International Flavors & Fragrances Inc (IFF) 2004 Q4 法說會逐字稿

Welcome to the International Flavors & Fragrances fourth 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 make some cautionary remarks. This 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 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 important 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 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 let's move forward with our review of the full year 2004 and the quarter just completed. Afterwards, we will provide some guidance and commentary regarding our current expectations for 2005.

For the full year 2004 we exceeded sales of $2 billion for the first time in IFF history, with sales totaling $2,033,700,000. This performance represents an increase of 7 percent over 2003 sales levels.

Reported sales for 2004 benefited from the strengthening of various currencies in relation to the U.S. dollar. Had exchange rates remained constant, sales for 2004 would have increased 2 percent in comparison to the prior year.

Reported sales for 2004 were strongest in fragrances, led by a 13 percent increase in fine fragrance sales. Sales of aroma chemicals and fragrances used in functional products each increased 7 percent for the year. Sales of flavor compounds grew 11 percent for the year; however, this growth was partially offset by sharply declining sales of fruit preparations.

Now, as many of you know, in May we released an announcement that we had signed a letter of intent to sell our European fruit businesses to Frutarom Industries. The sale of the German and Swiss operations to Frutarom closed on August 17. After required consultations with the works council of our French employees, the French group business was sold at the end of October.

In 2003, the fruit business had sales approximating $90 million. Our 2004 results include about 60 million of such sales. On a pro forma basis, excluding sales attributed to the European fruit businesses from the comparable time periods in 2003, 2004 sales would have increased 4 percent in local currency and 8 percent in reported dollars. For the full year 2004, our reported sales growth was solid in all regions, although Europe's growth resulted from the benefit of currency translations. What is important to note and what our results demonstrate is that company-wide, we are winning new business and experiencing sustained demand for our creations.

For the full year 2004, North America reported a 9 percent increase in fragrances and an 8 percent increase in flavors. Latin America reported a 7 percent sales increase, led by a 9 percent increase in fragrances sales. Latin America flavor sales increased 3 percent against a difficult 2003 comparative, when flavor sales grew 9 percent.

Asia Pacific achieved local currency sales growth of 6 percent, with flavors growing 7 percent and fragrances 3 percent. Asia sales in reported dollars grew 10 percent, with currency benefit mainly due to the Japanese Yen and the Australian dollar.

India continued its pattern of strong growth, achieving a 15 percent increase in local currency sales and 17 percent in reported dollars. In local currency, India was led by an 18 percent increase in flavors while fragrances grew a solid 12 percent -- all impressive increases.

Overall sales in our European region were somewhat weak, declining 5 percent in local currency while increasing 4 percent in reported dollars. Excluding sales attributed to the European fruit businesses, sales declined 2 percent in local currency while increasing 7 percent in reported dollars.

While growth was hard to achieve in Europe, there were still some bright spots, including a 5 percent local currency growth in fine fragrances in Europe, driven mainly by a number of new wins which we have talked about in past calls.

Our growth in flavor compounds was 2 percent in local currency and a combined 4 percent local currency sales growth in Eastern Europe, Africa and the Middle East -- all countries where we believe we have substantial opportunity for future growth.

Our earnings per share for the full year, excluding the cost of restructuring activities, were $2.27 per share, relative to comparable 2003 results of $2.12 cents per share. We continue to invest in research and development. Our spending on R&D was 8.6 percent of sales, in line with our expectations for the full year 2004. Research and development is and will remain the cornerstone of our future profitable growth. Also, in the next year or two we expect the research and development budget will more closely approximate 9 percent of sales, mainly due to the elimination of the fruit preparations business. Relative to other parts of our business, fruit preparations require less R&D as a percentage of sales.

Before I turn the call over to Doug, let me review some actions taken during the year to further enhance the performance of our business.

