McCormick & Company Inc (MKC) 2013 Q2 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 second-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.

Alan is going to begin with comments on second quarter results and a business update followed by Gordon with a more detailed review of our second-quarter financial performance and McCormick's latest financial outlook 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 two, 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.

During the second quarter of 2013, McCormick made great progress with initiatives to drive growth through product innovation, brand marketing support and acquisitions.

Our investments are paying off and we look forward to sharing with you this morning some areas of success along with our plans for the second half.

Let's start with a review of the latest financial performance.

Our second-quarter financial results were in line with the outlook for the quarter that we shared with you back in early April.

For our consumer business, we achieved strong sales growth with a 5% increase in local currency.

This increase was based largely on higher volume and product mix in both developed and emerging markets.

Sales performance in the US, UK, France, China and Russia were particularly strong driven by innovation, marketing support for our leading brands, and distribution gains.

Industrial business sales were about even with the year ago period.

As anticipated, we had lower demand from quick service restaurant customers in several geographic areas.

The most notable was China, where certain quick service restaurants have reported high double-digit declines in same-store sales.

These declines are a result of consumers in China who are avoiding poultry in their diet due to bird flu concerns.

We remain cautious and expect this pressure to extend into the third quarter but improve in the fourth quarter.

For the total Company, operating income declined $5 million to $116 million.

This included $4 million of transaction costs to complete the acquisition of WAPC and approximately $5 million of increased retirement benefit costs which is a headwind for us throughout fiscal year 2013.

Consistent with our past practice, we are including the WAPC transaction costs in our reported results rather than treat them as a non-GAAP item.

Our rationale for this approach is that acquisitions are an integral part of our growth strategy.

At the earnings per share line when the factor is discussed, we had expected earnings per share in the second quarter to be comparable to the year-ago result of $0.60.

This outlook did not include any impact for WAPC.

Our actual result was $0.59 per share, which included $0.02 of cost for the completion of WAPC.

So excluding this $0.02 impact for the WAPC transaction, EPS came in just above the outlook that we provided in early April.

Looking back on our second-quarter financial results, we were pleased with the sales growth of our consumer business and are working to manage through a period of lower demand for certain industrial business products.

As Gordon will describe in more detail, we are raising our fiscal year 2013 sales projection to reflect the addition of WAPC and adjusting our profit outlook for the impact of the WAPC transaction costs and our expectation that pressure on our industrial business will extend through the third quarter.

Next, I want to discuss our progress with several key growth initiatives.

Let's begin with our acquisition of WAPC completed just a few weeks ago.

As first announced last August, this business has a leading position in bouillon in Central China, a modern production facility and sales of approximately $122 million which we expect to grow at a double-digit rate.

On a full-year basis, we expect sales of WAPC to bring our total business in China to approximately 7% of total Company sales.

Our team was extremely well prepared for the integration of this business and in the first week had added the McCormick brand to the product package, provided new uniforms with the McCormick logo, changed the signage on the building and staged a welcome ceremony for WAPC employees as seen on slide five.

We are off to a great start and we are confident that WAPC will be an excellent addition to our portfolio of leading brands.

In 2013, we expect this acquisition to increase our sales growth by 1 percentage point and for profit on these sales to be neutral after finance and integration costs.

However, we incurred $4 million of transaction cost to complete this acquisition most of which were recorded in the second quarter and as a result this acquisition will lower 2013 EPS by $0.02.

In 2014, we expect a further sales benefit from the incremental impact of WAPC in the first half and expect this business to be accretive in our operating income.

While acquisitions are an important growth initiative, we are growing sales of our core products in both developed and emerging markets through product innovation and brand marketing support.

In local currency, we achieved a 6% increase in consumer business sales in the Americas this quarter.

Our execution at retail for the Easter holiday was strong and supported by a significant baking and brunch campaign that included print, coupons and digital media.

Easter was followed by the expansion of our griller hood platform.

Compared to the first half 2012, we increased the number of units shipped on grilling displays by 21% and this year our displays feature not only Grill Mate products including our new steak sauce and burger seasonings, but Lowry's leading marinades, McCormick brand pepper, garlic and onion and in the Southeast, Zatarain's seafood items.

We expect similar strong execution for the July 4 and Labor Day holidays and in 2013, our grilling program includes dedicated Hispanic support.

In Canada, consumers reach for our La Grille brand products during grilling season and for those cooking indoors, we've introduced a line of Club House brand Bag 'n Season items as seen on slide six.

Across the broad line of spices and seasonings, we are working with US retail customers to optimize sales and profit with category management tools.

We've had success with two major retailers eliminating opening price point products in order to bring increased focus to higher profit McCormick brands and their private label items.

We are connecting directly with consumers through digital marketing and social media.

