International Flavors & Fragrances Inc. (IFF) Q1 2011 Earnings Report, Transcript and Summary

At this time, I would like to welcome everyone to the International Flavors & Fragrances First Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to introduce Michael DeVeau, Investor Relations Manager. You may begin.

Thank you, operator, and good morning, everyone. With me on the call today is Doug Tough, our Chairman and CEO; Nicolas Mirzayantz, our President of Fragrances; Hernan Vaisman, our President of Flavors; 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 second quarter and full year of 2011. These statements are based on how we see things today and contains elements of uncertainty. For additional information concerning factors that can cause actual results to differ materially from forward-looking statements, I ask that you refer to the cautionary statement and risk factors contained in our filings with the SEC. Some of today's prepared remarks will discuss non-GAAP financial information, which excludes those items that affect comparability. These items are laid out in the reconciliation to comparable GAAP measures, which is also available on our website. With that, I'm happy to introduce Doug.

Thank you, Michael, and good morning and good afternoon to everyone. While the rest of the IFF team will take you through the full details of our quarter one performance, I would like to provide a few preliminary high-level comments. First, we are pleased with our strong start to 2011, especially in the context of comparing against double-digit growth in the prior year period. Our worldwide local currency sales increased 9%, as strong growth was achieved across both our Flavor and our Fragrance businesses. The primary driver of our performance continues to be success in winning new business. This strong sales growth plus our margin improvement initiatives, pricing actions and focus on profitable businesses mix flowing from our strategic review drove a 30 basis point improvement in gross margin to 41.6%, despite a 4% rise in raw material costs. Complimenting this success, our continued focus on cost discipline and productivity provided substantial benefits to operating profit margin, which improved 190 basis points to 18.7%, the highest quarterly level in nearly 7 years. The end result of our operational performance was significant as adjusted earnings per share increased 21% year-on-year to an all-time quarterly record. We feel this is impressive taking in the context of the 42% adjusted EPS growth, which we achieved last year. But from a non-financial perspective, I want to mention some customer awards that we won during the quarter. Serving our customers is vital to IFF's success, so customer recognition means a lot to us. First, in Flavors, we were recognized in Australia and in India by a multinational food and beverage company for our outstanding contribution to their business in 2010. Specifically, these honors cite our consistent and excellent quality, service, innovation and technology. The customer noted the work we have done to upgrade their offerings to achieve healthier profiles by our sodium and our sugar reduction tools, as well as extensive work in naturals. In Fragrances, our team in Brazil once again received an award for superior service from one of that country's largest cosmetic companies. In addition to this honor, we also received a social environmental responsibility award for our current and ongoing sustainability initiatives taking place in that region. Looking at our first quarter results in the context of the strategic priorities that we laid out at our Investor Day on March 15 in New York City, we have begun to make progress. While we're still early in the process, we believe that by leveraging our geographic reach, strengthening our innovation platform and maximizing our portfolio, we can drive commercial performance that should lead to long term shareholder value. In the first quarter of 2011, our strong top line performance was once again driven by double-digit growth in the emerging markets. In these critical markets where per capita disposable income is growing at nearly 3x that of the developed markets, the demand for our customers' products is great. As a result of our long-standing presence and recent investments in the emerging markets, we experienced 12% growth from these locations in the quarter. Highlights include 20-plus percent growth in key markets such as Russia, Indonesia, India, Turkey, the Middle East, South Africa, Poland and other countries. Under the direction of Dr. Ahmet Baydar, who many of you heard speak at our Investor Day, we believe our greatest opportunity as a company remains our ability to deliver superior innovation to our customers. For that reason, we try to have our innovative products and delivery systems carry a margin premium greater than our existing business, as our customers reward us for greater differentiation. In the first quarter, we have made progress strengthening our innovation platform by increasing our absolute R&D dollar investment by approximately $5 million or 9% to support the growth initiatives. In Flavors R&D, we have entered into an agreement with GLG Life Tech Corporation, a vertically-integrated leader in the agricultural and commercial development of high-quality stevia, to pursue exploration and commercialization of Reb C, a sweetness modulator product that helps lower calorie levels while improving the same great taste. On the Fragrance side, we were recently awarded the 2011 FiFi Award for Technological Breakthrough of the Year from The Fragrance Foundation. This is the highest honor in the fragrance industry, and it was awarded for our unique encapsulation technology, which was applied to a new category, Hair Care. And finally, as part of our strategic assessment, we have identified underperforming businesses that we believe can be improved. As such, we have begun implementing various solutions, including price increases to improve overall profitability, and have been successful in some instances. As expected, in other areas, we have begun to exit some low margin businesses in the first quarter. While the impact was small, approximately $1 million in sales in this quarter, it is an important part of our strategy to focus our efforts on profitable categories. After Nicolas, Hernan and Kevin finish their respective sessions, I will give you some perspectives on our outlook for the full year. With that, I would like to introduce our Group President of Fragrances, Nicolas Mirzayantz.