As I mentioned earlier, we completed the sale of our European fruit preparations business. Proceeds of the sale approximated $40 million, and these proceeds were used mainly to pay down debt. Secondly, we engaged in and successfully completed consultations with our French employees works councils on both the sale of the fruit business and the closure of our Dijon manufacturing facility. We have since begun the process of transferring production from Dijon to our other IFF facilities, and we expect this process to be completed by the end of February.

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.

The closure of the Dijon and Canadian facilities is the result of IFF's ongoing review of its organization and processes for ways to optimize production. By consolidating its flavor and fragrances operations into its larger, more specialized sites, IFF can increase capacity utilization and further improve both productivity and customer service.

Finally, on October 1, we announced that Jim Dunsdon was named to the newly created role of Chief Operating Officer, reporting to me.

I would also like to provide an update on our work with respect to requirements under the Sarbanes-Oxley act in order to comply with the management assessment and auditor attestation requirements of Section 404. While some work remains, we currently anticipates we will be able to satisfactorily report on management's assessment of the effectiveness of internal control over financial reporting.

Now let me turn the call over to Doug to discuss our financial results in more detail.

Thank you, Dick. Good afternoon everybody. As Dick mentioned, reported sales for the fourth quarter declined 1 percent and in local currency sales declined 4 percent. The favorable currency translation was due to the strength of the Euro, the Pound Sterling, the Japanese Yen and the Australian dollar. Those currencies strengthened versus the U.S. dollar by about 10 percent, 10 percent, 3 percent, and 7 percent, respectively, fourth quarter '04 versus '03.

As was noted in our press release, the sales comparison in the quarter was impacted by the disposition of the European fruit business. The 2003 fourth-quarter sales included a full quarter of sales associated with the fruit business, whereas the 2004 quarter includes one month of sales for only a portion of the business, the French portion.

On a pro forma basis, adjusting to allow for like-for-like comparison regarding sales attributable to the European fruit business, fourth-quarter sales would have been flat in local currency and would have increased 3 percent in dollars.

For the quarter, our strongest sales performance was in fine fragrance, which achieved a 6 percent local currency increase and 11 percent in dollars. And for the full year, fine fragrance increased 8 percent in local currency and 13 percent in dollars, driven mainly by new wins.

Notable among recent wins, some of which we've mentioned before on earlier calls but bears mentioned repeating, the L'Oreal Armani fragrance, Armani Mania; an LVMH fragrance for Christian Dior, Pure Poison; L’Instant for Guerlain, another LVMH fragrance; the Prada Puig -- Prada fragrance for Puig; Lacoste Pink fragrance for Procter & Gamble; a Liz Claiborne fragrance, Realities; another L'Oreal fragrance for Victor & Ral (ph) called Flower Bomb; another LVMH, a new men's fragrance -- Solo; a new win for Lauder for Michael Corrs called Island; a Kenneth Cole fragrance for Cody Lancaster (ph) called Reaction; and two new Avon fragrances, a new women's global fragrance called Surreal and a men's global fragrance called Instinct; and finally, for Unilever's prestige fragrance business, a Karl Lagerfeld called Liquid Karl. The Guerlain, Prada, Dior and Lacoste fragrances have all been notably successful since their launches.

For the quarter, functional fragrance sales decreased 3 percent in local currency and were flat in dollars. However, for the full year functional fragrances grew 3 percent in local currency and 7 percent in dollars. Chemicals increased 2 percent in local currency and 7 percent in dollars for the quarter, although for the full year, chemicals sales were flat in local currency, increasing 7 percent in dollars.

Sales of flavor compounds in local currency were flat in the quarter and increased 3 percent in dollars. And for the full year, sales of such compounds increased 6 percent in local currency and 11 percent in dollars. This strong performance in sales of flavor compounds in 2004 was not sufficient to offset the sharp decline in fruit preparation sales, much of which took place after our announced intention to dispose of the business. Sales of fruit prep declined 42 percent in local currency in 2004 in comparison to 2003, which in dollar terms represented a 37 percent decline. On a like-for-like basis in 2004, fruit sales declined 20 percent in local currency and 12 percent in dollars.

