McCormick & Company Inc (MKC) 2009 Q1 法說會逐字稿

Greetings, and welcome to the McCormick's first quarter 2009 conference call.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Joyce Brooks, Vice President, Investor Relations from 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 first quarter financial results and outlook.

We have posted a set of slides to accompany today's call at our website, IR.McCormick.com.

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.

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.

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.

In addition, information we present today, which excludes restructuring charges, as well as unusual items recorded in 2008 are not GAAP measures and we present this information for comparative purposes alongside the most directly comparable GAAP measures.

A reconciliation of GAAP to non-GAAP measures can be found in this morning's press release and in the presentation slides for our call.

It is now my pleasure to turn the discussion over to Gordon.

Thanks, Joyce.

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

In a difficult economy and faced with head wind from a stronger dollar, we were pleased to achieve earnings per share of $0.44 for the first quarter of our fiscal year.

On a non-GAAP basis, excluding restructuring charges, earnings per share in 2009 was still $0.44.

Compared to EPS of $0.41 for the first quarter of 2008, this was an increase of 7%.

This is in the range of our growth target for the year, which on a comparable basis is 7 to 9%.

If you recall, we had indicated that our profit growth in the first half would be hampered by the stronger US dollar and lower income from our joint venture in Mexico.

Both of these factors created some profit pressure in the first quarter, but were more than offset by solid profit from our consolidated operations, which included the benefit of our actions to improve productivity and control costs, as well as the addition of the Lawry's business.

We reported a sales decline of 0.8% in the first quarter.

However, in local currency, we grew sales 7.2%.

As indicated on slide five, pricing was up 4.6% and volume and product mix rose 2.6%.

The increase in volume and mix includes the effective acquisitions, which added 5.4%.

As you look across the different parts of our operation, there were varying levels of sales performance this quarter.

To review this, let's take a look at our two segments.

First, consumer, and then industrial.

We reported a first quarter increase of 2.5% in consumer business sales.

In local currency, we grew sales 9%.

Pricing added 4.1% and volume and product mix, another 4.9%, which included an 8.1% increase from acquisitions.

In the Americas, consumer sales rose 10.5% and in local currency grew 12.9%.

As we mentioned in our last call, we took a price increase in early January to partially offset higher material and packaging costs for this part of our business.

With this increase, pricing added 4.8% to sales.

Volume and product mix added another 8.1%, which included a 12.6% increase from acquisitions.

Excluding acquisitions, volume and product mix declined 4.5%.

Several factors led to this decline.

About one third of the decrease was due to lower sales volumes for Zatarain's.

For rice mixes in particular, retailers bought in ahead of our fourth quarter price increase taken in response to higher rice costs.

In the first quarter, retailers worked through this extra inventory.

The second factor also relates to retailer inventories.

A comparison of our consumer purchase data with factory shipments in the first quarter shows that consumer takeaway for our branded spices and extracts was positive this period.

However, our unit sales of these products were down.

This suggests a greater than normal reduction in retail inventory from the end of our fourth quarter to a lower level that retailers were holding at the end of February.

The remaining factor behind the volume and product mix decline was the result of a shift in sales mix.

Parts of our consumer business in the Americas had strong sales growth early in 2009, including McCormick brand taco and chili seasonings, slow cooker blends, gravies and other dry seasoning mixes.

We also grew sales of value priced products including warehouse club and Hispanic items.

Volumes of other products, other items in our product line were lower this period, including our premium line of gourmet spices and herbs.

We also saw a decline in sales of our seafood seasonings, as consumer turned to lower cost meats.

Looking ahead to the second quarter, we expect this shift in mix to continue.

However, we do not expect further impact from inventory reductions at retail.

In fact, across our broad product line, we look towards sales growth in the second quarter, as we begin our revitalization of dry seasoning mixes, move into the Easter holiday, which occurs later this year than last year, and which will be followed by our grilling season.

We'll also be launching our Lawry's marketing campaign this quarter.

For our Europe, Middle East and Africa region, which we refer to as EMEA, we reported a 12.7 decline in consumer sales; however, local currency sales rose 1.7% while pricing actions taken in the fourth quarter of 2008 added 3.2% to first quarter sales, volume and product mix lowered sales 1.5%.

This was a strong improvement from a sharper decline in the fourth quarter of 2008, which was driven in part by trade deloading.

