International Flavors & Fragrances Inc (IFF) 2002 Q4 法說會逐字稿

Good day and welcome to the International Flavors & Fragrances fourth quarter earnings release conference. Today's call is being recorded. Speakers for today's call will be Mr. Dick Goldstein, chairman and chief executive officer, and Mr. Doug Wetmore, senior vice president and chief financial officer. Gentlemen, please go ahead.

Thank you. This conference 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 fourth quarter and year-end review. I'm pleased to report that our results for the quarter and for the full year 2002 were in line with our expectations. For purposes of this comparison, comparable 2001 results exclude sales associated with certain non-core assets disposed of during the course of 2001, and during the second quarter of this year. Fourth quarter sales increased five percent in dollar terms, and about one percent in local currency in comparison to 2001 fourth quarter.

For the full year, sales increased two percent in dollars and one percent in local currency. Our earnings per share were 41 cents for the quarter and for the full year, we achieved per-share results of $1.92. We achieved our expected earnings for the quarter and year while at the same time increasing our spending on research and development to the targeted level of eight percent. To emphasize this point for a moment, when we spoke to you in January of 2002, we explained that a cornerstone of our future growth was our renewed commitment to and expansion of our R&D efforts. R&D is the key ingredient to our future profitable growth.

Accordingly, investment in research and development over the next few years will continue at approximately eight percent of sales. We also continue to make substantial progress in paying down debt, enabled by our very strong cash flow and continually improving management of our balance sheet. Our interest expense reflects the progress made. We achieved our performance despite a bleak economic picture in just about every corner of the globe. I stated at the end of our third quarter that we were essentially done with our integration efforts in connection with the BBA acquisition. This remains the case. However, I must add that we expect to continue to benefit from the combination of the two companies in the years ahead. What do I mean by this? Every day brings new opportunities to further evaluate and refine how we conduct our business. How we create new products for our customers. How we deliver to and service our customers. How we strive towards continuous improvement in all that we do, adding increased value to our customers' products and to our shareholders and co-workers. The benefits of the integration early on were those of cost-cutting and improved efficiency. Moving forward, we will be focused on top-line growth and value creation, while never losing sight of IFF's historic focus on cost control. We continue to keep our promises and commitments to our 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, such as fine fragrances.

In 2002, we participated in a large share of the major launches for the year. To name a few, these wins included polo blue for Ralph Lauren, Intuition for men by Lauder, Arden Beauty, Motion for HUGO boss, and just last Friday, it was announced that the new Davidoff fragrance, Echo, is ours. There were more wins we already know of for this year. We can't provide the details as yet, as we would never preempt our customers. But when I say we're doing better, I mean we are doing better. Moreover, while I cannot talk about specific customer relationships, I am pleased to note that we have made substantial progress in rebuilding old relationships as well as developing new ones.

In this regard, IFF has been added to certain customer core supplier lists in the past year, lists we were not on before. We earned such appointments based on hard work and demonstrating to these customers that we mean what we say - the customer is number one. Membership on such supplier list is no guarantee of sales growth. We must still create winning formulae and provide excellent service to win the business. But we are now in a better position to compete, and that is all I ask. The rest is up to us.

This kind of progress with customers, combined with all that I have discussed in the past, provides a great deal of optimism for the future. While I'm pleased with all that we have accomplished, such progress must still be evaluated in the context of the global economy. And although the strength of the global economy remains uncertain, I am more confident than ever that the actions we have taken to streamline our business, to realize operating efficiencies, coupled with our back-to-basics approach to customer service bode well for our future.

I'm 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 - 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. Now I'll turn the call over to my colleague, Doug Wetmore, to discuss our financial results in more detail. We will then briefly discuss our expectations for 2003 and the first quarter, and at the same time, when we are concluded with that, we will then take your questions. Doug?

Thanks, Dick. Good morning, everyone. All my comments are in comparison to the pro forma consolidated results for the fourth quarter and full year 2001. 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 of certain non-core businesses. Specifically our North American Brazilian fruit preparations businesses and the UK chemical business acquired as part of the BBA transaction. These businesses with collective annual sales of approximately $60 million were sold in separate transactions.

