McCormick & Company Inc (MKC) 2012 Q4 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 the Company's fourth-quarter financial results and 2013 outlook.

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

With me on today's call are Alan Wilson, Chairman, President and CEO; and Gordon Stetz, Executive Vice President and CFO.

Al is going to begin with comments on our fourth-quarter results, followed by remarks about fiscal year 2012 and an outlook for 2013.

Gordon will provide a more detailed review of our fourth-quarter financial performance and financial guidance for 2013.

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

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.

Our fourth-quarter results enabled us to meet our 2012 objectives -- to grow sales 9% to 11% in local currency and deliver earnings of $3.03 to $3.08 per share.

For fiscal year 2012, we grew sales 9% to reach $4 billion for the first time.

This is double our sales of a decade ago.

For the past five years, we have delivered a 6% compounded annual growth rate in sales, at the top end of our long-term objectives.

Including the impact of our 2011 acquisitions, we increased sales in emerging markets 47% to reach 14% of 2012 sales.

This is up from10% of sales in 2011, and has moved us forward towards our goal of 20% of sales by 2015.

We continue to invest in product innovation.

We expanded our facilities and capabilities in the UK, Mexico, US, South Africa.

And early in January, celebrated the grand opening of our new state-of-the-art R&D facility in China.

Our investment and product development led to the launch of more than 250 new-branded products in 2012.

On the Industrial side of the business, a move toward healthier products directed a significant portion of our development work, with more than 30% of new product briefs globally having some wellness aspect.

We invested nearly $200 million in brand marketing support, twice what we spent in 2005.

Globally, digital marketing was12% of our total spending, up from 5% in 2010.

Slide 5 features some of our successes in this area, beginning with a double-digit increase in our US online traffic.

We have similar progress underway in Europe, as we align our digital presence to a common global framework.

Employees in our operations around the world achieved $56 million of CCI cost savings.

This was a key step in our ability to manage through a period of high material cost inflation.

And we generated significant cash in 2012.

Cash flow from operations reached a record $455 million.

We returned $297 million to shareholders through dividends and share repurchases, a 25% increase from $238 million in 2011.

In November, McCormick's Board approved a 27th consecutive dividend increase, ensuring our place among approximately 60 companies in the S&P dividend aristocrats.

We achieved these results as we continued to navigate a challenging environment and adapt to the pressures faced by today's consumers.

Clearly, employees throughout McCormick are driving our strategy to grow sales and profit by investing in the business, and fueling that investment with our CCI program.

I want to thank them for all their efforts and recognize their achievements.

In the fourth quarter, we had a mixed performance with strong results in some areas of the business, and other parts that did not meet expectations.

We are extremely pleased with our results in Europe, the Middle East and Africa, EMEA, with strong top-line growth of 10% in local currency including a 6% increase in volume and product mix.

As 2012 progressed, our Consumer business team in EMEA gained traction with new product introductions and brand marketing support.

In addition, our merchandising effectiveness was recently recognized by a leading UK retailer that awarded McCormick Top Supplier of the Year.

We delivered10% growth for this customer with our new merchandising fixtures.

In our EMEA emerging markets, we continued to exceed expectations with the Kamis brand in the fourth quarter, and grew sales through increased exports in the Middle East and Africa.

Our Industrial business in EMEA had another outstanding sales performance, backed by increases in branded food service items and higher demand from quick-service restaurants across the region, as well as some distribution gains with these customers.

A third area that drove fourth-quarter sales growth was our Asia Pacific Consumer business.

We grew sales in China at a double-digit rate in local currency, with increases across all categories.

While the Asia Pacific region had a strong sales result for the Consumer business, demand from Industrial customers, primarily quick-service restaurants, was weak.

This was largely an outcome of less new product and promotional activity versus the year ago period.

We expect this decline to extend into the first quarter of 2013, which has a tough year-ago comparison.

If you recall, we grew base business Industrial sales in the Asia Pacific region 22% in local currency in the first quarter of 2012.

In the Americas, our sales and profit were below our expectations in the fourth quarter of 2012.

For our Consumer business in the Americas, sales were comparable to the year-ago period -- a 2% increase in price offset a 2% decline in volume and product mix that resulted largely from customer purchase patterns and some temporary supply chain disruptions.

I will discuss customer purchase patterns first.

If you recall, we had reported a year ago that sales in the fourth quarter of 2011 had declined approximately $10 million or 2%, due to customer purchases in advance of a price increase in the US.

This created a favorable year-on-year comparison for us in the fourth quarter of 2012, based on customer purchase patterns.

However, based on our analysis of fourth quarter 2012, we determined that a number of US retailers lowered their inventory of spices and seasonings from year-ago levels.

We believe that this reflects buying patterns resulting from past pricing actions, as well as some caution on the part of retail customers following weaknesses in year-ago sales consumption.

For those of you who follow us closely know that we have experienced quarter-to-quarter fluctuations in customer buying patterns periodically for the past several years, largely in response to our pricing actions.

Across the past several years, we have taken pricing actions on six different occasions in the US.

These actions have helped -- have had a cumulative increase of 25%, and together have helped address a 45% increase in material costs.

Importantly, we have been able to execute the necessary pricing, while maintaining our volumes.

This is illustrated on slide 9 which shows, for our America Consumer business, the significant impact of pricing in each of the last four years, along with our volume and product mix results.

