McCormick & Company, Incorporated (MKC) Q1 2013 Earnings Report, Transcript and Summary

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 first quarter financial results and 2013 outlook. We have posted a set of slides to accompany today's call at our website, ir.mccormick.com. [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 first quarter results and a business update, followed by Gordon with a more detailed review of our first quarter financial performance and financial guidance for 2013. After that, we look forward to discussing your questions and some closing remarks from Alan. As a reminder, today's presentation contains projections and other forward-looking statements. Actual results could differ materially from those projected. The company undertakes no obligation to update or revise publicly any forward-looking statements whether as a result of a new information, future events or other factors. As seen on Slide 2, our forward-looking statement also provides information on risk factors that could affect our financial results. It is now my pleasure to turn the discussion over to Alan.

Thanks, Joyce. Good morning, everyone, and thanks for joining us. Our first quarter results included strong growth in our consumer business, earnings per share above our guidance and a great start to cash flow from operations in 2013. We grew sales in our consumer business 7%, driven by innovation and marketing support for our leading brands. While consumers in many of our markets remain under pressure, we believe that we have good momentum for this business segment and expect solid sales and profit performance in 2013. Tough economic conditions had a measurable impact on our industrial business in several markets. We had expected some weakness in the first quarter, particularly in comparison to the strong year-ago sales and profit growth, and we continue to have a conservative 2013 outlook for our industrial business. For the total business, first quarter operating income was comparable to the year-ago period. A $6 million increase in our consumer business operating income offset a similar decline in the industrial business, a net result that was generally in line with our expectations. During our January call, we had indicated that first quarter profit would be unfavorably impacted by higher material costs, increased retirement benefit expense and a difficult comparison for our Industrial business, which grew sales 13% in the first quarter of 2012. These factors played out as expected and led to the comparable operating income result that we reported. We increased earnings per share from $0.57 -- to $0.57 from $0.55 in the first quarter of 2012 and reported an increase in cash flow, generating $32 million this period, up from $23 million a year ago, mainly due to improvement in our cash conversion cycle. Gordon will go into these financial results in more detail. What I would like to discuss next is the excellent progress with our initiatives that are driving growth in our consumer business. I'll then comment on the leadership changes we announced 1 month ago. As a third topic, I want to comment on the current operating environment, how this is affecting our outlook and how we are adapting. I plan to specifically discuss industrial business conditions during my prepared remarks and would welcome any follow-up questions that you may have during our question-and-answer session. So let's start with our key growth initiatives for the consumer business. In the first quarter, these initiatives drove increased volume and product mix, with growth in each of our 3 regions. With this strong start to the year, we believe we have great momentum underway. The first initiative is product innovation on Slide 5. In our January call, we reviewed some of the new products poised for launch in the first half of this year. I'm pleased to report that we're meeting our targets for retailer acceptance for a number of these items. I want to share just a few of our new product success stories unfolding in 2013. In the U.S., we're extending varieties of our gourmet recipe mixes with flavors such as smoked paprika chicken tacos and Tuscan beef stew. This product line offers consumers a way to make premium, all-natural meals that are full of flavor. Recent retailer data showed that 35% of sales for these products are incremental to the category. While our first quarter is not the height of grilling season, initial acceptance of new Grill Mates items, including sauces, accounted for about half of the 23% increase in unit volume. Also in the U.S., we are more than halfway toward reaching our distribution goal on Big Easy Rice, a product that offers the authentic New Orleans flavor of Zatarain's in a convenient microwavable pouch. In Europe, the Middle East and Africa, EMEA, our Vahiné brand of dessert items is the clear category leader, and our innovation has helped drive 2% unit growth for the category in the latest 52 weeks. In early 2013, we launched another 12 new items that included toppings and cake mixes. Also in EMEA, we are introducing our recipe mixes in 2 new markets, leveraging consumers' affinity for our Ducros brand in France and Kamis brand in Poland. We are achieving great retail acceptance and on-shelf presence for these products. Moving to the Asia Pacific region. In November, we secured placement of our marinades in a bag with one of the major retailers in Australia. Consumers love the flavors and convenience of these products, and we've already gained the #2 spot in the wet marinade category at this retailer. Moving to brand marketing support. We're staying agile on our spending. While the brand marketing support we recorded as selling, general and admin expense was $4 million lower in the first quarter, at the net sales line, we had a $3 million increase. This increase was used to fund additional price promotions, helping consumers adjust to past pricing actions, as well as allowances for shelf placement of new items. We continue to analyze and improve the effectiveness of our marketing dollars and are focused on execution. We have an increase of approximately $5 million in brand marketing support planned for the second quarter of 2013. One example of greater effectiveness was our fully integrated Super Bowl big game mega event. We combined consumer promotion and in-store activity for 3 of our brands: McCormick items, such as recipe mixes for chili and Buffalo wings; the Zatarain's brand to create flavorful dishes like jambalaya; and Grill Mates. The results were excellent. We achieved a 53% increase in feature ads and merchandising display, a record-high sales month for Zatarain's and increased the effectiveness of our digital advertising. Also in the U.S., to cover even more of our product portfolio and meet consumer interest in flavor and recipes, we relaunched our mccormick.com website. In addition, the new website offers more interactive features and better integration with social channels. In France, we measured a 10% sales gain in response to television advertising for our Ducros version of Perfect Pinch. And in China, we laid the groundwork for growth