McCormick & Company Inc (MKC) 2011 Q2 法說會逐字稿

Greetings and welcome to the McCormick's second quarter 2011 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 provide an update on our business, review McCormick's second quarter financial results, and share our latest 2011 outlook.

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

Joining us for the call are Alan Wilson, Chairman, President and CEO, and Gordon Stetz, Executive Vice President, CFO, and Treasurer.

Alan is going to start with a business review and discussion of some recent business building agreements and transactions.

Gordon will follow with a review of our second quarter financial results and an update to our 2011 outlook.

After that, we look forward to discussing your questions.

As a reminder, our presentation today contains projections and other forward-looking statements.

Actual results could differ materially from those projected.

The Company undertakes no obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events or other factors.

In addition, certain information we will present today are not GAAP measures.

This includes annual financial results from 2010 and prior years that exclude items affecting comparability.

We present this non-GAAP information for comparative purposes alongside the most directly comparable GAAP measures.

Reconciliations of GAAP to non-GAAP measures can be found in the presentation slides for our call.

It's now my pleasure to turn the discussion over to Alan.

Thanks, Joyce.

Good morning, everyone, and thanks for joining us.

Some of you that dialed in on our last quarterly call in March remarked that it was an unusually short call.

I don't know that anybody was actually complaining but in our efforts to exceed your expectations, you'll find this morning's call a little bit longer since we've got a lot of really good news to report.

The good news starts with our latest financial performance and a double digit increase in sales and profit for the second quarter.

This was accomplished in an economic environment that remains challenging for McCormick as well as our customers and our consumers.

Both our consumer and industrial segments achieved a strong sales performance.

Through new products, increased distribution, and our brand marketing, we were able to offset areas of weakness in certain parts of the business.

On the cost front, we are effectively managing through volatile and inflationary material cost environment with our pricing actions and through our comprehensive continuous improvement program, CCI, which is now expected to generate at least $45 million in cost savings in 2011.

Following the end of our quarter, we announced two agreements.

Kohinoor and Kamis that gave us a leap forward in execution against our emerging market strategy.

Let me begin with an update on our sales and profit growth initiatives and then share with you why we are so excited about the news on Kohinoor and Kamis.

As I indicated, one key driver of second quarter sales was our new product activity.

In our consumer business the US relaunch of our frozen Zatarain line with new packaging, new graphics and simpler ingredients led to a 16% increase in unit sales with 11 of the top 25 grocery customers accepting an average of 6 items.

We're rolling out 3 new flavors including Big Easy Rice Bowl and French Quarter Pasta Bake.

Unit sales of Recipe Inspirations are up nearly 20% year-to-date in the US, which includes the introduction of 6 world flavors.

Also in the US, many of you have seen our new Grill Mates varieties of seasoning blends, marinades and rubs which helped drive a 5% unit increase for Grill Mates in the first half.

In France, we're boosting sales of new products for both our Ducros brand of spices and seasonings as well as 21 new Vahine brand desert items.

The new Ducros items include a line of organic spices and herbs, seasoning blends, adjustable grinders, and an environmentally friendly refill box, 16 items in total.

Moving to our Asia Pacific region, Thai Chili Sauce, which we introduced in 2010, continues to grow and will be launched in additional markets in the second half.

In Australia we've introduced one pot meals to bring together convenience and flavor with dishes like chicken and leek casserole.

On the industrial side of our business, we've maintained a strong new product pipeline across our global regions in support of our foodservice customers and those food manufactures we serve.

In the Americas, we've increased sales with seasonings for snacks that feature natural ingredients.

That's a key McCormick strength.

In the quarter, we gained acceptance for new cereal flavors and new sauces.

Our industrial business in EMEA has had a string of quarters with strong sales growth.

And the second quarter was no exception.

A 4% increase in volume and product mix and this most recent quarter included sales of additional Ducros and Vahine branded items in the foodservice distributer channel and several new sauces for quick service restaurants.

We also had recent new product wins with food manufactures that include flavors for snack nuts and for Mexican meals.

Innovative beverage flavors for quick service restaurants in Asia rounds out the new product activity for our industrial business.

One-third of sales growth is expected to come from new products, and we've got a lot onboard and in the pipeline to meet this objective.

We look for another one-third of sales to come from base business growth which we are driving with increased distribution and effective marketing.

Let me share the latest news starting with distribution gains.

Second quarter sales included incremental consumer business in the US that we announced in the past 12 months.

We've commented previously on our expansion in club stores and I'm pleased to report that we've expanded 2 of our leading Grill Mates items nationally in warehouse clubs.

Also driving growth is a new private label business with a grocery retailer and a leading drug chain that we mentioned earlier in 2011.

In recent weeks, we've also won the private label business for a leading Dollar Store chain and will start to supply these products later in 2011.

In Europe, we're also making great strides with new distribution.

In France, you can find our Ducros brand in nearly every grocery retailer except one which has historically offered only private label.

Our sales team has now negotiated acceptance of 55 Ducros items with this retailer.

And in Portugal, we recently won distribution of our Margo brand items with a leading discount retailer.

