Good day, everyone, and welcome to the International Flavors & Fragrances Second Quarter 2007 Earnings Conference Call. Today's call is being recorded. All participants' lines will be muted until the question-and-answer portion of this call, and instructions will be given at that time. The speakers for today's call will be Mr. Robert Amen, Chairman and Chief Executive Officer; Mr. Douglas Wetmore, Senior Vice President and Chief Financial Officer, and Yvette Rudich, Director of Corporate Communications. Please go ahead.

Hello and thank you for joining us today. During the course of this webcast, we may make certain forward-looking comments. The complete text regarding our forward-looking statements is included in our press release and in our filings with the Securities and Exchange Commission. In addition, during this webcast we may refer to certain non-GAAP financial measures in order to supplement our GAAP financial results. Examples of such measures include our discussion of local currency sales performance, and applicable geographic region and earnings per share, excluding restructuring charges and other nonrecurring item. We will leave this slide up for a moment to ensure that everyone has an opportunity to review it prior to continuing the webcast. Now here is what we plan to cover on today's call. Rob will begin with opening remarks and some highlights on the quarter and our business. Doug will then review our first quarter results. Following closing comments from Rob, we will then take your questions. With that, I will now turn the call over to Rob. Rob?

Thanks, Yvette. Good morning, everyone. I'm very pleased to share the second quarter results with you today. As you can see, we recorded a sales increase of 8%, and that's plus 5% in local currency term. And that's a sales performance that's consistent with our long-term expectations. Operating profits were up 13% and reported earnings per share were up 30%. Adjusted earnings per share, adjusting to exclude nonrecurring items, was plus 13%. Doug will provide in-depth review of this shortly. I feel good about it because they are good results earned the right way. We achieved it because we're focusing on our customers and we're growing our business with the strategic accounts. And we've improved operationally. Overhead manufacturing costs were improved. Now turning to the business highlights, the Flavor business delivered another very strong quarter. We estimate the general market is growing about 4 to 5%. So the 11% growth recorded here is very, very strong. The growth excluding the foreign exchange would be about 8%. Growth was solid in all regions, North America and Europe, and also importantly in the emerging economies in Latin America and Asia. Improvements have come both in growing our existing products as well as new products win in beverage and savory. The Fragrance business, well, they had mixed results. Fine and beauty grew nicely 11%, up... reported and 7% up to local currency terms. Strong performances for fine and beauty in North America, Asia, Latin America, and importantly in Europe. Functional results were mixed, overall in line with the market. However, there were some good and some disappointing regional results. The Fragrance ingredients was about flat with last year's second quarter, about as we expected. And Doug will now go over the details for both of these businesses. Doug?

Thanks, Rob. Good morning, everyone. Let's begin with that overview of sales. On this slide you can see the breakdown of sales and growth by our two business units for the second quarter. As Rob mentioned Flavors achieved 11% growth in dollars on an 8% local currency increase. Fragrance sales grew at 6% on a 3% local currency increase. The difference between the local currency growth and reported dollar performance was attributable to the strength of the euro and the pound sterling. The euro was about 7% stronger than the prior year quarter, while the pound was about 9% stronger. And the basket of other currencies accounted for the remainder of the exchange effect. In a moment I'll discuss the sales performance by business unit in a little more detail. Our growth was solid in all geographies, North America continued its strong recent performance, growing 7% in the quarter. This performance was led by excellent results in both fine and functional fragrances with respective increases of 7% and 11%. Flavor sales growth was also very strong. Europe reported very strong growth increasing 11% over Q2 2006. Quarterly sales benefited from the strength of the European currencies versus the dollar, but the reported growth reflected a solid local currency increase of 4%, in line with the growth achieved in the first quarter this year. Latin America sales increased 1%. This growth was particularly strong in Flavors which grew 18% in the current quarter, building on the 14% growth in the first quarter this year. Latin America fine fragrances also continued its strong growth increasing 7% in the quarter. Both functional fragrance and ingredients were impacted by erosion of existing business in the region. Ingredients were also impacted by some pricing pressure. Greater Asia achieved very strong growth, driven mainly by new…

