International Flavors & Fragrances Inc (IFF) 2009 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the International Flavors & Fragrances fourth quarter and full-year 2009 earnings conference call. Today's call is being recorded. All participants will be in a listen-only mode until the formal question and answer portion of the call. Participants will be announced by their name and Company, and in order to give all participants an opportunity to ask a question, we request a limit of one question per person, please.

Now I'd like to introduce Michael DeVeau, Investor Relations Manager. You may begin.

Thank you, operator. Thanks, everyone, for joining us. With me on the call today in New York is Doug Tough, our Non-Executive Chairman; Kevin Berryman, our Executive Vice President and CFO; and Hernan Vaisman, [Group] President of Flavors. Also joining us today in Europe is Nicolas Mirzayantz, our Group President of Fragrances. Our call's being recorded and will be available for playback on our website.

Please keep in mind that during this call, we may make forward-looking statements about the Company's performance. These statements are based on how we see things today and may contain elements of uncertainty. For additional information concerning risk factors that can cause actual results to differ materially from forward-looking statements, I ask you to refer to the cautionary statements and risk factors in today's earnings release and IFF's filing with the FCC. Some of today's prepared remarks will exclude those items that affect comparability. These items are laid out in our nonGAAP reconciliation, which is also available under the Investor Relations section of our website. With that, I will now introduce our Non-Executive Chairman and Incoming CEO, Doug Tough.

Thank you, Michael. Good morning, good afternoon, and good evening to all of you on the call wherever you are in the world. As many of you will be aware, I have been elected IFF's new Chairman and CEO effective no later than the end of the first current quarter. That is the first quarter of 2010. While I am still finishing off my current commitments to Ansell and its shareholders, I want to take a moment to make introductory comments today.

I'd like to start out by saying I am very excited to have the opportunity to join the wonderful IFF team. I've been on the Board for over a year now, and have also been able to meet with the top 40 or 50 senior managers in our global organization. What I have seen has impressed me, as the team is passionate and committed to our customers and their needs. We have a very good line of sight on current and future consumer needs that are required to deliver sustainable growth. IFF has weathered the global economic crisis relatively well and has emerged focused and stronger on a number of elements, with the ability to further improve all attributes of our business.

I am also pleased with the strong leadership that the executive team has shown over this period of transition. In a challenging economic environment, they have worked as a strong team to make tough decisions and achieve fundamental improvements in our business, which has resulted in a stronger foundation, which will support a brighter future for our Company. I would like to thank them and all of their teams for all they have accomplished during this transition period. They have done a terrific job of remaining focused to drive improved performance over the second half of 2009.

Now, I know that many of you are anxious to hear my thoughts on the future direction of the Company, and how that might be different, if at all, from what has been communicated to you in the past. You can appreciate that I cannot go into any specific details at this time. However, I will say that the Board and I have been aligned with the strategies that are in place and working today. Of course, I will certainly look to work with the collective IFF team once I am on board to pressure test our strategies and all that we do in order to ensure that we are operating to the best of our ability. Over time, we will I'm sure evaluate other options. We will consider what-if strategies and examine other growth avenues. In short, do what all good management teams do.

IFF has tremendous capabilities in research, consumer insight, and creativity -- all attributes that provide our customers with winning products, which translate into profitable growth for IFF. These capabilities, when combined with the passion and commitment of our talented workforce and our diverse geographic and product portfolio position will allow us to create long-term value for our customers, for our employees, and of course for our shareholders. I will continue to support and lead IFF through my role as Non-Executive Chairman. In today's call, I will let our key senior executives explain our performance and review the key issues in 2010.

With that, let me turn the call over to our Chief Financial Officer, Kevin Berryman.

Thank you, Doug, and hello, everyone. Before turning it over to Hernan and Nicolas to give you some insight on the performance of our business units, I would like to provide a brief overview of our fourth quarter performance and some perspective on 2009 results. Looking at our quarterly results, the improved trends in our performance reported in the third quarter continued through the fourth. Our worldwide local currency sales again grew 2% plus year-over-year in Q4 as the commercial environment continued to show improvement versus the first half of 2009. The growth in the top line, when combined with continued discipline and cost management, supported a substantial improvement in margin as operating profit margin improved 310 basis points year-over-year.

I feel it is important to note that roughly 100 basis points of this improvement was related to incremental R&D credits that our finance team realized through a proactive effort over the course of the year. Given the success of these efforts and the resulting magnitude of these credits in 2009, we felt it was prudent to become more in line with current reporting practices to revise these credits from income tax expense to operational expense. It is also important to note that this had no impact on our net income. Regardless, an integral part of our improved margin has been the continued disciplined management of controllable costs. In Q4, we again demonstrated our ability to improve operational performance while continuing to support key growth initiatives in each of our businesses. The end result allows us to report adjusted Q4 EPS growth of plus 26%.

