International Flavors & Fragrances Inc (IFF) 2002 Q1 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone, and welcome to the International Flavors & Fragrances first quarter earnings release conference call. Today's call is being recorded. The speakers with us today for the call will be Mr. Richard Goldstein, Chairman and Chief Executive Officer, and Mr. Douglas Wetmore, Senior Vice President and Chief Financial Officer. At this time I would like to turn the call over to Mr. Goldstein. Please go ahead, sir.

Thank you very much. Before we begin, I need to read you some cautionary remarks. This conference call may contain statements that are considered forward-looking within the meaning of the private securities litigation reform act of 1995. The complete forward-looking statement is in our press releases and is updated from time to time in the company's SEC filings.

Now to move forward with our first quarter review. As I said to you in January, the year 2001 was a good beginning, a year with many accomplishments that began the process of reinventing IFF and building the foundation of our path to future growth. We continue to be pleased with the progress we have made in our reorganization and in the integration of BBA into one IFF.

The strength of the global economy remains uncertain. But I am confident that the actions we have taken to streamline our business and realize operating efficiencies, coupled with our back to basics approach are the cornerstones on which we will build future growth. This will enable us to achieve superior, long term operating results, thus enhancing shareholder value.

With our first quarter results in, I am even more confident that we are on track with our plan. At 44 cents per share, our earnings are up and at the high end of our guidance, despite the difficult and uncertain economic conditions that confront us. Each region has performed pretty much as we expected when we spoke with you at the time of our January call.

Excluding sales associated with certain non-core assets disposed of during the course of 2001, our first quarter sales decreased about 1.6 percent compared to the same quarter last year and in line with expectations. Our earnings are being sustained by the continued increase in synergies from the integration of IFF and BBA, as well as substantially reduced interest costs as we reduce our debt and take advantage of lower interest rates.

Ahead of expectations, IFF achieved incremental integration savings of about $16 million in the current quarter. As a point of reference, in the first quarter of 2001, we achieved approximately $2 million of savings. You will recall that at the time we announced the BBA acquisition, we stated that we would achieve approximately $70 million of savings. I'm pleased to reiterate that we are on track to deliver as promised.

As of April 1, 2002, our run rate was approximately $70 million. The next improvement in the run rate will be at the end of the second quarter when we close our Chicago plant, and there will be further improvements in the second half of the year when the final two plants in the UK close. We are also keeping our commitments to customers, and this bodes well for IFF's future.

Through our renewed focus on R&D and on customer service initiatives, we are seeing improved win rates, especially in those areas which required the most improvement. Yet we still have much to accomplish. With the success we had in rapidly implementing our integration and reorganization during the course of 2001, I made clear that in 2002 we would redouble our efforts to grow the top line. Those efforts continue unabated.

We see the balance of the year in line with the guidance we provided in January. More specifically, we still expect 2002 revenues to grow in low single digits, excluding for comparative purposes approximately $60 million of sales related to non-core businesses disposed of during 2001. On earnings per share, we continue to expect an increase of between eight and 12 percent, excluding non-recurring charges.

In short, IFF is well positioned to drive long term growth and to continue to increase shareholder value. Now I'll turn the call over to Doug Wetmore, who will discuss our financial results in more detail. Afterward, we will briefly discuss our preliminary expectations for the second quarter and will then be pleased to take your questions.

Thanks, Dick. Good morning everybody. Before going into the details for the quarter, there are a couple of housekeeping matters to bring to your attention. First, on January 1, 2001 you'll recall we reorganized into the five geographic regions of North America, Europe, Asia Pacific, Latin America and Central Asia Middle East, or CAME.

During 2001, as the integration of BBA and our own reorganization progressed, we concluded that the CAME region as then constituted needed further refinement. And, accordingly, with effect from January 1, 2002, certain countries formerly in CAME have been placed under the management of our European region, and the former CAME region will now operate as the Indian Sub-Continent Region. This region will include India, Pakistan, Bangladesh and Sri Lanka.

North America, Latin America and Asia Pacific were unaffected by this change. This change shifted responsibility based on 2001 full year results for about $43 million in sales and about $6 million in profits to Europe. There was no impact on the bottom line results. Secondly, during the fourth quarter of 2001, the company disposed of certain non-core businesses, specifically our North American and Brazilian fruit preparations businesses and the UK Chemical business acquired as part of the BBA transaction.

