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McCormick & Co. (MKC)

Q2 2012 Earnings Call

June 27, 2012 8:00 am ET


Joyce L. Brooks - Vice President of Investor Relations and Member of Investment Committee

Alan D. Wilson - Chairman, Chief Executive Officer and President

Gordon M. Stetz - Director and Chairman of Investment Committee


Kenneth Goldman - JP Morgan Chase & Co, Research Division

Thilo Wrede - Jefferies & Company, Inc., Research Division

Gretchen Guo

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Ann H. Gurkin - Davenport & Company, LLC, Research Division

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Mitchell B. Pinheiro - Janney Montgomery Scott LLC, Research Division

Andrew Lazar - Barclays Capital, Research Division


Joyce L. Brooks

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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 2012 outlook.

We have posted a set of slides to accompany today's call at our website, [Operator Instructions] As a reminder, the conference is being recorded.

With me on today's call are Al Wilson, Chairman, President and CEO; and Gordon Stetz, Executive Vice President and CFO. Mike Smith, formerly Vice President, Treasury and Investor Relations, who participated in our past 2 calls, recently accepted the role of CFO of our EMEA region and is in the process of relocating to U.K. Our remarks this morning will be brief so that we have time for your questions and can start to wrap up around 8:50 a.m., allowing time for those who plan to join the General Mills call at 9 a.m.

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

Alan D. Wilson

Thanks, Joyce. Good morning, everyone, and thanks for joining us. I'm pleased to report we achieved a fifth consecutive quarter of double-digit sales growth and delivered a solid profit performance for the second quarter of fiscal 2012. These results demonstrated our progress with a number of key growth initiatives: product innovation, brand marketing, customer intimacy and expanded distribution as well as acquisitions.

Through the first half of 2012, we generated $144 million of cash flow from operations. Importantly, we have turned the corner on our gross profit and material costs. After posting decreases in gross profit margin for the past 4 quarters that ranged from 120 basis points to 270 basis points, gross profit margin in the second quarter was down just 20 basis points. This was right in line with our expectation, and we expect to maintain this leveling out for the next 2 quarters as we're now lapping these deep material cost increases that began to impact us in the second quarter of 2011.

By no means are we predicting an end to the volatility in material costs. However, we believe that we're now better positioned for the benefits of our Comprehensive Continuous Improvement program and our long-term shift in business mix to positively impact not only our gross profit dollars but our percentage margins.

While the second quarter produced solid results, we continue to operate in a challenging environment with customers and consumers under pressure in many of our markets. The macroeconomic situation is also having an impact on our business and was most pronounced this period in our income from unconsolidated results, which is being impacted by the exchange rate between the U.S. dollar and the Mexican peso.

We continue to manage through these challenges, adapting our growth initiatives and resources to maintain our momentum and effectiveness. In that regard, I'd like to share with you our latest activity in each of our 3 regions.

In the Americas, we have grown Consumer business sales in a 6% to 7% range for the first 2 quarters of 2012. As you recall in the first quarter, our sales growth came mainly from pricing and our acquisition of Kitchen Basics in mid-2011. First quarter volume and product mix were down a bit on the heels of our fourth quarter 2011 pricing action. In the second quarter of 2012, as consumers adjusted to higher pricing, we have seen an improvement in volume and product mix, which was more on par with the year-ago period. We're helping consumers adjust and driving sales with value programs and driving category interest with new products.

We have seen early signs of success with a number of items, including Zatarain's Frozen Meals for Two, Grill Mates blends, marinades and barbecue sauces as well as new McCormick Gourmet and McCormick Recipe mixes that allow consumers to easily prepare wholesome traditional meals for their families. In Canada, we've gained great retail acceptance for over 35 new products.

As for the latest category growth, 52-week sales of spices and seasoning at grocery were up 3% in dollars. While our branded sales trailed this rate of growth in the grocery channel, our retail takeaway is up 5% across all channels for the latest 52-week period. We believe that this reflects some consumer channel migration as well as our own success in expanding our distribution in warehouse clubs, dollar stores and other alternate channels.

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