McCormick & Company Inc to Acquire Reckitt Benckiser Group PLC's Food Division
Jul 19, 2017 AM CEST
RB.L - Reckitt Benckiser Group PLC
McCormick & Company Inc to Acquire Reckitt Benckiser Group PLC's Food Division
Jul 19, 2017 / 12:00PM GMT
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Corporate Participants
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* Kasey Jenkins
* Lawrence E. Kurzius
McCormick & Company, Incorporated - Chairman, CEO and President
* Michael R. Smith
McCormick & Company, Incorporated - CFO and EVP
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Conference Call Participants
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* Akshay S. Jagdale
Jefferies LLC, Research Division - Equity Analyst
* Alexia Jane Burland Howard
Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst
* Andrew Lazar
Barclays PLC, Research Division - MD and Senior Research Analyst
* Brett Michael Hundley
The Vertical Trading Group, LLC, Research Division - Research Analyst
* David Christopher Driscoll
Citigroup Inc, Research Division - MD and Senior Research Analyst
* Jonathan Patrick Feeney
Consumer Edge Research, LLC - Senior Analyst
* Robert Bain Moskow
Crédit Suisse AG, Research Division - Research Analyst
* Robert Frederick Dickerson
Deutsche Bank AG, Research Division - Research Analyst
* Steven A. Strycula
UBS Investment Bank, Research Division - Director and Equity Research Analyst
* Thomas Hinsdale Palmer
JP Morgan Chase & Co, Research Division - Analyst
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Presentation
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Kasey Jenkins, [1]
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Good morning, everyone. This is Kasey Jenkins, Vice President of Investor Relations. Thank you for joining us on this morning's call to discuss McCormick's agreement to acquire Reckitt Benckiser's Food Division, RB Foods.
To accompany our comments this morning, we have posted a presentation on our website. ir.mccormick.com, as well as the press release and the factsheet we issued last evening. (Operator Instructions)
With me on the call this morning are Lawrence Kurzius, Chairman, President and CEO; and Mike Smith, Executive Vice President and CFO.
During our remarks, we will refer to non-GAAP financial measures. These include adjusted EBITDA, adjusted EPS and our leverage ratio. Please refer to Slide 13 for a more detailed discussion of these non-GAAP financial measures.
As a reminder, today's presentation contains projections and other forward-looking statements. Actual results could differ materially from those projected. The company undertakes no obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events or other factors. As seen on Slide 2, our forward-looking statements also provide information on risk factors that could affect our financial results.
It is now my pleasure to turn the discussion over to Lawrence, who will begin on Slide 3 of the presentation.
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [2]
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Thank you, Kasey. Good morning, everyone, and thank you for joining us. I am extremely pleased to announce that McCormick is strengthening our global flavor leadership with the acquisition of RB Foods.
As you know, at McCormick, we are intensely focused on bringing the Joy of Flavor to our consumers worldwide, and this acquisition advances that vision as we continue to differentiate McCormick through industry-leading growth.
RB Foods is a leader in the attractive and growing Condiments market, with iconic flavor brands including French's, Frank's RedHot and Cattlemen's. Their focus on creating products with simple, high-quality ingredients makes them a perfect match for McCormick as we continue to capitalize on the growing consumer interest in healthy, flavorful eating.
We are excited by the addition of these beloved brands to our existing global portfolio, providing us with an even greater opportunity to demonstrate our Passion for Flavor and to create shareholder value over the long term.
As you can see on Page 4, we will acquire RB Foods for $4.2 billion in cash. McCormick estimates that RB Foods' 2017 revenue will be $581 million, with an adjusted EBITDA of $215 million. The combined pro forma net sales are expected to be $5 billion with significant margin accretion.
The addition of Frank's RedHot Hot Sauce, the clear consumer favorite in an attractive and high-growth category, French's Mustard and other beloved products enables McCormick to become a one-stop shop for condiments, spice and seasoning needs, providing our customers and consumers with an even more diverse and complete flavor product offering.
These market leading products, together with RB Foods' dedicated state-of-the-art manufacturing facility, are a strong complementary fit. The transaction will immediately advance McCormick from #10 to a leading position in U.S. Condiments. French's and Frank's RedHot will be the #2 and #3 brands in our global portfolio, respectively.
Let me tell you a bit more about these iconic flavor brands that hold leading market share positions in advantaged categories.
