McCormick & Company Inc (MKC) 2006 Q4 法說會逐字稿

Good morning.

At this time, I would like to welcome everyone to the McCormick & Company fourth quarter earnings conference call. [OPERATOR INSTRUCTIONS] Thank you, 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 this morning's teleconference.

With me on today's call are Bob Lawless, Chairman and CEO of McCormick;

Alan Wilson, President and COO;

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

Fran will begin this morning's discussion with comments on McCormick's financial results for the fourth quarter and fiscal year ending November 30.

Bob will follow with some remarks on progress with key business initiatives and conclude with our outlook for 2007.

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.

To accompany today's call we have posted a series of slides at this website and we'll reference these slides during our remarks today.

We hope you'll find this helpful.

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

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

I'd like to begin by stating that we were extremely pleased with our fourth quarter and fiscal year results for 2006.

Our financial performance exceeded our own expectations in many areas, including sales growth, margin expansion, and cash flow.

There were strong results from both the consumer and industrial businesses.

Let me comment on the fourth quarter, then follow with some broad remarks about financial results for the fiscal year.

Highlights for the fourth quarter financial results can be found on slide number 3.

Our consumer business has exceptional sales growth.

We increased sales 9.6% and 7.9% in local currency.

Higher volume from new products and effective marketing programs as well as pricing actions added 5.4% to sales.

Simply Asia, acquired in June 2006 added another 2.5% to sales for the quarter.

Our consumer business in the Americas led these results.

Sales in this region rose 11.2% or 10.8% in local currency.

Simply Asia added 3.4%, an increase of 7.4% was achieved through higher volume from new products, incremental advertising support, and other marketing programs as well as pricing actions.

The higher volume included increased sales of the Zatarain's brand, which grew 17.1%, rebounding from a tough fourth quarter last year in the wake of hurricane Katrina.

We'll comment later in our remarks about progress with the revitalization of our spice and seasoning line and other growth initiatives for our consumer business in the Americas.

In Europe, consumer sales rose 6%.

And in local currency increased 0.3%.

In our two largest markets, the UK and France, we achieved sales increases of more than 5% due to higher sales of core herbs and spices.

These gains were largely offset by lower distribution in the Netherlands and our decision to exit from Finland early in 2006.

In the Asia Pacific region, we increased sales 1.4% and in local currency sales declined 0.2%.

Sales growth in China rose 13% on the heels of a strong third quarter performance.

However, our business in Australia continued to be impacted by the discontinued sales of some lower margin copacking business in 2006.

We indicated in our September earnings release and conference call that we would significantly increase advertising in the fourth quarter.

We nearly doubled this brand support with an 8.7 million increase during the quarter.

Operating income was positively affected by higher sales and the benefit of cost reductions.

With these increases, we offset a significant portion of the increased expenditures for advertising and incentive compensation.

And 2.2 million of stock based compensation expense.

In our industrial business, we had outstanding growth with sales up 8.1% and in local currency 6.5%.

This growth was net of a 1.5% decrease from the elimination of low-margin business.

In the Americas, we increased sales 3.4% and in local currency 3%.

In this region, customer and product rationalization reduced sales by 1.8%.

An increase of 4.8% for the quarter excluding this effect reflects higher sales to strategic customers.

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

With foodservice customers, we increased sales about quick service and casual dining restaurants during the quarter.

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

Sales of branded products of foodservice distributors also increased with higher volume and the benefit of a price increase implemented early in 2006.

In Europe, sales rose 27.3% and in local currency increased 21.3%.

We increased sales of seasonings for chicken, condiments, and other foodservice products.

A new joint venture in South Africa also added to fourth quarter sales.

For the Europe region, customer and product rationalization reduced sales 1.3%.

In the fourth quarter, we increased sales in the Asia Pacific region 8.9% and in local currency the increase was 6.1%.

The loss of some low-margin distribution in Australia was more than offset by gains in China where we've continued to grow sales to both foodservice customers and food manufacturers.

Operating income for the industrial business excluding restructuring charges was 22.6 million, compared to 21.2 million in the fourth quarter of 2005.

For this business, the sales increase, cost reductions, and more profitable business mix more than offset stock based compensation expense of 1.6 million and higher incentive compensation when compared to the prior year.

For the total company, we increased fourth quarter sales 9%.

In local currency, the increase was 7.4%.

The growth drivers were higher volume as well as price increases and favorable product mix.

Simply Asia foods added 1.5% to sales.

The negative impact of SKU and customer reductions on the total company fourth quarter sales was 0.6%.

Gross profit margin reached 44.3%, a 40 basis point increase from 2005 and this was net of a 60 basis point decrease from the portion of the restructuring charges that we recorded in cost of goods sold.

As a percent of net sales, selling, general, and administrative expense rose to 26.9% from 24.1% in the prior year's fourth quarter.

Of the 280 basis point increase, 100 basis points were due to increased advertising and 50 basis points related to stock-based compensation expense.

In addition, a portion of the increase was due to higher incentive compensation.

This compares to a tough year in 2005 when incentive compensation was reduced.

In the press release, we noted a lower tax rate with an EPS impact of $0.03 when compared to the 2005 rate of 32.7%.

This decrease was due to several discreet items as well as the mix of earnings among the different tax jurisdictions.

We reported in the third quarter a favorable impact from the settlement of an international tax audit and this is followed in the fourth quarter by reduced accruals for state tax audits in the United States.

Income from unconsolidated operations declined in the fourth quarter.

In mid 2006, we received the remaining 49% share of dessert products international and redemption of our 50% ownership interest of signature brands.

This led to a reduction in both the income from unconsolidated operations and minority interest.

In addition, our share of income from McCormick to Mexico was down in the fourth quarter due to increased marketing support.

We reported fourth quarter EPS of $0.62 compared to $0.65 in 2005.