with revitalized packaging design and an expansion of our advertising to an additional province. This activity, along with great sales execution, is driving strong double-digit sales growth. Moving beyond the first quarter. In March, we had a significant baking and brunch campaign for Easter that included print, coupons and digital media. And headed into the creak -- the peak grilling season, we'll continue to build upon our Grillerhood platform and launch marketing support for our new steak sauce with the tagline "better-tasting steak guaranteed." This marketing plan includes dedicated Hispanic support for Grill Mates. Our third avenue of growth is acquisitions. I'm pleased with the progress on the regulatory approval for the purchase of Wuhan Asia-Pacific Condiments. We have a few more steps, and we expect to complete this transaction midyear. We anticipate a rapid and seamless integration of WAPC with our existing business in China. McCormick's strategy includes investing in acquisitions, product development and brand marketing to grow sales and profits, and to fuel these investments with our comprehensive continuous improvement program, CCI. Our long-term goal is to achieve annual savings of at least $45 million with this program, and that remains our guidance for 2013. I'd like to comment next on some leadership changes which we announced early in March. These changes are an integral part of our ongoing leadership development and succession planning. Mark Timbie, President of Consumer Foods America and Chief Administrative Officer, has announced his retirement for June 2013. During his 17 years with McCormick, Mark has been an important member of our senior leadership team, and he has contributed strongly to our success in the U.S. and in international roles. At this time, Ken Stickevers, President of U.S. Consumer, will report directly to me, and we'll have some additional organizational announcements prior to Mark's retirement. On the industrial side of our business, Chuck Langmead has been promoted to President, Global Industrial. This new position will help us drive sales growth by aligning our customer intimacy efforts and driving strategy consistently across our industrial businesses worldwide. Chuck has been responsible for our industrial business in the Americas. And another one of our senior leaders, Randy Carper, will assume the role of President of the U.S. Industrial Group, reporting to Chuck. I'm confident that Chuck, Randy and our other business leaders have the ability to manage through the current environment and achieve long-term sales growth and improve profitability for our industrial business. That provides a good transition to my third topic, the current operating environment, its effect on our outlook and how we are adapting. I'd like to address this topic by segment and begin with our consumer business. As I've stated in our initial remarks, consumers in many of our markets remain under pressure. Our growth initiatives have achieved increased sales of our brands in a number of our top markets, although private label has continued to gain share in certain markets. We're responding by building our brand equity. This includes differentiating our products through innovation and ensuring that consumers perceive our products as a good value, building our brand equity. Our teams continue to analyze retail price points, working with our customers to tactically adjust price promotions and couponing as appropriate, and for selected items, get to lower every day price. We're also making sure that our brands are well represented across channels, that our products are on the shelf no matter where consumers are shopping. As a result of these actions and initiatives, we believe that McCormick's consumer business is well positioned for growth as consumers strive to achieve a balance between taste, convenience, value and health. Let's turn to the industrial business and start with a look back to the first quarter of 2012. During that period, we grew sales 13%, with 10% of an increase in volume and product mix. We had won a number new product wins [ph] with both food manufacturers, as well as the food service industry leaders that we serve. In EMEA, through the rest of 2012 and into 2013, sales have remained robust, driven largely by increased sales to quick service restaurants. In the Asia Pacific region, our activity with limited-time offers has slowed. In the first quarter of 2013, we had a significant decline in China related to the U.S.-based quick service restaurants, which were impacted by well-publicized reports on chicken. Based on their upcoming promotions, new product activity and plans for additional restaurant locations, we expect sales to begin to recover as we move through 2013. In the Americas, sales to food manufacturers have been fairly steady, with a solid stream of product innovation. Our current pipeline includes a number of new seasoning blends for salty snacks, crackers and meal preparation kits. For the food service industry, we saw slowing demand later in 2012 and into the first quarter of 2013, particularly with quick service restaurants. The economic pressure on consumers that has adversely impacted restaurant traffic has increased in the first quarter of 2013, with higher payroll taxes and fuel costs. The slide on -- the chart on Slide 12 illustrates this point. This trend has led not only to weaker demand, but a heightened focus by our food service customers on every day value and menu prices. These customers are working to lower their costs, including pressure on suppliers for product reformulations. While our restaurant customers are navigating a tough period, they continue to value our creativity, product development capabilities and technical expertise. As evidence of our effectiveness in this area, our teams have recently been recognized in the U.S. with a Taco Bell innovation reward [ph] , and in Asia with the McDonald's innovation award. Given this backdrop, we anticipated a slow start to 2013, and we have a conservative view of our industrial business for the fiscal year, although we do expect improved results and a return to growth in sales and profit by the second half. As seen on Slide 14, while we've had some challenges in our industrial business, such as steep material cost increases, we have achieved a 54% increase in operating income in the past 5 years. Based on our outlook for strong consumer business results and a more moderate performance in our industrial business, we reaffirm our 2013 guidance for 3% to 5% sales growth and earnings per share of $3.15 to $3.23. Before turning it over to Gordon for more details on the quarter and our outlook, I want to thank McCormick employees around the world for all of their dedicated effort to drive success with our 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 15, 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. Our portfolio of products, geographies and customers is broad, and offers us the opportunity to flavor your meal no matter where or what you are enjoying. McCormick is well positioned to achieve long-term profitable growth. Gordon?

