International Flavors & Fragrances Inc (IFF) 2003 Q4 法說會逐字稿

Good day, everyone, and welcome to the International Flavors and Fragrances fourth-quarter 2003 earnings release conference call. 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.

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. These statements are based on current expectations and the current economic environment. Forward-looking statements and projections are inherently subject to significant economic, competitive and other uncertainties and contingencies which are beyond the control of management. The company cautions that these statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other factors that could cause actual results to differ materially from any forward-looking statements and projections are specified in the Company's 10-K filed with the SEC and other IFF filings made with the SEC from time to time. IFF does not update forward-looking statements and expressly disclaims any obligation to do so.

Now, to move forward with our fourth-quarter and year-end review -- I am pleased to report that our results for the fourth quarter were better than had been expected in both sales and operating results when we last spoke with you in October 2003. Fourth-quarter sales increased 11 percent in dollar terms, and about 3 percent in local currency in comparison to the 2002 fourth quarter. For the first time this year, order activity was fairly stable throughout the quarter. We did not suffer the abrupt backouts and cancellation of orders seen most notably in the second and third quarters of 2003. For the full year, sales increased 6 percent in dollars, although this represented a local currency sales decline of just under 2 percent for the full year 2003. For purposes of this comparison, comparable 2002 results exclude about 9.4 million of sales associated with the fruit concentrate business we disposed of in 2002. Our earnings per share were 40 cents for the quarter and for the full year, we achieved per share results of $1.83. These per-share results include the impact of our restructuring charges taken in connection with the ongoing reorganization of our business. I will talk about our reorganization more in a moment. Excluding the per-share impact of these restructuring charges, earnings per share were 48 cents in the fourth quarter and $2.12 for the full year 2003. The fourth-quarter and full-year results were driven by a strong performance in North America, most notably a 19 percent increase in our flavor business, which far exceeded earlier expectation. We also continued to demonstrate growth elsewhere, driven by a combination of improving economic conditions and new wins, most notably in Latin America flavors, India in both flavors and fragrances and in Asia Pacific, fragrances.

As we have emphasized in the past several quarters, we continue to focus our efforts on research and development, the cornerstone of our future growth. R&D spending represented about 8.3 percent of consolidated sales for the full year 2003, increasing somewhat from 8 percent in sales in 2002. We expect that the next several years, R&D will continue to be approximately 8 to 8.5 percent of sales. We are encouraged by the progress we are making and the pace with which we are beginning to see new products with new technologies being introduced by our customers. This bodes well for IFF's future. We have said all along that R&D is the key ingredient for our future profitable growth.

We also continued to make substantial progress in reducing debt. This was enabled by our very strong cash flow and continued improvement in managing our balance sheet. At December 31, 2003, debt for borrowed money stood at $847 million. Through improved operating results and better utilization of our asset-base, we have also continued to improve our return on invested capital, which for the full year 2003, approximated 12.5 percent after tax. We expect this improvement to continue in the years ahead.

We also completed the last stages of our reorganization, resulting in pre-tax restructuring and other charges of about $11 million in the quarter and about $42 million for the full year 2003. As we have previously stated, these actions were only possible after completing the integration of IFF and BBA, and after performing a thorough analysis and assessment of our Company's personnel and processes post-integration. For the full year 2003, we eliminated approximately 320 positions. The last stages of the reorganization have not been easy, but the steps were necessary. And having completed these tasks, we are now fully focused on what we know and do the best, making high-quality flavor and fragrance products for our customers. IFF is well positioned to drive long-term growth and shareholder value.

Now, I will turn the call over to Doug to discuss our financial results in more detail. Afterward, we will briefly discuss our preliminary expectations for the first quarter and we will then be pleased to take your questions.

Good morning, everybody. All comments I will make regarding sales for the full year 2003 are in comparison to pro forma consolidated sales of IFF for the full year 2002. The pro forma information reflects the disposition of the fruit concentrates business in June 2002. As Dick mentioned, this business had sales in 2002 of 9.4 million in the period of time the business was still owned by the Company.

