McCormick & Company Inc (MKC) 2012 Q1 法說會逐字稿

Good morning.

This is Joyce Brooks, McCormick's Vice President of Investor Relations.

Thank you for joining today's call to review our Company's first-quarter financial results, and 2012 outlook.

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

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

A question-and-answer session will follow our remarks.

(Operator Instructions)

As a reminder, the conference is being recorded.

Joining us for today's call are Alan Wilson, Chairman, President and CEO; Gordon Stetz, Executive Vice President and CFO; and Mike Smith, Vice President Treasury and Investor Relations.

Alan is going to share some highlights from the first quarter of 2012, and how we are effectively adapting to the current business environment.

Gordon will provide a review of our first quarter financial performance, and discuss our 2012 financial guidance.

After that, we look forward to discussing your questions, and some closing remarks from Alan.

We are planning a more in depth review of McCormick's strategy and global growth initiatives at our April 17 investor conference in New York.

I hope that you're planning to attend.

As a reminder, today's presentation 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.

As seen on Slide 2, our forward-looking statement also provides information on Risk Factors that could affect our financial results.

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

Thanks, Joyce.

Good morning, everyone, and thanks for joining us.

McCormick's financial results for the first quarter demonstrated the effectiveness of our strategy and growth initiatives.

We grew net sales 16% with double-digit increases in both our consumer and industrial businesses.

Over half of the increase was driven by very strong underlying sales growth augmented by sales from acquisitions completed in 2011.

We are particularly pleased with this performance given the current environment where consumers are confronted with a tough economy and higher prices.

Our portfolio of businesses, united by our passion for flavor, is a real advantage in this environment.

Across our consumer and industrial business, we are delivering flavor regardless of whether consumers are cooking at home or eating out.

For consumers eating at home, we're meeting demand for great flavor, convenience, and healthy eating, with product innovation, meal ideas, and brand marketing support.

In our industrial business, our growth with quick-service restaurants was a key driver of first-quarter results.

These customers are expanding globally, and in this economy are seeing increased demand based on their competitively priced menu.

A further balance exists across our three regions, and with our leading shares in a number of developed markets, along with an increased percentage of sales in emerging markets.

We have illustrated on Slide 4 the distribution of our first-quarter sales across a number of emerging markets where we are participating in strong sales growth.

Including acquisitions, our sales in emerging markets were up 73% in the first quarter versus the year-ago period.

As a reminder, we also participate in emerging markets through our unconsolidated operations around the world.

The rate of sales growth in the first quarter was ahead of our expectations, which led to an earnings per share result at $0.55 that was just above the guidance range we provided in our January earnings call.

However, this bottom line result was below earnings per share of $0.57 that we achieved in the first quarter of 2011.

As you recall, we anticipated a significant impact from year-over-year material cost inflation in the first quarter, which is expected to gradually improve in the next three quarters.

Likewise, we expected income from unconsolidated operations to get off to a slow start, due to unfavorable currency exchange rates and higher material costs, and then improve as we progress through the year.

As we look ahead to the next three quarters, we are reaffirming the guidance provided in January, 9% to 11% sales growth in local currency and earnings per share of $3.01 to $3.06.

While we will discuss our growth initiatives in more detail at our April investor conference, I want to provide a few updates today with a focus on our consumer business.

But first, let me just comment that our industrial business had consistently strong results around the world this quarter.

In local currency, we grew industrial sales in each region at a double-digit rate, and this is all organic growth, without any acquisitions.

Our profit growth was even more impressive, up more than 30% on top of a 12% increase in the first quarter of 2011.

Let's turn now to our consumer business in the Americas.

During the first quarter, sales in the US have been an area of investor interest in the food industry due to weak December and January consumption data in many food categories for branded products, and in some cases, private label.

McCormick was not completely immune from this weakness, and our Americas consumer business was the one region that had a decline in volume and product mix in the first quarter due to lower sales of branded core items in the US.

However, a number of our other product lines -- Zatarain's, Hispanic items, economy products, and our consumer business in Canada had solid sales growth this period.

While several factors may have adversely affected sales of our US branded core items, we believe a leading factor was the initial consumer reaction to pricing taken during the preceding 12 months.

The cumulative impact of these increases can be seen in our first quarter sales result for the consumer Americas business, which rose 7% from pricing.

We also believe that a milder Winter was another factor affecting sales of our core items this period, with reduced sales of recipe mixes for cold weather meals like chili and stews.

In addition, the mild weather allowed people to get out to restaurants, and we saw the benefit of this in our industrial sales to the food service channel, which did pick up this period.