While still a factor in the first quarter, it had less of an impact than in the previous quarter.

Given the difficult economy, we were pleased to see our sales stabilize this period.

While some consumers are trading down to private label spices and herbs as a result of retail emphasis on these items, the category remains strong and retail takeaway for our brands is also positive in the latest scanner data.

In France, we are encouraged by the strong performance of our Vahine dessert items, which is a leader in this category.

In 2009, sales of both the Vahine brand and private label have increased while sales of competitive brands have decreased.

We are driving the growth of Vahine with our revitalization efforts and focused marketing support.

In several of our smaller markets, including the Netherlands, Spain and Portugal, we achieved modest increases in sales of both branded and private label products when measured in local currency.

In the Asia Pacific region, we reported a 5.5% decline in sales.

However, in local currency, first quarter sales grew 4.3%.

Pricing added 1.8%, and an increase of 2.5% came from higher volume and product mix.

China remains the primary driver of the favorable volume and mix in this region with double-digit increases.

One driver of this success is distribution expansion.

In 2007, we began to penetrate street markets in China, also known as wet markets, and by the end of 2008, we were in 8000 locations.

In 2009, we expect to enter another 1500 locations with our McCormick brand products.

While we reported a first quarter decline of 5% in industrial business sales, when foreign currency rates are excluded, we increased sales 5%.

As shown on slide 10, pricing added 5.2% while volume and product mix lowered sales 0.2%.

During this period, incremental sales from acquisitions, primarily food service sales of the Lawry's brand, added 2%.

In the America's, industrial sales declined 0.8%, but grew 3.6% in local currency.

Because of the year on year increase in commodity costs, and our pass through pricing mechanisms for this business, price increases are still contributing to sales and added 5.7% in the quarter.

Volume and product mix declined 2.1%, which included a 2.8% increase from acquisitions.

Excluding acquisitions, volume and product mix lowered industrial sales 4.9% in the Americas.

While restaurant industry weakness continued into 2009, the larger volume impact this quarter was sales to food manufacturers.

Some of our customers have reported a slowdown in parts of their business.

In concert with the focus of our strategic customers and to support their growth, we are guiding our development efforts toward core line extensions and value priced items instead of more cutting edge or premium priced new products.

In international markets, our industrial business sales were quite robust when measured in local currency.

While industrial sales for EMEA declined 20.6%, the impact of currency rates at 29.5% was particularly significant as this business is largely based in the UK.

Excluding this currency impact, sales grew 8.9%.

As in the Americas, pricing was an important component of our sales growth in this region, adding 5.6%.

Volume and product mix were favorable and increased sales 3.3% in the first quarter.

Higher sales of customized products to both quick service restaurants and to food manufacturers more than offset a decline in the branded products we sell to food service distributors.

In the Asia Pacific region, we grew industrial business sales 0.4% in the first quarter.

In local currency, the increase was 7%.

While pricing added 1.1% to sales, most of the increase, 5.9%, came from higher volume and product mix.

Our sales to quick service restaurants were strong, especially for products supplied from our operation in Southeast Asia.

Below the sales line, we set a goal to increase gross profit margin at least 50 basis points in 2009.

In the first quarter, gross profit margin rose 10 basis points.

As in 2008, we expect to see progressive improvement in our gross profit margin with each successive quarter.

We expect this sequential margin improvement to be driven in part by productivity improvements from our comprehensive continuous improvement program and our restructuring actions.

For our industrial business, as projected costs for certain commodities declined in 2009, we will adjust our pricing to maintain gross profit dollars, which will lead to an increase in our gross profit as a percent of net sales.

In addition, we expect a continued benefit from the stronger sales in our consumer business, which has a higher margin than the industrial business.

Selling, general and administrative expenses were 27% of sales in the first quarter of 2009 compared to 28.3% in the year-ago period.

Our marketing support was about even with last year.

The decrease in SG&A reflects our efforts to manage costs, improve productivity and integrate the Lawry's business with few incremental operating expenses.

In this period, we had little incremental brand support behind Lawry's as our comprehensive marketing program is being launched in the second quarter.

Turning to slide 15, operating income was $89.8 million.

On a comparable basis, excluding restructuring charges, we increased operating income 11.1%.