Secondly, we disposed of our fruit concentrate business in June 2002. This business had annual sales of approximately $23 million, and third, effective January 1, 2002, we adopted the provisions of FAS 142, prescribing accounting for goodwill and other intangible assets, and as we stated in that January call last year and throughout this year, adoption of this standard eliminated about $33 million of amortization expense, or about 35 cents per share for the full year 2002. Having said that, let me move to the results.

As Dick mentioned, sales increased five percent in dollars and local currency sales increased one percent. Sales for the quarter slightly exceeded our expectations on a reported dollar basis, and were in line with expectations on a local currency growth basis. Earnings per share were 41 cents, in line with expectations in our previous guidance, and for the full year, earnings per share were $1.92, again in line with the guidance we provided in January 2002.

The relative strength of the Aromas - well as to a lesser extent the yen and the Australian dollar resulted in dollar sales being four percent greater than the local currency results. For the quarter, there was about a nine percent favorable exchange effect on translation of European results into the dollar, and about a two percent favorable effect in Asia Pacific. For the quarter, flavors decreased one percent in local currency, resulting in a reported dollar increase of about three percent. Fragrance sales increased about two percent in local currency in the quarter, while in dollar terms, they increased about six percent.

Turning to North America, the North America fragrance sales increased one percent for the quarter, in line with the guidance previously provided. Fine perfumery increased in the low double digits, not withstanding the quarterly performance, fine perfumery was flat for the full year 2002 in comparison to the prior year. The performance in the fourth quarter was consistent with the sequential improvement we forecast as 2002 progressed, and reflected the benefit of the new wins we've discussed and as Dick mentioned moments ago.

Aroma chemicals increased in the mid single digits for the quarter and for the full year, aroma chemicals were flat in comparison to 2001. Functional products declined in the mid single digits for the quarter. As we've mentioned in past calls, we continue to see so impact associated with destocking in the distribution channels, and we expect that we will continue to see this for several more quarters. For functional pro products, the prior-year comparative was difficult in that such products increased six percent in the fourth quarter of 2001.

For the full year, functional products increased about one percent in comparison to 2001. North America flavors decreased two percent for the quarter. The region performed less than had been expected, although we're still pleased with the growth achieved for the full year. The performance in the fourth quarter was ...

Please stay on the line. You are currently on the International Flavors & Fragrances New York conference call. We are experiencing a temporary delay in today's conference and expect to be underway shortly. We thank you for your patience, and please continue to stand by. Again, this is Premiere Conferencing and you are currently on hold for the International Flavors & Fragrances New York conference call. At this time we are experiencing a temporary delay in today's conference and expect to be back underway shortly. We thank you for your continued patience, and please continue to stand by.

Welcome back to today's International Flavors & Fragrances conference call. We apologize for the delay. We'll turn the call back over to Mr. Goldstein and Mr. Wetmore.

Apologies. There seems to have been a cut-off in the teleconference. I'll resume with discussing the North America flavors, which was when we first became aware of the problem, and if there's anything that is not covered, we'll address it during questions. North America flavors decreased two percent for the quarter. That performance was less than had been expected, although we are pleased with the growth for the full year.

The performance in the quarter was impacted by a slowdown in customer order patterns, although we believe the slowdown to be temporary. Flavor compound sales, our core flavor business in North America, increased five percent for the full year 2002. Europe fragrances reported a local currency increase of about six percent, which on translation resulted in a reported dollar increase of 16 percent. The performance was substantially better than had been expected, and reflected a strong performance in fine fragrances. Fine fragrance local currency sales increased about 21 percent for the quarter, resulting in a reported dollar increase of 33 percent.

For the full year, fine fragrance sales increased six percent in local currency, and about 10 percent in dollars. Functional product sales increased about two percent in local currency, resulting in 11 percent increase in reported dollars. Functional product order patterns were sporadic throughout the year as we've noted in earlier calls, and for the full year, functional products were flat in local currency, and increased four percent in dollar terms.

