McCormick & Company, Incorporated (MKC) Q1 2014 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 for a discussion of McCormick first quarter financial results and 2014 outlook. We've posted a set of slides to accompany the call at ir.mccormick.com. [Operator Instructions] With me this morning are Alan Wilson, chairman, president and CEO, who will begin with comments on the latest financial performance and the business update; and Gordon Stetz, executive vice president and CFO, who will provide a more detailed review of first quarter results and the latest financial guidance for 2014. As a result, 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 two, 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.

Thank you, Joyce. Good morning everyone, thanks for joining us. Our first quarter results included solid sales growth and a strong cash flow, as well as earnings per share that was ahead of our initial outlook. These results were driven by progress with our growth strategies and the dedicated efforts of McCormick employees around the world. We grew sales 8% in local currencies. The incremental impact of WAPC, acquired mid-2013, accounted for about half this increase. Product innovation, distribution expansion, brand marketing support, and pricing also drove sales growth in each of our two segments. Gross profit margin rose 70 basis points, due in part to a favorable business mix and our comprehensive continuous improvement program, CCI, which is generating cost savings throughout the company. Increased sales, higher gross margin, and our diligent expense management led to an 11% increase in operating income, which included additional brand marketing support. The operating income result was ahead of our expectations for the first quarter and drove a 9% increase in earnings per share, even with a higher tax rate. Quarterly, we are off to a good start in 2014, and have greater confidence in our ability to achieve our financial objectives for the year. As Gordon will discuss in more detail, we are reaffirming our 2014 outlook for sales growth and earnings per share. As we look to the rest of 2014 and beyond, we’re encouraged by the increasing consumer demand for flavor. Spices, herbs, and seasonings are on trend and a healthy way to add taste, and not for a lot of cost. Our meals are typically just a fraction of the cost of a meal, to deliver most of the flavor. The outlook by Euromonitor shows growth in spices and herbs and in recipe mixes, in both developed and emerging markets. For herbs, spices, and seasonings, the largest part of our consumer business, you can see our category share information on slide five, along with attractive category growth rates in our top markets. In developed markets, the majority of Millennials say they love to cook, and the percentage of all consumers that prefer hot or spicy sauces, dips, and condiments is up 8 points in the last two years. The exploration of new flavors is evidenced by the popularity of ethnic fare. In emerging markets, an increase in the middle class and in working women are driving the transition from spices in bulk to spices as a branded, packaged food product that offers greater quality, safety, and convenience. Demand for flavor is on the rise, whether consumers are preparing meals at home, eating out, or enjoying a snack. As a flavor leader, it’s our job to accelerate this growth and build our share. We position our consumer business to flavor meals at home. Our growth strategies include brand building, scalable innovation, and expanding our geographic footprint. In the first quarter of 2014, each of these avenues of growth contributed to an overall 9% increase in consumer business sales in local currencies. The addition of WAPC accounted for 7 percentage points of this increase. I’m pleased to report that this acquisition continues to outpace our forecast for sales and profit growth. At the operating income line, we achieved an 8% increase in the first quarter for our consumer business, including the impact of a double digit increase in brand marketing support. Staying in China, in addition to the benefit of WAPC, we grew consumer sales of our base business 20% this period, with increases in both herbs and spices and in condiments. In Europe, the Middle East, and Africa, EMEA, we grew sales 4% in local currency, led by strong increases in France and in several smaller markets. Across this region, we increased brand marketing support by 38% in the quarter, with our holiday TV advertising in France, a brand quality message in Poland, and support for our Flavor Shot launch in the U.K. In the Americas, sales in local currency were about even with the year ago period. The competitive pressure in the U.S. that we noted in the fourth quarter of 2013 is being addressed with actions to strengthen our brand equity with the consumer and to win at retail. The first is to