Turning to our full-year performance, it is clear that 2009 turned out to be a tale of two halves. In the first half, our financial performance reflected the difficult operating environment. Sales were impacted by the economic environment, and as such our local currency sales were down 3% versus the prior year. This was due largely to a sharp falloff in Fine Fragrance sales as well as declines in fragrance ingredients that Nicolas will discuss shortly. During the first half, we also experienced a dramatic rise in raw material costs, which had a large impact on our gross margins. Of course, the year-over-year strengthening of the US dollar versus the first half of 2008 had a significant impact on our P&L. The resulting pressure on margin was strong.

While the financial performance was disappointing, the Company took strong actions in the first half to mitigate the impact of these issues, taking pricing at the beginning of the year and initiating strong cost control measures. These actions helped improve results in the second half, and when combined with an easing of headwinds, drove a substantial improvement in performance. Specifically, worldwide local currency sales turned positive, growing 2% plus year over year, 5 percentage points higher than the first half. While raw material costs remained higher than year ago prices in the second half, we did see an easing of these cost increases over the second half of the year. Consequently, our pricing actions, margin recovery and cost control initiatives, and restructuring efforts were able to drive an improving margin picture over the second half of the year. Both growth margin and adjusted operating profit margin improved in the second half versus the year ago period.

Gross margin improved 60 basis points to 40.5% in the second half 2009 versus the comparable year ago period. We managed to deliver 150 basis points of adjusted operating profit margin improvement in the second half of 2009 versus the comparable period last year. A weakening dollar versus the year ago comparable also supported improved results for sales and margins. The combination of this improved operational performance in the second half and an improved foreign exchange environment as well as some below the line leverage drove bottom line results in the second half of the year. Adjusted EPS in the second half grew 16% year-over-year. The yearly recovering of the weakening was realized in the first half.

As we head into 2010 and reflect on 2009, it is important to note that 2009 was, indeed, this year of two halves. On the surface, our full-year financial performance did not tell the full picture of the progress we made in 2009. It is important to understand the momentum that we've seen in the second half, as it is an important element into how we evaluate the year. As our strategic initiatives continue to gain traction and we adapt to an ever-changing economy, we believe that we are well positioned to return to local currency sales growth and improve on overall profitability in 2010. I now like to turn the call over to Nicolas Mirzayantz, our Global President of Fragrances, who will provide an update on the fragrance business.

Thank you, Kevin. Good morning and good afternoon, everyone. As Kevin previously noted, it is clear that the operating environment in the second half improved greatly versus the first half of 2009. For the second consecutive quarter, the fragrance business unit has posted solid local currency sales growth. In Q4, local currency sales grew 4% year-over-year as our accelerated pace of new wins in all categories drove performance.

In the fourth quarter, Fine Fragrances and Beauty Care trends continually improved. Local currency sales decreased 1%, the smallest decline of 2009, as weakness in Fine Fragrance offset strong double digit growth in beauty care. Fine Fragrance did improve. However, it remained under pressure as strong win performance globally was mitigated by market contraction in the middle of markets.

Within beauty care, Toiletries and Hair Care posted strong double digit growth driven by new win performance in greater Asia and Latin America. For the fourth consecutive quarter, we have seen accelerated growth in the beauty care category. Our success can be credited to a longstanding regional expertise and cultural investment in consuming sides within the key emerging markets. This investment and category expertise are the primary drivers in our overall market growth and greater momentum.

For the full year, Fine Fragrance and Beauty Care sales declined 8% as a result of sharp declines in recent consumption as well as supply chain contraction in North America and Europe in the Fine Fragrance business. Despite challenging market conditions, our Fine Fragrance team was able to successfully maintain our share position while improving our position for 2010 as new win performance was at record levels. I am very pleased and proud of the significant progress the team was able to accomplish.

Functional Fragrance continued to perform very well, growing 6% in local currency in the fourth quarter. This performance was once again driven by strong personal wash growth and new product wins and volume gains in Fabric Care. It is important to note that Functional Fragrance performance improved every quarter since Q1, finishing the year with 5% growth globally. This reflects our [constant] commitment in this category and the investment in consumer insight and talents made over the past few years to strengthen our position. One area of improvement of the sector that I would like to highlight is the technology of fragrance encapsulation for Fabric Care. For the full year, encapsulation represented a large component of our growth and was one of the driving forces of our above market growth level.

In the fourth quarter, Fragrance Ingredient sales also improved as local currency sales increased 7%, the best performance of 2009. This was driven by underlying improvement in customer demand as we leveraged our vast ingredient portfolio to get [valuable] information to our customers. For the full year, Fragrance Ingredient sales were 2%, primarily due to erosion in the Fine Fragrance category and customer destocking in the first half of 2009.

