International Flavors & Fragrances Inc (IFF) 2010 Q4 法說會逐字稿

At this time I would like to welcome everyone to the International Flavors & Fragrances fourth quarter and full year 2010 earnings conference call. All participants will be on a listen-only mode until the formal question and answer portion of the call. Participants will be announced by their name and company name and in order to give all participants an opportunity to ask their questions, we request a limit of one question per person. I would now like to introduce Michael DeVeau, Investor Relations manager. You may begin.

Thank you, operator. Good morning, everyone. Speaking on the call today is our Chairman and CEO, Douglas Tough, our President of Fragrances, Nicolas Mirzayantz, and our CFO Kevin Berryman. Also in the room is Beth Ford, Executive Vice President supply chain.

This call is being recorded and will be available for play back on our website. Please keep in mind that during this call we will be making forward-looking statements about the Company performance, particularly with respect to the first quarter and full year of 2011. These statements are based on how we see things today and contains elements of uncertainty. For additional information concerning factors that could cause actual results to differ materially from forward-looking statements, I ask that you refer to the cautionary statement and risk factors contained in IFF's filings with the SEC.

Some of today's prepared remarks will discuss non-financial information, which excludes those items that affect comparability. These items are laid out in our reconciliation to comparable net GAAP measures which also available on ourselves website. With that I would like to turn the call over to Doug.

Thank you, Michael. Good morning, and good afternoon to everyone. IFF had an excellent year in calendar year 2010, led by strong performance answer across flavors and fragrances.

Our 13% local currency sales growth can be credited to strong growth in the emerging markets, increased levels of innovation, and an underlying strength across our product portfolio. While we did experience some benefits from restocking and favorable comparisons early in the year, I am pleased to say that a large part of our success was driven by new business wins. This record, top line performance, provided strong operational leverage that when combined with our margin improvement drove a substantial increase in operating profit.

For the full year, adjusted operating profit increased 17% and operating profit margin expanded 60 basis points to 16.3%. The benefits of lower interest expense and a more favorable tax rate provided additional leverage to our bottom line results. For the full year adjusted earnings per share grew 25% to $3.37, a Company record for the highest annual EPS we have achieved. I would like to now highlight some key accomplishments that we achieved throughout the last 12 months.

First, from a customer perspective, we were recognized as a leading supplier by both Procter And Gamble, and Natura. In addition we were selected for a global core supplier for a multi-national flavor customer, making us one of only three suppliers on that coveted list. In 2010 we solidified our commitment to research and development by appointing Dr. Ahmet Baydar to a newly created position of Senior Vice President, Research and Development. Under Dr. Baydar's direction we're strengthening our innovation, technological development and external collaborations, all of which are vital to accelerating our performance.

In addition, we signed a licensing agreement with a developer of an all natural sweetness enhancer, Redpoint Bio, that will enable us to offer our customers more natural solutions for reduced sugar products. More recently, we entered into an agreement with Evolva Holdings, a publicly trading Swiss biotech company. The objective of our partnership is to create a commercially viable biosynthetic root for production of a key ingredient.

We also recently announced our plans to invest over $100 million in greater Asia over the next three years. This investment will be allocated to two new state-of-the-art manufacturing facilities located in Hangzhou, China and Singapore. As growth in this region continues to accelerate, it is important that we align our infrastructure to support our capacity requirements. Our investment reflects our continued confidence in our growth strategies in the Asia region, and our long-term commitment to these very important emerging markets.

Last but not least, we began work in 2010 to enhance our growth and our profitability by embarking on a strategic assessment of the company. In our new approach we evaluated our categories, our customers, and our regions by aligning all appropriate costs to better understand where we were creating the highest levels of value. What was highly encouraging is that the diversity across our IFF franchise in total is strong. Both the flavor and fragrance businesses have solid margins and a significant runway for future growth.

Similar to most businesses, we were able to point out opportunities where we can accelerate our performance. By better understanding the facts, our leadership team now has the ability to make better business decisions which in turn should lead to greater financial returns for our shareholders. While we will not disclose specific details behind the results of our review, for obvious competitive reasons, I look forward to discussing our strategy with investors at an Investor Day that we will hold on March 15th in New York City.

As you can see, we have made a tremendous amount of progress both financially and strategically, making 2010 an outstanding year. Before passing it onto Hernan, I would like to acknowledge and thank the many IFF associates around the world who have helped us achieve such success in 2010. In particular, I would like to give my special thanks to those who worked diligently alongside our external consultants to complete our strategic review. Thanks to their hard work and dedication, we are better positioned to improve our overall growth and profitability.