increase our investment in marketing. In the first quarter, nearly half of the incremental brand marketing was directed toward the U.S. market to drive sales of core products. These additional funds were applied to an everyday cooking message, with an emphasis on healthy eating, and a closer to fresh message with an emphasis on our gourmet line. During this period, we also continued to develop our digital marketing programs, connected to the consumer in a personalized way. As for insight-based innovation, I’ll comment in a minute on the new items at retail across our markets. In the U.S. specifically, we have development underway for new product concepts for launch in the second half of 2014. These products align with our consumer insights, addressing demand for convenience, flavor, and quality. We’re excited about their sales potential, and you’ll hear more about these in our next earnings call in June. To win at retail, we’ve realigned our sales organization to boost our resources in underdeveloped markets, where our category share of our brands is below the national average. Using insights and analytics, we’re setting a gold standard for addressing the retail spice set, one that better addresses how consumers shop our categories. This is fostering a more strategic dialog with our customers, as we work with them on category management, with the goal to optimize sales and income in this highly profitable section of their store. Our consumer business group in the U.S. is energized by the actions underway to drive better results, and I share their enthusiasm. We’re encouraged by early signs of traction, based on consumption of core spices and seasoning seen and in recipe mixes. As I wrap up my remarks on our consumer business, I want to comment on innovation across our three regions. We have some great new products now in the market. These were developed based on our consumer segmentation research and more in-depth insights, and include items designed to appeal to value minded consumers as well as involve cooks seeking more premium products. Of the items shown on slide nine, I’m particularly excited about the potential for Flavor Shots in the U.K., our 13-spice blend in China, and in the U.S., Grill Mates burger mixes for the 2014 grilling season and gluten-free recipe mixes. Innovation is also a key driver for our industrial business. We supply flavors to the top food service restaurant chains and the top food and beverage companies. These industry leaders look to McCormick as a partner to develop flavors in their next market-leading products. In the first quarter, we’re very pleased with our industrial business results. In the Americas region, we’ve won the supply of new products to food and beverage companies and grown sales of branded food service products. These gains more than offset continued weak demand from quick service restaurants. 2013 was an excellent year for our industrial business in EMEA, and the success continues in 2014, with the 12% local currency sales growth in the first quarter. We’re driving sales through expanded distribution of new products, particularly in this market with quick service restaurants. The improvement in industrial sales in China continued this quarter with a 20% increase in local currencies. This growth rate compares to weak demand from quick service restaurants in the first quarter of 2013 that related to concerns about avian flu in poultry menu items. In total, for our industrial business, we grew first quarter 2014 sales 6% in local currency, largely through higher volume and product mix, with minimal pricing impact. This growth rate, together with a more favorable business mix, our CCI cost savings, and comparison to weaker results in the first quarter of 2013, led to a 24% increase in operating income and an operating income margin of 8%. We expect further improvement in the upcoming quarters. To summarize, for the majority of markets across our two segments, we achieved good first quarter financial results and have momentum. In the U.S. consumer business, we have actions underway to improve our market performance and we expect to see a positive financial impact as we progress through the next few quarters. In a dynamic market, we believe that there are several factors that create an advantage for our business: our leading positions in growing markets, our breadth of product from value-priced to premium, flavors for all types of eating occasions, market-leading customers, and an expanding geographic presence. Across the company, we’re bringing focus, setting priorities, and directing our resources based on McCormick’s strategic imperatives: ready talent, fully engaged, winning share with a global focus and performance, superior results, consistently delivered. Together, we believe these imperatives will drive our success and lead to greater value for McCormick’s shareholders. Gordon?

