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International Flavors & Fragrances Inc. (IFF)

Q2 2007 Earnings Call

August 07, 2007, 10:00 AM ET

Executives

Yvette Rudich - Director of Corporate Communications

Robert M. Amen - Chairman and CEO

Douglas J. Wetmore - Sr. VP and CFO

Analysts

Jeffrey Zekauskas - JP Morgan

John Roberts - Buckingham Research

Michael Sison - KeyBanc

Jeff Conwell - Tribeca Global Management

Vito Menza - Sandler Capital Management

Tim Taylor - Portland House Group

Presentation

Operator

Good day, everyone, and welcome to the International Flavors & Fragrances Second Quarter 2007 Earnings Conference Call. Today's call is being recorded. All participants' lines will be muted until the question-and-answer portion of this call, and instructions will be given at that time.

The speakers for today's call will be Mr. Robert Amen, Chairman and Chief Executive Officer; Mr. Douglas Wetmore, Senior Vice President and Chief Financial Officer, and Yvette Rudich, Director of Corporate Communications.

Please go ahead.

Yvette Rudich - Director of Corporate Communications

Hello and thank you for joining us today. During the course of this webcast, we may make certain forward-looking comments. The complete text regarding our forward-looking statements is included in our press release and in our filings with the Securities and Exchange Commission.

In addition, during this webcast we may refer to certain non-GAAP financial measures in order to supplement our GAAP financial results. Examples of such measures include our discussion of local currency sales performance, and applicable geographic region and earnings per share, excluding restructuring charges and other nonrecurring item. We will leave this slide up for a moment to ensure that everyone has an opportunity to review it prior to continuing the webcast.

Now here is what we plan to cover on today's call. Rob will begin with opening remarks and some highlights on the quarter and our business. Doug will then review our first quarter results. Following closing comments from Rob, we will then take your questions.

With that, I will now turn the call over to Rob. Rob?

Robert M. Amen - Chairman and Chief Executive Officer

Thanks, Yvette. Good morning, everyone. I'm very pleased to share the second quarter results with you today. As you can see, we recorded a sales increase of 8%, and that's plus 5% in local currency term. And that's a sales performance that's consistent with our long-term expectations.

Operating profits were up 13% and reported earnings per share were up 30%. Adjusted earnings per share, adjusting to exclude nonrecurring items, was plus 13%. Doug will provide in-depth review of this shortly.

I feel good about it because they are good results earned the right way. We achieved it because we're focusing on our customers and we're growing our business with the strategic accounts. And we've improved operationally. Overhead manufacturing costs were improved.

Now turning to the business highlights, the Flavor business delivered another very strong quarter. We estimate the general market is growing about 4 to 5%. So the 11% growth recorded here is very, very strong. The growth excluding the foreign exchange would be about 8%.

Growth was solid in all regions, North America and Europe, and also importantly in the emerging economies in Latin America and Asia. Improvements have come both in growing our existing products as well as new products win in beverage and savory.

The Fragrance business, well, they had mixed results. Fine and beauty grew nicely 11%, up... reported and 7% up to local currency terms. Strong performances for fine and beauty in North America, Asia, Latin America, and importantly in Europe.

Functional results were mixed, overall in line with the market. However, there were some good and some disappointing regional results. The Fragrance ingredients was about flat with last year's second quarter, about as we expected.

And Doug will now go over the details for both of these businesses. Doug?

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

Thanks, Rob. Good morning, everyone. Let's begin with that overview of sales. On this slide you can see the breakdown of sales and growth by our two business units for the second quarter. As Rob mentioned Flavors achieved 11% growth in dollars on an 8% local currency increase. Fragrance sales grew at 6% on a 3% local currency increase.

The difference between the local currency growth and reported dollar performance was attributable to the strength of the euro and the pound sterling. The euro was about 7% stronger than the prior year quarter, while the pound was about 9% stronger. And the basket of other currencies accounted for the remainder of the exchange effect. In a moment I'll discuss the sales performance by business unit in a little more detail.