Now, before passing it onto the team to review the details of our fourth quarter results, I did want to give you my perspective on Q4. Consistent with the previous three quarters, our strong local currency sales performance continued into the fourth quarter. Margins, which are historically lowest in the fourth quarter, were impacted by growth oriented incentive compensation expense, rising input costs, particularly in the fragrance ingredients business, and lower R&D credits.

In addition, as we have communicated throughout the year, we did make targeted investments to support identified strategic initiatives. Despite these additional costs, we were successful in driving earnings per share growth as our adjusted EPS increased 10%. If we did not have the elevated levels of incentive compensation, adjusted earnings per share would have approached the mid $0.70 range. With that I am now pleased to introduce Hernan Vaisman, our Group President of Flavors who will provide an update on the Flavors business.

Thank you and hello, everyone. I am very happy to report that local currency sales in the fourth quarter increased 11%, and most regions reported additional growth. Our very strong performance was once again driven by increased volumes and new business across all categories. The strong trends in greater Asia continued into the fourth quarter, as every category reported double-digit growth.

From a regional perspective our three largest greater region markets, China, Indonesia, and India combined to an impressive 18%. In the developed markets of North America and EAME, double-digit growth in savory and confectionary drove results. Our strong performance in Europe can be credited to our new EU regulatory approved natural flavors profiles. The introduction of these profiles enabled our customer to accelerate the development of their products to comply with the new legislations, while meeting the consumer demand for more natural products.

Our performance in Latin America was strong as Confectionary, Savory and Dairy all grew double-digits. On a full year basis, local currency sales increased 10%. In Greater Asia and India, nearly all categories experienced double-digit growth. In North America increased volumes and new business wins in Savory and Confectionary drove results. In Latin America, new business wins and volume recovery in Savory, Confectionary and Dairy more than offset the loss of non-strategic business.

Our strong positions in emerging markets continued to pay dividends, as these regions grew 14% in the fourth quarter and full year. In the key emerging markets such as the BRIC countries, we grew nearly 20%. In eastern Europe, growth was impressive as Poland, Russia, Hungary combined in excess of [35%]. As a result, our emerging market purchasing flavors has grown to approximately 48% of sales in the fourth quarter. A position that I expect will provide greater opportunity for growth in the future.

From an R&D perspective, our novel technologies had a sweetness enhancement and sodium reduction were components behind our new win performance. External collaborations such as our a agreement with ( inaudible ) and recently announced partnership with Evolva Holdings, our long-term initiatives, that are on the way to capture incremental sales and wellness opportunities. Adjusted operating profit increased $7 million to $54 million as strong sales growth and margin improvement initiatives drove results. As a result, adjusted operating profit margin improved 50 basis points to 17.9%.

Looking ahead, I expect that local currency sales growth will begin to normalize in the first quarter, as our year-over-year comparisons become more challenging. In addition, our effort to focus on more profitable categories could have a modest impact on our sales figures. Nevertheless, on a full year basis, it is my expectation that our new win performance will continue to drive solid local currency sales and profit growth. With that I would like to turn the call over to Nicolas Mirzayantz, our group President of Fragrance.

Thank you, Hernan, and good morning and good afternoon, everyone. It is my pleasure to report in the context of 5% growth in Q4 2009, local currency sales in the fourth quarter of 2010 increased 8% over the prior year period. Overall growth can once again be attributed to Fine Fragrance and Beauty Care and strong emerging market performance, as new business wins in Latin America and Greater Asia continue to drive results.

For the fourth consecutive quarter, we achieved double-digit growth in Fine Fragrance and Beauty Care as new business wins and increased volumes drove results in Europe, Latin America, and greater Asia. As noted on our last conference call, Paco Rabanne's Lady Million, Armani's Acqua Di Gio, and Calvin Klein's Beauty continue to play an integral part of overall growth in this category.

Functional finance results were solid, as new win as cross all categories more than offset volume declines. The strong trends in Fabric Care in Greater Asia continued, as the team was successful in both winning new business and growing pre-existing volume. North America and Europe did experience slowing as volume weakness impacted results. In Hair Home Care our composition, a unique portfolio of ingredients drove high single-digit growth.

Fragrance ingredient sales performed well, growing 9% as new wins, a strong portfolio and underlying improvement in demand continued to drive results. For the full year local currency sales increased 16% as new win performance, improving economic conditions, and the benefits of restocking drove double-digit growth across all regions and nearly all categories. Our very strong performance can be credited to the team's ability to execute key strategy initiatives that were developed two years ago.

Our previous investments in site, innovation, and creative expertise have enabled us to grow faster than the overall market in 2010, which in turn drove market share gains. In Fine Fragrance and Beauty Care specifically, new business wins and increased volume drove 26% growth. Functional fragrance continued momentum against 5% comparable, growing 7% in 2010 as new win performance across all categories led results. Similar to Fine Fragrance, growth in fragrance ingredients was strong, growing 18%.