Looking ahead to 2013, with material cost inflation estimated at approximately 3% and no major pricing actions currently planned, we expect retail buying patterns for our products to normalize, and for consumers to face less pressure from higher pricing.

Realizing that consumers in the Americas were still adjusting to high prices in this past holiday season, we stepped up fourth-quarter activity behind coupons and focused our trade promotion funds on optimizing retail price points for key products.

This redeployment of marketing funds to couponing and price promotion put some added pressure on top-line growth.

It also lowered our fourth-quarter brand marketing recorded in SG&A, which across all businesses was down $2 million from the year-ago period instead of up by $2 million that we had forecast in our previous earnings call.

These changes in our marketing efforts paid off with improved consumer off-take during the Thanksgiving and Christmas holiday periods.

Heading into 2013, we will remain close to the consumer, using a combination of equity-building programs and promotions to position our business for success in the marketplace.

Also affecting Consumer business sales in the Americas were some temporary supply chain disruptions that occurred in the fourth quarter, and related largely to Hurricane Sandy.

While this devastating storm had a limited impact on our sales to customers in the Northeast, it did impact a number of suppliers in this area, which created product shortages during our critical holiday selling period.

We also lost several shifts of production time in our manufacturing distribution facilities in Maryland.

The other supply chain disruption during the quarter, one that affected our operating income result, related to our Industrial business in the Americas.

During the quarter, we recorded a $4 million charge as a result of material from one of our suppliers that was out of specification.

We expect to recover a portion of this charge in 2013.

Across all of our businesses, operating income also had an unfavorable impact from our business mix.

With the relative performance in the Americas versus our smaller regions, our business mix was less favorable at the operating income line.

As most of you know, our Americas business is more profitable due to greater scale and less complexity.

This mix of business was a primary reason for the decline in gross profit margin and also impacted operating income.

While this business mix had an unfavorable impact on operating income, keep in mind that there was some offset in the tax rate, as most of our international businesses operate at a lower tax rate than in the US.

We had a further tax benefit from the repatriation of cash implemented in the third quarter.

In total, the tax rate variance contributed to a 13% increase in EPS, along with increased operating income and a significant increase in our income from unconsolidated operations.

This was led by a joint venture in Mexico which achieved double-digit sales growth.

Looking back on the fourth quarter, we were pleased with our progress and results in some areas, and managed through some challenges in other parts of our business.

Looking ahead across our global portfolio, we are well-positioned as a global leader in flavor and see excellent long-term growth opportunities for our business.

Consumer interest in flavor continues to drive demand for our products.

On slide 10, you can see the latest 52-week category growth for spices and seasonings in our top five markets.

These growth rates range from 3% in France, to 8% in the UK and Poland, and in China, the category is growing at a strong double-digit pace.

A 2012 US study revealed that while today's US consumer is under pressure and striving to save both time and money, the one thing they refuse to give up is flavor.

If you take a look at the metrics on slide 11, the one that I find the most compelling is that more than half of consumers point to flavor and seasonings as a great way to add variety to everyday dishes.

Turning to slide12, Euromonitor projects that, globally, herbs and spices will be one of the strongest of all flavor-related grocery categories through 2016.

We believe these latest flavor trends, together with our effective growth initiatives and sustainable business strategy, will drive strong, underlying financial performance in 2013, even in a still-challenging global economic environment.

As Gordon will describe in more detail, our profit projections include some offsets to this growth, as a result of year-on-year increases in our tax rate and retirement benefit expense.

Before I turn it over to him, I want to share some of our projections and plans for 2013.

Excluding the impact of any acquisitions, we expect to grow sales 3% to 5%, which is in line with our long-term objective for sales growth before acquisitions.

We have a great lineup of new products for our Consumer business in 2013.

Innovation continues to be one of the best ways to distinguish our brands from private label and other competition.

Consumers in the US are already seeing more than 25 new products on the store shelf this month, including new varieties of Grill Mates, Perfect Pinch, Recipe Inspirations and recipe mixes.

We are introducing Zatarain's rice mixes in a convenient retort pouch, and a line of frozen Thai Kitchen single-serve entrees.

In Canada, we are launching a range of recipe mixes to easily prepare authentic Chinese and Philippine dishes.

We are expanding our range of Vahine dessert items, including new extracts, decorations, toppings, and baking mixes, in France.

In Poland, we are introducing eight recipe mixes and four Bag 'n Season items under the Kamis brand.

Our team in Australia is introducing a new packaging format with liquid marinade in a bag.

And our first new products for Kuhinoor in India include a convenient mix of rice and spice in a two-minute meal kit.

In our Industrial business, we have a solid pipeline of new flavors and seasonings, more than sufficient to meet our sales growth objectives and to align with our customers' new product launch plans.

Our brand marketing plans include further increases in digital marketing, support for new product launches, and a sharp focus on retail price points.

In the US, we are stepping up activity behind the first-quarter events including a multi-brand approach to Super Bowl with nearly twice as many in-store displays, as well as an additional winter cooking recipe mix event, and an early start to our activity for Easter.

In Europe, we plan to increase television advertising behind our core line based on strong returns in 2012.

Throughout the Company, work by our high-performance team is well underway with the goal to achieve at least $45 million in CCI cost savings, providing an important offset to increased costs.

And we continue to focus on the management of working capital to improve our cash generation.

As a final note, we are on track to complete the acquisition of Wuhan Asia-Pacific Condiments in mid 2013, and we will make any adjustments to our financial guidance at that time.