These businesses were sold in separate transactions. Thirdly, effective January 1, 2002, we adopted the provisions of , which prescribes accounting for good will and other intangible assets. And, as we stated in our January earnings call, adoption of this standard eliminated about $33 million of amortization expense, or about 35 cents per share for the full year.

Yesterday we filed an with pro forma information detailing historical geographic information for 2000 and 2001 to reflect the shift in responsibility for certain countries to Europe from the former CAME region and detailing results for the Indian Sub-Continent. Secondly, including historical quarterly geographic information for 2001 to reflect this same transfer of responsibility.

And, third, pro forma information with respect to the year 2001 on a quarterly basis to reflect the adoption of and to eliminate the operating results of the businesses disposed of during 2001. This should facilitate comparisons going forward. Now, turning to the first quarter, unless I indicate otherwise, all comments regarding sales performance for the quarter are in comparison to 2001 results adjusted to eliminate sales and operating expenses of the non-core businesses that we disposed of during 2001.

Our press release and the appended schedules include details on 2001 results as reported, as well as 2001 pro forma results prepared as though these businesses were disposed of prior to January 1, 2001. A copy of the release is also available on our web site, IFF.com, if you've not yet seen it. Please note when reviewing that while the chemicals business that we disposed of, all the chemicals were manufactured in the UK, sales performance in each region with the exception of North America was impacted by the disposition of this business.

Now, having dealt with all the housekeeping matters, and as Dick noted, our sales for the quarter were in line with the expectations we outlined in January. Local currency sales for the first quarter decreased by about 1.6 percent as we had expected. Currency translation was unfavorable for the quarter by about two percent, mainly due to the euro, the Japanese yen and the Australian dollar.

In comparison to the prior year, these currencies declined versus the US dollar by about four percent, 12 percent and six percent, respectively. As a result, reported dollar sales declined by just under four percent in comparison to the prior year, pro forma sales for the quarter. And, as Dick mentioned, per share results were at 44 cents per share, the high end of the range that had been forecast back in January.

North America fragrance sales were flat for the quarter, and we continue to have a very good performance in functional products where sales increased nearly 20 percent in comparison to the prior year quarter. The growth continues to reflect the benefit of new wins and the performance we've seen in recent quarters. It was a particularly strong performance considering that these products showed a 10 percent increase in the 2001 first quarter.

Fine perfumery declined nearly 20 percent for the quarter. You will recall from our most recent earnings conference calls that fine fragrances would be the hardest hit from the events of September 11th and the slowdown of the economies. And this is proving to be the case. However, these results were in line with our expectations.

Aroma chemical sales were flat for the quarter. North America flavor sales increased two percent for the quarter, and this performance was in line with expectations. As we noted throughout last year, we continue to see the benefits of the reorganization and the integration of BBA into our North America flavor operations, and we expect North America flavor sales to continue to demonstrate growth as the year progresses.

Turning to Europe Fragrances, local currency fragrance sales in Europe increased by about three percent for the quarter. On translation, this three percent local currency increase resulted in a dollar decline of one percent. The performance was in line with our expectations. Our performance in soap and household products was as expected, where local currency sales decreased in the low single digits, resulting in a high single digit decrease in dollar terms.

Fine fragrance declined in the high single digits in local currencies, resulting in a reported dollar decrease of about 12 percent. Again, the impact of prevailing weak economic conditions was most pronounced in fine fragrance. Aroma chemical sales in local currency increased about 25 percent, resulting in a reported dollar increase of about 20 percent. For the past several quarters we have seen gyrating order patterns regarding chemicals in Europe, and this first quarter was no exception.

Europe flavors declined seven percent local currency for the quarter, resulting in an approximate 11 percent decrease in dollar terms. This local currency performance was somewhat below what had been previously forecast. The performance in the quarter was personally due to a very difficult comparative versus the prior year quarter, when Europe flavors achieved a nine percent local currency increase.

Latin America fragrances reported a decrease of about eight percent for the quarter consistent with what had been expected. Argentina declined about 50% due to that country's well publicized economic troubles. This was in line with what we expected for the country. Brazil decreased about eight percent for the quarter and Mexico declined in the mid-single digits for the quarter.

