International Flavors & Fragrances Inc (IFF) 2004 Q3 法說會逐字稿

Good day and welcome to the International Flavors and Fragrances third quarter 2004 earnings release conference. Today’s call is being recorded. The speaker’s for today’s call will be Mr. Richard Goldstein, Chairman and Chief Executive Officer and Mr. Douglas Wetmore, Chief Financial Officer. Gentlemen please go ahead.

Thank you, Good morning everyone. Before we begin, I need to make cautionary remarks. This call may contain statements that are considered forward looking within the meaning of the 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 that are beyond the control of management. The company cautions with 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 important practices that could cause actual results to differ materially from any forward looking statements and projections are specified in the companies 10K filed with the SEC and IFF 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. OK. Now let’s look forward, move forward, with our review of the quarter.

I am pleased to report that the positive momentum begun in the last quarter of 2003 in the first six months of this year has continued. Sales results for the third quarter were solid in both local currency and in reported dollars in both flavors and fragrances. Reported dollar sales for the quarter increased 5% in comparison to 2003. On a local currency basis sales increased 2% for the quarter. The purposes of this comparison, the 2003 third quarter results included a full quarter of sales associated with our European fruit business. As many of you know, in a main press release we announced that we have signed a letter of intent to sell our fruit business in Switzerland, in Germany to Frutarom Industries. The sale of these operations to Frutarom closed on August 17th . The Swiss and German business had annual sales approximating $65 million in 2003, on a life for life basis. Excluding sales for Germany and Switzerland for the period August 17th through quarter end 2003, third quarter 2004 sales increased 3% local currency and 7% reported dollars. The reported sales growth was solid in all regions although Europe benefited from currency translation.

What is important to note with what our results demonstrate is that company wide we are winning new business and experiencing sustained demand for our creations. North America reported a 14% increase in fragrances and 16% increase in flavors. Year to date North American sales have grown 12%. Latin America reported a sales increase for the quarter, 7% sales increase for the quarter and has increased 9% to date. Asia Pacific reported local currency growth of 5% resulting in an increase of 8% in reported dollars. Year to date, Asia sales have increased 7% in local currency and 13% dollars. In the report of the 2% increase in local currency which translated to 4% in dollars. Year to date India, sales have increased 15% in local currency and 17% in dollars. All impressive increases.

Our earnings per share for the quarter excluding the cost for restructuring activities were 58 cents per share relative to the comparable 2003 results of 57 cents per share. We continue to invest in R&D Our spending on R&D was 8.5% of sales for the quarter in line with our expectations for the full year 2004. R&D is and will remain the corner stone of our future profitable growth. But before I turn the call over to Doug, let me review some more actions taken during the quarter to further enhance the performance of our business.

As I mentioned earlier, we completed the sale of our German and Swiss group businesses with this transaction closing on August 17th. Proceeds of the sale approximated $36million. Secondly we engaged in consultations with our French employee works council on both the sale of the group business and the potential closure of Dijon Manufacturing Facility. We have now completed those consultations. We can now proceed with the intended sale of certain assets of the group fruit preparation business to Frutarom as well as the closure of our Dijon facility. We expect the sale of the French assets to Frutarom to close in the fourth quarter. We will shortly begin the plans for production from our Dijon facility as we take the first steps toward closure. We expect this process to be completed sometime in the first quarter of 2005. As a result of these developments we recognize pretax restructuring charges of $20million in the third quarter, primarily representing the expected cost of the Dijon closure and related employee separation costs. The total charge was reduced by the net proceeds realized today and to be realized on the sale of the French fruit asset. The company also completed the transfer of all production from its manufacturing operations in Canada. All Canadian production was absorbed in our other North American plants and the Canadian facility is now essentially closed.