Distribution gains continue to drive our business in China as we expand into new cities and new distribution points including street markets.

Moving to the industrial business, our distribution gains include the supply of additional regions in the US for a quick service restaurant customer.

We announced this earlier in 2011 and are starting to see the benefit on our top line.

In our EMEA region, we're building distribution in foodservice through our joint ventures in both Turkey and South Africa.

And as part of our growth in emerging markets in Asia, we've begun to supply flavor products to support the expansion of a major quick service restaurant customer in India.

Turning to brand marketing, we have some additional business highlights.

During the quarter, we launched a major new marketing campaign for Hispanic consumers in the US, our largest to date.

This integrated program includes an Asondo Sebroso tour, which means Grilling With Flavor in Spanish, with 26 planned stops featuring product samples, flavor ideas and donations as part of a program to establish scholarships for Latino students.

The campaign also includes television advertising on Hispanic networks, regional radio ads, and in store displays and recipes.

We've launched a Spanish language website that encourages exploration of new flavors and recipe sharing.

This is an important initiative that in the second quarter helped drive double digit sales growth of our Hispanic products in the US, and that we will continue to run in the second half of 2011.

With an increase of 150% in our 2011 social media spending, we're gaining traction with consumers.

In the UK, we launched Schwartz Cooking Club across Facebook, Twitter and YouTube in May with 71 million ad impressions planned for the next 3 months.

In the US, our Grill Mates Facebook fans recently grew by 100,000 in a recent 2-week period, gaining an average of about 10,000 new fans a day.

We have an event underway where consumers can get their photo posted on a grill on the NASDAQ video screen in Times Square both at Memorial Day and over the 4th of July.

And in the second quarter we launched the second addition of our Flavor Forecast in China with much fanfare.

To summarize our sales initiative, while we're certainly feeling some impact of higher prices during this period, we're driving sales with innovative products, expanded distribution, and by reaching consumers with marketing programs that build awareness and usage of our great products.

Heading into 2011, we were faced with significant cost increases in our raw and packaging materials.

Midway through the year we're seeing further increases in some material costs, including commodities we use in our industrial products such as soybean oil, dairy ingredients and wheat.

While our pricing actions have provided an important offset in 2011, of equal importance, our efforts to improve productivity and reduce cost through our CCI program.

Our teams throughout McCormick have made excellent progress in 2011 and we now expect to deliver at least $45 million in cost savings from this program.

Gordon plans to provide some additional remarks on our latest outlook for the impacted CCI, pricing, cost inflation, and the impact on our gross profit and gross profit margins in 2011.

On June 1, we were pleased to announce an agreement to form a joint venture with Kohinoor Foods Limited to market and sell branded basmati rice and food products in India.

McCormick will invest $115 million for an 85% interest in this new joint venture.

Basmati rice is a cornerstone of Indian cuisine and Kohinoor is a leading brand with more than 15% share.

With sales of $85 million, this business has an extensive distribution network of 350,000 retailers and the ability to scale to a national brand in India.

Sales of Kohinoor have been growing at a double digit pace.

Consumers in India view basmati rice as a premium item and have been shifting their purchases toward branded basmati rice.

In addition to expanded distribution, we'll work to grow sales and profits of this business by developing new products under the popular Kohinoor brand through consumer marketing, and by applying the latest food technologies and global best practices to this joint venture.

Kohinoor is a great next step for McCormick which builds upon our other investments in India and offers a new avenue for growth.

Earlier this week we signed the agreement with the owner of Kamis to purchase 100% of the shares of this business for approximately $291 million.

Kamis is a strategic acquisition for McCormick that establishes a foothold in Eastern and Central Europe and is an excellent complement to our leading brands in the UK, France, and other parts of Western Europe.

Kamis is a brand leader in Poland, with more than $100 million in annual sales.

The brand has category shares in Poland of approximately 45% in spices and seasonings, and 30% in mustard, as well as subsidiaries in Russia, Romania, the Ukraine and exports into a number of Central and Eastern European countries.

More than a third of consumers in Poland purchase seasonings at least every 2 weeks.

Across its entire portfolio, Kamis is growing sales at a mid single digit rate.

Established in 1991, this business has a modern production facility near Warsaw, and about 1,250 employees.

Upon closing, Kamis will report into Malcolm Swift, our President of Europe, Middle East and Africa.

Our growth plans for this business include product innovation and building brand marketing support, introducing certain products that we offer in other European markets into some of the Kamis markets, and expanding the Kamis brand into other Central and Eastern European Markets.

Between these 2 deals, our business development team has been really busy and with great results.

And our integration teams are formed and well underway.

My congratulations to them.

It was just 4 months ago at the CAGNY conference where I shared with you a goal to build our percentage of sales in emerging markets from 9% in 2010 to 12% by 2015.

With Kamis and Kohinoor, we expect more than 12% of McCormick's 2012 sales to come from emerging markets.

Before I turn it over to Gordon for a closer look at the second quarter and a review of our latest outlook for the year, I'd like to acknowledge the achievements of all McCormick employees around the world.

