International Flavors & Fragrances Inc (IFF) 2006 Q1 法說會逐字稿

Good day, and welcome to the International Flavors & Fragrances first-quarter 2006 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. Good morning. Thank you for joining the conference call. 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 the SEC from time to time. IFF does not update forward-looking statements, and expressly disclaims any obligation to do so.

Okay, before I turn the call over to Doug to review the first quarter in some detail, I would like to make a couple of opening comments. First, we have previously announced that I will retire as Chairman and Chief Executive Officer of IFF at our annual shareholders' meeting on May 9, 2006. I have enjoyed my tenure at IFF, leading the Company through a period of significant changes. We acquired and successfully integrated BBA. We introduced the culture of One IFF, improved customer service, and reorganized the Company to position itself for future profitable growth.

As I have shared with many of you in past conversations, I believe for a company to remain vibrant, it is important that new ideas and initiatives are constantly evolving. And this is allowed to happen most effectively through a periodic change in leadership. I am confident that with the progress we have made, IFF is well positioned to deliver long-term growth and increased shareholder value. Thus, the timing is right to put the succession plan into effect.

There is no further news at this time regarding my successor, although we are hopeful of being in a position to make an announcement at the time of our shareholder meeting next month. We will keep you apprised of developments as and when appropriate.

Turning to our results, I am pleased with how the first quarter developed. We continued to achieve above-market growth in fine fragrances, and also did very well in both Latin America and India. India grew by 16% in local currency after achieving a compound growth rate of 13% over the last three years. Latin America grew at 11%, following on a very strong performance in 2005.

Continuing trends exhibited in 2005 and part of our core strategy for future growth, I'm also encouraged by growth with our large accounts. Growth with these large global, regional, and local customers is a key pillar of our long-term strategy. We continue to invest in our infrastructure and in the regions where we see long-term growth potential. Construction of our new state-of-the-art fragrance ingredient facility in China is on schedule for completion and commissioning in mid of 2006. This new facility will greatly contribute to helping fulfill the needs of our global, regional, and local customers.

We also continue to operate in a challenging pricing environment, while at the same time experiencing increasing material and operating costs. However, we have taken a series of actions to reduce our costs and restore our profitability. The evidence of these actions is shown by the improvement in our first-quarter gross profit.

We remain committed to research and development. Our primary objective is to provide our customers with proprietary technology and innovation, products and service that will help them win in the marketplace. By remaining focused on technology and innovation, superior service, and operating discipline, I'm confident that we can differentiate ourselves from our competitors and drive market share gains to create value for our shareholders.

Now let me turn it over to Doug to review our financial performance for the quarter. Afterwards, we will be happy to take your questions.

Thanks, and good morning, everyone. First-quarter 2006 sales totaled $511 million, decreasing 2% in comparison to the prior-year quarter. Sales for the quarter were unfavorably impacted by currency, mainly the dollar/euro relationship, but also various Asian currencies against the dollar. In local currency, flavor and fragrance sales increased 4% and 2%, respectively. Fragrance sales were led by fine fragrance, which increased 2% in dollars and 8% in local currency -- mainly driven by new wins, but also benefiting from strong demand for some of our longer-lived fragrance creations. Fine fragrances grew 16% in local currency in the fourth quarter 2005, so the current growth continues a favorable trend.

Functional fragrance products were down 4% in dollars and flat in local currency, while fragrance ingredient sales declined 1% in local currency and 6% in dollars.

Sales growth by region is detailed in our press release issued earlier this morning. But as Dick noted, and as has been the case for the past several quarters, our sales performance was strongest in India and in Latin America. Having said this, it also bears mentioning that North America achieved solid sales growth in both flavors and fragrances, led by a 21% increase in fine fragrance, 4% in flavors, and 13% in fragrance ingredients.

Net income for the quarter increased 2% in comparison to the prior year as reported. Net income benefited from gross margin improvement, effective cost control with respect to SG&A, as well as a lower-than-expected tax rate for the quarter.