Thanks, Doug. Last October we shared with you our 2007 to 2009 goals. And those were set gross sales at something greater than 14% excluding foreign exchange impact, to improve our operating margins to greater than 18%, and to grow earnings per share by 10% or more each year over that period of time. Well, I believe the second quarter was an important step on that journey. We will achieve our goal by building a stronger, more customer-driven company. To do that, we'll continue to invest in research, creative centers, and manufacturing assets that will strengthen our competitive advantages. This spending will approximate depreciation overtime. We'll invest in our people's development and continue to improve our internal processes to enhance productivity and cost. The free cash flow, not needed to build the Company, will be returned to shareholders, first and form of dividends. Our target is a payout of 30% to 35% over time. And the balance of the free cash flow will be turned to share owners via share repurchases. On July 25th, we announced two important initiatives. First, a $750 million share repurchase program. Our plan is to retire about 15% of the shares outstanding, roughly 13 million shares. We expect to execute an accelerated stock repurchase plan this year for the majority of the shares, and then to pursue open-market purchases in the future. Secondly, we announced a 10% increase in the dividend. This will be payable October 4th to shareowner's of record on September 20th. Well there's only been nine months since the last dividend increase. It's reasonable to expect our assessing future dividend actions will occur on an annual basis. In summary, I'm pleased with the progress IFF is making. We had notable improvements in flavors and in productivity and that help drive operating margins 80 basis points higher. We are building a stronger, more capable company. We're growing sales faster than we believe the market is growing because of the excellent work our folks are doing in research, our creative team, the application scientists, sales and in our facilities and offices to meet the needs our customers have for unique products. I believe our dividend increase and share repurchase program will translate the progress IFF is making into building shareowner value. Now, the operator will explain how we'll handle the question-and-answer Question and Answer

[Operator Instructions] Our first question will come from Jeff Zekauskas of JP Morgan.

Hi, good morning.

Good morning, Jeff.

I was looking on the funds flow statement, and there's a line for gain on disposal of assets, that was $6.7 million. And I guess in the first quarter there was a $0.8 million gain. So what is that $5.9 million gain?

It is the sale of an idle asset dating back to the days of the BBA acquisition. It's a plant has been closed for the thick end of seven years, and at the same point in time offsetting that were certain costs associated with demolition and so forth, but you have to break out that gain separately.

So forgive me, there was a $5.9 million after-tax gain in the quarter, is that correct?

I think that's a pre-tax gain. I would have to check on that. But I... I understand your point. There is a gain on a sale of assets.

Yes, it looks like it's $0.06 a share. Is that right? $0.065?

Probably a little bit less than that, Jeff, but I think that's one element of other income and expense. Other income and expense was up about $2 million or so from the prior year.

Yes. Okay. I'm just surprised you didn't call that out.

Well, you know, it's in other income, Jeff, and there are a number of elements that are in other income. Exchange gains and losses, interest income, gains on the sale and disposition of assets, and the accrual for demolition of some closed facilities, and it is in other income because it is other. And it is highlighted on the funds flow statement, so I look at things overall in the context of materiality to the consolidated financial statements and I made a judgment that that was not necessary to be broken out separately.

Okay.

Obviously, it was clear enough in there, because you were able to ask the question.

Yes. Yes. By looking at the funds flow statement. What were the start-up costs in China? Were they significant? And were... how much do you think these extra start-up costs will affect your third quarter earnings? And how much do they affect you this quarter?

I think, as I mentioned in my comments, they diminish in the third quarter... because the plant... this is a chemical facility, so it's a more complex start-up than just a normal compounding plant. They began in the latter stages of last year, the impact was most pronounced in the first quarter, diminished a little bit in the second quarter, and will basically wind down to, I won't say next to nothing in the third quarter, but we'll be below $1 million in the third quarter. And it's... it's somewhere between $1 million and $2 million in the second quarter, and a little bit over $2 million in the first quarter. So full-year basis it will probably impact us under absorption somewhere between $3 million and $4 million.

But the... I think Unilever wants to get out of its North American laundry business. Is that something that might affect you? Or would that not affect you?

You know, Jeff, we don't talk about our customers, and I'm not prepared to talk about that today.

Okay. Thank you very much.

That's not going to go away... they will be sold and consumers will continue to buy and there will be fragrance, so they are not disappearing, it's the ownership that's changing, or may change.

Were an ownership change, might that affect IFF in anyway?

It's possible. It's impossible... it would depend on who bought it, and what they wanted to do with it. I can't speculate on how... what would occur.

And in past instances, Jeff, where something... somebody acquires a business that's been disposed of by somebody else, they are basically focused on investing on that business and growing it, so it could have a beneficial opportunity, so you just have to wait and see.

Yes. Okay. Thank you very much.

[Operator Instructions] Your next question will come from John Roberts of Buckingham Research.

Good morning, guys.

Good morning, John.

Can you give us an update on the encapsulated Fragrance product?

Encapsulation continues to progress, although slowly. I thought we were going to be accelerating an important fabric conditioner launch, that now is going to be ramping... I saw the forecast now it will start... third quarter, fourth quarter. But it continues to go well. The products that were introduced are succeeding in the marketplace. We continue to work with key accounts on bringing that technology forward, and so we continue to invest and pursue that. It's going pretty well.

