McCormick & Company Inc (MKC) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

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

At this time I would like to welcome everyone to the McCormick & Company second-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).

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

Ma'am, the floor is yours.

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 the second quarter ending May 31st and our progress with growth initiatives and restructuring programs.

At the end of our remarks we look forward to your questions.

Before we begin our discussion, please note that during the course of this conference call we may make projections or other forward-looking statements.

Please refer to this morning's press release for more specific information on this topic.

As indicated in the press release, the Company undertakes no obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events or other factors.

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 those listening via webcast.

As Joyce indicated, I'll begin my remarks with a review of our year-to-date financial performance.

As reported to you in March, our first-quarter results demonstrated some good traction with both new products, growth in the base business and margin improvement efforts.

We are pleased as this traction continued into the second quarter and drove another strong performance.

Through the first six months we've increased sales in local currency 3% and gross profit margin 110 basis points.

The gross profit margin increase is 40 basis points greater if restructuring charges are excluded.

Earnings per share excluding the impact of our restructuring program was $0.59 compared to $0.56 in the prior year, an increase of $0.03.

An increase of $0.10 was due to higher sales and margin as well as increased income from unconsolidated operations and lower shares outstanding.

This was offset in part by $0.07 of stock compensation expense that we began to report in 2006.

I'll begin my discussion of the second quarter with the consumer business results.

Second-quarter sales for the consumer business rose 1.8% and in local currency increased 2.9%.

This is a reduction of approximately 1% from the elimination of low margin business mainly in our international regions -- excuse me, this included a reduction of approximately 1% from elimination of low margin business mainly in our international regions.

Our consumer business in the Americas had another impressive quarter with sales up 6% and in local currency 5.2%.

A U.S. price increase was taken early in 2006 to offset the higher cost of energy, packaging and benefits which contributed to this second-quarter sales increase.

Higher volumes were achieved with new products including McCormick finishing sauces and Zatarain's microwavable complete meals.

Both products are meeting our targets for consumer takeaway and there are still some distribution gaps to fill.

Led by North America, advertising for the total company was up 17% this quarter including support behind both these new products.

Sales of our dry seasoning mixes rose this quarter following our revitalization of this line in 2005.

Hispanic items under the Mojave and McCormick brands continued to grow and accounted for 1% of the second-quarter increase in this region.

In Europe, if you recall, we increased first-quarter sales 5% in local currency.

At that time we commented that competitive conditions for our spice category in France were beginning to stabilize.

We also had the benefit of customer purchases in advance of our March 1st B2K implementation.

In the second quarter consumer sales in Europe declined 6.7% and in local currency 1.7%.

The decline was due to timing around this B2K implementation as well as our decision to exit the business in Finland.

We would continue to characterize the market conditions in France as stabilized at this time.

In the Asia-Pacific region sales declined 0.6% but in local currency rose 1.3%.

In Australia sales of spice and seasonings and our airplane branded products were very strong, but were offset in part by the discontinuation of some low margin contract packaging business.

Operating income for the consumer business was $48.8 million when restructuring charges are excluded.

This is a decrease of $4.6 million versus the second quarter of 2005.

Higher sales and gross profit margin, primarily in North America, increased operating income.

In addition, the second quarter of 2005 included the impact of an operational accounting adjustment.

These increases were more than offset by $3.1 million of stock compensation expense as well as other expense increases related to advertising, incentive compensation and B2K implementation.

Moving to the industrial business, second-quarter sales rose 1.8% and in local currency 2.2%.

In the Americas we increased industrial sales 5.3% and in local currency 4.3%.

New products drove a portion of this increase and included beverage flavors, products that flavor several new restaurant menu items and new snack seasonings.

Sales also benefited from a price increase implemented earlier in 2006 for products sold to food service distributors.

As with our U.S. consumer business this price increase was taken to offset higher costs including energy, packaging and benefits.

We were particularly pleased with the second consecutive quarter of improved results in our U.S. industrial business.

I'll comment later on my remarks about progress with the transformation, but want to note here that we had no measurable sales impact from our actions to reduce the number of industrial customers and SKUs because many of our customary communications occurred during the second quarter.