Our growth was solid in all geographies, North America continued its strong recent performance, growing 7% in the quarter. This performance was led by excellent results in both fine and functional fragrances with respective increases of 7% and 11%. Flavor sales growth was also very strong.

Europe reported very strong growth increasing 11% over Q2 2006. Quarterly sales benefited from the strength of the European currencies versus the dollar, but the reported growth reflected a solid local currency increase of 4%, in line with the growth achieved in the first quarter this year.

Latin America sales increased 1%. This growth was particularly strong in Flavors which grew 18% in the current quarter, building on the 14% growth in the first quarter this year. Latin America fine fragrances also continued its strong growth increasing 7% in the quarter. Both functional fragrance and ingredients were impacted by erosion of existing business in the region. Ingredients were also impacted by some pricing pressure.

Greater Asia achieved very strong growth, driven mainly by new wins and improved volumes. Greater Asia sales increased 8% in local currency and 10% in dollars, and Flavors lead that growth in Asia with a 10% local currency increase.

Local currency sales to our top 30 customers, which currently account for about 57% of our sales, grew at a faster rate than the 5% local currency increase achieved overall. This performance with our major customers continues the pace the growth achieved for the full year 2006.

Now turning to Flavors, Flavors has continued it's very strong start to the year. The new wins and volume growth of existing business have driven improved gross and operating margin performance. The very strong operating profit leverage results from the solid sales performance enhanced by very good cost control. And the end result was a 31% increase in operating profit for the quarter. Year-to-date, Flavors operating profit is up 26% on an 11% increase in sales.

This chart depicts the percentage growth in Flavor sales in both local currency and reported dollars compared to the prior-year quarter. The yellow line depicts the local currency growth. And as is evident, the local currency Flavor sales performance has been consistently improving over the past several quarters, driven by increased wins, improving volumes and improving macro trends pretty much around the world. The improved performance in Flavors in recent quarters reflects the benefits of our improved focus on the Flavors market ands our Flavors customers.

Now turning to the Fragrance business unit. As Rob mentioned, the Fragrance business unit has the more difficult comparisons with the prior year, but Fragrances performed in line with our expectations for the quarter. And as was the case with Flavors, new wins and continued success of existing creations drove the sales growth.

We continue to be very pleased with the sales performance of fine fragrance and beauty care as well as functional fragrances. Shifting of order patterns for Fragrance ingredients impacted sales for the second quarter.

You will recall from our first quarter results that ingredients had a 13% local currency sales increase. We indicated at that time that we believed a portion of those ingredients sales has been pull forward by our customers into Q1. And this proved to be the case with a corresponding impact of second quarter sales and results.

Year-to-date ingredient sales have increased just under 7% in local currency. Fragrance ingredients also had some lower selling prices, impacting our gross margin and operating margin. And these factors along with the cost of scaling up production in the China ingredient facility tempered the profit impact of the sales growth. The impact of the China plant will diminish in the third quarter and then no longer be a significant factor on results.

Looking at Fragrance sales, this chart depicts the percentage growth in Fragrance sales in both local currency and dollars, again, the yellow is the local currency. As is evident, the local currency sales performance has been quite strong for the past several quarters, driven by new wins and the sustained success of existing creations. And that strength has been most evident in fine fragrance and beauty care.

We stated in Pascals that we knew the pace of delivered most notably in the third and fourth quarter of 2006 was not likely to be sustained at such high levels. However, we remain confident that we're growing faster than the market overall and in so doing increasing our share of the Fragrance market. We expect Fragrance sales overall to stay at about the same growth level in the third quarter this year as in Q2.

Turning to our overall consolidated results, as we mentioned before, sales increased 8% in dollars based on a 5% local currency increase. And Flavors lead that growth with a very strong 8% local currency increase. Gross margin increased at the same pace as sales, 8%, and remained the same percentage of sales as the prior-year quarter 42.9%.

The major elements contributing to the GP performance were the strong Flavors sales growth, which drove improved expense absorption and favorable Flavor sales mix. However, offsetting these favorable developments were downward pressure in Fragrance, most notably ingredients and the impact of the scale up of the Xinjiang [ph] production facility.