Our earnings per share for the quarter were 43 cents compared to 40 for the prior-year quarter, an increase of 8 percent. Excluding the effects of restructuring charges in both years, results per share would have been 46 percent -- 46 cents per share -- excuse me -- compared to 48 cents per share in the prior-year quarter. This decline was expected and was mainly due to the weak sales performance of the fruit preparations business in Europe for the period of time owned by the Company, and lower expense absorption attributable to the facility closure in Dijon and transfer of related production to other manufacturing locations.

Our full-year and fourth-quarter per share results were towards the high end of the range of expected results when we last updated our guidance in October 2004. I will comment further on the operating performance in a couple of moments, but let me share a couple of additional comments regarding sales in each of the geographic regions.

North America fragrance sales increased 3 percent for the quarter, led by an 18 percent increase in aroma chemical sales, while fine and functional fragrances sales were flat with the prior-year quarter. Functional fragrance had a difficult comparison with the 2003 fourth quarter when they achieved a sales increase of 9 percent.

For the full year, fine and functional fragrances increased by 6 percent and 7 percent, respectively, and the fine fragrance performance most notably was driven by new wins. The functional fragrance performance benefited from the combination of new wins as well as increased demand attributable to some restocking efforts on the part of some of our customers. Chemicals ended the year with a 20 percent increase in sales year-on-year.

North American flavor sales decreased 4 percent for the quarter. Flavors had an extremely difficult comparison to the 2003 fourth quarter, when flavor sales increased 19 percent. For the full year, flavor sales in North America increased 8 percent, driven by new wins and growing market share.

Turning to Europe, overall we continued to see modest improvement or continued strength in certain of the major economies of Western Europe, notably Ireland and Great Britain, which combined grew 5 percent in local currency for the fourth quarter and 7 percent for the full year. Our strongest performance in the fourth quarter was in Eastern Europe, which grew 21 percent in local currency, led by a 46 percent increase in Russia and a 30 percent increase in Poland. For the year, Poland and Russia grew 25 percent and 15 percent, respectively.

Europe local currency fragrances sales declined 1 percent for the quarter, although on translation this resulted in a dollar increase of 7 percent. The quarterly performance benefited from solid growth in fine fragrance sales, which increased 6 percent in local currency and 16 percent in dollars. The fine fragrance performance was driven by the wins, many of I just mentioned a moment ago.

For the full year 2004, fine fragrance sales increased 5 percent in local currency and 16 percent in dollars. However, the fine fragrance growth was essentially offset by 5 percent local currency decline to the sale of functional fragrances and aroma chemicals. For the full year, functional fragrance sales in Europe were flat in local currency and chemical sales declined 10 percent. Europe flavor sales on a like-for-like basis, adjusting for fruit, were flat in local currency for the quarter, resulting in an 8 percent increase in reported dollars.

Turning to Latin America, our fragrances reported a sales increase of 3 percent for the quarter and 9 percent for the full year, and this performance was led by strong 20 percent growth in fine fragrances. Sales of functional fragrances declined 1 percent in the quarter, while chemical sales declined 5 percent.

Fragrance sales were strongest in Colombia, Argentina and Central America, with respective increases of 20 percent, 7 percent and 6 percent, and Argentina achieved its growth notwithstanding a difficult comparison, having increased 60 percent in the 2003 fourth quarter. Brazil sales grew 2 percent in the quarter while Mexico grew 1 percent. For the full year, Argentina fragrance sales increased 22 percent while Venezuela increased 24 percent. For the year, Mexico and Brazil fragrances sales increased 8 percent and 6 percent, respectively.

