McCormick & Company Inc (MKC) 2008 Q2 法說會逐字稿

Greetings and welcome to the McCormick second-quarter 2008 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, Ms.

Joyce Brooks, Vice President of Investor Relations for McCormick.

Thank you, Ms.

Brooks, you may begin.

Good morning to everyone joining us today by phone and webcast for a review of McCormick's second-quarter results and a discussion of the Company's business and outlook.

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

Following our remarks, we look forward to discussing your questions.

As a reminder, our comments on the Lowry's acquisition continue to be limited because of the regulatory review that is underway.

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 and credits are not GAAP measures, and we present this information for comparative purposes alongside the most directly comparable GAAP measure.

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 is now my pleasure to turn the discussion over to Alan.

Thanks, Joyce.

Good morning, everyone, and welcome to this morning's call.

I am extremely pleased to report strong financial results for McCormick's second quarter.

The sales results are evidence that our growth initiatives are resonating with customers and consumers, and our pricing actions and profit performance demonstrate that we are effectively managing through an unprecedented periods of escalating costs.

As we look to the second half of 2008, I have increased confidence in our ability to deliver a year of record results for the Company.

Our solid performance in the second quarter was broad-based.

At the top line, we followed 11% growth in the first quarter with another 11% sales increase.

This is ahead of the original 2008 sales growth goal of 4% to 6%, as well as the upwardly revised projection of 5% to 7% sales growth set back in March.

We achieved the strong second-quarter growth with a combination of pricing, favorable foreign exchange rates, favorable product mix, and incremental sales from recent acquisitions.

U.S.

customers responded to our marketing programs with increased purchases of reduced-sodium Zatarain's products and continued strength in our gourmet items which now feature new flip-top caps.

With the new salmon seasoning and Grill Mates Grinder, our grilling season is off to a great start.

By the end of the second quarter, we had crossed the 10,000-store mark with installations of our new merchandising system.

In addition to the positive impact on sales, this and other marketing initiatives recently helped us gain new distribution with a regional retail chain.

As in the U.S., increased marketing, new products, and improvements to our merchandising in the UK and France have received a positive reaction from both customers and consumers.

Our early read on new products in the U.S., which includes flavored pepper, Crusting Blends and Cinnamon Grinders, is quite positive.

We've met our goals in product placement at retail stores and have begun to launch print, sampling and other marketing support to gain consumer awareness and trial.

In Europe, we've introduced a new premium line of seasonings as well as a number of new barbecue items.

Looking ahead to the second half of 2008, we are relaunching our entire line of Vahine desert items with greatly significantly upgraded packaging and have already received a great response from retailers in France.

I want to point out that significant level of marketing support is planned for the third quarter to drive growth of the new U.S.

and international items I just mentioned, as well as summertime favorites such as Grill Mates, Old Bay, and Grinders.

In our U.S.

industrial business, increased prices helped offset the impact of higher commodity costs, and we overcame weakness in the restaurant industry with new products sold to quick-service customers and food manufacturers.

In international markets, growth in industrial sales continued to outpace U.S.

growth with particular strength this quarter in a number of countries, including the UK, South Africa, China and Australia.

Increased demand by restaurant customers is a primary driver of these results.

I wanted to provide an update on our February purchase of Billy Bee Honey in Canada.

Since acquiring this business, the integration has progressed well and we recently announced that by April 2009, production would be moved from a stand-alone leased facility and consolidated with another McCormick facility in Canada.

Also in Canada, after months of careful preparation, our team successfully implemented SAP in June.

Cost savings from SAP, our restructuring program, and other supply-chain initiatives are integral parts of our effort to manage through a tough cost environment.

Margin pressure from higher-cost commodities and to some extent energy have continued.

Through a combination of pricing actions, cost savings, and favorable product mix, we have effectively offset these increases.

For the second quarter, we were able to report a 9.6% increase in gross profit dollars, which is just below our 11.2% increase in sales.

Those of you who have followed us closely since the restructuring program began in late 2005 know that we made excellent progress in North America during 2006 and 2007 and that a number of actions in 2008 are underway in Europe.

