International Flavors & Fragrances Inc (IFF) 2006 Q3 法說會逐字稿

Good day, and welcome to the International Flavors and Fragrances' third quarter 2006 investor's webcast. Today's call is being recorded.

The speakers for today's call will be Rob Amen, the Chairman and Chief Executive Officer, and Mr. Douglas Wetmore, Senior Vice President and Chief Financial Officer. Gentlemen, please go ahead.

Thank you, good morning, everyone. Before we begin I would like to review the forward looking statements. The complete text regarding our forward looking statements is included in our press release and in our filings with the Securities and Exchange Commission. There is a slide reflecting summarized wording of that applicable forward-looking language that has appeared on your screen. We will leave this slide up for a few moments to ensure that every one has an opportunity to read through it prior to our continuing with the webcast.

Turning now to nonGAAP financial measures. During the course of this webcast we will refer to certain nonGAAP financial measures in order to supplement our GAAP financial results. An example of such a measure is our discussion of local currency sales performance in certain geographic regions supplemental to the report of dollar results because of the impact of exchange rates on translation. As with or forward-looking statements, we will keep this slid up for a time to ensure that everyone has an opportunity to read through it prior to continuing with the webcast. Okay, we will now move on.

Here is the agenda of matters which we'll be covering today. I will discuss our third quarter and year-to-date results as well as comment on our updated outlook for the full year 2006. I will then turn it our discussion over to Rob who will discuss the business unit focus that we announced in October. Rob will also cover our strategic direction moving forward as well also outline our financial goals for the 2007 to 2009 period, after which we would be happy to answer questions you may have.

Now let's turn to the third quarter results. For the quarter sales increased 9% in reported dollars. That is 7% in local currency. Our operating margin increased 26%, driven mainly by the strong sales performance augmented by continued cost discipline enabled mainly by the actions taken in late 2005 and earlier this year to improve profitability.

Earning per share as reported, declined 3%. However, this earning per share comparison is made difficult by the one time tax benefit realized in the third quarter 2005 related to the repatriation of dividends from overseas affiliates. This benefit totaled $23 million or $0.24 per share. Excluding this benefit from the prior year comparative earnings per share improved 46% in the current quarter versus a comparable figure of $0.48 in the prior year period-- prior year quarter, excuse me. I will talk more about the overall improvement in earnings per share in a few moments.

As we look at the-- third quarter was stronger than the first half of the year. Should be advancing a slide, there we go. As many of you know, it is difficult to ascertain a lot of information about the Flavors and Fragrance industry given the great deal of fragmentation and the fact that a lot of companies are either private or parts of larger publicly held companies. We do believe we are seeing an improvement in the overall business environment for Flavors and Fragrances. We achieved solid growth in both sales and earnings in all geographic regions in which we operate. The improved operating margin has been driven by the stronger sales growth combined with improved manufacturing expense absorption and good cost discipline. As a result, our cash flow has improved notably in the year-to-date period. Now I would like to discuss each of these subjects in a little more detail.

As I mentioned, sales increased 9% in the quarter. Excluding currency, our sales increase would have been about 2 percentage points lower or 7% increase, a very solid performance. Flavors achieved a 6% sales growth in reported dollars on a 4% increase in local currency sales. Fragrance sales increased 12% in dollar terms on an underlying 10% increase in local currency sales. An important element of the Fragrance performance was the strong 5% growth in functional fragrances. Driven by a combination of improved volume and new product introductions, including sales of the encapsulated product we've talked about before.

Fine Fragrance continued its outstanding performance over the last several quarters growing 24% in dollars and 21% in local currency. Overall fragrance sales, including ingredients grew 12%. It's difficult to assess market performance but I feel comfortable in saying that I believe we are growing faster than the market.

Our growth was also solid in all geographies. North American continued its strong 2006 performance growing 7% in the quarter and is now up 6% year to date. Europe sales resulted-- sales results benefited in the quarter by the strength of the euro versus the dollar, but the 10% reported growth reflected a strong local currency increase of 5%. Latin America continued a strong performance of the first half of this year, increasing 12%. Latin America sales growth was particularly strong in Fine Fragrances which grew 51% in the quarter and have now increased 25% year-to-date.

