McCormick & Company, Incorporated (MKC) Q3 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 third quarter financial results and latest 2013 outlook. We've posted a set of slides to accompany the call at our website, ir.mccormick.com. [Operator Instructions] As a reminder, the conference is being recorded. With me on the call are Alan Wilson, Chairman, President and CEO; and Gordon Stetz, Executive Vice President and CFO. Please note that today's presentation contains projections and other forward-looking statements. Actual results could differ materially from those projected. The company undertakes no obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events or other factors. As seen on Slide 2, our forward-looking statement also provides information on risk factors that could affect our financial results. It's now my pleasure to turn it over to Alan.

Thanks, Joyce. Good morning, everyone, and thanks for joining us. I'm pleased with the progress we're making in 2013 to advance McCormick's growth initiatives in operations around the world. We've had strong product innovation activity. Our recently acquired business, WAPC, is off to a great start. Plans are in place for a significant increase in our fourth quarter brand marketing, and we're again raising our projected cost savings from our CCI program. We continue to operate in a difficult environment and weak third quarter results in certain parts of our business have put pressure on our projected 2013 financial results. While we have moderated our sales and profit outlook for 2013, we believe that the growing consumer demand for flavor, along with our brand leadership, CCI program and solid fundamentals will lead to a stronger performance in 2014. For this morning's call, I want to begin with our third quarter results and then move on to a review of current market conditions and our outlook for fiscal 2013. I'll conclude with an update on progress with our growth initiatives. Turning to third quarter results on Slide 4. We grew sales 4%. This was driven largely by increased sales in our consumer business led by the acquisition of WAPC and a shift in sales from the fourth quarter. Industrial sales decreased just slightly, and we were glad to see some improvement in China this quarter. Gross profit margin was even with the year ago period, following the decline in each of the past 4 quarters. This improvement was primarily due to a favorable mix of business and our CCI cost savings. Operating income rose 3%, which is below our expectations for the quarter as the profit impact of the sales shortfall in the industrial business was greater than we expected. Despite this pressure, we continue to invest in our brand marketing this period. The favorable tax rate provided an offset to the operating income result, and at the bottom line, we reported earnings per share of $0.78. This is in line with the EPS guidance that we provided in June and even with EPS in the third quarter of 2012. For our consumer business, we grew sales 8% and operating income 9%. Our acquisition of WAPC and the shift in sales together contributed 10% to sales. I'll comment first on the sales shift and then address the underlying decline in consumer sales for the quarter. As in past years, we offered a holiday display program to customers to encourage adequate inventory and early displays for the fall cooking period and holiday season. This year, we had a particularly strong response with twice the number of display units shipped when compared to a year ago. As for the pricing action, we implemented a 3% increase in the U.S. that went into effect in the fourth quarter. Since our last major U.S. price increase at the end of 2011, the majority of our materials, including cinnamon, oregano, rice and packaging continued to increase. While savings from our CCI program have partially offset these higher costs, we believe this pricing action was appropriate. Turning to the underlying performance in consumer sales for the quarter, we had varying results this period, as Gordon will cover in more detail. But I want to provide some remarks and the third quarter results for our U.S. consumer business. If you recall, we achieved a strong 6% growth rate in the first half of 2013 for consumer business sales in the Americas. We had excellent sales and marketing execution for Super Bowl, Easter and grilling events. This was followed in the early part of the third quarter by lower sales of spices and seasonings, including grilling items, with softness in both our factory shipments and in retail sales. In the latter part of the quarter, we're encouraged by stronger growth at retail for the spice and seasoning category, and we expect this improvement to extend into the fourth quarter. For our industrial business, third quarter sales were comparable to the year ago period in local currency, although operating income was down 16%. As anticipated, we had weak demand from quick service restaurants in the U.S. and China, although China was better than we expected as sales begin to recover from consumer concerns about bird flu earlier this year. In the U.S., quick service restaurant customers have faced lower restaurant traffic and have emphasized menu items that don't use McCormick flavors. The decline in operating income is largely attributable to an unfavorable mix of business across regions as our U.S. industrial business is more profitable in some other regions due to scale and efficiency. Other factors affecting this quarter included the higher retirement benefit costs and increase material costs. For our industrial business, we have a more cautious outlook for the fourth quarter performance, although do -- we do expect better sales and profit growth. I'd like to comment next on our view of the current economic conditions in our primary markets and the impact on McCormick's business. There's been a lot of news recently about the slowdown in emerging markets. In Eastern Europe, we entered the market post recession with our acquisition of Kamis in 2011. The economic outlook in this region has been lowered for 2013, but we continue to see growth in our main markets and are achieving solid increases in both our consumer and industrial businesses. Latin America slowed recently. Although our primary business in Mexico has had solid sales growth in both our consolidated industrial business and our consumer business joint venture. And in Asia, recent reports indicate a slowdown in China and India. Despite a lower GDP growth rate in China, we're growing consumer business sales at a double-digit rate, and we believe that the weak demand from quick service restaurant customers relates more to consumer concerns specific to poultry than in general economy as our customers continue to invest in new locations. In India, we would expect greater economic volatility, and we're experiencing fluctuations in our businesses. But we're in this market for the long-term potential as a leading flavor company. India is a compelling market for McCormick where the per capita spice consumption is estimated to be 5x greater than in the U.S. In our developed markets, while we see a slow recovery underway in North America and Western Europe, it's a bit unsteady quarter-to-quarter and benefiting some demographic groups more than others. For our business, even with the third quarter slowdown in the U.S., the 52-week increase in our largest category, spices and seasonings, remain strong in our top developed markets as