Thanks, Alan, and good morning everyone. As Alan has described, we had solid first quarter financial results that included strong sales growth in many parts of the business; greater than expected earnings per share driven by our growth strategies, CCI program, and share repurchase activity; and excellent cash flow. 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 14, we grew consumer business sales 9% in local currency. This builds on a 7% sales increase in the first quarter of 2013 that was largely volume and product mix driven, and had no impact from acquisitions. In the first quarter of 2014, sales from WAPC accounted for 7 percentage points of the increase, and higher pricing contributed 2 percentage points. In the Americas region, sales were about even with the year ago period in local currency. A 2% increase in pricing following a late 2013 pricing action was offset by lower volume and product mix. In comparison, consumer sales in this region rose 7% year on year in the first quarter of 2013, from the first quarter of 2012, and the increase is mainly attributable to higher volume and product mix. As Alan described, our U.S. consumer business has actions underway to drive performance, and we have early indications of improvement. We are also pleased to see that category growth remains healthy for spices and seasonings, and the recipe mix is based on the latest retail sales. In Europe, the Middle East, and Africa, EMEA, we grew consumer sales 4% in local currency. The increase was largely volume and product mix driven, evidence of the growth strategies underway for brand building and scalable innovation. We increased brand marketing support 38% and introduced a number of new items. The sales increase this period was particularly strong in France and in several smaller markets. In local currency, consumer business sales in the Asia Pacific region rose 73%. The addition of WAPC, which will also have an incremental benefit in the second quarter of 2014, accounted for 64 percentage points of the growth. We grew sales in the base business 9%, building upon a 15% year over year increase in sales in the first quarter of 2013. China led this base business growth with a 20% sales increase, mainly from new products and expanded distribution. For the Kohinoor brand in India, sales rose slightly in local currency, with significantly higher pricing offset by lower volume and product mix in the first quarter. Operating income for the consumer business rose 8% to $94 million from the first quarter of 2013. This increase was primarily due to higher sales, a favorable business mix, and CCI cost savings, which more than offset a $6 million increase in brand marketing support. Turning to our industrial business, we grew first quarter sales by 6% in local currency, led by favorable volume and product mix, as seen on slide 19. As Alan noted, we had increases in each of our three regions. In the Americas, industrial sales rose 3% in local currency, with strong demand from food manufacturers in the U.S. and in Mexico. We have won the supply of a number of seasoning and flavor products for snack chips, crackers, breakfast foods, and yogurt. We also grew sales of branded food service products. Demand from quick service restaurants remained weak in this market through the first quarter. We continue to work with our customers to draw restaurant traffic by developing flavors for new menu items. In EMEA, our industrial business achieved another quarter of strong sales growth with a 12% increase in local currency. This follows a strong sales increase in the first quarter of 2013, compared to the first quarter of 2012. The first quarter increase in 2014 reflects continued success with product innovation and distribution gains, largely with quick service restaurants and the impact of higher pricing in response to material cost increases. In the first quarter of 2014, we grew industrial business sales in the Asia Pacific region by 10% in local currency. Volume and product mix is improving in China, as this market recovers from the sharp year ago decline as Alan described. Based on our current outlook, we expect this improvement to continue through the next few quarters. Operating income for the industrial business rose 24% to $30 million. Across all three regions, higher sales, together with CCI cost savings and the favorable business mix, drove this performance. These first quarter 2014 results for our industrial business, with sales up 4% and profit up 24%, are a reversal of declines in the first quarter of 2013, which included a year over year operating income decrease of 22%. Across most parts of this business, we are pleased with our progress and the strong financial results driven by our growth strategies. For the total company, operating income rose 11% as a result of higher sales, a more favorable business mix, and our CCI cost savings. These same factors also improved gross profit margin by 70 basis points, and during the quarter, we funded additional brand marketing programs, with more investment planned in the upcoming quarters. As projected, the tax rate this period rose to 31.1% from 28.5% in the year ago period. This increase was due to the discontinuation of the R&D tax credit, a tax law change in France, and the mix of income across tax jurisdictions. For the fiscal year, we continue to expect the tax rate to exceed 2013 and for 2014, to be in a 30% to 31% range. Income from unconsolidated operations was down slightly from last year. Cost to relocate our joint venture in Mexico to a more efficient and higher capacity facility began to impact our results towards the end of 2013, continued into the first quarter of 2014, and are expected to extend into the second quarter. Once we get past this, in the back half of the year, we expect a strong year over year increase in the income from unconsolidated operations. We reported earnings per share of $0.62. This was a 9% increase from $0.57 in the year ago period and driven by higher operating income and lower shares outstanding, which were offset in part by unfavorable tax rate. Let’s turn next to some highlights for cash flow and quarter end balance sheet as summarized on slide 28. Cash flow from operations was $77 million, up significantly from $32 million in the first quarter of 2013. This improvement was led by lower pension contributions in 2014. During this period, we used $57 million of cash to repurchase 0.9 million shares. At quarter end, we had $303 million still available on our $400 million authorization. Our balance sheet remains sound. We are close to our target debt level and well-positioned to fund investments to drive growth, including future acquisitions. Turning to our 2014 outlook, we continue to expect momentum from increased consumer demand for flavor and the effectiveness of our growth strategies and are reaffirming our projected sales and profit growth for 2014. At the top line, we reaffirm a 3-5% projected increase in sales on a currency neutral basis, with higher volume, the effect of increased pricing, and in the first half of the year, the incremental impact of WAPC. In addition, we expect currencies to reduce sales by approximately 1 percentage points in 2014, based on prevailing exchange rates. We continue to project a 6% to 8% increase in operating income from $591 million of adjusted operating income in 2013. This projection includes the benefit of CCI cost savings that are expected to reach at least $45 million for 2014. Our earnings per share outlook remains $3.22 to $3.29. This is a year over year increase of 3% to 5% from adjusted 2013 EPS of $3.13. As we discussed in January, we expect the impact of higher operating income to be offset in part by an increased tax rate. As shown on slide 30, our projection for a higher tax rate and a $0.01 in special charges are expected to have an unfavorable impact of 5% to 6% on the 2014 EPS growth rate. In the second quarter of 2014, we are projecting only a slight increase in earnings per share, from $0.59 that we reported in the second quarter of 2013. This outlook is based on our plans for higher brand marketing support and continued weakness in demand from quick service restaurants in the U.S., as well as additional costs related to the facility relocation in our Mexican joint venture. With our first quarter results, we are on our way toward another year of strong cash flow. As many of you know, we adhere to a balanced use of cash and are committed to returning a significant portion to our shareholders in the form of dividends and share repurchases. In 2014, we expect to use nearly $200 million of cash for dividends and through share repurchases to reduce our shares outstanding by 1% to 2% this year. As I conclude my comments, we are confident in our ability to deliver on our 2014 financial objectives and look forward to reporting on our progress in the upcoming quarters. 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 instructions.] Your first question comes from the line of Thilo Wrede from Jefferies.

