McCormick & Company, Incorporated (MKC) Q4 2010 Earnings Report, Transcript and Summary

Greetings, and welcome to McCormick's Fourth Quarter 2010 Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Joyce Brooks, Vice President Investor Relations for McCormick. Thank you Ms. Brooks, you may begin.

Good morning to everyone on today's call and to those joining us by webcast. The purpose of our call is to review McCormick's fourth quarter financial results, 2010 accomplishments and 2011 outlook. In the room with me are Alan Wilson, Chairman President and CEO; and Gordon Stetz, Executive Vice President and CFO. Paul Beard who has participated in many past calls is not with us today due to his recent appointment as President Asia/Pacific. I know you join me in wishing him continued success in his new role. We’ve posted a set of slides to accompany today's call at our website ir.mccormick.com. As a reminder, our presentation today contains projections and other forward-looking statements, and 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. Please refer to our slides in this morning's press release for more information concerning forward-looking statements. In addition, certain information that we will present today are non-GAAP financial measures. This includes information which excludes the impact of a significant tax accrual reversal recorded in the third quarter of 2010 and restructuring charges recorded in 2009. We present this non-GAAP information for comparative purposes alongside the most directly comparable GAAP measures. Reconciliations of GAAP to non-GAAP measures can be found in this morning's press release and in the presentation slides for our call. It is now my pleasure to turn the discussion over to Alan.