Looking at our geographic breakdown of sales, accelerated growth in the emerging market once again drove our improvement for the fourth quarter. Performance in this market were very strong, growing 13% in the fourth quarter, and 18% for the full year. Significantly out pacing the development markets. Countries such as Brazil, Russia, India and China combined continued to grow over 20%, as our longstanding presence and previous investment in this key regions led to above market growth.

The highlight in the fourth quarter, however, continues to be Latin America where new wins and increased volume and Fine Fragrance and Beauty Care from both global and regional customer drove an impressive 48% growth rate. Said another way, Latin America Fine Fragrance and Beauty Care results accounted for over 50% of our total Fine Fragrance and Beauty Care growth, impressive when you know that it makes up less than 25% of the category.

From a profitability standpoint, adjusted operating profit declined by $6 million to $46 million as strong sales growth and margin improvement initiative were offset by accelerating input costs, lower R&D credits, higher growth incentive compensation expense, and investment to support growth. As a result, adjusted operating profit margin for our seasonably smallest quarter decreased 250 basis points to 13.8%.

It is important to note that if we normalize the year-over-year impact of lower R&D credits, and in addition growth revenue incentive compensation expense, operating profit would have increased versus the prior year. Before commenting on 2011, I would like to acknowledge our employees for the hard work and dedication. In particular I would like to give recognition to the many IFF associates who worked tirelessly to complete the closure of our Drogheda, Ireland manufacturing facility, as well as a partial closure of our Haverhill UK manufacturing facility. Thanks in large part to these employees, we were successful in not only rationalizing these facilities, but we did so while meeting historical level of demand and providing outstanding level of customer service.

Looking ahead, we're facing challenging year-over-year comparables. In particular, the first half of 2011 will be more difficult than the second half as we compare to an 18% local currency growth rate in Q1 2010, and a 23% growth rate in Q2 2010. Nonetheless, we believe our strong pipeline of new business should position us well as the underlying trends in Q1 are strong. We believe that these strength should translate into solid growth on a full year basis.

As Kevin will discuss shortly, input costs have accelerated recently. However, our pricing efforts, continued margin improvement initiative, and the $17 million to $20 million savings from our European manufacturing restructuring should offset these pressures. With that let me turn to Kevin.

Thank you, Nicolas, and good morning and good afternoon, everyone. Looking at our quarterly results, as Hernan and Nicolas have noted, our strong top line growth continues to be driven by new business wins. Similar to what we experienced in the third quarter, growth from new business wins out paced volume growth. Volume trends from existing business, as expected, slowed but remained positive. Emerging markets once again represented our strongest growth area, increasing to 45% of our total business in the fourth quarter. And for the first time in Company history, greater Asia on a full year basis has surpassed North America to become our second largest region because our Europe, Africa and Middle East business.

Gross margin was pressured slightly as input costs, particularly in the fragrance business unit, increased year-over-year in the quarter. Adjusted operating profit declined $6 million to $84 million versus the fourth quarter 2009, and adjusted operating profit margin decreased 210 basis points year-over-year to 13.4%. It should be noted that operating costs this quarter includes approximately $11 million of higher growth driven incentive compensation costs, versus what we would consider more normalized levels, and lower R&D credits versus year ago. The additional incentive compensation expense above normalized levels continued to be driven by our strong performance year-to-date.

We discussed the R&D credit's impact on our conference call last year when we noted the accelerated levels of credits we realized in the fourth quarter of 2009. Clearly, below-the-line-items such as lower interest expense and a favorable tax rate provided a boost to our EPS. For the quarter adjusted earnings per share grew 10% to $0.69.

Analyzing the P&L in more detail, I would like to further discuss input costs, research, selling and administrative costs or what we call RSA, and currency. Regarding input costs, we did experience a 2% increase in the quarter. The fragrance business unit input costs increased year-over-year as the mix of business from a geographic and category base resulted in the use of higher cost inventories. It is important to note that we did see an acceleration in our fragrance ingredients input costs, which are the building blocks to our fragrance compounds business.

Looking ahead to 2011, we expect input cost pressure to continue to build, as our current raw material purchases are showing signs of inflation. We have also seen additional acceleration and key input costs over the last six weeks driven by market dynamics in citrus oils, mint methanol and Turpentine. We will, however, be proactive by taking pricing actions, driving margin enhancing innovation, and achieving efficiencies that we believe should offset pressures longer term.

From an overhead cost standpoint, RSA expenses as a percentage of sales, increased 200 basis points year-over-year to 26.7% as accelerated sales growth was offset by the previously mentioned growth driven incentive compensation expense, increased investments in R&D, lower R&D credits, and higher business re-investments that are aligned with our strategy. Within RSA, R&D expense specifically as a percentage of sales, increased 160 basis points to 9.1%.