As shown on slide number 4, higher sales and greater gross profit margin more than offset incentive compensation contributing $0.06 to EPS.

Restructuring charges in the fourth quarter of 2006 were $0.10 compared to $0.05 in the fourth quarter of 2005 a difference of $0.05.

Increased advertising behind our brands had a $0.04 impact.

Our lower tax rate had a favorable $0.03 impact, income from unconsolidated operations had an unfavorable $0.02 impact, and stock based compensation expense recorded in 2006 also lowered EPS by $0.02.

Lower shares outstanding added $0.01 to the earnings per share.

For the second half of my remarks, I'd like to comment on the financial results for the fiscal year.

These are summarized on slides 5 and 6.

We grew sales 4.8% for the year.

At the high end of our 3 to 5% objective.

In local currency, the increase was 4.7%.

An increase of 4.5% was due to higher volume from new products and effective marketing programs as well as pricing action.

Simply Asia added 0.7%.

For the total business, the elimination of lower margin customers and SKUs reduced sales 0.6% during all of 2006.

Our goal was to increase gross profit margin 100 basis points in 2006.

We achieved a new high for gross profit margin of 41%, up from 40% in 2005.

The 2006 result includes an unfavorable 50 basis point impact from restructuring charges.

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

In 2006, we more than offset cost pressures from certain materials, employee benefits, and energy with our pricing actions.

We continued to take costs out of the business and steps to consolidate facilities are already lifting margins.

Actions to eliminate lower margin business in our U.S. and European industrial businesses and by exiting our [Finland] consumer business have begun to shift our mix to a more profitable and faster growing portfolio of customers and products.

As in the fourth quarter, SG&A was up for the total year, as well.

As a percent of net sales SG&A rose to 28.4% from 26.3%, an increase of 210 basis points. 80 basis points of the increase related to $22 million of stock based compensation expense.

For the total year, we increased advertising expense nearly 30% or 12.7 million, which added another 40 basis points to SG&A as a percentage of net sales.

Higher incentive compensation also added to this percentage.

Higher gross profit margin was offset by higher SG&A resulting in an operating income margin that was about even with 2005 when measured on a comparable basis excluding restructuring charges and stock based compensation expense.

With the factors I discussed that affected taxes, the 2006 rate was 29% compared to 32.7 in 2005.

As I indicated a moment ago, the joint venture transaction with ETI and Signature brands has the effect of reducing both the income from unconsolidated operations and minority interest for the fiscal year.

The majority of our joint venture income continues to come from our joint venture in Mexico.

Despite lower income in the fourth quarter for the full year, this business increased sales 10% and net income by 19%.

We reported fiscal year EPS of $1.50 versus $1.56 in 2005.

As you can see on slide 6, the year-to-year increase in restructuring charges to $0.22 in 2006 from $0.05 in 2005 lowered EPS by $0.17.

An increase of $0.16 came from higher sales and gross profit margin net of incentive compensation.

A 6% -- a $0.06 impact from higher advertising expense lowered EPS, as well as $0.11 of stock based compensation expense.

The lower tax rate added $0.06 and the lower number of shares outstanding added $0.04.

Increases in other income and income from unconsolidated operations added another $0.02.

On a comparable basis, excluding the restructuring charges and stock based compensation expense, we increased EPS 13.7%, well above our 8 to 10% objective.

Let's turn to the balance sheet and cash flow.

Slide 7 outlines a few highlights.

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

Inventory was 406 billion at the end of 2006.

An increase of 62 million or 18% compared to 344 million at the end of 2005.

An increase of 11% can be attributed to specific factors such as foreign exchange rates, increases in strategic inventory, a build up related to our facility consolidations, and the acquisition of Simply Asia foods.

The remaining increase of 7% related to raw and packaging cost increases, sales growth, and some build up at year end for 2007 new product.

We have in place a number of projects that will reduce inventory levels in 2007.

Again, in 2006, we generated a significant amount of cash with 311 million of cash from operations.

Net capital expenditures during 2006 were 79 million, a portion of this capital funded higher speed equipment to support our manufacturing facility consolidations.

For example, a new production line for dry seasoning mixes in our Hunt Valley plant is 9 times faster than the equipment it replaced.

Despite these additions due to the pacing of various projects, capital expenditures were below our estimate of 90 million.

During 2006 we've repurchased 4.4 million shares for 156 million at an average cost of $35.38 per share.

As a result of this program, we reduced shares outstanding 2% during the fiscal year.

At November 30, 206 million remained of the 400 million share repurchase program that the Board approved in March, 2005.

We paid 95 million of dividends, a 10% increase from 2005 and in 2006 80% of cash from operations was spent on dividends and share repurchases.

That concludes my remarks.

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

Thanks, Fran.

As Fran said, we're extremely pleased with our 2006 financial performance.

Let me briefly reflect on some other accomplishments and then update you on our key initiatives.

This would help set the stage for remarks about 2007.

Behind our 2006 sales growth and margin increase are quite a few success stories.

I'd like to share and those are listed on slides 8 and 9.

In the second quarter, we streamlined two of our joint ventures, taking 100% ownership position of dessert products and as Fran said exiting our share of signature brands.

In the third quarter, we completed the acquisition of Simply Asia foods, maker of Thai Kitchens, the leading brand in the United States, Thai food category, as well as rapidly growing Simply Asia brand.

In November, the Board approved an 11% increase in the fourth quarter dividend, to $0.20 from $0.18.

At year-end, we completed another transaction as part of our plan to streamline our joint ventures.

We moved from a joint venture in Japan to a more profitable license arrangement for the McCormick consumer brand in that market.

For the fiscal year 2006, 10% of our sales came from new products launched in the last three years.

A major focus of our U.S. consumer business has been the spice and seasoning revitalization program and I'll comment on that in just a minute.

