McCormick & Company Inc (MKC) 2009 Q4 法說會逐字稿

Greetings.

Welcome to the McCormick's fourth quarter 2009 conference call.

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

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

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

It is now my pleasure to introduce your host, Joyce Brooks, Vice President, Investor Relations for McCormick.

Thank you, Ms.

Brooks, you may begin.

Good morning to everyone on today's call and to those joining us by webcast.

The purpose of our call is to review McCormick's fourth quarter financial results, achievements in 2009, and guidance for 2010.

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

With me are Alan Wilson, Chairman, 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 presentation today contains projections and 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 statement 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.

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

Note that we do not expect to record any restructuring charges in 2010.

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

Thanks, Joyce.

And I would like to welcome everyone on this call as well.

I'll begin with comments about our business performance for the fourth quarter and fiscal year.

Then Gordon will provide more insight into the financial results for the quarter, and I'll wrap up with our outlook for further growth in 2010.

Due to the seasonality of our business at McCormick, the fourth quarter of the fiscal year is historically a big part of our annual profit results and an even larger part of our cash flow.

The most recent fourth quarter was no exception.

Strong financial results led to a record year in profit and cash flow for 2009.

Taking a look at slide four, on a comparable basis with the fourth quarter of 2008, we grew earnings per share 8%.

Sales growth and margin improvement were key drivers.

This year, we had our largest holiday marketing program ever in support of our seasonal items, including spices, herbs, gravies and holiday essentials here in the United States.

We also increased marketing this quarter behind our consumer favorites such as Vahine dessert items in France and behind new products such as honey jams in China.

While we grew consumer sales 4% in the fourth quarter, sales in our industrial business continued to be hampered by a moderation in new product innovation by food manufacturers and continued pressure on the food service industry.

We were pleased to deliver another quarter of increased operating income for our industrial business, which was up 6% on a comparable basis, excluding restructuring charges and unusual items.

On the same basis, we increased operating income for our consumer business 12%.

These results were driven largely by progress with CCI, our comprehensive continuous improvement program.

Cash flow from operations in the fourth quarter was particularly strong, exceeding our expectations with further achievements in working capital management.

Turning to results for fiscal year 2009 in slide five, excluding restructuring charges, we achieved earnings of $2.35 per share and reached a record $416 million in cash flow from operations.

We were particularly pleased with the cash results since this was well in excess of the previous high of $342 million.

Excluding restructuring charges and unusual items, earnings per share of $2.35 was a 10% increase from the prior year and above our latest guidance of 8 to 9%.

This was our fourth consecutive year of double-digit EPS growth on a comparable basis.

With a 100-basis point improvement in gross profit margin, we surpassed our 50-basis point goal for the year.

Another area of excellent achievement was in cost reductions, which totaled $42 million for the year, 40% ahead of our initial 2000 goal.

And we reduced our cash conversion cycle by five days at the top end of our three to five-day target.

This is a total reduction of 10 days since 2007, bringing our cash conversion cycle down by more than 10%.

Now, let's talk about sales growth, which is the one area that came in below our expectations.

We grew sales 5% in local currency.

This increase was mainly due to incremental sales from Lawry's, which were right on target.

However, the sales growth in our base business lagged our expectations, hampered by the impact of the economy on our customers and consumers.

In 2009, food retailers faced heightened competition in an economically constrained consumer.

Certain retailers responded by placing more emphasis on their private label products during the year, while others, including dollar stores and hard discounters chose to expand their branded offerings.

The net effect of these actions was some share loss of our spices and herb products to private label during 2009.

However, we were able to grow sales of our branded spices and seasonings at retail with our marketing support and new product innovation.

As seen on slide six, based on retail scanner data, consumer purchases of our products were up in each of our four largest geographic markets in 2009.

Inventory reductions by food retailers also impacted sales growth in our major markets.

During 2009, the growth in consumer purchases at retail exceeded the growth rate for our net sales of spices and seasonings, as shown on slide seven.

Likewise, our industrial customers were affected by a tough economy in 2009.

While we had some great new product wins early in the year and success in lowering costs for this part of our business, sales to industrial customers had slowed by the fourth quarter.

Among our industrial customer groups, quick service restaurants fared relatively well and our sales to this channel was the best performing part of our industrial business in 2009.

This performance was lagged by sales to food service distributors, which serve higher end restaurants and institutions.

We also had a disruption from the bankruptcy of our UK distributor.

As for food manufacturers, 2009 was a year when many of these customers focused on core items, with limited activity behind innovation, and a fair amount of SKU reduction.

At this time, we are encouraged by an increase in activity in 2010 and our innovation pipeline.

We continue to have strong win rates for new products.

For both consumer and industrial businesses, 2009 marked a period of further volatility in both input costs and currency.

Our sourcing teams worked to minimize the profits impact of higher cost and our pricing actions provided an effective offset, which accounted for about 4% of sales growth for the year.