On this same basis, operating income for the consumer business rose 10.9% to $74.3 million and despite the tough sales environment for our industrial business, we grew operating income 11.9% to $16 million.

For both businesses, we are benefiting from productivity improvements and our acquisition of strong brands is lifting the operating income margin of our total business.

Our tax rate at 28.2% was favorable this quarter primarily due to the settlement of a tax audit.

We are still projecting a rate of 31% for the balance of 2009.

At the beginning of my remarks, I commented on profit pressure from our joint venture in Mexico.

We indicated in our guidance for 2009 that this business would be unfavorably impacted in the first half by the stronger US dollar, as well as the impact of soybean oil, which is a main ingredient in mayonnaise.

Fundamentally, this business has continued to perform very well, even in the face of a more difficult economic situation in Mexico.

Pricing actions taken in 2008 have been maintained.

The business has gained share and sales volume grew at a double-digit pace in the first quarter.

However, the profit -- excuse me.

The profit results from this business when translated into US dollars caused a decline in income from unconsolidated operations to $3.2 million from $5.3 million in the first quarter of 2008.

Our strong operating income more than offset lower income from our joint ventures and as a result, we reported earnings per share of $0.44 for the first quarter, up $0.05 from $0.39 last year.

Excluding a favorable $0.02 from restructuring charges, on a comparable basis, the increase was $0.03, or 7.3%.

Higher operating income added $0.05 per share and lower income from unconsolidated operations reduced EPS by $0.02.

The favorable tax rate added $0.01, which was offset by a reduction in other income for the quarter.

Before I turn it over to Alan, I'll comment briefly on the balance sheet and first quarter cash flow and refer you to slide 18.

In the first quarter of 2009, cash flow from operations was closer to a more normal pattern with a decline of $13.3 million.

This compared to a $24.3 million increase in the first quarter of 2008, which benefited in part from the timing of receivable collections.

Employees and operations around the world continued to focus on asset management following the introduction of our incentive-based McCormick profit metric last year.

With McCormick profit, we reward each operating unit for its effectiveness in managing its working capital.

We expect this to improve our cash conversion cycle and continue to project a reduction of three to five days in 2009 following our five-day decrease in 2008.

For the latest 12-month period, day sales outstanding and days payable were both favorable, while inventory turns were flat.

Trade receivables were down $45.3 million to $342 million at the end of the quarter with the impact of foreign exchange rates having a greater effect than higher pricing.

Inventory ended the quarter at $448 million, down $2 million versus February 2008.

A decline from foreign exchange rates was largely offset by increases from acquisitions and higher input costs.

Also, we increased inventories of Lawry's and Billy Bee products as we transition these operations into our facilities.

We expect these increases to reverse later this year.

We noted in our January call that we would be contributing a greater amount through our pension plans in 2009.

Earlier this month, we contributed $20 million to our US pension plan.

At this time, we expect to make a similar contribution during the third quarter.

As stated previously, our primary use of cash during 2009 will be the reduction of debt from acquisitions.

Throughout 2009 and into 2010, we will be working to return our debt ratios to pre-acquisition levels.

We continue to maintain a strong balance sheet and financial discipline, which are particularly important in this environment.

That completes my remarks on our first quarter financial results.

I would now like to turn it over to Alan.

Thanks, Gordon, and good morning.

Our first quarter EPS result has us on track to meet our profit target for 2009.

As Gordon indicated in his review of the financial results, our sales were affected by the unfavorable currency rates and lower volumes in this period for certain parts of our business.

However, we successfully offset these head winds with careful control of our operating expenses and a favorable business mix.

This enabled us to achieve a 7% increase in EPS on a comparable basis for the first quarter.

We are operating in an increasingly tough economy with more consumers in most parts of the world under pressure.

Some consumers are preparing more meals at home and many are shopping for value priced products at value priced retailers.

Others are eating at quick service versus casual dining restaurants.

Our broad portfolio of customers and products generally serves us well in this environment, allowing us to reach the consumer even as they modify their restaurant visits, shopping trips, and product purchases.

We have a number of branded products that help families prepare low cost meals, such as our dry seasoning mixes.

We are redirecting a portion of our marketing dollars to print an interactive media that offers cents-off coupons for our branded products and feature recipe ideas for healthy, low cost meals.

Our FSI coupon redemptions in the US are up 20% versus last year.

