International Flavors & Fragrances Inc (IFF) 2011 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the International Flavors & Fragrances second quarter 2011 earnings conference call. All participants will be on a listen-only mode until the formal question and answer portion of the call.

(Operator Instructions)

I would now like to introduce Michael DeVeau, Investor Relations Manager. You may begin.

Thank you, operator, and good morning, everyone. With me on the call today is Doug Tough, our Chairman and CEO; Hernan Vaisman, our President of Flavors; Nicolas Mirzayantz, our President of Fragrances; and Kevin Berryman, our Executive Vice President and CFO. Please note that today's call is recorded and will be available for playback on the website.

Please keep in mind that during this call we will be making forward-looking statements about the Company's performance, particularly with respect to third-quarter, second-half, and full-year 2011. These statements are based on how we see things today and contain 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 our filings with the SEC. Some of today's prepared remarks will discuss non-GAAP financial information, which excludes those items that affect comparability.

These items are laid out in our reconciliation to comparable GAAP measures, which is also available on our website. With that, I would like to turn the call over to Doug.

Thank you, Michael, and good morning, and good afternoon, everyone. In light of the instability in the financial markets around the world, I felt it was appropriate to reemphasize that IFF is a diversified and competitively advantaged organization.

Whether you analyze our portfolio by geography, where 75% of our sales come from outside the United States and 45% of sales come from the fast-growing emerging markets. Or analyze IFF by our product, where 52% of our sales come from Fragrances and 48% from Flavors, the breadth and the diversity of our portfolio is great and our innovative solutions are key components of consumer staple products that enjoy long-term growth stability.

Our business strategy is sound and we are an established partner with many global and regional consumer products companies around the world, which are themselves committed to growing their business. Our management team, as well as all IFF employees, are capable of executing our strategic initiatives to deliver long-term value for shareholders.

As we communicated at our recent Investor Day on March 15, 2011, we believe that by leveraging our geographic reach to capture growth in the emerging markets, by strengthening our innovation platform to achieve better margins, and improving our portfolio by making better business decisions based on economic profit, we can deliver our long-term targets of 4% to 6% local currency sales growth, 7% to 9% operating profit growth, and 10% plus earnings per share growth annually.

Despite the volatility in the financial markets and the factors impacting our recent share price performance, we continue to believe that these goals are attainable and we remain confident that we can achieve these results in 2011 and beyond. Before the rest of the senior team reviews the full details of our quarter-2 performance, I thought I would provide a few overview comments on our recent results.

First, we are pleased with our second-quarter local currency sales growth in light of the challenging year-over-year comparisons. To put our performance into context, it is important to note that our sales growth last year was very strong, up 17%, as it included an elevated level of new business wins and restocking benefits.

Fortunately, the diversification of our product and our geographic portfolio continued to provide us with the ability to grow our local currency sales 3%, as Flavors in the emerging markets drove the positive results. As we previously indicated on our first-quarter conference call, Fragrances performance was soft, as we were comparing to a very difficult 23% growth rate reported in Q2 of 2010.

Gross margin percentage declined year-over-year, as raw material increased significantly across both Flavors and Fragrances. Pricing actions, as expected, lagged the input increases. However, we were successful in achieving approximately 2 percentage points in the quarter.

In addition, we also benefited from our European restructuring, which helped reduce the impact of the rising raw material costs. Separately, our disciplined approach to cost management, including the benefit of lower compensation accruals and favorable foreign exchange, drove an 11% increase in adjusted operating profit and a 50-basis point improvement in our adjusted operating margin.

The solid operating profit performance led to a 14% increase in adjusted earnings per share to $0.97, a record for the second quarter. Looking at our performance over the first half of 2011, it is clear that we have started the year well, despite the challenging raw material environment. Our local currency sales growth of 6% for the first half is a tribute to the strong momentum we have seen in the business.

At the same time, our pricing actions and focus on controlling costs, including the benefits of our European restructuring and lower incentive compensation expense, helped to offset the significant raw material pressures and drive a 16% increase in adjusted operating profit, and a 130-basis point improvement in adjusted operating margin. This all culminated in strong adjusted EPS growth of 18% in the first half of 2011.

While these results are indicative of a solid performance, I thought I would provide a perspective on our results over a longer time period. Looking at our performance on a 2- and a 3-year average to smooth out the volatility of 2009 and 2010, we believe both businesses are outperforming the market and gaining market share.

The end result has been positive to our financial results, as our performance on a 2- and a 3-year average is above our long-term financial targets. After Hernan, Nicolas, and Kevin finish their sections, I will give you some perspectives on our outlook for the balance of the year and then we will take any questions that you may have. With that, I would like to introduce our Group President of Flavors, Hernan Vaisman.