However, the stronger dollar was a real head wind to our reported sales growth in 2009, reducing sales by 5% for the year.

By the fourth quarter, the impact of currency was neutral and at today's exchange rates should provide a bit of a tail wind in the first half of 2010.

With changes under way by our customers, costs and currency volatility, and consumers still under pressure, our business leaders were agile in addressing these challenges and pursuing opportunities for growth.

We also stayed focused on several key initiatives.

Job number one in 2009 was a seamless integration of Lawry's.

Looking back on the work of our team, this has been one of our most effective integration efforts.

Our new marketing campaign has been under way for more than six months now and I'm encouraged by the year on year growth achieved in the fourth quarter, with unit sales up 8%.

Based on results to date, for sales, profit and cash, this has been a very successful acquisition at McCormick.

In 2009, we increased our brand marketing support by $20 million and our spending is now up more than 50% in the last five years.

During this year, we optimized this spending by adapting to current market conditions.

To address the actions of various retailers behind the assortment of brand and private label in our core categories, we've worked directly and diligently with many major retailers to optimize product mix, pricing, and promotion for both brand and private label.

In addition to emphasize the value of our brands, we directed a portion of our promotion in advertising to coupons and feature prices in both the US and certain international markets.

Consumers have responded with our coupon redemption rates, up more than 50% in the US and branded sales growth in most major markets, as I showed earlier.

Due in part to more online advertising, traffic to our US website exceeded 200 million visits last year.

Following a relaunch of our UK Schwartz site, an increase in advertising search activity hit rates in October and November doubled versus the previous year.

These consumers are actually spending an average of about seven minutes at each visit.

On slide 12, a portion of our marketing support -- many of our -- supported many of our consumer favorites and drove sales.

Our revitalized McCormick brand dry seasoning mixes grew 6% in the US, outpacing the increase in private label.

Grill Mates sales were up 20%.

In Australia, higher sales of slow cooker seasonings led to 3.5% share gain in the recipe mix category and Aeroplane gelatin sales rose 14%.

Our promotion and advertising also featured some of our newer items such as Lawry's reduced sodium seasonings, honey jams in China, and Schwarz flavorful products in the UK.

Rotisserie -- Vahine in France is an extension of our leading brand of dessert items to a range of cake mixes.

In just over a year, we've gained a 6% share of the cake mix category in France with these new items and our marketing campaign.

Together with our marketing efforts, innovation helped drive category growth in our four largest markets, as shown in units on slide 14.

New product wins on the industrial side of our business included condiments, as well as seasonings for chicken and seasonings for snacks.

In 2009, we continued to expand the geographic footprint for the McCormick brand in China.

And in the last two years, have doubled the number of major cities where consumers can purchase our products.

During this period, we also gained new distribution with value priced retailers in the US, Canada, and France.

Another key initiative behind our success was cost reduction.

Our process reliability program coupled with the McCormick high performance work system have unleashed capacity in all of our major locations.

We have successfully completed our restructuring program, which began in late 2005.

This initiative has enabled us to reduce the number of major facilities by 26% and increase our sales per facility by 66%.

In 2009, we also made great progress with CCI and as illustrated on slide 16.

Employees in all parts of the business contributed to the substantial cost reductions achieved.

In addition, we have made impressive results from a sustainability standpoint.

Our largest production facility in the UK was named sustainable manufacturer of the year by a leading manufacturing publication in recognition of a 14% reduction in electricity usage and a 48% increase in recycling.

A new recycling unit in our Atlanta, Georgia plant contributed to a 43% solid waste reduction for this facility.

Across all major facilities, we've reduced greenhouse gases by 24%, water usage by 19%, and electricity usage by 14% since 2005.

While the 2009 profit results of our unconsolidated income declined in US dollars, we have impressive results from our largest and long-standing joint venture, McCormick to Mexico, which grew sales 19% in local currency.

As a sign of the consistent and steady performance at McCormick, the Board approved in November an 8% increase in the quarterly dividend.

This marks the 24th consecutive year of increases in our shareholder dividend.

I hope that these latest achievements and our 2009 financial results give you a sense of the talent and energy of our employees.

We have a wonderful culture and high employee engagement and we were pleased to be named just last week to Fortune Magazine's 100 best companies to work for list.

Before discussing our outlook for 2010, Gordon is going to provide you with some further insight into our fourth quarter financial results and business performance.

Thanks, Alan.

As previously stated, our fourth quarter results were a strong finish to the year.

On a comparable basis, fourth quarter earnings per share rose 8%, with an underlying increase in each of our two segments.

On this same basis, we achieved a double-digit increase in consumer business operating income, which rose 12%, including the impact of higher brand marketing support and a solid 6% increase in industrial operating income.

Just as we have for the full year, we saw areas of both strength and weakness in the quarter for our two segments.

For the consumer business, we increased operating income $17 million on a comparable basis.

This includes a $5 million increase in marketing support for the quarter, which totaled $6 million for both business segments.

