International Flavors & Fragrances Inc (IFF) 2011 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 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 now begin.

Thank you, operator, and good morning, everyone. With me on the call today are 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.

This call is being recorded and will be available for playback on our 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 the first quarter and full year of 2012. These statements are based on how we see things today and continued elements of uncertainty.

For additional information concerning factors that can cause actual results to differ materially from forward-looking statements, I ask that you refer to the cautionary statements and risk factors contained in today's 8-K filing with the SEC as well as our 2010 1010-K filed on February 24, 2011. 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 are also available on our website.

With that I would like to turn the call over to Doug.

Thank you, Michael. Good morning and good afternoon, everyone. From a local currency sales basis we are pleased with our full-year 2011 performance in light of the 13% growth we reported in the year-ago period. Our strong growth in flavors and the emerging markets continue to provide us with the ability to grow on top of last year's strong performance as local currency sales improved 4% year over year for the Company.

In Fragrances results were less strong, particularly in the second half. However, they must be taken in the appropriate context considering the very challenging 16% year-ago comparison which included a record level of new wins as well as restocking benefits across all categories.

While gross margin declined due to significant raw material cost inflation of 10%, our ability to raise prices approximately 2.5% for the full year and our cost control efforts allowed us to deliver 11% adjusted operating profit growth and a 70 basis point improvement in operating profit margin. This strong offering profit performance lead to an 11% increase in adjusted earnings per share to a company record of $3.74.

Analyzing our performance over two- and three-year periods to include the heightened volatility of 2009 and 2010 you will note that we have either met or exceeded our long-term financial targets over a one-, two-, or three-year basis. We think this is a positive sign given the challenging environment we have been managing through over the past 12 months.

Before turning it over to the IFF senior team to take you through the details of our Q4 performance, I would like to discuss our progress against the strategic priorities we outlined at our 2011 investor day. Stemming from the in-depth analytical review of our business, we identified opportunities where we felt we could improve our financial performance. Particularly our plan focuses on accelerating growth in attractive market, mainly the emerging markets, aligning innovation to drive profitable growth, focusing on differentiation or offering our customers something that our competitors cannot, and improving returns by fixing underperforming businesses based on economic profit analysis.

Starting with our global footprint we felt that we could leverage our geographic reach to capture the attractive growth rates in the emerging markets. In 2011, our local currency sales growth in the emerging markets was approximately 8%, significantly faster than the developed markets. Key emerging markets now represent 46% of our total company sales, which can be considered among best-in-class for our industry.

Accordingly, earlier in 2011 we began construction of two manufacturing facilities in China and Singapore. As our growth in the greater Asia region continues to accelerate, it was important that we align our infrastructure to support our projected capacity requirements. The Guangzhou site will be dedicated to Flavors, while a facility in Singapore will be used for both Flavors and Fragrances.

Located near existing IFF sites, both new facilities are ideally suited to ensure a smooth transition with experienced in-house talent. On the heels of the investment into our creative centers in Shanghai and Mumbai, we believe these facilities underscore our long-term belief in the region, the strength of our local teams, and IFF's dedication to serving the present and future needs of our customers as they expand in this region.

In November, we announced the opening of a new state-of-the-art Flavor and Fragrance facility in Dubai, United Arab Emirates. The new site houses creative and application labs as well as sales and marketing offices that support all categories for the unique and fast-growing Middle Eastern market. We believe that by having our creative and technical teams work very closely with regional customers in our ultra-modern labs it will significantly shorten the innovation process and increase speed to market leading to incremental business.

And more recently, we announced that a portion of our Functional Fragrance resources are being reallocated to Singapore and Mexico to more effectively serve the growing presence of our customers in those markets.

Strengthening our innovation platform continues to be most critical for our future success. In 2011 we fully evaluated our entire research and development investments across all existing and new platforms. Our disciplined approach, designed to improve our return on investment, was predicated on the insight gained from our consumer research program. We then evaluated our ability to deliver innovation for each opportunity, taking into account the technical likelihood of success including the research, development, and regulatory phase.

During this step we also looked at the likelihood of the commercial success, which means even if we develop a solution that meets the consumer's needs can the technology become marginalized at an attractive customer and consumer price. This was then followed by a full evaluation of the technology's degree of fit within our current strategy and the opportunity cost of not pursuing the project.

Finally, we determined the resource requirements and prioritized the highest return projects to maximize our investments.

To track our success we have developed important internal milestones to help ensure we are achieving our stated goals. At each milestone we evaluate our success and failure rates to determine if any adjustments are needed in an attempt to achieve the greatest efficiency possible, thus increasing return on investment.

