McCormick & Company Earnings Call Insights: Industrial Sales in China and Industrial Guidance

McCormick & Company (NYSE:MKC) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Industrial Sales in China

Alexia Howard – Sanford Bernstein Research: (indiscernible) popping a couple of quick questions. Are you able to quantify how large the Industrial sales are into China? I guess, I’ll look at it – has been, there is a fairly small proportion of your total company sales or even the sales of that segment. So I was just curious about that. If you could give us an idea of how much they were down this quarter that would be helpful. Then just a second broader question. Do you have views on what’s going wrong with the quick service restaurants sector in the U.S.? It seems as though it was in recovery about a year, 18 months ago, and now it seems to be dropping off again and I am wondering if you just have any high level thoughts on what might be driving that, because it seems peculiar given recovery that we’re seeing elsewhere across the food space.

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

Industrial Guidance

Ken Goldman – JP Morgan: I just wanted to make sure I understood the guidance for the Industrial segment this year. I think you guided to the low-end of the 3% to 5% organic range or toward that end. But you just did minus 3%. Will the second half be enough to get to that plus 3% or is my math wrong there?

Alan D. Wilson – Chairman, President and CEO: That is the guidance. We were saying that the Industrial business will be towards the lower end of that 3% to 5% on a sales growth basis and that our expectation is that recovery will start to occur as we progress through the year weighted more towards the second half of the year.

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Ken Goldman – JP Morgan: Then, one other question, we are seeing not just you guys, but a couple of other food companies and I realize that you’ve guided to a reversal of this next quarter and historically you’ve done a good job of spending behind your brands, but you didn’t lower your marketing as a percent of your Consumer sales this quarter. Other companies like I said have done the same. Is there something that we should be looking at that you see across food? You see so many different food companies out there that would lead to this happening at a particular time, maybe – I didn’t perceive that it would happen. I thought some companies would kind of reinvest, drive the volumes a little bit higher, both through promotions and advertising. We are seeing some companies really cut that ad spending as a percent of sales. Is there something you’re aware of that maybe we haven’t thought of or I haven’t of that’s driving some companies in the food space to do this right now?

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

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