While we regard the effects of weather as rather one-time in nature, we're taking steps to reinforce the value of our products with consumers, mainly through the redirection of our promotional funds.

As an example, we're partnering with retailers to generate incremental volume using a portion of trade promotion funds to reach attractive everyday price points on-shelf for key items such as grinders and vanilla extract.

Recognizing that consumers are shopping in more stores and across channels to get the best prices, we continue to expand our presence in the dollar channel.

We recently increased the number of brand and private label spices and seasonings that we supply to one of the leading chains.

The weak December and January have been followed by gradual improvement in sales of core items in February and March.

This is a pattern that we've seen following past price actions -- an initial reduction, then gradual improvement.

We're working to accelerate this improvement with our initiatives behind our marketing and promotional initiatives, and further distribution gains across retail channels.

Moving to our consumer business and portions of Western Europe, we operate in a challenging retail environment with large sophisticated retailers.

In addition, many consumers in this region face high unemployment rates, and, as in the US, are confronted with food cost inflation.

For a number of quarters in the past three years, we've reported a decline in volume and product mix for sales in the Europe, Middle East and Africa region, EMEA, largely due to weakness in the UK and smaller markets in Western Europe.

However, in the second half of 2011, we began to get some traction from accelerated product innovation and incremental marketing programs.

Our first quarter result, with 3% growth, is our third consecutive quarter with an increase in volume and product mix.

In our two largest EMEA Markets, the UK and France, 52-week consumption data for spices and seasonings shows unit sales of our brands outperformed private label.

In the latest quarter, we achieved good consumer offtake due to new products and incremental brand marketing.

In addition, we were able to convert the smaller-store formats for our UK retailer to brand from private label, and we increased our focus on a range of value products now available in France.

Our team in EMEA has been very effective driving sales in Western Europe while working on the integration of Kamis, and supporting the launch of our packaged spice and seasoning brands in Turkey.

Let's transition over to our consumer business, and some key emerging markets, before I turn it over to Gordon.

The integration of Kamis has progressed well, and we're making plans for an SAP upgrade and a factory expansion in 2013.

As I indicated last quarter, we've begun to partner with retailers to optimize the Kamis product assortment and merchandising.

Increased advertising in the period running up to Christmas has led to record category share for the brand, and we're benefiting from new distribution in Russia.

Moving to Turkey, our McCormick/Yildiz joint venture first introduced a line of spices and seasonings, co-branded Ulker and Ducros in July of 2011.

The business ran its first flight of TV beginning in late December, along with outdoor advertising and a digital program on Facebook.

As an aside, Turkey is the fourth-largest country by Facebook membership.

In less than 12 months, we've achieved a 10% unit share of the category in this market.

In Asia, our consumer business in China had an outstanding quarter during this holiday period, the Chinese New Year, boosted by incremental brand marketing.

Our marketing plan has generated strong growth and share gains in the urban spice category.

In the second half of last year, we began to shift our emphasis to brand building in China, and the early results are very positive.

And in India, our Kohinoor business had a good quarter during a seasonally strong period tied to the new rice crop.

We are implementing our innovation plan, and expect to have new products ready to be launched through Kohinoor's extensive distribution network by the end of 2012.

To summarize, we're operating in markets with a variety of challenges and opportunities.

Regardless of the market, developed or emerging, consumers want flavor, and McCormick is meeting that demand.

Across our consumer and industrial business, we're bringing passion to flavor at home or eating out.

In closing, I want to recognize our leadership team and employees throughout the Company who are behind our success in driving results.

Gordon is now going to discuss our first-quarter financial results, and latest 2012 guidance.

Gordon?

Thanks, Alan, and good morning, everyone.

McCormick's first quarter results at the top and bottom line compared favorably to our initial outlook.

The sales performance of our base business and acquisitions exceeded our expectations, and due to the leverage of higher sales on operating expenses, operating income was also ahead of our outlook for the quarter.

Let's take a closer look at each of our two segments, starting with our consumer business.

As seen on Slide 11, we grew consumer business sales 18%.

In a period of increased pricing, our volumes held up well, and we had a strong contribution from acquisition activity in the first quarter of 2012.

In the Americas region, we grew consumer business sales 7%.

As seen on Slide 12, sales from kitchen basics added 2% to growth, and the effect of currency was minimal.

Pricing was up 7% this period with some incremental impact from a December 2010 price increase, as well as the pricing actions that went into effect in the fourth quarter of 2011.

As a reminder, we estimated the December 2010 price increase shifted about $10 million of sales from the first quarter of 2011 into the fourth quarter of 2010.