I first want to mention a few other highlights from the business in 2006.

We increased sales of Hispanic products 15% during 2006.

In the fourth quarter, 25% of our holiday TV spending was directed towards Hispanic consumers.

In 2006, consumers were encouraged to toss out old spices and herbs with the special print campaign.

This was followed by a 92% increase in inquiries about product shelf life to our consumer hot line.

Third, the sales of grill mates rose 18% for the 52 week period ending mid-November.

In the fourth quarter, with the benefit of additional print advertising, unit sales of gourmet products rose 17%.

Likewise, gravy sales increased following our holiday ad campaign.

Lower sodium items that we first introduced in 2005 reached $5 million in 2006 sales.

Also, following a 2005 introduction, 2006 sales of slow cooker seasonings grew more than 200%.

Here are a few comments that relate to Europe.

We had a successful implementation of SAP.

We launched the new wet pourer sauces and gravies in the UK, a number of dry seasonings items were reformulated to reduce salt and to simplify ingredient statements.

Actions were taken with our [Vahe] name brand of dessert items in France that set the stage for growth in 2007, including an increase in advertising, a new interactive website, and an improved merchandising system.

Consumer business SKUs across the region were reduced by 25% with minimal sales impact from actions such as standardizing our packaging formulas, eliminating slow-moving items and the exiting of Finland.

In our industrial business, we're concluding a four-year effort to simplify the business.

During this period, SKUs were cut nearly in half and we moved from more than 500 customers to a business focused on about 50 strategic customers.

In the Asia Pacific region, we increased sales in China 8% in 2006.

We've made a number of changes in recent years to rationalize our products and our customers, optimize our distributor network, and develop a great leadership team.

We are exploring the potential of new markets such as India in this particular region.

I'll discuss the progress in our U.S. industrial business in just a minute.

I next want to comment on the steps we've taken to expand the experience of our executive leadership team.

In mid-December, we announced the promotion of Alan Wilson to President and Chief Operating Officer.

Since joining McCormick in 1993, Alan has earned the respect as a leader who sets direction, is willing to make tough decisions and is comfortable with complexity.

We also announced the promotion of Mark Timbie, to President of North American Consumer Foods and named Lawrence Kurzius as President of Europe, Middle East, and Africa.

These appointments reflect the continuation of our succession planning process that has been underway for several years.

We announced in November that Karen Weatherholtz, Senior Vice President Human Relations will retire in March 2007 from the Company and the Board.

She contributed greatly during her career instilling strong values and developing an effective organization and motivating our workforce.

McCormick's management committee is the executive team that works collaboratively on strategy, Alan, Fran, Mark, Lawrence, and Chuck Langmead will join me as members of this committee.

I look forward to working with them and continuing to build shareholder value at McCormick in the future.

In 2007, Barry Beracha will also retire from the Board.

He has been a Director since 2000 and has chaired the Compensation Committee over the last three years.

We appreciate his contributions and service to this great company.

As announced in December, Mike Mangan, Senior Vice President and CFO of Black & Decker has joined the Board.

Mike will bring not only his financial expertise, but his perspective from a company that markets branded products to consumers around the world.

And this morning, we announced that George Roche, former Chairman and President of T. Rowe Price will join the Board effective February 1.

McCormick will benefit from his extensive understanding of the global investment community.

George also has a financial background as he was CFO at the firm from 1984 until 1997.

With these changes, we continue to move toward a more independent Board with Fran and I the only remaining insiders.

This is a sharp contrast to my first days as Chairman when 7 of the 13 Board members were company executives.

I'd like to comment next on our key initiatives beginning with our restructuring plan.

My remarks are summarized on slide number 10.

All aspects of this program met or exceeded our expectations in 2006.

Restructuring charges had an EPS impact in line with our projection of $0.22.

Cash payments related to these changes were 47 million versus an expected 60 million.

And most important, savings in the first year of this plan were right on target at $10 million.

Our largest project, the closure of the plant in Salinas, California was completed three months earlier than scheduled.

Our voluntary separation program met the targeted head count reductions.

We completed all our organizational changes in the U.S. consumer and industrial groups.

This level of accomplishment was due to the hard work and great execution by employees all over the world.

We continue to expect a workforce reduction of approximately 1,000 by the end of 2008.

At year-end, 700 employees affected by the restructuring program had been notified.

Our projection of total charges through 2008 remains unchanged at 110 to $130 million.

And we reaffirm our goal for annual savings from this program at 50 million by the end of 2008.

At this time, we've taken actions that will generate more than 75% of these savings.

Moving on to our spices and seasoning revitalization program and slide 11.

By now you should have seen in stores across the United States our new labels, new products, such as our signature blends and roasting rubs.

The new flip top caps begin appearing at store shelves right in time for the holiday season.

An improved sales volume growth rate in retail stores that began mid year indicates consumers are reacting positively to these changes.

Between August and the end of our fiscal year, we installed our new merchandising system in more than 2,000 stores.

Primarily in the Southeast and the Southwest.

In addition to resetting stores with additional customers, we gained a foothold in stores that previously did not carry McCormick spices and seasonings.

In 2007, our plan is to install the new merchandising system in approximately 6,000 additional stores.

Also in 2007, we'll keep the product line fresh with new products and innovative marketing programs.

This includes the expansion of our gourmet range of organic products that we first mentioned in our last call.

Our initial expectations for initial lunch have already been exceeded.

On average, customers plan to take 18 of the 21 new items.

Earlier this month, we issued our flavor forecast for 2007, which can be found on our website.

Beyond our core spice and seasoning products, we expect continued success with Hispanic items, the Zatarain's brand, Simply Asia, Thai kitchen, and other value products.

In addition, we expect a sales from incremental advertising that began in 2006.

