International Flavors & Fragrances Inc. (IFF) Q4 2012 Earnings Report, Transcript and Summary

At this time, I would like to welcome everyone to the International Flavors & Fragrances Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] I would now like to introduce Shelley Young, Director of Investor Relations. You may begin.

Thank you, Jennifer. Good morning, and good afternoon, everyone, and welcome to IFF's fourth quarter and full year 2012 conference call. Earlier today, we issued a press release announcing our fourth quarter and full year 2012 financial results. A copy of the release can be found on our website at ir.iff.biz. Please note that this call is being recorded live and will be available for replay for up to 1 year on our website. Before turning the call over to Doug Tough and our senior management team, I'd like to read our forward-looking statement. Please keep in mind that during this call, we will be making forward-looking statements about the company's performance, particularly with regard to the fourth quarter and full year 2012 and our outlook for 2013. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning factors that could cause actual results to differ materially from forward-looking statements, please refer to our forward-looking statements and risk factors contained in our 2011 10-K filed on February 28, 2012, and the press release filed this morning, all of which are available on our website. Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability. Reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release that we issued earlier today and on our website. For those of you who are new to our conference calls, I'd like to introduce the participants on today's call. With me on the call 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. Now I'd like to turn the call over to Doug Tough.

Thank you, Shelley, and good morning and good afternoon to everyone. Our focus on the call this morning is to provide an overview of our fourth quarter and full year operating performance, give you an update on our strategy, take you through a review of each of our business units and provide our current outlook on 2013. After the prepared remarks, we will leave time for your questions. Turning to the fourth quarter. We achieved local currency sales growth of 8%, which continues the accelerating growth momentum we have seen in each quarter this year. If we exclude the impact of the exit of low-margin Flavors businesses to get a more consistent year-over-year comparison, then on a like-for-like basis, we achieved 10% growth, which is the highest we have achieved since the third quarter of 2010. This broad-based growth across all categories and regions was due to strong new customer wins in both business units, as well as growth in our base business, owing to our ability to create consumer-preferred flavors and fragrances. Once again, our growth was buoyed by double-digit growth of 11% in the emerging markets, which accounted for 49% of sales in this quarter, up from 47% last year, as well as 6% growth in the developed markets. If we exclude the impact of the exit of low-margin Flavors business to get a more consistent year-over-year comparison, then on a like-for-like basis, we achieved 10% growth, making this the highest performance we have achieved since Q3 of 2010. Looking at our growth by business unit. Our Fragrance business delivered 13% growth this quarter, and our Flavors segment achieved 7% like-for-like growth. Our top line performance says a lot about the progress we have made this year, in finding new and better ways to serve our customers and provide them with innovative products that are desired by consumers all around the world. Our ability to deliver strong top line performance demonstrates the diversity of our global organization, our ability to work with regional and global customers and our continued focus on innovation. Importantly, our gross margin performance increased 430 basis points over the year-ago quarter. This reflects our strong volume growth, increased manufacturing leverage and volume gains, as well as portfolio optimization through the exit of low-margin Flavors sales activities. In addition, this quarter, the net positive impact of price in relation to input costs resulted in margin expansion. Raw material costs, however, remain at historically high levels, and on a year-to-year -- year-to-date basis, are up nearly 4%, and over the past 2 years, they are up 14%. The strong top line performance also allowed us to achieve an adjusted operating profit growth of $8 million or 9% and adjusted EPS growth of 12% this quarter to $0.83 per share. Our local currency sales, operating profit and EPS growth are in line with our long-term growth target. Importantly, the strong top line growth we achieved in the fourth quarter of 2012 enabled us to meet our long-term local currency sales growth targets for 2012. Looking at our total performance for the full year 2012 and on a 2-year and 3-year average to reflect long-term trends. We have achieved our top line growth targets of 4% to 6% for the consolidated company on a 1-year, 2-year and 3-year average basis. Total company growth was supported by solid performance from Flavors, despite the impact of discontinued sales activities and strong growth from Fragrance Compounds. On a 3 year-average basis, which combines our strong performance in 2010 with more modest performance levels in 2011 and '12, our 3-year average growth is 8% for both Flavors and Fragrance Compounds. Fragrance Ingredients growth has been pressured over the last few years and has had a negative impact on the Fragrance business and on our total top line performance. Still, on a 3-year basis, our Fragrance business achieved 6% local currency growth. Before turning the call over to Nicolas and Hernan, who will provide you with an update on the progress of the Fragrances and Flavors business units, respectively, I would like to provide some perspective on the progress we have made in executing our strategic priorities. We have a clearly articulated corporate strategy, and we are focused on driving the business forward using 3 guiding strategic pillars. Firstly, we want to accelerate our growth in the emerging markets by expanding our manufacturing footprint, increasing our understanding of local customers and providing technical expertise to markets outside the United States. Secondly, we want to strengthen our innovation platform to drive profitable growth by focusing on consumer trends, commercializing new ideas and products, and working with biotechnology firms to create sustainable products. And thirdly, we look to maximize our product portfolio to improve returns to our shareholders. We do this by focusing on margin-enhancing opportunities and by consistently analyzing and monitoring categories and looking for opportunities to increase profitability-enhanced returns. As a global company, over 75% of our sales are from outside the United States. IFF has had a presence in many of the emerging markets for over 50 years. We are well-indexed in emerging markets, and continue to invest in manufacturing capacity and creative applications and sales offices in these markets to better serve global and local customers in the regions. As a result, we have benefited from the growth that is coming from providing consumer products to the global population that can now afford to buy consumer packaged goods. Our sales in the emerging markets grew 8% in 2012, and for the full year, now represent 40% -- 47% of our global sales, up from 46% last year. To align our infrastructure to support our projected capacity requirements, in September of last year, we opened a new liquid Flavors and Fragrances facility in Singapore, and we expect to complete construction on our Flavors-dedicated facility in Guangzhou, China in the first half of 2013. In June, we opened a new facility in Delhi, India to house creative, technical, sensory and sales professionals for the company's Flavors business unit. These investments underscore our long-term belief in the region, as well as the strength of our local IFF teams. We also announced a $50 million investment to expand our facility in Gebze, Turkey, which will serve the growing markets of Southeast and Central Europe and Africa. We expect the first phase of the expansion will be completed in the first half of 2013. Through these investments, we have been able to optimize our manufacturing footprint, collaborate with our customers on a more global basis and grow with our customers in the emerging markets. Strengthening our innovation platform continues to be most critical for future success. Innovation is a key growth driver and cultural imperative for IFF. Throughout our history, IFF's patented technologies and captive molecules have been game-changers for us, our customers and the industry. This year, we aligned our innovation programs around key R&D platforms, each of which addresses a consumer need or anticipates a future preference. By aligning our resources around these platforms, each program is ensured the proper support and focus that it needs so it can be further developed and eventually be accepted for commercial application. We have a robust pipeline of new R&D products, and we are working to make each of them commercially viable, either through our own internal R&D efforts or working with partners who specialize in these areas. We issued a press release earlier this week on the successful outcome with an outside partner, Evolva Holding, in the preproduction and scale-up of a natural, sustainable vanillin through a biosynthetic route. Vanillin is a key flavor ingredient in many food products, so a dependable source should be welcomed by our customers. Hernan will be telling you more about this joint development project. The Scientific Advisory Board, announced in early 2012, has been fully active for 1 year. The Board is comprised of 5 scientific talents and are well-respected experts in their fields. They provide regular reviews of our ongoing initiatives and guide our development efforts. They have proven to be a very active and engaged Board, and their insights, to date, for us, have been invaluable. Focusing internally, we continue to look for ways to improve returns with rigorous economic value analysis, by evaluating resource allocation by category, by customer and by region, across both of our businesses, thereby appropriately aligning resources behind our advantaged portfolio and reducing the cost associated with our negative economic profit businesses. This year, we implemented the realignment of our Functional Fragrance business to strengthen our ability to win new customers and business, expedite decision-making and continue to deliver preferred customer fragrances. We also exited approximately $28 million of low-margin sales activities in our Flavors business, which resulted in gross margin expansion, both for Flavors and for the total consolidated company. We have ingrained the concept of economic profit throughout the organization, which is helping to drive better resource allocation. By focusing on those areas that are most profitable to IFF, we believe we will increase the company's profitability and better align resources with appropriate programs. I will now turn the call over to Nicolas and Hernan, who will provide you with an update on the progress of our business units during the quarter and for the full year, and then to Kevin Berryman, our CFO, who will provide an overview of our financial performance. After their respective sections, I will give you some perspective on the outlook for 2013. And with that, I would like to introduce Group President of Fragrances, Nicolas Mirzayantz.

