McCormick & Company Inc (MKC) 2006 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the McCormick third quarter earnings conference call. [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 joining this morning's teleconference.

With me on today's call 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.

Bob will begin with a discussion of McCormick's financial results for the third quarter ending August 31st, Followed by an update on our guidance for the year and comments on our key business initiatives.

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.

In addition, information we present today, which excludes restructuring charges, are not GAAP measures.

And we present this information for comparative purposes alongside the most directly comparable GAAP measures.

Please refer to this morning's press release, which is posted on our website for more specific information on these topics.

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 those on the call and those listening via web cast.

We are extremely pleased with the third quarter results.

This was the third consecutive quarter where the results outpaced our expectations.

I'll comment in a few minutes on where this puts us year-to-date and our latest guidance.

But for now I want to focus on what's behind our third quarter performance.

Let us begin with our consumer business results.

In the third quarter, we increased sales for this part of the business 7.1% and in local currency 5.1%.

Pricing, new products, effective marketing programs, and higher volumes of ethnic items added 2.8% to our sales.

As part of our growth strategy, we acquired Simply Asia foods in June which added another 2.3% to the sales growth.

Taking a look at each of our three regions, consumer business in the Americas had another impressive quarter with sales up 8.7%, and in local currency 7.8%.

Simply Asia added 3.5%.

The remaining increase of 4.3% was due in part to the U.S. pricing action taken in some of our products in early 2006.

During the quarter, a number of product lines led to higher volumes, ethnic items, our new gourmet grinders and new signature blends.

Even core items such as peppers and gravies.

Sales of Zatarain's were also up and we reached an ACV of 68% for the new ready to serve complete meals.

The integration of Simply Asia has proceeded smoothly and we already have expanded distribution with one of our major customers.

In Europe, sales rose 3.3%, but in local currency declined 1.6%.

Of this decline, 0.6% was due to our decision to exit Finland earlier this year.

We also continued to see an impact from lower distribution in The Netherlands.

As you know, our largest markets in Europe are the UK and France.

In the UK, sales of Schwartz-branded herbs and spices continued to be very strong, but have been offset in part this year by weaker performance in the dry seasoning mixes and some of our noncore wet products.

In France, higher sales in 2006 have been led by core spice and seasoning products.

We have recently introduced a line of smaller sized and lower priced Ducros-brand spices and herbs.

As an alternative to products found in nongrocery channels.

In the Asia-pacific region, we increased sales 7.2% and local currency 6.6%.

The sales contribution from China was particularly strong this quarter.

Operating income for the consumer business was $60.7 million when restructuring charges are excluded.

This was a $2.7 million increase from the third quarter of 2005.

Included in this increase was a $2.9 million negative impact with stock based compensation expense.

We also recorded higher incentive compensation expense this quarter as compared to a lower accrual for this expense at the same time last year.

Clearly, higher sales and significantly improved gross margins more than offset these factors.

I have a few more remarks about operating income for the total business.

But I will first comment on our industrial business results for the quarter.

In our industrial business, we increased sales 5.8% and in local currency 4.5%.

Despite a decrease of 1.5% from the elimination of low margin business.

In the Americas, the increase was 5.5% and in local currency 4.9%.

In this region, customer and product rationalization reduced sales 1.5%.

The increase of 6.4% for the quarter excluding this impact reflects higher sales to our key strategic customers.

Sales to food manufacturers led this increase with particular strength in snack seasoning sales and new flavors for beverages and other consumer products.

With food service customers, we increased sales to both quick service and casual dining restaurants during the quarter.

Sales of our seasoning and coating systems for chicken were especially strong.

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

In Europe, sales rose 11.7% and in local currency increased 8.5%.

Some of the same types of products drove the increase in Europe, as well.

Areas such as snack seasonings and products of flavored chicken sold through the food service channel.

In this region, customer and product rationalization reduced sales 2%.

In the third quarter, sales in the Asia-Pacific region declined 5.1% and in local currency decreased 7.1%, following the loss of low margin distribution in Australia.

This was more than offset -- excuse me, this more than offset gains in China where we've continued to grow sales to both food service customers and food manufacturers.

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

Excluding restructuring charges, operating income for the industrial business was $22.7 million.

This was up $1.8 million over the third quarter of 2005, even with stock compensation expense of $1.6 million and higher incentive compensation expense in 2006.

