But that's something that we will owe you in future quarters.

And I'll just add that during the period of the B2K implementation inventories did build up and, of course, the vanilla purchase added inventory.

But if you look at the last two years, '05 and '04, the improvements that we have made on working capital management over those years have contributed -- been contributors to our large net cash flow from operating activities in about the 330, $340 million.

So -- and I might point out that prepaid allowances over a five-year period have come down significantly during that whole period from well over 100 million to, down to 40 something or 30 something as it is now.

So I think it has been masked by some other programs, but we're moving in the right direction now.

Okay.

And then kind of a different question, I think, Bob, you kind of commented that the targets both the share repurchase program and the sales targets are a function of acquisition activity.

With this restructuring and changes of the financial targets, have you changed the way you are thinking about acquisitions?

I mean I think the ones you have made in recent years have generally worked out very well, but I think you have been willing to take some dilution near term.

Is that still the case?

And I -- so I guess just more broadly how do you feel about that?

Well the acquisition strategy is not being curtailed at all, Eric.

We're going to continue to move forward as I said in my notes.

One of the areas that we're going to focus on is the consumer side from an acquisition standpoint instead of industrial, which we had before.

So that's going continue to be very, very aggressive.

Depending on the size of the acquisition, and whether it's a synergistic acquisition or a growth acquisition there may be some dilution associated with it, but small.

Very, very small.

Okay.

We're looking for the ones that are accretive like Zatarain's.

Okay.

And then, kind of following up on John McMillin's question earlier about the -- like in the consumer business you have done really well in the last six, seven years by taking big chunks of market share.

So kind of related to that in the industrial business now being a focus on kind of almost, let's say, fewer accounts and penetrating them more, who do you have to displace at these bigger accounts?

Well, it -- maybe nobody, Eric.

Maybe we just don't allocate the resources and the teams that we have had on the top 10.

We have a significant competitive advantage, as we have shared with everybody on this call and all our employees on this call, with our competitors either on the private side or on the public side.

And we're going to take those competitive advantages and leverage them like we have with some of the major accounts that you're very familiar with.

So we think we can get in on their innovation streams.

It's going to take some time.

Get on their innovation streams and get part of their new product programs and at the same time look to displace or replace some of the competitors.

And Bob, have you gone out to these major customers and talked with them and kind of said, Look, we want more of your business, and what do we have to do to get it?

Or is this just, kind of your plan as opposed to already talking with them of these customers and getting a positive response from them?

[Structured] plan, Eric, is the best thing I can describe.

Structured plan to the major customers in current and in new.

Okay.

All right.

Thank you.

Thanks, Eric.

Your next question comes from Leonard Teitelbaum of Merrill Lynch.

Good morning.

Hey, Lenny.

Yes, you may have -- I just had to step-off calls here for a minute so if you've answered this just -- I'll pick it up off the transcript.

And I'm going to get back to industrial business for a minute.

We had talked about a few quarters ago that you had expected some money coming in or income coming in from a major customer.

Has that been permanently cancelled, and if so, how was it that -- first of all has it been permanently cancelled?

Do you mean all the new products, Lenny?

Well, what we -- we had been looking for a few quarters ago we had a miss in the industrial division because some income that we thought was coming in from some new products or new product launch by a major customer had been deferred.

I just want to know has that been permanently deferred or cancelled or what is the status of that?

No, it's going to flow through in 2006. [multiple speakers].

All right.

And I take it from your remarks that one of the goals of this restructuring is to try to get your predictability up.

So we should be looking for something of a -- that would move the needle up as it moves the needle down some time in '06; is that -- it's "deferred income" as I had called it.

Is that -- am I overemphasizing that or not?

No, that's fine.

Okay.

Now, the second thing is when we were all down in Hunt Valley there I guess a couple of years ago now, we had talked about some of the same plans you are talking about now, that we had concentrated our efforts on several large customers.