We are working to complete a facility consolidation in France and recently announced changes to our direct store distribution network in the UK, which will improve efficiency and increase our capacity to handle greater product volume.

The restructuring credit we reported this quarter was due to a gain on the sale of our plant in Salinas, California, which was consolidated with other manufacturing facilities in 2007.

The last comment I wanted to make at this point before turning it over to Gordon relates to one of my top priorities for McCormick in 2008 -- cash.

Our goal for 2008 is to deliver at least $300 million of cash from operations.

This is an increase of $75 million from our year-ago result.

Through the first half, cash from operations was up $101 million, so we are well on our way toward a significant improvement in 2007.

To discuss in more detail our cash flow and other financial results, I'm going to turn it over to Gordon.

Thanks, Alan.

I would like to add my welcome to all of those joining us today.

We appreciate your time and interest.

I will provide some remarks on the total business and then some color on our two segments.

Second-quarter sales were up 11.2%.

The currency impact was again favorable this period, adding 3.9% to our sales growth.

While higher pricing contributed significantly to the sales growth, the combination of volume and product mix also had a positive effect that included the impact of new products and new distribution, as well as 1.7% in incremental sales from acquisitions, Billy Bee in Canada and Thai Kitchen in Europe.

Alan stated that our gross profit dollars rose 9.6%.

While this increase demonstrates our ability to pass through our higher costs, it also illustrates the impact of today's input cost environment on gross profit margin.

Margin was 39% compared to 39.6% in the second quarter of 2007, a decline of 60 basis points.

I would like to point out that this is a modest improvement from the 100 basis point gross profit margin decline we reported in the first quarter when we were still putting some of our pricing actions in place.

Excluding the restructuring credit we reported this quarter, operating income rose 4.5%.

This rate of increase was below the 11% growth in sales, mainly due to an 18% increase in marketing support.

The additional $4.8 million of marketing support funded incremental print advertising, interactive media, and other programs designed to drive sales of our branded products.

I encourage you to take a look at a new part of our Web site launched in the second quarter called "Spices for Health" where we provide consumers with information such as the antioxidant properties of many spices and herbs.

Our McCormick Gourmet Web site now features cooking videos with Cat Cora, the first female Iron Chef, and with Christopher Lee, recently named one of Food and Wine magazine's best new chefs.

Below operating income, lower interest rates led to a favorable variance in interest expense.

In addition, interest income was favorable in the second quarter.

EPS was also impacted by a carryover benefit from 2007's share repurchase activity.

In 2008, we continue to curtail our share repurchase activity in anticipation of the Lawry's acquisition.

EPS for the second quarter was $0.41 and on a pro forma basis, $0.39.

This was a $0.04 increase from $0.35 in 2007 with $0.02 from operating income and $0.02 from the lower interest expense and increased interest income.

Keep in mind that the impact from increased operating income includes the effect of greater marketing support.

Let me provide a few details about each of our business segments, beginning with the Consumer segment.

Across all regions, Consumer sales rose 12.1% with a favorable impact of 5% from foreign exchange rates and 2.6% from recent acquisitions.

About 70% of the remaining increase came from pricing actions and 30% from favorable mix and higher volume.

In the Americas, we grew Consumer sales 11.4% with a favorable impact of 1.8% from currency and another 3% from Billy Bee.

An increase of 6.6% had similar contributions from pricing and from favorable product mix and increased volume.

Alan commented earlier about the role of new products, new distribution, marketing and merchandising in achieving these results.

We are not seeing any measurable pullback by U.S.

consumers following our February price increase.

While our latest consumer take-away analysis showed a pick-up in private-label purchases, there was a nearly equal increase in consumer purchases of our branded products.

In Europe, consumer sales rose 12.6% with the majority of the increase, 11%, coming from favorable currency.

In addition, higher pricing had a positive effect on sales as well as the 2007 acquisition of Thai Kitchen in Europe, which added 2% this quarter.

Our markets in the UK and France are also benefiting from improved store merchandising, product innovation, and marketing support.

In several smaller markets, we are working to improve our financial performance with changes in distribution systems, merchandising, product packaging and marketing.