An increase of $3.4 million reflects higher sales and gross profit margin for this business.

For the total business, we increased sales 6.5%.

In local currency, increase was 4.8%.

This increase was driven by price, product mix, and volume as well as our recent acquisition which added 1.3% to sales.

The increase in gross profit margin during the first half was driven in part by some easy comparisons to the 2005 vanilla situation.

During this period, 2006 gross profit margin rose 110 basis points.

Although we have moved beyond this favorable comparison, we're able to achieve 150 basis point increase in gross profit margin in the third quarter.

This increase is good evidence that several actions we've taken are making a difference.

First, we've been able to offset cost pressures from energy, benefits in input costs with our pricing actions.

Second, we continue to take costs out of this business and some of our more recent steps around facility consolidations are already paying off.

And third, actions to eliminate lower margin business in our U.S. industrial business, our Finland consumer business, and our industrial business across Europe are shifting our mix to a more profitable and faster growing portfolio of customers and products.

We reported a sizable increase in operating expense in this quarter.

As a percent of net sales, SG&A rose to 28.3% from 26.4%. 0.7% of the increase related to $4.4 million of stock based compensation expense.

A larger increase was due to a higher accrual for incentive compensation.

This compares to a tough period last year when we lowered our guidance for the year and consequently lowered our accrual for incentive compensation.

Let me comment briefly on income tax expense.

In the press release, we noted a variance of $0.03.

This has two components.

In the third quarter of 2005, we moved our effective tax rate to 32.7% from 32%, which resulted in EPS reduction of $0.01.

And in 2006, the resolution of an international tax audit in the third quarter had a favorable EPS impact of $0.02.

We would continue to provide 32% as the ongoing tax rate to use for the fourth quarter of 2006.

We reported third quarter EPS of $0.32 compared to $0.35 in 2005.

Restructuring charges in 2006 were $0.10 stock based compensation expense was $0.02, and the favorable tax variance was $0.03.

The remaining increase of $0.06 was an outstanding result that was ahead of our expectations driven by higher sales and greater gross profit margin.

Frankly, sales were higher than expected for our U.S. industrial business and the profit contribution for both of our businesses in North America were well ahead of our forecast.

In fact, our initial projection was to increase gross profit margin 100 basis points on a comparable basis.

Year-to-date, we've added 130 basis points to gross profit margin and 180 basis points when restructuring charges are excluded.

As a result, we expect to exceed our goal for improving gross profit margin for the fiscal year.

After some brief remarks on the rest of our financial results, I'll provide a more complete financial outlook.

Let's turn to the balance sheet.

At the end of the quarter, accounts receivable was just slightly higher than the year ago amount despite higher sales and the currency impact.

As for inventory, we continue to build in anticipation of production transfer from facilities that will be closed.

Fluctuations and strategic inventory positions and currency rates also drove a portion of this increase.

During the quarter, we issued $100 million of 5-year notes related to our acquisition of Simply Asia foods.

Also we repurchased 796,000 shares at an average price of $34.67 for a total of $27.6 million.

At quarter end, $274 million remained on the current $400 million authorization.

Let me review some changes in our EPS guidance for the year.

Our prior guidance was to increase earnings per share on a comparable basis with 2005 by 8-10%.

With projected restructuring charges at $0.22 and stock based compensation expense of $0.11, our EPS range was $1.41-$1.44.

At the end of the third quarter, we increased this guidance.

Our year-to-date results and fourth quarter outlook have us on track to achieve an EPS growth rate of 11-12% for the year.

Again, on a comparable basis, excluding restructuring charges and stock compensation expense.

This is the departure from the 8-10% growth rate we set earlier this year for 2006.

We still believe 8-10% is the right growth rate for the next few years as we proceed through a period of significant change at McCormick.

However, in 2006, we've achieved greater than expected increases in sales and gross profit margin, have had the benefit of favorable taxes, and are enjoying a more favorable currency environment.

Our plans for the fourth quarter already include greater spending behind our brands to drive sales.

In the United States, additional campaigns such as television ads for finishing sauces will deliver an overall 250% increase in consumer impressions when compared to last year.

And we're also beginning media advertising for the holidays on October 30th, earlier than 2005 start date of -- excuse me of December 5th.

In fact, our 2006 plan will reach 95% of women ages 25-54 an average of 17.5 times.

The net result in the U.S. is that we expect to have almost 339 million more target consumer impressions than in 2005.

