International Flavors & Fragrances Inc (IFF) 2004 Q2 法說會逐字稿

Good day and welcome to the International Flavors and Fragrances Second Quarter 2004 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. Before we begin, I need to read you some cautionary remarks. This call may contain statements that are considered forward-looking within the meaning of the Private Securities 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 that 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 as specified in the company's 10K filed with the SEC and IFF's other filings made with the SEC from time to time. IFF does not update forward looking statements and expressly disclaims any obligation to do so.

Okay, now we will move forward with our review of the second quarter. I am pleased to report that the positive momentum that we had and saw in the last quarter of 2003 in the first quarter this year has continued. Sales results of the second quarter were strong, both in terms of local currency and in reported dollars in both Flavors and Fragrances. Reported dollar sales for the quarter increased 9% in comparison to the prior year. On a local currency basis sales increased 5% for the quarter. Sales growth was strong if all regions although Europe's results were primarily the result of currency translations. While Europe's performance largely reflects the effective currency, our four European flavor and fragrance compounding businesses performed well in the quarter. Flavor compound sales in Europe grew 4% and fragrance compounds grew 7% in the quarter.

We should also note that Europe's sales for the quarter were impacted by continued weak sales in our fruit business. Local currency sales of fruit preparations declined 20% in the second quarter and are down 14% to date. As you know we have announced plans to exit the fruit business and I will review that progress with you in a moment or two.

What is important and what our results demonstrate is that company-wide we are benefitting from new wins and strong demand for our products. North America reported a 8% increase in fragrances and 5% increases in flavors. Latin America reported a 13% sales increase in fragrances and 5% increase in flavors. Asia Pacific reported local currency growth of 7% in fragrances and 13% in flavors. And in India, we reported a 17% increase in flavors and a 8% increase in fragrances. All impressive increases, I believe is fair to say.

Our earnings per share for the quarter excluding all restructuring activities were 65 cents per share relative to a comparable result in 2003 of 59 cents per share. This is an increase of just over 10%. We continue to invest and research and development.

Our spending and R&D was 8.5% of sales for the quarter. In lines with our expectations for 2004. I know I have stated it in the past but it warrants frequent mention. Research and development is the cornerstone of our of profitable growth.

Before I turn the call over to Doug, let me review some actions we took during the quarter to further enhance the performance of our business. As many of you know, on our May 27 press release we signed a letter of intent to sell out fruit preparations business in Switzerland and Germany to Fruit-a-Ron Industries. We anticipate this transaction to close in the third quarter. Secondly and as we detailed in the same press release. We have have entered into consultation with our French employee works council on both the sale of the fruit business and closure of the Dijon manufacturing facility. We expect this process to continue for the next few months. Third, the company announced the closure of its manufacturing operations in Canada with the transfer of all related production to our North American plant.

As a result of these actions we have reported a $7.7 million restructuring charge in the quarter related to asset write downs and employee separation costs. These restructuring actions come after extensive review and analysis of the portfolio of products and are wholly consistent with our long term strategy. They will streamline our organization and help us maintain our competitive position in the market place. As we noted in today's press release IFF currently expects earnings per share for 2004 to be in the range of $2.09 to $2.16 compared to $1.83 in 2003. Excluding all restructuring charges, IFF continues to expect 2004 results to be between $2.24 and $2.31 compared to $2.12 in 2003. These expected earnings are in line with the guidance we provided you in April of this year and at the time we issued our first quarter earnings.

I also want to briefly mention Sarbanes-Oxley specifically Section 404 which deals with process and control documentation and management assessment thereof. As I have told you before, Sarbanes-Oxley has been has not necessitated any material changes in the way IFF conducts or accounts for its business. However, it has created more work as we took steps to insure we would be in good shape with respect to the provisions of Section 404. I am pleased to report that we have made substantial progress over the last several quarters in meeting the 404 requirement and I am confident that we will meet all applicable of the act for 2004 and in the years ahead.

Now I will turn the call over to Doug to discuss our financial results in more detail ,after which we will open the floor to questions.

Thank you, Dick. Good morning everybody. Dick mentioned local currency sales tore for the second quarter 2004 increased 5% from the prior year resulting in 9% increase in dollars. The favorable currency translation was principally attributable to the strengthening of the the pound sterling, Japanese yen and the Australian dollar versus American dollar. In comparison to the 2003 quarter these currencies strengthened versus the U.S. dollar by about 8%, 13 percent, 9%, and 16% respectively. As Dick mentioned excluding the effects of restructuring charges in both years, per share results were 65-cent in 2004 compared to 59 cents in 2003. Including the restructuring charges 2004 earnings per share were 59 cents compared to 54 cents for the prior year quarter.