Let me briefly touch on the more significant factors that impacted earnings and the corresponding comparison to the 2005 quarter. In the 2006 quarter, gross profit as a percentage of sales was 42.4% compared to 41% reported in the prior year. The margin improvement was primarily attributable to local currency sales performance and improved manufacturing expense absorption; favorable sales mix, notably the strong fine fragrance performance; and the effects of price increases negotiated in 2005, which took effect January 1, 2006.

Also, as Dick mentioned, we continue with our many research and development efforts. For the quarter R&D expense totaled 8.9% of sales compared to 8.6% reported in the prior year quarter. That level is pretty much in line with our intended level of R&D spending for the full year 2006.

Selling, general, and administrative expenses as a percentage of sales were 16.7% compared to 16.2% in the prior-year quarter. SG&A expenses were impacted by higher incentive plan accruals than in the prior year, driven by the improved local currency sales and operating performance.

SG&A expense also includes about $700,000 of incremental stock option expense related to the adoption of FAS 123R. Excluding the impact of adopting this standard, SG&A expenses moderately increased by about 0.4%. Overall, adopting FAS 123R added about $900,000 of operating expense, and the balance of this incremental expense is included in R&D.

Interest expense declined 4% from the prior-year quarter, mainly due to a lower average rate on borrowings compared to the prior year. Average rate for the 2006 quarter was 2.3% compared to 3.2% in the 2005 quarter.

And the effective tax rate for the quarter was 28.6% compared to 31.2% in the prior-year quarter. The rate for the 2006 quarter benefited from reversals of accruals no longer deemed necessary regarding certain overseas locations. The reduced rate added about $0.02 per share to our results for the quarter.

During the quarter, we repurchased about 2.3 million treasury shares at a total cost of about $75.5 million. At the end of the quarter, we had a remaining authorization under our latest program of about $102 million. At quarter end, we had just under 91 million shares outstanding, down a little over 2 million shares since year end.

Turning briefly to our full year 2006 expectations, our press release includes our guidance for the full year 2006, and we will, consistent with past practice, update this guidance as appropriate as the year unfolds.

Overall, our guidance has not changed from that provided in January of this year on issuance of our full-year 2005 results. However, we have included one additional element that we did not have before. And as I just mentioned effective, January 1, 2006 the Company adopted FAS 123R, and I will discuss the impact of that adoption more in a moment.

In brief, though, our guidance is as follows -- we continue to expect 2006 local currency sales to increase in the low single digits in comparison to 2005. And based on current exchange rates, that performance translates into a low single digit increase in reported dollars.

Now let me give you our latest view in terms of expected sales for each of the geographic regions. The expectations have not changed much from the guidance we provided you in January.

North America fragrances and flavors are expected to increase in the low to mid single digits. Fragrances will grow at a somewhat faster pace than flavors.

Europe fragrances are expected to be flat to up in the low single digits in local currency. And Europe flavors are expected to increase in the low single digits in local currency.

Latin America fragrances are expected to increase in the mid single digits, while flavors in Latin America are expected to increase in the mid to high single digits.

Asia-Pacific fragrances are expected to increase in the low single digits in local currency. And flavors are expected to increase in low to mid single digits in local currency.

And both India flavors and fragrances are expected to increase in the high single to low double digits in both local currency and dollars.

Gross profit as a percentage of sales is expected to improve slightly from 2005. And as in the first-quarter results, this improvement in gross margin will result from a combination of improved sales performance, favorable product mix, implementation of price increases, and the savings resulting from the restructuring actions that we have undertaken.

R&D expense is expected to approximate 9% of sales consistent with previous guidance. SG&A expense as a percentage of sales is expected to decrease somewhat from the full-year 2005 levels, again mainly as a result of restructuring activities that we have undertaken and the absence of costs associated with the product contamination issues which we dealt with during the course of 2005.

Partially offsetting these savings will be the inclusion of about 14 to $16 million in equity compensation expense in 2006 compared to $7.3 million of such expenses in 2005. The actual expense will depend upon the value of the Company's stock over the course of the year and the number of equity compensation units granted.

