International Flavors & Fragrances Inc (IFF) 2006 Q4 法說會逐字稿

Good day and welcome to the International Flavors & Fragrances fourth quarter 2006 earnings release conference call. Today's call is being recorded. The speakers for today's call will be Mr. Robert Amen, Chairman and Chief Executive Officer, and Mr. Douglas Wetmore, Senior Vice President and Chief Financial Officer. Gentlemen, please go ahead.

During the course of our webcast we may make certain forward-looking comments (technical difficulties).

This slide summarizes the (indiscernible) of applicable language. The complete text regarding our forward-looking statements is included in our press release and in our filings with the Securities and Exchange Commission. I will leave this slide up for a few moments to ensure that everyone has an opportunity to read through it prior to our continuing with the webcast.

Also during the course of the webcast, we will refer to certain non GAAP financial measures in order to supplement our GAAP financial results. Examples of such measures include our discussion of local currencies sales performance and applicable geographic regions and earnings per share, excluding restructuring charges and other non-recurring items.

As with our forward-looking statements, we will keep this slide up for a time to ensure everyone has an opportunity to read through it, prior to continuing with the webcast.

Here is the agenda of matters which we will be covering today and now I am going to turn the call over to Rob for some opening comments.

Thanks, Doug. Good morning. It is my pleasure to share these excellent fourth quarter results with you. Let's start by looking at the fourth quarter.

Sales were up 11%. In local currencies they were up 7% which is in line with the third quarter results we posted. Operating margins improved 2.2 percentage points to 13.3%. Better driven by sales and good expense management but I do note that it is still below the level we had achieved in 2004.

Earnings per shares on a comparable basis and Doug will go through the reconciliation. We see earnings per share on a comparable basis up by 36%. For the full year, sales were up 5% and that is growth that, we are not certain, we don't have hard industry data but we think the market is going growing somewhere in the order of 2, 3 or perhaps 4%.

Earnings per share for the year, again on an adjusted basis, were up 20%. I feel good about the results, the progress and the momentum we have going into 2007.

Looking at the highlights for the quarter, clearly the success we are enjoying in fine and beauty care is exceptional. It comes as a result of a well-developed strategy, superbly executed by a global team. Sales growth was positive in all regions with Europe posting the best improvement in years. Local currencies sales were up there 5%. Latin America's performance was also noteworthy.

I'm pleased our expense ratios improved. This reflects the efforts started earlier in the year. I still see more potential to improve our cost structure ahead.

Lastly, strong cash flow. This year, the team has done a great job managing working capital. Capital expenditures have been modest, below depreciation which, really, isn't our goal or sustainable in the long run but it benefited cash flow this year. Clearly we generated the free cash flow to benefit the balance sheet.

For the year, the highlights -- clearly the improvement in sales [of] 5%. We don't have good industry data as I mentioned, but our estimates we believe we grew share in 2006, which is one of our goals.

I also mentioned earlier I believe we have further to go to improve our cost structure. We are developing these plans and will begin implementing over the course of this year. They won't have a material impact in 2007. They should contribute in 2008.

For the year the highlight is, of course, the strong improvement in earnings in cash flow. We generated the free cash flow sufficient to increase dividends by 14%, reduce debt by more than $170 million, enable us to make pension contributions of something on the order of $60 million and to buy in more than $160 million worth of stock.

Lastly, as I said, we've got good momentum going into 2007. But, Doug, would you help us with the analysis?

Thanks rob. Very briefly, we will talk about the fourth quarter and the full year 2006 and we will get right into the details for both fourth quarter and full year 2006 sales.

Reported dollar sales increased 11% in the quarter on a 7% local currency increase. This strong growth completes a solid second half of 2006. We also grew our local currencies sales by 7% in the third quarter.

For the full year, sales increased 5% in both local currency and in dollars. Our sales growth is strongest overall with our largest customers. On a local currency basis, sales to our five largest customers increased nearly 9% in the fourth quarter and over 6% for the full year. Local currency sales to our top 30 customers which now accounts for 57% of our sales, compared to 55% in 2005, grew 11% in the quarter and 8% for the full year.