To complement this new process we recently formed a new scientific advisory board comprised of five scientific talents in the key research and development areas we identified in our strategic review. We believe this advisory board will provide us with external perspectives on ISS R&D programs, they will raise scientific issues and opportunities, help us identify appropriate research partners, provide background in specific areas of expertise, and assist in the identification and development of key R&D personnel.

We anticipate that this will give a strong competitive advantage, not only by tapping into the minds of the scientific advisory board members but by leveraging their access to a global network of academics, high-level industry members, and their associates.

By maximizing our portfolio we believe we can enhance overall profitability by improving our less attractive portions of the portfolio to capture the previously announced $50 million operating profit opportunity within a five-year horizon. In 2011 we began having fact-based conversations with our customers regarding appropriate pricing actions to improve our returns. We also had conversations regarding supply-chain opportunities, where by optimizing our agreements we could drive greater efficiency for both ourselves and our customers.

Focusing internally, we evaluated resource allocation by category, by customer, and by region across both of our businesses, thereby appropriately aligning resources behind our advantaged portfolio and reducing the costs associated with negative economic profit businesses. This was most evident in our recent announcement where we realigned our Functional Fragrance responsibilities and reduced our work force in Fragrances as well as other parts of the organization. We believe this initiative will strengthen our expertise and our ability to win in key categories and markets, while simultaneously simplifying our decision-making process, improving our resource allocation, and enhancing collaboration.

It marks a significant step towards improving the underperforming areas of our portfolio that we have identified in our strategic review as we expect to realize pretax cost savings of approximately $9 million in 2012. In those areas where we were unable to improve our underperforming businesses through the aforementioned initiatives, we made the difficult decision to exit some businesses totaling approximately $8 million of sales in 2011.

Finally, more recently we have instituted economic profit, or EP, as one of our long-term incentive compensation metrics. As part of our strategic review, we began including EP in the evaluation of relative performance across our business portfolio. We believe that evaluating EP helps us identify the resources and the drivers of value across various businesses and it is linked to the creation of shareholder value.

While we are only in year one of our plan, we believe that we have made solid progress against our strategy. And while the significant raw material inflation in 2011 required us to shift our attention to more immediate needs, we never lost focus on our long-term strategy. For that I would like to acknowledge the IFF's team's ability to adapt both strategically and operationally during very difficult times to deliver our solid results.

Once Hernan, Nicolas, and Kevin conclude their prepared remarks, I will give you some perspectives on the outlook for 2012 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. Good morning and good afternoon, everyone. I am happy to report that the strong trends that we have seen over the course of 2011 have continued in the fourth quarter as we achieved 8% local currency sales growth led by a double-digit increase in beverage and high single-digit increase in [savory].

In North America we continue to post solid growth on top of our most challenging year-over-year comparison. The majority of our success continues to come from health and wellness portfolio as our (inaudible) technologies drove double-digit and high single-digit growth in beverage and savory, respectively.

Despite comparing to a 10% increase last year in EMEA, our performance in Q4 accelerated versus Q3 as Eastern Europe, Africa, and the Middle East grew double digits and Western Europe grew mid single digits. In Latin America growth of 1% was below our expectation as the softness we noted in Mexico last quarter continued into Q4. Brazil, on the other hand, remained quite strong, growing high single digits.

Our best performing region in terms of both dollar growth and percentage change continues to be Greater Asia. Performance in this region has improved every quarter this year growing over 10% in Q4 as every category reported strong growth, highlighted by beverage and confectionery where we achieved double-digit growth. To some extent it should be noted that the timing of the Chinese New Year did provide a benefit to our results pulling some growth from Q1 2012 into Q4 2011.

Consistent with the previous three quarters, the impact of exiting low-margin business in Q4 was approximately $1.5 million in local currency sales and a total of $6 million for the full year. As we have indicated before, in 2012 we expect the impact of exiting underperformers business to increase between 1 to 3 percentage point of Flavors total local currency sales growth for the full year, as we believe it is our best option to maximize shareholders' value.

It should be noted that while top line may be impacted, our gross margin should show a corresponding improvement.

Looking at the geographic breakdown of our sales, the emerging markets continued to grow double digits for the ninth consecutive quarter. The BRIC countries continued to be the primary drivers of growth, increasing mid teens and led by 20%-plus growth in China.

Turning to profits, fourth-quarter adjusted operating profit increased 18%, or $10 million, to $63 million. Adjusted operating profit margin increased 170 basis points versus the prior-year period to 19.6% as volume growth, pricing action, and cost control more than offset the impact of higher raw material costs.