In the US, we increased site recipe searches for our gourmet dinner party program 32%, increased Facebook fans by 25%, and achieved a 47% increase in unique visitors to our McCormick.com website.

As you can see from the graph on slide seven, digital marketing achieves one of our highest return on investment and across all types of spending shown here, McCormick in the US exceed those of the food industry.

Our team in the Europe, Middle East and Africa region, EMEA, has great lineup of new products in 2013.

I shared with you earlier this year some of the new Vahine dessert items in France that we launched.

We are also entering the French and Polish markets with a range of recipe mixes.

In France, we've already gained 6% share of the category with these items.

In this country, we've introduced our first premium gourmet line.

Additional renovation across Europe includes our 2 for 1 recipe mix that offers complementary items in the same pouch such as Mediterranean chicken pasta plus cheesy crumb topping.

In the next few months, consumers in the UK will see new flavor shots at retail, a combination of seasonings and oil that add a new measure of convenience.

We are already gaining customer acceptance and plan to launch an advertising campaign in early 2014.

In France, we've developed and already installed in 500 stores a new merchandising system that increases our shelf space by 11% and provides improved product visibility.

Largely through new distribution, we've increased sales of Kamis brands in Russia by 25% year to date in 2013.

As indicated in our January call, we are doubling our plant size in Poland in part to accommodate this rapid growth in Russia as well as anticipated growth in Poland and other Eastern European markets.

Moving to the Asia-Pacific region, one of our strongest category shares is that of the Aeroplane gelatin brand in Australia due in part to new products including a non-refrigerated ready-to-eat gelatin, our share has reached a record 85% and new Sweet Treats leverages the Aeroplane brand beyond gelatin.

In China, we launched family classics and world flavor recipe mixes in the past year and have already gained a 4 percentage point category share with these items.

In July, we will introduce a 12 spice seasoning blend, a staple of Chinese cooking.

We currently have the number one brand of ketchup in China and are growing share with the introduction of the squeezable package.

Our 2013 plant expansion in Guangzhou included the installation of this new production line.

And in India, our initial test market for Kohinoor brand 2 Minute Meals and Rice 'n Spice have gone well and we are beginning to expand to additional cities beginning in August.

Across all of our markets, we have an impressive level of new product activity and are achieving good returns on our brand marketing support.

We have had great success this year with our CCI program and now expect to achieve at least $50 million of cost savings in 2013, up from our initial goal of at least $45 million.

CCI is our fuel for growth providing the funds for investments in areas like product development and brand marketing.

To maintain our momentum for consumer business sales, we've increased our plans for incremental marketing for our brands in the second half of 2013.

This will take our projected increase in brand marketing support to approximately $15 million for this fiscal year.

We are investing more in our brands to build awareness and trial of our new products, continue the momentum in digital marketing, and strengthen our in-store presence across channels.

This is a good investment for McCormick at a time when consumers in many markets are preparing meals at home.

As consumers explore new flavors but also seek convenience and affordability, we want our brands top of mind and prominently displayed at retail.

Let's turn next to our industrial business.

Those of you who have followed us for the past few quarters know that we are experiencing lower demand from quick service restaurants.

Although we've maintained growth with quick service restaurants in our EMEA region, customer demand has been challenging in the Americas and Asia Pacific regions.

In the Americas, certain quick service restaurants emphasize menu items in the first half that don't use McCormick flavors such as coffee or other breakfast items.

We are encouraged with some recent new product wins, convenience menu items that are being heavily promoted by our large customers.

In the fourth quarter, we anticipate a return to growth for this part of our industrial business.

In the Asia-Pacific region, we reported a slight increase in volume in product mix this quarter.

This was the net impact of higher sales to quick service restaurants in Australia offset in part by reduced demand from these customers in China where consumer concerns regarding bird flu has lowered restaurant traffic.

Based on our customer's outlook, we expect the situation in China to improve in the fourth quarter of 2013.

We are also encouraged by progress in India with a significant new product win with a large restaurant chain.

Across all regions, customer intimacy remains a priority with quick service restaurant customers and we are encouraged by recent awards in locations around the world that recognize McCormick's innovation, quality and service.

Beyond quick service restaurants and the industrial business, demand from food manufacturers has been particularly strong for our snack seasonings.

Food manufacturers continue to have an interest in products that deliver great flavor as well as health and wellness whether it's reduced sodium, lower fat, simple ingredients or other attributes.

Our foundation in natural herbs and spices has us well positioned to meet this demand.

While sales of branded food service products had a slow start to the year, we saw improvement in the second quarter.

In the Americas, we've expanded our product offerings which now include new Zatarain's brown rice with reduced sodium.

This product line meets nutritional standards in schools and other institutions.

Our digital market is expanding as well allowing us to communicate directly with our end-users, the chefs.

