International Flavors & Fragrances Inc (IFF) 2002 Q2 法說會逐字稿

Good day, and welcome to the International Flavors and Fragrances' Second Quarter Earnings Release conference. Today's call is being recorded.

The speakers for today will be Mr. Dick Goldstein, Chairman and Chief Executive Officer, and Mr. Doug Wetmore, Chief Financial Officer.

Mr. Goldstein, please go ahead, sir.

Thank you. Before we begin I need to read 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 second quarter results, 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.

We have said from the beginning that the reinvention of IFF would take three to five years. We are now two years into the process. We are focusing on what we know and do the best, making high quality flavor and fragrance products for our customers.

With our second quarter results now in I am even more confident that we are on track in our plan. Excluding sales associated with certain non-core assets disposed of during the course of 2001, second quarter sales in local currency increased 2 percent in comparison to the prior year quarter. This performance exceeded forecasts. We had expected second quarter sales to be essentially flat with the prior year.

I'm pleased to report that each region performed at least as well as expected when we last spoke in April and in certain instances much better than expect. We'll touch on the individual regions later in the call.

At 54 cents per share our earnings came in at the high end of our guidance despite the very difficult and uncertain economic conditions that confront us. We have moved into the final stages of our integration of IFF and BBA, and our results continue to exceed our expectations. With the successful closure of the former BBA plant in Chicago all capacity from this plant has now been transferred to our New Jersey operation, all the while maintaining a high level of customer service.

As of July 1, 2002, we are at a savings run rate of approximately $73 million. There will be further improvements at the end of the third quarter when the final two BBA plants in the UK close.

You will recall that at the time we announced the BBA acquisition we stated that we would achieve in the aggregate 70 million of savings. Final savings on integration savings will likely approach $80 million.

While we are delivering on the integration we are also keeping our promises 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 we believed required the most improvement, North American Flavors and Fine Fragrances.

Now that the news is in the public domain let me mention just a few of our recent Fine Fragrance wins, Lauder's Intuition for Men, Crave by Calvin Klein, Polo Blue for Ralph Lauren, and a couple of new Elizabeth Arden fragrances. All of these are in the early stages of launch. These Fine Fragrance wins are just the beginning.

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 continue to see the balance of the year in line with the guidance we've provided in January. More specifically we still expect 2002 underlying volume growth in the low single digits excluding for comparative purposes approximately 60 million of sales related to non-core businesses disposed of during the latter stages of 2001 and another 23 million of sales on similar non-core businesses in the just completed quarter.

On earnings per share we continue to expect an increase of between 8 to 12 percent excluding non-recurring charges, a range of between $1.89 and $1.96 per share.

If the dollar continues to weaken, there could be further up side potential to both sales and earnings on a reported dollar basis. But we are holding to our previous guidance in view of the uncertain economies in many regions of the world in which we operate.

IFF is well positioned to drive long-term growth and shareholder value. And I can assure you our focus is to continue delivering on our promises. Along these lines and in light of the challenges confronting some companies in corporate America, I'd like to reiterate IFF's commitment to shareholders, indeed our commitment to all our stakeholders, a commitment that focuses on creating value through leadership, quality, creativity, technology, and integrity.

I mentioned earlier that IFF focuses on what it does best, making quality flavors and fragrances. We are proud that IFF's earnings are based on just that, the high quality of its flavors and fragrances.

Similarly, IFF is committed to having in place strong corporate governance principles. For instance, as you know, our Board has nine directors, eight of whom are independent and each of whom have provided valued guidance and governance to this company.

The New York Stock Exchange and others who are examining ways to buttress confidence in the American marketplace have put forth a variety of recommendations to achieve that goal. I can tell you in that context that IFF will continue to do what's right for its shareholders and all other stakeholders.

Now I'd like to turn the call over to Doug Wetmore to discuss our financial results in more detail. Afterward we will provide guidance with respect to the third quarter preliminarily at least, and then we will be pleased to take your questions.

Thank you, Dick, and good morning, everyone.

All my comments are in comparison to the pro forma consolidated results of IFF for the second quarter of 2001. This pro forma information is available on EDGAR for those that have not already accessed it. And for those that may not be familiar with the details, allow me to briefly summarize the nature of the pro forma comparisons.

First, on January 1, 2001 we reorganized into five geographic regions of North America, Europe, Asia-Pacific, Latin America, and Central Asia and Middle East or CAME. With effect from January 1, 2002 certain countries initially included in CAME have been placed under the management of our European region, and the former CAME region will now operate as the India region. This region includes 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 results for about $ 43 million in sales and about $6 million in profits to Europe. There was no impact to 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 that was acquired as part of the BBA transaction. These businesses were sold in separate transactions.