Thank you, Doug, and good morning and good afternoon, everyone. I am happy to report a 7% local currency sales growth in the first quarter in the context of an 18% growth rate in Q1 2010. In the face of challenging comparisons, our strong pipeline of new business drove an 8% increase in our Europe, Africa and Middle East regions and a 9% increase in both our Latin America and Greater Asia regions. The only region where results were soft was in North America, where our very strong new wins performance was upset by volume erosion. In the Fine and Beauty Care category, local currency sales grew 14% over the prior year period, against a very strong 28% sales growth in Q1 2010. Strong new wins performance drove a 22% growth in EAME, in an absolute dollar basis, it was the largest contributor of incremental dollars. Latin America continued to represent our fastest growing region, expanding 23% in local currency as both new business wins and volume growth with existing customer drove results. I am also pleased with the growth of 7% in Asia, reflecting our progress across Fine and Beauty categories. Functional Fragrances continue to perform well, growing 4% on top of 10% growth in Q1 2010 as new wins across all categories more than offset volume declines. From a geographic perspective, the strong trend in Greater Asia continued as Fabric Care and Home Care grew double digits. Globally, our Home Care business grew double digits as our unique portfolio of ingredients and technological applications provided significant opportunities for growth. Lastly, comparing to a 20% growth rate in the year ago period, Fragrance Ingredients grew 3% as our pricing initiatives drove results in the sectors of business where commodity-based pricing is more rapid and transparent. Consistent with our discussion on our fourth quarter conference call, we did see an acceleration in input costs in Q4, and we were responsive with immediate pricing actions. From a geographic perspective, the strong trend seen in the emerging markets throughout 2010 continued in the first quarter 2011. Performance in these markets were strong, growing 12% or nearly 4x the rate of the developed market in the first quarter. In our EAME region, strong double-digit results in Eastern Europe, Africa and the Middle East, were realized as we continue to increase our investment in these key markets. In Latin America, Brazil, all others country within the emerging markets, we're mid-teens on the back of new business wins in Fine and Beauty Care. In Greater Asia, Indonesia, India, Vietnam and Thailand generated double-digit growth. From a profitability standpoint, adjusted operating profit grew 13% or $8 million to $69 million as volume growth, higher pricing, the benefits from our previously announced European facilities rationalization, continued internal cost initiatives and favorable mix more than offset the rapidly accelerating input cost environment. It is important to note that the completed closure of our Drogheda, Ireland manufacturing facility, as well as the partial closure of our Haverhill, U.K. Ingredients manufacturing facility played an integral role in our performance in the first quarter. The combination of these restructuring pressure pricing initiatives more than offset the input cost acceleration seen since the first quarter of 2010. As a result, adjusted operating profit margin in the quarter increased 110 basis points to 18.3% versus the first quarter of 2010. Looking ahead to the second quarter, it is important to note that we will face our most difficult year-over-year comparison of 2011, 43% local currency sales growth. While we continue toward this success winning new business, we expect the challenging comparables will place pressure on our top line growth in the second quarter. In addition, accelerating input costs are expected to pressure gross margin in the second quarter as the full impact of our pricing initiatives are not expected to be fully realized until the third quarter. It is important to note that these pressures are real and require additional pricing conversation with our customers as material prices, such petrochemicals-related product, have demonstrated strong volatility. I would like now to turn the call over to our Group President of Flavors, Hernan Vaisman, who will provide an update on the Flavors business.