Local currency aroma chemical sales increased one percent in the fourth quarter, driving a dollar increase of 10 percent. For the full year, aroma chemicals increased 20 percent in local currency, resulting in a 25 percent increase in dollars. Europe flavors declined two percent in local currency for the quarter, resulting in a seven percent increase in dollar terms. The local currency performance was somewhat below what had been expected. The flavors Europe performance has been impacted by a slowdown in the fruit business, directly related to our announced intention to explore strategic alternatives for this business. For the full year, flavor sales in the regions decreased three percent in local currency, and increased one percent in dollars.

Latin American fragrances reported a decrease of five percent for the quarter and ended the full year down six percent versus the prior year. This performance was somewhat better than had been expected. Notwithstanding the results were consistent with the persistently weak economic conditions in the region. For the full year, Argentina was in deep recession. Brazil fragrance sales were flat in the quarter and were down three percent for the full year. And the economic uncertainty in Brazil driven by concerns over the now-completed elections slowed Brazil all year. We remain cautious about Brazil's prospects in 2003.

Venezuela, while a relatively small element of total Latin American results, contributed to the decline in the fourth quarter. Venezuela sales declined 28 percent in the fourth quarter, and as a result, declined 16 percent for the full year. Mexico fragrance sales were essentially flat for the quarter and increased one percent for the full year. Central America sales increased 34 percent in the quarter, and 27 percent for the full year, driven by new wins. Latin America flavor sales decreased 16 percent in the quarter with a similar 16 percent decrease in sales for the full year.

The fourth quarter performance was significantly worse than had been expected. Brazil, Argentina and Mexico were the principal causes with declines of 15 percent, 19 percent and 19 percent respectively for the quarter. For the full year 2002, Argentina and Brazil flavors declined 40 percent and 17 percent respectively in comparison to 2001. Chile and other Andean-packed countries decreased in the high single to low double digits for the quarter and these same countries were down 20 percent or more for the full year. Mexico flavors declined nearly 20 percent in the quarter, although for the full year, Mexican sales increased two percent, reflecting the benefit of some new flavor wins.

Asia Pacific fragrances increased four percent in local currency, resulting in a six percent increase in dollars. The region finished the year flat in local currency terms and up approximately one percent in dollars. The performance for the quarter was somewhat better than had been expected, and the increase in the fourth quarter, and for that matter, the full year, were led by Thailand, which increased 43 percent in the quarter, and 28 percent for the full year 2002. Taiwan, which increased 34 percent in the quarter and 27 percent for the full year. Singapore Malaysia, which increased 14 percent for the quarter and 17 percent for the year. And South Korea, with an eight percent increase in the quarter and four percent for the full year.

These strong performances were weighed down by weak performances in Japan, which declined five percent in local currency for the quarter and eight percent for the year, resulting in respective dollar declines of six percent for the quarter and 11 percent for the year. And this performance reflects the continued poor condition of the Japanese economy.

The Philippines, which declined five percent in local currency for the quarter and nine percent for the year, resulted in respective dollar declines of seven percent for the quarter and 10 percent for the year. Indonesia was essentially flat for the quarter but declined six percent for the full year. As we mentioned in the third quarter call, but it bears repeating, it will take some time for Indonesia's economy to begin strengthening, and as we previously noted, the unfortunate events in Bali and related repercussions will likely temper our Indonesian results for the next several quarters.

Asia Pacific flavor sales grew seven percent in local currency for the quarter, resulting in a nine percent increase in reported dollars. For the full year, the region achieved a four percent sales increase in both local currency and dollar terms. For the quarter, the local currency performance was significantly better than had been expected, and several countries achieved solid growth.