Turning to the regions, North America fragrances increased by 8% for the quarter. North America fragrance sales were strong in chemicals and functional fragrances both of benefited from easy comparison with the 20,032nd quarter when they declined between eight and 9%. Functional fragrance increased by 6% in the quarter. We saw consistent customer demand throughout the quarter and the performance benefited from some new wins as well. Fine perfumery decreased 1% in the second quarter slowing, from the 10% increase achieved in the first quarter this year. Aroma chemicals increased by 29% for the quarter.

North America flavor sales increased 5%. This performance was in line with expectations and reflected continued strength in our core flavor business. The pace of growth slowed somewhat in the quarter from the preceding two quarters as customer restocking activities slowed and resumed more normalized order patterns. We continue to see a high level of new brief activity it in North America flavors and expect that situation to continue.

Turning to Europe. Overall we saw modest improvement in the major economies of Western Europe. Notably Italy and Great Britain. However, such improvement was essentially offset by weaker sales elsewhere in the region. Local currency fragrance sales increased 1% for the quarter. On translation this resulted in a reported dollar increase of 8%. The performance benefited from strong growth and fine fragrance sales which increased 11% in local currency and results in 20% in dollars. And this growth was mainly driven by new wins.

Notable among some of the recent fine fragrance wins are the following. A new women's fragrance for Armani by L'Oreal. A new fragrance for Christian Dior, for LBMH called Pure Poison. A men's flagrance for Elan, Le Enfan -- I apologize for the pronunciation. The new women's fragrance for Prada, a new women's fragrance for La Cost and new women's fragrance for Liz Claiborne.

Also fragrances increased 4% in local currency and 11% in dollars driven by a new combination of wins and improved demand. Aroma chemical sales in local currency declined 14% and declined 7% in reported dollars. For the pass several quarter we have seen gyrating order pattern regarding chemicals in Europe.

Europe flavors sales declined 3% in the local currency for the quarter resulting in a 4% increased in reported dollar sales. This performance was as expected. The performance also reflected 4% growth in flavor compounds and the compound performance resulted from several new wins. However as we noted the fruit business declined by 20% in the quarter. More than offsetting the flavor compound sales growth.

Latin American fragrances reported an increase of 13% for the quarter. The performance benefited from an easy comparative as sales declined 13 percent in the 2003. Argentina reported strong growth in the quarter, increasing 36%, driven by a combination of new wins and continued improvement in the Argentine economic conditions. Brazil achieved a 9% increase driven mainly by new wins in both functional and fine fragrances and also benefited from an easy comparison with the second quarter of 2003. Mexico fragrance sales agree 9% and Columbia grew 33%. And our smaller markets in Venezuela and Central America reported growth of 62% and 15%.

Latin America flavor sales increased 5% in the quarter. Mexico flavor sales increased 28%, rebounding from a poor 2003 second quarter. Venezuela increased 19%, the Dominican Republic 25% and Central America 40%. Argentina sales increased 17%, also benefitting from a combination of new wins and the improved economy there.

Asia Pacific fragrances increased 7% in local currency and 11% in dollars. Growth was led by China Hong Kong which grew 29% and Vietnam which grew 49%. Indonesia grew 7% while the Philippines grew 12%. Much of this growth resulted from new wins. Japan sales declined 5% in local currency although this resulted in 3% increase in dollar sales and local currency sales in Australia also declined, in this case by 9%.

Asia Pacific flavors local currency sales increased 13% resulting in a 19% increase in dollars. Local currency growth was driven by new wins and strengthening economies in a number of countries. The region also benefited from an easy comparative with the 2003 quarter when sales decreased 5% in local currency. China Hong Kong flavor sales increased 28% while Philippines Indonesia and Vietnam grew 32%, 19% and 44% respectively. South Korea declined 11% and Japan sales increased 3% in local currency resulting in a 13% dollar increase.

India fragrances increased 8% in local currency and 11% in dollars. The performance was in line with expectations and reflected the benefit of several new wins and continued strong growth in the Indian economy. India flavors increased a local currency increase of 17% resulting in a dollar increase of 18% and again on the performance for the region it was as expected, as with India fragrances reflected a new wins in the market place and very strong Indian economy.

