Sensient Technologies Corp (SXT) 2010 Q2 法說會逐字稿

Good morning everyone. Welcome to the Sensient Technologies Corporation 2010 second-quarter conference call. Today's call is being recorded. At this time, for opening remarks, I would like to turn the call over to Mr. Steve Rolfs. Please go ahead sir.

Good morning. I am Steve Rolfs, Vice President Administration of Sensient Technologies Corporation. I would like to welcome all of you to Sensient's conference call to discuss 2010 second quarter financial results. I am joined this morning by Mr. Kenneth P. Manning, Sensient's Chairman and Chief Executive Officer; Doug Pepper, Sensient's President and Chief Operating Officer; and Dick Hobbs, Sensient's Senior Vice President and Chief Financial Officer.

Earlier today, we released our second-quarter 2010 financial results. A copy of the release is available on our website, which can now be found at Sensient.com.

Before we begin, I would like to remind everyone that comments made this morning, including responses to your questions, may include forward-looking statements as defined in the Securities Litigation Reform Act of 1995. Our statements may be affected by certain factors, including risks and uncertainties, which are discussed in detail in the Company's filings with the Securities and Exchange Commission. We urge you to read Sensient's filings for a description of these factors. Please bear these factors in mind when you analyze our comments today.

Now, we will hear from Ken Manning.

Thank you Steve. This morning Sensient reported its second consecutive quarter of record earnings. EPS grew to $0.58, an increase of 9.4% over the prior year. The Company revenue also reached a record level of $334 million, up 9.9% compared to last year.

Sensient's Color Group performed particularly well this quarter. Group revenue increased 20.5% to $113 million. Operating income was up $20.9 million, up 39.2% in comparison to prior year. These results were driven by strong volume gains in nearly every product line.

Sales of Food and Beverage Color were up 20% this quarter, in large part because of new natural color wins. Our Pharmaceutical Color business also grew at a double-digit pace. We have made good progress in both of these product lines, and we expect to continue growth in the future.

Revenue in the Flavor and Fragrance Group was up 3.8% this quarter. The group generated solid volume growth across many of its product lines in the US, Latin America, and Europe. Both revenue and profit were higher in the traditional flavor product lines, but this growth was offset by lower revenue and profit in our Dehydrated Flavor product lines.

As we discussed last quarter, Dehydrated Flavor had been impacted by lower pricing in advance of raw material cost improvements. These lower costs began to benefit us late in the second quarter and will provide additional benefits in the second half of 2010.

Sensient's operations have generated strong cash flow this year. This has allowed us to continue to pay down debt. Total debt has been reduced by over $75 million in the last 12 months. Debt-to-capital is now below 31%, down from 35% at this time last year. Our strong financial position continues us to allow investment in our operations in order to generate organic growth.

Over the last two years, we have improved and extended our sales coverage. We have also added production capability that enhances our ability to offer new and differentiated products. Our success this quarter in areas such as Natural Colors and Pharmaceutical Colors is the result of these investments we have made in facilities and in our people. We expect these investments to Continue to drive Sensient's growth in the future. As a result, I have increased this year's earnings guidance to $2.05 to $2.10 from our previous guidance of $2.00 to $2.06.

I am very pleased with this quarter's record, and I continue to be optimistic about the Company's future. Please forgive the cold that I have. Dick Hobbs, our CFO, will now provide you with the details for the quarter.

Good morning. Sensient reported record revenue of $334 million for the quarter ended June 30, 2010, an increase of 9.9 (technical difficulty) from $304 million in the same period last year. Revenue for the first six months of 2010 was $648 million, an increase of 10.4% from $586.8 million reported in the same period of 2009.

The Color Group and the Company's operations in the Asia Pacific region each grew local currency revenue in excess of 20%.

Sensient's operating income for the second quarter of 2010 was $47.1 million, an increase of 9% from $43.3 million in the same period of 2009. For the six months ended June 30, 2010, operating income increased 5.1% to $85.8 million from $81.6 million in the same period of 2009.

