McCormick & Company Inc (MKC) 2007 Q3 法說會逐字稿

Good morning.

My name is Melissa, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the McCormick & Company third quarter financial results conference call.

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

After the speakers remarks, there will be a question-and-answer period.

(OPERATOR INSTRUCTIONS)

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

Also sitting in on today's call is Gordon Stetz, currently Vice President of Finance for Europe, who will replace Fran as CFO effective November 1st.

Bob will be discussing McCormick's financial results for the third quarter ending August 31st, including business updates, and will provide an outlook for the fourth quarter and year.

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, and actual results could differ materially from those projected in our 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 joining us by Webcast.

I want to begin by stating that we're very pleased with our third quarter results, with both sales and profit ahead of expectations.

We grew sales 8% and reported earnings per share of $0.43, which was $0.45 on a comparable basis, excluding restructuring charges.

Our consumer business performance was particularly strong this quarter, with sales up 9%, and a 16% increase in operating income excluding restructuring charges.

On the other hand, we had a tough quarter for our industrial business, which is working through challenges from increased raw material costs and general weakness in the restaurant industry.

Let me discuss each of these businesses in more detail, starting with our consumer business.

Sales for this part of our business rose 8.5%, with a favorable impact of 2.4% from foreign exchange rates.

An increase of 6.1% was primarily driven by higher volume.

Consumer sales in the Americas were up 7.9% this quarter, with a 0.5% benefit from foreign currency.

Sales were affected significantly by an estimated $9 million to $11 million of earlier sales for the fall season in the U.S.

consumer business.

By encouraging our customers to buy early, we're able to achieve operational efficiency by moving some of our production out of the peak fourth quarter.

We also expect to benefit from early store placement for promoted items.

This move added 3.5% to 4.5% to the third quarter sales in the Americas.

While this action will lower fourth quarter sales, the percent reduction will be closer to 3%, as this is our peak sales period for the consumer business in the Americas.

For a second quarter now, we were unfavorably impacted by the expansion into private label line by one of our warehouse club customers.

While we're a supplier of some of this private label, a number of our branded products are no longer carried by this customer.

This reduced sales in the region by approximately 1%.

Offsetting this decrease was the incremental impact of Simply Asia Foods in the month of June.

As a reminder, our acquisition of this business occurred at the end of June, 2006.

The underlying growth in the third quarter for the consumer business in the Americas was a 3% to 4% range.

This increase was driven by our revitalization initiative for the core business and a growth with other product lines including Hispanic, seafood complements, Zatarain's, and gourmet products in the U.S., and our Club House brand products in Canada.

We're making great progress in 2007 with a number of stores converted to the new merchandising system.

As of last week, we completed 6,150 stores, up from 4,750 that we reported at the end of June.

Another 1,500 will be set before the holiday season.

We continued with these conversions in 2008, with an estimated 12,000 to 14,000 stores in total completing the change over.

In addition to the revitalization of our core spice and seasoning line, we are encouraged by other growth drivers.

This includes our seafood revitalization which is well under way, and the introduction of new items such as are reduced sodium version of popular items such as seasoning blends and Zatarain's rice mixes.

Our gourmet line continues to do well with the expanded gourmet organic products launched early in the year for the U.S.

and more recently in Canada.

I'd like next to turn to our consumer business in Europe.

As in the Americas, we're making great progress with our growth initiatives in this market, with improved financial results for this part of our business.

In total, sales rose 9.7%.

As it has throughout 2007, foreign exchange rates had a significant impact, adding 6.2% to sales.

With improved and incremental marketing support, we grew sales volume with Ducros-branded products in France.

Sales of our Schwartz brand product in the UK had the benefit of product introductions, marketing support and higher pricing.

In both of these key markets, we are continuing to make strides with improved merchandising for our retail customers.

In early September, Lawrence Kurzius, President of this region, joined me at an investor conference during which we focused on our business in Europe.

I encourage anyone who wants to hear more about the turnaround underway for this part of the business to access a replay of this presentation on our website or to contact Joyce Brooks.

In the Asia Pacific region, we increased sales 10.6%, with a 9.3% benefit from foreign exchange rates.

Sales growth in China continued at a rapid pace, with another double-digit increase.

Expanded distribution and marketing support behind our core spice and seasoning products drove sales along with the increase in a number of wet products.

Sales growth in China was offset in part by lower sales of our branded spices and herb line in Australia.

This was due to the move by a large retailer earlier in 2007 to introduce a private label line of spices and herbs.

Our emphasis in Australia remains on value-added items, and we're achieving growth with product lines such as Aeroplane brand gelatin.

Across all regions operating income for the consumer business was $70.5 million when restructuring charges are excluded.

This is a strong increase of 16.2% from the third quarter of 2006, with the benefit of higher sales and lower selling, general, and administrative expense.

Marketing support was up, in line with the third quarter sales increase.

As I stated earlier, we continue to be extremely pleased with our consumer business performance.

Moving on to our industrial business, we made progress with our transformation efforts and achieved good growth in a number of areas.

However, third quarter results were unfavorably affected by the effects of higher material costs and a general weakness in the restaurant industry.

