McCormick & Company Inc (MKC) 2008 Q1 法說會逐字稿

Greetings and welcome to the McCormick's first quarter 2008 conference call.

At this time all participants 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, Ms.

Joyce Brooks, Assistant Treasurer for McCormick.

Thank you Ms.

Brooks, you may now begin.

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

Today's call is being webcast and a replay will be available at IR.Mccormick.com.

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

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

As a reminder, because the regulatory review of the Lawry's acquisition is underway, our comments on this topic will be limited on today's call.

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.

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.

It is now my pleasure to turn the discussion over to Gordon for a discussion of our financial results.

Thanks, Joyce.

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

2008 is off to a good start with first quarter sales up 10.9%, and earnings per share of $0.39.

Excluding a $0.02 impact of restructuring charges earnings per share reached $0.41.

On a comparable basis, this was a 10.8% increase from $0.37 that we reported in the first quarter of 2007.

We achieved sales growth in each segment and region of our business and higher operating income for both our consumer and industrial businesses.

Operating income excluding restructuring charges for the consumer business was up 11.3%.

While we are pleased with that result in this per idea of higher and more volatile commodity costs, we are pleased to report a modest increase in the operating income of our industrial business.

Let me provide more details about each of these businesses beginning with the consumer segment.

Consumer sales rose 9.5% with a favorable impact of 4.2% from foreign exchange rates.

Increased prices and higher volumes contributed about equally to an increase of 5.3%.

In the Americas, we grew consumer sales 8.2% and 6.7% in local currency.

About one half of this increase was due to volume and product mix.

Marketing support, innovation, our revitalization program, and an early Easter holiday drove increases in spices and seasonings, Hispanic items, dry seasoning mixes, economy brands, and our Club House brand in Canada.

The other half of the increase was from pricing actions.

We had some carryover benefit of higher pepper prices taken during 2007 and a one month benefit of a 2008 pricing action that applied to a broad range of products.

In Europe, consumer business sales rose 11.7% and 2.6% in local currency.

In the first quarter, we had a carryover benefit from price increases taken in 2007, and incremental sales from the 2007 acquisition of Thai Kitchen in Europe.

In addition, our Schwartz brand in the UK is responding well to improved merchandising and advertising.

We are expanding a successful UK campaign with print ads to other Markets in Europe.

Sales in the Asia Pacific region were up 13.6% and 3% in local currency.

While we continue to grow sales in China at double digit pace, our consumer business in Australia had lower sales.

In both Australia and China, we are introducing improved merchandising systems which have met with success in the U.S.

and Europe.

Across all regions operating income for the consumer business was $67 million when restructuring charges are excluded.

When compared to the first quarter of of 2007 on this same basis, this was an increase of $6.8 million or 11.3%.

This increase outpaced sales growth of 9.5%.

While we plan to increase our advertising in 2008, this expense was down $1.8 million in the first quarter due to the timing of our marketing programs.

This expense reduction also contributed to the increase in operating income.

On a dollar basis our pricing actions, favorable sales mix and cost savings related to our restructuring program effectively offset the impact of increased raw and packaging material costs in the first quarter.

We expect these factors to continue to provide an offset unless commodity costs continue to increase.

Moving over to the industrial business, we were pleased with our financial results in the face of several challenges.

This part of the business is under pressure from steep cost increases and volatility in several commodities including flour, soy oil and cheese.

Also there is continued weakness in the U.S.

restaurant industry.

In this tough environment we grew sales 12.8% and 9.6% in local currency.

In the Americas the increase was 10.1% with 1.7% from favorable foreign exchange rates.

Higher pricing to offset commodity increases accounted for the majority of the increase.

We have also achieved growth with snack seasonings, beverage flavors, and new seasoning business for several food manufacturers.

These food manufacturers are customers with whom we are developing relationships.

Which places them in the second tier below our top strategic customers.

The sales increases in our international industrial business that we achieved in 2007 continued into the first quarter of 2008.

Industrial sales in Europe rose 17.3% and 12% in local currency.

Pricing contributed to about one half of this increase.

Strong sales of snack seasonings and seasoning blends and condiments for the restaurant industry also contributed to the growth in the first quarter.

Sales in the Asia Pacific region rose 23.9% and 13.3% in local currency.

Pricing had a minimal impact in the first quarter, higher volumes and a positive sales mix resulted from increased sales of seasonings for chicken sold to restaurant customers and snack seasonings sold to food manufacturers.

