McCormick & Company Inc (MKC) 2011 Q3 法說會逐字稿

Greetings and welcome to the McCormick's third-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 and welcome to our review of McCormick's third-quarter financial results and latest 2011 outlook.

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

With me are Alan Wilson, Chairman, President and CEO and Gordon Stetz, Executive Vice President, CFO and Treasurer.

Alan is going to begin with an update on our business and the current operating environment and then Gordon will discuss our third-quarter financial performance and latest guidance.

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 that we will present today are not GAAP measures.

This includes certain financial results from 2010 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 is now my pleasure to turn the discussion over to Alan.

Thanks, Joyce.

Good morning, everyone and thanks for joining us.

In the third quarter, we delivered strong top-line growth and a solid profit result.

In local currency, we grew sales 11%, a step up from our 5% sales increase in the first half of 2011.

We are driving this growth with product innovation, expanded distribution and increased brand marketing support, along with pricing actions.

We reported a double-digit increase in each of our two segments and in a number of our operating regions.

Of particular note this quarter was a 5% increase in volume and product mix for our consumer business, which was accomplished during a period when pricing also rose 5%.

The increase was led by our Americas business and was broad-based with increases in grilling products, dry seasoning mixes, authentic ethnic cuisines, Zatarain's, Simply Asia and Thai Kitchen, as well as our sales of the private-label products that we produce for some of our major customers.

We also had a favorable impact from customers that purchased product in anticipation of a fourth-quarter price increase.

On the industrial side of our business, we grew sales in local currency at a double-digit rate in each of our three regions with sales in China up 30%.

In markets around the world, this performance was driven by demand from quick service restaurants and our supply of seasonings for snacks.

Earnings per share was $0.69.

Several factors affected profit this quarter as Gordon will discuss in more detail, but I want to share the major drivers.

Positively impacting EPS this quarter were higher sales.

Our cost savings from McCormick Comprehensive Continuous Improvement program, CCI, and discrete tax items.

Offsetting a portion of these increases were our additional investment in brand marketing support, which was up 27% for the quarter and a further escalation in our raw and packaging materials costs.

For these reasons, as we anticipated, our third-quarter profit growth moderated from the double-digit increase in earnings per share that we reported in the first half.

For the full year, we remain on track with our 2011 sales and profit outlook.

During my remarks this morning, I would like to cover three topics and will begin with comments about the completion of our investments in Kamis and Kohinoor, as well as a few remarks about a smaller acquisition in the United States.

Next I would like to go a bit in-depth into the current environment, including our input costs and pricing actions as we head into our fourth quarter and look ahead to 2012.

Finally, I will share why I am pleased with our momentum as we kick off the fourth quarter -- McCormick's peak selling period.

Earlier in September, we completed the acquisition of Kamis and our Kohinoor joint ventures.

As stated in our June call, these two strategic deals give us a leap forward in executing against our emerging market strategy.

The acquisition of Kamis is an excellent complement to McCormick's business in Western Europe and our recent joint venture in Turkey.

Kamis is a brand leader in spices, seasonings, mustards and other flavor products in Poland with distribution subsidiaries in Russia, Romania and the Ukraine.

The purchase price for this business was approximately $286 million.

Kamis will be managed under Lawrence Kurzius, the President of McCormick International and by Malcolm Swift, our President in Europe, Middle East and Africa.

We welcome the Kamis employees to McCormick and named one of our business leaders in Europe, [Fiona McDonnell], as General Manager and she is now on-site.

Our integration plans began in the pre-close period and our integration team is fully engaged.

Sales of this business have been increasing at a double-digit rate and we intend to continue this growth through new product introductions, brand marketing programs and penetration of other markets in Central and Eastern Europe.

The Kohinoor joint venture establishes a new platform for growth in India and demonstrates our commitment to invest and grow in this region.

Our investment was approximately $113 million.

This gave us an 85% interest in the newly formed joint venture.

The Kohinoor brand is one of the top national brands in the basmati rice category in India with products reaching over 350,000 retailers and sales growing at a double-digit rate.

Kohinoor will be managed under Lawrence Kurzius, as well as Paul Beard, President of Asia-Pacific, who many of you know.

One of McCormick's senior leaders, Satish Rao, has been named Managing Director of the joint venture and has relocated to India.

We have taken steps to achieve a smooth transition for this business and have met with all of our distributors to ensure business continuity.

We produced new advertising to be launched in the fourth quarter featuring Bollywood stars using Kohinoor products in the family setting.

You can access a fact sheet for each of these businesses on our website, which contains more detailed information.

During the third quarter, we acquired the assets of Kitchen Basics for $38 million.

Kitchen Basics is a leading brand of ready-to-serve shelf-stable liquid stock in North America.

As a key flavor ingredient, consumers use stocks to add depth and flavor to a variety of dishes such as gravies and soups.

Annual sales of Kitchen Basics are approximately $25 million and have increased at a double-digit pace for the past three years.

We expect to continue to grow the brand with expanded distribution and product innovation.

This acquisition is expected to be immediately accretive to earnings.

Acquisitions are a key part of our three-pronged growth strategy and we are extremely pleased with what we accomplished in 2011 as a result of our team's diligence, persistence and financial discipline.

We are having success this year, not only with acquisitions, but with our other growth strategies -- launching new products, investing in brand marketing and expanding distribution.

However, we are also feeling the impact of the current economic environment.

Many consumers are struggling in this economy; they are making tough choices and some are altering their shopping patterns.

In the US and the UK, we've seen a shift in private-label sales for basic ingredients like pepper, garlic and cinnamon and we have seen a shift in our sales towards alternative channels like dollar stores and warehouse clubs.

In response, we continue to gain new distribution in all channels.