Thank you, Doug, and good morning, and good afternoon, everyone. Marking the twenty-fourth consecutive quarter of growth, I am happy to report that local currency sales in the second quarter grew 8%, led by a double-digit increase in savory and high single-digit increases in beverage and confectionery. In North America, our health and wellness portfolio continue to provide strong growth opportunities driven by our sodium production initiatives.

Our considerable capabilities in helping our customers create healthier products that are aligned with the consumers' needs are paying dividends, as we continue to see a number of business wins utilizing our sodium moderation solutions. Comparing to an 18% increase last year, our strong result in EMEA can be attributed to double-digit growth in Eastern Europe, Africa, and the Middle East.

Western Europe results were solid against strong year-over-year comparables, as the team continued to capitalize on our innovative naturals portfolio to win new business across both global and regional customers. In Latin America, our consumer preferred flavors drove solid growth, as confectionery and savory each grew at double-digit rates. Finally, in greater Asia, growth remains strong as double-digit trends in beverage and confectionery continued.

As I mentioned on our Q1 conference call, we have begun to exit some low-profit business, which was approximately $1 million in the second quarter in greater Asia, a similar level to what we saw in the first quarter.

Looking at the geographic breakdown, our sales in emerging markets continued to grow double digits as countries such as Brazil, Russia, India, and China combined grew in excess of 20%.

Turning now to profits, second-quarter operating profit increased 10%, or $6 million to $71 million as accelerated sales, including volume growth and pricing that's continued cost discipline drove results. Operating profit margin declined 60 basis points versus the previous year period to 20.6%, as pricing initiatives, as expected, lacked raw material inflation.

Before providing commentary on the balance of the year, I would like to provide an overview of our first-half performance. Local currency sales increased 10% in the first half of 2011, on top of the 10% we reported in the year-ago period, indicating continued strength in our Flavors business.

The strongest growth was achieved in North America and EMEA, both growing double digits as we continued to leverage our innovative health and wellness portfolio.

The effect on profitability was profound, as operating profit increased 19%, or $22 million to $150 million. As a result of this strong top line performance, which included both volume and pricing growth, as well as continued cost control discipline, operating margin improved 100 basis point year-over-year from 20.9% to 21.9%.

Looking ahead, while we are comparing to double-digit growth throughout the balance of the year, we are off to a solid start as new business performance remains strong. Pricing initiatives are under way to minimize the impact of raw material pressure and we will continue to focus on controlling costs to deliver strong operational performance in the second half. With that, I would like to now introduce our Group President ofF, Nicolas Mirzayantz.

Thank you, Hernan, and good morning, and good afternoon to everyone. In the face of one of our most challenging year-over-year comparisons in company history, 23% growth, local currency sales declined 2%, as new business wins were more than offset by volume declines. In the fine and beauty care category, local currency sales were down 4% year-over-year against a company record 37% growth in Q2 2010.

Our EMEA and Latin American regions were pressured the most, as we cycled a 55% growth rate in EMEA and a 30% growth rate in Latin America. North America was quite resilient, up 1% despite a 24% year-over-year comparison, as new business wins offset volume pressures. Functional fragrances grew slightly, up 1%, supported by new business performance across all categories and solid results in the home care category.

From a geographic perspective, the strong trends in greater Asia continued, as fabric care grew double digits. And, in North America, our home care business achieved double-digit growth. Lastly, comparing to a 24% growth rate in the year-ago period, which happened to be our strongest quarterly performance of 2010, fragrance ingredients declined 5% year-over-year, as strong pricing initiatives were offset by lower volumes.

From a geographic perspective, continued emerging market growth helped mitigate softness seen in the developed markets. In our EMEA region, strong growth was experienced in Eastern and Central Europe. And in greater Asia highlights include double-digit performances in Indonesia and Thailand, as well as high single-digit growth in China.

From a profitability standpoint, adjusted operating profit declined by $5 million, as strong double-digit increases in raw material costs and lower sales impacted results. Adjusted operating profit margin fell 180 basis points to 16.8% versus the year-ago period.

It is common to see deterioration in gross margin due to inflation at pricing actions like raw material costs. It is important to note that the significant pressure raw material placed on gross margin were substantially reduced by pricing actions, lower incentive compensation expense, and cost control initiatives.