Thank you, Nicolas. Marking the third consecutive quarter of growth, I am happy to report that local currency sales in the first quarter grew 12%, as double-digit growth in Beverage, Savory and Confectionery drove results. Our very strong performance can once again be attributed to increased volumes and new business wins across all regions and all categories. In the developed markets, our health and wellness portfolio continues to offer excellent growth opportunities. Our recent successes in taste modulation solutions and naturals continued into the first quarter. In North America, double-digit growth in Beverage, Savory and Confectionery was mainly driven by our taste modulation portfolio as many of our new wins were geared towards less sugar or less salt. Our strong performance in Europe continued to benefit from the new European legislation for approved natural flavors profiles. Our earning production of many of these natural flavors has led to a double-digit growth across all our categories in Europe. In Latin America, solid growth was achieved as Confectionery, and Dairy grew double digits. And finally, growth in Greater Asia remained strong as double-digit trends in Beverage and Dairy continued into the first quarter. As mentioned earlier, we have identified underperforming businesses which require action to grow profitability. In the first quarter, we did exit some low-profit businesses, which was approximately $1 million or one percentage point of growth in Greater Asia. Going forward, I expect this number will grow as we believe exiting certain underperforming businesses is one option to maximize shareholder value. As such, the quality of growth is expected to be better as we further develop our profitable businesses. Looking at the geographic breakdown of our sales, I am very pleased with our balanced performance across all regions. In the developed market of North America and Europe, we experienced double-digit growth driven by new wins and volume growth. Complementing this success, the strong trends seen in the emerging markets have continued into the first quarter. The BRIC countries on a combined basis grew double digits. Growth in Eastern Europe, Africa and the Middle East also grew double digits as new business wins drove results. From an R&D perspective, we have partnered with GLG Life Tech Corporation to develop the extraction capability for high-grade Reb C extract for exclusive use by IFF as a flavor modulator, which will contribute to our health and wellness toolbox when available. While not a sweetener itself, Reb C has been trialed with sweeteners that has shown to enable a 20% to 25% reduction in calories, making it a nice addition to our portfolio. First quarter operating growth was very strong, growing 28% or $17 million to $79 million. This increase was led by accelerated sales growth and continued cost disciplines that more than offset the developing input cost pressures. As a result, operating profit margin improved 280 basis points to 23.3% versus 20.5% in the prior year period. Looking ahead, while we are comparing to an 11% growth rate in the second quarter of 2010, we are off to a solid start as new business wins are expected to be the driver of our results. With that, let me turn to Kevin.