When we provided guidance in January, we had not yet quantified the impact of adopting FAS 123 regarding share-based payments. FAS 123R requires the expensing of stock options. The impact of 123R is approximately $3 million and about $0.03 per share for the full year 2006.

For IFF, the impact of FAS 123R is fairly small, due to the fact that we began using and expensing restricted stock units rather than issuing stock options about three years ago. The impact we are reporting relates primarily to the last vesting of significant option awards granted nearly three years ago, as well as the cost of much smaller option awards issued in subsequent years. We still use stock options in certain countries where use of restricted stock is tax inefficient. On adoption of 123R, there was an immaterial catch-up or cumulative effect of adoption in the first quarter of 2006.

As we outlined before in January, interest expense is expected to decline approximately 10% from 2005 levels. The effective tax rate in 2006 is now expected to approximate 30%, down about 1% from previous guidance. The revised rate is primarily attributable to the impact of the first quarter rate and what impact that had on the full year.

Based on the foregoing, IFF currently expects earnings per share for 2006 to be in the range of $2.20 to $2.28. This range conforms to the $2.23 to $2.31 previously provided to you, adjusted for the impact of adopting FAS 123R, which I discussed.

With that, we will now open the call to questions. Operator?

(OPERATOR INSTRUCTIONS) Mike Sison, KeyBanc.

A question on your organic growth of 3% there. How much was pricing?

Probably less than 1%, Mike. There has been price increases, but at the same point in time, we had to honor instances where there's price adjustments built in. So net net, less than 1%.

Did you get more or less pricing depending whether it was flavors or fragrances, or sort of across the board, about --

I think it's so small that it would be very hard to break it down any further than that. I think overall, they would have to be pretty close to one another.

And when you take a look at what Givaudan reported and Sensient -- and I know in Sensient's case, it's not a really good peer for you guys. But it appeared that they showed more pricing. Any reason you think you are lagging there? Will there be a catch-up? And it looked like their pricing was in more the 2 to 3% range for the first quarter.

You know, I think it's very hard to analyze that, because I think only the folks at Givaudan and Sensient can really provide that insight. I can only tell you what we had. And I must confess, I have not had a chance to look at Sensient’s results in particular detail.

Do you see that pricing accelerating at the year progresses?

Not markedly. I think we built in some price increases in the second, third, and fourth quarters of 2005. So we will anniversary those prices. I think the key thing for us from a pricing perspective is simply that winning the business is the best opportunity for, in essence, a price increase. And I feel pretty confident that we're winning a lot of business. And that is going to drive the margin improvement, both from a pricing perspective, but also from absorption of the manufacturing expenses.

Did you have a squeeze from raw materials in the quarter, meaning that -- were raw materials -- the increase year over year higher than what your pricing increases were? And could you give us a feel for what that was?

Our experience so far was pretty much consistent with what we had forecasted at the beginning of the year. And we had talked about an overall weighted average increase in raw material costs of give or take 3%. I don't think that our current view has changed much from that.

And you see some upward movement in certain elements that might have been a little bit more than forecasted. At the same point in time, you may see some downward movements. Remember, we buy a lot of agricultural products, and a lot of that had to do with just the success of the crops.

Right. And can you talk a little bit about new products? Any update on the encapsulation project? Has that launched yet? And when you take a look at your organic growth of 3%, could you give us a feel -- a little less -- 1% was pricing. Was the rest sort of new products driven? Was it more just stronger growth internationally?

No, I think, Mike, the new product growth is driving the volume increases. We are in the marketplace with encapsulation. We will have to wait to read the impact of it in the marketplace with our customer. But we are excited about it, and we anticipate that encapsulation does have a role for us to play going forward. And we're delighted to now, as I say, see it in the marketplace and [read] it with the customer.

We had continued good strong new product activity in fine fragrance. And we're seeing, as you can tell by some of the numbers continued good growth in the growth parts of the world, which include of course Latin America. Within Asia, we're seeing the growth in China. We continue to see growth within Indonesia. And of course, India, as we talked about in the past.

Okay. And the encapsulation launch -- that was internationally, right?