Latin American flavor sales increased 1 percent in the quarter and 3 percent for the full year. Latin America did have a difficult comparison versus the 2003 fourth quarter, when flavor sales increased 15 percent. In the current quarter, growth was strongest in Mexico and Chile, with respective increases of 19 percent and 8 percent. Brazil and Argentina flavored sales were weak in the quarter, declining 4 percent and 10 percent, respectively. And again, both countries had difficult comparisons with the prior-year quarter, where Brazil grew 32 percent and Argentina 17 percent. For the full year 2004, growth was led by Venezuela which grew 64 percent, Central America which grew 20 percent, and Mexico which grew 9 percent.

Asia Pacific fragrances decreased 4 percent in local currency, resulting in a 2 percent decline in reported dollars. Fragrance performance had a difficult comparison to the 2003 fourth quarter, when sales increased 8 percent in local currency and 15 percent in dollars. For the full year, Asia fragrances increased 3 percent in local currency and 7 percent in dollars.

For the fourth quarter, local currency growth was led by China/Hong Kong which grew 9 percent, and the Philippines which grew 16 percent, much of which resulted from new wins. For the full year, China/Hong Kong led the region with a 21 percent increase in sales, again, mainly driven by new wins. Japan fragrance sales increased 4 percent in local currency and 7 percent in dollars, although for the full year, Japan fragrance sales declined 2 percent in local currency, increasing just slightly in dollars.

Asia flavors in local currency sales increased 2 percent, resulting in a 6 percent increase in reported dollars. And for the year, Asia flavor sales increased 7 percent in local currency and 13 percent in dollars. Local currency growth was driven by many new wins and continued strengthening of the economies in a number of the countries in the region.

For the fourth quarter, China increased 11 percent and Indonesia grew 14 percent. For the year, China sales grew 14 percent, while Indonesia grew 15 percent. South Korea sales declined 8 percent, continuing slowness that we have seen in that country throughout the year. For the full year, Korea sales declined 15 percent. In Japan, local currency flavor sales grew 3 percent in the quarter and 5 percent for the full year, resulting in respective dollar increases of 6 percent and 13 percent.

And India continues its strong performance, finishing the year with a 22 percent local currency sales increase and a 26 percent increase in dollars for fragrance sales. For the full year, India fragrance sales increased 12 percent in local currency and 16 percent in dollars, all of which was driven by many new wins in the marketplace. India flavors reported a local currency increase of 11 percent with a dollar increase of 12 percent. And for the full year, India flavor sales increased 18 percent in local currency and 19 percent in dollars.

Now turning to the operating results. For the quarter, gross margin came in at 42.6 percent, about 50 basis points less than the prior-year quarter. This performance was as expected and was consistent with the guidance we provided in our third-quarter conference call. We did have favorable product mix in the quarter; however, the benefit of the favorable mix was offset by two major elements.

First, the weak performance in fruit prep sales in Europe contributed to the lower margin, mainly due to poor expense absorption with the lower sales. And secondly, and also as we forecast and as I mentioned earlier, we had unfavorable expense absorption as production was transferred from Dijon to other plants, and the unfavorable expense absorption will continue into the first quarter of 2005 as the remaining operations at Dijon will continue, while be it at a reduced rate until they close.

R&D expense totaled 9.2 percent of sales compared to 9 percent in the prior-year quarter, and for the full year they were 8.6 percent of sales compared to 8.4 in the prior year. The increase in spending is in line with our plans and expectations, as we previously discussed. And as Dick mentioned, but it bears repeating, moving forward, R&D spending will increase somewhat as a percentage of sales, mainly as a result of the elimination of the fruit prep business, because the fruit prep business required less R&D as a percentage of sales compared to other parts of our business.

For the fourth quarter, SG&A expense as a percentage of sales increased to 18.1 from 17.9 percent. The SG&A increase resulted mainly from inclusion in the quarter of a 1.9 million in equity compensation expense for which there was no comparable expense in the 2003 results. For the full year, SG&A as a percentage of sales increased to 16.8 from 16.2, and there were two primary reasons for this.