Thank you, Hernan, and good morning and good afternoon, everyone. In the first quarter, local currency sales grew 9% as strong growth in the emerging markets and increased levels of innovation drove results. Our operational leverage from the strong top line performance combined with our margin improvement initiatives, continued focus on efficiency and lower incentive compensation expense versus the year-ago period, drove a 22% increase in adjusted operating profit. In the context of this strong growth, we also made strategic investments to help ensure our growth momentum can be maintained, especially in the emerging markets. While the benefits of lower interest expense and a marginally favorable tax rate were a benefit to bottom line results, these were offset by approximately $6 million of other expense. The driver behind this expense relates to foreign exchange losses on outstanding working capital exposures principally associated with the weakening U.S. dollar over the course of the quarter. At the end, our strong operational performance drove a 21% increase in adjusted earnings per share to $1.03, which is an all-time company high. Analyzing the P&L in more detail, I would like to further discuss input costs, RSA costs or Research, Selling and Administrative costs, and currency. Specifically related to input costs, the pressure we experienced in the fourth quarter began to accelerate as we did experience a 4% increase in the first quarter of 2011. As expected, both business units saw year-over-year increases. Going forward, we expect input cost pressures to escalate in the second and third quarter as the cost of our higher current raw material purchases flow through the P&L. In particular, we've seen strong increases in turpentine, petrochemicals, citrus oils and mint menthol, all driven by market dynamics. As cost pressures build in the second quarter, we expect the gross margin will be under pressure as our pricing actions will not take full effect until the second half of 2011. From an overhead cost standpoint, RSA expenses as a percentage of sales decreased 160 basis points year-over-year to 23%, reflecting strong operating leverage and lower incentive compensation provisions, offset by business reinvestments to support future growth. Within RSA, R&D expense as a percentage of sales was flat at 8%. However, on an absolute basis, R&D expense actually increased by approximately $5 million or 9% as higher investments were made to support strategic initiatives. Looking towards the balance of the year, with the accelerating levels of input costs, controlling our cost structure will be vital to our success. While we do plan to make incremental investments in R&D efforts and commercial opportunities throughout the year, we will remain disciplined in the management of our costs to support our investments into higher profit categories, regions and customers. Regarding currency, the euro declined in value year-over-year against the U.S. dollar in Q1, and had a slight negative impact on results. However, looking ahead, if currency rates stay where they are today, with the euro at $1.43, we expect foreign exchange impacts to be favorable for the full year 2011. As we have previously communicated, we have also implemented hedging strategies in order to protect our levels of euro-based profits at the local affiliate level. Currently, we have hedged approximately 65% of our euro-based exposure in 2011 at rates near the full year 2010 average euro/U.S. dollar exchange rate. Our upside on euro exposure therefore will come from the remaining 35% that is not hedged. This should be taken into consideration when modeling the impact of foreign exchange over the balance of the year. From a cash flow statement perspective, our strong operational performance provided a substantial increase in net income. However, we did see an increase in working capital for the quarter, driven by a few large one-off cash events. A large reduction in payables was driven by our 2010 annual incentive compensation payout and a tax payment. When combined, these items resulted in a decrease in payables of $70 million versus the same quarter a year ago. Further increases in working capital were driven by our growth and a quarter-end increase in accounts receivable. These dynamics resulted on our cash from operations following over $67 million from the year ago period. As a reminder, we expect our capital expenditures to grow to levels near 5% of sales in 2011. These investments will focus on supporting strategic growth, with a specific concentration in the emerging markets, and also driving efficiencies by strategically improving our manufacturing and supply-chain footprint. Before Doug provides his comments on the full year, I would like to give you some perspective on the initial trends we are seeing in Q2. Although our first quarter performance was strong, our local currency sales levels have exhibited some softness through April. The strong performance in Flavors is continuing into the second quarter, however, Fragrance sales are under pressure in light of challenging year-ago comparisons. If this trend continues throughout the balance of the quarter, we could see our performance in Flavors being offset by softness in Fragrances. As expected, we are also experiencing gross margin contraction as the full impact of our pricing actions to cover rising input costs are not expected to take effect until the third quarter. That being said, our disciplined approach to cost management, including the reduced levels of incentive compensation versus year-ago levels, should drive operating profit dollars and margin higher in Q2, which should lead to low double-digit EPS growth in the second quarter. With that, I would like to turn the call back over to Doug for his perspective on the full year of 2011.