They're behind our second quarter performance and success with our growth initiatives, whether it's in product development, distribution wins, CCI activity, or these latest acquisitions.

I applaud their efforts and I'm really proud to be part of this excellent team.

Gordon?

Thanks, Alan, and good morning, everyone.

Today's announcement of our second quarter sales and profit performance demonstrates the strength of our brands and the effectiveness of our CCI program.

We are particularly pleased to be delivering year-to-date high performance across most of our operating units.

Let's start with a closer look at top line results.

There has been a lot of interest in our pricing activities so let me begin with a few general remarks, and then move into a discussion of our 2 segments.

In response to higher raw and packaging material costs, we began to implement pricing actions early in fiscal year 2011.

In the first quarter, pricing added 3% to our sales growth.

In the second quarter, our pricing actions were more fully in place for our consumer business, and we continued to pass through higher costs with increases to industrial customers.

As a result, pricing added nearly 5% to second quarter sales.

Keep in mind that as we head into the third quarter of 2011, we'll begin to lap some significant pricing on pepper that was taken in August 2010.

As indicated on slide 14, in the Americas region consumer business sales were up 9%.

Our pricing actions accounted for 7% of this increase and we grew volume and product mix by 2% in the quarter.

This increase was led by authentic regional cuisine in the US and dry seasoning mixes and Billy Bee Honey in Canada.

Unit sales of Zatarain branded products rose 16% as a result of distribution gains for frozen products and incremental marketing behind the brand.

We grew net sales of Hispanic items in the US at a double digit pace through our direct store delivery system in western markets and the campaign Alan described.

For many of our other products, we believe the emphasis by certain retailers on private label limited our sales growth during this period.

We are responding to this environment by analyzing and adjusting our promotional activities, launching differentiated new products, and insuring we have good distribution of our products, both brand and private label, in all channels.

Consumer sales in EMEA increased 10% and in local currency rose 2%.

In this region, pricing of 4% was offset in part by a 2% decline in volume and product mix.

This was an improvement from a 6% decline in volume and product mix during the first quarter.

What we saw in this most recent period were mixed results.

Sales of our Ducros and Vahine brands in France benefited from new product introductions and product distribution.

Increases in developing markets related primarily to distribution gains.

In the UK and the Netherlands we experienced volume and product mix declines.

In these countries, consumers remained under pressure, and a competitive retail environment has led to aggressive actions with private label items in many categories.

As stated in the first quarter, we are addressing this situation by, first, redirecting a portion of brand marketing support to emphasize the value of our products; Second, accelerating new product activity to differentiate from private label.

And third, working to improve our in store merchandising.

In the Asia Pacific region, consumer business sales rose 23%, and in local currency were up 13%.

The result this quarter was led by China where we grew sales, volume and product mix with our efforts to introduce new products and expand distribution geographically and into additional retail channels.

This pace of growth in China is on top of a double digit sales increase in the second quarter of 2010.

Operating income for our consumer business was $77 million, a 13% increase from the second quarter of 2010.

We achieved this increase largely through higher sales and CCI cost savings.

Recall that in the second quarter of 2010, we increased our brand marketing by 18% to support the launch of Recipe Inspirations and Perfect Pinch in the US.

This year, we maintained nearly the same level of spending with incremental marketing support behind Zatarain's and Hispanic products in the US, as well as social media activity in a number of markets.

Let's take a look at the sales performance for our industrial business by region on slide 15.

In each region, we have taken pricing actions with our industrial customers to pass through increased material costs.

And we expect this pattern to continue for the next 2 quarters.

Industrial sales in the Americas grew 9%, and in local currency were up 8%, with similar increases in volume and product mix and in pricing.

Volume and product mix this period was driven by new products and increased demand by food manufactures for snack seasonings, cereal flavors and other products.

We continue to see a robust pipeline of new products that includes simple ingredients, a healthier profile, and ethnic flavors.

Also in the Americas, sales to the foodservice industry were comparable to the second quarter of 2010.

We had stronger sales to quick service restaurants that included new products and expanded distribution.

But saw some weakness this period in the sale of branded foodservice items.

In EMEA our industrial business posted yet another quarter of strong sales growth.

We grew second quarter sales 13%, and in local currency 7%.

Volume and product mix drove this increase as well as our pricing actions.

Demand from quick service restaurants continues to be the key sales driver in this region.

We saw particular strength in the sales of products that we manufacture in our facilities in Turkey and South Africa.

In fact, we just increased production capacity in our consolidated industrial joint venture in Turkey by 26%.

In the Asia Pacific region, industrial business sales rose 21%, and in local currency 12%.

This increase builds on a 13% increase in the second quarter of 2010.

It is also a sequential turnaround from the first quarter of 2011 when sales were affected by the emphasis on certain menu items by our quick service restaurant customers.

This quarter, we benefited from some new products for these customers, along with support for their business building activity in India.

Across all regions, operating income for our industrial business rose 10% from the year ago period to $32 million in the second quarter of 2011.

This increase was driven by higher sales and CCI cost savings.