Could you provide us with a little bit more insight on how this quarter was so much better than what you initially expected? Where was the upside surprise?

It’s in a few areas. It would be stronger growth in pretty much all of our businesses outside the U.S. and within the gross margin, it was stronger gross margin based on the mix that we experienced within the quarter. So I would say those two factors are primary ones that outdelivered relative to our initial expectations.

Is the stronger growth outside of the US driven by one-time factors because based on what I’m hearing about the world outside the U.S., it’s not looking necessarily that much better from a macro perspective.

Well, there’s nothing one-time in nature within the quarter. I mean, it was all driven by the brand marketing support, innovation, and on the industrial side, the strength of our customer relationships. So I can’t say that there was an anomaly within it. Certainly we see the world that we operate in, and understand it’s a difficult environment, and that continues to give us caution as well.

I’d say one thing where we’re a little counter to some of the rest of what we’re reading, is our business in China is continuing to show strong growth, and we’re gaining distribution of our core business, and then the acquisition of WAPC has outperformed what we expected it to.

And then on Kohinoor, you called out high price increases due to higher input costs, again, and the impact on volume. What we’re hearing from other basmati rice companies in India, they seem to be faring much better with these price increases and might have a different input cost profile than you do. Can you provide a little bit more background there, what the level of input cost increase is, and why the impact on volume is so meaningful?

We’re seeing about a 20-plus percent increase in the cost of rice, and are passing that through, and are dealing with that with volume. We may have a bit of a different supply chain model than some of our competitors there because we are more -- remember, our strategy in India is to use the access to the supply chain and the customer base to expand into different areas. So while Basmati rice is the business today, that’s not our long term intention. So we have a little bit different objective and a different profile than some of our competitors there.

