International Flavors & Fragrances Inc (IFF) 2008 Q4 法說會逐字稿

I would like to welcome everyone to the International Flavors and Fragrances fourth quarter and full year earnings conference call. Today's call is being recorded. (Operator Instructions). I would like to introduce Rich O'Leary, Chief Financial Officer.

Welcome to the fourth quarter and full year conference call. With me is Robert Amen. Our earnings release was filled this morning and is available on our website, www.iff.com, in the investor relations section. As you know, during the call, we may make forward-looking statements about the company's performance. These statements are based on how we see things today, so they contain elements of uncertainty. For additional information concerning factors that could cause actual results to differ materially from the forward-looking statements, I ask that you refer to the cautionary statement and risk factors contained in today's earnings release and IFF's filing with the Securities and Exchange Commission available on the website. Some of today's prepared remarks will exclude those items that effect comparability. These excluded items are captured in our GAAP to non-GAAP reconciliation on the website.

Here is what we will cover on today's call. Rob will open with an overview of the fourth quarter performance, then I'll provide a view of our fourth quarter and full year financial results, and following closing comments from Rob and then we will take your questions. Now I will turn it over to Rob.

Thanks, Rich. Good morning, everybody. By now, you have had the opportunity to see the press release and you shared by impression. I am generally pleased with our performance in the fourth quarter especially in light of the global economy. fourth quarter earnings per share, adjusted for nonrecurring items, was $0.50 per share, down $0.03 from last years fourth quarter. Rich will provide you an analysis of the key drivers to this earnings per share change. Our local currency sales were up 2% - a bit above my expectations. I will comment on the regional performances when I address the business units in a few moments.

Operating margins were 12.3% below last year's fourth quarter of 12.8%. The GAAP with 50 basis points in margins actually shows real progress in recovering from the cost escalation in materials and input costs and the GAAP that we have seen in the prior quarters this year. Currency paraties shifted a great deal. In the fourth quarter, the dollar versus the pound was 18% stronger than the third quarter of 2008, and 20% stronger than the fourth quarter of 2007. The Euro, or the dollar, I should say was stronger versus the Euro by about 13% versus the third quarter this year, and about 10% stronger than the fourth quarter of last year. Blended together, currency parity changes were about a 5% drag on revenue and hit us for $0.02 per share. Rich will give you a much more detailed analysis of the translation of the balance sheet items that impacted us later on.

In the quarter, our interest expense was higher. You will recall in our October call, I spoke to you about the interest rates swap that was causing the interest expense to be higher and it was higher this fourth quarter by about $3 million versus last year's fourth quarter. Also during the year, we initiated a performance improvement plan which resulted in a special charge of $12 million, and as I have said before, Rich will give you more details on it. Let me turn to the full year.

Local currency sales for 2008 were up 2%, in line with the growth we reported in the third and fourth quarters. And if you compare this to the course of revenue growth over the year, we have clearly seen a slowing in growth rates around the world since summer. Flavor has had a strong year all year. Our Flavors business was up 8% in the first half, and up less in the second half. For the year, the business grew 6% year-over-year. Our Fragrance fought back from a weak first quarter and showed excellent improvement in Asia and Fragrance ingredients. Earning per share on an adjusted basis were $2.76, up 4% and new record for IFF.

2008 presented a lot of challenges, the weak US economy, soft fine fragrance market in the US and Europe, volatile currency markets and a sharp slow down in the economies in the second half. I believe IFF managed to meet most but clearly not all these challenges. While we always want to do better and to accelerate our growth in sales and profitability, I am pleased with the result that is we have recorded. Now, we will turn to the businesses.

Our Flavors business had a solid performance in all regions all year. The driver of the growth was winning new businesses. Our Flavor teams won a significant amount of business all year in the key categories that we were after in beverage, sweet and in savory. Local currency sales growth of 6% was really excellent. The business did slow along with the global economies as the year progressed but was still up more than 3% in the fourth quarter. I was impressed with the growth in the fourth quarter sales in North America. You may recall that North America Flavor sales were flat in the third quarter reflecting customers pulling down inventories. They pulled them down enough that they had to restock and North American sales were up 4% in the fourth quarter. Latin America was a star performer all year, but the sharply higher US dollar hurt our fourth quarter sales. For the year, the Latin American region grew local currency sales 21%.