We increased industrial business sales 7.4%.

Foreign exchange rates had a 2.6% favorable impact, and the elimination of low margin customers and SKUs reduced sales by 2.4%.

An increase of 7.2% was driven equally by volume and by price and product mix.

In the Americas, sales rose 2.9% from last year.

Foreign exchange rates added 0.7% and customer and SKU elimination reduced sales by 2.6%.

A sales increase of 4.8% was mainly due to price increase taken to keep pace with the increase in material costs, including pepper, soy oil, and flour.

Higher volume this quarter was achieved with increased sales of snack seasonings, new beverage flavors, and other new items to large food manufacturers.

This part of our business is performing in line with our targets for 2007.

However, we have continued to experience reduced sales for the restaurant side of our business, which is being affected by the general weakness in the foodservice industry.

Europe had another good sales quarter for the industrial business.

Following a year-to-date increase of 22.5%, sales in the third quarter rose 16.1%, which was an 8.8% increase in local currency.

In this region, the elimination of low margin customers and SKUs reduced sales by 2.5%.

An increase of 11.3% was volume related and due to strong promotional and new product sales to quick service restaurants.

Sales of Schwartz and Ducros branded products through the food service channel also rose in this quarter.

About one-third of the increase was incremental sales of condiments from a joint venture in South Africa which was added in the fourth quarter of 2006.

While we expect some moderation of growth in the fourth quarter, we're extremely pleased with our industrial sales performance and turnaround in Europe.

In Asia Pacific region, we increased industrial sales 27.3%, and in local currency the increase was 18.8%, with equal contributions from higher volume and from favorable price and product mix, with increased sales in both Australia and China, especially with quick service restaurant customers.

These customers have awarded the supply of new items to McCormick, and we are benefitting from their promotions and growth in these markets.

Excluding restructuring charges, operating income for the industrial business was $22.6 million compared to $22.7 million in the third quarter of 2006.

Our 7% sales increase and the benefit of cost savings and favorable general, selling and administrative expenses were offset by higher material costs during this quarter.

We are in a unique period right now when costs for several of our main commodities, including flour and soy oil, have risen to unprecedented levels and continue to trade with tremendous volatility.

Costs for these commodities rose rapidly during the third quarter, and toward the end of the quarter we began to see increased cheese prices, as well.

While we were in the process of passing these higher costs through to our strategic customers with with higher prices, operating income could again be impacted by these factors in the fourth quarter.

Next I'd like to comment on how the consumer and industrial results came together for the third quarter.

For the total business, we achieved a sales increase of 8%, and in local currency the increase was 5.5%.

Whereas we're very pleased with our sales growth this quarter, gross profit margin has fallen below our objective for 2007.

Gross profit margin for the third quarter decreased 90 basis points.

The decline occurred on the industrial side of our business.

If you recall, we achieved a significant improvement in the first quarter of this year as we realized cost savings related to our restructuring program.

In the second quarter, higher commodity costs begin to offset these savings.

We also incurred some costs related to maintaining customer service levels during several facility consolidations.

At that time, we expected that our pricing actions would catch up with higher material costs in the second half, and that costs to maintain customer service levels would lessen.

While the customer service situation lessened in the third quarter, commodity costs increased further, and are expected to remain at a high level through the fourth quarter.

So as I indicated a moment ago, we are still in a catch up mode on our pass through pricing with industrial customers.

Please keep in mind that in a period of rising costs, our pricing protocol with industrial customers preserves gross profit dollars, but results in a lower gross profit margin.

In our consumer business, we're being impacted to a lesser extent by basic commodities, but are beginning to face other increases including packaging costs.

We will take appropriate actions to offset these increases as we move into 2008.

The bottom line is that the gross profit margin will continue to be under pressure for the rest of 2007, and most likely into the first part of 2008.

This is particularly frustrating as we've made great progress on the restructuring program and are on track to achieve our cost reductions at or above our $30 million goal for 2007.

As we have in the past, we will provide more specific 2008 guidance for gross profit margin and other financial factors in our January conference call, when we announce our 2007 fourth quarter results.

As a percent of sales, and excluding restructuring charges, third quarter selling, general and administrative expenses were 26.9% this year compared to 28.3% last year.

Again, we're benefitting from reductions in those operating expenses as part of our restructuring program.

We will also have lower incentive compensation expense in the third quarter of 2007 compared to the third quarter of 2006, in which we increased our year-to-date accrual.

Interest expense was up $1.8 million this quarter due to increased debt levels and higher interest rates on our short-term debt.

We applied a tax rate of 30.7% to the third quarter in order to bring our year-to-date rate to 30.4%.

This includes an underlying rate of 31%, as well as the benefits for some discrete tax items in 2007.

A tax rate of 31% is below our guidance of 32%, and is a result of our income across various tax jurisdictions in which we operate.

In the third quarter of 2006, the tax rate was 26.1%, which also included a year-to-date rate reduction, as well as the resolution of an international tax audit.

Our tax rate was also low in the fourth quarter of 2006, at 29.8%.

Income from unconsolidated operations continued at a high level reported in the third quarter 2006, with good performance at our McCormick (inaudible) joint venture.

