Management's Discussion and Analysis

Executive Summary

Strategy for Growth

Our strategy is to improve margins, invest in our business and increase sales and profits.

We have increased margins with cost-savings programs, new capabilities and processes introduced through our B2K program, acquisitions of high-margin brands and the introduction of higher-margin, more value-added products. Since 2000, gross profit margin has increased 4.8 percentage points. Our B2K program is a global initiative that is significantly improving business processes through state-of-the-art information technology. Utilizing B2K, we have improved the supply chain throughout McCormick. In 2005, $33 million of cost savings were realized, comprised of $21 million of cost of goods sold and $12 million of selling, general and administrative savings. This followed $24 million of cost savings in 2004.

As the next step in our progress with margin improvement, we announced in September 2005 significant actions to improve our global supply chain. We also conducted a comprehensive review of our industrial business that identified additional actions to improve this business. These actions were put together in a comprehensive restructuring plan which the Board approved in November 2005. This restructuring plan is expected to reduce complexity and create an organization that is more focused on growth opportunities in both the consumer and industrial businesses. This plan is described in more detail later in MD&A and in note 4 of the notes to consolidated financial statements.

In addition to increasing profits, a portion of the higher margin has supported investment in business growth initiatives. Since 2000, we have significantly increased our investment in areas such as advertising, promotion and product development to drive sales. Based on our strong business fundamentals and improvement actions underway, we believe our business can generate sales growth of 3-5% and an 8-10% increase in earnings per share through 2008. This sales growth will continue to be achieved through innovative new products, effective marketing, distribution gains and acquisitions.

Our business generates strong cash flow which has increased in recent years. Actions to grow net income and reduce inventory should lead to further gains. We have consistently paid dividends and expect to increase dividends at a rate similar to the increase in earnings per share. Additional cash is being used to fund strategic acquisitions to extend our business into new product niches or new markets. Another use of cash is share repurchase. An active share repurchase program is lowering shares outstanding and improving value for McCormick shareholders.