Again, reflecting relative economic weakness in those countries. Latin America flavor sales decreased about 10% in the quarter. Argentina flavors sale declined over 60% in relation to the prior year. Accounting for the lion's share of the region's decline in sales. Argentina offers few prospects for a near term turn around in either flavors or fragrances.

In Brazil, excluding the fruit business that we sold, sales declined about five percent in the quarter pretty much along the lines of the fragrance performance. Partially offsetting the declines in Brazil and Argentina, Mexico grew at a robust rate in excess of 30%, partially due to a favorable comparative versus 2001, when that country had declined.

Asia Pacific fragrances declined one percent in local currency terms resulting in a four percent decrease in dollars. That performance was somewhat better than had been expected. Japan was the principle cause for the region's performance, declining nearly 20% in local currency terms for the quarter and approximately 30% in dollar terms.

Japan performance reflects the very difficult economic circumstances currently prevailing in that country as well. Indonesia fragrance sales declined approximately five percent in the quarter, reflecting continued slow economic conditions there. And similarly, the Philippines declined about 10%. Greater China was down just slightly for the quarter and that performance was not unexpected as China had a very difficult comparative with the first quarter 2001, when it grew at a rate of nearly 30%.

South Korea, Taiwan and Thailand all grew at low double digit rates or better for the quarter. Asia Pacific flavors reported flat sales on local currency resulting in a four percent decline in dollars. Again, it bares repeating. It was just about where we expected them to be. Japan, Singapore, Malaysia and the Philippines all contributed the performance with declines in the high single to low double digits and local currency.

The sales increases were led by greater China, achieving a five percent increase for the quarter and both South Korea and Vietnam reported strong double digit increases. Thailand was flat. India fragrances reported a local currency decrease of about three percent resulting in reported dollar decline of about four percent. Similarly, India flavors reported a local currency decrease of three percent and a similar four percent decrease in dollars.

Both of those were as expected. Looking at operating results, margin and expenses, the gross margin of 41.7% came in slightly better than the prior year quarter as reported and in-line with what had been expected. Gross margin was below the prior year pro forma of about 42.8%. Margin was very clearly impacted by product mix, most notably the significant weakness in fine fragrances, which generally carry the highest gross margins.

To put this in perspective, fine fragrances declined in local currency terms in the low double digits. This decline was partially offset by mid-single digit local currency increases in functional products and aroma chemicals, resulting in fragrances overall being down one percent in local currency as reflected in one of the schedules attached to our press release.

Operating costs were in line with expectations. spending increased in line with what we discussed in our January call. Roughly approximating eight percent of reported sales. We realized, in excess of 18 million dollars in integration savings in the first quarter this year in line with our plan, that's the 16 million dollars incremental that Dick mentioned, plus the two million realized in the first quarter of 2001.

Operating margin was sustained by the synergies associated with our restructuring and reorganization efforts. At December 31, 2001, we had 5,929 employees as reflected in our annual report. We're now below 5,900 and we expect greater than 250 additional personnel will depart during 2002 as we complete our integration and reorganization process.

Selling and administrative expenses decline by 11%. Again, reflecting the benefit of synergies realized year on year. Interest expense decreased by about 50% in comparison to the prior year quarter, about 10.4 million this year compared to 22.3 last year. Our average interest rate this quarter was three point seven percent versus about six point eight percent last year.

The interest decline reflects the favorable interest rate situation in 2002 in comparison 2001 and we've talked about this in our annual report and I won't go into the details about the interest rate swaps, but those swaps do remain in effect and have enabled us to significantly decrease our overall cost to debt. Interest also declined due to lower debt levels.

Debt outstanding at this quarter end is about 130 million dollars less than at March 31, 2001 and we will continue to reduce debt as the year progresses. Other income and expense improve over the prior year primarily because of favorable exchange games in Argentina, resulting from hedging positions we took towards the end of 2001. During the quarter, we repurchased approximately 5,093 shares under our stock by back program.