For the total industrial business, we continue to focus on strategic customers and through innovation are working to shift our product portfolio for toward more value-added, higher-margin products.

We have a solid pipeline of new products and believe that we will have stronger growth for this business in the fourth quarter of 2013 and into 2014.

I want to comment next on the appointment of Lawrence Kurzius to President, Global Consumer and Chief Administrative Officer.

Lawrence's previous role was President of McCormick International.

In April, I discussed the retirement of Mark Timie, President of Consumer Foods America and Chief Administrative Officer later this month.

We will miss Mark and thank him for his 17 years of leadership and contribution to McCormick success.

At that time, we announced that Chuck Langmead had been promoted to President, Global Industrial.

This latest announcement that Lawrence will lead our global consumer business and Chuck our global industrial business aligns us with our increasingly global customers.

We will more effectively plan and execute behind our growth initiative and optimize the deployment of our capital and human resources.

Each of these executives will be supported by their global councils and their regionally based operating units.

This organizational structure is another step in our global expansion as a leader in flavor and I have great confidence in the leadership that Lawrence and Chuck bring to these new roles.

Before turning it over to Gordon, I want to thank McCormick employees around the world for all of their dedicated efforts to drive success for their growth initiatives and staying agile in a still challenging environment.

Flavor remains a great business.

McCormick brings passion to flavor and consumer demand for flavor is growing.

On slide 13, you can see the latest 52-week increase in consumption data for spices, herbs and seasonings in our top markets.

This is our largest consumer business growth platform and it remains a very attractive category.

While our focus is on flavor, we have an expansive portfolio of products, geographies and customers that affords us the opportunity to flavor your meal no matter where or what you are enjoying.

This has us well-positioned for long-term profitable growth.

Gordon?

Thanks, Alan, and good morning, everyone.

As Alan has described, our second-quarter financial performance was in line with our expectations with strong consumer sales offset by a slight decrease in industrial sales results.

Let's take a closer look at sales and operating income for each segment and start with slide 15 for the consumer business.

We grew consumer business sales 5% in local currency, a result driven by volume and product mix and to a lesser extent by pricing actions.

In the Americas region, we had a particularly strong sales growth of 6% in local currency with volume and product mix driving most of the increase.

Sequentially, this followed a similar result in the first quarter of 2013.

Unit growth was strong for both of our core growth platforms in branded spices, herbs and seasonings and in recipe mixes.

We also had good results with Simply Asia this quarter which is one of our regional leaders.

We expect this strong rate of growth for our Americas consumer business to continue through the second half with the support of incremental brand marketing and our new product activity.

In addition, we expect a favorable comparison to the fourth quarter of 2012 when sales for this part of our business were unfavorably impacted by the timing of retailer purchases as well as Hurricane Sandy.

In Europe, the Middle East and Africa, EMEA, we grew consumer sales 3% in local currency with similar contributions from pricing actions and from volume and product mix.

Innovation and incremental brand marketing drove sales in both France and the UK.

While still a small percentage of total sales in Russia, we achieved a 35% sales increase this quarter largely through distribution gains.

These increases were partially offset by a modest sales decline in several smaller markets.

Consumer business sales in the Asia-Pacific region rose 4% in local currency.

In the second quarter, pricing actions added 10% while volume and product mix lowered sales 6%.

China was the largest contributor to higher sales this quarter with 11% growth in local currency driven in part by revitalized packaging and expanded advertising.

Australia also grew sales largely through new product innovation.

Sales in India declined 2% which was the net effect of significant pricing actions and lower volume and product mix.

As discussed in our last earnings call, we are passing through a steep increase in the cost of basmati rice in 2013 which had an adverse impact on consumer demand this quarter.

Operating income for the consumer business was $88 million compared to $89 million in the second quarter of 2012.

During this period, the favorable impact of higher sales and CCI cost savings was more than offset by $4 million of transaction costs to complete the acquisition of WAPC as well as higher retirement benefit costs, a $3 million increase in brand marketing support and material cost inflation.

While year to date our marketing spending is about even with the first half of 2012, keep in mind that this spending was up $9 million in the first half of 2012 from the first half of 2011.

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

As seen on slide 20, second-quarter sales rose slightly in local currency with the benefit of pricing actions offset in part by a slight reduction in volume and product mix.

In the Americas, on slide 21, industrial sales declined 1% as a result of lower volume and product mix.

In this region, sales of our branded products to food service distributors improved slightly this quarter and we had solid sales growth with food manufacturers particularly with snack seasonings in both the US and Mexico.

However, as described by Alan, we experienced lower demand for our customized products for quick service restaurant customers.

In EMEA, our industrial business grew sales 4% in local currency with similar contributions from (technical difficulty) pricing actions and volume and product mix.