Thanks, Alan, and good morning, everyone. As Alan has described, our first quarter financial results for the total business were generally in line with our expectations, with strong consumer business performance offset by some weakness in industrial sales and profit. I'll begin with a closer look at sales and operating income for each segment. Let's start with the consumer business. As seen on Slide 17, we grew consumer business sales 7%, a result driven largely by volume and product mix, with a lower impact from pricing and foreign exchange rates. In the Americas region, we grew sales 7%, with volume and product mix driving the increase. Sequentially, this followed a 2% decline in volume and product mix in the fourth quarter of 2012 that related to changes in retail trade inventory, as well as some supply chain disruptions related to Hurricane Sandy. When we discussed this decline with you in late January, we indicated that we were already seeing some recovery in first quarter sales. In addition to a favorable carryover effect from a weak fourth quarter, our latest sales in the Americas consumer business are a strong start to the year and reflect the new product and brand marketing activity that Alan described. In fact, we achieved unit growth across most of our brands and product categories. In Europe, the Middle East and Africa, EMEA, we grew consumer sales 4%, with similar contributions from currency exchange rates, volume and product mix, and pricing actions. Our growth initiatives led to sales increases of Vahiné dessert items and Ducros herbs, spices and seasonings in France, Schwartz brand recipe mixes in the U.K. and new distribution for Kamis products in Russia. These gains were offset in part by a modest sales decline in several smaller markets. Consumer business sales in the Asia Pacific region rose 13%. This builds upon a 20% sales increase in the first quarter of 2012, which excludes the impact of currency and acquisitions. Through our growth initiatives, we are achieving significant sales increases in China, and increased first quarter volume and product mix by 20%. Sales for the Kohinoor brand in India grew 19% in local currency. This was the net impact of significant pricing in response to higher cost for basmati rice, offset in part by reduced volume and product mix. Operating income for the consumer business was $88 million, an 8% increase from the first quarter of 2012. This increase was largely due to higher sales and CCI cost savings, which were offset in part by increased retirement benefit expenses and material cost inflation. While brand marketing support recorded as selling, general and administrative expense decreased $4 million year-on-year, as Alan indicated, we increased by $3 million the price promotion and slotting [ph] allowances reported in net sales. By comparison, we increased brand marketing $9 million in the first quarter of 2012 . Turning to our industrial business, let's start with a review of sales. For this segment, first quarter sales declined 2%, as seen on Slide 22. This was driven by lower volume and product mix, offset in part by pricing actions and a slight favorability in currency rates. While the first quarter 2013 sales result varied by region, we had achieved strong growth rates in the year-ago period, and for comparison, these rates are included on each of the next 3 slides. In the Americas, on Slide 23, industrial sales declined 3%, with a 6% decrease in volume and product mix. Our sales of branded food service products were flat, sales to food manufacturers were down slightly and sales to our top quick service restaurants declined more significantly. As Alan indicated, the restaurant industry is under pressure from lower sales. We expect this to begin to improve in the next few quarters, as we get better traction with new product activity. In EMEA, our industrial business achieved another consecutive quarter of strong sales growth. We grew sales 7% in local currency, with a 5% increase in volume and product mix, driven by quick service restaurants. This growth was broad-based, supplied by our facilities in the U.K., Turkey and South Africa. In the first quarter of 2013, sales in the Asia Pacific region decreased 12%. This decrease was largely from volume and product mix, and was primarily the result of lower consumer demand at quick service restaurants in China related to the issues Alan discussed. We expect the situation there to improve in the next few quarters. With the lower sales this period, we show on Slide 26 that operating income for the industrial business was $24 million, down from the $31 million in the year-ago period. Operating income was also unfavorably impacted by higher material costs, increased retirement benefit expense and the mix of business, offset in part