We were able to improve our operating profit margin through CCI and a shift in mix toward more value-added products, achieving 8.4% in the second quarter.

We were pleased with this improvement given the downward pressure on margins that is created by our pricing protocol in an inflationary environment in which we adjust prices dollar for dollar to reflect changes in material costs.

For the total business, second quarter operating income rose 12% from the year ago period following a 12% increase in the first quarter.

Operating income margin was up slightly from last year at 12.4%.

Gross profit margin, on the other hand, was down 120 basis points.

This was a reversal from 130 basis point increase in the first quarter.

Heading into the first quarter we had some lower cost inventory in the system and didn't experience the full effect of higher material costs.

By the second quarter, a greater impact of higher material and packaging costs had worked their way into our cost of goods sold.

We succeeded in offsetting the dollar impact of higher costs with our pricing actions and CCI cost savings.

However the net effect of these factors caused gross profit as a percentage of net sales to decline in the second quarter.

McCormick employees are achieving excellent results with CCI, and we have increased our projected cost savings for 2011.

However material costs continue to escalate.

From our initial cost inflation estimate of 7% to 8% for the year, we are seeing further increases into the second half of our fiscal year.

While we expect pricing actions and CCI cost savings to continue to offset the dollar impact of higher costs, we also expect a decline in gross profit margin to continue into the second half.

SG&A rose 5% from the second quarter of 2010, but as a percentage of sales was down 140 basis points.

The tax rate was in line with our guidance at 31.1%, up slightly from 30.2% in the year ago period.

Keep in mind that for the next 2 quarters of 2011, we will be comparing to a third and fourth quarter in 2010 that both had very favorable tax rates.

As projected, income from unconsolidated operations was down slightly in the quarter.

The primary reason for the decline was the impact of higher soybean oil on our joint venture in Mexico where mayonnaise is a leading item.

The fundamentals of our joint venture's performance remains solid including aggregate sales growth of 24%, of which about half is due to the incremental impact of Eastern condiments in India which is performing right on plan, and half from increases across our other joint ventures.

At the bottom line, as shown on slide 17, earnings per share was $0.55 compared to $0.49 in the second quarter of the prior year.

This $0.06 increase came from higher operating income.

I'd like to turn next to the balance sheet and cash flow.

During the quarter we spent $39 million to repurchase 807,000 shares at an average cost of $48.32.

At the end of May, $270 million remained on our $400 million share repurchase authorization.

In mid May, we curtailed our share repurchase activity in anticipation of our acquisition activities.

We expect to use a combination of cash and debt to finance our recently announced transactions.

Net cash flow from operations was $36 million for the first 6 months of 2011.

This is down from $65 million in the year ago period.

Net income has increased in 2011 and we have improved our receivables collections.

However, as we saw in the first quarter, inventory has increased since our 2010 fiscal year end.

This increase is driven in part by higher material costs, currency impact, and inventory positions.

The higher costs of raw and packaging materials mean that the inventory we hold also has a higher cost, which accounted for about one-quarter of the increase versus the year ago inventory balance.

The impact of currency added another 20% of increase.

And as we mentioned last quarter, in response to world events and potential supply issues, we are currently holding certain positions of spices and herbs to assure steady supply of high quality products for our customers.

This accounts for more than half of the remaining increase.

In the face of these increases we are very focused on lowering our inventory levels.

One initiative currently underway is the implementation of new inventory management processes in North America.

Once we fully implement this system and begin to drive reductions in our inventory in North America, we will turn our attention to implementing those new processes in other parts of our business.

Given our current inventory level, the continuing cost pressure, and the importance of holding strategic inventory in this environment, we are not likely to reach the goal set in April 2010 which is to reduce our cash conversion cycle by 10 days by 2012.

We achieved a reduction of 3 days in 2010 but do not expect to see further progress in 2011.

Be assured that activity to improve our working capital continues.

We remain committed to improving our cash conversion cycle and will revise the goal once we have better visibility in this volatile cost environment.

I'm going to wrap up our remarks with our latest financial outlook for 2011.

During my review of McCormick's second quarter results, I provided some comments about certain aspects of our projections for the balance of the year as they relate to our existing business.

Let me summarize this outlook and then incorporate the impact of the 2 transactions that Alan discussed.

We are including them in our guidance at this time, because we have a high degree of confidence that they will be completed later this quarter, most likely by the end of the third quarter.

So on slide 19, starting with our base business, we are reaffirming expected sales growth of 5% to 7% in local currency, although at this point in the year, we are seeing more of a shift towards pricing within this range.

Another 1% of growth is expected in incremental sales with 3 months of the Kohinoor and Kamis businesses.

This takes our sales growth outlook in local currency to 6% to 8%.

Based on prevailing currency exchange rates, the impact of foreign currency is now expected to add 2% to sales, up from our earlier estimate of 1%.

Turning to earnings per share, on slide 20, we began the year with a $2.80 to $2.85 range.

We are reaffirming this range for our base business.

This may seem overly conservative given the double digit increases achieved in each of the first 2 quarters.