Across all regions, we will nearly double the amount of advertising spent in the fourth quarter of 2005.

Our planned promotions will result in higher spending, as well.

Across all regions, higher marketing support behind our brands will impact fourth quarter earnings per share by $12 million or 6% -- $0.06 per share in 2006 when compared to 2005.

We also have higher incentive compensation expense in the fourth quarter of 2006 versus 2005.

With the excellent third quarter results, we're now evaluating some additional opportunities to spend behind our brands.

However, at this time we believe it's appropriate to increase our 2006 EPS range by $0.04.

With an extra $0.04 in income from business, we have increased our projected 2006 EPS range to $1.45-$1.48 from a range of $1.41-$1.44.

This range includes projected restructuring charges of $0.22 and stock based compensation expense of $0.11.

These estimates are unchanged from a prior outlook.

I'd like to move now to an update on our key initiatives at McCormick.

I'll begin with our spice revitalization program.

I hope you've been seeing our new labels appearing across the country.

We began to ship these early in the quarter.

We're also gaining shelf placement for new items including the gourmet grinders, roasting rubs and signature blends.

We have already exceeded our ACV targets for the rubs and blends with shipments of these products to over 75% of our customers.

The new flip top caps are just a few weeks away from hitting the store shelves.

We're particularly excited about this package improvement as it eliminates the number one consumer complaint in prying off the current packaging order to remove the freshness seal.

The rollout of the new merchandising system got into full swing in August and we are in various stages of completion in the first grocery chains in the West and the Southeast.

Keep in mind that we'll not be in every store for these customers as there are certain size and traffic criteria.

The new systems are appearing in qualifying stores with Batches, Albertson's Winn Dixie, and independent supplied by associated food stores.

We have moved up the learning curve and are now changing over 40 stores a day on average.

And we'll continue at this pace through October.

At that time, we'll stop for the busy holiday shopping period and resume in January.

We expect to have 2700 stores changed over in 2006.

We'll begin to measure consumer sales take away at these locations and plan to have some early results to share with you in our January conference call.

At that time, we can discuss more specifically our 2007 new product plans in the U.S. as well as international locations.

As a sneak preview, I'd like to mention that our U.S. consumer business, we've developed additional low sodium versions of popular seasoning blends and have customer samples ready for an expansion of our gourmet organic item line from the current 8 to a range of 30.

During the transformation of our U.S. industrial business, this has been an area of great progress and tremendous team execution.

We're even more encouraged by the business results in the third quarter and have increased confidence that we're headed in the right direction.

The industrial group recently completed a measurement of our current share of the business with these customers.

Today, we have less than a 25% share of all of the products that we could supply.

Our greatest opportunity to make new inroads is through new products rather than unseating a current supplier.

This is why the increase focus on our development resources, deeper penetration of our customers' organizations, and top to top meetings are so vital.

It is gratifying that this stepped up activity has already led to a number of new product opportunities for restaurants and food manufacturers.

While we're seeing some sales impact of product and customer reductions, this is more than overcome by the underlying momentum with our larger, more strategic customers.

These early results give us great confidence behind our goal to improve our operating margin, 250-350 basis points by 2008 for this part of the business.

The final initiative I'd like to talk about this morning is our restructuring plan.

The largest project we have announced as part of this program is the closure of our second largest plant in Salinas, California.

This has been an enormous effort by a lot of employees.

I'm pleased to report that the project will be completed about three months ahead of schedule.

During the quarter we concluded the steps necessary to announce the closure of industrial condiment plant in Scotland.

Has already been transferred to another facility in the UK and will net employee reduction of 60 people.

Previously announced projects include a U.S. condiment plant and a voluntary separation program are all on track.

Our total charges for the restructuring program remain unchanged at $110 to 130 million.

And our goal for annual savings from this program continues to be $50 million.

Let me summarize.

There was a tremendous amount of energy at McCormick.

Employees throughout this company are responsible for our progress with these key initiatives and our success in growing sales and profit.

We are entering our fourth quarter, which historically has delivered more than 40% of our annual EPS.

While sales today this September are encouraging, we still have our largest two months ahead of us.

We're well-positioned with increased marketing support, great products for our consumer industrial businesses, and good momentum from our year-to-date performance.

I'm confident this will be a record fourth quarter and fiscal year for McCormick.

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

[OPERATOR INSTRUCTIONS] Your first question comes from Terry Bivens from Bear Stearns.