Our latest win is placement of nine branded items, including extracts and gravy mixes in Sam's Club locations across the United States.

Another action we are taking is to emphasize the value of our brands.

We have added resources to analyze and optimize the effectiveness of promotional price points and the timing of these promotions.

Through traditional and digital media, we are highlighting product differentiation and usage ideas.

Secondary placement is an additional way that we separate our brands from private label, as well as our product innovation.

Another challenge in this environment is the steep rise in material costs, not only for commodities, but for many of our spices and herbs.

We began the year expecting 7% to 8% cost inflation and through the first half, we managed this through pricing actions and our continuous Comprehensive Continuous Improvement, CCI, cost savings.

In the third quarter, we began to experience further increases in our raw materials.

We are now expecting a double-digit rate of material cost inflation in 2011 and we expect these higher costs to persist through 2012.

To illustrate this, let's take a look at one of our top five raw materials, black pepper.

Black pepper is a crop that has a long history of fluctuation, but has hit historic highs.

Slide 9 shows that the cost of pepper has more than doubled in the past year and a half.

Similarly, costs have escalated for red pepper, nutmeg, cinnamon, cloves, cumin, tumeric and many other items.

There are several factors influencing the spice and herb markets at this time, which include poor weather conditions in some of our growing regions, farmers' shift to growing more lucrative crops that are less labor-intensive such as coffee, cassava, rubber and palm oil, increased global demand and a weakening US dollar.

Beyond spices and herbs, the cost of packaging, fuel and energy have remained steady, but at an elevated level.

So how are we responding to this cost pressure?

First, we are leveraging our global procurement team for insights and smart decisions on strategic inventory.

As we have reported throughout 2011, our inventory is up due in part to higher strategic inventories.

While neither Gordon nor I want to see more inventory on the balance sheet, this is one way to effectively manage our purchase of spices and herbs.

Second, our CCI cost-savings program is a vital means of offsetting a portion of the increase.

We have raised our projected savings for 2011 to at least $50 million, which is approaching the level reached in 2010 of $54 million.

Third is pricing actions.

For our consumer business, we increased prices as we headed into 2011 to offset a portion of the cost inflation.

In response to the latest increase, we have begun to implement additional price increases in both brand and private-label items.

In North America, the average increase will be about 5%.

Depending on the underlying raw materials and price thresholds, the increase will range from a low level in certain items like extracts to a double-digit rate on black pepper.

In our industrial business, as I indicated, higher ingredient costs lowered profit in the third quarter.

As many of you know, we have a pricing protocol to pass through the higher cost of major commodities to our customers, materials like dairy ingredients, wheat and soybean oil.

However, these protocols do not extend to items in the commodity trading market such as spices and herbs.

To address this, we are working with our customers to adjust pricing for these items and expect to get pricing in place over the next few months.

In the meantime, we expect profit for the industrial business to be under pressure in the fourth quarter and to remain under pressure in the early part of 2012.

To summarize this portion of my remarks, our business is being challenged by a difficult economy, a weaker consumer and escalating material costs.

We are addressing these challenges by adapting our marketing efforts and promotional activity and taking prices where we need to.

Throughout this period of volatility, the fundamentals of our business remain sound and we have made good progress with our sales growth initiative, progress that we are seeing continuing into the fourth quarter.

We have a strong lineup of activity as we head into this important selling period.

During the fourth quarter, secondary displays are an essential way for retailers to avoid out-of-stocks on key holiday items.

We have displays being shipped to complement the merchandising strategy for all of our major US customers.

We are planning to increase brand marketing support at least $5 million for the programs behind dry seasoning mixes, Hispanic products, seasoning blends and the Thanksgiving holiday in the United States.

In Europe, we have incremental marketing support behind our Vahine desert page in France and an integrated digital and PR campaign for slow cookers in the United Kingdom.

And in China, we have new grinders advertising that features a chef hosting a cooking class with consumers.

Finally, we expect a lift from new products.

In addition to items introduced early in 2011, we have launched Recipe Inspirations in the United Kingdom and in the US, a line of authentic Hispanic dry seasoning mixes, premium grade Grill Mates barbecue sauces, new Lawry's rice seasoning mixes and four new reduced sodium dry seasoning mixes.

Results from our other reduced sodium products indicate that 75% of sales are incremental to the category.

We have good sales momentum heading into the fourth quarter in an incremental impact from Kamis, Kohinoor and Kitchen Basics.

A combination of this increased volume, our pricing actions and some favorable foreign currency exchange rates have us on track to achieve strong sales growth in 2011.

Before I turn it over to Gordon, I want to recognize and thank McCormick employees in locations around the world who are driving our success with excellent sales growth, above-target CCI savings, completion of acquisitions and a joint venture that expand our global portfolio of leading brands.

Gordon?

Thanks, Alan and good morning, everyone.

We're pleased with our financial performance for the third quarter.

At the bottom line, we achieved $0.69 of earnings per share in the face of significant cost increases and with an increase in our investment in brand marketing support.

Our earnings per share this quarter included the benefit of favorable discrete tax items.

At the top line, we exceeded our projections for sales growth in many parts of our business.

In total, sales for the quarter rose 16% with an 11% increase in local currency.

Volume and product mix was up 6% and the pricing actions we have taken in response to higher material costs added 5%.

As seen on slide 14, we grew consumer business sales 15% with a 10% increase in local currency.

In the Americas region, we grew consumer business sales 12% in local currency with equal contributions from volume and product mix and from pricing.

About half of the increase in volume and product mix, an estimated $10 million, was the result of customer purchases in advance of a fourth-quarter price increase.

This buy-in is expected to lower fourth-quarter consumer sales in the Americas by $10 million.

