McCormick & Company Inc (MKC) 2007 Q4 法說會逐字稿

Greetings and welcome to the McCormick fourth-quarter conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Joyce Brooks, Assistant Treasurer for McCormick.

Thank you.

Ms.

Brooks, you may begin.

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

Today's call is being webcast, and the replay will be available at IR.McCormick.com.

At this Web site, we've posted slides to accompany today's call.

With me today are Alan Wilson, President and CEO; Gordon Stetz, Executive Vice President and CFO; and Paul Beard, Vice President of Finance and Treasurer.

In addition, Bob Lawless, McCormick's Chairman and recently retired CEO, has joined us.

Following Alan and Gordon's remarks, we look forward to discussing your questions.

As a reminder, because we're under a regulatory review of the Lawry's acquisition, only limited comments on this transaction can be provided at this time.

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.

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 Web site, 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.

It's now my pleasure to turn the discussion over to Alan.

Thanks, Joyce.

Good morning to those on the call and those joining us by webcast.

I'm going to start today's discussion with the review of the fiscal year, then turn it over to Gordon to comment on our fourth-quarter results.

I'll conclude with our guidance for 2008.

As reported this morning, McCormick's 2007 results exceeded our initial goals for sales and profit growth with sales up 7% and a 12% increase in EPS on a comparable basis, excluding restructuring activities.

For those of you who followed us during the year, you know that the components of our profit growth varied from our initial plan.

As I discuss the fiscal year results, please refer to Slides 3 and 4.

I would like to begin with a few comments on our strong sales increase in 2007.

A big reason why sales growth exceeded our 4% to 6% target was the performance of our international businesses, which were well ahead of our expectations.

We grew sales outside the US by 7.1% in local currency with favorable foreign exchange rates adding another 7.6%.

This includes a reduction of 0.7% from the elimination of low-margin business.

We followed the expansion and growth of our strategic industrial customers in Europe and Asia and had success with new product introductions to these customers.

For the consumer businesses, marketing effectiveness, new merchandising systems and pricing actions added further to sales growth in international markets.

In the US, sales rose 2.7%, including the impact of a 1% reduction from the elimination of low-margin industrial business.

Consumer sales were unfavorably impacted by the introduction of a private-label line by a large warehouse club customer, and weakness in the restaurant industry adversely affected our industrial business.

Across both businesses, sales in the US were favorably impacted by price increases for pepper and for certain commodities in our industrial business, such as soybean oil, flour and cheese.

We also had strong sales performance with a number of consumer products that I'll go over in a few minutes.

In 2007, we achieved an unprecedented level of cost savings that totaled $35 million, 17% ahead of our $30 million objective.

These cost savings stemmed from our three-year restructuring program.

With one year left to go in 2008, we have already realized $45 million in annual restructuring savings and expect to add up to $10 million more this year.

Facility consolidations, elimination of administrative redundancies and rationalization of joint ventures are the actions delivering these results.

However, the commodity cost increases which I just mentioned had an unfavorable impact on margins, an impact that was most significant in our industrial business.

We had a lag in the timing of price increases as we passed through higher costs to our strategic customers.

This lag impacted not only our profits but had an additional impact on the percentage margin.

This occurs because the increase in price is set to equal the increase in cost, maintaining profit dollars but decreasing the profit margin.

The effect of the timing lag and the pass-through methodology reduced gross profit margin for the total business by approximately 100 basis points.

This unexpected headwind more than offset a benefit of approximately 80 basis points from our ahead-of-plan cost reduction efforts in 2007.

The benefits of cost reductions did come through in our operating expenses and accounted for about a half of the 70 basis point decrease when compared as a percentage of net sales to 2006.

There was a modest reduction of $3.2 million in advertising that primarily occurred in the fourth quarter.

Recall that, in the fourth quarter of 2006, we nearly doubled our advertising.

Advertising behind our brands ended the year at $54.7 million, slightly below 2006 but $9.5 million ahead of our 2005 advertising expense.

With this improvement in operating expenses, were able to more than offset the decrease in gross profit margin and report a 30 basis point increase in operating margin on a comparable basis, excluding the impact of restructuring charges.

Earnings per share grew 12% on a comparable basis, excluding restructuring activities, ahead of our original goal of 8% to 10%, and the increased guidance of 9% to 11% provided midway through 2007.

The key drivers of this increase are shown on Slide 4.

Restructuring impact had an impact of $0.18 in 2007 and $0.22 in 2006.

With some rounding impact, EPS, excluding these amounts, rose to $1.92 in 2007 from $1.72 in 2006 with $0.18 from higher sales and operating margin and $0.03 each from joint venture income and lower shares outstanding.

Higher interest expense reduced EPS $0.03, and we had a $0.01 reduction primarily from the tax rate in 2007 versus 2006.

We were pleased to deliver this result after navigating several challenges in 2007.

Reflecting the strong profit growth, our Board approved a 10% increase in the quarterly dividend in November.

Before Gordon reviews the fourth-quarter financial results, let me recap some 2007 business highlights.

These are listed on Slides 5, 6 7.

As already mentioned, we realized restructuring savings of $35 million in 2007 and manage the transition in facilities, organization and personnel with minimal business disruption.

Innovation continues to be vital to our growth, and new products launched in the last three years contributed 10% to 2007 sales.

We opened the Create It Center early in 2007, where our unique development process speeds the pace of product introductions and increases the probability of marketplace success.

Consumers responded enthusiastically to our marketing support, product innovation and improved merchandising behind a number of product lines in our US consumer business.

Hispanic items now account for 8% of US consumer sales and rose 11% in 2007.

Also in the US, our popular grinders continued to grow with a 20% increase.

We increased sales of slow-cooker seasoning mixes 17%.

The gourmet line, including an expanded organic offering, was up 12%.

Grill Mates rose 7% and consumers responded to our initial revitalization efforts with a 6% increase in purchases for our seafood products.

Our revitalization program was in full swing during 2007.

By year end, we had exceeded 8500 US grocery stores installed with our new merchandising systems.

As we reset the stores, we continue to refine our space allocation to avoid out-of-stocks on our highly popular items, like grinders, to improve the consumer shopping experience.