For the fourth quarter, reported dollar sales increased 11 percent and local currency sales increased 3 percent. Sales for the quarter exceeded our expectations on both a reported dollar and local currency basis. We did not experience any notable backout or cancellation of orders at the end of the quarter, which had been our expectations based on our experiences in the second and third quarters of the year 2003. Our earnings per share for the fourth quarter were 40 cents and for the full year, $1.83. These per-share results reflect the impact of restructuring charges of 8 cents per share in the fourth quarter and 29 cents per share for the full year. And excluding these charges, the earnings per share would have been 48 cents and $2.12 for the fourth quarter and full year, respectively. The relative strengths of the Euro as well as, to a lesser extent, the Yen and the Australian dollar, resulted in the reported dollar sales being about 8 percent greater than local currency results for the quarter. In the fourth quarter, there was about a 15 percent favorable exchange effect on translation of European results into the dollar and about a 9 percent favorable effect in Asia.

For the quarter, flavors increased 6 percent in local currency, resulting in a reported dollar increase of about 14 percent, and for the year, flavors increased 1 percent in local currency, resulting in a reported dollar increase of about 8 percent. For the quarter, local currency fragrance sales were flat in relation to the 2002 quarter, while in dollar terms, they increased about 8 percent. For the year, fragrance sales decreased about 4 percent in local currency, resulting in a reported dollar increase of about 3 percent.

Turning to the regions, North America fragrance sales increased 2 percent for the quarter and declined 6 percent for the full year. Functional fragrances led the fourth quarter performance with a 9 percent increase. Although for the full year, functional fragrance sales declined 4 percent. The full-year performance reflected the continued impact associated with destocking of finished product that contains our fragrances. And we have discussed this at various calls in the past. We expect that the impact of destocking will continue, albeit at a potentially lower level for several more quarters. For the fourth quarter, fine fragrance sales decreased about 4 percent and ended the year down 8 percent. The 2003 fourth-quarter performance was aggravated by a difficult comparison with the fourth quarter 2002 when fine fragrance sales increased 12 percent. Aroma chemical sales decreased 3 percent for the quarter. And for the full year, chemical sales were down about 8 percent in comparison to 2002.

North America flavors increased 19 percent for the quarter and 3 percent for the full year 2003. The fourth-quarter performance was substantially higher than expected. Moreover, the order activity was strong throughout the quarter across a wide range of customers. The performance reflected the benefit of new wins as well as a resumption of more normalized ordering patterns from our customers.

Europe fragrances reported a local currency decrease about 4 percent, which on translation, resulted in reported dollar increase of 13 percent. Fine fragrance local currency sales increased about 2 percent for the quarter, resulting in a reported dollar increase of 21 percent. For the full year, fine fragrance sales increased 3 percent in local currency and about 24 percent in reported dollars. The fine fragrance performance was driven by the benefit of new wins, including those that had been launched in North America in 2002 and rolled out to Europe in 2003.

For the fourth quarter, functional fragrances were flat in local currency, resulting in a 17 percent increase in reported dollars. And for the full year, functional fragrances were down about 4 percent in local currency, increasing 14 percent in reported dollars. Local currency aroma chemical sales decreased 12 percent in both the fourth quarter and full year 2003, resulting in a low single-digit increase in reported dollars for both the quarter and the year.

Europe flavor sales for the quarter were flat in local currency, resulting in a 14 percent increase in reported dollars. And for the full year, flavors sales in the region decreased 1 percent in local currency terms while increasing 15 percent in dollars. The performance in Europe in both flavors and fragrances reflects our view that this region is the last to show evidence of improving economic conditions, especially in the major countries in the region.

Latin American fragrances reported an increase of 3 percent for the quarter, though it entered the year, the full year 2003, down 5 percent versus the prior year. Results were consistent with the improved economic conditions through the region. Sales in Argentina rebounded sharply, increasing 60 percent for the quarter and 22 percent for the full year 2003, as economic circumstances stabilized and improved in that country. Brazil fragrance sales increased 1 percent for the quarter. Although fragrance sales in Brazil ended up the full year being down about 8 percent in comparison to 2002. Mexico fragrance sales declined about 3 percent in the fourth quarter and 6 percent for the full year 2003. And our performance in Mexico very much mirrored the weak economic conditions in Mexico.