In addition, we had the benefit of new product introductions, distribution gains, and incremental brand marketing support.

While we grew sales in Zatarain's, Hispanic items, economy products, and our Clubhouse brand in Canada, as Alan discussed, we believe higher pricing impacted sales of our core items in the US.

In total, volume and product mix was down 1% compared to the year-ago period.

In Europe, the Middle East and Africa, EMEA, we grew consumer sales 25%, with a 26% increase in local currency.

Our Kamis acquisition added 22% to sales this quarter.

Against a weak year-ago result, the sales increase in EMEA-based business was 4% in local currency, and mainly due to favorable volume and product mix.

We are pleased to see our initiatives behind new products and incremental advertising gaining traction this quarter, particularly in France, where we grew unit sales of both our Ducros brand of spices and seasonings, and Vahine homemade dessert items.

We also achieved growth this period in smaller markets including Spain, Portugal and the Netherlands, as well as through export into the Middle East and Africa.

While sales in the UK were down in the first quarter, we are encouraged by improved consumption data for our Schwartz brand in the latest 12-week period.

Consumer business sales in the Asia Pacific region more than doubled, and in local currency were up 104%, with Kohinoor in India contributing 83%.

Excluding this impact, we grew first quarter sales 21% in local currency with increases in both pricing and volume, and product mix.

If you recall, this sequentially followed a sales decline in the Asia Pacific region base business in the fourth quarter of 2011.

This rebound was led by a 29% local currency sales increase in China, which, as Alan indicated, was driven by incremental brand marketing and strong sales during the Chinese New Year, and in response to our brand marketing.

Sales in Australia also improved this period due in part to the growth of our Aeroplane brand, which has exceeded an 80% share of the gelatin category in that market.

As expected, first quarter operating income for our consumer business declined, ending the quarter at $81 million compared to $87 million in the year-ago period.

While we achieved strong sales growth and had the benefit of CCI cost savings, profit was unfavorably affected by significant year-over-year material cost increases.

In addition, operating income reflected incremental marketing investments behind our brands.

For the consumer business, brand marketing support was up $10 million in the first quarter, with increases in Zatarain's advertising, Hispanic holiday ads, support for new product launches like Recipe Inspirations in the UK, and our brand building in China.

Let's turn to our industrial business, and start with a review of our sales performance.

For this segment, we also grew sales at a double-digit rate.

In local currency, the increase was an impressive 15%.

About two-thirds of the increase was in volume and product mix, followed by one-third from pricing.

In markets around the world, we are having particular success with new product wins and increased demand from leading quick-service restaurants.

On Slide 17, industrial sales in the Americas grew 15% in local currency, with 9% of the increase from volume and product mix, and 6% from pricing.

In this region, both the food service industry and food manufacturers contributed equally to top line growth.

Within the food service industry, sales of customized products to quick-service restaurants continued to be strong, and we saw improved sales of our branded food service products sold mainly to broadline distributors.

This was an indication of more people eating out during December, and early in 2012.

The increase in sales to food manufacturers was driven mainly by a number of new product wins, including seasoning blends for snack foods.

During this period, we noted some weakness in demand for our products that flavor some core items of other food manufacturers.

Our first quarter industrial sales in EMEA continued a track record of strong growth.

We grew sales 10% in local currency, with an 8% increase in volume and product mix.

Demand from quick-service restaurants remains robust, and we are meeting this demand with products supplied from our operations in the UK, Turkey and South Africa.

We also gained acceptance for some new branded food service items in the UK, which begin to ship in the second quarter.

In the Asia Pacific region, industrial business sales rose 27%, and in local currency we grew sales 22%.

Against a weak year-ago result, the majority of growth was driven by a 19% increase in volume and product mix.

This performance was broad based, with higher sales in our largest market, China, as well as Australia and our industrial operations based in Singapore and Thailand.

Our multi-national customers continue to expand in this region.

While our quarter-to-quarter sales growth tends to vary, over the long term we are benefiting not only from this expansion, but from our success with innovation that in 2012 includes syrups, beverage flavors, and sandwich sauces.

Operating income for the industrial business rose 31% to $31 million as a result of excellent sales growth and CCI cost savings.

Also, following a year-ago program tied to our rollout of McCormick For Chefs in the US, marketing support for our branded food service items decreased $1 million.

These factors led to improved operating income margin, which rose to 8.3% from 7.2% in the year-ago period.

For the total business, first quarter operating income rose 2% to $113 million.