Excluding restructuring charges, operating income for the industrial business was $14.3 million, up slightly from $14 million in the first quarter of 2007.

With a 13% increase in sales this quarter compared to a 2% profit increase, it is clear that our industrial business remains under pressure from higher commodity costs.

However we have made progress getting higher prices in places, in place in all regions and are working more closely with our customers to contract future purchases of these raw materials.

Our level of collaboration is greater than in 2007.

Also providing an offset to higher commodity costs are cost savings from our restructuring program as well as a more favorable business mix following our elimination of lower margin SKUs and customers.

To summarize this portion of my remarks, we are working hard to minimize the impact of this tough environment, and have confidence that we can continue to grow sales and operating income in 2008 for our industrial business.

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

Excluding restructuring charges, operating income rose 9.6% adding $0.04 to earnings per share.

Interest expense this quarter was up with a slight increase in debt and higher rates.

This was offset by an increase in interest income during the quarter.

A tax rate of 30.1% this year compared to a 29.4% rate in the first quarter of 2007 when the Company had the benefit of a discrete tax benefit in Europe.

While we had the benefit of certain discrete items early in 2008 we continue to project a 31% tax rate for the fiscal year.

As indicated in our January call, the higher cost of soy oil is impacting our joint venture in Mexico, and led to a decline of $1.1 million in income from unconsolidated Operations for the first quarter.

In this competitive market, soy oil is a primary ingredient in mayonnaise which is the leading item for this business.

While we are consulting with our joint venture partner on ingredient purchases and product pricing, if soy oil stays at this level it is likely that we will continue to report a decline in our joint venture profit throughout 2008.

The reduction in joint venture income for the first quarter reduced earnings per share by $0.01.

Given our acquisition activity we did not repurchase shares this quarter; however the carryover benefit from last year's activity resulted in a 2.3% reduction in average shares outstanding on a diluted basis.

To recap our first quarter earnings per share results, we achieved $0.39 in 2008 compared to $0.33 in 2007.

Restructuring charges related to the restructuring program were $0.02 per share this year compared to $0.04 per share last year.

The remaining EPS increase of $0.04 was due to higher operating income.

A $0.01 decrease in income from unconsolidated operations was offset by a $0.01 increase from lower shares outstanding.

I want to spend a few minutes on the quarter end balance sheet and our cash flow.

At the end of the quarter, accounts receivable were up 11.6% , slightly ahead of the 10.9% sales increase.

Inventory was up 9.1%.

Of the $38 million increase, $18 million was due to foreign exchange rates and we estimate that another $17 million related to higher raw and packaging material costs.

Additional increases were due to the acquisition of Billy Bee and some inventory build in advance of an SAP conversion in Canada.

Debt to total capital ended the first quarter at 40.6% compared to 43.2% in the prior year.

Although debt is up slightly, the weak U.S.

dollar has had a strong effect in lowering this ratio.

Cash from operations in the first quarter was $24 million versus a negative $75 million in the year ago period.

If you recall, accounts receivable at November 30, 2007, was high compared to the year ago comparison.

In the first quarter of 2008, we had strong collections of these receivables.

Payments for restructuring actions and taxes this year were less than in the first quarter of 2007.

Also due to the over funded status of of our pension plan in the U.S., we did not make a $22 million contribution that had been made in the past few years.

This quarter we used cash and increased debt to fund the $76 million acquisition of Billy Bee and $17 million of net capital expenditures.

That completes my remarks and our first quarter financial results and it is my pleasure to turn it over to Alan for comments on the business and our

Thanks, Gordon.

For the remainder of our remarks, I'd like to briefly cover three topics.

First, the effect of higher input costs and a tougher economy on McCormick's business.

Second an update on our growth initiatives including acquisitions along with our restructuring program.

And third, our latest financial outlook for 2008.

As Gordon explained, we've taken a number of pricing actions in response to higher input costs.

In our consumer business, higher pricing is in place for both brand and private label products.

In our industrial business, we've increased prices to pass through higher costs and are working more closely with our customers to coordinate the purchase of many of these largest commodities.

Chuck Langmead and his team have done a great job achieving growth in the business while meeting the challenges of higher costs.

In the first quarter, we were able to offset the dollar impact of higher commodity costs with higher prices.

This led to an 8.1% increase in gross profit dollars; however when measured as a percent of net sales, gross profit margin was down 50 basis points.