Turning to operating results, the gross margin came in at 43.6%. Sixty-three basis point better than the prior year quarter. The increase was primarily drive by improved sales performance and a portion of the increase was also attributable to product mix. R&D spending increased 14% in comparison to the prior year's quarter. A portion of this is due to currency but overall R&D spending was 8.5% of sales compared to 8.1% in the prior year quarter. As Dick mentioned the increase is in line with the plans and expectations as we previously discussed and will continue with the same proximate rate at the balance of this year.

Selling, general and administrative expenses increased as a percentage of sales year-over-year and there were two primary elements of the change. First accruals with respect to our incentive compensation plans. Looking back in '03, by the end of the second quarter 2003, it's become apparent we were not going to achieve preestablished targets for our incentive plans and bonus accruals with respect to those plans were adjusted downwards. As was disclosed in our 2004 proxy for the full year 2003 we paid out approximately 25% of our targeted incentive awards. In the current year, operating results are markedly improved and more in line with the pre-established goals of 2004 and accordingly incentive compensation accruals are higher than in 2003 in both dollar terms and as percentage of sales.

Secondly, operating results for the second quarter include approximately $1.1 million of expense relating to accounting for the restricted stock units issued in May of this year. We discussed this -- the issuance of restricted stock with you at the time of the first quarter conference call. In summary, our intention is to replace the use of stock options in many cases with restricted stock units, previously we did not recognize compensation expense associated with stock options. In May 2004 the company issued time and performance based restricted stock units as an element of the executive compensation plans. As a reminder, stock units for the senior management team are performance and time based. And units for the remainder of the eligible employees are time based. As a result, the company expects to record somewhere between $4.5 and $6 million in additional pre-tax compensation expense during 2004 for which there is no prior year comparable. The actual expense to be recorded in any period will depend on the value of the company stock and such stocks were included in the updated earnings guidance we provided in April this year and also contemplated in the guidance we provided today.

SG&A expense also included about $1 million incurred in connection with the implement of SAP in various facilities, at quarter end we went live in Jacksonville, Florida and in Haiber Hill in the U.K. and our flavors plant will go live in the Australia in the third quarter. Approximately 75% of the company now operates on SAP and that will be well over 80% by the end of the year. Interest expense decreased by 23% in comparison to the prior quarter, and our average interest rate was 2.9% versus 3.2% in the prior quarter. Interest declined due to lower debt levels. Our debt for borrowed money is $150 million less than at June 30, 2003. More specifically it is down from 964 million to 808 million. This debt reduction was all achieved through operating cash flow. We will continue to reduce debt as the year progress progresses and currently we would expect debt at the year-end to approximate $725 million.

Other income and expense improved in the quarter this year in comparison to prior year mainly because the 2003 results included about 1.5 million in losses for the repurchase of long-term debt that we executed in the second quarter last year. During the third quarter we purchased 164,000 treasury shares under the buyback plan year-to-date acquired 768,000 shares. At June 30, 2004 we had a remaining authorization of $15 million under the existing program. However, at a meeting earlier this week the board authorized an additional $100 million repurchase program which is expected to be completed over the next 18 to 24 months. We remain committed to properly balancing the repurchase of shares with the reduction of the our overall debt levels.

The effective tax rate for the quarter excluding restructuring charges was 31.5% in line with guidance we provided earlier. I expect it will continue for the full year.

Couple of other items, our day sales in inventory declined from 152 at December 31st to 140 days at the current year end. Receivable days increased to 66 days from 65 at December 31st. Capital investments for the quarter totaled 14 million and are just under 27 million year-to-date and we expect capital spending to accelerate in the second half of the year but do remain cautious in our capital spending. At this time we expect the capital spending in 2004 to approximate $80 to $85 million, down slightly from earlier expectations.

Looking at the full year '04, our current expectations are that we expect 2004 revenues in local currency to grow in the low to mid single digits. This local currency growth based on current exchange rates is expected to result in high single digit increase in reported dollars. North America fragrances is expected to increase in the mid single digits mainly due to improved fine fragrance sales which represent from earlier full year expectations. North America flavors will increase in the high single digits compared to 2003, consistent with earlier expectations.

Europe fragrances will increase in the low digits in local currency terms resulting in a high single to low double-digit increase in dollars in line with previous expectations. Europe flavors are expected to decline in the low single digits in local currency terms although this will result in an increase in mid single digits in reported dollars. This performance considers sales of the European fruit preparation businesses for the full year 2004. We will you update the guidance at the time we issue the third quarter results and provide insights into both with and without the fruit preparation sales.