And at March 31st, 2002, we had a remaining authorization of about 53 million dollars. As we've said throughout, we remain committed to properly balancing the repurchase of shares with reduction in our overall debt levels. The organization of identifiable and tangible assets associated with the BBA acquisition totaled three point two million dollars for the quarter. The effective tax rate for the quarter was 34.3 and I expect the effective rate for the full year to approximate 34.3%.

Cash and investments at March 31st totaled $34.9 million. Our day sales and inventory declined from 150 at December 31st to 147 at the current quarter end. And our receivable days declined from 72 days to, at year end, to 68 days at March 31st. We continue to focus on our working capital. investments were $19.6 million for the quarter and depreciation for the quarter was $17.3 million.

And at this time, we continue to expect capital spending for the year to approximate $90 million, including the effective, resuming implementation of SAP as we previously mentioned. With respect to SAP, I'm pleased to note that we went live in November with our UK chemical plant in a very smooth transition. We mentioned that in our January call.

We also went live in our plant in February 2002 and are pleased with that overall implementation as well and will be rolling out SAP to additional operations as the year progresses. With respect to the expected costs associated with the integration and reorganization, the guidance we provided in earlier calls and in our annual report, remain applicable.

Looking briefly at the second quarter expectations, we currently expect local currency to be flat. Local currency sales to be flatfish. We expect exchange to be neutral. So, flat sales and dollars as well trending upwards from the first quarter.

The purposes of this quarter, the 2001 comparable figures exclude approximately $15 million in sales related to the non-corp business we disposed of. Let me give you some preliminary guidance in terms of where we expect sales to be for each of the geographic regions. North America fragrances expected to be flatfish. The strength and functional products will be essentially offset by weakness in fine fragrances and chemicals.

North America flavors will decrease in low single digits compared to the 2001 quarter as reported. However, excluding those sales of the food preparation business from last year, flavor sales will increase in the low single digits. Europe fragrances will decline in the high single digits in local currency terms with essentially the same dollar decline, excluding the sales associated with the UK chemical business.

Local currency sales in Europe will be flat. Europe flavors are expected to decline in the low single digits in local currency terms. Latin America fragrances will increase in the low single digits. Although, Argentina will remain weak, expected to decline 30%. Its overall performance reflects wins elsewhere in the region. Both Mexico and Brazil are expected to increase in the high single digits.

Latin America flavors is expected to decline in the low single digits as in fragrances. Argentina is the primary contributor. Asia Pacific fragrances are expected to be flat in local currency resulting in a low single digit decline in dollars. While Asia Pacific flavors are expected to increase in the mid-single digits in local currency. Resulting in a mid-single digit growth in dollars.

In the India region, both fragrances and flavors are expected to increase in local currency in the low single digits. We expect earnings per share for the second quarter 2002, excluding any non-recurring charges to be in the range of 51 to 54 cents per share.

And for comparative purposes, 2001 second quarter earnings would have approximated 48 cents per share, excluding non-recurring charges. Reflecting the elimination of goodwill amortization in the quarter and also contemplating the businesses disposed of.

As Dick mentioned previously, we continue to expect 2002 revenues to grow in the low single digits, excluding the sales related to the non-core business disposed of. And we expect earnings per share for 2002, excluding non-recurring charges, to increase between eight and 12% in comparison to 2001 and that 2001 figure takes into account the elimination of amortization of good will. We will now open the conference call to questions. Thank you.

Our question and answer session is conducted electronically. If you would like to ask a question, please press the star key followed by the digit one on your touch-tone phone. Again, that's star one for you questions. And we'll pause for a moment just to allow everyone a chance to signal. Our first question, gentlemen, comes from at JP Morgan.

Hi, good morning.

Morning, Jeff.

I guess a few questions. In terms of the $16 to $18 million cost savings achieved in the quarter, when I look at your fourth quarter numbers, there's not really so much difference in SGNA costs or in R and D costs. And your gross margin sequentially is down, as it should be because of the mix. So, can you help us see where the incremental cost savings are?

Jeff, it's incremental over the first quarter of 2001. But as Dick mentioned, there's really no change in the run rate between the end of the year and now. The next step will be as we close Chicago and as we close the UK plants.

Is the head count reduction of 250 for 2002 different from your previous expectations or is there more to come in 2003?