However, we remain cautious about the impact of the global economy on our consumers and on our retail and industrial customers.

In addition, as I stated earlier, we are facing further increases in material costs.

While we do not typically comment on specific quarters, I have a few quick remarks on the third and fourth quarters of 2011 and ask that you keep in mind for any financial projections.

As I mentioned earlier, we had some significant tax rate variances that boosted earnings per share in both the third and fourth quarters of 2010.

In the third quarter of 2010, we recorded the reversal of a significant tax accrual which increased GAAP EPS by $0.10 to $0.76, but was excluded from our adjusted EPS of $0.66.

In the fourth quarter of 2010, a favorable tax rate added $0.09 which was included in EPS of $0.99.

Another thing I'd like to point out, based on our marketing plans for the third quarter of 2011, we expect to increase brand spending by at least $6 million as we continue our Hispanic campaign, add incremental support for Zatarain's, and emphasize a brand value message to consumers.

Now, to update our 2011 earnings per share for the anticipated impact of the 2 transactions.

We expect to report approximately $9 million in acquisition related costs related to Kohinoor and Kamis which will lower 2011 EPS by $0.06 to $2.74 to $2.79.

As for the timing of these acquisition related costs, $2 million was recorded in SG&A in the second quarter which lowered EPS by $0.01.

We expect to complete these transactions in the next few months and record the remaining $7 million in the third quarter which is projected to lower EPS that quarter by $0.05.

Any fourth quarter impact for profit from these businesses should be minimal due to initial integration costs and planned investment spending.

For fiscal year 2012, both businesses are expected to be accretive getting an estimated $0.07 to $0.09 to EPS.

While we plan to call out the acquisition related costs in our guidance and we'll highlight them in our financial results, we do not plan to report them as non-GAAP expense as we view these types of acquisitions in joint ventures as an integral part of our strategy.

I hope in my remarks and the previous press releases that we have provided the information you need as you evaluate these transactions and our latest outlook.

Joyce is available after our call should you need help with additional details.

On slide 21, we have summarized our latest guidance which includes the sales growth and earnings per share, along with CCI savings of at least $45 million.

We continue to expect a decline in gross profit margin and an increase in our marketing expense that is in line with sales even at the higher growth rate.

Our standing shares are likely to be flat rather than down 1% as we have curtailed repurchases pending cash outlays for the new acquisition and joint venture.

Let me summarize.

This is an exciting time for McCormick.

We have delivered excellent financial results for the first half of the year.

Results that are in line with or ahead of our goals for 2011.

Following double digit profit growth in the first half, our outlook for the full year is tempered a bit by the current economic and input cost environment.

But we fully expect our new products, upcoming brand marketing, and latest distribution wins to maintain momentum for our business and lead to a solid second half performance.

Accelerating this momentum as we head into 2012 are some excellent additions to our global portfolio of leading brands.

We look forward to completing these agreements and moving forward with the integration and growth of these businesses.

Thank you for your attention.

And Operator, let's take the first question.

(Operator Instructions) Ken Goldman of JPMorgan Chase.

Good morning.

To support your brands, you talk about McCormick adjusting your promotional activities.

Is that just promoting more?

Is it a broader adjustment than that?

I know you touched on this a little bit in your comments but if you could provide some color there, that would be useful I think.

Yes, sure.

What we're doing, as Gordon pointed out, is a little bit of a shift from second quarter last year to third quarter where we're upspending more against some of the new products that are hitting.

So we're going to have an incremental spend.

The second thing that we're doing is, our promotional spending is going to be fairly similar but we're going to emphasize the value of our business to consumers as they're under pressure.

So it's more of a message as opposed to just increasing the promotional spend.

And can you talk a little bit about the pricing environment for private label right now?

Another private label manufacturer, not in spices, but recently cited some unusual pushback from its customers.

I'm curious if that's something you're experiencing, too, or whether it's different in your categories?

It's been a little different in our categories, mainly because we took our pricing earlier and have really strong justification.

I would say similar to what you've heard from other companies, both in brands and private label, you have to really be pretty descriptive on what's happening with cost in order to get pricing approved these days.

But we had very good justification as we went in.

Now, I will say in terms of private label pricing on the shelf, we still have not seen in every segment private label passing through the increased cost at this point.

Andrew Lazar of Barclays Capital.

Good morning, everyone.

Gordon, I was hoping maybe you could just give us a little more color around the year-over-year change in gross margin in terms of, we know part of that was just the dynamic around the higher pricing which impacts the margin percentage.

But any color around the underlying change year-over-year in the margin whether it be to the mix of your businesses which I know can impact margin quite a bit, and things of that nature would be helpful.

Yes, as we described in the script, Andrew, we were able to cover the dollar increases through pricing or CCI.

And so the math is such that when you're just covering the cost increases, the margin points will start to decline.

You can see both businesses, consumer and industrial, grew at similar rates.

Industrial slightly higher than consumer.

So there was not a huge mix impact.

It really was a function of the math as it relates to the increases that we were trying to cover through pricing and CCI.