Higher incentive compensation expense and lower R&D credits combined to drive a $16 million increase in RSA versus the year ago period. The balance of our increase, or $7 million, was driven by targeted investments in R&D which were highlight in our strategic review and selling expense in order to strengthen our marketplace position. We believe these investments will provide us with opportunities to strategically grow our business longer term.

In 2011 we will continue to maintain focus on the management of our cost structure to ensure we are operating efficiently. Investments and resources, R&D efforts, and commercial opportunities will be driven by our belief in the profitable growth opportunities that these investments will deliver. Regarding currency, the euro declined in value year-over-year against the US dollar as expected, which did place some pressure on our results. Looking ahead, if currency rates stay where they are today, with the euro at $1.37, we expect foreign exchange to be modestly favorable for the full year 2011.

As we have previously communicated, we also implemented hedging strategies in order to protect our levels of euro-based profits at the local affiliate level. Currently, we have hedged over 50% of our exposure in 2011 at rates near the full year 2010 average euro, US dollar exchange rate. It is important to note that the impact quarter by quarter may vary, and the impact of our hedges in Q1 will place some pressure on earnings versus the current euro, dollar exchange rate.

As a reminder, as Nicolas already alluded to, we have finalized the formal closure of our Drogheda, Ireland facility, as well as the partial closure of our Haverhill UK facility, and shifted all operations to other facilities. The total cost for this initiative continues to be in line with the upper range of our previously communicated expectations. What I am worth noting, is that we are currently working with the trustees of the pension plan of the impacted employee population regarding various aspects associated with the funding requirements for the plan. We expect to finalize this effort in the first quarter of 2011.

Finally, we continue to expect to deliver our targeted annual cost savings of $17 million to $20 million for this rationalization in 2011. From a cash flow perspective we continue to make improvements of working capital efficiency versus the prior year. Year-end operational working capital, defined as inventories plus accounts receivable minus accounts payable as a percentage of our sales, declined 140 basis points year-over-year driven by our success in better managing our receivables and payables.

This continued improvement in operational working capital efficiency helped support our ability to realize a positive cash flow from our total working capital position. The second year in a row that working capital has been a source of cash. Quite impressive, given the growth that we saw in our business this year. This efficiency, combined with our strong operational performance, drove a $23 million increase year-over-year in cash flow from operations. Capital expenditures finished the year at 4% of sales as expected.

Looking ahead, we expect implementation plans from our recent strategic review may require some additional investments, although any upward pressure from our existing guidance of 4% should be minimal. Before passing it over to Doug, I would like to make some final comments on our 2010 performance.

First, our sales performance was strong and broad-based across our entire business as nearly three quarters of our categories finished the year up double-digits. From a regional perspective, our emerging markets grew nearly 1.5 times the rate of our developed markets as the investments we have made over the previous years are providing substantial returns. The operational leverage from the strong sales performance, when combined with lower input costs and our continued focus on efficiencies, not only drove margin improvements, but also allowed us the flexibility to make key investments that are aligned with our strategy. We believe these incremental investments in R&D and business development resources will position us well as we compete in the marketplace.

It should also be noted that while our substantial growth did tax our manufacturing efficiencies, we successfully executed the closure of one and-a-half fragrance European facilities. To position us well for our future, we made incremental capital investments, approximately $39 million versus 2009 levels, that were directed at key growth regions and technologies that are aligned with our strategy.

In addition, we recently announced our intention to invest over $100 million in two new, state-of-the art manufacturing facilities for both Flavors and Fragrance in China and Singapore. For the second year in a row, we made strong improvements to working capital as our efficiency levels improved significantly versus the prior year period. This improvement, as well as our strong provisional performance, drove higher year-over-year levels in cash flow from operations.

Finally, as Doug noted, we completed an in-depth strategic review, and have defined clear priorities going forward. Without question, 2010 was a year of great performance both financially and strategically. It was an important year, as it has reaffirmed our confidence in our Company's ability to drive improved future performance. With that I would like to turn it back over to Doug for his perspective on 2011.

Thank you, Kevin and Nicolas and Hernan for the comprehensive review of Q4 and our full year 2010 results. Looking ahead, we expect local currency sales to be in line with our long-term targets in 2011, albeit that the quality of our growth will be better, as we have begun exiting some lower margin businesses.

We believe our team's ability to continue to win new business will be an important driver of results going forward. While we are facing our most challenging year-over-year comparables in the first half, we are off to a good start. We do expect input costs will rise in 2011. It is our expectation, however, that proactive pricing, manufacturing efficiency and other internal costs disciplines, as well as the $17 million to $20 million savings from our European manufacturing restructuring, should offset the pressures.