On October 1st, we announced that Jim Dunstan was named to the newly created role of Chief Operating Officer. In this capacity Jim has global responsibility for all aspects of IFF sales, business development, regional management and operations and her reports to me. At this stage in IFF’s reinvention and with or current strategic imperatives, I can think of no better person to step into COO role than Jim. This new structure will allow me to spend more of my time building and maintaining key customer relationships globally on a talk-to-talk basis and pursuing potential new avenues of growth. As we noted in today’s press release, IFF currently expect earnings per share in 2004 to be in the range of $2.04 to $2.07 cents compared to a $1.83 in 2003. Excluding all restructuring charges, IFF expect 2004 results to be in the range of $2.24 cents to $2.27 compared to $2.12 in 2003. Please expect that earnings are in line with the guidance we provided you earlier this year although that we have lowered the high end of that range to two principal reasons. First we remain cautious in our expectations for the fourth quarter given elements of economic uncertainty, most notably in Europe but in other regions as well. Secondly, the disposition of the fruit business has eliminated some operating profit relative to the prior year. While proceeds on the sale have been used to pay down debt, given our low interest rates, lost operating profit is not replaced dollar for dollar by interest savings. In addition we expect that we will see some unfavorable expense absorption as we transfer production from Dijon to our other plant. And as we work on closing the sale of the French Fruit assets, and when they are moved to Frutarom. Now I will turn the call over to Doug to discuss our financial results in more detail.

Thank you Dick. Good morning everyone IFF Inc. National and local currency sales for the third quarter for 2004 increased 2% in the prior year resulting in a 5% increase in dollars. The favorable currency translation was principally attributable to the strengthening of the Euro, Pound sterling, Japanese yen and Australian dollar versus the US dollar. In comparison to the prior year quarter these currencies have strengthened versus the US dollar by about 7%, 12%, 8% and 6% respectively. As Dick mentioned the sales comparison in the third quarter was impacted by the disposition of the European fruit preparations businesses in Switzerland and Germany. The sale of which closed on August 17th. Last Friday October 22nd we filed a form 8K with the securities and exchange commotion providing some (inaudible) information with respect to 2002, 2003 and 2004 excluding operating results of the German and Swiss fruit preparation businesses to facilitate comparison with our core business performance. A copy of the form 8K can be downloaded from our website IFF.com. We will further update this pro form information shortly after we complete the sale of the French food preparation assets to Frutarom which we expect to close in the fourth quarter. With this proforma information in mind excluding fruit sales from the comparable period in 2003 meaning from August 17th through September 30th 2003 both flavor sales and total sale would have increased 3% in local currency and 7% in dollars.

Our strongest sales performance in the quarter was in fine fragrance which achieved a 9% local currency increase and 12% in dollars year to date fine fragrance has increased 8% in local currency and 14% in dollars. Functional fragrance sales increased 2% in local currency and 4% in dollars for the quarter and are up 5% and 9% in local currency and dollars respectively year to date.

Chemical sales increased 1% in local currency and 6% in dollars however year to date chemical sales are flat in local currency although they have increased 7% in dollars. Turning to the regions North America fragrance sales increased 14% for the quarter and the fragrance sales were strong in all categories. Fine fragrances increased 17% over the prior year period fine fragrance did benefit from and easy comparative having declined 24% in the 2003 third quarter. Functional fragrances increased 9% also benefiting from an easy comparison with the 2003 third quarter when such sales declined 3% although the chemical sales increased in the third quarter.

North America flavor sales increased 16% for the quarter, this performance reflected continued strength in our core flavor business enabled by a continued new wins and continued strong demand for our creations. Year to date North America flavor sales have increased 13% over the prior year. Now turning to Europe overall we continued to see some modest improvement in certain of the major economies in Western Europe notable Ireland and Great Britain however for the quarter our strongest performances were in Eastern Europe where Poland and Russian sales increased 31% and 17% respectively. Egypt also grew 19% for the quarter. In Europe local currency fragrance sales decreased 5% for the quarter although our translation which resulted in a dollar increase of 2% the performance benefited from solid growth and fine fragrance sales which increased 4% in local currency resulting in a 11% increase in dollars. The fine fragrance growth as we noted in the second quarter was driven by many new wins. The notable among these wins some of which I have mentioned before are the following. A new Armani fragrance for L’Oreal, A new Christian Dior fragrance for LVMH, a new (inaudible) fragrance for LVMH, the Prada fragrance for pooch, a Lacoste fragrance for Proctor, a new Liz Claiborne fragrance ‘realities’, a another new women’s fragrance for Victor and Raul for L’Oreal, a new Clearance fragrance for Rosario called ‘vivid’ and another LVMH men’s fragrance called ‘solo’.