And then as I think about your business from a margin perspective, I know that you had, obviously, a big increase in the first quarter as costs hadn't fully flowed through, you're seeing that impact now.

And if I missed this I'm sorry but you talked about originally the 7% to 8% input cost inflation this year with some increases still coming in the back half.

Has that 7% to 8% been updated to be greater at this point for the full year or is it still 7% to 8% just with more of that inflation coming in the back half?

Yes, as you saw in our comments we're upping our CCI because our teams have been very very good at delivering that.

But that's really going to offset greater increases than anticipated.

We haven't put out a specific number but I can say that that 7% to 8% is going to be higher.

And to give a broad range, I'd say it's approaching more high single digits.

And we're offsetting that through the CCI activities that we described earlier.

Last thing would just be, on the industrial side, I know a couple years ago you adjusted the way that you're able to pass through pricing to make it smoother, if you will, or to manage through more volatile environments a bit better there.

It seems like that's playing out the way that you would hope through this more volatile environment.

But any perspective there would be helpful as well.

Yes, sure.

This is Alan.

Our protocols are working for the market basket of commodities like soybean oil and flour and those sorts of things.

Where we have a little more negotiation and aren't necessarily part of the protocols is all other stuff like packaging and minor ingredients.

Which we are also seeing an increase.

And so those we're chasing a little bit more, there's more of a delay in those as opposed to the raw commodities where we collaborate.

But I would say we're pleased that we have the ability to work with our customers on passing those through.

Alexia Howard with Sanford C.

Bernstein.

Good morning, everyone.

Can I ask a little bit about the new inventory management process that you referenced.

And I think that might have been linked to your efforts to secure supply in certain areas.

Could you tell us a little bit more about where the biggest areas by product, by region, where you've had to take those extra steps to secure supply?

Certainly, as we saw some of the unrest in the Middle East -- we buy a lot of herbs out of places like Egypt -- we increased our inventory mix to assure supply.

And so there is some of that.

The other thing that, as we see commodities rising from time to time, we're taking longer positions of spices to try to offset as much as we can what we see are higher prices.

And that's just a pattern of what we do.

So we're pretty balanced.

I think what you're seeing in the inventory levels is a combination of higher costs, some strategic positions to help offset future costs, and then some inventory to make sure we have supply assurance in the case of some unrest.

Okay.

And then just a quick follow-up.

Last quarter, I think we saw very sluggish sales growth in the Asia Pacific region for the industrial business, but this quarter it seems to have rebounded nicely.

I think you mentioned innovative new flavors in beverages.

Are we likely to see that kind of lumpiness going forward amongst those quick service restaurants or do you think you're now on much more of a steady trajectory here?

I would expect to see a more steady trajectory, although that is one of the things that we're subject to what our customers are driving.

And what we saw in the first quarter is customers were driving more core menu items and focus there.

But as they've headed into an innovation cycle, which we expect to continue, we see the benefit of that.

A lot of our growth is built on those product innovations, especially in China.

Eric Serotta of Wells Fargo Investments.

Good morning.

Wondering whether you could provide a little bit of additional color on the areas of the business where you're seeing increased retailer emphasis on private label.

I realize it's America's consumer you highlighted but is that in core herbs and spices?

And maybe if you could provide a little bit of color around that.

Yes, it is around core herbs and spices, and it's predominantly in the US, the UK, and a little bit in Canada.

But most of our products aren't duplicated in private label.

And it's pretty focused on the top 10 or 15 items in core herbs and spices.

But what we have seen so far this year are retailers holding the line on pricing largely in private label, even though the costs have gone up.

Now, we expect over time, as we've seen in the past, those to eventually flow their way through.

But I would say the most aggressive market for private label, and has been for a long time, is the UK.

The US continues to be a good market for private label but we've held our own in share with our brands.

But it is just a few items that are duplicated in the stores.

Okay.

And could you talk a bit about the incremental cost pressures that you're seeing in the second half?

What types of inputs are you seeing that in?

Because there's a good deal of your inputs where there's, frankly, not a lot of transparency or visibility, things like pepper or garlic.

We don't have quite the read that you guys do, obviously.

Where are you seeing the input cost inflation or the incremental input cost inflation as we enter the second half?

It's predominantly around the agricultural commodities.

The biggest impact for us is pepper, both black, white, and red, and so we're continuing to manage that.

We're seeing some relief in garlic later in the year as the new crop comes on but pepper is more than offsetting that.

We're still seeing, and I think we will for a while, we're still seeing some of the more published commodities, which you do have transparency on, in flour and soybean oil, stay pretty high.

So those are all flowing their way through.

I would say packaging, we're seeing inflation in packaging, as well.

And lastly, when do you expect to start to see some of the benefits from the new inventory management processes that you have in place to offset some of the headwinds that you talked about on the inventory side?

This is Gordon, Eric.

Our teams are working very hard with the new module and the new processes.

We've put a new organization in place just recently in this year.

So we're going to see where we stand at the end of this year and evaluate the progress that's been made and give you more clarity.

I can say that as a Company, we're working very hard on improving our management of inventories.