As I'll described more fully in a minute, we stepped up the pace of our share repurchase this quarter and reduced shares outstanding by 1.8%.

We reported third quarter EPS of 43% -- $0.43 compared to $0.32 in 2006.

Charges related to the restructuring program reduced earnings per share $0.02 in the third quarter of 2007 and $0.10 in the third quarter of 2006.

Excluding the impact of these restructuring charges, EPS rose $0.03, or 7.1%.

We estimate the earlier timing of sales for our U.S.

consumer business added approximately $0.02.

Other sales increases and improved operating income margin added another $0.03.

We had unfavorable effects from the higher tax rate versus 2006 of $0.02, and from higher interest expense of $0.01.

Lower average outstanding shares added $0.01 to EPS.

I want to spend a few moments on the latest balance sheet and our cash flow information.

At the end of the quarter, accounts receivable were up $72 million compared to August 31st, 2006.

Foreign exchange rates accounted for $13 million of the increase.

The timing of value-added tax remittances added $17 million.

The remaining $42 million increase included receivables related to heavier sales at quarter end, that included the earlier fall season sales to our U.S.

consumer business.

Inventories continue to be high, ending the quarter at $440 million compared to $417 million at the end of 2006.

Foreign exchange rates accounted for $9 million of the increase.

About one half of the remaining $14 million is due to higher material costs and one half due to higher volumes, primarily on certain international locations.

In the U.S.

and Europe, we've begun to make good progress in both our consumer and industrial business in reducing inventory volumes.

Midway through the third quarter we stepped up the pace of our share repurchase, given the lower price of McCormick stock.

By quarter end, we had purchased 2.5 million shares at an average price of $36.33, for a total of $89.3 million.

This compared to $27.6 million in the third quarter of 2006.

Year-to-date, our repurchases have totaled $146.8 million, and we expect to repurchase up to $180 million worth of shares by year-end.

This should reduce average shares outstanding by approximately 2% for the 2007 fiscal year when option and RSU activity is considered.

At August 31st, 2007, $59 million remained on the current $400 million authorization that the Board approved in June, 2005.

The Board will be discussing a new authorization at the upcoming meeting.

On the cash flow statement we also reported an acquisition of $13 million for the Thai Kitchen brand in Europe.

The business was operated separately from Simply Asia Foods in the U.S., and we recently negotiated and completed this transaction.

Annual sales are approximately $7 million.

Let's take a look at the fourth quarter.

We are well prepared for the important holiday season, with our new merchandising systems, new products on the shelves, and brand marketing plans all designed to drive sales.

As pointed out earlier, we expect the estimated $9 million to $11 million of earlier sales related to the fall season to lower fourth quarter sales.

The estimated $0.02 EPS benefit of these sales in the third quarter are expected to have an unfavorable impact on the fourth quarter earnings per share.

While we're experiencing greater than expected pressure on our industrial profit margin, we have been able to offset this with lower expenses, including those resulting from a restructuring program.

We have also had the benefit of a lower tax rate and favorable foreign exchange rates that are likely to continue into the fourth quarter.

So as we look ahead to the balance of the fiscal year, we reaffirm the increased outlook shared in our June conference call.

Sales are expected to grow 5% to 7% versus our initial guidance of 4% to 6%.

And our EPS guidance is 9% to 11% increase versus the 8% to 10% goal set at the beginning of the year on a comparable basis, excluding restructuring charges.

Before I summarize, let me comment briefly on the transition of CFOs that will take place on November 1st.

Many of you listening on today's call know that succession planning has been a priority, not only for me, but for McCormick's entire Board of Directors.

I consider the passing of the CFO role from Fran to Gordon to be a perfect example of effectiveness of succession planning at McCormick.

Following positions at General Foods and Citicorp, Gordon joined McCormick in 1987 and was identified early in his career as a high talent manager.

His role at McCormick began with financial analysis and Investor Relations, and progressed to strategic planning and acquisitions, the Head of Finance and Administration for our U.S.

consumer business, and most recently the Vice President of Finance for Europe.

During his years with McCormick, Gordon was instrumental in the acquisition of Ducros, the implement of SAP in our U.S.

consumer business, a successful launch of our shared services organization, and the restructuring and transformation of our European business.

We have great confidence in his abilities, knowledge, and experience, and we welcome Gordon into the CFO position on November 1st.

As excited as I am about the prospects of Gordon in his new role, it's with equal pride and admiration that I look back on what Fran Contino has achieved as CFO at McCormick.

From the day Fran joined McCormick in 1998, Fran approached this business with a fresh perspective and an incredible focus.

As CFO, his initiative and leadership were the catalyst to significant change and accomplishments, accomplishments that continue to benefit our Company today.

These include the successful development and implementation of SAP worldwide, an increased gross profit margin through supply chain initiatives, and most recently, our restructuring program.

He leaves behind an excellent financial organization that is able to expertly navigate the ever more challenging regulatory and reporting environment.

In the interest of time, I'll end with the statement that Fran has been an integral part of the shareholder value we have built at this great Company.

