International Flavors & Fragrances Inc (IFF) 2002 Q3 法說會逐字稿

Please stand by. Good day and welcome to the International Flavors and Fragrances third quarter earnings release conference. Today's call is being recorded. The speakers for today's call will be Mr. Richard Goldstein, Chairman and Chief Executive Officer, and Mr. Douglas Wetmore, Senior Vice President and Chief Financial Officer. Gentlemen, please go ahead.

Thank you. Good morning. 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 results for the third quarter. I'm pleased to report that our results for the quarter were in line with our expectations, despite an increasingly bleak economic picture in just about every corner of the globe. For purposes of this comparison, 2001 third quarter results exclude sales associated with certain non-core assets disposed of during the course of 2001 and the second quarter of this year.

Third quarter sales increased five percent in dollar terms and about two percent in local currency or underlying volume terms in comparison to the 2001 third quarter. Our earnings per share of 50 cents were near the high end of the range forecast for the quarter when we last provided guidance in July.

We achieved the target of earnings, at the same time increasing our spending on R&D to a level of eight percent of sales in the quarter compared to seven percent in the prior year quarter. , substantial progress was made in paying down debt this quarter. This was enabled by our very strong cash flow and continually improving management of our balance sheet. Our interest expense reflects the progress made.

We have talked about the integration of BBA each quarter over the past two years. We need not talk about it much more in the future as I'm pleased to say that at the end of the third quarter we are essentially done. The last two BBA manufacturing plants to be closed ceased operations in September and production was successfully transferred to our other plants. With the exception of minor projects, we can close the books on what I consider to be a very successful integration of two companies.

As of October 1, 2002 we are at a savings run rate of approximately $80 million, well ahead of plan. You will recall that at the time we announced the BBA acquisition we expected that we would achieve in the aggregate $70 million of savings.

While we are delivering on the integration we are also keeping our promises to customers in terms of service levels. This bodes well for IFF's future. Through our new focus on R&D and customer service initiatives we're seeing improved win rates especially in those areas we believe require the most improvement, North American flavors and fine fragrances.

The strength of the global economy 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 bode well for our future.

I am equally confident in our ability to achieve superior long term operating results thus enhancing shareholder value. We are focusing on what we know and do the best making high quality flavor and fragrance products for our customers.

With the success we had in rapidly implementing our integration and reorganization during the course of 2001 we made clear that in 2002 we would redouble our efforts to grow the . Those efforts continue unabated. We continue to see the balance of the year in line with the guidance we provided in .

More specifically we still expect full year 2002 underlying volume growth in the low single digits comparative purposes the non-core businesses disposed of during stages of 2001 and in the second quarter this year.

On earnings per share for the full year we continue to expect an increase of between eight to 12 percent excluding non-recurring charges. A range would be $1.89 and $1.96 per share. If the dollar continues to weaken there could be further upside 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 of the regions of the world in which we operated. IFF is well positioned to drive long term growth shareholder value. And I can assure you our focus is to continue delivering on our promises.

Now, I'll turn the call over to Doug to discuss our financial results in more detail. We will then begin to take your questions. Doug.

Thanks, Dick and good morning everyone. My comments are in comparison to pro forma consolidated results of IFF for the third quarter 2001 and this pro forma information is included in a separate column in the income statements included with our press release.

The pro forma information reflects the following: during the fourth quarter of 2001 the Company disclosed a certain non-core businesses, specifically North American and Brazilian fruit preparation businesses and the U.K. chemical business acquired as part of the transaction. These businesses had collective annual sales of approximately $60 million.

Secondly, effective January 1, 2002 we adopted the provisions of FAS , which prescribes accounting for goodwill and other intangible assets as we had previously adoption of this standard eliminated about $33 million of amortized expense or about 35 cents per share for the full year.

And third, of our fruit concentrates business in June 2002. This business had annual sales of approximately $23 million. Having said it, let me move to the results. As Dick mentioned, reported dollar sales increased five percent. Local currency sales increased two percent.

Sales for the quarter slightly exceeded our expectations on a reported dollar basis and were inline with expectations of currency basis. Earnings per share were 54 cents near high end of the forecast range for the quarter. We had expected between 52 and for the third quarter. We remain on track to deliver the cash results for the full-year 2002 as we initially outlined to you in our January call and affirmed at the time we released second quarter 2002 earnings in July.