Another thing to keep in mind when projecting fourth-quarter sales for this part of our business was a shift in sales from the first quarter of 2011 into the fourth quarter of 2010 for an estimated $10 million that related to customer purchases in advance of our previous price increase.

Growth in a number of productlines drove the other half of the increase in volume and product mix in the Americas.

During the quarter, we increased our marketing support behind core McCormick products and the Zatarain's brand.

This investment drove a significant increase in our McCormick brand dry seasoning mixes, products that consumers can use to make an inexpensive meal for their family -- dishes like chili, tacos, stews and pasta.

We achieved double-digit increases in the sales of Grill Mates featured in a great digital media campaign and our authentic Asian products under the Simply Asia and Thai Kitchen brands.

Sales of these brands were boosted with some great new products that include a line of dipping sauces.

In the third quarter, we also had a pickup in sales of private label due in part to our distribution gains in 2011.

We are monitoring consumption trends closely and, as Alan indicated, are developing new tools to help optimize price and promotions on brand and private label, both of which offer our retail customers an attractive profit.

In Europe, the Middle East and Africa, EMEA, we grew consumer sales 22% with a 7% increase in local currency.

Both pricing and favorable volume and product mix contributed to growth this quarter.

This increase is a nice improvement from previous quarters.

We continued to have a good performance in France, which benefited from brand marketing support, distribution gains and a number of new product introductions.

Also contributing to growth this period were export sales into developing markets.

We also saw steadier results in some of the smaller markets like Spain and Portugal, which had steep declines in the year-ago period.

In the UK, we are operating in a competitive retail environment where private-label share has increased in many categories.

We have redirected a portion of our brand marketing support to emphasize to consumers the value of our products and we have also accelerated the development of several new products, which are differentiated from our competitors in the marketplace.

While the UK continues to be a challenging market, our actions led to a modest increase in volume and product mix this period.

In the Asia-Pacific region, consumer sales rose 18% and in local currency were up 3%.

Both pricing actions and favorable volume and product mix contributed to this increase.

This was led by a 7% increase in China in the third quarter where we have a rebranding initiative underway and some new television advertising.

Operating income for our consumer business increased 5% to $101 million with the favorable impact of higher sales and CCI cost savings.

These increases were offset in part by the escalation of material costs and a $7 million increase in brand marketing support.

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

For this part of our business, we also grew sales at a double-digit rate, up 17% in total and 12% in local currency.

This is particularly impressive given overall food service trends.

McCormick continues to benefit from its strong global relationships with some of the top quick service restaurants, which, as a group, are faring better than other restaurant formats in today's environment.

Industrial sales in the Americas grew 14% and in local currency rose 12%.

Volume and product mix added 7% of the increase.

This was driven in part by a double-digit increase in volume and product mix with food manufacturers, including sales of snack seasonings and ingredients.

Many of these products featured all-natural ingredients, reduced sodium and other healthy attributes for which we continue to see high demand.

We also increased sales of food service products led by new products and expanded distribution with quick service restaurants.

Sales of branded food service items to the distributor channel were also up in the third quarter.

In EMEA, our industrial business continued a run of strong sales growth.

We grew third-quarter sales 21% and in local currency 11%.

Favorable volume and product mix added 7% with the remainder coming from pricing actions.

As in the prior two quarters, the increase in volume and product mix was led by greater demand from quick service restaurants for products we supplied from our operations in the UK, Turkey and South Africa.

In the Asia-Pacific region, industrial business sales rose 30% and in local currency grew 17%.

Sales in China drove this result with a 30% increase in local currency this period.

We are achieving exceptional growth in this market as we support the rapid expansion of quick service restaurants.

This period, we also benefited from the promotional activities of these customers.

Operating income for the industrial business declined 8% to $28 million in the third quarter.

While this business had the benefit of higher sales and CCI cost savings, we were significantly impacted by rising material costs.

As Alan described, we are going beyond the key commodities and working with our customers to respond to increases in other ingredients such as spices and herbs with increased pricing.

This pricing activity will continue through the next quarter and because our pricing actions are lagging these cost increases, we expect further profit pressure in our industrial business.

Margins for this business are under pressure due in part to higher costs, as well as the effect of higher prices on net sales when calculating percentage margins.

Margin was also impacted by the mix of our business during the third quarter as a result of buying patterns and other customer activity.

Our strategy for the industrial segment continues to be to develop and grow the business through value-added higher margin products.

For the total business, third-quarter operating income rose 2% from the year-ago period and operating income margin was below the prior year period at 14%.

Year-to-date, we have grown operating income 7% and operating income margin is down 30 basis points.

At the gross profit line, we achieved a 9% increase in gross profit dollars with the strong sales performance and CCI cost savings.

However, gross profit as a percentage of net sales declined 250 basis points.

This decrease in gross profit margin was the net effect of increased prices, higher costs and our CCI savings and the decline is expected to continue into the fourth quarter.

As a result, we expect gross profit margin to be down for the fiscal year, which is consistent with the outlook we presented back in January.

SG&A rose 13% from the third quarter of 2010, but as a percentage of sales, SG&A was down 60 basis points.

This period, SG&A included an $8 million increase in brand marketing support, up 27% and $1 million of transaction costs related to Kamis and Kohinoor.

The tax rate came in favorable at 26.8% due to $5 million of discrete tax items.

As you analyze third-quarter results, keep in mind that we also had significant discrete tax items in our year-ago results.

In the third quarter of 2010, discrete tax items added $16 million to net income.

Of this prior-year amount, $14 million related to the reversal of a significant tax accrual for a closed tax year.

This tax accrual was recorded based on uncertainties about the tax aspects of transactions where the Company reorganized its European operations and divested certain joint ventures.