Thirdly, effective January 1, 2002 we adopted the provisions of Financial Accounting Standards 142, which prescribes accounting for goodwill and other intangibles. And as we stated in our January earnings call and reiterated in April, this standard eliminated about $33 million of amortization expense or about 35 cents per share for the full year.

So with these developments we filed an 8-K detailing the pro forma information for 2001 to facilitate comparison with current year results. The 8-K includes historic geographic information for 2000 and 2001 to reflect the shift in responsibility between the regions, historical 2001 quarterly geographic information to reflect the same transfer of responsibility, and pro forma information with respect to the year 2001 on a quarterly basis to reflect the adoption of FAS-142 and to eliminate the operating results of businesses disposed of during 2001.

So having said all that, let me move to the results. As Dick mentioned, sales for the quarter exceeded our previously announced expectations, and earnings per share came in at the high end of the forecast range for the quarter. We remain on track to deliver the forecast results for the full year 2002, as initially outlined to you in our January 27th call and affirmed at the time we released first quarter earnings.

For the quarter in local currency sales increased 2 percent in comparison to the second quarter of 2001. The relative strength of the euro as well as to a lesser extent the yen and the Australian dollar resulted in reported dollar sales increasing by 3 percent. For the quarter there was about a 2 percent favorable exchange effect on translation of European results and about a 1 percent favorable effect in Asia Pacific.

On a consolidated basis Flavors were flat in local currency resulting in a reported dollar increase of about 1 percent. Fragrance sales increased about 3 percent in local currency, while in dollar terms they increased 4 percent.

Now turning to the individual regions, North America Fragrance sales decreased about 2 percent for the quarter in line with what had been previously forecast. Functional products were flat for the quarter. And the performance reflected some effects of destocking in the distribution channels. Year-to-date functional products have increased about 8 percent in comparison to 2001.

Fine perfumery declined in the low single digits. Year-to-date, however, fine perfumery has declined about 10 percent in comparison to the prior year.

The performance in the second quarter was consistent with the sequential improvement we've forecast for 2002 as the year progresses and reflects to an extent the early benefit of some of the new wins Dick mentioned earlier.

Aroma Chemicals were down in the mid single digits for the quarter.

The North America Flavors increased 4 percent for the quarter. The region performed somewhat better than had been expected. And the 4 percent increase is somewhat understated. Flavor sales for 2002 second quarter include only two months of the sales attributable to the fruit concentrates business the company disposed of in early June. Excluding fruit concentrates from both the 2001 and 2002 second quarter sales, North American Flavor sales would have increased 9 percent in the quarter, and the North American region would have increased about 3 percent in total compared with the prior year quarter.

I should mention disposition of the concentrates business was not reflected in any of the pro forma information I mentioned a few moments ago. The North America Flavors growth is being driven by good wins and is also being supported by continually improving customer service levels.

Europe Fragrance reported an increase of 11 percent in local currency and a 14 percent increase in reported dollars. This was a substantially stronger performance than had been previously forecast. The region was lead by strong performances in functional fragrance products and in aroma chemicals.

Functional product sales increased 13 percent in local currency resulting in a 15 percent increase in dollar terms. The functional products rebounded from the first quarter when they had declined in the low single digits. The performance was more impressive given the difficult prior year comparison when functional products' local currency sales increased in the high single digits.

Fine Fragrance local currency sales decreased in the mid single digits in the quarter resulting in a reported dollar decrease in the low single digits. And local currency chemical sales increased over 20 percent continuing the strong performance seen in the first quarter this year.

Europe Flavor sales declined about 3 percent in local currency resulting in a flat performance in dollar terms. This performance was in line with what had been forecast earlier. The Flavors Europe performance has been impacted by a slowdown in the fruit business, which is directly related to our announced intention to seek strategic alternatives for this business.

Turning to Latin American Fragrances, they reported a decrease of 3 percent for the quarter. The performance was consistent with what had been expected and reflects the persistently weakening economic conditions in that region. For the quarter Argentina declined about 45 percent reflecting that country's deep recession, and Brazil declined about 5 percent. Both countries performed worst than had been expected.

The weakness in Argentina and Brazil were partially offset by continued strong performance in Mexico and Central America. Mexico increased in low double digits while Central America increased 30 percent. These performances were driven by strong performance in new fragrance wins.

Latin America Flavor sales decreased about 14 percent in the quarter. Brazil and Argentina were again the principle causes for the decline. Brazil and Argentina declined by 24 percent and 30 percent respectively. Chile and the other A&D impact countries also declined.

Mexico Flavors partially offset the weak performances elsewhere with a strong 22 percent increase reflecting the benefit of new wins and continuing the performance achieved in the first quarter. Mexico Flavors are up about 26 percent year-to-date.