Gross profit margin was also affected by an unfavorable mix of business.

With sales growth of the industrial business out pacing that of our consumer business.

As for the current economy, the largest impact to our business continues to be weakness in the restaurant industry which has affected our industrial business.

This impact began in the U.S.

in 2007 and it is continuing into 2008.

In our consumer business, we are seeing customers shift to lower cost retail channels, with some pick up in sales of of our economy brands but no significant gains in our sales of private label through the first quarter.

I'd like to comment next on our growth initiatives and restructuring program.

We are revitalizing our core spice and seasoning products in markets around the world.

New merchandising systems to improve the consumer shopping experience and retailer stocking activity is a key step in this revitalization.

We improved merchandising first in the United States, then in the UK, France, and most recently, China and Australia.

The largest of these efforts due to the number of store conversions is in the U.S.

consumer business which is part of Mark Timbie's responsibilities.

Due to the efforts of our sales and marketing teams in this part of the business, we are measuring a sales lift in the mid single digits following the installation of these systems, and we've converted 9150 stores this time up from 8500 in late January.

Marketing programs are being further refined as we measure effectiveness.

We have moved to more print and Interactive media in the U.S.

and are making similar moves in Europe.

For the first time we will use a unified print campaign in both the UK and France.

In the second quarter, support for new products, crusting blends and flavored peppers will kick in.

Based on the timing of our 2008 advertising plans, we expect the reduction in first quarter advertising to be followed by higher spending in the second quarter.

For the total year, we estimate an increase of at least 10% in our 2008 advertising expense.

I would like to comment on our strategy to grow through acquisitions.

In recent years, we have successfully added a number of leading niche products to our consumer business in the Americas such as Zatarain's and Simply Asia.

In February, we were pleased to announce the acquisition of Billy Bee Honey Products, a leading brand in Canada.

This is a terrific complement to our savory and desert aid products in Canada and a great extension of the sweet products we currently market in Europe and the Asia Pacific region.

We view honey as a unique flavor and a healthy way to add sweetness to many foods and beverages.

To update everyone on Lawry's, we're continuing to work with the FTC on the regulatory review process and are still limiting our remarks regarding this business and the transaction.

We remain excited about the possibility of acquiring the Lawry's business and view it as an excellent addition to our U.S.

consumer business.

Turning to our restructuring program.

Those who have followed us in 2006 and 2007 know that many of our past actions occurred in the U.S.

and that much of the current activity involves our business in Europe.

We've completed facility consolidations in the UK and changes are now under way in France.

We have eliminated under performing and lower margin SKU s in the Netherlands and Belgium and to change our go to market strategy has improved the profitability of our businesses in Italy and Belgium.

Under the leadership of Lawrence Kurzius, employees in Europe, Middle East and Africa are making great progress with our restructuring program.

Let's now turn to our financial outlook.

While we had a strong first quarter, 2008 is not without challenges.

The effect of the global economy on our business is an area of concern as are commodity cost fluctuations; however, we expect sales to continue to benefit from higher pricing and favorable foreign exchange rates.

We are also seeing good consumer response to our revitalization and marketing efforts and our product innovations.

In addition, sales of Billy Bee products are expected to add $25 million to $30 million to 2008 sales.

As a result, we've increased our projected sales increase to 5% to 7% from 4% to 6%.

Earnings per share in the first quarter exceeded our expectations due to excellent sales growth.

We are on track to deliver cost savings related to our restructuring program and are moving toward a more positive business mix.

We continue to pursue pricing actions and collaboration with industrial customers to counter higher input costs.

As a result, we're well positioned to grow profits in an environment of economic uncertainty and higher costs.

A portion of this profit growth will be used to fuel increased marketing to drive our brands.

We reaffirm our expectation to achieve earnings per share in our target range of $1.97 to $2.01.

This includes an estimated $0.10 of restructuring charges and excluding these charges for both 2008 and 2007, is an 8% to 10% growth rate.

I also want to reaffirm our outlook for $300 million and more of cash from operations.

Let me summarize.

Employees throughout the Company are providing the energy and talent behind our growth and delivering results.

Gordon and I share the confidence of the entire leadership team that we are on our way to another record year and to increasing value for McCormick shareholders.

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

We would now like to discuss your questions.

Thank you.

We will now be conducting a question and answer session.

(OPERATOR INSTRUCTIONS) Our first question is coming from Terry Bivens of Bear Stearns.