Thanks, Joyce. Good morning, everyone, and thanks for joining our call. We delivered a fourth quarter performance that was a strong finish to McCormick's record 2010 results. At the top line, our sales growth was driven by 6% increase in volume and product mix, demonstrating the underlying strength of our key categories and products in a still difficult economy. At the bottom line, our actions to repatriate cash from foreign subsidiaries led to a favorable tax rate. This lifted earnings per share to $0.99 which was above our initial projections for the quarter. Let's talk about the key initiatives that drove sales, beginning with the Consumer business in the Americas. We had a record level of holiday support and for the first time in the U.S., distinctive advertising for Thanksgiving and for Christmas. Recipe Inspirations also received incremental advertising this quarter and we continued to benefit from new distribution in the warehouse club channel and for our Billy Bee Honey brand in Canada. The results were impressive. In the U.S., unit sales of branded herbs and spices were up double digits. Gourmet and extract products grew more than 20% and our dry seasoning mixes rose 8%. Sales of Lawry’s and Zatarain's were both up more than 5%. In fact the primary areas of weakness in this part of our business were private label and economy products, which both declined in the fourth quarter. Consumer sales in Canada also grew at a double-digit pace. The net result was a 9% increase in consumer sales in the Americas. Clearly, consumers regard our brand as a good value and rely on McCormick to deliver great flavor, especially for their holiday meals and baking. As we indicated in our press release, our fourth quarter unit sales growth in the U.S. exceeded the increase in units purchased by consumers at retail based on our scanner data. We believe that customers who purchased products in advance of a late 2010 price increase contributed to this difference. As a result, we estimate that $10 million of sales may have shifted from the first quarter of 2011 to the fourth quarter of 2010. This would indicate that the underlying increase in volume and product mix for our Americas Consumer business was closer to 6% rather than 8%. This rate of growth is more in line with the fourth quarter sales consumption rate based on our scanner data and still an exceptional performance. In contrast to growth in the Americas, results for our Consumer business in Europe, the Middle East and Africa, EMEA declined this quarter which was in line with our forecast of continued weakness in this part of the business. Throughout 2010, we have seen sales growth in the U.K. and in France dampened by declines in smaller markets such as Spain, Portugal, Italy, the Netherlands, Belgium, markets which together account for about 20% of our sales in EMEA. In these smaller markets, our business has been impacted by the poor economy and competitive conditions. During the fourth quarter, increased promotions and allowances to U.K. customers more than offset a mid-single-digit increase in volume and product mix. Sales in France remained robust as a result of distribution gains, new products, successful grinder advertising and merchandising improvements. Scanner data in this market showed a mid-single-digit increase in both the Spice and Seasoning category and for our Ducros brand. Likewise, the homemade dessert category grew at a mid-single-digit pace along with our Vahiné brand. In the fourth quarter, Asia/Pacific had another outstanding result with Consumer business sales up 12% in local currency driven by a 22% increase in China. New products, expanded distribution and increased demand all contributed to this increase. Staying with the Consumer business, operating income this quarter was down $4 million or 2% on a comparable basis excluding the restructuring charges which we recorded in the fourth quarter of 2009. While we achieved strong sales growth and improved productivity with our Comprehensive Continuous Improvement program, CCI, we also invested in our brands during this important holiday period. Across all three regions, we increased brand marketing support by $7 million to drive sales in the fourth quarter and into 2011. Operating income was also impacted by rising raw and packaging material costs. In response to higher material costs for our Consumer business, we’ve taken price increases for both our brand and the private label products that we supply. Across our various markets and product line, this increase averaged 3%. This is similar to the price increase that we took in our Consumer business in both 2008 and 2009. As a reminder, with the exception of black pepper, we took no additional pricing for most of 2010. On Slides 8 and 9, we have listed the factors leading to this increase as provided to our retail customers along with some graphs. Here are some key points that I want to highlight. An increase in global demand for dehydrated garlic has resulted in unusually sharp increases. Global demand for black pepper continues to rise, while the supply from traditional growing areas such as Brazil and Indonesia have fallen. Cinnamon yields have been reduced as farmers have not replanted cinnamon trees, shifting their acreage to more profitable annual crops. Packaging costs are being driven by rising base raw material costs, as well as high demand. Clearly the cost inflation we face is steep as well as broad-based. Customers have accepted our price increases and we have seen competitors take pricing actions as well. Let's turn next to the performance of our Industrial business, which had a strong finish to a great year. Industrial sales were up in each of our three regions with a total increase in volume and product mix of 7% for the quarter. In the Americas, new product activity with food manufacturers in both the U.S. and Mexico drove a 6% increase in volume and product mix in the fourth quarter. Sales to Food Service customers were close to year ago levels as they have been throughout 2010. In the EMEA and Asia/Pacific regions, sales to Food Service customers and in particular, quick-service restaurants led our growth. This was the result of increased restaurant traffic, new products and promoted items. As in the Consumer business, Industrial business sales in China rose more than 20%. For the fiscal year, between our Industrial and Consumer business, China, Singapore, Thailand and other parts of Southeast Asia contributed 5% of total company sales. This is up from 3% of sales in 2005. The most noteworthy part of our fourth quarter Industrial business results is operating income, which rose 17% on a comparable basis, excluding the 2009 restructuring charges. And fourth quarter operating income margin was nearly 8%. Throughout 2010, our Industrial team has done a great job reshaping the portfolio, developing more value-added products, improving productivity with our CCI program and effectively managing our pass-through pricing with customers. For the full year, Industrial business operating income increased 26% and operating income margin rose to 8% from 6.7% in 2009, excluding the impact of restructuring charges recorded in that year. In 2010, we moved more than 100 basis points closer to our 9% to 10% goal for this business. Let's discuss how we performed against some of our other long-term in fiscal year 2010 objectives. Top line growth ended the year at 4.5% and in local currency, the increase was 3%. This growth was the result of favorable volume and product mix and was squarely within our 2% to 4% currency neutral range for 2010. While a few parts of the business were affected by the weak economy, we hit some exceptional sales results that demonstrate consumers have a growing interest in flavor and a preference for our brands. Unit sales of McCormick brand extracts and our premium gourmet items moved up more than 5% in the U.S. In the second full year since the acquisition, unit sales of the Lawry’s brand were also up 5%. Acquired in 2003, we're still growing our Zatarain’s brand with sales up 6% in 2010. New products and marketing support drove a 7% increase in Grill Mates. Our recently introduced Brown Sugar Bourbon Marinade is now our second most popular flavor. This validates our trendsetting Flavor Forecast, as Brown Sugar Bourbon was featured in our 2005 Flavor Forecast. Recipe Inspirations has been one of our most successful new products in the last five years based on our first year sales. Detailed consumer panel results indicate that an impressive 57% of Recipe Inspirations sales are incremental to the Spice category as they provide an easy way to try new spices. In addition, 26% of consumers who purchased a Recipe Inspiration are then buying regular spice bottles, indicating Recipe Inspirations are acting as a trial vehicle for our main line. The last sales highlight I want to share are our sales in China. For the full year, our team in China grew net sales 14%. Turning to our CCI program, McCormick employees delivered $54 million of cost savings. This exceeded the top end of our initial $35 million to $40 million goal by 35%. Keep in mind that these savings are net of any upfront costs. We achieved efficiencies throughout the organization in areas that included improved process reliability, global procurement, high-speed production lines and go-to-market changes. We're following our success in 2010 with another aggressive goal in 2011. CCI cost savings and a favorable business mix increased gross profit margin 90 basis points, well ahead of our target of at least 50 basis points. And we met our commitment to invest a portion of these savings, $21 million, in brand marketing support. This investment drove sales of Recipe Inspirations in the U.S., Flavourful in the U. K, Vahiné in France and many other products in markets around the world. Our joint ventures contributed greatly to our profit growth, particularly McCormick de Mexico. Income from unconsolidated operations exceeded $25 million for the first time and added 3% growth to our 2010 earnings per share. I also want to point out that the cash dividends from our joint ventures rose to $18 million in 2010 from $11 million in 2009. During the year, we were pleased to complete agreements for new joint ventures in India and in Turkey. Earnings per share for the fiscal year rose 13% on a comparable basis, excluding the impact of the reversal of a significant tax accrual in 2010 and restructuring charges in 2009. This was well ahead of our initial 6% to 8% outlook. With a favorable tax rate adding 5% to EPS, the remaining increase of 8% was driven largely by outstanding joint venture results and higher operating income. Finally, on the heels of reductions in both 2008 and '09, we took three days off of our cash conversion cycle in 2010. Those three days are a great start toward our goal of a 10-day reduction by 2012. Gordon will have more to say about cash and our year end balance sheet but let me conclude this portion of our remarks. I want to recognize McCormick employees around the world. It's their passion for flavor, their energy and their determination that delivered another year of great results. 2010 marked our fifth consecutive year of double-digit EPS growth when measured on a comparable basis. And we’re pleased to share our success directly with investors. With the board's approval of our 25th consecutive dividend increase in November, this was recognized in December by S&P when it added McCormick to its S&P 500 Dividend Aristocrats Index, a distinguished list of fewer than 50 companies. I'll turn it over to Gordon at this point for additional comments regarding our fourth quarter financial results.