As indicated in our January call and guidance, and depicted on Slide 22, we anticipated that the phasing of our 2012 year-over-year material cost inflation would have a greater impact in our first quarter, then begin to improve in the second quarter.

While we were able to offset higher cost with pricing and CCI cost savings in the first quarter, gross profit margin declined 270 basis points, which in turn limited our operating income growth.

The first-quarter 2012 operating income result also reflected our $9 million increase in brand marketing support, although in total, selling, general and administrative expense as a percentage of net sales was down 100 basis points from the first quarter of 2011.

With the debt related to our acquisitions, interest expense was up $1.3 million from a year ago, and the tax rate came in at 30%, in line with both our 2012 guidance and the tax rate in the first quarter of 2011.

Sales of our unconsolidated operations rose 8% in the first quarter.

However, as anticipated in our January outlook, income from unconsolidated operations was below the year-ago period, lowering earnings per share by $0.02.

The primary reason for this decrease was the impact of higher soybean oil costs, and a weak Mexican peso on our joint venture in Mexico where mayonnaise is the leading product.

We anticipate the phasing of year-over-year material cost inflation to ease for the McCormick-to-Mexico business in the second half of 2012, and for the full year we continue to expect income from unconsolidated operations to decline slightly from 2011.

At the bottom line, as shown on Slide 24, earnings per share was $0.55 compared to $0.57 in the prior-year period.

A $0.01 increase from operating income was offset by a $0.02 reduction in income from unconsolidated operations, and a $0.01 reduction from higher interest expense.

Let's turn next to our cash flow and February 29 balance sheet.

As a reminder, cash flow is strongest in the second half of our fiscal year due to seasonality of the business.

In the first quarter of 2012, cash flow from operations was a positive $23 million compared to a negative $23 million in the first quarter of 2011.

The improvement was mainly due to a lower increase in inventory in the most recent quarter.

It also included the unfavorable impact of a $21 million increase in pension plan contributions in the first quarter of 2012.

During the first quarter, we resumed our share repurchase activity, and used $42 million of cash to repurchase 835,000 shares.

At quarter-end, we had $227 million left on our $400 million authorization.

Our balance sheet remains solid, although our inventory levels continue to be elevated.

As in the preceding quarters, this higher inventory related to several factors.

The majority of the increase was attributed about evenly to higher material costs, and strategic positions that we've taken for certain spices and herbs.

The remaining increase related to our acquisitions.

While we anticipate further material cost inflation this year, we expect inventory to level off and begin to decline as we work down a portion of our strategic inventory.

In addition, we have made some initial progress with our new inventory management processes in North America, which will eventually be expanded to other regions.

Let's turn to our 2012 guidance on Slide 26.

Based on our latest outlook, we reaffirm our top line projection of 9% to 11% sales growth in local currency.

Based on prevailing foreign currency rates, we estimate an unfavorable currency impact of 2% for the year.

We had very strong sales growth in the first quarter, and nearly 50% of the increase came from our 2011 acquisitions.

We expect incremental sales of 5% to 6% from these acquisitions in the next two quarters, and for the full year we expect acquisitions to contribute about 4% to our sales growth.

Excluding acquisitions, we anticipate sales will grow 5% to 7% in local currency, with a similar increase in the consumer and industrial segments.

We continue to expect our pricing actions to be a large driver of this 5% to 7% increase, with volume and product mix flat to up slightly.

While we grew volume and product mix 4% in the first quarter, we recognize that we are operating in a challenging environment, and that some of the factors behind this increase were unique to this period.

We are also reaffirming a 9% to 11% increase in operating income, and high single-digit cost inflation.

As Alan stated, we now expect at least $45 million in CCI cost savings.

Our objective [is] to achieve earnings per share of $3.01 to $3.06 remains intact.

Keep in mind that the year-over-year earnings per share growth should increase as we progress through the year, with the highest increase anticipated in the fourth quarter since acquisition-related transaction costs lowered earnings per share by $0.05 in the fourth quarter of 2011.

To summarize, our guidance remains 9% to 11% sales growth in local currency, a 9% to 11% increase in operating income, and a solid EPS result.

We are committed to delivering high performance, achieving our financial objectives, and building shareholder value in 2012.

Alan has a few closing remarks, but let's turn next to your questions.

Thank you.

(Operator Instructions)

Akshay Jagdale, KeyBanc.

Congratulations on a good quarter.

I have two questions.

First one is regarding sales growth and your expectations for the remainder of the year.

You know, you're really the first Company to actually come out and say, at least in the food space, to come out and say that there's a shift in consumer spending towards away from home, which is interesting.