We grew operating income with sales growth and cost savings from CCI, as well as with a favorable business mix.

Keep in mind that we closed the acquisition of Lawry's in the third quarter of 2008 and there is no incremental impact from this acquisition in the fourth quarter results.

For the total consumer segment on slide 23, sales rose 4% in the fourth quarter, with pricing up 3% and a 1% benefit from foreign currency exchange rates.

As a reminder, our pricing actions in the consumer business occurred late in 2008 and early in 2009 in order to offset higher costs.

At this time, the impact of pricing actions for our consumer business in 2010 are expected to be minimal.

For consumer sales in the Americas, the increase was 5% with two-thirds from pricing and one-third from volume and product mix.

This quarter our largest unit increases in the US were dry seasoning mixes up 5%, Lawry's items up 8%, McCormick branded spices and herbs, up 5%, and grilling products up 16%, evidence that grilling has truly become a year-round event.

Sales for each of these product lines was driven by greater marketing support, which included television, print, Internet, and coupons.

Offsetting some of this strength were declines in unit sales of our gourmet lines.

For our Europe, Middle East and Africa region, EMEA, we reported a 1% increase in consumer sales.

However, in local currency, sales were down 2%.

A 2% benefit from pricing was more than offset by lower volume and product mix.

Through the fourth quarter, our business in France continued to benefit from healthy category growth for our Ducros spices and seasonings, as well as our growth initiatives behind Vahine dessert items.

However, the retail environment in the UK continues to be challenging and affected our fourth quarter sales in this market.

In the Asia Pacific region, we reported a 15% increase in consumer sales.

In local currency, the increase was 7% with higher volume and product mix the primary driver.

In China, our geographic expansion and new product activity, as well as a portion of our incremental marketing, led to this increase.

Let's turn to the industrial business.

We increased fourth quarter operating income 6% on a comparable basis.

In a quarter where segment sales declined, this profit increase is evidence of our effectiveness with CCI-driven savings and careful cost management.

Also, the majority of new products added to our portfolio in 2009 are accretive to the overall margins.

Across all regions, industrial sales declined 2% and were down 1% in local currency.

Pricing actions to reflect input cost changes added 2% to sales while volume and product mix were unfavorable.

In the Americas, industrial sales were down 4% and down 2% in local currency.

This is a reversal from the performance in earlier quarters during 2009.

We continue to benefit from new product activity with quick service restaurants, but saw a lower demand from food manufacturers during this period.

Our relationships with these strategic partners remains strong and they remain committed to McCormick as its supplier.

In EMEA, we achieved sales growth with industrial customers through the end of 2009.

Sales were up 2% and up 6% in local currency, primarily as a result of the pass-through pricing for higher costs.

In the Asia Pacific region, we saw a slowdown in demand from the restaurant customers during this period.

Industrial sales in the fourth quarter were down 2%, and down 6% in local currency as a result of unfavorable volume and product mix.

In China, our customers have focused on core menu items in recent months and their pace of innovation slowed in the fourth quarter.

Let's look at how this adds up for the total business.

Sales rose 2%, primarily as a result of higher pricing, with the pluses and minuses of volume and product mix across our segments and regions having a minimal impact on this quarter's sales.

Gross profit this quarter rose 190 basis points to a seasonally strong 45.6%, due in part to our move toward a more favorable business mix.

Our margin improvement is also being driven by CCI, as well as our restructuring actions and discretionary cost controls throughout our operations.

Turning to slide 29, SG&A in the fourth quarter of 2009 was 25.8% of net sales, an increase of 30 basis points.

The $6 million increase in brand marketing added 60 basis points.

This increase was offset in part by our progress with CCI and cost controls, as well as lower distribution costs and favorable benefit expenses.

Operating income reached $178 million.

On a comparable basis, excluding restructuring charges, we increase operating income 11% in the fourth quarter versus the year-ago period.

Our tax rate for the quarter at 33.6% brought our fiscal year rate to 31.9%, which reflected our mix of business.

We expected our tax rate in 2010 to also be close to 32%.

With a 67% increase, income from unconsolidated operations this quarter showed a dramatic turnaround from the year-to-date declines we had been reporting.

As Alan shared, our joint venture in Mexico has had strong sales all year.

In the fourth quarter, with the weaker US dollar and lower soybean oil costs, we saw significant profit growth from this business.

We are looking for further gains in 2010 and expect to reach or exceed the level of profitability reported in 2008.

So a look at the bottom line shows fourth quarter earnings per share of $0.87 compared to $0.62 last year.

In the fourth quarter of 2008, we recorded restructuring charges and an impairment charge that had lowered EPS by $0.22.

In 2009, restructuring charges lowered EPS by $0.04.

Excluding these items EPS increased 8% or $0.07 to $0.91 from $0.84 in the prior year.

Higher operating income added $0.10 per share, lower net interest expense added $0.01, and income from unconsolidated operations added $0.02, offset in part by $0.06 from an increased tax rate.