Customers continue to be enthusiastic about this initiative.

Revitalization and innovation also played a role in the improvements in our consumer business in Europe during 2007.

We introduced an award-winning spice package and new, easy-to-use Silvo Toppers.

We staged a relaunch of our successful grinders and supported our broad range of branded products with increased advertising in France and the UK.

Both the consumer and industrial businesses in Europe had strong sales performance.

In total, sales were up 14% and 5% and local currency, a dramatic improvement from prior years' performance in both of these key markets, the UK and France.

The unfavorable impact from the closure of our business in Finland and the loss of a customer in the Netherlands both began in 2006 and are largely behind us as we begin 2008.

Behind the pressure from commodities and restaurant weakness, our industrial business made great strides in 2007 with the transformation that began in 2006.

Since that time, we have reduced the US industrial customer account by 30%, ahead of our 25% goal.

This has led to a 51% increase in average sales per customer.

Since the beginning of our transformation, we have lowered the number of SKUs by 20% with 16% of this reduction achieved in 2007.

While the benefit of our actions to reduce complexity and focus on strategic customers were blunted by cost headwinds in 2007, we're moving in the right direction with this business.

2008 will be the third year of our transformation process, and we're continuing to evaluate our portfolio of products and customers to improve the margin and profitability of this business.

At the end of 2006, we had our customer count in Europe down to 50 from 500 back in 2003.

In 2007, our team maintained this customer count but continued to lower SKUs with an 8% reduction.

Next is China.

While still a small part of our business, less than 5% of sales, we grew sales in China 23% and 18% in local currency.

During 2007, we completed our integration of Simply Asia Foods and acquired the remaining part of this business in Europe.

In the US, we successfully implemented SAP in both Simply Asia Foods and Zatarain's and brought South Africa under the system platform as well.

Early in 2007, we announced the formation of the McCormick Science Institute to advance the health benefits of spices and herbs.

The last item on my list is Lawry's.

Toward the end of 2007, we were extremely pleased to announce an agreement to acquire the Lawry's business.

While we're limiting our comments at this point, as Joyce indicated, I do want to provide an update and where we are in the regulatory review process.

By mid-December, McCormick had submitted the required Hart, Scott, Rodino application.

We have now moved to the second request phase of the HSR review process.

Out of respect for the process, we do not believe it's appropriate to comment on the timing or likely outcome of the review.

Suffice it to say we're working diligently with the regulatory agency to obtain clearance and that the processes seems to be progressing well.

We appreciate your patience during this process.

At this point, I'd like to turn it over to Gordon for a review of our fourth-quarter financial results.

I'd like to add my welcome to those on today's call.

We were generally pleased with our fourth-quarter financial results.

Highlights are listed on Slide 8.

We achieved sales growth of 7% and reported earnings per share of $0.67, which was $0.75 on a comparable basis, excluding restructuring charges.

With savings from our restructuring program, pricing actions and expense controls, we were able to offset a 5% increase in the cost of our raw materials during the fourth quarter.

In addition, we had a benefit from higher joint venture income and our share repurchases during 2007.

I'll comment in more detail on the consumer business, the industrial business and then come back to the results in total.

We grew consumer sales 6.4% with a favorable impact of 3.6% from foreign exchange rates.

An increase of 2.8% was driven primarily by pricing and product mix.

Volume was affected by the early sales and shipment of approximately $10 million of US holiday prepacks that were mentioned in our third-quarter call.

While this increased third-quarter sales in 2007, it reduced fourth-quarter consumer sales approximately 2%.

As we indicated, this action was taken to achieve operational efficiency.

Customers were offered extended payment terms to take early shipment of these prepacks.

As a result, we were able to better manage our distribution costs during our busiest sales period.

The added benefit was a chance to get our holiday displays out in the stores early.

Consumer sales in the Americans were up 2.1% in the fourth quarter with a 1% benefit from foreign exchange rates.

The impact of the early shipments on this part of our business was approximately 2.5%.

Excluding this impact and the impact of currency, we increased North American consumer sales 3.6% with favorable pricing and product mix.

In the fourth quarter, high volumes of certain products, including Hispanic items and organic items, were offset by reductions in the grocery channel of pepper and the discontinuation of certain underperforming SKUs.

In addition, sales of branded products to a major warehouse club customer continued to be unfavorably affected by the introduction of a private-label line.

In Europe, sales of our consumer products increased 19%, and in local currency, the increase was 8.1%.

Higher volumes contributed about 75% of this increase and pricing and product mix accounted for the remaining 25%.

We experienced strong sales results from our largest markets in the UK and France.

Marketing support, new merchandising systems and new products are driving sales in these countries, along with pricing actions in 2007.

In the Asia-Pacific region, we increased consumer sales 15.5% and 3.3% in local currency.

This increase was driven by higher volume.

Growth in China continued at a rapid pace with another double-digit increase in sales of core spice and seasoning products and a number of condiments and sauces.

These increases were offset in part by lower sales of our branded spices and herb line in Australia.

This decrease 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 are achieving growth with product lines such as Aeroplane brand gelatin.

Across all regions, fourth-quarter operating income for the consumer business was $130.1 million, excluding restructuring charges.

This was an increase of 6.4% versus the prior year and in line with the increase in sales.

With this part of our business, the increases in certain commodity costs began to have an impact as we moved into the latter part of 2007.

In addition, we're feeling the impact of increases in packaging materials -- corrugated, plastic and glass -- as well as higher energy costs.

While these increases were offset in the fourth quarter by cost reduction activities, we have announced a price increase for our US consumer business that Alan will discuss in more detail.

Moving on to our industrial business, Alan shared the progress with our transformation efforts, and we continue to achieve good growth in a number of areas.

However, fourth-quarter results continue to be unfavorably affected by the higher material costs and weakness in the US restaurant industry.

Across all regions, industrial business sales increased 8.1%.

Foreign exchange rates had a 4% favorable impact, and the elimination of low margin customers and SKUs reduced sales by 1.2%.

An increase of 5.3% was driven primarily by favorable price and product mix.

In the Americas, sales rose 3.2% from last year.