This reversal increased earnings per share by $0.10 in the third quarter of 2010 and was treated as a non-GAAP adjustment.

As you think about tax expense in the fourth quarter of 2011, let me remind you that we also had a significant tax variance in the fourth quarter of 2010.

During this period, the repatriation of cash from foreign subsidiaries resulted in foreign tax credits in the US that added about $0.08 to earnings per share that quarter.

Moving to income from unconsolidated operations, we had a slight increase this quarter, which was impressive given the impact of higher soybean oil on our joint venture in Mexico where mayonnaise is a leading item.

Even with the cost pressure, this business grew sales at a double-digit rate and achieved higher income.

Our unconsolidated joint venture in India, Eastern Condiments, also contributed to the higher income while our smaller joint ventures had a slight decline in profit this period.

We are not yet reporting any profit from the new joint venture in Turkey, but have made great progress in the past year and have launched 42 items nationally with Ducros, a co-brand.

We are beginning to gain distribution and are encouraged by the early results.

At the bottom line, as shown on slide 19, earnings per share was $0.69 compared to $0.76 in the third quarter of the prior year.

Excluding the impact of the significant tax reversal in the year-ago period, this was an increase of $0.03, an amount comprised of $0.01 from operating profit, including an unfavorable $0.01 from transaction costs related to Kamis and Kohinoor, $0.01 from this year's tax rate when compared to the rate in the third quarter of 2010 and $0.01 from the net impact of smaller items, including our share buyback activity in the past 12 months.

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

We have discussed the effects of the current economic climate on our income statement in our pricing actions, cost inflation and sales trends.

McCormick's balance sheet and cash flow have also been impacted primarily in our management of working capital.

As we have moved into this higher cost environment, we increased our strategic inventory positions in several spices and herbs, crops that do not have hedging options other than outright purchase.

We also accumulated higher inventory levels of crops sourced from growing regions exposed to political risks such as North Africa and Egypt.

In addition to higher levels of raw material, the cost of our raw material inventory has led to a significant increase in inventory.

Foreign exchange rates is a third factor that affected inventory.

Despite these increases, improving working capital remains an important priority for our business.

As indicated last quarter, a key initiative currently underway is the implementation of a new inventory management process 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 these new processes in other parts of our business.

For the three quarters ended August 2011, net cash flow from operations was $86 million compared to $185 million in the year-ago period.

I am sorry -- $145 million in the year-ago period.

Our growth in net income was more than offset by increased working capital.

During the third quarter, we issued $250 million of 10-year, 3.9% notes to finance in part our acquisitions.

We also entered into a new five-year, $600 million revolving credit facility, which replaced our existing $500 million facility, which was due to expire in June of 2012.

The all-in drawn pricing on this new credit facility is LIBOR plus 0.875%.

Early in September, we completed our acquisition of Kamis and the Kohinoor joint venture for a combined price of $399 million financed with cash and debt.

Our share repurchase program remains curtailed while we pay down the borrowings associated with these investments and return to our target debt level.

At August 31, 2011, $270 million remains on our $400 million share repurchase authorization.

Even with these purchases and increased working capital, our balance sheet remains strong and we have the capacity to continue to pursue further success with our acquisition activity.

Let's finish up with our latest financial outlook for 2011 on slide 21.

We are reaffirming the full-year guidance set forth in our June earnings call.

We expect to grow sales 6% to 8% in local currency, which includes 1% of sales from Kamis and Kohinoor as indicated in our previous outlook.

We continue to expect favorable currency to add 2% to sales at prevailing exchange rates.

As discussed earlier, for the full year, we are projecting a decline in gross profit margin, at least $50 million in CCI cost savings and an increase in brand marketing support that is in line with our sales growth.

For the fourth quarter, we plan to increase marketing support by at least $5 million.

Our outlook for 2011 earnings per share remains $2.74 to $2.79.

Given our year-to-date results, this implies a range of $0.93 to $0.98 in the fourth quarter.

In our June earnings call, we lowered our earnings-per-share guidance by $0.06 to reflect an estimated $9 million of transaction costs related to the completion of the Kamis and Kohinoor deals.

We incurred $2 million of these costs in the first half of 2011, which lowered earnings per share $0.01.

At the time of our June call, we expected to complete these deals by the end of the third quarter and to record the remaining $7 million in transaction costs, which would have lowered our third-quarter earnings per share by $0.05.

We now expect the transaction costs to total $11 million instead of $9 million.

We expect the reduction to 2011 earnings per share to be $0.07 rather than $0.06.

Because the Kamis and Kohinoor deals were completed in early September rather than in the third quarter, let me provide you with the timing of these costs.

Of the $11 million, we recorded $2 million in the first half, approximately $2 million in the third quarter and expect to record $7 million in the fourth quarter.

Likewise, the reduction to earnings-per-share impact was $0.01 in the first half, $0.01 in the third quarter and an estimated $0.05 to be recorded in the fourth quarter, adding up to the full-year impact of $0.07.

To recap, there is a $0.01 increase in the impact of transaction costs for the full year and a shift of $0.05 that had been in our third-quarter outlook and is now expected to be recorded in the fourth quarter.

Let me summarize.

McCormick is adapting its business to the challenges of today's environment -- adjusting our marketing programs, merchandising activities and product innovation to achieve sales growth.

We are carefully managing our pricing actions and our working capital and are driving down costs with our CCI program.

As a result, we are well-positioned and have good momentum heading into our fourth quarter and look for 2011 to be a year of strong financial performance.

Thank you and I would like to turn it over to the operator to take the first question.

(Operator Instructions).

Thilo Wrede, Jefferies & Co.

Good morning.

Congratulations on getting into Sam's Club.

Can you give us a little bit more background?