What would you attribute the sort of delay or slowness in ramp to?

Actually a lot of things unrelated to our product. It was the... determination the customer wanted to change packaging and go with a full launch, as opposed to just change the label and they really wanted to demonstrate the uniqueness and newness to the consumer by changing the whole physical appearance.

Okay. Secondly, with the recent changes in the debt markets at all, both in terms of rates and liquidity affect the time timing of your accelerated share repurchase program and how it's funded.

It would be possible. One of the principles we think is important is to maintain an investment-grade rating on our bonds, and we're evaluating it right now. We're... at this point no one is suggesting it should have an impact, but we're not going to do something foolish just to get this done. But I do expect we'll be able to get the accelerated stock repurchase plan done this year.

This quarter, or this year?

Pardon me?

This quarter or this year?

It's possible this quarter, but given the volatility in the market, I don't want to necessarily tie myself down to this quarter.

Okay. Thank you.

Thanks.

And we'll now move on to Mike Sison of KeyBanc.

Hi, guys, nice quarter.

Thanks, Mike. How are you today?

Rob, you commented on the market growth for Flavors being 4% to 5% this quarter. Your business there continues to track pretty well. When you look at the backlog of products going in to the second half, do you think you can sustain that level of growth for that business unit in the second half?

Well, you know, we don't forecast going ahead. We feel very good about how our businesses are performing, and the Flavors business... it's a great demonstration, the increased focus on the business with the new leadership, great alignment, the Flavors teams around the world are doing a superb job, and, importantly, it reflects the strength in our customers' businesses. So there's a lot of uncertainty economically around the world with the high oil prices and other things, I don't want to get in to projecting what consumers are going to do longer term, but I feel pretty good about the second half.

Assuming the market grows 4% to 5%, you would continue to at least grow at that level at minimum?

Our financial objective is to grow faster than the market.

Right. And in terms of the Fragrance growth, is... it looks... is the market so much sluggish there in the second quarter? Did it slow from the first quarter?

Well, that market isn't growing as fast.

Okay.

You know, I think historically we would have said that the Fragrance market is probably growing more like 2% to 3%. We did just fine in Fine and Beauty, the Functional Fragrance, we had a couple of regions that had very, very good growth. A couple of others where due to erosion we had some disappointment. But I think we're about... well, as Doug indicated, we don't expect a big jump in our growth in the third quarter, and the Fragrance business had very, very strong '06 growth, and so the comparisons are tough. But I do expect the Fragrance business to pick up its rate of sales, you know, certainly as we exit this year and go in to next year.

I think too, just to repeat, the impact of the Ingredients swing from Q2 to Q1... and you have to look at it from a six-month perspective, and for six months Fragrances is up 5% in local currency, which is a pretty good comp to last year's full year performance of being up between 6% and 7%, if memory serves.

Okay. But for the full year, you feel pretty good about meeting your stated goals you talked about in terms of 4% plus, based on, I guess, new product backlog, the market's pretty healthy, and sort of the outlook from your customers?

Absolutely. We feel very good about '07 being... certainly tracking with our long-term goals. Right across the board.

Then on EPS basis, I know you don't give us specific guidance on a quarterly basis, but... yes, you are certainly tracking above the 10% in the first half. And as I recall you were looking for 10% plus growth on... I guess the adjusted number for '06 is the 232? Is that right?

Yes, because of the one-off items last year, yes.

So when you look at the second half of the year where the one items come in, and you assume you get some volume growth, is the EPS growth going to be muted year-over-year?

You know, that's a fair assessment, first of all we have more challenging comps in the second half of the year in the top line because we grew 7% in local currency in both the third and the fourth quarter. And I think, specifically, just go back and look in the third quarter last year we had the benefit of nearly a $4 million insurance settlement associated with a contamination issue a couple of years ago, which flowed through selling and admin expense. So there's some of that, I don't think you'll see quite the profit leverage, but I still think you are going to see positive leverage.

You'll be positive EPS growth? You won't see negative EPS growth?

No. No. No. I mean, no. Mike, Mike, please. There's no indication of that. Operating margins, which are so important here... the continued expansion of the operating margins which is what it all comes down to. There's a difference in sales growth, there's a difference in mix. But, we're able to get those productivity and cost improvements, and they are just starting to come in.

Right.

So I think... we continue to look for sustained growth in earnings per share.

Okay. And just... Doug, can you just... so I make sure I know exactly what we're comparing with. The third quarter is $0.70, and the fourth quarter $0.49 in terms of the comparison year-over-year, what we should --

Mike, I do not have those third and fourth quarter numbers with me, but I'll follow up on that... and please call me back after the call, and anyone else that is interested in having those comparable numbers, because we did have some --

Right.