The relative strength of the Euro as well as to a lesser extent the Yen and the Australian dollar resulted in recorded dollar sales being three percent greater than low currency results. For the quarter there was about 11 percent favorable on translation of European results into the dollar. And about a two to three percent favorable in Asia Pacific.

For the quarter, Flavors increased one percent in currency resulting in a dollar increase of about five percent. Our increased about two percent in local currency, while the dollar they also increased five percent.

Turning to the regions. North American Fragrance sale increased two percent for the quarter. That performance was somewhat better than had been forecast. Fine Perfumery increased in the high single-digits. Not withstanding the quarterly performance, though, year-to-date Fine Perfumery has declined about four percent comparison to the prior year.

The performance in the third quarter for was consistent with the sequential improvement we forecast for 2002 and reflects to an extent the benefit of some of the new wins we've discussed in previous calls.

Aroma Chemicals also increased in the high single-digits for the quarter. Functional products declined in the mid single-digits for the quarter. We continue to see associated with de-stocking in the distribution channels and I expect that we'll to see this for several more quarter.

Year-to-date Functional Products have increased about three percent in comparison to 2001. North American Flavors increased five percent for the quarter. The region performed somewhat less than had , although we're still pleased with the growth achieved. Year-to-date North American Flavors are up about three percent and that growth is being driven by good wins and being supported by our improving customer service levels.

Europe Fragrance increased eight percent in local currency and 20 percent in reported dollars. The performance was substantially stronger than had been forecast. The reason was led by strong performances in both fine fragrances and in aroma chemicals. Fine local currency sales increased about 25 percent for the quarter, resulting in a reported increase of nearly 40 percent. On a year-to-date basis, though, fine fragrance sales have increased about two percent in local currency and are up about five percent in reported dollars.

Functional product sales decreased about 10 percent in local currency, resulting in a flat performance in dollars. The functional products order patterns this year have been quite sporadic. Year to date, functional products had been flat in local currency and are up just slightly in dollar terms. Local currency in aroma chemical sales increased over 20 percent and are over 30 percent in reported , continuing the strong performance seen in the first half of this year.

Europe flavor sales were essentially flat in local currency, resulting in a 10 percent increase in reported dollars. The local currency performance was somewhat below what we had expected. The flavor's Europe performance has been impacted throughout the year by a slowdown in the fruit business, which was directed related to our announced intention to explore strategic alternatives for this business.

Latin American fragrances reported a decreased of nine percent for the quarter and has declined seven percent year to date. This performance was worse than had been expected, but the are consistent with the persistently weak economic conditions in the region. , Argentina declined 50 percent, reflecting that country's deep recession. Argentina is down about 48 percent year to date.

Mexico the high single-digits in the quarter, although Mexico fragrances remained up in the lower single-digits on a year-to-date basis. Brazil increased about one percent in the quarter, but is down about four percent year to date. And the economic uncertainty in Brazil, driven by concerns over the elections, has slowed Brazil all year. The Brazilian performance in the third quarter was driven by new fragrance wins. Central America and the Andean countries were essentially flat for the quarter.

Latin America flavor sales decreased 25 percent in the quarter and earned 16 percent year to date. Brazil, Argentina and Mexico were the principal causes for the decline, with declines of 27 percent for Brazil, percent for Argentina and 23 percent for Mexico.

Year to date, Argentina and Brazil flavors have declined 48 percent and 18 percent respectively, in comparison to 2001. Chile and the other Andean (pack) countries increased in the low to mid single-digits in the quarter, although these countries are down 20 percent or more on a year-to-date basis. Mexico flavors declined in the quarter as well, although year to date those have increased nearly 10 percent in Mexico, reflecting the benefit of new wins in that country.

Asia Pacific fragrance decreased three percent in local currency, a one-percent decrease in dollars. Performance was below expectations. Local currency sales performance was strongest in Thailand, Vietnam and Singapore , which grew 42 percent, 34 percent and 19 percent respectively. One a local currency basis, Japan decreased in the low single-digits for the quarter, reflecting the poor condition of the Japanese economy. Local currency fragrance sales in Japan are down about 10 percent on a year-to-date basis.

The Philippines and China and Hong Kong also declined in the quarter. Indonesia declined 14 percent in the quarter and is down about eight percent year to date. It's going to take some additional time for Indonesia's economy to be strengthening and the unfortunate events in and related repercussions will likely further weaken Indonesia results for the next several quarters. Asia Pacific flavor quoted a six percent increase on local currency with a dollar increase of nine percent. That was a performance that was slightly better than it had been expected.