In the UK, we have installed improved merchandising system in Sainsbury that is increasing store take away.

Across Europe, new products for 2007 will include new seasoning blends, grinder varieties, such as pesto and hot chili, and additional lower sodium products.

With the revitalization programs underway, we're excited about the ability to enhance our global leadership position, strengthen our brand image, and build sales growth for our global consumer business.

Turning to the transformation of our U.S. industrial business and slide 12, we have made fantastic progress in 2006.

The financial results for [Inaudible] are evidence that the improvements of this business are leading to new sales projects and product wins, reducing costs and most importantly improving profitability.

I'd like to report on a few more measures of our progress.

A year ago, we announced a plan to reduce complexity and improve margins by eliminating small and lower margin customers.

Specifically, we aim to reduce customers and lower margin products in this part of our business by 25%.

We made quick progress with customer reductions reaching 27% by mid year.

For the fiscal year 2006, we increased sales per customer in more than one-third and increased new product sales for R&D professional by more than 15%.

As for SKU reduction, we're finding that many of the customers that purchase unique SKUs from us are willing to accept higher prices and higher margins for us.

In fact, after our third round of price increases since the beginning of 2006, many customers continue to order these products from us.

While we have achieved a 5% reduction in SKUs, the remaining products now have margins at or above our target levels.

The success in streamlining our business was critical to the closure of both our Hunt Valley plant that produced industrial condiment products and the Salinas plant that supplied both the consumer and industrial products.

When we first announced our transformation plan, some questioned our ability to grow sales with our top customers.

Our results tell the story.

In 2006, we increased sales to top industrial customers by 5.7%.

We achieved this sales growth while improving our profitability with these customers.

At the beginning of the year, less than one-third of the SKUs sold to this group had gross profit margins above our new target levels.

While we have further to go, at year-end more than half of the SKUs sold to this group have margins that meet our targets.

In addition, we have improved forecast accuracy and implemented new processes and scorecards to monitor our progress against our business goals.

We have eliminated unproductive development work on noncritical projects, and improved product quality.

And as you can imagine, the list goes on and on.

In summary, we're extremely successful in our transforming actions during 2006.

The changes we made have created a more profitable and robust business.

Our U.S. industrial business is headed in the right direction and most importantly we have great momentum for 2007.

I'd like to move on to our 2007 outlook.

Please refer to slides 13 and 14.

Early in 2006, we set sales and EPS goals through 2008.

These were to grow sales 3.5 -- 3 to 5% and increase earnings per share 8 to 10%.

For 2007, we expect to grow sales 4 to 6% with the revitalization effort and greater marketing support for our consumer business in the Americas and in Europe and focus on strategic industrial customers.

We expect the base business growth of 2 to 3%.

New products will add 1 to 2%, with a full-year of Simply Asia foods, we expect an increase from acquisitions of 1 to 2%.

The downward pressure from SKU and customer rationalization will continue to negatively impact sales in the range of 1 to 2%.

Moving to earnings per share, you can find some of the key income statement assumptions on slide 14.

I'll start with gross profit margin.

We expect an increase of approximately 50 basis points, excluding the 2006 and 2007 impact of restructuring charges.

First, a portion of the 30 million in cost savings is expected to offset certain cost increases.

Please note that a price increase has been announced in our major markets that will offset the higher cost of black pepper in 2007.

And second, we expect further benefit from more favorable product mix, particularly in our industrial business.

Selling, general, and administrative expense is expected to increase in line with 2007 sales growth.

We expect a similar level of incentive and stock compensation expense.

Cost savings from our restructuring plan will fund further increases in advertising support for our brands and offset cost increases.

In the U.S., for example, we have plans to double that portion of our advertising dollars spent on nontraditional media such as the Internet.

In 2007, restructuring charges are expected to be approximately 36 million and we're projecting an EPS of about $0.18 compared to $0.22 in 2006.

We expect our effective tax rate to be 32.5%.

Income from unconsolidated income, net of minority interest should be up slightly in 2007 following the transactions completed in 2006.

That leaves shares outstanding.

Based on our projected pace of share repurchase, we expect a 2007 reduction of 2% to shares outstanding.

As stated previously, a significant acquisition could cause us to suspend this activity.

These assumptions add up to earnings per share projection on a reported or GAAP basis of $1.67 to $1.71 for 2007.

On a comparable basis, excluding the $0.18 of expected restructuring charges, this is an increase of 8 to 10%, which is in line with our longer term objective.

Turning from sales and EPS to cash, we expect to continue our track record of generating significant cash from this business.

A portion of this cash will fund an estimated 50 million in payments related to our restructuring plan in 2007.

Capital expenditures are projected to be at about $90 million, slightly higher than 2006 due to the timing of projects related to the restructuring plan.

In the absence of a significant acquisition, we expect to spend 150 to $180 million for share repurchases, which is an annual amount similar to spent -- to what we spent in the last three years.

That concludes my remarks on the financial outlook and I'd like to summarize.

There is a tremendous amount of energy at McCormick.

Employees throughout this great company are responsible for our success in growing sales and most importantly, profit.

They are behind our progress with key initiatives, our restructuring program, our spice and seasoning revitalization, and our U.S. business transformation and our pursuit of acquisitions and innovation.

Our energy and progress has not gone unnoticed.

At 12/31/06, our share price was up 25% from a year ago.

As shown on slide 15, looking back 10 years since our leadership team began to come together, our total annual shareholder return has averaged 15%.

This compares to 9% for the average food stock, and 8% for the S&P 500 stock index.

Since 1998, our formula for success has been to improve margins, invest in the business and grow sales and profits.

As we enter a new year, we are well positioned to improve margins with significant cost savings.

And we continue to increase marketing support and develop great new products to grow sales and profits.

McCormick is a global leader in spices, herbs, seasonings, and other flavors.