It was outside. But I think the key -- the encapsulation is not moving the percentage sales increase. Remember, it's the initial launch. And while we expect it to be building, it did not by itself materially move the sales. I think the key thing as Dick mentioned is winning overall and that is the key.

Everybody is looking at it in a test market environment in order to (technical difficulty) and therefore, we're not talking about a global launch. We're talking about countries. But the significance of it is that it's in the marketplace, and it's being watched very carefully by all concerned.

Jeff Zekauskas, JPMorgan.

This is Silke Kueck for Jeff. A couple of questions -- are there any gains from insurance recoveries related to the paprika issue last year in any of your numbers this quarter?

No. If and when that materializes, we would feel compelled to break that out, simply because we broke out the expenses associated with it at a point in time in the past.

Can you talk about the new product launches and flavors in North America, in that -- what we heard from some other industry players is that particularly the beverage market domestically was very strong, and there was like a whole host of new launches in that area?

Silke, you know, we had the growth. North America flavors was really across the product portfolio. So you had some beverage growth. There was some sweet growth. There was also the savory growth. So I don't think anything stands out particularly as being notable. But it's more across the entire portfolio.

And then on the fine fragrance side, which was very strong, can you talk about the new launches, whether those were in Europe or whether those were, I guess, geographic launches or global launches?

They were in both North America and Europe. Some of them will be regarded as global launches. And it's a question of whether or not the lead takes place in Europe or in the U.S. But we continue to see very strong performance in a category that, as you know, is not growing at this time. But our share continues to grow year on year -- quarter on quarter, actually.

When you sell fragrance molecules into things that are not perfume, something like a body splash that may be sold at Bath & Body Works, is that captured in functional fragrances, or that's captured in fine fragrances?

The body wash -- first of all, it would be a fragrance compound. We would not be selling a fragrance molecule. And to a very great extent, that would be the fine fragrance and toiletries. The functional fragrance is basically bath soaps, laundry detergents, household care products and so forth.

Thank you for clarifying. And on the functional fragrance side, once there's a more global launch in terms of the encapsulation technologies, should that lift performance in functional fragrances? [And that is], can you talk about what's currently weak, or why functional fragrances are flat?

Well, certainly, with the expectation that encapsulation is going to be successful, yes, it would have an impact on the entire functional fragrance category. And it would spread, we would anticipate, first and foremost within North America and Europe, and then follow it in other regions.

The application of course, Silke, as I think you know, has transferability within several product categories. But the first reading of it at this point is very important in the fabric category.

Can you talk about what is weaker in functional fragrances or why it was flat? Are there some other things that are slowing? Is that like a regional -- ?

One of the key things, Silke, is simply as it relates to functional fragrance, it's really -- let's just say that that's the area where inventory levels are very carefully managed by our customers and by our customers' customers. And there is really not much more that we can add to that. We provide it as demand is there. But that is -- there's focus on inventory in those areas, as there has been for the last several years.

Okay. Last thing -- I know you have not announced a new CEO yet. But have you [found] one yet? And can you talk about whether this will be somebody internal or from within the industry, or any detail?

Silke, I think I have said everything that I can say at this time.

John Roberts, Buckingham Research.

Richard, thank you, and best wishes going forward.

Thank you.

You have got three items that were significantly off trend. You had the 8% decline in functional fragrance in North America. You had the 9% decline in functional fragrance in Asia, and the 12% decline in fragrance ingredients in Europe. Maybe for those three items, can you tell us how much was market conditions versus competitive activity versus outsourcing decisions maybe by customers that might shift things around?

I don't think, John -- to address them in inverse order, I don't think that the outsourcing issue was really an element associated with it. I think it’s -- there is macro factors that influence -- and remember, the great demand for fragrance ingredients is primarily in functional fragrance. And so those kind of move lockstep a little bit. So the demand for Europe is a combination of inventory balancing and demand for the end products in which those fragrance ingredients are included.