We expect to see a negative impact on industrial sales in the Americas of up to 2% in the second half of 2006; but, as we've stated previously, less of an impact on profits.

In Europe sales decreased 6.4%.

In local currency the decrease was 0.9% and was due to the elimination of lower margin items.

In this region we began this process back in 2003 and by 2005 had reduced the SKU count by 40%.

In 2006 we have targeted another 10% of SKU reduction.

This reduction of lower margin items will continue to pressure sales in the second half of the year, but have minimal impact on profit.

In the second quarter sales in the Asia-Pacific region declined 8.2% and in local currency decreased 8.7%.

The main reason for this decline is the discontinued supply of certain low margin products in Australia which began in the first quarter.

In China we've continued to grow sales to both our foodservice customers and food manufacturers.

While industrial sales in the Asia-Pacific region were down in the first six months, operating income was up due to a more positive mix of products sold.

Excluding restructuring charges operating income for the industrial business was $18.9 million.

This was up $1.8 million over the second quarter of 2005 even with stock compensation expense of $1.8 million in 2006.

An increase of $3.7 million reflects higher sales for this business as well as the operational accounting adjustment reported in the second quarter of 2005.

I'd like to make a few other comments on the financial results beginning with the gross profit margin for the Company.

A primary goal for 2006 is to increase gross profit margin 100 basis points excluding the impact of restructuring charges.

If you recall, gross profit margin in the first half of 2005 was significantly impacted by vanilla as well as the operational accounting adjustment in our UK condiment facility.

As a result the increase in the first and second quarters of 2006 was projected to be at least 100 basis points.

We have certainly achieved this gross profit margin, up 110 basis points in the first half.

In addition to the favorable comparisons to last year we increased margins with our cost-saving activities and a positive mix in sales.

Keep in mind that the reported increase of 110 basis points included $4.7 million of restructuring charges that reduced gross profit margin by 40 basis points.

Selling, general and administrative expenses increased substantially during this quarter.

Of the $16.5 million increase, $5 million was related to stock compensation expense.

We also increased expense in advertising, incentive compensation and the B2K implementation in Europe.

In the second quarter we completed a transaction to acquire the remaining 49% of Dessert Products International in exchange for our 50% share of the Signature Brand's joint venture.

While this should have no net impact to our sales and profits for the remainder of 2006 and into 2007, minority interest will be significantly reduced with an offsetting reduction in income from our unconsolidated operations.

As we had first announced in May, a gain of $27 million was realized from the sale of our interest in Signature Brands.

During the quarter income from unconsolidated operations rose $1 million to $4.8 million.

Once again, a great performance by our joint venture in Mexico drove this increase.

Earnings per share in the second quarter of 2006 were $0.46 compared to $0.31 in the prior year.

As noted in the details in the press release, earnings per share excluding the net impact of restructuring charges that included the gain was $0.32, a $0.01 increase from the prior year.

Stock compensation expense of $0.02 was recorded during the quarter.

The remaining increase of $0.03 was due to higher sales, improved gross profit margin and an increase in interest income, higher income from consolidated operations and a reduction in shares outstanding.

I must say we're very pleased with this first-half performance.

Following the announcement of the $0.20 gain related to the sale of Signature Brands we increased our EPS guidance for the full year to $1.41 to $1.44 from $1.21 to $1.24.

We've also adjusted our projection of restructuring charges as this transaction was part of our efforts to simplify the business.

Including this gain and recent adjustments to our estimates, the range of restructuring charges we are projecting is 110 to $130 million compared to the initial projection of 130 to $150 million.

The total impact of these charges for 2006 is currently $0.22 compared to the earlier projection of $0.42.

This estimate could change based upon the timing of various restructuring actions.

Despite this decrease in charges the expected annual cost savings remain unchanged at $10 million in 2006 and $50 million for the remainder of the program -- total program.

On a comparable basis to 2005, considering the impact of our restructuring plan, the 2005 special charges and the $0.11 of 2006 stock option expense, our EPS guidance remains at 8 to 10% increase from 2005.

