management’s discussion and analysis Executive Summary Business Overview MCCORMICK & COMPANY 2004 ANNUAL REPORT McCormick & Co. is a global leader in the manufacture, marketing and distribution of spices, herbs, seasonings and other flavors to the entire food industry. The Company’s major sales, distribution and production facili- ties are located in North America and Europe and its prod- ucts reach nearly 100 countries around the world. Additional facilities are based in Mexico, Central America, Australia, China, Singapore, Thailand and South Africa. In 2004, approximately 38% of sales were outside the U.S.  The Company operates in two business segments, con- sumer and industrial. In 2004, the consumer business accounted for 53% of sales and the industrial business accounted for 47% of sales. Consistent with market con- ditions in each segment, the consumer business has a higher overall profit margin than the industrial business.  The consumer business supplies a variety of retail out- lets that include grocery, drug, dollar and mass merchan- dise stores. In the U.S., these customers are serviced both directly and indirectly through food wholesalers. In international markets customers are serviced either directly or indirectly through distributors. Products for the consumer segment include spices, herbs, extracts, sea- soning blends, sauces, marinades and specialty foods. In 2004, 67% of net sales were in the Americas, 29% in Europe and 4% in the Asia/Pacific region. In its primary markets, the Company supplies both branded and private label products and has a leading share that is more than twice the size of the next largest competitor. The Company is growing the consumer business by develop- ing innovative products, increasing marketing effective- ness, expanding distribution and acquiring leading brands and niche products. The industrial business supplies both food processors and the restaurant industry. Restaurant customers are sup- plied both directly and indirectly through distributors and warehouse club stores. Products for the industrial seg- ment include blended seasonings, spices, herbs, condi- ments, compound flavors and extracts, and coating systems. In 2004, 73% of net sales were in the Americas, 19% in Europe and 8% in the Asia/Pacific region. The Company has many competitors who also supply products to food processors, as well as restaurants, food service dis- tributors and warehouse clubs. The Company is driving sales for the industrial business by supporting the global expansion of its customers, building current and new strategic partnerships, and developing consumer-preferred value-added products. Through acquisitions, the Company seeks to expand its flavor solutions globally. The Company’s long-term financial objectives, first set in 2002, are to increase annual sales 3-7% and earnings per share 10-12%. With the opportunities to increase  margins and the sales initiatives for the consumer and industrial businesses, the Company expects to continue to achieve these objectives. Early in 2004, an additional goal was set to generate $350-$400 million of cash flow from operations after dividends and net capital expendi- tures for the three-year period 2004-2006. In 2004, the first $206 million of this goal was achieved. With this cash  the Company is seeking to acquire businesses and to repurchase shares.  The Company is investing in areas such as product development and marketing support to drive sales. Research and development expense and advertising behind McCormick’s brands have increased significantly and consistently since 1999. In 2004, research and development expense increased 18% and advertising expense increased 43%. Margins are being improved with new capabilities and processes introduced through McCormick’s B2K program, a global initiative that is significantly improving business processes through state-of-the-art technology. Utilizing B2K, employees are improving the supply chain through- out the Company. A goal to reduce costs by $70 million through 2006 was set early in 2004. In 2004, $24 million in cost savings were realized, comprised of $15 million of cost of goods sold and $9 million of selling, general and administrative expense savings. Margins are also improving as higher-margin more value-added products are introduced. Since 2001, gross profit margin has increased a total of 1.9 percentage points. The Company’s strategy is to improve margins, invest in the business and increase sales and profits. Strategy for Growth The Company purchases a significant amount of raw materials from areas throughout the world. The most signif- icant raw materials are vanilla, cheese, pepper, packaging supplies, garlic, onion and capsicums. Some of these are subject to price volatility caused by weather, market condi- tions, growing and harvesting conditions, governmental actions and other unpredictable factors. While future move- ments of raw material costs are uncertain, the Company responds to this volatility in a number of ways including strategic raw material purchases, purchases of raw mate- rial for future delivery and customer price adjustments. With its consumer and industrial segments, the Company has the customer base and product develop- ment skills to provide flavor solutions for all types of eating occasions, whether it is cooking at home, dining out, pur- chasing a quick service meal or enjoying a snack.  21