In 2007, we will launch the McCormick Science Institute.

The mission of this organization is to advance knowledge of health benefits of culinary spices and herbs by sponsoring scientific research at leading universities and through targeted communication initiatives.

We are uniquely positioned to form and support this new institute and are excited about the potential opportunities.

To conclude, we have a lot of important initiatives underway, initiatives that are already delivering substantial results at higher sales and lower costs.

Both of our businesses, consumer and industrial are more focussed on growth opportunities and high potential customers and products.

Driving our products is a great leadership team.

We're increasing their impact and expanding their knowledge in new roles and responsibilities.

I could not be more pleased with this organization, our business, and our market position as we begin 2007.

I'm confident this will be another record year for McCormick.

To our shareholders and everyone in the call, I thank you for your interest and now look forward to your questions.

Operator, we're ready for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from Terry Bivens from Bear Stearns.

Good morning, everyone.

Morning, Terry.

Bob, could you give us an update on the shelving?

I know there was some stuff done at Wegmans.

I was in -- there was a new Wegmans near where I live.

I did not see the shelving there.

I'm just wondering how that's going, first of all at Wegmans, and what kind of buildout you see of that?

I think as I referenced in the call, Terry, we completed the -- just in excess of 2,000 stores, mainly in the Southeast and Southwest in 2006 and we're going to complete somewhere between 6,000 and 8,000 stores in 2007.

It's going exactly as we planned.

Once again, we completed in the fourth quarter and as we installed them in the fourth quarter, the final ones were completed probably by mid-October.

Everybody's interested in how the movement is unit by unit, bottle by bottle, I know on the call.

But when we look at what we're doing versus what other people have done as they've introduced new merchandising, we're combining three or four other factors like new products, SKU elimination, new caps and new labels and the improved merchandising system.

We're finding it a little bit difficult early on to segregate exactly how much the new shelving is contributing to the overall unit growth.

Having said that, and I speak for Alan who's on the call and he can sure add if he desires, unit movement has been tremendous in the stores we have put it in as we look at the new merchandising systems.

As far as Wegmans, we really don't comment on individual accounts at this point, Terry.

Fair enough.

And maybe this is for Fran, Fran, there was a pretty significant bump-up in D&A on the cash flow statement, what caused that?

It's just the further depreciation that mainly added through our SAP integration as we bring more and more of our company live, more of our capitalized cost begins to be depreciated, this is an expected result.

Okay, that's kind of what I thought, but I wanted to confirm that.

Okay, thank you very much.

Thanks, Terry.

Thank you.

At this time, our next question comes from Chris Growe from A.G. Edwards.

A question, as it pertains to the Europe consumer division, I think historically, Bob, you said you talked -- you'd like to look for some increase in advertising and marketing support there to help drive that business higher.

It was a little softer than I expected in this quarter on an underlying basis.

Should we presume there's more investment to come there to really stimulate the sales growth in Europe and the consumer division particularly?

As we said in the text, Chris, we're going to continue to increase advertising in 2007.

Some of the 2006 that we increase was allocated to Europe and will increase more in 2007 to allocate against the Ducros, the VAHE name, the Schwartz, and the Silvo brands.

And that's the answer you think to getting the sales momentum moving there?

There's no question it is.

We've proven it virtually in every other consumer market in the world as we advertise, especially behind the new products, and especially behind some of the more specifically designed products for health and wellness.

We get a tremendous lift, so we anticipate that.

I think as we said in the script, I think it was Fran's part of the script.

Some of our sales performance in Europe in the consume business is being blunted by the distribution loss that we had at Silvo.

The growth in the -- in our Schwartz business in the UK and our Ducros and Vahe business in France is starting to rebound.

Okay.

And then the other question I had for you is on the industrial division.

And that continued to exceed my expectations and I'm guessing yours.

The -- while the top customers are doing quite well in terms of their growth as you indicated.

It seems like there's been more of a benefit, at least versus what I expected from those customers that you were trying to prune that you expected to lose that's kind of hung on.

Is there any risk to that in 2007?

These customers moving away from McCormick?

Especially as the prices have gone higher three consecutive times?

I think there's also always a small risk, Chris.

But once again we've increased prices, we've set new purchasing terms with these customers, and I think what it should say to everybody on the call, we have a value proposition that's pretty unique in this industrial business.

And we've said last year as quarter by quarter and Chuck Langmead as champion, really this in the marketplace we're going to get value for the proposition we have out there.

And I think people are realizing that on the customer base both the strategic customers, the critical customers and we're growing with them as a result of the price increases with the other customers, they tend to be enjoying the value proposition we provide to them.

And we're going to get margin levels at where we anticipated getting them when we started this journey back in 2005.

And those margin levels, 2007 should be a pretty significant step forward the way it looks right now given that the sales reduction has been a little less than I expected.

Is that a good way of looking at it, Bob?

It will be a good -- yes, 2007 will be a good year for industrial.

That's great.

Thanks for the time.

Thanks, Chris.

Thank you, our next question comes from Eric Katzman from Deutsche Bank.

Hi, good morning, everybody.

Morning, Eric.

Few questions.

First, Bob, can you quantify what the price increase was on pepper?

Alan?

The average increase in the consumer business was around 3% on the items that we increased.

It varies based on the product mix and how much is actually in the pepper.

Some of the pepper items went up a lot more than that.

Okay.

So the average across the -- U.S. consumer line is 3%?

No, product that is contained pepper.

Oh, okay.

The average in the consumer business is less than 1%.

Okay.

And then second, I mean, it sounds like amazingly enough that the pricing on industrial, to follow-on on Chris's question, basically all you had to do was ask.

Well, I think it was a little tougher than that, Eric.

To be honest with you, we went out and sold a value proposition.