To summarize, I firmly believe that McCormick's business strategy and growth initiatives, powered by employees around the world, have us positioned to deliver strong underlying performance in 2013 and momentum for future success.

Let me turn it over to Gordon now for more insight into our fourth-quarter financials results, and more details on our 2013 guidance.

Gordon?

Thanks, Alan, and good morning, everyone.

Our results for the fourth quarter included 4% sales growth in local currency, a 4% increase in operating income, and earnings per share up 13%.

We recognize that our results for the quarter differed from many of your projections, and I would like to help you understand the key variances.

Let's begin with a closer look at sales and operating income for each of our two segments, starting with the Consumer business.

As seen on slide17, we grew Consumer business sales 4% in local currency, a result driven by pricing and the impact of our 2011 acquisitions.

Volume and product mix was comparable to 2011 in the fourth quarter, but varied by region.

In the Americas region, volume and product mix declined 2%, as shown on slide 18.

We had some benefit from pricing taken in the fourth quarter of 2011, as well as higher prices on pepper that went into effect in August 2012.

Heading into the fourth quarter of 2012, we had a favorable comparison to the year-ago period when we reported an estimated $10 million shift in sales to the third quarter of 2011, from the fourth quarter of 2011.

However, as Alan described, volume and product mix in this region in the fourth quarter of 2012 was affected by further fluctuations in the timing of purchases by our retail customers and by supply chain disruptions.

We estimate that the fluctuations in retail purchase patterns lowered year-on-year sales in the fourth quarter by approximately 2%, and we estimate that the supply chain disruptions largely related to Hurricane Sandy lowered sales approximately 1%.

Importantly, we believe that the supply chain disruptions were temporary, and we expect no impact to results heading into 2013.

As for the shift in customer purchase patterns for this part of our business, a less inflationary cost environment should lead to more normal retail purchase patterns.

In Europe, the Middle East and Africa, EMEA, we grew consumer sales 9% in local currency.

The level of success behind new products, brand marketing, and retail distribution was evident in the 6% increase in volume and product mix.

The implementation of master branding in Europe is proceeding well.

Sales of Kamis products in local currency are ahead of plan, and we are growing sales in additional emerging markets, the Middle East and Africa through expert -- export.

Consumer business sales in the Asia-Pacific region rose 32%.

Excluding the impact of acquisitions and currency, the increase was 7% led by a double-digit growth rate in China.

Across all three regions, fourth-quarter Consumer business operating income was $177 million, a $13 million increase from the year-ago period.

The Consumer business had higher sales, the benefit of CCI cost savings, and a favorable comparison to the fourth quarter of 2011 when we recorded $7 million of transaction costs related to acquisitions.

The positive impact of these factors was offset in part by the unfavorable mix of business across regions.

While this mix of stronger international sales had an unfavorable impact on operating margin, keep in mind that it contributed to the favorable tax rate during the fourth quarter.

Turning to our Industrial business, let's start with a review of sales.

For this segment, we grew fourth quarter sales 4% in local currency, driven by pricing taken in response to increased material costs.

As with the Consumer business, the growth in volume and product mix varied by region.

On slide 23, Industrial sales in the Americas rose 6% as a result of pricing actions.

During the fourth quarter, we grew sales of seasonings and flavors to food manufacturers, and also increased sales of branded items to food service distributors.

Offsetting this growth was a continuation of weak demand for our products sold to quick-service restaurants in this region.

In EMEA, our Industrial business achieved another consecutive quarter of strong sales growth in the fourth quarter.

We grew sales12% in local currency, with a 7% increase in volume and product mix.

Quick-service restaurants continue to expand in parts of EMEA, and we have gained share from the competition.

In addition, we have introduced new branded food service items.

In contrast to the Consumer results in the Asia-Pacific region, this was another weak quarter for the Industrial business, with sales in local currency down 11%.

We had a tough comparison to the fourth quarter of 2011 when we grew sales in local currency by 22%.

Following a strong first quarter in 2012, as Alan noted, we have been impacted by a lower level of promotional activity behind some of the quick-service restaurant items we flavor in this region.

Operating income for the Industrial business was $23 million, down from $28 million in the fourth quarter of 2011.

As previously discussed, the $4 million supplier charge was a significant part of this decrease, with the remainder largely attributable to the mix of sales this period between regions.

As with the Consumer business, this mix had an unfavorable impact on operating income, but helped lower the tax rate.

For the total Company, we grew fourth-quarter operating income 4% to $200 million.

The benefit of higher sales, our CCI program, and $7 million of acquisition-related costs in the year-ago period, were offset in part by the unfavorable mix of sales in both segments and the $4 million charge.

The unfavorable mix was also the primary reason for the 100-basis-point decline in gross profit margin in the quarter.

Moving below operating income, our tax rate for the quarter was 24.7%, compared to a rate of 28.7% in the fourth quarter of 2011.

As mentioned, the favorable rate in 2012 included the geographic mix of business across tax jurisdictions, as well as an additional benefit from the repatriation of cash from foreign subsidiaries that occurred in the third quarter of 2012, as was discussed in our September earnings call.

Income from unconsolidated operations has begun to lap some difficult results that began in the fourth quarter of 2012 -- 2011, related to pressure from higher material costs, compounded by unfavorable currency exchange rates, primarily for our joint venture in Mexico.