From an RSA standpoint, we will continue to be disciplined in the management of fixed costs. Some of the impacts we faced in 2010, in particular incentive compensation expense, should transition to reflect more normalized business trends. We also plan to make investments to support future growth, particularly in the areas identified in our strategic review.

We are incorporating our strategic findings to accelerate our growth in the right categories, regions, and customers, and improve our overall profitability by implementing margin enhancing solutions, such as cost reduction or changes to pricing on parts of the portfolio that are under performing. Overall, top line growth may be slightly impacted by some of these initiatives, however the reduction will be in under performing categories and customers.

As a result of the above mentioned commentary, we are optimistic in our ability to deliver results that will approach our long-term financial targets. In summary, 2010 was a strong year at IFF, both from a financial perspective and a learning perspective. Our double-digit top line and bottom line performance is a testament to the Company's potential. Thanks in large part to the hard work and dedication across the entire organization, we were able to deliver record results across almost all of our financial metrics.

The IFF people worked very hard in establishing customer intimacy so we understand our customer's needs today, and in the future. Those excellent relationships enabled us to achieve a heightened level of satisfaction and R&D success with our customers. We will look to sustain and improve that customer intimacy to continue to win in the marketplace.

We also worked diligently to fully understand where we are creating value, and where we are destroying it. We have begun to incorporate those findings into our 2011 plan, as we expect to maximize those areas that provide the greatest opportunities, improve those areas that are more challenged.

We believe the insights gains from our strategy review will provide additional opportunities as to how we drive incremental value longer term for our shareholders. Looking at 2011, we are optimistic about our growth prospects and the potential financial results that we can deliver. With that we will be happy to take any questions you may have.

(Operator Instructions)Your first question comes from the line of Mark Astrachan from Stifel Nicolaus.

Thanks and good morning, everyone. I guess trying to get a sense of how quickly can pricing offset the input cost pressure. It sounds like it sounds fine for the year, but I guess I am trying to get a sense is the go forward pricing intended to offset input cost pressure you saw in the fourth quarter? Are you anticipating it will be for additional costs inflation in the first half of the year?

I think we had noted earlier on, Mark, and this was in past conference calls, we saw some of the cost pressures coming, so some of the pricing discussions have already started with our customers. Having said that, the acceleration in cost pressures came more swiftly than first anticipated, and will necessitate pricing discussions at an even escalated level from where we were. Those discussions are ongoing, and they will vary customer to customer, and region to region as well as almost product to product, so over the course of the first half we will be having all of these discussions. And the implementation of the timing is going to vary, and I will invite Hernan or Nicolas to talk further if they want.

Yes. We are already discussing with customers and as he mentioned, one by one you have different impact on the costs. We will see some recovery in price by this quarter, but we can't predict exactly where we will be-- the amount that we'll be recovering.

In Fragrances, as we had visibility on some additional pressure and input costs. We have engaged with our customers providing great transparency as far as what were the key drivers of input costs. And as Doug was mentioning, product by product, line by line. So, we're working with our customers to secure the price increase.

Great. Just sort of related to that, how accepting are the customers of pricing given what's going on with commodity costs? Then, related to that, is there an opportunity to take proactive pricing as well where applicable, and not just reactive pricing?

I think from a pricing point of view with customers, no customer is necessarily looking for a price increase. The good news is there is such visibility in the category as well as across a lot of categories and a lot of companies, whether it is oil, as well as apparel companies. There is pressure all around the globe right now, so the customers are aware of it. Nicolas just a moment ago mentioned the word transparency with our customers. We execute that transparency with sharing with them the cost information which is in the public domain, so they have a good grasp of the factors at work. So, the receptivity to it is well understood.

Your next question comes from the line of Emily Klingbeil with Credit Suisse.

Hello, good morning. Congratulations first of all on such a strong finish to 2010. I have a similar question, but I guess a slightly different take on it.

The first part of it is with commodity costs increasing, particularly at some of your largest customers and taking away some of their operating profit, I would like to know how this is impacting innovation and demand for replacers? And how you see it really impacting your top line in terms of what they're demanding from you? And the second part of the question is on the commodity cost increases. How comfortable are you that you have levers to be able to offset those costs, whether it be through sourcing and/or through SG&A? Thank you.

Emily, could you reshape the first question for me, please?

(Operator Instructions)

Operator, can we go to the next question and we'll have Emily jump back into the Q&A session.

Your next question comes from the line of John Roberts with Buckingham Research.

Good morning.

Good morning, John.

As a result of the review, how much of your sales are in the questionable category that you have some plan of action for dealing with?

