McCormick & Co. (MKC)

Q4 2011 Earnings Call

January 26, 2012 8:00 am ET

Executives

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

Gordon M. Stetz - Chief Financial Officer, Executive Vice President, Director and Chairman of Investment Committee

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

Analysts

Andrew Lazar - Barclays Capital, Research Division

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

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

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

Eric Serotta - Wells Fargo Securities, LLC, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

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

Robert Dickerson - Consumer Edge Research, LLC

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

Eric R. Katzman - Deutsche Bank AG, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Presentation

Operator

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Greetings, and welcome to McCormick's Fourth Quarter 2011 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joyce Brooks, Vice President, Investor Relations for McCormick. Thank you. Ms. Brooks, you may begin.

Joyce L. Brooks

Good morning, and welcome to our review of McCormick's fourth quarter financial results and 2012 outlook. We have posted a set of slides to accompany today's call at our website, ir.mccormick.com.

With me are Alan Wilson, Chairman, President and CEO; and Gordon Stetz, Executive Vice President and CFO. Also joining us for the first time is Mike Smith, who was named Vice President, Treasury and Investor Relations in October. Mike has been with McCormick since 1991 and brings to this role his experience in a variety of leadership positions, most recently as Vice President of Finance for a U.S. consumer business.

This morning, Alan's going to begin with some highlights from 2011 then discuss our perspective on the current business environment and McCormick's growth opportunities as we head into 2012. Gordon will provide a review of our fourth quarter financial performance and introduce our 2012 financial guidance. After that, we look forward to discussing your questions and some closing remarks from Alan.

As a reminder, our presentation today contains projections and other forward-looking statements. Actual results could differ materially from those projected. The company undertakes no obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events or other factors. As seen on slide 2, our forward-looking statement also provides information on risk factors that could affect our financial results.

In addition, certain information that we will present today are not GAAP measures. This relates to financial results from 2010 that exclude items affecting comparability. We present this non-GAAP information for comparative purposes alongside the most recently comparable GAAP measures. Reconciliations of GAAP to non-GAAP measures can be found in the presentation slides for our call.

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

Alan D. Wilson

Thanks, Joyce. Good morning, everyone, and thanks for joining us. McCormick's financial results in the 2011 fourth quarter were a strong finish to a year of solid growth and important accomplishments. We delivered these results in a period of volatile material cost and a challenging economic environment in many of our markets. Our financial performance demonstrated the resiliency of our business and the ability of our leadership team and employees throughout the company to adapt to the current environment. I want to recognize and thank our employees for their efforts and achievements.

We grew sales in the fourth quarter by 13%, including a 5% benefit from our latest acquisition activity. Pricing rose 6%, yet we still achieved a 1% increase in volume and product mix. Product innovation, higher brand marketing and distribution gains helped drive the sales growth.

Fourth quarter earnings per share were $0.98 compared to $0.99 in the fourth quarter of 2010. Operating income rose 4% despite $7 million of transaction cost related to acquisitions completed in 2011, which lowered earnings per share by $0.05. We also had an unfavorable impact from a higher tax rate, increased interest expense and a slight decline in income from unconsolidated operations. Gordon will go into more details, but if you consider these headwinds, we had solid underlying growth in earnings per share, which reflected our strong sales performance and significant CCI cost savings.

For the full year, we grew sales 11% and 9% in local currency. This was well ahead of our initial expectation for 5% to 7% growth in local currency. Acquisitions were not in our initial range and added 2% of our growth for the year. Pricing added 5% to sales, above our initial projection, as we responded to a double-digit increase in material cost. In light of these pricing actions, we were extremely pleased with our volume and product mix, which rose 2.5% in 2011 excluding the impact of acquisitions.

I want to spend a moment on our key sales drivers in 2011, and we'll start with Kamis in Poland and Kohinoor in India. These businesses are helping to reshape our portfolio of leading brands around the world with more exposure in emerging markets.

The integration of these businesses has progressed well to date, and we've maintained their pace of growth. With the addition of these businesses and our projected growth in China, Mexico and other countries, we now expect sales in emerging markets to account for at least 13% of 2012 sales. This is a significant increase from 2010, when sales in emerging markets accounted for 9% of sales. Keep in mind that we have additional presence in these markets through our unconsolidated operations. Income from these operations contributed 7% of our 2011 net income.

Product innovation continues to be a primary component of our sales growth. New products launched in the past 3 years accounted for 9% of 2011 sales. Rather than 1 or 2 big launches, we achieved broad-based success across a number of our growth platforms. In our consumer business, we launched more than 200 new branded products in 2011, well ahead of our normal pace which is closer to 100. These included 6 new World Flavors Recipe Inspirations in the U.S. and the launch of this product line in Canada and the United Kingdom. Grinders is another growth platform, and we added new versions in the U.S., the U.K. and France along with an introduction of Grinders in China.

Our team in France developed nearly 40 new products, including an organic line of spices and herbs and a number of Vahiné dessert items. One of our biggest successes was here in the U.S. with Zatarain’s frozen entrées. Including new items, we grew sales of Zatarain’s frozen entrées 40%, and our sales of these new items now comprise nearly 1/4 of our total Zatarain’s brand sales.

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