Asia sales performance improved [markedly] from the first half of the year driven mainly by new wins and improved volumes. Asia sales increased 10% in local currency. The pace of sales growth in India slowed somewhat in the third quarter, mainly due to weaker fragrance compound volumes. However, flavor growth continued to be very strong growing 11% in both the quarter and year-to-date.

This slide simply summarizes what has been discussed so far regarding operating results. A 9% sales increase, an 11% increase in gross profit, as well as improvement in gross profit as a percentage of sales and a 26% increase in operating profit. While both research and development and selling general and admin expenses showed modest increases versus 2005, the increase was mainly due to exchange. It's important to note that both expense categories declined as a percentage of sales.

SG&A expense in the current 2006 quarter reflects a benefit of $3 million for a partial insurance settlement related to the 2005 product contamination episode. For comparison the 2005 results included about $5 million of expense associated with that same product contamination problem.

In our view, the operating highlights for the quarter in 2006 year-to-date, are gross margin improvement as a percentage of sales of 1%, focus spending on R&D to support initiatives and to drive top line growth, good cost discipline throughout the organization, all of which results in expanded operating profit now up 17% of sales.

There were a number of matters or events that transpired that make the comparison between 2005 and 2006 somewhat difficult. I want to review the evolution of earnings per share from that reported in the 2005 quarter to the 2006. To do so in a meaningful manner we have to decompose the $0.72 per share reported in the prior year quarter. The 2005 result included the $23 million tax benefit that I spoke of previously. For the sake of comparing 2005 and 2006, we have adjusted the 2005 earnings per share to exclude this benefit. As a result, base 2005 earning per share for the quarter would have been $0.48. And you can see the evolution of earnings per share to the reported $0.70 in the current quarter.

Let me just talk about each of those elements briefly. Before getting into that it bears mentioning that the amounts are approximate as they are subject to rounding. And also, we have not broken out the translation impact separately for each caption so the impact of currency moves is embedded in each of the items I will discuss.

The biggest contributor to improvement in earnings, not surprisingly, is our sales growth adding $0.10 per share. Productivity is very much intertwined with sales performance, most notably in enabling improved expense absorption in our manufacturing plants. Productivity also includes the benefits of cost savings initiatives undertaken. The result, $0.05 per share in additional income.

I just mentioned the product contamination matter with costs in '05 and an insurance recovery in '06. The swing between the two quarters approximated $8 million pre-tax, and after-tax about $0.06 per share. We continue to work to recover additional amounts from the vendors involved and their insurers, but the $3 million recovery represents cash received to date.

During the course of the quarter other income added $0.04 per share mainly arising from gains realized on the sale of fixed assets somewhat higher interest income, all of which was partially offset by somewhat higher exchange losses in the quarter. We also benefited from a lower effective tax rate. Excluding the Home Land tax benefit, our 2005 effective tax rate for the quarter was 31.7%, the current quarter's rate was 2 percentage points lower adding about $0.02 per share. We have also reduced the number of shares outstanding by 3% in 2006, compared to the 2005 quarter, adding $0.03 per share. And, finally, we have about $12 million of additional incentive compensation expense, including equity compensation under FAS 123R, which represents $0.08 per share in additional costs. In 2005 based on poor operating performance there was very little in the way of incentive comp.

Now let's look at the full year and go through a similar analysis. The earnings per share as reported was $1.87. But taking into account the same Home Land benefit, the as adjusted earning per share for the 2005 period was $1.63.

Now moving on to the components of the current year growth. Sales growth added $0.16 per share, productivity $0.09 per share, the product contamination matter swing between the year-to-date periods was about $11 million pre-tax, about $0.08 per share, we had some costs in the second quarter of the year that accounts for the difference. Year-to-date other income added $0.02 per share. Excluding the Home Land tax benefit, our effective tax rate for the 2005 year-to-date period would have been 31.2, the 2006 year-to-date rate is 2.5 percentage points lower, adding about $0.06 per share. We have also reduced the number of shares outstanding by 4% in 2006 compared to the 2005 period adding $0.08 per share. Finally, the incentive compensation expense including equity comp under 123R is about $0.16 per share, ending up with $1.96 for the year-to-date period.