In addition, our previously announced restructuring in Europe was more important than ever as it provided approximately $5 million of savings in the quarter that further helped reduce the impact of raw materials. Looking at our performance over the course of the first 6 months of 2011, and taken in the context of the 20% growth we reported in the first half of 2010, I am pleased that local currency sales were up 2%.

All regions around the world reported positive results, even as we compare to the very strong growth that I make of 25% growth in EMEA, 21% growth in greater Asia, and 16% growth in both North America and Latin America. From a category perspective, fine fragrance and beauty care grew 4% in the first half 2011 on top of the 32% growth we reported in the first half of 2010. Functional fragrance grew 2%, despite comparing to an 11% year-over-year growth rate.

While gross margin was under pressure due to significant raw material inflation, we were able to deliver 2% adjusted operating profit growth and hold operating margin near similar levels reported last year, as we capture restructuring savings, implemented initial pricing actions, and control costs.

Looking ahead, while we continue to expect softness in Q3 due to the challenging 15% year-over-year comparable, we will expect that our sales begin to improve over the balance of the year. We are encouraged by our continued new win momentum and believe that our pipeline of new business should position us well as we enter the fourth quarter.

While pricing benefits are expected to increase in Q3, they will not completely offset raw material increase and I expect to see year-over-year decline in operating profit margin in the third quarter. As a result, we continue to have discussions with our customers to capture additional price increases. With that, let me turn it over to Kevin.

Thank you, Nicolas, and good morning, and good afternoon, everyone. Second quarter 2011 sales totaled $716 million, an increase of 7% from the prior-year period as the impact of foreign exchange contributed positively to our top line growth. Excluding the impact of currency, sales grew by 3%, reflecting continued new business success and the realization of price increases that are being implemented to reduce the impact of higher input costs.

The emerging markets continue to perform well, up 6%. These markets represented 45% of our total sales. Adjusted operating profit grew 11%, or $12 million, as lower incentive compensation accruals, foreign exchange benefits, and continued cost discipline drove results.

Despite a 310-basis point contraction in gross margin relative to the significant increases in raw material costs, adjusted operating profit margin increased 50 basis points to 17% versus 16.5% in the year-ago period as we continue to exhibit strong cost control, achieve the restructuring savings and benefit from lower incentive compensation accruals.

With interest expense essentially flat year-over-year, and a more favorable tax rate offsetting approximately $1 million of other expense related to foreign exchange losses on outstanding working capital exposures, we were able to gain additional leverage in our P&L to deliver 14% adjusted earnings per share growth versus the year-ago period.

Analyzing the P&L in more detail, I would like to further review input costs, RSA costs, or research, selling and administrative costs, and currency. As expected, we continued to see input costs escalate in the second quarter, as raw material prices rose 12% versus the year-ago period. While both businesses experienced significant pressure, it was greatest in Fragrances, as prices were up double digits driven by strong increases in naturals, petrochemicals, and feed stock ingredients such as turpentine.

Flavors, which were up high single digits, continue to be impacted by sharp increases in items such as mint, menthol and citrus oils. While there have been some signs of relief in energy costs, we continue to expect that raw material prices will rise high single digits for the full year.

As such, we expect pricing benefits to build throughout the third quarter and we will have more discussions with our customers regarding additional pricing actions in situations where material costs have increased since our last discussions.

From an overhead cost standpoint, RSA expenses as a percentage of sales decreased 360 basis points year-over-year to 22.7%, reflecting lower incentive compensation provisions and continued cost discipline. Importantly, within RSA, R&D expenses increased slightly from the prior-year quarter as additional investments were made to support our strategic growth initiatives.

It is important to note that if we exclude the impact of incentive compensation in both 2011 and 2010 periods, R&D would have actually increased by 11% year-over-year, or 30 basis points as a percentage of sales.

Looking to the second half of 2011, with the elevated level of raw materials, cost control will continue to be important to our success. We plan to make incremental investments in R&D efforts and commercial opportunities to support our strategic plan. These investments will be balanced with respect to our short-term and long-term performance needs.

Regarding foreign exchange, the euro and several other currencies around the world increased in value year-over-year against the US dollar and had a positive impact on both our top and bottom line performance. Looking ahead, if currency rates stay where they are today, with the euro at approximately $1.42, we expect foreign exchange impacts to be favorable for the full year 2011.

As we noted on our recent conference calls, we have implemented hedging strategies in order to protect our level of euro-based profits at the local affiliate level, as our euro-based profits represent the largest foreign currency exposure for the Company.

Similar to what we said last quarter, we have hedged approximately 65% of our euro-based exposure in 2011 at rates near the full year 2010 average euro/US dollar exchange rate. Our upside on euro exposure, therefore, will continue to come from the remaining 35% that is not hedged.