Good morning, everyone.

Good morning, Terry.

A couple of things.

Alan, you mentioned that you did have a bit of a negative gross margin effect from a little bit faster growth on the industrial side.

How long do you expect that to continue?

Well, as long as the commodity costs continue to be volatile, we would expect to see that.

Where we are right now is we're using a combination of pricing and productivity to offset the increased cost but we're only focused on recovering to the best extent that we can gross margin dollars, gross dollars, not necessarily gross margin percentages.

Okay, and I did understand you to say that your price increases you felt did cover, in terms of gross margin dollars the commodity push, was that correct?

That's correct.

Okay, very good.

As you look into the second quarter a couple of quick questions.

You mentioned maybe some acceleration on the consumer side due to the earlier Easter.

Does that take away from second quarter in any way?

We think it should pretty well wash itself out over the period.

We do have a fairly heavy advertising investment towards the end of second quarter, but we think there will be some minor impact on an early Easter but not anything significant.

Okay, very good.

Thanks a lot.

Thank you.

Our next question is coming from Chris Growe of Stifel Nicolaus.

Good morning, Chris.

Good morning, guys, how are you?

I just wanted to clarify, in terms of Lawry's there really is no update then and I guess could you just tell us then, you've been through a second request.

Are you still fulfilling the requests of the FTC or?

Yes, that's exactly what's going on.

We've received a second request and we're in the process of answering that.

Oh, okay, okay.

I thought you already responded that.

And then I just was curious, there was some working capital improvements sequentially which were encouraging, particularly on receivables.

Are there, and I know that's been included I think in a lot of the sort of bonuses for executives that kind of thing for the year.

Are there any working capital parameters you're putting out there that?

Sort of the benefit we could see to working capital for the year?

What we're, this is Gordon, Chris.

What we've done is internally we've cascaded targets down to each of our operating unit General Managers and we focused on areas that we think are opportunities in each of their respective businesses.

What we've done publicly is just restate that we believe our cash flow will return to levels prior to 2007 which is in excess of $300 million and within that projection, we've assumed certain improvements in working capital but we have not gone so far as to break it down by category right now.

Okay, got you.

And then I wanted to ask as well on the gross margin side we obviously seen even more movement throughout the quarter and input costs even higher.

Do you believe that your gross margin can still grow for the year?

As we've said, we really are focused on trying to recover gross margin dollars at this point.

We think if commodities stabilize, we should start to see the impact of our productivity efforts help gross margin, but at this point, we're really staying even with the combination of pricing and productivity.

Okay.

Just one last one, that was just relative to your Europe consumer business, it had an easier comparison in the quarter and it had been accelerating throughout sort of the recovery and sales of the growth in sales there and (inaudible) a bit this quarter.

Does that require more marketing investment of things to stimulate the sales growth in Europe?

Yes.

We're continuing to increase our marketing investment in Europe.

We're pretty happy with where our business is in the UK.

We had a little bit of a slowdown in France and we're putting some extra effort behind that.

Okay.

Thanks so much.

Thank you.

Our next question is coming from Eric Katzman of Deutsche Bank.

Hi, good morning, everybody.

Good morning, Eric.

I just have a few questions.

First one, given that you have a fairly broad based view of what's going on out there between food away from home and food at home, can you talk a little bit about how much, I know it's tough to measure but how much shift you're seeing from consumption at foodservice versus at home and how do you think that's benefiting you in terms of the consumer business?

Well, food away from home, we see the impact almost immediately, so if someone doesn't go out for dinner on Friday night, those sales in the restaurants are pretty quick.

It takes a little bit more time or frankly with the turn rate of our products a lot more time to actually start to see the impact.

We are seeing good volume growth in grocery channel and we expect that's because more people are eating at home than are eating out, but it's not the quick turn that you expect to see.

We decline quicker in restaurants than we see an impact in grocery at least on our items.

And are you also seeing within the food at home consumption I guess you mentioned a little bit more in your economy brands, but are you also seeing let's say a shift by the consumer as a means of saving money, let's say shopping at less expensive or less price point oriented outlets?

We're certainly seeing a trend towards more of the outlets where cost and price has been more aggressive, but we're not, and we're seeing a pick up in economy brands but our regular brands, our every day brands are really holding their own.

We had good growth, for instance on gourmet through the first quarter as well.

Okay.

Switching subjects for a second then, it sounded like there may be a change going on in terms of how you're dealing with your industrial customers.

