McCormick & Company Inc (MKC) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, my name is Melissa.

I will be your conference facilitator today.

At this time I would like to welcome everyone to the McCormick Company first quarter earnings conference call. [OPERATOR INSTRUCTIONS] It's now my pleasure to turn the floor over to your host, Joyce Brooks.

Ma'am, you may begin your conference.

Good morning and thank you for joining McCormick's teleconference.

On the call with me today are Bob Lawless, Chairman, President and CEO of McCormick, 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 first quarter ending February 28th and our progress with growth initiatives and our restructuring plan.

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.

Today's event is being webcast and following the call, an audio replay can be accessed at ir.mccormick.com.

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

Thank you Joyce.

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

As Joyce indicated I will begin with a brief review of the first quarter financial results.

Results that demonstrated some initial traction with our new products and margin improvement efforts.

Second I will be providing a update on our restructuring plan and our growth initiatives, including the revitalization of our US spice business.

It is important to us that analysts and investors stay up to date on our progress, whether it is customer's reactions to our initiatives, our internal announcements regarding facilities or organization, or any of our other action.

So let's begin and take a look at the first quarter.

In the first quarter, we achieved strong performance in three key areas of our business, our consumer business in the Americas, our industrial business in the Americas, and, most importantly, our consumer business in Europe.

In 2005, these three businesses represented 86% of the total sales and contributed at higher level profits to our corporation.

In the America's we increased consumer sales 4.5% and industrial sales 4.8% in local currency.

For the consumer business in Europe sales were up 5.1% in local currency.

In addition to these gains, we were pleased to report significantly higher gross profit margin increased from unconsolidated operations and earnings per share resulted that exceeded the outlook we shared with you this past January.

I will comment on each business and then discuss financial results for the total Company.

By now, you may have read in the press release that beginning in 2006 we are including the results of our warehouse clubs with our consumer business results.

Late in 2005, the management of this business was moved to our U.S. consumer foods business.

As part of our industrial business review, we concluded that the branded products sold to warehouse clubs would be more effectively managed as part of our consumer business.

This classification is also more in line with that used by many other food manufacturers.

A second change involved previously unallocated corporate expenses, which in 2005 totaled $45 million.

With the division of sales and profit responsibility among three business leaders and intense focus on profit contribution, we have decided to fully allocate all general and administrative expenses to these business segments.

This change will also become effective in the first quarter of 2006.

First quarter sales for the consumer business rose 1.2% and in local currency 4.4%.

In the America's we increased consumer sales 5% and in local currency 4.5%.

If you recall in the first quarter of 2005, we commented on the impact of the reduction in trade inventories.

In 2006 we did not experience this negative pressure.

In fact, we increased sales with new products and increased volumes of current items.

Our newly launched Zatarain’s's ready-to-serve complete meals have already gained acceptance at 75% of our target accounts.

The new McCormick finishing sauces are also being enthusiastically received.

Products launched in 2005, such as seasoning mixes for slow cookers, contributed to sales growth, along with our products marketed to the Hispanic consumers.

The increase in this region was particularly impressive in that includes $3 million of slotting allowances for the new Zatarain’s and McCormick brand products that lower consumer sales in the Americas by 1.4%.

During the quarter we successfully implemented a price increase that will offset the higher cost of energy, packaging and benefits that we face in 2006.

First quarter sales in Europe declined 5.1% but in local currency increased 5.1%.

We continue to see stabilization of the competitive conditions for our spice category in France in the first quarter and increased sales in this particular quarter.

A portion of this increase was due to customer purchases in advance of our B2K implementation, which commenced on March 1st.

I'm pleased to share that this implementation has been a great success.

This was accomplished through diligent planning and preparation, which included participation by many employees in both Europe and the United States.

The Asia Pacific region reported a sales decline of 3% and in local currency 0.7%.

In China we are continuing to eliminate lower margin items, such as soy sauce.

In addition, sales of products to flavor chicken were weak in China this quarter due to concerns about the avian flu.

Sales for some other core items, such as spices and herbs, rose during the quarter.

Excluding special charges operating income from the consumer business was $46.2 million.