And I just wanted to isolate, as part of your better performance that you admitted in terms of sales growth, how much of it was related to that shift and weather?

And the reason I'm asking is, if sales growth was better than you expected which you said, I'm just wondering why you don't have the confidence I guess to raise your sales growth guidance.

So if you can give me a little bit of perspective on that, that would be helpful.

And my second question is regarding brand marketing.

And you increased brand marketing by, I believe, $9 million this quarter which was well ahead of your guidance, but for the full year you still kept the guidance the same.

So I'm wondering if there's flexibility on that or if you're committed to not spending much more for the remainder of the year.

Yes, a couple things.

It's pretty hard to actually quantify the impact of weather but we did see some impact in our consumer business, at least in the US where a lot of the real cold weather items were dramatically lower than they were a year ago, things like chili and beef stew seasoning and things like that.

The reason we're a bit cautious is as we've seen fuel prices start to rise, that tends to have a fairly significant impact on people as they spend their dollars going out or staying home.

So we're a bit cautious on that, so it's pretty hard to quantify.

On the second question on advertising spend, we're committed to continue to invest in our brands.

You'll recall we spent up pretty heavily in the fourth quarter of last year and our pattern is, if we see the opportunity to do that because we have pretty good returns on our advertising investment, we'll do that, but at this point, early in the year with a small quarter, it's not the appropriate time to change our guidance.

And just one follow-up.

So you are spending more it seems like in your consumer business which makes sense.

Can you just talk about, in terms of the outperformance this quarter relative to your own expectation, would the business have outperformed even if there wasn't a shift to QSRs, for example?

Was your consumer business sales growth in line or below your expectations and how much of that do you think is because of a shift towards QSRs?

I would say that the consumer business was probably slightly ahead of our expectations, given some of the volume trends we saw early in the quarter when we were providing some guidance.

As we progressed, we saw stabilization and some strengthening and it was pretty broad based.

You saw the strong numbers in EMEA as well as China and Canada and the US stabilization.

So I'd say really in terms of the outperformance, the consumer business was probably slightly ahead.

I will say the industrial business was very robust as well.

Just to also highlight some of the things we're cautious about.

If you recall in the prior year, we did have some weak comparisons in markets like China on the industrial side.

So the strong performance in the first quarter, while we're very pleased with, it was against a weak year-ago period.

Great, thank you.

I'll get back in queue.

Thilo Wrede, Jefferies & Company.

You've now had four quarters of 5% or 6% price increases across the business, yet the gross margin decline you've had this quarter was the biggest since this inflation really started in second quarter last year.

Shouldn't four quarters of good pricing give you a little bit more power to have less of a margin decline on the gross margin level?

No, if you recall, and going back to the chart that we've tried to illustrate this is, in the first quarter of last year, we were not yet experiencing the material cost inflation pressures.

It was largely building up an inventory and also yet to be realized on the P&L.

So as you recall, as we progressed through last year, the third quarter was down over 100 basis points -- I mean the second quarter, and then the third quarter and fourth quarter were similar.

So it really is a function of the timing of when these material cost increases started to hit us and it started to accelerate as we progressed through the year.

So we're looking at almost an opposite phenomenon this year where the majority of the increase really we start to experience in the first part of the year and then it starts to moderate as we progress through the year and that's really what's causing the gross margin issue.

Okay, and was there any margin impact from the shift from food at home to more of the industrial business?

Well, there certainly will be because obviously it's a lower margin structure business relative to the consumer business.

But as you saw, the industrial margins themselves were up over the prior year so that was helpful to the overall Company margin structure as well.

Okay, and then a few weeks ago you put out a press release that you hired Dr.

Cardellina as a scientist.

I think the press release called out that he had experience with supplements and areas of the, I would say, food business; that's not necessarily your core business.

That signaling anything that maybe McCormick will move more into a supplement role or is it just part of his resume but that's not the reason why you hired him?

No, that's part of his background.

He's a very talented scientist and he's going to help us tremendously in our flavor business but there's nothing to read in from his background.

Great.

Thank you very much.

Thanks.

Chris Growe, Stifel Nicolaus.

Hi.

I want to just come back to that cost inflation comments that you've made today.

I guess, Gordon, obviously the peak being here in Q1.

Has it stepped down pretty meaningfully going forward or is it a gradual decline?

I'm trying to get a little better sense of the gross margins we turn through the year?

I'd say it's a gradual stabilization based on the way I just described how it played out last year.

Okay, and then I was just curious, the QSR performance in the quarter.

Is there any way to look at -- if you look at the category trend, if you want to call it that, how the QSR has broadly performed in the quarter was meaningfully better in Q1 than, say, Q4.