Asia-Pacific Fragrances increased 2 percent in local currency with a 2 percent increase in dollars as well. Performance was stronger than expected. And the sales performance was strongest in Vietnam, which grew over 90 percent, Singapore and Malaysia, which grew over 23 percent, and Thailand, which increased 17 percent in local currency. China also performed well achieving an 8 percent increase.

On a local currency basis Japan decreased in the high single digits for the quarter reflecting the poor condition of the Japanese economy. And Indonesia also declined, dropping 9 percent in the quarter and being down 5 percent year-to-date. We believe it will continue to take some additional time for Indonesia's economy to begin strengthening.

Asia-Pacific's Flavors reported a 3 percent increase in local currency with reported dollar increase of 4 percent. The local currency performance was somewhat less than had been expected; however, several countries achieved strong increases including South Korea, which increased 20 percent, the Philippines up 42 percent, and Vietnam up 92 percent. Taiwan and Thailand also achieve solid growth. Again the performance in certain countries was offset by a decline in Japan. Japan declined 13 percent in local currency in the quarter.

India Fragrances reported a sales increase of 27 percent in local currency, a 29 percent increase in dollars. This performance was markedly better than had been expected. The region's performance was equally strong in India and Pakistan as well as in the smaller markets and reflects strong benefit of new wins in the marketplace.

India Flavors reported a sales increase of about 7 percent. And this performance was also stronger than expected and again reflecting the favorable impact of new wins.

Gross margin came in just about where it had been expected for the quarter at 42.8 percent of sales compared to the pro forma of 44.5 for the second quarter in 2001. Year-to-date gross margin is 42.3 compared to 42.4 reported for the prior year and 43.7 pro forma year-to-date 2001.

As in the first quarter, margin was impacted by product mix, most notably the continued weakness in Fine Fragrances, which generally carry the highest gross margins. We do expect incremental margin improvement in the second half of the year as the remaining manufacturing synergies are realized and as we also realize the benefits of some of the Fine Fragrance wins.

Operating costs were in line with expectations.

Research and development spending increased in line with what we had discussed in January, roughly approximated 7-1/2 percent of sales now. We realized in excess of $18 million in integration savings in the second quarter this year, and for comparative purposes we realized about 10 million of synergies in the second quarter 2001. The operating margin was sustained by the synergies associated with the restructuring and reorganization efforts.

At December 31, 2001 we had 5929 employees. At July 1 we're below 5800. We expect that about 200 additional personnel will depart before the end of the year as we complete the integration and reorganization process.

Selling and admin expenses declined by about 2 percent compared to the results for the second quarter 2001, again reflecting the benefit of synergies realized year-on-year.

Interest expense decreased by 47 percent in comparison to the prior year quarter. Our average interest rate this quarter was 3.3 percent versus 5.5 percent in the second quarter last year. And the interest decline reflects the favorable interest rate situation in 2002. And we provided a discussion in our Annual Report regarding certain interest rate swaps we've entered into. I won't go into those details here except to say that such swaps remain in effect and have enabled us to significantly decrease our overall cost of debt.

Interest also declined due to lower debt levels. Reported debt outstanding at the quarter in the balance sheet that accompanied the press release was about 1,140,000,000. However, this amount includes approximately 27 million of gains on the interest rate swaps, the required mark to market adjustment under FAS-133. Our true economic debt at quarter end was about 1,113,000,000. This level of debt was also impacted by the strengthening of the euro and the yen. The strengthening of these currencies increased reported debt by about $24 million in the quarter. We will continue to reduce debt as the year progresses.

During the quarter we repurchased approximately 800,000 Treasury shares under our existing buyback program. At June 30th we had a remaining authorization of about $25 million worth. As we've stated throughout, we've remained committed to properly balancing repurchase of shares with reduction of our overall debt levels.

Amortization of identified intangible assets associated with the BBA acquisition totaled 3.2 million for the quarter, the same as in the first quarter. And I would not expect this number to change moving forward until such time as some of the assets become fully amortized several years from now.

The effective tax rate for the quarter was 34.1 percent. I expect the effective rate for the full year 2002 to approximate 34.2 percent now, representing a slight decline from the 34.3 in the first quarter. And that decline is merely due to earnings mix amongst the countries in which IFF operates. Generally the international operations are taxed at lower rates than the US operations.

The non-recurring charges during the quarter represent severance and other separation costs for IFF employees principally that have been impacted by the reorganization where decisions have been made and communicated to the affected employees prior to the end of the quarter. It also reflects all cost net of proceeds associated with the disposition of the fruit concentrate business we mentioned earlier.

Cash and investments at June 30th were $34 million.