Foreign currency translation increased revenue and operating profit by less than 1% in the quarter and had no affect on our reported earnings per share. For the first half of 2010, foreign currency translation increased revenue, operating income and earnings by approximately 3%.

Interest expense for the second quarter was down 2.9% from last year's second quarter. As previously mentioned, Sensient issued $110 million of new fixed-rate notes in the quarter to refinance some of our existing debt. By issuing these notes, Sensient has locked in a portion of our debt at a fixed rate of 4.91% and strengthened our financial position. For the remainder of 2010, we expect interest expense to be comparable to prior-year levels.

Diluted earnings per share increased 9.4% to $0.58, a record level for the second quarter. Earnings per share for the comparable period last year were $0.53. For the six months ended June 30, 2010, diluted earnings per share were $1.06, compared to $0.98 in the prior-year period, an increase of 8.2%.

The Company reported $64.2 million of cash from operating activities in the first six months of 2010, an increase of 16% from the $55.4 million reported in last year's comparable period.

Total debt at June 30, 2010 was $389.1 million, a decrease of $26.1 million in the quarter. This represents the first time since 1999 that debt has fallen below $400 million. Over the last 12 months, total debt has decreased by $75.7 million, resulting in a debt to total capital ratio of 30.7%.

Debt-to-EBITDA is now at 1.9 compared to 2.3 one year ago. By the end of the year, we expect a debt to total capital ratio to be below 30% and the debt-to-EBITDA to fall below 1.8.

I will now take a brief look at the results of our operating groups. Sensient's Color Group reported record quarterly revenue of $113 million, an increase of 20.5% from $93.7 million in the comparable period in 2009. Revenue for the six months ended June 30, 2010 was $220.9 million, an increase of 22.2% from $180.8 million recorded in the prior-year period.

Foreign currency translation decreased Color Group revenue in the second quarter by approximately 1% and increased year-to-date revenue by approximately 2%.

Color Group operating income of $20.9 million in the second quarter of 2010 was up 39.2% from $15 million in the same period in 2009. For the six months ended June 30, 2010, operating income increased 35.7% to $39 million from $28.7 million in the prior-year period.

Foreign currency translation decreased operating income in the quarter by approximately 2% and had a favorable impact in the year-to-date period of approximately 2%. Operating margins in the quarter increased 250 basis points to 18.5%.

Food and Beverage Color revenue was up 20% in the quarter, which contributed to the increased operating income. Nonfood product lines, including cosmetics, pharmaceutical, and technical colors, were also strong in the quarter.

Flavors & Fragrances Group revenue in the quarter ended June 30, 2010 was $205 million, up 3.8% from the prior year's quarterly revenue of $197.6 million. For the six-month period, revenue was $395.7 million, compared to $382.1 million in the prior-year period.

Foreign currency translation for the Flavors & Fragrances Group had minimal impact on second-quarter revenue and increased year-to-date revenue by approximately 2%.

Group operating income was $33.2 million compared to last year's record quarterly profit of $30.2 million. Operating income for the six months ended June 30, 2010 was $60.4 million, compared to $64.2 million in the prior year. Foreign currency translation increased operating income by approximately 1% and 2% in the quarter and first half respectively.

During the quarter, the group reported solid volume growth across many of its product lines. Higher revenue and profit in the group's traditional product lines were offset by lower revenue and income from dehydrated flavors. As we've previously stated, the benefit of more costs within the Dehydrated Flavor product line will improve margins in the third and fourth quarters of this year.

This quarter's operating margins of 16.2% were down 110 basis points from last year's second quarter but were up 190 basis points from the first quarter of 2010.