by our CCI cost savings and a partial recovery of the charge for out-of-specification materials that we discussed in our fourth quarter earnings call. For the total company, as we projected, first quarter operating income of $112 million was comparable to the first quarter of 2012. The favorable impact of higher sales and cost savings from our CCI program were offset by an increase of approximately $5 million in retirement benefit expense, as well as the impact of higher material costs, which we had expected to affect the first part of 2013. As described in our January call, we are projecting that material cost inflation will moderate from a high-single digit rate of increase in 2012 to a level close to 3% in 2013. The higher increase in material costs early in 2013 affected gross profit margin, as well as operating income. Gross profit margin of 38.7% was down 50 basis points from the first quarter of 2012. As material cost inflation eases heading into the second half of the year, we expect our CCI cost savings and a more favorable mix of business to improve gross profit margin, and for operating income growth to resume. Moving below operating income. Our tax rate for the first quarter was 28.5% compared to a rate of 30% in the year-ago period. The 28.5% tax rate included a $1.2 million discrete tax item that resulted from the recognition of a 2012 U.S. research tax credit. A new law enacted in 2013 retroactively granted the credit in 2012. For the remaining 3 quarters of 2013, we continue to project a tax rate of approximately 29.5%. Income from unconsolidated operations had a strong start to the year, rising 17% to $5.4 million. Our joint venture in Mexico grew sales 15%, contributing to this profit result, and we also had improved performance from our Eastern joint venture in India. We reported earnings per share of $0.57. This was a $0.02 increase from $0.55 in the year-ago period and was the result of the favorable tax rate, higher income from unconsolidated operations and a slight reduction in shares outstanding. This EPS result of $0.57 includes an unfavorable impact of approximately $0.03 from higher retirement benefit expense. We will have a similar impact in each quarter throughout 2013, reflecting the $22 million annual increase, and this is included in our guidance. Let's turn next to our cash flow and quarter end balance sheet on Slide 31. Cash flow from operations was $32 million, up from $23 million year-to-date in 2012. This improvement was led by the change in inventory, which decreased slightly in the first quarter of 2013 compared to the significant increase in the year-ago period. In 2013, we used $60 million of cash to repurchase 900,000 shares. At quarter end, we had $77 million still available on our $400 million authorization. Our balance sheet remains strong. We are at our target debt level and expect to use a combination of cash and short-term debt to fund the purchase of Wuhan Asia-Pacific Condiments. In September 2013, we have $250 million of debt maturing and intend to refinance this with medium-term notes. As a final topic, I'll review our latest 2013 guidance, and then we'll take your questions. Our guidance continues to exclude any impact from the acquisition of WAPC, which we expect to complete midyear. Turning to Slide 32, we reaffirm our projected sales growth of 3% to 5%. Consumer business sales are more likely to grow at the upper end of this range and industrial business sales at the lower end. We continue to project a 6% to 8% increase in operating income and about a 50-basis-point increase in gross profit margin, with at least $45 million in cost savings from our CCI program. Keep in mind that retirement benefit expense remains a $22 million headwind to operating income in 2013. At the bottom line, we reaffirm our outlook for $3.15 to $3.23 earnings per share in 2013. This includes an $0.11 unfavorable impact from increased retirement benefit expense. As we pointed out in our January call, excluding this increase and the year-on-year higher tax rate in 2013, we expect an on underlying double-digit increase in earnings per share. As stated previously, we are planning to increase brand marketing support approximately $5 million in the second quarter. As a result of this higher spending and the impact of increased material costs and retirement benefit expense, we expect second quarter earnings per share to be comparable to $0.60 in the second quarter of 2012. To wrap up our guidance, capital expenditures in 2013 are still expected to be in a range of $120 million to $130 million, and we expect our increased profit and further improvement in working capital to deliver another year of strong cash flow. Let's turn now to your questions, after which, Alan will provide some closing remarks. Operator?