Thank you, Kevin. Looking ahead, we continue to believe our recently stated financial metrics remain appropriate. And therefore, we expect local currency sales in 2011 to be in line with our 4% to 6% long-term growth target. As Kevin has also mentioned, we are seeing top line trends slow in the second quarter in light of the very difficult year-ago comparison. However, we believe new business wins will continue to drive growth for the full year. As our input costs are expected to rise throughout the year, it necessitates that we not only follow through on discussions with customers regarding increased pricing, and also, we'd discuss the second round of increase as costs have risen significantly since the first set of those discussions. Further, on those businesses that are heavily dependent on petrochemicals, we will need to consider a further increase should current trends remain, as Nicolas previously cited. The pricing actions that we are discussing with our customers range from low single-digit to high double-digit increases, depending upon the facts associated with the ingredients that we are using in the creation of the products that we sell to them. While discussions with customers regarding price increases are never easy, the business unit teams are proactively speaking with our customers using a fact-based approach to the real increases in cost that the industry is facing and how those costs affect the specific flavors and/or fragrances that we are selling to them. The rapidly changing cost environment requires these actions on top of our existing cost disciplines, and customers recognize this environment as they are experiencing it from many suppliers. Given our discussions to-date, we believe that we will be able to offset the cost increases longer-term through our pricing efforts, but will have a modest 2011 impact on gross margin due to higher costs and the lag in pricing. We also continue to make progress against our strategic priorities as we accelerate our growth in the right categories, the right regions and customers, and improve our overall profitability by implementing margin-enhancing solutions or exiting low-margin businesses. As such, we are optimistic that our performance in this first quarter coupled with the opportunities we see throughout the remainder of the year give us the confidence to achieve our long-term targets of 4% to 6% local currency sales growth, better than 9% operating profit growth and 10% plus EPS growth for the full year 2011. In summary, we are pleased with our strong start to 2011. Our performance across all financial metrics was solid as the team has done an excellent job building on our successes of 2010, and we have made investments in our future in R&D and in manufacturing. As we look towards the balance of the year, we remain cautiously optimistic that our pricing actions, savings from our European restructuring and the efficiency programs will help us mitigate the gross margin pressures seen from rising input costs in 2011. We expect that our disciplined approach to costs and reduced levels of incentive compensation versus year-ago, offset by some incremental investments in the business, both on category projects and R&D, will result in strong operating profit growth. 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 offer our shareholders strong returns, longer-term. With that, I and the rest of the management team will be happy to take any questions that you might have. Thank you.

[Operator Instructions] Your first question comes from Mark Astrachan with Stifel, Nicolaus. Mark Astrachan - Stifel, Nicolaus & Co., Inc.: I guess just firstly on April, in terms of trying to flesh out a little bit more of what you talked about, can you give us a bit of color around how much you think was timing in terms of shipments or sales ahead of pricing that you took in the first quarter, whether there's any sort of change that you're seeing from an in-demand standpoint, particularly in Fragrances? And then, what the month sales in May have looked like at least in the first, call it 10 days of the month?

Mark, this is Kevin. I'll take a crack and then hand over to Nicolas for any additional color. I would say that in terms of your specific question on whether there was a Q1 versus Q2 dynamic on sales relative to the pricing actions we were taking, we don't exactly have a lot of clarity as it relates to that. But we do see versus our Q2 performance a year ago, we have a very strong comparable. And certainly, that is one of the drivers to some of the softness that we are seeing in our Fragrance business in the initial stages of Q2. I don't believe that ultimately, the pricing dynamic would have played any particular materiable, at least we don't have a sense of that, but certainly, the year ago comparables are quite strong and it's certainly some element of the driver of performance that we are seeing in the preliminary stages of Q2. I won't really talk about specifically in May, but I would just say that as we have started the quarter, we're continuing to see the softness that we have alluded to in terms of our Q2 performance that we outlined in the comments on the call. Perhaps, I could turn it over to Nicolas for any other additional commentary as it relates to the Q2 picture.

Thank you, Kevin. Mark, in response to Q2 dynamics, as you recall, we had a very strong growth level a year ago. For the business unit, we grew 23% on a global basis, but if you go into more details, Fine and Beauty Care grew 37%, Ingredients grew 24% and Functional Fragrances grew 12%. Back then, the drivers included strong base business growth, which included some benefit of restructuring for those strong new wins, including an exceptionally strong pipeline built in new products. So as we compare to these tiers, we're seeing some softness. However, our underlying new win performance remains strong, and our expectation is that we should return to more normalized levels in H2.

Your next question comes from Ed Aaron with RBX (sic) [RBC] Capital.

I wanted to ask just a question on the Flavors business. The market share trends there seem to really be accelerating, and could kind of seems like maybe there's a bigger structural change that might be happening there. I just wanted to get some perspective on how you view that and what the sustainability of that might be.