Our day's sales in inventory declined from 150 at December 31st to about 139 days at June 30th. And receivable days stayed pretty much constant at 71 days at June 30th compared to 72 days at the end of the year.

Our capital investments for the quarter were about 22 million and are about 41 million year-to-date.

Depreciation for the quarter totaled about 18.8 million and is about 36.1 million year-to-date.

At this time we continue to expect capital spending in the year 2002 to approximate $90 million, as we've said in earlier guidance.

We completed a sale lease back of our (Hazlet) and South Brunswick, New Jersey facilities on June 28th. Sales proceeds were $48 million generating a gain of approximately 27 million. The deferred gain is included in the caption non-current liabilities in the balance sheet that accompanied the press release. And consistent with accounting guidance the gain will be deferred and recognized on a straight-line basis over the initial lease term. Proceeds from the sale were used to reduce commercial paper outstanding. And the lease qualifies for treatment as an operating lease.

Regarding SAP, as you know, we went live in our Carrolton, Texas plant in February 2002 and are pleased with the overall implementation there. We'll be rolling out SAP to additional locations in the second half of this year. As we've said, we've resumed the implementation of SAP.

Operating costs include certain expenses associated with the preparation of these implementations, most notably in the areas of data cleanup and in training. Such costs must be expensed. They can't be capitalized as part of the project.

Turning briefly to the third quarter, we expect local currency sales to increase in the low single digits. And based on current exchange rates this will result in a reported dollar increase of approximately 3 to 4 percent.

For the purposes of this forecast 2001 comparable figures exclude approximately $15 million of sales related to the non-core businesses we disposed of during 2001 as well as about $5 million of fruit concentrate sales for the businesses disposed of in June 2002.

Let me give you some preliminary guidance in terms of where we expect the sales for each of the geographic regions.

North America Fragrances is expected to be flattish. Fine Fragrance is expected to continue to be sluggish despite the benefit of new wins. And both Functional Fragrances and Chemicals will continue at about the same levels as current. North America Flavor sales will increase about 10 percent compared to the 2001 third quarter. This increase excludes the 5 million in fruit concentrate sales I just mentioned.

Europe Fragrances will decline in the mid single digits in local currency terms although the strengthening of the euro will result in dollar sales increase of about 4 to 5 percent. Europe Flavors are expected to increase in the low single digits in local currency terms resulting in a high single digit increase in dollars.

Latin America Fragrances will decrease in low single digits. Both Argentina and Brazil will remain weak. Brazil concern is due to the concern over the forthcoming elections to be held in October this year. Latin America Flavors is expected in the mid single digits for many of the same reasons.

Asia-Pacific Fragrances are expected to be flat in local currency resulting in a low single digit increase in reported dollars. And Asia-Pacific Flavors are expected to increase in low single digits in local currency resulting in mid single digit growth in reported dollars.

In India Fragrances are expected to be flattish while Flavors are expected to increase in the low to mid single digits.

We expect earnings per share for the third quarter 2002, excluding any non-recurring charges, to be in the range of 52 to 55 cents per share. And for comparative purposes 2001 third quarter earnings would have approximated 49 cents a share excluding non-recurring charges and reflecting the elimination of goodwill in the quarter as well as the businesses disposed of.

And as Dick mentioned, we continue to expect 2002 revenues to grow in the low single digits excluding for comparative purposes those sales related to the non-core businesses disposed of. And similarly, we're sticking to our previous guidance in terms of earnings per share.

With that we'll open the conference call to questions, Lisa.

Thank you. The question and answer session will be conducted electronically. If you have a question today, please press the Star key followed by the Digit 1 on your touch-tone telephone. Once again that Star 1 to ask a question, and we'll pause for just a moment.

Our first question today comes from Alice (Longley) of CS First Boston.

Alice (Longley): Hi, good morning.

Good morning, Alice.

Alice (Longley): Hi. Could you comment on operating margins going ahead? They were down slightly in the second quarter I guess because of Fine Fragrances being down. And it doesn't look like we're going to get much improvement. Maybe you can tell us what Fine Fragrances over all might look like in the third quarter, and then what will happen to operating margins for the company? Maybe we're going into easier comparisons here.

Alice, we'll start getting the benefits from further plant closures in the third quarter. As Dick mentioned, the Chicago plant has been closed, so we start generating savings there. So operating profit will benefit from that.

We are I think at this point in time being very cautious in terms of the overall outlook on Fine Fragrance sales.

Yeah, I'm not bullish on the Fine Fragrance sales going forward. We continue to have a disproportionate share of wins, but the category itself is not showing any strong rebound. And, as I think we've noted, year-on-year it's down close to 10 percent.

Alice (Longley): Well, you know, in the second half you've got the comparisons against inventory work down by departments last year. And maybe inventories are tighter through the channel, so that sets up a little bit of an easier comparison, what we had in the first half. Is that true?