Thank you, Doug, and good morning and afternoon, everyone. Fragrance performance was very strong in the fourth quarter, with double-digit sales growth and improving profits. Due to record-breaking new wins in Fragrance Compounds, including Fine & Beauty Care and Functional Fragrance, combined with a strong underlying growth in the base business, fourth quarter reported sales increased 10%. Excluding the impact of local currency, Fragrance growth was 13% and was the highest local currency sales growth we have achieved in any quarter, since the third quarter of 2010. In line with our strategy of leveraging our geographic reach, 53% of our fourth quarter Fragrance Compound sales were from the emerging markets, which grew at 17%. Brazil continues to be one of our leading markets and had a strong double-digit growth this year. Excluding Ingredients, Fragrance Compounds grew 15% this quarter, due to strong growth in every region led by Latin America. Globally, we have strengthened our [indiscernible] participation and are very well-positioned for new business growth. Our innovation platforms, including our encapsulation technology, drove double-digit growth this quarter in Fabric Care. We were a pioneer in developing this technology, and continue to strengthen our leadership by leading the charge in term of exploring new application for its use. We are working with our customers to introduce encapsulation in other categories and regions. In total, products using our encapsulation technology had double-digit growth this quarter, and we have a very strong pipeline of new wins. Our Fine & Beauty Care category, which includes Fine Fragrance, Toiletries and Hair Care, grew by 19% this quarter, driven by strong growth in Latin America, North America and EAME. Fine Fragrance had double-digit growth due to continued success in driving new launches in Latin America, North America and Europe, including Lancome, La Vie Est Belle, Bath & Body Works, Cashmere Glow and [indiscernible]. Both Toiletries and Hair Care had also double-digit growth and contributed to overall strong performance. Our Functional Fragrance sales grew by 12% this quarter. This was our 18th consecutive growth quarter in Functional Fragrance, led by double-digit growth in Greater Asia and Lat Am, and double-digit growth in Fabric Care in Europe. Turning to Fragrance Ingredients, which has been challenged this year. We saw positive growth of 6% due to short-term customer order patterns. We expect that Fragrance Ingredients top line will continue to be pressured, especially in high-volume commodity products, continuing the trend we have seen on our external portfolio, which now accounts for just under 10% of total company sales. As we mentioned last quarter, we expect to see some Fragrance Ingredients volume migrate to Compounds during 2013, which will be a higher value add for our customers. We were able to retain this business due to our vertical integration and unique expertise in providing both security of supply and sustainable solution that support our customers' growth objective. We expect the migration of this Ingredients volume to Compounds to put significant pressure on our Ingredients top line growth in 2013. As we've said in the past, Ingredients is a strategic business for us, and we will continue to invest in this business, especially in higher-value specialty chemical area, while at the same time, ensuring that we maintain a cost-effective portfolio, particularly in the price-sensitive commodity components. Turning to the full year. The Fragrance business grew by 3%. Our Compound business grew by 7% with equal contributions from both Fine & Beauty Care and Functional Fragrance due to a platform of innovation and our ability to proactively provide our customers with solutions, based on the strength of our creative consumer insight and research and development teams. The Fragrance business contributed to the consolidated company's ability to deliver sales growth in line with our growth targets for the third year in a row. Importantly, the emerging markets accounted for 51% of our full year Fragrance Compounds sales, which exclude Fragrance Ingredients. It is worth noting that 2012 was another record year for fragrance, and we have achieved very solid momentum in many areas of the business. From a profitability standpoint, segment operating profit increased $60 million or 44%, to $53 million in the fourth quarter, from $37 million in the fourth quarter of 2011. As you know, our raw material costs have significantly increased for the last 8 quarters, up 14% for the consolidated company and even more for Fragrances. Today, they remain near historical levels. To protect our bottom line, we initiated both external and internal actions, including price increases, operational and commercial restructurings and numerous other efficiency programs. Despite these efforts, the net impact of rising material costs have negatively impacted our margins. In Q4 2012, we realized our first reduction in raw material costs, and also the decline was small when combined with strong volume growth and improved mix of business, efficiency savings and pricing; our operating margins increased this quarter. Turning to the full year. Fragrances generated segment profit of $238 million or an increase of $11 million, compared with $227 million in 2011. Looking ahead, we are very encouraged by the strong new level of wins or increased [indiscernible] participation and the strength of our existing volume, but are expecting a more moderate level of growth in the first quarter of 2013. As for Fragrance Ingredients, in the first quarter of 2013, we expect top line growth to remain under pressure, especially in the high-volume commodity area. I would like now to turn the call over to my colleague, Hernan Vaisman, our President of Flavors.