Good morning, everyone.

Good morning, Terri.

Just a couple of things.

Commodity outlook, Bob, some of those materials, energy complex, et cetera seems to have come down pretty nicely of late.

How are you looking at input inflation, you know, as we finish the year and going into next year?

As we finish the year, Terry, we're very confident that whatever inflation is built into our current forecast.

I think as everyone knows, this is the time of year we compile our 2007 budgets and we're looking at all of the various factors, distribution freight costs, and our commodity costs, really kind of pulling those together just at this point in time.

We don't see anything that's going to impact 2007 in a very significant way at this point, but really more to come in the January conference call.

Okay.

You don't see anything up side or downside?

Not in the fourth quarter, no.

Okay, very good.

And where are we in the SKU rationalization program?

Well, that's a large question.

If you take it by market segment, Europe is virtually completed and probably first second quarter of 2007 will be done both industrial and consumer.

If you look at the United States, in the consumer business, SKU rationalization is part of our spice revitalization program, so that's going to go on for another 12-14 months.

Okay.

and the industrial business, we're probably 50% of the way there through the SKU rationalization in customer pruning.

If you go to China, we're probably 80% of the way through the SKU rationalization in China.

Still head winds ahead of us.

And like we did this quarter, we'll make everybody aware of exactly what that impact is on sales.

Okay, terrific, and just one more for Fran. of exactly what that impact is on sales.

Okay.

Terrific.

And one quick one for Fran.

Inventory showed a little bit of a move up there, is that Simply Asia or anything else in there?

We have a lot of components, one of which is foreign currency.

Certainly a factor to be reckoned with.

Simply Asia is kind of a like number as far as currency.

And we also have built up, as Bob mentioned, an inventory to anticipate our move out of the Salinas plant.

That move will take some time.

We had to have the inventory specially on order for our busy season to make sure that we fill all of the customer orders.

Okay.

Thanks very much.

Nice quarter.

Thanks, Terry.

Thank you, your next question is coming from Eric Katzman from Deutsche Bank.

Good morning, everybody.

Bob can you just talk a little bit more about how many of those top, I guess it's 50 industrial customers you've met with at this point seeing that you're kind of focussed on top to top discussions?

I've probably met with 5-6, Eric.

Of those, I don't plan to meet with anymore than the top 10.

And as we've shared at conferences, you know, we're going out talking about McCormick's value proposition, which is very different than we've talked about before.

We think we bring, versus the competition, two very specific attributes that we haven't sold quite as hard as before.

First of all, the ability to provide a commodity or a blended seasoning in our research capabilities.

The others all the value added items that we bring, like quality global regulatory, et cetera.

So that's what the themes are.

And people seem to be very receptive of us making a difference in the marketplace.

And that's why I said in the comments that we see tremendous opportunity for gains, not only with our current large customers, but in those customers we put in the critical category, which is sort of the second tier.

Okay.

So it's going very well.

Okay.

Second question on the acquisition, can you give us a little bit more details on, I think when you announced it, you said it would be kind of, I think you said kind of neutral to this year, but accretive after.

You sound a little bit more optimistic about it, is that still kind of the earnings impact?

The sales impact we're very pleased in.

We got one major account, which you never plan that right out of the box when you make an acquisition, so we're very pleased with it.

We're using that U.S. consumer team like we did with Zatarain's.

So it's a pretty powerful distribution network that we have.

So we continue to be pleased and optimistic.

I think for this year it's maybe neutral to slightly above for this year and next year as we'll do the 2007 budgets, we'll bring you an impact.

Okay.

And last, Fran.

Can you just kind of go through, just have there been any changes to expectations in terms of CapEx, interest expense, and some of the other kind of, you know, items?

No, I think CapEx is going to stay within, you know, probably stay within a $5 million band of what we previously put out.

We checked that on a very regular basis.

And as you know, in connection with our restructuring plan, which we also check on a very regular basis, the original estimates as we reiterated in the call are holding for capital, the impact of expense for the year, and the benefits that we expect.

Related to capital, we should be in the 90-95 million range for this year and we're -- in fact, I'm not so sure that our folks could spend as much money in the fourth quarter as it would take to get up to that level.

But we are still holding with that estimate.

As far as interest goes, we've been pretty fortunate on the interest income side because we've had more cash to invest during the whole of the year.

And we're getting kind of a double benefit there.