Before I turn it back over to Alan, I'll comment briefly on the balance sheet and cash flow and refer you to slide 32.

Beginning in 2008, we began to reward our business leaders not only for strong operating income performance, but also for their management of working capital.

In our second year of McCormick profit we are growing both profit and cash.

With a further improvement in the fourth quarter, cash flow from operations reached $416 million, an increase of $101 million from 2008.

This increase has been driven by higher net income, including the positive impact of Lawry's, as well as effective working capital management.

Alan shared with you already our continued progress in compressing our cash conversion cycle, which now stands at just above 80 days.

Keep in mind that our cash flow from operations includes an increase in pension contributions.

In 2009, we contributed $72 million versus $19 million in 2008.

This brought our funded level for the primary US pension plan back above 90% based on the accumulated benefit obligation liability.

At this time, we anticipate contributions in 2010 of approximately $45 million.

About half of this amount was funded in early December.

As we discussed last quarter, 2010's pension expense is expected to increase substantially due primarily to changes in the actuarial assumptions, primarily the discount rate.

We now expect pension expense to be approximately $27 million in 2010 compared to $13 million in 2009.

The increase from 2009 to 2010 is expected to reduce EPS by $0.07, approximately 3%.

Note that our cash flow will benefit from the lower expected contributions and that the increase in pension expense is a noncash item.

I'll conclude my comments on the balance sheet and cash flow by pointing to our great progress with debt reduction.

As you know, our primary use of cash during 2009 has been the reduction of debt from the Lawry's acquisition.

This focused approach and strong cash generation has allowed us to reduce our debt by $252 million during 2009.

Our priorities for uses of cash, as we head into 2010, will be to reduce debt and fund potential acquisitions, as well as fund dividend payments and an estimated $100 million in capital expenditures.

In a few minutes, I'll look forward to discussing your questions, but I first want to turn it back over to Alan.

Thanks, Gordon.

We're excited about our prospects for growth in 2010.

While we expect our customers, both consumer and industrial customers, to be operating under continued pressure during a gradual economic recovery, we are seeing more appetite for innovation.

There's some clear platforms for growth in our business around health and wellness, convenience, authentic ethnic flavors and value.

In 2010, these platforms direct our product innovation for both consumer and industrial businesses, as well as our marketing support.

As we stated earlier, we have high win rates with our industrial customers and an innovation pipeline that includes new products for food manufacturers, and the food service channel.

As discussed in our last call, the new product lineup for our US consumer business includes Perfect Pinch and Recipe Inspirations, which both did very well in test markets during 2009.

We've received some early support for Recipe Inspirations from consumer trends expert Phil Lempert who discovered this product and has included it in his food industry remarks on ABC, Supermarket Guru, The View, and more recently on the Today Show.

He commented, "This is going to pave the way for other similar concepts that will expand our palette."

We've had an unprecedented reaction from our customers, with 14 key grocery retailers requesting early shipments in Recipe Inspirations in anticipation of strong consumer demand.

We are introducing new varieties of McCormick brand dry seasoning mixes and Lawry's marinades and will be extending our range of products imported from our joint venture in Mexico to our line of popular teas.

In Canada, we're revitalizing our Club House brand core spices, featuring new labeling, new products, and media advertising.

Consumers in Europe will see a UK version of Perfect Pinch and new varieties of our Schwartz flavorful range.

In France, we're expanding our line of Vahine cake mixes and decorations and our team in Australia is introducing a line of slow cooker seasonings for rice.

In 2010, we're also going to seize the opportunity to increase marketing support behind our leading brands and new products to capture consumer interest as they continue to prepare meals at home.

We're getting a good value for our marketing dollars when purchasing advertising.

And in the US and Europe have achieved strong ROIs on these dollars as measured by incremental consumer purchases.

We've also tested higher levels of marketing with good results.

With a 50% increase in media, we were able to deliver a double-digit increase in sales for most of the products we tested.

At this time, we intend to add $20 million to our marketing programs in support of our core items, as well as new product innovations.

This is an increase of 14% from 2009.

Core item support will include ads that feature the antioxidant benefit of our Super Spices, our latest flavor forecast, and first-ever grilling flavor forecast.

The convenience of our dry seasoning mixes, the authentic ethnic flavors of brands such as Zatarain's, Thai Kitchen, and Simply Asia and support for the Vahine line in France.

As shown on slide 40, a large portion of the promotion and advertising behind product innovation will be concentrated on our national launch of Recipe Inspirations and Perfect Pinch here in the US.

We are fueling these investments in our business with cost savings from CCI.

Our goal in 2010 is to reduce cost of goods sold, as well as SG&A expenses in the range of $35 million to $40 million.

We have high confidence in this target with many initiatives already under way.

These 2010 cost savings will fuel our incremental marketing support and help offset modest increases in input costs.

Gross profit margin is projected to improve by at least 50 basis points as a result of productivity and our continued shift toward a more favorable business mix.