Thanks, Alan, and good morning, everyone. As Alan indicated, we were pleased with our fourth quarter performance which included strong sales growth in many parts of our business. It demonstrates the effectiveness of our key growth initiatives even in markets where consumers remain under pressure. For the total company, fourth quarter sales rose 6% from favorable volume and product mix. Price and foreign currency exchange rates each had a slightly negative impact this period. Let's take a look at our two business segments by region beginning on Slide 16, with the Consumer business. In the Americas region, we grew sales 9% with most of the increase in volume and product mix. As Alan shared, we had impressive results in our core products in the Lawry’s and Zatarain’s brands, along with incremental sales from Recipe Inspirations and other new products. Distribution gains in the U.S. warehouse club channel and with Billy Bee Honey in Canada also added to sales volume and product mix. Consumer sales in EMEA declined 10% from the year-ago quarter and were down 5% in local currency. This decrease occurred outside of our primary markets and was due to poor economies and more competitive conditions in our smaller markets. These markets, including Spain, Portugal, Italy, the Netherlands and Belgium have been weak throughout 2010 and we expect this situation to persist into 2011. Our business has been stronger in our primary markets, France and the U.K. Sales in France remain strong this period for both Ducros spice and seasonings and Vahiné dessert items. While volumes in the U.K. were up, we also increased promotions and allowances to our customers. In both of these markets, we had incremental brand support to drive sales growth into 2011. Sales in the Asia/Pacific region included the strong result in China that Alan discussed and a slight increase from our business in Australia, where higher sales of recipe mixes and Aeroplane gelatin offset declines in spices and seasonings. Turning to the Industrial business, we grew sales in the Americas 6% and 5% in local currency. New product wins with snack seasonings and cereal flavors increased our sales to food manufacturers in both the U.S. and Mexico. We saw some pickup in sales of branded products to broad-line distributors this quarter as well, which is encouraging, although we remained cautious. These increases in volume and product mix were slightly offset by a decrease from lower pricing as we passed through lower commodity costs, primarily dairy ingredients. This is starting to level out and we expect to see prices increase in 2011 as we pass through rising costs of wheat, soybean oil and other commodities to industrial customers. In EMEA, Industrial sales rose 1% and were up 4% in local currency. Sales to quick-service restaurants led this increase, particularly in the U.K. and South Africa. Our branded Food Service business in the U.K. has recovered nicely from the bankruptcy of our major distributor in mid-2009. Industrial sales rose 20% in the Asia/Pacific region with a 15% increase in local currency. Alan mentioned the strong growth in China and Southeast Asia. Australia also drove sales growth with new products for quick-service restaurants including beverage flavors and sauces. Across both segments with rising material costs, some higher promotions and allowances and our pricing actions not fully in place, gross profit margin ended the fourth quarter down 10 basis points and down 40 basis points excluding restructuring charges that impacted cost of goods sold in 2009. As we approach the end of the first quarter of 2011, we expect the decline in gross profit margin to moderate. Our pricing actions for the consumer business are now largely in place in our major markets and we are making continued progress with CCI. SG&A as a percent of sales rose 80 basis points primarily due to the incremental brand marketing support. With higher sales, a decline in gross profit margin and SG&A up, operating income was even with last year on a comparable basis excluding the impact of restructuring charges in the fourth quarter of 2009. The lower income tax rate added $0.09 to fourth quarter earnings per share primarily due to increased foreign tax credits in the U.S. These credits resulted from the repatriation of cash from foreign subsidiaries. Due to the mix of foreign earnings that related to this cash, the repatriation generated these tax credits. Based on our latest projection, we expect our 2011 tax rate to be 31%. Rising material costs, primarily in our joint venture in Mexico, impacted income from unconsolidated operations which was down slightly this quarter. Sales remained robust from McCormick de Mexico and other our joint ventures which achieved a double-digit increase from the year-ago quarter. As outlined on Slide 21, fourth quarter earnings per share were $0.99 compared to $0.87 in the prior year. On a comparable basis, excluding $0.04 from 2009 restructuring charges, EPS rose 9%. This was an increase of $0.08 and was due primarily to the favorable tax rate in the quarter. While operating income did not drive EPS growth in the fourth quarter, we are well-positioned for profit growth heading into 2011 with our pricing actions in place, our sales growth initiatives underway and further success with our CCI program. Before I turn it back over to Alan, I'd like to comment briefly on the balance sheet and cash flow. In 2010, we completed the pay-down of debt related to the acquisition of Lawry’s. Our debt ratios at year end were in line with our long-term objectives and we resumed our share repurchase activity. We used $82.5 million to repurchase shares at an average cost of $41.06 per share. For the fiscal year, cash flow from operations was $388 million. This was down 7% from 2009, during which we benefited from a strong reduction in trade receivables. In 2010, as Alan mentioned, we achieved a three-day reduction in our cash conversion cycle. However, our year-end inventory level was higher than we'd like it to be. Higher cost of our raw and packaging materials has had an impact on our inventory. In addition, because of global crop conditions for a number of key spices and herbs, we have increased some of the positions we hold to ensure a steady supply of high-quality materials for our customers. Having said this, steps to lower inventory remain a particular focus for me and the rest of the organization in 2011. Let me summarize our remarks as they relate to 2010 financial results. In the face of a sharp increase in material costs and continued caution on the part of the consumers and customers, we were pleased to grow sales and operating income in 2010. Our cash flow remains strong and our balance sheet is sound. We are poised for further investments in our business to drive sales and profit. And now for a discussion of our outlook, I'd like to turn it back over to Alan.