Your next question comes from the line of Robert Moskow with Credit Suisse. Rachel Nabatian - Credit Suisse My question is on the Europe business, which is strong, and it sounds like there’s a lot of support put behind it. From what we’ve seen, that region can be rather volatile, and recently we’ve only heard negative commentary on grocery there. So what we’d like to know is, what gives you the confidence that what you’re seeing here is sustainable growth?

I’d never say it’s ever not going to be a bit volatile, but what we’re doing is driving our new product innovation, supporting it with pretty strong advertising, both in our core spice and seasoning business and the recipe mix business that we have in France, and we’re seeing the response from that. That doesn’t say Europe’s not a tough place to operate and is not highly competitive, but we’re gaining traction from the programs that we have. Rachel Nabatian - Credit Suisse And then just as a follow up, on the value side, the plan to turn around the U.S. consumer business, according to our scanner data, it looks like private label continues to take share, and you had mentioned kind of innovation ranging from the value to the premium side, so I guess I wanted to know how you plan to combat the private label competition specifically.

We offer a broad range of products across all the price points, and to remind you, we do produce private label, so that’s a part of what’s in our portfolio as well. What we’re doing is, one, making sure we’ve got the right promoted price at the right times of the year, when consumers are buying. The second thing is building the equity behind our brand, and then driving product innovation in the category. I think the spice and seasonings business, it’s still going to take some time. We’re encouraged by what we’re seeing in our core business, our core products, early on, and that’s what we’re supporting with advertising. We’re also driving the category and gaining share in our recipe mix business. So we’ve got early signs of traction. We’re not calling the turnaround yet, but we are encouraged by what we’re seeing.

Our next question comes from the line of David Driscoll from Citi.

Wanted to ask about the industrial operating margin. When I look over a multiquarter period of time, really in 2013, every quarter seem to get sequentially better, although clearly on a year over year basis, a number of those quarters in fiscal ’13 were down from fiscal ’12. The simple question here is, you had nice improvement year on year in the first quarter industrial margins. Do you expect that to continue and is the pattern of sequential improvement throughout ’13 indicative as to what’s happening within the business?

It’s a fair observation. And certainly we are building upon the improvement that we saw in the fourth quarter, which was very strong margin for that business, and we’re pleased with the performance we saw in Q1. We certainly look for better performance on the industrial business. The absolute margin is a function of promotional activity and mix of the business within the quarter, so I’m a little cautious about saying that each quarter will get sequentially better, but I’d say overall we certainly are looking for an industrial margin improvement. And it’s a function of the recovery that we’re seeing in some of those markets like China a slightly more benign inflationary environment and good CCI performance. But I’m encouraged by the performance, but we’re still a bit cautious on predicting it quarter by quarter.

Can you just say what are the factors that are causing that fiscal second quarter to be flattish year on year? It seems like when we just look at the first quarter results, a lot of the things that happened in the first quarter repeat in the second quarter, yet you’re expecting a worse result versus the growth that we saw in Q1. So what’s happening in Q2?

Well, we’re going to lean into our business again, so the brand marketing support that you saw in Q1, we’re repeating that again in Q2 and perhaps even a little more. As we mentioned, the unconsolidated income line will continue to be impacted by some of these relocation costs that we saw in Q1 from our unconsolidated venture in Mexico. You heard us talk about some of our caution on the QSR side of things in the U.S., and we’re still encouraged by the early signs of the U.S. consumer business, but we are up against some strong comparisons in the second quarter of last year, where we great volume quite strongly. So that’s part of our caution as well.

I hear you on all of those comments. I would only say that from the outside, it looks like those are consistent with the same forces that impacted Q1. So it’s not immediately obvious why Q2 would be flat, but I’ll leave it there.

The next question comes from the line of Eric Katzman of Deutsche Bank.