Several countries achieved solid growth led by Vietnam which increased over 100 percent, China, Hong Kong up 31 percent, Singapore Malaysia up 27 percent and the Philippines up 11 percent. Year to date China, Hong Kong has increased 10 percent, Philippines 14 percent, South Korea 25 percent and Vietnam 80 percent.

Japan and Indonesia continually to partially offset the solid performances achieved elsewhere in the region. Indonesia declined 10 percent in the quarter and is down in the mid single digits year to date. Japan currency in the low single digits in the quarter although it is down high single digits in local currency year to date.

reported a sales increase of 11 percent in local currency in the quarter and is up in local currency year to date. The performance was better than had been expected. The region's performance was strongest in Pakistan which increased nearly a percent in the quarter although India also performed well increasing in the high single digits.

Performance reflects the strong benefit of new wins in the marketplace. India flavors reported a local currency increase of about 17 percent for the quarter. This performance was also stronger than had expected and again reflected the favorable impact of new wins in the marketplace. The performance was strong in all countries but was led by an increase in excess of 50 percent in Pakistan.

operating results the gross margin came in just about where we expected for the quarter at 43.6 percent of sales compared to the pro forma 43.5 for the in 2001. Gross margin as reported for the third quarter of 2000 was 41.9 percent.

Year to date gross margin is 40.7 percent of sales compared to 42.3 as reported for the prior year and about 44 percent for the pro forma year to date 2001. Our operating costs were inline with expectations. These include expenses of approximately $1 million associated with our SAP initiative as well as business excellence. Year to date we've incurred about 2.2 million of these - of expenses associated with these initiatives. And these costs are related to training, data conversion and other expenditures that don't for capitalization.

R&D spending increased what we discussed in January of this year approximating eight percent of reported sales for the quarter and representing 7.8 percent of sales year to date. At December 31, 2001 the company reported employees. We are now below 5,800 at October 1, 20002. And we expect additional personnel will depart during the remainder of this year.

Interest expense decreased 46 percent in comparison to the prior year quarter. About 8.9 million in this quarter compared to 16.5 million in the 2001 third quarter. Our average interest rate for the quarter was percent versus 5.3 percent in the third quarter last year. And the interest decline reflects the favorable interest rate situation in 2002 in comparison to the prior year.

We provided a discussion in our annual report and 10-Qs regarding the interest swaps that we've entered into that have helped us reduce our interest costs. remain in effect. Interest has also declined to the lower . Our reported debt outstanding at this quarter end is one billion, 76 million -- down about 66 million from June 30th and down just about 80 million since December 31st, 2001.

However, the reported debt included approximately $59 million of FAS 133 gains on the interest rates slots into as of September 30th, 2002. And these gains are amortized over the remaining term of the debt. Our true economic debt at quarter end was about a billion, 17 million. A reduction of some 97 million since June and about 140 million since December 31st, 2001. I'm confident that we'll be well below the billion dollars by the end of this year -- ahead of our expectations. We had targeted debt to be at one billion by the end of this year.

As we disclosed in our second quarter 10Q, an existing Euro credit facility was canceled in July 2002 and replaced by a new Euro credit line. Other income and expense for the quarter includes write-off of about 1.3 million of remaining unamortized costs to the 150 million Euro credit facility that was terminated.

During the quarter we repurchased approximately share under our buyback program. And on September 30th, 2002 we had a authorization of about $2 million. As you know from our press release earlier this week, the Board has approved a new share repurchase authorization of $100 million once we complete the existing program. We expect the new program to be complete over the course of the next 18 to 24 months.

We remain committed to balancing the repurchase of shares with reduction of our overall debt levels. And with our strong cash flow and focused management on balance sheet we can continue to make reductions in our debt levels as well as continue to buyback stock as market conditions warrant.

The effective tax rate for the quarter was 33.7 percent. I expect the effective rate for the year 2002 to at 34 percent representing a slight decline from the first half of the year. That decline continues to be principally attributable to the earnings mix amongst the in which IFF operates.

We're not yet in a position to provide guidance for next year. However, many of you have models that you're already working on for 2003. And in this regard, you should assume that the effective tax rate for 2003 will 32 percent to 32.5 percent. This reduction from the current rate is the result of tax claiming initiatives and realizing benefits of combining IFF and entities into a more efficient tax structure. The reduction of the effective rate is sustainable for at least several years barring significant changes in tax legislation.

