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McCORMICK & COMPANY 2007 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

    We are increasing margins with cost-savings programs, new capabilities and improved processes. Our acquisition of high-margin brands and introduction of higher-margin, more value-added new products are also lifting margins. As we reduce the number of lower-margin products and customers, we are eliminating complexity and further boosting margins.
    A portion of the cost savings associated with our actions is being used to fund product development and brand support. During the past five years, we have increased research and development expense 57%. In 2007, we spent $55 million in advertising to consumers, compared to $27 million in 2002. These are effective investments that are driving sales and profit growth at McCormick.

Key Growth Initiatives

Key initiatives underway to grow sales and profits include:

    > A restructuring program to improve our global supply chain was announced in 2005 and will extend through 2008. This plan is reducing our complexity and creating an organization more focused on growth opportunities. We expect to reach up to $55 million in annual cost savings, ahead of our initial goal of $50 million.
    > We are building consumer interest by revitalizing our consumer brands. Currently underway is the revitalization of McCormick brand spices and seasonings in the United States. Along with new packaging, we are installing new shelving systems in 12,000 to 14,000 stores to make shopping easier for the consumer and restocking easier for grocers. A similar effort is underway that is designed to drive growth of our Schwartz brand in the U.K. and the Ducros brand in France.
    > As a leader in our industry, we watch the latest trends to direct our product development activity. Consumer demand for wellness, freshness, convenience, ethnic flavors and more, guide our new products. Innovation at McCormick extends to grinders and other new packaging, and to distribution, such as our penetration of the more frequently shopped street markets in China.
    > Through acquisitions we are adding leading brands to extend our reach into new geographic regions where we currently have little or no distribution. We have a particular interest in emerging markets that offer high growth potential. In our developed markets, we are seeking brands that have a niche position and meet a growing consumer trend.

Our Financial Objectives

With good visibility into our business prospects and operating environment, we use growth objectives as internal goals and to provide a financial outlook for our shareholders. Upon completion in 2008 of our three-year restructuring program, we expect to grow sales annually by 4 to 6% and achieve an annual increase of 9 to 11% in earnings per share.
Our business generates strong cash flow. Actions to grow net income and improve working capital are designed to lead to higher levels of cash. We have paid dividends each year since 1925 and have increased the annual dividend in each of the last 21 years. In the future, we expect to increase dividends at a rate similar to the increase in earnings per share.
Additional cash is being used to fund strategic acquisitions and capital projects. A share repurchase program is lowering shares outstanding and improving value for McCormick shareholders.

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