And I know our teams are very dedicated to doing that.

The volatility of the cost environment has made projections on this pretty difficult so we've decided to just give you a heads up, as we did in the conference call script, on new timing of our goal for cash conversion cycle.

We would like the teams to work through this a bit and then at year-end we can update you.

Thilo Wrede of Jefferies & Company.

Good morning.

My first question was regarding your updated guidance.

There were a lot of moving parts.

You're taking it up at the top line by 1% because of the acquisitions and another 1% because of FX.

But then there are the integration costs and different share count.

So when I put all these parts together, my impression is that the underlying business, the like-for-like business, is maybe slightly weaker than you previously thought?

No, that's not the take away.

I'd be careful in doing that.

Really, the headline messages we are reaffirming there's a number of these puts and takes between the share buyback and other items.

But in the end it's a range that we're providing you.

So we're reaffirming the range and the only changes that we're really indicating, at least as it relates to earnings per share, is the acquisition related cost.

Okay, that's helpful, thank you.

And then at the current inflation level that you're looking at for your input cost, if you look out into fiscal '12, would you expect the rate of increase of the year-over-year inflation to be better or worse than what you're seeing right now?

It's early to call 2012 but we would expect to see higher prices and some continued inflation but not at the level that we've seen this year.

So with the inventory management that you're working on, this run rate of inventory being about 17% of sales, that should definitely come down late this year, early next year?

Again, we're working hard on managing our inventories.

And the volatility environment is such that we're reluctant to give you a specific projection on that.

We would expect to start to see underlying improvement in particular in our finished goods area as we progress through the end of this year and into next year.

But in total inventory, given the cost environment, we want to assess that at year-end and then come back to you with a specific projection.

Chris Growe of Stifel Nicolaus.

Hi, good morning.

I just had a couple questions for you here.

The first one, in relation to your cost increases for the second half, somewhat to an earlier question, are those primarily coming through in industrial and primarily therefore in pass through costs?

Or is it across-the-board, is it even more of your consumer business related?

And I'm talking about the second half inflation here.

Yes, it's fairly balanced.

We're seeing across both of our businesses.

Alan referred to some of the headline commodities that impact the industrial business mostly.

And you can follow those and see those.

But as he indicated, as well, we're seeing it in packaging and pepper so we're feeling the pressures across both businesses.

Okay.

So given the incremental inflation, is there more pricing to come?

And I'm really looking more at the consumer business.

Or is it the idea just to use the CCI savings to offset that and not actually bring it to the consumer?

Pricing is the last lever we want to pull.

And we're evaluating whether there will be additional pricing actions.

Right now we haven't made any decisions on that.

But the first thing that we attempt to do is to offset it with productivity, so that's our objective.

We're not at a point yet to declare whether we're going to take additional pricing in the year.

Okay.

And I had just two quick ones.

First one, just to be clear on that $6 million increase in the third quarter, that's not incremental?

That's part of the full year plan, it just happens to be a little more weighted to the third quarter?

Is that the way to say it?

Yes, that's the way to think about it.

Our second quarter advertising spend was roughly in line with last year.

Our third quarter advertising spend is going to be up a little bit compared to last year.

Okay.

And then my final question, just to understand.

A question for Gordon.

You had a couple acquisitions here, a couple good-sized ones at that.

Your balance sheet, though, looks to still be in pretty good shape.

You mentioned curtailing share repurchases.

Is that done for this year?

When I start looking at my cash flow projections and where the balance sheet stands, I would argue you could get back to repurchasing shares in 2012.

But I want to understand where you want the debt to EBITDA or your debt levels to stand here going forward.

We manage to a debt to EBITDA range of, say, 1.5 to 1.7.

And we expect to be higher than that by year-end.

So for the moment we are curtailing our share repurchase.

Again, we'll reevaluate this at year-end as we look into cash flow and projections next year and determine whether or not it's appropriate for us to go back into the share repurchase market.

Ann Gurkin of Davenport & Company.

Good morning.

Just wondering if you would comment on current consumer behavior trends in the US.

Are consumers eating more at home, changing their purchase patterns, any kind of update there?

Yes, we are seeing consumers continue to eat at home.

And we're seeing some softness in the foodservice sector which is impacting our industrial business a little bit.

We're seeing a little bit of a different pattern than we saw in 2008 and 2009 where we saw significant growth in dry seasoning mixes during then.

And what we're seeing now is more flat dry seasoning mixes, so there may be a little bit of that change.

Certainly, everything we're hearing from customers that consumers are buying closer to when they need the products, they're spending less on their trips because they're trying to manage through that, and buying a lot closer to pay days.

Okay.

And then congratulations on all your acquisitions.

Are there any opportunities for cross-selling or bringing products to different markets?

Are you that far along yet in that analysis?

Absolutely.

We go into these with the idea that we've got great products in all of our markets and that we want to bring those products to new consumers wherever they are.

And that's really what we've done with all of our acquisitions where we'll do things like we did with Ducros with grinders and bring those around the world.

We're doing the same thing with Slow Cookers.