Have you already filled the channel there?

You talked about I think nine SKUs that you have nationwide now.

Is there a chance that will grow in the future and any more color would be appreciated?

Yes, without getting into too many specifics, we've had a regional distribution at Sam's Club for about two years.

We expanded that earlier this year nationally with some Grill Mates items and then what we are talking about on this call is expansion of another nine SKUS, predominantly in the baking area such as extracts and gravy mixes and things like that.

We are real pleased with what we have seen there.

We can't speculate on what might happen in the future, but we continue to grow and invest with not only that customer, but customers in a number of channels.

Okay.

Then a question about your inventory.

Is your inventory still physically increasing?

Are you increasing the volume of your inventory or are the increases now more driven by overall price increases, currency and so on?

And if the physical inventory is still growing, when do you expect that to slow down or reverse?

The majority of the increases is driven by the cost pressures and the strategic inventory and foreign exchange.

So about 45% of the increase is related to cost pressures and the environment that we are in.

Maybe another quarter of it is related to strategic inventory purchases and maybe another 20% is related to foreign exchange.

The volume component is not as big of an issue as the cost pressures.

Obviously, the environment we are in, it's difficult to project cost inflation.

It's a volatile environment, but we certainly aren't expecting a retreat in the cost environment anytime soon.

So we would expect to start to hopefully moderate as we go into 2011 -- I mean 2012.

Our teams are very focused though.

I don't want to say they are not focused on the volume opportunities to try to reduce inventory, so they are looking at their modeling, their safety stock assumptions, their demand planning assumptions.

So it is still a big area, but we are feeling it from the cost side.

Okay.

Then one last question about the pricing.

You talked about more pricing to come.

Are you expecting any major pushback from retailers as you go into the holiday season?

We are expecting absolutely great execution by retailers as we head into the holiday season and we have announced and implemented pricing in a number of our markets, the US consumer included.

So we will see the impact of that as we go through, but we feel like we are well-positioned with our display activities, an increase in advertising, which is right on with the kinds of things that we want to drive in the holiday period.

So we feel like we are well-positioned for the fourth quarter.

All right, thanks a lot.

Alexia Howard, Sanford Bernstein.

Good morning, everyone.

Just a couple of questions here.

A couple of quarters ago, you called out a concern about private-label share gains going forward.

It seems as though that hasn't played out particularly harshly.

Is this less of a concern today and what do you think has happened there?

I think what we have seen is an increase in pricing in private label, which has closed some of those gaps with the brand.

Certainly we are at some pretty high levels in terms of overall pricing points.

But as I look at the public data on what is happening with private label, their pricing has increased at a rate that is higher than even the branded on a percentage basis.

So I think that is part of what is going on.

The other thing is I would like to think that, and I'd not only like to think, but I am pretty confident that our product innovation, our increased advertising is really helping our brands hold up in this environment.

That is great.

Thank you.

A quick follow-up on the sales in Africa that you mentioned.

Are you able to quantify how much benefit you got out of the European sales growth from those sales into Africa this quarter?

Could you tell us a little bit about your strategy there?

Is it a strategic move, is it an explicit investment and deployment of resources in the region or is it a bit more opportunistic and pull-based and led by local distributors?

The first answer is it had a very minimal impact on our results in Europe this quarter and it is more opportunistic at this point.

We have a nice business in South Africa.

We think there is great opportunities, but we are working with distributors in Northern Africa and in places like Morocco and Nigeria to build and grow our business.

And it is a business that we have had for a long time, but we are seeing some success there.

Great.

Thank you very much.

I will pass it on.

Chris Growe, Stifel Nicolaus.

Hi, good morning.

I wanted to ask you about, on the industrial side, of the margin in that business.

I know obviously there is heavy cost inflation there, but with the volume so strong, I was surprised at the profit decline.

I guess one of the things I was thinking about would be how mix played a factor into that.

Was that an issue in terms of the profit result in the quarter or anything else we could point to for that division?

Yes, certainly, it was a combination of all other ingredients, those nonmajor commodities, which were a lot higher.

Typically we don't have pricing protocols on those and so it's more of a negotiation, but they tend to balance each other out.

What is happening right now is everything is up and so it is more of a negotiation to be able to implement pricing on those commodities.

There are absolutely was an impact in our industrial business on the mix of our business and so we sold more of the lower margin items and less of the higher margin items in this period.

So that was impacting our sales to an extent.

Gordon, do you want to add anything on that?

No, that is absolutely right.

Yes.

Did you indicate then that fourth-quarter profits would be down?

You mentioned there would be some pressure still.

Does that mean that you think they will be down in the fourth quarter?

Well, certainly, as we indicated, the pricing protocols are on a lag, so (technical difficulty).

The thing that can shift quarter to quarter is the mix, as Alan indicated.

We have had some significant wins on some quick service restaurants.

I will say that some of those are in the lower margin part of it.

So whether they are down or flattish, we don't expect a strong performance from the industrial profitability in the fourth quarter.

Okay, that is helpful.

I just wanted to ask a quick question about 2012.

I know you don't want to give guidance.

So my question is -- I think you discussed or mentioned on the call you expect this heavy inflation to continue into next year.

Do you expect double-digit inflation in 2012 or is that going too far at this point?

We do expect to see higher costs continuing into 2012.

We don't see, at least in the commodities that impact us, much that is going to cause it to decline or go down.

We are expecting in 2012 to continue to see higher costs.

Double-digit though maybe going too far at this point to say that?

We are not ready to say that yet.

But certainly you have seen it continue to creep up as we have gone through this year, that is for sure.

Okay.

Thanks so much for the time.

Akshay Jagdale, KeyBanc Capital Markets.

Thank you.

My question is more regarding the guidance.

