McCormick & Company Inc (MKC) 2010 Q2 法說會逐字稿

Greetings and welcome to the McCormick's second-quarter 2010 conference call. At this time all participants are in a listen-only mode. A 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.

Thank you. Good morning to everyone on today's call and to those joining us by webcast. The purpose of our call is to provide an update on our business, review McCormick's second-quarter financial results, and share our latest 2010 outlook. We have posted a set of slides to accompany today's call at our website IR.McCormick.com. In the room with me are Gordon Stetz, Executive Vice President and CFO, and Paul Beard, Senior Vice President, Finance, and Treasurer. Alan Wilson, Chairman, President and CEO, is also on the call but dialing in from a different location. Alan will begin with the business update followed by Gordon, who will review our financial results and outlook. After that, 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 statements, whether as a result of new information, future events or other factors.

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

Thanks, Joyce. Good morning, everyone, and thanks for joining us. We're pleased to report another quarter of strong financial performance at McCormick. Our results for the second quarter demonstrated our passion for flavor and the effectiveness of our strategy to invest in the business and to fuel our growth with improved margins. Product innovation, increased brand marketing and distribution gains drove the top line and above-target progress with our CCI program has gross profit margin up 110-basis points year to date. This level of success was accomplished in the midst of a global economy that remains challenging in a number of our markets. Although conditions remain difficult, based on these results and our latest outlook we're well positioned heading into the second half. This morning I would like to begin with an update on the business environment and progress with our growth initiatives. After that I'll comment briefly on this week's announcement of a new share repurchase program.

Across our primary markets and locations around the world we see varying degrees of economic recovery. From our perspective, consumers in the Americas remain cautious but seem more willing to explore new flavors. Increased retail purchases of our new products, our more exotic gourmet spices and our authentic ethnic brands suggests that there's a willingness to branch out and to experiment with more distinctive flavors. We believe other food manufactures are seeing this too, based on the product innovation activity in our industrial business. While parts of the food service channel continue to be a bit weak, we saw some increased demand from food service distributors. In addition, some of our industrial customers in the Americas are once again focusing on the strongest part of our value proposition, quality and reliability, which has won us an increased share of their business.

In Europe, the Middle East and Africa, EMEA, our two primary markets are the UK and France. These economies are still in recovery from the economic downturn and private label pressure remains a factor; although the growth of private label moderated slightly in the latest period. The UK and France will be the focus of our media in the second half, as we step up our marketing behind differentiated products, such as the Flavourful range for Schwartz in the UK. Beyond these two markets, our business has been affected by the severe declines in several countries where we have smaller businesses, in particular Spain and Portugal, and the currency situation for Europe is expected to turn unfavorable for us in the second half. In away-from-home eating, quick service restaurants in Europe have maintained traffic with their value pricing and promotions, which has lead to good growth opportunities for McCormick.

Turning to our third geographic region, Asia Pacific, we also operate in some very distinct markets. China and Southeast Asia offer abundant opportunities for growth in grocery and food service channels and with global packaged foods companies, calling for our rapid expansion in new products, new distribution channels and consumer marketing. Australia has a concentrated retail market and our focus there remains on categories where we have a strong lead like airplane jelly and seasoning blends. Given these varying markets and economies and the changes in consumer behavior and retailer actions, our management team has operated with a great deal of energy and agility, which has enabled excellent progress with our growth initiatives.

Through the first half of 2010, we have increased marketing support by 22% to invest in the growth of our leading brands. In the second quarter, much of this increase has been in the United States to build consumer awareness and trial for our new Recipe Inspirations and Perfect Pinch products and set the stage for their future growth. We gained each excellent retailer acceptance and placement for these products in the first quarter and followed that with media advertising in the second quarter. Scanner data for May showed that all six varieties of Recipe Inspirations ranked in the top 40% of McCormick blends, with Rosemary Roasted Chicken ranking in the top 50 items for the total spice and seasoning category. That means that it turned at a rate comparable to our Grill Mates seasoning blends and did so during Grill Mates' peak selling period. Other marketing and new product activity in the quarter featured Grill Mates, Simply Asia, Flavourful in the UK, sauces in China and Rice Cookers in Australia. Gordon will have more to share on these in his remarks.