In the fourth quarter of 2012, income from our unconsolidated operations rose $3 million to add $0.02 to EPS growth.

Sales of these businesses grew 7% this period.

We reported earnings per share of $1.11, a 13% increase from $0.98 in the fourth quarter of 2011, with contributions from the favorable tax rate, higher operating income, and the increase in unconsolidated income.

Let's turn next to our cash flow and year-end balance sheet.

Cash flow from operations was $455 million, up from $340 million in 2011.

The improvement was led by the change in inventory which was just about flat in 2012, compared to a significant use of cash in 2011, when we increased our strategic inventory of certain spices and herbs, and had an impact from steep material cost inflation.

In 2012, we used $132 million of cash to repurchase 2.3 million shares.

At year-end, we had $137 million still available on our $400 million authorization.

Our balance sheet remains strong.

We paid down $85 million of debt in the fourth quarter, and returned to our target debt level.

As a final topic, I want to discuss our 2013 guidance, and then get to your questions.

Turning to slide 32, we are projecting a solid sales performance with 3% to 5% growth in local currency, driven primarily from higher volume and product mix.

At this time, we are projecting a minimal sales impact from currency and about 1% from pricing.

This range of sales growth currently excludes the impact of our agreement to acquire Wuhan Asia-Pacific Condiments.

If we close this deal as expected in mid-2013, it will add about 1% to the sales range, putting our 2013 target right in line with our long-term sales growth target of 4% to 6%.

Alan indicated earlier that the Industrial business in the Asia-Pacific region has a difficult year-ago comparison in the first quarter of 2013.

In fact, we will have a difficult sales comparison in each of our three regions for the Industrial business.

In the first quarter of 2012, we grew volume and product mix 8% in the Americas, 8% in EMEA, and 19% in the Asia Pacific region.

Moving to gross profit margin, we anticipate about a 50-basis-point increase, due in part to our goal to achieve at least $45 million in cost savings from our CCI program.

As Alan noted, material cost inflation is projected to be up approximately 3% for the total year, a significant moderation from the past two years.

Because this easing of material costs is expected to occur gradually as we progress through the year, the gross profit margin improvement should be marginal in the first quarter, and then increase with each successive quarter.

At this time last year, we did not think that the interest rate environment could go much lower.

We were wrong.

At that time, we reported to you a year-on-year increase of $9 million in 2012 retirement benefit expense.

Due primarily to a further reduction in the discount rate, a key factor in determining these expenses, we are facing a steeper year-on-year increase of $22 million in 2013.

While this expense increase should affect each quarter fairly evenly, it is expected to have a greater impact to EPS growth in the first half, when EPS tends to be lower, than in the second half of our fiscal year.

Looking ahead to 2014, while I won't predict where interest rates will go from here, I believe the most likely scenario is a stabilization of retirement benefit expense at this level.

We continue to evaluate ways to lower retirement expenses and manage plan liabilities.

Early in 2012, we closed our US pension plan to new participants, and in early 2013 announced the closure of our defined benefit plan in Canada.

In order to improve the funding level of the US plan, we contributed $35 million to the plan at the end of fiscal year 2012, and another $28 million early in fiscal year 2013.

Largely as a result of this expense increase, we have set up our operating income growth range at 6% to 8%, slightly below our longer-term goal of 7% to 9%.

Our guidance for 2013 includes a 29.5% tax rate, a 10% increase in income from unconsolidated operations, and a 1% reduction in shares outstanding.

At the EPS line, we project $3.15 to $3.23 for 2013, which is an increase of 4% to 6% from $3.04 in 2012.

This is below our long-term objective of 9% to 11%, largely as a result of the year-on-year increases in tax rate and retirement benefit expense, which are expected to lower our EPS growth rate by 8 percentage points, as shown on slide 33.

We expect higher sales growth and our CCI program to drive a double-digit increase in EPS, excluding these two factors.

Largely due to the difficult year-ago sales comparison for our Industrial business and the greater impact of material cost inflation in the first part of 2013, we expect EPS in the first quarter to be comparable to the year-ago period, close to $0.55, which we reported in the first quarter of 2012.

To wrap up our guidance, capital expenditures in 2013 are expected to be in the range of $120 million to $130 million, up from $110 million in 2012.

This range includes our plans to expand for growth in China and Poland, as well as funding for new product development and technology.

In 2013, we expect our increased profit and further improvement in working capital to deliver another year of strong cash flow.

Let's turn now to your questions, after which Alan will provide some closing remarks.

Operator?

(Operator Instructions)

Alexia Howard, Sanford Bernstein.

Good morning, everyone.

Good morning, Alexia.

Can I ask about the consumer takeaway data in the US?

It looks as though the volumes have fallen off a bit in the recent months, and it's kind of hard for us to tell how much of this is the supply chain related or the timing of Nielsen cut-off date or maybe Hurricane Sandy and so on?

Maybe you could just go through how much the supply chain issues affected the Americas, maybe both consumer and industrial volumes this last quarter?

And then, as we look out to 2013, how confident are you in the volume outlook in the North American consumer business, given that consumer takeaway data that we are seeing?

Yes, a couple of things, Alexia.

The Nielsen data cutoff, I think on the 22 or 23 -- I think it was the 22.

So, we missed two pretty important days of sales for our products.

And as we looked at the more longer-term, based on IRI which is what we measure, we saw a pretty good recovery.

And we are encouraged by what we saw in consumer takeaway in the Thanksgiving and Christmas holiday periods for our products.