The 250 is contemplative by what we had in terms of the reorganization and the integration of BBA.

Just, I guess, lastly a question for Dick. In what product areas do you feel IFF is making the most progress and in what product areas are you making the least?

Well, I think, Jeff, we're showing very strong win rates in flavors particularly in North America. Although, it's spilling off into other regions as well. And also, our win rate in fine fragrance is very strong. It was strong in the, in 2001, particularly the back half of the year and continues strong in 2002.

Sales on that, of course, don't get reflected until late this year, but I'm very comfortable with it. We're also seeing good growth and win rate in functional flavors, particularly in North America. So, that I'm really quite pleased with the win rate.

And what's the area where you're making least progress?

I don't think that there's any area where we're not making any progress. I think that in terms of regions where I think we still need to get ourselves firing on all cylinders more strongly is Europe. And I think that what's happening is that the economy in Europe is still sluggish.

And we're not seeing the pick-up, although we are seeing the, we're doing a good job within the categories and the win rate is okay. But if I have to pick an area where I really would like to see stronger focus at the moment, it would be Europe.

Okay, thank you.

Although, Jeff, just to add to that. We have made substantial progress on the customer service side in Europe. So, that's eliminated one of he issues about why customers may not have necessarily wanted to do business with us.

Okay, thank you.

Our next question will come from at Credit Suisse First Boston:

Hi, my question is really about the operating profits in the first quarter being down in line with sales. I thought they would be better sales when you offset that with the interest expensing down so much. But, I understand that fine fragrances have particularly high gross margins. So, that would be a reason the gross margins were down, but I thought that you would be able to more than offset that by the bottom line. Was that a disappointment to you?

Well, you know, Alice, you hit it right on the head. And as I mentioned in my comments, you know, with fine fragrance being down and you're right. It does bring the highest margins to us and product mix did affect us overall. Had fine fragrances not declined the order of magnitude that I talked about, the operating profit would have been dramatically higher I would suggest.

But as we said, the next step in the synergies which will carve further costs out of the manufacturing expense, takes place at the end of the second quarter and into the third quarter. And basically, as I said in my comments, everything came in pretty much as expected in terms of performance because we knew, all along, that fine fragrance would particularly weak.

Is the point that fine fragrances have also relatively high SGNA sort of fixed costs for development reasons?

I think, proportionally speaking, they may, but also the functional fragrances also have pretty high cost because they're more technically demanding because of the need to work with the ingredients.

When do you think fine fragrances turn up? Do they turn up in the third quarter in your, because of the new wins?

Yes, I think that what, you know, you're beginning now to come into the season, Alice, when you're talking about the sellings for mother's day, father's day. There should be some, but of course, the big season, as you know, for fine fragrance is really, has been traditionally been a fourth quarter business. And what, I think that you'll see, is sequential improvement coming through on fine fragrance, which should be reflected in the fact that our win rate has been as strong as it has been.

But just to clarify. Do you think fine fragrances in North America will be up in the third quarter?

Geez, I hope so, but I mean, we still don't have any indications, at this point, from our customers and from the department stores that they are predicting, you know, a strong return to the fine fragrance category in what I will say the, you know, going into third and fourth quarter. It, it, it still, the guidance, which we gave in January, we really don't know very much more than we know at the current time.

You're confident that you're gaining share in fine fragrances.

I am confident that we're gaining share in fine fragrance on the strength of the win rates that we have. Yes, I absolutely am.

And would that be true for Europe as well?

Yes, in Europe as well in terms of fine fragrance. But performance in fine fragrance in both North America and Europe was, continues to be strong.

And one final question that's easy. How many shares did you have at the end of the March quarter?

Shares outstanding?

Right.

Outstanding was about 94 six.

Good. Thanks a lot.

Our next question will come from and Goldman Sachs.

Hi, just a couple of things. First, to follow-up on the market share question, I know you don't like to talk about your customers, but can you give us some examples of fragrances that you, you know, that you have won. Just so that we can get comfortable that you actually are winning the big, you know, blockbuster fragrances as opposed to lots of little things.

Well, Amy, several of these are going to be coming into the market place over the next period of time. And when they do, we'll be glad to provide the details, but you know that historically, we've never really talked about the specifics until it's time for us to launch with our partners.