China-Hong Kong increased 18 percent for the quarter and 12 percent for the full year. Philippine flavor sales increased 19 percent for the quarter and 15 percent for the full year. Vietnam increased 14 percent for the quarter and grew nearly 70 percent for the year. Thailand and Taiwan sales in the quarter increased by 18 percent and 14 percent respectively, and Australia-Asia (ph) increased by six percent in local currency in both the quarter as well as for the full year 2002.

Japan continued to partially offset the solid performances achieved elsewhere in the region. Japan flavor sales declined in the low single digits for the quarter and in the mid single digits for the year. In Indonesia also impacted results. Sales there increased in the low single digits for the quarter, but declined three percent for the full year 2002.

India fragrances reported a sales increase of seven percent in local currency in the quarter, that's 11 percent in dollars, and increased 11 percent in local currency for the full year, 12 percent in dollars. The performance was better than had been expected, and the region's performance in the quarter was strongest in India, which increased 13 percent. India fragrances grew by 10 percent for the full year 2002 and Pakistan grew by 17 percent. The performance in the region reflects the strong benefit of new wins and continues to confirm our expectations as to the future growth prospects of the region. India flavors reported a local currency sales increase of about six percent for the quarter, seven percent in dollars, and increased by seven percent in both local currency and dollars for the full year 2002.

Performance was also stronger than expected and again reflected the favorable benefit of new wins in the marketplace. In flavors, the performance was strongest in India, which grew 14 percent in the quarter and eight percent for the full year. Looking at our operating results, the gross margin came in just about where we previously expected at 42.9 percent of sales for the quarter. For the full year, gross margin was 42.7 percent. Our operating costs why in were in line with expectations. The operating costs in the quarter include expenses of approximately 1.5 million, associated with our business excellence and SAP initiatives, and for the full year, we incurred about $4 million of such expenses. These are costs related to training, data conversion and other expenditures that don't qualify for capitalization and must be expensed as incurred.

R&D spending increased in line with what we discussed in January 2002, approximating 8.5 percent of sales for the quarter, and eight percent of sales for the full year. Interest expense decreased by 40 percent in comparison to the prior-year quarter, and the interest decline reflects the favorable interest rate situation in 2002 in comparison to 2001. Our average rate for this quarter was 3.3 percent versus 4.1 percent in the fourth quarter last year, and for the full year, our average rate was 3.4 percent, compared to 5.4 percent for the full year 2001. We've talked about the interest rate swaps in our annual report in previous calls. Such swaps remain in effect and have enabled us to significantly decrease our overall cost of debt. Interest expense also declined due to the substantially lower debt levels.

Our debt outstanding of this quarter-end as reported is about 1,057,000,000, down about 20 million from September 30th this year, or this year just completed, and down about 110 million since December 31st, 2001. At December 31st, 2002, the debt includes approximately $64 million of gains on the interest rate swaps we've entered, and these gains are being amortized over the remaining term of the debt. Our true economic debt at quarter end was about $993 million. We said very early in 2002, our debt would be below a billion dollars before the end of the year, and I'm please to note we met this goal. We reduced debt by about $166 million during the year.

At this time, I would expect a debt at the end of 2003 would be in the range of 875 million, although it will fluctuate due to exchange rates. We remain committed to properly with balancing repurchase of shares with reduction of our overall debt levels, and in that regard, during the quarter, we repurchased approximately 130,000 Treasury shares under our buyback programs. At December 31st, 2002, we had a remaining authorization of about 95 million under the program the board approved in October 2002. The effective tax rate for the quarter was 33.8 percent and the rate for the full year was 34 percent.

I expect that the full-year rate for 2003 will approximate 32 percent to 32.5 percent, and the reduction from the current-year rate is the result of tax planning initiatives and the benefits of combining IFF and BBA legal entities into a more efficient tax structure. The reduction in the effective rate will be sustainable over at least a several-year period, barring significant changes in tax legislation.

There were no recurring charges during the quarter, although it's recognize recognized in the full year 2002 represent primarily severance and other separation costs for IFF employees impacted by the reorganization where he did signatures had been - decisions had been made and communicated to the employee during the year. Balance sheet, cash and investments totaled $15.2 million at the end of the year. Our day sales in inventory were about 154 days at December 31st, 2002 compared to 150 at December 31st, 2001.