Even though Fran is with us through July of next year, I wanted to take a few minutes today, since this will be his last earnings call, to recognize his accomplishments with our shareholders and analysts, especially those who have worked and developed a relationship with him over the years.

Thanks, Bob, for those kind remarks.

I'll try to keep my composure, as this is kind of a sentimental day for me.

But I did want to tell you how fortunate I feel that I am, given the fact that I made the decision nearly ten years ago to come with McCormick.

It couldn't have been a more rewarding experience, and the Company has done extremely well, and it's been a joy for me, particularly working side by side with you and under your great leadership.

I'd also like to say that one of the many joys of being a CFO is having the opportunity to work in Investor Relations.

And I would like to thank everybody on the call and listening in, who have given me the opportunity to meet them and to share the story about McCormick.

It surely is something that I really enjoyed.

And finally, I'd like to close with saying how pleased and delighted I am to welcome Gordon into this role.

Gordon is a person I've now known for all of those ten years, and a person that is so well qualified, with little succession learning curve time that will be necessary.

In fact, he's ready to go, and we're very fortunate to have.

So thanks to all of you on the call.

I really appreciate it.

Thank you, Fran.

But an important thing to remember, you're not going anywhere until we get these tough questions out of the way in the next ten or 15 or 20 minutes.

Let me share some final thoughts with you.

Our business is not without challenges.

As was clear in today's message, our industrial business is in a period right now where it's under pressure with steep cost increases for several commodities, and a general weakness in the restaurant industry.

We've been able to offset these headwinds, and expect to do so in the future by the following items: Tremendous progress with our revitalization programs designed to improve the consumer shopping experience, increased purchases, and reduced customer labor cost.

Progress with innovative new products that meet today's trends towards flavor, wellness, and convenience.

Progress with our efforts to lower costs through our restructuring program.

At the midway point, this program has been well executed and we're on track to meet or exceed our savings targets.

And throughout McCormick, employees are focused on the right things to move our business forward and achieve a positive change.

Our accomplishment (inaudible) financial performance that includes a 7.5% year-to-date sales growth, and most importantly, a 16% increase in earnings per share on a comparable basis excluding restructuring charges.

And at the same time, as I've said earlier, we maintain our guidance for the year, despite these cost pressures.

Together with Alan, Fran, and Gordon, and the rest of the leadership team at McCormick, I'm extremely confident that our market position, growth initiatives, and sustainable strategy will lead to increased value for McCormick shareholders.

To our shareholders and everyone on the call, we thank you for your interest and attention, and now we would like to discuss your questions.

(OPERATOR INSTRUCTIONS) Terry Bivens, Bear Stearns.

And Fran, good luck.

Hit em straight.

Bob, just with regard to your remarks this morning, I must say, they're a little bit more -- a little bit less ebullient than I thought they might be.

Let's -- on the issue of the advanced shipments there, I guess my expectation had been that I know you guys are trying to expand the fall into a cooking season.

But I guess I thought that might stand apart a little bit from the normal holiday sales.

So I guess I was a bit surprised to hear that what added to Q3 might be subtracted from Q4.

Can you give us a little bit more color on that, the thinking behind that?

Well, I think, Terry, in the past years we've talked, and Alan has talked on previous conference calls, where we always had tension this time of the year to make sure the stores, warehouses and in fact, the stores had inventory appropriately placed for the fall season because it's such a significant part of the year for us.

And the strategies we implemented, we think are very simple.

We gave them extended payment terms to allow them to place orders to insure the inventories are in their warehouses and through the stores.

And whether it's a one-to-one transfer, what I tried to say on the call was that's our expectation at this point in time.

But we're very optimistic for the fall season that the inventories are there, and you know the challenge associated with retail inventory management in the trade creates pressure on everybody in the consumer products industry, and really gives us excitement that we're there this year versus other years.

Have you made any assumptions in your fourth quarter estimates for reorders?

We really haven't at this particular point in time.

The real strategy is the inventories out of our distribution centers into their distribution centers.

Okay.

And just briefly on commodities, if you could give us a little more color on the pass through mechanism.

For example, as I look at cheese, if you just look at block prices, it looks like they should have peaked in Q3 and should be coming down in Q4.

But I took from the tenor of your remarks that the commodity pressure, if anything, is going to be slightly greater in Q4.

Bear in mind, the process, Terry and for everyone on the call, that we have in the industrial business there always is this lag or gap between the prices going up and our ability to pass through the quarterly price increases to our customers.

Right.

So, your cheese is a perfect example, and I would concur completely with you.

Cheese prices have sort of peaked.

But we're in the process of passing those peak prices on to our customers during the fourth quarter.

And you could logically think we'd see some mitigation as we move into 2008 on that particular commodity.

But once again, we're in an unprecedented period as far as price increases in our business on five or six or seven items.

And the ability to pass the price increases through and keep the same gap and time that we've always had, we find, and I think it's evidenced in our report in the third quarter, that gap is increasing, and as a result, we see that tension in the fourth quarter in our industrial business.

Okay.

Thank you very much.

Jon Feeney, Wachovia.

Congratulations, Fran.

It's been a pleasure working with you.

Thank you.