We are a major supplier of private label products and are participating in the growth of private label sales and other value priced items such as our Hispanic product line in the United States.

Our sales growth with value priced retailers, including dollar stores, supercenters and warehouse clubs has outpaced other channels.

We recently picked up new business with a value priced retailer in France that will be carrying a limited line of our Ducros brand.

In the US, Family Dollar just added -- agreed to add our Grinders, Grill Mates, Zatarain's and Lawry's items.

And on the industrial side, as we've indicated before, a large part of our food service sales are to quick service restaurants.

While we are well positioned, we're not immune to the effects of this difficult economy and our leadership team and employees are adapting to new challenges.

We are effectively managing through changes in product demand and customer requirements while pursuing new opportunities in the marketplace.

We believe that we will continue to grow our business in the face of a tough economy, unfavorable currency impacts, and further volatility in input costs.

We expect 2009 to be another good year for our consumer business, with sales growth from each region on a local currency basis.

The top line will be driven by Lawry's, new product innovation, and effective marketing and merchandising of our leading brands.

Also adding to sales are the pricing actions now in place in our major markets, which are helping to offset higher input costs.

Our employees have done a great job integrating Lawry's.

We are now poised to launch our comprehensive marketing support for the Lawry's brand beginning in April.

This includes television, print, interactive media, product innovation, coupons, and radio.

In addition to Lawry's, a major focus for the US consumer business this year is the comprehensive revitalization of our dry seasoning mix line with new packaging, merchandising, and marketing.

Our reformulation of this product line is a cornerstone of the revitalization, which clearly differentiates us from our competition with removal of trans fats, MSG, and artificial flavors and colors.

Retail customers are enthusiastic about these improvements.

We've just started shipping the reformulated products and in April we will start communicating the changes to consumers.

Other growth initiatives in the Americas include new marinades for the upcoming grilling season, expansion of Simply Asia offerings to include steamers and more value-added seasoning mixes, and a broader marketing program behind our high antioxidant super seven spices.

Moving to Europe, our next steps in the Vahine revitalization will include new products and geographic expansion.

For spices and seasonings, we are carrying the health and wellness message to this region and just launched a print and interactive media campaign in the UK and France.

We have launched nine new line extensions of our dry seasoning mix offerings under the Schwartz brand and are supporting it with TV advertising.

Across all markets in Europe, a portion of our marketing support will feature ways to prepare low cost meals with our products.

Our industrial business faces a challenge with restaurant customers as consumers continue to eat more at home for both restaurants and food manufacturers we are working to support growth of our value priced items and extensions of core products.

For this business, the heightened concern about food safety and growing interest in natural flavors has us well positioned as a supplier.

We were pleased to achieve sales growth in each of our three regions in the first quarter when measured in local currency.

Employees in this part of the business continue to partner with our customers to manage cost volatility while working to improve our productivity and profit margins.

Our strategic partnerships remain strong during a difficult period.

McCormick continues to be recognized by its customers for consistent quality, excellent service, and ongoing innovation.

Our financial outlook begins on slide 23.

Across both segments, we expect to grow sales 2 to 4%.

Our initial guidance projected a 7% unfavorable impact from currency and that's still our latest estimate.

This includes our growth range for sales in local currency to 9 to 11%.

We continue to look for 3% from acquisitions and 2 to 4% from pricing.

Based on our first quarter results, we're likely to be at the lower end of our volume and product mix range of 2 to 4%.

We are on track to lower costs by $30 million in 2009.

As a part of our comprehensive continuous improvement program, projects have been identified and are now under way.

These projects are expected to generate $21 million of cost reductions.

As we complete our restructuring program, additional savings of $9 million are expected.

Our margins will also benefit from the higher growth of our consumer business this year due largely to acquisitions.

We are reaffirming our guidance for 2009 earnings per share.

On a GAAP basis, our guidance is $2.24 to $2.28 and excluding an estimated $0.05 of restructuring charges, the range is $2.29 to $2.33.

This is a 7 to 9% growth rate on a comparable basis with 2008 excluding restructuring charges, as well as the noncash impairment charge and items related to the Lawry's acquisition that were recorded in 2008.

This projected range reflects the downward pressure that a stronger dollar will apply to our higher EPS.

Excluding this impact, our 2009 growth rate would be at the higher end of our long-term goal to grow EPS 9 to 11% annually.