Revenue in the Corporate and Other segment, which includes the Company's operations in the Asia Pacific region, was $27.1 million in the second quarter of 2010, compared to $21.2 million in the prior-year second quarter. For the first half of 2010, revenue was $51.4 million, an increase of 28.8% from revenue of $39.9 million in the first half of 2009. As stated in local currency, revenue in the Corporate and Other segment was up 21.3% from last year for the quarter and up 20.2% in the first half.

We saw volume growth in most of our key markets across the region.

As Mr. Manning stated, Sensient has increased its guidance for the remainder of 2010. As a result, Sensient expects 2010 diluted earnings per share, as reported, to be between $2.05 and $2.10.

Thank you very much for your time this morning. We will now open the call for questions.

Mike Sison, KeyBanc.

Nice quarter. In terms of the momentum in color, how much of that is sustainable going forward? Maybe a little bit of it was restocking, or when you look at the third and the fourth, is that level of growth sustainable?

Yes, let me give you kind of the market overview, and then Dick can give you some of the details in terms of the financials. We are taking a far more -- and you can see this from our capital investment -- aggressive view on natural colors in the US and pharmaceutical colors. We see great opportunities there; we see opportunities to innovate. We see a lot of European companies that are being asked by their European owners to go to natural colors even though they are not required in the United States.

As you know, with the E number issue that's going on in Europe and the EU, natural colors are definitely preferred.

We also see a greater penetration of our non-food and beverage markets, in particular industrial colors, inkjets, things of this sort. So we see color, which unfortunately was a little bit of a sleeper, getting very aggressive.

As far as restocking, we have actually been managing the inventory very well and I don't see this as a restocking issue.

But Dick, do you want to add to this?

Thanks, Ken. Yes, Mike, looking at overall at the Color Group, every sector within the Color Group was up double-digit, and a number of sectors were up over 20% and 30%. Looking at the total for the revenue growth of 20.5%, the volume portion of that was about 18%. And so we are seeing -- and of course our new products throughout the Company are up about 28%, so we are seeing a lot of success with companies switching some things out and with some of the initiatives that we have taken with some of the businesses.

We have doubled our sales force in the US in the last year or so, so we're going to take a -- as a strategic incentive and point, we are going to take a far more aggressive view of color worldwide.

Okay. You've done a great job there of getting the sales growth to the bottom line. Switching gears, the growth in Flavors & Fragrances are -- you know, you turned the corner it looks like in the second quarter, but operating income didn't really move in the right direction. Is that leverage going to start to improve in the third and the fourth?

Good question. Looking at Flavor, if we look just add what we would call the traditional flavors other than the dehydrated flavors, the revenue was up about 6%. That was all volume. So we had a nice 6% increase in the volume, and the profit on that particular part of the business was up even more than that as a percentage. So, we did increase our margins on the traditional flavor business.

In the case of the dehydrated flavors, we had a very small decrease in the total topline, but that involved a 6% volume increase. We had been talking about that, and we have mentioned it in our comments here that we did have, at the end of 2009, an expectation of costs coming down. As a result of that, there were some reductions in the selling prices, in the dehydrated flavors, in anticipation of the cost decrease. We have now seen that cost decrease -- it's at the level that we had estimated it, and it's kicked in pretty much towards the second part of June. So, when we go into Q3 and Q4, we will have dramatically lower costs, as anticipated in our Dehydrated Flavors business.

Okay, so we'll start to see the leverage in the second half in Flavors. (multiple speakers)

That's correct. That's right.

We would expect, looking at the overall group, that we should at least be able to get to last year's operating profit margins, and maybe even do a little bit better than that in the second half of the year with the overall Flavor group.

Okay, great. Then is -- I guess one last question for you, Ken, in terms of color. It sounds like you're sort of in the early phases of this sort of focus. Does this type of -- is the growth potential pretty exciting where '11 and '12 could be another two more good years?