In Europe functional fragrances decreased 8% in local currency and 2% in dollars sales of functional fragrance reflect the weak European sales of some of our costumers which has also been discussed in their recent earnings releases. Although the chemical sales in local currency declined 8% and 3% in reported dollars. Europe flavor sales on a like to like basis declined 8% in local currency in quarter resulting in a 1% decline in dollars. Sales of flavor compounds were flat in local currency resulting in a 7% dollar increase. On a like to like basis fruit sale declined 38% in local currency in the quarter and as I will note later this fruit weakness this fruit weakness contributed to weaker gross margin for the quarter than had been expected. Our flavor performance in Europe was also impacted by fairly poor summer conditions in Northern Europe, which lead to the sales of many of our food customers being some what weaker with a result in weaker demand for our flavors. That and American fragrances reported a sales increase of 10% for the quarter and are up 11% year to date. The performance benefited somewhat from and easy comparative as sales declined 4% in the third quarter 2003. However the strong growth was primarily the result of new wins in the market place.

Argentina continued to report strong growth with sale increasing 22% in the quarter driven by a combination of new wins and Argentine economic conditions. In so doing Argentina overcame a very difficult comparison with the prior year quarter when fragrance sales increased 33%, year to date Argentine sales have increased 28%.

Mexico fragrance sales increased 17% for the quarter and are up 10% year to date Mexico also benefited somewhat from an easier comparative from with dales their declining 10% in the 2003 third quarter. Brazil achieved a 6% increase driven mainly by new wins in both functional and fine fragrances Brazil sales have increased 7% year to date. In our smaller markets in Venezuela and Central America reported sales growth of 5% and 11% respectively.

Columbia sales weakened somewhat in the quarter declining 13% however year to date Columbia sales have increased 9% sales. Latin America flavor sales decreased 4% in the quarter although for the year flavor sales have grown 3%. Latin America had a very difficult comparison versus a year ago when flavor sales increased 31% for the quarter. In the current quarter we achieved strong growth in Chile, Venezuela with respective increases of 34% and 55%. Mexico and Brazil flavor sales were weak in the quarter collectively declining about 10%. However Mexico sales continue to be higher on a full year basis by 7%.

Turning to Asia fragrances increased 3% in local currency resulting in a 6% increase in dollars year to date fragrance sales have increased 6% in local currency and 10% in dollars. Growth was lead by China and Hong Kong which grew 19% and Vietnam which grew 90%. Much of this growth resulted from new wins. Vietnam fragrances are up 67% year to date following a very strong performance in 2003. Japan fragrance sales declined 4% in local currency although this resulted in a 3% increase in reported dollar sales. And local currency sales in Australia increased 1%. Asia’s pacific flavor sales in local currency increased 6% resulting in a 10% increase in reported dollar. And year to date, Asia flavor sales have increased 9% in local currency, and 15% in dollars. The local currency growth has been driven by new wins and continued strengthening of the economies in a number of countries in the region. China, Hong Kong increased 9 % while Indonesia, Thailand and Taiwan grew 21%, 29% and 15 % respectively. South Korea declined 31% in the quarter, reflecting a continuous slowness that we have seen in that country throughout the year. Korean sales have declined 16% year-to-date. Sale in Australia fell 6% in the quarter, although they are up 5 % year-to- date. India fragrances reported a 2% decline in local currency sales, with flat sales in recorded dollars. This performance was in line with expectations, as India had a very difficult comparison, versus the prior year when sales increased 13%.

Year-to-date India fragrances have increased 10% in local currency and 13% in dollars, and we expect that the growth achieved in the first half of 2004, will resume in the 4th quarter this year. India Flavors reported a local currency increase of 7%, resulting in a reported dollar growth of 7%. Performance was as expected and reflected the benefit of new wins. Year-to-date India Flavor sales and local currencies have increased 20% over the prior year.

Looking at the operating results, gross margins came in at 42.9%, 50 basis points better than the prior year quarter. This increase was enabled by improved sales performance and a portion of the increase was also attributable to product mix, however, the increase was somewhat less that had been expected and hoped for. The weak performance in proof preparation sales in Europe were a major contributor to the lower than expected margins. Mainly due to poor expense absorption, associated with lower sales. Remember as I mentioned earlier fruit preparation sales were down 38% for the period – like for like comparison.

R&D spending increased about 10% in comparison to prior year quarter, a portion of the increase is due to currency, but overall R&D spending was 8.5% of sales, compared to 8.1% in the prior year quarter. This increase in spending is in line with our plans and expectations as we’ve discussed many times in the past, moving forward R&D spending will increase somewhat as a percentage of sales, mainly as a result of the elimination of the fruit preparation business. Relative to other parts of our business fruit preparations require less research and development as a percentage of sales.