Well, Ed, as I mentioned before, I mean these -- I mean, results that we had in the last year came on back of a -- with the strategy that we outlined 4 years ago, when we review last year. So I mean, basically, these, I mean, bench in the market shares held through a good technology and a very well executed, I mean, establishment in there that we mentioned 9 years ago. The health and wellness trend is helping us in a very solid way. We have now a very strong portfolio that they've helped us to deliver where the customers are looking at, together with the naturals. So I believe that this, I mean, strong health portfolio will help us to keep momentum.

Your next question comes from Lauren Liebermann with Barclays Capital.

Just I want to clarify, some of you said it a bunch of times, but what you're calling soft for the second quarter is really a matter of comparison, not demand?

Yes, that's how we would interpret the softness in the Fragrance business right now.

Okay, great. Then just on that hedging loss, so how should we think about that for the rest -- I don't really know how to model out or think about that, because it's actually a pretty big swing factor in the quarter in terms of profitability more than offset it, but kind of how do we think about that from here with currency, where it is?

Well, Lauren, this depends ultimately on what's going on with foreign currencies. If I had that view, I -- I have a different perspective on a lot of things, but at the end of the day, it's difficult to model that. It is clear that we had a variety of exposures that kind of cumulated, and have a receivable when the U.S. dollar went one direction and then a payable for our U.S. dollar went in the other direction in terms of strengthening or weakening, and that translated into the number that we saw in the first quarter. Going forward, I don't expect that to continue, and as a matter of fact, as we looked over the course of the quarter with the U.S. dollar strengthening, that -- or weakening, that will translate ultimately into an improvement in our effect on earnings per share over the course of the year. So the challenge over the quarter, which was a start of the quarter to the end of the quarter perspective, now that we're at higher levels of foreign currency levels versus U.S. dollar, that will translate into an improved performance from a P&L perspective going forward. So I don't think that you necessarily need to think about that as an ongoing cost.

Okay, perfect. And then just on Functional Fragrance in the past -- this second quarter, any thoughts on what might drive an acceleration in that business? It sounds like wins are still good but the drag from volume's sluggishness on existing business is a little tough, and especially with a lot of your customers taking pricing. What are your thoughts on that business in the back half?

Lauren, as we mentioned, the pipeline of new business is very strong across the portfolio and across the regions, so we'll have to see and monitor the market dynamics. When we look, we still have some positive trends going on like in Functional in Asia, where we see a good continued demand, but it will be too early to say right now what will be the initiatives from our customers.

Your next question will come from Andrew Sawyer with Goldman Sachs.

I just have a quick one. I think Doug and Kevin mentioned a couple of times that you're going back in evaluating another round of price increases. I just wondered if you could talk to the dynamics of that. Are you going back to the customers and taking bigger increases on the discussions you already had? Are you planning a second round later in the year? Or maybe just taking that more broadly, how are you guys thinking about changing systems or internal processes to maybe be more nimble and thinking about taking pricing more frequently?

Well, I'll start, Andrew, and then ask Nicolas or Hernan to jump in. I mean the process is really one of negotiating from a fact-base, so we have order of magnitude. 10,000 ingredients, they're not all in fluctuation but many are, and many are of frankly, insignificant fluctuation. And so the issue is negotiating with the customers, sharing with them the specifics. I mean, things that are petrol-based are obvious to almost all people from the standpoint of the cost structure. And we will review with the customer, the ingredients which are in their formulas and the costs which are changing, and those with dynamics which we see. I mean I think there is already a relatively good degree of nimbleness in the context of our line of sight from procurement, identifying some of these trends early on, which let us get into discussions with customers based on the then-assumptions. They have changed significantly. Again, many of our customers and fellow competitors have been very open about the nature of how rapidly things are changing, which is why on the heels of a first increase, we've had to go back for a second round, and conceivably, particularly petrol-based, a third round. And again, it's the basis on sharing with them the facts, which we've been successful in negotiating the price increases so far.