We increased Consumer sales and it Asia-Pacific region 17.4% and 4.2% in local currency.

While we continue to grow sales in China at a double-digit pace, our consumer business in Australia was down slightly.

In both Australia and China, we are introducing improved merchandising systems which have been successful in the U.S.

and Europe.

Across all regions, operating income for the Consumer business was $55.8 million when restructuring charges are excluded.

When compared to the second quarter of 2007 on this same basis, this was an increase of $2.7 million or 5.1%.

This was below the 12% increase in sales, again due mainly to increased investments to grow our brands.

We still expect to increase advertising this year with an even greater increase in our total marketing support, which includes point-of-sale materials, sampling, and other sales-building programs.

Moving over to the industrial business, we continued to face steep increases and volatility in several commodities, including flour, soy oil and cheese.

Our U.S.

restaurant customers continued to be pressured by industry weakness.

Despite these pressures, we've been able to largely pass through the higher cost to our customers.

In the second quarter, we grew Industrial sales 10.1% and 7.6% in local currency.

Higher pricing was the primary factor behind this increase.

In the Americas, the increase was 8.2% with 2% from favorable foreign exchange.

Higher pricing, in response to commodity cost increases, more than offset a decline from product mix and volume.

We had success with a number of new products for snacks, beverages, poultry and side dishes.

However, demand was down this quarter from some of our core restaurant products, as customers shifted their emphasis to other menu items.

We increased Industrial sales in Europe 9.6% and 8.9% in local currency.

Higher pricing drove two-thirds of this increase, and favorable product mix and volume provided the remaining one-third.

Sales in the Asia-Pacific region rose 26.9% and 14.2% in local currency.

Pricing had a minimal impact in the second 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 $21.6 million, up from $21 million in the second quarter of 2007.

We were pleased to be able to offset the impact of higher cost and deliver a modest increase in profit for this part of our business.

To summarize my remarks on the Industrial business, we have worked hard and had good success in minimizing the impact of this tough environment our business in the first half of 2008.

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 15.4%.

When measured in local currency, the increase in receivables was 7.5%, which was close to the 7.3% increase in sales in local currency.

I am pleased to report that we have made progress in renegotiating payment terms with several customers in international markets.

Inventory was up only 7.5%.

Of the $32 million increase, $15 million was due to foreign exchange rates, $7 million to acquisitions, and we estimate that another $13 million related to higher commodity costs.

Debt to total capital ended the second quarter at 38% compared to 43.1% in the prior year.

Although debt is about even with the year-ago balance, the weak U.S.

dollar has had a significant effect in lowering this ratio.

Cash from operations in the first half of 2008 was $93 million versus a -$8 million in the year-ago period.

The primary factors behind this increase were lower payments for restructuring actions, strong collection of receivables, lower retirement plan contributions, and the timing of tax payments.

In 2008, we've used cash and increased debt to fund the $76 million acquisition of Billy Bee, $57 million of dividends, and $40 million of capital expenditures.

That completes my remarks on our second-quarter financial results.

It is my pleasure to turn it over to Alan for our latest financial outlook.

Thanks, Gordon.

While we had a strong first half, 2008 has had its share of challenges.

The future effect of the global economy on our business creates some uncertainty, as does continued escalation and volatility in commodity costs and higher energy costs.

To achieve these results in a tough environment is a reflection of the commitment and drive of our employees throughout the Company.

I would like to provide our latest financial guidance that continues to exclude the acquisition of Lawry's, which is currently under regulatory review.

We remain excited about the prospect of adding Lawry's brands to our portfolio of products.

Looking ahead to the second half, we can expect to continue to grow sales as consumers react positively to our revitalization efforts, product innovation, and marketing programs.

We also expect to have incremental sales from the Billy Bee acquisition, new distribution, and a continued benefit from our pricing actions.

As a result, we are now projecting sales growth in the high single digits.

This is up from a 5% to 7% range we forecast in our last call back in March.

Our pricing actions, cost savings, and favorable product mix have offset much of the commodity cost increases to date.