Foreign exchange rates added 1.6% and customer and SKU elimination reduced sales in this region by 1.4%.

A sales increase of 3% was mainly a result of price increases taken to keep pace with increases in material costs, including pepper, soy oil, flour and cheese.

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

Sales growth for this part of our business ended the year in line with our targets for 2007.

These improvements were offset by softness in our sales to restaurant customers that relate back to a general weakness in the industry.

We had another excellent sales performance for our industrial business outside of North America.

Fourth-quarter sales in Europe rose 20.2% and 10.7% in local currency.

This included a 1.1% reduction from the elimination of lower-margin customers and SKUs.

About half of the increase was driven by higher volume from promotional and new product sales, primarily to strategic customers in the quick-service restaurant industry.

Industrial sales in the Asia-Pacific region rose 19.4% to 9.5% in local currency with equal contributions from higher volume and from favorable price and product mix.

We increased sales in both Australia and China, especially to quick-service restaurant customers.

These customers have awarded the supply of new items to McCormick, and we're benefiting from their promotions in these markets.

Excluding restructuring charges, operating income for the industrial business was $16.7 million compared to $22.6 million in the fourth quarter of 2006.

Our 8% sales increase and the benefit of cost savings continued to be offset by an increase of over 10% in commodity costs during this quarter.

As Alan described, we have pass-through pricing arrangements with our strategic customers for our largest-volume ingredients.

In accordance with these arrangements, we continue to pass through higher costs with increased prices to these customers.

As we move into 2008, we have adjusted prices further in response to material costs.

As we proceed through this year, we expect the cost increases of flour, soy oil, cheese and other key ingredients to begin to level out.

Under this scenario, the margin pressure we have been under for this part of our business should begin to moderate.

Next, I would like to comment on how the consumer and industrial results came together for the fourth quarter.

As I stated at the beginning of my remarks, sales growth was 7%.

Gross profit margin was 43.2% compared to 44.3% in 2006.

Excluding restructuring charges, the fourth-quarter margin for 2007 was still 43.2% but compared to 44.9% in 2006, a decrease of 170 basis points.

During this period, we realized approximately 50 basis points of margin improvement from restructuring savings.

This was more than offset by the impact of higher commodity costs, net of our pricing actions of approximately 200 basis points.

Increases in utilities and other production costs began to have an unfavorable margin impact in the fourth quarter.

Also lowering gross profit margin during the quarter was the faster growth in our international businesses as compared to the US.

As a percent of sales and excluding restructuring charges, fourth-quarter selling, general and administrative expenses were 26.2% this year compared to 26.9% last year.

We're benefiting from reductions in operating expenses as part of our restructuring program.

A further reduction of 40 basis points was due to advertising expense.

Again, as Alan indicated, we had nearly doubled our fourth-quarter advertising in 2006.

Interest expense was up $1.2 million this quarter, due to increased debt levels and higher interest rates on our short-term debt.

The tax rate in the fourth quarter of 2007 was 30.6%, bringing the rate for the full year to 30.5%, as compared to a rate of 29.8% in the fourth quarter of 2006, which benefited from several discrete items as well as the mix of earnings among the different tax jurisdictions.

Income from unconsolidated operations was up $1.8 million or 51.4% with good performance in our McCormick de Mexico joint venture and our action at the end of 2006 to move from a joint venture in Japan to a more profitable licensing agreement.

Our share repurchase activity during 2007 was the primary factor in a 2.7% reduction in fourth-quarter shares outstanding on a diluted basis.

If you recall, we accelerated our buyback activity in the third quarter.

We reported fourth-quarter EPS of $0.67 compared to $0.62 in 2006.

Excluding restructuring charges, 2007 fourth-quarter EPS was $0.75 compared to $0.72 in the prior year.

A reconciliation of these results is provided on Page 9 of the slides.

The benefit of higher sales was offset in part by lower gross profit margin with a net contribution to EPS of $0.01.

The primary contributors to EPS were $0.02 from unconsolidated income, $0.02 from lower shares outstanding, offset by $0.01 from a higher tax rate and $0.01 in higher interest expense.

Looking back at the fourth quarter, the primary challenge we faced was higher material costs.

As Alan will discuss, we expect the margin pressure we experienced to ease as we move through 2008, due to the pricing actions now completed and currently underway.

I'd like to wrap up my part of today's discussion with some comments on our cash flow and debt level.

Cash from operations in the fourth quarter was $202 million, up $11 million when compared to $191 million in the fourth quarter of 2006.

For the year, cash from operations was $225 million, below last year's result of $311 million.

As we have reported in prior quarters, this decrease was primarily due to the change in operating assets and liabilities, which was a $28 million addition to cash flow in 2006 but became an unfavorable of $108 million in 2007.

Behind the changes in operating assets and liabilities were a $41 million increase in tax payment and $30 million from higher incentive compensation payments.

An increase in accounts receivable was due to higher sales, a higher mix of international sales and the reclassification of certain balance-sheet items.

We do not expect further unfavorable impact in these areas.

In fact, the change in operating assets and liabilities in 2008 is more likely to increase our cash from operations.

As shown on Slide 10, for the fiscal year, we used cash from operations and increased debt to fund $157 million of share buybacks, $77 million of net capital expenditures, $104 million of dividend payments and $16 million of acquisitions.

Regarding share repurchases at November 30, we had $49 million remaining of the current $400 million share buyback authorization that the Board approved in June 2005.

Due primarily to the impact of foreign exchange rates, our debt to total capital ratio ended the fiscal year at 39.8%.

In December, we issued $250 million of new ten-year notes at a rate of 5.75% that will be used to refinance $150 million of notes due on February 1, 2008, and to pay off a portion of outstanding commercial paper.

That concludes my remarks on the fourth quarter.

At this point, I'd like to turn it back over to Alan to discuss our business and financial outlook for 2008.

Thanks, Gordon.

Before we move on to 2008, I want to take a minute to recognize Bob Lawless, who has joined us for today's call.

Bob, we just reported McCormick's 2007 results.

This was year last year as CEO of McCormick, and 2007 provided a great finish to an 11-year track record, a track record that I'm going to work hard to repeat during my time as CEO.