Thank you, Nicolas. Good morning and good afternoon, everyone. Flavors had a nice quarter of growth, marking our 28th consecutive quarter of local currency sales growth. On a like-for-like basis, which excludes the impact of exiting low-margin sales activities, we generated a strong local currency sales growth of 7%. Our growth this quarter was reduced by 3.5 percentage points, due to the exit of low-margin sales activities. Although this put continued pressure on our top line growth, it had a favorable impact on gross margin for both Flavors and for the total company, and has helped us to improve the profitability of our overall portfolio, in line with our strategy. This quarter, our performance was supported by strong growth in North America, which delivered like-for-like local currency sales growth of nearly 15%, as well as strength in emerging markets. Greater Asia, Latin America and EAME delivered solid growth this quarter. Our like-for-like growth in North America of 15% was, once again, led by double-digit growth in Beverage. In EAME, we grew by 6% due to moderate growth in Beverage and Savory. Greater Asia, our largest region, delivered 5% like-for-like local currency sales growth, led by double-digit growth in Dairy and high single-digit growth in Savory. In Latin America, local currency growth on a like-for-like basis was 6%, led by double-digit growth in Beverage and positive growth in Savory. We continue to make progress in this region, working with our regional customers to improve sales momentum in Latin America. Turning to the full year. We delivered strong local currency sales growth of 8% on a like-for-like basis. This marks our third consecutive year of high single-digit sales growth, contributing to the consolidated company's ability to deliver growth in line with our stated consolidated growth target of 4% to 6%. Flavors growth was supported by increased traction from product use in our sweetness modulation and masking technologies. The use of innovative technologies help our customer create products that stood out in their markets. Early this week, we announced the next phase of our relationship with Evolva. We are entering the preproduction phase to develop and scale-up, via third party, a natural vanillin for commercial application through a cost-effective natural and sustainable growth. We are very pleased with our partnership and believe that the program with Evolva will increase the availability and sustainability of vanillin, which is a key flavor ingredient in many food products. We continue to work with R&D and creative teams to commercialize products that will provide us with a competitive edge in the market. We believe we have found such a product in our collaboration with Evolva. I would like to add a final word on the managed exit of our low-margin sales activities. As we have noted, we expected the financial impact of these efforts to be done by the first half of 2013. As a result, we will expect that our sales growth in the second half of the year will be stronger than the first half of the year, due to the elimination of this impact. It should be noted that even with the impact of the discontinued sales, we are showing consistent solid growth levels due to the underlying strength in the portfolio. Turning to our profitability this quarter. As Nicolas mentioned, this marked the first quarter in our 2 years that we realized declining raw material costs, which when combined with a more favorable category mix and the exit of lower-margin sales activities, supported gross margin expansion. Raw material costs, however, remain elevated on a year-to-date basis and have had a negative impact on year-to-date margins. The favorable gross margin was offset by an increase in incentive compensation expenses and resulted in the Flavors' fourth quarter segment profit decrease of $1 million to $62 million this quarter. That said, on a full year basis, like-for-like local currency sales of 8%, combined with a gross margin upside, resulted in Flavors' segment profit of $298 million, an increase of $14 million or 5% from the prior year. Looking ahead. In the first quarter of 2013, we can see a more moderate growth level as we enter the quarter, and we are closely monitoring the situation. However, our underlying sales growth remains strong, driven by strong pipeline of new business wins using our sweetness and Savory modulation tools and other innovations. We are excited about our many collaborations, which are all based on creating value for consumers in every region of the world. With that, I would like to turn the call over to Kevin Berryman, our CFO.