Before providing commentary on 2012 I would like to provide an overview of our full-year performance. Local currency sales increased 9% in 2011 on top of the 10% we reported in the year-ago, indicating continued strength in our Flavors business. The strongest growth was achieved in North America and EMEA, both growing double digits, as we continue the leverage our innovative health and wellness portfolio. The affect on profitability was profound as adjusted operating profit increased 17%, or $42 million, to $[284] 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 90 basis points year over year to a company record of 21.1%. Looking ahead to Q1 2012, while we are comparing to our strongest growth rate on 2011, 12% growth, we are expecting a solid start to the year as new business wins remain strong. Profitability is expected to remain healthy as we continue to capture price increase to offset raw material costs and control our own costs.

With that I would like to introduce our Group President of Fragrance, Nicolas Mirzayantz.

Thank you, Hernan. Good morning and good afternoon, everyone. Local currency sales in the fourth quarter, while down 3%, improved sequentially versus the third quarter with five out of our seven categories delivering year-over-year growth. In Fine Fragrance and Beauty Care local currency sales declined 6% against a 16% growth rate in Q4 2010 as new business wins and price increases were more than offset by volume declines.

When evaluating Fine Fragrance independently, it is important to note that the pipeline filling associated with last year's new win was abnormally high as Fine Fragrance grew greater than 20% in the year-ago period. Particularly in Europe and Latin America where we grew way in excess of 20%.

Beauty Care, which includes toiletries and hair care, did post strong high single-digit growth as the team was successful winning new business and capturing price increases. Functional Fragrance results were strong as all categories reported positive results. Highlight within Functional Fragrance included double-digit growth in home care and high single-digit growth in fabric care, both led by the emerging markets and Europe. It should be noted that this strong growth, when combined with the recently announced realignment initiative should drive improved returns as we continued to grow our business.

It should also be noted that top-line performance for our fragrance compound in Q4, which exclude Ingredients, was up 2%. And excluding both Ingredients and Fine Fragrance, the rest of our business was up 7% in Q4.

Fragrance ingredients continued to be the most challenged part of our portfolio in Q4 due to price-driven volume declines. Like in Q3, the adverse affect on volume was greater than historical correlations and, therefore, had a greater impact on our results. While sales decline of fragrance ingredients margin remained stable as the loss of sales were associated with lower margin businesses, thereby reducing the impact on profitability. Going forward, we expect market dynamics and our performance to improve as we progress through 2012.

From a geographic perspective, emerging market growth did mitigate the weakness seen in the developed markets. In our EMEA region double-digit growth was achieved in Eastern and Central Europe and the Middle East. In Greater Asia China was a standout growing mid-teens.

While not surprising given our strong year-ago comps and the current economic situation, it should be noted that Fine Fragrance and Ingredients in Western Europe decreased, particularly in France, Germany and Spain. Something that we will continue to monitor given the region's economic uncertainty. Despite a challenging second half, it is worth noting that 2011 was a record year in our Fragrance Compound business and is on top of [16]% growth in 2010.

From a profitability standpoint, as expected, adjusted operating profit declined by $9 million as double-digit increases in raw material costs and volume declines more than offset higher prices, the benefit associated with the European restructuring, and cost control initiatives. As a result, adjusted operating profit margin decreased 230 basis points to 11.5% versus the year-ago period.

It is important to note that the significant pressure that raw materials placed on gross margin was reduced by increased pricing action in Q4 over 4% and cost control initiatives including lower incentive compensation expense. In addition, our previously announced restructuring in Europe provided approximately $4 million of savings in the quarter that further helped reduce the impact of raw material price increases.

As Doug mentioned, we recently announced that we are reorganizing our Functional Fragrance group to align with the global category approach of our Fine and Beauty Care and Fragrance Ingredient businesses to simplify its business structure for greater efficiency. We believe these changes will have a positive effect by improving our speed to market, cross-category synergies, and one consumer knowledge.

Part of this realignment involves a reallocation of creative resources to support investment in innovation and growth opportunities, primarily to strengthen our leadership in the emerging markets of Latin America and Greater Asia, align with our customer strategies and investments. Our decision to proceed with this plan is a clear indication of our commitment to our strategy and continuous improvements.

Looking ahead, we expect top-line performance in the first quarter to remain under pressure as we continue to experience price-driven volume declines in Ingredients and softness in Fine Fragrance due to a strong year-ago comparison of 15% growth. Beyond that we are encouraged by our continuing strong level of new wins and believe that our pipeline of new business resulting from greater access to core listings and large projects should position us well as we progress beyond the first quarter of 2012. In addition, we continue to have incremental pricing discussions with our customers to reduce the impact of higher raw material costs.

With that let me turn it over to Kevin.

Thank you, Nicolas. Good morning and good afternoon, everyone.

Reviewing our quarterly results local currency sales growth improved sequentially versus Q3 to more than 2% in the fourth quarter as pricing approached 3.5%. While gross margin remained under pressure due to a 10% rise in raw material costs, improved leverage and sustained pricing benefits in Q4 helped reduce the impact on gross margin versus year ago as compared to Q3. With our Q4 gross margin down 220 basis points from the year-ago period improved versus the 330 basis point decline that we saw in Q3.