Higher sales of branded food service items in the UK led the increase in volume and product mix this quarter.

In the second quarter of 2013, sales in the Asia-Pacific region grew 2%.

In Australia, we achieved a double-digit increase in sales with strong demand from quick service restaurants and the supply of new limited time offer menu items.

This growth was offset in part by lower sales in China where consumer traffic in quick service restaurants declined as a result of consumer concerns about bird flu.

Operating income for the industrial business was $28 million in the second quarter of 2013 compared to $33 million in the year-ago period.

Lower sales, an unfavorable mix of business, higher retirement benefit costs, and material cost inflation were offset in part by our pricing actions and CCI cost savings.

We expect operating income for this business to remain under pressure in the third quarter with a recovery expected in the fourth quarter.

For the total Company, second-quarter operating income was $116 million compared to $121 million in the year-ago period.

The favorable impact of higher sales and cost savings from our CCI program were more than offset by an increase of approximately $5 million in retirement benefit expense, $4 million of WAPC transaction costs, $3 million of incremental brand marketing support, and higher material costs.

In addition to an impact on operating income, higher material costs and an unfavorable industrial business mix affected gross profit margin.

Gross profit margin of 39.3% was down 20 basis points from the second quarter of 2012 although this was an improvement from a 50 basis point decrease in the first quarter and we expect further improvement in the fourth quarter of 2013.

Moving below operating income, our tax rate for the second quarter was 29.6% close to our guidance for 2013 and about 1 percentage point above a 28.7% rate in the year-ago period.

Looking ahead to the third and fourth quarters, we are expecting a large impact from the year-to-year variance in tax rate.

As a reminder, we had a favorable tax impact from cash repatriation in 2012 that led to a 25% tax rate in both the third and fourth quarters of 2012.

Income from unconsolidated operations continued at a strong pace in the second quarter of 2013 rising 51% to $5.9 million.

Our joint venture in Mexico contributed to this profit result with a 16% sales increase and we also had improved performance with our Eastern joint venture in India.

At the earnings per share line, we had expected second-quarter EPS to be comparable to $0.60 that we reported in the second quarter of 2012.

This outlook was based on the pacing of material cost inflation, expected weakness in industrial results, incremental brand marketing, and higher retirement benefit expenses.

Our actual result of $0.59 per share came in close to this projection.

This EPS of $0.59 included a $0.02 impact from the WAPC transaction cost which was not considered in our outlook.

As Alan remarked, we are not planning on reporting and adjusted EPS that excludes these costs since acquisitions are a key element of our growth strategy.

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

As noted in our May 31 WAPC announcement, the purchase price for this acquisition was approximately $147 million.

We paid $117 million in the second quarter and the remainder will be paid based on contractual events.

We are financing this transaction through a combination of cash and short-term debt.

As a result of this acquisition, our debt to EBITDA ratio at quarter end was above our target level of 1.5 to 1.7 but we expect to return to this range by year-end in the absence of further acquisitions.

In September 2013, we have $250 million of debt maturing which we intend to refinance with fixed-rate notes.

Year-to-date cash flow from operations was $133 million compared to $144 million in the first half of 2012 with the decrease mainly due to the timing of tax payments.

During the second quarter, we used $32 million of cash to repurchase 500,000 shares.

At quarter end, we had $45 million still available on our $400 million repurchase authorization and in April, our Board approved a new $400 million repurchase authorization.

Before turning to our outlook, I wanted to describe a lump sum payout program.

Earlier this week, a lump sum payout was offered to approximately 3,300 former US employees.

This action follows the closure of our UK pension plan, our US pension plan and most recently our Canadian pension plan.

It is another step we have taken to manage the size and potential volatility of our retirement benefit plans.

While there is no immediate cost savings from this section, we believe it is an important action for long-term management of our retirement plan programs.

As described in our press release, should enough eligible participants accept this offer, we will recognize a one-time non-cash charge in the fourth quarter.

We estimate this amount to be in a range of $25 million to $45 million.

As a final topic, I will review our latest 2013 financial outlook and then we will take your questions.

As indicated in this morning's press release, our outlook does not include any potential impact of a lump sum payout settlement charge.

Should we record a charge associated with this program, we intend to provide you with adjusted financial results that exclude the charge.

Our 2013 financial outlook has been revised to reflect the addition of WAPC and our expectation that the pressure on our industrial business will extend through the third quarter.

As shown on slide 31, we have increased our projected sales growth rate by 1 percentage point to 4% to 6% for the addition of WAPC.

Our outlook for our operating income growth has been lowered to 5% to 7% to reflect the $4 million of WAPC transaction costs and our expectation of lower profit from the industrial business in the third quarter.

Other updates include an increase in expected CCI cost savings to at least $50 million and an increase in planned incremental brand marketing support to approximately $15 million.