It's a triple -- because we have more cash, the interest rates are higher on what we're able to earn on that cash.

Since a lot of that cash is outside the United States, we're also getting positive benefit of FX, as well.

So I think our interest expense is holding based on our estimates are pretty good at estimating how much our would be, the rates have certainly tracked up this year.

And we anticipated that, as well.

So I think, interest as a whole for the year will be at or slightly below our original expectation, mainly because the interest income.

Okay.

Thank you.

Thanks, Eric.

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

Good morning, everybody.

Congratulations.

Thanks, John.

Can you just kind of fill in the blanks.

I know you gave the impacts for acquisitions for each division.

If recorded sales were up six, and then up five excluding currency.

What is that number excluding acquisitions?

Does it go back to three?

We'll get -- I just don't remember.

I read it in the script, John.

Joyce is going to find it there.

I don't think it's in the scripts.

I'm just talking about internal sales growth for the quarter excluding currencies and acquisitions.

We had indicated that had the impact of acquisitions was 1.3.

Okay.

I'm sorry.

Currency was 4.8.

The net result is 3.5, John.

And so your expectations were maybe a percent or so lower than that?

Well, we exceeded our expectations.

Yeah.

It was between a half and a percent, John.

And driven mainly by the industrial business, John and the U.S. consumer business.

Because, you know, you could argue, some people have argued you're taking your guidance range up 4 cents. $0.03 is coming from taxes, you can argue 1 cent from currency.

But clearly you have an intent to spend a lot more marketing.

I don't know, that's the key point of the call.

And I hope I explained it in the script.

We're going to spend $0.06 a share, $12 million preplanned on advertising in the fourth quarter between U.S., consumer, and European consumer businesses to drive the fourth quarter and really impact 2007.

And that's what we said all along.

And the net result of that is we still anticipate to grow our EPS 11 to 12% for the year.

Terry mentioned costs, but I guess one cost that's been going the other way is pepper.

Correct.

Can you kind of detail that and to what extent yourself protecting yourself, your customers on and on to the extent that you can talk about it.

I really can't talk too much because it's going on as you know on a fairly regular basis.

As I said to Terry for 2006 will be negligible in the fourth quarter, we're putting together our 2007 budgets at this point in time.

There are some head winds with this.

But once again, John, from our industrial business, we have the ability to pass those through in most cases.

So that isn't a real tension point.

And on the consumer business, we'll have to look and see what the impact is relative to the overall pricing strategy.

And just to the extent that you walk away from so many industrial competitors, I think you -- at our conference you kind of mentioned walking away from almost seven out of eight customers.

Doesn't that make your competitors stronger? and doesn't that down the road lead to more competition even if there's a short-term help?

I don't believe it does, John, as we've shared at your conference, and we shared on this conference call last time, most of these customer sales on an annual basis are between $10 and 15 million per year, we ship them every week for 52 weeks and the commodities are so, so small.

And there's hundreds of these, John.

And they're going to very, very small suppliers in the marketplace today.

So I don't think that makes anybody stronger in the marketplace.

It's not going to the big competitors that we talk with everyday on the call about constantly.

THey're not interested in the margin levels of these people that we're we're divesting ourselves of.

I don't think it does.

I think it makes us stronger, reduces complexity, and gives us more resources to apply against our critical customers.

And I'm optimistic and industrial with those two categories of customers.

And I think we've demonstrated at least three quarters this year that the strategy is working.

That's where the growth is coming from.

Yep, the early numbers are good.

Now just getting into the racks and, every once in a while I've got to make sure I'm not listening in on a Campbell Soup conference call with the low sodium.

Did you give a lift that you expect from this racks?

A list?

What list?

A sales lift.

We have not given a specific list, no.

Based upon the tests we had and some of the early indications that we would anticipate, our unit list to be greater than what Campbell saw which is 5-7%.

That's what we have commented publicly on.

You can rest assure in the January conference call we'll have 2700 stores completed by then, we'll give you an update on the January call.

Haven't you gone to customers already and talked about a, that your internal tests showed a 3-5 lift, not a 5-7?

There's been no --

Not that I'm aware of.

What we've gone to our customers with save them 50% of the labor component.

Okay.

Well, thanks for answering all of this.

Congratulations.

Thanks, John.

Thank you your next question is coming from Jon Feeney from Wachovia.

Morning, guys.

Morning.