That increase - about four days is attributable to the strengthening of the Euro, during the latter stages of the quarter and the impact on the balance sheet - reported inventory levels. Receivable days remain fairly constant at about 70 days. Our capital investments for the quarter were about $82 million for the full year, in line with the guidance we provided.

At this time, we expect capital a spending in 2003 to be pretty much consistent with these levels in the range of 80 to $85 million. With respect to SAP, I'm pleased to note we went live with our Chinese chemical plant in a very smooth transition in November, and the latest implementation took place today in Deragada (ph), Ireland. We will be rolling out to additional operating locations as the year progresses. Depreciation for the full year 2002 totaled $72 million. Now I'll turn it back over to Dick to provide some commentary on our expectations for 2003, and then I'll provide a few more details regarding the geographic regions. Dick?

Thanks. We have consistently said that the process of rebuilding IFF would take three to five years. In that context, we reflect on 2002 as building on the initiatives we began in 2001. I have frequently said that our improved win rate and improved customer service satisfaction bode well for the future.

We have built the foundation for our path to grow. A key initiative as I had said before is our commitment to research and development, as it is a key ingredient to our future growth. I'm very pleased with the progress we've made in refocusing our R&D efforts on our customers' needs and wants. I'm confident that we will begin to reap further benefits of these initiatives in the latter stages of 2003, and more significantly in 2004. I'm not in a position to provide specifics as yet, but our progress in R&D bodes well for the future. Our guidance for 2003 must be framed in the context of the global environment in which we live.

As we noted earlier, there are really very few bright spots, if any, in the global economy. Added to this, we face the imminent prospects of a military conflict in the middle east, which will doubtless cause further disruption in the world's economy. With this in mind, we expect 2003 revenues to grow in local currency in the low single digits, excluding for comparative purposes approximately 9.4 million of sales related to non-core businesses disposed of during 2002. This local currency growth based on current exchange rates would result in an approximate sales increase in reported dollars of seven to eight percent.

On this same basis, we currently expect earnings per share for 2003, excluding non-recurring charges, to be in the range of $2.12 to $2.20 per share. An increase of between 10 and 15 percent in comparison with 2002. Expected earnings reflect continued cost savings from reorganization and integration efforts, partially offset by planned increases in spending on the company's research and development initiatives. Now I'll turn the call back over to Doug for some details regarding Q1, after which we'll open the call for questions.

For the first quarter 2003, we expect local currency sales to increase in the low single digits in comparison to the prior year. Exchange is expected to be favorable by approximately five to six percent for the quarter. Let me give you some preliminary guidance in terms of each of the geographic regions. North America fragrances is expected to increase in the low single digits, mainly due to continued strength in fine fragrance. The fine fragrance growth, though, will be partially offset by weakness in functional products, where we continue to see some impact from destocking, as I mentioned earlier. Chemicals are expected to be flattish for the quarter.

North America flavors will increase in the mid single digits compared to the 2002 first quarter. For purposes of comparison, the North America flavor sales exclude approximately 5.1 million of the sales to the non-core businesses that were disposed of. Europe fragrances will increase in the low single digits and local currency terms resulting in a low double digit increase in dollars. Europe chemicals will be down about 10 percent, having a very difficult comparative with the 2002 first quarter, where chemical sales increased 26 percent. The chemical weakness will be more than offset by continued strong growth in fine and functional fragrances. Europe flavors is expected to be flattish in local currency terms, although this will result in an increase in low double digits and reported dollars. As we've noted before, we continue to see weakness in the fruit business in Europe.

Latin America fragrances will decline in the mid single digits, reflecting continued weakness in the region. Argentina, Mexico, Brazil and Columbia are all expected to decline in the quarter. Latin America flavors are expected to decline by about 10 percent in the quarter.