Fragrances continue to leave our sales growth, but flavors also performed very well in the fourth quarter. Flavor sales grew 7% in dollars on a 5% increase in local currency while fragrance sales increased 13% in dollars on an underlying 9% increase in local currency sales. For the full year there was no overall currency differential between local currency and reported dollar growth. On both a dollar and local currency basis flavor sales increased 4% while fragrances increased 6%.

An important element of our fragrance performance was the strong 9% growth in functional fragrances driven by a combination of improved volumes and new product introductions.

Fine fragrance continued its outstanding performance for the last three years growing 18% in dollars and 14% in local currency during the fourth quarter. For the full year fine fragrances grew 13%. The fine fragrance performance was driven both by new product introductions and by strong demand for existing fragrance creations.

Overall, in the fourth quarter, fragrance sales including ingredients grew 13% in dollars and 9% in local currency.

Our growth was also solid in all geographies. North America continued its strong 2006 performance, growing 8% in the quarter and growing 7% for the full year. Europe sales results benefited in the quarter by the strength of the euro versus the dollar but the 15% reported growth reflected a strong local currency increase of 8%. Latin America sales increased 9% in 2006. Sales growth was particularly strong in fine fragrances which grew 25% in the quarter and for the full year of 2006. Latin America also continued to contribute strong growth in flavors, which grew 11% for the full year. Asia sales performance continued to improve, driven mainly by new wins and improved volumes. Local cursing sales increased 7% for the quarter and 4% for the full year. The pace of sales growth in India slowed somewhat in the quarter mainly due to weaker fragrance compound volumes. However, flavor growth continued to be very strong growing 10% in both the quarter and the full year.

In summary, looking at the fourth quarter operating results and just to repeat a few things that Rob highlighted before, we realized an 11% sales increase in improved gross profit by 13%. A 34% increase in operating profit on those sales results. It bears mentioning that while both R&D and, selling, general admin expenses increased this quarter in absolute value terms compared to the prior year; exchange was an element of the increase.

As a percentage of sales, both R&D and SG&A expenses declined from the prior year to 9.3% and 17.6%, respectively. SG&A expenses in 2005 quarter included $3 million for the product contamination matter we dealt with last year. Absence of these costs contributed to the favorable comparison in the current quarter.

Turning to the full year operating results, we achieved a 5% sales increase and improved gross profit by 7% and a 14% increase in operating profit. Selling, general, and admin expense in 2005 included $8 million for the product contamination matter, and in 2006 SG&A expense includes the benefit of a $3 million partial insurance settlement related to the contamination episode, and those funds were received in the third quarter.

Assets of the contamination cost combined with the insurance benefit of the current year contributed to the favorable comparison in SGA expense as a percentage of sales.

On that specific note regarding contamination we continue to pursue the matter of recovery from our insurers and those of our suppliers but to date no additional insurance proceeds have been received nor accounted for.

Both R&D and SG&A in 2006 also include higher incentive compensation expense than the prior year. You may recall that the Company paid very little bonus in 2005 based on our core operating results. We are paying out at close to target on all key metrics in 2006.

Now I would like to discuss earnings per share. In analyzing earnings per share for the full year 2006, it is essential to exclude from 2005 certain unusual items. The 2005 results included a $0.26 per share benefit relating to the Company's repatriation of funds from overseas affiliates under the provisions of the American Jobs Creation Act. Partially offsetting this tax benefit, we reported restructuring charges of $0.16 per share relating to the elimination of 300 positions. The cost-cutting actions we undertook in 2005 were a strong part of the foundation of the improved profitability in 2006.

Taking into consideration these nonrecurring items, we consider the 2005 base or normalized earnings per share to be $1.94. On that basis, we will analyze 2006 results.