seen on Slide 7. Many customers and consumers are preparing meals at home as a way to explore new flavors, improve healthy eating and manage their budget. Some consumers are managing their budget by purchasing private label. In the latest 52-week period, the U.S. consumption data shows sales of private label up at nearly twice the category rate, although this trend was also affected by retailer price increases and by our success in reducing opening price point offerings at certain retailers to improve category sales and profits. By reducing these low price and lower margins opening price points, we're encouraging consumers to trade up to private label or our branded alternatives. At McCormick, we have the advantage of strong brand leadership, not just in spices and seasonings, but across many of our categories as seen on Slides 8 and 9. As a supplier of everything from opening price point to private label to premium gourmet, we continue to work with our customers to optimize the shelf set. Our objective is to keep our brands relevant and the perceived value to the consumer by continuing to invest in marketing, developing distinctive and compelling new products, gaining placement for our products across retail channels and focusing on in-store merchandising and execution to stay front of mind with consumers. Pressure on today's consumer in our developed markets is also evident in our year-to-date sales to the food service industry which account for about half of our industrial business. The other half of sales are products sold to many of the major packaged foods companies. A number of these companies have faced a period of weak category growth, private label inroads or branded competition and have aggressive programs underway to lower costs. As a supplier to these companies, this focus on cost reduction efforts can detract from their new product activity. While 2013 has been a difficult year for our industrial business, we're proud of our long-term relationships with food service and packaged foods companies that are global leaders. Together with these customers, we recognize that innovation is a key element to attracting the consumer and we'll continue to develop winning products to restore growth. We're encouraged by an industrial business pipeline of new products heading into 2014. I began my remarks with McCormick's third quarter results and shared our perspective on current business conditions. In the fourth quarter, we expect to grow sales 7% and adjusted earnings per share by 7%, which is moderated from our previous outlook due in part to the shift in U.S. sales. For the fiscal year, our sales and profit projections have moved to the lower end of our ranges, but remain within our long term 4% to 6% range for sales growth. And for EPS, excluding the impact of higher retirement expense and tax rate, are within our long term 9% to 11% EPS growth objective. So why do we expect this improvement in the fourth quarter given our year-to-date results? As discussed, we see retail sales recovery from the category softness early in the third quarter. We're driving sales with innovation and approximately $10 million in incremental brand marketing, which I'll describe in a minute, and we have some favorable comparisons to the fourth quarter of 2012 which included some areas of sales weakness and costs related to a supplier quality issue. Gordon will comment on these factors in more detail. Looking beyond 2013, while I'm not prepared to give guidance for 2014, we expect a stronger financial performance based from progress with our growth initiatives. In addition, we anticipate low single-digit material cost inflation, and we do not expect our 2014 retirement benefit expense or tax rate to be the headwind that it was for McCormick in 2013. I want to comment next on progress of our key growth initiatives and the momentum we're building as we approach 2014. Starting with acquisitions on Slide 12. We're pleased to report that WAPC is off to an excellent start with sales and profit ahead of expectations and on target in our integration process. We have sales and marketing activity underway in 3 central China provinces to introduce McCormick's strengths and capabilities to WAPC customers. And in the coastal regions where McCormick has strong relationships with modern trade, we've began to introduce WAPC bouillon products. Looking ahead, we have a solid pipeline of potential acquisition opportunities. These include core spice and seasoning businesses in markets where we don't have a strong presence, and in our current markets, brands that deliver flavor and that we can profitably expand. Innovation is another key growth driver. We're introducing a number of innovative new products this year and most of them are now in distribution. In the U.S., these include our flavorful McCormick steak sauces, easy-to-serve Zatarain's microwavable rice mixes and our success with a line of gourmet recipe mixes, for which 36% of sales are incremental to the category. In France, we introduced a premium gourmet spice and herb line and an assortment of recipe mixes for which we've already gained a 6% category share. This quarter, the U.K. is launching Flavour Shots, a blend of spices and seasonings and sunflower oil that combines convenience and great flavor. Retailers are telling us it's our most innovative product to date. Under the Kamis brand in Poland, we've introduced a full line of recipe mixes. In China, we have a new squeezable pouch ketchup and a 13-spice blend that will be supported by television advertising this quarter. And we're having success with the new Aeroplane brand desserts in Australia and convenient rice and seasoning blends in India. As for our industrial business, as I indicated, we're pleased with our new product pipeline as we head into 2014. In support of all of our innovation efforts, we continue to expand our sensory, culinary, flavor analysis and our other capabilities in our worldwide R&D facilities. Turning to brand marketing support on Slide 14. We're planning a $10 million increase this quarter, led by holiday activity in EMEA and programs in the Asia/Pacific region to build awareness and trial of new products. The fall cooking and holiday season are an important period for our U.S. consumer business. In addition to the significant increase and display activity, we're staging the same type of mega-themed event approach that led to the success with our first quarter 2013 Super Bowl event. We've kicked off the fourth quarter with a fall cooking event supported by a new TV ad, print and online support, and we have a similar approach ready for the Thanksgiving and Christmas season. Across all of our businesses, we're excited about the growth potential of our leading brands and continue to measure and improve the effectiveness of our marketing support. Underpinning our growth initiatives is the increased interest in flavor in markets around the world. Globally, Euromonitor projects robust long-term sales growth for spices and seasonings, our largest category. With a 22% share of this category, 4x that of our next largest competitor, we are a global leader and meeting this consumer demand for flavor with a broad portfolio of products and increasing geographic presence. Before turning it over to Gordon, I want to thank all of our employees for their efforts and achievements. Together, we have a passion for flavor, and we're working toward continuing our growth and success at McCormick. Gordon?