The non-recurrent charges the quarter represent primarily severance and other separation costs for IFF employees impacted by the where decisions have been made and communicated to the effected employee prior to the quarter. We had the balance sheet -- our day sales inventory declined from 150 at December 31st, 2001 to about days at the current quarter end. We would expect to continue to improve that over the course of next year.

Our receivable days declined from 72 at December 31st to 70 at the current quarter end. I'm very pleased with that performance in light of the economic developments that we've this year. Our capital investments for the quarter totaled about 17 and are about 59 million year-to-date. Depreciation for the quarter is 18 and is about 54 million year-to-date. At this time we capital spending in the year 2002 to approximately $80 million, down somewhat from the plan of 90 million for 2002.

Looking briefly at the quarter, we expect local currency sales to be flat as to up just slightly. Based on current exchange rates, this will result in a reported dollar increase in sales in the low single-digits. For purposes of this forecast, 2001 comparable figures excluded approximately $14 million of sales related to the non-core businesses that we've disposed of. In looking at the individual regions, some preliminary guidance is as follows.

fragrances is expected to be in the quarter. Fine fragrance is expected to increase in the high single-digits, benefiting from the new wins and an easier comparative. But both functional fragrances and chemicals are expected to be to down slightly. North America flavors will increase about five to six percent compared to the fourth quarter.

Europe fragrances will increase in the low single-digits in local currency terms, but with the strengthening of the euro, this will result in dollar sales increasing by about five to six percent. Europe flavors are expected to be in local currency, resulting in a low single-digit increase in dollars.

Latin America fragrances will decrease in the high single to low double-digits. Both Argentina and Brazil will remain weak. Latin America flavors is expected to be flat to up just slightly. Asia Pacific fragrances are expected to increase in the low single-digits in local currency, resulting in a low to mid single-digit increase in reported dollars. Asia Pacific flavors are expected to be in local currency, resulting in low single-digit growth in dollars. In the India region, fragrance is expected to be , which flavors are expected to increase in the low to mid single-digits.

We remain cautious regarding the fourth quarter, due to the uncertain political and economic environment that we currently . We continue to expect earnings per share for 2002, excluding nonrecurring charges to increase between eight and 12 percent in comparison to 2001. to earnings per share in the range of $1.89 to $1.96.

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

Thank you. The question-and-answer session will be conducted electronically today. If you would like to ask a question, you may signal us by press the star key, followed by the number one on your telephone. Once again, if you would like to ask a question, please press star, one. And we'll pause for a moment. And our first question will come from with Goldman Sachs.

Hi, guys. I would like to start by talking about the first quarter. I believe the consensus estimate is about 44 cents. I'm at 43. And it sounds like you guys have a pretty wide range, you know, about a seven-cent range - somewhere between 34 and 44 cents. I realize, you know, the uncertainties with respect to Christmas and the economies, but I would have thought that we would have been able to narrow that range a bit, given that we're in the fourth quarter.

, we're not narrowing the range, we're leaving it as it is since the guidance - the global uncertainties that exist today with any crystal ball on our part in terms of being able to predict how is Christmas going to be in North America? Are we going to be at war with Iraq? We're going to stand just as we are in terms of .

The - when do you ship - wouldn't you have shipped most of your, you know, most of the raw materials that go into the holiday fine fragrances already?

We certainly will have shipped stock in order to be able to provide initial inventories within the stores. But of course as you well know we're in a situation where our fine fragrance is done in about five or six period starting with slightly before Thanksgiving or right after Thanksgiving and running up until Christmas.

And we still, given the compression of lead times with respect to providing to our customers, have the opportunity to provide product all the way up through the beginning of December. So, it really is impossible to predict with any specificity what the holiday season is going to look like.

Can you just tell us so far how it looks? I mean based on what you know today in the U.S. make you feel more comfortable on the lower end or the higher end?

You know, , the forecast is based on what we've seen really through the middle of October. So, that's the best information we have available at this point in time.

And that - that's what, I mean it's going - in it's a little soft, it's a little stronger. Can you just give us a little sense?

Well that's . . .

It's . . .

. . . expectations I just enumerated.