This was down 5.6 million versus the first quarter of 2005 and due almost entirely to stock compensation expense, which was 5.7 million for this part of the business.

Higher sales and operating income, primarily in the America's, offset the slotting allowances and the cost of B2K implementation in Europe.

Industrial sales rose 0.7% and in local currency 1.9%.

In the America's we increased industrial sales 5.6% and 4.8% in local currency.

This increase reflects the introduction of new products by our customers, including some of those that were delayed in the latter part of 2005.

We also saw continued sales strengths with seasonings and other products that flavor snacks.

A price increase was implemented for products sold to food service distributors to offset higher costs, including energy, packaging and benefits.

I will comment on the transformation of our US industrial business later in my remarks, but want to point out that there was very little impact from SKU rationalization or customer rationalization in the first quarter.

We expect to see a sales impact from these actions beginning in the second quarter of 2006 for the industrial sales in the Americas.

In Europe sales decreased 12.7%.

In local currency the decrease was 4.8% due to the elimination of lower margin items.

In this region we began to eliminate lower margin SKUs back in 2003.

By 2005 had reduced the SKU count by 40%.

In 2006 we have targeted another 10% of SKUs.

This reduction of lower margin items will continue to create pressure on sales in 2006, but will have minimal impact in profit.

In the first quarter sales in the Asia/Pacific region declined 6.1% and in local currency decreased by 0.6%.

In China industrial sales rose as we continue to benefit from the expansion of our restaurant and food manufacturer customers in this market.

This increase was more than offset by sales decrease in our industrial business in Australia, where some lower margin products will no longer be supplied by McCormick.

This will have a negative sales impact throughout 2006, but less of a profit impact.

Excluding special charges operating income for the industrial business was $11.5 million.

This was up 4.1 million over 2005, even as stock compensation expense of 3 million, reported in 2006, is included.

The increase of 7.1 million reflects the improvement in our cost for vanilla versus the first quarter of 2005, as well as higher industrial sales and the benefit of our cost savings programs.

In addition, the industrial business in Europe had a negative impact on operating income in the first quarter of 2005.

Our guidance for 2006 is to increase gross profit margin by 100 basis points.

If you recall last year, gross profit margin in the first half was significantly impacted by vanilla.

So you should expect the improvement in the first and second quarters of 2006 to be 100 basis points or more.

In the first quarter we increased gross profit margin by 140 basis points to 39.2%.

In addition to an improvement with vanilla margins, our industrial business, and improved performance in our European industrial businesses, we benefited from a cost savings initiatives.

Income from unconsolidated operations reached 7.3 million in the first quarter, based on a excellent performance by our joint venture in Mexico.

Our initial guidance was for slight improvement in this income statement item.

Following this first quarter result, we expect a more modest increase in unconsolidated operations in the next three quarters of 2006.

Earnings per share in the first quarter of 2006 was $0.11 compared to $0.26 a year ago quarter.

In the first quarter of 2006, we record a special charges of $0.17 and stock compensation expense of $0.04.

When compared to 2005, $0.06 of the EPS was added by higher sales, margins and income from unconsolidated operations, which more than offset higher costs for slotting allowances and expense related to our B2K implementation.

In addition, we are comparing to the first quarter of 2005 when EPS was adversely impacted by vanilla and our industrial business in Europe.

I would also like to provide a comparison to the first quarter outlook that we provided to you in January.

In our guidance we had expected first quarter EPS, excluding special charges, to be in the range of $0.22 to $0.24.

So our result of $0.27 was approximately $0.04 ahead of our forecast.

Three factors lead to this favorable performance.

First, expenses related to B2K and marketing programs were expected to be up $0.03 from the prior year.

The increase was less than this in the first quarter and we now expect a portion of these expenses to occur in the second quarter of 2006.

Second, sales growth and margin improvement exceeded our forecast for both the consumer and industrial business.

As I indicated earlier, a portion of this related to customer purchases in advance of our B2K implementation.

Our income from unconsolidated operations also exceeded expectations.

And third, stock compensation expense was $0.04 instead of $0.05.