Thanks, Alan, and good morning, everyone. As Alan described, the third quarter results of our business segments varied by region, and in certain areas, were below our expectations. While we expect better growth rates in the fourth quarter, we have adjusted our full year outlook to reflect the third quarter performance. I'm going to begin with a closer look at sales and operating income results for each segment, starting with the consumer business. We grew consumer business sales 7% in local currency. As Alan indicated, this third quarter increase included the impact of WAPC and the shift in sales from the fourth quarter. Each of these contributed about 5% to sales growth in the third quarter for the consumer segment. Excluding the impact of currency, WAPC and the sales shift, consumer business sales declined 2% in the third quarter. On the same basis, we have grown consumer business sales 3% year-to-date. On Slide 18, in the Americas region, sales rose 4% with an underlying decline of 4%, following the strong first half and soft consumption early in the third quarter. While the shift in sales creates a fourth quarter headwind for this part of our business, we expect our brand marketing, new product activity and in-store fall cooking and holiday season execution to drive growth. And as a reminder, in the fourth quarter of 2012, the combined impact of Hurricane Sandy and retail purchase patterns lowered sales growth in this region by about 3%. In Europe, the Middle East and Africa, EMEA, sales in local currency were even with the year ago period. Increases in Poland and parts of Western Europe were driven by innovation and our brand marketing activity. This was offset by a decline in the U.K. related to weak retailer sales across a number of categories. Consumer business sales in the Asia Pacific region rose 54% in local currency. WAPC contributed 59%, leaving a base business decline of 5% in local currency. While we grew sales in China at a double-digit rate, excluding WAPC, sales in India declined significantly. In India, sales declined as consumers reacted to a significant increase in the cost of rice. Operating income for the consumer business rose 9% when compared to the third quarter of 2012. Higher sales and our CCI cost savings drove this increase and more than offset the impact of a $3 million increase in brand marketing support and higher material and retirement benefit costs. Turning to our industrial business as seen on Slide 22. Third quarter sales were comparable to the year ago period in local currency, with an increase in pricing offset by a slight reduction in volume and product mix. In the Americas industrial business, sales declined 2% as a result of lower volume and product mix. Solid sales growth with food manufacturers was offset by lower demand for customized products sold to quick service restaurants, as Alan described. We grew industrial sales in EMEA by 4% in local currency. This is on top of 7% year-on-year growth in the third quarter of 2012. In the third quarter of 2013, we had similar contributions from pricing actions and volume and product mix, with the primary increase in customized flavor solutions, supplied from our facilities in Turkey and South Africa to quick service restaurants. In the third quarter of 2013, Asia/Pacific sales in local currency grew 2% from the year ago period. This reflects an improvement in China with sales to quick service restaurants, and while we remain cautious, we expect further improvement in the fourth quarter. As a reminder, industrial sales in this region declined 17% in the fourth quarter of 2012. Operating income for the industrial business was $30 million in the third quarter of 2013 compared to $35 million in the year ago period. An unfavorable mix of business, higher retirement benefit costs and material cost inflation were offset in part by CCI cost savings. We expect operating income for this business to improve in the fourth quarter versus the year ago period, due in part to $4 million in costs associated with a supplier quality issue that we recorded in the fourth quarter of 2012. For the total company, third quarter operating income was $148 million compared to $144 million in the year ago period. The favorable impact of higher sales and cost savings from our CCI program more than offset an unfavorable business mix, approximately $5 million in retirement benefit expense, $4 million of incremental brand marketing support and higher material costs. As Alan indicated, gross profit margin improved from prior quarters and was even with the year ago period in the third quarter. This was due in part to a favorable business mix with the stronger consumer business sales as well as CCI cost savings. Moving below operating income. Our tax rate for third quarter was 26%, largely as a result of a $3 million discrete tax item. The 26% tax rate was up slightly from 25% in the third quarter of 2012. We currently expect an underlying tax rate of 29% for fiscal year 2013. This is down from our prior guidance of 29.5% as a result of our current mix of earnings across tax jurisdictions. Our 2013 guidance for income from unconsolidated operations continues to be an increase of about 10%. This growth rate was front-end loaded as income from unconsolidated operations was up 33% through the first half of 2013. In the second half, profit for our joint venture in Mexico is being unfavorably impacted by the cost to relocate to a new manufacturing facility. This new facility has been built to create capacity for growth in this market and to improve efficiency. We reported 78 -- I apologize, we reported $0.78 earnings per share. Compared to the third quarter of 2012, higher operating income added $0.02 to earnings per share, offset by the increase in the tax rate and the net impact of other factors shown on Slide 30. Let's turn next to our balance sheet and cash flow on Slide 31. Increases in working capital from the year ago period are largely related to extended terms, which were part of the holiday display program in the U.S., as well as the WAPC. Year-to-date cash flow from operations was $227 million compared to $256 million in the first 3 quarters of 2012, with the decrease due, in large part, to the timing of tax payments and higher receivables. During the quarter, we issued $250 million of debt and were able to price our new 10-year note offering with a 3.5% coupon, a 90 basis point spread to U.S. treasuries. These proceeds have been used to retire our long-term debt that came due in September. In the fourth quarter, we intend to bring the debt levels closer to our debt-to-EBITDA ratio target by fiscal year end. Following the acquisition of WAPC, we had minimal share repurchase activity in the third quarter. In the fourth quarter, we expect to complete our current $400 million authorization, which had $45 million remaining at the end of the third quarter and to begin repurchasing shares from the $400 million authorization approved in April. Before turning to our outlook, let me comment on the outcome of the lump sum payout program for the U.S. pension plan that we announced during our last earnings call. As we described, a lump sum payout was offered to approximately 3,300 former U.S. employees with deferred vested pension benefits. Based on the strong response to this program, we expect to pay out approximately $60 million, which will be funded from pension assets. We will record a settlement charge of approximately $20 million in the fourth quarter and will provide supplemental non-GAAP earnings per share exclusive of this item. This program was an important step forward in the long-term management of McCormick's retirement plans and we are pleased with our success. As a final topic, let's review McCormick's latest 2013 financial outlook as shown on Slide 33. The projections I am sharing are on an adjusted basis to exclude the impact of the settlement charge. Starting at the top line, we expect a 7% sales increase in the fourth quarter, which puts us at the lower end of our 4% to 6% range for fiscal year 2013. We are seeing improving consumption numbers. We expect a favorable impact from WAPC of 2% to 3%, and we have a favorable comparison to the fourth quarter of 2012, which had some sales weakness in the Americas consumer business. Offsetting these increases in part will be the unfavorable impact of the sales shift we described. We expect a double-digit increase in operating income for the fourth quarter, leading to a 3% to 5% increase in adjusted operating income for the fiscal year versus our prior guidance of 5% to 7%. Factors that we anticipate will have a favorable impact on operating income this quarter include the projected sales growth rate and CCI cost savings, which we now expect to reach at least $55 million in 2013. In addition, our fourth quarter 2012 result included $4 million of expense related to a supplier quality issue. We expect these factors to more than offset a planned increase in brand marketing support of approximately $10 million and a projected increase of about $5 million in retirement benefit expense. Moving on to the tax rate. As I indicated, our guidance for the fourth quarter tax rate is 29%. This compares to a tax rate of 24.7% in the fourth quarter of 2012 due to cash repatriation. This year-on-year variance in the tax rate is expected to lower our adjusted earnings per share by approximately $0.07 in the fourth quarter. For the fourth quarter, we expect to grow adjusted earnings per share of 7% from earnings per share of $1.11 in the fourth quarter of 2012. We expect operating income to have the strongest contribution to this growth, followed by the favorable impact of lower interest expense and shares outstanding, partially offset by the unfavorable tax rate impact. This fourth quarter outlook leads to a fiscal year earnings per share projection at the lower end of our $3.13 to $3.19 range. As shown on Slide 34, excluding the impact of increases in our 2013 retirement plan expense and the higher tax rate, our underlying adjusted earnings per share growth rate is expected to be close to 9%. Just to be clear, the $0.11 increase in retirement benefit expense I'm referring to here is the actuarially determined annual expense, which is part of our operating cost and is separate from the onetime settlement charge related to the lump sum payout program. That concludes my comments on guidance. So now let's turn to your questions, after which, Alan will provide some closing remarks. Operator, we're ready for the first question.