We expect these same factors to continue to provide an offset in the second half.

As a result, gross profit dollars and operating income dollars should also increase at a high single digit pace although we expect continued pressure on margins.

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 per share of restructuring charges.

Excluding those charges for both 2008 and 2007, this is an 8% to 10% growth rate.

Due primarily to our third-quarter marketing programs I mentioned at the beginning of my remarks, we are projecting a modest increase in earnings per share for the third quarter followed by a more significant increase in our fourth quarter.

Not unlike a number of other food companies, we are meeting our 2008 profit objectives with greater-than-expected sales growth.

While we've not been able to improve margins, we are pleased to be able to minimize the impact of today's tough cost environment.

This dynamic will be with us through 2008 and could easily extend into 2009.

We remain confident that our business can increase EPS 9% to 11% annually in 2009 and beyond, but in the near-term at least, sales growth may play a stronger role than margin expansion in achieving this result.

As a final remark to our financial outlook for 2008, I also want to reaffirm our guidance of $300 million or more of cash from operations.

Let me summarize.

I hope you can sense from comments this morning our enthusiasm about this business and the confidence in our ability to deliver strong financial results.

McCormick employees around the world are making great strides with their key initiatives to drive sales and improve efficiency throughout our operations.

Their focus and energy have created real momentum and are the reason for our confidence.

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

I look forward to reporting more great progress and solid results in the upcoming quarters.

We would now like to discuss your questions.

Thank you.

Ladies and gentlemen, at this time, we will be conducting a question-and-answer session.

(OPERATOR INSTRUCTIONS).

Ken Goldman.

Good morning.

It's good to hear that you remain excited about Lawry's.

I know you can't talk at all about it, but my question is if unfortunately Lawry's would fall through, where would your focus be?

Would it focus on replacing it with other acquisitions?

Maybe you could talk a little bit about how fertile that market is, or would you really just turn to share repurchase?

Give us a little sense of what your backup plan is.

First, we don't expect that to be an issue, but we would look at the other uses of cash.

There are certainly other acquisition alternatives that are there, but we would definitely go be back into a share repurchase plan.

(multiple speakers) pure speculation, because we expect that not to be an issue.

Okay.

My other question is business with food manufacturers -- you touched on it a little bit.

Can you describe in a little more detail how healthy that is, how you're feeling about your work with the General Mills of the world and so forth, and maybe what some of the trends are there?

Yes, our business with food manufacturers is pretty healthy.

If you recall, that's a big part of what we've done in our industrial restructuring, is to reduce the number of customers in that area that we're working with and really focus on fewer, larger customers.

We are really seeing the results of that.

So, our business in that area was pretty strong last year and continues to be strong this year and the outlook looks pretty good.

Okay, thank you.

Jon Feeney, Wachovia Securities.

Good morning, guys, and thank you.

I wanted to ask about the U.S.

industrial business specifically.

It looks like some of that restaurant business has fallen off a little bit, which is to be expected with what's going on in the economy.

Is there a negative margin mix that -- you know, a notable negative margin mix going on in that industrial business that's hurting you as restaurants suffer and food manufacturers really don't?

Well, our margins are certainly under a good deal of pressure in that area because of the commodity cost, and the commodity cost increases that we are seeing are more geared to that customer base because that's where the flour and the soybean oil are used.

So, there's certainly more of a margin compression based on more commodity costs than there are in other parts of our business.

Okay, that's fair.

On the grocery side, you mentioned you are just about pacing private label.

Trade-down has been issue in some categories, not so much in others.

Is there any more -- are there any other retailers out there in the pipeline who are making noise around store brands?

I know you dealt with Costco a year ago, but anything, any concerns, fears there?

Not anything significant that we are seeing.

I mean, certainly, every retailer is trying to differentiate themselves using their private label, but we are not seeing any large increase in activity.

I think most retailers understand that they need a strong, healthy brand to bring the innovation to help with their private label as well.

But we are not seeing a significant increase in activity.

Okay.

Just finally, could you update us?

I know I ask about this every quarter, the gravity feed shelving initiative?