From a cash flow statement perspective, our strong profit growth provided an increase in net income. We did however see a rise in working capital in the first half driven by the large cash events we spoke about on our first quarter conference call.

As you will recall, a large reduction in payables, resulting in a decrease in Q1 cash flow versus year-ago, were driven by our strong 2010 annual incentive compensation payout and several tax payments. When combined, they resulted in a decrease in payables of approximately $130 million versus the same period a year ago.

Further increases in working capital were driven by higher inventory levels associated with the rising raw material price situation, as well as other payables.

The combination of all of the previously noted items resulted in our cash from operations falling $126 million from the year-ago period. Based on a more normalized year-over-year comparison, cash flow from operations would have increased by approximately $4 million versus year-ago levels, if we did not have the incremental $130 million related to our 2010 annual incentive compensation payouts and tax payments.

Regarding our capital expenditures, we are on track with our goal of spending approximately 5% of sales for 2011, as we expect our investment levels to increase over the back half of the year. As part of our commitment to return cash to our shareholders, we announced an increase in the quarterly cash dividend, raising it 15% from $0.27 per share to $0.31 per share on a quarterly basis.

We believe this increase underscores our strong financial condition and excellent cash flow position, as well as the Board's confidence in IFF's future growth prospects. Finally, as we noted in the past, we have paid off $100 million of our outstanding senior notes in the beginning of July, and we expect to pay another $20 million in November of 2011.

Once the next payment occurs, our leverage positions us in a manner that optimizes our financial flexibility going forward. With that, I would like to turn the call back over to Doug for his perspective on the balance of 2011.

Thank you, Kevin. Looking towards the balance of the year, we believe that the operating environment in the second half will likely be similar to what we had seen through the first 2 quarters of 2011. While we continue to see Fragrance softness in the third quarter due to the challenging 15% year-over-year comparable, we expect that sales will improve over the balance of the year.

And, the strong momentum in Flavors is expected to continue throughout the second half. As such, we expect our local currency sales growth in the second half of the year to be in line with our long-term targets of 4% to 6%, with our strongest performance coming in Q4.

We anticipate pricing benefits will build in the third quarter and expect to have discussions with customers regarding additional pricing actions in situations where those material costs have increased since last conversations. We expect to see year-over-year gross margin percentage pressure in the third quarter, although it will be to a lesser extent than what we experienced in Q2.

As a large portion of our results are denominated in euros, the year-over-year strength in the euro versus the US dollar will represent a tailwind during the second half of 2011, if exchange rates remain where they currently are. In addition, from an RSA standpoint, we will continue to focus on controlling our costs and drive operational performance in line with our 7% to 9% operating profit targets, which again should translate into 10% plus EPS growth in the second half.

The net result is that by leveraging our geographic reach, strengthening our innovation platform, and maximizing our portfolio, we should be able to achieve our long-term targets of 4% to 6% local currency sales growth, 7% to 9% operating profit growth, and 10% plus EPS growth for the full year 2011. In summary, we are pleased with our first half 2011 results in light of the challenging raw material environment and very strong year-over-year comparables.

While we will continue to experience input cost pressures throughout the remainder of the year, we have finished the first half of 2011 on solid footing, as we are balancing short-term pressures against long-term investment opportunities.

We expect that our pricing actions to cover raw material costs will further take hold in the second half, and that our disciplined approach to controllable costs, offset by some incremental investments into the business, will result in strong operational performance in the second half, despite the historical increases in raw material costs.

IFF's excellent diversity, blending both Flavors and Fragrance across our excellent geographic footprint in the emerging and the developed markets, coupled with our wide array of customers and categories, gives us confidence in our ability to deliver our long-term financial targets. Beyond this year, we will continue to enhance our performance as we make progress against our strategic plan.

Our plan embeds the insights we gained from last year's assessment to address the opportunities identified, all of which should drive shareholder's value longer term. With that, we will be pleased to take any questions that you might have. Thank you.

(Operator Instructions)

Your first question comes from the line of Mark Astrachan of Stifel Nicolaus.

Good morning, everybody. I guess the first question is, given what's happened of late in the markets and the economy overall and then commentary from Procter & Gamble talking about a deceleration in anticipated volume growth for its fiscal 2012, how do you all think about the views of volume versus pricing on a go forward basis?

And, just the overall expected demand from a consumer standpoint, developing market versus developed market with the idea that developing markets is still a bit stronger than developed markets. And then, second question, unrelated to that, curious what the differential is between your view on input costs and your larger competitor who is anticipating mid-teens year-on-year growth?