Looking at our geographic breakdown of sales, accelerated growth in the emerging markets once again drove our improvements. In greater Asia and LatAm, new wins and increased demand from both global and regional customers continued to drive results. Developing markets both in Russia and in China continued to drive growth in all categories. In this market, hair care, fabric care, and personal wash [increased] to double-digit results in the fourth quarter and full-year 2009. As evidenced by our performance, investments we made throughout the year, combined with our solid consumer understanding and our presence of over 50 years in this market, have allowed us to deliver above market growth.

From a profitability standpoint, adjusted operating profit increased by 19% or $8 million to $51 million, excluding a $3 million charge related to a previously announced European facilities rationalization. The improvement was driven by incremental R&D credits that Kevin noted earlier in the presentation. As a result, adjusted profit margin for the quarter increased 130 basis points to 16.3%. Excluding the impact of the R&D credits, operating profit increased $2 million year-over-year as higher pricing and continued margin improvement initiatives more than offset unfavorable mix, higher input costs, and higher incentive compensation expense.

As we look at 2010, the recent business momentum has provided us with some optimism. The progression achieved in 2009 as well as our strategic commitment to more aligned fragrance organization has allowed to us strengthen our consumer expertise across every region and through all categories. When combined with our R&D innovation initiatives, we are well positioned to deliver winning and consumer preferred fragrances to our customers that would increase returns, grow market share, and create greater [liquidity]. I am now happy to introduce Hernan Vaisman, our Global President of Flavors.

Hello, everyone. Local currency sales in the fourth quarter increased 1% over the comparable 2008 period, marking the 18th consecutive quarter of local currency growth. Growth can be attributed to a solid performance in greater Asia, as higher volumes and new wins in Beverage and Dairy drove results. In North America, local currency sales remained constant. Strong performance in Beverage was offset by weakness in Dairy. Looking at [EMEA], local currency sales were down 1% year over year. In Latin and North America very strong in Beverage was offset by weakness in Confectionery and Savory. Sales in Latin America were mixed. At we previously discussed, loss of non-strategic business continued to impact results.

In greater Asia, local currency sales were up 5% as new win performance and [shortage] demand in Beverage and Dairy dropped results. In addition, Beverage results were positive. As was previously discussed, customers perceiving volume weakness or inventory destocking was eliminated. I will also note that the [line] growth during the quarter was stronger than our final reported figures. We did experience lower sales of shipments at year end of (inaudible) as several of our customers conservatively managed their inventory levels. This trend has reversed itself in the first few weeks of 2010, and we are expecting growth to return to close to normal levels in quarter one.

Open a full-year basis, local currency sales increased 2% plus. Greater Asia, Latin America, and North America delivered solid growth resulting from new wins and price increases that more than upset weak economic conditions. Local currency sales in Europe remain constant. The economic slowdown and inventory reductions by our customers impacted our results.

In summary, I continue to be pleased with the line demand trend behind our local currency sales performance. As we have in previous years, the Flavor teams posted solid local currency sales growth despite adverse economic conditions. The emerging markets once again are driving our results as we made great improvement in the Savory and Dairy categories. Complementing this success and together with our France team, we opened three new state-of-the-art facilities in Shanghai, China; Sao Paolo, Brazil; and Moscow, Russia, positioning IFF to better serve these key markets. As we look at our cost structure, margin recovery inputs -- including price increases, cost discipline and improved operating efficiencies -- drove improvement. More specifically, gross margin percentage in Q4 improved approximately 190 basis points year-over-year. This helped support the Flavors operating profit margin as it increased by 340 basis points year-over-year to 17.4% in the fourth quarter.

Looking ahead, we expect local currency sales to be positive once again in 2010. While we are ending Q1, we have started the quarter on a positive note. With the second half result, we expect to see solid local currency sales growth that, when combined with our continued focus on cost and production initiatives, should result in continued margin improvement. I am pleased with the performance of our Flavors business in 2009.

Looking ahead, our vision to create differentiation and brand value for our customers remains entrenched. We continue to support our customers' brands through brand superiority that will ensure that IFF delivers on its strategic intent to gain market share and expand margins. With that, let me turn it back to Kevin.

Thank you, Hernan. I would first like to cover our Q4 sales trends. Looking at the chart, it is now clear that Q2 represents an inflection point in our industry. It is encouraging to note that our underlying trends in the categories continue to either improve or remain firmly positive in Q4. As a result, we finished the year can Flavors, Functional Fragrances, and Fragrance Ingredient categories all recording positive local currency sales growth in Q4. While Fine and Beauty Care remain negative in Q4, it is clear that weakness in the Fine Fragrance category continues to dissipate. The key takeaway here is that there has been a marked improvement across the board, reflected in our second half performance. Fine Fragrance remains the only business that has not returned to positive growth territory. However, we are continuing to win this profitable category by realizing a high percentage of new wins. We remain cautiously optimistic for this part of our business going forward.