[Operator Instructions] Our first question is from the line of Alexia Howard of Sanford Bernstein. Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division: I'm kind of popping a couple of quick questions. Are you able to quantify how large the industrial sales are into China? I guess, our look at it has been that it's a fairly small proportion of your total company sales or even the sales of that segment. So I was just curious about that. And if you could give us an idea of how much they were down this quarter, that will be helpful. And then just a second broader question. Do you have views on what's going wrong with the quick service restaurant sector in the U.S.? It seems as though it was in recovery about 1 year, 18 months ago, and now it seems to be dropping off again. And I'm wondering if you just have any high-level thoughts on what might be driving that, because it seems peculiar given recovery that we're seeing elsewhere across this huge space.

Sure. Our industrial sales in China are between 2% and 3% of our total sales. So it's significant. It's been a good growing business, but it's not an overwhelmingly growing business. I think what's happening with overall restaurant sales and we're seeing a bifurcation, I think, across a lot of categories with how consumers are spending. Consumers that are under stress are certainly experiencing the impact of the increased spike attacks and fuel prices, as well as a whole lot of other stresses, and they're not spending. Consumers at the higher end seem to be, at least so far, continuing to spend. So I think we're seeing a little bit of that play out in our business as well. We would think that would tend to impact the quick service restaurants more than some of the other broad food service channels. It's interesting, if you look at that chart that we showed on restaurant traffic, we were starting to see some sequential recovery, which kind of went away in the first quarter. And we think, over time, that will continue to get back.

Our next question is from the line of Ken Goldman of JP Morgan. Kenneth Goldman - JP Morgan Chase & Co, Research Division: I just wanted to make sure I understood the guidance for the industrial segment this year. I think you've guided to the low end of the 3% to 5% organic range or toward that end, but you just did minus 3%. Will the second half be enough to get to that plus 3%? Or is my math wrong there?

No, that is the guidance. We were saying that the industrial business will be towards the lower end of that 3% to 5% on a sales growth basis. And our expectation is that recovery will start to occur as we progress through the year, weighted more towards the second half of the year. Kenneth Goldman - JP Morgan Chase & Co, Research Division: Okay. And then one other question. We're seeing not just you guys but a couple of other food companies, and I realize that you guided to a reversal of this next quarter, and historically, you've done a good job of spending behind your brands. But you did lower your marketing as a percent of your consumer sales this quarter. Other companies, like I said, have done the same. Is there something that we should be looking at that you see across food? I mean, you see so many different food companies out there that would lead to this happening at a particular time, when maybe I didn't perceive that it would happen. I thought some companies would kind of reinvest, drive the volumes a little bit higher, both through promotions and advertising. And we're seeing some companies really cut that ad spending as a percent of sales. Is there something you're aware of that maybe we haven't thought of or I haven't thought of that's driving some companies in the food space to do this right now?

I can't speak broadly to what everybody's strategy is. But I know, in our thinking, we've had so much pricing over the last couple of years that we believe it's -- we're working on getting the right shelf price. So we -- so as you saw in the quarter, we increased our promotion spend a little bit and didn't increase our advertising spend. Now for us, we're coming off a pretty heavy increase in the first quarter of last year. So for us, it's just kind of rebalancing, and we still expect that our advertising spend for the year will be up, pretty much in line with our sales growth, so kind of in that 3% to 5% range. What I do see a number of companies doing and talking about is, again, getting the shelf price right so that they're capturing volume. I think everybody, like we are, are expecting this year's growth to be driven much more by volume than necessarily pricing, as we've seen some amount of stability in commodity prices.

Our next question is from the line of Akshay Jagdale with KeyBanc.

I wanted to ask about just the cadence of commodity or raw material costs and what this might imply for perhaps '14. It seems like your guidance assumes significant improvement in gross margins. I'm getting to around 150 basis points in the back half of the year. Can you help us understand like what are we going to see in terms of commodity prices or raw material costs in the back half of the year? And are you taking any positions for 2014? Is 2014 supposed to be a down year in raw material prices? Or is that too sort of early to even think about that?

Starting with 2014, I'm reluctant to go that far out with any forecasting, given the volatile environment we've lived through in the past 5 years. So I don't want to talk too specifically about 2014 or our positions. But to help you with our thinking in the back half of the year on the gross margin improvement, it's going to be a combination of things that we discussed in the call. One is certainly the material cost inflation we see easing as we go into the back half of the year, so we're feeling that 3% guidance more in the front half of the year. The second is the CCI for us occurs throughout the year. So we'll be incurring the CCI benefits as we progress, and that will help offset that as we get into the back half of the year and actually help improve margins. And then lastly, the business mix, both within the portfolio and the total portfolio. If you recall that fourth quarter, which is a large quarter for us, was not as strong as we wanted in the fourth quarter for our U.S. consumer business. And our expectation this year is that business will perform better and that, in fact, will have a very positive impact on gross margin. And within our industrial business, we're looking for the product portfolio itself to improve as we look at the pipeline and the types of items we'll be launching, again skewed towards the back half of the year.

Okay, that's helpful. And just one follow-up on your Indian business. Can you give us more color as to what's happening? I know you once you bought the business, you've had made some changes to the distribution model. If I remember correctly, I think you said sales were up 19% but volumes were down. I was surprised by that. I mean I'm aware that basmati rice costs are up, but I was under the impression volumes for the industry are up significantly as well. So can you just help us understand, broader picture, like what's going on in India, what you perhaps learned since you bought that business?

Well, we've learned a lot and are continuing to learn every day in that market. What I would say is I think our volumes may have been impacted a little bit by pricing, which the industry is broadly taking. And we feel pretty comfortable with our supply chain and distribution model, that we'll be able to show long-term growth in that business. But as always happens as we integrate a new acquisition, we look at the business model. There's a little bit of structural change going on in our business, but we're pretty encouraged by long-term growth there. And in our other joint ventures as well in India, we've seen some pretty solid growth.