Yes. The growth potential is very exciting. We are really taking, as a strategy, an aggressive point of view to our markets and to a lot of markets that we have largely not paid enough attention to. In the United States, it was naturals, and in -- actually throughout the world, it's pharma. But we are also -- we see a lot of opportunities in things like cosmetics, things like industrial inks, inkjet inks. These are things that really, really could take off in some of the markets, are very, very big. Some of them are growing very nicely. This is a business that could really do an awful lot for us going forward. I am very confident that we will do it.

Great, thank you. Hope you feel better.

Okay, thank you.

[Eric Ing], Oppenheimer.

Hi, it's Edward Yang. Unless I have a doppelganger out there or fellow tribesmen. I must have missed this, but I think you mentioned that color volumes were up 18%. Is that correct? What was the (multiple speakers) volume growth?

Yes, that's correct. The flavor volume was up 6%. The color was up 18%, and I would add that the Asia-Pacific was up 19% in volume.

Volume.

What were those volume numbers for 2Q '09, just for comparison purposes?

I don't have that. We certainly

We will get that right to you. I don't have it either.

We will get that to you. I don't have that in front of me.

Okay, no problem. Dick, I think you mentioned that currency was down about 1% or so for you in the quarter. When I look at how the euro has performed, or the British pound, those currencies were down substantially more than that. So what accounts for that gap?

If I look at the -- I have a chart in front of me here, and I'll start with the euro. So as I look at the period March through June, the 2009 euro was moving -- taking a little bit of a move that was going up a year ago. This year, the chart is converging, and it's coming from up and going to down. Just based on how our revenues fell into the quarter, that convergence of those charts resulted in what I would call a de minimis effect.

Now, I would add to that, as I look at this same chart and I look ahead for the remainder of the year, and if I extend the current euro, which is in the high 120s versus last year, which was in a range for the second half of the year 140, even touching to 150, we do have a headwind certainly going forward. But with the convergence in the current quarter, it did end up with a de minimis (technical difficulty) effect on the bottom line and had no effect at all on the earnings per share.

Maybe I could just follow with you on that off-line.

Absolutely.

In terms of your international exposure, could you please give me an update in terms of which percentage would be UK versus continental Europe? Then what is in Asia-Pac? Is that mostly China or Japan, etc.?

Just in general terms, about 40% of our sales are in US dollars. The euro would be the biggest currency, and that is going to be about 25%, followed by probably the Canadian dollar, the peso and the pound.

In Asia-Pacific, we are looking at about $100 million there, so if I just do the math quickly, we are looking at 7% or 8% of the total revenue.

That's an annualized figure, the $100 million.

Yes, just looking at an annualized number and (multiple speakers) --

-- broken into different currencies, each of which we (inaudible) (multiple speakers) absolutely. That's right. Because the biggest part would be in China.

Just to round out some of the modeling questions real quick, what was CapEx for the quarter?

Steve is going to pull that out in a second, Ed.

Capital expenditures in the quarter were $11.5 million, and for the year, we think that could be the high $50s million to maybe as high as the low $60s million. Mr. Manning said we do have a lot of significant capital projects in the works to pursue some of the areas he talked about, like natural colors and the pharmaceutical colors.

Is that a change? Because I had something more in the $50 million range.

Yes, it's going to be more. It's definitely going to be more, Ed.

That's just related to your optimism on proposal activity, or high return projects?

As we have announced, we do have significant capital certainly as it relates to natural colors, and also as it relates to pharmaceuticals. So, you are asking a very good question in this particular quarter, because I would have to say that our outlook for the year is up, with those projects coming in. That's a big reason for the shift to a bigger number.

Natural gas prices have started ticking back up. Does that affect your profitability on the dehydrated vegetables side?

We've actually taken a fairly conservative position on gas where we try to protect a substantial part of our needs going forward. So in the quarter, across the whole company, it was a modest benefit. We are pretty much locked in for this year, and we are beginning to be substantially locked in for next year locked in for next year. Based on those levels, we see a modest benefit next year as well.

Ed, could I jump back on the currency for a moment because (multiple speakers)

Yes, sure.