I think again for one quarter, for each of the specific items that you would relate to, it's very hard to analyze it, because you can have aberrational order patterns for one quarter. And what we have to do is look at over a full year. And I can't really shed that much more insight to you at this point in time.

You would say the biggest factor in all three of those declines was just timing of customer orders?

Well, no, it's not just timing. I think as we mentioned before in response to Mike's question, the inventory order patterns -- not just timing of orders, but are there elements of destocking? I think we have instances where some of the distribution chains are talking about trying to reduce their inventory levels, and that works its way back through the supply chain to us.

I would just say that I would not look at a specific quarter, because -- on the other hand fragrance ingredients sales in North America were up very strongly. And similarly, I would not at this point in time forecast that that level of activity would continue. So I'm trying to take a more long-term view of things rather than an individual quarter.

Because I thought when we see fragrance ingredients up and functional down, that might be an outsourcing decision, where somebody is buying more ingredients to do their own functional product.

I guess that's actually an in-sourcing.

Right, in-sourcing. Sorry.

But I don't see that -- and certainly not one quarter as being indicative of anything. I think you really have to look more on a long-term basis.

Jeff Zekauskas, JPMorgan.

Hi, this is Silke again. So I guess obviously -- there was this announcement in April by Wal-Mart to reduce inventories, which is a pushback for Procter & Gamble and some other customers which are very large customers of yours. Can you talk about how local currency growth has changed for your -- I guess for your top five or six customers? Usually, sometimes they during the quarter will give an update how growth has been for their key customers versus for the company as a whole.

Well, I think, Silke, to answer that -- and I think Dick has some comments on the specific question as it relates to Wal-Mart. But our growth with our largest -- our coordinated accounts, our global accounts, whatever you would characterize them -- for the first quarter, that growth was about 1% higher than the growth for the local and the regional accounts. So it's consistent with our overall plans and our strategy. So we don't see the "Wal-Mart" impact yet on that. But Dick -- ?

The Wal-Mart situation is -- I read it as really a continuing process by Wal-Mart to ensure that they are holding as little inventory as possible within the system. And this is not new for any of the major customers doing business with Wal-Mart. It is a continuation of something which has been ongoing for a considerable period.

There was a lot of publicity with respect to the last initiatives. But the major customers of Wal-Mart have been well aware of that for some time. And of course that has had an impact through the system with respect to all suppliers in terms of adjusting the flow of inventory in order to keep pace with what the takeoff is going to be for a customer the size of Wal-Mart.

I think just where we are right now having implemented SAP on a global basis, we're really ideally positioned to deal with those types of supply chain issues, and with efficient production, efficient material requirements planning, and servicing our customers on a global basis.

I think the important point, Silke, is that these are what I call timing issues, within the -- but don't have long-term implications with respect to the total amount that's being sold within any given category.

And then lastly, in -- North American flavors really have improved this quarter and I think domestic flavors sales have been down for all of last year. And you know, there's growth across the board. But can you specifically talk about what's happening in packaged foods, whether there's something like an uptick in packaged foods, and what you have sort of done over the past year to come up with new solutions in that area?

I think, Silke, it's a mix going on in terms of -- yes, there are improvements and uplifts in new products on packaged food. There's very good movement in beverages, where the flavor systems play a critical role.

Also we have talked in the past in terms of other alternate channels of distribution. Americans are not eating less; they're simply eating differently. We have much stronger performance in the food service sector today than we have in the past, if we go back last year or the year before. We underscored with you that the out-of-home eating is a critical area of opportunity for us, and we're beginning to see improvement in performance and that helps and gets captured in the improvement in North American flavors.

How do you gain from a trend to out-of-home eating?

Well, we are providing all sorts of flavor systems to the fast food restaurant chain. We're looking at all forms of out-of-home and away-from-home eating. We're looking and doing business in terms of institutional care. We're looking at university feedings. We're looking at --

In instances where food is prepared outside the home, but brought back in the home for consumption.

This would be of course every supermarket. There are all sorts of away-from-home opportunities to be captured. As I think I have mentioned in earlier calls, the individual who has responsibility for putting the meal on the table in the evening makes that decision in less than one hour prior to the time that meal is put on the table. It can be on the way home from work. It can be a decision that's then taken even at home, even if the decision is to feed with a meal preparation that is outside the home.