Although the first half of our year typically accounts for less than 40% of our annual EPS, we're very pleased to have this strong start to 2006 fiscal year.

Our EPS guidance for the full year remains at $1.21 to $1.24.

This projection includes special charges totaling $0.42, giving a range for EPS, excluding special charges, of $1.63 to $1.66.

We continue to project that stock option expense will reduce EPS $0.11 in the fiscal year of 2006, of which $0.04 was recorded in the first quarter.

On a comparable basis to 2005, considering the impact of special charges and stock option expense, our EPS outlook is in the 8 to 10% increase range versus 2005.

We expect to achieve this level of EPS increase in both the first and the second half of fiscal 2006.

Let's turn to the balance sheet.

Again this quarter we achieved a reduction in accounts receivable and prepaid allowances versus a year ago.

Our debt to total capital ratio remained low at 41.9%.

During the first quarter we purchased 400,000 shares at an average price of $32.04, or a total of $12.8 million.

At quarter end, $349 million remained in our current $400 million authorization.

We expect to step up our share repurchase activity in the second quarter and for the balance of the year.

I would like to now turn to a few updates.

Let's start with our restructuring plan and the actions related to facility consolidations and other steps to improve efficiency and lower costs.

In our January conference call we indicated that the closure of two U.S. manufacturing facilities and one in Belgium had been announced.

In February we announced a fourth facility closure in Sydney, Australia.

The transition of production to other McCormick facilities is well underway and we have begun to realize some reduction employees at those locations.

In Finland we have made the decision to exit a small and unprofitable part of our business.

This will lead to the closure of a production facility but, unlike the other plant closures, there will be no transfer of activity.

In recent weeks we have successfully implemented a voluntary separation program in several functions in the United States.

This will lead to additional headcount reductions during the second and third quarters.

Under the leadership of Chuck Langmead, our transformation plans for the US industrial business are well underway.

Our initial customer segmentation is now complete and we have taken the first steps in rationalization.

Last week we advised certain customers being serviced by our Salinas, California plant that we would no longer be supplying the product as of March 31st.

A number of customers supplied from other U.S. locations have now been advised of significant pricing actions, which we expect to lead to further reductions.

In total more than 250 customers have been contacted.

To date, we have taken price increases on about 500 SKUs.

With the steps our industrial team has taken, we feel even more confident that the 25% reduction in customers and SKUs will be realized.

The new industrial sales organization has now been realigned and a new structure for our technical and product development group has been announced with a focus on resources applied to strategic customers.

The voluntary separation program will lower headcount in headquarters, sales and technical functions in the second half of 2006.

We have had several meetings with strategic customers and more are scheduled.

It is too soon to point out any expansion of business, but I can state from my own participation in these meetings that we're establishing more open communication that will lead to more growth opportunities and most importantly, significantly improved forecast.

In the midst of all this change, as we reported earlier, we have begun to benefit from the rollout of new products by our customers.

These include beverage flavors, chicken coating systems and snack seasonings.

We have additional new products in the pipeline for 2006 and are encouraged by our current outlook for this business.

Moving on to the spice revitalization of our consumer spice business and seasoning business.

Those of you attended CAGNY conference had a opportunity to hear Alan Wilson, President of North American Consumer Foods and Supply Chain present.

Alan shared our plans to revitalize our US consumer spice and seasoning business with gravity feed merchandising equipment, contemporary labels, a convenient flip-top cap and on-trend new products.

This initiative was presented at a retailer trade conference two weeks ago and the response was universally positive.

In fact, the least positive comment we got was customers who wanted to put a test market, as you would expect, right away.

Most have enthusiastically embraced the concept and are very eager to move forward.

And moving forward we are.

The new labels will begin to appear in the stores in the second quarter.

We will begin to ship the new flip-top caps in the third quarter.

At this time we will start to change over stores to the new merchandising system.

This will be done by geographic region, as being managed by a dedicated team.

We remain on track to convert 3500 to 4000 stores prior to the 2006 holiday season.

By 2008, we expect to have the system in at least 15,000 stores.

Following on the heels of the meal idea revitalization in 2005 and having seen the positive consumer reaction, we're very excited and look forward to the consumer reaction in sales momentum as we revitalize our spice and seasoning business, which is the largest and most profitable part of our worldwide business.