Just to touch on the global industrial for a second, and the strength there, I think Thilo might have asked this question in another way, but with the Heinz 3G Burger King connection, they made some strides with McDonald’s, did you pick up some McDonald’s business? And has that been a help to that side of the company?

Well, as you know, that is a significant customer for us, and we supply them around the world. So there has been some realignment in the supply chain there, and we’ve been growing our business with that customer in Europe and in China. Just where we picked it up from is tougher to say.

And then the second question, on the U.S. consumer business, Alan, I asked you last quarter, was the weakness that you had reported in the fourth quarter really just a function of core spice and seasonings, or was it broader based into things like Zatarain’s and some of the grilling items, etc.? Can you go into a little bit more detail? It sounds like this core spice and seasonings business was still pretty weak, but is that true with some of the other products as well? Or did you make improvement there?

We’re seeing improvement, actually, in our core spices and our recipe mixes. We’re still seeing some weakness in some of those other brands, and some of it’s driven by our promotion plans from last year. We were pretty heavy early in the year. Is there going to be more spread this year? Secondly, a little bit of a lighter Mardi Gras, and I never want to use weather as an excuse, but we’re seeing in Zatarain’s, for instance, the cost of crawfish pretty high right now. We’d expect this to be coming into pretty heavy crawfish season, the weather has made that a little later. But fundamentally, what we’re doing is driving behind our core business, which is our most profitable business, and then over time we’re addressing the other businesses.

I’m going to have to keep better track of my crawfish pricing index.

Yeah, right now it’s about $5, and in the middle of the season, it should be about $3.50. You’re wondering why I know that.

And then just as a quick follow up, and then I’ll pass it on, I think you mentioned that you had put more money behind the gourmet line. And I guess that’s your highest price point in the core spices business? Did I hear that correctly? And is that kind of the response to some of the other spice products being available in other aisles of the store, and that’s kind of at least initially how you intend to combat the new competitors in various outlets?

Well, we segment the consumer in a couple of different ways. One is by price point, the other is by how involved they are in cooking. And gourmet is the involved cook who wants the best product, and so we are supporting and differentiating our product based on our freshness and unique sourcing of those products. So that is one part and one segment that we’re going after. The other part of that is the more core and value price consumer. We have some other programs to try to impress that. And then later in the year, we have a relaunch of our gourmet products that we’re expecting to roll out.

The next question comes from Akshay Jagdale with KeyBanc.

I wanted to ask about the comment you made on the U.S. consumer segment. You said you were seeing early signs of some improvement, I believe. Can you give us some color on that? What is it exactly that you’re seeing that makes you feel that way.

We’re seeing our share gap closing with our core spices. We’re seeing growth and actually share gains in our recipe mixes. And we are seeing a flattening of share from some of those fragmented competitors that we talked about. Private label continues to gain, but the regional and smaller competitors are flattening out a bit.

And in terms of your decision to continue to spend heavily behind that, can you give us some sense of, you already had a pretty dominant share of [voice] in that segment or category. Can you talk about the returns you’re seeing on the incremental dollars you’re spending? Are they still pretty high return, and better than the industry average, for every incremental dollar that you’re spending on advertising?

We’re still continuing to see pretty strong ROIs based on the spending that we have, and in fact, advertising and our digital programs have much higher ROIs than the promotional spends that we were doing. We got a little heavy, I think, over the last year, in promotional spend, and not all of those were great paybacks and didn’t build equity. So we’ve adjusted our spending away from promotions. But we’ve adjusted our spending to more focus on equity building.

And last one, on the Kohinoor acquisition, if you just take a step back, can you summarize how that acquisition has performed since you bought it? There’s been some puts and takes. And then just give us a sense of where you are, really. Are you in the first or second inning of your strategy to introduce new products through that distribution chain? So perhaps what may have happened that’s worse than your expectations so far, and then sort of where are we now relative to your broader, longer term plan in India?