Frank's RedHot and French's Mustard are both #1 brands in the U.S. and Canada. Frank's RedHot maintains a passionate consumer following, while French's Mustard has been delivering classic flavor for generations. French's Crispy Vegetables is the #2 selling food items during Thanksgiving week and Cattlemen's Barbecue Sauce has earned a leading market position in the branded U.S. foodservice channel.
At our most recent Investor Day on April 4, we discussed our acquisition agenda and our growth strategies, both influenced by current trends, focused on the importance of taste, more real food, natural ingredients and healthy eating, and most importantly, flavor. The acquired product portfolio has both flavor and health attributes and is a meaningful step as we continue to execute our strategy.
First, it fits in our bigger, broader acquisition agenda. This transaction adds significant scale in key market categories and channels, with the addition of market-leading brands and also drives growth in the flavor category. We have been successful globally and continue to focus on sauces, condiments and marinades. Our global footprint combined with these successful, but largely domestic products, creates a strong growth opportunity.
Second, it is another example of McCormick growing with flavorful, healthy offerings. With Frank's RedHot, we will address a rapidly growing and on-trend flavor category. All of these products have simple, high-quality ingredients and are moving towards better-for-you flavors and healthy products that fit perfectly within our Taste You Trust portfolio. The combination of flavor and health has been a driver of McCormick's success with millennials and these products are no different.
Third, it drives growth across both of our segments. This transaction increases our industrial segment sales in the U.S. and Canada in the branded foodservice channel by over 50%, and we will further leverage complementary distributor relationships. In our consumer segment, we have growth opportunities through a full product portfolio offering. For example, we expect to leverage our seasonal holiday promotions and grilling events to include French's, Frank's RedHot and McCormick branded products.
And importantly, we have a proven track record integrating brands. We believe that we are well positioned to integrate this transaction quickly, efficiently and effectively.
Now let's talk a bit more about each brand, starting on Page 7. McCormick already has an advantaged flavor portfolio with leading on-trend brand and we're adding another. Frank's RedHot is the clear leader in the advantaged hot sauce category with exceptional sales growth that is outpacing strong underlying category growth.
Similar to our core urban spice portfolio, consumer data shows that millennials over-indexed their purchases of hot sauce. And not unlike the cult-like following of our OLD BAY brand, Frank's RedHot enthusiasts are deeply passionate about the brand. Frank's RedHot and it's saucy spokesperson, Ethel, are definitely helping save the world from boring food.
With French's Mustard, we are adding a product that is classic Americana. It has a strong heritage of over 100 years and has remained the market leader through innovation, including not just the classic yellow mustard, but also a wider range of flavors with a pipeline of new products and formats. French's Ketchup is differentiated as a better-for-you option as its healthy qualities are a driver for over-indexing with millennials and French's Crispy Vegetables are a holiday tradition, made with real fresh vegetables and certified, sustainable palm oil. It is a key ingredient in the most googled recipe of 2016, and we believe that we have an opportunity to expand the breadth of the portfolio through innovation and to drive consumption beyond the holiday season.
In addition to retail, RB Foods brands have attractive positions across hot sauce, mustard, crispy vegetable and barbecue sauce sold through the U.S. and Canada foodservice channels. We expect these products to build upon McCormick's industrial segment growth and increase our scale in the U.S. and Canada branded foodservice channels by over 50%. We also anticipate meaningful synergies between French's, Frank's RedHot and McCormick products in fast, casual and other channels. We believe these brands are ideal additions to McCormick's tabletop offerings and its established products.
Another area where we see great opportunity is in our ability to leverage our international infrastructure, which already includes condiment consumer insights, sales and supply chain expertise to significantly expand the global presence of Frank's RedHot and French's in both retail and foodservice channels. We expect this to result in both substantial growth and household penetration. We plan to make Frank's the #1 hot sauce globally.
With that, I will now turn the call over to Mike to talk a bit more about what we see as the financial impact for McCormick. Mike?
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Michael R. Smith, McCormick & Company, Incorporated - CFO and EVP [3]
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Thanks, Lawrence, and good morning, everyone. I will now take you through an overview of the key financial highlights of the transaction, which you can find on Slide 11.
Overall, we are very excited about this asset as it supports our focus on long-term growth, both at the top line and bottom line. As Lawrence mentioned, McCormick is paying $4.2 billion in cash for RB Foods, which represents an approximate multiple of 19.6x adjusted EBITDA, with a post-synergy multiple of roughly 15.9x.