Thanks, Gordon. Heading into 2011, we remain cautious as we continue to operate in an uncertain environment. While we've taken pricing actions to offset the increase in raw and packaging materials, these costs remain volatile. Food service trends in the U.S. have started to level out but still have areas of weakness. And while Consumer sales in our major markets in Europe have been strong, we expect many of the smaller markets there to remain difficult. We also faced a headwind related to our tax rate. Gordon shared our guidance for a 31% tax rate in 2011. This compares to 28 1/2% in 2010, which excludes the reversal of the significant tax accrual but includes a number of favorable items that we do not expect to repeat in 2011. The increased rate from 28 1/2% to 31% is expected to lower 2011 EPS by about 3%. At this time, we are projecting 2011 EPS in a $2.80 to $2.85 range. This is an increase of 6% to 8% on a comparable basis from $2.65 per share in 2010. Excluding the 3% impact of the higher tax rate, our range is right in line with our long-term 9% to 11% objective for EPS growth. Behind this projected profit increase are our plans to grow sales 5% to 7% in local currency. Based on current rates, we expect foreign exchange rates to add another 1% in 2011. Pricing across both our Consumer and Industrial businesses is forecast to increase sales approximately 3%. Our key growth initiatives are expected to deliver another 2% to 4% of growth from favorable volume and product mix. Keep in mind that this range accounts for the $10 million shift in Consumer business sales from the first quarter of 2011 into the fourth quarter of 2010, as well as any volume impact from our pricing actions in the Consumer business. We believe that 5% to 7% sales growth is an achievable goal for 2011. While we plan to discuss this more fully at Cagney, let me give you some quick headlines. In our Consumer business, we are continuing to support Recipe Inspirations and are rapidly gaining distribution of our six new World Flavors in the U.S. Other new products for early 2011 include grilling, grinders and Salad Toppins in the U.S., Flavouful Seasoning Blends in Canada, new Flavourful varieties in the U.K. and new Vahiné dessert items in France. We also intend to introduce our most successful new products in other regions. Examples include the introduction of Slow Cookers in the U.K., Recipe Inspirations in Canada and Thai Chili Sauce in markets outside of China. While we have a strong category share in our leading markets, we still have opportunities to gain new distribution. We recently won the private label supply in the U.S. for a large grocery retailer and for a leading drugstore chain. In the U.K., we're replacing a competitive brand in a convenience store chain and have made further inroads into smaller store formats which will boost 2011 sales. On the Industrial side of our business, we have a robust new product pipeline that includes an increasing number of products that help our customers achieve their wellness objectives, whether it's a reduction of salt, a simpler ingredient statement or elimination of trans fats. Many of our largest customers are working towards stated goals for their portfolio of products. There's been an impressive amount of customer collaboration in our Technical Innovation Centers. In 2010, customer visits to our U.S. facility were up 25% and the number of consumer tests rose 33% from 2009. As evidence of our customer intimacy, our product development capabilities, quality standards and service level, we recently gained an increased share of business for several quick-service customers in the Americas, and have won new business with a restaurant chain in France. Our customer intimacy and capabilities has also won us the supply of new beverage flavors in parts of the Asia/Pacific region. And in 2011, for the first time, we'll be supplying products to quick-service restaurants in India. Clearly, we have some strong momentum headed into 2011 which supports the sales outlook. Below the top line, we expect only a slight decline from the record gross profit margin achieved in 2010. On Slide 27, you can see some of the pluses and minuses expected to affect gross profit margin in 2011. CCI cost savings are projected to be at least $40 million with a large portion impacting our cost of goods sold. As illustrated, we expect these cost savings, together with our pricing actions, to offset most of the higher material costs. A number of CCI projects to deliver our targeted savings are well underway. A few final points to summarize our outlook. We're planning brand marketing support to increase in line with our sales growth. The tax rate is projected to be 31%. Income from unconsolidated operations is expected to be down slightly from a record level in 2010. We expect to reduce shares outstanding approximately 1% in the absence of any major acquisition activity and we're planning capital expenditures in a $90 million to $100 million range. We're confident that our category leadership, top line growth initiatives and CCI program will enable us to succeed and to deliver greater shareholder value in 2011. We look forward to providing insights into our key growth initiatives at the upcoming Cagney conference in February and sharing our first quarter results with you in March. Operator, we'll take the first question.

[Operator Instructions] Our first question is from the line of Alexia Howard of Sanford Bernstein.

I want to ask about the pace of innovation here. It does feel as though the rate of innovation is really stepped up and as we go into 2011, that's obviously going to be a big driver here. Do you have a number for the percentage of sales from new products that you're at right now? And can we expect this pace of innovation to be a new level that will continue for some years to come?

The way we look at it, first I'll answer the first question, we are seeing increased activity in innovation, both driven by our customers, both our food service customers as well as our food manufacturer customers, and we are certainly stepping up our innovation activity. There's a recognition clearly across the industry that we have to innovate to grow. And I'd say the one question mark on that is the impact of increased pricing and whether that will impact our customers' willingness to really go forward with a lot of the innovation as planned. But I’ll say the activity really is picked up. We generate about 8% of sales from products that have been introduced in the last three years and that's been a fairly consistent number year-to-year. It ranges between about 8% to 10%.

And just a quick follow-up on the commodity comp side, it looks as though from the graph on Page 27 that the material cost increase in 2011 is going to be maybe around $100 million. Is that the right ballpark? And how locked in is that at this point given the way everything is bouncing around right now?

You're about right. It's about 7% to 8% off of our raw material or cost of goods sold so that's in the ballpark. I'm sorry, I didn't get your second question, Alexia.

How locked in is that for 2011 given your forward-buying practices?

We tend not to try and divulge too much about our forward position, but we try to establish coverage to mitigate any of this volatility. So we do try to lock in as much as we can so we don't experience this as we go throughout the rest of the year.

Our next question is from the line of Ken Goldman of JPMorgan Chase. Kenneth Goldman - JP Morgan Chase & Co: So the New York Post reported that Wal-Mart, to combat competition from dollar stores, is pressuring suppliers to provide products that are smaller and at lower price points. So if that's the case, is it reasonable to assume that your wider range of products, like you sell plenty of A to Z spices already, and the naturally low price points of spice bottles will somewhat immunize you to Wal-Mart's efforts? Or is it too early to know exactly what the impact might be?