[Operator Instruction] Our first question comes from David Driscoll with Citigroup.

I have 2 questions. One on the cost outlook, the inflation outlook, and one on that comment about the 2014 tax and retirement costs. On the cost outlook, the -- I believe what you wrote there was in 2014, you're looking for low single-digit material cost increases. I guess I just want to get your impressions that if we have deflation in the grain markets potentially affecting much of the grocery store, how do you see your business in 2014 in comparison to what might be many other categories, in fact, seeing price declines while you guys are actually having to take pricing? So that's the first one.

Yes, we -- our commodities certainly are different. Most of our products are grown outside the U.S. in areas that are within a few degrees in the equator. And there's a lot of different dynamics that impact that. Weather, like monsoons in India, can impact some of the -- some of our costs. We're certainly not expecting cost declines across our core spice and seasonings ingredients. We may see some and -- that impact more of our industrial business in things like grains, but we're going to be a little counter to what you may be seeing in some of the other commodities. I'll let Gordon take the other part of the question.

Second question was just on 2014 tax and retirement costs. It seems like from the comments, both from the lump sum payment, like I'm struggling to understand why that's not favorable to the retirement cost picture going forward in 2014. And the tax rate, it doesn't seem like it should be moving up much. So when you make this comment that it's less of a headwind, that still suggests that it is a headwind. It's just less of a headwind. But kind of why is it? It doesn't seem like it perhaps should be.

Yes, David, just to focus first on the retirement going forward, our -- what we're saying when we say less of a headwind is really we're speaking to the fact that this year's increase in the operating income expense impact of that was a function of the interest rate environment, primarily where rates declined at end of last year when we established our valuation. Our expectation, given the rate environment, is certainly that rates -- and as well as everyone knows this on the call, rates shouldn't decline any further. So at a minimum, we would expect that expense not to go up like it did this year. And then if it's a favorability, it will purely a function of what the rate environment is at November 30 when we establish the valuation date. And to your point on tax, tax rate, again, the favorable rate that we experienced in 2012 was primarily a function of a transaction we did, which was cash repatriation, which we did not duplicate this year and do not anticipate a similar transaction at this stage as we look into 2014. So again, we're not looking for any unfavorable comparison related to the tax rate as we head into 2014 as we had experienced in 2013.

Your next question comes from Ken Goldman with JPMorgan. Kenneth Goldman - JP Morgan Chase & Co, Research Division: Alan, if I heard you correctly, and I may not have, I thought you said -- you mentioned some success in reducing opening price points at certain retailers and that this is encouraging consumers to trade up to private label or branded alternatives. Again, I may not have heard that right, but it's not often that a company talks about trading consumers up to private label. So maybe you can add some color there.

Yes, sure. What -- opening price point in the spice business, and has been there for a long time for these products. And we have a number of these brands like Fifth Seasons and Spice Classics and a couple of other control brands that would show up actually in our branded sales that sell between $0.50 and $1. And a number -- some retailers, some major retailers have reduced their reliance on those. And what's happening is, that's improving the category sales and profits for the retailer. A lot of those are shifting into private label, but that's a good thing for both us and them. Kenneth Goldman - JP Morgan Chase & Co, Research Division: Okay. And then when you look at the change in your consumer performance in the Americas from the beginning of the quarter to the end, and I know you've touched on this a little bit, but can you just again add some color as to what you maybe think some of the biggest drivers were of that improvement...