On shelving, 2700 stores, I guess what -- can you talk a little bit about what the governing factors are on that number?

That's going to be a really pretty small percentage of your total retail outlets.

Can you give us a sense of what that would be of your total volume, and what are the, what's the holdup if, you know, the lift numbers are so good and from everybody we've talked to seem to be so good at retail?

Well, I think, you have to bear in mind what we said at the previous calls these racks were expensive and designed for category A, category B, and maybe some category C stores.

There has to be significant volume opportunities in these stores to put a rack in.

If I look at what our potential installation is, it's somewhere between 17 and 19,000 stores, we plan to do about 2700 in the fourth quarter, which we announced, we plan to complete about another 15,000 next year -- excuse me 8500 next year and the balance in the beginning of 2008.

The restricting factor.

Number one, labor to do it in the stores.

And the availability of equipment from a supplier.

Those are the two constricting factors we have at this point in time.

Add to that we're not going to do it in November and December, we're not going to do it in May, June, and July, which are the busy summer periods because the stores don't want us to disrupt their environments.

Right.

Okay.

And can you give me a sense, Bob, maybe a tough question.

The total 17-19,000 store opportunity you're thinking of, would that be 80% of your U.S. volume?

I think we're in about 25,000 stores.

Okay.

Thanks.

And just maybe ask John's question a different way about customer rationalization.

How is it you got to be doing business with these 10 or 15 million less profitable accounts.

And what have you changed about maybe, your sales compensation or your management strategies to make sure that, you know, these less profitable customers don't kind of creep back into the mix over time?

I think I tried to explain it in previous calls.

We had an organization structure and design that allowed us to make individual decisions in three different organizational buckets, which allowed us to become awfully wide and not very deep relative to the businesses that we were in.

Secondly, we had a process that allowed us to work on new products with not a good funnel to say that we're not going to work on these from a profitability standpoint.

But the real enabler was as we installed SAP.

Go back two years ago, that was the enabler and tool where are we getting profit?

Where are we getting good returns, and adequate annual volumes?

Combine that with today where we change the organization structure, one individual's in charge, two commercial executives running two commercial teams that are really focussed on a very specific set of customers.

Bear in mind today we're focussed on customers from a strategy standpoint as opposed to products before.

And when you're selling products, with us having the number of SKUs we have, we ended up getting way too many SKUs in the marketplace and having them not being as profitable as we anticipated.

Thanks, that's a good explanation.

And finally, can you talk a little bit about how much what we're seeing in the industrial business is just a better environment, you know, for the category?

It's clearly I think your customer in a little bit better shape.

I think that's a small part of it, Jonathan.

Real small part.

I think the big part is what we're doing, the streamlining of the business and the real focus on those customers and some of these new product initiatives.

And I'm disappointed nobody's asked my favorite question.

How come we can forecast better today than we have before?

That's the key enabler that gives me confidence about the future is our team is forecasting every week and much better than we've ever done in the industrial business than ever before.

That was going to be my next question.

Thanks very much.

Thanks a lot.

Thank you, your next question is coming from [Robert Boscov from Credit Suisse.]

I hate to ask this question, then.

But if you're forecasting better than before but then your sales came in much better than you expected, so --

I'll take the high side, Robert, versus the other.

Okay.

And once again, as we're taking skews out of the business and as we're eliminating customers out of the business, the robustness around what the total looks like is still being worked on by Chuck and his team.

I'll take higher than lower right now.

Well, here's my real question.

Did you say that you have currently you think about 25% penetration of the new products that are being launched by your industrial customers?

No, I didn't -- no, what I tried to say there, Rob is that we haven't shared market share data with our investors and analysts before.

As we look and do the research, we feel we have about 25% of the available business that's currently being sold in spice seasoning condiments, et cetera with our major customers.

So we get pushed a lot to say you really have -- you have a maximum share with customer A and we really don't.

So the message there was we have 75%, potential as they work on new products and as we try to make current products in the system to grow our businesses with our strategic and critical customers.

All right.

I get it now.

And then my question is, what has been the barrier in the past, do you think of increasing that share in the -- increasing that share?

I mean you obviously have a great reputation in the industry and a great reputation with your customers.

Is it just a matter of getting in front of the right people at the customers?

Getting them to think about you in different categories?

What's it been?

Three things.