Let me comment next on our progress towards improving the margins of our industrial business. Industrial business operating income margin for fiscal-year 2009 was 6.7% and if you recall, included costs related to the 2009 bankruptcy of our primary food service distributer in the UK, which were recorded in the second quarter. Year to date in 2010, operating income margin for this part of our business was 7.7%. As you can see from the graph on slide eight, we are definitely moving in the right direction, with the improvement driven by both CCI lead cost savings and a more favorable product and customer mix. For example, employees at our condiment plant in the United Kingdom have made great strides toward increasing the efficiency of that operation. Operating at a lower cost is enabling us to both improve margins and compete more effectively. We're making good progress toward our goal of 9 to 10% operating income margin for our industrial business by 2013.

I mentioned CCI, our comprehensive continuous improvement program, as a factor behind these results. Employees are increasing productivity, not only in the UK but across all of our operations. Many of our manufacturing facilities have high-performance work systems in place, as we discussed in our 2010 investor conference, engaging employees at all levels and the CCI program. With CCI, we are also lowering costs by buying more effectively, applying tools and technology and streamlining processes.

On Tuesday we announced that the Board authorized a $400 million share repurchase program. At quarter end, $33 million remained on the prior authorization. Along with our increased dividends, we view share repurchases as an important element of our return to shareholders. Between dividends and share repurchases, we have returned more than $1 billion of cash to our shareholders in the past five years. Since the acquisition of Lawry's, we've made steady progress toward reducing our debt levels and in the fourth quarter expect to increase the pace of our repurchase activity. By the end of fiscal-year 2010, we expect to have spent between $50 million to $100 million on share repurchases. As we've stated in the past, over time we expect our program to reduce shares outstanding by about 2% annually in the absence of significant acquisition activity. Priorities for cash continue to be our dividend payment and the acquisition of strong brands. In the absence of acquisition activity, we will use a portion of cash to repurchase shares.

Let me summarize. As we head into the second half, the economic environment remains uncertain and we will continue to face challenges. At McCormick we have become increasingly adept at working through these challenges while gaining good traction with our growth initiatives and CCI program. I'll conclude my remarks with a sincere thanks to McCormick employees around the world for their committment and talent, their agility in managing this business, and their ability to achieve great results.

Gordon, let me turn it over to you at this point and I'll come back into the conversation for Q&A.

Thanks, Alan, and good morning, everyone. Let me provide some additional details behind our second-quarter financial results and begin with a look at our consumer business and top-line growth on Slide 11. In the Americas region, sales rose 4% and in local currency the increase was 2% due to favorable volume and product mix. An important part of the second quarter sales increase came from Recipe Inspirations and Perfect Pinch and for a number of other products, the positive results we reported in the first quarter extended into the second quarter. For example,, in the US we had another quarter of increased sales of our spices and herbs, which outpaced the sales growth rate of the private label items we supply. In addition, we achieved double-digit increases for Grill Mates, Gourmet Items and Simply Asia products. Also in the Americas, we had excellent growth during this period in Canada, with promotions behind grilling products and new distribution gains for Billy Bee Honey.

Consumer sales in EMEA were flat to the year-ago quarter and down 3% in local currency. Currency through the second quarter still had a positive impact. Sales this quarter were impacted by a significant decrease in several European markets struggling with severe economic declines. In these markets we are seeing not only weak consumer demand but retailers pulling back on inventory levels. Our largest consumer markets in this region, France and the UK, have fared better. We achieved volume growth through the first half, and while private label continues to out pace the growth of brands, the rate of increase has moderated in the latest period. Given this backdrop and recent trends, we remain cautious in the third and fourth-quarter outlook for our consumer business in EMEA.