Let's turn to the balance sheet.

At the end of the quarter accounts receivable was about even with the year ago despite higher sales and the currency impact.

Increases in inventory included some build up in anticipation of production transfer from facilities that will be closed as well as the impact of currency rates.

During the second quarter we repurchased 1.4 million shares at an average price of $34.16 or a total of $47.6 million.

At quarter end $301 million remain on the current $400 million authorization.

We have changed our projection for share repurchase during 2006 following yesterday's acquisition of Epicurean assets.

We paid $97 million in cash for the Epicurean assets with a corresponding increase in our short-term debt.

As a result of this transaction we have lowered our projection of share repurchase for 2006 by $50 million.

Based on our current outlook we now expect to spend roughly $50 million to repurchase shares during the second half bringing our share repurchase for the total year to approximately $110 million.

I'd like to spend the remaining time on progress with our key initiatives at McCormick.

Growth through acquisitions -- first, as announced late yesterday we completed the acquisition of Epicurean International, the Thai Kitchen and Simply Asia brands are great additions to our North America consumer business that provide a strong foothold in the Asia food category.

With compound annual sales growth of 32% since 2002, these brands deliver authentic, easy to prepare Asian foods to consumers.

Thai Kitchens is the leading brand in the Thai food category and the more recently launched Simply Asia Brand extends the business into other Asian cuisines.

Our opportunity for growth is through increased consumer awareness and trial as well as higher store penetration.

While these brands have good presence in distribution channels such as warehouse clubs and natural food stores, they are underdeveloped in grocery stores where the ACD of Thai Kitchen is 45 and Simply Asia is 21.

As we've stated, acquisitions are part of our growth strategy and a way to meet our annual goals to increase sales 3 to 5% and EPS 8 to 10%.

Epicurean is a terrific business; it fits right in with our target of specialty and ethnic food businesses.

I can assure you that we're pursuing other opportunities in the U.S. and internationally to acquire great businesses that complement McCormick's leadership position in the development and marketing of flavors for food.

Second, I'd like to provide a quick update on our initiative to revitalize our U.S. spice and seasoning business.

Many of you are focused on the new gravity feed merchandising system, a key element of this program.

We'll be rolling out this system market by market beginning in the West and Southeast regions of the U.S.

The first installations will begin in August and we're on track to set 3,000 to 4,000 stores by the end of 2006.

The merchandising system will soon appear in additional regions as we continue with the next wave of installations in 2007.

Our plan is to install the system in 15,000 stores by the end of 2008.

Retailers are excited about this new system and the benefit of higher sales and, most importantly, lower labor costs as our test markets demonstrated a 50% reduction in time it takes to restock the new system.

Other features of the revitalization are new products, new labels and new flip-top caps.

We have begun to present our lineup of new products to retailers and our presentations are being well received.

New product lines include roasting rubs, signature blends, wet garlic blends, buffalo wing seasonings and steak gravies.

In addition to these new lines we're adding a variety of gourmet items, gourmet marinades and grinders.

In addition to our everyday grinders we're introducing a line of six new gourmet grinders; some of you had a chance to see these products in our recent meetings.

New bottle labels are now hitting the store shelves.

Contemporary graphics bring a more consistent look to the whole line of products and feature attractive food photography.

The last element of revitalization addresses consumers' number one complaint about the current packaging which is the initial opening of the cap and freshness steel.

A new flip top cap is currently scheduled for introduction at the beginning of Octobers/November holiday season this year.

Following on the heels of our meal idea center revitalization in 2005, and based on our test results, we are confident that U.S. consumers will respond enthusiastically to these improvements in our spice and seasoning business.

Turning to the transformation of our U.S. industrial business, meetings continue with our strategic customers.

Our realigned organization and focused R&D effort are designed to deliver these customers finished applications that work.

As a result of these changes we're getting product development opportunities in areas where McCormick had not previously been considered as a supplier.

We've also gained more insight into their forecasts, particularly for new products.

To allow increased focus on these customers we set a goal to reduce the number of customers serviced and products supplied by 25%.