We anticipate sales growth from this acquisition to be in line with our long-term guidance of 4% to 6%, as we build upon RB Foods' successful track record of growth. These assets also have a very attractive adjusted EBITDA margin, which will significantly increase our margins.
Those of you who remember our acquisition of Lawry's, which until today was the largest deal in our history, will recall a favorable impact to our margins, and we expect simpler results from this acquisition going forward.
We also expect the transaction to be accretive to McCormick's adjusted EPS in year 1, with an increase of approximately 5%, excluding integration and transaction costs as well as ongoing amortization cost. We expect this accretion to increase to approximately 10% once the synergies are fully realized.
McCormick expects to achieve cost synergies of approximately $50 million, the majority of which will be realized by 2020, with anticipated synergies in sourcing and procurement, supply chain and manufacturing and selling, general and administrative expenses. We will utilize our Comprehensive Continuous Improvement program, CCI, to ensure we achieve these synergies.
We expect to incur approximately $140 million of transaction and integration costs, with majority to be incurred in 2017. This will include noncash charges related to purchase accounting. We also expect to incur increased annual amortization in the $20 million to $25 million range.
Finally, in terms of our capital structure, McCormick expects permanent financing of the transaction to consist of approximately $3.7 billion of new debt, including prepayable term loans and notes and $500 million in equity. Following the acquisition, McCormick will have a pre-synergy leverage ratio of 4.9x, and we expect to delever to approximately 3x by the end of fiscal 2020, in part due to our anticipated strong cash flow generation.
I want to emphasize that McCormick is committed to a strong investment grade rating. While we anticipate a temporary reduction in our credit rating, we plan to return to our current credit profile over time. As part of this commitment, McCormick will curtail its share repurchase program and will utilize our expected strong cash flow to pay down prepayable debt. Importantly, we will also maintain our dividend policy.
The transaction's impact on McCormick's financial results for current -- to the current fiscal year will depend on the actual closing date, which we expect in the third or fourth quarter. After closing, we plan to update you on the estimated impact to fiscal 2017.
Finally, with pro forma 2017 annual net sales of $5 billion and pro forma adjusted EBITDA of $1 billion, McCormick is building scale, which will help us drive faster growth, increase margins and generate increased cash, allowing us to create additional shareholder value over the long term. This completes my remarks. Let me turn it back to Lawrence for some closing comments.
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [4]
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Thank you, Mike. As Mike said, we believe this combination of powerful flavor brands will drive significant shareholder value. It reinforces our focus on growth with the addition of iconic brands with leading market shares and provides further international and foodservice opportunities. It enhances McCormick's scale and will generate meaningful margin and earnings accretion.
McCormick is a global leader in flavor, a growing and advantaged business platform. We continue to capitalize on the global and growing interest in healthy flavorful eating and in the source and quality of ingredients. The acquisition of RB Foods is a great strategic fit for McCormick and further establishes our flavor leadership.
That completes my remarks, so now let's turn to your questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Our first question comes from the line of Andrew Lazar with Barclays.
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Andrew Lazar, Barclays PLC, Research Division - MD and Senior Research Analyst [2]
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Just two questions for me, if I could. I guess the first one would be, maybe a little bit higher level. Of late, we've seen the overall industry multiple get a bit pressured by investors' concerns over a lot of the things that we've all talked about, whether it be changes in retail, concerns of pricing pressure, broader industry consumption trends, things like that. And obviously, this asset sort of, for you, doubles down pretty significantly on that center store, part of the store. And you just went through obviously all of the compelling reasons to McCormick of these assets and for doing this deal, but I guess, first I'm trying to get your maybe broader perspective on how those two things sort of match up a little bit, if you will?
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [3]
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Sure, Andrew. This is Lawrence. Well, first of all, this is an asset that we had previously identified as being a tremendous strategic importance. I would say that over the last decade, whenever we've looked at big ideas, this -- the opportunity to acquire RB Foods was really at very near the -- either at or very near the top of the list. Now these are important flavor brands and a tremendous strategic fit. One of the advantages that we've got in the center store, of course, is that herbs, spices and seasoning continue to be a growing category, consumer demand for flavor continues to be very strong. As a portfolio, these brands that we're acquiring show similar characteristics. The growth -- the organic growth rate of these brands is comparable to ours. But when you dissect it into pieces, the real driver has been the hot sauce business. Hot sauce category is actually growing faster than herbs and spices. And then it's another advantaged category, much -- and we see it as really -- almost like a liquid spice that consumers use in many different ways, the consumption has been quite strong as a category. And really, Frank's has been the brand that has driven it. I don't think we've provided a breakdown, but within this portfolio, Frank's RedHot hot sauce business is actually the largest piece of the business, it's quite a bit bigger than mustard. So -- mustard, crispy vegetables, relatively flat categories, but the hot sauce category and the Frank's RedHot brand, in particular, really drive the growth of the whole portfolio. So overall it's not dilutive to our growth at all, and we just see a lot of continued runway for growth there.