We had the expertise.

We're simply going to go after these -- not only them, but other companies like them.

Now, that's been a couple of years ago.

Could you kind of tell me why it's taken -- it just seems like it's the same plan that has been dusted off, only you are more serious about it now?

Or what am I to read into that if my facts are right?

I think, Lenny, I would summarize it this way, we did say we were going -- a lot of our growth in the industrial business was going to come from a few customers that we were going to try to place in the strategic category back then.

But we also said back then we were going to be a product-focused industrial business and, thus, we would be extremely wide relative to product offerings.

The difference today is this: We're narrowing our customer base down, significantly down to what I'll call the "top 50" that offer the greatest gross potential for us.

We're narrowing our focus down from product focus to customer focus.

That doesn't mean we're eliminating any of our product categories, it's just we're going to align our resources around customers as opposed to around a flavor SBU or a seasonings SBU like we had been before.

We're going to still have the product capabilities within the system, but they're going to be focused on high-growth customer opportunities rather than a lot of opportunities for products available in the marketplace for customers that we've now determined generate less than $25,000 annually in sales.

So that's the big difference is we are streamlining and shrinking our opportunity to supply products into this marketplace; and secondly, we're going to focus on customers; and thirdly, we're taking capacity out of the system, which we didn't do before.

All right, I'm going to follow-up offline.

Thank you very much.

Good luck, guys.

Your next question comes from Alton Stump of Longbow Research.

Thanks.

Hi, guys.

Good morning.

I had a quick question on Europe.

I think you said a few minutes ago that you probably think it's not going to get any worse.

I guess the question is, with the overall market is there any signs that we could see things start to get better in full year '06 or is it likely that we'll see things kind of stay at rock bottom in terms of what the overall market is doing over the next 12 months?

Well, I think there's two things going on in Europe.

One is from a sales perspective we see it getting better in 2006.

But some of that will also be mitigated by our skewed rationalization both industrial and the consumer side.

From a margin perspective in 2006, as Fran said earlier, we're increasing expenses for our B2K implementation which is going to be starting on March the 1st, and we have also allowed some increase in marketing and merchandising, marketing and advertising expenditures to make sure all these new product launches in France and in England are taking place.

So it is a rebound, but it may not -- we're going to have to explain the math to you as we go through the quarters.

Okay, thanks.

And then I guess as a very quick follow-up to that, within the new 3 to 5% sales growth outlook number, is there any contribution that we should maybe be using from Europe, of course, with the SKU reductions and with the overall market environment still pretty week?

Should we assume something like flat sales from Europe over the next three years within that number or is it better or worse than that?

Oh, no, I think it's in the 1 to 3 category from a sales standpoint increase, taking both our businesses into consideration in Europe.

Okay.

It's not flat.

Okay, great.

Thanks, guys.

I appreciate it.

Thanks.

Your next question comes from Andrew Lazar of Lehman Brothers.

Good morning.

Good morning, Andrew.

Just two, two questions one is more on the fixed cost side.

So as you rationalize customers and SKUs and such, and sort of take capacity on them, I'm curious on the timing of those two things.

So are the restructuring charges and things you are doing around capacity enough to sort of keep up with the pace at which you'll be kind of running lower on fixed cost absorption given your -- your volumes will be coming down just with respect to SKUs and customers and such?

I'm trying to get sort of the timing of those two things will play out.

And is there -- do you think you'll basically going to keep pace --? [multiple speakers].

Well, the benefits will trail the cost, but we still are planning for '06, for instance, to be absent those charges in our 8 to 10% range of EPS growth.

But if we're expecting a $10 million benefit in '06 and perhaps a 60 million expense, obviously, it's trailing.

But those charges that have been announced so far, those are all kind of -- those incorporate the -- obviously, the lower fixed cost absorption that's going to development from all the other actions you're taking.

Oh, no, those are the gross charges -- the benefits would be separate.