As part of this process we identified customers and SKUs that contributed marginally to sales and had a minimal profit impact.

Less than six months after announcing this plan we've reached our objective as it relates to customers by eliminating supply to more than 275 of the 1,000 customers we were servicing at the beginning of this year.

In fact, it is likely that we will exceed this initial projection.

We have eliminated a number of unprofitable SKUs and further reductions are underway.

We have increased prices on certain products to bring margins to target thresholds with the latest round effective June 1st.

As we approach our 2007 fiscal year we will further increase margins through the consolidation of U.S. manufacturing facilities and our voluntary separation program.

Altogether these steps -- a focus on strategic customers, the rationalization of smaller customers and SKUs, and actions to improve margins -- put us on track to meet our goal to improve operating income margin 250 to 350 basis points by 2008 for this part of the business.

The fourth and final initiative I'd like to comment on is our restructuring plan.

First, there's significant activity underway to ensure a smooth transfer of production from several facilities that we've indicated would be closed.

A tremendous amount of planning, coordination and hard work will ensure that any impact to customers will be minimal.

We have made great progress and are actually ahead of schedule with the Salinas, California facility.

Second, as part of the restructuring program we announced in May, the simplification of two joint ventures -- acquiring 100% of Dessert Products International in exchange for our share of the Signature Brand joint venture.

I commented earlier on the financial impact of this transaction.

From a business standpoint we can be more focused and continue to grow the Vahine brand of dessert aids in France and other European countries.

Acquired with Ducros in 2000, we've increased sales and net income of the Vahine Brand more than 50%.

Let me summarize.

Our initiatives to improve the business are now underway and our focus has turned to great execution.

Employees throughout the Company are working hard to implement these important changes in our business.

I am confident that each of these changes will position McCormick to build shareholder value in 2006 and beyond.

Our first half performance was excellent; it exceeded our expectations and was better than the projection we shared with you back in March.

As I stated earlier in my remarks, we added $0.10 to earnings per share with increases in sales, margins, income from unconsolidated operations and lower shares outstanding.

We are achieving these results with new products, marketing programs behind our core business and cost savings.

And we're using our cash to acquire growing businesses and to repurchase shares.

During the next six months we'll need to manage through the significant changes in our U.S. industrial business, the reduction in facilities, the integration of an acquisition and other activities that are underway.

However, we are seeing strong momentum behind both our consumer and our industrial businesses and we've added a great business with the Thai Kitchen and Simply Asia brands.

While our EPS guidance on a comparable basis remains an increase of 8 to 10%, we are excited that our momentum together with our first-half results have given us an opportunity to finish the year at the high-end of our range while continuing our investment in advertising, promotion and other growth initiatives.

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

(OPERATOR INSTRUCTIONS).

Jonathan Feeney, Wachovia.

Good morning, congratulations.

Bob, could you comment about your U.S. industrial pipeline and how that relates to the industry as a whole?

Is some of the strength you're seeing here market share gains do you think or has something really clicked with your community of customers that -- in this first half of the year that that business can resume -- the kind of innovation driven business can resume its mid single-digit growth pattern of the past 10 years?

Jonathan, I would say three things.

First of all, we're dedicated and focused on the top customers that we indicated and that's a significant change for us and we're seeing increased volumes in current products and obviously new product opportunities.

Secondly, remember last year we talked about new products that were being delayed and with the focus on these large customers we're seeing these new products being launched in the first half of 2006 and we'll continue throughout the year.

An important factor in this, our key account teams are engaged with their customers and we have much better visibility than we had before on the launch of these new products and thus gives us much more confidence and rigor around our forecasting in the industrial business.

And the third part of it is, as we said in the conference call script, we are increasing prices to some of these smaller customers that we desire to stay with and those price increases are sticking.

So when you bundle it altogether I could not be more pleased with the performance of the team, our ability to execute just in the six-month period, and the transformation that's taking place.

And layer on top of that margin improvement as a result of our facility consolidations and the net result of it all is an industrial transformation that we feel real comfortable with meeting our objectives.

Okay.