Thanks, Mark. It's Doug. I'll tackle the first part of your question and ask Kevin to deal with the second one. I think you've raised the overall question about the global economic environment and uncertainty, and none of us have a great crystal ball.

But, within IFF, we certainly focus on what we can control and the variables that we can't control we leave to others to figure those out. And, I say that because it's given us a focus on really what are our strategic initiatives, a challenge, are they still relevant, are our business plans still relevant, and we think they are.

The comments and the confidence we have in the overall results for this year, and we think the operating environment in H2 will be comparable to what it is in H1, barring entirely unforeseen issues. So, we're focusing on the basics. You're right, that there's probably likely to be a little more economic softness and perhaps some demand challenges in the developed markets relative to the emerging.

But, where some customers are citing perhaps a slowdown, others are robust and particularly in some of those emerging markets, where we're particularly well placed. So, initiatives in R&D, investments in our strategic plan in advantaged categories, give us a pretty high level of confidence about Q2 at least without an entire world meltdown. And, I guess with that, I'll ask Kevin to address your second question.

Good morning, Mark. As it relates to the question on input costs, we really can't comment as it relates to the specificities associated with other indications of input cost increases, but, I can give you just a couple of thoughts. There certainly are a variety of reasons why there might be differences between the numbers that we're thinking we have versus what someone else might be thinking about.

Certainly mix can play a role, the timing of purchases and how they will hit the P&L can play a role, inventory levels on items that are facing pricing pressures, all of those can play a role as it relates to differences. What I can say, is relative to IFF, is that we believe we have a very strong monitoring process and we continue to have a high confidence level in our projections.

As a result of that, we continue to believe that we will be up high single digits in our input costs versus year ago. And, I would say that we're feeling good about that. Could it ultimately approach a number of 10%? Perhaps.

But, we still believe the numbers are in the ranges that we are discussing and certainly not mid-single digits for other numbers that I have heard. These are the levels of which we are approaching and discussing our pricing actions with our customers, and we feel confident as it relates to our perspective on what IFF's cost pressures are going to look like.

Thank you.

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

Thanks, good morning. So, the first thing I want to check on is, I know you said that by the fourth quarter, I believe you said by the fourth quarter, you will be fully caught up on pricing versus cost inflation on an annualized basis. But, if I think about it, not what the run rate will be, but more holistically for 2011, what percentage of cost inflation do you think you're going to recover? Is it greater than half?

Hi, Lauren. This is Kevin.

Hi.

Yes, significantly higher than half.

Okay, okay, great. And then, when I think also, there was once or twice towards the end of your guys' prepared commentary where you talked about incremental investments and commercial opportunities in R&D. Is that any different than what you had been thinking in terms of incremental investment levels a couple months ago?

Because, as I'm looking at it, I know you're going -- the key for you guys is delivering in line with the long-term goals, but, I am actually thinking through this as being it could be -- your EBIT growth in the second half could be better than your long-term goals as pricing starts to come through. And, I just wanted to know if I should be thinking about more proactive reinvestment as the pricing comes in.

Well, let me talk about really the investments, Lauren. And, yes, there will be some incremental investments versus that which we had talked about. By the same token, as we have done the strategic plan and got into a greater degree of specificity, some ideas have emerged to be stronger and we've invested more, and will be investing more, and others under analysis didn't necessarily bear the full fruit that we thought.

So, we've either halted or curtailed a slowdown of some of those investments. But, in this environment, we think there's an opportunity for the, hopefully, the strong to get stronger, the Company's basis for competing is competitive differentiation, particularly through R&D. So, since certainly the investor meetings and conference --- in our first quarter conference call, we have drilled down further into some of the initiatives, both commercial and R&D and are investing behind them.

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

Great. Thanks for taking the question. I just wanted to start by asking about any behavioral changes that you may or may not be sensing from your customers.

And, I'm particularly interested in your thoughts on their willingness to invest more in innovation, just with the macro picture maybe darkening a bit. And, whether, along those lines, you see any real differences evolving between Flavors and Fragrances.

Good morning. It's Nicolas Mirzayantz. As far as pattern, we don't see any change in terms of commitment from our customers to innovation. It is definitely one of the key driver of differentiation, leading indicator of driving consumers preference.

So, the commitment to innovation is stronger than ever and to include what Doug was saying, that our commitment to innovation and to our new programs that were identified, we're just waiting review, are more important than ever. So, no change in that respect.