We also continued to exhibit strong cost control, including benefits from lower incentive compensation provisions, and execute against our cost savings initiative to drive 8% adjusted operating profit growth, which led to a 70 basis point improvement in operating profit margin. With interest expense down $1 million and a $3 million benefit from other income we were able to overcome the very low effective tax rate in Q4 2010 to drive 7% adjusted EPS growth versus the year-ago period.

Turning to raw material costs. As expected raw material costs continued to be a headwind in the fourth quarter. While both businesses faced significant cost pressure it was most significant in Fragrance where strong increases in naturals, petrochemicals, and feedstock ingredients drove double-digit increases in our input costs. Flavor input costs, which were up high single-digits, continued to be impacted by higher year-over-year cost increases in items such as citrus oils and menthol.

Looking ahead, based on current prices, we expect to continue to see modest, low single-digit raw material cost inflation in 2012. This is the case even though some raw materials have come down from their market peaks. At the end, our costs in 2012 are still expected to be above our 2011 levels and sharply above historical levels. This requires continued pricing discussions with our customers.

From a 2012 calendarization standpoint, we expect raw material cost inflation to be greatest in Q1 of 2012 as we are comparing to our lowest cost period of 2011. Beyond the first quarter our comparisons will become less difficult due to double-digit raw material cost increases we experienced in Q2, Q3, and Q4 of 2011.

From an overhead cost standpoint, adjusted RSA expenses as a percentage of sales decreased 290 basis points year-over-year to 23.8%, reflecting lower incentive compensation expense and continued cost discipline. Within RSA it is important to note that we continued to make R&D investments to support our long-term strategic growth initiatives. Excluding incentive compensation expense from both periods, our comparable R&D spend increased year over year.

Regarding foreign currency dynamics, foreign currency movements in the fourth quarter had a limited impact on both our top- and bottom-line performance. Looking ahead to the full year 2012, we have hedged approximately two-thirds of our euro/dollar exposure at rates which average approximately 1.40, effectively equal to the rate we saw in 2011.

While the rationale for our hedging program is to protect our cash flow exposure, i.e., the transactional impact, the mechanics of our program produce similar benefits for our translational exposure. Net-net our exposure to euro FX volatility in 2012 has been reduced by approximately two-thirds as a result of our hedging efforts. As such, if currency rates stay where they are today with the euro at 1.33 we expect foreign exchange impacts to be only a modest headwind to EPS for the full year 2012.

Well, first-half 2011 cash flow had been impacted by a rise in payables driven by a large reduction in payables associated with our 2010 annual incentive compensation payout and tax payments, both results of IFF's strong 2010 financial performance. Second-half cash flow dramatically improved versus the year-ago period. Our cash flow from operations in Q4 specifically improved $72 million from Q3, even when including the $40 million payment associated with the patent litigation settlement. As a result and as expected, our operating cash flow dramatically improved over the second half of the year.

From a use-of-cash standpoint, capital expenditures, as expected, finished the year near 5% of sales as we made incremental investments in manufacturing capacity in the emerging markets and technologies. We expect that our investments in 2012 to also approximate 5% of sales.

In addition, over the course of 2011 we have paid off $124 million of our outstanding senior notes and, importantly, renewed our credit revolver, both of which we believe will optimize our financial flexibility going forward. Finally, as part of our commitment to return cash to our shareholders, we announced in July an increase in the quarterly cash dividend raising it 15% from $0.27 a quarter to $0.31 a quarter, which we believe underscores our strong financial condition and excellent cash flow position.

With that I would like to turn the call back over to Doug for his perspective on 2012.

Thank you, Kevin, Hernan, and Nicolas. Looking ahead we expect local currency sales growth in 2012 to be in-line with our long-term targets, albeit at the low end of our 4% to 6% range, as we plan to accelerate the exit from some of our underperforming businesses, more particularly in Flavors. As such, we believe that our team's ability to continue to win new business will be an important driver of our results going forward.

We do expect some input costs to rise low single-digits in 2012, which will require continued pricing conversations with our customers. It is our expectation, however, that we should reach a gross margin inflection point if raw materials remain at current levels as we approach the second half of 2012.

From an RSA standpoint, we will continue to exhibit disciplined cost control. It should be noted, however, that as our incentive compensation program resets it will be a headwind should we perform in line with our current targets.

In addition, we also plan to make incremental investments in R&D to support future high value-at-stake initiatives identified in our strategic review. These investments are vital to sustain our long-term growth.