With incremental marketing support and our product innovation plans, we expect to grow sales 2 to 4% in local currency.

Based on current rates, the impact of foreign currency will boost sales by 2% for a total projected increase of 4 to 6%.

We've also added sales performance as a component of our operating division's annual incentive compensation to bring increased focus.

While healthy sales growth and margin expansion will drive profit growth in 2010, higher pension expense will be a head wind, as Gordon indicated, reducing EPS growth by about 3%.

Taking this into account, we expect to achieve earnings per share in the $2.49 to $2.54 range.

On a comparable basis with 2009, excluding the impact of restructuring charges recorded in 2009, this is a 6 to 8% increase.

Note that no further restructuring charges are expected in 2010.

We are looking for another year of excellent cash generation from our business with higher profit and further reduction in our working capital.

Our search for more great acquisitions to fold into our portfolio continues with a focus in Asia.

Along with further paydown of our debt, acquisitions are our preferred use of cash in 2010.

We have a number of interesting businesses on our radar screen both in developed and emerging markets.

Let me summarize so we can get to your questions.

Our passion for flavor is the foundation of our success.

Taste continues to rank first in what we choose to eat ahead of quality, health and convenience.

From premium gourmet items to the private label items we supply, our products offer consumers a good value, providing 90% of the flavor for a meal at less than 10% of the cost.

And we have long-term relationships with our customers who rely on McCormick for superior quality and service.

With our marketing program lineup and innovation plans, McCormick's leadership team is excited about driving growth in 2010 on both the top line and the bottom line.

It's the skill, energy and enthusiasm of McCormick employees around the world that give me confidence in the great performance and achievement of our financial goals for the year.

Gordon and I look forward to reporting first quarter results with you in March and a more in-depth discussion at our investor conference in April.

We thank our investors for your continued confidence and thank everyone on the call for your attention this morning.

Now let's take some questions.

(Operator Instructions) Thank you.

Our first question today is from the line of Alexia Howard with Sanford Bernstein.

Please proceed with your question.

Good morning.

Good morning, Alexia.

Hi, I just wanted to follow up on the top line growth in the industrial segment.

I think you said quick service restaurants domestically were pretty strong but this time it was sales to other food manufacturers that might have been slightly lighter.

And that may have been due to the timing of new product introductions.

Can you talk a little bit about how that is likely to develop going forward, was it just the timing of new product introductions happened to be light this quarter or can we expect that situation to continue?

Yes, what we saw through a lot of 2009 was a focus by retailers in reducing SKUs and less of the ongoing line extension kinds of innovation that we've seen the last several years.

What we're seeing is a pretty good innovation pipeline, as everybody recognizes that we've got to have innovation to grow.

So we are seeing a higher level of innovation activity.

What I would expect to see and what we're seeing in the new products are more of the bigger, larger kinds of products as opposed to smaller line extension kinds of products.

Okay, and then just a quick follow-up.

The commodity cost outlook.

I know you've got a lot of commodity-driven pricing in the industrial segment.

Across consumer and industrial, are we expecting commodity costs to remain up or how do you expect that to shape up going forward?

We're expecting commodity costs to be relatively benign through the year.

We may start to see some uptick towards the later half of the year.

And certainly in more of the industrial type commodities, just to remind you, those tend to be pass-throughs.

So as we see changes in dairy or wheat or soybean oil, we'll pass those through as prices go up and we'll pass them through as they come down and we've seen more moderation through the back half of last year and what we expect to see through the first half of this year.

Great.

Thank you very much.

I'll pass it on.

Thank you.

Thank you.

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

Please proceed with your question.

Hi, thank you.

I was intrigued by your comment about acquisitions and a focus on Asia.

I do remember back at an analyst day in 2007 where I think it was Bob Lawless said you're going to try to focus more on emerging market acquisition targets.

But really nothing has materialized in the last couple of years.

Alan, can you talk a little bit about the obstacles you have faced in trying to find suitable targets in these markets and why you think you might be able to have more success this year?

Yes, typically the targets in those markets tend to be family businesses that have grown up, and there's a point in the lifecycle where the owner decides it's time to move on.

What we saw in really 2007, 2008 were price expectations in emerging markets that were in our view too rich.

And so we did not bring any of those to close.

Now, what we're seeing is a combination of more realism in expectations by owners and a lot of the folks that we've developed long relationships with.

Because our process is as much as possible to go in to develop relationships, get to know people, and at a point we'll be able to convince them that we're a good partner.

And we're seeing more progress along that than we've seen in the last couple years.

Okay.

Are there a lot of bidders for these types of assets?

And do you think your relationships are better than the other bidders?

Some things are more announced as public auctions with investment bankers and more of a process.

And in those cases, we really have to look hard to see if those are strategic for us.

We typically tend to focus on developing longer term relationships with owners so that, so that we're not so much in a process.

Okay, thank you.

Thanks.

Thank you.

Our next question is from the line of Eric Serotta with Consumer Edge Research.