Thank you, Hernan, and good morning and good afternoon, everyone. Turning to our quarter results, reported revenues for the fourth quarter totaled $681 million, compared with $644 million in the prior year quarter, or an increase of 6%. Our local currency sales growth increased 8%, as currency translation reduced our reported sales by 200 basis points in the quarter. On a like-for-like basis, our sales growth was 10% in the quarter. Our gross margins were 42.2% this quarter, up from 37.9% in the prior year, or an increase of 430 basis points. The improved performance was due to favorable manufacturing leverage supported by strong volume growth; ongoing cost-savings initiatives; an improved sales mix, including the benefits of exiting low-margin sales activities in Flavors; and the continued benefits of pricing, which helped to offset the continued high level of input costs. The strong sales and gross margin improvement in the quarter also resulted in higher levels of incentive compensation provisions in the quarter, resulting in research, selling and administrative expenses being higher than normal levels and certainly, well above last year, when incentive compensation provisions were abnormally low. Our sales strength and gross margin expansion, however, more than offset these increases. As a result, our adjusted operating profit increased 9% or $8 million, to $99 million in the quarter. With interest expense down slightly year-over-year and a lower effective tax rate due to a lower cost of repatriation and reductions in tax provisions, we were able to drive a 12% increase in adjusted EPS growth to $0.83, up from $0.74 in the fourth quarter of 2011. To provide additional perspective on the underlying sales growth momentum in our business, we are including a graph of our quarterly like-for-like growth by business unit and for the total consolidated company. This graph highlights the sequential improvement we have achieved in our business in each successive quarter of the year, buoyed by a strong level of new wins and an improvement in the growth of the base business. On a consolidated basis, our total company like-for-like growth showed increased momentum in every quarter, from 1% in the first quarter to 5% in the second, 7% in the third and finally, to 10% in the fourth quarter. For the full year, total company grew by 5% on a like-for-like basis. Importantly, this is the third year in a row that we have met our long-term local currency sales growth target. Looking at the business units. Flavors has shown strong and consistent growth every quarter, when eliminating the impact of exiting low-margin sales activities. On a like-for-like basis, Flavors sales growth ranged from 6% in the first quarter, to 9% in both the second and third quarters. For the full year, Flavors like-for-like growth was 8%. Turning to our Fragrance business. An improving growth trend in our business was seen in every quarter, buoyed by new business wins and an improving growth trend in the baseline business, combined with some pricing to recover raw material cost increases. This year, Fragrance declined 3% in the first quarter, was flat in the second, but then grew by 5% in the third and 13% in the fourth quarter. For the full year, Fragrance delivered 3% local currency sales growth. Importantly, when further evaluating the incremental growth momentum for Fragrance, it was largely driven by the combined results of our Fine & Beauty Care and Functional businesses or the Fragrance business excluding the Fragrance Ingredients sales. The improving trend here was also impressive, as growth trended up consistently over the course of the year from minus 1% in Q1, to 15% in Q4. As a result, for the full year, both Fine & Beauty Care and Functional, grew 7% -- by 7% in local currency sales. To illustrate our strength in the emerging markets, I would also like to highlight the trend in our shifting sales mix, from the developed markets to the emerging markets, over the past 3 years. As you can note, the percentage of sales in the emerging markets has increased from 44% in 2010, to 46% in 2011, and finally, to 47% in 2012. Importantly, during Q4 of 2012, at least 50% or more of our sales on our Compounds businesses, which are those businesses excluding our Fragrance Ingredients sales, were to the emerging markets. Specifically in Q4, the emerging markets accounted for 50% of all Flavors sales and 53% of our combined Fine & Beauty Care and Functional sales levels. At this rate, we believe we are well on track to have more than 50% of our total sales come from the emerging markets by 2015, consistent with the strategic objectives we have set for ourselves, as part of our focus to leverage our geographic reach. Turning to raw material costs. As you know, we have been closely monitoring our input costs and this is the first quarter in 8 quarters where we've actually seen them decline, albeit at a modest level, down less than 2%. While that was nice to see, as many of you already know and which has been mentioned already, we have faced significant input cost pressure over the last 2 years. In fact, over the last 2 years, we have seen our input costs rise by 14%. While both businesses faced significant cost pressure, it was more significant in Fragrances, where strong increases in naturals, petrochemicals and feedstock ingredients drove strong double-digit increases in input costs. Nevertheless, our gross margin improvement versus year ago for the quarter and full year was 430 and 210 basis points, respectively, and was driven by strong innovations, improved product mix, cost-savings initiatives and the exit of low-margin sales activity. Importantly, with the recent margin expansion, our margins have now recovered back to levels we saw in 2010, before the raw material costs began to rise. And the net benefit of pricing input costs movements in the fourth quarter, represented actually less than 1/3 of the total improvement in gross margin for this period. Simply put, advances in our gross margin for both Q4 and for the full year are fundamentally being driven by our execution against our strategy, which calls for driving innovation, optimizing our portfolio and driving efficiency in everything that we do. Looking ahead to 2013, based on our current outlook. We expect raw material costs to be relatively benign, which will result in costs that are flat to slightly increasing. From an overhead cost standpoint, adjusted research, selling and administrative costs or RSA costs, as a percentage of sales, increased 380 basis points this quarter, to 27.6%, up from 23.8% of sales in the prior year quarter. This increase reflects higher incentive compensation provisions this year, due to achieving stronger volume growth versus expectations from Q4 and its impact on our performance versus our full year targets. As a result, the fourth quarter RSA expense contains incentive compensation provisions above more normalized levels and certainly, well above last year when provisions were abnormally low. Excluding the impact of the increased incentive compensation accrual for the current year quarter, adjusted RSA as a percent of sales would have actually fallen versus a year ago. This would result in a more normal level of leverage associated with our business model, whereby our growth would result in improved absorption of our fixed cost structure. Importantly, R&D investments continue to increase in support of our strategic pillar to enhance our innovation efforts. Regarding foreign currency impacts. In the fourth quarter, foreign currency had a 200 basis-point impact on our top line, but a limited impact on our bottom line performance. Importantly, due to our cash flow hedging activities, there was limited impact on the fourth quarter year-over-year operating profit margin. In short, our exposure to euro volatility in 2012 was significantly reduced, as a result of our hedging efforts. Looking ahead to 2013. We are now nearly 80% hedged against the euro levels that approximate $1.29, effectively a rate that is consistent with the average exchange rate level for the full year 2012. For 2012, cash flows from operations were $333 million or 11.8% of sales, compared with $189 million or 6.8% of sales for 2011. Of note, the cash flow in 2012 includes $105 million payment related to the Spanish tax settlement announced in Q3 of 2012. Cash flow from operations in 2011 includes a $40 million payment for a patent litigation settlement. If we exclude these aggregate payments from both years, our operating cash flow would have nearly doubled from $222.5 million to $438.5 million, a clear indication of the strength of our operating model. Our strong operating cash flow provides us with the ability to continue to make targeted investments in the growth of our business, targeting those projects with the greatest return, while also returning cash to our shareholders. This year, we made capital investments totaling $126 million or nearly 5% of our sales, including new facilities in Singapore and China. We expect to have a similar level of spending, as a percent of sales, in 2013. In 2012, we also increased our quarterly dividend by $0.03, or nearly 10% to $0.34. And in the fourth quarter, we paid out our dividend that is usually and typically paid in January, in December. We also announced a $250 million stock repurchase program, which will enable the company to purchase nearly 5% of its outstanding shares, based on the market price of our shares on December 31, 2012. Finally, it is important to note that the cash flow conversion rate, measured as the conversion of net income into operating cash flow, and adjusting for the payments related to the patent settlement in 2011 and tax settlement in 2012, increased in 2012 1.3x [ph] from 0.7x in 2011. On this basis, looking at a 2-year average, our operating cash flow to net income conversion rate is at a healthy 1.0x. In summary, 2012 was an exciting year for IFF. We delivered broad-based top line performance, led by growth in the emerging markets. We were able to achieve local currency sales growth in line with our long-term targets for the third year in a row, due to the stability of our business, in which diversification of categories, products and customers supported our performance. Our ability to anticipate consumer preferences with innovative products, such as those using our sweetness and sodium modulation tools in Flavors, or those using our encapsulation technology in Fragrances, were critical drivers to our new win successes. Our gross margin expansion was due to many different factors, including our operating leverage, continued cost discipline and cost-reduction efforts, strong innovation, improved product mix, including the exit of low-margin sales activities, and continued pricing actions to help offset the high level of input costs. Importantly, the operating results we achieved this year enabled us to invest in our business growth and to make changes in our capital structure. We have invested, and continue to invest, in additional capacity and creative centers in the emerging markets of Asia. We are building a facility in Turkey, and we'll look for other opportunities to add capacity in those markets, where changing demographics result in increased demand for customer products. We continue to invest more than 8% of sales annually on R&D programs, and as a result, we have a very strong pipeline of products based on our key R&D platforms. The business generates strong cash flow, and our quarterly dividend and authorization of a $250 million stock buyback program are indications of our confidence in the future. With that, I'd like to turn the call over to Doug for his outlook on 2013.