It is useful to put in context our quarterly earning per share performance this year compared to the last several years. The 2006 third quarter performance represents our highest quarterly performance in several years. And, with IFF, if you get solid operating results, good cash flow results soon follow. Our cash flows from operations have improved about 70% in the current year-to-date period compared to 2005, mainly as a result of the improved operating results. Cash used and investing activities is down, mainly as a result of markedly lower capital spending in the current year compared to 2005. The net number presented on this slide also reflects about $15 million in proceeds arising on the disposition of fixed assets.

On the subject of capital spending for the full year 2006, I now expect such stemming to be about 45 to $50 million compared to expected depreciation for the year of about $75 million. We have also paid down debt in the current year by about $160 million. Recall that we incurred borrowings in the second half of 2005, mainly in connection with Home Land repatriation activities. Our gross debt at September 30 was just over 800 million versus 950 million last year. Now we continue to pay dividends and we continue to buy back shares, albeit at a somewhat higher pace than in 2005.

Now let me talk about share repurchase activity for just a moment. Year-to-date we spent just over $160 million in share repurchases, including $71 million in the just completed quarter. And, year-to-date we have reacquired just under 5 million shares. At quarter end, shares outstanding stood at 89.5 million, down about 4% from the prior year. As we said, we are committed to returning cash to our shareholders. And in that regard, on October 11 we announced a 14% increase in our dividend, beginning with the dividend to be paid in January of 2007. We also announced a new share repurchase plan at the same time. Our existing authorization was nearly complete with the remaining authority of about $15 million. We will commence repurchase activity under the new plan on completion of the existing plan, and we expect to complete the new plan over the course of the next 18 to 24 months.

Now just looking at 2006 third quarter in summary, we are very pleased with the development and progress in the quarter. As you can see on the slide, strong sales gains both in dollars and in local currency, improving margin, strong cash flow, and that's supported the dividend increase and the new share repurchase authorization. And our operating performance also enabled us to raise our full year guidance for 2006. We have increased the expected earning per share to the range of 2.36 to 2.44 from the old range of $2.20 to $2.28. Sales performance from a local currency perspective is somewhat stronger than previously forecast. And secondly, enabled principally by the stronger sales but enhanced by good cost disciplines and other measures taken to improve profitability, we have arrived at the new earnings per share guidance.

With that, I will turn the call over to Rob who will take you through the next section.

Thanks, Doug. Clearly, we are pleased with the progress demonstrated by the third quarter results. I would like to take a few minutes now to put this current performance into a strategic context for you. When I spoke on the second quarter earnings call I said I wanted to spend the next two to three months doing a reality check. I have done that. And I am prepared to share some of my findings with you.

Let me first start by saying, IFF does a terrific job in many areas. However, I do see areas where IFF can improve. I will describe those but also lead into a brief overview of the areas that we want to focus on, the strategic direction we want to take, and the financial goals we've set for the coming three years.

Starting with the market. The volume growth in the Flavors and Fragrance business is driven by population and disposable income growth. We expect market demand to grow in-line or slightly faster than the global GDP, about 4% or more on average, slower in the more mature industrialized nations and faster in the emerging economies of Asia, Latin America and eastern Europe. While volume growth is expected, I anticipate pricing to remain competitive.

Innovation is highly sought after by our customers and it's rewarded. Innovative products and services will enable IFF to grow, both its top line and its share of business with key customers. In today's competitive consume marketplace, growth is tough. We see the key global and regional companies winning share from others by delivering better solutions for consumers. Clearly, we have to be aligned with, and in fact, partnered with these key customers if we're going to achieve our growth goals. We win when our customers win.

So what is my assessments of IFF today and its ability to compete? Well, first, IFF is a leader in both flavors and fragrances. We're established leadership in many areas, but certainly not all products areas. In general, we have strong competitive capabilities that our customers value. Our customers value more than the flavor and fragrances we produce for them. Because we have excellent capabilities in consumer insight, brand understanding and, of course, the creative developments process.