During your years at the helm, you led this company through a transformation that solidified our position as an industry leader and put us on a path to growth.

You spearheaded initiatives behind innovation, technology, acquisitions, brand building, portfolio rationalization, cost reductions and employee development.

As a result, investors have seen their stock price triple with a similar increase in the dividend.

You have always said a CEO will be remembered not by what he did but by what he left behind.

Without question, you have left behind a stronger and more vibrant McCormick.

Bob, we thank you for your leadership of this great company, look forward to your continued role as Chairman and wish you the best in your retirement.

Thank you, Alan, and thanks to everyone on the call for your support and patience over the years.

We have tried to distinguish ourselves over the years from a financial perspective from our peers in the industry.

But must say I am most proud of the succession planning process we went through, culminating in a great leadership team to take McCormick forward in the future and duplicate the results of the last 11 years.

Thanks to everyone for your support.

As we enter 2008, our company is financially sound and positioned for growth.

First, we have effective strategies to drive sales.

You can turn to Slide 11.

We're revitalizing our global brands and supporting them with more effective marketing.

With the transformation of our industrial business, we're focusing on our largest high-potential customers.

Across both businesses, innovation is essential as we build upon our market leadership.

For the consumer business, we have some exciting new products in our 2008 lineup.

In the US, we're bringing innovation to ground pepper with added flavors such as worcestershire and hickory.

These products have one of the highest scores we've ever received for intent to purchase after use.

New Crusting Blends bring restaurant-style preparation into the home, and we're expanding our products that consumers prepare seafood with new marinades, rubs and coatings blends.

In Europe, we're introducing super-premium brand extensions in the UK and France and innovative packaging formats, such as clear-top tins and sachets with windows.

We're expanding the successful Toppers range into additional countries and launching large-size grinders in our major markets.

Second, we continue to find ways to take costs out of our business.

2008 will be the final year of our three-year restructuring program, and we're on track to achieve up to $10 million in savings this year.

In addition, we [will have] ongoing supply chain management projects that have delivered annual cost reductions of $10 million to $20 million.

For the industrial business, we're confident that, over time, our actions to reduce complexity, develop more value-added, higher-margin products and focus on our strategic customers will lead to higher operating margins.

Third, our balance sheet is sound, and we have the opportunity to increase our cash flow as we wind down our restructuring program and focus attention on working capital improvement.

With a debt to total capital ratio below our target of 50%, we're in a good position to increase our leverage for the Lawry's acquisition upon completion of regulatory review.

Because this review is still underway and the timing of the transaction is uncertain, we have not included sales and profit from the Lawry's business in our 2008 guidance that I would like to share with you next.

Back in 2006, we stated that, during our three-year restructuring program, we expected to increase earnings per share 8% to 10%.

At our analyst day in April 2007, we indicated that, upon completion of this program beginning in 2009, the rate of EPS growth would increase to 9% to 11%.

As our restructuring program is still underway in 2008, our outlook for 2008 EPS growth is 8% to 10%.

This growth will be driven primarily by higher sales and margin improvement.

Let me discuss these and other projections that will impact our 2008 income statement.

As shown on Slide 12, we expect to grow sales 4% to 6% in 2008.

This is above the 3% to 5% annual sales growth that we expected during the restructuring program.

We expect pricing to add 2% to 3% to sales, and in the early part of the year, we expect favorable foreign exchange rates to add another 1%.

During 2008, further product and customer rationalization is expected to reduce sales 1% to 2%.

Of the 4% to 6% sales growth, we expect our consumer business to be at the top end of this range.

Our industrial sales growth is likely to be closer to 4% as we continue to eliminate lower-profit customers and products in this part of our business.

As I stated, we do expect to improve gross profit margin, but at a rate below our long-term goal of 50 basis points annually, due primarily to input cost.

We expect an improvement of approximately 25 basis points, excluding restructuring costs, primarily as a result of the higher mix of consumer business in our portfolio and continued achievement of our restructuring savings.

What began as a headwind for us midway through 2007 is expected to continue in 2008.

In our consumer business, we're being impacted by higher raw material as well as higher packaging, transportation and utility costs.

In our US consumer business, we're responding to these higher costs with a price increase on many items that was announce in December and will be effective in early February.

This will increase US consumer sales by approximately 2.5% in fiscal year 2008.

In early January, we took a similar level of increase in our branded foodservice products.

During 2007, we were able to increase prices in our consumer brands in the UK and France and we'll take additional price increases in 2008.

In our industrial business, we continue to adjust prices in response to higher costs.

As Gordon stated, we expect commodity prices to level out as we move through 2008.

This will allow us to fully implement our pass-through pricing.

Turning to interest expense, 2008 should be down slightly from 2007 due to lower share repurchases and lower interest rates, again assuming that we do not have incremental financing for the Lawry's acquisition.

The 2008 tax rate we're assuming is 31% compared to 30.5% in 2007, when we had the benefit of some one-time items.

Commodity costs will also begin to impact from McCormick de Mexico joint venture in 2008 as soybean oil is a key ingredient in their number-one selling item, mayonnaise.

This will put pressure on our unconsolidated income in 2008, which we expect to be below 2007 results.

Another factor I would like to mention relates to share repurchase.

While McCormick has used available cash for share repurchases, our pace of repurchases in 2008 will be lower than in past years as we anticipate the Lawry's acquisition.

Share reduction in 2008 versus 2007 is expected to be around 1%.

Higher sales and improved gross profit margin are expected to lead to an increase in earnings per share of 8% to 10% on a comparable basis, excluding restructuring charges.

Restructuring charges in 2007 reduced EPS $0.18 and in 2008 are expected to reduce EPS by $0.10.

This puts our reported EPS projection in a range of $1.97 to $2.01.

I would like to make a brief comment regarding EPS by quarter in 2008.

On a comparable basis, we expect to have higher EPS growth as we move through the year for several reasons.

First, with the timing of our US consumer price increase, we will get only one month's benefit in the first quarter.

Second, in our industrial business, we also have some continued margin pressure due to the timing of our pricing actions versus cost increases.