OK. You know, , I just wanted to ask about acquisitions because you've had an enormous amount of success of and you know you've exceeded this energy. Now that that's pretty much behind us, are you thinking about acquisitions as we look in 2003?

Am I thinking about them? I - the answer is no. I don't have anything in mind at all in terms of acquisitions. As you well know, acquisitions are opportunistic in the sense that you can do all the planning one wishes but you - it's a question of availability. I know there was a lot of speculation that we were going to be aggressive with respect to and in the end we decided that that was not something that provided strategic benefit for us. Any acquisition opportunity that presents itself we will look hard at. We will not buy simply to increase top line sales. We would only move aggressively if we thought and saw a significant strategic benefit.

Now, in the context of you'll remember that there were several strategic benefits that we found. And we would look for the same kind of strategic benefit or other strategic benefits before proceeding.

OK. And then - just last question on the results, North American functional fragrances, , you mentioned that that was down because of destocking at retail, do you expect that to continue? What's going on there? Do you have one particular customer that's having it just seems like we've seen retail destocking for about five years, maybe 10 years in the industry. So, I'm not sure what's new about that.

Well, , it's - you know they have been somewhat sporadic throughout the year in functional fragrance and are up by I think three percent on a year to date basis. I think everybody is just getting better throughout the whole supply chain in terms of managing their inventory levels. I wouldn't point it out as being attributable to customer or even a small selection of customers. It's really across the board.

OK. And then I guess a similar question on the fine fragrance business in Europe. It was very strongly this quarter, up 25 percent but given the year to date numbers the implication is down significantly in the first half of the year. Can you just talk about that? Is that just a timing issue?

It was down in the early - in the first half of the year and some of that was certainly knock-on effect from September 11th and you know, the ...

Remember that the large portion of European comes from your duty frees, . and you had a long period post September 11th that certainly trailed into the early part of the following year on the de-stocking.

So is the 25 percent increase being driven by new wins?

Yes.

Yes.

OK. So it's not that the market in travel retail's picked up?

I think the market in travel retail is picking up somewhat and that's based upon my discussion with our customers and also my spending time in travel retail in the duty free shops in airports where I travel. But in our particular case it's a combination of the fact that there is a little better movement there. But frankly, uptick at this point is due to greater number of wins.

Great. Thanks a lot.

OK.

Our next question will come from Jeff Zekauskas with JP Morgan.

Hi, good morning. I guess sort of two questions. You've had a nice sequential improvement in your gross margins even though sales were sequentially. Is that a function of divestitures or is that a function of the rationalization of plants?

Well, it's a combination of factors, . First of all, we have had the sequential improvement in the Fine Fragrances as the year has progressed. We also have had benefit of the plant closures associated with the integration as the year has . And really, the improvement in the margin has been a blending of those combined with the divestiture of the lower margin businesses as we've talked in the past. The fruit business in North America and Brazil as well as the business that we sold last year were lower margin pieces of business.

I see. So there's a little bit of mix. I guess, secondly, in the old days if I remember correctly, there was supposed to be 70 million in from and then another 25 to 30 million to come from SAP initiatives and other internal corporate ?

That's right, Jeff.

And so is it the case that there's another 20 to 30 million in costs that you'll pull out over the next 12 months?

Well, no -- but remember, you're right and we're on target for all of that. , a lot of the restructuring initiatives that have taken place. But remember, Dick said very early on that substantial elements of that would be reinvested in business as well as in our customers. And some of that reinvestment is going into R&D. It's gone into our new compensation plans. We made very clear very early on all of that would not flow to the bottom line.

It's about, Jeff, if you recall the discussions that we've had along that. I said we would get on the -- from the synergies from the acquisition that money would come through. And that's the 70 that we talked about which is now 80.

The to 30 was going to be split roughly a third, a third, a third in the context of investment in the business where we felt that we needed to invest. And we've talked about R&D. We've developed business excellence initiatives, SAP, et cetera. A third of it finds its way back to your customers and a third of it should fall to the bottom line.

On the subject of SAP, we're only beginning to exploit the advantages that SAP brings to the table. As you know, North America is the only region that is operating with the full ERP package. We're in the process of implementing SAP elsewhere and that will be completed during the course of 2003 and 2004. The savings that we contemplated at the time we made the decision to go to SAP were not a part of the 25 to 30 million nor the BBA savings. So, we'll see some substantial improvements over the course of '03 and '04 and beyond as we go global with SAP.