I never like to use weather as an excuse, but the early part of June, it was a fairly atypical weather for the early part of the summer. I think that did impact it, we saw -- and the reason I can say that with some confidence is because of the impact on grilling items and -- which is a big part of our summer sales in the U.S. So I think there was something going on there, and we've seen it from the releases by retailers and other food manufacturers that the beginning of summer was weaker than I think they expected. We're encouraged by what we've seen later in the summer and what we're seeing early in the fall.

Your next question comes from Leigh Ferst with Wellington Shields. Leigh Ferst - Wellington Shields & Co., LLC, Research Division: I was wondering if you could tell us what kind of reaction you've gotten to 3% price increase. And what kind of marketing you're doing to -- marketing promotion you're doing in relation to that?

Yes, price increases are never easy. And as David mentioned in the first part of the call, we're a little counter to what some other companies are seeing because our products are going up and some are seeing some commodity health. By and large, and we have a long history of this, we have a good story. We are explaining the reason for the price increase and we're moving it through. From a consumer standpoint, we are certainly continuing our strong advertising program. We are promoting to make sure that we get to the right price point at the right time, so that we maintain consumption as we move it. 3% is pretty modest as this is, I think, one of the lower price increases we've had in the last 5 or 6 years. Leigh Ferst - Wellington Shields & Co., LLC, Research Division: And shifting to a long-term perspective, I know you're not giving guidance on '14, and you're still using the Euromonitor 5-year outlook, but is there any change in how you look at your business long-term based on what's going on around the world?

Well, certainly, we believe long term that we're well positioned. There is -- there is some lumpiness in different markets that we are adapting to, and we continue to do that, but we're -- we believe that long term, we're in a great business, we are seeing category growth rates that are strong. Over time we're seeing the world's consumers continue to develop a level of affluence, which means they improve their food supply. And we think that's positive. We're seeing more move in most markets to modern trade. We think that's all positive. Certainly, we believe we're well-positioned. And we'll adapt our business to make sure that we can manage through whatever situation that we have. Leigh Ferst - Wellington Shields & Co., LLC, Research Division: Great. And regarding Wuhan, you said you're ahead of plan. Are you -- do you think that's because you had to wait so long to implement this and you had a long-term to -- a long time to evaluate what was -- and plan what you wanted to do there?

Yes, we had a very strong integration plan and it's been well executed. And so I think that's a -- that is certainly a piece of it. I want to give the team on the ground a lot of credit for what they've done to bring it in. But we, given the length of time between the announcement and the actual close, we did have time to put together good plans.

Your next question comes from Chris Growe with Stifel. Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division: I just had 2 questions for you. I wanted to start first with the industrial division and just to get a better sense of kind of what's going on in that division. We have seen an improvement in Asia, still some weakness in the U.S. I guess what I'm trying to get at is, do you have any more visibility into the pipeline of products your restaurant customers are implementing, do you foresee an improvement, say, into Q4 and into early 2014?

In terms of specific restaurant customers, about half of our business is foodservice distributors and the other half are quick service. We're seeing actually more optimism in the branded food service business than we are in the QSR. From our standpoint, but remember, this isn't -- you shouldn't read that we're making a comment on the entire consumption for QSR, just the products that we supply. We tend to supply more core menu type items. And as they are introducing breakfast, for instance, that's not necessarily an area that we play in. We're encouraged that we're seeing some new product activity, but we're not seeing enough to offset some weakness in the core items. Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division: And so do you have visibility to those improving say, later in the quarter and early into next year? Is there any kind of a little positive outlook as we look ahead?

Yes, we think over the next few quarters, we're going to see some continued improvement, but we've expected to see that for -- as we've have headed in the second half of the year. We think fourth quarter will be better, certainly, than we've seen in the first 3 quarters. Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And just one -- if I could ask one on the consumer division. You had a weak start to the quarter, it sounds like, from a demand standpoint. So I'm just curious, was that related to I guess what you were talking about earlier about some of the weather weakness earlier in the quarter? And then just to understand, as you ship more product ahead to the degree at which that helps sales this quarter, it sounds like you got more product out there, more in the slate out there. Do you think that could help fourth quarter sales, then, as well for the consumer division?

Yes, we think that will help fourth quarter consumption. The earlier we get it up, the more likely we are to move it through. And last year, we saw consumption -- even with everything that happened, we saw consumption stay pretty steady. But our factory sales were a little more lumpy because of certain internal events. But I think we're feeling pretty good at this point as to where we are in fourth quarter. We've got a good advertising program. We've got strong displays out on the floor. So we're encouraged and optimistic about fourth quarter.

Your next question comes from Alexia Howard with Sanford Bernstein. Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division: Can I ask about the U.K. You mentioned weak retailer sales over there. So I'd like to get a bit of a sense of whether that's likely to persist and what's causing that over there?

The U.K. has been a little bit weaker. The question on what's driving that weakness is probably a little tougher. The U.K. is, as you know, a difficult market. The retailers are largely consolidated. We saw just relatively flat sales in the U.K. in the quarter. We again, we have a good line of product activity. We have advertising in place and so we're trying to make sure that we can keep our products relevant to the consumer. Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And as a quick follow-up, the Mexico JV relocation, when will that be completed? And when can we expect a rebound in performance over there? And I'll pass it on.

Yes, the performance of our business -- the underlying performance of our business in Mexico has been pretty good. We'll finish the charges in the fourth quarter as we relocate from an older plant to a new plant, where we expect higher productivity. So we should see the impact of that as we go in through next year.