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Andrew Lazar, Barclays PLC, Research Division - MD and Senior Research Analyst [4]
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And very last one would just be, it's a carve-out, obviously, with very healthy margin structure, maybe it's 30%-plus kind of EBIT margins, and I guess, you're expecting somewhere around 9% of sales in synergy. So that's a certainly healthy level of synergy. I guess I'm trying to also sort of match those up a little bit, maybe you can be a little more specific about where some of the bigger opportunities around synergy are, given it's already seemingly very well run and certainly very profitable business?
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Michael R. Smith, McCormick & Company, Incorporated - CFO and EVP [5]
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Andrew, this is Mike. I'll take that one. I'd point you back to our Lawry's acquisition a few years ago. And that's where we were buying a nice brand that was from Unilever at that time. We brought it into our business. There were a lot of opportunities from a CCI perspective we found right away. And a good example, for example, might be where if you ship spices and herbs, we might cube out on freight -- in our trucks versus weight out. When we brought in Lawry's, we found we could match up the shipping and save a lot of money that way in freight and distribution, so that's one example. But I think if you look at this business overall, there's a lot of similarities to Lawry's back in 2008, 2009, and if you look at the margin accretion we got from that, some of which was given by the synergies we harvested back then, I think you'll see similar opportunities with this one.
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Operator [6]
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The next question is from the line of Alexia Howard with Bernstein.
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Alexia Jane Burland Howard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [7]
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So two quick questions. On the financial side, we're struggling to get to the 5% accretion in year 1, if you're levering up to 4.9x. Are you able to tell us what average interest rate you are anticipating on the incremental data, or is it because you anticipate cost savings? And should we think about that 5% as basically being fiscal '18 to you guys? And a follow-up question is, what overseas markets do you see as the biggest opportunity to the growth for this business? And how could the geographic mix evolve over time, because at the moment it's a very U.S. centric business?
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Michael R. Smith, McCormick & Company, Incorporated - CFO and EVP [8]
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Yes, Alexia. I think in the 3.5% to 3.75% range for interest rates. As far as the timing perspective -- and we've taken out for you all the integration costs, all the financing cost and the amortization cost that we estimate right now. Of course, we'll have a better estimates when we close, but -- and we'll give you a little more guidance on '18 at that point, but hopefully that helps you fill out your template.
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [9]
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And as for the overseas market, you're right, today it's predominantly a North American business. The brands are -- you mentioned U.S., but it's also quite a strong brand in Canada as well -- quite a strong set of brands in Canada as well. Today, the brands are sold in about 30 countries outside of North America, but this has been a nonfood -- sorry, this has been a food asset trapped inside a nonfood company. And so they haven't had access to the international network and international resources of their parent. For us, this is going to be a core business, and we're going to treat it accordingly. We have tremendous infrastructure, as you know, outside of the Americas, about 40% of our total business is outside of the Americas. And so we believe that we can drive these brands through that infrastructure. Infrastructure includes, of course, sales organization and route to market and also includes substantial manufacturing assets in both Europe and in Asia, where we are already a leader in the condiments market in a number of countries. So I think it's going to fit in very well. Currently the -- some of the strong countries that -- where the brand -- stronger countries for the brand, include Mexico and U.K., both of which are very strong markets for us. And I would certainly see us building on that, but expanding well beyond it pretty quickly. It's a little bit early, not having ownership of it, to get too specific about that. But again, we see the strong opportunity. Also I'll go -- say that it's not just a retail opportunity. So a lot of our strength in the international growth is in our industrial segment, which includes branded foodservice products. And we see a strong potential for these brands in branded foodservice, particularly throughout Asia, a great deal of our foodservice strength is in selling Western-style condiments to upscale restaurants, international restaurant customers and international hospitality, entertainment and hotel customers, who want the American brands for tabletop as a quality mark in their markets. And again, we think that these fit right into that. Right now, under the current ownership, these brands don't have access to that channel. We think it's a great growth opportunity for us.