Keep in mind that retirement benefit expense remains a $22 million headwind to operating income in 2013.

Based on the latest operating income outlook, we now expect EPS of $3.13 to $3.19.

As you can see on slide 32, excluding the impact of increases in retirement plan expense and the year-on-your tax rate, our EPS range continues to have an underlying EPS growth rate that is ahead of our long-term objective of 9% to 11%.

In the third quarter, we are projecting 2013 EPS to be comparable to the $0.78 that we reported in the third quarter of 2012.

Sales growth driven in part by incremental brand marketing and CCI cost savings are expected to be largely offset by an impact of about $0.03 from increased retirement benefit costs and a $0.04 impact from a higher tax rate.

To wrap up our guidance, we expect our profit results and working capital management to deliver another year of strong cash flow.

Now let's turn your (technical difficulty).

Operator, we are ready for questions.

(Operator Instructions).

Alexia Howard, Sanford Bernstein.

Good morning, everyone.

Hi, I am sure others will ask about the quick service situation but I'd like to ask about India.

You built up your sales in China through acquisitions and organic growth pretty rapidly over the last few years.

So I'd like to hear a little bit more about the strategy and the priority level for India.

Could you give us a little bit of information about what percentage of sales are currently in India, how important this new restaurant chain customer might be and might there be other opportunities like that?

Might we see further acquisitions in India?

And just a little sense of the priority level as of India versus China at this point?

Thank you.

Sure, India is much more of a developing market for us than China is.

We have been in China for more than 20 years and we are in China with both our consumer and our industrial business and so we've had time to build that out.

India right now we have mainly a consumer business along with a couple joint ventures that are more ingredient based.

Our strategy is really similar because the industrial business helps provide the scale for us to continue to grow and expand our consumer business.

Although, in this case, we have an established a consumer business that will allow us the scale to start to build out an industrial business.

India is still a pretty small percentage of sales, less than 5% and we are very bullish on the market although we recognize that it's going to be a long run, long-term growth strategy for us.

Remember, as we stated when we made the Kohinoor acquisition, our strategy there is to evolve to a much more value-added portfolio and we've started to do that by introducing the Rice 'n Spice mixes and some of the 2 Minute Meals.

So what we want to do is put our value-added products through the distribution channel that we acquired when we bought Kohinoor.

Great, thank you very much for the color.

I will pass it on.

Thilo Wrede, Jefferies & Company.

Good morning, everybody.

I would've thought that the organic growth rate in the consumer business in EMEA might accelerate now that you've integrated Kamis and you can roll out the product into new regions.

And I think you alluded to it in the slides that Russia is actually a great growth driver for you right now.

Yet the organic growth rate doesn't seem to budge too much.

Was I too optimistic or are they are really too many offsetting factors?

What's the outlook there that this can get better?

We have a multitude of markets there and our business has performed pretty well.

It's off of very strong growth in the quarter last year and so we expect that we will continue to grow.

We are pretty bullish on our business in Poland.

Our business in Russia is continuing to expand.

Our business in the UK and France are a little more mature but we are still seeing volume growth in both those markets.

The organic growth rate of around 3%, we should expect that for the rest of the year as well?

Obviously it's an environment that continues to feel economic pressure so it's an area that we're actually very pleased with the performance in certain of those markets given the tough conditions that they are operating in where you see volume declines in other categories and in fact our growth is outpacing those other categories.

So we are looking for positive volume growth because they continue to execute well.

We're leaning into those businesses in the back half of the year with new products and part of our advertising increase is targeting Europe.

So we are looking for strong growth but we haven't been so far as to give a specific number but we are still expecting good growth out of that region.

Okay.

Thank you.

And then just one housekeeping question.

Does the new guidance include any kind of currency headwind assumptions?

It reflects whatever currency rates are — we are at right now.

Then let me ask differently.

Is the guidance reduction driven at least partially by currency as well?

No, it's primarily the two items we mentioned which is the impact of the transaction costs from Wuhan and the delayed recovery in the industrial side of our business.

All right, I appreciate it.

Thank you.

Ken Goldman, JPMorgan.

Hi, good morning, everyone.

Forgive me if you mentioned this, but other than rice, could you update us on some of your more important inputs and maybe what you are seeing for the next couple quarters in terms of total COGS inflation?

Yes, Ken, this is Gordon.

We don't see any news to the update that we provided at the beginning in the year and that included a 3% adverse impact or increase on material costs during this year with a lot of that occurring in the front part of the year and then moderating as we progressed through the year.

That continues to be the same outlook.

That's baked into the guidance we just provided you and that's also one of the factors we are including as we think about our gross profit margins and how they are improving quarter to quarter and stabilizing and recovering as we progress through the year.