It seems like your guidance for (technical difficulty) is higher than what it was before.

You are saying double digits.

You had a range before and acquisition costs are going to be higher, but you didn't change EPS guidance.

Is the difference just the lower tax rate or is there something else in the SG&A line that we should be thinking of or did I miss something?

Actually, this is Joyce.

Your line is a little unclear, so may I ask you to repeat your question please?

Sure.

Can you hear me now, Joyce?

Yes.

Okay.

Sorry, my question was regarding guidance.

It seems as though your cost guidance now, you are saying it is going to be closer to 10%.

Before it was just a range and you increased your cost guidance on the acquisition, but your EPS guidance range didn't change.

Does that mean that the offset you were expecting in terms of higher costs is just a lower tax rate?

I mean I know you also increased your CCI guidance, but I am just wondering if there is anything else in SG&A that we may be missing where you think there is an offset to these costs.

There is a number of factors.

Obviously, the strong sales growth is contributing as a help to offset some of those as well.

We have also been increasing our advertising and promotion as well to help drive sales.

So it is really a combination of factors.

I guess my takeaway would be that we are absorbing some of these increased costs and we are still achieving the results that we laid out for you in the beginning of the year and that is the strength of our underlying business that is doing that.

That is helpful.

So is it fair to say that the sales have been better than you had expected so far and how would you characterize your gross profit performance in the third quarter relative to your own expectations?

Well, certainly, sales have been stronger and gross profit, it is probably fair to say it has been a little more under pressure than we had anticipated.

I will say we expected it to be under pressure as we proceeded through this year because we saw the cost increases, as we indicated early in the year, with the high single-digit type number.

So we expected those to start to occur through the third and fourth quarter.

But I will say it has gotten higher as you can tell by the increases we have talked about in this call.

Just one last one if I may on marketing spending.

I was impressed that even though you had some margin pressure on the gross profit line, you still continued to invest in your brands.

Can you help us understand now with these new acquisitions, should we expect anything different in 2012?

How are you feeling overall about your level of marketing support as a percentage of sales?

Do you think you need to continue to move that up and how much room is there to move it up?

Well, it is early to call 2012, but our pattern and our expectation is that we will continue to increase marketing spending either slightly above or pretty much in line with our sales increases.

In terms of the new brands that we have acquired, they have good marketing programs.

We expect to continue to build on those and bring product innovation to them.

So I would expect it -- our expectation is to continue to drive our brands with marketing as we have the last several years.

Okay, perfect, thank you.

I will pass it along.

Rob Moskow, Credit Suisse Group.

Thank you.

A few details.

Gordon, I would like it if you could give us a tax rate estimate for fourth quarter.

I know you have given us an EPS range, but it could be anything from 26% to 31% from what I can tell.

Second, did you give any reason for why the transaction costs are higher on these acquisitions?

What was -- most of the time in these estimates, you should be conservative in your estimates and this time, we are running higher than expected?

And then lastly, I guess for Alan, on the industrial business, a lot of us remember the restructuring of the industrial business many years ago.

I think it made the organization stronger.

And I am just wondering if -- with your basic customers now and with the way the organization is structured, are you better prepared for this inflationary period on your non-traded commodity costs?

Thanks.

Fourth quarter -- the underlying rate has been 31% as we have progressed through this year.

That has been the constant.

The more difficult component is sometimes the discrete items.

But if you think about a 31% rate for the fourth quarter and these transaction costs, a lot of them are nondeductible, that will push the rate up even higher.

So it could be as high as 33%.

So the only caveat I have is you sometimes have these discrete items that occur that can impact that.

But we would expect it to be closer to a 33% type rate based on the underlying rate of 31% and the transaction cost impact.

In terms of the estimate of the due diligence costs, clearly it went a little longer.

We were anticipating this being done in the third quarter.

You have to go through various regulatory filings, due diligence, etc.

with these transactions.

So the only answer I can give you is that it took a little longer, it was a little more expensive than we anticipated.

That is really all that has occurred.

In terms of the industrial question, we do believe that our strategy to focus on major significant strategic customers is the right strategy.

I do believe we are well-positioned to deal with the high commodity.

We continue to gain business, we continue to grow.

What we saw this time though, it's something that we learned, is we have to continue to adjust our pricing protocols in a different environment and I think we are very well-positioned to do that.

I know that it is going to take some time and a lot of effort, but I think we are well-positioned.

Alan, what kind of a pushback are you getting from these strategic customers on your efforts to take your prices up?

Well, in most cases, our customers understand the pricing pressure, but it is always a discussion, it is always a difficult conversation because we are not the only ones walking in with increased prices and they are seeing it across the board.

And just like we see in our consumer business, they are seeing an impact with consumers as they continue to take higher pricing.

I would say we are having constructive discussions and we're working our way through these, but it is always a process and a conversation.

Okay, thank you.

Mitch Pinheiro, Janney Montgomery Scott.

Good morning.

First, could you give us some idea of what the pricing actions are, the magnitude for consumer and the industrial in the fourth quarter?

Yes.

In general, it is about a 5% increase in consumer as we go into the fourth quarter.

Some items are almost nothing, some items are more like double-digit, some of the commodities have really surged.

Industrial, it is a little harder to pin down the specific pricing as we go into the quarter because a lot of it is commodity, depends on when customers make contract decisions and things like that because we will price it based on the market at the time that we make those decisions.

But the overall impact we expect is going to be in that 5% range.

5% for the combined?

For the combined across the board.

Got you.

I know that kind of translates into an expectation that is about 5% in industrial as well, but that is the way we see it today.

Okay.

How does your cost coverage look, commodity costs, how far out are you bought?