Our improvement in profitability was augmented by continued good expense control in both research and development, and selling and administrative expenses. Exchange added about 3% to each category compared to the prior-year quarter. As a percentage of sales, R&D declined 10 basis points versus the prior year quarter. And selling and admin declined 60 basis points versus the prior year quarter.

Operating profit as a percentage of sales increased to 17.9% from 17.1% in the prior-year quarter. And with good expense control, operating profit increased 13% on that 8% sales increase. A very good leverage for the Company in the quarter.

Now, let me review the components of the growth in earnings per share as reported. Note that we have not isolated the impact exchange has in the analysis. So the impact of the weaker dollar is embedded in each of the elements discussed, accept the number of shares outstanding. The amounts are approximate as they are subject to rounding.

But starting with EPS for the second quarter 2006, of $0.67, first there were no unusual items in the 2006 quarter that should be excluded for purposes of a meaningful comparison. Sales growth added $0.05 per share and productivity added $0.03 per share. The strong sales growth facilitated the productivity improvements, an element of which is capacity utilization and absorption.

While the combination of changes in other income and expense, interest expense and the 2006 restructuring charge were net to less than $0.01 per share and not a big factor between the periods, would note the increase in interest expense. And the primary driver for interest expense increase was the increase in the overall average interest rate on debt. This year it averaged 4.2% compared to 3.3% in the second quarter last year.

Taxes impacted the current result in a favorable manner. Overall, the effective tax rate for the quarter was 19%, compared to 28% in the prior-year quarter, adding about $0.09 per share. During the second quarter 2007, the effective tax rate was favorably impacted by the reversal of about $10 million of previously established tax accruals no longer required based on rulings obtains from applicable tax jurisdictions.

We have also reduced the number of shares outstanding by 2%, compared to the 2006 quarter adding about $0.02 per share. In taking into account all of these component, earnings per share for the second quarter 2007 were $0.87 per share.

Now for the sake of comparison, this slide excludes the one-time benefit of the tax accrual matter. And excluding the one-time benefit from results, our overall tax rate would have approximated to 30%, compared to the 28% reported in the prior-year quarter. And taxes would have had a negative impact of about $0.02 per share on reported EPS for the quarter.

The variation on the tax rate results from earnings mix from the countries in which we operate, and repatriation of funds to the US parent also impacts the rate, given that the United States is one of the highest tax jurisdictions in which we operate. It's useful to put in context our quarterly earnings per share performance this year compared to the last several years.

When excluding the restructuring charges and other non-recurring items, such that's current quarter's tax benefit and the tax benefit of the Homeland repatriation as well as gains on sales of assets, and taking into account stock splits, earnings per share of this quarter represents the highest quarterly EPS achieved in the Company's history. It also bares emphasizing that the second quarter of our operating year is consistently the highest earnings per share quarter of the year.

Looking briefly at cash flows, the detailed cash flows available in our press release and in the 10-Q, which is filed today, the 2007 cash flows from operations declined compared to the prior-year quarter, however, this performance was not unexpected. The main drivers for the decline as I mentioned in the first quarter call were payment of about $55 million in incentive and deferred compensation in the first quarter this year, compared to about $9 million in similar payments in the first quarter of 2006. The deferred compensation payments were related to retirements.

For the full year 2007, I would continue to expect cash flows from operations to have about the same relationship to net income as it did in 2006 for the full year. We remain pretty tight on capital spending with just under $13 million for the quarter, and $21 million year-to-date, comparable to the prior-year period.

Capital spending is expected to scale up somewhat in the second half of the year. There has been no major change in gross debt outstanding. Our gross debt at June 30th, 2007 was just over 800 million, about the same as year-end 2006. And net debt backing out cash balances at the balance sheet date was $680 million at June 30th, 2007, compared to $692 million at year-end '06.