Equally, our customers value our ability to execute on a global basis. The IFF brand has power. Our customers see IFF as being a leader in innovation and creativity, and supporting that with substantial capability in understanding consumers, and, of course, the quality of our products. In the recent past we have created some hurdles for ourselves with some poor operations execution. And I'm confident this will be corrected over the next few months. IFF clearly has a history of major innovations that bring value to our customers. And that tradition is alive and well in our research efforts today. For example, we are very excited by the perspective growth in our encapsulation technology in the functional fragrance applications such as Fabric Care. Lastly, IFF has excellent people. Our perfumists, flavorists, evaluators, marketers and other staff are excellent. They are focused on winning. And yes, even they, I believe, can do better.

IFF isn't performing at its maximum capabilities yet, we have areas where we have to improve, even areas where we are currently excellent. First our focus. In its evolution, the Company has developed a complicated organizational structure that made accountability less than clear. We needed to address that. And I will say more about that in a few minutes.

Next, we are in the business of developing new flavors and fragrances that bring excitement to our customers products and perceive benefits to the consumers. Our win rate in fine fragrance and beauty products has been fabulous, and that's not by chance. We have a process that is delivering winning results. We need to bring that process across all of our areas of endeavor.

Lastly, our business model, an area for opportunity. We have to become more efficient and effective. We have to reduce our cost of doing business if we are going to grow our margins. So let me address each of those areas.

Recently we announced a new organizational structure. I believe bringing clarity of focus improves the Company's alignment and makes accountability clear. Doing this should enable us to improve our focus on the key customer initiatives, make better decisions on resource allocation and accelerate our growth. The focus on customers and on cost to serve will, I believe, result in better earnings going forward. The best example of this is the superior performance in the Fine Fragrance and Beauty Care team. They have delivered superior performance for 11 consecutive quarters.

Very simply, the business will be organized into two groups. Each led by an experienced and successful executive. This organization will be global so that accountability performance for the customer or in a product area is clear. To enable these businesses to focus on the customers, they will be supported by strong, centralized resource groups such as finance and legal. These changes will be effective January 1, 2007. We are working on the transition now, so that everything will be ready at the start of the new year.

The area I talked about improving product and technology, well, simply put, customers want us to provide them with flavors and fragrances that consumers love. We do a good job. We have do an even better job of providing new and better performing flavors and scents. That will help our customers win. We also have to provide cost-effective solutions to our customers. We have got to be innovative in every element of our product, from how it is created, how it's presented and how it's used. Equally, our customers demand we provide unique differentiated solutions to enable their brands to be distinctive for consumers. And commoditization destroys our customers' value proposition.

Clearly, R&D is a critical capability for IFF, and we are making good progress here. Thus far in 2006 we have patented 7 fragrance molecules, 5 flavor molecules and received an additional 5 patents on our encapsulation technology. The impact of these discoveries will be realized over the coming years. However, I believe we can improve our performance by better aligning R&D with the business units and making better choices of where we spend our resources. IFF is a global enterprise. I believe we have many opportunities to leverage our internal capabilities around the world to reduce our costs. And managing costs is about making choices. Are we spending and investing in the areas with the best opportunities? We need to focus our resources on fewer initiatives and accelerate our performance. I believe we do a thorough, professional job in all these areas, but we are going to get better.

The key initiative for the senior leaders in 2007 is to do an in-depth assessment of all of our processes and practices to prioritize the improvement opportunities. We are just now completing an SG&A benchmarking process, which I believe will help us identify gaps and opportunities. An example, where we are now beginning to scratch the surface of benefits to be derived from the global SAP deployment. The implementation was a success, but the long term objective is really to make a big change in our cost.

Most of what I have addressed are the tactical performance issues we have to work on day in and day out. Here I want to lay out a high level view of what it is we are working to become. First, we aim to be the global leader in flavors and fragrances. What's that mean? The biggest? Perhaps. We define it as being the reference company in the industry. The leader in capability and execution. We will focus on bringing innovative, differentiated solutions that help our customers grow their business. By doing that we expect to grow our market share, because our customers prefer both working with us and the products we sell. We will offer superior value propositions to our customers. People make the difference. A core element of our strategy is building a culture where the best and brightest want to work. Where they're challenged, supported and developed. A culture that builds a [cadre] of talented people that our customers want to work with. IFF's best asset is its people.