Yes, without commenting specifically on specific customers, we already sell a variety of sizes of spices at different price points as you all know. We cover everything from economy products all the way through to gourmet, and certainly what we saw last year was a recovery in more of the higher-end stuff, the gourmet. And if you recall what happened a couple of years ago, we saw consumers trading more to DSMs. We're watching to see what actually happens. But the specific initiative to take products out of bottles, that's not something we've historically done. Kenneth Goldman - JP Morgan Chase & Co: Just one other question, given the high volatility in your input costs, I think this is worth asking but although it may be kind of from left field, some of the protein industry have been talking about growing their own corn. And clearly you're not facing the volatility in your input costs to that level. But I can see a scenario maybe, it's already happening where the acreage battle starts to affect some of your inputs, too. So I guess I'm asking how volatile would your inputs have to be? How dire would the situation have to become? Not that we're anywhere near there yet, but for you to start going backward in the supply chain to avoid some unpredictability in your costs. I guess could you even do that? Could you, if you wanted to, grow some your own cinnamon or vanilla or is that just too difficult from an operational standpoint? I guess I'm just wondering how to think about the old make or buy decision that for some manufacturers seems to be leaning more toward make lately.

For us, because of the wide variety of different products that we source; we source more than 70 individuals spices and then when you add in all the regions that we source from, it's a couple of hundred; it's just too complicated and too complex that would drive us back. Now we've got strong long-term relationships with growers of different products and so while we're not backward integrated, our long-term relationships and the supply stability that we've had helps us in terms of supply assurance and quality. It doesn't necessarily immunize us from the cost volatility, but it certainly does help us. The complexity of everything we’re doing would say we’re not driving backward to agriculture.

Our next question is coming from the line of Alex Bisson from Northcoast Research.

Maybe just one question on marketing. It looks like going forward, it's not going to be the same headwind that it was in fiscal '10. But could you talk about any changes in how those dollars will be allocated either among geographies or behind new products versus kind of older existing products, things along those lines? Different parts of the portfolio, also.

Sure. Every year, we look at our marketing mix to determine what the best, most effective spends are. And this past year, we've had a combination, if you've seen them, of driving core products with our antioxidant advertising in the U.S., new products like Recipe Inspirations and then our more image building holiday ads that we ran in Thanksgiving and Christmas. We're continuing to really increase at a pretty high percentage rate, our spend against social and digital media because that is becoming a very effective spend and where the consumers are getting our message. We're still going to continue to support our products in France and the U.K. as well as in our other consumer markets like China. And we've got a healthy mix of core products and new product advertising in the U.S. We've got some really good new products that we're introducing in the U.S. that we want to make sure we support as well. But I think just like everybody else, you'll see more of a mix driving to social media because that's where the consumer is getting their information.

And maybe just one question on product mix: It sounded like the branded piece of the portfolio has picked up in terms of growth and that private label has slowed or maybe even declined a little bit. What do you think is going on there? Do you think consumers are trading up to the branded part of the portfolio or are you losing some customers altogether out of the category?

We've certainly seen healthy category performance and I would say we've seen more of a return to brand as consumers have developed more confidence. The other thing is we're driving that with our product innovation and our promotion programs. That has really helped. Obviously, we're cautious on what we think will happen in 2011 given the difficulty the consumers face.

And then one final question. Can you just talk about the level of coupon activity in the fourth quarter versus last year?

Coupon activity, it was heavier in the U.K. and that's what drove that pricing decline that you saw from the U.K. In the U.S., coupon activity was pretty similar to last year.

Our next question is from Robert Moskow of Crédit Suisse Group. Robert Moskow - Crédit Suisse AG: Just a little back of the envelope math, it looked like when I took that $100 million inflation number and put it on your -- just on the materials part of your cost of goods, you're talking about something in the mid-teens in terms of inflation. And I'm just wondering if you're looking at that way, first of all, Gordon. And have you ever gone into a year with that kind of a headwind to make up foreign pricing? And if so, how do you know that there's not going to be some kind of negative elasticity of demand? You're assuming volume growth in a year when you're taking up pricing, it seems like quite a bit.

We'll have to work through this math a bit, maybe off-line, but we're looking at more about of a 7% to 8% off the raw material base. That is still a significant increase to your point. So I don't want to say that this is not an event that is unusual. We have not historically seen increases at this level. Last time we talked about this was 2008. From an elasticity standpoint, the price increase that we took is 3%. That's not too out of line from our experience in previous years. That is the question mark that we, I think, the industry in general is looking at as we go into 2011. We do have support behind our brand as Alan talked about to make that we continue to innovate and drive the consumer, but that is something that we have factored into our thinking as we've given you the guidance for next year.

And as you see on Slide 27, it's really a combination of the pricing and our CCI savings, both together that are going to offset that or project it to offset that cost inflation.

Yes, we didn't feel that we could price completely to the inflation that we need the CCI savings to help offset it as well. Robert Moskow - Crédit Suisse AG: Just to show you how I got there, I just took 40% of your cost of goods. I assume that's the percent that's. . .

No, it's a much higher. It's closer to 80% on raw and packaging of cost and goods.75% to 80%, yes. Robert Moskow - Crédit Suisse AG: A quick follow-up. In 2010 you had a lot of distribution gains in China and the wet markets and I think that was a good selling point of the stock. I didn't see any follow-up in your 2011 outlook. You've mentioned distribution gains in a lot of places but not China. Are there more gains to be had in just the consumer sector there?