So, that is part of the reason why we are displaying more confidence in our outlook in the US business.

We think there may be some impact, but not a lot of impact of actual consumer takeaway from Hurricane Sandy.

There is certainly an area of the country that is extremely important for us where we have very high shares was impacted.

But, we think the bigger impact was on our supply chain in the quarter.

Okay.

And then maybe as a follow-up, there were a number of mentions at the negative mix effects this quarter.

And I am thinking more globally, now.

I am trying to get a sense for the Company-wide margin outlook as you continue to push for growth in emerging markets.

So, I mean, have you got to a point where you are profitable in places like the Middle East and Africa, or China, on the consumer business for example?

And if you are not at a level of profitability there yet, how are you managing that transition as you really balance growth in emerging markets versus profitability?

Thank you.

Hi, Alexia, this is Gordon.

We are profitable in those markets.

The particular issue was in the fourth quarter that we were pointing to relates to the relative mix of the business of the US versus those foreign markets.

And given the skewing of our results and the importance of the holiday period within the fourth quarter, to the extent the US market doesn't perform to the expectations that we have had, that can have a negative relative mix on both the gross and operating margin lines.

So, that's the near-term impact that we saw within the quarter.

On a longer-term basis, we fully expect the Americas businesses to continue to grow.

We have talked about the Americas margin structure being a strong line as it is, so our desire is for that business to continue to grow over time.

And the emerging markets, as we gain scale and share and expand our presence there, we would expect those to start to approximate overall corporate margins as well.

And the margin story really does differ by which emerging market we talk about.

We have been in certain areas for quite some time, China in particular.

That would be a better relative margin to say India, where we are still establishing an infrastructure.

And then versus Poland, where we have an established business there that is being integrated into the European team, where they have margins comparable to the overall Company structure.

Great.

Thank you very much.

I will pass it on.

Thank you.

Thilo Wrede, Jefferies.

Good morning, everybody.

Good morning.

Gordon, you indicated that the Wuhan acquisition could add about 1 point of incremental sales growth.

That is all included in your guidance right now.

Is there any reason to assume that the income benefit wouldn't be a similar range?

It is more than likely it would be flat to slightly dilutive, and that is primarily a function of the transaction costs that we would expense at the time we closed the transaction, which we have indicated previously are about $4 million.

Okay.

Fair enough.

Then the China industrial business, what impact do you expect from the trouble (inaudible) is having in China -- or just had in China?

Well, certainly, when our customers in China are not growing their sales, it does impact us in a couple of ways.

Without giving specifics on any particular customer, I think our larger customers there, our quick service customers have reported challenges in their current sales as a result of this chicken issue.

Most of the quick service business there is chicken, although we do a lot of other kind of things like dessert toppings and drink mixes.

But if their traffic is down, our sales are under some level of pressure.

Do you see a corresponding uptick in your consumer business then, if China consumers don't go to quick service?

Our consumer business grew very strong in China through the year.

And we have continued with that momentum.

Okay.

And then last question I had is for the industrial business overall, is the target still to get about 10% EBIT margin, and kind of what is the timeframe you are looking at right now?

Well, what obviously impacts that, and many of you have heard us talk about this, is the material cost environment.

To the extent that it's inflationary, which is what we have seen through -- from 2011 to 2012, our pricing mechanisms are pass-throughs as we have talked a bout.

And those pass-throughs do not allow for margin expansion.

In fact, it's passing dollar for dollar through on the raw material costs, and actually has margin -- gross margin points compression on it.

So what we point to in those periods is year-on-year operating income growth.

We have seen consistent year-on-year operating income growth out of that industrial business, and we have seen margins stuck pretty much in that 7.5% to 8% range.

So underneath this period of cost inflation, there actually is margin improvement.

But in terms of the timing of when we continue to believe we can get to that, say 8% to 10% range is going to be very much a function of the cost outlook.

Okay.

Thanks a lot.

Akshay Jagdale, KeyBanc Capital Markets.

Good morning.

Good morning, Akshay.

My first question is on gross margins.

You talked a lot about mix.

So I am -- from based on your comments, my interpretation is that because of the softness in the Americas business, your gross margins came in below even your plan.

So if I am wrong on that, please correct me.

But my broader question on gross margins is, your long-term goal has been to increase gross margins, I believe, roughly by 50 basis points every year.

We have had now two or three years of -- two years at least of significant margin compression, and now commodity costs seem to be easing.

So at some point, shouldn't we start to see gross margins increase higher than the 50% rate that you typically expect?

And if you can give us an answer as to when that might happen, that is my first question?

Hi, Akshay.

This is Gordon.

Your first assumption is correct.

The gross margin impact was very much a function of the geographic mix of the business, as we said in the call.

And that is primarily the Americas region softness we pointed to.

As we have indicated in the call, we expect, because of a more benign environment, improvement in our gross margin this year.

And that follows two years of material cost inflation, which we have had that compression on.

Now in those periods of material cost inflation, we want to make sure that we are still able to deliver operating income dollar growth.

And certainly, our teams primarily, industrial group, but also in the consumer group have been focused on delivering those operating income growth targets.

It is difficult to give you an exact timeframe as to where we will be on the gross profit margin in the long-term.

I can tell you in a benign environment, we would expect this nice steady improvement that we have seen over time.

That would be a function of the consumer business growth outpacing the industrial business growth.