In the Asia Pacific region, second-quarter sales increased 22%, with strong growth in local currency of 7%. We grew volume and product mix in this market by 11%, lead by excellent results in China. In this country we continue to gain distribution, including product placement in frequently-shopped street markets. In addition, we have launched several new products, including Thai chili sauce, which plays to our strength in the bottled sauce category at retail and is supported by a full media campaign. And we have added new flavors of ice cream toppings to expand our number one position in this category. Operating income for our consumer business was $68 million. Excluding restructuring charges recorded in the second quarter of 2009, operating income was down $3 million. This was due largely to the additional $7 million investment in marketing spend in the second quarter of 2010, which was directed toward building consumer awareness and trial of our new products. Income was favorably impacted during the quarter by higher sales and cost savings from CCI.

Turning to our industrial business on slide 13, we delivered $29 million of operating income. In comparison to the second quarter of 2009, we drove profit with higher sales and the productivity improvements that Alan discussed. This result also included $1 million of incremental marketing behind our food service brands. Let's take a look at the sales performance for this part of our business on slide 14. Industrial sales in the Americas rose 2% and in local currency were down 1%. In response to lower commodity costs, primarily dairy ingredients, we passed through lower pricing for certain products during this period. We grew volume and product mix 2% with the introduction of new flavors sold to food manufactures in the US and in Mexico. We were also encouraged by an improvement in sales to food service distributors, as we roll out the new packaging phase of our McCormick for Chefs program. Looking ahead, we are encouraged by our pipeline of new products for both food manufactures and food service customers in the Americas.

In EMEA, industrial sales rose 22% and in local currency increased an impressive 12%. We grew sales to quick service restaurants in this region, which continued to have good traffic, and promotions that emphasize items we flavor. As in the Americas, we have a number of items, such as sauces and other condiments in the pipeline. In the second quarter of 2010, sales also benefited from a recovery in branded food service products in the UK when compared to a period of disruption in the second quarter of 2009. Industrial sales rose 24% in the Asia Pacific region, with a 13% increase in local currency, lead by growth in China. In this market, sales to quick service restaurants were quite strong and included new product wins for chicken wing marinades, beverage flavors and other items. Our industrial team there has been extremely successful, with more than 50 items scheduled for launch this year.

Across both segments, sales rose 5% and in local currency the increase was 2%. A 3% increase in volume and product mix was offset by reduced pricing, which primarily related to the pass through of lower costs to industrial customers. Operating income for the total business was up 9%, excluding the impact of restructuring charges in the second quarter of 2009, as shown on slide 16. Gross profit margin improvement was significant, at 100-basis points for the quarter. This was ahead of our 50-basis point projection for the year and an indication of the effectiveness of our CCI program and move toward a more favorable mix of products and customers.

SG&A as a percent of sales rose 60-basis points. A large part of the increase related to $8 million of incremental marketing support, along with the higher cost of benefits and fuel. SG&A in the second quarter of 2009 included $7 million in costs related to the bankruptcy of our UK distributer. The tax rate in the second quarter of 2010 was 30.2%, comprised of a 33% underlying rate net of discrete tax benefits. For the second half of 2010, we expect the tax rate to remain at 33%, which is an increase from our initial guidance of 32%.

Income from unconsolidated operations increased significantly as a result of our McCormick to Mexico joint venture, which had a large benefit from favorable soybean oil costs and foreign currency exchange rates through the first half. For the second quarter, sales from unconsolidated operations were up 11%. While we expect continued growth of these businesses in the second half, our projections do not include additional large variances from favorable input costs and currency. Second quarter earnings per share were $0.49 compared to $0.38 in the prior year. On a comparable basis, excluding $0.04 of restructuring charges recorded in the second quarter of 2009, EPS rose 17%. This is an increase of $0.07, which included higher operating income, as well as $0.02 each from favorable tax rate and income from unconsolidated operations, offset in part by higher shares outstanding.