As we indicated when we first announced our guidance for 2009, we expected EPS growth in the first half of the year to be unfavorably impacted by currency and joint venture income.

Although we had this profit pressure in the first quarter, we still reported a solid increase in EPS as a result of our cost management and favorable business mix.

However, in the second quarter, we are planning a significant increase in marketing support, primarily in the United States as we feature the revitalization of our dry seasoning mixes and launch our new Lawry's campaign.

This compares to 2008 when we increased our marketing spending in the third quarter to support grilling and seafood products in the US.

As a result of this pacing of 2009 versus 2008 promotion and advertising dollars, we expect the rate of EPS growth in the third quarter of 2009 to be stronger than in the second quarter of 2009.

Let me summarize.

Our business remains strong during this recessionary period with a strong portfolio, diverse product line, proven growth strategy, and aggressive cost reduction initiatives.

We are staying agile and successfully adapting to consumer trends and customer initiatives.

Together with McCormick's leadership team, I'm confident that we will continue to overcome challenges and find opportunities for growth in the marketplace.

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

Thank you.

(Operator Instructions) Our first question today will be coming from the line of Ken Goldman of JPMOrgan Chase, please go ahead, sir.

Good morning.

Good morning, Ken.

I think it's great you are adding a channel at least with some products in some dollar stores, but my big question is on the potential of losing some shelf space in another channel, which is Wal-Mart.

From what you guys have said, I believe that Wal-Mart was doing some tests.

I don't know if those were normal or abnormal in terms of the timing and scope of those tests, but could you give us a little insight in how confident you are that you'll be able to maintain all of your shelf space at Wal-Mart?

We're not getting into any specifics on on a specific customer, Ken.

But what I would say is that we've been very happy with our branded growth in that channel and with that customer and we believe that consumers find value in the comparison of retailers who they can see that they are getting a good price.

We continue to work well with all of our customers in managing the category for growth and maximizing the profitability of the category.

What individual customers decide to do with shelf space is absolutely something that they are going to make decisions on, but we're in there with our category management story and we find that we're a good partner.

Retailers who are -- have the right mix of brand and private label are the retailers that are winning in this environment.

So, I can't make projections on specific customers, but I will say that we find that we're very well positioned.

Okay.

And you should know that customer already has a pretty large mix of private label SKUs in our category, as well as a lot of regional brands.

Yes.

Well, second question is for years management, whether it's you guys or your predecessors, reiterated the value in trading consumers up to higher priced products.

So why is it not a bad thing for mix and/or margins that consumers are now trading down to lower priced products?

I wouldn't say it's a good or bad thing, but it's a reality.

It's -- we -- when consumers are trading up to higher premium products, we're helping to set the trends and we're providing the products that they were looking for.

In this economy, consumers are moving to value and we are providing the products that help them with that.

So, so I would say that it's not necessarily -- we're not making a value judgment on what's good or bad, but it's reality and consumers today are looking for products that they can use lower priced meats to still have a great meal and that's where we're hitting those trends.

We want to provide what consumers are looking for and lead with those trends and our dry seasoning mix business is fitting that bill.

It's an advantage of the breadth of the portfolio that we have that we're selling things at virtually every price point, so as consumers are looking for premium innovation, we're there to provide that.

As they're looking for value, we're there to provide that.

Okay.

Thanks very much.

Thanks, Ken.

Thank you.

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

Please go ahead with your question, sir.

Thanks.

I wanted to ask you about the inventory deload.

First quarter looks like you're up like everybody else experiencing a deload.

But you said you're confident that it's not going to happen going forward and you cited the scanner data as being pretty good.

The scanner data that we use doesn't seem to do a very good job of measuring your sales, because a lot of your sales are in non-measured channels.

Do you have better data than we have?

And how confident do you feel that that scanner data really reflects what's going on at the consumer end?

And then have you talked to your wholesalers and are they telling you that they are done deloading from an inventory perspective?

Well, the scanner data that we see is broader than just IRI Nielsen, which you have public visibility to.

We're able to see broader in all of our channels.

So we have a pretty good indication of what consumers are actually taking.

So that gives us a bit of confidence in that.

I would say that what we're finding is, was that both wholesalers and retailers did manage inventories down in the first quarter, as they have with a lot of other customers, and I think we're getting to a point where additional deloading is going to lead to more significant out of stocks on the shelves, so that's why we feel like this will turn.