Let me comment on the key elements contributing to our earnings per share improvement in the current year. Sales growth was the main driver of our improved earnings, adding $0.30 per share. Productivity and our cost saving actions added $0.17 per share as we realized the savings of many of the cost-cutting initiatives undertaken.

The product contamination matter accounted for a differential of $0.11 between the years and now (indiscernible) as I mentioned before was a partial insurance recovery in the third quarter '06.

Other income added $0.05 per share, mainly due to the gains on asset sales, partially offset by higher exchange losses and other nonoperating items.

Excluding the Homeland Tax benefit which we have already taken out of the 2005 comparative, our effective tax rate in 2005 would have been 31.6%. The 2006 rate is 28.8, which is 2.8 percentage points lower, adding about $0.10 per share.

We have also reduced the number of shares outstanding by 4% in 2006 compared to the prior year, adding $0.09 per share.

Finally, additional incentive compensation expense consumed $0.30 per share. As I mentioned before, we are paying out as close to target in all key performance metrics established for the 2006 operating year.

Taking into account all these components, earnings per share for 2006, excluding the restructuring charges, totaled 246.

We have introduced another charge. It bears mentioning that the 2006 results include substantial gains on the sale of various assets. The second chart excludes these nonrecurring gains from our results. Everything is consistent with the prior slide, with the exception of other income being adjusted to exclude $0.14 per share after-tax related to the gains. Other income was adjusted from being a source of $0.05 per share to a decline of $0.09 per share, the differential of $0.14.

The property sales included the disposition of our former creative facility in Paris which was vacated at the time we moved into new facilities in Neuilly, as well as the sale of a parcel of land retained at the time we did the sale leaseback of our New Jersey facilities several years ago. We retained no interest in any of the properties sold this year.

I emphasize the exclusion of these gains as it is important to consider the $2.32 EPS for 2006 as a more appropriate baseline to all future earnings per share grew moving into 2007 and beyond.

It is useful to put our earnings per share performance into perspective by comparison to the last few years, for the sake of comparison results of pro forma to exclude the effects of restructuring activity and related costs. The Homeland Tax benefit in 2005 is also excluded as are the gains on asset sales in 2006.

We recognize we have made great progress and just completed what we consider to be a pretty good year. But as Rob mentioned we also appreciate that there is a lot more work to do that we have, moving forward.

Now looking at cash flows, our cash flows from operations improved about 50% in the current year compared to 2005, mainly as a result of the improved operating results. Cash flow from operations is after making approximately $60 million in pension contributions to the U.S. and certain other affiliate pension plans in the fourth quarter of the year. These contributions put us in pretty good shape for all major plans from a funding perspective, and substantially mitigated the impact of the adoption of FAS 158 -- the new pension standard.

Cash used in investing activities declined from 2005 levels. Mainly as a result of markedly lower capital spending in the current year. The net number presented on this slide reflects about $27 million in proceeds arising on the disposition of assets. Capital spending for the full year total $58 million.

As Rob mentioned we paid down debt in 2006 by $172 million. Recall that we incurred borrowings in the second half of last year mainly in connection with the Homeland Repatriation activities. Our net debt at December 31st, 2006 was $692 million compared to $677 million at the prior year end. We continue to pay dividends and we continue to buy back our shares.

For the full year 2006, we spent $271 million in share repurchase including $109 million in the just completed quarter. For the year we reacquired just under 7 million shares including 2.3 million shares in the fourth quarter and after the effective stock option exercises reduce the net shares outstanding by about 3.5 million shares. At year end, shares outstanding stood at 89.2 million, down about 4% in the prior year.

Now I'll turn the call back over to Rob for the next portion of our discussion.

I have been asked and I have asked you why to invest in IFF? I believe there are a few core reasons.

First, IFF is a business driven by population growth and rising personal income. Global trends make our outlook quite positive. IFF is a global leader with great customers. We are very fortunate to be working with the best of the global and the regional accounts. They're demanding. They want great products. They want great services. Equally, they are willing to pay when we bring them products to help their products be differentiated in the marketplace.