I'll comment briefly on cash flow. For the first half of 2010, cash flow from operations was $65 million compared to $97 million in the first half of 2009. While higher net income added $26 million to 2010, cash flow in the first half of 2009 included the benefit of a significant improvement in receivables. McCormick profit continues to bring focus to working capital, and business leaders are rewarded not only for strong operating income but also for their management of working capital. This has continued in 2010, as we work toward our 2012 goal to reduce the cash conversion cycle by another ten days.

Let me wrap up with our latest outlook for 2010 as outlined on slide 21. While earnings per share exceeded our expectations for the first half, we remain cautious as we move into the second half, given the perspective on the global economy that Alan provided. We will continue to incur higher benefit costs, primarily due to pension expense. In addition, our tax rate is expected to be at a higher level, and as I stated earlier, the steep increases in income from unconsolidated operations are expected to moderate. We are also seeing costs for some of our raw and packaging material starting to rise, and as a further headwind, we expect currency exchange rates to have an unfavorable impact.

So for the full year, we are maintaining our earnings per share range of $2.49 to $2.54 but now expect to be at the upper end of this range. We are also reaffirming 2%to 4% sales growth in local currency but now project a 1% favorable impact from foreign currency exchange rates, based on prevailing rates. This assumes an unfavorable sales impact of 2% in the second half. As for gross profit margin improvement, based on an excellent year-to-date result and current outlook, we expect to exceed 50-basis points and are on track to exceed $40 million in CCI-lead cost savings. Both of these are increases from our initial projection. As for incremental marketing expense, we still expect $20 million for the year, most of which occurred in the first half. Let me summarize by stating that we are pleased with our business performance and financial results through the first half and confident that 2010 will be a record year for McCormick.

Gordon, before we ask the operator to put through the first question, let me start by addressing recent questions from investors regarding pressure by US retailers to reduce branded SKUs. In the US market we have not only maintained shelf space but across all outlets have grown our share. Since 2008 we've expanded distribution of our brands in alternative channels, such as dollar stores. For the past 18 months, there's been a great deal of speculation concerning various spice category solutions at Wal-Mart. I'd like to share with you that later this Summer, the core spice and herb section of Wal-Mart Supercenters will be merchandised in a consistent manner across the United States, with an assortment consisting primarily of McCormick-branded products and a limited number of great value, private brand items. Wal-Mart has also agreed to carry our new Recipe Inspiration items in most of their stores nationally. We're very pleased with the opportunity to demonstrate the strength of our brands with our valued customers.

Operator, let's open up the line for questions.

Thank you. (Operator Instructions). Our first question comes from Alexia Howard with Sanford Bernstein. Please state your question.

Good morning, everyone.

Good morning, how are you?

Great. So I want to talk about the marketing spending outlook in the second half of the year. You've obviously seen quite a big step up in the first half, are you anticipating that that kind of pace is going to continue in the second half?

No, we expect it to moderate a bit. It's still going to be more than it was last year but we -- it won't be nearly at the rate to which we've spent in the first half. A lot of our first-half spending has been behind introduction of new products and we'll get to more of a normal level of advertising. Remember, we've had increased step ups in the last couple years in the fourth quarter and we'll continue to increase it but not as much as we have the first half of the year.

And you're anticipating a continued step up in promotional activity? We're hearing a lot of the retailers are asking for incremental promotional spending at this point, do you anticipate that stepping up in the second half?

I don't think so much of a step up because, as you recall, we added a lot of high-value promotions over the past year, so I wouldn't say it's going to decrease but I wouldn't expect to see that kind of increase as we head into the back half of the year.

That's great. I'll pass it on. Thank you very much.

Thanks, Alexia.

Our next question comes from Alex Bisson with Northcoast Research. Please state your question.

Good morning, thanks for taking my questions.

Morning, Alex.

Just quickly on the marketing spend, I guess I was looking for just a little bit bigger increase in the quarter just ended, so am I right to think that the marketing spend came in a bit below plan?

No, it was pretty well on plan. We're spending about what we said. Gordon, do you want to add any perspective on that?