Please go ahead with your question.

Good morning, everyone.

Good morning, Eric.

Just wanted to circle back on your top line growth targets for this year.

It seems that the upper end of the range, 4%, it seems kind of aggressive to me, especially when you look at your core consumer volumes that were basically flat or down all year.

And I know you went through some of the reasons why they were down for the year.

But could you give us some color as to why you think that the upper end of that range should be achievable especially with at least America's consumer, you're making the comment that you're not expecting much pricing.

Right.

We, we typically, in normal years, we get a good bit of growth from new product innovation.

And in this -- in 2009, much more of an organizational focus in the Americas was on the Lawry's integration.

So we didn't have a lot of new product integration as we would typically have.

As you've seen by the support that we've seen, we are aggressively driving Recipe Inspirations, and Perfect Pinch, and supporting those in a pretty big way.

We also are counting on a continued growth of Lawry's, as well as continued growth of our core businesses.

We're supporting that with advertising as well.

So that's, that's the reason that we centered on the guidance.

We don't expect that we're going to spend the advertising money and not get some response.

Sure, 4% though seems like a pretty steep target, even with a sizable $20 million increase in advertising.

But I guess you've seen some nice lift to date.

Another thing, did I hear you correctly in response to the first question that some of your customer innovation is now focused on larger projects rather than close in?

It seemed to be the opposite all year.

Just wanted to make sure that there was a -- see if there was a change?

Yes, what we're seeing is less and less of the line extension kinds of innovation.

There's certainly still work being done on taking sodium and reducing sodium and adding flavor, but what we are seeing is in terms of innovation, more of the, more significant innovation is where our pipeline is stacking up right now.

And that's changed over the past quarter or two?

Because if I remember correctly at least you talked about your industrial customers getting a little bit more conservative and focusing more on close in innovation.

And maybe this is going back more than a quarter or two, maybe it's going back a year.

But it seemed like most of this year, the focus was on closer in things.

And have your customers become more aggressive in what they are looking at in terms of innovation or is this really just the same as you've seen all year?

I think it's more a theme we've seen all year, where there's not as much room for minor innovation, as retail customers have done more SKU reductions, and more of a focus on saying we need to be truly innovative.

I think everybody's struggling with top line growth in the industry and I think there's a recognition that innovation is what's going to drive that growth.

Okay.

Well, good luck.

Thank you.

Thanks, Eric.

Thank you.

Our next question is from the line of Ken Goldman with JPMorgan Chase.

Please go ahead with your question.

Good morning.

Good morning, Ken.

Alan, I want to know how many Lane Kiffin voodoo dolls you have in your office right now.

I have absolutely written off that part of this year's history.

Understood.

I guess I have a similar question to Eric Serotta's.

Just hoping to understand a little bit about your visibility into some of the drivers of the consumer top line.

It seems like there's an unusual number of upside and downside risk this year.

You're going into your first period in a couple of years without any pricing perhaps.

There's a little bit of a channel shift, which I know is not a huge deal to manage, but it's something.

There may be some additional pressure for SKU rationalization.

And then of course the Wal-Mart decision I believe is still pending, which could be a positive or a negative.

Just wondering when you look at all of those, how much confidence you have in the numbers that you're putting out there and maybe you could give us some of that confidence as well.

Well, we feel like we have the right program certainly to hit the numbers that we've put out there.

Again, because we're -- we have a renewed focus on product innovation and we expect to see benefit from that.

You're right, there are a lot of moving parts in the business this year and certainly we're not going to speculate on what's going to happen.

But we think most of the SKU rationalization that we expected to see, we've seen.

And, that has by and large not had a significant impact because the products that have been reduced haven't been major sellers.

And as well what we've seen is as retailers have reduced space, they have tended to reduce the space for more of the smaller regional brands.

There's no question that the top line is going to be a continued -- a lot of pressure on the top line as the economy continues to struggle.

But we have pretty good faith that we've got the right programs to grow our business.

Okay, thanks very much.

Thanks.

Thank you.

Our next question is from the line of Chris Growe with Stifel Nicolaus.

Please proceed with your question, sir.

Hi, good morning.

Hi, Chris.

Hi.

I just had a couple of questions for you.

The first was, I guess I wasn't clear.

In your targets for the year, sales and EPS, do you incorporate acquisitions this year, especially, given you've got a pretty good pipeline of deals in the works?

We've not put any of that in the works.

Okay, good.

I want to be clear on the marketing investment.

The $20 million increase you had in '09, does that shift throughout the year maybe more to coupons and price day support from say advertising as the consumer was quite weak.

And I guess I'm just trying to get a feel for what happens in 2010, should we see a lot of that shifting occurring as well?

Is that all incorporated in that number you gave us of $20 million?

No, coupons and promotion pricing comes right out between gross and net sales, so that wouldn't be at all in that spending.

There would be some in-store kinds of activities that could be in there or specific consumer kinds of promotion, but it's by and large media advertising.

Okay.