Thirdly, IFF offers a very special value proposition. We integrate great science and creativity with unique insights into consumer and customer brands. This enables us to not only create great products but to support our customers in their efforts to bring their great products to the market.

Lastly, IFF has the financial strength to win. We have the ability to invest in building a stronger company while still returning cash to shareholders.

Now in October, I reviewed our financial goals. Let me just cover them again.

At that time, I said our goal was to grow local currency sales by something greater than 4% a year. That was based on the data we have. We will continue to evaluate that goal in light of the markets because our expectation is we want to grow this company on the order of 1 to 2% faster than the market growth.

So if we have the data that demonstrates that the market is growing faster, we will be raising our expectations. We expect to improve our operating margins to above 18% of sales by the end of the year 2009. That will come, driven in part by the increase in sales by new products but clearly by cost improvements as well.

Earnings per share should grow by more than 10% on average. It won't be always a smooth line. Sometimes it will be faster, sometimes perhaps a little less. We think certainly about that level overall. We believe we will have a free cash flow to enable us to meet all of our obligations and increase dividends in line with our earnings per share.

As Doug mentioned, we have 89 million shares outstanding and our current dividend yield is about 1.7%. We are currently now executing under the $300 million stock buyback authorization.

And lastly, as I've said before we will pursue capability building acquisitions. We are currently evaluating areas of interest in products and technologies to focus on. We will be deliberate and thoughtful. We are looking for partners to grow with, partners who can help us establish the building blocks to leverage our future growth.

So with that, we would be happy to take your questions.

(OPERATOR INSTRUCTIONS). Jeff Zekauskas.

In 2007, do you expect the flavors market, your flavors business to grow faster than fragrances or fragrances to grow faster than flavors?

That's a great question. In the past several years we have had fragrances grow faster than flavors and it -- really the two, we believe, are going to be very, very close. I mean it is not a substantial difference one way or the other, but we expect our flavors business to pick up more.

When we look at the history of IFF, the way volumes have been reported on an annual basis is that often there is a weak year followed by a relatively strong year and then a weak year and then a strong year. Is that the kind of pattern that you see going forward? Or is it the case that various industry factors are accelerating the growth in the industry itself?

That is, is 2007 likely to be above your longer-term trendline or below or the same or can you not tell?

I'm not sure if that is one, two or 12 questions.

Well, above or below trendline.

We have had -- looking back, the Company has had some good years followed by weaker years, but clearly that is not our plan or our expectations going forward. We wouldn't be able to meet our goals if we did that. 2006 was a very, very important year because we had a great second half. The team did a superb job and I do mean, when I make those statements about momentum, I think it is very important.

We believe that the momentum we had coming out of '06 is going to mean a lot for us in '07. We anticipate volume and sales growth in '07 and we are building those products and efforts to make sure that continues in '08 and beyond.

So I think the external macrotrends of the rising population, the rising disposable income around the world is going to support our market growth; and I wish I had better data to share with you on what the markets are growing. But I believe over the next several months we are going to be doing more work on it and when we are confident we will share with you, but there is a very real possibility that the markets -- many of you and we have shared the idea of being above 1 or 2% growth are perhaps growing faster than that. That should translate into quicker revenue growth for us.

Thank you. I will get back into the queue.

Mike Sison.

In terms of the 5% organic sales growth you achieved in 2006, could you just give us some anecdotal sort of commentary on how much of that growth was driven by new product wins and maybe how much of it was just the market?

There are a couple of key elements. One was we said growth early on was about 1% of pricing involved in that and that was really some of the pricing initiatives we undertook in 2005 that rolled into 2006. It's as we have talked about in the past it is difficult to isolate precisely new wins because sometimes new wins (indiscernible) existing compounds but what we have seen is growth in fine fragrance where it's most specific.

Over the last three years, the business, the sales or about 50% are new wins, and new wins being in the last five years. So but we continue to have a very high win rate on new business briefs. We don't win everything sadly but that's the reality of life. But we continue to have a very high win rate and that leads us to believe that we will continue to have new product introductions in the future sales.