Absolutely. It's pacing the way we had anticipated. The big events that we were supporting this quarter we supported and it was largely behind the Recipe Inspirations and Perfect Pinch so there was really no change to our original thinking on that.

When you look at the step up in marketing spend for the second half, you noted a lot of it will be in Europe. Will that be focused on markets that are performing better from a global macro standpoint, or will it go into the markets that have been more adversely impacted?

It'll be primarily in the UK and France, which is our largest markets and the markets that are performing the best, and the reason for that is that's where we get our best returns. We're considering what we need to do in some of the weaker markets but we believe we'll get our best returns investing behind our biggest businesses.

Okay, and then just one final one on the new product introductions. It looks like the trial and consumer awareness has been outstanding, but I was wondering if you could talk a little bit about the repeat usage or the repeat purchase you're seeing within the two big platforms, Recipe Inspirations and Perfect Pinch?

Well, it's still hard to get an early read but based on the turn rates that we're seeing we're very, very pleased, especially with Recipe Inspirations. Perfect Pinch is also doing very well, but the purchase cycle's a little longer so it's harder to read that, but Recipe Inspirations are use it once and replace it. So it's still a pretty early read but one that we're very encouraged with and pretty similar to what we saw in the test markets, so we think we've got a very good product here.

Excellent, that's good news. Thank you very much.

Okay, thanks, Alex.

Our next question comes from Ken Goldman with JPMorgan. Please state your question.

Good morning.

Hi, Ken.

So just wanted to make sure I understood the Wal-Mart statement you made, Alan. Are you suggesting that the tests are over and that they're going with Wal-Mart. What's really different besides what was previously where you were still selling a lot at Wal-Mart and maybe some private label to them, too?

What it really means is that effectively the great value test is over, and Wal-Mart's made the decision to merchandise in those test stores pretty much the way that they've merchandised around the rest of the country, so that's the outcome of that. It hopefully lists some of the concerns that have been out there for the last 18 months or so.

Is there any read of that besides that it's just good news overall where they've decided to go with the McCormick-branded solution as most of their shelf set there?

We're taking it as great news.

Okay, and then can you address the industrial business. Really great sales growth there in some regions but it's always a lumpy business as you guys have suggested in the past. How should we think about the sustainability of some of the growth via QSR there in some regions?

Well, I think we -- what we're seeing and recall we had pretty strong sales comparisons to last year as we were supporting the launch of some significant new products in the US, so we're pretty pleased with what we've seen from a sales growth perspective. We do expect it to continue in the foreseeable future. We've got good momentum in Europe, the Americas has good momentum behind the products that we're selling and the customers are supporting the products that we're selling, and we're seeing continued distribution expansion and new product wins in Asia. So we believe that, at least the current outlook as we see it, barring some major economic changes that sends people back out of restaurants that we're feeling pretty good about the food service part of our industrial business.

Great, thanks very much.

Okay, thanks.

Thank you.

Next we have Robert Moskow with Credit Suisse. Please go ahead with your question.

Hi, I just wanted to ask another follow up on the Wal-Mart. Aren't they testing also a merchandising set where there's a low-priced branded product, as well? I remember doing a store check right around your headquarters there that -- where I saw some brands that were maybe second and third tier, is there another test still going on?

Yes, that's not so much the test. What they've done is merchandise and they will continue to have in different parts of the store some regional brands. It's less of a test. For instance, in high Hispanic areas there's some Hispanic-focused brands and I think you saw some of those. So they'll continue to have those in distribution but the predominant core spice set will be McCormick and some Great Value private brand.

Okay, and then also a follow up on operating profit for the quarter. When I look at it I guess quantitatively it's up about $8 million year over year when you adjust for the restructuring charges, but then you also said that there were some incremental charges in the UK last year of about $7 million, so is operating profit roughly maybe up $1 million year over year if you normalize for that?

