Management's Discussion and Analysis

Results of Operations - 2004 compared to 2003

For the year ended November 30, 2004, we reported net sales from continuing operations of $2.5 billion, an increase of 11.3% above 2003. Sales growth was the result of a 4.2% volume increase, 3.7% from favorable foreign exchange rates, 2.2% in the first half of the year from the acquisition of Zatarain's and a 1.2% increase in pricing and product mix. The acquisition of Silvo on November 1, 2004 added $4.5 million in sales in 2004. During 2004, we achieved higher volume with new products, expanded distribution and more effective marketing.

Gross profit margin increased to 39.9% in 2004 from 39.6% in 2003. The gross profit margin increase was due to cost reductions of $24 million. Sales of more value-added products and pricing actions in our consumer business also improved gross profit margin. Higher costs of employee benefits, fuel and a competitive operating environment in Europe during 2004 partly offset the gross profit margin increase.

Selling, general and administrative expenses were higher in 2004 than 2003 on both a dollar basis and as a percentage of net sales. These increases were primarily due to increased distribution expenses, higher advertising expenses and increased employee benefit costs. The increase in distribution expenses was primarily due to higher fuel costs, as well as freight and warehousing costs associated with new product introductions, and incremental distribution costs related to the acquired Zatarain's business. The increase in employee benefit costs was mainly the result of higher pension costs in 2004 compared to 2003. In our consumer business, advertising expenses increased in order to launch several new products and to support our brand name.

Special charges were a credit of $2.5 million in 2004 compared to a charge of $5.5 million in 2003. This change was primarily due to a net gain of $8.7 million recorded in 2004 for funds received from a class action lawsuit that was settled in our favor.

Pension expense was $30.0 million and $22.1 million for the years ended November 30, 2004 and 2003, respectively. In connection with the valuation performed at the end of 2003, the discount rate was reduced from 7.0% to 6.0% and the expected long-term rate of return on assets was reduced from 9.0% to 8.5%. These changes along with the increased amortization of prior actuarial losses increased pension expense in 2004.

Interest expense from continuing operations increased $2.4 million. Higher average debt levels during 2004 contributed to this increase, partially offset by repayment of higher rate long-term debt.

Other income decreased to $2.1 million in 2004 compared to $13.1 million in 2003 due to two significant transactions recorded in 2003. In 2003, we benefited from $5.4 million of interest income received on the Ducros purchase price refund and a one-time gain of $5.2 million from the sale of an interest in non-strategic royalty agreements. We entered into the non-strategic royalty agreements in 1995 and since then had benefited modestly from tax credits and royalty income.

Our effective tax rate was 30.3% in 2004, down from 30.9% in 2003. The decrease in the effective tax rate was due to mix of earnings among the different taxing jurisdictions in which we operate and the settlement of tax audits for less than amounts previously accrued.

Income from unconsolidated operations decreased 11.0% in 2004 when compared to 2003. This decline was mainly attributable to lower income from our Signature Brands and Japan joint ventures. Our Signature Brands business, a cake decorating business in the U.S., was impacted by a decline in the overall U.S. cake mix category. Our retail joint venture in Japan moved their business to a new distributor in 2004 with the objective of building sales in this market over time. We experienced a period of startup costs associated with the transition to this new distributor. Income from our joint venture in Mexico was equal to last year.

Income from continuing operations was $214.5 million in 2004 compared to $199.2 million in 2003. Diluted earnings per share from continuing operations increased $0.12, comprised of $0.18 from higher sales and operating margin and a $0.02 benefit from fewer shares outstanding and a lower effective tax rate, offset by a $0.05 decline in other income, a $0.02 increase in interest expense and minority interest, and a $0.01 decline in income from unconsolidated operations.