Bob, could you -- we talked about that wholesale club customer that's expanded their private label initiative.

Could you refresh our memory as to -- do you branded -- your brands, are you confident your brands offer the retailer better per square foot profit economics than private label?

And if so, do you have the data to have these conversations with other retailers, so that more of this activity doesn't come up?

This is Alan Wilson.

We're confident that our brands bring significant value and command a premium to private label, and that it is a good proposition.

There's certainly a place for private label in the mix and a place for a strong -- the strong leading national brand in that mix.

Certain customers have, in some cases, have a more aggressive private label strategy, not just in our category, but across the whole store.

And so we work with them to try to make sure that they're maximizing the best value for our categories as they are making those decisions.

But that we have a tremendous amount of data on what the consumer wants and we try as best we can to sell that and work with those customers to maximize the value to the consumer and for them, for their sales profits.

The only thing I would add Jonathan, we continue to sell McCormick products, McCormick branded products, throughout the distribution system of this particular customer.

So no one on the call should view that this is an overall customer that's eroding to zero.

They've taken certain selected items in our category and chosen to put them in a particular private label, as Alan said.

And you can rest assured we work real hard on that, and we do participate in some of the sales of the private label items.

At the same time, there is a tremendous demand for our branded items on a North American scale, and we work very hard on that.

Yes, sure.

I was just seeing where you're both producer, if both of you are in this command position to talk about the value chain-wide economics of a particular branded SKU versus a private label SKU.

I guess, hopefully you'll be able to convince people that they ought to be expanding the branded side, not the private label side.

Every day.

Just one other question, if you wouldn't mind.

On the industrial business, you talked about increasingly about the (inaudible) foodservice industry in the U.S.

and how that's affecting your business.

Is there a negative margin mix between, say, your (inaudible) ingredients business, like Doritos, et cetera, versus restaurants that we might be (inaudible) in some of the lower margins there?

Well I don't know that there's a negative margin mix.

I think, Jonathan, it goes back to what we talked about earlier in the call, is the escalation of some of these particular raw material prices is particularly specific to the commodities used in that foodservice sector versus other sectors.

So maybe the answer to your question is yes, it's impacting the margins on that sector.

And as a result of the pass throughs, there's a gap in timing, as I addressed earlier.

Well, that makes perfect sense.

Just like-for-like, I mean, is a dollar of revenues to a restaurant in the U.S.

a comparable margin to a dollar of revenues to a food manufacturer, typically?

Is there a typically higher margin, one or the other, or is it the same?

I would say very similar in a normalized cost environment ,

Okay.

Thanks very much.

Eric Serotta, Merrill Lynch.

Bob, you explained the increase in receivables and inventories a bit.

But when I take a step back and look at the broader picture, we have seen sort of a steady march up in the cash conversion cycle over the past more than a year.

Just wondering when you foresee a turn in that for the positive?

And how long you see that taking to get back to more normalized levels in terms of the cash conversion cycle?

Eric, as we've addressed every quarter conference call, we've had restructuring processes, we've closed major facilities in the world.

And especially on the industrial side of our business we want to protect customer service, so everything we saw in inventory increase was premeditated by the management team.

So while we've said before the inventories are too high, we don't want anybody on the call to think they're high and not being managed.

We were in control of what we're doing.

We're adding to that, and now two things that are continuing to be pressure, one is currency -- foreign currency, and the other is overall cost increases in our raw material base, which weren't budgeted as we work back to December 1st of 2006 for our fiscal year 2007.

We see mitigation of that.

More comparable numbers are in the fourth quarter of 2007, and obviously much more comparable as we move into the first quarter 2008 and second quarter 2008.

So it's a fluid situation.

As I said in the script, we're not happy with our inventory levels at this particular point in time.

They are going down in the consumer and industrial businesses in North America and in Europe.

I don't want anybody on the call to think there isn't tremendous activities around lowering inventories.

That's being mitigated by the fact of foreign currency exchange and by the overall pressures on costs.

Okay, and since you guys are now more than half way through the restructuring program and I think you've completed the major announced facility consolidations, should we expect a moderating impact from inventory builds for facility consolidations?

And then I have a final question on consumer.

That is correct, except for the European situation.

Bear in mind, we put SAP in Europe, and the restructuring programs and the overall savings for 2008 of $10 million will come from our European, Middle East and African operations.

Okay.

So we see some elevation there, Eric.

But the North American environment should be reduced, yes.

Okay, and then just looking at the Americas consumer top line, it was up 3% to 4%, you said on an underlying basis, excluding this seasonal pull -- the pull forward of that $9 million to $11 million.

Did you specify what the mix was there between pricing and volume, as well as what pepper price pass through was in particular?

We didn't specify it, but it's about 1% price.

It's about 1% price.

And that -- is that true organic price mix, or is that pepper price pass through for that 1%?

The only pricing we took this year was pepper.

Okay.

And the extra month of Simply Asia added approximately what in the quarter?

Virtually de minimis in the quarter.

Great.

Well, thanks a lot.

Good luck.

Chris Growe, A.G.

Edwards.

I just wanted to follow-up quickly on the working capital question.