Our industrial business margin structure is getting better through the CCI and portfolio mix, and that is still the strategy that we have adhered to.

Okay.

Great.

And just one follow-up on the pension expense issues.

It is a little bit hard to judge that from an analyst perspective.

So I mean, it has been a bit frustrating, because your underlying performance has been very solid.

And so, to glean into that, I am trying to understand -- I mean, when you set your management compensation plans, are you excluding those type of issues as one-time?

I mean, I am just trying to understand.

I mean, if the interest rate environment reverses, how would you deal with some positive tail winds from this type of item?

Our philosophy is that we are all-in.

So when we have a negative, like we did in 2012, we take the hit on that.

When we have a negative like we expect in 2013, we have got to figure out how to overcome it, from a compensation standpoint.

And when is positive, we expect that there will be some level of benefit to our growth rate.

Obviously, every year is unique as we set our compensation plans, so we will adjust targets and goals based on that.

But our basic philosophy is, we are all-in, and we are measuring ourselves against top tier performance.

Okay, great.

Thank you.

Thanks.

Chris Growe, Stifel Nicholas.

Hi, good morning.

Good morning, Chris.

I just had two questions for you.

The first one I want to be clear on was -- in your discussion with -- to Alexia's question about product mix -- or about mix.

I want to make sure I also understood the product mix within businesses.

I am not sure if you were addressing that, or if you were addressing the business mix between industrial and consumer.

Can you speak to the product mix with each division and how that was a factor?

In particular, it sounds like it was a negative in industrial in the quarter.

Yes, it -- on the consumer side, it was mostly the volume issue, as it relates to the entire portfolio mix in the Americas softness.

But within the industrial business, I would agree, that we did have some negative mix, in particular in the US industrial business within the quarter.

And that would be related to weaker QSR performance?

Is that the main factor there?

Yes, that is certainly a part of it, yes.

Okay.

And then, I wanted to ask just a bigger picture question about -- I guess the cash flow, but more importantly like how you expect use the cash in 2013?

You have some share repurchase authorization available.

And I guess along those lines, could you also talk about maybe acquisition pipeline, and how that -- it looks for the Company from here?

Yes, I would say, as always, our priorities in the use of cash are -- our dividend is extremely important.

Acquisitions, because we believe investing in growth is important.

We have some CapEx, as we are expanding our facilities in China and Poland specifically, and investing in a new flavor technology in the US, which we are very keen on.

And we think will have a positive impact long-term, on margins in that business.

But we have room as we do acquisitions for cash repurchases, with at least the Wuhan acquisition that we have on the table right now, we will continue to buy back shares.

We are always in the market.

We see some level of activity.

I would say it's not as robust as we have seen in some years, but we still have -- we have some good targets and continue conversations at expanding our footprint.

Chris, I would just add that given where we are with our targeted debt level and the amount of cash we generate, depending on the acquisition size, we have historically been able to do both share repurchase and acquisitions.

And that is our intention as we go into this year.

Okay.

That's very helpful.

Thank you.

Rob Dickerson, Consumer Edge Research.

Thank you very much.

I guess the first question is just -- I have heard you say, I guess on the Q3 call and also this morning, that overall you would expect that consumers would increasingly become a little bit more comfortable spending on flavors, because it's such an attractive category and flavor matters at current prices.

But then, at the same time, it seems like you are couponing and retail takeaway in the IR data, which includes the holiday does seem to be improve a little bit on the margin in volume.

Part of that could be from the increased couponing.

So I am just curious, I guess, what studies have you done, not on flavor being a great category, but on consumers willing to pay current prices for that flavor?

And then two, if the couponing seems to be working, would there be a point such that you would consider lowering your pricing to actually get volume growth?

Thank you.

Thanks.

We do a tremendous amount of work on price elasticity.

And we have, as we have gone into this aggressive pricing environment, as I have said on the call, we have had about a 45% increase in commodity costs over the last four years, and have taken about 25% pricing.

And we have taken a number of different actions along the way, and we are always evaluating the impact of that on volume.

The consumer is looking at two things.

One, is that we are a fairly low-frequency purchase, and there has traditionally been less price sensitivity on some of our items, than there is in a number of other categories.

All that said though, on the shelf when you have got a range of price points ranging from $1 up to about $8 in gourmet, we want to get the promoted price right, when the consumer is there to buy.

Our business is largely a base business, which means that a small percentage is sold on promotion.

But as we get into some of these key periods, we want to make sure that we are incenting our customers to buy our brand, and not letting them have a reason to walk away.

Coupons are always a part of our mix, as are price promotions at certain times of the year.

That really hasn't changed.

We did view that we needed to make sure that we were driving positive volume consumption in the fourth quarter, and so we shifted some of our spending.

And we will keep evaluating what the right mix, to get to consumers are.

We have taken some price -- some price reductions on shelf, on a couple of key items that we talked about like vanilla and grinders, and we are measuring the impact of that.

We think the results have been generally positive, in terms of that.

We will continue to evaluate certain items to get to the right price points.

And in this -- and by the way, what we have seen as our pricing has gone up, we have seen those price gaps close now, as competition, largely private label, has also taken price increases to either catch up or improve their margins.

So we are seeing that situation moderate a bit.

All that -- it's fairly complex, because of the number of items, and we have got different elasticity's with different items.

So we may be trying to be sharper sharp run things like dry seasoning mixes, and evaluating what we do on certain spice items.