John, the element of sales you called questionable is, fortunately for us in a modest sector. Most of the business came through very positively, but in both Flavors and Fragrances there are opportunities.

The good news, though, is there are different ways to attack the problem, some may be through pricing and some is through the concept of what does it cost to serve the customer. So, where we mentioned there will be a higher quality of sales, we have nevertheless still indicated that we would expect to be in the 4% range plus in terms of top line where we have been. So, it is a better quality and there will be some reduction, but it is at a modest level.

You don't want to give us a sense at what the total part is that needs to be addressed in pricing or some other way?

Correct.

Okay. I will get back in the queue.

Your next question is from the line of Emily Klingbeil with Credit Suisse.

Hello, we'll try that again. My question was really on just the commodity cost pressure that some of your largest customers are facing. My question is, are you seeing this environment as one where they're looking to you and towards innovation to try to help them drive their top line? And is it having a little bit of reverse effect in terms of your win rate? How is it impacting your win rate?

I think Hernan will be able to talk to this well, but I will start insofar as they're very much expecting us to come forward with innovation, ideas and ways to mitigate against commodity cost pressure. That's where our consumer insight comes in, in identifying things like health and wellness and nutrition, which has been particularly picked up by our flavors group, and I'd really like Hernan to talk to that in more depth.

Thank you. Yes, definitely we expect a kind of switch between the high volume products in terms of innovation to more affordable products. So far we haven't seen the market in this kind of approach, but definitely following experience that we have in the past whenever you have this kind of a price increases, the only specific one would be when we have these type of requests. In terms of how it is going to really affect the tax rate, I strongly believe, following what we went through many years, we have a very solid tool box to help our customers through these kind of price increases on their cost side.

Thank you.

You're welcome.

Your next question comes from the line of Jeff Zekauskas with JP Morgan.

Hello, good morning. I have a two-part question. Can you compare the rate of cost inflation in your Flavors business versus the rate of cost inflation in your Fragrance business? And the second part is an unrelated question which is that your deferred tax line on your funds flow statement was, I think, negative $13 million this year, and in the previous year it was negative $17 million. Are your cash taxes higher than your book taxes, and if they are, why is that?

Let me take a crack, Jeff, on the inflation question Flavors versus Fragrance. I would certainly say we're seeing higher levels of input cost trends for the fragrance business at this particular point in time. I mentioned in my commentary, citrus oils which affects both businesses, turpentine, which is a fragrance oriented input cost. So, generally speaking even though we're seeing increases in input costs in our Flavor, our natural flavors, our naturals, which to a large extent hits our Flavor business as well, the index on inflation in Fragrance is certainly higher than Flavors at this particular point in time.

Yes.

In terms of the deferred tax question, we've evaluated -- I would have to get back and we can follow up on a follow-up call on that, but fundamentally the cash taxes paid and the book taxes, there is not a significant difference. Now, a year-over-year there can be differences obviously, but I can follow up and give you more details as it relates to that.

Thank you very much.

Sure.

Your next question comes from the line of Ed Aaron with RBC Capital Markets.

Hello, this is Asher Cronk sitting in for Ed. Thanks for taking my question. My question centers around your pipeline and expectations for growth for new business wins moving in 2011. It seems like the mix of new versus existing business will obviously play a role in gross margin, just given that new business is priced for the current commodity environment. So, just how should we think about that?

Hi, it's Nicolas. Just want to say that we continue to see a very strong pipeline of new business as we have accelerated our innovation rate, increased participation and also the result of the focus on the key categories and emerging category expertise. So we see strong pipeline right now and we have access to more business, and therefore we remain confident as the in-flow of new wins moving forward.

And similar direction I think in Flavors we see very strong pipeline. I mentioned before, I also mentioned the trends of health and wellness and naturals really help us to cover material increase in the pipeline, and also help us to increase our (inaudible) rate. Having said that, as I mentioned before, when you have these kind of increases in commodities, the Company might start looking for a different kind of approach in the portfolio. But for the time being I am following what we have today is very solid.

Great, and if I could just sneak in a follow-up. What was the normalized tax rate on the quarter? And what would you expect for that line item moving into 2011?

I would say that we're kind of in the mid-27 range is how you should probably be thinking about it for 2011.

Great. Thank you for taking my question.

Your next question comes from the line of Lauren Lieberman with Barclays Capital.

Thank you, good morning. I just was curious a little bit about the trends and functional fragrance, because it was interesting to me most that in North America things had already started to slow in the third quarter, but in Europe it was a pretty dramatic slowdown. So I understand it, by definition, has to be tied towards category trends which are definitely not encouraging in those two regions, but where do you think inventory levels stands for your customers? Should we expect to still see negative growth in those two regions for functional for another period of time? Thanks.