Thank you, Nicolas, Hernan and Kevin. We are pleased with the progress we've made over the past few years in driving growth across both businesses based on our technology. While the business is both diverse and stable, reflecting its focus on consumer products, it is also growing as the emerging markets' middle-class population expands and increases their use of consumer products. The defensive and growing nature of our business, combined with our customer intimacy, innovation and consumer insights, enabled us to deliver solid results in a challenged environment. Although we are mindful of economic volatility in various parts of the world, we are confident that based on our diversification, we will be able to offset softness in one part of our business, with strengths in another. The accelerated momentum we see in the Flavor and Fragrance Compounds business is fueled by the strategic investments we have made in the emerging markets over many years, combined with our ability to provide customers with products that meet and surpass consumer expectations and lead to market share growth for both our customers and for us. We are committed to driving the business for the long-term, creating new and innovative products that will appeal to consumers all over the world, and collaborating with global and local customers to bring these products to market. Given our progress on a number of value-enhancing initiatives, we expect our gross margins will continue to trend above year-ago levels. We have a committed and a dedicated group of people whose mission is to see the company succeed. We are pushing ahead to meet our internal financial objectives and have been able to deliver top line growth in line with our long-term targets, due to our diversity and our ability to provide value to consumers year after year in every region. We have a robust R&D pipeline, which should provide us with longer-term growth, while providing us with sustainable raw materials at lower costs. We are implementing our plans to make our Ingredients business more competitive, and we intend to provide you with an update on that business on our next earnings call. For the full year 2013, we expect the company to achieve its long-term financial growth targets. For the first quarter of 2013, we expect to see continued local currency sales growth in Flavors, offset in part by the continued acceleration and exit of low-margin sales activities. In Fragrances, we expect momentum to moderate in Fine & Beauty Care and maintain solid growth in Functional. While we expect to see improved volume trends in Ingredients for the full year, we still expect year-over-year declines in the first quarter. In conclusion, our strong performance at IFF this quarter is the result of our geographic footprint, our product diversity and our ability to work with our customers to develop new products that help shape the industry and delight consumers. We are well-positioned in the market, and we are selectively reinvesting in those areas where we see the most growth. Going forward, we expect continued momentum and growth. We will continue to proactively manage our performance and calibrate costs in line with our top line growth, as we continue to execute against our business plans. We will continue to focus on excellence in the execution of our strategies. I thank you all for your participation, and the management team will be pleased to take any questions you may have.