Regarding Flavors, I have the same comment as Nicolas. For the time being, the pipeline is very strong. Innovation related, customers are looking for that. I have to say, as Doug has mentioned, no one has a crystal ball, this kind of economic condition might change. But, for the time being, no change in the pipeline and main composition.

Thanks, and just a follow-up, if I could, on the pricing side. I was under the impression that, substantially, all the necessary pricing would have been implemented at the start of Q3 and it sounds like there's still more work to do on the Fragrance side. Should I conclude from that, that some of the pricing that you had hoped, or planned to put through, didn't get through as quickly as you had intended?

Yes, this is Kevin. As I mentioned in the commentary, we continue to believe that we're in this level of high single digits and depending upon the timing of discussions with customers, in some instances, certainly there have been increases versus when we last spoke with a certain set of customers.

So, there is those instances where the Fragrance team, specifically, is going to be having those ongoing dialogues as it relates to ensuring that the final pricing that we need necessary to take us to where we cover our full expectations on input costs. They will happen and will occur and we would expect that will happen over the course of certainly the third quarter.

Okay, thank you.

Your next question comes from the line of Jeff Zekauskas of JPMorgan.

Good morning. This is Silke Kueck for Jeff. Good morning.

Hi, Silke.

One question, and a follow up. Can you talk about the current trends in July and August on the Fragrance side, and given that the comparisons are still difficult, but easing a little bit, would you expect local currency growth in Fragrances still to be negative in the third quarter, or should it not?

And, my follow-up question is, I was interested to know what lower compensation expenses -- what the benefit was in the quarter, either on a sequential or year-over-year basis. Thank you.

Silke, this is Kevin. I'll make the comment on incentive comp and some preliminary comments as it relates to the Fragrance question you have and I'll turn it over to Nicolas to see if he has any additional commentary or color on the issue. As it relates to incentive comp, if you look at our global expenses, you can see that there's a reduction in our global expenses.

And, certainly, the biggest driver to that is what's happening in terms of incentive comp. I would, however, note that incentive comp is part of our business. And ultimately, as we over perform, it will be larger, and when, perhaps, we're performing at a level that is less than our expectations, it will be less.

I would say to you in Q2, the incentive comp versus what we would consider more normalized is not a big number. I would call it $3 million to $4 million as it relates to the difference. So, I think that's the way to think about it in terms of the performance in Q2 and that it's not a materially different number versus what would be a normalized level.

The other point relative to Fragrance, we have talked about there being, and Nicolas highlighted the fact that Q3, that there is some softness as we started the quarter continuing. But, we've also said that our expectation is over the balance of the year, that given the momentum in our new win portfolio, that we will continue to see that improving sequentially versus where we were in Q2. Nicolas?

No, I would echo Kevin's comments. We are still entering a strong comp for Q3 because we grew 15%. So, (inaudible) in Q2, the momentum in terms of new win is still very strong. The pipeline of new projects with which we have access is very strong. So, we continue to build the fundamentals, and to build upon the progress we're making with our key customers.

Thank you.

Your next question comes from the line of Carlos Laboy of Credit Suisse.

Good morning, everyone. Two questions. One is, do you feel you're leading this new discourse, this round of discussions on pricing here with your key clients, or are you running into your competitors already having those discussions?

And, the second one is, when you think back to 2008, are there any signs of customer destocking like 2008? And, what is your sense about why things might be different this time, if at all?

Let me start with -- I'll try to take both of them. As it relates to the second question, though, we haven't seen any of that destocking mentality. It's been a growth and a rebound mentality and things could change. But, we've certainly seen more fundamental focus on growth and innovation than probably ever before, which we think helps us.

Really, as it relates to the other question, I think all companies are, all of the large fragrance and flavor houses are facing significant cost pressures. Some companies are quoting slightly higher numbers than others, but we're all facing those. And, I don't think we could probably argue we are earlier than some, but I don't think that matters.

Right now what seems to have caught everyone by surprise, a little bit, certainly coming out of their commentary, has been the fact that the costs have risen more sharply than first envisioned, which has necessitated a second round of discussions at minimum, and perhaps some ongoing things if costs continue to accelerate.

But, we don't necessarily think we're -- we thought we were first. We think we're first, but we can't be sure of that. What we know is we've certainly got some pricing benefit in Q2 and that will accelerate into Q3 and Q4, as the others have already commented upon.

Thank you.

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

I wanted to understand a little bit more of the really strong Flavors volume growth in both -- or revenue growth in US and then local currency in Europe. Could you provide a little bit more color on the health and wellness product mix that you're serving, or is it you having more fermented products that allow your customers to have natural labeling, or what's going on there?