I would like to [cover up] on the other key drivers of our financial performance. Specifically, input costs; research, selling, and administrative costs or what we call RSA; and currency. Turning to input costs, we continue to see year over year increases in the P&L driven primarily by the fluctuations in raw material costs. In the fourth quarter, our input cost increases represented a 2% increase in our costs of goods. As communicated earlier in the year, we did expect this cost increase to moderate throughout the balance of the year. This did happen, as input costs increased versus the year ago period were less than what we had seen in the first three quarters of 2009. However, our input cost composition was mixed. In our flavors business unit, input cost prices were down as we finished working through our higher cost inventory. In the fragrances business unit, we once again experienced a rise in input costs versus the year ago period as the mix of the business from a geographic and segment basis resulted in the use of higher cost inventories in the fourth quarter. Despite the small increase in Q4, we did realize gross margin expansion plus 40 basis points for the second consecutive quarter as margin recovery efforts, including pricing, manufacturing efficiencies, and cost reduction initiatives, offset the raw material cost increase. Looking ahead to 2010, we continue to see our current purchases of raw materials at lower price levels. So it appears that this favorable trend will continue. Regardless, input costs driven by the costs of raw materials will remain at levels that are above 2007 and 2008, prior to the accelerated increases seen in the second half of 2008 and the first half of 2009.

From an overhead cost standpoint, we continue to improve our cost structure. RSA expenses decreased $3 million year-over-year. Excluding the impact of currency, RSA costs were down $9 million year over year, reflecting incremental R&D related credits, benefits of previously announced restructuring, and continued cost management discipline. If we exclude the benefit of the R&D credits, RSA and constant currency still declined $3 million versus the fourth quarter of 2008. Within RSA, R&D expense as a percentage of sales declined to 8.1% of sales in 2009 compared to 9.6% last year, driven by the incremental R&D credits, a more focused approach to investment, and strict cost control. I'm very pleased with the way our organization has responded to the pressures we faced over the course of 2009. For the year, adjusted RSA expenses decreased $24 million year-over-year, driven by the impact of the incremental R&D credits, ongoing cost reduction efforts, and the effects of a stronger US dollar. If we exclude the positive impact of currency, RSA still declined $11 million, driven by reduction in Q3 and Q4. In 2010, we will continue to maintain strict discipline in the management of our fixed cost structure to ensure we are operating as efficiently and effectively as possible. As always, potential investments in resources, R&D efforts, and commercial opportunities will be driven by our belief in the growth opportunities that these investments will deliver. We will look to fund these opportunities by our continued focus on cost discipline.

Moving to currency, it is important to note that the fourth quarter was the first quarter in 2009 we experienced positive currency tailwind. From a sales standpoint, it had a positive $32 million impact or a 6% increase in sales and represented a $6 million benefit in operating profit. As a reminder, we have shown in the slide the Euro changes versus the dollar as representative of our currency exposure, as a material portion of our portfolio is Euro-based. Looking ahead, if rates stay where they are today, we expect a relatively small impact to our results in the first half of 2010 due to currency parity.

The weakened dollar in Q4 relative to the year ago period has also proven to be beneficial to overall margin results. Similar to the past two quarters, I have tried to illustrate this issue by highlighting the drivers of change in our operating profit margins in the previous four quarters versus year ago results. In Q4, we continued our trend of operational improvements. As you can see, the margin improvement due to operations improved 260 basis points versus the year ago period, as a result of price increases, cost reduction efforts, and the impact of the incremental R&D credits. Even after eliminating the incremental benefits of the increased R&D credits, our margin improvement, driven by operations, was a robust 160 basis points. All in, including the positive impact of currency, the margin improved 310 basis points in Q4 versus the comparable year ago period. As we look forward, we expect that our efforts to drive operational improvements will continue to gain traction.

Turning to our EPS reconciliation, I would like to reemphasize again the operational performance of the group. As highlighted on the slide, we continue to see improved operational performance, improving EPS by $0.19 or a 38% improvement versus the year ago period. When including a net $0.06 cost associated with interest and other items, partially offset by foreign exchange and higher income taxes, adjusted EPS grew 26% versus the year ago adjusted figure.

I want to provide you also with a quick update on the recent European fragrance facility rationalization plan. As a reminder, we announced during Q3 that we had initiated a collective consultation process with employee representatives regarding the potential closure of our fragrances compounding facility in Drogheda, Ireland, as well as the potential partial closure of our fragrance ingredients chemical plant in Haverhill, United Kingdom. In the beginning of Q4, we announced that we concluded the consultation process and determined we would proceed with the facility rationalization plan. As a result, we have recorded a $13 million provision, $10.5 million in Q3 and $2.5 million in Q4, related to this restructuring activity. As a reminder, we expect to deliver our targeted annual cost savings for the strategic project of $17 million to $20 million annually, which will be fully realized in 2011.