[Operator Instructions] Your first question comes from the line of Mark Astrachan with Stifel, Nicolaus. Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division: I guess maybe just a couple of questions for Nicolas and Hernan, just in broader strokes in terms of thoughts about what they're seeing in specific regions around the world, in terms of pockets of strength, weakness. And then specifically for Nicolas, there was a big increase in Latin America Fragrances in the quarter, if you can maybe talk a bit about what contributed to that, and how much of that should or will continue to be helpful?

Mark, good morning. It's Nicolas, how are you? Mark, just for your comments in Latin America, I think it is fair to say that we continue to strengthen our leadership in the markets. And as the market is growing, a significant number of new consumers coming to the markets and entering these categories, so we see an increased activity in terms of the retail markets increasing, players going -- entering new categories, new channel of distributions. So we should combine all this momentum and all strong strategic partnership we have in the region. We're enjoying more than our fair share of the growth of the market, so we continue to strengthen our leadership. Obviously, the growth was more significant than we expected in the fourth quarter. But right now, the pipeline of new wins and the continued activity in the market would indicate that we will continue to see a good momentum going into 2013.

Mark, this is Hernan. I mean, we have a kind of a mixed bag situation. We started the year, I mean, in -- with Greater Asia, delivering good growth in this point in time, but we're seeing other areas like Western Europe and even -- I mean, Eastern Europe, that this kind of production platform for Western Europe, some kind of a slowdown, some softness there. In U.S., we still see good growth. And in Latin America, gaining momentum. So I mean, we are continuing that the -- why we believe that this is kind of moderate growth due to the discontinue of business. We are in the right path. And I think that really makes us very confident, is that we have a strong pipeline of projects in-house.

Mark, this is Kevin. Just one quick additional comment. I think that if we looked at the broad portfolio across a lot of different regions, there was actually good solid growth in a lot of countries. So there was some standouts, obviously, you picked one of them, but we saw some good solid growth across a broad swell of countries and regions. So we were pleased with that performance in the fourth quarter.

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

I just wanted to know if you guys could talk a little bit about the Evolva partnership. Just, I guess, a little bit of why it's important with this particular ingredient? Is it a bit of a particular source of inflation? Has quality been an issue? Have there been shortages? And then when you expect -- presumably, if the scaling up goes well, when that will be commercialized and start to impact your business?