Selling, general and administrative expenses increased as a percentage of sales year-over-year and there are two primary elements of this increase. First, accruals with respect to our incentive compensation plans, by the end of the third quarter ’03 it had become apparent that we were not going to achieve pre-established targets for our incentive plans for the full year 2003 and bonus accruals with respect to those plans, were adjusted downwards.

To put this in perspective, as was disclosed in our 2004 proxy, for the full year 2003 we’ve paid out approximately 25% of our targeted incentive awards.

In the current year sales and operating results were much improved and more in line with the pre-establish goals for 2004. Accordingly incentive compensation accruals are higher in 2003 in both dollar terms and as a percentage of sales. Secondly also as we mentioned at the time we released second quarter earnings. Operating results for the third quarter include approximately $1.7 million dollars of expense related to the accounting through restricted stock unit issued in may of this year. Year-to-date we have expensed about $2.9 million for these units for which there was no comparable expense in the prior year. As we mentioned before IFF is replacing the use of stock options with restricted stock units for all eligible U.S. based employees and the majority of eligible overseas employees. Previously the company did not recognize compensation expense associated with stock options, as was permitted under applicable accounting standards. In May this year the company issued time and performance based restricted stock units, the restricted units for senior management are performance and time based and units for the remaining eligible employees are strictly time based.

As a result we expect to record somewhere between $4.5 and $6 million dollars in pre tax compensation expense this year for which we had no comparable year expense. The actual expense to be recorded in any period will depend upon the value of the company’s stock and the number of RSUs granted.

SG&A expense also includes about $1.8 million dollars incurred in connection with the implementation of SAP in various facilities. At quarter end we successfully went live in Australia and in our Flavor Plant in Gaberhill (ph), England. Approximately 80% of the company now operates on SAP.

Operating margins for the quarter was 17.1% of sales compared to 17.6% in prior year comparable period. Primarily for the reason of the expense fluctuations I have just discussed. Interest expense decreased by 8% in comparison to prior year and our average interest rate this quarter was 3.1% versus 2.7% in the prior year. Interest has declined mainly due to lower debt levels. Debt is $222 million dollars less that at September 30th 2003, down from $923 million to $701 million. Debt also declined from June 30th 2004 levels by more than $100 million, partially due to the free run proceeds, but mainly due to our strong operating cash flow.

We will continue to reduce debt as the year progresses, and currently we would expect debt at year end to approximate $650 to $675 million, representing a substantial improvement over our earlier forecast expectations. We are ahead of our plan in terms of debt reduction. Other income expense declined somewhat in the quarter in comparison to the prior year, mainly due to the impact of exchange fluctuations. Year-to-date we have repurchased approximately $1.4 million treasury shares under our buy back program. And as of September 30th 2004 we had a remaining authorization of about $92 million, under the latest share repurchase program.

The effective tax rate for the quarter, excluding restructuring charges was 31.5% in line with guidance we provided in earlier calls and I expect that rate will continue for the full year 2004.

Other items, our day sales and inventory declined from 152 at December 31st 2003 to about 137 at the current quarter end and our receivable days stayed fairly constant at 67 days compared to 65 days at December 31st 2003. Depreciation for the quarter was $19 million and our capital investments for the quarter totaled about $14 million dollars and $41 million year-to-date.

We expect the capital spending to accelerate somewhat in the fourth quarter, however, at this time we expect capital spending for the full year 2004 to approximate $50-$65 million, down from earlier expectations. Much of this capital spending variance is attributable to timing. There have been no major changes to our capital plan in 2004-2006 time period.

Now looking at full year expectations as discussed, we expect 2004 revenue in local currencies to grow in the low to mid single digits in line with our previous guidance. Let me give you some updated guidance in terms of where we expect the sales to be agreed to the geographic regions. North American fragrances are expected to increase in the high single digits, mainly due to the improved fine fragrance sales. This represents the slight improvement from our earlier full year expectations. North America Flavors will increase in the high single digits, compared to 2003, consistent with earlier expectations. Europe fragrances will decrease in low single digits and local currency terms, resulting in a high single digit increase in dollars, in line with previous expectations. And Europe flavors are expected to decline in the low single digits and local currency although this will result in an increase in mid single digits and reported dollars.