Your next question comes from Thilo Wrede with Jefferies.

Gordon, in the last few quarters you've made a good effort of reducing inventories. You seem to have had inventory growth this quarter. What's your view on inventory right now and your ability to reduce that going forward?

Well, I think the 2 factors impacting it this quarter, the vast majority of that increase year-over-year relates to the Wuhan acquisition, probably -- not probably, 70% of that increase year-over-year is primarily the fact that we now have inventory associated with that acquisition. We did have also some increases as we prepare for the fourth quarter this year, making sure that we're ready for great execution around our products and having that inventory sufficient to drive through with the programs that we have in place. I'd say, on a go-forward basis, it is something that we continue to have a lot of programs around and we have lots of energy around our sales and operation planning process. You've heard us talk greatly about systems improvements, which we have done and we're leveraging globally. So if we look at our 3-year forward plans, we continue to believe that that's an area we can get efficiencies and continue to get a benefit in our cash flow.

Okay. And then maybe I missed this in your prepared remarks, but you're obviously now doing price increases in the U.S. consumer business. Yet, in the third quarter, price was more or less flat if not down in the U.S. consumer business. How do I need to look at that? Why was the pricing going in the opposite direction of what I would have expected?

We haven't taken pricing in a couple of years, it's been 2 years. And so what we introduced was a 3% price, which will be effective in the fourth quarter. So you would not have seen pricing impact in the third quarter at all.

But was there an increase in promotions in the U.S.? For example, I mean last quarter, price grew at a much healthier rate.

There may have been some promotional activity. Our -- Gordon, can you help me with that?

Yes, I mean really, we haven't seen a great deal of price realization in the U.S. I mean, the only price that we've taken was a minor one that was in the third quarter of last year related to pepper, so you probably saw a slight benefit. But we've anniversary-ed that now as we've come into this third quarter. So as we go into Q4, as Alan said, the latest price increase really is not executed until partway through the fourth quarter.

Okay. I appreciate that. And then last question I have for you was the rice business in India, you said it was a reaction to an increase in rice cost. If the Indian consumer, other than the price increase, how is the Indian consumer doing right now? Is that a healthy market for you other than that?

I wouldn't say it's a healthy market. There's a lot of volatility in India and you've seen that with currency changes. So we've got some internal things specific to our business that we're working through and that's around making sure that we've got a competitive position. But I wouldn't say that the Indian consumer at this point is a robust consumer.

Your next question comes from Chuck Cerankosky with Northcoast Research.

If you sort of look at the Americas and keeping in my how people talked about this bifurcated recovery, can you comment on the demand trends both in consumer and industrial segments? What you're seeing by channel and type of restaurant and retailer?

Yes, we're seeing -- and it is, I think, bifurcated. I think there are certain segments that are doing well. We're seeing in most of our markets more robust, an interest in high-end gourmet-type products. We did a really good job with a higher-end gourmet product in France. We're seeing that and some results in the U.S. as well. And we're seeing from retailers like we talked about, eliminating some of the opening price points, they're still a value consumer, but we're able to serve them a little bit better with better quality products. I do think it is tough. I think consumers are not feeling very robust. And I think it's a tough market.

Your next question comes from Ann Gurkin with Davenport. Ann H. Gurkin - Davenport & Company, LLC, Research Division: I have 2 questions. One, if you think about top line growth for the next 12 to 18 months, what do you see as the key levers to driving that growth? Is it pricing? Innovation? Mix? Can you help me as to how to think about what drives top line?

Yes, I'll start it and Gordon, if you want to add anything, please do. Certainly, we'll see some impact of pricing that we'll experience most of the next year. We have a pretty good pipeline of new products that we think will help drive growth. We're starting to shift our industrial business into more higher-value flavor-type products as we have some new technology coming online. So we kind of see some of that coming. Gordon, do you want to add anything to that?

Yes, I'd emphasize back to our long-term algorithm and the elements of that, where we talk about the 4% to 6%. Now don't take this yet as guidance for 2014 but certainly, if you break that down, 1/3 of that is in the base business around strong execution and the strong category trends, 1/3 of that through the innovation and 1/3 of that through acquisitions which have occurred, on average, over time. So if you look into next year, we have certain elements of all of that with a little bit of price. So that's the way I would be thinking about it. Ann H. Gurkin - Davenport & Company, LLC, Research Division: Okay. Great. And then second, in the fourth quarter, for some reason, I think you all are going to launch a new flavor platform, a product platform. Is that still on track? Can you give me any update on that?

It will be commercialized and we're in the process of commercializing it. It really won't impact fourth quarter very much. It will be probably be more through next year as we start to get it completely online. Ann H. Gurkin - Davenport & Company, LLC, Research Division: But we should still learn about it in Q4. As expected?

Yes.

Your next question comes from Robert Moskow with Credit Suisse.

This is actually Rachel Nabatian in for Rob Moskow. So by our math, given that $30 million was pulled forward in 3Q, it seems like you need a really big 4Q for consumer, especially since industrial is expected to be weaker than our prior expectations. Now to be fair, you did say that it's an easier comp and you have programs in place to drive sales. But even so, it still seems like you need a rather large sales increase. So I guess we just wanted to know, what gives you the confidence that you're going to be able to hit your sales target?