Latin America sales will increase reflecting improved economic conditions throughout much of the region and improving somewhat from earlier expectations. We expect the Latin America flavor to increase in the mid single digits.

Asia fragrances are expected to increase in low single digits resulting in a low to mid single increase in dollars and Asia flavors are expected to increase in mid single digits in local currency, resulting in a high single increase in dollars. India fragrances and flavors are expected to increase in the low double digits in both currency and dollars.

And as Dick mentioned, we expect earnings per share for 2004 to be in the range of $2.09 compared to $1.83. Excluding restructuring charges, I expect 2004 per share results to be in the range of $2.24 to $2.31. In evaluating this growth again, please remember that we will have 4.5 to $6 million of operating expense in 2004 related to the amortization of the stock units for which there is no prior year comparable.

With that we will now open the conference call to questions.

Thank you. The question-and-answer session will be conducted electronically today. If you would like to ask a question, you may do so by pressing the star key followed by digit one on your touch tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. That is star 1 if you do have a question or comment. We will pause for just just a moment. We will talk our first call from Jeff Zekauskas with J.P. Morgan.

Hi, this is Denita Comore for Jeff Zekauskas.

Good morning, Denita.

How are you.

Good, thank you.

I wanted to ask a few questions about -- starting with the product mix and the contribution to growth margin. I notice that the fragrance sales are very strong in North America. Do you think that is what contributed to the growth margin improvement?

It was certainly one of the contributing factors but we did have -- it's really a blend of a product mix. We had a strong performance in fine fragrances in Europe and really with the absent. The exception of being Europe, we really had strong performance everywhere that is what drives the gross profit.

Would you say the fragrance margins are higher than the flavors margin in general?

Generally on the gross margin basis in the fragrance margins are higher although when you get down to operating profit, they are fairly comparable.

Okay. Wanted to ask you about R&D guidance. That you gave earlier. if you wouldn't mind you repeating that.

In terms of spend you mean?

Yes.

Well, we are on target. I mean we have made it a point in virtually every call to underscore the importance of research and development going forward and we are currently spending at a rate of eight and a half% of sales which is in line with what our expectations are for the year.

Right. Would you say the expectation is around 170 million or so for the year?

You know a lot of the R&D is conducted outside of the United States. So currency translation does play a part in it. But the range of 165 to 170 would not be far off. Depending on your model, I would suggest you use 8.5% of sales as the guiding factor.

Right, and I just want to get a sense of whether you think you know, the dollar numbers would go up in the latter half of the year.

Depends on the currency.

Okay.

Through six months we are at about 8.4% of sales so we are not far off from the target.

And with interest expense I think you have given us targets for that. Do you think the reate would remain around 3% or so.

Well, I wish I knew for certain but I think that it will probably stay close to the 3% give or take a little bit. We locked in a lot of rates and really the floating rate element is the commercial paper element and still those rates are fairly attractive. So I think using a rough rate of 3% and taking into account your own views of the direction of interest rates is not a bad starting point.

Right. And also with restructuring charge would you expect to see cost savings from the future. If you can give us an idea of what the timing of that might be. And roughly the dollar amount.

Well, the closure of the Canadian operations will generate a modest amount of savings. That's really we are focusing more on optimizing the utilization of assets and so we're transferring that production back to the States. I think the remaining elements of the charge in the second quarter were related to impairment of fruit related assets and as I said we will give you guidance on what the P&L will look like exclusive of fruit when the transaction closes which is expected to be sometime in the third quarter.

And in Europe, could you give us an idea why it declined. Are you seeing weaker volume growth in Europe.

Well, I think in large measure if you take a look. If you strip out the fruit performance, our performance in Europe is not, it is totally in line with the growth expectations that we are looking for. Fruit itself, as we mentioned earlier, had quite a depressant with respect to the overall component.

Remember, we said flavor compounds were up 4% but the fruit business was down 20% which resulted in Europe flavors being down overall by the 3% and local currency growth in fragrances was 1% with a very strong percent in fine fragrance and fairly respectable performance in functional fragrance.

Could you maybe give the fragrance number again?