Let me summarize, 2006 is off to a great start.

We're growing our sales with new products, stepping up marketing support for our brands, and continuing to pursue attractive acquisitions.

Our core businesses are building momentum.

As we shared with you during our January conference call and CAGNY, four initiatives should be on your radar screen as they are on mine.

First the U.S. industrial business revitalization, and hope you take from this call and seeing our results that we're making tremendous momentum in this area.

Secondly, our U.S. consumer business vitalization.

We're investing money behind our brands and investing money in merchandising with the specific intent of growing this category supported by new product introductions.

Thirdly, European consumer rebound.

We're excited about the first quarter in our European consumer business, especially in France.

We saw some positive momentum and, as we have stated, we have invest in the brand to help grow this particular product category in Europe.

And lastly, our restructuring process.

The restructuring continues, as you can see we're moving forward on a global basis, implementation is in progress, execution is done by dedicated teams of people, and we're starting to see some fruits and benefits from the restructuring process.

For this reason I continue to be extremely excited about our objectives and extremely excited about 2006.

To everyone on the call, I thank you for your interest.

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

Thank you.

[OPERATOR INSTRUCTIONS] Your first question is coming from Jonathan Feeney with Wachovia.

Hi, guys, congratulations.

Thanks, Jonathan.

First question is for you, Bob, how much of this European decline in, I guess, not so much in local currency terms but still a decline on the industrial segment, is the result of activities, rationalization of customers that you initiated, and how much of it is just a function of it being a tough environment over there?

Because we have just been hearing from your competitors, particularly in Europe, that it's just a really tough go of it and that their numbers aren't much better than yours.

I would think from our standpoint, Jonathan, the majority of the decline is a SKU rationalization and businesses that we have chosen not to participate in from a profitability standpoint.

A smaller amount would be the overall industrial market in Europe.

I think, once again, as we have shared with you, our European market is driven on the industrial business by our top four customers.

They continue to launch new products, they continue to expand geographically.

We're excited about that.

But having said that, the major part of our slowness in the first quarter was the result of decisions that we took either on SKUs, products or customer businesses that were not as profitable as we need for the future.

And if I could turn to the U.S. for a second.

You're having these contacts with 250 customers about either severe price increases or discontinuation of the products you're making for them.

Has that in any way compromised -- any examples of that compromising business you are doing elsewhere that you didn't intend to lose, where you actually kind of poisoned the well with a customer and they kind of hurt you someplace else?

Not really, Jonathan.

We are focusing on the top 50 customers that we call our strategic or critical customers.

And, once again, most of this activity is not designed around those customers at this point.

It's mostly customers that have been very small.

I think we shared in the January conference call and sure shared at CAGNY that the annual purchases of a lot of these people are less than $25,000 a year.

We're not impacting our major customers.

And just for Fran, a couple of detailed questions.

Can you get anymore specific about the effect of the vanilla price decline—vanilla cost decline-- on overall sales for the business, on a consolidated basis, and secondly, the migration of the club business from consumer to industrial.

Can you give us a sense of how much profitability there was in that club business?

The sales impact of the vanilla continues to be less and less as we move through 2006.

And we do not give that level of profitability on that part of the business that's moved.

Okay.

Thank you very much.

Thanks, Jonathan.

Thank you, your next question is coming from Terry Bivens with Bear Stearns.

Good morning, everyone.

Good morning, Terry.

Couple of things, let me try tackling the vanilla issue maybe in a different way.

Of the increase we saw in the gross margin this quarter, how much could be attributed to vanilla?

A large part.

I think as we said, as we go through the first and second quarter, we're expecting at least 100 basis point improvement in gross margin each quarter and a great deal of that has to do with a great deal of negativity from the prior two quarters.

We don't want to be that specific, but let's say it's a large number.

Maybe as much as 40 or 50% of it.

So it is a pretty good chunk of it then, Fran.

It is.

Okay.

Very good.

Now on the industrial side, hopefully warm weather is beginning to emerge and will stay here for a while.