Asia Pacific fragrances are expected to increase in the mid single digits in local currency, and that increase will result in a mid to high single digit increase in reported dollars. Asia Pacific flavors are expected to be flattish in local currency, resulting in a low single-digit increase in dollars. Both India flavors and fragrances are expected to increase in local currency in the low double digits. We expect earnings per share for the first quarter 2003, excluding any non-recurring charges, to be in the range of 47 cents to 50 cents per share. And with that, we'll now open the conference call up to questions.

Thank you, gentlemen. If you do have a question or a comment for to today's presenters, you may signal us by pressing the star key followed by the digit one on your touch-tone phone. Star one if you have a question or comment. We'll take your questions in the order that you signal us and take as many questions as time permits. We'll take our first question from Jeff Zekauskas from JP Morgan.

Good morning.

Morning, Jeff.

Just a few things. You've stressed your emphasis on research and development in the call today. Is the work that you're doing in R&D more applicable to the fragrance market, or is it equally applicable to your growth prospects in both flavors and fragrances?

I would say it's equally applicable. Remember that in many of the instances we're talking about, when we're talking about the renewed emphasis in research and development, a lot of it is new molecular structures, and those structures can have applicability in both or they may be single focused, depending upon - depending upon what emerges. But what should be emphasized is that the direction which Clint Brooks and his team is taking is not aimed at flavors or fragrances independently, it's aimed at both.

OK. That's helpful. Just a second question. Can you sort of clarify some of your operational goals for next year? I know that you've had - you've completed the integration of Bushbo con Allen (ph), but still you've implemented SAP. There's probably more plant consolidation that can come. Can you sort of give us an idea of how that might affect your cost structure next year?

Jeff, we'll continue to benefit next year from the closures that took place during 2002. As you'll recall, the Chicago plant which was a former BBA plant, closed at the middle of the year, and two locations in the UK closed during the latter stages of the third quarter, so we'll anniversary those savings. We would expect to see continued margin expansion, both at the gross profit level as well as at the operating profit level, but you do have to take into account the fact that we will continue to have expenses associated with the implementation of SAP next year. We only capitalize the things that are appropriately capitalized. And then we also have some cost increases just as other companies do in terms of pension and insurance expenses.

OK. Thanks very much.

We'll take our next question from Alice Longley from Credit Suisse First Boston.

Morning Alice.

Hi. Something on the progress of the year. Doug, did you say that local currency sales would be low up low single digits?

Flattish to up slightly. That's the lexicon, but right now, flattish to up slightly in local currency.

And then you're expecting up low single digits for the year? I think it works out to about two percent, your guidance. Are you expecting acceleration through the year? And also the EPS guidance seems to suggest some acceleration through the year bottom line too.

Alice, the first half of the year is, just global economics, we're being very cautious in that regard. We do get the benefit of the currency as a stands right now, most could I significantly in the first, and the currency benefit diminishes as the year progresses, but we would expect to see some benefit, some sequential improvement as the year progresses.

So you're expecting basically the economic conditions to improve gradually through the year? Is that the idea?

Well, I don't know, Alice. I mean, I think we have to await and really just see what happens. Particularly with respect to the middle east. You know, how quickly the engagement takes place, and more importantly, how quickly it's over.

I understand that. It just sounds like your guidance is assuming some acceleration through the year.

Yes, I guess that's accurate. And that's not an unfair - I think that's an accurate statement.

OK. My next question is on gross margins. If you look at comparables, you're looking at the year ago without the divested business, and even adjust - well, anyway, gross margins are down end of quarter, and I'm wondering why that's the case given the cost-cutting programs and also given the fact that fine fragrances were so strong which have high gross margins.

First of all, you noted that the North America flavors business declined when actually we had been expecting it to increase, and also Latin America declined rather significantly, so you do get some absorption issues, expense absorption issues. Secondly the implementation of SAP, we had about $4 million of expenses year-to-date and about 1.5 million in the quarter. A good chunk of that, because the SAP implementation impacts plants, the expenses go in as manufacturing expenses so that does impact our gross margin.