Lauren, I mean, you explained pretty well all. I mean, basically it's a very important Flavor ingredient. Just to give you a kind of magnitude, I mean, if you're thinking that we're -- potential, I mean, of the market is 10 billion [ph], the first 4, 5 Flavors, 1 is vanilla. So I mean, this is one of the component of this kind of Flavors profile. It's a very expensive raw material, has a high volatility in the market. You have always problems in sourcing. So by doing that, I mean, we will be able to, first, I mean, have a very sustainable way of getting this product, in a very cost-effective and sustainable way. So I think that this is the key element of this partnership. We are really, very, very exciting, and we are very close to get, I mean, the things done. If we can -- if we will be able to be successfully, I mean, to scale-up manufacture, we will have the first, so let's say, samples in the market by the end of this year. So it goes as we expect, Lauren. I think that we will see some -- I mean, good results by early or mid-2014.

And is that -- is it the assumption that this will happen early in your numbers for the end of this year, or no?

No. I think that it's too early to say because, I mean, whenever go to the market, Lauren, you have to go to samples, I mean, customers need to test in their products, and only just after that, I mean, it'll start to -- going to launch in a new or next environment. So that's why we're not contemplating in our numbers in 2013.

Okay. And then, I still had a question on incentive compensation. And I know, Kevin, this is something we've gone a bit back and forth on before. But it was granted, it's all because the revenue growth came in so strongly, but the way that it works for you guys, it's sort of a circular reference. I mean, at least in terms of what I believe your long-term operating goals are, it's not just revenue, there's also an operating profit element to it. And because of the step-up in compensation above getting to normalized levels this quarter, you didn't hit your full year operating margin target. So I know it's tough, I understand it's a good thing, because everyone's getting paid and the top line is there. But it is frustrating from an external standpoint to say the business is in such a good shape, and then so much of it gets given back in a not terribly predictable way. So I don't really -- is there a thought process going forward, and how that can be managed differently, the formula could be shifted? Anything you can offer would be great.

Thanks for the question, Lauren. We are always thinking about ways to have an incentive compensation program that is directly aligned with performance and, effectively, we do. And that has resulted, given some of the variability in our performance and different levels of incentive comp and certainly, that occurred in Q4 of this year. I think the specifics, as it relates to Q4, was that the top line performance really was stronger than we expected. And our local currency sales growth jumped up above 4%. We talked to the 4% number, but it's almost close to rounding to 5. So it's a big number. So it's bigger than what our expectations were and it's relative to a strong November and December. Growth is a big part of our incentive comp dynamic, and so that translated into us having to increase our provisions for the quarter. Having said all of that, at the end of the day, we didn't hit our profit objectives, and so consequently, the impact on our incentive comp was more about our growth and less about our profitability. And I would also remind you, as it relates to 2011, we had very strong levels of operating profit growth in 2011, where we grew more than 10%. I believe, the number was 11% in 2011. And our incentive comp was quite low because we underperformed versus our expectations internally. So there is the resetting of the comp, which ultimately has an impact on a comparable basis, and ultimately, as we look to drive incremental growth and innovation into our portfolio, we continue to see a greater stability in the top line, which will translate into greater stability of our incentive comp levels.

And your next question comes from the line of Edward Aaron from RBC Capital Markets.

It sounds like you're maybe expecting a little bit slower growth in Fine & Beauty in Q1, just wondering if that's just a reflection of the comparison getting a little bit tougher? Or if there is maybe some factors, kind of more specific to Q4 inventory, restocking or whatnot, that, yes, you don't expect to continue?

Edward, it's Nicolas. First of all, as you say, we saw very, very strong Q4 coming from the strength of the existing business and brands having more confidence in the Christmas season as well as the strong momentum in new wins. And it was really across the different regions, but mostly, also driven by the strength in Lat Am and North America. So Christmas was positive in the U.S, mixed in Europe and strong in Latin America. The fact that most of the strength came from Latin America, and we see continued momentum, this will be a good balance to offset what could come as pressure points in Europe or the markets. So right now, it's too soon for us to understand the inventory level. One thing which is fair to say, that it will not be the same pressure point that we saw in 2009, when you had a lot of inventories throughout the entire supply chain at the retail level and the customer level. So it's a bit too early to say at the moment. But obviously, a strong Q4 put some tough comparison with Q1.

And just a quick follow-up on the previous question regarding incentive comp. If you kind of look at the full year provision, the Q4 provision, where does that take you on a full year basis, kind of relative to target for 2012?

Say again, Ed.

I'm just wondering what the incentive comp shook out on a full year basis, relative to a kind of target in 2012. With a bigger Q4 provision, did that take you, just kind of back up to target? Or did it take you above your incentive comp target for the full year?

It's slightly above.

Your next question comes from Jeffrey Zekauskas from JPMorgan. Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division: This is Silke Kueck for Jeff. My recollection is that the Beverage business used to be more seasonal, where really, it would pick up like in the second and third quarter. And so, what led to the strength in the Beverage business in the fourth quarter? And why is North America up 15%?

Silke, I mean, basically, what I've mentioned is, I mean, this remarkable growth in Beverages was being brought by new wins we haven't had before. I mean, we are making great inroads in North America in very important brands in the still beverage. So this has been the main reason that you have this -- such a big increase. Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division: Okay. In -- or you also ask a Fragrance question. In Fine Fragrances, the local currency comparisons are very, very good, both for IFF and Givaudan, so I think like up 19% and 15%. So who's losing share? Or were the -- or the comparison's just so easy?