This performance takes into consideration the elimination of sales attributable to the German and Swiss fruit preparation businesses. Latin American fragrances will increase in the high single digits, reflecting improved economic conditions throughout much of the region and that’s an improvement, somewhat from earlier expectations. We expect Latin American flavors to increase in the low single digits somewhat less than had been previously expected. Asia fragrances are expected to increase in the low single digits and local currency, resulting in a low to mid single digit increase in dollars and Asia flavors are expected to increase in mid single digits in local currency resulting in a high single digit increase, in reported dollars. The Asian performance is in line with earlier guidance.

India fragrances and flavors are expected to increase in the low double digits in both local currency and dollars, consistent with earlier guidance. As Dick mentioned we expect earnings per share for 2004 to be in the range of $2.04 to $2.07 compared to the $1.83 in 2003. Excluding all restructuring charges, we expect 2004 results to be $2.24 to $2.27 cents per share, compared to $2.12 in 2003. In evaluating this growth please remember as I mentioned before, we will have approximately $4 ½ to $6 million of operating expenses for the restricted stock for which there is no prior year comparable. We will reduce the high end of the range from that which we have previously provided to take into account the elimination of the operating profit attributable to proof as Dick mentioned, as well as the expense absorption matters I previously discussed. The interest savings on paying down debt, with the proceeds of the sale of the Fruit businesses, are not sufficient to off set the operating profit that has eliminated. So with that we will now open the conference call to questions. Cynthia.

Thank you Gentlemen, today’s question and answer session will be conducted electronically, If you would like to ask a question, please press the star key followed by the digit one. If you are using a speaker phone, please make sure your mute function is turned off to make allow your signal to reach our equipment. Once again if you would like to ask a question please press star one. We will pause for just a moment to give everyone an opportunity to signal. We will take our first question from Jeffery DaCosta (ph) J.P. Morgan, please go ahead.

Good Morning this is Silka Foo (ph) sitting in for Jeff. How are you?

Morning Silka

A couple of questions on the pro forma basis your gross margin improved 50 basis points this quarter, not withstanding the 6% drop in the European businesses and on a sequential basis it looks like you improved year-to-date ratio by 20 basis points in the second quarter and another 10 basis points this quarter so can you just talk about what kind of additional cost improvements we should expect in 2005 now that you’ve trimmed some of your lower margin businesses and so in general how will you improve your cost structure going forward?

Silka I think that the one thing that remains to be completed with respect to the cost restructuring that we have undertaken is we still have the French fruit preparations business that we expect to close in the fourth quarter and as I mentioned I expect to see some expense absorption issues associated with in the quarter, which leads to our guidance being what it is. We will continue to focus on all aspects of expense control and I think some of the enablers that we’ve undertaken for the last several years, we are realizing benefits from and will continue to realize benefit in the future. I think the most significant aspect of that is SAP which by next year we will have essentially implemented at all locations. I’d be hesitant at this point in time to provide any guidance with respect to margin improvement for say 2005 simply because we are still in the midst of the budget process and I think it’s a bit premature to provide any guidance there.

However, it looks like the cost associated with the divestiture of the European businesses, you won’t have the same expenses next year going forward, is that correct?

That’s true. That part is true Silka and you can anticipate that we will be looking for improvement operating, operational improvement in every segment of our business as we begin to try and move to a different level in terms of the utilization of our assets.

But remember that the fruit is a very capital intensive business and as a result of that if you don’t get sales activity you immediately face expense absorption issues when the sales decline 38% in the quarter, you can certainly understand that the issue of attempting to absorb fixed expenses over a much reduced sales base. We will have eliminated the capital associated with the fruit business and we will have eliminated the manufacturing expenses and also remember that generally that was a lower gross margin and operating margin business than IFF overall, but while it is profitable as you can see from the 8K filing it is less profitable than IFF’s core business.

On your more profitable business side like the fine fragrance business, it looks like Fine Fragrances improved 17% in North America and grew like 16% overall. How did this performance domestically differ from your performance in Europe and do you think you gained any share in the North American fragrance market?

Yes I definitely think that we are gaining share in North America although I would not in any way suggest that the performance in Europe in fine fragrance has not also bee very good. We continue to do well in this segment and I think that this is a function of the efforts, which we have made and the Fine Fragrance group has particularly done over the last couple of years in satisfying our customers with new products. Remember that the Fine Fragrance business is essentially a global business and that although the launches may start in North America or start in Europe they will move from one to the other and then also move through to Asia and Latin America.