There's not really much mention of it and I know we are kind of getting to the end of the roll-out, but where do we stand, how is it lifting your sales?

We're still seeing the same impact that we've talked about, something in the mid single digits.

Obviously, there's a lot of variety, depending on the individual customer, and an awful lot going on in the analytical base as things change, but we are very happy with it.

We are kind of wrapping up our installations; we are well over 10,000 stores now and are kind of finishing up the drips and drabs that are out there.

Those 10,000 stores, would those be -- what roughly percent of ACV would that be?

Total ACV, that would be about a third, but it would be it a little over 60% of our volume.

60% (inaudible).

Okay, thank you very much.

Robert Moskow, Credit Suisse.

You know, I guess I have two questions.

The fundamentals in the quarter were just a little lighter than I thought, but I thought that you guidance, Alan, for the second half of the year is pretty robust.

Can you tell me, in the second half, what kind of visibility you have?

Are customers buying in heavily into your merchandising ideas for the coming season?

You know, what kind of commitments have they made to you?

Then I guess the second question is going to be a little different.

What kind of visibility do you have about the Lawry's business?

Are you meeting with Unilever on a monthly basis?

Are you getting business updates on that business?

I will answer the second one first because it's real easy to answer.

We are having very little in terms of conversation on the business.

We're just not allowed to, from a regulatory standpoint, but we are certainly tracking data that's in the public domain, and that's about all I'm comfortable talking about Lawry's.

We do feel pretty good about our merchandising efforts for the second half of the year.

Obviously, every year -- and this year is no different -- in our consumer business, the holiday displays and promotions are a critical part of our business.

We tend to perform very well with that.

It's an important category for our customers and obviously an important time for us.

We put a tremendous amount of emphasis on that, both internally and with our customers.

We feel pretty good about our plans for the year.

We do have a good tracking on how that's going, and we just reviewed it in our consumer business yesterday and feel pretty good about it.

Okay.

Is there anything specific that you're doing in the second half this year?

I remember, last year, you actually pulled forward a lot of sales into the third quarter to try to get ahead of the game for merchandising.

Do you have the same strategy this year, or are you different?

No, we have a similar strategy this year, and we expect that to be successful, and already have some commitments from the same customer base that we have.

Again, that is a display-specific program and we feel pretty good about it.

Also, just to remind you, we are continuing to increase our spend on advertising and promotion, and we will see that in the second half.

So, we are doing both from a retailer standpoint, a good effort on displays as well as the investment in advertising and promotion with consumers.

Does that mean, if we are forecasting third and fourth quarter, that in years past the fourth quarter has been the much bigger of the two -- I imagine it will be again, but do you think the growth, third quarter to third quarter, fourth quarter to fourth quarter, will be comparable to last year?

Do you see any big mix shift between third and fourth this year?

Well, as we said, we expect the third quarter to have lower growth this year because of our advertising and promotion spend and a higher increase in the fourth quarter.

What about the sales?

We expect the sales to be pretty robust in both quarters.

Okay, thank you.

Gordon, do you want to add anything to that?

The only thing I would add is obviously foreign exchange has been helping us in the first half of the year and the comps on the foreign exchange get different in the fourth quarter, so the impact on the fourth quarter from FX we would expect to be less.

Okay, thank you very much.

Chris Growe, Stifel Nicolaus.

Good morning.

I just want to ask one follow-up quickly on the Lawry's and then I had one other question.

That was, on the Lawry's transaction, the fact that you are now under review -- is there an explicit time frame that you should expect to hear back on that review, or is it just sometime soon?

Is that the hope?

As we said, we expect this to be done in the second half of the year, and now that we are in the second half of the year, it's progress as we would expect but there's not a specific time frame.

Okay.

Then I just wanted to ask -- you mentioned increased distribution in the consumer business in U.S.

I'm just curious.

Was there one large customer there, maybe perhaps one you're getting into there, or can you discuss that in any more detail?

Sure, it's Winco.

It's a customer that we've never really had in the Pacific Northwest and it's a great growth customer, and we are very pleased to be able to offer their consumers our products and the consumers are responding.

Okay, great.