Hello, Lauren, it is Nicolas. Despite challenging year-over-year comparable functional fragrance was plus 1% in Q4, but for the full year was actually plus 7%. So we had already sealed the pipeline of introduction and new wins. We also had benefited, to some extent to some additional promotion program, that maybe we're not there again this year, so we had to deal with very strong comparables.

We're seeing some return to normalized level of erosion in the developed markets which is affecting the top line. But as I said, when I looked at the new wins ratio, it continued to be very strong.

Is my line still open?

Yes.

Okay. Thanks. I am sorry, I guess what I wanted to get to is, I know it is very normal in a normalized environment where you don't have tons of restocking to see choppiness across the quarter. So, I understand the full year trend matters an awful lot. But very specific to functional fragrance in the developed markets I know from my other coverage category growth is very weak. So what I want to understand is do you think inventory levels for your customers, and at retail even, are high enough that we should still expect to see negative trends in functional for another quarter or so until kind of demand catches up with that inventory? Because the category slowed in the second half of the year.

I think it is fair to say that the level of growth in this category in developed countries is slower than in the rest of the portfolio and the other region. Right now we don't have visibility yet on the inventories that are still out there to understand what will be the impact for us in Q1.

Okay. Thank you very much.

Your next question comes from the line of Andrew Sawyer with Goldman Sachs.

Thanks, guys. Sorry to beat this into the ground. On the commodities side since it is tough to track a lot of your inputs, can you give us some help around what that basket inflation is, or what the year-on-year indexes are both for AG and petrochemicals? Are we talking 10s or that magnitude?

You're right that we have a broad basket of goods, and some are more critical than others. We probably see the pressures unfolding is in the mid-to high single digits overall for the basket of goods. I wouldn't want to say we saw some of this coming before, and some of the pricing actions that we have already taken are going to mitigate some of that.

Okay, thank you for that context. Really appreciate it. Then, just a quick one. As I look across your businesses, the one that really stood out that is still showing acceleration against the tougher comps is the North American Flavors business. Can you give more color around that?

Yes, of course. As I mentioned before we have a very good year in America. We have a very good solid wins in the health and wellness arena. So on top of a better economic situation, it really helped us to really deliver good solid growth in North America. Basically, new wins and higher volumes.

Your next question comes from the line of Mike Sison with Keybanc.

Hello. Congrats on a great 2010. In terms of 2011, in terms remembers it of the outlook for volume, you have noted that you would be in line with your long-term goals, which as I recall on the volume front or local currency front, is plus 2% above the market growth. So, to help us frame up 2011, what do you think the markets will grow in 2011? And how much of the growth that you're looking for is supported by new products? Then when you take a look at the EPS progression, you sort of highlighted again, it was 10% plus, right? In terms of EPS growth or long-term growth goal.

Given the headwinds in raws, is it sort of lower growth in that in the first half and then much stronger growth in the second half? Can you sort of help us understand the progression as the year unfolds?

Sure, Mike. Let me take some of it and then I will ask Kevin to address some subsections of it. Really from an overall market growth point of view, the world is really made up of many different parts, and the emerging market's obviously growing more rigorously than the developed markets so, these are generalizations. If we're seeing maybe a point or so of growth, to two points max in developed, we would be seeing at least triple that in the emerging markets. And we are well positioned in the emerging markets and investing there. So, that will be a big chunk of our growth going forward, which is why we have held onto the 4% plus local currency growth this year. It is made up of a different parts, and to come to that overall standpoint.

We think we have higher comparables the way Nicolas already mentioned it in half one, but in looking at the business, we think there is going to be a robust performance really throughout the year. Some of that has been addressed by my comrades in the context of wins and the pipeline of innovation we've already got. So, the confidence level in the top line is quite robust. You raised an EPS question, and I will ask Kevin to talk to that, Mike.

Mike, I think there is a couple dynamics that you need to think through. The first one is on the input costs. Certainly, although we have seen acceleration in certain areas, there is a likelihood that some of that will come into the second half of the year versus the first half. In addition, remember that we have the $17 million to $20 million of manufacturing efficiencies due to the rationalization that we're expecting from day one. If you take into account our pricing initiatives, and certainly the fact that in our RSA investment we're going to probably have more normalized levels of incentive compensation, we'll still be able to realize some improvements in the first half of 2011, even though we're comparing to very, very strong year ago numbers.

Great, thank you.

Your next question comes from the line of Edward Yang for Oppenheimer.

Hello, thanks for taking my question. First of all, what do you expect global expense spending to total in 2011? It has been volatile with some of the RSA and incentive compensation spending that you mentioned. And secondly, just on pricing, I would like to understand that better for both Flavors and Fragrances.