The other perspective I would have is the difference between the first half and the second half, the second half was and to achieve the 7%, there was a lot of volume win and a lot of new product win. And I think that's the more important thing because that's what's going to carry us forward into next year.

The + 7%, would that have been wins you would have done in the first half of '06 or maybe the back half of '05? I'm just curious as the timing of when you win something it takes what? About a year?

It's -- lightning speed it would be three months and more normal it is nine to 12.

Was your win rate and sort of the quantity of wins in '06, greater than the quantity of wins in '05?

We don't have the data, we've never shared with you, but we had a very, very successful '06 in terms of wins. We kind of categorize things as must wins. We had a very high percentage of the most wins.

So when you look that 2007, it sounds to me the win rate seems pretty equivalent or not, if not stronger than what you are going into '06. The only reason your sales growth was slow is if the market was slower.

Well there's lots of uncertainties. A, we have to win it and then the customer has to launch it, and the timing, and when they ramp up their supply chain. But you are right. We feel very good, heading into '07 given the wins we had and the carryover business because it is not just all new business. That is certainly an element. The other element is the staying power and the erosion of older products.

We were pleased, actually, with erosion of our older products was slower than we had originally projected. And that benefited the revenue growth and of course, hopefully, we will see that continue in '07.

Right. Then when you take a look at your earnings per share growth goal of 10% per year starting '07 through '09? Is that often -- you sort of highlighted two '06 earnings per share numbers in your release -- the 254 and a 232. What would you base the 10% growth off of?

As I mentioned in my comments we really think the 232 is the proper baseline because all that does is exclude the non-recurring charges, restructuring charges. There was a $0.02 per share in the year and also excludes the gains from the sale of nonoperating assets. So that is our baseline.

So internally you were looking at the 252 to grow 10%+ up to 232.

With our long-term strategic growth we will average off of the 232.

Okay. Great. I will get back into queue.

John Roberts.

You've had some time now to think about this [Juvedon] Quest combination. Any impact IFF?

We have thought about it and Juvedon is a fine company, a good competitor, Quest was as well. It really doesn't change the competitive dynamics for us in the immediate future.

You don't think it gets them on to more or less for bidding or anything like that work? Might be a little bit more competitive?

Competitive market whether they are more or less or not, they are good and no I don't think it really changes the dynamics for us.

Secondly has the sustained fragrance product moved beyond the initial customer application?

Do you mean the capsulation?

Right.

The next launches are scheduled to be this year. And as Rob mentioned, it is more along the lines of making sure that the customer follows their timeline, but we see that in our 2007 growth.

Thirdly with the new global structure in place instead of the regional structure I think as of January 1, are you doing anything differently that you can cite any anecdotal things you can talk about that are changed since you've gone in with that structure?

Yes. I mean, I think we have done the sorts of things that you would expect. When we went to the two business units, we realigned our R&D structure so that R&D, the applicable areas of R&D report to the business unit managers. And we have seen an improvement in the dialogue, the alignment, and the response already in that area.

We have got global managers in charge of the creative centers. So we are taking a hard look at our structure. And where we are spending money and how we are doing things and trying to leverage best practices around the world better. I think there's better continuity on commercialization. Over the course of 2007, we are pleased. We didn't do too much about it, but we had 20 patents filed this year and I think, Doug, the number was 11 new molecules?

Commercialized molecules, yes.

So we think this alignment is going to allow us to be working on the things that the flavorists and the perfumers need more and enable us to commercialize more rapidly those things which are discovered in research.

Just as a housekeeping point in probably late March before we issue the first quarter 2007 earnings, we will file with the SEC business unit information on a quarterly basis for 2005 and 2006 so that you can update your models, too. We will report henceforth on a business unit basis so flavors and fragrances rather than a geographic basis.

Super. Thank you.

Richard O'Reilly from Standard & Poor's.