I think we’re in the early stages of our plan in India. The things that we have done over the last year, we didn’t acquire the full supply chain for that business in India, because what we wanted was the retail presence and the ability to drive other products through that chain. What we’ve done over the last year has been to beef up our own supply chain to improve our service levels and to get better control of our inventory. We’re focused on continuing to build our capabilities there, and to start to introduce those new products. We have those products in place now, and we’re starting to roll those out. We’ve got our distribution chain in place. We expect to continue to see it grow, but again, to remind you of our strategy in emerging markets, we have a tendency to pay as we go. So we’re not going to get out over the tips of our skis and invest and lose a lot of money in a market until we’re sure we have the infrastructure to support it, and then we’ll expand as we go. That’s exactly what we did in China, that’s what we’re doing in India. You asked how it’s performing, it’s performing below our expectations at this point, but we feel like we’ve got the right plans to address it.

Your next question comes from the line of Chris Growe from Stifel.

The first one, if I could ask, is a bit of a follow on to Dave Driscoll’s question, about Q2. I guess I also had been planning on a bit of an Easter shift into Q2 as well. Is that occurring? Can you give us a better sense of how it helped Q2?

That’s a difficult one to predict, quite honestly. And we haven’t talked about that, and certainly our internal forecast that is guiding us toward the direction we’re giving you now has accounted for that. But I couldn’t quantify that for sure for you right now. There is some shift in timing, and it could have an impact, but our current outlook is exactly what Gordon says.

Could you cite how much emerging market growth you had this quarter? What sort of dollar sales growth did you see in those markets? Was that a significant contributor to the first quarter?

Well, certainly the Wuhan acquisition is emerging markets, so we broke that out for you separately, and we talked about China being up 20% also on the consumer side, and then double digit on the industrial side. So we’re talking double digit type increases on the emerging market side. So it was a big help, and that was one of the outperformers on the quarter relative to our expectations.

It drove a lot of the consumer growth rate.

If I could maybe squeeze in one more, which is in relation to the marketing, did more of the marketing this quarter go towards Europe? And it looks like you had a pretty significant increase there, and maybe you’ll spread it more towards the U.S. in the second quarter? Just curious how the phasing will go in between divisions.

No, Europe was up about 38%, but half the marketing increased spend was in the U.S.

Your next question comes from the line of Ken Goldman with JPMorgan.

First, as you look into the summer, and you see much higher meat costs approaching, just curious how that affects your marketing plan in any way, for grilling. And second, it looks like Cerberus will be on track to buy Safeway here. If that deal goes through, do you expect it will affect your distribution in any way? I’m just curious if you’re stronger with either of those customers.

In terms of meat costs, because our grilling portfolio has a wide range of products that are good for a wide range of meat, even if the consumer starts trading from filets to cheaper cuts of meat, or even to burgers, a lot of our innovation actually is actually the burger mixes. So what we think will impact us more is the return to more normal weather. We’re really hoping for some better weather as we head into the Memorial Day weekend. But our products will span across the broad range, whether it’s pork or chicken or hamburger, obviously our Montreal steak is great on steaks, and we hope the consumers are continuing to buy. But we think we’re well-positioned, no matter what’s happening across the broad portfolio. In terms of the Safeway Albertson’s acquisition/merger, we have a good position with both those customers, and so we’re not anticipating this to have a significant impact on our business. We do have a strong relationship with both of them. As long as they’re driving to win in the marketplace, we think that’s good for us.

Your next question comes from the line of Andrew Lazar from Barclays.

Two questions from me. The first one, obviously you talked about seeing some of the early signs, and I guess I was under the impression, it’s probably still the case, that this kind of turnaround in the U.S. consumer is still going to take some time. But I guess things are reacting maybe positively a little more quickly than maybe I had thought. Is it fair to say that the brand equity building part is what’s currently driving some of those early signs, and the winning at retail piece is going to take more time? Or is that not the right way to look at it?

I think that’s kind of the right way to look at it. I don’t want to get over-optimistic, because we know it is going to take some time, but we are doing exactly what we said we were going to do. We’re out selling our message with retailers. That is a customer by customer and in some cases region by region approach that is going to take some time. And frankly, it’s never done, because when we present something that works for us, the competitors in there are presenting something else as well. So that’s going to be a longer slog, but we immediately changed our focus into building consumer equity, and we’re starting to see some of the benefits of that.