Well, just -- you pointed out all the accurate elements. We are looking at a more favorable comp in Q4 as it relates to both the U.S. consumer business and the global industrial business. When you net the 2 elements of the pull-ahead and the issues that we experienced last year in the Americas on the consumer side, we're probably up against a net headwind of about 2% to 3%. So your question obviously is what gives us the confidence. Well, we're starting in a good place with the merchandising displays up there and we're starting in a good place with the consumption trends that we're seeing. And behind all that, we have very, very strong programs targeted in every month in advertising around, as you heard us talk about the mega events and for holiday cooking. So ultimately, it's going to be the execution and the pull-through that we're gearing up. You heard us talk about $10 million of incremental spend to drive those sales. So we're looking for sales recovery in that Q4. Combining that with what we would see as an improving gross profit trend relative to what we've seen prior year in the first 3 quarters, that's all the elements of our thinking in our guidance.

Your next question comes from Rob Dickerson with Consumer Edge.

I guess, just to try to summarize the strategy around the pricing increase a little bit. It's basically what you're saying is that input costs, you're probably expecting it to be still low single-digits into fiscal '14. And because of that, you're taking the 3% price and that's it? Because I guess what's still a bit counterintuitive is if we look at the global forecast despite growth either in the U.S. or on a global basis, when you look at your trends, I mean, you have been losing share and that share has been lost by volume. So I'm just trying to get an idea of like how to match the price increase with continued volume share loss because it would seem like, as you said, as we go into next year, most of the growth I would think would be coming from price at least in the Americas, which could mean that you could continue to lose volume. So if you could just comment on that please?

Yes, we believe we've got the programs that will help us to continue to drive and increase volume. And our growth is going to be based a little bit on price, pricing is a big part of our algorithm. We only use price to offset commodity costs and we have seen that commodity cost increases. Part of what you've seen in the growth in private label has been price. Our private label customers and our retail customers, whether we supply the private label or not, have been taking price. So I think you're seeing some of that in the dollar growth from private label as well. So we're in an environment and we've been very responsible on price where we believe that this is appropriate. We have not taken pricing in a couple of years. It was time to do that because our costs have continued to accelerate. But we take our responsibility in terms of how we price, we take a lot of responsibility and accountability for that.

Okay. And then just a quick follow-up. On the marketing side, it looks like kind of as the year has progressed, the plan is to increase marketing and it's supposed to be up $13 million for the year. I think original guidance, it was supposed to be up $15 million. So you're technically spending less than you originally expected even though $10 million of it, almost all of it is coming in Q4. So can you just comment on why -- I mean, I know, it's only $2 million, which is -- off of $15 million, but could you just comment why it would come in at a little bit lower? And why it is so Q4-loaded even with the volume pressure that we saw in Q3?

We do, in our U.S. business, about 40% of our sales in the fourth quarter. So it would be back-loaded. The highest ROI that we get in our marketing programs are geared towards the Thanksgiving and holiday -- and Christmas periods. So it just makes sense that that's where the bulk of that would be, and it supports the programs and the display activities that we have out there. We are leaning into our business. We recognize that we have had some challenges. We've typically had pretty good volume growth. We want to continue that and that's why we are leaning in with our marketing programs.

Your next question comes from Eric Katzman with Deutsche Bank.

I guess first question. Alan, you know it's -- I've been hearing about Wal-Mart reducing inventories across many categories. And so I guess in relationship to the fourth quarter and your easier comps but hopes for some improvement, kind of how does -- how do lower inventories at retail -- by the retailers figure into your calculations of improvement?

Yes, we -- I'll say, the big impact on the sell-in in the third quarter were specific large customers who took their orders at end of August instead of at the beginning of September. So that would say that they are believing, at least in this category, that there's some reason to get those displays up early, and we've seen them and they're up. So that we think is positive. Ultimately, what happens is the consumer is going to have to pull it through, which is why we have the marketing programs that we do. So we're banking on our sales -- our factory sales and our consumption relatively matching up. We haven't factored in that we think there's going to be a large de-loading by the retailers at the end of the year. Typically, we don't see that in our category in the fourth quarter.

Okay. And just to kind of follow on to that. It seems like over the last few years really, and I've heard this from some investors, questions about how shipments versus consumption have moved around. I think last year, you may have had some movements from the fourth into the first quarter and now you've had third versus fourth. And so as the category manager and clear share leader, why don't -- why doesn't the company have seemingly like better or maybe more consistent kind of shipments as opposed to what seems kind of almost like a high low from quarter-to-quarter and year-to-year?

I think what happens, and what's happened in more recent periods, is customers have been buying a lot closer to consumption. And in their stores, they tell us, their customers, the consumer is buying on a different pattern. They're buying closer to when they get paid. And so they're trying to manage their levels of inventory closer to when they're going to have needs. When they miss it and they have too much inventory, they immediately react to that. When they have not enough inventory, which is what happened in fourth quarter last year, they also react to that. So I think there's -- I think it's a little bit less certainty around how the consumers purchase patterns are and a focus by everybody on making sure that they're maximizing cash flow.

Okay. Last question. Your stock has underperformed the group pretty significantly this year, maybe anticipating some of what we're talking about today. You're saying that fiscal '14 should be a pretty strong year. Yet it sounds like, and it's not a huge business, but it sounds like Kohinoor is missing your targets and Wuhan is not going to add to earnings next year, if my memory is correct. So I guess, what else can you -- you talked about the top line a little bit for '14, but what should -- and you talked about some of the non-operating things. What should help? Is like CCI savings maybe going to be accelerated? Or is there -- you're just counting on the mix shift getting better to help the business? Because it sounds like input cost will continue to be a bit of a headwind.

Yes, without getting into giving guidance for next year, we're still putting our budgets together. But the key things that we think will help to impact, one is recovery in our U.S. industrial business and in China as well. Wuhan will add about $0.03 the next year. We do expect to be in a better position in India next year, so that is certainly a piece of it. We've talked about the impact on pension cost, which we're not forecasting at this point, but we believe shouldn't be the headwind that they've been this year. And then underlying -- and none of that stuff actually matters except the core performance of our business. And we believe that we will continue to show the kind of resilience that we have with good advertising programs, good new product introductions and execution on our -- in our core business.