If the strategic direction is set, the opportunities prioritized, what are the goals for the next few years? Our planning effort has developed the following goals. First, grow sales by roughly 4% annually, excluding foreign exchange impact. Improve operating margins from this year's roughly 16% to above 18% by the end of 2009. This should enable earnings per share to grow by 10% or more on average over the next 3 years. This will generate substantial free cash flow. The cash will be used to pay down debt as planned, but will also allow dividends to grow in line with EPS, and, importantly, from the current share buy back program. Yes, we will evaluate and pursue capability building acquisitions. Our preference is for organic growth. But that can be enhanced with selected product or technology acquisitions. All of this, we believe will build a Company that is a leader with our customers, an exciting and rewarding place to build a career, and a Company that delivers share owners an above average return.

With that, Doug and I will be happy to take questions.

[OPERATOR INSTRUCTIONS] Jeff Zekauskas, JPMorgan.

A few details questions first. What was the size -- what was the pretax gain on the sale of assets and the after-tax effect in the quarter?

If memory serves, I think the pretax gain was somewhat north of $8 million. And then you just apply our effective tax rate to that.

And what -- was the insurance reimbursement taxed or that's not taxed?

No, that is taxable. Just as the costs associated with the contamination issue were tax deductible.

And in your guidance, do you expect additional reimbursements in the fourth quarter?

No, we don't think it would be prudent to anticipate further settlements. So we will account for those when they are realized. That -- having said that, though, we continue to pursue resolution of those matters pretty aggressively.

So the operating performance was really probably much better than it has been in about 8 years? So is the quarter eccentric or atypical? Or has the quality of your business stepped up? That is, is the fourth quarter likely to resemble the third in terms of the growth characteristics?

Well, Jeff, I think you saw it starting earlier in the year. I believe IFF is really starting to turn the corner in its growth. Second quarter performance was pretty good. The third quarter performance is certainly above average. And I would not anticipate forecasting a string of quarters at this level. But the win rate that the Company has reported for several quarters now, is really translating into higher sales. And quite honestly, we think our above average win rate, which we are enjoying now, suggests the future is going to be rewarding.

I guess just 1 last question before I get back on the queue. I think [Givaudan's] operating margin is 21%. So why wouldn't your operating -- longer term operating margin goals be higher than 18?

Well, everything in time and in step. Certainly we don't have an end point of 18 something. From -- we have been operating in the low 16% level. When we get up above 18, we will reassess it and recreate it, and we'll move further. But this is simply the '07, 8, 9 timeframe.

Thanks very much. I'll get back in the queue.

Mike Sison, KeyBanc.

Great quarter.

Thank you.

In terms of the growth that you had in the third quarter, did you get any pull ahead? Meaning, did the plus 7 take some of the momentum into the fourth quarter? Or was that pretty much clean and your fourth quarter is coming in as expected?

I would like to think we had a clean quarter, Mike, but we have raised our guidance. We have increased the full years sales guidance and the full year earnings per share guidance. So I think, from that, you can infer that, and as Rob said, we are gaining momentum. So remember also, the comparison for the third quarter sales performance was slightly favorable. Because our third quarter 2005 was somewhat weak. So that enabled a bit of performance. But it was mainly driven by strong volumes and new wins.

And when you think about your SG&A as a percent of sales now in that 16% level, is that a good run rate going forward, considering all the cost savings that you have achieved thus far?

I think Rob mentioned with the benchmarking, I think over the next couple of years we should anticipate that that should come down somewhat. Although I think it is a bit premature to try to quantify that. Because we are still in the final phases of completing that benchmarking. But the goal would be to leverage what SAP brings to the table. And that allows us to streamline, particularly administratively, costs.

Right. And in terms of the new products wins, can you give us a feel for -- are your new project wins up a certain percent? Is there any way to quantify or give us a sense of what -- how much better the new wins are in '06 versus '05, and the momentum going into '07?