Is it fair to say then, when you say that you're gaining share, that we're talking about, you know, again the blockbuster fragrances, the Estee Lauders, the Loreals, the of the world?

Amy, I wouldn't have said that our win rate is improving. I would not have said that we're doing better, if I was not talking about our major global customers.

Okay, wonderful. And so, then, yet, well I guess that I'm just trying to translate that into a sales acceleration. Can you give us maybe by quarter. I guess for second quarter you expect sales to be flat.

Right.

Can you give us some sense of, you know, the third and fourth quarters?

Well, I mean, I think that if you take our full year projections. What we have said and we continue to hold with is that we expect to see an update in the back end of the year and this will be reflected in the third and the fourth quarter. Specifically, we haven't given any guidance with respect to what we think the third and the fourth quarter are going to be.

And we're not going to do anything more than what we've done so far today, but it will, it continues to be our expectation that we will see the growth in the third and fourth quarters in order to provide the overall growth that we've talked about for the year in low single digits.

And that's because the new wins kick in and not because you're banking on an economic recovery. Is that fair?

That's right. That's right. I mean if we have a strong economic recovery and it puts additional wind in the sails, then maybe we'll be pleasantly surprised with respect to the way the full year turns out, but we are not predicting that.

Yeah and I think just to amplify that point, Amy, part. You know, it will be sequential improvement as the year progresses. And obviously, part of that improvement is facilitated by easier comparisons. First with the third quarter, but even more so with the fourth quarter when we felt the pronounced effect on fine fragrances. And it is going to be amplified by the fact that the wins that we've won now will be selling.

But as we said on other calls, really since our third quarter call last year, we are really exercising caution because of the economy and how that impacts the scale of launches.

Okay, great. Can you also just talk about the second quarter and why the guidance that you're giving is below the street. I think you're looking for 51 to 54 and the streets are 56.

Well, the easiest thing is we're trying to give you the guidance based on what we see. I've not really commented on any of the guidance on the street. We only provide a guidance for the first quarter and for the full year. And as we've said, I think three or four times during the call, we remain confident. Both from a top line perspective as well as earnings perspective that we're comfortable with those targets we've established for the year.

Is it fair to say that in terms of the profit growth and the EPS growth that it will look similar to the first quarter with most of the growth coming from interest expense and a lower tax rate.

No, I don't think that, that is, we're going to continue to see benefits from the synergies. Obviously, the benefits of those synergies diminish somewhat because we anniversary achieving sizable savings. I think we achieved about $10 million dollars in savings in the second quarter of 2001.

And we'll probably be at about $18 to $19 million dollars of savings for this year. But again, the key for the profit perspective and this is something we've been voicing caution on throughout is the fine fragrances.

So, again, because fine fragrances are going to pick up in the second half with the win rate, presumably that will hurt your profit in the second quarter.

Well, I don't know that it will hurt the profit in second quarter. I think it will be totally consistent with the guidance which we've been providing.

Right. It will temper the growth. Let's put it that way.

Well, we're confident with the estimate that we've just provided.

Okay, just lastly on the tax rate. Why, the tax rate was substantially less. I was looking for the tax rate for this year to be 37.7 and now you're saying 34.

Well, I said in the call that I actually, in the January call, I expected it to be 34.5. But as it turns out, there was some, excuse me, changes in tax legislation. It's coming at about 34.3 and the primary driver in that reduction is simply the elimination of the non-deductibility of the amortization. We had said that in our January call.

Okay. Alright, thank you.

Our next question comes from at Morgan Stanley.

Good morning.

Hi, Catherine.

Good morning.

Hi there. Can you talk a little bit longer term, Dick, about some of the initiatives that could potentially drive an acceleration in sales. You know, with a focus on capital. I mean, are there regions that you think that you're investing a little bit more capital now that will help, you know, sustain earnings return and get the sales numbers up.

Well, I think there are a number of things, Catherine. First of all, our major customers are reporting that they are doing better. Which you will recall I had indicated that with major customers like and with Kraft, , Pepsi Co. making major acquisitions, that they would need to put new product into the market place in order to be able to justify their acquisitions.