Finally, as Kevin mentioned, if currency rates stay where they are today with the euro at 1.33 we expect foreign exchange will be a modest headwind for the full year as a result of the hedging program. Nonetheless, I remain confident in our ability to continue to navigate through these uncertain times as we strive to achieve the long-term targets in 2012.

Looking towards the first quarter, we expect Flavors to deliver good growth even as they exit low-margin businesses and Fragrances to be challenged as we continue to see softness in Ingredients and pressures in Fine Fragrance due to the strong year-ago comparison. While we continue to expect greater pricing benefits, the gap between raw material costs and price increases is expected to remain as we are comparing to the lowest cost period of 2011, although this will improve versus Q4 2011. As a result, profitability and earnings per share will be under pressure as cost control initiatives are not expected to fully offset our gross margin pressures.

To wrap up, at the beginning of 2011 we expressed optimism that we would continue to perform well despite macroeconomic challenges and unprecedented raw material cost increases. Our ability to achieve our long-term financial targets for the second consecutive year demonstrates the team's aptitude for successfully executing the strategy and navigating through a challenging operating environment.

We continue to leverage our geographic reach to capture the growth potential of the emerging markets, strengthened our innovation platform to deliver differentiating products to customers, and maximized our portfolio to improve the underperforming areas of our business. I am proud of all of our employees, each of whom played a role in achieving our results, and I remain confident in our ability to continue to remain agile and work with our customers and our internal resources to achieve our long-term targets in 2012.

Longer term our strategic review has provided insight to management as to the opportunities to further enhance our performance going forward. Our plan embeds these insights to address the opportunities identified, all of which we believe will maximize shareholder value.

And with that we will be happy to take any questions that you may have. Thank you.

(Operator Instructions) Mark Astrachan, Stifel Nicolaus.

Thanks and good morning, everybody. I guess just to start on the Fragrance business, so a little bit better but still negative versus some easier comps. I heard what you said, Nicolas. I guess maybe just a bit more color there in particular on some of the places of underperformance and how you go about improving that. And I guess in particular if you put it into the context of some of the recently announced initiatives, why focus on the functional piece which seems to be performing better than the other two categories?

Good morning, Mark. Regarding 2011 performance, it is important to take into context of the very strong growth we reported in 2010. It was 16% growth, which was greater than any year in the business. It was a record year and also significantly higher growth rate than the industry.

If you look at it, it was seven consecutive quarters of growth and obviously some pressure in the second half. Unfortunately, the difficult comparison, as well as price-driven volume declines in ingredients, did put some pressure in the results, especially also in Fine where we had the strongest comp in 2010. So I think that overall if you pull [this thing] into perspective and if you look at a two-year average I think it's still a very, very strong average for the business being at 8% growth. So in excess of the market.

I think what is important as well is our ability to secure new business and also to have access to additional growth potential by entering new (inaudible) or strengthening our position into some new (inaudible). So, yes, challenge in the second half, but we believe that most of the key driver was a strong comp. If you remember also, in Q1 of this year we were still adding some strong growth in the business unit and very strong growth in Q4. So, therefore, we believe that we have an abnormality high level of pipeline which affected some of the volume dynamic in the second half.

So just to clarify then, one, just could you comment on why the functional business in terms of the restructuring? Two, do you consider yourselves share gainers, share losers in the Fragrance category?

So to your first question regarding Functional Fragrances, first we wanted to realign the business with the priority of our business -- of our customers and to continue to fund innovation. At the same token, we also wanted to build upon the learnings from the strategic review that we did and that building upon the economic profit learnings as well. We wanted to make sure that we were improving the performance, the modeling performance across our portfolio. So that was really the first question.

Can you remind me the second one, Mark? I am sorry.

The second is do you consider your Fragrance business a net share gainer or share loser, or not at all?

We have maintained our share. We have maintained the level of share, the significant increasing share that we have gained last year and we believe that we have maintained it.

Okay, thanks. Just one clarification, Doug. First-quarter EPS being under pressure does that mean down year on year, does that mean below long-term targets? Just a bit of help there would be appreciated.

I think it will be, in the first quarter, south of year ago.

Thank you.

Lauren Lieberman, Barclays Capital.

Thanks, good morning. Just wanted to follow up on the Ingredients business, because as I look at what you reported by region it actually looks like most regions got quite a bit better sequentially with the exception of Europe. And so, maybe I am going a step too far, but just think that the Europe softness had more to do with macro demand and that maybe you are starting to see some stabilization elsewhere.

And knowing that a lot of contracts seem to, my understanding is, reset January 1, how is that looking in terms of stabilizing and starting to win some business back? Thanks.