Number one, more in-depth calls and relationship development with the customers rather than just with the technical community, I think secondly we're taking complexity out of the business and we're making our business much simpler and we have less customers to concentrate and thus the resources can be focussed on our major customers.

And thirdly is this value proposition, I think I talked with Terry or Eric about, selling a value proposition to try to differentiate McCormick industrially from the other competitors in the marketplace.

And what we want for that is recognition and over time some compensation for that.

Got it.

Okay.

And just one final question, regarding the restructuring plan, it's supposed to go, you're -- it's supposed to go three years, is that correct?

Yeah, into 2008.

Is it possible you're a little ahead of plan that you might be able to finish in '07 all of your changes?

I think that the piece we're working on and we said in the last conference call is Europe and that's just underway right now.

So I don't think we're going to finish early, no.

Thank you very much, congratulations.

Thank you your next question is coming from Ann Gurkin from Davenport.

Good morning.

Good morning, Ann.

Wondering if I could get more details on product development.

You talked a little bit about sodium.

Are you doing food service work? and then organic products, are any of those targeted directly at Wal-Mart? and lastly, I don't know if you talked about [Lomini], the [Lomini] test in Europe?

We really don't share with customer, except to say as I said in my script we're really expanding the organic items from 8-30, as we have for a long time a real strong effort in low sodium.

We've had sodium reduced products for years, but a real effort behind that because that's what the consumers are really telling us.

We have the one-time opportunity to really streamline our whole spice sections in this country with the spice revitalization program, we're trying to take advantage of every opportunity we have.

But we really don't share the customer.

About the mini test in Europe?

The mini test in Europe is going well.

Extremely well.

Can we get the growth rate or how did the products grow in the quarter?

No, I don't have that number what it's grown in the quarter.

Ethnic for us is pretty big.

If that's important, then, we'll get Joyce to get that number rounded for everybody.

Okay.

Great.

Thanks.

Thanks.

Thank you your next question is coming from Eric Serotta from Merrill Lynch.

Good morning.

Morning.

Just wondering whether you could give a little bit more color into the sales dynamic or the customer dynamic in Europe at the moment.

McCormick was one of the first companies in our space, at least to talk about a stabilization of conditions in Europe.

Your local currency sales were down about 2% and I know you talked about some of the reasons why.

That was about in line with last quarter.

I know there's a lot of moving pieces, last quarter you had, I guess the head wind from the prebuy in the quarter ahead of B2K.

But could you give us an idea as to how you describe the competitive environment there right there now versus where we were three months ago when we last addressed this?

Not a significant change versus three months ago.

What I indicated to Ann was that our lower, lower price, smaller packages we've launched are doing very well.

That's targeted against, with our major customers against the discounters that are are coming in.

Once again our category is 8-10 items, so it's not devastating to us.

And we've always said that the impact in France with the dibs discounters for is us important.

The whole situation that's going on in the country relative to lack of consumer conference and variability in changing dynamics in the political environment is more impactful for our category.

Flip over to UK for a moment, our business seems to be strengthening UK, driven a lot by new products and driven by better merchandising streamlining of items in the store.

Offset that with closing a Finland and headwinds last quarter with SAP launch, still pretend we're right on track where we want to be from a Europe growth standpoint in sales.

It's difficult, but there's nothing that changed the causes a more optimistic outlook or a more negative outlook.

Would you care to venture an estimate as to when your consumer trends on a local currency basis could turn flattish?

We've been -- we've seen the nice improvement, it's kind of leveled off over the past quarter in terms of the rate of decline.

Is it reasonable to think first half of next year, let's say that we could start to see some positive comparisons?

What we're going to go into next is we're going to go into SKU rationalization in consumer and Europe as we look at the whole restructuring program.

So I'm really reluctant to commit at this point in time to a number that we're going to be held accountable for on the positive side.

Okay.

Let me summarize to say there's no real change quarter to quarter, our strategies are still in place, our growth opportunities are being pursued, some of the advertising increase that we talked about earlier in the script is being allocated to our businesses in UK and in France.

So I believe we're doing the right things, the difficulty tends to be camouflaged with closing some businesses and SKU rationalization.

Okay.

And then moving on to industrial.

Clearly top line was a lot better than what we were looking for and it sounds like a lot better than what you were looking for as well in the quarter.

It seems, you're benefiting from customer launches of new products.

Are we -- if I remember, last year at this time, you were citing the customer delays in new products and earlier this year you cited the launch of products that had been previously delayed.