I mentioned the wins during my commentary. And remember, if you are familiar with, and I know you are, our product development cycle, the sales being realized now are the result of sales and creative activities of the last 18 to 24 months. And I also said that our win rate continues. So I think you have to reach your own conclusion from that, in terms of the future. But I did say our win rates continues, and that bodes well for the future.

So the win rate year-over-year is higher than it was '05 versus 04?

I think that is a very fair statement, yes.

Okay. And when you look at your financial goals, Bob -- or Rob, into 2007 to 2009, I am just curious, when you look at the pluses, 4 % plus, 18% plus, what do you think you need to do to get to the plus side of that. In addition, when you look at local currency sales of 4 %, it is only matching, let's say, market growth. And any reason you wouldn't do better than market growth?

Well, our goal clearly is to continue to grow our share. I said that. If we are doing the right things for our customers, we are going to grow faster than market. We think the market is going to be around global GDP. And that's why we're saying 4 plus. I don't have the data to support a higher number at this stage, but I think it will be above that.

One of the things we want to do in setting these expectations for you and others, is we have got to have multiple options to achieve them. We have got some terrific product options. The R&D effort needs to continue to deliver for us. We are going to have to go after the cost effectiveness side of our business model. And that still isn't well planned. We have some rough ideas. We have got enough options where I am comfortable setting as a strategic objective for the Company, growing earnings per share by more than 10% a year over the next several years.

Great. And last question. I'll get back in queue. Just could you give us an update on encapsulation? Are there going to be new launches? Or should we expect new launches next year? Or sort of an update of how things have gone there.

Well, we are starting now. I guess we are going to have the first commercializations this quarter. We had a little in the third quarter. It will grow in the fourth quarter. We have got some major customer launches next year. But it is really up to our customers to roll that out. We will report it as they do. I think just to be consistent with what we have said in the past, and to quantify for those that may not have heard it before, the sales of those products will probably be less than 1% of our consolidated sales this year.

We would anticipate them, right now, based on what we have seen, to be between 1% and 2% of our sales next year. And in 2008 we would expect them to be somewhere in the range of 2% to 4% of our sales. So apply that to our current sales base, and you can get some idea of the order of magnitude. And remember, our growth is incremental, briefs, because the individual briefs are not of overwhelming value. It is the momentum that is gained by winning a lot of business in that area.

Great. Thank you. Great quarter.

[OPERATOR INSTRUCTIONS] Jeff Zekauskas, JPMorgan.

Over time, your R&D has been running about 9% of sales. And you spoke of some efficiencies that you might be able to capture. Is it likely that your R&D as a percentage of sales will decrease, and by what magnitude over time?

Jeff, we are in the midst of doing a review of our R&D structure and priorities. And I haven't seen that we need to either set a goal for reducing it or changing it. We really want to be sure that we have a structure that enables us to identify the opportunities, put the resources appropriately to those opportunities, and then deliver. And I don't have too much in the way of specifics on R&D today. I would like to review that with you at some point in the future, when we have more details for you.

Second question is, as you reorganize the Company into flavor, operating structure, and fragrance operating structure, will exterior consumers of your information be able to see an income statement, or gauge the profitability of both businesses?

Jeff, since the announcement was just a couple of weeks ago, we are in the process of evaluating what changes we have to make to our financial reporting. And as Rob said in his comments, the changes will actually be effective January 1, 2007. So I wouldn't anticipate any change in the current year reporting structure. But moving forward, I would anticipate that there would be some changes along the lines of what you are suggesting.

How did business with your 5 largest customers go this quarter?

We had fairly good growth there.

Yes, I understand that. But usually you disclose it. That is, I think, in the last 2 quarters it was 4% growth and 5%. What was it this quarter?

Let us just double check that number for you, so we are not giving you a round word answer. And we will come back to you on that. Okay, Jeff?

Before call is over.

All right. I'll get back in the queue. Thank you.

[OPERATOR INSTRUCTIONS] Jeff Zekauskas, JPMorgan.

So why was Europe in fragrances so good? Local currency, it was up 7.

The performance in Europe, is plain and simple, the team in Europe did a superior job of winning new business, and the products were successful in the marketplace. They just did a great job. Volume growth drove it all.