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Operator [10]
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The next question is from the line of Rob Dickerson with Deutsche Bank.
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Robert Frederick Dickerson, Deutsche Bank AG, Research Division - Research Analyst [11]
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I just had one broad question and specific question. The broader one was just on valuation. This is pre-synergies, obviously this is -- I think you said you have close to 20x EBITDA. Given the margin profile, risk profile of the business, it may not seem that rich relative to some transactions we've seen recently over the past 2 years, but just trying to gauge what your thought process was when -- I'm assuming you outbid other interested parties for the asset. I'm just trying to gauge what your thought process was when you essentially were able or willing to pay, let's say, a slightly higher price than other parties? Is this essentially just driven by the international infrastructure and the scale that you already have within kind of the grilling space in the U.S.? Or you just felt like the margin profile essentially is strong enough and the growth profile that if the math works, then 20x EBITDA makes sense?
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [12]
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Rob, I'll start and then I'll let Mike comment on it. You almost answered the question yourself there in asking it. First of all, the asset is incredibly strategic to us. And so we really wanted it, and we were willing to step up, to stretch for it a little bit. The process was quite competitive. As we -- just as we saw the value in this business, so did others. And so there was a market discovery process that established a market price for this asset. With all that said, we did not give up our financial discipline. And so when we look at the business, at the multiple it is and compare it to comparable company transactions, when you consider the growth characteristics of the business and the margin structure of it, we saw a great opportunity to create shareholder value including this in the McCormick portfolio. They are just ways that we have to continue to drive that growth and driving the growth on the -- on that strong margin structure really does create a lot of value. Well, hold on, Mike...
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Michael R. Smith, McCormick & Company, Incorporated - CFO and EVP [13]
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(inaudible) this transaction because you're going after a long -- strategic long-term shareholder value. I mean, we look at every one of our investments with an EVA lens. And the beauty of this investment, I mean, when you look at their ROIC versus their cost of capital, with that sales growth we see in the mid-single digits with highly accretive margins, that's the P&L side that we like. But also from the balance sheet side of things, it's an extremely efficient cash conversion cycle, from a working capital perspective and also from a capital usage perspective. Generally, a little less than we are from a capital asset perspective. So this thing throws off a lot of cash and really drives solid EVA growth for us.
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [14]
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Rob, one other thing, is we think about synergies as well. I think that we saw synergies that others who were competing for the asset didn't and that create value for us that they may not have had. We are strong in both retail and in foodservice. We're strong in both North America and internationally. So all of those are opportunities for us to grow. The supplier base for these assets overlaps tremendously with our existing supplier base. And so there's synergy opportunities there from the added scale. We found an awful lot to like about the asset that justified the price.
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Robert Frederick Dickerson, Deutsche Bank AG, Research Division - Research Analyst [15]
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Okay, great. And then just very quickly. And just synergy reinvestment very broadly is the expectation that you likely will reinvest some, a lot, all or you don't really see that much need for incremental investment for the brand, let's say, for the U.S. because like Frank's is already strong?
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [16]
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Rob, I'll take first. I'm going to let Mike talk about the synergy reinvestment, but I will say that although these were not core businesses for their parent under the current ownership, they were not orphaned brands either. These were well-supported, well-marketed brands and strong marketing budgets in the North American area. And so we don't see a big need for incremental spending. I think we can bring a lot of thought contribution to this. There are areas where we have tremendous expertise, like in digital, social and mobile marketing, where the brands might be underinvested, but there's really not a need for a heavy investment on that.
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Operator [17]
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Our next question is from the line of Ken Goldman with JPMorgan.
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Thomas Hinsdale Palmer, JP Morgan Chase & Co, Research Division - Analyst [18]
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It's Tom Palmer on for Ken Goldman. I had a question on the accretion figure. Going forward, are you going to guide to and report using adjusted EPS that excludes purchase accounting and amortization? Or was the comment about accretion mainly to highlight the cash accretion of the deal?
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Michael R. Smith, McCormick & Company, Incorporated - CFO and EVP [19]
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Yes. We're giving you the pieces of it. We're not going to change and guide to like a cash EPS. Similar in the past where we kind of called out some of the big items for you. Amortization, for example, of $20 million to $25 million, it's a big item. So we just want to give you the tools, but we're going to retain our current policy of disclosure.