Consumers continue to buy products.

We're seeing volume growth at retail with their customers, with consumers, and at some point, and we think that's starting to turn already, that the sales will follow.

Okay.

And do you have a sense also -- you mentioned a couple of new customers, a retailer in France and another one in the US that are adding items.

Is that -- was that already in your plan for this year for 2009 or is that kind of new news that would provide some upside?

And the reason I ask is it just seems very early in the year to already lower your sales guidance to the low end of 2 to 4.

We're only one quarter in.

So you have this -- these new customers.

Then in addition you have kind of a weakening of the dollar just in the past week.

Wouldn't -- wouldn't that be enough to help you maintain a 2 to 4?

Well, we didn't, we didn't call outside our guidance, but with the slowness in the first quarter, we -- and in this environment, we think it will be tough to catch up.

Those value retailers are going to be relatively small but we just wanted to show that we're selling our products in broad channels and in value channels that consumers are increasingly moving to.

So that's kind of where we are.

The one-week change in currency rates, we are trying to project currency.

It's been really volatile, but -- if you just go back to where we issued the original guidance, it's still not very different from the original guidance.

We're glad to see it change this week, but we're not calling the trend at this point.

Okay.

I'll get back into queue.

Thanks.

Thanks.

Thank you.

Our next question is coming from the line of Ann Gurkin of Davenport & Company.

Please go ahead with your question.

Good morning.

Good morning, Ann.

Just a follow on the comments regarding the volume outlook.

Is a large part of the change due to lower sales to the industrial customers, to the food manufacturers?

Yes, that was the impact in the first quarter and what we saw with those customers is very similar to what we saw in our own consumer business, where there was some pantry deloading by consumers and inventory deloading by retailers, and a reduction in the number of new items that were being launched, as a lot of the large food companies have come out and said they are focused on value innovation and line extensions that are closer in to what they are doing to really hit where we are in this economy.

And as you look through the year, do you expect those sales to remain down for the food manufacturers, like what you saw in the first quarter?

No, we would expect some recovery.

Okay.

And then secondly, may I just get a comment on how sell-in is going for the Easter holiday?

We're feeling like we're pretty well on target for the sell-in and recall that, Easter products are products that are not normally sold.

They are only sold at Easter, so we have a pretty good indication of what the promotions look like for that.

That's food colors, extracts and things like that.

So we're feeling pretty good about not only our Easter sell-in, but also our grilling sell-in.

Great, great.

Thank you.

Thanks.

Thank you.

(Operator Instructions) Our next question comes from the line of Chris Growe with Stifel Nicolaus, please go ahead.

This is actually Dan Stevenson in for Chris.

We had questions in two different areas, first, you guys noted in your press release that marketing would be up $20 million.

Last quarter I think you said it would be up 20%.

We were wondering if these were two different figures.

And then on a related note, how much of the increase in marketing is due to the presence of Lawry's and how much of the increase is directed towards the base business?

This is Gordon Stetz.

The $20 million was a full-year number and roughly three quarters of that $20 million increase was related to the acquisitions of Lawry's.

We did not indicate that the first quarter that would be up substantially.

In fact, the first quarter advertising and promotion in total was roughly equal to the prior year.

So as Alan indicated in his remarks, our expectation is a substantial portion of that increase will be spent in Q2.

Around Easter, the Lawry's launch and some of the grilling event that we mentioned before.

Okay, thank you.

That's helpful.

And then our final question pertains to your mix, kind of touching on an earlier question.

You noted that consumers, in consumer, the value oriented products and dry seasonings mix both grew at the expense of premium priced products.

We were wondering, was that still a net positive for your mix or did that shift negatively effect your consumer division products?

I'm sorry.

Could you repeat that question?

Yes, sure.

So for consumer the value oriented products and dry seasoning mix both grew at the expense of premium.

And so was that still a net positive mix for you, or did that shift negatively affect the consumer?

The percentages are equal to the higher dollar items, but clearly if you're selling a packet of DSM, that doesn't equate to a gourmet spice, so the effect would be negative just because of the dollar mix.

Okay.

Thank you very much.

Thank you.

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

Please go ahead with your question.

Hi, can you hear me?

Good morning, Mitch.

Hi, good morning.