Just one more for you, and that was just, relative to the European consumer business, that had seen some much better underlying growth, excluding foreign exchange, which seemed to slow this quarter.

I wonder if you could talk about the trends in that business and maybe what happened sort of sequentially to have that business slow.

There's a couple of things going on in the business.

The businesses in the UK and France are performing fairly well, and business in some of the smaller markets are performing a little less well.

We also made a change in our go-to-market there which has a negative impact on sales, as we moved from a direct force to a distributor force in one of the countries, which will dilute net sales but have a positive impact on our profits.

You mean going forward or you mean just in this quarter?

In this quarter and going forward.

Okay, I got you.

Okay, well, thank you for the time.

Eric Katzman, Deutsche Bank.

I've got a few questions.

I guess, following up on Rob Moskow's question regarding the fiscal third-quarter guidance, you know, last year, you pulled in a fair amount of business.

I'm kind of wondering.

How much of the difficult comp is due to that versus the A&P spend?

It's really more the A&P spend.

We expect the early shipment of displays to be similar this year as it was last year.

Okay.

So the early display is not a one-time deal.

You think it's now more of an ongoing situation and willingness of the retailers to take that in early?

Yes, the retailers that took it were very happy with the program, and we were happy with the results as well.

So it's kind of built in our base now and one of things -- one of the ways that we are just helping to get products on the shelf faster for the holidays.

Okay.

Then in terms of the U.S.

and kind of the competitive dynamics, I guess [Tome] is still out there, and then you've got all of these smaller players that we have a tough time following at best.

Can you talk a little bit about how, if you hear, how the smaller players in the business are doing given the I guess higher working capital and raw material cost volatility situation?

Well, I think it's a tough environment for everybody out there.

We are certainly seeing no downturn in competition or competitive activity from our standpoint.

As you know, Eric, it's a really fragmented category with lots of players, a lot of regional players, and we are not seeing any slowdown in their activity.

I can't speak as to how their internal measures are going, but we've not seeing any -- we haven't seen any uptick, but we also haven't seen any increases or decreases in the activity.

Okay.

Then the last question for Gordon -- I guess you mentioned something about how you had negotiated, I think it was better account receivable terms with customers in Europe or some customers in Europe.

I think that that's been a long-term problem for the Company in terms of working capital and cash conversion cycle.

Can you talk a little bit more about that, and does that mean working capital should be a little bit more of a source versus a use?

The answer would be yes.

The only caveat would be the pressure from commodity cost on inventories.

But it goes back to the McCormick profit initiatives that we started this year.

I have to applaud the operating units that have embraced this in terms of looking at the drivers of their working capital and trying to understand the relationships between their actions to drive sales and profit and how they can also manage the balance sheet effectively.

So, it's been embraced by our operating units, and the expectation is that they continue to do better under this metric.

Okay, and then one last question and I will pass it on.

What percentage of the overall business is now being run on SAP, however you want to kind of define that?

The majority of the business, probably off the top of my head, probably about 75% to 80%, Eric.

We just went live in Canada, as we mentioned in the script, June 1, so the majority of the major -- the major operations are now up on SAP.

We still have to do some of the smaller units around the rest of the world.

Okay, helpful.

Thank you.

Eric Serotta, Merrill Lynch.

Good morning.

A couple of quick questions -- first of all, on the consumer business, I know, this quarter, you talked about some gains by private label that were sort of offset by continued gains in your branded business.

I'm wondering whether you could drill down a bit more into your branded business.

I believe, last quarter, you talked about actually stronger growth in the gourmet and higher-end type items within the branded business, and then base spices and seasonings, teas.

What were the trends like this quarter?

Actually, the gourmet business grew in the mid single digits, and it was because of some increased advertising as well as the launch of some new products.

We did really well with the gourmet sea salts in this period.

We are still seeing core gains that are doing pretty well as well, and our dry seasoning mix business is also doing very well.

Okay.

Are there plans for another restaging of the dry seasonings business, dry seasoning mix business?

As you know, we are just in the last stages of revitalizing the spice and extracts category.

The answer is yes, we are working on a revitalization of the DSM category which we will start to see next year.