Looking at our cash flow statement, our disciplined focus on operational improvement drove a significant reduction in working capital in 2009, as a reduction in inventory combined with better operating discipline over receivables and payables improved results. The improvement in working capital was the primary driver to improvement in cash flow from operations of $71 million to $292 million for the year. Importantly, we were able to more than offset the $34 million annual decrease in net income, which was driven by the weakness in the first half to deliver the strong cash flow improvement. As a result of our strong cash flow performance through the end of 2009, we paid down additional debt of $150 million and made an incremental $20 million contribution to our US pension. For the full year, we reduced our gross outstanding debt by approximately $240 million, including the $150 million previously mentioned, which was an early repayment of our Japanese term loan. Actions such as these reflect our commitment to maintaining our investment grade rating.

Looking at capital expenditures, we finished the year at levels near expectations. Going forward, we expect higher spend levels over the next few years, as we will focus our investments behind supporting strategic growth, with focus in the emerging markets and driving efficiencies by strategically improving our manufacturing and supply chain footprint. As earlier communicated, we would expect our future capital expenditures to grow to a level approximating 4% of sales.

So a perspective on our results. Our Q4 results were certainly in line with our expectations and again indicative of improving business performance. As we leave a tumultuous 2009, it is clear that we managed through a year that had very different performance than the two halves of the year. Regardless, without question, the strong discipline in maintaining focus across growth initiative and cost management over the course of the year allowed us to dramatically improve results for the second half of the year and position us with some momentum as we enter 2010.

So what does that mean more specifically for 2010? We continue to be cautiously optimistic regarding the health of our customers' businesses, which should translate into a more solid growth environment in 2010. In addition, the headwinds in raw material costs and currency are expected to turn and, combined with our continued focus on driving margin improvement, should translate into improved margin picture in 2010. Finally, we would expect that the first half year over year performance will be stronger than the second half.

In summary, we are excited that our strategies and focused execution drove a marked improvement in the second half of 2009, specifically in Q4, and continued our operational improvements -- our best performance all year, and now we are beginning 2010 with stronger momentum behind us. Our global presence and diversified product portfolio continues to offer us great growth opportunities, and our emerging market presence continues to position us well in key growth areas around the world. We also continue to be disciplined in driving efficiencies in all that we do, thus ensuring that we will have the ability to improve margins while continuing to support our growth initiatives. So as we enter 2010, we will remain disciplined in the evaluation of our performance and as we consider additional investments to build stronger growth momentum, it will be done consistent with our ability to drive an improved margin picture. This commitment will ensure that our company will be able to win in the marketplace regardless of what the future might look like. With that, we would be happy to take any questions that you may have.

Kevin, thank you very much. (Operator Instructions). We'll begin with Jeff Zekauskas with JPMorgan.

Hi, good morning. Your capital expenditures came down this year from about $85 million to $66 million, and you've been, your volume growth profile moves along in general slowly, and you've been closing facilities. Is it the case that your CapEx is going to stay at this level over the next several years or maybe even go down?

Good morning, Jeff. This is Kevin. Let me respond to your question. I think in actuality, we are going to be ramping up our capital to ensure that we are supporting where we are expecting to grow. Specifically, as I alluded just briefly in the call, in terms of our outlook for capital expenditures going forward, given what we consider to be a more robust growth environment from the emerging markets, we're going to be supporting our growth opportunities there through some incremental expenditures. We are also in -- currently spending against the restructuring plan that has previously been announced. So if I were to talk about the general view of our CapEx going forward, that will continue to be the normal maintenance spend to ensure that our facilities are operating at high efficiency levels, and there potentially could be restructuring dollars more oriented against our developed market positions. But we will have incremental capital in the emerging markets to support what we consider to be a strong growth dynamic going forward for us in those particular key growth areas for us. As I mentioned, we're talking about closer to a 4% number of sales going forward and we would expect to be in that neighborhood.

So the level of -- can you quantify your levels of capital expenditure that you expect?

Roughly in the neighborhood of 4% of sales. So if you're at --

4%?

If we're at roughly $2.5 billion in revenue, you can calculate the number. We're getting close to the three-digit number.

Okay. Thank you very much.

Sure, Jeff.

Moving on now to Mike Sison at KeyBanc.

Hey, good morning. Welcome on board, Doug.

Thank you.

A question for you -- I know you can't go into much detail. But when you take a look at the opportunities to improve IFF over time, are there any areas you see maybe the biggest opportunity, maybe is it the cost side, at the top line side, or any other area that you observed over the last year?