But, once again, I'd also say -- in response to Chris and your comment, Eric is that that was Phase I, we still have a Phase II of SKUs and customers we're looking at to make sure that we're getting the margin and growth opportunities.

Most importantly, it's the growth opportunities with these customers.

So Phase I was to set the margin where we wanted to be.

But Phase II was do we have significant growth opportunities or is that another area of complexity that we need to take out of the business.

I see.

And has the competition for that business followed your pricing moves?

I really don't know, Eric.

I just don't know.

I know the competition has gained some of the smaller customers and we should bear in mind that most of the customers that we decided not to renew our relationship with were less than $10,000 a year in sales.

So they're very, very small customers.

I understand that, but I'm talking about the ones which you kept.

It would seem that competition would cede the opening and probably kind of follow suit.

But okay.

And then, Fran, can you talk about why the -- why is the tax rate jumping up to 32.5 for '07?

Is that because so much of the items were discrete in '06?

Well, actually, Eric, the tax rate of 29%, is composed of the discrete items, the items that we mentioned on the call.

And the effective rate if you excluded them out was still around 31% on the rest of our income.

And we see pressure in 2007 from a planning standpoint.

I mean, every one, every jurisdiction, states, and other jurisdictions are more aggressive on their taxing.

If we can significantly increase our income outside the United States, we have an opportunity to beat that estimate.

But at the present time, the way we're adding it all up, it looks like we're returning at the present time to, to the rate we disclosed.

And then last question, I'll pass it on.

Bob, over the years I've followed the Company, you've had, it seems like periods of strength in China and then you've had to SKU cut and kind of figure out a different strategy.

But it sound like you're now, maybe, I don't know, maybe you've got it figured out a little bit more.

Growth is returning there.

You're looking at India, can you talk a little bit more about kind of the Asia strategy.

And can that be material to the Company even within the next few years given the acquisition opportunities or movement of a rural economy to an urban economy and people not relying on open air markets as much?

I can, Eric, and 'll try to make it as brief as I can.

First of all, I think over the next 3 to 5 to 7 years China/India will be a significant contributor to McCormick.

We're investing both in China and we're investing in India and the joint venture we have.

And obviously looking where there's growth opportunities in India.

If you go back to China for a moment, we were changing in China and we had a, we've had various business models, but the important thing, China's changing too.

And that's what we have to try to keep up with.

There's so many cities that are becoming so Westernized and the populations are becoming so large that our ability to penetrate these cities is becoming much more of an opportunity for us now that we have a new focused distributor system, better execution capabilities than we had before.

We've got a good leader over there in Ben Lee and I think to summarize your comments, Eric, we've gone through the high, we've gone through a valley, and we're back working ourselves towards the high for the consumer business in China.

But it is going to take time.

One of the strategies we have always employed in China is we're going to continue to make money.

We're not going to let enthusiasm, excitement, or emotion get ahead of ourselves.

We're going to continue to grow it in a very planned, focused way, but there's tremendous opportunity.

Thank you.

Thanks, Eric.

Thank you.

Our next question comes from Jonathan Feeney from Wachovia Securities.

Good morning.

Good morning, Jonathan.

Just a follow-up.

I'm not sure I completely understood your answer, Bob to Terry about the percent of sales covered by the gravity feed shelving.

You mentioned 2,000 units.

And I guess I'm just wondering, of your consumer business, what does that represent of your sales?

Very small amount.

Very small amount.

Very small amount, Jonathan.

And you talk about the 6,000 units in 2007, so is it fair to say that the Gravity people have three times the lift impact on your sales than it did last year?

No, no, no -- you shouldn't use a linear progression to get that calculation at all, no.

Once again, as I said earlier when we started this program and I said briefly, to Terry, this program has many factors to it.

But the biggest factor is depending the size of the stores you put these in.

And we're looking at A stores, B stores, and C stores.

And that's part of the analysis we're going through each and every time, but with a new reset team, with a new account.

So I don't think we should do any calculations projecting the number of stores we complete as what that lift will be to the Company.

We will give you updates as we go through quarter by quarter when we look at all the factors.

And once again, I don't want to repeat myself too much, but it's not just the merchandising system, it's the whole projects that's going to give us a lift.

Once again supported by a tremendous increase in advertising in '06 that will carry over into 2007 for the U.S. consumer business.

So.

But it would be fair to say that, correct me if I'm wrong that the lift and performance customers in those 2000 placements met or exceeded your expectations?

That's correct.

Okay.

Good.

And just one other question, Bob, you talk about advertising as you've proven out on all the consumer markets globally how effective that's been.

It's funny, I think a number of food companies might beg to differ about the effectiveness of advertising, particularly traditional media advertising and how that's changed.

Do you -- are you confident that your advertising is as effective today and your ad dollars are as effective today as they've ever been?

Or are there things that you're doing internally, as far as the mix of the kind of ad spend you're doing to maintain or expand that effectiveness.

You almost answered the question for me, Jonathan.

The last comment you made is so appropriate, we do an ROI, Alan and this team of people do a return on investment analysis for our advertising, we've done that for the last about 3 to 4 to 5 years.

So advertising dollars are hard to get in our company as everybody on the call knows and once you get them you have to bring a return.

We're not just focused on advertising on television, we have a great mix of advertising programs out there, but I would say, and I was a slow convert back in the early 2000 era, and Alan can sure attest to that.

We have proven with increased advertising significant lift in our new product launches and specific areas where we dedicate these to specific promotion programs we have throughout the year.

What would be an example of a kind of -- let me ask you this way, what would be an example of a kind of advertising program that's among the higher ROI costs that you do?

I'll let Alan answer that.

We do a mix of -- our marketing mix analysis of everything that we do.

We find, for instance, that print for us is very effective especially as it relates to our gourmet line.

We find in the Hispanic market that TV is pretty effective.