First, accruals with respect to our incentive compensation plans. By the end of the third quarter of '03, it had become apparent we weren't going to achieve our 2003 targets, and bonus accruals with respect to those plans were adjusted. And as we noted in the prior quarter and as was disclosed in our 2004 proxy, for 2003 we paid out approximately 25 percent of our targeted incentive awards. In the current year, sales and operating results are much improved and more in line with the preestablished goals for 2004. For the current year, we achieved just under 70 percent of our operating goals. Incentive compensation accruals are higher than in 2003 in both dollar terms and as a percentage of sales. And secondly, the SG&A increase resulted from the inclusion of equity compensation expense for which there was no comparable amount in 2003. For the full year 2004, such expense approximated $5 million.

As we have discussed in the past, but it bears repeating, IFF has replaced the use of stock options with restricted stock units for all eligible U.S. employees and a 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 2004 the Company issued time and performance-based RSUs -- restricted stock units -- as an element of its equity compensation program. Restricted stock units for senior management are performance and time-based, and units for remaining eligible employees are time-based. The actual expense to be recorded in any period will depend upon the value of the Company's stock and the number of the RSUs granted.

SG&A expense also included about $1 million in the quarter, incurred in connection with the implementation of SAP in various locations. During the quarter, we successfully went live in Argentina and South Africa, and approximately 85 percent of the Company now operates on SAP. We will complete our implementation of SAP in 2005, and I'm very happy to say SAP is a real success story at IFF.

Operating margin for the quarter was 14.5 percent of sales compared to 15.6 percent in the prior-year comparable period, primarily for the reason -- for the gross margin decline in the quarter and the expense fluctuations for incentive comp and RSUs that I have already discussed.

Interest expense declined 8 percent from the prior-year quarter, mainly due to reduced debt. Debt for borrowed money is about $185 million less than at the prior year-end, down from 847 to 661, and it's down about 385 million from two years ago. Debt was reduced mainly as a result of the Company's strong operating cash flow, as well as the proceeds from the sale of the European fruit business.

And on the subject of debt, I am also pleased to note that Moody's recently upgraded its outlook on IFF to stable, at the same time affirming our A3 rating in recognition of our success at reducing debt and improving our operating results.

Other income and expense declined somewhat in the quarter in comparison to the prior year, mainly due to the impact of exchange fluctuations. For the full year 2004, we repurchased approximately 1.8 million treasury shares under our buyback program at a total cost of around $66 million. And at December 31, 2004 we had a remaining authorization of about $76 million under the latest share repurchase program. And we remain committed to properly balancing the repurchase of shares with reduction of our overall debt levels.

The effective tax rate for the full year 2004, excluding restructuring charges, was 30.8 percent, about 70 basis points lower than had been previously expected. The decline was specifically due to legislative changes in the Netherlands and in Mexico, where statutory tax rates were lowered, both of which were enacted in the fourth quarter of 2004. The change has provided benefits by reducing future deferred tax liabilities, with the benefit being recognized in the fourth quarter 2004.

Our days sales in inventory declined from 152 at December 31, 2003 to 150 days at the current year-end. Our receivable days increased slightly to 70 days. Our capital investments for the quarter totaled about $30 million and were $71 million for the full year '04, in line with our updated guidance provided in October. And for 2005, we currently expect capital spending will be in the range of 90 to $100 million. A portion of this increase is attributable to some projects which shifted from 2004 to 2005.

In looking at the next three years in total, meaning 2005 through 2007, we currently expect capital spending will total approximately $225 million, or on average about $75 million per year. This average spending is pretty much in line with our expected levels of depreciation over the same period of time.

Now I'll turn the call back over to Dick to provide some commentary on our expectations for 2005, and then I'll provide a few more details regarding the geographic regions. Dick?

Thanks Doug. We have consistently said that the process of rebuilding IFF would take three to five years. In that context, we reflect on 2004 as a confirmation of progress made. We have frequently said that our improved win rate and improved customer service levels bode well for the future. We believe we are seeing evidence of that in our sales growth in Asia, India, Latin America, and North America, as well as in parts of Europe. I am confident we have laid a solid foundation for our future growth.