The next question is from the line of Thilo Wrede of Jefferies & Company. Thilo Wrede - Jefferies & Company, Inc., Research Division: Could you talk a little bit more about the expansion of Kamis into Russia. Are you taking legacy Kamis products into Russia? Are you taking McCormick products into Russia now? What is the size of the overall opportunity in eastern Europe? And kind of which inning are you in at this point?

Yes, we're very early. We have a -- we've continued to expand distribution in Russia, primarily with the Kamis brand out of Poland, and we're encouraged by what we're seeing. And primarily, what we're seeing right now is a growth in distribution. Russia, like a lot of more emerging economies, especially in the spice business, is largely a lower-cost bulk business. But as the economy is growing, there's a real interest in modern trade and in safe, convenient packaged products, and that's what we're selling. So we're encouraged by what we're seeing. Russia has been a very, very fast-growing business in our category, and we believe it's got great opportunity for us to continue to invest and expand. Thilo Wrede - Jefferies & Company, Inc., Research Division: Okay. And then, if I take your $0.60 guidance for the second quarter and look at the seasonality between first half and second half of this year, it seems to me that the year is most skewed towards the second half in at least 3 or 4 years. Is that just coincidence or is your business changing to business that is really more biased towards the second half of the year? Is anything going on that we should be aware of?

Well, historically, our business has skewed towards the end of the year and specifically in the fourth quarter, so we do continue to see that. I think the dynamics this year are a little bit of the comparisons to last year, where we had a weaker end of year last year than we would have liked and have normally experienced, that we expect to get back to more of a normal pattern.

Our next question is from the line of Robert Moskow of Crédit Suisse. Robert Moskow - Crédit Suisse AG, Research Division: Just a couple of questions. I'm surprised no one has mentioned weather as being the primary reason for tough comparisons in quick serve restaurants in the first quarter. And I wanted to know if you thought that the warm weather last year contributed to your strength in that segment last year and set up the tough comp this year. And then conversely, do you think you got a benefit in your consumer business in first quarter? And then secondly, there's a very early Easter in the first quarter, and I want to know if anything got pulled forward into first quarter for the consumer business from the early Easter. And what does that mean for maybe a slower pace of growth in the second quarter?

Yes. Certainly, last year's weather, and we didn't rely too much on excuses then, but last year's weather certainly impacted a number of our seasonal items early in the year. And we think that did impact, and this year is more of a normalized pattern. So we think that could have happened. As we look at our business to quick service restaurants, we could point specifically to some new product wins, which launched early last year, that drove a lot of that business. There may have been some underlying weather events that -- good weather that got people out, so there may be some impact of that. We've looked at the impact of early Easter in our U.S. business, and we think there may be some slight impact, but not significant, because it was later in the month and only a little bit more than a week earlier than last year. So we think there may be some slight uptick, but we're encouraged by what we've seen in our U.S. consumer business. We think it was good execution on our Super Bowl event that created a pretty good momentum, as well as some more normal weather patterns. Robert Moskow - Crédit Suisse AG, Research Division: Alan, branded food sales for you in the U.S., like your sales to branded food manufacturers you said was flat, but you said you have a lot in the pipeline coming. Can you talk a little bit about your customers there and how they're looking at innovation this year? My perception is that they're doing a lot more, but then again I was surprised to see first quarter being flat. I thought you'd be a little bit higher.

Yes, I think what I've seen from the food manufacturers, as you well know, a lot of our customers were going through a number of structural changes last year, as they changed -- as some of the companies were being split, some were going through major restructuring, and I think there was more of a focus on managing costs. What I'm seeing right now is back to a focus on growth, but a focus on fewer, bigger initiatives in innovation. So while I'm comfortable that we have a good pipeline and expect to see that benefit us, as we talked about, through the second half of the year, there wasn't the kind of new product activity that we have historically seen early in the year from a number of our customers. Now remember, we're not necessarily a harbinger of what other -- all the companies are doing because if we are participating in a new product launch, we'll benefit from it. They may be still be launching stuff that we're not participating in.

Our next question is from the line of Jonathan Feeney of Janney Montgomery Scott.

I just wanted to clarify, I guess, is the discussion you had with Ken on the marketing spending. Was this the plan to kind of have this shift between Q1 and Q2? And if not like -- I mean, did you plan this coming into the fiscal year or did you respond based on the fact, as you talked about, inter-quarter here and see something that made you think you want to spend more in the second quarter?