But we do a tremendous amount of work in really understanding that dynamic.

Okay.

That is very helpful.

All right.

I will pass it on.

Thank you.

Robert Moskow, Credit Suisse Group.

Hi, thank you.

Good morning, Rob.

Good morning.

I think you are not the only food company or CPG company that has kind of entered the year thinking that they could increase brand marketing, and then have to adjust that expectation down.

But I wanted to get to a final number for you for the year.

Were you still up about $10 million, in terms of increasing your brand marketing for the year?

And I will leave it at that.

Yes, Rob, we were up $11 million, and a significant portion of that was also up in the advertising.

So we were up year-over-year.

We also, as mentioned, we had a significant portion in digital that we were spending behind.

So, yes, we were up.

And was that kind of in line with sales growth?

Or was a kind of below sales growth, and how would we compare that to your guidance for 2013, which was to be in line with sales growth?

It was just ever so slightly below sales growth, if we do the math.

Okay.

All right.

Thank you.

Andrew Lazar, Barclays Capital.

Good morning, everyone.

Good morning, Andrew.

With respect to some of your comments about industrial sales in the Americas, I think you were -- and actually your organic side of that were actually pretty good.

And I think you said it was driven by increased sales of branded products to food service, as opposed to the QSR.

So, that's fairly consistent, I think, with some of your stock comments in the third quarter, where you were a bit more optimistic, as pricing was starting to wane.

Volumes for the -- just the branded sort of packaged food companies, many of which you supply, were starting to improve a bit.

So I was hoping to get a bit of an update from you on just how you see the landscaper on the branded package food guys, and if that trend has continued in a way that keeps you somewhat maybe cautiously optimistic from an industry standpoint?

Yes, we are encouraged by what we are seeing in that part of the business.

Obviously, different companies have different philosophies and challenges.

I would say the one thing that we didn't see as we went into last year, is the amount of actual new product launches that we typically expect to see.

A lot of our customers are going through restructuring's, and have focused on some level of reorganization.

We do see a pretty strong pipeline of new product activity among the consumer food customers that we have that does encourage us, as we go in the second half of the year.

Got it.

Okay.

That's helpful.

And then, I know that from time to time, not just in your business, but in others there can be these quarter to quarter shifts in kind of inventory management, particularly key customers in the ends of key retailer's fiscal years, and we have seen that from time to time.

Is -- I guess, I'm trying to get a sense of how your capabilities or systems allows you to have some visibility to what your inventories are at the customer level?

Has your ability or capabilities there, changed at all in the last couple of years to where you have a better sense of how that tracks?

Because it still seems like a lot of companies in this space get blindsided every so often by some of these shifts.

And admittedly, that's maybe just the reality of the customer shifting things kind of quickly in a given period that you can't read.

But I am trying to get a sense of what your level of visibility is to that?

Yes, we have a level of visibility to about half our US volume.

Because of things like vendor managed inventory, or data that we can purchase to evaluate consumption versus their factory sales.

So we have that level of visibility.

It doesn't -- even in the case of our VMI customers though, it doesn't change the fact that if they decide on a short-term that they are going to aggressively manage inventory that won't happen.

I would say we did miss this a bit, in terms of laying out what we thought was going to happen relative to prior periods, because of the amount of pricing that we have taken.

I would say this probably a little bit of an underlying caution by a number of our customers, because of some softness in December and January of last year, and we are seeing the volumes pick up.

So we are encouraged by that.

But I think in terms of their inventory management, there was a level of caution around what they thought they needed to bring in, in that period.

Got it.

And I think Gordon said that, you felt like -- separate from the supply chain issues from Sandy, that these issues as well, on the inventory side seemed like they are pretty well behind you?

Or does some of that bleed into the first quarter?

I wasn't clear that piece.

No.

We think it's -- just based on what we have seen so far, since we closed the year, we are cautiously optimistic and encouraged by what we are seeing.

Thanks very much everybody.

In the US business.

Right.

Thank you.

(Operator Instructions)

Eric Katzman, Deutsche Bank.

Hi, good morning, everybody.

Hi, good morning, Eric.

Still have a couple of questions.

I guess, first, Gordon, a number of companies have changed their pension accounting, and have offset having to take a pension expense hit.

Obviously, yours is pretty significant.

Did you look into that?

And why didn't you use this mark-to-market methodology, or maybe Hershey's IFRS approach to offset some of this $22 million in expense?

Our philosophy, Eric, has been to disclose the amount.

The underlying economics whether -- based on whatever accounting you are using, that doesn't really change.

So from our standpoint, we felt that -- certainly it's important for the investment community to know what the amount is, and for you to evaluate the impact to us.

We have given you the cash impact associated with some of the funding, as well.

But we do look at those things.

However, we finally landed that the best way to disclose this was purely to give you the benefit was the impact.

And as Alan said, we are challenged as a management team to overcome this and move on.

Okay.

And then, I guess on slide 15, maybe you answered this question -- but you Alan, you talked about retail price points.

Maybe you could expand on that a little bit?

I don't recall for a for longtime you talking about retail price points.

I assume you mean sharpening those to drive consumption higher?

Because you weren't talking about higher pricing in the business.

So what --?

No.

We are -- there is a couple of initiatives.

One is making sure we have got the right prices on items that are price sensitive.

So things like dry seasoning mixes, and pepper and vanilla and that sort of thing.

And so, we have got some initiative on that.

We are not talking about higher prices.