Third, in the first part of 2008, for our US consumer business, we will have the incremental unfavorable effect of the move to private-label by our large warehouse club customer.

Fourth, when comparing the first quarter of 2008 to 2007's first quarter, I want to remind you that we recorded a tax adjustment benefit of $0.01 in 2007.

As a result of these factors, we expect EPS in the first quarter of 2008 to be about even with 2007, again excluding the impact of restructuring charges.

Turning to cash flow, 2007 was an unusual year in that a number of payments, including tax and incentives, resulted in a lower amount of cash from operations versus 2006.

In 2008, in addition to returning to a more normal payment cycle, we have initiatives underway to reduce inventory and receivables.

Changes to our incentive plan program reflect this increased focus on working capital.

Each unit's incentive will include a capital cost for the amount of assets, net of liabilities, that are managed by that unit.

We're optimistic about our potential to improve cash flow in 2008 and expect to approximate the amount of cash from operations generated in the three years prior to 2007, which averaged in excessive $300 million.

As for uses of cash, we expect to fund net capital expenditures of $90 million, which will be slightly ahead of depreciation and amortization.

For share repurchases, our projection is $25 million, which relates to the 1% reduction in shares outstanding that I mentioned earlier.

That completes our remarks regarding our financial outlook.

Let me summarize.

We made great progress in 2007 with our key growth initiatives, initiatives to restructure operations, revitalize our core brands, transform our industrial business and expand our product development capabilities.

Employees around the world are aligned with these activities and achieving improvements in all aspects of the business.

While we did not meet our gross profit margin objective, we were pleased to exceed our sales and profit goals in 2007.

We ended the year with a strong balance sheet and are well-positioned for the acquisition of Lawry's in 2008.

Based on recent investor discussions, commodity costs are top-of-mind.

I want to assure you that price increases are in place to offset these current cost pressures, and we are well-positioned to achieve a modest increase in gross profit margin in 2008.

We have confidence that we will meet our financial goals and that 2008 will be another record year for McCormick.

I look forward to sharing with you our progress in the upcoming quarters.

To our shareholders and everyone on the call, thank you for your interest and attention.

We would like now to discuss your questions.

(OPERATOR INSTRUCTIONS).

Eric Serotta, Merrill Lynch.

A couple of questions --- first, if we could touch upon the Americas consumer business, it was up about 3% for the year in terms of sales, excluding currency and acquisitions.

At the same time, you pointed to a number of items that were -- I believe you called in the US consumer business -- that were up in double-digit range.

I'm just wondering.

Other than the two pieces that you highlighted of the club stores and the -- I'm blanking on the other at the moment, but the club stores and the pepper, what was sort of below trend or below average in the consumer business to get you to that 3% sales growth for the year?

Core herbs and spices were a little bit lighter than that.

Our DSM business was a little better than that -- dry seasoning mix.

Our gourmet business was ahead of that.

Can you give any color as to the reasoning behind the weakness in core herbs and spices?

It's not weak; it's just that it was below that particular trend.

We're continuing to revitalize, and we're in the process of really expanding our business.

We feel pretty good about those results in the current environment.

Okay.

Moving onto the industrial business, could you give us some color as to your customer mix within restaurants between QSR, casual and then fine dining?

I was always under the impression that your mix was more within restaurants and industrial was more weighted towards QSR, which from what I've look at, has held in pretty while up until maybe very recently.

I guess I was a little bit surprised to hear you cite the weakness in restaurants, in light of what I perceived as your greater exposure to QSR.

We have a pretty broad customer mix in the restaurant industry through our distributor business, as we sell through companies like Cisco, but we also have a pretty good mix with QSR as well.

Could you quantify that at all or give us any sort of rough range?

Is QSR more than half or more than two-thirds of that restaurant business?

Eric, this is Gordon.

We generally don't give that specific level of detail.

Just a final question to wrap up here -- when I look at the cash conversion cycle and particularly receivables, I saw they were up sequentially this quarter and year-over-year.

Days receivables, DSO, the sequential pattern seems like typical seasonal pattern, but I would have expected it to be a little bit less, given the pull forward of sales and the extended receivables terms that you did at the end of the third quarter.

So why did we not see a greater improvement in receivables, DSOs this quarter?

As mentioned in the call, Eric -- this is Gordon -- there's a couple of factors.

There's a few items which are slightly distorting it, which are reclassification items.

But I'd say the bigger impact is the higher sales included in our international operations.

That tends to have a longer payment term.

So the strong growth in international is skewing that a bit.

Jonathan Feeney, Wachovia Securities.

We know we are now getting to grips with the impact of the private-label shift at one of your major warehouse customers.

Very interested to hear, particularly as we face a potential recessionary environment, what other major customers are thinking about private label in their categories, because actually we are seeing that tick up in the measured (inaudible) a little bit, in spices and seasonings.

I mean, should we expect to see more of this kind of activity, or have you been able to convince people that McCormick is the best way to go for their spices and seasonings categories?

Yes, I don't think we're seeing any major shifts on that, Jonathan.

What we're seeing is some consumer interest in value, and we saw it pretty strong in the fourth quarter, where customers who had their pricing right and their merchandising right did very well, whereas where pricing wasn't right at retail, it wasn't as strong.

But we're not seeing a broad shift to private-label at all.

We're seeing the usual trend.

It has been relatively flat for a number of years in private-label.

Okay.

Yes, I understand.

Thank you.

Just one follow-up, if you wouldn't mind?

I know there's some sensitivity surrounding the Lawry's deal, but if you take a look at the data on that, it looks like that brand, at least since the news, has been decelerated a little bit.

It's certainly probably better to say there has been a lower-rated investment by Unilever than would probably prove sustainable.

Could you give us a sense philosophically about the levels of investment you think you will need to put back into that brand to get it going and how you are feeling about that integration?

Jonathan, we're not really prepared, at this point, to talk in any detail at that.

We are in the regulatory process, and we're respecting that process.

As we're able to close it, we will provide more details and color on what we plan to do.

Can't fault a guy for trying, can you?

Thanks very much.

Robert Moskow, Credit Suisse.

Bob, I just wanted to wish you many happy returns.