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Thomas Hinsdale Palmer, JP Morgan Chase & Co, Research Division - Analyst [20]
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Okay, a quick follow-up. In the prepared remarks, I think Mike mentioned the synergies in the context of the CCI program. I just wanted to clarify, the $50 million in synergies is incremental to the $400 million plan that you had over 4 years?
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Michael R. Smith, McCormick & Company, Incorporated - CFO and EVP [21]
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Yes. I would make that assumption that -- for this acquisition, that is newly found CCI.
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Operator [22]
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The next question comes from the line of David Driscoll with Citi.
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David Christopher Driscoll, Citigroup Inc, Research Division - MD and Senior Research Analyst [23]
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I wanted to ask a little bit about the revenue synergies, and two parts to this question. The first question on revenue and revenue synergies is that, is that embedded in the 10% accretion goal or is that accretion goal the business as it is today inclusive of the $50 million in cost synergies? That's the first one, and the second question is on revenue synergies is -- and I apologize if I missed this, but is there a sense of what this business could be outside the United States over the forecast horizon of year 3 accretion goal in terms of the revenue synergies?
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [24]
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David, the first part of your question was really breaking. It was hard to hear. Could you just repeat the first question again? Sorry.
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David Christopher Driscoll, Citigroup Inc, Research Division - MD and Senior Research Analyst [25]
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Yes. Simple. On the year 2 accretion, you've got 10%. Does that include revenue synergies? And then the second part is, just on revenue synergies specifically, how big can the revenue synergies get over the course of time by year 3, if we want to just pick some particular year so we get a sense as to what you guys are thinking the opportunity is outside of the United States?
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Michael R. Smith, McCormick & Company, Incorporated - CFO and EVP [26]
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Okay, I get it. The 10% accretion would include those revenue synergies that we see that we built into the model. Yes.
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [27]
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I'd also say just on the revenues, I mean, we expect to grow this business at a pace that's really comparable to historic growth rate, overall. And so I want to be careful about overbaking the revenue synergies. We've got a lot of confidence that we can continue to drive the growth this business has enjoyed. It's been really well run and well managed by the current team. And we're confident that we can continue the growth trajectory that it's been on. I would say that we can add -- the international growth is an area that we can accelerate. It had good percentage growth on a very small base, and we think we can continue that percentage growth as that base gets bigger. I hate to put an absolute number on it, but we're pretty -- we're expecting to get double-digit international growth.
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Operator [28]
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Our next question is from the line of Steven Strycula with UBS.
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Steven A. Strycula, UBS Investment Bank, Research Division - Director and Equity Research Analyst [29]
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Great. I'm not sure if Brendan Foley is on the line, but I would love to hear either Lawrence or Brendan's thoughts, given his experience at Heinz, as to what he thinks about the condiments business specifically, and what French's could mean in terms of other categories, whether it's broader distribution in ketchup, both in the U.S., abroad and other condiments?
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [30]
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Sure. Well, Brendan is not on the call, but I'll take the question. We have a lot of condiment expertise and we have quite a lot of condiment experts, including a pretty large slate of alumni of the company that you just mentioned. We are pretty optimistic that there's a great growth opportunity for us. In the base business, we see an opportunity, particularly on Frank's, to continue to build distribution, household penetration and to drive market share. On French's, we believe there are innovation opportunities. In both of these 2 brands, we see a strong opportunity to further build out the foodservice business on the domestic side. And I think we've already commented on the international. Mike, you want to say anything?
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Michael R. Smith, McCormick & Company, Incorporated - CFO and EVP [31]
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I can assure you Brendan is very excited about this acquisition.
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Steven A. Strycula, UBS Investment Bank, Research Division - Director and Equity Research Analyst [32]
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Great, and then a quick follow-up question. Related to the synergies question that Andrew was asking, just to peel back the end a little bit more on how we get to the $50 million. Is -- my understanding was that there was like 1 production facility for the condiments business, were there more than 1? It seems like it was a straightforward supply chain, but was there any outsource co-packing or maybe there's some margin arbitrage from in-sourcing production versus you can kind of capture that nice gross margin spread? Is that an element of it? Or -- I'm just trying to understand the $50 million a little bit better.
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [33]
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Yes, that is an element of it. We -- as you know, we produce condiments already in the U.S. and North America. So they currently have some co-packers or some in their business too. So just similar to the Stubb’s acquisition or the Lawry's acquisition, over time, we would most likely in-source that.
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Operator [34]
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Our next question is from the line of Brett Hundley with The Vertical Group.