OK. And the final question is, could you comment a little bit more about what you meant about the flavors being down two percent in North America and, you know, there was some sort of a temporary slowdown that you thought was going to be temporary and I guess you expect flavors to be up in the first quarter. What's that all about?

We did see a slowdown in order patterns with our flavor customers during the latter stages of the quarter. Can't really conclude as to what that meant, although we know it's not lost business, and we do expect a resumption and more normal order pattern as the first quarter progresses.

Why wouldn't it be the same destocking that sort of goes on and on and continues that you're seeing in functional fragrances?

Well, the shelf life of a food product is substantially less than the shelf life of a soap or household or personal care product, so you can't have that order of magnitude of destocking that we've seen in the past on the personal care side.

I see. But the orders you're getting in the first quarter indicates that North American flavors are going to be up now?

Yes.

All right. OK. Thank you.

Thank you.

Amy Chasen with Goldman Sachs has our next question.

Your US fine fragrance business is just very, very impressive and actually Europe as well, and you talked about the share gain there. It does seem, however, that if you look at your flavor business in North America, that you're actually losing market share. I mean, I understand the order patterns and destocking and all of that, but those are not really new issues here. Is that a fair assessment?

Well, actually, for the full year, Amy, we're looking at North America up five percent for the full year in flavors. I wouldn't read very much into that. I mean, we've had a strong rebound in North American flavors in 2002. I'm really not at all disappointed in the results. I think that we're going to continue to see strength in 2003.

So do you think that you're gaining market share in North America in both fragrances and flavors?

Well, I think that we're certainly doing better, and it's difficult to know whether or not we're taking more business from our competitors or whether or not we're just doing much better in the context of - that are available. I'm quite certain that it's, frankly, a mix of both, and that, therefore, depending upon the category that one is looking at, that we are, in fact, taking market share from our competitors much as we have been doing in the fine fragrance area, and in other areas, it's a question of expansion of various categories and we're getting our fair share, whereas in the past, we didn't get our fair share, if that's helpful.

And along those lines, can you just talk about what the tone of business in fine fragrances was in the fourth quarter? Obviously you guys are gaining market share, but do you have a sense for kind of how things played out at retail?

Well, I mean, you get all of the noise levels that we get in terms of the fourth quarter at retail from the department stores. It was weak. I think that there are several people who are providing explanations along the lines of six or seven fewer shopping days in the season, but I think that it would be - it's not wrong to characterize it as a disappointing fine fragrance season in the context of what people had hoped, given the comparatives from a year ago, Amy.

Do you think that there's a secular decline in the fine fragrance business?

I think that there are a lot of issues in North America that don't, frankly, exist in Europe, and in other parts of the world, and I think that the issues in North America are significant enough so that our customers are now rapidly coming to terms with steps that are going to have to be taken in order to improve the dynamic of the fine fragrance category in North America. I would also - I'm sorry ...

Such as?

Well ...

I'm not sure what you're referring to.

Well, I think really, it would be better if our customers really addressed the issues that they think they're going to have to take with respect to distribution issues, et cetera, than for me to opine on that subject. But I will tell you that I do think that our customers are seriously examining the situation. I will also point out that there is still expansion going on within the category, and it's a question of where you look.

For instance, historically, one never looked at the fragrances that were being sold in places such as Victoria's Secret, bath and body works, and those types of outlets as a provider of expansion in fine fragrance. Similarly, if you take a look at Avon, again, you have a situation where Avon on a global basis continues to grow not only in developed markets but more importantly, in emerging market areas. But in the U.S., I think that the focus really has to be on examining what were not historical outlets for fine fragrance and take a look at the broadening base of customers that have developed.

OK. Thank you.

We do have a follow-up question from Jeff Zekauskas.

I guess this question is for Doug Wetmore. The capital expenditure numbers that you spoke of, the 83 million for 02 and a similar number for 03, that sounds - the 02 number sounds low versus your expectations previously in the 03 number sounds high. Is that correct, and sort of what's the normal ongoing cap ex for your businesses?