Dividends reflect an increase from the prior-year period. The increased dividend payout reflects the 14% increase announced in October of last year. And we have continued to buy back our shares, albeit at a somewhat slower pace than in 2006. Year-to-date, we have spent just over $80 million in share repurchases, including $49 million in the just-completed quarter.

In doing so, we have reacquired about 1.6 million shares, and as I mentioned at quarter end shares outstanding are down about 2% from the prior year, standing at 89.3 million shares. We're committed to continue to return cash to our shareholders as evidenced by our announcement on July 25th.

Now, I'll turn it back over to Rob for further details on that announcement and some closing comments. Rob?

Robert M. Amen - Chairman and Chief Executive Officer

Thanks, Doug. Last October we shared with you our 2007 to 2009 goals. And those were set gross sales at something greater than 14% excluding foreign exchange impact, to improve our operating margins to greater than 18%, and to grow earnings per share by 10% or more each year over that period of time.

Well, I believe the second quarter was an important step on that journey. We will achieve our goal by building a stronger, more customer-driven company. To do that, we'll continue to invest in research, creative centers, and manufacturing assets that will strengthen our competitive advantages. This spending will approximate depreciation overtime.

We'll invest in our people's development and continue to improve our internal processes to enhance productivity and cost. The free cash flow, not needed to build the Company, will be returned to shareholders, first and form of dividends. Our target is a payout of 30% to 35% over time. And the balance of the free cash flow will be turned to share owners via share repurchases.

On July 25th, we announced two important initiatives. First, a $750 million share repurchase program. Our plan is to retire about 15% of the shares outstanding, roughly 13 million shares. We expect to execute an accelerated stock repurchase plan this year for the majority of the shares, and then to pursue open-market purchases in the future.

Secondly, we announced a 10% increase in the dividend. This will be payable October 4th to shareowner's of record on September 20th. Well there's only been nine months since the last dividend increase. It's reasonable to expect our assessing future dividend actions will occur on an annual basis.

In summary, I'm pleased with the progress IFF is making. We had notable improvements in flavors and in productivity and that help drive operating margins 80 basis points higher. We are building a stronger, more capable company. We're growing sales faster than we believe the market is growing because of the excellent work our folks are doing in research, our creative team, the application scientists, sales and in our facilities and offices to meet the needs our customers have for unique products.

I believe our dividend increase and share repurchase program will translate the progress IFF is making into building shareowner value.

Now, the operator will explain how we'll handle the question-and-answer

Question and Answer

Operator

[Operator Instructions]

Our first question will come from Jeff Zekauskas of JP Morgan.

Jeffrey Zekauskas - JP Morgan

Hi, good morning.

Robert M. Amen - Chairman and Chief Executive Officer

Good morning, Jeff.

Jeffrey Zekauskas - JP Morgan

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

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

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

Jeffrey Zekauskas - JP Morgan

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

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

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

Jeffrey Zekauskas - JP Morgan

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

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

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

Jeffrey Zekauskas - JP Morgan

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

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

Well, you know, it's in other income, Jeff, and there are a number of elements that are in other income. Exchange gains and losses, interest income, gains on the sale and disposition of assets, and the accrual for demolition of some closed facilities, and it is in other income because it is other.

And it is highlighted on the funds flow statement, so I look at things overall in the context of materiality to the consolidated financial statements and I made a judgment that that was not necessary to be broken out separately.

Jeffrey Zekauskas - JP Morgan

Okay.

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

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

Jeffrey Zekauskas - JP Morgan

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

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

I think, as I mentioned in my comments, they diminish in the third quarter... because the plant... this is a chemical facility, so it's a more complex start-up than just a normal compounding plant.

They began in the latter stages of last year, the impact was most pronounced in the first quarter, diminished a little bit in the second quarter, and will basically wind down to, I won't say next to nothing in the third quarter, but we'll be below $1 million in the third quarter.

And it's... it's somewhere between $1 million and $2 million in the second quarter, and a little bit over $2 million in the first quarter. So full-year basis it will probably impact us under absorption somewhere between $3 million and $4 million.