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Brett Michael Hundley, The Vertical Trading Group, LLC, Research Division - Research Analyst [35]
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My first question is just, I'm backing into a breakdown of maybe like 25% to 30% industrial mix for you guys and the remainder retail for this business. Am I in the right ballpark there?
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [36]
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I think that we have included that information in what we've sent out. I think the acquired brand is about 35%, it is brand -- it is foodservice, yes.
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Brett Michael Hundley, The Vertical Trading Group, LLC, Research Division - Research Analyst [37]
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Okay. And then just -- I wanted to just revisit the cost synergy discussion once more and just see if you guys could give us any type of additional color on timetable. I mean, you talked about the majority being in place by 2020, I think, you said. But are you able at this point to kind of cut down those years and talk about where we can see a large percentage in one year versus the other?
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Michael R. Smith, McCormick & Company, Incorporated - CFO and EVP [38]
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Well, I mean, we said most of it will be by 2020, so that's a pretty big percentage of the $50 million. And obviously, when we would have to in-source production, for example, I think it's going to take a little bit of time, and we have to close this -- close on the business too. So again, 2020, once we close this is only 2 years away, so if you've started off, you can ramp it up as you see fit to get to most of the $50 million by 2020.
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Brett Michael Hundley, The Vertical Trading Group, LLC, Research Division - Research Analyst [39]
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And then just my last question. I just want to be clear on something. So maybe I'm reading too much into your $5 billion pro forma number, but when I look at where -- kind of what your guidance is, where consensus is on the top line, and the sales number that you give for the RB Foods business. It kind of implies to me a drawdown in your legacy McCormick business for the year. And I just want to get clarity from you on that and make sure I'm not reading too much into this.
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [40]
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Yes, you're reading -- it's a good point actually. 5 and 1 have a nice ring to it, something like 5.2 and 1.1 not so much. So we were going after the big numbers, similar to the Investor Day when we highlighted our 2019 algorithm.
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Michael R. Smith, McCormick & Company, Incorporated - CFO and EVP [41]
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We're not signaling any change to the guidance on the underlying business.
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Operator [42]
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Our next question is from the line of Robert Moskow with Crédit Suisse.
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Robert Bain Moskow, Crédit Suisse AG, Research Division - Research Analyst [43]
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When I thought about the RB Foods business, I -- what always amazed me was that how a noncore business for Reckitt could generate that type of growth over the past few years. And as you analyze it, did you think through whether it was benefiting from anything in the competitive environment that maybe, I don't know, Heinz has pulled back in some areas that had allowed Reckitt to accelerate? And kind of following on that, did Reckitt grow at a pace that was above its normal rate and then maybe you guys can come in and keep that going because of the resources you can provide? I wonder what's your thought on that.
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [44]
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Rob, that's great. I'm glad to give you some color on that. And first off, I'm going to say these are great brands. I know there have been some comments that there are legacy brands. These are classic, iconic brands. The French's brand is like pure Americana, but these brands have generated solid, mid-single-digit growth going back for more than 20 years. And so there's a long, long track record of steady growth of the brands and increasing consumer popularity of the brands and again, particularly, Frank's hot sauce with the introduction of the advertising campaign featuring the Ethel character in 2009 really has taken off and has been a big driver of the recent growth and it's a big driver of our future plan. They have not benefited from any lack of competition, and in fact, have had a very strong competitive headwind over the last 3 years from the introduction of the Heinz mustard product into retail, which has been a drag on their performance that they've had to overcome. And so there hasn't been any kind of extraordinary circumstance that has given them a benefit. If anything, they've had some extraordinary challenges during the recent years. Again, we just think under our ownership where it's a core business rather than a noncore, it's going to get reap -- that benefit will -- the business will reap a lot of benefit from a home in a food company.
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Robert Bain Moskow, Crédit Suisse AG, Research Division - Research Analyst [45]
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Lawrence, I thought I had heard in foodservice that Kraft Heinz kind of pulled back a little bit in terms of the resources they gave. And I kind of jumped to the conclusion that maybe French's had benefited from that with more distribution. Did you find that...
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [46]
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Yes, on the foodservice side, actually French's is not that big. Although we said that 35% of the business is foodservice, it's actually -- the majority of that is actually hot sauce, not French's Mustard, the stronger piece of it. We think there's a big opportunity there. Again, these are great brands, both in retail and in foodservice. There's a great synergy between retail and foodservice. And we think there's a great opportunity for us to drive that growth.