OK. Thank you very much.

with Credit Suisse First Boston has the next question.

Good morning, .

Hi. Good morning. Something - my first question about your sales guidance for the fourth quarter. When you said it was , I think, in local currencies. Now does that include divestitures?

Yes. That is in the context of eliminating the businesses that were ...

And what would the local currency sales guidance be, excluding divestitures and currency in the fourth quarter?

Well, the local currency guidance excluding?

Excluding divestitures and current - well, and currencies.

You know, , I've never looked at that number because we - I'll have to go back and calculate it. And I can give you a call because we look at everything in the context of the - versus the pro forma.

Well, what I mean is the comparable number to the two-percent increase we got third quarter.

Well, that's what we're - that's what I said. The - comparing apples to apples.

All right. So, it's flat.

It's . Yes.

And that compares to the two-percent increase in the quarter.

Yes. That's right.

That's correct.

All right. That's what I - and now that is quite a change from some acceleration that you thought that you would get into the fourth quarter comparisons. And why that kind of writing down? Is it just the economy pervasively?

Yes. I think that that's fair. I think that, in terms of - it's very compatible with our look at the - in terms of the full year being in line with our year forecast. And for the fourth quarter, given the uncertainties that exist, it is, in my view, a conservative and appropriate forecast for the quarter.

Remember, too, , that countries like Indonesia and Brazil are fairly significant countries, you know, for us and there's some fairly bleak developments in those countries. And that does impact our outlook.

Now those - the biggest factors in the reduction of the sales guidance would be Indonesia and Brazil - those are the two biggest?

And uncertainty in North America.

And in Europe.

And then I have a question on margins. I think increase in R&D is terrific. But gross margins, actually, even though it's certainly up sequentially - but they tend to be up sequentially anyway in the year as it goes on because of some seasonal - seasonality with the waiting to fine fragrances, I guess, being in the second half. So my question is why aren't gross margins up year over year, given all the cost cutting that you've been doing and the profitability improvements and that the fine fragrances are doing well?

Well, but remember, on a year-to-date basis, , fragrances are still down four percent versus the prior year.

Yes. But we're just looking at the quarter.

The quarter? You've got mix issues. We just closed the plants at the end of the quarter - the two last plants. It's a variety of issues. I mean, it's pretty much in line with what we expected when we provided the guidance in July. I'm not unhappy with it. I'd always like it to be higher, but we're pretty happy with the way it came in.

OK. Thanks a lot.

Our next question will come from with Morgan Stanley.

Hi.

Good morning, .

Hi. Question on flavors. is seeing a lot of success in apparently beverages and food services and taking market share there. What are your milestones and strategy with active flavors to become a little bit more competitive? Is it you know a shift in R&D focus? Is it a shift in kind of the market penetration in terms of where you want to focus on geographies? You know, what are you plans?

, I'm really quite pleased with the progress we're making on the flavors business at this point. I mean our win rate is up significantly and the progress which particularly in North America in the - on the food service side of our business as well as with our traditional customer base is really moving along very positively. So, I often expression of concern with respect to progress on our flavors business.

When you look at the growth drivers of that business going forward, I mean is it - what areas will it come from?

Well I think it will come from a variety of factors. It will come from the traditional categories with many of our customers launching new products. You will recall we had several discussions about the fact that many of our global customers, Unilever of Best Foods, Kraft acquisition of Nabisco due to give rise to a whole range of new we're seeing the benefit of that coming through certainly on the food service side. We're also seeing the benefit of real deployment of the source against that out of home category.

Again, you will recall the discussions we've had about the fact that the shift in eating habits. It's not that Americans in particular eat less. They just eat differently. And for a period of time we had not been devoting the type of resource against the out of home category that is appropriate. We doubled our efforts in that area. And I can tell you that we're seeing the wins coming through now.

OK. And then you know going back to gross margin again. Longer term you know looking out for the next you know two to three years how do you sustain further improvement in gross margins? I mean where in that cost structure do you think there's some real opportunity to get the and also how will impact that?

Well, I think it's going to be a combination of a lot of factors. I mean we first of all will have the continued roll out of S80 which will take us a couple of years yet to fully implement on a global basis. We have a series of other initiatives all tied into our excellence program which will make us a more efficient operation. Sourcing initiatives take place, inventory reduction initiatives are taking place and if you that with sales growth I think you'll find that and our profitability will look rather nice.