I'm just wondering when do the comparisons start to get tougher?

How much of a benefit in terms of ballpark, how much of a benefit did you get in the past couple of quarters from the delays in the product last year? and you talked a lot about in response to John's question about your increased forecasting ability.

But what's kind of a steady state growth that you look at for U.S. or Americas industrial excluding the SKU rationalization?

I think if you look at the steady state number, it's in the 3 to 5%.

And for the near-term, moving closer to the 5%.

If you go back to your other questions, the new products that we talked about being delayed last year really impacted the first quarter and really are limited impact today.

So these are new products that have been in the pipeline that we have better visibility from a forecasting perspective on and obviously are coming to fruition kind of in the time line we anticipated.

Some of the increases that we see quarter to quarter on the industrial business, I think is just the fact that we're better focusing on our core business, which we do with our customers as opposed to new products.

And that's just better account management, better day-to-day management and understanding of what their needs are in the marketplace.

So I think it's an overall better management of the business than we had a year ago today.

When you talked about 3-5% as a core steady state growth excluding the -- excluding the customer rationalization, are you looking back retrospectively or is that what your improved forecasting is pointing to for future quarters?

Eric, I'm going to let answer this, and then we're going to go to the next caller.

No problem.

You know, I think what we should think from the industrial is we're right on track with what we want to do and what we want to accomplish, and we shouldn't try to make anymore out of any particular situation like forecasting or what happened last year.

We're right on track for what we anticipated doing.

Our strategies are solid and we should just stay with the numbers we talk about.

Thanks, again, I'll pass it on.

[OPERATOR INSTRUCTIONS] Your next question is coming from Andrew Lazar from Lehman Brothers.

Morning, everyone.

Morning, Andrew.

Just a quick one on marketing.

Bob, you talked about the incremental spends you're going to do in the fiscal fourth quarter.

I'm trying to get a sense of where that is.

Where that would put your absolute kind of level of spending, let's say for the year.

More relative to kind of history.

In other words, are you stepping it up largely because you've got, the flexibility and a lot of new products and activities around which you can invest.

Or, you know, is it maybe alternatively a realization that when you benchmark against either peers or where you think brand spending needs to go forward, that McCormick wasn't in the right place and now you're bringing it up to a level that's maybe more sustainable because you've got the flexibility?

See what I'm getting at?

What's the bigger driver.

We obviously benchmark and look at the consumer, advertising, and it shouldn't be a surprise to anybody on the call that that's an area where we wanted to increase and put money in over the last 5 to 7 years.

If you look at our year-to-date promotion numbers, we were flat for the first three quarters.

So we had planned on spending a significant amount in the fourth quarter because the new product launches, Zatarain's last year we spent very little in the fourth quarter because of Katrina.

So we knew there was going to be a lift in the fourth quarter.

And thirdly, we have the opportunity to upspend in Europe a little bit, which is what I said to someone else, which we had not anticipated earlier in the year, but made that decision in June and July to put money behind Ducros and Schwartz brand.

So it's a combination of things, but our goal is to make sure our to drive brands and new products.

Ask and the good news is, every time we upspend on promotion and advertising, we get a lift on our consumer products because our brands are so strong out there.

And especially the new product areas.

And that's what I'm getting at.

It's proven to be the case, I guess for a couple of years now.

Just trying to get a sense of if this puts you at a level, I mean, we don't know yet, that is sustainable or whether going into '07, given the momentum you have in the business where, you know, where there's an opportunity to keep going on that front.

I think there's an opportunity outside of the United States.

I think in the United States, we're very comfortable with where we are.

Got it, great.

And the very last thing is, always curious after sort of list pricing actions, you know in the industry, just kind of what a postmortem is.

Maybe the key learning or two In terms of what you learn either around the elasticity of your brands and how retailers accepted it and things of that nature?

It went very well.

The retailers accepted it.

We're all in a very similar situation.

I'm certain all your clients are.

We had unbelievable increases in freight costs and benefit costs over the last 12-24 months.

And we were all allowed that opportunity for a price increase.

Once again I would repeat to everybody that we did it on selected items.

It wasn't a total across the board.

We were very specific about where we increased the prices.

Thanks very much, guys.

Thank you, there appears to be no further questions at this time.

Okay, well this concludes today's call.

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Thank you this concludes today's McCormick & Company conference call, you may now disconnect your lines at this time and have a wonderful day.