No, it was a plan, and a part of that promotion spend is product allowances to get new stuff on the shelf. So we've had -- we typically, in a number of our businesses, don't pay major allowances. But as we launched things like Big Easy Rice and some of the steak sauces, there is a bit of that impact, and it was a part of our plan to be able to do that. I'm a big supporter of continuing to manage and increase our advertising spend, and I think you'll see -- and you've seen it consistently, we've more than doubled it in my tenure. I think you'll continue to see that we'll invest behind the consumer.

And I guess just another follow-up. Is it -- you have every reason to believe that one of your main customers in China will recover eventually, and there's some reason to believe, with the promotions going on there, that you'll see recovery in the second half. I mean, how -- if that were not to materialize, is it fair to say then that recovery on that particular customer, that it would be difficult to make your guidance?

I would not expect that to be the case. I do know that there is a lot of focus on making sure that -- from our customers, that consumers get back in the stores. I'd also say that because of the impact of that business on our overall company that I would not expect that to be the reason that we'd miss. I mean, certainly, it wouldn't help, but we expect a recovery.

Our next question is from the line of Andrew Lazar of Barclays.

Just 2 quick things. First, with respect to gross margin in the first quarter. I know you went through a lot of the puts and takes, Gordon. And maybe I don't appreciate the level of inflation that you did have in input costs in the first quarter, just because, usually, if you get 5% of volume growth and 2% of pricing in your consumer business, normally that drives a pretty awesome amount of sort of margin leverage in the quarter. So I'm just trying to get a sense, was there anything else in there that we should be aware of or am I just not appreciating the level of the skew of input costs to sort of the first part of the year versus the second?

I wouldn't suggest there's anything else in there, Andrew. Obviously, the $3 million up spend and some of the pricing and promotion impacts gross margin as well, because that's going to be between the gross and net sales line. But the other impact was clearly the industrial business, which not only had the volume declines, but as we mentioned in the call, had a negative mix as well within that business due to, again, some of the timing of the items that we're expecting to occur later in the year.

Okay, that's helpful. And then, if I had this right, I think last quarter, Alan, you said the level of activity in terms of potential M&A was maybe not as robust as you'd seen in prior years. And I'm just curious if there's any update to that. Like we're still in this very low interest rate environment, obviously it won't be around forever, and from a seller's perspective, it's hard to imagine a time where it'd be more attractive to think about selling an asset.

Yes, I mean, we still have a pretty active pipeline. And I don't know what's going to happen through the rest of the industry. But I'd say we have an active pipeline that we feel pretty good about, but we're not seeing a flurry of things coming to market at this point. Now a lot of the stuff that we'd be looking at wouldn't necessarily come to market, but we're not -- so I'd say, from our standpoint, we're seeing an active pipeline, but we're not necessarily ready to pull the trigger on anything right now.

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

A couple of questions. It's been a long time since I've heard McCormick talk about higher allowances. I realize that it doesn't sound like it's a big number, but is that -- like, how should I take that? I mean, what does that mean -- like, what's going on, on the shelf that allowances are moving up?

Well, I think it was a combination of 2 things. One is the kinds of new products that we launched in the first quarter and then secondly, working on getting the right price promotions. So it's -- again, like we said, it's not a big number. It is -- it impacted what you'd see in net sales in the first quarter.

I would just differentiate that, Eric, compared to your historical memory, which may be what you're referencing, which was driven by a lot of competitive activity, where this was a combination of what Alan just described. This was new product placement and some planned promotions to drive volume in the quarter.

So nowadays, when you guys are referring to allowances, you're really referring more to promotion as opposed to having to pay some retailer for shelf space for whatever, 2 or 3 years which...

You're absolutely right. That's absolutely right.

Okay. And then, second, can you -- maybe kind of on an annual basis, you referenced how big the emerging market is as a percentage of the total. You've been putting more emphasis on that in the last couple of years. How much was, like, let's say, your emerging market business up? Do you look at it that way these days, like in the quarter?

We do on an annual basis, not in the quarter. Gordon is going to see if he can put his hands on the data. But our emerging market business would be up, and we expect it to be up substantially as we complete this deal with Wuhan in China. But we don't necessarily look at it that way in the quarter.

Yes. I'll have to circle back to you, Eric. But I mean, clearly, if you look -- think of the components on the consumer side, it was up in strong-double digit for them, so that's definitely a strong number. Clearly, as we talked about the China industrial side of things, it was weaker. So I'd have to see how that adds up in total for you.

Okay. And I guess the reason why I'm asking is because, for the most part, over the last 10-plus years, you guys have executed very well on pretty much every acquisition, except that one in Holland years ago. But it doesn't sound like Kohinoor is doing that well, and that gives me a little bit of pause. I mean, you know we follow this little company, Amira, and they're growing their India business by -- way in double digits in terms of volume. And you're saying that your -- that business is -- that volume was impacted. So I'm kind of -- is that -- like is this something that we need to watch out for? I mean, I guess, it's not that big but then again, emerging markets is where you're putting a lot of capital.