-- just for the call so everybody can hear, we do have a lot of Canadian dollar business. And so that also helped with the mix, and also we have a lot of Mexican peso business. So those factored in, and certainly we are part of what then caused the number to be kind of neutral. Because those weighed in and offset the euro a little bit as well.

That's very helpful. Thank you for that color. Just lastly, he did announce some recent management changes. I'd appreciate some color on that please.

That's correct. Well, we essentially wanted to strengthen the management of the Company. We did change the President and Chief Operating Officer to Doug Pepper. Doug is a very experienced executive; he is a CPA; he understands the strategy very well, ergo some of the more aggressive aspects of color and businesses that we just recently spoke about. We felt that this -- and so did the Board of Directors -- this strengthened the management significantly in not only the corporate area here, but also in the groups. We thought about it, we worked through it a great deal, and it was done based upon merit, best qualified, and people who best understood the strategy and the need to implement it aggressively.

Okay, thanks for your time.

Christopher Butler, Sidoti & Co.

Good morning guys. If I remember correctly, the drag on dehydrated products in the first quarter was about $3 million. If you gave it, I missed it, what the -- any kind of drag you saw in the second quarter. Could you give us an idea if you're expecting to recoup all of that in the second half of the year?

Absolutely. Looking at the second quarter, we had hoped that the dehydrated impact would switch over perhaps in May. For a variety of reasons, it switched over the second half of June. So the differential was somewhat similar to the first quarter. But it's behind us, as I mentioned earlier, and we absolutely see that turning around. Certainly, the magnitude is at least a couple of million dollars in each quarter. That's a number for just the cost item. Certainly, we are always looking at pricing, and that was mainly as it affected the onion flavoring items. We also have garlic items that are also an excellent market and very well-positioned in the second half.

Not to beat a dead horse with the FX question, but if I recall, in quarters past, you had given us some indication of what you were expecting that was implied in the guidance, understanding that you do have two or three or four different currencies that you are tied to internationally.

Right, that's correct.

The key currencies for us, of course the euro first and foremost, the Canadian dollar, the British pound and the Mexican peso. Steve can add --

Certainly the US dollar.

Yes, obviously the US dollar and certainly the yuan in China. But Steve --

Well, Dick had talked about facing a headwind on those. We will get a modest benefit at current rates on the Canadian and the peso, but the euro and pound will be a headwind. If you add it all up, at current rates -- and we don't know where rates are going to go, but at current rates it's about a 2% to 3% drag on the top line. If you looked at the charts for those currencies last year, that gets a little worse than the fourth quarter. The headwind is a little (technical difficulty) in the fourth quarter.

So we can use that as a baseline as those move throughout the quarter, then work from that 2% to 3% headwind.

I think that's fair, Chris. Based on things right now, I think that's as good a baseline as any.

Could you give me an update on new products? We've talked about the natural side of things, but even on the synthetic side, new products have been important to Sensient and having customers introduce new products and where they stand on that.

Sure. What I'm going to do on that one, Chris, is let Dr. Hering, our Head of Technologies, address that question.

Chris, you're right. We have seen renewals in project briefs with our customers, both national brands, private label, in flavors and in colors. What we have been able to take advantage of is our expertise on savory flavors. That's the combination of our flavor systems business and bio-ingredients. We've seen a number of new wins there in Q2 in both national brands and private labels.

Natural colors in the US is certainly showing a lot of momentum. We see that continuing on for the foreseeable future. It justifies our capital expenditure at our St. Louis facility for natural color extraction and purification capabilities. Even on -- in the nonfood color areas, (inaudible) testing a lot of colors and showing a lot of activity.

Another point I'd like to raise on natural colors and foods is, in addition to the momentum we see in the US, there's quite a bit of activity in our Latin American markets with that as well, primarily with national brands.