And some new products we may make the investment in things like sampling in stores.

We really evaluate what the mix, right mix is for every individual item and we update that mix about every 6 months.

I think the important thing to conclude is if you look at advertising as a percent of our sales, our consumer sales relative to some of the other people, you may be talking about that might quarrel with us, we're still significantly lower then them on a percent of sales.

Okay.

Thank you very much.

Thanks.

Thank you.

Our next question comes from John McMillin from Prudential Equity.

Good morning, everybody.

Morning, John.

Thanks for the slides and all the details.

Just a couple of quick questions on consumer industrial in general.

On the consumer end, I guess you gave a 5.4% organic sales number for the quarter just taking out currency.

Can you just give us a rough idea of what's volume, what's price?

It's about 50/50, John.

And then year ago comp, I guess was relatively easy just given the Zatarain's issue, you don't have that number around do you?

I don't have that, John, I know, but what we commented on either Fran or I did, Zatarain's last year in the fourth quarter was really devastated from a sales standpoint.

I think Fran made the comment, it was easier -- pretty easy comps or us relative Zatarain's.

We got Simply Asia in there too and once again, I just don't want anybody to take away -- we had a strong consumer herb and spice quarter, we really did.

Yes, certainly -- and just, if you can, and I'm a believer in marketing, but the dollars spent were more advertising than promotion.

You don't have any breakdown on that?

I guess you gave the advertising number--.

It was a lot more advertising than promotion dollars.

Incremental advertising was up significantly, John.

Right.

In fourth quarter the advertising was up about 9 million of the total of advertising and promotion, which we commented was about 11 or 12 million.

Okay.

That answered my question.

And just the industrial question.

I think you talked about going from what 800, 900 customers down to 100, if I remember correctly.

Kind of where are you now?

Well, we're probably -- we had 800 or 900, John, and I think we mentioned that during that time period, we -- a lot of the customers didn't make money.

But as I look at it today, once again this is a year -- I've got a year's knowledge, we've eliminated about 250 customers today to 300 in that area.

We're looking at another 100 to 150 customers in that area.

We've also raised the prices up significantly as I mentioned, I think to Terry or Chris, and those customers are deciding to stay with us.

Once again, that was Phase I and the important thing now, is as we report through 2007, either Alan and I will report on Phase II for the industrial, which is further SKU rationalization, further customer rationalization because our ultimate goal that we gave you was to get operating margin increase by 250 to 350 basis points.

That's the ultimate goal in the industrial business.

And just my last question, Bob, a year ago, you talked about doing 8 to 10% EPS growth, longer term.

And I think we're all pleased to see you do considerably more than that in '06.

But I just -- I'm just kind of questioning is that still the right number?

And there's certainly ways you can manage, I guess you tried in this fourth quarter to spend as much money as possible.

But is that still the right growth range?

And -- do you regret kind of going down that--?

--what we said in the script.

So we think it's the right range now with the investment opportunities that we have before us.

We're finishing the restructuring program and spending money there.

We're spending money on research, the research center with the creative center.

So we -- spending money in McCormick science institute.

All of these are designed to grow our business.

And I think as we look at where our margins have got to, where our free cash flow or cash from operations is, we have to continue to spend behind this business.

I think as we go through the quarters, John, we'll continue to give an update.

But we feel good about 2007.

That's what I said in my summary comments.

Thank you.

Thanks, John.

[OPERATOR INSTRUCTIONS] Our next question is coming from Eric Serotta from Merrill Lynch.

Good morning.

Hey, Eric.

Hey, first a quick housekeeping item here.

Could you just remind me what you said about the organic growth in North America -- America's consumer sales X Simply Asia.

I seem to remember picking up a number on the call that was different from how I interpreted the press release.

What was Simply -- what was organic sales up in Americas and consumer in the quarter?

Eric, we reported 7.4%.

And that excludes Simply Asia as well as the impact of foreign currency.

Okay.

And I guess I'm just a little confused because the press release says consumer sales in the Americas were up 8% and that included Simply Asia, which was a couple percentage points.

I guess we could -- we'll reconcile it offline, but the organic sales are--?

7.4, Eric.

7.4.

Which is 8 in my terms.

The 8 in the press release includes Simply Asia, I gave you a number excluding that.

Okay.

Well, we can reconcile it after.

Could you talk a bit about the progress.

You commented earlier on the progress on the rollout of the new merchandising system.

And I realize that that's just one piece of the broader revitalization of the consumer business, but I seem to remember numbers last quarter talking about getting to about 2700 stores by year end and I think an incremental 8500 stores next year.

And this quarter, if I remember correctly, you said you're at 2,000 by year-end and looking at 6,000 next year.

So first, are those, are those numbers correct?

And second, why, if they are why the slow down in the pace of rollout?

Is it really tougher to get into the customers and set up the units?

Or is it something -- or is it something different from that?

No, it's paced the way we desire it and I think that's the disadvantage of quoting any numbers at the beginning of any program that's going to go over a three-year period that has the magnitude of this.

Once again, I think it was John that asked me, I'm very comfortable where we are relative to what we've installed and comfortable the returns we're seeing and the movement we're seeing in the stores.

We put 6,000 out there next year as a benchmark.

If we can do more, we'll do more.

If the customers choose to participate with us earlier, we'll do more earlier.

But bear in mind, we have two windows of opportunity to install these shelves.

One is early in the year, and one is mid in the year.

We can't do it around the growing season and we just don't do it around the holiday season.

We're very sensitive to our capabilities to do it and once again our customers receptivity from a timing standpoint.

I sure don't want anybody to take any negatives away about this new merchandising system and the whole project in general.

Sounds like it was really mainly a timing issue then.

Are you still comfortable that you could get to something like, I think you said 15,000 stores within a couple of years as being the maximum penetration?