Latin America flavor sales increased 15 percent in the quarter and 9 percent for the full year. The performance continued the strong sequential improvement we saw in Latin America flavors for much of 2003. Brazil flavor sales led the way, increasing 32 percent in the quarter and 19 percent for the full year. This performance was the result of many new flavor wins in the Brazilian market. And moreover, the performance gives us further confidence that Brazil is starting to rebound from its recession and we look for further sales growth there in 2004. Argentina flavor sales grew 17 percent in the quarter and 31 percent for the full year. The Argentine performance in both flavors and fragrances benefits from an easy comparative with 2002, but resulted from a number of new wins in the marketplace.

Central America also had good growth in both the quarter, where it grew 90 percent, and for the full year, which grew 80 percent. Mexico flavors declined (technical difficulty) percent for the quarter and 11 percent for the full year, pretty much mirroring our fragrance performance in that country.

Asia-Pacific fragrances increased 8 percent in local currency, resulting in a 15 percent increase in dollars. Fragrances finished the year increasing 7 percent in local currency terms and up about 12 percent in reported dollars. The Asia-Pacific fragrance performance was led by increases in Thailand, which increased 61 percent in the quarter and 51 percent for the full year 2003. Indonesia, where fragrance sales increased 15 percent in the quarter and 20 percent for the full year; and greater China, where sales grew 9 percent in the quarter and 8 percent for the full year. The strong performance in these countries was mainly the result of new wins, continuing the trends we have noted throughout the year 2003. This growth was somewhat offset by continued weak performances in Japan, which declined 10 percent in local currency for the quarter and 5 percent for the year, resulting in respective dollar increases of 2 percent and 3 percent. And the Philippines, which declined 33 percent in local currency for the quarter and 11 percent for the full year, resulting in respective dollar declines of 34 percent and 14 percent.

Asia-Pacific flavor sales grew 1 percent in local currency for the quarter, resulting in a 10 percent increase in dollars. And for the full year, the region declined 2 percent in local currency, with a 4 percent increase in dollars. The quarterly performance was led by local currency sales growth in greater China, which increased 3 percent for the quarter and 5 percent for the full year; Vietnam, which increased 47 percent for the quarter and 14 percent for the full year; Thailand, which grew 13 percent in the fourth quarter, although it ended up the year only increasing 1 percent in comparison to 2002; and Indonesia's sales, which grew 6 percent in the quarter and 3 percent for the full year.

Japan continued to partially offset the performances achieved elsewhere in the region, and Japan's flavor local currency sales declined 10 percent for the quarter and ended the year down 9 percent in comparison to 2002. The Philippines also declined 15 percent in the quarter and 22 percent for the full year in local currency.

India fragrances reported a 3 percent local currency increase in sales, which resulted in an 8 percent increase in dollars for the quarter. Fragrances ended the year increasing 7 percent in local currency and 12 percent in dollars. In the fourth quarter, India flavors reported a local currency increase of 8 percent, resulting in a reported dollar growth of 10 percent. And for the full year, flavors grew 11 percent in local currency with a 12 percent increase in dollars. The performance in both flavors and fragrances was driven by a combination of new wins and the continued strong performance of the Indian and neighboring economies. The performance in India continues to validate one of the principal strategic reasons underlying the acquisition of BBA, the market leader in India at the time we acquired them. And that is the strong growth prospects in the region for the next several years.

Turning to operating results, our gross margin was 43.1 percent of sales for the quarter compared to 42.9 percent reported in the fourth quarter 2002. And for the full year, gross margin was 42.5 percent of sales, declining slightly from 42.7 percent reported last year, meaning 2002. For the full year 2003, we were unable to overcome the margin impact of the fall-off in the higher-margin fine fragrance sales, which we discussed in detail in our third-quarter earnings release and call. Operating costs were in line with expectations, including expenses of approximately $1 million associated with our business excellence and SAP initiatives. For the full year, we incurred about $4 million of expense for these initiatives. These are costs related to training, data conversion and other expenditures that don't qualify for capitalization and must be expensed as incurred.