I think that's right, Alice. But given the nature of the economy in general and given the fact that, as you well know, the real increase in Fine Fragrance sales during the course of the year is through the holiday season and the fourth quarter, we continue to be very cautious with respect to our expectations, although the points you register are certainly valid.

Alice (Longley): Do you think you'd still be down in the order of 10 percent in Fine Fragrances in the second half?

I don't know whether or not- I don't think that would be the case. I only mention the 10 percent decline in the first half of this year just as a barometer of the fact that the category itself has not turned itself around.

Remember, Alice, we were down 15 percent in Fine Fragrances in the first quarter, and the decline lessened in the second quarter as we got the early benefits of the wins. But I think we have to be cautious, and I think our customers are being cautious as well in terms of their inventory levels and the uncertainty in the economies right now, particularly in the Fine Fragrance markets of Europe, North America, and Japan.

Alice (Longley): Are you assuming- because the second quarter was much better than the first in Fine Fragrances, are you assuming like down mid single digits in Fine Fragrances in the second half?

I think we'll see some sequential improvement, but I'm not going to tie ourselves down to a specific number at the present time because there's really a lot of uncertainty.

Alice (Longley): Okay. And then the other question was operating margins. Can they start turning up in third quarter or not? And the final follow-on to that would be some guidance interest expense in the third quarter?

I think, as I said, we'll get the benefit of the closure of the Chicago plant. But we'll also continue to have costs associated with the implementation of SAP. But I would expect some improvement in the operating margins in the third quarter.

Alice (Longley): Sequentially or year-over-year?

I think sequentially. And also it all depends really on Fine Fragrance and how Fine Fragrance performs. As you know, they do bring higher gross margins.

Alice (Longley): And interest expense, can you give us some guidance? I keep getting too high with my intricate contact situation.

Well that's probably because of conservative guidance. It seems at present that there doesn't seem a real tendency to be raising rates anytime soon, although we could be affected a little bit by translation because, as you know, we have some European debt and some Japanese debt. I think a round number of $10 million in the third quarter would not be a bad number to use.

Alice (Longley): Okay. And then I guess I'll slip in one more question. Looking at your mix of currencies, what kind of a benefit would you expect from currencies in the third and fourth quarter, assuming rates stay where they are today?

We'll, as I mentioned, we'll have about a 2 to 3 percent benefit in third quarter, and in the fourth quarter it probably is more like 3 to 4 percent.

Alice (Longley): Okay. Thanks so much.

Thank you, Alice.

Thank you, Alice.

Our next question today will come from (Jeffrey Zukakis) of J.P. Morgan.

Good morning, Jeff.

(Jeffrey Zukakis): Hi. Good morning. I guess maybe the place to start is that performance in Flavors seems markedly better than what you've been recording, especially in North America. How have you accomplished that?

I think we're just doing better in the marketplace, Jeff. I mean, as you know, we've said all along that one of our strong weaknesses we had in the business was in our North American Flavors business, and therefore the opportunity for significant improvement existed. The team's doing an excellent job, and they continue to meet or exceed my expectations quarter-on-quarter. And I'm pleased with their performance.

(Jeffrey Zukakis): So it's not a particular category that you seem to be taking a good deal of share, it's more across the board?

It's across the board with all of our customers.

(Jeffrey Zukakis): Second thing, Doug, can you say again when you did the sales lease back transaction and what the period of amortization of the gain is-over how many years?

The initial lease term is I think 22 years. The deal closed at the end of the quarter, so there was no impact on the operating results for the quarter. We did pay-down the debt at quarter end. We'll begin recognizing the cost of the sale lease back and the corresponding amortization of the gain really effective July 1st.

(Jeffrey Zukakis): Okay. And lastly, can you update us on the Popcorn litigation?

Jeff, we stand by the 8-Ks, which we have filed. As you know, we have filed two. All the IFF flavors meet FDA standards. They're safe for handling and use by workers when used properly. As we've said, IFF workers have handled diacetyl in high concentrations for over 50 years with no adverse effects. We believe that the injuries at the Gilster-Mary Lee plant, which is the subject of the litigation, was caused by inadequate workplace conditions.

It continues to be a story. I know that there was a story in USA Today not long ago. We've been lead to believe that there is likely to be a follow up by Inside Edition following up on the USA article. But from our standpoint it's nothing new. It's old news. That Inside Edition would be a TV story. But we continue to believe consistent with what we've said in the 8-K.

(Jeffrey Zukakis): Are there any court dates we have to pay attention to?

Jeff, it's still I think in very early discovery, so there hasn't been a calendar set.