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Operator [47]
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Our next question is from the line of Jonathan Feeney with Consumer Edge Research.
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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst [48]
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Two questions really, and related. First, I always thought of you in this category, particularly 1 day that TABASCO brand would ever sell. So congratulations on strategically getting into it. But could you talk about what competitive landscape because the low end of this category is very crowded? The barriers to entry don't mechanically -- wet-fill businesses don't seem to be that high and you can see a bazillion different sauces, regional, local, et cetera, in there. What is it that makes the Frank's brand special in your mind? And can give us any color. I presume that wasn't your intention to disclose the gross margin. Can you give us a flavor for where that gross margin index is versus the rest of your company, on Frank's specifically?
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [49]
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Jonathan, are you messing with us because I joked about the flavor for that margin? The hot sauce is a very fragmented category. There are thousands of brands and there's a steady flow of brands in and out. But the leading brands are pretty well established. And Frank's is overwhelmingly the leader in hot sauce, has a very strong development in the East, but there are regional competitors that are strong and there's a great opportunity for us to grow, particularly on the West Coast and the South Central region, there are some regional competitors and there's a lot of opportunity for us to grow the product. Tastes great. Has tremendous engagement with the millennials, much like our -- I think we mentioned in our remarks, much like the OLD BAY brand, the followers are quite passionate, the product repeats very well after trial. People who try it really like it. And the taste profile of it is -- they all have a little bit of a different taste profile. And the Frank's taste profile is one that consumers get hooked on. Mike, you want to?
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Michael R. Smith, McCormick & Company, Incorporated - CFO and EVP [50]
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Yes, it's really -- it's actually a very high usage product. You can pour a lot of the stuff on it. It doesn't have the heat context of some of the other brands, where you can only use a little, so it's a high repeat usage. To your second question about margins, these margins are very comparable to our spice and seasonings lines. And actually as Lawrence mentioned, the high-growth part...
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [51]
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Gross margin.
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Michael R. Smith, McCormick & Company, Incorporated - CFO and EVP [52]
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Gross margin, but the high-growth hot sauce business actually has higher gross margins than the rest of the portfolio. So that helps this margin up going forward.
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Operator [53]
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We have time for one additional question today, which is coming from the line of Akshay Jagdale with Jefferies.
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Akshay S. Jagdale, Jefferies LLC, Research Division - Equity Analyst [54]
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Congratulations on the deal. You provided a lot of details, so thank you for that. I just wanted to ask, maybe I missed this, but what is the historical growth profile of the business? You gave some flavor, but are you able to give us like a 3, 5-year CAGR?
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [55]
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I can tell you that over 20 years, it has been mid-single digit. And I believe that virtually every time frame that we looked at, we found a 4%, 5% over just about any cut of that time period.
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Akshay S. Jagdale, Jefferies LLC, Research Division - Equity Analyst [56]
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Outstanding. And just one last one. To your credit, you're probably one of the only companies that talks and focuses on EVA. So just -- do you expect this deal to be EVA positive at some point? Because I mean, obviously, you're spending $4 billion, I'm guessing the -- you could say, the cost of the deal including equity is 5%, 6%, but I know you take a more holistic view at it. But can this deal be EVA positive given the multiple you are paying?
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Michael R. Smith, McCormick & Company, Incorporated - CFO and EVP [57]
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Definitely, that's why throughout, in earlier question, we wanted to get EVA into there because as I said, we look at all of our investments, whether capital or M&A with an EVA lens. And if you look at the metrics here, bringing in both the P&L and the balance sheet, this does generate EVA for the company, so yes.
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Operator [58]
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Thank you. I'll now turn the floor back to Lawrence Kurzius for closing remarks.
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Lawrence E. Kurzius, McCormick & Company, Incorporated - Chairman, CEO and President [59]
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Thanks, everyone, for your questions and for participating on today's call. I know that we will have calls scheduled with many of you later this morning. In closing, I'd like to recognize and thank the employees who worked so hard to complete this transaction. It's an important milestone for McCormick and another strategic acquisition to drive our growth. We have great respect for RB Foods and the strong business its employees have built. We expect to grow these brands in new and unique ways through our proven track record of insight-driven innovation and the ability to leverage our global footprint. We're confident McCormick is the perfect home for RB's popular food brands and its employees.
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Kasey Jenkins, [60]
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Thank you, Lawrence, and thank you all for joining us today. If you have any further question regarding today's information, please give us a call at (410) 771-7140. This concludes this morning's conference call.
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