During the fourth quarter, we successfully implemented SAP in our Dutch fragrance compounding facility, our Singapore compounding operations and in Thailand. All implementations went without disruption of operations and more importantly, without any disruption in customer service. At December 31, 2003, approximately 70 percent of the Company is running on SAP, and we will be near 95 percent by the end of 2004. We consider SAP a real success for IFF.

R&D spending increased in line with what we have discussed throughout the year, ending the year at about 8.3 percent of sales. And for the full year 2003, selling and admin expenses, as a percentage of sales, declined about 70 basis points in comparison to the prior year. This decline is a direct result of the reorganization activities undertaken throughout the year 2003. Notwithstanding our year-on-year decline in gross profit as a percentage of sales, operating profit improved slightly, again as a result of the ongoing cost-cutting efforts. Interest expense decreased 30 percent in comparison to the prior-year quarter, about 5.9 million this quarter compared to 8.4 million in the 2002 fourth quarter. And for the full year 2003, interest expense declined 23 percent in comparison to 2002. The interest decline reflects the combination of continued significant reduction in debt as well as the ongoing interest rate environment in 2003 in comparison to 2002 and our continued success in managing the interest rate exposure. Average interest this quarter was 2.7 percent versus 3.3 in the fourth quarter last year, meaning 2002. And for the full year 2003, our average interest rate was about 3 percent compared to 3.4 percent for the full year 2002.

Our reported debt at the year end is about $885 million, which is down about $78 million from September 30, 2003, and about 172 million since December 31, 2002. The reported debt includes about $38 million of gains on interest rate swaps that we had in place, and those gains are amortized over the term of the debt. Our true economic debt, as Dick mentioned, the debt for borrowed money at year end was about $847 million, substantially better than had been forecast during our last call. At this time, I would expect the debt at the end of 2004 will be in the range of 725 to $750 million. And to a certain extent, that debt fluctuates due to exchange rates.

We did not repurchase any shares during the past quarter. But for the full year 2003, we repurchased 1,751,000 shares at a total cost of about $55 million. At December 31, 2003, we had a remaining authorization of about $42 million under the program the Board approved in October 2002. The effective tax rate before charges for the quarter and year was 32 percent, as expected. When considering the restructuring and other charges, the effective rate for the quarter was 31 percent and 31.5 percent for the full year. And the reason for the difference is that the restructuring and other charges were mainly in higher tax jurisdictions, resulting in a higher tax benefit to the Company. At this point in time, I expect the full year rate for 2004 to approximate 31.5 percent, an improvement of about 50 basis points over the normalized rate for 2003. This reduction from the current year rate is the result of finalizing tax-planning initiatives and the benefits of combining IFF and BBA legal entities into a more efficient tax structure. That reduction in the effective rate will be sustainable over at least a several-year period, barring significant changes in tax legislation.

Just a couple other items -- our days sales in inventory decreased from 154 at December 31, 2002 to 152 days at December 31, 2003. Receivable days improved to 65 days compared to 70 last year, a substantial improvement. Our capital investments for the year totaled about $66 million and this level of spending is consistent with the updated guidance given during our third quarter conference call. At this time, we expect capital spending in 2004 to approximate 85 to $90 million. Some of this spending in '04 relates to projects deferred or delayed in 2003. Over the next several years, I expect that we will spend, on average, an amount of capital equivalent to our annual depreciation, which was about $74 million in 2003. I will turn it back over to Dick to provide some commentary on our expectations for 2004, and then I will provide a few more details regarding the individual geographic regions.