Kohinoor specifically was up around 20% in sales in local currency. But that's -- as we said before, it's a combination of pricing, significant double-digit pricing, upwards of 20%, and a small decline in volume, which we feel compared well to some of the other competitors in India. So that's kind of the dynamic we're facing in this fiscal year.

Yes, I mean, our understanding, Eric, is that there is sensitivity to price in the basmati rice market. I know there's companies out there talking about their growth. Some of that is distribution-driven. Kohinoor already has a very strong distribution network at 400,000 points, where I believe some of the other conversations you may be hearing are being driven by distribution. So there is some expectation at the type of pricing that you'll see some basmati rice softness, and that does not, in any way, color our view on the opportunity that India presents, because we continue to use that brand name and that distribution system to launch new products. And that was part of the original acquisition plan, and that's continuing to be what we execute against.

Our next question is from Erin Lash with Morningstar.

I wanted to follow up on Andrew's earlier question about the acquisition environment. You commented that maybe, from your perspective, while the pipeline is still there, there's not as many maybe opportunities. And I wondered if you could address whether that reflected the quality of the assets that are potentially up for sale or whether it had to do more with the price that sellers are looking for at this point.

No, I think it's more structurally what's happened in the industry, as companies are kind of consolidating. They went through a major portfolio shift last year, and as companies are consolidating now, they aren't necessarily paring down their portfolio. So some of those established brands that we may expect to see, just as a matter of routine, aren't coming to market right now. On the other hand, a number of the kinds of assets that we look at are individually owned by entrepreneurs, and so theirs are more -- at some point, it will make sense for them to look for an exit strategy. And we get to know them, and we talk to them and make sure they know of our interest, and that's what we would expect. And we've talked about this in the past when we did the Kamis acquisition. We've known that business and that owner for more than a decade, and at a point, it made sense for him. That tends to be more what we're seeing.

That's very helpful. And then if I could just ask one follow-up on a different note. And I apologize if I missed this, but I was wondering if you could provide any details in terms of how your distribution or distribution gains are going with regard to some of the more alternative type channels like dollar stores and drugstores?

Yes, we've continued to grow distribution and brand offerings in those channels, which is really strong. Because what we've seen is those channels have migrated from very low priced, not very high quality products in our category to a lot more branded offerings. And so we're benefiting from that both in dollar, the drug channel somewhat. But we're still seeing opportunity for growth there.

Our next question is from the line of Ann Gurkin of Davenport & Company. Ann H. Gurkin - Davenport & Company, LLC, Research Division: I have 2 questions. One, if I can get an update on your R&D facility that opened, I believe, in January in China, and how we should think about leveraging your now global R&D capabilities. And then my second question has to do with should we still expect a new product or a new flavor delivery item by the end of the year to be launched?

First, on the technical center, we're very pleased with the expansion and the new innovation center in China, where we have a space now where we can collaborate with customers. We have a culinary center, very much like the model that we have in Hunt Valley, as we've done this in other parts of the world. So we're pretty enthusiastic about that. And we're operating -- we've made some organizational changes about 2 years ago to align our technical function, our R&D function under a Chief Science Officer with Hamed Faridi. And so we're seeing the benefits of that, and it's allowed us to move people from different markets and get some good overlap in experience and leverage our science from one area to the other. So I think we're pleased with that. We are -- the new technology that you're talking about in flavor, we're expecting to be more -- to impact more 2014 and '15 than we are to impact 2013.

Our last question comes from the line of Chuck Cerankosky of Northcoast Research.

Just a couple quick data points, Gordon. What was the CCI cost savings during the quarter and what was the contribution from the partial recovery from that supplier that was actually a negative in the previous quarter?

The CCI cost savings, they occurred fairly evenly throughout the year. So if you take $45 million and assume about 1/4 of that, that's a good estimate as to what occurred in the quarter. The partial recovery, we're still in discussions, so it's a bit of a sensitive timing issue as we would talk to all the various parties. I would say it was not material in terms of how much we had. It was not material to the quarter.

Not material, but more to come?

That depends on the discussions, quite frankly.

There are no further questions at this time. I would like to turn the floor back over for closing comments.

Thanks for your questions, everyone, and participating in the call. McCormick's leaders and employees all around the world are working to overcome the challenges of today's environment, deliver increased sales and profit and build value for our shareholders. Consumer interest in flavor continues to expand in both developed and emerging markets. McCormick is meeting this demand with our growth initiatives, increased global presence and our passion for flavor.

Thanks, Alan. I'd like to add my appreciation to those that participated on today's call. Through April 7, you may access a replay of the call by dialing (877) 660-6853. The conference ID number is 409379. You can also listen to a replay on our website later today. If you have any additional questions regarding the information today or anything else to discuss, I welcome your call at (410) 771-7244. This concludes this morning's conference.