Absolutely. We're still pretty concentrated in a few significant cities and we've got product distribution pretty broadly. But the penetration in the mid-tier, which are still huge populations, continues to grow and we're really encouraged by our introduction of condiments, especially things like Thai Sweet Chili Sauce which is doing very well there. Robert Moskow - Crédit Suisse AG: Lastly on gross margins, should we factor in kind of dilution in the first half of the year and then building up towards accretion in the back half as the pricing moves its way through?

Well, I'd be careful to try to get into the quarter because a lot of these things are driven by mix of our portfolio. I understand your thought process. Our pricing is executed, so we will start to accrue those benefits into the first quarter. So I'm expecting generally that the gross margins should be -- not a volatile quarter-to-quarter thing but a lot of it can be impacted by industrial versus consumer mix in each of those quarters. So I'd be careful of that type of thinking. Robert Moskow - Crédit Suisse AG: And then lastly, just short-term, you’re two months into your first quarter, you mentioned that a lot of customers took a lot of inventory in fourth. Do you expect a pretty weak sales number in first quarter, the full $10 million? And how confident are you that it’s not more than $10 million in terms of how much was pulled forward?

Well, obviously we're still in the quarter and we're reading this as we go forward. We still have some big events ahead of us and particularly U.S. We have Super Bowl and we have Mardi Gras, we have had big promotions. We are still trying to get a determination as to exactly how the sales will impact first quarter. But in general, if you look at the take away versus what we shipped, it does appear that there was a $10 million shift out of Q1 and to Q4 and it's a difficult read right at this moment.

Our next question is from the line of Ann Gurkin from Davenport and Company. Ann Gurkin - Davenport & Company, LLC: Two questions. One, can we start with Zatarain’s. Can you talk about opportunities to expand Zatarain’s and the outlook for the growth of that product line over the next several years?

Yes, we're very excited about what we're seeing at Zatarain’s. We had very strong growth in both our boxed rice mixes this past year and we've introduced frozen products. We've had those out there in very limited distribution for a couple of years and we are seeing that expand pretty well, and it's becoming a very nice growth story for the business. And we're doing things like Blackened Chicken Alfredo and Jambalaya in frozen and we've got, I think seven or eight products now that we’re continuing to expand distribution on. So that's one that we are pretty excited about. We’re also hopeful for a return to Louisiana Seafood with our breaders and Crab Boils as we get past last year's oil spill and people get more confidence in the shrimp and fish industry coming out of the Gulf. Ann Gurkin - Davenport & Company, LLC: So high single-digit growth looks reasonable?

Yes. Ann Gurkin - Davenport & Company, LLC: And then secondly in terms of acquisition, can you update at all on the volume or potential for acquisition, valuation, any change in that profile?

I'd say it's a pretty active environment right now. And so it looks more active, I think than it has for us, at least in the last couple of years. And as you've seen, we've done a very good job of paying down our debt from the Lawry’s acquisition and so we have a pretty good pipeline that we are working against.

Our next question is from the line of Eric Katzman with Deutsche Bank.

First, was the account that you mentioned in terms of the win, was that Sam's Club? Because I know that you've talked about the potential to take that account out of test market during 2010.

No, there's no new update on that particular customer but we do continue to have new product and distribution wins.

So if Sam's Club was to go your way, which would be a first half event given the timing of the seasoning -- of the business, that would be incremental to whatever you put out today.

Yes, and I can't speculate specifically on what an individual customer is going to do. But we do factor in some distribution wins as part of our sales guidance, but I wouldn't necessarily say that they were commenting that they've made a decision.

And then one of the things that I thought was kind of interesting in terms of the charts that you put up on inflation, most of your commodities, there is no futures or liquid market and yet you are seeing significant increases. And so I'm just kind of wondering maybe just from a broader perspective Alan, I mean do you think because there really isn't that like financial speculation, like a lot of times the companies in the industry will say that investor speculation is what's spurring the growth in the commodities but that doesn't really exist in your market. So it seems like -- would you agree with that? And is that -- so the increases that you're seeing are really fundamental-based.

Yes, I think the increases we’re seeing are more fundamental-based. I would say that there is some opportunity by speculators to take pepper inventory because it can be held for a very long time without degrading before it's ground. So there may be some of that, but it's not like we see in soybean oil or wheat or some of the other commodities where it's really driven by speculators. I think the thing we do see is competition for acreage because as farmers move more into corn to take advantage of this ethanol subsidy, they don't plant other things. And so that will impact us to some degree.

Well, I guess I went to Ken's question about backward integration and stuff. But based on Bob's comment about Madagascar, I'm not sure -- maybe that place would be better off if you took it over.

I'm not going there.

And then just last question, in all seriousness, the private label decline that you saw in the fourth quarter, I mean that's really quite surprising. Do you attribute that to just the retailers more focused on brands, your advertising, consumer confidence. Kind of how would you break it down? Because it seems to go against what has been the trend.

Yes. Now to comment on the private label products that we supply. And some of it is driven by rationalization of the products that are being offered so there's more of a focus on some efficient assortment. The second thing is where you may see on some of the scanner data where private label is growing, it may be from retailers who produce their own products or we don't supply. But we certainly had a lot of activity behind our brands in the fourth quarter and as we went into the Christmas season. And I think we're benefiting from that. We're aggressive on promotion, we're aggressive on advertising and we typically do see consumers respond at the holiday period to our brands.

Our next question is coming from the line of Chris Growe of Stifel, Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc.: I had two questions for you. The first one is, and forgive me if I missed this, but just a question regarding product mix and how that performed in the quarter. My modeling of the Consumer business, given the revenue growth, was a little lighter than I expected. Was mix a factor in that, especially that division?