I guess I was confused on the base earnings. I think your answer to Mike answered that, but the other of the $0.14 gains, $0.6 was in the fourth quarter, the other $0.8 was in the third quarter?

Yes.

I think your answer to Mike answer that, but the other of the $0.14 gains, 6 was in the fourth quarter the other 8 was in the third quarter?

Yes.

Okay. Because I don't think you highlighted that previously. Am I wrong? In your guidance?

We did highlight that in the third quarter. It was an element of the reconciliation of earnings per share for the third quarter. If you go back through the slide, it was not specifically broken out absolute value it was one of the elements (MULTIPLE SPEAKERS)

But that was part of your previous full gear EPS guidance?

Yes, it was.

Okay. Fine. So we should be thinking about the 232. So, obviously, the few estimates out there should be revised to reflect a lower operating base?

Remember when we updated the guidance for 2006, we knew that we had the gain on the sale in the third quarter of these other assets, but with real estate transactions, there is no certainty when they close. So we could not contemplate any gains on the sale earned in the fourth quarter when we provided that (indiscernible) guidance.

Okay. Fine. Good. Thanks a lot.

(OPERATOR INSTRUCTIONS) Jeff Zekauskas.

Doug, what was the pretax value of the land sale in the quarter?

The pretax value of the land sale? Or you mean the pretax gain?

What is the pretax gain?

The pretax gain?

Yes.

Just under 8 million, I think. 7.6.

Just under 8 million. So if you strip that out, your other income was a very large negative number this quarter? Why is that?

As I mentioned you had some volatility which drove in currency. We had higher exchange losses than the prior year and then there was just a couple of other miscellaneous costs in there. Nothing, other than exchange stood out as being particularly significant.

How large were the exchange losses?

Couple million dollars.

What were the other large items in there?

Well, you know, it's included in other income because it's other nonoperating items. I don't have a complete analysis right in front of me but there is nothing else that stood out.

There's nothing big or material that by itself is worth (MULTIPLE SPEAKERS).

Secondly, if you look at your very strong fine fragrance volumes both for the quarter and for the year, if you broke that up into men's and women's fragrances, are the growth rates different?

Women's represents a higher share of the overall market and we did very well in women's. But I think we got several significant wins in men's as well. From a value perspective, Jeff, I don't have that broken down between men's and women's.

If it is important, give me a little bit of time and you can follow up on that and if anybody else is interested in that information, please call me.

What's the CapEx for the coming year for 2007?

It should go back to more in line with our depreciation and as we've said for several years, if you look over an average three-year period, we should spend pretty much in line with depreciation over that three-year period. We will have some ups and downs. As you know, '05 was substantially higher than average. '06 was lower but as a measure, our depreciation is roughly $75 million excluding the amortization of the intangibles that you see on the cash flow statement. I would model something along the lines of $75 million in CapEx spending.

Then, lastly, on your cash flow statement, what is the other net the negative $38.3 million and in terms of your incentive comp, has that already been paid out or do you pay some of that next -- in 2007?

No, that has not -- that does not get paid out as yet. It is paid out during the first quarter.

So that would be .3 times 89.2? So in other words, it is roughly 27 million in incentive comp you have to pay out?

It's actually a little bit more than that.

A little bit more than that?

Yes.

I'm sorry, what is in the 38 million?

You mean the other net (MULTIPLE SPEAKERS)?

Yes. Other net. That's the one I mean.

You've got a number of different things in there. It's deferred taxes. Again it is capturing the other. It is down substantially from the prior year.

I think deferred taxes is a separate line, but I can follow up.

No, a fluctuation in the balance I believe. That's the deferred tax provision that would be broken out separately.

Thank you very much.

Dan Jensen from Handelsbanken.

Yes. Hello. Dan Togo of Handelsbanken in Copenhagen. I was wondering if you could elaborate a bit on flavors market in Europe. I can see growth has picked up somewhat in Q4 compared to previously in the year. What is the explanation for that?