And I guess secondly, Bob, you look at some of the -- could you quantify a little bit more specifically -- I missed some of the beginning of the call unfortunately;

I apologize if you mentioned it -- but what the effect of customer rationalization in Europe relative to just a tough overall environment?

Customer and SKU rationalization impacted Europe by the tune of about 1%. (multiple speakers) Sorry -- just to add to that, during the second quarter, as we said in the script, there had been very little impact of that in the industrial business.

That will accrue in the third and fourth quarter of 2006.

Right, I did catch that.

I guess following up on that, do you think it's -- is there something going on competitively or is this just the European consumer environment that -- Western Europe anyway -- that a lot of people are seeing which are causing these declines?

I think it's the European environment, especially since we have a high propensity of share and business portfolio in France and we all know what's going on in the French economy.

That's true.

Okay, thanks very much.

Terry Bivens, Bear Stearns.

Good morning, everyone.

Two things, one for Fran and, Bob, one for you.

Fran, refresh my memory.

I know vanilla was an issue in the first half a year ago.

Is there any way -- I guess you're looking at 110 basis points improvement in gross margin in this first half, is there any way to quantify how much of that came from better vanilla pricing?

The impact of better vanilla pricing is a factor, but it's not as large a positive factor this quarter as it was negative in '05.

In other words, the negativity in '05 when compared to '04 was large.

By the time we get to '06 compared to '05 the average cost of vanilla had already leveled out.

The other thing, too, I think we need to keep in mind is we really increased gross profit 150 basis points and we had $0.40 for restructuring.

I understand;

I was kind of exing that out for the time being, but I understand your point.

Okay, I'll follow up off-line a little bit more on that.

Secondly, Bob, I was intrigued by your comments on the new shelving which I think has a lot of potential there.

It sounds as though you're now expecting about -- 15,000 is I guess roughly half the stores maybe that could take it by '08.

Now I think initially we described this as a three-year initiative which to me implies I guess '09, so are we ahead of schedule on that, number one?

And number two, Campbell I think, when they did the same kind of initiative, they talked about lifts around 5% or so due to the shelving.

Now you and I have discussed this before, but I just wanted to check back with you and see in your mind what kind of lifts we should expect from this.

Let me comment on the phase-out and the rollout of the units, Terry.

We got 2009 discussed before, that was an error.

We've always had a three-year program, the majority of it in 2006 and 2007.

At the end of 2008 -- excuse me, '07 we'll analyze most of the "A" stores we're in and determine what "B" and "C" stores we want to put the units in in 2008.

So the big volume movement of the units in the high-volume stores will be conducted and completed during 2006 and 2007 and we'll follow-up that with the fill in in 2008.

As far as the unit growth, once again our test stores continue to be very robust.

We continue to be very, very pleased with the performance and, as I've said before on calls like this, we would anticipate a lift greater than what Campbell experienced in their launch of their new units because of the SKUs we have.

Okay, thank you very much.

Eric Katzman, Deutsche Bank.

Good morning, everybody.

I guess I wanted to understand a little bit more, Fran -- you talked about how the restructuring charge is now going to be lowered a bit, but the cash component is still the same.

Is there any cash benefit from the JV I guess swap and why wouldn't that lower the cash cost of the restructuring?

The amount of cash on the $30 million gain was so small that we did not mention it.

It was $5 million or in that neighborhood.

All right.

So the cash cost you say is still the same, $60 million or so?

A little less.

Okay.

And then, can you talk a little bit about the cost environment in terms of resin, any volatility you're seeing on pure raw materials and then how that kind of fits with your expectations for currency?

Because it would seem that currency should be swinging to a positive for you in the second half assuming the dollar stays where it is?

Our original projections in our budget was for currency to be neutral in the second half of the year.

We're now looking at if the rates stay where they are and go where they're projected to be now we should get some positive lift from currency.

As far as the raw materials, Eric, are concerned, I think we addressed that in the first-quarter conference call.

Like everybody else in the industry, we're seeing tremendous tension and pressure around plastic bottles, packaging materials, freight and logistics and distribution and warehousing.

Those are all going up exponentially and continue to go up as, obviously, the oil prices go up.