Sure. A good question. I would probably answer it by saying I'm pretty pleased with all that I have seen so far. Maybe you'd expect that, given I'd come on to the Board having done some due diligence. I think the Company's -- the overall goal that the Company and the Board have, and I do too, is really to grot business profitably, and I don't make that as a trite statement. But the focus on growth is obviously a function of the top line, and the profitability is both through the top line but also through what I think are some efficiency opportunities. Kevin touched a moment ago on some operational opportunities through restructuring, which we've done in the past and will continue to look forward to do so.

I think the hallmark that I have probably noticed in my time on the Board so far is really what the need will be to be discriminating in terms of the many growth opportunities that we have. When you take a look at IFF's geographical footprint, and these are elements which attracted me at the outset -- the diversity of our footprint from a country point of view, Flavors versus Fragrances in the channels, and also the variety of wonderful customers that we have, there's really a tremendous opportunity for growth across all of those. They will all take resources, so we're going to need to be strategically discriminating on where we put those growth opportunities. Obviously within the efficiency footprint as I -- and I will work with the senior team and all those around the globe, we have to look for those productivity improvements. In making the comment about growth being priority one, not trivializing for an instant the need to continue to get efficiencies, which I would look -- I think the whole team would look do.

Maybe the final comment really in response to your growth issue is really the challenge that the Board has thrown against the entire Management team -- that being to look at all avenues for growth, organic and also external. Certainly the good news from my point of view is that in evaluating the organic or internal growth opportunities that have been briefly touched upon by Nicolas and Hernan today, there are just a tremendous number of those internal organic opportunities for growth, which I would look for us to maximize going forward.

Great. And just a quick follow-up, Nicolas, if you don't mind. In terms of the Fine Fragrance business, how has that business changed during this downturn? At some point, do you think the consumer will come back and view this as a -- an item they would buy more? Has there been any major structural changes in the way customers deal with you now? Just an update there and just curious to see if -- what the outlook would be for Fine Fragrances in the recovery.

Hey, Mike, this is Kevin. Before turning it over to Nicolas, I think obviously we've had commentary on that subject in the past. I think the way we're approaching Fine though, just to give an overall color, is that we're cautiously optimistic on the business, but we're managing it in such a way that we're not assuming anything as it relates to that business going back to the days of old. So we're being quite prudent in terms of the management of the portfolio and how we add resources or not, as the case may be. So our expectation is that we're going to be able to successful from a margin perspective regardless of what the future might hold. So we're certainly managing forward from that perspective. So we're not leaning in front of ourselves, I guess, from that perspective. But I think Nicolas would certainly have some additional color in terms of the consumer and the future of that business.

Hi, Mike. Definitely Fine Fragrance category disproportionately felt the impact of this current environment, and very often in the category, we talk about destocking at the retailer level. It was also at the consumer level. And we know that after a few years of a lot of innovation, consumers were in possession of several bottles of fragrances. When we look at product rotation at retail and when we look at also the different phase of buying, we believe that the consumer was sitting on some inventory as well. We probably have not seen them for quite a long time. I think that the prestige market has been most affected. In North America, as you know, which was really the most challenging market last year, we're seeing some retailers, we're seeing brands trying to focus on different initiatives, either focusing on supporting some of the classic or trying to bring innovation. We understand the market is still very soft, and we have to focus ourselves on investing on strong business and creative fundamentals. Right now, we feel very positive about our new win momentum regardless of the soft markets.

Great. Thank you.

You have a question now from Barclays Capital, Lauren Lieberman.

This is Brian Bennett sitting in for Lauren today. My big question really just deals with North America, and I was hoping you could give a little more visibility on that market. I guess specifically we were a little surprised that sales decelerated sequentially. I was wondering if you could talk about what's happening there? Is there a divergence in trend in North America versus what you're seeing in Europe, and how much your outlook is for 2010 in that market?

This is Kevin, how are you doing?

Good, thanks.

Look, are you -- any specific business from an overall perspective?

I think just generally all the segments except Ingredients were just a little bit -- it decelerated sequentially, and I know the comp is a little bit tougher. Just wondering if there's something happening in the market that -- we would have expected to be a quicker rebound, just given what we're seeing some of the customers?

Just a couple of things. I don't know that we're noting any change in trends, but I would say a couple points, one of which I've already mentioned. Relative to comp versus year ago, fourth quarter was actually a pretty strong year, year-ago period. So that's one area. I think fourth quarter was the only quarter of the year ago where we had solid North American growth. I think that's part of the deal. I think the dynamic as you think about Christmas and what's happening from that perspective, that clearly plays a role in terms of what's happening in that fourth quarter, that fourth quarter period. Flavors had a really strong fourth quarter year ago. So there was a slight change there in terms of comparing versus that strong quarter, and from a fragrance perspective, I think it maintained -- we maintained our position. Hernan mentioned it a little bit, but we did get a sense over the course of the quarter where some of our customers seemed to have taken a position on inventories right at the end of the year. We were seeing strong growth, and right at the end of the quarter, things fell off. It certainly appeared that there was an impact there. A different dynamic than what we saw a year ago. So I think that that's playing a little bit of a dynamic in terms of comparing the numbers. If we look at where we right now, the preliminary trends as we turn the corner into 2010, things are actually looking pretty good. So we're comfortable that there was some inventory positioning being taken by at least some of our customers.