Was that the majority of the growth that occurred for you?

But you've also cited new product wins and distribution gains, that kind of thing, so I'm trying to understand what was driving the main piece of the growth in the QSR performance this quarter.

Well, the bigger turnaround in the first quarter was our food service business and it was a combination of our distributor business and our QSR business but that was a lot of what was happening in the US industrial business.

Around the world it's a heavier QSR blend of customers.

Okay.

Again that category trend picked up a lot in the quarter.

Was that the most important part of the growth in the quarter then?

For the industrial business it certainly was.

Obviously we talked about acquisitions and pricing as part of our growth algorithm in the quarter as well on the consumer side.

Sure, I was looking at the organic business.

Got you.

Okay.

And then I had just one more follow-up if I could, and that was just, in relation to price realization in the EMEA consumer division.

I'm just trying to understand there -- I'm sure you've taken pricing in relation to cost inflation.

Was there incremental promotional spending that may have reduced what the actual price realization that came through in the quarter?

We took minor pricing and we took it in 2010 and early '11, so there was very little pricing in the EMEA business and we did have a fairly heavy marketing and advertising spend.

Okay.

Thank you.

Thanks.

Robert Dickerson, Consumer Edge Research.

I just want to step back a little bit and kind of talk big picture because I know last year at CAGNY, you had a fairly extensive slide presentation.

And it seemed like the larger strategy for McCormick on average was just by 2013, you could reach the 16% to 17% operating margin.

You had 20% margin in 2010; in consumer, you had 8%; and industrial, the goal was to get industrial to 9% to 10% and then inherent within the plan was a continued shift to the consumer business on the top line.

But I guess, if I'm looking in the quarter, and I realize there was a little bit of a shift year-over-year because of the compare volume pulling into Q4 for last fiscal year.

But in general, I guess the question is, are we still on task to do that or could we see a scenario play out such that on an operating profit basis there actually could be a little bit of, not negative margin mix going forward, but maybe not as positive as you thought considering commodities are still high; you're carrying high inventories?

And even though you have this outsized growth on the top line driven by acquisitions, frankly consumer profit is still down 6%.

That is the second year in a row that your consumer division is down.

So if I think about what's happening in consumer now and what's happening in the segment business mix now relative to longer term plan I heard over a year ago, it just seems a little off, so I'm wondering if you could just provide some color on that.

I wouldn't read too much into an anomaly on one quarter, but what I would say is our strategies are exactly as we laid out last year.

Now we've seen an awful lot of volatility in costs as we went through last year.

Our costs were certainly a lot higher than we had anticipated in February of last year.

I'd say we're still experiencing that.

You'll also recall in that discussion that pricing is a very, very small part of our algorithm, but what happened in the quarter and in the time since then is that pricing has been much more a factor as we tried to recover the margin.

Our strategies are still the same.

The acquisitions that we made last year were by and large consumer acquisitions.

Doesn't mean we won't make industrial acquisitions going forward, but our strategy is still to grow our consumer business faster and drive the margin of our industrial business.

Okay, so then if I think about the rest of this year, and even into next year, if we do actually see input cost pressures ease a bit as we go through the year, is it fair to assume that you could see a little bit more of a margin benefit on the consumer side relative to what you get on the industrial side?

Well, certainly as we progress through this year, because of the volatility of costs, it may be tough within the consumer business but on a go-forward basis, to Alan's point, the basic fundamental algorithm around faster consumer growth, improved industrial margin leads to an enhanced overall margin structure for the Company.

That has not changed.

But again, back to Alan's point, these long-term goals can get interrupted through periods of cost volatility which is what we're experiencing right now.

Okay.

Fair enough.

Thank you so much.

Ann Gurkin, Davenport & Company.

Wanted to return to the step up in marketing spend.

Are you getting the return?

And I guess I was looking for $5 million and it looked like it was $10 million this quarter, so can you walk me through that a little bit?

Yes, we believe that we are.

We were supporting new product activity in the US as well as in the UK.

We spent a tremendous amount in the first quarter launching Recipe Inspirations in the UK and in France.

And we've seen the sales results from that and we feel pretty good about it, but as you're well aware, we continue with a pretty disciplined process to monitor what's working and adapt our model to spend behind the initiatives that are working.

This year, we're beefing up our spending in digital and mobile marketing.

We think there's a great return there.

We also have started to invest in China behind brand building to deepen our business there as opposed to just look for new distribution.