We're seeing that activity with our customers and accordingly we anticipate and we are already doing, seeing the improvement in that area. Secondly, I think by region we see macro economic factors improving in southeast Asia, in India. I don't hold out much hope for strong improvement in Latin America this year, but having just come back from Asia Pacific, I'm encouraged by what I am seeing.

And therefore, although the global economic climate has not materially changed, I do see improvement and I do see that the investments that we are making in those regions clearly will pay out in the future.

Okay, and then.

The last point that I would focus on in terms of underscoring the opportunities for us is that our service levels with our major customers around the world are back to the levels which they are expecting from us. And as you know, that for the last several years, we have been penalized by many of our major customers because we could not meet their expectations.

Okay. And then, just with respect to the competitive landscape, you know obviously very tough competition. How can you differentiate, either on the RND or the product side, that may give you a leg up in terms of market share gains over the next year or two.

Well, Catherine, all I can tell you is historically our RND initiatives have always been regarded by the industry as the leading edge within the industry. We continue to put our funding behind it. We have changed dramatically the leadership within RND, as you know. Brent Brooks is leading it. We are now now slightly about 18 months.

We're beginning to see dramatic improvement in terms of linkages between research and development and our business. This is translating itself into new product opportunities. And here, I am not talking just about fine fragrance. I'm talking about functional fragrance and I'm talking about the flavor side of the business. I am confident that we are going to be able to provide cutting edge technology, which will be a point of difference for us in all of our categories.

Okay, and then just on the sales force. Are you happy with, you know, the structure right now and what the team is accomplishing or do you think you have to make more changes?

No, I'm quite. I'm quite confident right now with the structure that we have in place. That we're still going through some growing pains, as you can imagine given the fact that we are, you know, just 18 months into what I have traditionally said is a three to five year process in terms of turning around IFF.

But the progress which we've made to date I'm quite pleased with. And, you know, there's an evolving situation and we go from strength to strength, in my view, in each month that we are proceeding with the reorganization and the integration.

Okay, just real quick. Doug, can you give us accounts payable?

The accounts payable, you know, Catherine, you've asked. I think you may have asked me a question that I may not have, but it's about, it's right around 100 million.

Okay. Okay, great. Thank you very much.

Our next question will come from Craig Albert. He's with the Osprey Fund.

Hi, good morning everyone.

Morning.

I wondered, if you could comment on why your sales growth, in the most recent quarter, is lower than sales. You've talked, in the annual report as well as today, about the win. And if it's simply an issue of the timing of the wins, can you explain a little bit about the time lag that naturally exists between winning a new account and when the product is actually shipped.

My preference would be to only comment on IFF because this is our earnings call. I think we don't have sufficient insights. We read the same things about that you read and I think that's best left to to comment on their growth rate. Dick, do you want to talk about the launches?

Well, I think that you're going to see, as you know, there's always a delay with respect to fine fragrance launches and the win rates. And we're coming into the season, if you will. You're talking about mother's day, father's day and then, of course, talking about the Christmas season. And I think you'll be hearing more about those. I'm confident that we are dramatically improving with respect to our win rate over the prior period of time.

And to the extent that you don't see it yet, it is because those products have not yet come into the market place. Vis-a-vis the competition, we're doing, we're doing as well against the competition as I could expect.

I think the other thing too, just to amplify and it was kind of repetitive throughout the scripted portion of our call is we're doing exactly as we said we would. And that is something we've delivered on for six quarters now and that is part of the key is predictability and reliability. And we have renewed the focus on the top line growth and that's where the balance of attention is this year as we finish the integration and the reorganization.

Right, Dick, what I'm trying to understand a little bit better is what is the typical lag from the time you win and you can announce to us that you had these increased wins and when you start shipping a product. What actually has to happen? Is there further development? Is it just simply ramping up the manufacturing and shipping it out. Is it a one month lag, a two month lag, six months?

Well, it really depends in terms of when the briefs come in and how and there's more compression going on within the system. But I think at this point, we're looking forward to see some of the, the benefits come through within the next few months.

Okay. And any further developments on the R and D side in terms of number of molecules or any of the other metrics .

Oh, I can only tell you that I'm really quite pleased with the progress, which is taking place in terms of the transfer of technology from our research and development group to our category teams and seeing it presented to our customers and finding it being received well by our customers. We're still, in my view, in the early stages of this transformation. This is an area, which historically, IFF was very strong at.