Jeffrey Zekauskas - JP Morgan

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

Robert M. Amen - Chairman and Chief Executive Officer

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

Jeffrey Zekauskas - JP Morgan

Okay. Thank you very much.

Robert M. Amen - Chairman and Chief Executive Officer

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

Jeffrey Zekauskas - JP Morgan

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

Robert M. Amen - Chairman and Chief Executive Officer

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

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

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

Jeffrey Zekauskas - JP Morgan

Yes. Okay. Thank you very much.

Operator

[Operator Instructions]

Your next question will come from John Roberts of Buckingham Research.

John Roberts - Buckingham Research

Good morning, guys.

Robert M. Amen - Chairman and Chief Executive Officer

Good morning, John.

John Roberts - Buckingham Research

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

Robert M. Amen - Chairman and Chief Executive Officer

Encapsulation continues to progress, although slowly. I thought we were going to be accelerating an important fabric conditioner launch, that now is going to be ramping... I saw the forecast now it will start... third quarter, fourth quarter. But it continues to go well.

The products that were introduced are succeeding in the marketplace. We continue to work with key accounts on bringing that technology forward, and so we continue to invest and pursue that. It's going pretty well.

John Roberts - Buckingham Research

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

Robert M. Amen - Chairman and Chief Executive Officer

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

John Roberts - Buckingham Research

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

Robert M. Amen - Chairman and Chief Executive Officer

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

John Roberts - Buckingham Research

This quarter, or this year?

Robert M. Amen - Chairman and Chief Executive Officer

Pardon me?

John Roberts - Buckingham Research

This quarter or this year?

Robert M. Amen - Chairman and Chief Executive Officer

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

John Roberts - Buckingham Research

Okay. Thank you.

Robert M. Amen - Chairman and Chief Executive Officer

Thanks.

Operator

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

Michael Sison - KeyBanc

Hi, guys, nice quarter.

Robert M. Amen - Chairman and Chief Executive Officer

Thanks, Mike. How are you today?

Michael Sison - KeyBanc

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

Robert M. Amen - Chairman and Chief Executive Officer

Well, you know, we don't forecast going ahead. We feel very good about how our businesses are performing, and the Flavors business... it's a great demonstration, the increased focus on the business with the new leadership, great alignment, the Flavors teams around the world are doing a superb job, and, importantly, it reflects the strength in our customers' businesses.

So there's a lot of uncertainty economically around the world with the high oil prices and other things, I don't want to get in to projecting what consumers are going to do longer term, but I feel pretty good about the second half.

Michael Sison - KeyBanc

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

Robert M. Amen - Chairman and Chief Executive Officer

Our financial objective is to grow faster than the market.

Michael Sison - KeyBanc

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

Robert M. Amen - Chairman and Chief Executive Officer

Well, that market isn't growing as fast.

Michael Sison - KeyBanc

Okay.

Robert M. Amen - Chairman and Chief Executive Officer

You know, I think historically we would have said that the Fragrance market is probably growing more like 2% to 3%.

We did just fine in Fine and Beauty, the Functional Fragrance, we had a couple of regions that had very, very good growth. A couple of others where due to erosion we had some disappointment.

But I think we're about... well, as Doug indicated, we don't expect a big jump in our growth in the third quarter, and the Fragrance business had very, very strong '06 growth, and so the comparisons are tough. But I do expect the Fragrance business to pick up its rate of sales, you know, certainly as we exit this year and go in to next year.

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

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

Michael Sison - KeyBanc

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

Robert M. Amen - Chairman and Chief Executive Officer

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

Michael Sison - KeyBanc

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

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

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

Michael Sison - KeyBanc

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

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

You know, that's a fair assessment, first of all we have more challenging comps in the second half of the year in the top line because we grew 7% in local currency in both the third and the fourth quarter.

And I think, specifically, just go back and look in the third quarter last year we had the benefit of nearly a $4 million insurance settlement associated with a contamination issue a couple of years ago, which flowed through selling and admin expense.

So there's some of that, I don't think you'll see quite the profit leverage, but I still think you are going to see positive leverage.