If that's what the return on investment indicates, Eric, that's what we'll get too.

Once again, as I said earlier, we look at the stores that can handle the volume -- that have the volume to handle this expenditure for us and give us an appropriate return.

Okay.

And finally, you mentioned India a few times on the call as a growth area.

In the past, you've cited some challenges in cracking the code in India or maybe the code is fairly, it's curry in 900 different forms.

Could you maybe just sort of -- has there been a revisiting of your -- or have you revisited your India strategy a little bit as to how to break in there?

Well, I think it's fair to say we revisit strategies all the time.

And once again we know we've tested our consumer products over time in India and once again we feel there's a product mix we can sell in India.

We do have a joint venture in India that we obviously manufacture and sell products around the world.

And so the Southern cone of India, say from Mumbai down has tremendous opportunity for growth just like China does.

I think as we look at the type of products we can sell to the consumers there, type of products we're getting in where our company is, you know, moving to, it's moving out of the herbs and spices as mainstream new products into value-added products.

We think there's opportunities in India as we look at the portfolio we're moving to.

Terrific, thank you very much.

Thanks, Eric.

Thank you.

Our next question comes from Ann Gurkin from Davenport.

Good morning.

Morning, Ann.

Just a couple things.

One, on the industrial business, are there any changes in your customer calendars for new product launches?

Or is everything on schedule?

Everything's on schedule.

Great, and secondly, your salesforce, are you changing anything in terms of incentives for this year?

We really don't comment on compensation at the sales level.

I think what we indicated when we started to transform our business, we were looking at creating new forms of compensation but we really don't specify what they are.

You're not changing the direction to compensate or anything?

No.

Okay great, that's all, thanks.

Thanks.

Our next question comes from George Askew from Stifel Nicolaus.

Yes, good morning.

Morning, George.

Congratulations on a nice quarter and congratulations, Alan.

Thank you.

Just two quick questions, the foot top cap rollout.

What strategy -- where are we in that conversion process on a time line?

Are we half way through it?

Or where are we there?

Well, we're converting by SKU and then bottle line and we are largely through it, the exception of that is our gourmet line which we'll be adding later this year.

Okay.

Okay.

Good.

And Bob you mentioned in your comments a reference to a installed improved merchandising in the UK, which improved store take away.

Correct.

Are we going to see gravity fed shelvings in the UK?

I didn't say that.

I know you didn't.

George, it's really not -- the extent and the magnitude we're doing in the United States, George, it's just a different way to merchandise our products over there.

It's really the dry sauce specs line and it just allows better consumer access to it.

So it's a minor program.

Okay.

Do you see taking the gravity fed shelving strategy outside the U.S. any time in--?

Don't know the answer to that at this particular point.

We do have different merchandising processes and systems in Europe.

So we'll be part of a major project to evaluate that.

And I think we'll wait to see how we do in the United States over the next couple of years.

Okay.

Those were me questions, thank you.

Thanks, George.

Thank you.

Our next question comes from [Emanuelle Scura] from Lord Abbett.

Hi, good morning.

Just one question on this initiative that you mentioned.

The launch of this McCormick research institute.

What do you expect from this initiative?

And how much are you anticipating to invest in this?

We haven't publicly said how much we're going to invest in it, but obviously it's -- we'll publish that as we get our arms around it.

We're developing the strategy right now and looking at what the components are of that particular strategy.

But we see it as another competitive advantage for us.

We see another one of our value propositions that we offered to our customers since we are the leaders in herbs and spices, there should be and are areas where we can transition through partnering, partnering with universities or partnering with other research institutes to come up with health and wellness benefits of our overall products that aren't evidenced out there today.

So one of the themes and one of the strategies is around health and wellness.

I see, thank you.

Thank you.

Our next question comes from Mitchell Pinheiro from Janney Montgomery.

Yes, hey.

Good morning.

Morning, Mitch.

Just a couple quick things.

One, Fran, what was the, your foreign currency assumption in the 3 to 4% sales growth for '07?

It's pretty flat.

Flat with your average of '06?

Yes.

Okay.

Second question is in terms of the gross margin, what were the component -- I may have missed this, but what were the components of the gross margin expansion in the quarter?

Was there gross margin expansion in the consumer business?

We don't disclose it that way, but in total, the gross margin expansion was 40 basis points, but that was blunted by 60 basis points of restructuring that also hit the fourth quarter.

So we actually you could say we moved ahead 100 points in the fourth quarter.

And it pretty much is spread across our businesses both here in the U.S. and around the world.

How about within consumer and industrial?

I mean, obviously I would expect some of the industrial side because of your sort of SKU rationalization and margin initiatives there, but was there any expansion on the consumer side?

We don't have any differentiation that we care to mention.

I think you're right.

But some of the benefits that we're getting early on here maybe have more to do with some shared facilities of both of those businesses.

Okay.

And just lastly as with regard to the $30 million of cost savings anticipated in '07, where -- is that -- how is that phased in?

Is that a more on an even basis or do you expect it to be a sort of back end loaded?

I think you should start seeing it quarter by quarter.

Most of, I think was commented earlier in the call, most of the actions that a company would need to take to generate those benefits have already happened.

And we're anticipating that that will flow in somewhat ratably, and remember all of our quarters are different.

Sure.

We'll get the bigger hit in the fourth quarter.

I mean the bigger benefit in the fourth quarter.

And the only thing, Mitch, I would comment on is depending on where we decide to upspend versus last year, you may see some variances by quarter.

Depending on our investment strategies on the consumer business.

Okay.

Okay.

Thank you.

Thanks.

There appears to be no further questions.

At this time, I would like to turn the floor back to Joyce Brooks for any closing comments.

Well, thank you.

This concludes today's call through January 31, you can access a telephone replay of our call by dialing 877-519-4471.

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