We are saying -- the integration, I mean, you say it fact-based. As an example, I mean, we saw this increase in the last quarter in some raw materials, we went to the customers with facts and we discussed for price increase we'll have to implement in the last quarter, in the first quarter. Then we saw a further acceleration in some raw materials and we started the second round of the negotiations, and we are in the process to discuss again, with fact-based, item by item, any price increases with our customers.

I would concur with what Hernan say, then also, Doug. We are much more fact-based and detail-oriented. We can precisely identify what could be the impact of the input cost, formula by formula. So we're sharing all this information with our customers. We're very transparent. I think that the facts are very clear on the market and we can compare to some of the other trends. So we're providing all that background information with our customers in our conversations.

And then just a quick follow-up if I could on that same topic. Does the rising input cost environment have any impact on how you think about product line exits?

It will from a strategic point of view. From the standpoint of we have goals and objectives and whether it's a base business or a business going forward, it really needs to contribute to the profitability in terms of our model. So if we can't get that pricing and we can't get a basis for product differentiation, it would very much influence the thinking on potentially exiting. But at the risk of some repetition, that exit is the final chapter. We will look for all opportunities with customers to negotiate a good settlement and a path forward in order to have a satisfactory business for us and for them.

Your next question comes from Jeff Zekauskas with JP Morgan. Silke Kueck-Valdes - JP Morgan Chase & Co: This is Silke Kueck for Jeff. Two questions, the first one is, can you quantify how much the closures of the Ireland and U.K. facilities contributed to operating profits in the Fragrance business and how much it should contribute to the full year results?

Silke, this is Kevin. We've communicated in the past that we--our expectation is that we will be able to deliver $17 million to $20 million of savings, so we still believe that, that is the right level. We're going to fall into that range, so you can basically assume that there is some percentage of that, that was incorporated into the fourth quarter results in line with our annual objectives. Silke Kueck-Valdes - JP Morgan Chase & Co: So was it a quarter of that or was it less than that in the first quarter?

In the first quarter, I would say it was at the lower end of the range. Silke Kueck-Valdes - JP Morgan Chase & Co: Okay, thanks. And my follow-up question is on volumes in the Flavor business. When I look at the North American and the European Flavor volumes, they were both very, very strong. And in North America, did new business wins contribute about half of this growth? And similarly, maybe in Europe, maybe you can explain some of the changes in the portfolio for naturals and how that contributed to volume growth?

[indiscernible] With something within North America, as I mentioned, I mean, this same growth was basically brought by a new wins. I mean we had a very successful many wins in the Beverage business. We're really remarkable on big business, that's why you see such a big growth in North America. In Europe, I think that you capitalized 2 main aspects, the naturals ones. I mean as I mentioned in calls, we have been working, we really, I mean, bring to the new level our naturals product portfolio. We are supplying to our customers now all natural flavors that they were requesting by the customers in Europe. This is basically more or less concentrated in the developed markets. And on the other hand, as I mentioned also, I mean the vehicle, the material growth in Europe or EAME is bring with by the developing market. We have very good success in the Central, South and Eastern Europe, together with Africa and Middle East. So EAME results, that this is 4, 5 quarter in a row that would visit[ph], you can attribute to the naturals, I mean, product portfolio that we have been improved, and the growth coming from the emerging markets.

Your next question comes from Emily Klingbeil with Crédit Suisse. Emily Klingbeil - Crédit Suisse AG: I have 2 quick questions, one is just a clarification. I was wondering if you could tell us what the new wins were as a percentage of sales in the quarter just for the entire company. How much of your top line growth did new wins represent? And then my second question relates to the comment that you made on the $1 million of sales that went away due to underperforming businesses. And I'm just curious, is that in aggregate? Because you mentioned that it came out of Greater Asia. And can you give us any sense in terms of what we can expect in terms of an acceleration of this for the full year?

Emily, it's Kevin. I'll take a crack at the first piece as it relates to the volume versus wins. Because we're comparing to various strong performance levels of year ago and we're starting to see erosion levels that are becoming more normalized for the Fragrance business, our new win performance was representative of a large percentage of the total growth that we were able to realize for the quarter. And so, I think, in total, that's the question. There was a little bit of pricing, but it was immaterial in terms of the total picture. But new wins was the bulk, certainly 80% or thereabout.