Look, it's very difficult to comment on the competition. The only thing, as I said before, was a very strong for us is the strength of our existing portfolio where you have a lot of classics and which are well-positioned in many markets, but also we had a significant number of new wins. But more importantly, this when [ph] you are successful in the marketplace and provided market share gain for the brands we partnered with. So we don't have the industry data, so it's difficult to comment on this, but I just want to provide you some insights on our performance. Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division: And if I can ask the last question on R&D. As a percentage of sales, R&D went up, and I understand some of this due to incentive compensation. But does the higher level of R&D also reflect more development expenses as a function of winning new business? Or does it include like milestone payments to Evolva? What else is in that R&D expense that it's so high?

Well, I mean, we've been targeting that 8% level anyway, and the fact we're a little bit higher, I view is a good thing. You've touched upon some of the items, such as the Evolva payment, but it's really the recognition that we're going to win through technology, win through investments. So it's a continued push we have on a lot of agreed internal platforms, Silke.

Your next question is a follow-up question from Lauren Lieberman with Barclays.

Just pretty clearly, you guys are talking down revenue expectations for Q1, and I just -- I mean, I had already assumed that Q1 would become as slower than this great number in Q4, but are you thinking about it as being a low point for the year? And I mean, how down or how much lower are we talking? Is it a kind of slowest growth in the year, or just slower versus Q4 and you want to make sure people don't assume that what you saw in Q4, maybe boost a little bit by some sales around the holiday, doesn't continue per se into Q1?

Lauren, it's Doug. I mean it's really a reference point. It's Q4 of 2012, it will be lower off that level. I think from the comments we made a few minutes ago, the year we're expecting to be in line with the long-term targets that we've said, so I wouldn't read a lot into a lower level other than managing expectations against the plus 8 or the plus 10 year like-for-like. I would just pick up, though, on something that Hernan said, which was the discontinued part of the low sales volume in Flavors is going to run through the first half and end at the end of the first half, and there will be, I would say, a significant part in Q1 that will affect Flavors. But it will still be positive, clearly, for the first half quarter.

Your next question is a follow-up question from Jeffrey Zekauskas with JPMorgan. Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division: If I can ask like 2 more questions of clarification. Is -- does the expansion into the emerging markets, is that a benefit or a headwind to your operating margin, or it's doesn't make a difference at all?

Silke, this is Kevin. Clearly, margin profiles by either customers or regions or whatever, they're not all exactly the same. But we do not see a reduction in our margin profile as it relates to our drive to have incremental business in the emerging markets. Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division: Okay. And secondly, I was wondering what the order of magnitude of sales are now for encapsulation technologies, and there was the comment made that you expanded the encapsulation product lines from Fabric Care into other end-markets and into other regions, and so I was wondering whether -- where you expanded and which regions, and whether it's now part of shampoos or soaps, or lotions, maybe? Can you just expand a little bit?

Yes, Silke, it's Nicolas. So we are very pleased with the progress we're making as some customers are going into market test with our new encapsulation systems, into new categories. Obviously, Asia is one area where we're rolling out even further the technology and which is good as seed [ph] where we're able to enter new countries, and even to enter new customers with the technology. So we are pleased with this additional growth potential that we're developing at the moment. Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division: Can you explain which product categories you're expanding into outside of Fabric Care?

Right now it's confidential. I would like our customers to have the privilege to do their market test in full confidence and then to be able to roll it out. So we'll leave that privilege to our customers that we partner with.

Your next question comes from Mark Astrachan with Stifel, Nicolaus. Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division: A follow-up on the guidance for '13, relative to long-term expectation. Does that include any benefit from what you talked about on the Ingredients-related restructuring that you said you'll comment on in the second quarter? And then, just a broader question about operating margins. So you saw a big increase in the Fragrance business for the year. Flavors didn't quite see the same increase that it's seen in recent years. I guess maybe a bit of directional color on how you see, A, the gap narrowing between the 2; and just sort of directional growth in profit in each of the business units going forward?

Yes, Mark, we'll be continuing to provide -- this is Kevin. We'll continue to provide you some insights as we are ready to disclose publicly what efforts are being executed in the Fragrance Ingredients. As we've said in the past, it's a fairly complex process, and the things that are being thought about have a lot of tentacles into our internal supply of products and across our facilities. So it is complex. Likely, when we decide to do something, it's going to be impacting largely 2014 as opposed to 2013. So the answer, just a quick answer to your question is, you would not have to assume benefits as it relates to that, for us to be getting to guidelines that have been established in terms of our objectives for the year. In terms of Fragrance and Flavors, we continue to believe that there's opportunities to improve the gross margin profile due to all the things we talked about over the course of this morning, innovation, continuing to drive the mix on the portfolio, to areas where we are advantaged, improving the margin profile for those areas which are less advantaged, all of those things, we think, have an opportunity for us to be able to drive incremental margin profile in both businesses. So that's a critical part of our strategy. As you know, it's one of the pillars of our strategy, and we'll continue to execute against it.

At this time there are no further questions. Do you have any closing remarks?

We'd like to thank all on the call today for their participation, particularly the questions that came at the end, and we look forward to talking with you in 3 months. Thank you, kindly.

Thank you for joining today's International Flavors & Fragrances conference call. You may now disconnect.