As you look towards the ice cream season perhaps, has the volatility of vanilla, how does that jibe with your traditional clients for vanilla in ice cream as we go through the summer.

Have you lost any clients?

Have you been able to add any?

Is there anything we should be aware of just in terms of vanilla as it pertains to ice cream?

Terry, we really don't comment on vanilla as it's designed to a specific customer around the ice cream market, expect to say that we continue to be as competitive as we always have been in any market we sell vanilla in.

I think we shared in January with you that vanilla has normalized itself for a variety of factors, which we have shared, and pretty much everybody is buying at a similar cost base and as a result it continues to be very competitive.

But we haven't backed off, our strategy around trying to grow our business through increased vanilla purchases as we've normalized our overall inventory costs.

Okay.

And just one more on the industrial side.

You mentioned coatings for chicken products as being, I think, a positive, if I heard you correctly, as we're looking forward.

How does that square with a lot of the concerns we have seen over the avian flu situation?

The avian flu is, at least from our overall sense, is only really prevalent or becoming a news worthy item in China.

And it did impact some of our consumer sales in the first quarter.

As far as overall restaurant sales, it has not impacted on a worldwide basis.

That would more domestically.

Than you haven't seen a falloff in orders on that.

Okay.

All right.

Very good, thank you.

Thanks Terry.

Thank you, your next question is coming from John McMillin with Prudential.

Good morning, everybody.

Good morning, John.

The sales gain of 3% in local currency, can you just kind of break through the components of it?

If you gave it already, I'm sorry, just in terms of what was price, what was volume?

We didn't give that level of detail.

We didn't give that level of detail, John.

But we did say that it was mostly driven by volume in both the U.S. and Europe.

So there was minor price realization in that number?

In the first quarter John, yes, remember we took the price increase in the first quarter.

There is minor impact but the major gain on volume, in the first quarter, was through Zatarain’s, was through our U.S. consumer business, especially the new products, and in Europe our base spice and herb business in Europe, especially in France.

Can you just kind of go through that volume increase then, particularly in areas that were impacted by pricing moves?

I think I asked you this question in the last conference call.

Would there be kind of any buy in, trade loading before some of these pricing came into effect?

Now you did say something happened with the B2K, that there was some buying in there.

Can you quantify of that 3% sales growth what came from maybe retailers buying in advance of pricing systems issues and so forth?

If I look at United States, John, the buy in in advance, especially in the time of the year we announced our price increase, was minimal.

We did have a buy in with B2K, especially in France, with the major retailers.

But, once again, as a percent of sales it was pretty minor.

Less than 0.5% for the whole quarter.

And just my last question just deals with Mexico where the consolidated line was certainly well above my expectations and seemingly, from what you said, above yours.

Kind of why?

Usually that's -- sometimes its soy bean oil that drives that business up and down.

Is there any reason why that business was so much ahead of expectation?

It was a surprise for us also, John.

But I think one of the things that, hopefully everyone on the call takes with Mexico, is that we are managing our partner and managing with our partner better than we have in this 58 year relationship.

They feel that way and we feel that way.

We're much more effective is using our marketing and promotion dollars than we ever have in my time as CEO.

We do have a good leadership position in the brand positioning in Mexico.

Our costs are really under control.

Soy bean oil, as you know, we have managed that and done a good job.

So it's a confluence of continuing activities coming together very positively and I think the summary I look at, with Mark Timbie who runs that business for us, is we're doing one heck of a job of managing that business versus the way we managed it a while ago.

Thanks a lot.

Thanks.

Thank you.

Your next question is coming from Chris Growe with AG Edwards.

Good morning.

Good morning, Chris.

Just had a couple of questions for you.

Just trying to sort of reconcile this.

You had a very solid gross margin advance in the quarter.

Your consumer profits were effectively flat, if you back out the option expense.

I'm just curious if you put those two together, I know it's a slice of one, was the flat consumer profit growth more of a cost challenge or perhaps marketing was up significantly, or vice versa maybe it was down?

Do you have a better sense of what happened in the consumer division?

Sure, I tried to say it in my script, Chris.