The key to our growth is continued focus on customer service, and most importantly, on research and development. For example, newly created molecules and natural extracts will contribute to winning flavors and fragrances in 2005 and beyond. Our delivery and material technology research also continues to advance the commercial applications of flavor and fragrance encapsulation technology. With ongoing innovation in encapsulation technology and functional fragrance applications, and aroma transfer technology and packaging applications, IFF will continue to deliver innovation that helps our customers create winning products.

Currently we have a number of new products in test markets 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. If all goes well, some of these products could be launched as early as the second half of 2005, with others more likely in early 2006. Remember, please, that these are not timeframes we establish. We follow the path to market established by our customers.

Our guidance for 2005 must also be viewed in the context of the economic environment in which we operate. We are seeing solid growth in Latin America. Southeast Asia and China also continues to grow solidly, as does India. But growth in Japan remains mixed. North America continues to win new business, but the region faces a difficult comparative with 2004, notably in the first half of the year.

Now, taking all these considerations into account, we expect 2005 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 low to mid single digits.

We currently expect earnings per share for 2005 to be in the range of $2.34 to $2.41 per share, an increase between 3 percent and 6 percent in comparison to 2004 EPS of $2.27. For purposes of comparison, this 2004 EPS amount excludes the effects of restructuring charges. Henceforth, as we review quarterly results with you, we will continue to update our guidance for the full year 2005.

I'll turn the call over to Doug again for some more details regarding the individual regions, after which we will open the call to questions.

As Dick mentioned, we expect 2005 local currency sales to increase in the low single digits, and based on current exchange rates this will result in a low to mid single digit increase in dollars.

For purposes of this comparison, though, the 2004 sales include the $58 million of sales attributable to European fruit. Excluding those sales of the fruit business from the 2004 comparative, we expect 2005 local currency sales to increase in the low to mid single digits. And based on current exchange rates, this local currency growth is expected to result in a mid single digit increase in reported dollars.

In 2005, gross profit as a percentage of sales is expected to improve somewhat from the '04 levels, mainly due to improved product mix and savings resulting from the restructuring actions we have taken this past year. As I mentioned, R&D expenses are expected to approximate 9 percent of sales. SG&A expenses as a percentage of sales are also expected to increase somewhat from 2004, mainly from the inclusion of approximately 12 to $14 million in equity compensation expense in 2005, compared to 5 million in 2004.

Interest expense is expected to decline between 10 and 12 percent from 2004. We don't expect much further debt reduction until 2006, when the five-year notes mature in May. The interest expense decline in 2005 will result mainly from our anniversarying the benefits of some 2004 debt reduction.

We expect our effective tax rate in 2005 to approximate 31.2 percent. This expected rate does not contemplate the effective of any benefit or cost that may arise as a result of repatriation of earnings from overseas subsidiaries as is envisioned under the American Jobs Creation Act of 2004. We're still evaluating various aspects of the rules that have just recently been issued, and we'll update you on this matter as the year progresses.

Let me give you some preliminary guidance in terms of where we expect the sales to be for each geographic region. North America fragrances are expected to increase in the low single digits, mainly due to improved fine fragrance sales. North America flavors will increase in the low single digits compared to 2004.

Europe fragrances will increase in the mid single digits in local currency terms, resulting in a mid to high single digit increase in dollars. Growth in Europe fragrances will be led by continued strong performance in fine fragrances and a resumption of growth in functional fragrances. Chemical sales in Europe are expected to increase in the low single digits and local currency, resulting in a mid single digit increase in dollars.

Europe flavors are expected to increase in the low to mid single digits in local currency, which is expected to result in an increase in the mid single digits in dollars. And these expectations exclude sales attributable to the fruit business from the 2004 comparative.