Well, you're isolating one event. There's a number of factors in there, so obviously we spent up in the quarter, as well, $8 million, which was not in the prior year. And also we had the impact of higher pension costs and as we described, that's on an annual basis about a $14 million impact and that goes through each quarter on pretty much a pro rata basis. So you're -- if you do the math the way you've described it you're accurate, but I'd be cautious that there are a number of things that we've spent up against for the purpose of driving our business.

Okay, thanks, Gordon. And just lastly, I guess the good news is that the back half of the year does imply more growth despite the currency headwind and despite higher benefit expense. I'm getting roughly 4% operating income growth, something along those lines, do you think that's about fair?

Yes, that math is correct if you're guiding towards -- as we said, we're guiding towards the upper end of the range and that's the way it would work out.

Okay, great. Thank you very much.

Thanks.

Our next question comes from Eric Katzman with Deutsche Bank. Please state your question.

Hi, good morning, everybody.

Good morning, Eric.

Morning Eric.

I've got a couple questions. I guess in the 15 years that I've been following you I don't ever remember you mentioning Spain or Portugal, so I understand what's going on in those markets but did the business basically just collapse? It can't be that big to begin with.

It's not that big but what it did is offset some growth that we had in the UK and France. It was a big enough decline that we thought we'd call it out. Gordon, do you want to add anything to that?

Absolutely. What we wanted to make sure is people understood that the large core markets are still hanging in there and there are markets surrounding those core markets that have had some difficulties.

That's what the financial markets are telling us, but I was just surprised that you called it out as an issue for the consolidated segment results, but okay. Then just a more specific issue, I noticed on the balance sheet -- and maybe this occurred earlier but I just didn't pick up on it, Gordon -- the intangibles were down by a fair amount year over year. Did you have some kind of revaluing of the intangibles because I don't remember you taking a charge or anything on that?

No, that's a function of the currency rates and that, as you know, at a point in time at the end of the quarter you strike your currency rates and then the year-to-year fluctuations in currency flow through accumulated other comprehensive income. So the fact that the euro, which is one of the larger items on that, which is the DeCrow acquisition back in 2000, the fact that the euro started to decrease was reading through both the intangible and then other comprehensive income.

Okay. And then on the -- just kind of follow up, congratulations on the Wal-Mart decision, it's nice to see that brands are still of value, but you'd talked a little bit I think at the analyst day about Sam's Club, Alan, and is there any update as to how that test is going and when we might expect a decision from that club store?

No update that we can really talk about. We're very pleased with what we're seeing and we think consumers are really pleased to have a great brand available in those stores, though.

Okay. All right, I think that does it for me, thank you.

Okay, thanks, Eric.

Thanks, Eric.

Thank you. Our next question comes from Mitch Pinheiro with Janney, Montgomery, Scott. Please state your question.

Hello, good morning.

Good morning, Mitch.

In terms of -- on the industrial business and the pass throughs you're seeing, which of the raw material and input costs that you're passing through the favorable pricing on?

It's the large commodities that we tend to work with customers on the ups and downs. The biggest impact currently are dairy products, and as we take positions on things like cheese with our customers, they go up, we pass it through, it goes down and we pass it through and we do the same thing on soybean oil, flour, or the other large items that are impacted like that.

So in this particular quarter it was primarily dairy products?

It's primarily dairy, yes.

Okay. And how about some of the hard-to-track spices or vanilla, pepper, how are the pricing outlook on those items?

Well, we're seeing increased upward pressure on specifically pepper and garlic. Garlic's up, I think, about 50% over the last 16, 18 months. Pepper has climbed in the last several months. So there have been some upward pressure in those and so we look at what we're doing there and what we think the outlook is as we make our pricing decisions. Those wouldn't necessarily be passed through automatically. We make a more rational decision on those, although for customers that are buying in bulk, they're buying based on whatever the price is on the day that we quoted, so it's not necessarily contract pricing for those either. But in our consumer business we -- as you know, we take pricing more strategically than tactically. But we are seeing some upward pressure in a number of the input costs.