Hi, Lauren. It's Kevin. Good morning. Look, I think that certainly we are watching carefully the dynamic in Europe with all of the economic uncertainty relative to the discussions in the news that we hear every day and I think that we are monitoring that closely. The Ingredients business in general is more oriented around both Europe and North America because of where the business ultimately is utilized by our customers, and so that is one area that we are specifically monitoring closely at this particular point in time.

So no more news other than that. And we will continue to adjust as appropriate to the extent that there is any other insights that we gain as it relates to that dynamic.

Okay. But the other regions, even North America, did get better or at least didn't get materially worse sequentially. And maybe are trying to tell me, sorry, that Latin America and Asia just aren't that big and so seeing it go from down mid-teens to download single digits I shouldn't be reading anything into that being a sign of stabilization?

Look, I think the material part of the business is in the developed markets, both North America and Latin. So that -- excuse me, North America and Europe. And so effectively that is going to be the driver to the numbers that we see for the business.

Okay, and then any news on contract resets and kind of six-month window for these contracts? Any renegotiating that you have done or business coming back to you because alternative sources of supply weren't sufficient?

Lauren, it's Nicolas. Today's market dynamic still remains centered on pricing and pricing being the key driver for customer decision making versus security of supply at this stage. So our price negotiation for the first half of 2012 were heavily centered around the lowest priced.

So going forward we are incorporating all the new trends in market dynamics to readjust our portfolio, but as we progress through the year we have to watch the market dynamics and understand the implication for portfolio. So as we have done in the previous quarter, we are constantly evaluating the different options. This is also one of the reasons why in 2010 we took the decision to the partial closure of our facility in Europe. So we are constantly adapting our resource and our assets to the market dynamics.

Okay, great. Thank you.

Ed Aaron, RBC Capital Markets.

This is Asher Cronk sitting in for Ed. Thanks for taking my questions. This one is for Kevin.

Kevin, how much did incentive comp benefit operating expenses in the quarter on a year-over-year basis, and how much of a headwind should we expect next year as you accrue to a more normalized level?

Good morning, Asher. How are you doing?

Good.

As you know, our compensation plans are really aligned with the creation of shareholder value. And while we certainly met our long-term targets for the year, we fell short of what the expectations that we had set for ourselves. As a result of that that has an implication relative to the incentive compensation levels for 2011.

I think, importantly, we should take and understand our compensation expense as a key business operating expense associated with performance. So there is a certain amount of variability associated with that item. As we perform that number will go up; as we don't it will go down.

In terms of the quarter, it was a material benefit for our performance, although I continue to rather talk to the number versus what I would consider to be a normalized level. And I think in 2011 fourth quarter that number is plus or minus, I will give you a general number, it's around $15 million in the quarter versus a normalized level of compensation expense. So there was a benefit to that extent.

To your question [around] 2012, we have provided some insight, and Doug has commented, as it relates to our desire to strive for the long-term financial targets. Certainly that number that is in there relative to incentive compensation expense is embedded into that kind of direction that we are providing for the 2012 figures. So it's embedded into that figure.

Okay. And then just as a follow on, what are your relative inflation expectations sort of in Flavors versus Fragrances next year?

Well, we haven't really talked a lot about that. But we think that the numbers are certainly significantly less than what we saw in 2010 but remain above historical levels.

And then presumably we would expect Fragrances to be higher than the low single-digit and Flavors lower?

Help me understand the question a little bit.

Just the relative inflation expectations in Flavors versus Fragrances. So on a consolidated basis you are expecting low single-digit; how would we expect Flavors versus Fragrances to look?

Look, I think that there is probably a little slighter, higher number in Fragrance than Flavors at this point in time.

Okay, thank you.

Jeff Zekauskas, JPMorgan.

Hi, good morning. In terms of your expansions in Singapore are their tax implications to that expansion?

Hi, Jeff. It's Kevin. There is opportunities that we have worked through with the local officials and local regulatory bodies that provide us some tax benefits.

Okay. And when would they begin?

They would begin as we start to operate the facility is the expectation.

And forgive me, when is that?

We are expecting that we will get to the point where it's going to be over the course of this year.

Okay.

Fully operational in 2013.

Okay. And then secondly, in terms of your raw materials, I would imagine they were pretty high in the third quarter. They came down in the fourth quarter and they are going up in the first quarter. But are first-quarter raw materials on average higher or lower than third quarter of 2011 raw materials?

Look, the percentage increases are up versus same period a year ago, right?

I know that, yes.

Right.

But I am wondering -- the third quarter of 2011 versus the first quarter of 2012.

I would say it's probably at a level that is -- because third quarter was the high-mark in terms of our percentage increase, so I am thinking that there is probably -- it's probably (inaudible). I would have to get it and confirm that with you, Jeff.

I am sorry, what did you say -- it's probably --?

It's probably close, but I will have to get back to you to confirm that.