When I came into the business slightly less than two year ago that position, as you recall, was vacant for 14 months. Clint Brooks has now been in his job about a year and a half and we're seeing dramatic improvements in terms of the linkages between research and development, creative and application and the, and getting it out in the marketplace.

Okay.

That coupled with high customer service improvement leads me to be quite comfortable.

Thank you.

No, I think we patented, if memory serves, either five or six new molecules in 2001. And we patent only those considered commercializable. And that number will probably increase to the high single digits in 2002.

Next question comes from Alec Patterson. He's with Dresner RCM.

Yeah, I guess just following up on this discussion about the wins and developing market share momentum. Dick, could you just sort of give a sense. Between improving customer service and winning back the hearts and minds of your customer base versus developing new products that actually gain new market share. Is there sort of a split between the two in terms of your focus, in terms of what will have the biggest impact?

Well, I think the, in the first instance, Alec as I had mentioned repeatedly in our call, the focus was to correct the problems that we had with our customer base. In meeting with our customers, repeatedly I was told that IFF had become too difficult to do business with. In that context, what have we done? We have gotten back to basics.

We have reminded that the customer is king and we have improved in all disciplines those things where our customer found us too difficult to do business with. In that context, our customer service levels are improved dramatically. This has translated into a very, very different set of discussions when I am now meeting with our customers around the world.

They are very happy at this point with the fact that, quote, it's not the old IFF if you will. The arrogance has gone. Arrogance is a disease that can either be a wake up call or, if not cured, can kill you. I'm pleased to say that it hasn't killed us. Now, that's half the equation. The other half of the equation is seeing to it that the new products that we developed to go into the marketplace are the best there is in that they capture the intention of our customers.

So, that we continue to be the customer, the supplier of choice. More and more what are doing with our customers is partnering with them now at the front end in the new product work. What this does it allows us to provide our best opportunity to provide the technology necessary to be able to give them wins in the market place. I've repeatedly said that the total process here of turning around IFF was going to take three to five years. We're only 18 months into the process

Yeah, and I appreciate all that. I'm just trying to sort of look at it the way you just split it up and to sort of re-establishing the base of business and a customer sense that was lost due to arrogance and how much that might mean to the sales level. And then, also the perspective of adding on top of that the wins by establishing better products and integrating yourself in your customer base.

Well, it's indeed as you suggest. I mean, it's a two pronged attack and we are proceeding at a very good pace in both directions.

Okay, well then let me switch it to a different question quickly. The working capital management initiative of some of your customers. Have you see or talked to them about that and sort of the level of progress they're making or how that might impact your sell through to them?

Yeah, well I mean, our customers continue and will constantly press for, to keep the lowest level of inventories. Because their customers, in turn, are pressing for the lowest levels of inventories and we are working with them in order to be able to meet everybody's expectations. And really what it amounts to is attempting to see to it that it's a delicate balancing act.

In order to assure that, as their suppliers, we see to it that they get product when they need to get product and that we don't disappoint them on customer service level. And at the same time, not overload them with product in advance. I anticipate that this will be an on going process with our customers. It is an area where I do not anticipate that they will ever be, reach a point where they will say they hit it and they've hit the rubble.

It will always be on going and we will be working with them in that connection.

On the same point, though, we're also working on our suppliers and trying to reduce our working capital investment and I think we've started to make progress in that. And one of the reasons you had not seen that earlier is that we were building up inventory manufactured and the plants being closed to see us through the transition to the surviving plants. Well, now there's only a couple of plants, albeit significant ones, that remain to be closed. And I think you'll see working capital trending downwards for IFF as well.

Clearly, you guys are doing a great job in working capital. I guess in terms of your outlook on sales and what you're budgeting, does that incorporate an expectation on the working capital initiatives out of your customer base.

Yes, yes.

OK. Great, thanks.

Mr. Goldstein, that does conclude our question and answer session, I'll turn it back to you for any closing comments.

No, that's it. Thanks very much and - more to come next quarter.

Thank you. That does conclude our conference call. We do appreciate your participation. At this time you may disconnect. Thank you.