So when you talk in terms of incremental promotional spending you don't see any increase step up in the second half I think is what you said, would -- so pricing--?

Not necessarily incremental step up. We've -- and we're still going to have fairly high levels of promotional activity as we did last year.

So when we look at pricing as part of your second-half sales input, is pricing expected to be flat or how would you characterize that?

Our -- Gordon, you may want to help me on this. Our current assumption on pricing is relatively flat although there'll still be some downward pressure in the industrial business as we pass things through based on our current guidance.

Yes, that's absolutely right.

Okay, and this is the last question on the non-consolidated operations. Is the second half -- you've had terrific growth, obviously, in the first half there, is the second half still anticipated to be up but less up? Is that what I understand?

Yes, that's correct, Mitch. As you recall from last year, we started to see good improvement in that business towards the second half of the year so the comparisons start to be more difficult. So we're anticipating growth but certainly not on the magnitude that we saw in the first six months.

Okay, thank you very much.

Thanks.

Thank you.

Thank you. (Operator Instructions). Our next question comes from Ann Gurkin with Davenport. Please state your question.

Good morning.

Good morning, Ann.

Just wondering if I can get a little more detail on where you see pressure in raw material and packaging costs?

Yes, it is predominantly -- if I had to highlight anything that's creating pressure right now, packaging costs are under some amount of pressure but the larger impacts to us are pepper and garlic.

Okay, that's what you're referencing, okay.

And in the past, as you know, as we've managed these sometimes we found it necessary to take price increases on specific commodity items when they start to climb and I'm not announcing anything like that today but we have shown that we have the ability to do that as we need to, but it's not the first lever we try to pull.

Okay, great. And then you also talked about new customer wins, can you give any more detail as to what area or any other update on that comment?

Not any specifics. As you know, we've talked about expanding the sales of branded products, specifically in the dollar channel, and showing the good results that they get when they do that and replace that with a controlled economy label and that's a lot of what we were talking about there.

Okay, that's great. Thank you.

Thanks.

Thanks, Ann.

Our next question comes from Robert Dickerson with Consumer Edge Research. Please state your question.

Hey, guys, just a pretty easy question. I'm just curious. I know the strategy in the past has been to hold pricing and we look in the back half of the year if you are seeing some pressure on the commodity side and you have picked up some volume share, at least in the last quarterly period. I'm just curious if there would be some pricing coming through, how are you thinking about that with just respect to volume share and competition with private label, just in the spice category?

Well, that's something we always have to weigh between recovering input costs and the impact on volume, so it is something that we do a lot of work on and run our elasticities to determine at what point do we need to pass pricing through and how do we do it because we've got a choice of taking pricing on specific items, which we can do a little more straightforward and quicker than we can do a general price increase and at this point, we're not prepared to talk about any strategy behind it. But that's how we tend to think about it. We definitely want to make sure that we stay competitive and aren't necessarily surrendering share to private label.

Got you, okay, and then just a quick follow up. If that's the case, would it be fair to say that it's -- at least for the time being current strategy would be to hopefully not lower prices more but rather increase the marketing such that you can hold pricing and the perception of the overall brand relative to private label?

Yes, but remember also, if we -- for instance, we have to raise prices on things like pepper, private label prices will also need to be increased, as well, so we run that balance all the time.

Got it, okay. And last just on growth CapEx, is there -- I'm still somewhat new to the sector but I'm just curious in the past if you've ever broken out maintenance CapEx relative to growth and how you see that growth proceeding throughout the rest of the year?

Historically we haven't broken it out in that fashion but I can tell you broadly, when we manage CapEx we manage for a return in excess of our cost of capital and we look at the total portfolio. So we make sure that the growth component of that portfolio can more than offset the no-return component of, say, roof replacements and things like that. So we manage it on a total portfolio basis to make sure that total spend is delivering nicely above our cost of capital.

Okay, great. Thanks guys, I'll pass it on.

Thank you.

Our next question comes from Andrew Lazar with Barclays Capital. Please state your question.