I hope you enjoy the next stage.

I think what a critic might ask here is that you said that your overall advertising is down for the year and then down $3 million for the quarter.

What I guess I would worry about is you have a 6% increase in operating income in the consumer business in the quarter, but lower advertising spending really helped you there.

What are your goals for advertising for '08?

To what extent do you think it's going to drive your business?

I guess that's the main thing.

I would hope that you would be trying to drive brand growth to further justify your price premiums to private-label in this environment.

Yes, we do expect the advertising spend in 2008 to be up.

The change in 2007 was a fairly modest drop.

What is happening -- as we're looking at our advertising mix and effectiveness, we moved more of our spend in 2007 to print and interactive, which has a lower cost than TV.

But we do expect our spend to be slightly off and continue to -- on a advertising as a percentage of sales to be relatively the same in 2008 as it's been in the past.

Recall that we doubled our advertising in the fourth quarter of 2006.

Okay, and just one follow up.

Have you done any kind of -- you have that R&D facility where you do consumer testing.

Have you ever done any focus groups to ask consumers what do they think about how they currently spend on spices and seasonings, in that the price of these bottles can be $4, $5.

I guess my concern would be, if they feel like their pantry is full, and most pantries are filled with all kinds of bottles, does it make them any less willing to take a risk or to be a little more experimental and buy another one?

Yes, our focus is on value-added products, and we do a tremendous amount of consumer research.

Every initiative that we do, we do price comparisons versus private-label to get to the right price for the consumers.

As we've said, we don't control what the price is on the shelf -- that's completely up to the customers.

Our customers who have gotten pricing right have done pretty well, and where things get out of touch, it's a little more difficult.

But we do have a target, what we think, and we try to maintain a fairly good premium to the different offerings that are out there on the shelf.

But again, we want to continue to drive the value add in our business, and that's what our innovation is all about.

(multiple speakers) talking about, too, is interest in our gourmet, our premium-priced line had a significant increase in 2007.

That is interesting.

Your price increase -- you said it's about 2.5% incremental for the year.

Can you give us a sense about what percent of the items in your line you're taking pricing on, just on a unit basis?

Like are some up 10%, and some are up 0?

The average is up about 5% for the items that we're taking pricing on, but we've excluded specifically pepper and vanilla, which we took last year in some of the pepper products.

So I think it impacts about 70% of our line.

Terry Bivens, Bear Stearns and Company.

Bob, best wishes from me as well.

Just in terms of the inputs, I know that's really the hot topic now.

We are looking for cheese to come down pretty hard.

Are you guys looking for the same progression through the summer?

Then the question would be, if you are, then how are you looking at soybean oil and wheat, just in terms of when you expect that to kind of get better?

We're seeing some moderation, certainly, in cheese, and we are still catching up in some of that in some of our markets.

We are still seeing soybean oil at a pretty high level and would hope to see it start to level off as we go through the year.

Wheat is another commodity, and we're expecting it to be pretty high but we're expecting it not to be as volatile as last year.

I'm seeing more and more of the new shelving racks.

I guess, according to the press release, you are more than half done on those now.

Can you give us an update on what kind of lifts you are seeing there?

Yes, we are still seeing -- and it varies, obviously, by customer, but we're seeing lifts in the low single digit to mid single digit kind of range as we do our comparisons.

It's still pretty fluid.

There's a lot going on in the markets.

We're reworking some of the planograms from some of our early introductions to make sure we have the right shelf space for the popular items, as we said in the call.

But we are feeling, still, very, very positive about the initiative, and we are continuing to set stores now.

We are ahead of target in 2007 and expect to be largely at our goal by the end of 2008.

Okay.

Just one last quick thing -- Alan, the last time I talked to you -- maybe this was my perception -- but it sounded like you were a little bit more worried about a trade-down from branded to private-label than you just expressed a few minutes ago.

Can I infer from that that the November numbers were a little better than you thought they might be in terms of the branded private-label calculus?

We fully expect -- we were happy with the holiday results.

We fully expect the holiday purchases of branded items to be stronger.

That's a seasonal pattern.

As people are producing their holiday meals, they don't want to take chances on quality, so our branded shares tend to do very well in the holiday.

What we talked about in our last conversation, Terry, was not private-label so much but some of the trade down to economy brands which we produce.

As you are aware, we have a few of those brands, and we have seen some strength in that, just as we've seen strength in the gourmet.

So we are seeing, still, a bit of a bipolar distribution as to where the strength for the consumer is.

Okay, I see.

Thank you very much.

Eric Katzman, Deutsche Bank.

Timing is impeccable with the markets going crazy as usual.

A few questions -- I guess working capital has always -- or for a long time has been a problem.

What gives you confidence, particularly in this volatile time for commodities, what gives you confidence that you can bring that down?

I think, Eric, it's a combination of things.

We have gone through a period of restructuring and a number of implementations with SAP.

When you go through those events, you do tend to focus on service levels and not, perhaps, the same focus and diligence on overall working capital.

So we think we have moved to a point within the restructuring program and the SAP implementation that we can start to bring these down.

Obviously, commodity cost pressures are going to have an impact, but we feel confident that we can monitor this and decrease the rate of growth, certainly at a rate less than sales.

We have programs in place, as Alan mentioned in his call, which relates to higher incentive targets for our general managers that we are tasking them with a capital charge on net working capital.

So we're hoping to bring a greater focus within the operating units there as well.

Okay.

Then I don't know; maybe this is a question for both Alan and Bob.

Do you see, given all of the volatility in the market, do you see some of the family-run companies that you've talked with over the years -- I'm thinking like Fuchs in Germany, and I think there was a South African company, too, maybe McIlhenny Tabasco group.

With all of the volatility of what's going on in the markets, is there any, let's say, more likelihood of M&A beyond Lawry's?

Could you do it, given the debt that you are going to have to put on, assume Lawry's is approved as is?

Yes.

We feel like we still have capacity for acquisitions, and obviously we will scrutinize them, as we always do, to make sure that they are pretty quickly accretive or they fit a specific strategy around maybe geographical expansion that we're looking at.

I would say -- so we don't believe we are out of the market.