I know that Bob and Fran, after the vanilla situation had kind of implemented a quarterly adjustment, but am I to take your comments that not only is it now a quarterly price increase based on the commodity but also kind of collaborating together to purchase inputs?

How exactly is that working?

Absolutely.

We're collaborating with customers on the positions that we're taking on these major commodities so that as we do that, we both understand what's happening in the market.

And that's been a fairly recent change towards the end of last year to really get closer to it, in a stable market, we can handle less frequent price changes and we can deal better with what's happening in commodities but when it's unstable as it has been, we really need that close collaboration and our customers are working very well with us.

Okay and then last thing and I'll pass it on.

On the M&A front, I mean, I suppose with the private equity players out there being kind of knocked out of the business for awhile, you have the benefit of maybe purchasing stuff at a lower multiple, but then on the other hand, it seems like there's an increased risk given the input cost volatility, like how -- like, for example, I know you can't talk specifically about Lawry's but is there a risk in making a purchase like that and not knowing exactly where their contracts are on high fructose corn syrup or whatever their main ingredient is?

Well, I think, and we don't have a lot of information on that particular acquisition that we can share but as we look at things, we look for areas where we can add value and in a case where we're buying something that's highly synergistic we will have a pretty good handle on what the right commodity inputs are, so I don't think that's as much a risk.

We're continuing to be active in looking at acquisitions and evaluating to help to grow our business and all over the world.

Okay, I'll pass it on, thank you.

Thanks, Eric.

Thank you.

Our next question is coming from Jonathan Feeney of Wachovia Securities.

Good morning.

Thank you.

Good morning, Jonathan.

Gordon, could you explain to me what, maybe what kind of bottom line benefit you might be getting from foreign currency, how that might work?

We don't give a specific number on that.

Obviously, we've given you the top line benefit.

Sure.

The impact of foreign currency can read through obviously in the translation of the income statement.

We also have dollar purchases abroad, a lot of the spice markets globally are dollar denominated and we'll do forward purchases on those as well but those can also be impacted by the weak dollar because those will start to rise in price as the dollar weakens, so it can sometimes be just a neutral benefit on that side.

So as a result we really don't get into detail on the EPS impact on it.

How about, I'm sorry if I missed this but could you give us anymore detail on like you gave us the 4% foreign currency effect on the top line, how price and mix is represented in the other seven?

In terms of the total sales of the Company, price was at least half of the total growth.

Okay.

And FX was about 4% of it and the rest would have been volume mix.

That's great.

Just one last one.

I know we had, we talked a little bit about it on the last call, some of the parameters, updated parameters after you lost some SKUs at a major customer last Fall, and has there been any follow through?

Have there been any other customers looking to expand their private label programs at potentially your expense or the expense of your key brands in the face of a weakening consumer right now?

We haven't seen a lot of that kind of activity.

I think most, at least in most of our developed markets, private label is pretty well developed and we haven't seen any significant moves by major customers.

And that one major customer that did make a move that sort of continues that schedule, no changes there?

That's right.

Okay, thank you very much.

Thank you.

Our next question is coming from Robert Moskow of Credit Suisse.

Hi, thank you, good morning.

Good morning.

I had a question about the shelving units that you're putting in.

Are you seeing kind of an inventory impact at retail when you do put those shelving units in, like for example, is there any kind of deloading at the customer that has to take place and could that be, is that part of the reason maybe that the consumer sales have been, maybe had been slow in '07 but seemed to be kind of picking up now, as you kind of lap those comparison?

There is a transitional impact as we go into such stores and usually -- and the impact is we're starting to set a store, the inventories will be drawn down a little bit so we have seen a little bit of that but because of the way we're setting the stores, it shouldn't be highly measurable because as soon as we get them set we start to see the input, the impact on volume, so I wouldn't read into it that it's a major issue.

We're setting stores pretty well continuously and are kind of wrapping up that program today but there is a little bit of a drawdown as we get ready to set individual stores.

And then just one other question.

The spice and seasonings in my store, I mean that section is pretty close to the condiment section, and you see alt kinds of brands like A-1 and salad dressings and what not, and steak sauces and very fragmented.

I'm just wondering, have you ever thought bigger picture about consolidation in the industry and whether or not McCormick would have even more clout by combining or doing any kind of M&A in that kind of, in that area of the store?

Is it something that -- is it a very different type of business or is it the same type of business with the same buyers and what kind of clout would you get?