Okay. Then, lastly, in local currency terms Flavors grew about 9% this year and Fragrances was negative 1%. So when you think -- if you had to guess as to what the global market growth rates were in Flavors and in Fragrances, what do you think they were in 2011?

Hi, it's Hernan speaking. It's very difficult really to have precise figures, but our estimation for Flavors is that it is around 4%, 5% for 2011.

Yes.

And it's also too early to say in Fragrances. We need to monitor some of the results that will be published in the next few weeks, but we believe it's in like maybe 1%.

Okay, good. Thank you very much.

Mike Sison, KeyBanc Capital Markets.

Good morning, guys. Nice end to the year. In terms of your outlook for 2012 you noted that you have roughly $9 million in pretax savings coming from product rationalization. Do you have any additional sort of restructuring savings that kick in next year?

Mike, the $9 million is relative. I am assuming you are talking to the Fragrance realignment initiative that we announced earlier in January?

Okay.

Right?

Yes.

That is associated with the commentary that Nicolas had where we had the restructuring, the realignment work where we took the charge of $10 million and we expect savings of about $9 million.

Okay. So I might have mixed that up, I apologize. So are there savings coming from product rationalization efforts in 2012?

No. I am not sure what you mean by product rationalization, Mike. The rationalization --

In terms of the $50 million to improve the portfolio by maybe either increasing pricing or walking away from products.

Certainly, the walking away is envisioned as part of our numbers for next year, but other product rationalizations really aren't factored into our 2012 plan.

Okay. So the $9 million gets you 2% operating income growth. In order to hit the 7% to 9% growth that you are looking for on a long-term basis, does the rest just come from volume growth?

Mike, there is a variety of things. Clearly we are expecting to see some growth; we are continuing to see some pricing. That will be offset certainly as it relates to some incremental input costs and, of course, we are talking about the incremental investments in R&D to support the long-term growth initiatives.

So there is a series of things that will translate into our ability to deliver against the long-term financial targets objectives that Doug has alluded to.

Right. Do you need to hit the 4% to 6% sales growth goal to get there this year? It sounds like you have a lot of other things to help you out in terms of meeting those goals besides sales?

Let me just talk to that. Mike, I think you are right in there are two things that are on an ongoing basis. One of which is this ongoing efficiencies reformulations, elements like that which are part of the portfolio. They are ongoing, a significant part of the puzzle.

And the other thing is just the opportunities associated with new [briefs] and new technologies where we would look for margin expansion as a function of bringing superior benefits. And Hernan and Nicolas talked about the new wins in the pipeline; all of those we would look for to bring superior products and margin.

Okay. So 2012, really the focus should be on your internal execution which should allow you to meet the earnings growth goals. And maybe the sales growth goals take a back seat as you walk away from some products and maybe still have some issues and ingredients near term?

Mike, I don't know that I would characterize that we are not planning on the growth. The numbers that we have talked about, being at the low end of the range incorporate the other business that could potentially be eliminated relative to the discussion, specifically in Flavors, with certain customers. So we are still expecting some growth and the profit algorithm certainly.

Got it. I get it, thank you.

Erik Sjogren, Morgan Stanley.

Hi, good morning. Could you comment a little bit about the brief pipeline as you see it right now in terms of innovation levels amongst [staples] companies and so on? Are you seeing any kind of trend changes there? Thanks.

We haven't seen big changes in the pipeline. Still the companies are looking for innovations and it's the same things that we have discussed in the past. They are looking basically for -- the products [that they are very well being to] health and wellness and naturals. So basically what we have seen -- having said that nothing really would be changing in there except that it's becoming more evident in the market.

So really I mean to answer your question, no, we still have -- receiving these kind of projects that they are basically innovation driven.

And it's Nicolas. Very similar trend for fragrances. Still the focus on innovation, focus on the emerging market. And also [one of these trends for us is] gain additional access to [all this] potential so which increase our pipeline of new projects.

Thanks very much.

Edward Yang, Oppenheimer.

Good morning. Maybe a question for Nicolas. But on the Fragrance side in Ingredients and Fine what is your sense of inventory levels out there? And beyond the tough comps I would assume that you saw some significant customer destocking, has that all played out?

Related to that how important is Valentine's Day to the Fine Fragrance business? I know historically Christmas and Mother's Day are big events, but how significant is Valentine's Day? Did you see a typical inventory build leading up to that? And depending on how sales go, what are some of the repercussions in terms of 2012, positively or negatively?

So in terms of inventory it is difficult for us to have visibility at this stage and we will expect probably a correction. As we saw 2010 and 2011 we saw a buildup of inventory. Our customers want to make sure in Fine Fragrance that they were not missing any growth opportunities.