Michael Sison - KeyBanc

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

Robert M. Amen - Chairman and Chief Executive Officer

No. No. No. I mean, no. Mike, Mike, please. There's no indication of that.

Operating margins, which are so important here... the continued expansion of the operating margins which is what it all comes down to. There's a difference in sales growth, there's a difference in mix. But, we're able to get those productivity and cost improvements, and they are just starting to come in.

Michael Sison - KeyBanc

Right.

Robert M. Amen - Chairman and Chief Executive Officer

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

Michael Sison - KeyBanc

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

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

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

Michael Sison - KeyBanc

Right.

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

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

Michael Sison - KeyBanc

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

Robert M. Amen - Chairman and Chief Executive Officer

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

Michael Sison - KeyBanc

Okay.

Robert M. Amen - Chairman and Chief Executive Officer

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

Michael Sison - KeyBanc

Okay.

Robert M. Amen - Chairman and Chief Executive Officer

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

Michael Sison - KeyBanc

Okay. Great. Thank you.

Operator

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

Jeff Conwell - Tribeca Global Management

Hi, good morning.

Robert M. Amen - Chairman and Chief Executive Officer

Good morning.

Jeff Conwell - Tribeca Global Management

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

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

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

Jeff Conwell - Tribeca Global Management

Okay. And that's in Fragrances, correct?

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

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

Jeff Conwell - Tribeca Global Management

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

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

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

Jeff Conwell - Tribeca Global Management

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

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

I think that's really what Rob was responding to with one of the previous questions. There is a little bit of uncertainty in the debt markets as we know right now, and rates have gone up a little bit.

I think the rate that we'll pay, obviously, is going to be driven by the market rates, and the term of the debt, whether we do it long-term or mid-term, so I don't have a precise answer for you as yet.

And also, we specified a range of $300 million to $400 million, one, to again, follow up on Rob's comment, we're committed to remaining investment grade and we want to have some flexibility in terms of the amount that is expended under the accelerated share repurchase program with the balance then being executed in open market purchases once the ASR is completed.

Jeff Conwell - Tribeca Global Management

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

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

Do you mean shares?

Jeff Conwell - Tribeca Global Management

I'm sorry, 7 to 10 million shares.

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

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

Jeff Conwell - Tribeca Global Management

Okay. Thank you.

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

Thank you.

Operator

[Operator Instructions]

Our next question will come from Vito Menza of Sandler Capital Management.

Vito Menza - Sandler Capital Management

Hi, guys nice quarter. A couple of my questions were asked, and I hate to ask this again, but I think it is something that does need to be flushed and it's that other income line, Doug, just so we can be clear, there was a bump in the interest expense.

The other income largely offset it. Part of that was due to the gain on sale, but what were the other offsets in there? Could you just highlight that a little more?

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

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

Vito Menza - Sandler Capital Management

Okay.

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

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

Vito Menza - Sandler Capital Management

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

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

Yes, sir.

Vito Menza - Sandler Capital Management

Okay. Good enough. Thank you, sir.

Robert M. Amen - Chairman and Chief Executive Officer

Thanks, Vito.

Operator

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

Tim Taylor - Portland House Group

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

Robert M. Amen - Chairman and Chief Executive Officer

You know, the opportunities are not because somebody is integrating or not. I mean it's a competitive marketplace, and we can test for all of the business that we can.

So... I mean, I feel very good about the '08 and '09 marketplace. When you take a look at the macro economic trends, you have continued growth in population, continued increases in disposable income, both in the mature markets of the industrial world, as well as the emerging.

So I see a lot of potential. That's why I'm quite comfortable with our longer-term financial goals of growing sales, excluding foreign exchange, at something greater than 4% a year over the next couple of years.

Tim Taylor - Portland House Group

Okay. Thanks.

Operator

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

Robert M. Amen - Chairman and Chief Executive Officer

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

Douglas J. Wetmore - Senior Vice President and Chief Financial Officer

No, thanks very much, everybody.

Robert M. Amen - Chairman and Chief Executive Officer

Thanks very much. Good-bye.

Operator

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

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