Okay.

Then shifting gears to -- I know this has come up several times -- the impact of the pull-forward of sales from the fourth quarter to the third quarter.

My understanding was, last year, in order to incent customers to take the product early, you offered some more favorable receivables terms that led to a ballooning receivables balance at the end of the third quarter, and you then collected those in the fourth quarter.

You know, do you still have to offer -- you know, this year, do you still have to offer customers those incentives to take the product early, or are they taking it earlier because they are seeing earlier, better lift from the earlier merchandising?

Yes, the program this year is the same that it was last year and should have a fairly similar impact.

On the other hand, one thing I would point out that even though receivables went up, this is product that we have to build.

So it's either going to be in our inventory and show up there, or it's going to be in the customers' inventory with an extended receivable.

So, the overall impact on cash is not that significant.

Okay, great.

Thanks for your help.

Mitch Pinheiro, Janney Montgomery Scott.

Could you talk about commodity coverage for I guess where you are now, for maybe '09?

Mitch, we generally don't divulge our commodity cost positions.

I'd say we work with our customers clearly on the industrial side to make sure that the pricing mechanisms are in line with the coverage, but in terms of a detailed position of where we have our commodities, we generally don't talk about that.

Okay, fair enough.

How much -- you talked about collaboration with your larger customers as far as purchasing.

Is there a percentage of your business that is done with greater collaboration now that you could share or give us some indication as to how much is more closely tied with one another?

I'm not sure how I'd break out a percentage of that but the things we're working on are the large commodities, like soybean oil, flour and dairy, that have a big impact on a fairly small group of customers.

I don't have the data to break it out more specifically than that, but those are the key areas where we are working collaboratively.

Yes, okay.

As far as staying on the commodity topic, you know, there is always a lag; commodity costs sort of rise and then sort of pricing goes into effect.

Has the lag shortened or is there any way you can talk about that?

I think our data would say right now that, from a pure commodity standpoint, that we are pretty well on time with the increases.

Because of the way we are working collaboratively, there is much, much less of a lag than there was last year.

Okay, great.

As far as your I guess ad spending , I think I had in my notes that, on a full-year basis, you expected advertising to be up 10%.

Am I

Yes, that's right.

Has the first half/second half mix, are we still -- first half, was it up greater than 10% or less than 10%?

It was less than 10%, Mitch.

If you recall from the first quarter, it was actually slightly down in the first quarter and this quarter now has caught us up, so obviously the third quarter which we talked about will start to put us on that path towards that 10% growth for the year.

Does it ever -- would it exceed 10%?

We did share in our remarks that promotion -- consumer promotion and advertising together we expect to increase for the fiscal year at a rate greater than 10%.

(inaudible) things besides media; we're doing some sampling programs and we've got point-of-sale material and other kinds of programs behind our brands.

Okay, thank you, Joyce.

As far as your shelving initiative, and you talked about maybe revitalizing the dry seasoning mix area, is there a Part II to the sort of shelving initiative?

You know, so first, so are there any learnings that you have that you will sort of reimplement in the existing base?

And then, two, does that play a part in any dry seasoning mix revitalization?

Yes, I mean, we are learning all of the time with this, and certainly, as we go forward, we will be doing tweaks to continue to improve it.

You know, there are certain segments that are not as well presented in the set, so we're working on that; we are working on getting the planograms right.

So our big initiative has been to get the store set over the last two years.

Now, in S&E, it's more continuous improvement and response.

On the dry seasoning mix business, it was about 3.5 years ago that we revitalized it, and it's time for a new refresh.

It's just part of the cycle.

We are excited about some of the things that we have, but we are absolutely taking the learnings from the spice and extracts business and the consumer insights that we have, and applying those in the dry seasoning mix category.

It's just a part of the cycle.

We do this about every three or four years with each of the categories.

Okay.

Are you seeing -- some of your new products certainly went more premium, whether it's your sea salts and that type of product.

Is there any -- have you seen any consumer reaction, perhaps negatively, given the economic pressures to the higher end, or at least can you talk about that a little bit?