I think the mood right now is that people have been positively encouraged by good Christmas results, but at the same token the brands are staying very cautious about the development, especially for Europe, but still maintaining a good pipeline of new introductions. So it will take us a little bit more time. I think in Q2 we will have a better understanding of the pipeline and the stock inventory at our customers.

Regarding Valentine, it is a growing period for fragrances but nowhere near Mother's Day and Christmas at this stage. So I think that people will try to build on the momentum that was created around Christmas, but probably too early to say.

Okay, understood. And just a modeling question for Kevin. So I think this question was asked before but -- related to the incentive comp. What is -- is there kind of a ballpark normal run rate on global expenses that we can assume? This square was a little light, but is it kind of running at $12 million to $15 million a quarter. Is that a good number to plug-in?

Well, it's not a particularly bad one, but as you know we register and recognize compensation expense again relative to our performance. So to the extent we overperform the number will be higher and to the extent we underperform versus our expectations it will be lower. So I caution you not to be so prescriptive as it relates to what that number is, because it is going to be pay-for-performance so to speak.

Sure. And your CapEx spending has increased over the last two or three years or so. In 2009 you spent $69 million -- $67 million in 2011. You spent, let's see here, close to $125 million. The D&A hasn't really moved around too much -- $28 million, apologize for that. The D&A has actually come down somewhat.

What is really driving that and is that just a time lag issue? Would like to understand that better.

Look, as we are embarking upon several large expenditures, certainly the depreciation would not occur for those items until which time you are operational. So certainly the spend that we have talked about. And the significant spend in terms of capacity needs and emerging market focus to ensure we have the ability to continue to drive the growth in those attractive markets certainly will, at some point in time, as we start to depreciate those assets when they become operational.

Okay, thank you.

Mark Astrachan, Stifel Nicolaus.

Thanks for taking the follow-up. So two questions. One, Kevin, could you just give us an update on use of capital structure in terms of potentially looking at increasing flexibility for share repurchase or things like that?

Then, second, on the guidance again for 2012 or the outlook versus long-term expectations; however, you want to look at it. Could you give a bit more color?

Like, by my math it would seem that the gross profit line is going to be pressured. What allows you to get to the 7% to 9% operating profit longer term is more on the SG&A side. And sort of related to that are we using 2010 SG&A expenses as the base given what happened in incentive comp in 2011?

I think that -- the first question again, Mark, was?

Capital structure, share repurchase, increasing flexibility to do something like that.

We have been fairly consistent in terms of what we have talked about relative to our use of cash, Mark, and effectively our overarching desire is to be able to maintain a level of financial flexibility. Certainly we are focused and we will continue to be focused on the needs that are going to be necessary to support our growth initiatives, and that includes CapEx obviously in terms of supporting the business.

We are also certainly being more proactive in our valuation and monitoring of corporate development initiatives including M&A activity. And I think that at the end we will continue to ensure that we have a tax efficient use of our cash, including those opportunities where they might involve return of cash to shareholders. So at the end of the day we are focused primarily on our internal growth initiatives, as well continuing to be proactive in terms of the monitoring of other potential growth opportunities.

As it relates to the 2012 item, look, I think that Doug has highlighted the fact that there is certainly some uncertainty as it relates to 2012 environment in which we will be operating, that we feel as if we are targeting our desire to reach the objectives. But there certainly is some uncertainty as it relates to the environment in which we will be operating.

I think all the elements are important as it relates to the financial algorithm necessary to deliver against the objectives. Certainly top-line growth is going to be important, some pricing is going to be important, the management of or the delivery of the savings associated with the recently announced initiative -- all of these items are going to be important for us to be able to deliver against the targets that we are going to be striving for in 2012. I wouldn't necessarily characterize it as one or the other.

Let me just fill in a little bit, Mark, because way back early on you had something which suggested that it wasn't going to be sales -- these results might not be sales achieved, they would be achieved through RSA management. We have talked about it and I think are disciplined in the context of that.

But the investments that we have in the strategic projects defined in the past are underway; we call them high value-at-stake inside the Company. They are being progressed. The focus on R&D and an increased investment in 2012 in R&D is already earmarked, so the growth in the top line will contribute to the results.

We did indicate in the early parts of the year we are going to be under some margin pressure as a function of the costs that we have had -- the raw material costs, costs in inventory -- until such time as pricing and efficiencies and other measures capture the margin we need. But it's really, as Kevin said, all parts of the algorithm that are going to get us there. But it's really not going to be at the expense of investing in those items that we have deemed critical for the long-term, i.e., R&D and some of the innovation and expansion into emerging markets and so on. They are all part of the mix this year.

Okay, great. Thank you.

There are no further questions at this time. Do you have any closing remarks?

My appreciation for all the attendees on the call and the comments, and we look forward to talking to you in a few months. Thank you.

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