Right, but it incorporates the thinking on the lower fixed cost absorption?

Okay.

Oh, yes.

It incorporates them, yes.

Okay.

And then, second, I recall getting a little bit on to one of these questions when you were talking about how you had gone through a period where some of your key customers on the food service side were obviously delaying some of their new product launches from '05 into '06.

I had ask the question, What was it about that your forecasting perhaps didn't allow you to see that as it was kind of developing?

And I think if I'm not mistaken, Bob, you said, That's one of the things we're going to find out through this review process.

So I guess I'm just following up on that and saying, going forward is there something different in your forecasting or your capability now with those couple of very key customers that you'll have a sort of better visibility as you go forward as to when and what they do with respect to how your products are used?

I guess I would answer it, Andrew, that they're too wide and not deep enough.

We had a lot of activity and products flowing through a very centralized forecasting area that was trying at the same time to advertise -- to forecast volumes for major customers and deal with these other 600 customer orders simultaneously.

And I think what the reality is, is we need to focus that group on a very few group -- a few customers and allow them to have the capabilities to interact with the customers on a more frequent basis to understand better the forecasting -- to get better alignment between their forecasting and what the expectation of the products are in the marketplace.

Okay.

There really shouldn't [multiple speakers].

We just shouldn't --.

We just didn't have a robust process.

Okay.

Because there really shouldn't be any reason at the end of the day if you are really all around your key customers as you should be that going forward you wouldn't have a better idea of what their plans are within -- obviously, the competitive sensitivities that they have.

But one would think you could obviously take that up a notch or two.

I would agree and we are, and the teams of people that we're organizing under the two groups will have those specific responsibilities, and we're talking about aligning some of the compensation around their ability to do that, which generally increases the focus.

Okay.

And just anything competitively in sort of U.S. consumer as you come and do a lot of this revitalization and what have you, which will be exciting, no doubt.

I wonder have you seen anything competitively that would sort of make you believe there's anyone else doing anything of a similar nature to their portfolios around the core business?

We have not, Andrew, no.

Okay.

Thanks very much.

Thanks.

Your next question comes from George Askew of Stifel Nicolaus.

Outstanding.

Thanks.

Good morning.

Hey, George.

I think I'm bringing up the rear here.

Let's see the -- many of my questions have been touched on, but I still kind of want to address them.

You noted that the forecasting of industrial clearly is going to be enhanced communication it sounds like; more focus, deeper, better communications.

Is there any kind of contractual adjustments that will go on there with customers as well?

For example, if you are teed up for new products two quarters out and you delay it that there's some kind of issue there.

Is there anyway to kind of hedge yourself there?

No, there isn't, George.

We don't have contracts.

No, it's -- now, the only way to hedge our best better is to have better linkage between our customer service teams and their marketing teams, and our product development teams and their marketing teams.

So that we're closely aligned and that's why we like the strategy as we get deeper with the current customers with more resources allocated in different functional segments.

Okay.

The gulf region, clearly you had a three-month impact for this quarter post-Katrina.

How should we think about that over the next three quarters from here?

Is it going to be a point drag or are you seeing a rebound there?

What -- how should we look at that?

Well, two things, number one, from a product supply standpoint, we're up and running in our facility in New Orleans, so we're ready to supply.

On the demand side there still are a significant number of stores that have not reopened yet.

So there is going to be still some drag in the first, second, and third quarter of 2006.

We haven't quantified it at this point in time, George.

All right, good.

And then on the competitive front, Associated British Foods now owning your number one competitor in the U.S., are they doing anything differently?

I mean, I know a prior question had asked about serious initiatives I guess, but are they doing anything differently or changing their go-to-market strategies that you are aware of?

Not really.

Okay.

Not that we see in the marketplace, George.

Okay, excellent.

Great.

Well, I look forward to the news at CAGNY.

Okay, great.

Thanks, George.

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