I'm a little bit surprised to hear you mention private-label. I definitely heard that some of the premium producers were coming out with trying to increase new products, advertising spend, that sort of thing. But I thought that the private labels might be looking to harness the opportunities of consumers moving down the chain rather than coming out with new products. They are doing the same it seems.

The private-label effort in a number of different product segments is getting quite a bit more sophisticated. Certain national grocery brands have local tiers of private-label offerings. So as they get more sophisticated and compete against the national brands, correspondingly the application efforts get more involved, and they are also looking at more premium ingredients for those products. Obviously, that benefits us.

I appreciate your time.

(Operator Instructions). Brad Evans, Heartland. Thanks

Thanks for taking the questions. Just would you be able to size your natural colors business at this point?

I would say this. Worldwide today, it's about 50% of our total business. Now, I think the genesis of your question may be why are we kind of getting excited about it? One of the issues that I had as a strategic issue was, in the United States, up until about a year ago, we were not giving it a proper level of attention. We are giving at the proper level of attention now. We see a tremendous opportunity. The things that Gordy mentioned about the use of natural colors in various products, many companies like some of the European yogurt companies, you name them, are being asked by their parents to use natural colors in the United States even though they are not now required.

The possibilities are immense. The possibilities for technical innovation are quite immense. The possibilities for new colors that are natural and that are stable are immense. So, let's just say, from a technical point of view, we really, really feel this is a growth area.

That's helpful. So roughly half the colors business being considered natural at this point, and what is the respective (multiple speakers)

Brad? I would just like to add to what Mr. Manning said. About half of the food and beverage colors are natural. Just to give you a little financial perspective, the volume increase on the natural colors was about 20% in Q2.

Please go ahead. I just wanted to add.

The 20% is certainly an important number, yes.

I'm sorry Brad, go ahead.

That's helpful. I'm curious if you could maybe discuss the margin dynamics between synthetic colors and natural colors at this point.

The margin -- well, let's put it this way. A person would have to use more natural color in a product to get the same effect. So although the margins per se at the end of the day may not be that much greater, the fact that you must use more is very, very important. So as we find solutions for various customers to go from synthetics to naturals -- because this is really what the customers are demanding, and in fact, in Europe, the governments are demanding it. We are going to be selling more product.

One other question I just had was just could you just give us an update on your inkjet business at this point, and how that's progressing in terms of the recovery there?

That's doing very well. The actual number of --

Brad, we have --

Let Dick give give you the actual numbers (multiple speakers)

We are back with an OEM who we have dealt with in the past, and we have colorants that we are developing internally.

Yes, to put that into perspective, the OEM is the eighth largest customer in the Company. But do you have the growth?

Looking at the inkjet ink business, in the quarter, the revenue was up 70% in the United States. In continental Europe, it was up over 20%. In addition to that, we also have ink colorants and some very specialized patented formulations that would go into our inks, but also into inks of OEMs where --

Yes, that is a very important aspect to the new inkjet ink business because, in the old days, we didn't have the intellectual property that we have right now.

Could you roughly size the inkjet franchise for you at this point? How big is that business?

Yes, if you just give me a moment here I'll give you a rough idea. because, as I said, we do have, in the inkjet area, several different opponents. We have the US component and the European component. I would say, right now, the inkjet business is roughly $30 million a year. It has the potential, with some of the new deals we have, contract, whatever we might call them, to go up to $40 million on an annualized basis in the next 12 months.

Thank you. I'll get back in queue.

Susan McGarry, Granahan.

I wanted to just follow up on the Flavor & Fragrance new product development, what you are seeing outside of the dehydrated?

Fine. Susan, I'm going to put that over the Dr. Hering. So Gordy?

Susan, we've seen a lot of activity in our beverage area, certainly in confectionery, and saw activity particularly in Canada, new business opportunities on the dairy side of things with our organic food processing.

On the European side, we've seen good momentum with our beverage businesses. I think we (inaudible) some new wins out of our Flavors Germany facility, in Latin America both confectionery and beverage interests, and some dairy interest there as well.