Just a follow-up on the $20 million marketing spend.

Is that below the line?

Is that all below the line spent?

Yes, that would all be in the SG&A line, Mitch.

And you said in first quarter, you had mentioned I guess A&M was flat.

Again, that's in the SG&A line?

Yes.

What are you doing above the line?

What kind of activity or year-over-year growth or, if you could talk about that?

Yes, we're increasing our promotion spend as well above the line and you'll see those -- in fact, I think you're starting to see a fairly regular drop of freestanding inserts in the newspapers.

We're also doing the same thing with web-based coupons and we're finding those have not traditionally been great spends, but in this economy, we're finding that there's a much higher redemption rate.

We're able to communicate recipes and we're able to communicate value and get value at price reductions in the hands of consumers.

So that's where we're focusing that and you'll see, you'll see a continuous spend on that over the next several months.

Okay.

When you talk specifically about spending on Lawry's, is -- and your new products, is there an element there of sliding?

There's a minor spend, which is all kind of captured in our above the line.

Okay, got it.

In terms of dry seasoning mixes, obviously a mix shift towards there.

What type -- would you share with us the type of growth that you've had in dry seasonings?

Yes, mid to high single digits in the category, it's approaching about 10%.

On certain items, it's obviously a lot higher than that.

Okay.

Like chili and taco have been much higher than that.

Slow cookers.

And private label in the dry seasoning mix, was that -- how would that relate to your growth rate?

Well, private label and dry seasoning mixes have actually been losing share and what we've found is that the price gap between brand and private label has somewhat closed and consumers are finding the value.

We think with the revitalization, as we've taken MSG and trans fats out, that will even further differentiate our brands versus private label.

Okay.

When -- and how much of the dry seasoning mix private label do you make?

I know you make about 50% of private label.

In general, I didn't know if there was a mix there.

Yes, it's a little less than in spices because the volumes tent to be lower and more complex and our private label manufacturing tends to be higher speed.

But it's -- we still produce a substantial amount of private label.

Okay.

When I look also at the gross profit improvement in the quarter, I think it was 40 basis points, is there a -- is that going to be sort of a steady state type of improvement through the year?

I think you're looking for about 50 basis points.

Is this going to be -- are we going to see some sort of stepdown or -- in Q2 and then accelerating in the back half?

Or how would you characterize that?

We would see sequential improvement quarter to quarter, Mitch.

It was 10 basis points in Q1 and then as we progress through the year, we would see an improving gross profit margin picture.

Okay.

I'm sorry.

Yes.

I got you.

10 basis points.

Looking at the wrong number.

Okay.

Sorry about that.

And then finally, is there any -- I don't want to say seasonality, but on your unconsolidated income line, is -- when do you start to sort of lap the weakness, or start to see some growth there?

In unconsolidated?

Yes.

Towards the back part of the year.

And the big issue isn't so much seasonality of the business.

It's the year on year comparables as soybean oil was accelerating last year and then we saw the rapid decline of the peso.

So it's less of a seasonal purchase pattern and much more of a, of what happened with the exchange rates and the commodity costs.

Okay.

All right.

Thank you very much.

Thanks, Mitch.

Thanks, Mitch.

Thank you.

Our next question will be coming from the line of Eric Katzman of Deutsche Bank.

Please go ahead with your question, sir.

Hi, good morning, everybody.

Good morning, Eric.

Good morning, Eric.

I have a few questions.

First one, I guess I learned the hard way a few years ago about following whatever's going on in Madagascar, but it sounds like all (expletive) is breaking loose over there.

Does that have any impact on vanilla pricing and the business today?

It hasn't so far, but obviously we're very close with what's happening in Madagascar.

The benefit of what happened a few years ago is that a lot more sources, geographical sources of vanilla were developed.

That's what's kept prices low since 2005.

And so certainly we are continuing to monitor the situation there and manage our supply of vanilla.

But I feel pretty good about our ability to manage the -- manage a reasonably costed and assured supply of vanillas as these things develop.

I think we're probably better positioned than anybody else in terms of managing that.

We've got people on the ground, although I would say not on the ground in Madagascar this week, but we have people on the ground in all these regions and managing supply as that develops.

And can you just talk about maybe some of the other key raw materials since there isn't really a futures market for us to have visibility on and kind of how that may affect gross margin improvement such as pepper and all the other key stuff?