The Greater Asia team performed well consistently throughout the year. For the year, they recorded 10% growth in local currency sales - an excellent performance. Demand was good across the categories which confirms our category platforms of excellence are in fact providing superior products to our customers. Margins in the flavor business were off due to the rapid escalation of input cost, currency changes and some internal cost allocations. We were not able to fully recover these costs and consequentially margins were down about 50 basis points in the fourth quarter for year on year. The Flavor business, however, had a very solid performance all year.

Turning to our Fragrance business, I am proud of how our Fragrance business fought back from the disappointing start to the year. We estimate that the global Fragrance market was at best flat and probably down 1% to 2% for the entire year. So, for the Fragrance business to have local currency sales being down a fraction of 1% to me shows a very, very good performance by this group.

North America made a good recovery after negative comparisons for three consecutive quarters and the fourth quarter sales were even with the fourth quarter of 2007 and given the weak US economy and weak fourth quarter consumer spending, this was a good comeback. And this was accomplished by achieving a strong win rate this year. Fine Fragrance sales were in fact much stronger than the market in the fourth quarter and we believe we extended our market share gains there.

Asia had an excellent year and a strong fourth quarter. Our ingredients business delivered on their prune and grow strategy. Despite exiting selected commodity products, they grew sales and restored their profits meaningfully. Operating margins continued to trail the year earlier period so we have more work to do. I believe our cost recovery efforts and the cost reduction initiatives are succeeding and will help improve the margins as we move through 2009.

The Fragrance business is doing a lot of good things and they are going to win. Looking at the highlights for the year, a key reason I am pleased with the 2008 performance is that we didn't lose our strategic focus. Yes, we had challenges galore in the United States and other regions. The teams in Flavors and Fragrances adapted. They also continued on working to build a stronger IFF. Our investments in materials science and consumer understanding continues. This propelled our platforms of excellence forward which is foundational for future success.

We continue to invest in our customer support facilities, such as creative centers in the north region, Shanghai and Sao Paulo, so we can better heat our customer needs. We strengthened our talent pool by developing our people and attracting some key individuals. I believe IFF delivered good results for 2008 and we are a stronger competitor today than we were a year ago. Now, Rich, would you help these folks with some more insights in the quarter and the year.

Thanks, Rob and good morning to all of you. We will look at the consolidated sales in slide 11. We did have good results in a challenging environment and fourth quarter sales decreased 3% as a stronger dollar more than off set 2% local currency growth. As Rob said, our Flavor business continues to perform well, reporting a 3% growth in local currency, while the Fragrance sales were flat in local currency quarter.

For the year we have seen a softening in demand for the second half of the year. Overall, local currency sales increased by 2%, with Flavors performing well in all regions throughout the entire year. As Rob said, Fragrance has climbed back from a disappointing first quarter, ending the year down only 1% in local currency. Emerging markets were key drivers in growth for both businesses.

The recent strengthening of the dollar represents an important shift in the operating environment compared to the first nine months of the year. During the quarter, the dollar appreciated 11% against the basket of sales currencies. With about 45% of our revenues effectively priced in the US dollars, the impact on the reported sales was 5% unfavorable. Still, this equates to a $27 million decline in net sales. More than off setting favorable buy in price and mixed impacts for the quarter.

In terms of profitability, on slide 13, gross margin was down 90 basis points for the quarter. This represents a significant improvement compared to the third quarter GAAP of 190 basis points. Input costs continue to to rise during the quarter, but we made good progress in price realization, cost reduction and margin improvement efforts. We are not positive yet in terms input cost recovery but we've closed the gap in the fourth quarter.

Operating margin is down sequentially but the fourth quarter is historically our weakest quarter. On a relative basis, the positive trend continues, reducing the year-over-year GAAP to 50 basis points in the quarter. As you may recall the GAAP in the third quarter was 80 basis points after normalizing for incentive compensation. For the year, operating profit increased 2% to $373 million excluding comparability items. Now moving to the individual business performance. Looking at the top line, we're pleased with 3% local currency sales growth for Flavors. This continues the trend of 14 consecutive quarters of growth for this business. We have good results across most segments. This area has shown consistent growth throughout the year whereas beverages did slow some what in the fourth quarter. We are clearly winning in the emerging markets but the appreciation of the dollar has impacted local currency sales and demand in these regions.