Yes, not to this point, but if you just think about the whole trade-down impact, people are trading down from restaurant meals and they are not necessarily giving up the idea that they want to have a nice meal, so I think we are benefiting in that segment somewhat.

On the other hand, because we cross so much of the food segment with the things that we are offering, as people trade down from higher-end steaks at home to tacos and chili and maybe a cheaper kind of meat, we've got our slow cookers and our Bag n' Season line that helps to attack that.

So we think we are well-positioned to help consumers with wherever they are going.

We are not seeing a significant trade-down at this point.

In fact, we are seeing consumers not completely walking away from some indulgence, and we are providing -- helping provide a fairly inexpensive indulgence.

Okay.

The last question is on your unconsolidated operations.

Can you talk about that a little bit?

It was flat in the quarter.

Obviously, soy oil has got to be having a big impact there.

But are there any other factors happening in unconsolidated?

You know, the biggest impact really is the cost of soybean oil on our Mexican joint venture.

That's a big part of the cost structure for mayonnaise and is putting a good deal of pressure on the margins there.

Gordon, do you want to add anything to that?

That's absolutely right, and that's pressure that we would expect to continue through the back half of the year as well.

Okay, thank you very much.

Andrew Lazar, Lehman Brothers.

Good morning, everyone.

Just two things, one on sort of productivity and cost saves.

I guess with the restructuring programs, the multi-year restructuring programs starting to kind of wind down this year, I was wondering if there is any way you could give us a sense or a metric on how to think about maybe the magnitude of your ongoing kind of productivity projects look like.

Some companies think about it as a percent of cost of goods, kind of incremental cost saves every year, or other ways.

But I wanted to get a sense, just now that that piece is winding down, how we think about the incremental cost saves opportunity going forward.

We haven't established an external metric to communicate, Andrew.

I can tell you it's in the DNA of all of our operations.

In fairness, we probably should start to find a way to help you understand that.

I will say that the plants every year look at their per-unit costs and seek productivity improvements to offset inflation.

Likewise, there's targets in SG&A in each of the operating units to try and grow that less than sales, less than inflation.

In some cases, we try to hold it flat depending on the initiative.

So it's many and varied across the businesses.

I don't have a single metric that I could communicate to you, but we do have the activity through the organization and we do roll it up internally and monitor it to see how we're doing relative to the cost increases.

I got you.

Then anything going forward that you deem appropriate in thinking about that obviously would be helpful.

The last thing would be when you think about -- this is on the retail side of your business -- when you think about the type of pricing that you have been taking, in context with the productivity and all the other things you're doing, do you feel like you are sort of appropriately pricing to where the underlying commodity cost of some of your key commodities are, rather than to where you may be covered, such that, when that coverage rolls off, you are in a good place with respect to fiscal '09 and such from a pricing standpoint, given there is some sort of a lag, as are always is, with pricing?

Yes, the dynamic in pricing is -- and we work with customers to help them understand the impact of pricing because, as you well know, we are at a decent premium to competition and to private label in the market, and so we are really sensitive to maintaining a premium that's not too high.

We want to make sure we stay very relevant to the consumers and especially in a tough time like this.

So the way we tend to think about it is to manage against that and to help offset the cost increases.

Obviously, what you're seeing is we are not pricing to margin right now.

We are trying to price to recover costs, and we think that's responsible in the environment that we are in.

Robert Moskow.

Gordon, can you give us guidance on interest expense for the year?

You know, it was down about $2 million sequentially, quarter-over-quarter.

Is that trend going to continue, or where are we at?

Obviously excluding any impact from the impending Lawry's acquisition, we would expect that similar benefit and trend to continue through the back half of the year.

So about between $12 million and $13 million a quarter maybe?

That's probably about right.

Obviously depending on what rates do, that can move, but that's probably about right.

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

Well, this concludes today's call.

Through July 3, you may access a telephone replay of the call by dialing 877-660-6853.

The account number for this replay is 309 and the ID number is 284606.

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

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

Ladies and gentlemen, this does conclude today's teleconference.

Thank you for your participation.

You may disconnect your lines at this time.