Management's Discussion and Analysis

Consumer Business

In 2005, sales from our consumer business increased 4.6% compared to 2004. Sales from Silvo, acquired in November 2004, added 2.8% to sales and favorable foreign exchange rates added 0.9%. The additional increase of 0.9% was mainly driven by pricing actions taken in 2005. In the Americas, consumer business sales increased 2.9% with 2.6% of the sales increase from price and product mix, 0.6% from favorable foreign exchange and a slight volume decrease of 0.3%. During the fourth quarter, demand for our McCormick and Zatarain's consumer products in the U.S. Gulf Region was lower due to the effects of Hurricane Katrina. This had a negative impact of approximately 1 % on the full year results. The remaining increase was driven by more effective marketing, new product introductions and pricing actions. In Europe, sales rose 9.9%, with Silvo adding 10.0%, favorable foreign exchange contributing 1.4%, both offset by decreases from volume, price and product mix of 1.5%. We continue to experience difficult retail conditions for a limited range of larger volume spice and herb products in France. While progress has been made in slowing the migration of sales to alternative channels, the poor economic conditions in France are complicating the recovery. In this region we have been successfully growing sales of value-added products such as dessert items, pastes and grinders with retail customers. Sales in the Asia/Pacific region decreased 3.4% due to unfavorable volume, price and product mix of 6.7% partly offset by favorable foreign exchange of 3.3%. Volumes in China were affected by our reduction in the number of distributors as we move to a higher quality network. Sales in the Asia/Pacific region are less than 5% of our consumer business.

Operating income from our consumer business increased 5.0% to $283.1 million. The operating income increase was driven by strong sales performance, cost reduction efforts and pricing actions. Operating income margin (operating income as a percentage of net sales) increased from 20.1% in 2004 to 20.2% in 2005. Cost savings on supply chain initiatives more than offset increases in special charges, fuel and the negative profit impact of challenging market conditions in Europe, particularly in France.

Special charges in the consumer business increased to $10.1 million in 2005 from $1.0 million in 2004. Special charges in the consumer business for 2005 included certain severance costs associated with the closing of our consumer manufacturing plant in Salinas, California, closing costs for a small plant in Belgium and costs associated with the reorganization of the distribution networks in the U.S. and Europe. Special charges in the consumer business for 2004 consisted of additional costs associated with the finalization of the production facilities consolidation in Canada.

Industrial Business

For 2005, sales from the industrial business rose 0.3% as compared to 2004. Favorable foreign exchange added 1.0% to sales while unfavorable volume, price and product mix decreased sales 0.7%. As anticipated, lower vanilla pricing in 2005 decreased sales approximately 2% and actions to eliminate lower margin products in Europe decreased sales approximately 1%. Sales in the Americas rose 0.9% with favorable foreign exchange adding 0.9%. In this region, lower vanilla pricing reduced sales approximately 3%. The remaining sales increase of approximately 3% was due to strength in snack food seasonings, certain new product successes and improved sales in the food service distributor channel. In Europe, sales declined 4.5% as unfavorable volume, price and product mix reduced sales 5.5% offset by favorable foreign exchange which added 1.0%. Included in the 5.5% decrease from volume, price and product mix was the impact of the elimination of lower margin products which decreased sales approximately 4%. In the Asia/Pacific region, sales increased 7.2% with a 4.9% increase from higher volume, price and product mix and 2.3% from foreign exchange. The increase was driven by strong sales of snack seasonings and to quick service restaurants which continue to expand their stores.

Operating income from our industrial business decreased 7.3% to $105.3 million and operating income margin was 8.8% in 2005, down from 9.6% in 2004. The sale of high cost vanilla beans during a period of declining prices, reduced operating income approximately $15 million during 2005, offsetting the benefit of cost reduction efforts. Operating income in 2004 was reduced by a $6.2 million operational accounting adjustment at an industrial plant in Scotland.

Special charges in the industrial business decreased to $0.1 million in 2005 from $3.0 million in 2004. Special charges in the industrial business for 2004 consisted of additional costs associated with the consolidation of production facilities in Canada and additional costs related to the consolidation of manufacturing facilities in the U.K.