We've made a commitment, as we did with Ducros, once we get Lawry's, to work very aggressively to get it back within our debt targets as quickly as possible.

We've said we want to do that within two years.

So we may be out of the market for a large acquisition for a period of time, but we believe that we can successfully handle the bolt-ons and the strategic acquisitions in certain geographies.

Eric, I would just comment, relative to the private companies that have been on our list for years, we see no change in overall direction from them, relative to their accelerated participation in the categories, or decelerated.

So, I think it's still just business as usual.

I guess the last question -- I guess the price increase that you took in the US -- I think you said, on those items where you raised it, it was 5%.

Given how tough it's been for everybody to predict on pricing or input costs, I should say, why not be a bit more aggressive on the assumption that almost anybody that's made a forecast on costs moderating has been wrong?

Why not try to get out in front?

As you know, price increases are always difficult.

We wanted to be responsible and maintain, as much as we can, a premium with private-label because consumers do have other alternatives.

So we are looking to be responsible in how we went out with the price increase.

We weren't looking to do anything because that would impact consumer take-away.

We do see a volume impact, certainly, as we raise prices.

So we're just trying to be responsible as we are doing that.

Ann Gurkin, Davenport and Company.

Just to continue on the pricing discussion, just to be curious on your insights into the acceptance of the customer, whether it's industrial or retail on another round of pricing.

There's a lot of concern that the customer really can't accept any more pricing.

I just would be curious on your insights.

Yes, as you probably have recognized, we're not the only company out there that's trying to pass on higher input costs.

It's a pretty common theme.

Any time we're having pricing discussions, it's an adversarial conversation.

But we're finding that we have been able to implement, as we have all along.

We're certainly working with our industrial customers on reformulating products so that we can help to blunt some of the cost impacts, and we want to work with customers.

But any time you're having a pricing discussion, you're not having the conversation around how we really drive innovation to grow the business.

We'd like to, as much as we can, get onto that conversation because that's what's best for both of us.

Then, in the US, in 2008, do you think you will repeat the holiday prepack promotion?

Would that meet your expectations?

Yes.

The customers who took that had the displays up early and largely performed as we expected them to.

It did what we wanted to from a distribution standpoint.

It got our displays in the stores earlier.

So we need to evaluate it now that we have closed the holiday period.

But I would expect that we would repeat that.

And perhaps increase the number of customers on that?

Potentially.

Thirdly, can you talk about the inventory levels at McCormick for your products as we start 2008?

Yes.

We finished the year higher in inventory than we wanted, absolutely, a lot of it driven by the cost of commodities as well as a pretty significant FX impact.

We're working diligently, as Gordon said, within the units to bring it back to a more moderate level.

We do expect to see progress in inventories this year.

That's great.

Thank you very much.

Chris Growe, Stifel Nicolaus.

Best wishes, Bob, on your retirement.

I just had a few follow-ups, if I could?

The first one -- just relative to the cost savings on the restructuring program, did that incremental $5 million or so to hit in the fourth quarter?

Because I think you were still talking $30 million last quarter.

It was pretty spread through the year, but when we got it all done and were able to look back, that's the number that we came up with.

But it was pretty spread through the year.

We did speak about some SG&A savings in Q4 that helped, so a good portion of that would have hit.

Hit in the fourth quarter, then?

Yes.

Then the benefit of that, I should say, I guess, the sales that you pulled forward to Q3 -- you would like to continue that in 2008, I presume, kind of going forward?

Correct?

That's kind of -- if you are modeling around that, it should continue in 2008.

Yes.

As we evaluate the final holiday program, we will make that decision, but we expect that we will continue in 2008.

I guess there was a comment about the industrial profit margin decline moderating throughout the year.

Is there a lag in the announcement of the price realization and therefore the benefit to that division?

It's announced now, but will we see more of it in, say, Q2 and Q3?

Or does it hit pretty quickly, as I expected?

Well, it will be still a bit of a lag.

We're still chasing a good bit of cost volatility, so we don't expect it to be immediate, but we do expect it to be helped through the year, both from a combination of getting the commodity costs through but also product mix and portfolio mix.

If you look at your Americas consumer division, really focusing on the US, those shelf systems are in place now and a large chunk of the customers you hoped to have them in.

Of course, you have more in '08.

Are you still seeing the sort of sales lift you had expected from those shelves?

I guess I would have thought we'd see more of it in the reported results already.

Is 2008 the year for that, then, you think?

Yes.

We're seeing it with the individual customers.

Recall, we said that a portion of them in 2006, so we had an impact there.

As we set them through 2007, it was a lot of in-progress.

So I think, in 2008, as we continue, we will still see the impact of it as it goes through.

We're seeing a variety.

We're still happy with the results, and we're seeing some customers that are doing better with it than others.

Then just one last final one, just relative to working capital, not to beat that one here any further, but are there specific goals, then, for, say, whether it's by division or you said by managers have this now in their compensation around, say, receivables and inventory and payables?

Yes.

We have set specific goals, and we've differentiated within the units as to what those goals are, based on what we think the improvement capabilities are.

So would it be possible, say, if you rolled those up, to tell us those numbers for the year?

It really is reflected in the cash flow guidance.

We're not giving specific targets by working capital category, but it's reflected in our guidance around the cash flow number.

Mitchell Pinheiro, Janney Montgomery Scott.

Most of my questions have been asked and most have been answered.

Bob, I wish you the best of luck.

It looks like the Detroit Red Wings don't need you right now, but maybe Toronto does.

So, there's something for you to do.

Just a couple of (inaudible) -- how did you progress with simply Asia and Thai Kitchen in terms of either ACV increases, or can you talk about sales growth there?

Yes.

The sales growth for the year was about 10%, and we doubled the ACV of the Simply Asia brand and increased the Thai Kitchen brand by about 30% in ACV.

What are the plans for '08 in those two brands?

Well, now that we have a good level of distribution and we started in the fourth quarter to kick in advertising for Simply Asia, we really want to bring the consumer franchise to it.

We're still working on the product mix and getting the right planograms for stores and making sure that we've got the right mix of products as we -- so that it's performing.