We have consistently said that the process of rebuilding IFF would take three to five years. In that context, we reflect on 2003 as a confirmation of the progress we began in 2001. It was the year of many accomplishments and some disappointments. I have frequently said that our improved win rate and improved customer service satisfaction bode well for the future. I believe we are seeing evidence of that in our sales growth in Asia, India, Latin America and North America, particularly flavors. I'm confident we have laid a solid foundation for future growth. The key to our growth is research and development. In 2003, we saw the first glimmer of benefits from our extensive R&D efforts these past three years. We are optimistic that we will see more of this in 2004 and beyond. For example, our global ingredients research program created and evaluated hundreds of new molecules in natural extracts, and selected the very best to commercialize and manufacture as new flavor and fragrance ingredients. IFF had 15 commercially valuable U.S. patents issued this year this year, the most in our industry. These ingredients will contribute to winning flavors and fragrances in 2004 and beyond. Our delivery and material technology research also continues to advance the commercial applications of flavor and fragrance encapsulation technology. Our patented CapLock (ph) flavor technology was commercialized in 2003, in notable new product launches including powdered beverages and chewing gum. With ongoing innovation in encapsulation technology and functional fragrance applications, and aroma-transfer technology in packaging applications, IFF will continue to deliver innovation that helps our customers create winning products.

Currently, we have a number of new products in market tests with customers in various regions. Early indications are that there are clearly discernible preferences for the product containing our flavor or our fragrance and our technology. However, please be patient. If all goes well, the earliest that some of these products could be launched is the second half of 2004, and more likely, early 2005. These are not timeframes we establish. We follow the path to market established by our customers.

Our guidance for 2004 must also be viewed in the context of the global environment in which we live. We are seeing improvements in Latin America, most notably Brazil and Argentina, yet Mexico remains fairly weak. Southeast Asia and China continue to grow solidly, as does India. The growth in Japan, in our estimation remains, from fragile. Statistics suggest North America continues to rebound, but we believe there are still some questions to be answered regarding the depth and breadth of the recovery. In taking all these considerations into account, we expect 2004 revenues to grow in local currency in the low single-digits. This local currency growth ,based on current exchange rates, will result in an approximate sales increase in reported dollars in the mid to high single digits. We currently expect earnings per share for 2004 to be in the range of $2.24 to $2.31 per share, an increase between 6 and 9 percent in comparison to 2003 EPS of $2.12.

Over the last several quarters, we saw fluctuating order patterns in nearly every geographic region. These order pattern shifts make it increasingly difficult to accurately predict sales performance for an individual quarter. We believe that over the course of the year, such fluctuating patterns will have a tendency to even out. But they can have significant impact on individual quarters. Accordingly, we will continue to provide guidance for the full year only, rather than each quarter within the year. We will also continue to update you with our latest expectations for the full year each time we review quarterly earnings with you. I will turn the call over to Doug for some more details regarding the individual regions, after which we will open the call to questions.

Looking at the regions, North America fragrances is expected to increase in the low single digits, mainly due to improved fine fragrance sales. And the fine fragrance growth will be partially offset by functional fragrance products, where we continue to see some impact from destocking, as I mentioned previously. Chemical sales are expected to be flat to up in the low single digits. North America flavors will increase in the low single digits compared to 2003. Europe fragrances will increase in the low single digits in local currency terms, resulting in a low double digit increase in reported dollars. Europe chemicals will decline in the low single digits, increasing in the mid to high single digits in reported dollars. In Europe, functional fragrances are expected to increase in the low single digits in local currency.

Europe flavors are expected to decline in the low single digits in local currency, although this will result in an increase in mid to high single-digits in reported dollars. We continue to see weakness in the fruit business in Europe, which will impact our overall flavor results in Europe. Latin America and fragrances will increase in the low (technical difficulty), reflecting improved economic conditions throughout much of the region, although we expect some continued weakness in Mexico. Let America flavors are expected to increase in the high single -digits, continuing the strong performance achieved in 2003. Asia-Pacific fragrances are expected to increase in the low single digits in local currency, resulting in a low single digit increase in reported dollars, while Asia flavors are expected to increase in the mid single digits in local currency, resulting in a mid single-digit dollar increase. India fragrances and flavors are expected to increase in the high single digits in both local currency and dollars. As Dick mentioned, we expect earnings to per share to be in the range of $2.24 to $2.31 for the full year. We will now open the conference call to questions.