In terms of the winning at retail piece, even though it’s very early, are there any anecdotal thoughts you can share with maybe how some of those conversations have gone? Are you seeing traction where you’ve had some conversations in sort of communicating to retailers where this makes sense and where some of their actions don’t make as much sense for them?

Yeah, we are seeing certainly varying degrees of acceptance and action in the store from that, but what we’re really showing them is the best way to grow their sales and profits in this category, and we’re benefitting from the fact that the best way for them to grow their sales and profits is the same thing that works for us, which is to sell more higher-turning McCormick SKUs as opposed to lower-turning, cheaper alternative products.

And then last quarter on the call, we talked a little bit about how you were looking at potentially some different options in order to address the consumer trends, both at the value end and the premium end, and potentially could include thinking about a different line for sort of evaluating, let’s say. Maybe it’s under the McCormick name, maybe it’s under a different name, or somehow related. But I didn’t know if there were any conclusions you came to with respect to how to address that, and if there were going to be some other new items there along those lines that we just haven’t seen yet.

Yeah, we are working on some premium solutions as well as some more value solutions. We already have a number of the offerings in the value range, and our strategy with those is to meet a customer need. Because those don’t necessarily drive traffic, and they don’t necessarily drive profitability for the retailer or for us, but they’re there to meet a customer need. We have a number of those offerings, and we’re continuing to evaluate what the right value offerings are. The premium, we’ve got some very concrete plans.

The next question comes from the line of Philip Terpolilli with Longbow Research.

Just two quick questions, and maybe one last one on China. The quarter was quite strong. Do you feel like you’re starting to get more of a mass there now in terms of maybe distribution wins getting a little bit easier than 12 months earlier? And then just maybe building on that, are there more M&A opportunities that could further accelerate things there?

We certainly feel good that we’re building scale in our consumer business in China. Our core business has continued to grow pretty strongly, and then Wuhan WAPC is an accelerator to that, because it gets us access to a much bigger sales force in a different part of the country than where we’ve been. So that’s why we made the acquisition. We see other opportunities for acquisition, not just in that market, but in a number of the markets that we’ve targeted, so we have a pretty good outlook, and a pretty good pipeline for those kinds of acquisitions.

Is the pipeline pretty similar to what you’ve seen the last 12 or 18 months? Or kind of getting better or worse?

I would say the pipeline itself is pretty similar. And whether it comes to closure is another question, but the pipeline is pretty similar, is what we’ve seen.

And then just one quick question, if I could, on the input cost front. Any update on what you’re seeing? I saw the low single digit guidance in the slide deck, but I know your bucket’s a little bit different than some of the other CPG group and can be a little bit more volatile at times. So any additional color on things maybe to watch out for this year that you’re seeing right now?

The things that we see that are starting to move up are, as you’ve probably seen, corn and wheat and soybeans and dairy are starting to move up a bit. So those impact us more on the industrial side of our business. I wouldn’t say that we have any significant changes on the consumer side.

There are no questions at this time. I would like to turn the conference back to Alan Wilson for any closing remarks.

I’d like to thank you for your questions, and for participating today. McCormick’s 2014 fiscal year is off to a good start. Our strategic imperatives around people, growth, and performance are driving sales, delivering CCI cost savings, which is our fuel for growth, and generating higher profits and strong cash flow. At McCormick, we bring the joy of flavor to every day. Our 125-year heritage of innovation, collaboration, and commitment to this business is at the foundation of our global leadership in flavor and has us well-positioned for the future. Thank you.

Thanks, Alan. I’d also like to thank those on this morning’s call. A replay of the call can be accessed by dialing 855-859-2056. The ID number is 22127582. You can also listen to the replay on our website later today, and if anyone has additional questions regarding today’s information, you can reach us at 410-771-7244. This concludes this morning’s conference.