Yes, we've seen pepper prices have really backed off their highs.

At this point last year we were looking at pepper prices that were approaching $2 and it's now down into the $1.20 to $1.15 kind of range and we've seen it even lower.

And part of that is the speculators are largely out of the, out of the mix right now.

So we've seen moderation in some of the other raw materials, but there's still some that are much higher because of the competition for agricultural space, we haven't seen some of the more minor commodities back off as much because there's just not as much being planted.

But the major commodities, the ones that impact us, like pepper, vanilla, onion and garlic, have backed off their highs.

Okay.

And then I guess is it -- this kind of goes maybe to Rob Moscow's question earlier about the inventory deload and just the seasonality of your business.

Given that you sell so much of the product in the fiscal second half, I would assume that if the retailers were going to deload, it would likely be at this time given that they probably have to start building back up in the second half.

That's what we would expect as well.

Okay.

So that's kind of what you're assuming in terms of the recovery or?

Right.

That's right, because it's easy to manage down inventories in the first part of the year, especially on core spices.

Towards the fourth quarter of the year, if there's a significant inventory deload, there will be a lot of out of stocks at Thanksgiving and Christmas and this is an extremely profitable category for the retailer and it's one that people generally don't want to take a lot of risk on in the holiday period.

Okay.

Then my last question, can you just update us as to how much on a, like a consolidated basis is the, the private -- your let's say DSM and the core bottle, spice bottle business.

Because I get a lot of questions from what I assume are kind of interests in shorting your stock on the basis of a trade-down and my sense is that, versus a long time ago given all of the, Lawry's now and Zatarain's and Simply Asia, et cetera, that the DSM, plus the private label is in the scheme of things is actually much smaller than it used to be.

Yes, it would be less than 10% of even our US sales and below 5% of our global consumer sales.

So it is not a significant percentage in terms of our sales.

Okay.

You're speaking strictly in terms of private label only, Eric, or when you say DSM and private label, you're saying?

I was thinking one, how much are those two kind of -- DSM and -- your branded DSM and branded bottles, how much is that of the total?

Have you disclosed that before?

I don't believe we have.

But the percentage you just gave was the amount of private label as a percentage of the total that you do?

Private label sales as a portion of our overall consumer sales.

Okay.

All right.

All right.

Thanks.

Thanks, Eric.

Thank you.

Our final question is coming from the line of Andrew Lazar of Barclays Capital.

Please go ahead with your question.

Good morning.

Good morning, Andrew.

I realize you had talked about sequentially improving gross margins as we go through the year.

Did you specifically say that you still thought 50 basis points for the full year was about right, or does that become a little bit tougher, just given how we've started out the year?

I ask because it's interesting actually comparing sort of your fourth quarter with your first and I guess it's testament just to how quickly various trends can change.

But the EU was a little weaker then, but is clearly seeming to have stabilized as you had talked about.

Premium was stronger.

That's gotten a little bit weaker.

I think your sales to industrial manufacturers was still solid relative to sort of this quarter and then the consumer business changed a little bit obviously this quarter.

So just some things shifting around in terms of maybe what was a little stronger and what was a little weaker.

It seems like on the whole, maybe that shift overall puts a little bit more pressure on margins, at least to start out the year.

There's no question that it does.

We still think we'll be able to achieve the margin improvement because we are very focused on our internal costs as you saw with our SG&A controls.

But we're managing the same kind of things in our cost of goods.

And as we go through the year, we should expect to see some benefit from lower input costs as we go through the year.

Got it.

And then just a last one, is looking at just your overall expectation for the year for just kind of organic sales growth, I guess it's in that -- even now at the lower end on the volume side, it's still probably in that 5, 6% range.

Again, just want -- that's still obviously a pretty robust sort of number relative to perhaps what a lot of food companies are perhaps likely to put up this year.

Just trying to get a sense of your sort of visibility and rationale for that sort of sales growth goal?

Obviously it's a pretty volatile environment, but with the impact of the Lawry's acquisition, the pricing that's already in place, we expect that we should be able to get at least at the lower end of our range.

Okay, thanks.

Thanks, Andrew.

Thank you.

There are no further questions at this time.

I would like to turn the floor back over to Ms.

Brooks for closing comments.

Okay.

Well, thank you.

This concludes today's call.

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