Mix was a positive factor given the strength of the brand in the division. Obviously, the offset to that positive mix as you saw in the gross margin was the increase in the raw material cost that we experienced and the pricing had not yet been implemented until very late in the quarter. Christopher Growe - Stifel, Nicolaus & Co., Inc.: So I underestimated the cost inflation. Would the fourth quarter run rate been more, in terms of cost inflation, more like what you're going to see in 2011? I know not every quarter is perfectly aligned, but was it up to that sort of level in the fourth quarter?

Yes, I think you could expect that although, as Gordon said, there was no pricing impact -- negligible pricing impact in the fourth quarter. And as we go through 2011, we'll see the impact of pricing to help offset that. Christopher Growe - Stifel, Nicolaus & Co., Inc.: And then I had two questions related to Europe and particularly the Europe Consumer business which was weak this quarter. I guess I'm just trying to understand first of all, is it mostly the U.K. that's driving that weakness? I think you mentioned the other kind of 20% of sales. Do you see that as a risk to 2011, that those other 20% are going to be weak? Or is it the U.K. ? And I guess in relation to the U.K., I'm wondering if there's still some more investment from the standpoint of promotion or price discounting to try and better battle private label on that market.

Yes. The U.K. specifically had very heavy promotion and discounts in the quarter and that's why you saw the impact specifically on pricing. Volumes actually did grow but not enough to offset the heavy promotions that we ran there. And I think that's something that we're seeing pretty broadly across the industry and not just our category. And we think the way to win there is to make sure we're offering the right value for the consumers as well as the right mix of innovation. I wouldn't expect to see those smaller markets to impact us to the degree that they have in 2010. One, were up against softer comps and we are again aggressively trying to build and grow those smaller markets as well. But I wouldn't expect those to have the same kind of impact in 2011 than they've had in 2010. Christopher Growe - Stifel, Nicolaus & Co., Inc.: An effect of lapping essentially more than anything else, right?

Right. Christopher Growe - Stifel, Nicolaus & Co., Inc.: They're not that getting better, I guess is what I'm getting at.

I don't think we’re going to see a strong recovery, but we’re lapped in some of those lousy comparables. Christopher Growe - Stifel, Nicolaus & Co., Inc.: One final one, if I could. Your joint venture earnings you’re projecting to be down a little bit for the year. I have built-in, from what little I know, some benefits from India, some benefits from Turkey and I was getting obviously profits to grow. So I guess I'm understanding, is it the Mexico piece? Is it soybean oil cost? Is that the main factor we should watch for, kind of hurting that profitability for that business as you see it today?

Yes, the primary driver is the Mexican joint venture which is by far the largest and most profitable venture we have. And it is soybean oil and the increase there that's driving that.

Our next question is from Eric Serrota with Wells Fargo.

I'm hoping you could provide a little bit more color on the 2011 outlook. If I sort of normalize for the tax rate, and then the $10 million shift in Consumer America sales, you sort of get to some pretty hefty growth rates on the low end, sort of the 9% to 11% range, which I know is in line with your long-term targets. But given the lower cost saves, the lower non-consolidated income, the flat to down gross margins, could you give us a little bit of color as to how you expect the top line to translate into that kind of earnings growth?

Well, the guidance we’ve given is 2% to 4% organic and roughly 3% pricing on the top line. So that's obviously one of the factors that you'll have to consider in your model. You're right in that the gross margin would be flattish and then beyond that, we've indicated that our advertising and promotion would rise roughly in line with sales. And the past few years, we've been growing that in excess of the sales growth rate, and this year we’re looking at growing it more in line with sales. So, given all those factors, we come back to the guidance that we’ve provided you.

And then with the fourth quarter, you didn't see much operating leverage in response to very strong volume. I know that raw materials were up and that squeezed your gross margins. But it also looks like SG&A was up pretty sharply, well more than the $7 million increase in brand spending. What else is in that SG&A line that constrained profit growth in the quarter?

Well, obviously you mentioned the $7 million in advertising and promotion. As we indicated at the beginning of 2010, we're still experiencing the impact of higher pension costs, and that was close to $3 million in Q4. So those two alone are $10 million. The rest of that is generally going to be variable things that rose in line with the healthy sales growth rates.

And then lastly, I wanted to just circle back to Rob Moskow's question in terms of demand elasticity, it seems like you're looking for some pretty hefty volume growth in 2011, notwithstanding the pricing that you've taken. I guess what gives you the confidence that your elasticity models are reasonable here? Could you provide a little bit more color? It just seems that with 3% pricing to get at the upper end, 4% volume growth despite the $10 million headwind seems like a tall order.

Yes, remember what's happening in the markets. As we take 3% pricing and on different products it's higher and lower than that. 3% is just where it averages out. But the percentage increase on private label products is actually a lot higher. And not only are we -- and because it's really cost driven, we’re not the only ones that are passing through those increased products or those increased prices. So we’re seeing the gap, the price gap between private label and brand really close as these price increases take effect. The other thing that gives us confidence in the buying growth is our new product activity and the distribution wins that we talked about.

Our next question is from Mitch Pinheiro of Janney Montgomery Scott.

Within your organic sales growth, how do you balance that between the Consumer and the Industrial side?

The 5% to 7% guidance?

On the organic, the non-pricing part of your. . .

For 2011?

Yes.

It's going to be roughly equal.

And as far as cap spending $90 million to $100 million, is there any major projects in that number?

Yes, we've got some plant expansion, specifically significant expansion of our Guangzhou plant in China and then there's a number of investments that we're making in increased capacity as we've won some of this new business.

Final question for Gordon, you mentioned obviously you're going to start reworking on your inventory, but I'm not sure, what can you do to improve that? I mean your cost, your input costs are up, where is that improvement, where does that lie?