I think it was 11% local currency growth which resulted in about 20% dollar growth and functional fragrance in Europe was up about 4%. I am flipping through my notes here. 11% fine fragrance for 20% in increase and functional fragrance increased 4% with a 11% increase and quite frankly, the decline in chemical sales is partly due to the fact we are winning more business so we are utilizing those chemicals internally rather than selling them to the competition. That is good for us.

That is all my questions.

Thanks very much.

Once again star 1 if you do have a question or comment. Our next question will come from Peter Thompson with Cohoe Partners.

I was wondering if you could elaborate a little bit on where the new business activity is for you guys, both geographically and flavors and fragrances.

It is across the board. We are finding we are having new wins in both, well all three major segments of our business. Fine fragrance, functional fragrance and the flavor side of the business and in fact we are finding it in virtually every region in which we are operating. The "weakest region" would be the performance in Europe and I don't regard it as being unsatisfactory. Northern America is quite strong. Latin America is bouncing back, doing very well. Asia Pacific is okay and India is well. I think it is really quite across the board.

Okay. That sounds very encouraging then I guess my next logical question would be then it seems to me your guidance for the second half of the year is potentially overly conservative if you are planning for constant currency revenue growth kind of low to mid single digits whereas first half of this year you were a solid mid single currency grower.

There are two elements that contribute to that. First, remember, we had a very strong fourth quarter so the comparison in the fourth quarter will be difficult. And secondly, we have enjoyed the benefit of a lot of restocking. In our customer's inventory levels that really drove -- We said very early on, the 18% increase of North America flavors as an example, would not continue because element of that were being driven by restocking. What we are really trying to do is take the best measure of this point in time where the pendulum in terms of that restocking and I think a lot of it depends on how the economy is perceived in the second half of the year.

That is a something I would underscore, Peter, for you. Just how the economy in the world is going to be respond to the back half of the year is truly anybody's guess and in that regard, I, we hold with the guidance that we have provided and believe it to be appropriately conservative.

Well congratulations. Great quarter.

Thank you.

Our next question will go to Chip Ruley with Kramer Rosenthal.

Morning Chip.

Good morning. Quarter looks good, guys. Doug, can you elaborate a little more on the customer restocking. If you can give us your feeling of what is going on. Is it just in the U.S. overall and how much of it do you think is, how much of the increase in the flavor side could be restocking versus new win and new product activity and then secondly, can you either do it now or have you had any plans to formalize the data review the R&D pipeline and show us where the pay off in investment is coming because I know you alluded to some things.

It is our intention. Let me take the back half of the question for you on research and development. It is our intention in the fourth quarter of this year to invite you to our research and development facility in New Jersey. And to give you a rather elaborate and in depth presentation on all of the good things that are coming through the pipeline as a result of our having refocused a couple of years ago.

On the subject of the restocking, you will recall Chip, that even in the first quarter we were very cautious about it. I think there is a substantial portion of the growth that is attributable to new wins and I think long term our future growth depends on how successful the new wins are in the marketplace. I think we will only be able to comment on the true extent of the restocking events in the fullness of time. But I am sure you read some of the statistics in the Wall Street Journal and so forth about industries building up inventory levels we have been a beneficiary of that as well. Remember where we are in the supply chain.

I guess I was trying to feel, are your customers telling you they are back to the normal inventory levels, is it overstocked or is there any way you can even guess at that.

The truth is that our customers don't tell us where they are on an inventory level. Moreover, we do know year on year pushing to really hold as little inventory in the system as they possibly can and therefore, I mean, if we didn't have the strong new wins that we have had, it would be easy to say it is all attributable to restocking, but fortunately we have the new wins coming through. I think what we want to continue to be is properly conservative in terms of indicating that there is a mix here and some of it is restocking and some of it is just the benefit of sales from new wins. And I suspect that that will continue but I can't tell you what the levels are going to be in terms of inventory that our customers want to keep, other than saying, that it has been my experience over the last several years that every customer with whom we deal seeks to hold less inventory in the future than they currently hold now.

Fair enough, thanks a lot.

Okay. Thank you.

Our next question comes from John Ray with R&B Getts Capital.

Good morning Johnny.

Good morning. I just have a couple here. First is on capacity utilization, I believe the last time we spoke indicated that flavors and fragrances were 65 percent and aroma chemicals were 80, 85. Can you give us an update where we stand with those.

Those are pretty close. The aroma chemical plants operate between 80 and 90% of available capacity. And I think the flavor and fragrance compounding plants. What you have cited is pretty accurate. At any one point in time somewhere between 60 to 65% of capacity and as we progress such as with the closure of the Canadian facility that will enable us to drive up the utilization of the remaining plants even further.