Latin American fragrances will increase in the low single digits, reflecting good wins. Having said that, though, Latin fragrances will have a somewhat difficult comparative following the solid performance in 2004. Latin American flavors are expected to increase in the mid to high single digits, primarily driven by continued wins in the marketplace.

Asia fragrances are expected to increase in the low single digits in local currency, resulting in a low to mid single digit increase in reported dollars, while flavors in Asia are expected to increase in the mid single digits in local currency, resulting in a mid to high single digit increase in dollars.

India continues its growth. India fragrances and flavors are expected to increase in the high single to low double digits in both local currency and dollars, continuing the pattern of strong growth we have achieved for the last several years.

Overall, on a consolidated basis, we expect to have fairly consistent growth in both fragrances and in flavors, both expected to increase in the low to mid single digits.

With that, I'll turn it over to questions.

(OPERATOR INSTRUCTIONS). Jeff Zekauskas, JP Morgan.

When I look over your annual results in 2004, the growth is strong in every geography with the exception of Europe. Is it fair to say that you believe that you gained share in all the different geographies but lost a little bit of share in Europe?

We do think we have gained share in every region outside of Europe. Within Europe, it's difficult to -- Europe is a big region for us, Jeff, as you know. In the UK and Ireland we have actually had some good growth. In France and in Germany, we are struggling to get growth. And I honestly don't know that it's a function of losing share to anybody else, or whether or not as I look at the economies and when I visit Germany, which is the largest economy in Europe, I think it is tough for everyone. Now, I am not in any way minimizing our need to gain growth in Europe in a material way, it's just a more difficult environment within which to get it. But we are committed to turning around the performance in countries like France and Germany, and to a lesser extent Italy and Spain.

And we know, certainly, in fine fragrance in Europe where we grew 5 percent in local currency, Jeff, I feel pretty comfortable saying that we did gain market share in fine during the course of 2004.

Do you have a sense of how much the overall flavor industry grew or the overall fragrance industry, or is just too difficult to nail those numbers down?

It's very difficult. As you know, we're one of the few that actually report publicly. And it's very, very difficult to get any data that's anywhere near accurate in this area.

As far as next year goes where you're thinking about low single digit or low to mid single digit growth, excluding fruit preparations and local currency, should we think about it in terms of, say, flat volume growth in the first half and sort of solid mid single-digit growth in the second half because of the way your comparisons work?

Jeff, we kind of steer clear of the quarterly guidance. I think the only thing I could say in that regard is that we know the first quarter will be somewhat of a difficult comparison because we had such a strong growth last year. I think if memory serves it was like 6 to 7 percent local currency and 15 percent in dollars, with very strong growth in every region except for Europe. But it's hard to say. I understand your rationale, but it's pretty hard to get further clarity on it at this point in time.

How much of a rationalization of your capacity is the Canadian change? Is that meaningful or not meaningful?

I think it's meaningful in the sense that it already has generated some savings, and it's going to allow us to better manage our capital, to better utilize the U.S. productive capacity, better manage inventory and so forth, while at the same time probably improving the service level of our customers. But those are the incremental types of improvements. I would not characterize Canada as a revolutionary move; it's more evolutionary move.

The last question. So what are you going to spend 90 million on in 2005?

Remember, we have got the facility -- the new facility in China, where we have already broken ground and where we expect to see a good piece of that spent.

It's spread pretty much over the regions. As Dick mentioned, China is a major element of it. We are substantially upgrading some creative facilities in India, again, to drive further growth. And we are also spending some money in various other areas, both basic R&D as well as applied. But a lot of it is intended to drive further business growth in the future, and it's the type of investments that we have to make.

(OPERATOR INSTRUCTIONS). Jeff Zekauskas has a follow-up.

Can you talk about your new product introduction efforts sort of more specifically for 2005? And have you narrowed the possible customers -- the possible customers for some of your encapsulation fragrance products?