And then, secondly, on Europe, it was -- it sounded like it really pulled up by non-Western Europe. So, could you maybe give us the split? It sounds like non-Western Europe is a much bigger percent maybe of the European business than I was thinking.

Regarding your first question, definitely the key driver in North America was the health and wellness trends we have in place. Customers are looking to reduce, in this case as I mentioned before, sodium opposed to sugar in order to really provide consumers with better -- I mean a healthier way of eating.

And, we are contributing with solutions that they could begin to reduce salt/sugar without affecting the taste. So, this is a, I could say, the key drivers of our success in North America. Regarding your second question to Europe, usually we don't split, make a breakdown of the sales. Having said that, we have a very strong performance in Africa and Middle East. This performance are coming basically from big wins that we have got lately.

And, when we did visit the trends in terms of Western Europe, it's also growing in a solid way and as I mentioned before, this basically helps us in new European regulation that really and we asked -- following your question about labeling, to declare when the products are not (inaudible). We have a strong brand portfolio and this also is helping us in the western part of Europe to grow and remain solid in a consistent way.

The other thing, John, to remember is that as you look at the comparable versus year ago, Flavors in EMEA was quite strong, plus 18%. So, put the context of the numbers that you're [earning] within that framework.

Thank you.

Your next question comes from the line of Summit Roshan of KeyBanc.

Good morning. Nice quarter. Most of my questions have been answered, but just some clarification. I think you mentioned pricing contributed about 2 points to growth. I was wondering if you break that out by the segments.

I'm sorry. Could you repeat the question?

I think you had mentioned pricing had contributed about 2% on a consolidated basis to the top line. I was wondering within Fragrances and Flavors, in each of the segments how much pricing had contributed.

We don't disclose the specifics, but I would suggest to you that Fragrance is a little higher and Flavors is a little lower.

Okay, great. Thanks. And, with respect to your pipeline going to the back half of the year, could you give us a little bit more color in terms of -- looking at Latin America in particular, saw double-digit declines in fine fragrances and fragrance ingredients. I was wondering if you could give us a little bit more color on the dynamics there and what you're expecting going into the back half.

Hi, it's Nicolas here. I think that we have to put the performance of Latin America into context of last year. And, if you remember, that was really one of the strongest contributor for the performance of the business, it was the performance of fine beauty care in LatAm. Last year, we grew 31%, in Latin America for fine beauty care. We knew it was well above the market trend.

So, it's -- it only makes sense now to come back to more regular levels. So, we will see some adjustment. What I can tell you is that our new wins momentum is still very strong. We have been in Latin America for a very long time, we have a very strong market share there, and we continue to have a very strong win rate and strong momentum in terms of new projects. So, our access to new business and our ability to secure new win is still there.

Just an additional commentary on top of what Nicolas has already said. He talked in his prepared remarks as it relates to the ingredient efforts on pricing and that there was strong levels of activity in pricing, especially on the ingredient front. And, within the context of the very strong actions that we took relative to pricing in ingredients, we knew in certain instances that there could potentially be some loss in volume.

But, we felt that it was appropriate and necessary to take those pricing actions to ensure that we have the kind of margin profile that's appropriate for our shareholders longer term in support of this business. So, while that's not necessarily a specific issue, per se, in Latin America, and Latin America's a small piece of our ingredient business, but that is a general comment that I think is appropriate to make relative to what you're seeing in the ingredient space.

That's helpful, thank you.

Your next question comes from the line of Alec Patterson of RCM.

Yes, good morning. Just curious, you mentioned in the release the currency benefit flowing to the operating profit line and I'm presuming a good chunk of that is a transactional effect. Is there a basis point, or percentage impact, you have for currency to the operating profit line?

In terms of margin impact for the quarter, there was really very de minimis impact. So, if you look at the 50-basis point improvement in operating profit margin, there really is no impact as it relates to currencies. However, we did see a $0.04 earnings per share increase due to FX, just because of the fact that we're translating a lot of non-US dollar currencies back into our reporting currency. And, so, there was a benefit of $0.04 for the quarter relative to FX.

Right. So, there's a translational impact, but you're saying there's very little net of hedging transactional impact. There's no leverage developed in the P&L because of currency necessarily?

That's correct.

Okay, and secondly, I was just curious, regarding -- you talked about the BRIC markets being up 20%, I believe, in Flavors and just an overall healthy tone to emerging markets. Are you not seeing any signs of consumer slowdown to the degree you can read through your customer base?

Some of what has been tremendous category growth in those regions, but, of late, there's been a lot of signs that these BRIC markets are slowing down, or are unable to deal with the inflation, so, there's a pullback by consumers. Are there any signs you're seeing through your customer base of category growth slowdown?