I think we've said in the past we were struggling in serving our flavors customers in Europe because of some operational issues. And we made it a point of correcting those things. As we've improved our operational performance and our on-time service, we picked up sales a good deal.

Equally, we have been growing our sales in Eastern Europe more significantly. So I think part of it was just internally getting our house in order and then the other is catching up with the market.

So in Q4 you are basically growing along with the market or what is your assessment there?

I would love to be able to tell you what I thought the market was going. I don't have the data to say that. We are pleased because, as you look back, we have not been growing very dramatically in Europe. This was a turnaround quarter for us. I want to see it sustained and continued on, but I can't comment on the whole market response.

I think we will have a little more in sight when some of our competitors release earnings and that happens, generally, in February.

Thank you.

Mike Sison from Keybanc.

Any cost savings expected to generate in '07?

Mike, some of the actions that we undertook in '06 as you know in late '05, we will benefit from those savings because some of the folks didn't leave the employ of the Company until the end of the first quarter or in some cases the end of the second quarter. So, yes, we will get some benefit in the first half of that. And we basically achieved all the annualized savings that we anticipated at the time we took those actions in the latter stages of '05 and early '06.

And in terms of R&D as a percent of sales, is that starting to go down in '07 in terms of the amount of R&D you are going to spend?

In looking at it the way that we report now, I suspect it might decline slightly, simply because of sales growth, but at the same point in time remember that we are going to have a somewhat different reporting scheme moving forward where elements of the R&D directly related to the flavor and fragrance business units will be embedded in those business units. Then basic R&D, the long-term R&D initiatives, will be separate as a corporate initiative. So it will be a slightly different reporting framework than you are used to, which is why we will provide 2005 and 2006 comparatives sometime in March.

Then in functional fragrances where the growth has picked up like a bit besides encapsulation, were there other major new product wins to highlight going into '07?

There were, Mike. We are not at liberty to identify the customers but to get that sales growth there was new product and higher volume in addition to -- I mean encapsulation was a very small amounts in the course of the quarter. So it came primarily in other areas.

So that part of the business should continue to sort of outpace let's say the average over the next couple of quarters because of the momentum recently built?

I think if you look on an analyzed basis that is probably true. Remember you can have some fluctuations from one quarter to the next. So but we are very encouraged about the encapsulation technology particularly and as we've talked about, that will become a more significant piece of our overall sales.

Any thoughts in raw materials this year? I think you had commented it would be up 3% and was that about right? And what are your thoughts for '07?

For 2006 it really did come in pretty much where we thought it would come in. We have certain views on '07. I think you are seeing a little bit of a slowdown in some of the inflationary pressures. Just petro-related as an example, but at the same point in time, you have impact of crop items such as what happens to citrus overall because of the freeze in California last year?

So it's a little too early in the year to predict anything, but right now we looked at it in terms of the budget probably along the lines of 2 to 3% increase overall for 2007.

Okay.

I think we have time for one more question then we will have to draw it to a close.

Mario Gabelli from Gabelli and Company.

Hi, Rob. Thanks. Without asking mundane detailed questions -- what I'd like to do I'll do it off-line -- but as you are entering your first calendar year of running the Company can you kind of bring us up-to-date again kind of a short version of what you see over the next three years that will set the tone for your running this Company? And what you want to accomplish and what you want to do? Just kind of a quick 101.

Yes, Mario. Good morning. You always ask the thoughtful questions. I guess my agenda is pretty well laid out in what we've said in the vision mission statement and what was said in the growth goals. I want to build a stronger enterprise. And that means building a stronger population of talent, making some acquisitions of technology or Company [strengthen] us.

We have got, we are in a good position, we need to execute on the fundamentals day in and day out, but my focus is on building further strength to just take us to a new level.

I will follow-up on why you picked why you bought so much stock back and so on because I got on late. Thanks very much.

Thank you.

Thanks, everyone, for dialing into the call.

Once again, ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may now disconnect.