Great. Thanks so much.

Sure.

Moving on to John Roberts, Buckingham Research.

Welcome, Doug. Thanks for participating in the call.

My pleasure. Thank you.

Could you give us your thoughts on acquisition either as you observed the consolidation in the flavors and fragrance industry, or maybe any relevant experience that you had at Ansell or your prior positions?

Sure. I guess as you can appreciate, the Company doesn't make comment about any M&A activity, so I won't even think about going there. I would revisit the brief that the Board have understandably provided to both the incoming CEO and probably any CEO, which is to evaluate any and all opportunities for growth. I and the management team will -- do see that the industry has a number of wonderful competitors who frankly challenge each other, which is a very healthy dynamic. The number of competitors is sizable, but obviously the customer base as well as the consumer base around the world is huge and therefore supports the kind of competitors that exist in the marketplace. I admire them and have come to better understand them better going forward. But I probably would reiterate the challenge -- notwithstanding what the Board has said, evaluate everything. When I have looked inside the Company at the strength we have in our people, the diversity of our customers, the R&D strengths that we have as well as the global footprints in flavors and fragrances, there's a tremendous number of internal options to pursue for growth, which we will do as the number one priority. To answer the second part of your questions, I have had extensive experience in M&A activity through both ansell and previously. They happen to be very good strategic moves in the context of entering new markets and/or acquiring new businesses and new challenges. While I have had that experience, and it's seemed that to be very beneficial for companies, it is not necessarily a platform at all for going forward for growth at IFF.

Thank you. Kevin, a followup. I think earlier you targeted up to $20 million in annualized savings from the recent restructuring, beginning in the second half of 2010. The recent 8-K that you filed providing some of the Management compensation objectives, does that signal any change to that target, either coming earlier or maybe having some upside?

No. Completely different in terms of -- and not connected. But we're continuing to work through that transition. And at the end of the day, it is going to translate into us really thinking about 2011 being the full benefit. We're currently in the midst of the final negotiations with our employee representatives in Drogheda, Ireland. So we're not even through that process. That certainly is important for us to effectively ensure we get through that process in a way that works for both parties. So, the numbers that we're expecting may have some benefits at the end of 2009, but they really will be relatively small, and I would counsel you that suggests it could be the 2011 benefit. The one last comment would I make is we've targeted a $17 million to $20 million number. You quoted $20 million and I hope that's the number. But certainly from our perspective, that's the range that we've communicated to you guys so far.

Thank you.

We have a question now from Edward Yang at Oppenheimer.

Kevin, could you provide the local currency breakdown between pricing and volume by segment?

I'd be happy to sit with you. We'll have to go through that. It's that intensive now.

Sure. We'll take that offline. In terms of the outlook for 2010, drilling down a little deeper, is 2% a good local currency run rate for 2010? You mentioned some margin improvement. Could you quantify how much you expect for 2010?

As you know, we don't provide a robust level of guidance, but I would say the following. Certainly as you heard our commentary, we were talking about leaving 2009 in a better place than we entered 2009. If you focus on what was transpiring over the balance of the second half, you start to get a better idea of how we're feeling about 2010. So the momentum that we were certainly seeing as we ended the year, we would expect that certainly in the beginning of 2010, we'd be able to see that momentum care rig forward. As we suggested, we will continue to be disciplined in terms of our management of cost such that, regardless of what the top line is doing, given certainly the economic volatility and uncertainty -- let's call it uncertainty as we approach 2010 -- we're going to be able to afford any investments in resources and R&D that will ultimately position us for higher levels of growth going longer term. I think we're feeling better as we enter 2010, and I think that we'll see how that plays out. Certainly as we started the year, we're feeling good because remember, the fourth quarter was impacted by this slowness at the very end where inventory positions were taken. Underlying trends continue to be strong.

Okay. Just a question for Doug. It's a fairly lengthy transition period since you've been announced as CEO in September. Just wondering in terms of how engaged you've been in terms of the day-to-day operations of IFF? And when you do formally take charge, should we expect a comprehensive plan in terms of your vision for IFF? And the previous questioners have addressed this, but in general, would you say that you expect incremental changes or transformational changes in terms of how IFF should operate?