(Jeffrey Zukakis): Okay. Thank you very much.

The last point I would just simply reference again that's in the 8-K I believe is the fact that there is full insurance coverage with respect to the costs of the litigation and the results of the litigation.

(Jeffrey Zukakis): Okay, thanks.

Moving on we'll hear from Catherine Lewis of Morgan Stanley.

Good morning.

Good morning, Catherine.

Can you just talk a little bit about how you're coping with, you know, the market contraction and FX devaluations in the southern (cone)? Do you plan to become more proactive in the second half either on pricing or costs?

You're talking about Latin America specifically. Well, the interesting thing is that, I mean, we clearly have been affected adversely in Argentina and Brazil, as Doug had mentioned. We're doing very well in Mexico and Central America. Indeed our performance in Mexico is in double-digit improvement. And, therefore, not all of Latin America is suffering.

We will continue to be active with our customers in Argentina and Brazil. And that's because we have a customer base there that continues to do business, and we will continue to support them.

Brazil, as you know, we've mentioned hinges really on the election. And depending on how that goes, the currency will either strengthen or it won't. It's really not in anybody's hands other than the electorate. I'm still, however, not dissatisfied overall with the performance that we're getting in Latin America because on the northern part of Latin America we're doing quite well.

Okay. But in terms of the pricing strategy there, has that changed at all in the last quarter or two in the cost structure?

You know, the approach hasn't changed any, Catherine. What we in cases like this may do in a difficult environment such as Argentina is work with our customer to help reduce their costs of the formula. And that may be working on a reformulation, which lowers their cost and may, in fact, at the same point in time improve our margins. But they want to be able to make their products cost competitive in the market. But Argentina is just a very difficult economy right now. And I don't think we're the only company that is experiencing the economic throes of Argentina. But our approach hasn't changed any.

And then secondly, Dick, early in your comments you had mentioned, you know, the stronger euro and that there might be some upsides to earnings. I know you haven't changed you guidance. But does it make sense, if you are benefiting, to try and reinvest that and really bolster your volumes and your competitive position rather than just passing it through the earnings number?

I'm sorry. Does what...?

Well, I guess, you know, if there's upside from currency, would you try and reinvest that in the business-either spend more on the SG&A line or more proactive strategies to grow volumes and increase your competitive position?

Well to the extent that we saw ourselves benefiting positively, I think that my instincts would be to continue to invest in the business in the process of reinvention that we're embarked up. As I've said repeatedly, to get us back to where we wish to be is a longer road. It's three to five years. We are not half way through the process. And where we see opportunities to invest properly within the business, we'll continue to do that. And, of course, we also anticipate that we will be able to meet expectations as we are providing them with respect to both top line and bottom line performance.

I think the other too, Catherine, is that we manage Europe in local currency. They have local currency budgets. We don't squeeze them because of translation going against us vis-à-vis a strengthening dollar, similar we don't open the spigots if the dollar weakens. They manage their business, and they're accountable for their business. And they're compensated in terms of their bonus based on their local currency performance.

Good. That's helpful. That's it.

Thank you.

We will now hear from Amy Chasen of Goldman Sachs.

Good morning, Amy.

Good morning, Dick. How are you?

Good, thank you.

Good. Hi, Doug.

Hi, Amy.

A couple of things-first of all, you mentioned in North American Functional Fragrances that there was some destocking. And I was hoping you could give a little more clarity on exactly what that was.

Well, as I said, Amy I think overall Functional Fragrances year-to-date are up about 8 percent. But I think our sense is that there was a little bit of over ordering, perhaps, in the first quarter, and we felt the affect of that in the second quarter. Perhaps there was a little bit more optimism about the economy. But I'm speculating at that point in time. But my feedback is that we felt the effects of some destocking in the second quarter.

Was that widespread or just among, you know, maybe one or two customers?

I think it's more widespread, because one or two customers wouldn't affect us that much.

Okay. And another question about the Fine Fragrance business-I noticed that most of your new wins are with men's fragrances. And, you know, those tend not to be as big as women's fragrances. And I'm just wondering whether maybe you're sensing that some of your customers are sort of testing you out to see how you do with the men's fragrances before using you for some of the bigger launches?

No, I think first of all I would say that the Arden wins that I referenced are women's fragrances not men's. Secondly, I would just caution you in the context of what may be big and what may not be big. The Calvin Klein launch of Crave, which is a men's fragrance, the amount of promotional support behind that I am told is bigger than anything they have ever launched. So the wins that we're seeing within our Europe business are clearly tied to women's fragrances as well as men's. I picked just a few of the ones that I mentioned. They were top of mind. They were also some of the larger ones. And some of the others are premature to really announce.

I'm sorry. Dick, did you say that CK is spending more on Crave than on any other launch including CK1?