So it's an overall mix that we think is going to pay out, but as you're well aware, we'll go back and adapt it to what's working from a return standpoint and put the emphasis where we think it's going to generate the best returns.

Perfect, and then how does the acquisition pipeline look right now?

It's still active.

I wouldn't say that -- there's nothing we can announce this morning but it's still active.

Okay, and then third, if you could just comment on Zatarain's frozen entrees, how are those performing?

That's been a tough category and how is that doing?

Well for us its been a very good category.

It's pretty well all incremental growth.

We just introduced Meals for Two and they're starting to rollout now, so we're seeing pretty good traction from things like Jambalaya and Blackened Chicken Alfredo.

So that's kind of an area that we're excited about.

Remember, we're niche in frozen.

We don't think the world needs another frozen lasagne and we're not trying to compete there, but the products that we have for Zatarain's and even for Thai Kitchen are pretty exciting to us.

That's great.

Congratulations on your quarter.

Thank you.

Thanks, Ann.

Mitch Pinheiro, Janney Montgomery Scott.

In the industrial segment, obviously the QSR was strong.

What part of this is sort of sustainable in Europe and driven by internal efforts like the innovation you've talked about and the process of getting these new products into the QSR segment and how much is just maybe economic related?

And then also how did your broad line distributor business do in the quarter?

Sure.

We've executed better, I'll say that.

Now recall this is one quarter after a number of quarters of fairly weak performance in the food service channel, so we're feeling good about the result.

We're cautious going forward again because of the impact of gas prices.

But it's been driven by our new product wins as well as some good performance by a number of our customers.

Our broad line branded business in food service also did very well in the quarter and it's kind of nice to see positive volume trends in that area as well.

Okay, one last question is, how are you progressing on gaining share within your largest strategic customers?

In the industrial business we've continued to gain share.

It's always kind of a tactical battle because we do that by winning new product innovation, and that's where we've tended to win more than our share of briefs.

There's some offsets to that as people are looking to reduce cost in our ingredient business and that's less of an innovation trend, but we've continued to gain share with most of our strategic customers.

Okay, thank you.

Thanks, Mitch.

Robert Moskow, Credit Suisse.

Hi, thank you.

I was just looking at how the quarters are supposed to progress for the rest of the year and are you forecasting -- what my model shows, that you continue to get 100 basis points of leverage on the SG&A line for the rest of the year?

That will vary obviously by the timing of A&P spend.

Obviously it would have been even more this quarter without the A&P spend, but certainly we're looking for leverage on the SG&A line because of, obviously, the price execution on the top line and the leveraging of the acquisitions against the SG&A base.

Okay.

And then one follow-up.

I can see, Gordon, how the gross margin comparisons are going to get easier for the rest of the year, but you're not really forecasting from what I can tell, any gross margin expansion.

Is it really just a catch up as the year progresses, is that correct?

I would characterize it as more of a catch up as the year progresses.

Things can impact that obviously in terms of the product portfolio and the segment portfolio so that's what can vary and cause it to go up or down in any given quarter but I would suggest it's more of a catch up.

Our price increases take a full year outlook and look to try and recover after even we look at CCI, the cost increases.

And your volume comparisons for second and third quarter; your currency comparisons for second and third quarter are going to get actually a lot tougher as well.

Does that flow through at all to a tougher comparison in terms of operating profit growth or -- it seems like what you're saying is it really isn't a concern.

FX, as we've indicated, will be a negative to the top line, 2% on the year, and you're correct in that Q2 will start to be a tougher comparison.

It's not the same impact on the operating income line as it is on the sales line.

We have hedging activities.

We also have cross border flow of goods that we try to make natural hedges out of, but it obviously will ultimately have a negative impact on the operating income line as well.

Just not as much as it is on the top line.

So third quarter will be a much easier comparison than second quarter?

Yes, well again, at current rates and rates as you know are volatile as well these days, but at current rates second quarter is a tougher one.

Okay, thank you very much.

Eric Katzman, Deutsche Bank.

A couple of questions.

I guess, I think Alan, you alluded to the US food manufacturers that you supply as still kind of being weak as the quarter progressed.

Could you just detail that aspect because obviously the other food manufacturers have been pretty negative and have not indicated any kind of recovery whatsoever.

What we see is a little bit of a lag behind their volume trends on core items.

So I wouldn't necessarily read into our results what's going to happen with all of the other food manufacturers.

If we're supplying core items and the core items are weak our sales are going to be weak.

To the extent that we have new product innovation wins, even when their trends may be a little weaker, our trends may be a little bit better.

I will say, I do think everybody is concerned with the consumer reaction to pricing and trying to put programs in place to make sure that we can protect volume.