If you accept the basic premise that the overall Fine Fragrance market is very modest if any growth, I think our achieving growth in the mid, single digits reflects gain of market share and its reflected by the number of wins that we have achieved and we have further wins that we are not yet in a position to announce simply because the customer has not yet announced that and as we said many time in the past it wouldn’t be in our best interest to preempt our customer.

And then lastly can you talk about the recent advances particularly in fabric care?

Are you talking about new technology Silka?

Yes.

Yes well it’s as you know we do have some new technologies coming through. What I can tell you is that we are in the process of working with major customers at this point on these new technologies and as I think we have mentioned in the past the product cycling time is not really something which is in our control. In other words although we believe that we have the technologies ready, you then have to work with your customers during their regular product recycling cycle in order to get them into the market place and that can take you easily 18 months to 2 years before that begins to occur and that’s why we have indicated that we think it will be 2005 that will be the first time that we will actually see product in the market place with the encapsulation technology, but we’re very excited about it.

It is safe to say too that the customers are very excited about the technology.

Thanks very much, I’ll get back in queue.

Thank you Silka.

If you would to ask a question please press the star key followed by the digit one on your touch tone telephone. We will go next to Peter Thompson with Kelco (ph) Partners. Please go ahead.

Hi, how are you guys doing today?

Hi Peter

I just have a couple of questions for you really quickly. When will you reconnect the proceeds from that French Fruit business?

Well as you said the transactional close in the fourth quarter but it would be …. I hesitate to provide the precise date since the transaction hasn’t closed. We will announce in a press release when the transaction will has been completed.

Okay just one quick follow up on that is have you guys quantified the proceeds from the Canadian manufacturing facility at all or …?

It was a fairly small facility. There is value associated with that and we expect that asset to be sold in due course. We took into account the estimated proceeds on the sale of that asset when we took a charge for the forced closure in the second quarter so I wouldn’t expect to see any upside or downside, downward movement associated with the sale of that facility. Again it was a very small facility.

Alright is there any plans at all for the allocation of that cash after you’ve gotten it from both the French Fruit business and that one?

Well the amount of cash involved in it all, we will look at what our cash need are and to the extent that we have excess cash as in the past what we’ve chosen to do is to apply it to debt reduction and share repurchase and those two activities still continue and I think if you take a look at the level of our debt over the last two years, we’ve done a pretty good job of reducing it.

The debt, we’ve lowered or estimated expected debt for year end by somewhere in the range of $50 - $75m as we mentioned in the press release in the script, the overall proceeds from the sale of the fruit business approximate $40m so certainly that’s an element of it as I mentioned in our prepared remarks but this company has very strong cash flow and we’re leveraging that. By the end of the year the only debt that we’ll have remaining outstanding is really debt of a long-term nature, the most significant of which are notes that mature in May of 2006.

Perfect.

Thanks very much.

We’ll take our next question from Susan Hager with Forceman Left (ph) please go ahead.

Hi Doug, hi Dick.

Morning Susan.

I’m wondering if you have some idea of how much of your European business is done with US companies versus non US companies?

It varies between flavors and fragrances. The flavor business is I think it’s about 55 to 60% concentrated in European regional food companies with the balance being, primarily the large multinationals that operate in many geographic regions. On the fragrance side it’s much more heavily weighted toward the large multinationals although in both cases we also still have a fairly good piece of business in the private label brands.

Okay, and then a follow up on the fruit question, after the fourth quarter are you totally out of the fruit business in Europe and that 38% drop, that was in anticipation of closing the business so customers just fell off?

Yes with the final sale in Europe on the fruit business we will be totally out of the fruit business globally.

I think the decline too Susan was, we announced that we were going to exit the business, some of the major customers that still remain our customers for flavor compounds looked to shift some of that business, but obviously it’s in our best interest and Futarom’s best interest to work to defend that business as much as possible because we are trying to sell a vibrant to Futarom, but certainly the performance through June, it was down 20% and that decline accelerated in the third quarter.

Regrettably when you’re in that process Susan as I’m sure you know, you’re at a competitive disadvantage and your competitors come in and make it quite attractive for you existing customer base to make a change.

The good news is with some of those fruit customers in the non fruit business, we have grown substantially this year.

But does that sound like that number was a little more that you thought it would be, does it have consequences in terms of the sales price, is the sales, in terms of your sales price of the assets?