Looking at the bottom line, segment profit decreased $10 million. Operationally, this reflects good volume growth and positive mix but these are more than off set by unfavorable currency impacts, insufficient input cost recovery and highly allocated expenses of about $6 million, including incentive compensation and a portion of the severance in the fourth quarter charge.

Turning to our Fragrance business on July 15, some things went well and we struggled elsewhere. Overall, sales were flat in local currency for the fourth quarter. Greater Asia continues to produce solid gains and the ingredients business has made significant progress year-over-year.

Fine Fragrance globally was flat year-over-year in local currency as improvements in the US and Latin America off set significant weakness in Europe. Overall, Fine and Beauty was down 3% in local currency due to lower volumes and in hair care and toiletries.

Functional Fragrances were up 1% globally, selecting new wins and volume in Asia primarily for personal wash and fabric. Operating profit increased to $41 million. This is mainly due to lower allocated expenses, including incentive compensation of $10 million off set by $2 million of severance from the fourth quarter charge. Operationally, price realization and margin recovery efforts were more than offset by negative sales mix and unfavorable currency impacts.

Now, we will take a look at input costs for the quarter. Last time, I took you through the key components and some of the drivers impacting year to year trends. In the fourth quarter, we still had substantial year-over-year cost increases, but the rate of increase has stabilized at around 5%. We are seeing improvements in petrochemicals and freight and fuel charges and there's been some easing in certain specialty chemicals.

Most of our supply contracts have quarterly or semi-annual resets, therefore we will not be a benefit from the most recent price changes until our first quarter purchases. Once we work through higher cost inventories, we should begin to see some cost relief some time during the second quarter.

Turning to foreign exchange, the dollar was much stronger during the fourth quarter. The net impact in the fourth quarter was $0.02 per share, but this includes two distinct elements. First, from an operating basis looking at our revenues and expenses, there was an unfavorable foreign exchange impact of about $0.04 per share and I will discuss this more on the next slide, and the drivers of that. This was partially offset by balance sheet gains of that $0.02 per share on working capital items. Overall, looking at our current sales mix and cost structure, I estimate that for each 1% change in the US dollar, it has a $0.01 to $0.02 per share impact on an annual basis.

Turning to page 18, you will see a break down of our sales and operating expenses, fine underlying currency. While 75% of the revenues are generated outside the US, the actual currency impact on an operating margin is much less. This is due to the fact that significant portion of our revenue base, especially in the emerging markets, are transacted either directly or indirectly in dollars. This provide a partial hedge for our business. Overall, our largest exposure is to the Euro, from which 40% to 50% of our operating profit is derived.

Before looking at the EPS components for the quarter and the year, I wanted to review two specific items impacting our fourth quarter results. First, we initiated a performance improvement plan that will affect approximately 90 positions globally. This resulted in a restructuring charge of about $12 million for severance on a pretax basis. When fully implemented in 2009, projected savings are approximately $9 million annually. Second, we recognized a $17 million tax benefit in the quarter following the completion of an open tax audit overseas.

Now, looking at slide 17,summarizes the individual impacts impacting earning per share in the fourth quarter. Reported earnings per share was $0.62 in 2007 versus $0.58 in 2008. On an adjusted basis, earnings per share was $0.50 compared to $0.53 in 2007.

Net commercial, which combines volume, price and mix, was $0.16 favorable. However, of this, $0.12 is really the pricing impact. In comparing that to input costs, this makes the GAAP and input cost recovery unfavorable; about $0.02 for the quarter. This does represent a significant improvement versus the $0.10 gap we had in the third quarter. As Rob mentioned, the interest rate swap cost us about $0.03 per share, and while the spreads have narrowed, we should begin to be in to that and later in the first quarter.

Overhead expenses are down slightly and for foreign exchange and lower compensation expense off set planned spending increases. Last, you see the currency impact that everybody discussed. Now turning to slide 21, you see the earning components for the full year. Reporting earnings per share in 2008 was $2.87, compared to $2.82 and 2007. Whereas, adjusted EPS was $2.76 this year compared to $2.66 last year.

Clearly, the main challenge we face this year was input cost recovery, and there is a [$0.10] gap between the commercial improvements and input cost increases. Overhead expenses were $0.03 favorable, X foreign exchange, as cost containment and a $22 million reduction incentive compensation expense, more than off set planned spending to support the growth initiatives. For the full year, the US dollar weakened, average to average, adding $0.15 per share to earnings. Interest expense reduced earnings per share by $0.29 per share, however, excluding $0.07 per share associated with the interest swaps primarily in the second half, you can see the effect of the share repurchase in 2007 was favorable by about $0.04 per share.