That's a fair question. Obviously, there's going to be pressure on our targets given the input costs. But underneath that, the teams are still working very hard on systems and processes, mainly in demand planning and sales and operations planning which relates to safety stocks, finished goods turns and the level of inventories that we need in the pipeline. So you're right in that we’re going to have some pressure due to raw material cost challenges, but I know the teams are very focused also on underneath all that, executing against some investments that we've made in technology and processes.

What would it take for additional price increases in fiscal '11?

Well, we're certainly watching the commodity environment pretty closely and we took the pricing that we had to take for the current environment, certainly just like we saw in 2008 with all the volatility. We'll be prepared to respond if we have to, and we think the consumer can bear it. We'll do what we have to do. We certainly have tried to take a very responsible conservative approach with pricing and just do what we have to do. And in fact in this case, we have a combination of our CCI and our pricing to try to offset the impacts that we have.

So you're not fully covered for fiscal '11 with your major items.

We have a variety of coverage on our items and it just varies based on the specific commodities.

Has any of your core or key customers helped you or given you some guidance as far as you taking out coverage maybe specifically for a key customer?

Well, specifically with our Industrial customers, we collaborate on what coverage to take and when we're going to take it and at what kind of pricing. So the Industrial business, we feel pretty confident that we'll be able to work our way through this and I would see price changes in Industrial as more fluid. In Consumer, specific to that, we make those decisions pretty well based on what we see from a volume demand and pricing standpoint as well, so we’re kind of making those decisions ourselves.

Our next question is from Andrew Lazar, Barclays Capital.

You talked about the combination of pricing and productivity being used obviously to cover some of the cost increases and perhaps that's the prudent approach, given where the consumer is at. And I apologize, I can't remember, back in '07 and '08 with some of the pricing that you took, was that on its own able to cover, or more on its own able to cover the inflation that you saw then? Whereas in productivity it was a bit more incremental to the bottom line, or was it fairly similar as this time around?

Yes, in 2007 and 2008 when we took pricing, we were dealing with cost increases but we weren't seeing the kind of runaway inflation in spice commodities that we're seeing now. It was limited in certain areas and we were pricing and generally that's been our philosophy. We want to try to price to cover commodity costs and then use productivity to offset all the other things that we have to deal with like pension costs and wage inflation and those sorts of things. In this case, because the commodities have been so much higher, we're taking what we think is a more moderate approach to that.

And then in terms of some of the cost increases you've seen, the way that those came about, was it equally as volatile as we might have seen a lot of commodities back in '08? Or were there cost increases that you kind of see coming in the way you do your procurement and such that you can plan a bit for it or is it tougher this time around?

No. We've been able to plan for it because we've seen. It's just been a kind of a steady escalation and some of it driven if there'd been any surges, it's been more because of specific weather events as opposed to something that we've seen like in soybean oil where over night things just changed. We've seen a steady increase in pepper, really over the last three years. Garlic is one of those that’s had the highest volatility and that's more driven by specific weather events that we think are more like a one time, one year in nature.

And then last thing just some of the other non-commodity costs you mentioned pension, things like that. I know that was a headwind in 2010 not mentioned this year, perhaps it's not as big a deal. Any other things we should sort of watch out for or that you’d call out in the cost structure outside of commodities for this year?

Now pension should be roughly the same Andrew, and obviously we indicated on the tax line, tax costs would be up relative to this year. But other than that, commodities are the issue.

Ladies and gentlemen, we have time for one more question. That question is from Robert Dickerson of Consumer Edge Research.

Just a couple of easy questions. I guess one, just a follow-up from Andrew's on the gross margin. I know I can't remember. I think it's slide 27. It does look like there is some gross margin pressure expected in '11 from that other bucket. So please explain, I guess what's in that other bucket.

Yes, that's a small number. I think that would represent our labor and overhead increases.

And that's just wage inflation or that's just employee count?

I can get back to you on that. It's a small increase and I don't. . .

It’d probably be more wage inflation. We're not expecting any kind of major surge or anything like that in hiring.

And then on the pricing side, should we expect to be somewhat balanced between the consumer and Industrial segments or do you think it's more weight towards the consumer?

I think there will be higher pricing in the Industrial segments based on the commodity pastures and the way that we deal with those. The Consumer segment we tend to price usually once a year and then lock that. Again, given the volatility, we may have to re-evaluate that. But with industrial it's more on a real-time basis since we’re passing through different commodity positions.

And then I'm just curious, obviously there's a lot of talk around will pricing be passed through, and some food companies are able to take pricing but you don't necessarily see it at retail. Is there any way to give us any feel as to, just conversations that you've had with retailers whether, you know, obviously you're expecting pricing to be up for you, but do you think that we should or should we expect to see that in the scanner or at retail?

I think we'll expect to see it at the shelf.

And then lastly, housekeeping. I know you said before that you expected to pay down the short-term debt, the $100 million in fiscal year '11, I'm assuming that's fully paid.

I'm sorry?

You just stated before that you have a $100 million in short-term debt and you. . .

The $100 million that we list on our balance sheet is short-term debt, it's actually long-term debt that's gone current that will come due in July.

I believe it was in Q3, you said that you expected to pay that down with cash. I just wondered. . .

I'm sorry. We'll let that obviously mature into commercial paper and then operating cash will be used to pay down whatever commercial paper is outstanding.

I would now like to turn the floor back over to Ms. Brooks for closing comments.

Well, thank you for participating in today's call. Through February 2, you may access a telephone replay of the call by dialing (877) 660-6853. The account number for the replay is 309 and the ID number is 361216. You can also listen to a replay on our website later today. If anyone has additional questions regarding the information we shared today, please give me a call at (410) 771-7244. This concludes our call.