Regarding, I mean, the second part of your question, and, yes, when we exit one business in Greater Asia, as I mentioned, it was $1 million, which represented 1% of the sales in Greater Asia. We have been, I mean, we exit this business, the growth would have been 8%. For the time being, I can't -- I refrain to leave any additional information, but as was mentioned and by that, we are analyzing case-by-case. And whatever we don't find any other solution, we will be exiting on regional business going forward.

Your next question comes from Mike Sison with KeyBanc.

In terms of S&A as a percent of sales, those were up 15% for the first quarter, it's tended to be around 17%. Is this 15% of sales sort of the new run rate to think about for this business for the next couple of quarters and next couple of years?

Well, Mike, if you think about the picture for Q2 specifically, that certainly will not be the case if the risk profile that we've been talking about relative to a softness in the Fragrance business offsetting the continued strong growth in Flavors. So certainly, in that kind of scenario, we would have an RSA level that is higher. So don't necessarily think that you can assume that going forward. We've communicated that we will have continued investments in to support not only R&D initiatives, but also commercial opportunities around the world, primarily in emerging markets. So as those opportunities become clear, we will certainly look to drive our investments. We had identified some high-value at-stake opportunities in our strategic initiative last year that we alluded to and talked to in our Investor Day on March 15, and we'll continue to stay focused against those initiatives as well. So that will ultimately translate into some potential investments in our RSA levels.

So maybe something closer to that 24% level is probably sort of the new run rate versus 25%, 26% in the past?

Well, the other thing that you have to think about, Mike, too, is the incentive compensation change that we had versus year-ago. And you remember the very, very strong performance that we had year-ago. So there are some lower levels there that we will see in 2011.

Your next question comes from Erik Sjogren of Morgan Stanley.

I just wanted to ask about the EAME region, obviously, has a very strong performance. I think this, which I find a bit surprising given the events in North Africa and the -- in fact, most staples [ph] companies, as far as I can tell, have seen fairly modest growth in the Western, Eastern Europe. Is this -- was there anything specific, which really drove -- is there any big phasing of orders in that? And is this an area where you're seeing a slow down now during the second quarter or...

Erik, no. As I mentioned before, I mean this performance you mean in Africa, I mean this at the back of the new wins. If you recall, we would say that we were, I mean, in the past focusing on those areas in growth area, high-growth area. So if there is a suddenly, a slow down for whatever [indiscernible] in a specific case, where I think we offset by new wins. I still recall your second point, we still believe, I mean, a very good growth in the second quarter in those areas.

Our next question comes from Ed Aaron with RBX (sic) [RBC] Capital.

Just a couple of follow-ups. Just to clarify, there was an earlier question about whether you saw any kind of pre-buying ahead of price increases that might have benefited the first quarter at the expense of Q2. I think you might have addressed it. I'm not sure I caught the answer. Can you just make sure you clarify that for us? And then I have one more after that.

Ed, this is Kevin. We didn't see that as a material driver to performance in Q1. Could there've been certain instances or whether that could have occurred, certainly, but we didn't see it as the material driver, obviously.

Okay, great. And then I just want to ask on variable compensation as well. If memory serves, that the normalization effect of that in 2011 would be a benefit year-over-year something north of $30 million. And I know you said that the variable comp expense was down in the first quarter, but just based on where the corporate G&A number shook out for the quarter, it seems like it couldn't have really been down by that much. So I was just wondering if we're likely to see that full $30 million plus add back in 2011 or perhaps figures coming in stronger, maybe we get a little bit less of that benefit.

I think the answer to the question is pretty simple. If we over-perform, incentive compensation provisions will be higher. If we underperform, they will be lower. So I think the fact that we would suggest to you that the numbers for Q1 were very strong. That certainly had some incremental provisions that we would assume for incentive comp in Q1. Going forward, it will depend upon how we perform.

There are no further questions.

Thank you all very much for your participation today.

That concludes today's conference. You may now disconnect.