So, you know to try and quantify a little - I mean is it you know 45 percent margin sound reasonable? I mean a target like that?

I don't think that's unreasonable over the course of the next probably two years, . Obviously we're focused on improving on the gross margin and initiatives and as we gain further benefit - remember, we'll anniversary some of the benefits of the that have taken place this year during the course of next year and we will be even more and more efficient. That's one of the focuses that operations has.

OK, great. And it's on Fine Fragrance. You know, I'm a little worried about the growth profile in that business. And, you know, when you think about your customer base, I mean, where are the opportunities? Is it going to be more, you know, specialty players like Victoria's Secret? Is it going to solely focused penetration in emerging markets? How are you going to growth out of that business?

Well, I think it's a combination of factors. I think that you're not wrong to express some concern about the Fine Fragrance category in its classical sense. We talked openly and candidly about that for . Our customers are also concerned, however, and I fully expect they are going to have to come to terms with how they're going to deal with some fundamental problems within the category. And they may well trace the distribution .

In addition to that, we are doing much better -- with the Victoria's Secrets of this world and the Bath and Body Works. Those type customers that are "new" to the Fine Fragrance area over the last several years. And as you know, they sell a range of product which includes not only the fine fragrance but also the hand lotions and the bath and shower gel. And all of that is business which falls into the category today of Fine Fragrance and Toiletries.

Also, if you take a look at emerging markets around the world, sure, we definitely anticipate that we will see growth over the fullness of time. It varies. Brazil has already been an area where we have seen some not withstanding the very poor economic conditions within Latin America. And if you look at other parts of the emerging markets in Asia, they also provide opportunities, particularly with local customs. And having just returned from a visit to China, Korea and Japan. But as I look at China and Korea, both of those markets provide opportunities in the fullness of time for Fine Fragrance as well.

OK, great. Thank you very much.

Our next question will come from from .

Yes, two questions. I'm just followup on the fourth quarter to get just a little clarity on that sales guidance. Doug, the base year -- I'm sorry -- base fourth quarter 2001 comparable was around 405 million. Is that correct?

Well, it's dropped about $14 million from our reported sales for last year and .

OK. And the number I have for reported is 419. So, I'm taking the 405.

Yes.

And then that's up targeted roughly four percent in dollar terms.

Yes.

OK. Thank you. As far as the fourth quarter, wide range -- and I applaud ranges in this environment -- for the earnings results. Is this mostly a function sort of the macro environment and the uncertainties surrounding the sales pull as opposed to any sort of internal actions that as of yet may not have been made on your part, but you might be planning?

It's more the macro. I mean, it's all the macro. It's uncertainty. And as I take a look at what our performance is to date and I compare it against the guidance that we've given for the full year, I think it would be imprudent to do anything other than to hold with the guidance we've given for the full year, which we believe will give us the performance totally inline with what our commitments were at the beginning of the year.

Just to add to that, too, I think we've done a pretty good job of giving as clear and precise a guidance as we possibly can the last several quarters. And - from top-line end result and we're giving you the best information was have at this point in time.

Yes. Agreed. I just wanted to be clear that there wasn't something internal driving that range.

No. It's just our look, which is no different than your own look at the global economic situation and the uncertainties that exist in the world that don't need any repetition on our part.

Agreed. And just, in Latin America, the very weak results there. Obviously, the economy is extremely weak. Is there an element of destocking that's going on with your customer base that's making this quarter, in particular, very weak and thus might not continue? Or is this more a reflection of just the lack of pull through in general?

You know, , I don't think that there's - the issues of stocking and destocking, I think, are much more in Europe and North America, simply because the distribution channels in Latin America and also in Asia Pacific don't really facilitate a big buildup of stock. So, if you never get the buildup, then you don't have the destocking effects. But it's really the results of, you know, Mexico is dependent on the United States. The economy - the U.S. economy is weak. Brazil and Argentina have been pretty well documented in terms of their economic problems. And our results reflect that.

, as we've seen in Asia Pacific in the past and in other areas of the world, when there's difficult economic times, flavors always has a tendency to get hit a little more than fragrances, simply because we're dealing in higher labor solutions. And it's reflective economic realities that are taking place throughout much of Latin America right now.

OK. Fair enough. Thank you.

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

Thanks very much and if there are any further questions, you can reach Doug. Otherwise, we look forward to talking to you again at the end of the full year results.

And that concludes today's conference. Thank you for your participation.