Now, we will recap the financial position as we head into 2009. We're in a scenario that we feel very good about. We finished the year with $178 million in cash on hand, net precash flow was about $150 million for the year, we realized $40 million in working capital improvements during the fourth quarter compared to the third quarter of 2008. We continue to have significant draw down capacity on out multiyear revolver and we have very little debt maturities required this year.

What is next? Well, we clearly will face additional challenges in 2009, including volatile currency parity and higher pension expense, probably in the range of $5 to $10 million on an incremental basis, and there's uncertainty regarding global economic growth. We will continue to manage our operating cost, taking into consideration year term market demand as as our long term growth plans. Our management team remains focused on profit and improvement. As I said, we should see some easing in input costs by the middle of the year and should benefit from lower interest rates spread from the second quarter. Last, while we have made progress in reducing our working capital burdens, we have additional opportunities in front of us. And now, let me turn it back to Rob for his wrap up.

Thanks, Rich. In the fall of 2006, I set out a series of strategic goals for revenue, margins, and earnings per share. Since then we over delivered in 2007, and in 2008, came in below our plan. I am pleased with the progress IFF has made but I am not satisfied. Given the external environment we will face in 2009, weaker economies, currency parity shifts and any other burdens Rich outlined, it is going to be particularly challenging to meet the three year goals. That said, our executive team remains committed to growing our sales faster than our market growth, improving operating margins by reducing cost, leveraging volume and growing EPS. 2009 will be a very challenging year in which to operate. We will, however, continue to pursue these goals.

Now, let's look ahead. We will continue to pursue our growth strategy because we believe in the long term growth potential of the global economy. It is likely we will see below trend line growth in the periods ahead, but I believe, in time, the developed world will recover and the emerging world will regain its growth rates of 6% to 8%. That said, it is unusually difficult to forecast the first quarter. Given what I see today in our forecast and order book, it appears to me we are on track to have local currency sales be roughly in line with the first quarter of 2008. Perhaps, a little bit lower. Perhaps a little bit above. The currency shifts that Rich outlined will be a drag on the top line of about 5%. That will likely impact the earnings per share by $0.04 to $0.06 in the quarter.

We will continue to pursue our improvement initiatives. Raw materials will likely still be high in Q1 because of the way the costs flow through the inventory. I believe that raw material costs will begin to abate and we will see a benefit of that starting in the second quarter. In 2008, IFF continued to progress. Sales and earnings per share were both records. We strengthened our company. And certainly the future presents many challenges. However, I remain very confident that IFF will grow faster than our markets and improve its profitability. Now, Rich and I would be very happy to answer questions.

Thank you. (Operator Instructions). We will take our first question from Erik Sjogren with Morgan Stanley.

Good morning. I have one question. A lot of the staples companies have now in the fourth quarter been talking about significant destocking with retailers - has this impacted order sizes, order volumes, frequencies, etc. on your end too?

As I mentioned, where I commented about North America. We are seeing, I think many cycles of varying places reducing orders and then catching up and I think that is going to be, I think it is highly likely in the quarters ahead, we will see the short term volatility. In the end, when I take a look at our customers who are announcing, they are still anticipating volume to be plus or minus, 0% to 1% or so. But I think the way they manage the order flow will present some quarterly challenges. As I pointed out, in the third quarter in North America, where we saw the early destocking, our sales were flat year-over-year. That turned around and sales in North America were up a strong 4%, well faster than the economy, because the destocking had gotten too far. So I think we will see the volatility on a go forward basis.

Our next question comes from Lauren Lieberman with Barclays.

This is Ryan Bennet in for Lauren today.

How are you.

Fine, good morning. One very quick question and then a broader one. On the pension expense, can you give us a sense of how much of a hit that will be in 2009.

As I said, incrementally, 2009 versus 2008, it is in the range of between $5 and $10 million incrementally.

Perhaps everyone will benefit, Rich, if you explained, what is the source of that? Why is pension expense up 2009 versus prior year?