So we have known that this trend is continuing. And I said frequently, it isn't that Americans are eating less; they're eating differently. We at this point through a lot of initiatives over the last few years have positioned ourselves well in these categories.

Thank you for the detailed explanation. In fact, I guess I can ask one more question. Can you just give a very short update on what is happening in terms of the butter flavor litigations? And is there sort of like a time limit we should keep in mind in terms of possible litigations coming up or settlements or other things?

We had a pretty thorough discussion of it in the 10-K that was filed. And there has really been no change in the circumstances since the time that K was filed. So there's really not much to add.

Okay. No, that’s fair. That’s all I needed to know. Thanks very much.

Mike Sison, KeyBanc.

When you sort of assess the marketplace, do you think you're holding share, particularly in the first quarter? In addition, when you assess the new product wins, you have talked about -- you have gotten some wins here or there, and it should drive growth going forward. Are you getting your fair share of those new products that are out there?

Mike, I think we're getting more than our fair share overall. We're certainly getting more than our fair share in fine fragrance. We're certainly getting more than our share in the flavor side. And on the functional fragrance I think you have got to take into consideration the very large shares that we currently have and accept the fact that some of the -- what one sees does reflect what we're calling the destocking and the Wal-Mart situation. So I'm not at all concerned about our being able to take more than our fair share of new product opportunities for the balance of the year.

And when you talk about the new wins that you have won, let's say, here in the first quarter, and maybe some of the ones that you won in the fourth quarter, that should really flow through on an organic basis when? On a sale, when should it be more noticeable to us in the numbers?

You mean wins where we won the brief in the first quarter of this year?

That's what you're sort of talking about when you talk about new wins, right?

Well, but the difference -- let's just use the example of fine fragrance. The sales that we are reporting in the fourth quarter of last year and the first quarter of this year if they are new launches are actually briefs that were worked on during the course of 2004 and 2005, because remember, the product development cycle for a fine fragrance can be 18 to 24 months (multiple speakers) from idea to launch.

When you get into flavors, it can vary. Some can have a launch cycle of three months and can have a very short duration. Others may have a longer development cycle, but then have a longer product life. And it's a little bit more difficult to tie it down on the flavors side of things.

But the wins that we have now are with briefs that were worked on during the course of 2005 and, in some cases, earlier.

Okay. So we should start to see that more pronouncedly maybe toward the end of the half, and certainly in '07.

Well, I think we continue to win current briefs. We've had a pretty good success rate in terms of briefs that we've been working on currently, where the launch would be later. I think the key to that is simply does the customer launch the product? And I think to a certain extent, that depends upon macroeconomic circumstances, on the customers' consumer testing and a wide variety of variables that are really beyond our control.

Todd Peters, American Century.

Just a couple of balance sheet items here. Your capital spending still for the year, is that kind of looking down around $90 million, I think?

I would expect it to be a little bit lower than that, Todd, quite frankly. We are still holding very tight to capital spending. I would not just extrapolate the $9 million that we spent in the first quarter. Some of that is simply timing. But right now I would probably -- if you're modeling something, I would probably model capital spending that closely approximates depreciation for the year, and 65 to $75 million, because it does fluctuate a little bit depending upon currency.

So yes, amortization is going to run around $70 million?

Depreciation should be about $70 million, yes. And then remember, we have about $14 million of amortization of intangibles. So if you're looking at the P&L, you have got to carve that out from the depreciation and amortization number.

Good, I still am. And then can you talk maybe a little bit more on what's going on in Europe for you? I guess overall, it's been a little sluggish in other sectors -- the food area. What are you seeing going on there? What's been the more recent trend?

Well, I think that overall of course the performance in Europe -- it's not what you would call the number one growth area in the world. Having said that, we are expecting that we're going to have increased performance within Europe. And again, it depends upon how you talk about Europe.