There are certain elements of it based on the future performance of the business over the course of the ensuing two-year period which, there is upside potential in the event that the business meet certain operating goals and only the fullness of time will prove whether those operating goals are achieved and as I just mentioned we’re working very closely with Frutarom to ensure as smooth a transition as possible and as good a customer service as possible.

And it’s probably not material in any case

No that is correct.

Thank you guys.

We will take our next question from Chip Brewy (ph) with Claymore Rosenthal, please go ahead.

Thank you can you break out a little bit more the fourth quarter impact of the loss for business income and then the expense you’ll be incurring to reorganize that business in the fourth quarter as it relates to earnings per share basis? A couple of follow-ups…

Well the cost associated with exiting the fruit have been – the true cost of exiting as well as the intended closer of Dijon (ph) have been taken in the $20m in the third quarter. There is no – there should be no further restructuring element associated with it. And quite honestly I cannot tell you the precise amount for the French fruit business simply because I don’t know the precise date at which the transaction will close. It’s kind of difficult to forecast that Chip, I think I’m going to have to wait till --.

No I thought you would have a figure in your mind. But the charge does cover kind of restructuring, moving the business around.

Yes that charge in the third quarter – take into account the net proceeds and then the closure of Dijon and any loss on exiting the fruit business.

Were there any issues kind of in the Western Europe market that were weak? Re-stock issues or any think like that? Or do you think it’s just cyclical weakness?

I think it’s just cyclical weakness. I mean if you look at the reports from the multi-nationals on their business performance in Europe they are signaling continued weakness which is why we have also expressed some concern about Europe and for the balance of the year.

Okay in India can you just go over again why the – is it just a tough comp or was there some sort of adjustment that won in the third quarter cause for the first, second and fourth quarters are going to be very strong and the third quarter was weak.

It was 2 things Chip first of all we did – as I mentioned we had a 13% increase last year in the third quarter, which was mainly driven by some new wins. I think the first half performance of this year we got the benefit of some pipe line filling as we won some new business with some major customers and what you ended up with in the third quarter was probably a period of stabilization of order patterns. And as we said we look for the growth in the fourth quarter to resume. I feel pretty confident our Indian colleagues have not disappointed us in the past in terms of achieving their forecast growth for the year.

Okay.

We’re winning a lot of business in India.

And then just some numbers if you would. Can you comment on how many shares or the dollars you spent on repurchase in the third quarter actually? And then can you read the numbers again for the compensation items, I had to jump off for a second. What was actually in the third quarter as far as the stock accrual and the compensation accrual (indiscernible)?

I don’t have the third quarter numbers right in front of me Chip if you want to carry that off line.

Okay that’s fine.

And if any body else that’s on the call has that question I will be more than happy to answer it and I’ll be in my office and the number’s on the press release.

That’s it.

Thanks Chip.

We’ll go next to Alex Bicccine (ph) with Lumbar (ph).

Yes good morning gentlemen I only have 2 questions. The first one is follow up question on what was just asked relating to the European clients suffering continuing weakness that you have on (indiscernible) I was wondering if these difficulties at the client end were impacting the pricing level of these or in other words if the clients are trying are trying to pass on their own pressure unto their supplies which is yourself.

Well we always have you know this is something that as I’ve indicated in the past Alex it really stops with the retailers the Wal-Marts and the Carports (ph) of this world in terms of pushing back on pricing with their customers and of course when that happens there is a continued push through the system. I will say this, however, that the climate has modified quite considerably as a result of very high petrochemical pricing. And I do expect that we should be able as our customers are seeking to acquire price increases with the retailers and we have noted for the first time that Wal-Mart is now accepting and acknowledging that raw material pricing is increasing. We are seeing that and it is our expectation that we will be able to persuade our customers going forward that there has to be some movement with respect to price increasing.

I think one of the other interesting thing with that is also many of the companies that you’re referring to have express the intent to let’s say be a little bit more creative with their business with new product innovation. And I think some of the efforts that we have undertaken in R&D played very well with that customer focus on new product introduction.

That’s a good point, my second question will relate to fine fragrances. You’ve had very good growth here and visibly gaining market share as you wouldn’t always be as well be growing above 10% in local currency. As the market is now growing do you feel that you’re gaining market share relative to smaller niche players as not managing – do not have the global judge of the creative necessity in this area? Or is it rather relative to medium size players and some in niche particular?