So are we seeing an even bigger increase in support in 2010?

Are you having to invest more heavily in say price based marketing, whatever you want to call it, in addition to what you're doing on the actual marketing line, you know, the media?

Yes, we've certainly increased our coupons and as we always do, worked with customers on getting the right promotions.

Chris, one thing I did want to correct -- not correct, but add color to.

This year's $20 million increase included about $14 million incremental from Lawry's.

Sure, okay.

And then I guess just looking at the gross margin, you had obviously a lot of cost savings coming through that was even above your target you even gave last quarter.

Was that the main driver to the upside there?

I'm looking at volumes being softish across the business.

What really drove the gross margin this quarter?

It was a good bit above my expectations.

Chris, this is Gordon.

Cost savings did come in above expectations.

We were talking about a $35 million and it ended up being up closer to $40 million, as we reported, but the business mix is also a big driver as well.

Because the consumer business grew within the quarter and the industrial business was actually down in the quarter.

So that will be a driver to the gross margin as well.

Sure, okay.

But in terms of like input costs overall, would that have been a major factor for the quarter?

No, input costs would not have been a major factor.

Okay, that's great.

Thanks a lot.

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

Please proceed with your question.

Good morning.

Good morning, Ann.

I was wondering if I could start in the UK.

If you could help me understand, are you making any changes to our strategy in the UK, given it's a continued very challenging environment?

Not in terms of major strategies, but what we are continuing to do is focus on new product innovation and supporting the brands there with a little bit different messaging focused on value.

It is -- the UK is admittedly one of the toughest markets that we have in the world in terms of growth.

But in terms of a large change in strategy, no.

Okay, and then switching over to Asia with the added business customers.

Do you need to add capacity or make any investment in that market?

Only in terms of, in terms of sales capacity.

We have -- we continued to debottleneck our manufacturing facilities and so we're not making a significant capital investment to increase that at this point.

That's great.

That's all I have left.

Thank you.

Thanks, Ann.

Thank you.

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

Please proceed with your questions.

Good morning.

Good morning, Mitch.

So could you talk -- if I missed this, I apologize.

But could you talk about your pricing outlook for the consumer, particularly the US consumer business, and the industrial business?

Our forecast right now doesn't call for any significant pricing or for any significant change in input costs.

We believe the moderate input cost inflation that we'll see that will impact the US consumer, or the consumer business in general, we will be able to offset with productivity and cost savings.

Now, if something changes later in the year, we'll certainly respond to that.

But what we're seeing right now is a more benign pricing environment.

In terms of -- so sort of the difference, consumer channel segmentation, is there pricing pressure or mix pressure as a result of that in 2010?

We've seen certainly mix pressure in 2009, as we've seen more sales go to our dry seasoning mix of products as opposed to our gourmet products.

We don't expect a continued shift in that kind of mix.

We think we saw the worst of it in 2009.

But, but we don't expect there to be a lot of need or opportunity for increased pricing or decreased pricing in 2010.

Okay.

You've had changes in your shelf sets, the gravity feeds.

That was an initiative I guess that happened over the last two years.

Is there any -- just seems to have lost momentum or just not a focus or maybe I'm wrong, if you could just update us on sort of what you're doing from the in-store merchandising and shelf space?

Well, in terms of our shelf, we're still very happy with the gravity feed merchandising sets that we've had.

They continue to make it easier for the consumer to shop, easier to stock for the retailer.

So we're still very happy with that.

We are continuing to focus on finding more opportunities for displays in other parts of the store and have continued to expand our presence in meat sections with displays and that sort of thing.

So there's not a major merchandising initiative this year other than finding the space and the appropriate merchandising for Recipe Inspirations, which we think is not only going to do very well as a product line itself but is also going to have a pretty high conversion rate to people buying the bottles for the spices that they find in those packets.

Is that a positive -- would that be a positive margin mix for you in that trade?

It's more of a neutral margin mix.

The key thing though that we're trying to achieve with that is to make it easier for people to continue to cook and discover how easy and great it is with using spice ingredients.

Okay.

Last question is relative to inventories coming out of the holiday cooking season, any comment with regard to that?

Yes, we think the in-store inventories at the end of the holiday season were lower this year than they were in past years.

And that's, that's just based on our measure of what our factory sales were as compared to what we saw in the measured channels.

Okay.

Beautiful, thank you.

Thanks, Mitch.

(Operator Instructions) Our next question is from the line of Eric Katzman with Deutsche Bank.

Please go ahead with your question, sir.

Hi, good morning, everybody.

Good morning, Eric.

Couple questions.

I guess can I get an explanation as to the difference between the media or sort of brand marketing spending that you referenced in the press release?

I think it was $147 million this year versus, say, the $57 million, or $60 million something that you I guess put in your 10-K.

Where's the $100 million or $90 million?

One is pure advertising and one is consumer promotion, but that consumer promotion is not price reduction, as Alan said earlier.