And that is, your accounts receivable in the quarter , can you attribute the growth over and above sales mostly to the U.S.

consumer division, the favorable terms you offered

Yes.

Okay, I just wanted to be clear on that.

And then relative to your gross margin, you attributed about the 90 basis point decline roughly to the industrial division.

You have an accelerated -- I guess you've had an acceleration of cost savings coming through that division then, to help offset that, therefore to keep profitability pretty much constant year-over-year.

Is that right, or -- ?

That is correct.

I mean, the summary on our industrial business is the programs we've put in place in 2006, which obviously accrued to the benefits in 2007, is totally being mitigated by the overall cost increases in our business.

And Chris, then as I addressed the lag then, the lag in getting price revenue for that is wider than we've anticipated before.

But everybody should realize we still have the same protocols in place.

And the offsetting price increases for the commodity increases will, in fact, happen in our industrial business.

We're just in the larger gap on time than we have normally been.

Okay.

And then I wonder if you could update us on sort of the SKU reductions that are occurring across the industrial division.

Should we expect some sort of pick up there in that activity?

Or are you pleased with the progress so far and focusing on those core customers?

Yes, pleased with where we are today.

I don't think a pick up would be appropriate at this point, Chris.

At some point in time, this is going to curtail off.

And I think as I said in the call, somewhere above 2% was an impact we had in the quarter relative to the SKU reduction, and that's going to tail off as we move into 2008.

Okay.

And I'm sorry, just one more follow-up.

And that is, relative to the cost savings, you just mentioned $10 million in 2008.

That's mostly coming from Europe.

Is that sort of the total amount of cost saves roughly that are coming through next year?

That's what we indicated in our total restructuring program, Chris.

When we meant $10 million in 2006, $30 million in '07 and $10 million in '08.

Please bear in mind though, we haven't got our 2008 budgeting process together and our budget together.

So while I wouldn't say that's the only cost savings, that's the one we have publicly stated at this point in time.

Fair enough.

Okay?

Thanks a lot.

Eric Katzman, Deutsche Bank.

Fran, best of luck.

Gordon, you' re going to have some big shoes to fill.

In terms of long term targets, you raised your long term target expectations back at your analyst meeting in New York.

And I'm wondering now, with hindsight given the volatility that we're seeing in raw material costs across-the-board, if you think that may have been a little bit too aggressive, Bob?

I don't think so, Eric.

And that was driven by the cost savings programs we had.

We're still very comfortable with the top line sales growth, both in the consumer and industrial businesses.

I think we're fine.

I think the piece that surprised us, which we addressed in the conference call, is the tremendous volatility that's taken place almost week by week in some of these commodities, and thus our ability to pass these through on a quarterly basis to our customers.

That gap, as I said to Chris, that gap is larger than we anticipated, but I don't think at this point in time we should modify any of our long term goals.

What I also said though, Eric, was it's going to have an impact as we move into the early part of 2008.

Okay.

And then kind of I guess talking about the mix issue, while consumer trends may be moving away from foodservice, given that people have to eat, in some respects I would normally think that - and maybe this is kind of something that would occur longer than just a one quarter phenomenon - but I would assume that the change from industrial sales, i.e.

QSR or foodservice moving to consumer, is going to be a mix shift positive for you.

Shouldn't that -- ?

I would say the answer to that is yes.

And what gives us encouragement, is that the program that our U.S.

consumer folks put in place where we had inventory placed in their warehouses in the third quarter for sale in the fourth quarter, and you're quite right.

I don't think this is an immediate transformation between the foodservice and eat-at-home, but we think the holiday season this year, just because of this phenomenon, inventories being available, will be positive for our U.S.

consumer business.

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

I guess one of the concerns in the industry today is as we -- as prices move up, consumers may trade down.

Are you seeing just more broadly in terms of your overall consumer product line in the U.S., are you seeing consumer trade down at all in terms of any prices that you put through?

So like for example, you said you put through a price increase in pepper.

Is McCormick pepper selling less than private label pepper?

McCormick pepper has had some volume hit this year, but the overall category has, as well.

So we haven't seen necessarily a big shift in share, but we really work hard at maintaining our price gap between the brand and the private label.

The other thing I would say, Eric, to add what Alan said, is if you look at the volatility in commodities that we addressed, other than pepper, most of those are part of our industrial business as opposed to our consumer business, maybe different than other consumer products manufacture companies out there today.

So we increased prices on pepper quite regularly in 2007, but our focus right today on this (inaudible) and what the conference call script hopefully addressed was, this is an industrial business phenomenon with us, not a general business phenomenon.

Okay, thank you very much.

Robert Moskow, Credit Suisse.

Good afternoon and good luck to you, Fran.

Thank you, Robert.

I wanted to know, your cash flow from operations is down substantially from the prior year.

It's $22 million year-to-date, and it was over $100 million a year ago.

Do you have any guidance for us on free cash flow this year, and do you expect free cash flow to be down?

Yes, a list the items that lead to this decline are really timing issues and some shift in some of the activities in our liability accounts.