It varies by customer and absolutely we look at the time at what the category adjacencies are and where we think we can add value with our brands and that's a part of our new product innovation as well as our acquisition activity, so we're always looking at the right category adjacencies, but if you are talking specifically of condiments and salad dressings and things like that it really varies by the individual retailer, even where it's placed and what the buying relationship is.

We think there's a lot of places in the store the McCormick brand can add value though and we're looking always at how we do that.

Theoretically, if you doubled your size through acquisitions in that region of the store, I mean, again, would it just vary by customer as to what it would get you or would it, are you pretty certain it would get you a lot?

No.

I think it would vary by customer because the metrics on a lot of these areas are different.

We have a unique go to market proposal for the spice business and it really varies by the different categories in the store as to what the expectations are on turns, on complexity, and so we really have to evaluate each of them on a case-by-case basis.

Great.

Thank you very much.

Thanks.

Thank you.

Thank you.

Our next question is coming from Ann Gurkin of Davenport.

Good morning.

Good morning, Ann.

Just want to spend a little more time on the foodservice segment and your restaurant customers.

I guess when you first plan for '08, the outlook for that segment, are you needing to go back and revise that outlook for that segment given that the restaurants are so weak?

And then secondly, are you being approached by your customers to get more help on new items on the menu or helping to manage their menus or anything like that?

Yes, we're doing a lot of work collaboratively with customers on innovation and that's a steady stream of what we're doing.

We're also working with them on product formulations to help manage the cost volatility as well as respond to their needs for a value focus.

So we are working well with our customers and we consistently look at our forecast for what we think is going to happen because we have to do that obviously to manage our commodity positions.

So are you tempering the outlook for that segment at this point?

I don't think we're tempering the outlook at this point, no.

Okay, and then I'm sorry if I missed this, are you all going to need to raise prices again this year given what's happened with commodity costs?

I think it's two answers.

In the consumer business, based on our forecast, we don't anticipate that we will need to; however if commodities get more volatile, we'll obviously look at that and make the decision when we have to.

With industrial customers because we're working collaboratively on commodity positions, as commodities change we'll be passing through the cost changes.

Okay, great.

Thank you.

Thank you.

Thank you.

Our next question is coming from Mitch Pinheiro of Janney Montgomery Scott.

Hi, good morning.

Good morning, Mitch.

On the restructuring charges, what exactly in this quarter, what was the, where was the money spent?

The biggest part of the restructuring program now is centered in Europe, and there's a number of activities going over there.

The biggest one is a consolidation of facilities occurring in the South of France.

There's also some changes in the UK that relates to a change in the route to market structure there.

Okay, and this will continue on an even basis through the remainder of the year?

Or is it choppy, or how?

Well, in terms of the execution in Europe, yes.

Now, there's also things that we are cleaning up from the U.S.

such as some asset sales on some buildings and things that remain from the consolidations there so in terms of that number on the P&L, I wouldn't say that number is going to be even throughout the year, Mitch, because it could be offset by some gains on sales of assets that we are still in the process of trying to sell from prior consolidations.

Okay.

Thanks, and in terms of looking at your ad spending, Alan, I think I heard you say that you expect ad spending to be up 10% for the year?

That's right.

So it was down I think $1.8 million in the first quarter.

What do you expect type of percentage increase in the second quarter?

I'm not sure that we've broken out the percentage increase, but we do expect an increase in advertising in the second quarter as we're getting ready for the grilling season in the U.S.

and beefing up our spending in Europe.

Okay.

When it comes to sort of collaboration with industrial customers, is it on a contractual basis or is it just let's say a gentleman's agreement?

It varies by customer.

Some customers we have very specific contracts on how we deal with this and protocols and other cases, it's as we see changes and we work with them, but in our relationships with customers have tended to be could collaborative by the way we go to market.

It's just now we're collaborating even more on commodity positions.

And in terms of the, is it the usual suspects in commodity positions, flour, soy oil, or does it extend to other--?

It tends to be major commodities.

For us it's flour, soy bean oil, cheese, and those are really the big ones that impact us.

And is pepper, I'm looking, pepper prices seem to be moving up again.

Yes, pepper is up again this year.

It's I think it's up about 20% in the first quarter.

Right.

We have not taken additional pepper pricing in our consumer business because we took it last year, but we're monitoring that, and we'll evaluate what we need to do through the year.