(OPERATOR INSTRUCTIONS). Jeffrey Zekauskas, J.P. Morgan. Your line is open, please go ahead.

This is Soka Cook sitting in for Jeff. Good morning. Can you explain a little bit the swing in functional fragrances in North America? This quarter, they were up 9 percent. But I think for 2004, they were supposed to be under pressure. What are the swing factors there?

A lot of it is just continued sporadic order patterns that are very difficult to explain. We still are not sure whether or not we are moving into an area where we are going to have more orders coming in, perhaps with smaller volumes or whether or not it's going to return to larger orders that appear less frequently. We expect destocking will continue in 2004. But it's the uncertainty with respect to the order patterns, which gives rise to the variability.

On the restructuring side, how much of your restructuring passed down to the bottom line this year or this quarter? And how much do you expect to see in 2004?

In 2004, we will anniversary some of the savings. A lot of the actions took place toward the end of the first quarter, so we will continue to benefit from those savings in the first quarter of '04. The actions continued throughout the year. As I mentioned, the selling admin expenses declined about 70 basis points year-on-year. And the big reason for that was the restructuring actions. And we will continue to benefit mainly on the SG&A line, as well as the manufacturing line, because that's where the bulk of the actions were undertaken.

(OPERATOR INSTRUCTIONS). Alex Pasini, Lombard.

I will have two questions if I may. The first one starts with a congratulations on the pick-up in your flavors business in the NAFTA region. Very gratifyingly, I guess, you're regaining market share from European competitors in that area, and that's very good. I was wondering how you explain, however, in that sense, the relative weakness in Europe in that context. Have you seen Quest (ph) fighting back quite strongly? Or is it just the market as a whole that is weak in terms of less launches of new products?

My guess is it's really the weakness of the region, in general. If you take a look at the basic economies in the lead countries, Germany, France, Spain, Italy, none of them are what we would call moving forward at the pace at which -- even the modest pace that we are seeing -- in terms of the North American economies. And then accordingly, as we mentioned before in our outlook for Europe for next year -- remains very, very cautious because we do not see, at this point, the fundamental movement in terms of growth within those lead countries.

If I understand correctly, it's rather the big food companies are not launching many new products rather than a Quest or Simrise (ph) fighting aggressively for market share?

Yes, I think that's where I would put it. Quest and Simrise are worthy competitors. But they are fighting just as hard in North America as they are in Europe. I think it's more the nature of the economy per second -- differences between Europe and the United States at this point.

My second question concerns fine fragrances. You have had some nice and well-publicized wins in this area in 2003. But according to a few articles, I have seen less wins than both (indiscernible). Your results are relatively weaker in this area than elsewhere. I was wondering what you expected -- what was the reason for this. Are you seeing a shifting strength here and the Geneva players being more aggressive? And how do you see the outlook for fine fragrances for 2004? I think this year, there has been many, many launches. I was wondering if that would continue into 2004.

Overall, I'm pleased with the win rate that we've had in fine fragrances and continue to be please. You can't win them all nor do we ever expect to win them all. We always want to win more than we lose and I think we are well on track for doing that. The fundamentals of the fine fragrance industry are well-known to virtually everybody who follows it. It has been a declining category, and it continues to decline. And there are some fundamentals that need to be addressed. Having said that, the growth that we have been attaining has been the difference in just our performance within the category. It obviously would be nice if the category were growing. And but from our perspective, the fact that we are now on the core list for every major fragrance company in the world is a significant change from a situation a few years ago. In that context, I continue to be really positive -- in the context of -- our win rate versus our competition.

(OPERATOR INSTRUCTIONS). Jeff Zekauskas.

Yes, just a quick follow-up -- can you talk a little bit more about your product launches you expect to see in 2004 and 2005? It seems like a lot of them this year happened in the flavor area, just as I look at your results year-over-year for the full year. Can you talk about what you expect to see over the next 12 or 24 months?