Western Europe -- it's no secret that the economies within the UK, France, Germany, Italy, and Spain are not the most vibrant on a global basis. Having said that, we are anticipating that we are going to be able to outperform within Western Europe.

Eastern Europe -- we're showing growth of around 20% at this point. And that of course will continue to be a very solid growth area for us. When we talk about the areas of the world where we anticipate being able to perform at a sustained level, you're talking about the developing regions of the world. We're talking about Latin America, focusing on Brazil, Mexico, and Argentina. We're talking about in Asia, with a significant focus on China. And of course, Asia in the broader sense includes India, where we have had strong double-digit performance.

In Eastern Europe, our performance in Russia continues to be very strong. We are looking for good solid growth in the remainder of the – in Poland, in Czechoslovakia. Those all provide continued opportunities of growth, and all of those countries and regions should be in double-digit performance.

And I feel comfortable about the overall growth of the Company, particularly when you balance in the weighted averages in terms of population growth and trend in the developing part of the world in contrast to the developed.

And then when you talk about your top customers, do you talk each quarter about how they did year over year? I didn't hear how that was.

Basically, we just said -- and again, I wouldn't measure it on one quarter. But the growth with our major -- we call them the global and our coordinated accounts really grew at a pace that was about 1% higher than our overall growth rate -- so if that gives you any indication.

Okay, and then last question, the CEO pending announcement -- can you just maybe talk about what sort of attributes or qualities that you would want the ideal candidate to have as you bring someone in? Would it be someone from within the flavor and fragrance industry or the food industry, or just a totally different industry?

I think that the overall objective will be to provide somebody who can continue the reinvigoration, to continue the leadership that we have had over the last few years, and provide the growth opportunities for our shareholders that we think is very, very possible. And I don't think that there is an intention to in any way narrow or specify the specific nature of the individual who is going to be selected.

But I can tell you that there is a vigorous process ongoing, and it is our hope and expectation that we will be in a position as I have mentioned -- to shortly be in the position of announcing who it will be that will succeed me.

I think we have time for one more question.

Jeff Zekauskas, JPMorgan.

Hi, Silke -- I am trying to fill out the whole hour. Can you discuss what you are spending the 9% of R&D on, and can you sort of discuss your efforts on the taste receptor side?

There's no one specific project that absorbs a disproportionate share of the R&D spending. And the R&D spending is broken down between basic -- the search for molecules and working on the encapsulation technology and taste receptor research and so forth --, and then there's the balance which is expended on the creative and application -- the development.

And no one initiative stands out. But certainly, I think we're making very good progress in terms of the taste receptor research and accelerating the process by which we can do high throughput screening of our natural library of chemicals. We think natural is very key. And we're very confident that we will make -- have some successes there.

But remember, that's long-term research. And I would not be thinking at all of having a sale in 2006, or for that matter, even 2007, for something that we are working on now. We don't quite have the pipeline that a pharma company has, but it is a little bit longer than a six- to 12-month pipeline.

Is R&D becoming more important? And I don't want to beat this Wal-Mart thing to death, but if Wal-Mart is continuing to reduce inventories and maybe even cut down on duplicate products to some extent, is that sort of like a reflection of the increases in R&D, that you just have to compete and be more innovative for the remaining products?

I have said repeatedly that the twin pillars for growth of this business have got to be proprietary molecules, which in the end are going to be utilized by our customers on both the fragrance and the flavor side of the business, and continued improvement in customer service. And those twin pillars of research and development and customer service remain the basic pillars for growth of the Company, and will be key differentiators for us as we go forward.

And remember that also, the technology side -- we have talked about hard molecules, but don't forget what we refer to frequently as the soft molecules, if you will, or the soft technology, which is the marketing acumen that we have, which is the fusion of brand understanding and consumer understanding and fragrance and flavor technology. And more and more, our customers are looking to us for assistance in that area and arena, and it too is a key differentiator.

Thank you.

Okay. I think that pretty much brings us to a close. We thank you all, and we look forward to talking to you again next quarter.

That does conclude today's conference call. Thank you for your participation. You may now disconnect.