I just wanted to point out, for instance, that we had nearly $30 million of benefits, primarily incentive payments, that were greater in this time period reflecting the bonuses we paid on the 2006 year compared to the lower bonuses, or practically no bonuses for the 2005 year.

And then we had higher restructuring charges in this period, in this nine month period, than we had the year before.

And we're having -- we've had some increases in our receivables in this period reflecting some of our higher sales growth that we talked about.

And in the European operation, purely timing with VAT payments from one period to the next.

So we feel pretty confident that our cash flow will return to the levels that it has been at, and that we expect our free cash flow not to be suffering.

In fact, we're starting to see our ITO improve, which means that our inventory relative to our sales growth, is starting to improve.

The other thing, Rob, as we addressed, we've bought a lot of stock forward in the third quarter versus the fourth quarter, and that's a shift in the movement there.

And you know the fourth quarter obviously is a significant volume quarter for us.

So just to reinforce what Fran said.

I don't think there's any tension around the free cash flow for McCormick in '07.

So if free cash flow was about $230 million in '06, should we think it's about the same in '07, or a little below?

I think a little bit below in 2007 versus 2006.

And then maybe a catch up in '08 as your pricing starts to offset the commodity costs again?

That is correct, yes.

Okay.

And then could you be more specific for us on the options expense?

You said that compensation expense was a benefit in this quarter.

I have about $4 million of options expense in the quarter last year.

It really wasn't anything to do with options.

It all has to do with incentive compensation.

Incentive compensation.

And I think as Fran said, Rob, it's a significant swing from 2007 third quarter versus 2006 third quarter.

Give us a sense about how much?

Well, it's a period when we true-up of what we expect our bonuses to be for a year, and it has an impact.

But we have not disclosed a net amount.

So -- but it's large enough to talk about.

And lastly, you set out an industrial business margin expansion goal of 250 to 350 basis points.

Is that goal now delayed?

Exactly, Rob.

Exactly.

It's not dismissed, and it's not off the radar screen at all for industrial folks.

But based upon what's happened just recently in the delay in timing of some of these pass throughs, it's now delayed, yes.

We said by the end of 2008 we would get the 250 to 350 basis points, that's obviously going to bounce into fiscal 2009.

Okay.

And the industrial customer -- you rationalize your industrial customer base a lot to get to the big customers and this might be a little farfetched.

But of the customers that you let go, do you have any sense if the ones you let go were faster growing, or -- and maybe you're kind of left here with some slower growing ones?

Or is that really not an issue and you don't think about it?

I think, Rob, the answer to that is if you look at our sales growth, we're very comfortable with our sales growth globally in our industrial business.

So the answer is really, no.

We're comfortable with the portfolio that we've streamlined down to.

And once again, these cost increases are really on the foodservice side of our business, not on the food manufacturer side of our business.

And it's a phenomenon that we're in.

And the good news is there's protocols in place to work ourselves out of this.

It's just taking a little more time.

Thank you very much.

[Gil Alexandra], [Farfal Associates].

For the fourth quarter, could you give us some estimate of what you think your restructuring charge will be?

We really don't break that out by quarter.

The only thing I would say is that the restructuring charges, as Fran addressed earlier, in 2007 were primarily -- [free structured] savings, I should say, were impacting the first and second quarter more than the third and fourth quarter.

All right, thank you very much.

Mitch Pinheiro, Janney Montgomery Scott.

Fran, best wishes.

But don't hit 'em straight, hit 'em long.

Real quick, could you talk a little bit about what you're seeing in the marketplace relative to food safety?

And has McCormick -- have you seen increased activity relative, on the industrial side, to ingredient suppliers, et cetera?

Obviously -- this is Alan.

With a lot of the discussion today, there is an increased emphasis by our customers and our consumers on food safety.

And we think that plays pretty well to our strength, because that's something that we really emphasize inside and with our customers.

But it is certainly being highlights.

It's got everybody's attention right now, but we think that plays to one of our strengths.

Are you seeing -- could that represent incremental growth in '08?

I think it's a competitive differentiator over time, Mitch, versus -- as Alan said, versus McCormick and other suppliers, yes.

Once again though, I think it's important to realize that it will be a competitive differentiator, but there's a cost associated with that.

It's built into our budgeting process and our forecast process.

But we do have a global quality program, we think in our sector, that's unparalleled.

And whether it's an issue in China or India or North America, we have the appropriate resources applied against it, and it's getting tremendous focus under Alan's leadership.

Well, with competitive differentiation and that expertise may -- it would seem like maybe there's pricing in it for you.

In other words, paying a premium for that improved food safety sort of dynamics in your organization.

I didn't know if that's possible?

It's something we work every day on, Mitch.

Obviously.

But speaking of pricing, and one thing I want to understand, is we're still three months from -- I guess two months from fiscal '08, right?

Uh-huh.

So in terms of the pricing, the repricing of the pass throughs, is there that much of a lag?

Or is this a situation where -- why wouldn't we be pretty -- a lot closer to a -- or a lot smaller of a pricing lag there?

I think it's the speed and volatility, Mitch, with what your prices are going up.

You just take soy.

We could charge soy, if we get everybody in the same room, and it's going up daily, not weekly or monthly, like commodities used to go up.