Well, we don't disclose specifically how far we are and it varies by commodity, but a good part of that inventory increase are positions that we have taken that will help us into next year that are at rates that are below the current market.

Roughly what percentage of your industrial business do you have a relationship where you are having like a direct passthrough where you are buying for your customers directly?

That is a tough percentage for me to get to without kind of backing into it, but with most of our major customers, on major commodities, we have those protocols.

The thing that makes it a little hard to get to is, depending on the products, the major commodities will be a big part or a smaller part of the costs that go into it.

So it is just hard to quantify that.

Okay.

As far as -- any channel mix dynamics in the consumer side that you can point out to as either different or changing?

Well, we are certainly seeing consumers shopping in more alternative channels like dollar and in club.

That has just been a shift that has been ongoing and accelerated in this environment.

That is why we feel good about our strategy to continue to expand our brand presence in those channels.

Okay.

Last question.

As you look out, you were very positive earlier in the year about the pipeline for innovation, new products with your larger industrial customers.

As we are entering the end of the year here, how does it look as you look out the next six months?

The industrial pipeline is still pretty good.

And we expect that is going to continue.

Just like we have seen, we are positive on our consumer innovation as well.

Everybody recognizes to continue to grow and to continue to deal with some of these cost pressures, we have to innovate, we have to find things that excite consumers because they are willing to spend when the items are right and priced right and really do bring innovation.

So we are seeing a pretty good pipeline and continued activity with technical development with our other customers.

I said last question, I do have one more, sorry.

In your marketing spend, where are you seeing your greatest success, your best ROI?

Without question, it is in the digital area.

It is a very effective and efficient spend.

It lends itself very well to the kinds of products that we sell, the recipe marketing, the word of mouth and the excitement that comes with it and we are going to continue to shift our spend more aggressively in that area.

Okay, all right.

Thank you very much.

We are coming up on nine o'clock.

We have got a number of folks still in the queue.

So we will go as long as -- we will try to get through everybody.

I will just ask you to limit your questions please going forward.

Ann Gurkin, Davenport & Co.

Good morning.

Just want to continue the discussion on the industrial business.

You talked about this just briefly a minute ago, but is there any pullback from customers as they see these higher price increases?

Are you seeing any change in demand from the industrial customers?

We are not necessarily seeing a change in the industrial customers and pullback, but we are seeing a shift.

As a for instance, food service distributors are a big part of our business and an important part of our business because we are selling branded products that carry good margins and that part of the segment is under pressure.

We are seeing pretty good success with our quick service restaurant customers.

That is all I have left.

Thank you.

Eric Katzman, Deutsche Bank.

Good morning, everybody.

I guess the sales looked quite good broadly across the business, so complements to that in this environment.

But just a couple of quick ones.

One, I thought that the pricing in consumer is usually taken early in the year and you try not to put something through as we kind of get right into the holiday season.

So, Alan, what gives you confidence that putting through pricing even on some of the basic spice stuff isn't going to be met with consumer elasticity?

We are in a little bit of a new world because it has been more than a decade since we have taken pricing as we head into the fourth quarter in at least our US consumer business.

And we are watching those elasticities pretty closely.

We felt that we were in a point where we didn't have a choice because of the increased costs.

And our customers have understood that, but we are going to continue to drive the investment in brand marketing, the display activity and our promotion plans through the fourth quarter.

So we think we are positioned to help deal with that, but we are in a little bit of new territory.

Okay.

Then just on the industrial side, I guess I am very surprised at the comments around the protocols because ever since vanilla hit, my impression at least was that these protocols covered pretty much everything.

And it seems to me that you can always hedge the major ingredients like soybean oil or wheat or what have you, and it was the items that are more obscure were the ones where you were in protocols and agreements with whatever it is, whichever customer it is to not get this kind of hit or exposure.

So I don't really understand what has happened and why -- again why the contracts aren't kind of broadly covering or the protocols aren't broadly covering the stuff that is hard to hedge to begin with.

Well, the biggest thing is those major commodities, we have had less control of and the minor commodities have not typically been volatile.

They tend to offset each other, they tended to be more consistent and reliable, but what we are seeing is a continued upward pressure now that is forcing us to really change how we do that.

And so it has been a challenge to get those kinds of things passed through.

It has just taken some time.

So we are working through them, but our protocols really do address those major commodities where we can buy collaboratively with our customers.

The only other thing I will add is it is not all due to that.

Again, we talked about a mix component as well.

So I don't want to get that lost in the dialog either.

Okay.

I will pass it on for the sake of time.

Erin Lash, Morningstar.

Thanks for taking my question.

I was wanting to talk about acquisitions.

Obviously, you have been quite acquisitive this year and you discussed the fact that you still have an appetite for acquisitions.

And I was curious where you felt some of those opportunities might lie, depending on region, category, that sort of thing?

Sure.

The acquisitions that we have made this year are acquisitions that we have worked on for a long time and we have been very interested in continuing to expand in emerging markets -- Eastern Europe, India, China and Latin America.

We will continue to pursue growth areas in those markets.

In our more developed markets like Western Europe and North America, we like to do tuck-in kind of acquisitions where flavor really matters and that is why we did Kitchen Basics in the past quarter because we believe we can bring innovation and continue to help people in how they cook in a segment that consumers continue to grow in.

So we believe that our acquisition strategy does two things.

It expands the categories we are in, but it expands geographically where we are.

And as you have seen through our history, acquisitions are about a third of our growth rate over the last 10 or 12 years.

Thank you.

That is very helpful.

I just had one quick follow-up.

You mentioned I think last quarter that retailers were emphasizing or promoting private-label products versus branded.

And I was wondering what you are seeing now and how you are thinking about that going into the fourth quarter with your planned price increases?