That's my understanding, Amy.

Wow.

My understanding is it's the biggest launch they've ever done. You'd have to talk with them to confirm that, but I'm just telling you what I'm hearing through our people.

Okay. Can you talk about the difference between the Aroma Chemical business in the US versus in Europe? I believe that you said that the US was actually down and yet Europe was up strongly. What's the difference between those two businesses?

The funny thing with that is we've seen just a sign wave of fluctuations in terms of Aroma Chemicals. I think to a certain extent it's just based on the demand. It's consistent in its inconsistency. I mean, Europe for the last two years has been gyrating wildly and North America has as well. And to a certain extent it is also impacted on where our customers are manufacturing their compounds.

Yeah, I would emphasize that last point, Amy. It really is- the ebb and flow can shift during the course of any given year as a result of where our customers are choosing to manufacture. Many of our customers have decided that, particularly for global products, they will ship the manufacturing base out of the US to Europe because of the currency situation. And that just gives a different flow as to where the Aroma Chemicals sales would take place. I think it's best to look at Aroma Chemicals in the aggregate rather than on a regional basis.

Okay, just a question completely unrelated, Dick- actually, Doug, this is for you on pensions. Two questions, 1) are you considering making any either voluntary or involuntary contributions to your pension funds later this year? And 2) are you considering changing any of your rate of return assumptions? And, if so, might there be any earnings impact?

Well to answer your last question first, no. We always have to look at our actuarial assumptions every year because they have to be reassessed every year. But there wouldn't be any current year impact as a result of that because the current year expense is predicated on the expense that we disclosed in the 2001 Annual Report. It's always a one-year trailing lag. So we will look at our actuarial assumptions.

And it wouldn't surprise me if the discount rate comes down, and it also wouldn't surprise me if the assumed long-term rate of return comes down. But we've generally tried to be in the middle to conservative end of the range for those assumptions. So I don't think it would have a significant impact on our overall results. And that applies on a global basis, not only for the US plans, but for the plans outside the United States.

In terms of the contributions to the plan, not only in the United States but around the world, we go through and we look at it in terms of tax deductibility of the contribution, which there's a very detailed calculation about what you can take a deduction for, and also looking at our funding requirements with our actuaries. And we have historically had a pattern of making contributions, so I don't think- you know, there's been some years we haven't had to, but I don't really know what the funding will be until towards the end of the year.

Okay. So just on the first point about, you know, likely changes for the discount rate and the assumed rate of return, I know you said no significant impact on your overall results, but just from the pension is it possible that there could be some EPS impact in 2003, say 5 cents a share or something like that?

You know, Amy, I couldn't even answer that at this point in time, although I think 5 cents a share- you know, we haven't had the benefits in the past of some of these huge pension swings that other companies have had. I don't think we would have the detriment in 2003.

Okay. Great, thank you.

Moving on we'll hear from (Alec Patterson) of (Dresner RCM).

(Alec Patterson): Yeah, good morning. I just wanted to follow-up on the question about the sale lease-back. I got a little confused. I'm sorry. Is this working out such that there will be a neutral impact on the P&L?

It's actually accretive.

(Alec Patterson): Okay. Could you give a rough idea how much?

It's accretive, a fairly nominal amount. But it benefited us as well. We're using the proceeds to pay down the debt, and we have the locations locked up for a sufficiently long period of time to ensure operational integrity. So we were comfortable with the transaction.

(Alec Patterson): Is the gain spread out across the entire lease?

Yes, on a pro-rata basis.

(Alec Patterson): Okay. So excluding the debt benefit, would there be an accretion?

No.

(Alec Patterson): Okay. All right. That's it. Thanks a lot.

Okay, thank you. I think that's about...

Anything else?

Our next question comes from (Sanjeeb Jisely) with Deutsche Bank.

(Sanjeeb Jisely): Good morning-a more general question here. I just want to know how market share has improved or not improved over this year?

Well I think our market share has improved on the basis of the fact that our win-rate is up. We'd have to go around the regions one by one, but overall clearly we're doing better in the Flavor side than we have been in the past, and we're doing better in Fine Fragrance. And I'm also seeing improvement in Functional Fragrance. So I'd have to say that overall our market position is stronger than it was a year ago.

(Sanjeeb Jisely): Brilliant. Thank you.

We now have a follow-up from Alice (Longley) of CS First Boston.

Alice (Longley): Hi. Could you update your cap ex plans for 2003? Before you had been guiding to a big cut in cap ex for next year and that would, of course, help cash flow a lot.

I think in the past, Alice, we've said that next year it will probably scale down to about $65 to $70 million. And at this present time I think that's still a pretty good number to use in the model, although it's still pretty early on.