Jeff, I think we had 1 strength in western Europe. Where that western European countries grew at 5%, so we see a little bit of improvement in the western European economies. Also, while it is still small, eastern Europe grew at about 18% for the quarter. So I think that there is some resurgence in the economic environment in Europe that is probably helping us a little bit. That was also one of the things I was referring to when I said you are seeing a little bit of strengthening in the flavor and fragrance industry.

Well, I mean, flavors didn't really grow in Europe. Flavors was up 1% in local currency. Is your encapsulation growth in Europe?

Some of the encapsulation sales are in Europe, yes.

What is your capital expenditures for next year?

For next year, we are just in the process of putting that together. But I would suspect that -- and to stay with the past, over a 3 year period, I would expect that capital spending would be in line, or slightly below our depreciation. So I think next year, it certainly won't be at the low level we had this year. Probably along the lines of 60 to $70 million. But we will provide further insight into that when we release full year 2006 earnings.

Thank you very much.

Mike Sison, KeyBanc.

In the fourth quarter, can you talk a little about the seasonality there? Isn't it typically a weaker quarter versus the third?

Well, it is our smallest quarter. And again, that is mainly because the fine fragrance sales and so forth for the holiday season have essentially been filled at that point in time. But it by no means is an inconsequential quarter. And I think the year-over-year comparisons, it has always been the smallest quarter. So we do have a fair comparison year-on-year with it. But that is basically why we moved to the full year guidance, too. And as you heard earlier today and saw in the press release, we are increasing our full year guidance.

Right. And in terms of fine fragrances, you sort of commented in the past that at some point the comparisons would be more difficult, but it continues to surprise on the up side. Great quarter in the third. What -- you probably have a good sense of what your backlog is going into 2007. Should we see similar strength, the 10 to 15% growth? Is that sustainable?

Mike, I think the -- part of that is Doug's conservatism. This is a team that delivered 11 quarters in a row of growth. So it is fair to say that the comparisons will get more difficult over time. But the team does just a great job of continuing to grow its share.

I think, too, it depends on the holiday season, because that will impact restocking activity in the first part of next year. But be mindful of the fact -- we continue to win a lot of new business, and that is key to our sales growth. And kudos to the fine fragrance and beauty care team.

What is the market growing in fine fragrances right now?

It is really hard to know. We are starting to see information from our customers. But very modest growth. Not more than 1, 2% depending upon the key areas.

I think one of the other positives, which some folks were concerned about earlier on, was the impact of the changes in regulations with respect to air travel. And now that seems to have diminished because they seem to have found a means to overcome that. So that eliminated that level of uncertainty, as well.

Right. And the pick up in functional fragrances, that was a nice step up versus the beginning of the year. Is the momentum there going to continue?

Well, I think with the encapsulation technology and the wins that we have seen, yes, I would expect that -- you know is it 5%? I can't tell you precisely, but we would expect that it would continue.

And Rob, when you look at the 18% margin goal by '09, you are at 16ish now. Can you sort of give us a feel, is the bulk of that new products? Is the bulk of that cost savings? A little bit of both? What is going to drive us to get there?

It is really a balance program. Clearly, we are anticipating sales growth, but coupled with that, is improving cost structure. I am not betting on just 1 variable to get us there. I think it will be above 18% by the end of '09. And seeing how it develops, then we will have more confidence to figure out what will drive it beyond that.

Great. And last question, Doug, tax rates. Any changes to that going into next year?

We are just in the process of doing the budget right now. And I think it will probably be very close to what we anticipate for the full year effective rate for this year. Which could be somewhere in the range of 29 to 30. Remember, earnings mix impacts us, because of certain of the countries that we operate in overseas. And we'll have time for 1 more question. But to just follow-up on the query that Jeff Zekauskas had. Sales to our top 5 customers in the current quarter on a local currency basis, were up just under 10%.

Thanks, guys.

Alex Richardson, [inaudible].

I just wondered what share buyback assumption for Q4 is built into your revised full year EPS guidance range?

We have not built that in.

Okay. All right, thanks.

Thank you all very much, and stay tuned. Thank you. We will be signing off.

And that does conclude our conference. Thank you all for your participation. We hope you enjoy the rest of your day.