We are talking generally about how we apply our promotion funds to make sure we are hitting the items that are really volume -- that are really price sensitive.

Okay.

And then last question, back to Gordon.

You -- right, the pension expense is non-cash, although you are making a contribution.

I guess you have your tax rate going up, and I am not really sure what that means for actual cash taxes paid.

But I guess my point is, if EBIT is up 6% to 8%, and excluding pension expense it is up close to 10%.

And then you have also got the JV income up 10%, is your free cash flow in fiscal '13 up double-digit, especially if inflation and working capital aren't much of a challenge?

We haven't a specific number out there, Eric, but I don't disagree with your math.

And that certainly could be an outcome as we progress through the year.

Yes, we do expect a year of strong cash flow.

Yes.

And built into that assumption is that commodity costs are fairly moderate.

Yes.

Okay.

All right.

Thank you.

Yes.

Thanks, Eric.

Anne Gurkin, Davenport & Company.

Good morning.

Good morning, Ann.

Good morning, I have two questions.

One, you commented about the outlook for the industrial business in the first quarter.

But can I get some more detail on your outlook for the overall QSR segment of your business for the year, and as the year progresses, the outlook for that QSR segment?

We think it's going to be fairly challenged.

We have some positives in certain markets.

And then, as we get into the back half of the year, some easier comparisons.

But we do think through the year, that -- and I'm following our customers' releases as closely -- probably closer than you are, because they really impact us.

But I would say that we think that it is going to be fairly challenged.

Great.

And Australia, can you comment on the environment, and how you are approaching for consolidated retailer environments, and your strategy to address the changing marketplace?

Yes.

Australia has been a tough market for McCormick.

As you well know, we are not the brand leader there.

And so what we have done, is we have kind of used it as a laboratory, in terms of how a second-place supplier challenges a market leader.

And so, we have been pretty innovative with new products.

We have been very targeted on the kind of things that we are doing outside our core spice and seasoning line, and we have seen some pretty positive results over the last two years as we have done that.

But, it is a challenging market.

Great.

That helps.

Thank you very much.

Thanks, Ann.

Erin Lash, MorningStar.

Hi, thanks for taking my question.

Good morning.

Good morning.

I apologize if I missed this, but I was curious.

The fourth quarter tends to be a quarter where there is more of a -- branded sales are more emphasized just because of the holiday cooking season and that sort of thing.

So I was wondering if you could comment between the mix of branded versus private label sales, if there was an increase in private label sales relative to branded in the fourth quarter?

I don't have the actual comparative data between branded and private label in the fourth quarter.

But typically, we do see an increase in branded shares for a couple of reasons.

One, is consumers are less willing to take chances on their meals.

The second is, private label is pretty prevalent in really popular items.

But a lot of the items purchased at the holiday like nutmeg, pumpkin pie spice, and apple pie spice and things like that, aren't necessarily replicated in private label, because they are a one-time purchase.

So I am afraid I don't have the data, specific to private label in this period on these items in front of me.

But, typically what we have seen is our branded shares are at the highest and fourth quarter of the year.

I would expect they still are.

Great.

That's helpful, thank you.

And just one other question.

When -- was the retailer inventory adjustments that were occurring in the quarter that you discussed, was that concentrated in any one channel?

Or was that across all channels?

It was pretty concentrated with a limited number of customers.

Okay.

Got it.

Thank you very much.

I appreciate it.

Leigh Ferst, Wellington Shields & Company.

Good morning.

I was wondering if you could comment on your digital marketing spending of 12%?

Give us some background on how you spent that in different categories and geographies, and how you are evaluating the impact of that?

Sure.

Our focus is in a couple of areas.

The main spending is in our larger consumer markets, like the US and EMEA.

And we are doing a number of things, everything from digital recipes to promotions that we work with on search, to really target where consumers are at on their mobile phones.

So as they are searching for things like chicken, we are working with retailers on driving specific purchases of specific McCormick items to a retailer.

And we are seeing some really great results with that.

As we continue to expand, we have some technologies which allow for individual flavor selection.

And we have been talking to a number of retailers around tying that to their programs.

But we are very encouraged by what we are seeing, in terms of returns, how consumers are responding.

We -- the digital consumer is a very engaged consumer.

And so, it's one that we increasingly are reaching out to.

Thank you.

And on your CCI, is there any evolution or change in the focus of the spending this year, on the savings this year?

I wouldn't say specifically.

I think it has been a pretty balanced approach to everything from SGA, to productivity and our manufacturing plants, as well as looking at savings within our procurement channels.

So, it's pretty balanced.

So I don't expect that's going to change.

We are not going to be heavier this year in one, versus the other -- different than we have been in the past.

Thank you.

Thank you.

Thank you.

At this time, I would like to turn the floor back over to management for any concluding remarks.

Thanks for your questions, and for participating in the call today.

We do believe interest in flavor continues to grow, and McCormick is well-positioned to meet this through our growth initiatives, our increased global presence and our passion for flavor.

While today's environment remains challenging, we are staying close to the market.

We are going to be agile, and we are going to adapt our business to drive sales and profit.

McCormick's leaders, and all its employees are committed to building shareholder value.

So thank you very much.

Thanks, Alan.

I would like to add my thank you to those that participated on today's call.

Through January 31, you may access a telephone replay of the call by dialing 877-660-6853.

The conference ID number is 403908.

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

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

This concludes this morning's conference.