Good morning.

Good morning, Andrew.

Alan, we've heard a couple of food companies talk about how they're -- when they spend on promotions these days they're not getting quite as much lift as they've historically seen just given the environment that's out there and I'm just curious if that's something that you've experienced or have some thoughts on?

Absolutely, and I would say -- and we've really talked about this before -- we are spending -- as we're doing value promotions we know those are some of the lowest ROI spends that we have and we try to make them as good as possible but we felt in the tough economy that it was important that we do that. And we're continually evaluating what the right level of spend are and what the right periods to spend them to get the most impact are, but we are seeing -- I would agree with what the other companies are saying, we're seeing a lower impact from some of the value promotions. We're seeing a pretty good impact still from our more consumer-driven recipe strategies and health-and-wellness advertising that are really helping, but I would agree with what the other companies are saying.

That's helpful, and then one last follow up for me on the Wal-Mart piece. I know there were some that might have believed that if the situation worked out in your favor, which it seems to have done and that's a good thing, that it would come with some change in the economics to McCormick of dealing with that customer or to that channel or what have you in order to keep the shelf the way it is. So I was just curious if you had some thoughts around that and if there's been any real change in the way -- your economics to a given channel or customer to keep the shelf space the way you wanted it to be?

Yes, as you know, we're not going to talk specifically about what we're doing with specific customers but I will say we're just happy with how things have worked out and we believe it's going to be a positive for both McCormick and for the customer.

Great, thank you.

Okay, thanks, Andrew.

Our next question comes from Eric Katzman with Deutsche Bank. Please state your question.

Hi, thanks for taking the follow up. I also noticed within the release that it seems as if Asia, both on the consumer and the industrial side, has really picked up, particularly in China. I know you went through some pretty significant SKU cuts there a year or two ago. Maybe you can just talk a little bit more about why that market seems to be reinvigorated at the moment?

Well, industrial, first, which is the bigger part of the business in China, last year was seeing some of the same things we were where the QSRs were not doing the new items and weren't promoting as heavily as they had in the past and so -- and there were some real declines in their sales and we've seen that pick back up and we've seen the innovation activity pick back up. On the consumer side, we've continued to upgrade the talent in our organization and we believe we're hitting on the things that consumers are looking to buy. We're investing and continuing to expand our presence in our major cities, as well as expanding in new products and some distribution. So we believe that as a region, and specifically China is a country that we should be growing in and we should be growing consistently and we think we have a formula that's working for us right now.

Okay, and then just one last one. Alan, because McCormick has such a -- in many ways a broad view of the consumer with the private label that you do along with the gourmet items and then on the industrial side everything from flavoring to basic food service ingredient stuff, it just seems that -- again, kind of following up on Andrew's broad view of things, that we're just getting so many different signals out of the economy and is that your sense as to what's happening out there that like on the one hand you may have a consumer that's willing to trade up but the others are still being very cautious? And maybe the same thing could be said of countries between UK and France doing okay versus Spain and Portugal collapsing or what have you?

Yes, I think there is still a bit of cautious optimism that we see, both with consumers and with customers, that some of the consumers are climbing back out of the bunker and they're trying new flavors and are experimenting a little more. But we still have an issue where jobs haven't necessarily recovered, I would say it's still fragile. And so I think it is a bit of a mixed signal around the world, and I would say that in most of the developed economies that there are -- there's a base of consumers where they really feel like that the worst may be over but then there's still a bit of fragility to that and respond and react to any little bit of nervousness and bad news. So it's kind of a hard read right now.

Okay, thank you.

Okay, thanks, Eric.

Thanks, Eric.

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference back over to Ms. Brooks for closing remarks. Thank you.

Thank you for participating in today's discussion. Through July 8, you may access a telephone replay of the call by dialing 877-660-6853. The account number for the replay is 309 and the ID number is 350421. You can also listen to a replay on our website later today. If anyone has additional questions regarding today's information please give me a call at 410-771-7244. This concludes our call.