And then second question, we are seeing — we've heard companies like Kroger and Safeway over the years talk about growing more in terms of natural and organic products but really they seem to be putting their money where their mouth is for the first time and accelerating the growth of shelf space for those items right around now, at least especially Kroger.

So first, I'm curious if you are seeing that as well?

And second, is there an opportunity for McCormick to benefit from that?

Not that people necessarily in spices are looking for more natural and organic than they are in other shelf stable categories but I'm just curious how you are thinking about kind of growing where the growth is so to speak in packaged food?

Sure.

And we have had organic spice items for more than 12 years and have continued to update that in spices, it hasn't been as big a factor.

Consumers already assume and rightly so that spices are naturally grown, that they are relatively safe and have some positive properties.

So there is certainly a segment of the market that likes it but it hasn't taken the kind of rapid growth that other packaged food categories have had.

But certainly we respond pretty quickly to trends and as we see those develop, our teams are pretty agile to make sure that we are hitting whatever the consumer is looking for.

Great, thank you.

David Driscoll, Citigroup.

Great, thank you and good morning, everyone.

We get the KNAPP-TRACK data and it seems to reflect pretty significant improvements in same-store trends, same-store sales trends for the restaurant US sector, the US restaurant sector.

So the question is kind of why doesn't this translate into a better expectation for industrial volume trends for your US quick serve business?

Kind of why not a better outlook starting in the third quarter?

It depends on what they are selling and what they are driving growth in and if there is a large amount of new product innovation, typically, that serves our business pretty well.

If they are focusing on things like value menus, it will have some sales but it's not the high velocity, higher-margin products that really drive our business.

And if they are focused on out of main time type products like breakfast, we have less participation.

So there are certainly trends there that we see as positive; we just don't see it recovering as much in our third quarter.

So if I maybe restate what you are saying is that while maybe the macro for QSR is good, it just didn't turn out to be good in the places that you need it to be good in.

That's correct.

That's a pretty good way to state it.

And then maybe just one follow-on on this whole point.

Because the idea was that maybe if you see a slowdown in your QSR, maybe there would be a commensurate pick up in your much higher profit margin business and consumer such that you would see kind of neutral changes to your guidance.

Obviously, that's not what happened.

Maybe can you explain that a little bit?

When you gave this new guidance, is there any pickup within the consumer business because you guys just give the net numbers, you give the amalgamated numbers?

When you look at the mix between consumer and industrial, do you have a better profit outlook within consumer itself?

David, this is Gordon.

I would say it's in line with our original expectations.

I'd say that given the opportunities that we see behind the growth in those businesses, you have seen us increase some of our outlook as it relates to our A&P spend and that's given the opportunities we see on a global scale behind innovation and brand marketing support.

So whatever improvement we are seeing through CCI or the incremental volume lift we're saying in consumer, I'd say we are leaning into with some of the increase in the marketing spend.

So net net, we are about where we thought we would be on the consumer side of things.

So hence, we are adjusting down to reflect, as I said earlier, primarily the Wuhan and that delayed recovery in industrial.

Thank you for that.

I will pass along, thank you.

Akshay Jagdale, KeyBank.

Good morning.

First is just overall long-term question.

You have a lot of puts and takes which is also unusual for McCormick.

Do you really think judging your Company's performance on underlying operating income growth is the right way to look at it?

A lot of good companies, and I consider your company to be a very good company, tend to offset headwinds whether they are pension related or QSR or things like that.

Can you just help me understand from your perspective if you're really happy with sort of double-digit underlying earnings — operating income growth excluding all these puts and takes or whether you are somewhat disappointed that there are all these headwinds in your business that you weren't able to manage I guess over the last few months or a year?

We have got pieces of our business that we are pretty happy with the underlying performance and as we stated, our consumer business has pretty good momentum.

Our industrial business is a little more challenged and we'd certainly like to be a little better there but the underlying profit growth is pretty good.

Obviously we'd like to be offsetting these things but we think about our business for the long term.

We are not necessarily managing year-to-year or quarter-to-quarter and so part of the reason that we are continuing to make investments in our marketing spending is to make sure we maintain that healthy business.

We view the challenges in industrial to be temporary and so what we don't want to do is overreact to something that we think is going to turn around.

So that's philosophically how we think about it and what we are trying to do with the updated guidance is just be transparent with the best book that we have at this point.

Okay great.

And just on the India business, we do cover a company that competes directly with you there and it was interesting that your view of the market is that I guess supply or the crop is short which is why prices are up.

And interestingly your demand seems to be affected negatively by higher prices which is not what we are hearing from the other company that we cover.

They are saying the crop is flat, prices are up slightly, but because they play across the value and the premium segment in basmati rice, their demand continues to be up despite higher prices to the consumer.