So we see great opportunities with these new countries, new channels of distribution, to bring innovative new products to them.

Rob Moskow of Credit Suisse.

Good morning.

Actually just two questions.

One is, is there any way to quantify all of these distribution gains that you have in the Americas?

And what I'm trying to get at is, maybe this is like a gift that keeps on giving for a few more quarters.

You mentioned Hispanic items in the West.

I think Billy Bee Honey in Canada.

Is there any way to quantify these things?

And then lastly, just in the language of the press release, in the Americas, you said you're adjusting your promo activities in EMEA, you're redirecting brand marketing support.

It sounds like you're course correcting in the middle of the year.

But the first half was a good first half.

Your volume is up.

Your pricing is up.

So what's causing you to have to make these changes in the middle of the year?

And are they disruptive or is the trade asking for them?

Maybe you can just help me understand exactly what's changing and how significant it is.

Yes, to answer the first question, it's hard to specifically quantify the impact of the new distribution.

But as they come on, there is certainly a gift that keeps on giving because we'll keep lapping the impact of the new distribution.

And our objective is to keep growing the business as we get new distribution.

But we have taken that into account with our sales guidance.

In terms of the course correction, I would say it's more we're adapting our programs to the environment.

And specifically in the UK where we're not getting the volume growth that we would like to see.

I agree, we've had a good first half to the year.

But I would say it's more tweaking and changing our mix than necessarily a big course correction in the middle of the year.

And the US, what's changing?

In the US, we're continuing our programs but we're going to keep emphasizing the value of our products on meals.

Eric Katzman of Deutsche Bank.

Hi, good morning, everybody.

Just a couple questions.

Gordon, can you say what the new run rate on the interest expense should be with the roughly $400 million or so leaving the building for the two acquisitions?

Well, we're in the process of evaluating our new capital structure, as we speak, and looking at potentially going to the debt markets.

So I'd prefer for us to have that actually done before I give a specific number.

But you can look at the incremental $400 million in the current rate environment, and, obviously, it will be a mix of what's available in the medium term and commercial paper.

So using the incremental $400 million and some rates there, that's probably the best rate.

We also have cash available overseas that we will be using to fund it.

Approximately $200 million exists overseas already and we'll be using that to help fund the acquisitions, as well.

Okay.

And the $2 million transaction cost in the quarter, and I guess you're going to have another one in the third quarter, I assume on a segment basis that's all run through the consumer business?

Yes, the vast majority will run through the consumer, yes, because these businesses are largely consumer businesses.

Okay.

And then getting back to just the $200 million overseas, maybe I'm just missing something but you only have $48 million of cash on the books.

Yes, we periodically pull that back on a loan basis.

So we carry higher commercial paper balances on average throughout the year but periodically we pull that back to pay that down.

So there is an amount of cash overseas of about $200 million.

Okay.

And then Alan, I'm wondering if you could just comment a bit, because I'm just struck by, when you go through -- and I appreciate the detail on the two acquisitions-- but I'm just struck by the difference.

In the Kohinoor one in India, you paid, even adjusting for the 15% interest that you don't have, you paid, call it, 1.5 plus times.

It's growing at a double digit rate.

But it's just going to be a couple pennies accretive which points to it being a pretty low margin business.

Versus the Polish business you paid close to 3 times sales.

It's growing at a decent rate, but it's materially accretive given that.

So the sales aren't all that different between the two businesses.

Maybe it's just as simple as just a difference in the margin?

Or are you planning on spending more back into one versus the other?

Maybe you could just help me with that.

Yes, the business in India is a business that's going to see investment spending as we drive and grow that.

We're excited about that market and we're making the investment for the long term growth.

Eastern Europe, which is a more developed market, we are going to invest, we've going to bring new products, but it's not to the degree of what we will see in India.

And I think the Polish business, that was an auction.

But was the India one an auction or was that just based on your connections?

It was based on a long-term relationship that we've had with the family that owned it.

And an ongoing discussion with them to maintain a long term partnership.

It's a joint venture which we're very very happy to be able to do.

And in Poland, it's an outright acquisition.

And then last question, I don't remember who asked this but somebody asked about China, and I was thinking more on the consumer side.

A couple years ago you had to go through a reset of the product lines.

And I think you actually even had to cut back on SKUs.

But it seems like over the last few quarters or so that that business has gained a lot of traction.

My guess is it isn't really that big in the scheme of things but have you hit on a new structure or formula over there or new distributer that seems to be working?

What we've continued to do is bring new products to the market, and that's been a help.

And a lot of our growth has been, as we expand more of a direct presence into other cities, that's helped.

Whereas in the past, and what you are talking about, is we were in the soybean oil business in China through distributors and we found that that wasn't the right business mix for us.

So we've refined the mix and feel that we have the right products.

We still see opportunities for innovation but more along expanded distribution and expanded our presence into other markets, or other cities.

As we're running past 9 o'clock, I think we'll end it here and be glad to take any calls afterwards.

Thank you for participating in the call today.

Through July 7, you can access a replay of the call at 877-660-6853.

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