All right. Second is on the North American flavors business, obviously the 18% in the first quarter was not sustainable and you guys indicated that but given what a lot of the branded food companies in North America in particular has indicated for a strong new product introductions in the second half. Just wondering in terms of volume would you expect that to accelerate and if you can talk a little bit about pricing as well in that area.

I think, the guidance we gave for North America flavors is we expect the full year to be in the high single digits which I think is a pretty solid performance and you know, only the fullness of time will prove whether the forecast is accurate or not or conservative or not.

With respect to the new product component and then Doug, you can come back on pricing. With respect to the new product component, there is a lot going on and I am delighted that we are getting our fair share and sometimes better than our fair share of those new product activities. And I will be disappointed if we don't continue to get our fair share at this point given the performance that we have had. You want to talk a moment on pricing.

I do think it is just a remind everybody we try to be very open about a lot of the growth particularly in the fourth quarter of last year and first quarter this year being attributable to restocking rather than new wins and we cautioned all along that we knew that 18 and 19% growth was not sustainable long term. In the pricing environment remember every time we create a new product. It is a opportunity for favorable pricing or we get the opportunity to price at our target margins. We realize we will continue to have pricing pressure from our customers and our customers will continue to have that from their customers, the distributors and the retailers and the thing we are doing to mitigate that pricing pressure is the investment in R&D. How we are trying to develop new technologies and to create new flavors and fragrances that separate our customer's products from the competition and enable them get an edge in the marketplace. If we do that we are in a fairly good pricing position relative to our competition.

The secret in all of it is to try and keep yourself out of the commodity end of the business. The best illustration of a business that fits that characterization is the fruit business that we are in the process of selling in Europe.

Okay. Great. And lastly, it is just on margin. I believe your targets for gross margins and operating margins were 45 percent and 19 and 20 respectively. It looks like you guys are well on the way there. Would you reconsider increasing those targets say over the next couple of quarters.

You know, we actually said the 45 and the high teens, we probably would take another year or two to get there because elements of the new developments in R&D are going to drive the pricing. We would like to get the journey done sooner. I think we are challenge ourselves once we get to 45 and further but you have to let us get to 45 first.

All right. Great. Nice quarter.

Thank you.

Once again, that is star 1 if you have a question or comment. We will pause for just a moment. We take a question from John Fitz with European Investors.

Thanks. Wasn't it true, if memory serves me right, a good portion of last year's earnings were depressed somewhat by inventory de-stocking by your customers, even in the current quarter last year there was actual de-stocking. So, there is a difference between it is a question of restocking or no longer destocking. If the customers went into a phase of no longer destocking. That would have a year to year positive impact but wouldn't be something that would necessarily come to an end.

You raise a very good point. But again, we don't have the level of insight into all our customers' inventory levels. But we have actually talked about destocking effect for the last several years and I think at the end of day it became apparent that our customers had taken the inventories down to such a point that with the rebounding economy they were at a risk of losing potential sales. In their perspective there is nothing worse than to lose a sale because they don't have the inventory.

My question is, how do you know they are restocking rather than ending their destocking process.

Don't know. It is really the long term linkage to what the end products do in the market place. Where we stay on the supply chain. It takes a little time to see the statistics. We do know food consumption in the United States was not growing at 18% in the first quarter, as an example in the first quarter.

Your estimate takes into consideration the earning of the second half of the year might be down quite a bit year to year if I am not mistaken. I have a hard time reconciling your comments with the notion that earnings in the third and fourth quarters could be down year to year.

What we have to do is one remember the fourth quarter we have a difficult comparison and two we are remaining cautious, as Dick said, because some statics point that the rebounds continue around the world economically, others suggest that the rebounds are stalling a little bit. And it just remains to be seen and we will only really know with the fullness of time.

I understand but if it is a possible, that earnings could be down in the second half of this year, then it is certainly possible they could be down next year as well. I assume your forecast for next year if you make one would be that earnings could be down next year or up next year.

We will worry about that when the time comes for us to give guidance. You know we don't give guidance beyond what we have done and as far as '05 guidance is concerned, we're going to wait to see how we finish '04.

And also remember that we are including expenses in P&L this year for which there is no prior year comparable.

Thank you very much. Thank you all for tuning in. And we will talk to you at the end of the next quarter.

That's it for the teleconference. Thank you and have a great day.