So I'm just trying to bridge the gap there, if you could provide any perspective on that, that would be helpful.

I can't help you much with that particular competitor.

I think they are in the mode of building their distribution inside the country and are more focused as an export company.

But we've shared the dynamics that are impacting our business.

Again, just to reiterate, our objective in that business is to drive value-added products through that supply chain.

Certainly basmati rice is a big part of the scale there and important to us but our objective long-term is to really move up the value chain.

Okay, great.

I'll pass it on.

Thank you.

Ann Gurkin, Davenport Company.

Good morning.

I first wanted to start with your comment in your release about distribution gains in the consumer business.

Can you give me some examples?

Predominantly Russia is what we were talking about with that.

Okay.

And then are we still expecting to hear news about a new flavor platform launch at the end of this year, calendar 2013?

We certainly expect so.

Okay, great.

And then finally, I was just curious about competitive landscape for snack flavoring offerings in the industrial business.

Are you seeing the competition increase, more people trying to get into that space?

Can you just comment on that?

Well, certainly, a lot of consumer companies are focused pretty heavily on driving snacks and as you probably know, we focus on a couple of strategic customers.

We are continuing to grow and win business with our strategic customers and we don't necessarily participate heavily outside those strategic customers.

So certainly I don't know that the competitive landscape has changed.

There is certainly more focus by a lot of companies on driving their snack business.

Great, thank you very much.

Eric Katzman, Deutsche Bank.

Good morning, everybody.

A couple of questions, I got on a little late, so I apologize.

But Gordon, was the $0.02 hit from Wuhan, is that all you expect from that transaction this year?

From a transaction cost standpoint, that is correct.

There will be integration costs in the remainder of the year that offsets the incremental profitability but from a transaction cost, that would be it.

And are those integration costs like inventory hits or —?

It's really a number of things as we incorporate them into all of our McCormick systems.

So it's everything from incorporating them into our IP systems, to QA systems, to financial systems.

It's broad-based as we go in and start to integrate them more closely to our operations.

US resources on the ground to help with the integration, those kinds of things.

Okay.

Then switching over to industrial, I guess there have been two problems with McCormick from Wall Street's perspective.

One is we have no visibility on your raw material basket, which I think Ken asked about.

And then industrial, you don't really have at the end of the day a lot of control over the business and I recall there have been other times where you've said these new products are going to be introduced, these new products are coming from your industrial customers.

And they've either been delayed or canceled or what have you.

So why should we have confidence that the fiscal fourth quarter is going to rebound in industrial where again there have been times where that just hasn't been the case?

You are right, we don't necessarily control the timing of new product introductions but we can see through planning what our customers are expecting to do.

And based on the visibility that we have right now, we would expect a recovery.

Remember we had a fairly weak fourth quarter in 2012 so we do expect some recovery there.

Okay.

And then last question, I guess, Alan, just more broadly on the consumer side.

Again, maybe I missed it with your intro comments, but are you seeing the middle income consumer get a bit stronger?

It seems as if private label has been a bit weaker of late and so you have a pretty decent view into that given your private label operations.

Maybe you could just kind of touch on that.

What we are actually seeing, which is an interesting dynamic in the data, is some customers moving away from opening price point really deep discount products, at least in our category, and there's a bit of a trade up happening from that opening price point to private label and then up to brand.

So we are seeing a little bit of an interesting dynamic.

It has been led by a couple of more value retailers that have been able to trade up the consumer.

I can't speak as to how that's happening across other categories but we are certainly seeing the dynamic in our category.

Okay, I will pass it on.

Thanks.

Which by the way we see as positive.

Thank you.

Robert Moskow, Credit Suisse Group.

Hi, thank you.

I guess I continue to be impressed by the performance of the consumer division.

You have sales growing at a mid-single digit rate in consumer and a lot of other packaged food companies are struggling to do 1% to 2%.

Obviously, industrial is going the other way.

But when you look at how the business is performing, Alan, is this kind of pace of growth, do you think it's sustainable and do you have like a good pipeline all the way into 2014 so that when we get past the headwind this year from pension expense and maybe industrial kind of normalizes again, I know it's a long way to look out.

But do you look at 2014 as being another year where you can deliver that 9% to 11% EPS kind of algorithm?

We certainly expect — we expect that we are going to do that long-term.

It is early to be giving guidance for 2014 but we've got good momentum and our consumer businesses around the world.

We are executing pretty well with really focused and targeted programs around big events and pulling in all parts of our portfolio from Zatarain's to Lowry's to Simply Asia to our core stuff.

So we do feel pretty good about the momentum there.

And certainly we would expect that 2014 should see some relief from the pension expense.

Alan, a follow-up, like the back half for consumer, obviously, things have to get even better I guess in order for the guidance to be deliverable because it's double-digit operating income growth and I know there is some very easy comparisons in the back half coming.