Previously, it was my understanding that in a rising raw material environment you don't necessarily adjust pricing on your existing products, that basically you only get pricing when you introduce new products. Has that changed at all or are you now adjusting prices on existing products as raw materials rise? Thank you.

I think, Ed, we don't really talk specifically about the expected cost structures going forward. We do know that we will be considering investments to support our growth initiatives per our strategy, and we do know there will be some dampening on our cost structure in RSA because of the very high levels of growth driven incentive compensation we incurred in 2010. We have a variable-based compensation scheme that translates into pay for performance ultimately, and that certainly was realized in 2010.

Perhaps on the other comment I will just have a preliminary introductory comment, but turn it over to Hernan and Nicolas. We have always proactively priced to the extent that there are input costs specifically that are affecting our margin structure. I think we're getting better and more proactive and getting sooner and ahead of the curve, but I will turn it over to Nicolas and Hernan to see if there is any additional comments they would like to make.

I think this is what you mentioned. We always pass increases to our customers when you have this kind of price increases. You cannot really absorb such increase. Definitely we have a very negative impact, so I don't know where the comment comes from, but definitely we always price existing and new businesses accordingly.

And to add to Kevin's comment, I think that we -- now the tools we have invested in IT to provide realtime visibility on the key drivers of input costs. Therefore we can go back formula by formula and really share with our key partners what we did impact on our portfolios. So, we're very early on to be able to share the visibility, and also to give greater level of granularity than we ever did in the past.

Kevin, just to clarify on the global expenses. Does that mean that you expect that to be up year-over-year, flat, or down from the $61 million you spent in 2010?

We don't provide guidance as it relates to that, but I think you have a perspective on some of the pluses and minuses that will be going on.

Okay, thank you.

Your next question comes from the line of John Roberts with Buckingham Research.

Thanks. Since the tax rate declined as 2010 progressed, should we assume a lower full rate in 2011? Maybe your geographic mix sort of shifted as the year went on and as you enter 2011?

We talked about that a little bit in our call, the preliminary comments. We expect that our rate for 2011 will be in the neighborhood of, let's call it 27, mid-27s is the right rate to be thinking about on an ongoing basis.

European Fine Fragrance business accelerated a little bit in the December quarter versus the September quarter. Is the significant amount of that re-exported as perfume to the emerging markets from Europe? Is the acceleration in Europe not really Europe consumption of end finished products?

It is a very good question. If you look at the dynamic in Europe of Fine Fragrances, most of the European players, manufacture in Europe for the rest of the world. We don't have visibility on what portion of the growth is coming from the emerging market or more developed market, but it is fair to say that some of the introductions last year were successful. So, we know that it was positively impacting our results in Europe but also for export to North America. It is fair to say that also a good portion of our revenue in Europe for Fine Fragrance were exported to emerging markets.

Great, thank you.

Your next question comes from the line of Sam Yake with BGB securities.

Yes, thank you for taking my question. I just have one question. I was wondering in the past you mentioned your margins in the emerging markets are comparable to the developed markets. I am wondering if you can address, in general, do you believe that trend will continue in the future?

Hello, Sam. Yes, I would say that's our expectation. There is, as we have discussed in the past, there are variabilities across countries or customers or whatnot. But in general you should not be thinking about the emerging markets as being a fundamentally different margin profile than the developed markets.

Okay, thanks so much.

Your next question comes from the line of Jeff Zekauskas with JP Morgan.

Thanks. In your opening remarks you said that the combination of price increases and cutting your manufacturing expenses, by $17 million to $20 million would roughly offset raw material inflation. So is another way of looking at that claim, that if you didn't have the expense cuts, your raw material inflation would be $17 million to $20 million above your pricing? And what you would attempt to do is to recoup that piece in 2012? Is that reading it right?

Well, look, I think the answer to your question, Jeff, is that when we are looking for pricing action, our expectation is that we are priced to recover our input cost increases period. Now, we continue to drive efficiencies throughout our organization in everything that we do, whether it is manufacturing or overhead costs or whatever else, and those will ultimately provide for, hopefully, additional margin opportunities longer term. We're in the midst of, certainly, some volatility on the input costs, so it is difficult to say what's going to happen specifically in one quarter or whatnot. The expectation is that we are pricing to recover our input costs, and that's what we're trying to accomplish.

And what's your CapEx for 2011?

We have continued to give a direction on 4%. We're finalizing our implementations relative to our strategy. We'll provide some additional insights relative to our Investor Day coming up here in March.

Great, thank you.

(Operator Instructions)There are no further questions at this time.

Thank you very much for your participation today. We're adjourned.

This concludes today's conference call. You may now disconnect.