We've mitigated some of that with the price increase and obviously mitigating some of the rest with the cost saving initiatives we have in place.

That continues -- that tension continues.

Okay.

And then the last question has to do with the allocation of capital vis-à-vis -- you've made this acquisition, but I think that your debt to capital ratios and coverage ratios were in very good shape beforehand, and yet you've decided to slow down the share repurchase activity.

But unless you're signaling that there could be another acquisition pretty soon in, why wouldn't you continue to use the flexibility to buy back stock sooner rather than later given the momentum in the business?

Well, there are lots of factors here.

One of the factors would depend on what happens to the stock price for the next three months.

We certainly have the capacity to continue the buyback program.

We'd like to also balance this against our credit rating and other considerations of cash flow related to the restructuring which puts some additional pressure on -- so it's a conservative approach but one that we think is prudent given this year's activities.

Okay, thank you.

Andrew Lazar, Lehman Brothers.

Bob, I have a question more broadly about private-label and McCormick's role there.

I guess just typically it does seem that maybe the game has changed a little bit over the last couple of years with some of the very fragmented players in private-label in your core consumer business and maybe their ability to hit really low price points or in fact take a profit margin that's a lot lower than maybe they had previously or a combination.

At the same time you're doing some plant rationalization of your own.

Your capacity I'm assuming continues to go up from a manufacturing capacity standpoint.

And on the same point, you're going ahead and doing some of the gravity feed shelving.

I'm not positive of where and how private-label will fit into that scheme as well.

So I guess I'm getting to does private-label, while it may have played a pretty important role for a lot of the reasons I just talked about historically for McCormick, I'm curious if it plays the same kind of role or has that level of importance going forward?

You're absolutely right, Andrew, the game is changing in private-label and there are a number of competitors out there that do have capacity and thus put tension on the overall pricing of private-label.

We continue to contend in our U.S. business and our European and Canadian businesses that by manufacturing private-label and have the ability to distribute and sell that, it gives us a competitive advantage relative to the gap in pricing between private-label and our consumer branded products which is critically important for us.

The strategy continues to be solid.

Once again overall margin erosion in the private-label manufacturing is something that we have to deal with.

The only piece I would question is as we close our big facility in California we are actually taking consumer capacity out of our system as opposed to putting consumer capacity into our system.

That creates a whole lot of analysis relative to what we do put in the facilities that we have, where we produce it and an overall strategy round does private-label play the same role it did as in the past.

It is something that is relevant to today, the question is very valid but it is really under review and probably can't share much more with you than that.

Okay, so there's an understanding -- some of the things that I mentioned are -- as you mentioned, are kind of happening and/or changing, maybe nothing earth-shattering from a change standpoint near term, but something that seems like it's more on your radar screen in terms of analyzing maybe a future role than perhaps it has been in the past?

That is correct.

Okay.

That's helpful.

Thanks very much, Bob.

(OPERATOR INSTRUCTIONS).

Ann Gurkin, Davenport.

Just a couple questions.

I wanted to start -- could you give us the category growth in the U.S. and what your marketshare is as of the end of the quarter?

Category growth and marketshare at the end of the quarter (multiple speakers) --

Or year-to-date.

We don't have current and relevant information as of the end of the quarter.

There's a lag in that particular --.

Once again I'm -- I'll say this, Ann, IRI or Nielsen as a measurement of our business in the United States is really not relevant.

It only captures about a third of our business when you take out a big customer and you take all the value added products it doesn't capture.

So to look at that and have that be a benchmark of how our U.S. consumer business is doing -- quite honestly I don't look at it anymore internally.

Having said that, I think the category has grown about 1 to 1.5% and our marketshare really remains about the same which is in the mid-40s to high 40s.

And then you'll have spent time I believe on your R&D spending narrowing the focus.

Is there any way to measure any kind of return on that change in strategy?

We're in the process of doing that, especially in our industry business, Ann, but once again we're only six months into that.

That's going to be a program and the whole evaluation of it is probably going to take 12 to 24 months to get a real appreciation of what the focused R&D spending is, what it does with new products and what it does with the new customers.