Items in the book, in the third and fourth quarter of last year that we highlighted. I apologize for not having those with me for the call.

Okay, and last question, can you give us an update, Rob, on one of the things that drives the business is new product wins, that you have sort of win them this year and timing wise they typically hit nine, 12, 18 months later. Can you give a sense of the win rates or the backlogs on that front?

I would tell you that... most notable in Fragrance when Fragrance was growing 11 % and 13%, they had an unbelievably high win rate. We've certainly come down from that. But we're winning at above sort of our strategic plan level.

Okay.

And Flavors, to be honest with you, is doing better than they ever have, and importantly doing better in categories where we needed to grow in, which was beverage.

Okay.

So I'm very pleased with the ramp-up in the Flavors win rate, and the Fragrance win rate, while down, is still above our target levels.

Okay. Great. Thank you.

And we'll hear next from Jeff Conwell [ph] of Tribeca Global Management.

Hi, good morning.

Good morning.

Doug, did I hear you say the Fragrance business going in to Q3 should be roughly flat with Q2? And is that different from or in-line with historical trends?

No, I said that the growth... excuse me... growth rate in Q3 of this year should approximate the growth rate in Q2.

Okay. And that's in Fragrances, correct?

Yes, that by... just in context, that's about a 3% local currency growth.

Okay. In addition to your comments in the Q about the $300 million to $400 million, I believe, of incremental debt.

Jeff, you are breaking up a little bit in your question. Could you repeat that?

Sorry. The incremental $300 million to $400 million of debt in order to complete the buyback that you mentioned in the Q, can you give us a feel for what the incremental cost of that debt is?

I think that's really what Rob was responding to with one of the previous questions. There is a little bit of uncertainty in the debt markets as we know right now, and rates have gone up a little bit. I think the rate that we'll pay, obviously, is going to be driven by the market rates, and the term of the debt, whether we do it long-term or mid-term, so I don't have a precise answer for you as yet. And also, we specified a range of $300 million to $400 million, one, to again, follow up on Rob's comment, we're committed to remaining investment grade and we want to have some flexibility in terms of the amount that is expended under the accelerated share repurchase program with the balance then being executed in open market purchases once the ASR is completed.

So the ASR, we should expect somewhere in the... I'm guessing $7 million to $10 million is your initial target?

Do you mean shares?

I'm sorry, 7 to 10 million shares.

I think that's probably in the range, yes.

Okay. Thank you.

Thank you.

[Operator Instructions] Our next question will come from Vito Menza of Sandler Capital Management.

Hi, guys nice quarter. A couple of my questions were asked, and I hate to ask this again, but I think it is something that does need to be flushed and it's that other income line, Doug, just so we can be clear, there was a bump in the interest expense. The other income largely offset it. Part of that was due to the gain on sale, but what were the other offsets in there? Could you just highlight that a little more?

The interest income was just about the same as the prior year. Exchange gains are actually absence of exchange losses, there was about a $2 million swing.

Okay.

And then we had about $2 million of accruals for demolition of some property that was closed about 10 years ago, and the buildings are now no longer in use. And we're going to demolish those buildings for safety purposes. And then you get down to a real small individual items, and that's really why they are captured in other income and expense.

Okay. So when you net them all up, and you add them all up, including the gain on sale of the asset, that's the number that we're seeing in the P&L?

Yes, sir.

Okay. Good enough. Thank you, sir.

Thanks, Vito.

I will now move on to Tim Taylor [ph] of Portland Health Group.

Hi. Givaudan mentioned last week that their sales may decline in 2008 as a result of focusing on the Quest integration. Are you seeing, or do you expect to see any opportunities there for IFF?

You know, the opportunities are not because somebody is integrating or not. I mean it's a competitive marketplace, and we can test for all of the business that we can. So... I mean, I feel very good about the '08 and '09 marketplace. When you take a look at the macro economic trends, you have continued growth in population, continued increases in disposable income, both in the mature markets of the industrial world, as well as the emerging. So I see a lot of potential. That's why I'm quite comfortable with our longer-term financial goals of growing sales, excluding foreign exchange, at something greater than 4% a year over the next couple of years.

Okay. Thanks.

It appears there are no further questions at this time. So that does conclude our question-and-answer session for today. Gentlemen, I will turn the conference back over to you for closing remarks.

Well, we do appreciate you joining us. I hope you found today useful. If you have some feedback for us in how we can make these sessions more useful for you, either in slides or presentations, please share it with us, because we want them to be helpful to you. So, Doug, if you have nothing more?

No, thanks very much, everybody.

Thanks very much. Good-bye.

That does conclude today's teleconference. Thank you for your participation, and have a wonderful day.