To put a lot of the flavor business in perspective, we see really interesting geographic expansion opportunities for what are [other] sophisticated products. So as an example, we have our extended distribution system. We are selling product in Kiev, in the Ukraine, in Romania, in the Baltics. These are things that we did not -- not to mention other areas. These are things we did not do just a few years ago. We are looking at, in addition to the product innovation that Gordy just spoke of, we are also looking for a lot of geographic expansion in flavor.

So you're seeing -- it sounds like you are seeing the customers become quite a bit less cautious in terms of product introductions and rollouts?

Even in the past quarter to even three quarters back, there's been a lot of activity, say, beneath the surface, where our customers are still interested in developing new products, new approaches to existing product lines. It's just that they've been extremely cautious in the products they actually roll out. So the activity level is still the same, perhaps even a little more presumably. As things loosen up a little bit, you'll see that in a higher frequency of new product launches from (multiple speakers).

So you haven't seen them become less cautious about the new product launches?

Their lunches I think are still quite measured and deliberate. But the number of briefs that we receive from that customer basis is still fairly (inaudible) even is growing. As Dick mentioned, we are up considerably from the same period a year ago in terms of new product development efforts.

Did you say that, ex-dehydrated, that the volume in Flavor & Fragrances up 6%?

That's correct.

So based on kind of what you're sensing from your customers at this point relative to product launch caution, do you expect things to improve during the second half, apart from dehydrated?

What we mentioned earlier in the call, the answer is yes, and improve over the prior year. I believe I had commented that the Flavor & Fragrance group would be in the mid to higher single-digit on the top line year-to-year change and that the Color Group would be higher single digits, possibly even double digits on the top line. That's what we were talking about earlier in the call regarding the rest of 2010 and into 2011.

Great, thank you.

Tom Leritz, Kennedy Capital Management.

I just have a question about the European utilization. Just any inroad that you've made on that?

I didn't hear your question. Could you repeat it?

Just the utilization rate of the assets in Europe. Any trends --?

Thanks. What we have done in Europe is -- and certainly we have excellent facilities there in throughout Europe, and we have our extended distribution system that has been put in place from Northern Europe to Eastern Europe into ultimately northern Africa and areas throughout the Mediterranean.

Yes. As an example, if you take the Belgian facility, they make some very unique products that are literally sold all over the European region, including parts of Eastern Europe. The utilization of that plant bounces off 100% every so often. We are selling product to Turkey, even though we don't have a plant in Turkey; we are selling product to of all places Tunisia, even though we don't have a plant in Tunisia. Most of that product would come from Italy because of the nature of what they do there.

So as Dick mentioned, we focus on certainly the utilization of assets. One of the things that has really helped us increase the utilization is our extended distribution system, where we have sales and technical support people in various countries. They draw from plants literally all over Europe, but in some cases all over the world.

And we have, in the UK, rather specialized items going into flavor that are actually shipped as far as Asia Pacific. They are very specialized extraction techniques. So, we are utilizing our European factories in that regard.

Yes, we have a lot of intercompany activity. We try to utilize our plants where there is a market in very, very distant places. So to Dick's point, not only do we have this plant in the UK sending product to Asia Pacific, we also have a plant in the UK that sends product to Spain and South Africa.

With the utilization, the operating profit margin is up 130 basis points from the same period last year.

I see. Just in terms of capacity left in that, could you talk about how much of your Europe is being utilized, how much excess capacity you have and --?

We certainly have the ability to make product without having to put capital into Europe for the next few years. We certainly have room, and we put new factories in a number of locations. We have the capability without having to put any capital going forward, and that's what we will endeavor to utilize with our sales efforts.

Thank you.

This concludes the Q&A portion of today's conference call. I'll now turn it back over to management for any closing remarks.

Thank you for your time this morning. That concludes our call for the second quarter. If there are any follow-up questions, or if we have missed anyone, feel free to call the Company. Thank you.

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