It's consumer promotion that goes directly in front of the consumer.

So it could be sampling events, it could be feature items, in-store displays.

So all of that is right in front of the consumer.

It's not price promotion which would be between gross and net.

So the $140 million something that's all a deduction from SG&A?

That is correct.

That is all on the SG&A line.

Okay, and do you think that that -- because when I look at your -- let's say the pure media advertising number that you list, I'm not sure what it was for '09 but I only have the '08 number, which was 57.

Right, that's like 3% of your consumer business is sales, which is pretty low in the rest of the industry.

So do you think that the $140 million is equivalent to what other people listed their advertising in their 8-K, or is it apples and oranges?

I'm trying to gauge --

I don't have a scientific study in front of me here, Eric.

But I do know when we looked at that type of disclosure, we wanted to make sure we were consistent in the industry.

We also wanted to make sure we're accurately portraying what our dollars are doing and how they are working for us and those dollars that are, what we call consumer promotional dollars are volume-driven events that do have a benefit as opposed to some perhaps a price reduction, which you'll see on the top line in sales.

So I would think other food manufacturers would view that similarly.

A sampling event or anything that's trying to get the consumer to buy your products should be an SG&A item.

So we're certainly in conformity with GAAP on our disclosure, that's for sure.

So I guess what I'm getting at is, if we just -- if we assume that it's apples to apples, your advertising to sales of just the consumer business just seems low relative to the peers.

And as you become -- as industrial gets to be a smaller and smaller percentage of the Company, it seems to me that that ratio is even more important.

And perhaps that explains why there was some disappointment in the top line in the US business this year.

Yes, your point's well taken, Eric, that we still have a relatively low advertising sales ratio in our consumer business.

And that's why we continue to try to increase that and get it up to more competitive levels, which I would remind you that we still are about 90% of the share of voice in our category, but on a relative basis compared to other consumer packaged goods industry, we still are pretty low.

And is it -- I guess it's pretty concentrated in the fourth, third and fourth quarter too.

So maybe it's a little bigger percentage given the seasonality?

Our share, our level of voice in fourth quarter has continued to go up and that's because that's where we see the biggest impact.

But we also spend in first and second quarters, we're building behind grilling and the other events.

We've really focused our spending in the last couple years behind grilling and holiday.

This year will be a little different, as we've expanded that to support the new product introductions.

Okay.

Thanks for that.

And then just switching to the CCI program, and the productivity efforts.

That's also I guess running -- you've ramped that up since the restructuring a couple years ago.

But similarly compared to some of the peers, that's -- it's only about by my estimation 2% of COGS.

And, it looks like the peer group is doing much bigger, let's say, productivity levels.

And so I wanted you to just kind of touch on that, the benchmark versus the peer group.

Is it a function of scale that maybe is why a General Mills or a Kellogg is taking -- whatever 4% to 5% of COGS out every year?

What do you think?

We're trying to understand the definition difference between what we're calling costs CCI versus, for instance, General Mills holistic margin management.

So that we are capturing and not disadvantaging ourselves.

We've hired actually a consulting firm to help us in, one, making sure that our program is ratcheted up, and we're taking out all the costs that we can.

And secondly, making sure that our definitions are consistent with what other people in the industry are doing.

For clarity, Eric, I've been accused of being a tough grader on this thing.

So the only thing that gets in that number has to be supported and documented and has to be a year-over-year benefit that we can count on as a year to year change.

Things like productivity improvements that releases capacity doesn't get into a CCI number, although that unleashes a volume opportunity, it's not a year-over-year reduction in costs.

So that's to Alan's point, we're still trying to get our arms around our definition relative to others to make sure we're not unduly penalizing ourselves as we report these numbers.

Okay, and last question and I'll pass it on.

On the M&A side, I mean I don't remember the Company talking so publicly about being so close to M&A.

And you said, I think to Mitch or to Chris that your assumptions don't include any M&A, but can you kind of go through your financial criteria as to what type of M&A is going to get done?

Does it have to be, I don't know, ROIC accretive in a year or two?

Just maybe just go through some of the financial metrics.

We would like to be EPS accretive by the second full year and EVA positive by the second full year, is the way we tend to think about it.

The financial change or the accounting changes where we now have to expense deal costs make first year accretion a lot tougher.

But we tend to think about it as being accretive by the second year.

And that's -- so you're including any deal costs in the dilution in the first year?

Yes.

Okay, and is it -- is the Board ambivalent as to whether it's equity or debtor cash?

I mean if one of these families wanted equity would that -- is that okay?

We've not done any equity deals.

Our preference is for a cash or a debt deal.

Certainly, if there was a structure that acquired equity that we felt was right for our shareholders and right for that deal structure, we would consider it.

But our preference is to do cash deals.

Okay.

I'll pass it on.

Thank you.

Thanks, Eric.

Thank you.

There are no further questions at this time.

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

Brooks for closing comments.

We would like to thank everyone for participating in today's discussion.

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This concludes our call.