I think we are -- over the next 12 or 24 months -- we expect I see considerable activity in both the flavor side of our business and the fragrance side, particularly as we begin to see some new technologies emerging. To get into the specifics, would be something which I really do not wish to do because it would be preemptory with respect to our customers and it's really their call when they want to start making noise publicly about the things that they are going to be doing. But you are correct in pointing out that our growth, particularly in North America and flavors, was very strong in the fourth quarter. And our hope and expectation is that we will continue to see growth, not only on the flavor side, but on the functional fragrance side as well in North America this year.

Tim Rankin, Franklin Mutual Advisers.

I was wondering if you can comment whether you're seeing any change positively or negatively from the low carb craze, and whether the strength that we saw in North American flavors was driven by new product introductions in that category?

I think every time there is a fad, it gives rise to new products in the marketplace and we benefit from those fads. And we are, for sure, working with customers to provide flavor technology in this area. I will leave it to all of the pundits that get on the television every morning to really opine as to whether or not this is one last thing or whether or not it is just this year's fad. But it for sure does give rise to new product introductions.

Mason Stark (ph), Raymeuth (ph) Capital.

I am just wondering if you could comment a little bit -- you mentioned that you did not buy back any stock in the quarter, and you've gotten your debt down to a pretty manageable level in terms of your capital. So could you give a quick comment as to what you plan to use your free cash flow for next year, and maybe as to why you didn't buy back stock in the quarter?

We were focusing a little bit more in the third and fourth quarters on debt reduction. I think our view is that probably in the second half of '04, you will see some upward movement, albeit slight in interest rates. And I think the opportune time to pay down debt is before the interest rates start moving. I think if you look over the last three years, we have been pretty successful in managing that. And we felt comfortable doing that. As we said throughout the last several years, we will continue to balance reduction of debt and share repurchase activity as well as returning money to our shareholders through dividend. We just try to strike a balance. Just in the fourth quarter, particularly, I felt it was more opportune to pay down debt than it was to repurchase shares.

Okay. I guess if you could maybe give some guidance as to where you think the share count might be going over the next four quarters?

I think you will probably see it stay pretty much where it is. I think the goal now would be to re-acquire shares in a manner that pretty much complements shares being issued under option exercise and other stock award programs. So 94 to $95 million -- shares, excuse me -- is probably a good measure.

Alex Pasini.

Two more questions, please -- one is a follow-up on this one regarding the use of cash. I was wondering how highly ranked in your list of priorities is acquisitions and buying market share. And in what areas you would be looking to reinforce your possessions, if any? And then in fragrance ingredients or in chemicals, which is rather weak as well, is this voluntary -- is it a strategic move to downsize this unit? Or do you see this as an important one going forward? And do you intend to -- (indiscernible) rationalization continues into 2004?

Let me talk first about acquisitions. Anything that would become available within our industry, I would regard it as an obligation to look at it hard and see whether or not it was something that we thought was a good fit and would be a good thing to do. Obviously, the price at which the property would be coming available also plays into the equation. But, acquisitions, things that you really can't plan for other than saying what I have just said, they are opportunistic, and they become available, then we will certainly look at them. As far as our chemicals business is concerned, I think that our chemicals business is a strategic part of our business. It indeed is a building block for our fragrance business. We will still, you know, be selling our aroma chemicals outside, as well as using them internally. And it's a question of the balance. And the sales to third parties really is a function of the best utilization of our asset base. To the extent that we have excess capacity, we will utilize it in order to be able to sell to third parties. With respect to proprietary technology, it would be our intention to retain proprietary technology for our own use in the aroma chemical area. Is that helpful?

That is, yes. Thank you.

Anything further, sir? Gentlemen, there are no further questions at this time. I will turn the conference over to you for any additional or closing remarks.

Thank you, very much. We will talk to you at the end of the first quarter.

That concludes today's conference. We thank you all for participation. You may now disconnect your phone.