The biggest component of that is the decrease in the pension assets across the spectrum of the US and European plants. And while the assets, from a performance standpoint, we had much less exposure than the boarder markets because of the mix of our investments in bonds versus stocks, there still is a significant impact year-over-year in terms of the erosion and the assets. And there's been some changes in the interest rates and slight modifications in the interest rates and discount rate we use year to year.

Some of you may recall we froze our US pension plan more than a year ago and this incremental charge is related to the decline in the equities market and that has to be recognized over a period of time. I suspect IFF will be one of many companies facing this added burden. It as non-cash charge. In the short run, we don't have to make cash contributions, but it is going to be a burden and that will be over the next several years. Correct?

Depending on the recovery of the assets. But there is an amortization and spreading mechanism and the impact is not felt immediately. But if the equities and planned assets stay where they are today, there's going to be increasing burden over the next five years.

Okay. Your broader question?

So, Rob, when you are thinking of 2009 broadly, it is an unfair question because I know there's not that much visibility and you provided guidance for 2009, so in very loose terms, if volumes were to come in much lower than you expected, what sort of flexibility are you building in to the P&Ls to be able to absorb some of that?

That is a hypothetical question is not a good one to handle. You know, we are not seeing it globally. We are going to be agile. We are committed to delivering on our plan and growing and we will adapt it. We are shifting our investments in people and assets. We have clearly cut back more in the developed countries but we will continue to invest where we see the market opportunities. I want you to remember that our 2009 is not going to be defined by the market.

I believe we grew faster that the market distinctly in Flavors and a number of segments in Fragrances because we have got really winning Fragrances and winning Flavors and we will continue to press that. If we see volumes deteriorate, we will have to make adjustments. I don't want to theorize on where or how we will do that. We have ongoing things. We want to improve the footprint, our supply chain but that we will do because it is the right thing to do. We might accelerate it in certain areas but we will continue to pursue internal initiatives and that's what is behind the improvement plan to have leaner, more focused, more effective organization.

Moving on to Mike Sison with KeyBanc.

When you take a look at 2009, maybe you could give us a feel for in total, what you are doing internally that can keep earnings on an up trend and given, assuming foreign currency holds where it is now, what type of volume or market demand back drop would you need to see to keep your earnings on the positive trend in 2009 versus 2008. Is there enough there internally and what may be new product wins that could off set the foreign currency and some other negative that you have?

Good question. Tough question. Let me see how best I can answer it. First of all, if the dollar stays where it is and it is about a 5% drag all year. That's a $0.20 to $0.25 potential drag for the year.

Okay.

That's if it just stays where it is for the entirety of the year and doesn't come back. Certainly forecasting the dollar is something I don't feel we have the expertise to be able to pull off. The internal initiatives are those that you know and some additional. We have finished our outsourcing. The back office of finance - that will have a benefit next year. And we have a number of initiatives that we talked to you about in the businesses of extenders and materials, lower costs.

We are working with our customers. If we get all of our internal initiatives achieved, and that is not entirely a lock down, that is always a risk to the timing and magnitude and volume was roughly flat. I think we would deliver an increase in earnings. But we don't believe that this year is a year where it only has a down side. We have got to do a lot of things right to be able to deliver an increase in earnings. But it is extraordinarily early difficult for us to forecast the circumstances of our customers and the currency markets. We are going to stay, as I indicated, we are committed to the long term plan and that's what we are holding ourselves accountable to.

The way to look at it, Rob, you are looking for market demand to be down, 1%, 2%, 3% and you would out perform to get the flat volume for the full year?

I don't think we are seeing the market demand being down 1%, 2%, 3% - just take a look at the Flavors business over the course of 2008. Yes, it was up roughly 3% in the second half. And it was a tougher second half, with a sharp reduction in the US GDP. So, and our Fragrance business, which really started out with a burden in the first half recovered and was down a fraction of 1%. So, I mean, we are looking and believing that things ought to be, as I said, very chose to 0%, maybe a little above. Maybe a little below on a global basis, and if we do well, we could be above that. And there is always a risk that the markets will be weaker than that. And theres the potential that they will be some what stronger. And this is not a year that is a wipe out by any means.

We can do well and with the platforms of excellence, the product introductions, I think we are winning a lot. And I am impressed with the fine Fragrance team has done. The fourth quarter was probably a tougher consumer spending quarter as anybody can recall and our fine fragrance sales were up nicely because we had enough new wins to overcome whatever the market did. We're seeing that Functional Fragrance did a nice job. Fragrance Ingredients really varies along with the overall market, and I think our Flavors team is on a roll and continues to win for a lots of good reasons. We are looking to make 2009 positive.