This is Hernan here. To the best of our knowledge as of today, no we haven't seen any kind of signal of it slowing down.

All right, great. Thanks.

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

Thanks. Sorry for the quick clarification. Kevin, you mentioned that the difference in incentive comp year-over-year was only $3 million or $4 million, but still the dollars of SG&A, or the non-R&D selling and admin was down much more significantly than that.

If there was about $5 million from the European restructuring, I don't even know if it all fell through SG&A, but there's still something missing, if you will, in the math. Can you just help me out there? The $120 million in last year's second quarter was a huge number and far off of the typical quarterly run rate.

The incentive comp number that I quoted of $3 million to $4 million is versus a more normalized level. That's not the year-over-year change.

Okay.

What I had hoped to have said is if you look at our global expense line, which is outlined in our press release in the attached financials, that the reduction in our global expenses is driven by the incentive comp change year-over-year, but that is coming from an abnormally high level a year ago. What I wanted to communicate is, what's most important, is relative to our results in the second quarter versus a more normalized level. And, it's $3 million to $4 million versus that level.

Okay, thanks so much.

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

It feels like the innovation, or the mix improvement is greater in the Flavors side than the Fragrance side, and I'm hoping maybe you can refute that a little bit. Maybe you can give us an update on what's going on with some of the new products, like the new Redken shampoo, and whether we might have sustained Fragrance move to other brands within that category? Or an update on the laundry care products that had that technology?

Hi, this is Kevin. I'll take a stab at a preliminary comment and then turn it to Nicolas if he has anything to add. I don't think the premise that you're suggesting is apparently there is the case. If there's gross margin pressure, I would say it's more about the timing of our pricing actions versus the accelerated level of input cost increases.

And, as we said in our -- previously over the course of this call, that we see higher levels of input cost pressures in our Fragrance business versus Flavor. So, I think that that's the dynamic that we're working through on a short-term basis here in 2011, and not an innovation issue. Nicolas?

You are absolutely right, Kevin. I think it's very much related to input cost pressure, which you saw with higher occurrences. But, if you look at the performance for the first six months, actually we grew 4% in fine and beauty over a very strong performance last year of 32%, and we grew 2% on functional over '11. So, in terms of mix, there is not a pressure point there.

But, you call innovation comparable on both sides of the business?

It's different. I think that we were very successful in pioneering the launch of micro-encapsulation into fabric care into the market. And, now, as we're expanding into category, it's still early on to get a benefit.

We're seeing our customers rolling out to other category, but it's not yet at the level of sales and performance that we're already enjoying in fabric because we went to the market with that technology already four years ago. So, it's not yet at the level to bring additional benefit at this stage.

And, John, the work we did on innovation corporately really was looked at from a category and potential size of the prize business. As you can probably appreciate, both Flavors and Fragrances have substantial categories, substantial opportunities. So, the net result of where we ended up was significant opportunities in both.

There isn't really a preferred part of the puzzle. And, if anything, one of the interesting dynamics was coming up with those innovation opportunities which could be beneficial and applicable in both Fragrances and Flavors. But, the innovative opportunities appear strong in both camps.

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

Thanks for taking the follow-up. Kevin, you dropped the language in your press release about operating margins expected to approach 18%. I was just wondering if you could give us the rationale behind that change and whether we should read anything into that.

No, I think that what was talked about when we were discussing our long-term financial targets at our investor day is reframing the discussion relative to our long-term strategic financial targets. And, I think that's what our model is. That's what we're driving towards. And, that's our expectation.

So, I guess ultimately, that would suggest that we're going to get to higher levels of margins. But, we're refraining from a specific point in time or a target number as it relates to margins. We do know we have abilities to increase over time.

Your final question comes from the line of Silke Kueck of JPMorgan.

Yes, good morning. I also have a short follow-up. The -- Hernan mentioned there were some businesses that were exited in the second quarter of about $1 million. How much -- I assume that it's probably in greater Asia, I was wondering how much of greater Asia growth was affected by this. And, is that number going to grow over time or get smaller?

More or less the impact was around 1% in the quarter. And, as I mentioned in my previous conference call, we are still dealing with customers, we are negotiating with them. In case that we cannot improve to profitability, we will be exiting the business with (inaudible).

There are no further questions. Mr. Doug Tough, do you have any closing remarks?

I want to thank the audience for their participation today and their interest in IFF. And, we look forward to talking again with you in three months, as we achieve our long-term goals in 2011. Thank you very much.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.