How about, in terms of marketing, getting back in the fourth quarter?

Was that a premeditated switch down and from TV to print and interactive, or how long was that planned?

You had been looking for sort of a flattish performance in terms of marketing spend.

Yes, I mean, the plan for the switch to interactive and print was pretty much the annual plan.

The fourth-quarter spend was a little lower when it rolled up than we expected, but it wasn't a significant change from plan at all.

It was just the way it ended up coming in, but the switch to more print -- as we do our ROI analysis that we've talked with you about in the past, we're always remixing our marketing mix based on what's working.

We do that every six months.

Two more questions, one -- when do you -- just refresh my memory.

When do you lap your warehouse club shift to private-label?

When does that happen?

In the second quarter.

In the middle, or the beginning?

Towards the end.

Towards the end?

Okay.

Then as far as your pricing actions, and I guess back to Eric's question about sort of getting ahead, and I appreciate your not wanting to get too far ahead because of the private-label price gap -- but just from conceptually, have you priced in where we are today with commodities?

So, in other words, if we can benchmark if wheat and soy go further, we can kind of anticipate further increases?

Or are you behind the curve already, or are you still ahead of the curve?

Can you talk about that a little bit?

Well, in the consumer business, we have to build in based on projections of where we think things are, and that tends to be more predictable, and we only take pricing on certain frequencies.

We don't go to market in consumer very often.

In industrial, we tend to respond more looking backward in terms of commodity costs.

So, we are trying to price to recover, which has driven that lag effect.

But in consumer, we're really looking at projections and what we think is going to happen through the course of the year.

Obviously, if we have a highly volatile impact in consumer, we have the ability to go back to the market.

But we tend not to do that very often.

Andrew Lazar, Lehman Brothers.

I wish you all the best as well, Bob.

I just want to head back just briefly to the action you took in the third quarter around selling in some of the holiday items early.

I know that, at the time and then today, you again talked about how a lot of the benefit there is around distribution efficiencies and manufacturing efficiencies and such.

I assume that's part of the ongoing productivity savings that you've talked about.

I also -- and I might have made more of this in my own head than maybe was there, but I kind of remember there being also the potential for a lot more benefits coming from ultimately getting the product in the hands of the retailer earlier, setting up displays earlier, fewer out-of-stocks, better in-store execution kind of when it really mattered.

Is it just that you haven't done the final analysis on whether that really happened?

Was that really part of what the ultimate benefit would be?

Is that a bigger piece of it than the efficiencies part or not?

The primary reason we needed to do it is because we were opening a third distribution center September 1, and we did not want to double-ship those items.

So that's really what drove it.

The side benefit of getting into the stores earlier is something that we absolutely wanted to drive.

But that preshipment or the early shipment only represents a fairly small percentage of our overall holiday promotional shipments.

So, it certainly had an impact in the stores -- who took it, who got it up early and priced it right, and we feel pretty good about that.

but it wasn't -- don't read more into it than it is.

It wasn't 80% of our holiday shipments; it was a much smaller percentage of our displays that you might expect.

But we think, where it was executed right, it was successful.

It certainly helped us in distribution efficiencies.

It took a tremendous amount of pressure off our distribution channel as we were opening that warehouse, and our over-time levels were way lower in our warehouses as a result.

Okay, thanks for that clarity.

On some of the smaller branded spice competitors out there, because obviously you have some of the manufacturing control over private-label and can manage that gap a bit better -- what about some of the things that are out there, smaller players?

Have they been following?

I would assume they are getting hit with equal pricing pressure, if not greater.

Have you seen most of -- and it's very fragmented, I realize, but a lot of them reacted in a similar fashion?

Yes.

We've generally seen our branded competitors following with pricing, for the most part.

That's a general; I wouldn't say that there's not a few that haven't.

But I think, generally, everybody is seeing the same cost pressures that we're seeing.

Just the very last thing would be -- so this is the second quarter, I think, now in a row where you did show whatever -- it was 2.5% Americas consumers sales growth, and it was 3% to 4% last quarter as well kind of on an adjusted, ongoing basis.

That was the piece that had been decelerating for some period of time and partly why you did a lot of the spice revitalization and all of that.

Are you at a point where, in your planning and as you look forward to '08 and what have you, excluding the extraordinary pricing moves that you've had to take and such, that kind of that 3%-4% kind of level around sales growth in Americas consumer is a sort of more sustainable level, based on some of the things that you've done?

Is there enough evidence where you have it that would suggest that's the case?

Yes, we expect it.

The way we build our model is we expect to get 1% to 2% volume growth and then get about half our growth from innovation.

As our innovation pipeline is pretty healthy, and as that grows, that adds to that core growth.

But we have a fairly modest expectation for like-on-like volume growth, and we think what we have is achievable.

Eric Katzman.

Looking through the model as I was listening to the call, it kind of just strikes me, Gordon, that we're kind of comparing apples and oranges a little bit, because when you talk about modest share repo of $25 million, that's assuming, I think, that the Lawry's deal goes through because otherwise, if the $300 million-plus of free cash flow you're talking about -- the share repo number would actually probably be north of $100 million.

So aren't you kind of comparing a little bit of apples and oranges?

If I'm understanding the (multiple speakers).

I can understand the reason for it, but just so I'm clear, because otherwise the free cash flow suggests that you have a lot more cash coming in.

Yes.

Obviously we would be applying that cash in the event -- this is a base model projection, assuming no Lawry's.

Granted, in the event that we were not anticipating the acquisition, that we would be more aggressive with the share repurchase, if that's your question.

Yes, that's basically it.

But the impact of the average shares that we are also talking about that is generally being driven by the prior-year activity because we were very aggressive, as you know, in the first three quarters.

This is an average share calculation, if I'm understanding your question.

There are no further questions in the queue at this time.

I would like to hand it back over to management.

Thank you.

Well, this concludes today's call.

Through January 30, you can access a telephone replay of the call by dialing 877-660-6853 and ask for replay number 309.

You will need a replay ID number; it's 263039.

You can listen to a replay also on our Web site after 2 PM today.

If you have further questions or points to discuss regarding today's information, please give me a call at 410-771-7244.