Jeff, we are working on a number of new product initiatives (technical difficulty). Some of them embrace the encapsulation technology and other new product initiatives are other technologies which we are working on. The good news is that our customers are as excited as we are with respect to the prospects. As you know and as we've mentioned before, the timing of fitting the new technologies into the product re-launches is something which takes time. But we are working now with all of our major customers, and I think the move -- the pace at which we will be able to commercialize these initiatives will in large measure depend upon the speed with which they wish to take them to market.

Jim Hallisey (ph), Bank of New York.

How much of the 12 to 14 million equity compensation expense gets added back to operating cash flow, and how much will SAP costs be in '05 compared to '04? And then I have one more question.

The SAP costs have varied on a quarterly basis between 1 and $1.5 million. On an annualized basis, it's -- probably in '04 it's somewhere between 5 and $6 million. I don't have the number off the top of my head. That will scale down, and then it's essentially done for all intents and purposes by the end of this year. We have a couple of significant implementations that remain, and then basically we get to a static platform that we will then all collectively evolve on.

In terms of the restricted stock units, the cycle runs from May of 2004 when the restricted stock units were awarded. The vesting period is three years, so the vesting and the costs associated with that are spread over the three years, and fluctuate, obviously, because of the market value of the stock.

So there will be no cash element of the RSUs. There was none in '04, there will be none in '05, and there will be none in '06. The first cash element of it will be in '07. And I don't have an answer for you on that precisely, simply because I believe participants will have an option to either take the compensation in stock or in cash equivalent. So we really won't know until individuals elect in 2007.

I think the one thing that bears repeating -- we talked about it when we issued this for the first time -- the compensation committee and the Board's goal was to end up having restricted stock unit expense on an after-tax basis roughly equivalent to what FAS 123 would have been had we expensed stock options all along. And for the last several years that was roughly 16 to 17 cents per share after-tax. But we will not get to that run rate until the 2007 year because each year additional restricted stock units will be layered in. And meanwhile, I think you're seeing the number of options outstanding decline doubly due to our -- some older ones expiring and also employees' exercising in the money options.

The final question is on the gross margin expectations for this year. Why not have a more optimistic view, given that you're benefiting from product mix in '05? You won't be held back by inclusion of those costs.

I think there's continued pressure from our customers, of course, with respect to -- as I've said on many occasions, this all starts with Wal-Mart. And as I talk with our customers, they are finding it very difficult to get price increases in the marketplace. And as a result, they are very reluctant to accept price increases. Now, we are pushing hard. We believe that there are areas where we can demonstrate that it is essential, given what is happening in some of the raw materials. But I think it would be -- it is prudent for us to look at the year as we have characterized it at this point.

Richard O'Reilly, Standard & Poor's.

I'm going to put Doug on the spot here if he doesn't mind. When I run through my model, I'm coming up with something below your guidance, the low end of your guidance. Maybe we can split hairs about what mid single digit and stuff like that is, but is there anything else like the other income line or something that could be a big swing? Or something you have --

Rich, I don't mind you putting me on the spot. I don't have your model in front of me so I can't comment on that. I would expect other income to ratchet up a little bit, but not measurably. And the only reason for that is we do anticipate -- we will accumulate cash as the year progresses. As I mentioned, you won't see much further decline in interest expense of 10 to 12 percent, (indiscernible) 16. And we will begin to accumulate cash, and that cash will be targeted towards funding the retirement of the notes that mature in May of 2006. I think that's the only element that I can think of. If you want -- I'm not in the office right now. I can look at your model, but it's somewhat difficult for me to comment on (multiple speakers) model.

I'm just trying to follow you. It's a slight difference in the gross margin can swing it a nickel or so either way, I guess.

I think you better go back and critically evaluate your model there, Rich. (multiple speakers) too low of a gross margin for us.

(OPERATOR INSTRUCTIONS). That does conclude our question-and-answer session for today. At this time, gentlemen, I will turn the call back to you for closing remarks.

Thanks very much and we'll talk to you again at the end of the first quarter.

That does conclude today's conference. We thank you for your participation.