I think we’re taking it –we’re clearly taking it from some body and I think it really is we’re taking it right across the board. I think that our successes have been at that the expense of some the major competitors and we’ve also taken it at the expense of some of the smaller more regional type competitors.

I think I’ll also be careful to refer to Premonitions as a medium size player they are pretty well respected competitor.

I know, being based in Geneva I know

Yes.

My final question would be on raw materials, how do you see the vanilla prices (inaudible) ect…evolving towards the end of this year into 2005? Do you see them coming down?

Well I think vanilla pricing clearly is coming down. It would be difficult for us to continue with run ups -- that was up at over 400, $500 per kilo. You know these are the ebbs and flows of when you’re into these types of what I call jungle crops that emerge from in the third world. We’ve seen it before and we’ll see it again while vanilla pricing is coming down citrus as you mention I mean you’ve had this, you know 4 hurricanes in the south, there isn’t an orange grove down there that hasn’t been severely damaged so citrus prices are very high.

Most notably in the grapefruit, I think that the orange and lemon to a certain extent will be mitigated by a very strong crop in Brazil which is also a major source of citrus oils.

Right and there is the balance you see. I mean when you talk about vanilla what happens of course is that when the pricing was as high as it was you have other growers decide to get into the business. Those beans are coming on market now and therefore you get the fluctuations. We saw it a few years ago in cocoa now cocoa pricing has stabilized. I don’t think it – you never have what I will call a perfect set of circumstances where all of your raw material pricing is low or for any sustained period. There is always something that’s out of line.

Okay thank you.

Once again if you would like to ask a question please press star one.

We’ll have time for one more question if there is an interest then I’ll be available afterwards if there is any follow up questions.

We do have a follow up question from Jeffery Dacosta please go ahead.

Yes good morning the question with clarification from a pure volume performance sense excluding the fruit preparation business. Your actual out look for volume growth for the year has not really changed, correct? And that is excluding the fruit business -- your previous guidance was for over all volume your local currency growth in the low mid single digit of 4 to 5% which is still the same. And in fact a list of your local currency growth expectation in the North America and Latin American fragrance business from a roughly 5% to 7 or 8%?

Yes.

Is that correct and so the reduction in earnings for this year are like roughly 4 cents and is really mostly due to some other transitional expenses having to do with shutting down the fruit preparation business in France. But those will not be ongoing and all things being equal they should be completely done some time in ’05.

Well I think the – you’re right and obviously these are estimates. But I think the key thing is that the fruit business we know with a 95% certainty that we will be out of the fruit business before the end of this year and as I said in my comments we’ll be essentially completed with the transfer production from Dijon by the end of the year. But I would expect it would still have some of it carrying into the first maybe into the second month of next year. Remember these are complex formulas we want to make sure we don’t disrupt customer service, that we can continue to replicate the formula in a receiving factory. And we take our responsibility in terms of delivering quality very seriously so we don’t want to disrupt that customer service. We’ve gone through that once before.

Overall Sofia however your analysis is correct, yes.

I know you are trying to finish off the call, I may have one last question so if your local currency forecast is still 4 to 5% on proforma basis, which those was really strong results. Where do you see growth next year?

I know there are like various new opportunities that you work on in advance with Fabicare, but can you just sort of talk about whether it will be from your work with consumer product companies or package food companies or food beverage companies?

You know Sofia from a regional perspective I think we’re going to have the greatest difficulty in North America and in North America on the flavor side of the business simply because we’ve had such an outstanding 2004 that the comparatives for next year even with the fourth quarter of ’04 versus ’03, remember we had a 19% increase and then an 18% increase in the first quarter of ’04. That’s going to be difficult and while we’re going to push for growth I think we have to be realistic – I can guarantee you we’re not going to have another high teen increase.

Europe it would be nice if we could get a little bit of an economic rebound but I think we have to continue to be cautious there. But Asia, India and Latin America I think we have every right and reason to believe that we’ll continue to get good growth there because the economies are strengthening and we’re winning business. The combination of the 2 bodes very well for IFF.

Okay thanks very much.

Okay thank you very much.

This will conclude today’s question and answer session. Gentlemen I will turn the call back to you for closing remarks.

Thanks very much for being with us. And we’ll talk to you in 90 days or so. Thank you.

This will conclude today’s conference call. We do thank you for your participation and you may disconnect at this time.