Thank you.

We will take our next question from Jeff Zekauskas with JPMorgan.

Hi, good morning. In your press release in one part you say that the unusual tax benefit was $17 million and then in the fourth quarter highlights, you say excluding tax benefits of $20 million. What is the deference between the $17 million and the $20 million?

Jeff, there are small items that when pulled together don't have a significant impact on a net income basis but in looking at what a normalized effective tax rate, we wanted to highlight the difference and the one transaction itself was the $17 million. And then we had some small adjustments to pluses or minus to the deferred tax balances and our accruals that, on a cumulative basis, was another $3 million.

Second, you have that helpful slide where you show your input cost hurting you by $0.47 cents and I think you said that the net detriment for the year was about a dime. So, if you make a couple of calculations, what that would point to is your prices being up 2% this year. Is that correct?

Yes, it is in that range - it's in the range of 2% pricing.

Okay. And just a general question for Rob. When you look at 2009, do you think the Flavor business will be stronger or the Fragrance business? Or do you think there will be a different pattern in terms of quarters?

Living here today, I would believe that our Flavors business will probably have more favorable comparisons to our Fragrance business. Given the rises, this downturn we are seeing in Europe will impact Fine Fragrance in Europe. It is not clear - we are seeing good stability in Functional Fragrance, but I think the burden for our fragrance business is going to be the consumer discretionary and impossible for me to forecast. The Flavor business, they have didn't a good job. They are broad based. They have a lot of good things going on there. And may be a little bit better market dynamics. So I would anticipate Flavors being up from Fragrance.

That is helpful. Also in the quarter, you said your compensation expense in the Fragrance unit was lower by about $10 million versus the previous year. Can you talk about the magnitude of that charge and why wasn't there any comparable charge in the favor unit?

There was a decrease of about $10 million related to incentive comp for the Fragrance business and there was about, as I mentioned earlier in the comments, there was a decrease in Flavors for the quarter. So, it was a reallocation between the corporate component of it and the two business units and when we made the adjustments in the third quarter and we reallocated we did it at a global level but we, at that point in time, this is the piece business by business and the corporate component of it. So we are shifting internal costs between the three components.

What do you think your tax rate will be next year?

On a normalized basis, we were at about 27.5% this year, I with expect that to inch downward next year. I'd say the floor would be maybe 27% but it's going to go down a couple of basis points.

Jeff, let me come back to you. You raised a good point on incentive comp. Our pay for performance system here, we made a big point of what we are doing with incentive comp overall, but it also varies by the performance of the business unit and that's all we were doing is allocating. Incentive comp is down in 2008 from 2007. If we achieve our full plans next year, incentive comp would go back up. We assume in our planning that we will achieve the plan and target incentive comp and that would be a delta of something between $15 and $20 million.

That is helpful. Thank you very much.

We will take a follow up from Lauren Lieberman from Barclays.

Couple of quick ones. I wanted to circle back object the comments with the fine Fragrance segment. As I understand, It was beauty care and toiletries that was weak, and not the perfume and cologne piece of the business?

Yes. On our performance.

On your performance. What I am trying to understand, maybe that one segment alone. Given the significant declines in that category now, is it you are not seeing destocking because you had it earlier in 2008 and that you are not going to see an additional wave or are you actually seeing some changes and reorder rates in January based on how the holiday season was? I am trying to get an understanding of how the business is looking.

Very good and fair question. I think there is no topic we have spoken of more than fine Fragrance. There was massive inventory correction that occurred in the first half of the year and we thought we would see it play out by the end of the third quarter. We think that's what happened. It might have been a little bit within the normal bands in the fourth quarter. And we may see a little bit more, maybe in Europe a little bit more than the United States.

The real reason our fragrance folks are doing better is because they've won more business. We knew that starting early in 2008 and thats why over the course of the year we were optimistic and said we belive the comparability numbers were going to look good. We are not seeing anything right now that suggests theres any kind of repeat on the inventory correction we saw a year ago. The first quarter 2009 numbers look to be more stable.