Okay.

But any early reads you want to give us?

I think the industrial business results speak for themselves, Ann.

With the new products we're launching and our ability to create and turn around this business and the transformation the team has put in six months, I think it's a pretty Herculean effort.

Great.

Thanks.

(OPERATOR INSTRUCTIONS).

George Askew, Stifel Nicolaus.

I've got a question on the gravity fed shelving timing and I think I just misunderstood.

You said you used the datapoint of August and the 3,000 to 4,000 units.

Are you commencing in August that installation or are you going to complete in August do you think?

We're commencing it in August.

It always has been in the third quarter, George.

And I know some people view the third quarter as June, but we've always viewed it middle to late third quarter and getting it done before the holiday season rush comes.

Okay, good.

You mentioned the high level of productivity and how retailers will benefit from the restocking process.

Are you finding that that benefit is appreciated by the retailers and are they trying to incent you to direct shelving to their stores sooner than you might otherwise?

Is that working to your advantage?

I think it is, George.

In the test markets people are excited about it and we've talked for a long time about the difficulties of restocking our shelves out there with 300 to 400 SKUs.

So this is an opportunity for them to really have shelves that look attractive all the time and, more importantly, stock them at about half the time it took them before.

So very good feedback.

Are they willing to pay you for that?

Haven't got that far yet.

Okay.

You mentioned improved visibility on the industrial side.

Can you kind of quantify that?

Is it a little bit longer view measured maybe in a quarter to three quarters out, or is it just a deeper view into the same time frame?

I think your second is the best answer I would give right now, George, as we're going through this transition and transformation.

We have a much deeper view with the key 20 or 30 customers relative to their business plans, relative to new product launches, relative to the quarterly draws, relative to any issues they may have in their supply chain that might cause disruptions.

It's just deeper account penetration, account management and more focused than we've had in the past and that translates into better visibility and better forecasting.

And, as you can see, better results.

Right.

Okay, good.

And then lastly, Fran, perhaps just a comment on the implementation of B2K in Europe.

Has it gone according to plan?

Are you happy with the progress?

We're very pleased with how the go-live on March 1st has gone.

We have had virtually no service level issues with our customers; all invoices were rolling out on time.

We successfully closed our books for the completion of this quarter.

Of course, we always time this so we have a couple of months to practice.

And we just had a full report yesterday at a board meeting of our European team and we are delighted that our success was contrasted to several other European companies who went live in a similar period of time and didn't experience.

But we're proud of our team.

Our U.S. folks went over, spent a great deal of time and ensured that our European go-live would go smoothly.

Excellent.

Thank you very much.

David Nelson, Credit Suisse.

I've got -- looking at your EBIT margins here up 140 basis points in the first half and it looked like to me last year was down about 100 basis points due to unusual things like static accounting issue on vanilla.

Just bouncing it off you, do you feel like your business is up about 40 bips at the EBIT line, first of all?

And then guidance for the back half seems to -- at least on the mid point -- I did note you said you're thinking about the higher end of the guidance range, but your earnings growth implies EPS growth, again, at the mid point of about 5% in the back half which is a little bit of a slowdown.

How am I reading things here?

I think your math is right, David.

The business on EBIT is about 40 basis points and we feel good about that.

The second half, the important thing is that we continue to spend money on advertising.

The second quarter we were up 17%.

We have demonstrated in the three major markets in the world -- in Europe and Canada and the United States -- that if we spend behind our brands we can get net of SKU rationalization and the customer rationalization, etc., we can get better growth in our consumer business.

We're staying committed to that for the second -- excuse me, the third and fourth quarter of this year.

So there is higher spending in those numbers and, in addition to that, we see ourselves having an opportunity to be at the higher end of the range.

So we're going to continue the spending.

If you remember last year, David, 2005 was a challenging year for our corporation and caused us to look at spending.

So some of the spending that we had last year was lower than we really wanted to do, especially in our consumer business.

So this year we're committed to get it back up.

Great.

Congratulations.

Thanks, David.

Thank you.

There appear to be no other questions at this time.

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