But there were two major factors that increased the profitability in the consumer division, which were planned by us, by the way, in the first quarter.

One should not take away on the call these were surprises to us.

One was a significant expense for slotting fees for the Zatarain’s products, as we launched a whole range of new products on a national basis.

I think if you look at the results we're 75% of the way of being where we want to be.

So that was effective utilization of the money to get the positioning in the shelves.

And secondly, we increased our advertising expense in Europe, especially for the Ducros brand in France.

Late last year you heard me say some moderation of the decline of our brand.

We felt it was very appropriate in the first quarter to put some advertising behind that.

And, obviously, it accrued some benefit and results and we expect some continued increases in the second, third and fourth quarter.

So, once you take away that they were planned expenses on the consumer business to benefit the second through the fourth quarter.

Okay.

I know you have some easier comparison, especially on the gross margin line this year, but how would you characterize the cost savings?

We know what the B2K savings coming through, I think they're roughly $30 million.

Is that sort of tracking ahead of plan, like it did the last two years, was that an aid to the quarter?

Not in the quarter, Chris.

No, not in the quarter.

No.

As I said in the conference call script, the cost savings that came through in the first quarter were small, but once again, we expect them as we get to the latter part of the year to start to accrue more significant benefit.

I miss that, I'm sorry.

And the last question just is on the [Trisese] mix free launch here in the U.S. and generally on new products, how that helped the first quarter.

Was that a significant aid to the quarter?

Yes, new products were all along, both in the consumer and industrial.

And once again, I sure don't want anybody to miss because of the conference calls we had in 2005, we started to see some benefit of some of the new products that were delayed in 2005 accrue benefit in the first quarter of 2006.

Secondly, the most important thing, and I did emphasize it in the conference call about forecasting, on these customer calls we're making we're getting much more visibility on their forecasting, which goes into our overall planning system and having a better predictability of our business on the industrial side as we go through 2006.

Very positive trends.

Okay, great.

Thank you.

Thanks Chris.

Thank you.

Your next question is coming from Robert Moskow with Credit Suisse.

Good morning.

I just wanted to know, maybe I should know this, but the B2K spending is that separate from your special charges that you're taking or is that included in the special charges?

No B2K spending is included in the special charges.

All B2K spending is a regular operating expense.

Okay.

So are you pushing back some of that spending and will that fall into Q2 and if so, how much?

Some of the B2K expense will fall in Q2, because as we announced March 1st was our go live date and we weren't precisely sure how much of the increase of expenditure around the go live date would fall in the first quarter or second quarter.

But as you move through stabilization, you also have increased expenses as well.

We expect that some of that will impact the second quarter.

But on the whole, we're right about where we thought we would be.

And that's gone pretty well, by the way.

And I know you don't want to give quarterly guidance, but with the combination of that plus the pull forward in France, is that enough to drive you into a negative growth for second quarter EPS or do you expect growth in EPS in second quarter?

We don't expect negative, Rob.

I think is what we said in the comments and what we would like to do and portray is that we're staying with 2006 with our growth being in the 8 to 10% range.

So that's 9% for us.

We see 9% in the first half and 9% in the second half.

We're off to a good start.

As Fran said, there is some mitigating factors that are going to have a carryover into the second quarter.

But I need to remind everybody on the call how small the first and second quarters are.

If it's 1 million or $2 million that we increase marketing spend or we spend on slotting, it can have a bigger impact in the first and second quarter.

We're very comfortable where we are with the half breakdown and the annual breakdown right now.

And lastly, have you seen consumption of Zatarain’s's increase back to regular levels in the Louisiana area?

No, not back to regular levels yet.

But once again we also see Zatarain’s products selling in parts of the United States greater than we anticipated that it would ever be.

So it's a little bit of a tradeoff.

But one does not offset the other.

There is still depression in the New Orleans area.

Okay, great.

Thank you very much.

Thanks.

Thank you.

Your next question is coming from George Askew with Stifel Nicolaus.

Yes, good morning, nice quarter.

Thanks George.

Just two quick questions here.

There are four elements to the consumer revitalization, the merchandising, advertising, packaging, new products.

The 3500 to 4000 stores really just applies to the merchandising, as I understand it.