Last question is, I think Gordon, it was half of your total sales increase this year or in the quarter was due to pricing, so that's roughly say 5%, but that seems more than sort of the price increases that I was sort of anticipating.

I thought you raised pepper last year 1% and then, on average, and then this year, I thought I heard maybe 3 to 4.

Is that right though or even less, 2 to 3.

Is that -- are you getting more pricing somewhere or is my math just--?

I think what you're remembering, Mitch, are the price increases that we talked about for our North American consumer business, and what's impacting as much as anything are the commodity pass throughs in the industrial business.

Okay.

Got it.

Thank you very much.

Thanks, Mitch.

Thanks, Mitch.

Thank you.

Our next question is coming from [Matthew Levison] of Matthew Levison and Associates.

Hi.

Good morning.

You stated that Australian sales were down and I wondered if you could get somewhat more detail about this?

Because everything we understand is that the economy there should be quite strong.

We are not the number one spice and seasoning supplier in Australia and it's a very concentrated market with just a couple of large customers.

We're seeing the impact of a large customer there that consolidated their category and that's impacting our business.

We have plans to relaunch specific products there and we feel pretty good about our plans.

Okay, thank you very much.

Thanks.

Thank you.

Thank you.

Our next question is coming from [Louis Toma] of Delta Partners.

Just a couple of questions.

I'm trying to understand the implications for Billy Bee into your guidance.

So you said that the acquisition will add about 25 million to $30 million for the fiscal year '08; is that correct?

That's correct.

Yes.

And so is that basically your increase of, if it looks like increase the range of your guidance by about 1 percentage point if you look at the mid point, so you basically are just accounting for the Billy Bees acquisition in that?

Is that the primary driver to the increase?

That's certainly the primary driver.

Obviously the FX has been a little stronger in terms of affecting the top line growth as well so it's also contributing to our confidence in raising the estimate.

Okay, and do you expect Billy Bees to have any PS contribution for fiscal '08?

Well, it's baked within our current guidance but it will have a positive impact of about $0.01.

Okay.

Thank you very much.

Thanks.

(OPERATOR INSTRUCTIONS) Our next question is coming from Andrew Lazar of Lehman Brothers.

Good morning.

Good morning, Andrew.

Alan, just a quick kind of an either/or question, so it may not be completely fair as you kind of have to answer one way or the other.

But I'm just -- I'll say that right up front, but I am curious.

If you had to choose an operating environment in which to sort of operate McCormick's business, one would be an environment with very little if any cost inflation and therefore, not a whole lot in the way of pricing power.

And sort of like we've seen the last 10 years or so, or something that's more like today's world which admittedly is challenging, it's very volatile from an input standpoint but you're getting a lot more pricing through kind of as an industry and yes, somewhere in between would probably be ideal but if it had to be one or the other I'm just curious how you'd think about answering that?

I think that's a real easy answer from my standpoint.

I would take the stable cost environment, because of several things.

One is, in a stable cost environment even though it's very difficult to get pricing, you have the opportunity to gain through productivity and that helps drive margin.

The second thing is the consumer behavior is a lot more predictable, because the consumer today is under tremendous amount of pressure and they're seeing inflation on a lot of fronts and on top of that, are seeing pressure from an income standpoint, so I did -- any point, I would take a healthy fairly stable environment with the ability to innovate and drive margin over the situation where things are more volatile and unpredictable.

That's very helpful, I appreciate your perspective.

Second quick thing, just on some of the agreements that you're trying to work out on the industrial side, more collaborative purchasing or going through with various customers on different -- does it require either more hedging or taking larger positions from an inventory standpoint on certain ingredients that you might otherwise have done and if so does that impact kind of your working capital outlook or is it not ha impactful to that?

It will have some impact on working capital but we're baking that in.

We think we'll get the improvement and that's more because of the commodity prices as opposed to the volumes.

Right.

And where we're working with customers, we're also working with them on forecasting their needs so it's not like we're bringing everything in.

It's a little different on spice and herb commodities where we make decisions on long or short positions based on what we think is going to happen.

So in some of those cases, we may have to add volume in order to protect price.

But that's a decision we make on an EVA analysis all the time.

Thanks very much.

Appreciate it.

Thanks, Andrew.

Thank you.

Thank you.

There are no further questions at this time.

I'd like to hand the floor back over to Ms.

Brooks for any closing comments.

Well, thank you.

This concludes today's call.

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