Okay. Significant questions in there. Let me try to deal with them little by little. The transition I would concur seems to have taken a significant amount of time. That was a function of a contract that I have with Ansell and the obligation that I have to the Board to fulfill that contract. It would run through the early part of March, so we're clearly at the tail end.

To build on parts of your question, I've used the opportunity to get to know the senior team quite well. I've used the opportunity to read immensely to understand what are the critical issues going forward. I've been both faithful to my Ansell duties, but also have extreme confidence, which was well placed in the operating committee, the senior leadership team here at IFF, who have stewarded the ship in exemplary fashion. I am quite up to speed on issues through that reading and understanding and attending a variety of meetings, but all the credit goes to them. I should hit the decks, and I will hit the decks running in the not too distant future.

Turning now really to the heart and soul of your question, the Company is in a good position with the current platform that it has. It took a number of difficult but necessary steps during last year to restructure cost management, margin management to come out of the year quite strong. Nicolas and Hernan have already touched about the broad scale wonderful position our businesses find themselves in, with the notable exception of Fine, but that's well understood. The geography that we have, the customer base, the cost rigor that's been taken in the current R&D pipeline gives certainly me great confidence going forward that we can achieve what goals we need to achieve through what I would call nontransformational. Any CEO change, and particularly operating from a position of some strength, allows the Company and the Board to deliberate on any and all options, and they will be considered. I think the really good news in response to your question is that this Company does not need to make any transformational moves out of a position of needing to do something critical in order to make its -- achieve its goals. That might occur, but I definitely wouldn't want to you bank on that. That's really a function of the great footprint we have going forward from an organic point of view. I'll hit the decks running. I'm quite knowledgeable on the issues and delighted to be going to work with the wonderful group that already exists here.

Thank you for the insight.

We'll take a question now from Sam Yake at BGB Securities.

Good morning. I'm a new analyst covering IFF. I have to say, Mr. Tough, I'm impressed with the Company's potential.

Thank you.

I just had one quick question. It's been a historical problem that currencies can impact your results greatly, and I know that you are looking at possibly engaging in a hedging program. Do you have any thoughts on possibly hedging currency in the future?

We're exactly evaluating that as we speak. We've had discussions internally and certainly discussions with the Board as it relates to that effort. So I would say philosophically that we need to make sure that we protect the economic dynamics of what can transpire from a currency perspective. I'm less concerned about the translation-related issues, although we all know that they have an impact. But we're evaluating that, and to the extent that we do any particular work there, certainly we'll advise as appropriate.

Thank you very much.

Now a question from Erik Sjogren at Morgan Stanley.

Yes, good morning. Erik Sjogren from Morgan Stanley here. First of all, is there any precedence about cost control in the RSA process? I think taking out the R&D credits and roughly 100 basis points of underlying improvement there. Do you see this as a run rate going forward, if your savings growth will continue to deliver, the top line growth holds up, and raw materials stay where they are?

How are you doing, Erik? Good afternoon. I assume you're over in Europe these days.

Nope. Good afternoon.

I think that we will always maintain a disciplined approach to our investments in our fixed cost structures. At the end of the day, philosophically, our chain here wants to think of those as fixed cost. So because of that, we'll always be looking for ways to be more efficient and productive and figure out different ways of doing things such that we can offset the underlying inflationary increases that ultimately will dictate that number drifting northward. Will that always be able to be done? Not necessarily. But when we combine it with our investments in growth, we ultimately believe we'll be able to continue to have growth leverage. So that's, I think -- fundamentally should be your takeaway. I wouldn't want to comment that this is the right level. We will always consider growth opportunities and investments in support of that. Then we'll determine how to manage that in a way such that we're driving growth and at the same time being able to provide incremental margin leverages.

Thanks very much. If I could just follow up quickly on the balance sheet. Obviously cash generation was very strong for the fourth quarter [year]. I think your (inaudible) appears about two times net debt to EBITDA now. Do you have any comments what kind of debt levels you're comfortable with and what plans for investments going forward here?

As you know, we talked in the past, Eric, we were committed to strengthening the balance sheet over the course of 2009 to the extent that we could, and certainly we've done that. So I think that at a $1 billion debt level, which is where we where are now -- two times as you mentioned -- we're feeling good about that position. We also know that we have great growth opportunities. So we will continue to be focused on our working capital front, which hopefully should supply us with additional cash inflows. That will ultimately allow to us have the cash to ensure that we are tackling those organic growth opportunities that are available to us. We're feeling much better about where we are from an overall debt structure at this point in time.

Thank you very much.

With that, there are no other questions in the roster. I'll turn things back over to our speakers for additional or closing remarks.

Thank you all for your attendance today. If there's a follow-up question, you can come through to Michael DeVeau, which we'll happily answer. We'll look forward to talking to you next quarter. Thank you.

Thanks once more for joining us, everyone. That will conclude today's call. Again, thank you for joining us.