You've seen a lot of announcements on increased advertising spending and we're seeing some amount of new product activity that we think will help us as well as help our customers.

And maybe you're going to go into this in more detail at the analyst day in a couple of weeks, but it seems to me on the consumer side that China -- there is some quarters where it's really great and then other quarters where it stumbles a bit.

On the industrial side, its been strong for a long time, but would you say now that China is, maybe emerging markets are more of a focus, but China is better positioned to be more of a consistent growth area for you?

We certainly --

On the consumer side.

Yes.

We certainly expect that it would.

Now remember, China has a similar dynamic that the American market has, except it's a quarter different.

Our Thanksgiving, Christmas holidays, a heavy boost to sales for the US.

In China, it's the first quarter because of Chinese New Year.

So we do see some seasonality in that pattern as well.

But we do think we're building a sustainable business in China and are really favorable on our brand building as we build consumer loyalty.

Okay, and then last question, maybe more on the industrial side of things.

I was on a flight the other day and I randomly sat next to this guy who works for another food ingredient supplier and he indicated that the manufacturers, the branded companies that he serves were really pressuring everything in terms of cost and I guess that's not surprising given all of the inflation.

But to the point where the food manufacturers were -- really wanted, to the extent feasible, to keep the taste profile the same.

They were actually looking for lower quality ingredients, to the extent again that cost versus taste balance could sustain it.

So are you seeing that and how does that work into the improvement on the industrial side?

I would say every customer that we have has fairly aggressive productivity initiatives.

And the way we try to deal with that is by offering alternatives that protect the flavor and also because in a lot of cases we can help them both reduce costs and improve their product and so that's a lot of the effort that we have going.

But I'd say, every manufacturer -- and us included -- have productivity efforts to try to offset these increased costs because we recognize it's a combination of high cost and high prices and lower volumes are not a sustainable mix.

And so we're all working on trying to do that, but for the most part, and I'd say across-the-board, we've benefited from that but it does present some challenges for us.

Okay, I'll pass it on.

See you in a couple weeks.

Thanks, Eric.

Chuck Cerankosky, Northcoast Research.

If we're looking at this process of higher raws sort of decelerating and still the flow of price increases going through, how do you see it affecting private label as both part of your sales mix and private label produced by competitors?

Well, what we've seen is private label pricing has gone up higher than brand pricing over the last six months or so on a percentage basis.

On the other hand, what we're seeing is consumers are very conscious of the prices they're paying, as we always do when prices go up and are making some tradeoffs.

So at least in the US, and I'll speak to the US, in our spice and seasonings business, we've seen private label gain some share, both in terms of dollars and in terms of units.

In dry seasoning mixes, we've actually gained share.

And then in our other major markets, Canada, the UK, and France, we've gained share.

So what we are seeing is private label manufacturers, and us among them, passing through higher prices and those higher prices are getting reflected on the shelf.

But the consumer is looking at an absolute price point on the shelf that they're making a decision on and so I think we're in a bit of a questionable period from an elasticity standpoint.

So we're very conscious of that and are implementing programs to help offset that.

How about just looking internally, what's the shift like between your branded product and private label products in the consumer segment?

We've seen some shift, not necessarily to private label, but some shift in volume to some of our economy brands.

Our private label business has grown but it's also because we've won some new customers with that, so I wouldn't say its been a dramatic shift in our mix of products from brand to private label.

There's a little bit more from within our brands to our more economy brands.

All right.

Thank you.

Thanks.

Rob Moskow, Credit Suisse Group.

I think Eric sat next to the same guy on the plane that I sat next to because I had the same question, so I cancel my question.

(laughter)

Okay.

Okay, Rob, thanks.

Thank you.

I'd like to turn the floor back over to Mr.

Wilson for closing comments.

Great.

Thanks.

Thank you all for your time and attention.

At McCormick, we're continuing to operate effectively and grow, even in the challenging environment that we have today.

We're adapting our product innovation and marketing to meet consumer demand for flavor, convenience, and value.

We're managing through this period of cost volatility with our pricing actions and our CCI programs and we're expanding our presence in fast growing emerging markets.

Through our Global Operations, we have leadership and employees in place to deliver a year of strong financial performance for McCormick shareholders.

Thank you.

Thanks, Alan.

I'd like to add my thanks to those participating on the call today.

We hope to see you at our investor conference three weeks from today.

Through April 3, you may access a replay of this call at 877-660-6853; the account number is 309 and the ID is 389082.

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

If you have any follow-up questions I can be reached at 410-771-7244.