Well, we are still seeing retailers promote private label, but as we always do in the fourth quarter, we expect to see consumers buy the brands because they trust the products for their holiday meals and our display activity ramps up so aggressively in the fourth quarter that we always see our shares go up in the fourth quarter.

So we expect to see that continue.

Thank you.

That is very helpful.

I will pass it on.

Robert Dickerson, Consumer Edge.

Just two very short ones.

I know we are short on time.

Just one was your FX guidance of the 2% for the year.

Is there any risk, do you think, to that as we go into Q4 just considering the appreciation we have seen in the dollar over the past month?

There is always risk in a volatile world with currency, but we got three quarter of the year behind us.

Obviously this is the biggest quarter we are entering into, but FX, as you saw in the results, was 4.6% favorability.

So it is our best guess at the moment given the rate environment.

Okay, fine.

I think you stated early on in your prepared remarks that you were tracking along to still meet your profit target or operating profit target.

And correct me if I am wrong, but I thought, I haven't checked this recently, but I thought your top-line guidance originally for the year was [5 to 7%] growth and then EPS was [5 to 7%] growth.

I thought you were guiding to like the zero to negative 2% operating profit growth for the year.

Is that what you were referring to and either way, is that a reasonable profit target for the year or just any comments on that?

Our guidance has always been mostly around the top line and the earnings per share, which has been consistent all year long.

The only change to the guidance that we have made, that we have tried to make clear here is obviously the impact of all these acquisitions.

Other than the acquisition impact, we have really been consistent since the beginning of the year on that EPS and top-line guidance, as well as the gross profit margin where we have been indicating all along that we expect to see it down versus prior year.

Okay, fair enough.

Thank you so much.

Pass it along.

Andrew Lazar, Barclays Capital.

Good morning.

Just one quick follow-up on inflation.

Of the double-digit inflation that you are looking for in input costs this year, can you give us a little bit of a sense of kind of how that tracked?

So maybe directionally what it was in the first half, maybe what you saw in terms of year-over-year inflation in the third quarter so we can get a sense of how that flows into the fourth?

Does it ramp up dramatically into the fourth from here?

Just trying to get a better read on that.

Obviously, as we started the year, as we indicated, we had gross profit margin improvement in the first quarter, if people recall, and we were making sure people were aware that we did not expect that to continue as we saw the increases start to occur as we progressed through the year.

We obviously knew the third and fourth quarters we would experience it the most.

So I would suggest that what you just saw in the third quarter is probably what we could potentially expect going into the fourth quarter.

You do have a shift of business mix in the fourth quarter as the consumer part of our business ends up being a much bigger part of the portfolio, but I would say the types of increases that we expected are starting to occur.

They occurred in Q3 and will occur into Q4.

Okay.

And last, is it fair to say that the lag that you saw and expect a little bit more in terms of pricing versus cost is more due to really trying to -- seeing where costs kind of went more recently and in thinking obviously out into 2012 versus having tried to get pricing through a little earlier, but running into roadblocks or delays from a whatever, retailer or a consumer standpoint?

Yes, we really haven't seen an impact in any delays.

It is more accelerating costs that are driving the need for pricing.

And it's less of certainly -- we have to negotiate pricing, but we haven't seen any delays in getting it implemented.

It is more that costs have gone quicker.

And I will say that part of our culture is that pricing is one of the last levers we want to pull as a company and so our teams try to do everything they can to manage costs and work with customers before we pull that pricing lever.

But we are just in an environment where we have to pull it faster.

Great, thank you.

Chuck Cerankosky, Northcoast Research.

Good morning, everyone.

Wanted to ask about the acquisition environment.

With the pressure on raw material cost increases, working capital pressures, capital availability in general, what are you seeing that doing to the people that you have been talking to?

Well, certainly, the environment is impacting everyone and different companies are in different position with being able to take pricing.

Again, depending on the market that they are in and the strength of their business.

We don't think that is going to either cause people to be more aggressive in selling their businesses or less willing to sell their business.

I think it is less of an impact, but it certainly will impact how we value businesses as we go forward.

I was just going to say how about their working capital investments, just carrying inventories going up for them, is that hastening their decision to sell at all?

I don't know that it is hastening their decision, but we are certainly seeing it impact their balance sheet.

All right.

Then what do you expect retailers to be doing over the next couple quarters as you try to push through additional pricing?

I think retailers are responding the way that they typically have.

We saw that as we headed into the fourth quarter where retailers did -- there was some amount of buy-in in advance of the price increase, but I expect that retailers are doing the same things in our category that they are in others and those are finding -- those prices are finding their way to the shelves.

Thank you.

I want to thank everybody for participating.

I know it has been a long call, but I did want to quickly wrap up.

Several factors impacted our results this period.

Things like discrete tax items and the timing of our acquisition costs.

And while those make the job of analyzing results and projecting our outlook a little tougher, we hope that we provided you what you need.

We do want to leave you with a couple of key takeaways.

First, we demonstrated our ability to implement pricing actions while achieving higher volume and product mix in our year-to-date results.

Secondly, we are adapting our business to the economic environment and today's consumer.

Our product innovation and additional brand marketing support and are vigorously pursuing distribution opportunities.

Third, we are investing for growth with accretive acquisitions and joint ventures while we exercise financial discipline and we have been maintaining a strong balance sheet.

I appreciate your attention.

I will turn it over to Joyce to wrap up.

Thanks, Alan.

I will add my thanks to those listening on today's call.

Through October 5, you may access a telephone replay of the call by dialing 877-660-6853.

The account number for this replay is 309 and the ID number is 377603.

You can also listen to a replay on our website later today.

If anyone has additional questions regarding today's information, I would welcome a call at my number, 410-771-7244.

This concludes our call.