To the functional side, where you said it might be more of a challenge for the fragrances business this year. Are you seeing, because it sounds there is pantry deloading and then retailer destocking and then who really knows what's happening with the distributors and the manufacturers themselves have some inventory to work through. Have you really not seen any change there in reorder rates from your customers yet? How should we think about the business in 2009?

It will be more challenging and because of the certainty. Functional has been very steady and if you look at the quarter, the sequential comparisons as we went through the year, functional Fragrance has been very stable. It is up 3% the first quarter versus the prior year and down 1% the second, flat in the third, and up 1% in the fourth. So, it is fairly stable and that's the kind of put it takes. There are, at any given time somebody doing product changes or they destock or they're stocking up. And we have seen a little bit of that among the majors but we haven't seen a massive destocking by our customers for whatever reason. There has been some normal typical surprises up and down but nothing significantly. And at this stage as we look out, we don't see it in the immediate future.

Okay. Then two very quick questions. One, now that some real good cost savings are coming through and the pricing seems to be sticking in the raw material picture is beginning to get better, and understanding the benefits won't be seen until the second quarter, thinking about 2009, even if the volumes are weak, do you think that we could see over year margin improvement?

I think, operating margin, yes. Because most of the problem, pension expense, incentive comp is going to be below line. If we get our larger initiatives underway - gross margins - we are looking to head up.

Is the 18% operating margin target--

It is going to be impacted by mix, by region, and some currency but over time we will trend higher. Won't be a smooth line.

In terms of the 18% operating margin target - is that something that seems feasible to you today.

It is a long way from where we are today. I am not going to tell you we are going to make it no matter what, but we're not quitting on it. That is our goal. If we don't get there by the end of the year, we'll continue to push on. But we believe we can get there and that is important for our business to provide the kind of profitability we need to invest in people and technologies and facilities going forward. We want top get above 18%.

And the last question, if you could provide an update on how the CFO search is going.

It is going. And don't blame Ryan. It is me.

Got it. Thank you so much.

And we will take our final question from John Roberts with Buckingham Research.

I wanted to understand the compensation allocation or accounting process so it doesn't effect the bottom line, but you accrue at the overall company level and then late in the year, the fourth quarter and you figure out what the allocation is going to be between Fragrance and Flavor, depending on their relative performance for the year?

We try to do it as we move through the year. If you recall, we made a major shift in the third quarter which we took at the corporate line, and all this is is OK, now we're going to push it down from the corporate to the two businesses. It was simply that.

It is just effecting the presentation of the two segment results?

True.

Secondly, I think you said first quarter 2009 at current currency rates you might have a $0.04 to $0.06 head wind and then I think you said that at current rates it might be $0.25 for the full year 2009. I would expect by the fourth quarter of 2009 you would have a very small effect if any in the fourth quarter 2009. How do we go from $0.04 to $0.06 in the first to $0.25 --

(Inaudible) have a significant impact in the second and third quarters which is when the dollar weakened the most or in 2008.

So it will be high single digit to approaching $0.10 in the second and third quarters at current rates? Meaning, if you are talking $0.04 to $0.06, midpoint is $0.05, we're talking close to $0.20 in the second and third?

We haven't done that detail. I was just sort extending the $0.04 to $0.06 over the course of the year which probably wasn't the most accurate way to do it. It's going to be a drag and I think it is going to be most pronounced in the first half and little bit less in the second half.

I still think it will be most pronounced in the second and third quarters. Weakened the most and came back down significantly in the fourth quarter.

We will keep you posted on that as we progress but we will not be forecasting the quarters ahead.

When raw materials spiked up on the customers they did reformulation to try to lower their base material costs and that gave you an opportunity to go in adjust the fragrance package to match the new base materials - with raw materials coming down, is there a reformulation that occurs again? That maybe allows you to get in and change your products and give you some mix effect here?

And our customers are always looking to improve effectiveness. I don't know that they are going to want to go back and reformulate to a higher cost because of materials. If the product is performing for the consumers and they are happy in a commercial sense, I don't think they're going to mess with it. They are always after us for ideas on how do we improve the effectiveness and the cost of their product. That is an ongoing part of the business. We have only started to see the reformulation benefits pull through. there will be more of that in 2009. That's an ongoing part of the business.

There appears there are no further questions at this time.

Thank you all very much for taking the time. And we look forward to speaking with you in the future. Should you have any issues, feel free to call Rich or me and good luck to you.