It's the shelving implementation.

The other three items will be rolling out pretty much entirely this year.

Is that correct?

That is correct, George.

And those three items will be national by the holiday season?

Yes, sir.

And then on the industrial side, as you see some of the delayed products rolling in here, are we seeing a double benefit to volumes as those products show up?

More than you would have expected during this period or is there a bit of a smoothing going on in that business?

I don't think there is a smoothing.

I think it's like with any new product launch that is either regional or national, George, you see some pipeline fill.

But once again, it's not big in nature, if you will.

The exciting part for me is that what we said in 2005 and as we've got better predictability of our customers and better visibility around the forecasting, we really understanding when they're going to launch these new products and start to see them come to fruition.

It's fulfilling for our team here that what we said in 2005 and our analysis is bearing fruit.

Okay, great.

Thank you.

Thanks, George.

[OPERATOR INSTRUCTIONS] Your next question is coming from Eric Katzman with Deutsche Bank.

Good morning, everybody.

Good morning, Eric.

A few questions.

Bob, I think you indicated that the share repurchase activity is going to be a little bit more weighted or more aggressive for the remainder of the year.

And historically you have said that share repurchase activity is likely if there is not much on the M&A front.

So is that how I should take that comment?

No.

No, I think what we said, Eric, is that our share repurchase activity will continue unless we have some M&A activity that comes into play.

As you know, we don't share where we're at with M&A activity and just can't.

But once again, M&A activity will supersede share buyback for the period of time we need to to make sure we manage the total debt to capital in the appropriate range.

Shouldn't conclude that there is no acquisition activity, no.

Okay.

And then second, can you, maybe this kind of goes back to John McMillin's question, but can you quantify, maybe you did for us in the first quarter conference call but I can't remember, what was the level of the price increase in consumer and what was the price increase that you took in U.S. industrial?

The consumer I can tell you about, that's 4%.

Once again that's across the board, so some are at 1 and 2 and some are at 6 and 7, Eric.

The industrial price increases are a variety by -- they're all over the board depending on the size of the account, the product, the specifications, et cetera.

We really haven't declared the actual price increase dollars taken by account or SKU.

Except they're significant.

Okay.

And then, third, is -- Fran I noticed on the cash flow statement that it looked like working capital was about a $44 million negative to cash flow from operations.

What is that?

And that was actually versus like a $55 million negative a year ago.

What is happening there?

The changes in operating assets and liabilities is, at this time of the year, Eric, and it's the same reason why it was there last year, is always negative to us, because of the way receivables are collected and other liabilities are cleared, whether it be pension liabilities or whatever.

So the real change there is the 12 million and it's just a function of timing.

One large payment to one of our customers an/or a timing of the payment to the pension plan would really effect that.

We don't expect anything negative as we look out the rest of the year.

And then last question and I will pass it on.

I think, Bob, you mentioned success with ethnic oriented products.

Can you kind of maybe be a little bit more detailed about that, because, I guess, based on our work it seems as if that's a kind of an untapped opportunity for most of the major package food companies.

And you seem to be a little bit more out in front, maybe that's a function of your product line, but maybe you could touch on that both for this year and longer term.

Sure Eric.

We have said it before, we have the Mohave brand, the El Guapo brand and a lot of our products that we sell under the McCormick brand are geared to and marketed to the Hispanic community.

Once again, if you recall back to last year, we advertised for the first time in a long time Hispanic television adds.

We continue to do that today because for our particular product categories, and you're so right, we see a tremendous boost in purchases if we can make people aware of what we have in the shelves and where they are on the shelves.

They know how to use them, but conversely just can't find them sometimes.

And part of our merchandising strategy with the spice revitalization is to make them more prevalent, the Hispanic products.

We have been at this for a while and I think we are a bit out front relative to how we sell to the Hispanic community.

It's a strategic initiative for our US consumer group.

It is something that is right at the forefront of their radar screen.

Okay, thank you.

Thanks Eric.

[OPERATOR INSTRUCTIONS] There appear to be no further questions.

I would like to turn the floor back over to management for any closing remarks.

Thank you.

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