[Operator Instructions] Your next question comes from Akshay Jagdale with KeyBanc Capital Markets.

So I wanted to -- I'm a little still confused on how this quarter turned out relative to expectations? Obviously, lower guidance. The numbers came in on the sales and gross profit, and gross margins are much below what we had, but we could have been way off. So how did the quarterly sales numbers come in relative to your expectation? And then I have a few follow-ups on that.

Well, as we try to highlight in the call, Akshay, that from the U.S. consumer side, the underlying core was not as strong as what we would have liked based on the slow start to the third quarter. However, relative to our expectation on the holiday program, that came in a bit stronger. So net-net, 9% operating income growth on the consumer side is pretty strong and I'd say, primarily close to our expectation, although we would have liked to have seen stronger performance in areas that have been doing quite well year-to-date. Europe is -- was flattish in consumer. And although the team is doing a great job there, that had been up until that point, performing at a slightly better rate than that. And certainly on the industrial side, we would have -- we expected a weaker performance, but we would have liked to have seen even stronger performance out of the industrial side relative to our expectations. So basically, that weakness in those areas were offset by the tax rate.

That's helpful. And then just focusing on the base consumer performance on sales, what was it that came -- I mean, is it the consumer switching to private label? Was that something that was unexpected? Or was there something else to it? I mean, I'm just trying to gauge what might happen in the fourth quarter? So I'm trying to understand whether it was the consumer behavior that was different than what you expected? Was it your execution in the stores? Just if you could give some color on that, that would be helpful.

No, it was weak consumption at the beginning of the quarter, as we talked about a fairly weak offtake for Memorial Day. And I think you've heard that, and consistent with a number of other companies. And we've seen some improvement as we have gone into the later part of the quarter.

And so what -- what do you think is underlying, sort of, why is that happening? Why is the consumer...

Why is the consumer getting better?

Well, no. First of all, what changed early on in the quarter in your opinion, from the consumer standpoint, that caused them to be more cautious? And then what's changed since then that it's getting better through the quarter?

I think, one, was a weak Memorial Day, a rainy Memorial Day up and down the East Coast impacted the sales of grilling products and related categories. I think if you look at some of the related categories around that, you'll see that. And what we've seen with improvement, I think, is that the consumers are starting to come back and we've seen that. And I don't want to put too much stock into to the 4-week IRI or Nielsen data, but we've seen continued improvement off the weakness from early in the quarter.

Okay. Great. And just 1 last one on India. You mentioned next year you expect improvement there. Is that distribution-driven? Are you changing price points? Is it new products? Can you just help me understand that?

Well, we expect to see some impact from the new product introductions that we introduced this year. We think that will be a positive, but we also expect that we should see -- and we know the rice harvest is right now, we expect to be in a better position in terms of our rice productions for next year.

Your next question comes from Andrew Lazar with Barclays.

Can you talk a little bit more about the piece of the industrial business with sales to other food manufacturers? It doesn't seem like that was so much the issue in the quarter as you discussed. It was more of the QSR side. But what we've heard obviously from, at least, more recently a lot of the food manufacturers out there, trends in their businesses haven't been particularly robust on the volume side So I'm just trying to get a sense of if you expect obviously industrial to get better as we go into '14, is there a risk that the piece that goes towards other food manufacturers maybe is at risk a little bit just given what we've heard from so many of the other food manufacturers? First question.

Yes, we think that is at some level of risk. Our focus in the industrial sales to other food manufacturers tends to be heavily in the snack area. And that has seemed to continue to be fairly robust, whether it's crackers or chips or those sorts of things, that part of the business has been fairly robust and we still see a lot of new product activity. So we're feeling a little more encouraged with that. I think as we saw at your conference, Andrew, there are certain customers that are pretty focused on productivity and cost. And if they aren't introducing new products, that would -- that could impact our business.

I think the last price increase that you mentioned was in 2011. And I think that was the first time you had taken pricing, maybe ever, heading into your key fourth quarter or the seasonal fourth quarter. And I remember at that time, that was -- you had to make sure that went smoothly and was a little bit of a risk. From my recollection, it went very smoothly. I don't think there were any issues around pricing into the big holiday quarter. So if you can just remind me if that was the case and what were some of the learnings there and did that help you obviously with the confidence going into this fourth quarter with the pricing?

Yes, it had been a long time since we had taken an increase heading into the fourth quarter. And that one was pretty much commodity-driven. And it did give us the confidence that we can execute it and that we can maintain our promotional plans as we do that. So -- and our view was that this was a better time to do this given where our markets are and where our customers are, to be able to get it executed. And we're finding -- certainly, it's not easy, but we're finding that we're executing it.

That concludes our Q&A session. I will now turn the call back to Alan Wilson.

I want to thank you for your questions and for participating in the call. Our passion for flavor, our broad portfolio and our expanding global presence have led to a decade of strong performance at McCormick, and we believe we are well-positioned for the future. Through our growth initiatives, CCI program and the efforts of our employees around the world, we expect to deliver solid sales and profit growth in 2013 and are committed to delivering on our long-term financial objectives.

Thanks, Alan. I'd like to add my thanks to those who participated in today's call. We ran a bit long, so thanks for your interest and sticking with us. Through October 3, a replay of the call can be accessed by dialing (855) 859-2056 and the conference ID number is 34927804. You can also listen to the replay on our website later today. If anyone has questions regarding today's information, we can be reached at (410) 771-7244. This concludes this morning's conference.

Ladies and gentlemen, thank you for joining today's conference. You may now disconnect.