Alice (Longley): And is that a good base to use sort of as a base for ongoing levels? Should we just have it grow from the rate of sales from there?

Yeah, I think that for the next couple of years I've said in the past that that range of 65 to 70 would probably suffice. My goal and I think our collective goal would be to have it lower than that, if at all possible. But at the same point in time we want to make sure we have the infrastructure to let the business grow. So I would suggest using a $65 to $70 million for the next couple of years in the model.

Alice (Longley): Okay. And then, if you take out the fruit concentrate business in North America, would it have any impact on the sales growth in the second quarter excluding divestitures?

Well, that's what we said in the press release. Had concentrates not been in the sales of second quarter 2002 and 2001, North America Flavors would've grown I think by 9 percent.

Alice (Longley): But you didn't give the impact on the whole company.

The differential I think would be roughly $6 million last year and $4 million this year on a consolidated basis. But I can get you the details, Alice. If you want to follow-up, please give me a call.

Alice (Longley): Okay. And then just one final question-we've been hearing from a lot of the companies that Germany is particularly weak. Are you seeing that too in your mix in Europe?

Yes.

Alice (Longley): And then are you seeing any strengthening or signs of strengthening in Japan? I know you didn't see it per se in your statements in the second quarter. So we're hearing from companies that Japan seems to be starting to wake up. Are you getting any hints of that?

I'd like to believe it. I think they've got a long way to go.

Alice (Longley): Thanks a lot.

Our next question today comes from (Lamont Richardson) of (Peg) Capital Management.

(Lamont Richardson): Good morning. We're investors. We're not analysts.

Is it possible going forward to supply a cash flow schedule with your quarterly releases, or isn't there sufficient time to get one out?

That's a very good point, and it's one of our goals...

(Lamont Richardson): If I could add, things seem to be going in a very disappointing direction for the balance sheet-receivables in the sky, cash down, and no attention paid to customer payables. And I don't know if these are seasonal.

Well, let me touch each of those points, sir. First of all we've added in the detailed balance sheet and a lot of deal with the income statement and with the press release. The goal is ultimately to have cash flows or summary cash flows accompany it. That'll probably be a little further on.

At the same point in time we're releasing earnings earlier than we used to in the past, which further challenges in that regard. And we always file the statement of cash flows with the 10-Q, which will be filed in mid-August.

In terms of the balance sheet, in all honesty I would like to get the cash down to zero to use that cash to pay down the debt. And we have successfully in my mind been reducing the cash balance. And that's a goal because cash is really not- especially with what you can earn on that cash right now anywhere in the world, it's best used to pay down debt. And we will continue to focus on that.

In terms of the receivables, we've historically for the last decade had average day sales receivables of between 70 and 72 at times when our customers have always looked for increasing their terms. So I'm actually- while I don't like 72 days, I'm pleased that we've been able to hold that constant when our customers have actually been looking for increased days.

I'm in all honesty quite satisfied with where the balance sheet stands right now. But if you have some specific questions you need further clarification, I'd be more than happy to answer them outside the call.

(Lamont Richardson): I've got one last question. Could you give us some comment, gentlemen, on your posture toward the dividend, which got whacked to hell a few years back?

Yeah, at that time we were dividending 99 percent of earnings.

(Lamont Richardson): I understand that. But going forward you've got a slightly better earnings, et cetera.

At the moment we have no plans for changing the dividend.

We're focusing on paying down $1.1 billion dollars of debt.

(Lamont Richardson): Okay, thank you.

We now have a follow-up from Jeffrey (Zukakis).

(Jeffrey Zukakis): Can you remind me how much you Fine Fragrance volumes were down in the fourth quarter of '01?

You know, I'll look that up. I didn't bring the fourth quarter file in with me, Jeff.

(Jeffrey Zukakis): My recollection is that it's some number in excess of 20 percent.

I know it was over 20 percent.

That's correct.

(Jeffrey Zukakis): So aren't you being sort of implausibly cautious about your prospects in the fourth quarter of this year given you have all these Fine Fragrance wins and you've got the euro behind you all things being equal? I mean, shouldn't you have an exceptionally strong performance? Or is there some business that you've lost?

Jeff, I think that nothing that you said is wrong in the context of what the fourth quarter performance was. Given the global economic situation today, I believe it would be imprudent on our part to change our guidance with respect to the balance of the year. But I hear you.

(Jeffrey Zukakis): Okay, thank you very much.

Thanks very much.

Just one final reminder, if you have a question, please press Star 1.

Okay, I think we have time for one more question at most, and then we'll have to close off the call.

Thank you, gentlemen, there are no further questions at this time. I'll turn the conference back over to you for any additional or closing remarks.

I think that's it. Thanks very much.

Thank you very much.