Well, you'll recall from the third quarter conference call, Jeff, that I actually said we were going to be between 80 and 85, I believe, at that time, which was down from the previous guidance of 92 to 93, and some of that is just shifting from one year into the next in terms of the timing of the expenditure, so 2003 is perhaps a little bit higher than we had anticipated, but that's simply because of a shifting from 2002. I think long-term, barring something unforeseen right now, we'll still be trending down more in line over the course of the next couple years where depreciation will - or capital expenditures will pretty much be in line with depreciation, so 70, 75.

OK. Thank you very much.

And next we'll take a question from Art Cecil with T. Rowe Price.

Morning, Art.

Good morning.

Hey Art.

I was just curious, there's been a lot of discussion, perhaps, about the next wave of litigation from these trial folks aimed at some food companies, and I'm just wondering whether you're seeing any accelerating interest in product reformulations on the flavor side of the business that could make any difference to you guys.

I won't say that it's in any way related to the litigation issues prompted by - that we've all read about, most notably the McDonald's case, but we have a constant dialog going on with major food customers who are looking for not only reformulations, but new products which can capitalize on a healthier-for-you format. And you're not wrong in suggesting that all of that is excellent for business, because it's the development really of - or an expansion of the categories.

Certainly some of that's been going on for a long time, sort of self-started by the food companies themselves. I just didn't know whether the litigation thing was at the point where it was going to provide additional impetus to that kind of a trend, but ..

Difficult to predict.

Yes. Doug, did you give an interest expense number for 03 and an aggregate cost savings for 03 from your restructuring and reorganizational efforts?

No, we didn't, Art. I think from an interest expense perspective, recognizing that some of our dent debt is overseas and will fluctuate with exchange rates, we should be in the range of 32 to 34 million next year. I don't think we'll see another substantial decrease, and that is just depending on the paydown of debt and also anticipating that interest rates would begin to creep up a little bit in the latter stages of the year.

OK.

From a savings perspective, we talked about in the past, I think Dick mentioned in October we were at an 80 million dollar run rate, and we've taken into account those savings, and as I mentioned previously, in response to another question, we are seeing some additional cost increases, primarily in the area of pension and insurance, and those were all being taken into account in terms of the guidance we've provided, so we're still pretty happy with the run rate that we've achieved.

I guess 212 in terms of earnings is certainly always hard to say what's the worst case given the uncertainties that we face. But do you all have enough ammo to kind of feel highly confident about a 212 kind of number?

We wouldn't have provided the guidance, Art, if we weren't confident in achieving that number.

OK.

And I think if you recall, I mean, the guidance was provided in the context of our anticipating a fragile global economy.

Right. OK. Thank you very much.

Thanks, Art.

It looks as though we have time for one more question. We'll take a follow-up from Alice Longley with Credit Suisse First Boston.

Hi. Again on the gross margin, can you give us any guidance for gross margin for 03, you know, up or down?

Hi Alice. It should be up, Alice. I think it's difficult to be precise because mix does influence it a little bit, but I think somewhere in the range of 43.3 to 43.5 for your model right now would not be a bad range to be in.

OK. And where do you have to deal with the increases in pension costs and insurance?

Well, it's spread. I mean, we have pension plans in various locations around the world, and the insurance is basically being driven by the events post 9/11 and the insurance company's rates going up, but the pension costs in the United States, Europe and Japan primarily.

Is that in cost of goods sold or SG&A?

That tracks wherever the employ employee is charged, so portions are in SG&A and portions of it are in manufacturing expense.

OK. And then R&D as a percentage of sales, do you have some guidance for that?

Yes, as we mentioned in the call, it should be eight percent of sales.

OK.

OK?

Yep. Good. Thanks.

That concludes our question and answer session. We'll turn it back to you.

Thanks very much, and we'll be in touch with you again at the end of Q1.

And that does conclude today's conference. We thank everyone for their participation. We hope you have a great day