But do you feel like that's true that consumer has to get even better in order to deliver the back half or do they just have to keep delivering the kind of results that they are delivering right now?

They have to keep on pace with where they are delivering now.

And remember, we did have a few one-time issues in the fourth quarter last year.

We don't expect those to repeat.

We are pretty focused on execution in the fourth quarter.

Okay.

So they just have to stay on plan.

They have to stay on plan.

Yes, thank you.

Tom Graves, S&P Capital.

Yes, thank you very much.

Couple of questions on China.

With the recent acquisition, it sounds to me like there are a couple of benefits you are looking for, not only the acquired business there, but the opportunity to increasingly leverage the distribution system with traditional McCormick products through the acquired distribution system.

Is that a fair assumption?

Absolutely.

The Wuhan business is stronger in the central parts of China.

Our core business has been stronger in the coastal region.

So what we plan to do is introduce more McCormick products through the central region but also take some of the Wuhan products into the coast.

Okay, thank you.

And also is it fair to assume that you are looking for this acquisition to be at least modestly accretive to fiscal 2014 earnings per share?

Yes.

All right, thank you very much.

Leigh Ferst, Wellington Shields.

Thank you, good morning.

I also had a question about Wuhan.

It has really high market share in the regions where it operates already.

Can you comment on what the potential is long-term for their market share?

Well, we expect that it will grow for a couple reasons.

One is, as we expanded into other regions, there is certainly an attractive market opportunity.

The products are core to how Chinese cook.

The second piece of it is we do expect, even though there's a lot of discussion around a little bit of the slowdown in the growth rates of China, there is still pretty robust growth.

So as the market grows, we will be able to take advantage of that but we do see expanding the distribution and taking advantage of that.

I guess the question would be how much competition do they have in other regions in which they don't operate already?

Oh, there is lots of competition in these products and they are the usual suspects that we compete with around the world.

So we feel pretty good about our prospects and being able to hold our own.

Okay.

And then moving to India, you had this steep price increase for the rice.

Is there — how much time will you give it to make sure that that was the right decision versus how do you weigh that versus the risk of losing market share?

Well, we are balancing market share and volume with cost and so we want to make sure that we maintain — we are not willing to necessarily lose a lot of market share so we will be pretty focused.

The price gets reset every year based on what happens in the markets and how we acquire positions.

And so I would expect it to get reset as we go into next year.

I don't have any outlook on what the crop looks like but as — the timing of that is towards the end of the year when we will be starting to make procurement decisions.

Okay, thank you.

And then closer to home, you sound pretty positive on grilling but some other companies have been concerned about the weather affecting the various businesses in their grilling.

Have you — can you comment on the weather?

How can you factor that into your outlook?

We do and certainly we would have hoped to have seen a better Memorial Day weekend from a weather standpoint.

It was rainy in the Northeast and I think what you are seeing is the impact of some of that but we had pretty good momentum already built off cycle.

So we believe based on growing household penetration and continuing to introduce new products in grilling, we see it as pretty robust.

Thank you.

Chris Growe, Stifel Financial.

Hi, good morning.

I just have two quick questions.

The first was, you had indicated that we'd see a little tick up in QSR sales in Q3.

So my question just is are you seeing just a push out of those product introductions or promotions you are expecting?

Is that what's negatively affecting the third quarter?

It's a little bit of that and it's just a little bit of the products that we are supplying not moving as quickly and recovering as fast as we would have expected.

So it's a little bit of product innovation and a little bit of where the customers are focused on driving growth.

Okay.

Another question I had was just in relation to — I think it was asked before by Rob on the fourth quarter.

I know that you have got an easy comp industrial division.

Is there anything unique to the consumer business in the fourth quarter that should make its profits be that much stronger?

Well, last year, we had some supply chain issues largely related to Hurricane Sandy so we feel like our business was somewhat suppressed and our sales were suppressed.

Our consumption actually was pretty good through the fourth quarter.

That's why we feel more confident that we should deliver it.

Okay, thanks for the time.

Thank you.

I will turn the floor back over for closing comments.

Thanks for your questions and for participating on today's call.

Through our growth initiatives, CCI programs, and the efforts of McCormick employees around the world, we are overcoming a number of headwinds in 2013 and delivering solid sales and profit growth.

Our passion for flavor, broad portfolio, and expanding global presence have us well-positioned to meet consumer demand for flavor in both developed and emerging markets.

Thanks, Alan.

I would like to add my thanks to those who participated on the call.

Through July 11, you can access a replay of the call by dialing 877-660-6853.

Conference ID number for that is 414507.

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

If anyone has additional questions regarding the information, I can be reached at 410-771-7244.

This concludes this morning's call.