And then it will drop down a little bit and go back up again.

So it's the tremendous volatility, and bear in mind, we have quarterly pricing protocols.

And so we factor that into the overall pricing mechanism we have with our customers.

Will prices fall quicker on the lag, on the other side?

Or do you think it will be equal to the -- ?

I think it's equal.

Okay.

Advertising and marketing expense in the third quarter, did you talk about that?

If you did, I didn't hear it.

Once again, the situation we find ourselves in, we're not cutting our marketing expenses and advertising expenses 2007 over 2006.

And I think one of the things you always want to hear, Mitch, is the fourth quarter, and the fourth quarter in 2007 will be on par with 2006.

But the important thing is to remember in 2006, we increased marketing and advertising expense significantly in the fourth quarter.

Okay.

All right, thank you.

And one more thing.

In the consumer business, with the $9 million to $11 million sort of advanced shipments, is this -- you talked about some of the positives in manufacturing in your heavy season and having stuff in place in the stores earlier.

Is there any other dynamic, positive or negative to consumer margins related to this?

Is there anything we have to think about as far as margins are concerned there?

I don't think so, Mitch, no.

There's nothing.

Once again, absorption during the fourth quarter in both our businesses, because of the significant volume, is not something that we really worry about.

Okay.

Okay?

Thank you.

Oliver Wood, Stifel Nicolaus.

Just have one question.

It's a follow-up on the advanced shipments.

I just wanted to make sure I heard correctly that the $9 million to $11 million in sales translates into $0.02 in EPS?

And I'm asking because when I do the math, I get a much smaller impact on EPS.

No, it's about right.

That's $0.02, about $4 million.

Okay.

So were the shipments that were advanced a much higher margin product set?

It's the consumer business, it's the time of the year that it flows through.

So that's our estimate of what the impact is at this point.

Okay, great.

Thanks very much.

Andrew Lazar, Lehman Brothers.

Fran, I want to wish you the best, as well, and thank you for all your help over the years.

Thank you.

With respect to Americas consumer, the organic sales growth rate was, as you mentioned, Bob, 3% to 4%.

And that was a pretty healthy uptick from where we were more recently, and even last quarter, where I think it was closer to 1% or so.

And given, obviously, the very, very healthy variable contribution margins on that business, I'm trying to get a sense of the drivers behind the better organic sales growth, I'm assuming are the things you've been doing all along.

It's the revitalization and the shelving, and all of that.

I guess the question is, do you feel like you've hit an inflection point in that business specifically, so Americas consumer, where maybe that type of year-over-year growth in the upcoming quarters, meaning 3%, 4% organic is more likely?

And is there a building confidence that that's the way it can go?

I think it's the latter, Andrew.

We're confident of our consumer business, we're confident of Zatarain's growth continued, Simply Asia is continuing to grow in that area, Hispanic and seafood areas continue to grow.

And I think as we look at this overall, what we'll call consumer merchandising program, where we're putting in the new racks, we're putting in new products, we're taking out SKUs, making it better, more shopable for the consumer, that's in very much the embryonic stages.

So as we would see that moving forward the fourth quarter and into '08 and '09, we expect increased volume gains out of that as the consumer becomes much more familiar with a very, very confusing category.

And we're seeing results of that now, and we're very positively encouraged by that.

And we think for the future, that just accrues more benefits on the consumer side.

And then with, last thing on the early shipments, I'm just curious, how was -- what was the main issue?

Was out of stocks, I guess one of the bigger issues that you're trying to resolve at the retailer in past kind of holiday periods (inaudible) actually help you get that?

Yes, a couple things is making sure the displays are in the store when the consumer is ready to buy them, and getting them through the customer's supply chain quickly enough to make that happen.

We believe we've seen it before, that the earlier the displays are in the store, the more consumer ends up buying.

So you're hoping it's obviously not a one for -- a direct one for one shift at the end of the day?

That's what we're counting on.

Okay.

And then I guess with respect to -- back in New York, you talked a lot about the role that acquisitions have played in the growth of McCormick over the last couple years, and that that was something, obviously, you were going to think long and hard about obviously going forward and be a bigger contributor.

It obviously didn't come up on the call, but there's no reason to, I guess, unless you actually pull the trigger on something.

But has anything changed on that front with respect to either the pipeline of what you're seeing, or strategically in how you think about it?

No, not at all.

The only hope we have is maybe with the situation in the equity markets, the private equity markets, maybe some of the multiples might come down a little bit.

But nothing has changed from McCormick's standpoint, no.

And lastly do -- if I missed this, I apologize.

What's your -- now your new best guess around full year tax rate?

32.

This year, or did you say next year?

Actually, I said this year, for full year '07.

31.

31.

Okay, great.

Thank you very much.

Thank you.

There appear to be no further questions.

I'd like to turn the floor back over to Joyce Brooks for any closing comments.

Thank you.

This concludes today's call.

Through October 4th, you may access a telephone replay of the call by dialing 877-519-4471, and the access code for the replay is 9133189.

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Thank you.

This concludes today's McCormick & Company third quarter financial results conference call.

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