Sensient Technologies Corporation (SXT) Q4 2007 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Sensient Technologies Corporation 2007's fourth quarter and yearend conference call. Today's call is being recorded. At this time for opening remarks, I will now like to turn the call over to Mr. Steve Rolfs. Please go ahead, sir.

Good morning. I am Steve Rolfs, Vice President, Controller and Chief Accounting Office of Sensient Technologies Corporation. I would like to welcome all of you to Sensient's 2007 yearend Earnings Call. I am joined this morning by Mr. Kenneth P. Manning, Sensient's Chairman and Chief Executive Officer; Dick F. Hobbs, Sensient's Vice President and Chief Financial Officer; and Rob Edmonds, Sensient's President and Chief Operating Officer. Earlier today, we released our 2007 financial results. A copy of the release is now available on our website at sensient-tech.com. Before we begin, I would like to remind everyone that comments made this morning, including responses to your questions, may include forward-looking statements as defined in the Securities Litigation Reform Act of 1995. Our statements may be affected by certain factors, including risks and uncertainties, which are discussed in detail in the company's filings with the Securities and Exchange Commission. We urge you to read Sensient's filings for a description of these factors. Please bear these factors in mind when you analyze our comments today. Now we'll hear from Ken Manning.

Thank you, Steve. Good morning. Today, we reported an all-time record in revenue and operating income for the year. Our earnings per share increased by 15% to $1.65 and our revenue equaled $1.2 billion in 2007. We had a particularly strong fourth quarter. Revenue increased 10% and EPS was up 18% from prior year. The company's performance shows that our strategy for growth is succeeding and we expect this performance to continue. During the past year, both volumes and margins increased in key flavor and color product lines. As part of our strategy, we focused on new products and technologies, such as the next generation of cosmetic systems. The number of new products developed this past year was up 21% and our emphasis on new products will continue in 2008. Our geographic expansion over the last several years has also proved effective. Global diversification was vital to our success in the past year. In the future, we will continue to focus on fast-growing markets, such as South America, Central and Eastern Europe and China. These markets feature a growing middle-class consumer base and offer excellent potential for growth. Sensient continued to strengthen its financial position in 2007. Sensient's increased cash flow has allowed us to pay down debt and strengthen our balance sheet. Our cash flow rose 6% this year to $105 million and was up 34% for the quarter. The cash flow has allowed us to increase our dividend and pay down nearly $150 million of debt over the last four years. The company's success in 2007 was broad based. Each of our groups reported higher revenues and profits, contributing to an outstanding year. We now have eight consecutive quarters of strong earnings growth. And as I mentioned several times before, I see no obstacles to continued growth. Therefore, I am increasing our earnings guidance for 2008. We now expect 2008 earnings to be between $1.74 and $1.78 per share. I will now turn the conference call over to Dick Hobbs, our CFO to review our 2007 performance in more detail.

Good morning. I will now provide details of the results for the year and the quarter ended December 31, 2007. Annual revenue for 2007 increased 7.8% to a record $1.2 billion. Our strong revenue growth this past year reflects improved pricing in several markets and higher volumes in each of our operating groups. We reported record fourth quarter revenue of $300.9 million, an increase of 10.3% from $272.8 million in the fourth quarter of 2006. Sales in both the Color Group and the Asia Pacific Group grew at double-digit rates in the quarter. Sales in the Flavors and Fragrances Group were also strong in the quarter. Foreign currency translation had a favorable impact on 2007 revenue. The impact of currencies on revenue for the quarter and full year was 5% and 4% respectively. Operating income for the full year increased 14% to $147.4 million, a record level for the company. For the fourth quarter of 2007, operating income grew 17.4% to $35 million in comparison to 2006 fourth quarter operating income of $29.8 million. Each of Sensient's groups saw higher operating income this year as a result of increased sales volumes and improved profitability. Margins were up this year across all our groups. Diluted earnings per share reached $1.65 for the 12 months ended December 31, 2007, an increase of 14.6% from $1.44 per share in 2006. In the fourth quarter of 2007, diluted earnings per share rose 18.2% to $0.39 compared to $0.33 in last year's quarter. Sensient's effective tax rate for the year was 30.1%, compared to 29% in 2006. The effective tax rate for the fourth quarter was 29.9%, in comparison to last year's rate in the quarter of 26.3%. Sensient's tax rate in 2007 and 2006 included benefits from the favorable resolution of prior year's matters and other adjustments. These benefits were more significant in 2006 than they were in 2007. The company reported cash flow from operating activities of $105.2 million for the year in comparison to $99.2 million in the prior year. Cash flow from operating activities for the fourth quarter was up 33.7% to $24.5 million, compared to $18.4 million in the fourth quarter of 2006. Our annual cash flow allowed the company to fund capital expenditures of $42 million, increased its dividend and reduced total debt by over $25 million. The debt reduction in 2007 was $44 million before the impact of foreign currencies. Strong cash flow and debt reduction will continue to be financial priorities in 2008. I would now like to take a brief look at the results of our operating groups. Within the Flavors and Fragrances Group, annual revenue grew 6.9% to record level of $783.7 million, versus $733.4 million last year. Group revenue for the quarter increased 7.7% to $199.4 million from $185 million in the fourth quarter of 2006. Flavors and Fragrances Group operating income rose to a record $117.3 million in 2007 compared to $104.5 million in 2006, which is an increase of 12.3%. Operating income in the fourth quarter was $30.1 million compared to $27 million in the prior year's fourth quarter, an increase of 11.3%. Group operating margins improved 80 basis points to 15% for the year. Sensient's Color Group reported revenue of $377.9 million in 2007, compared to $350.2 million in 2006, an increase of 7.9%. Fourth quarter revenue jumped 14.7% to $95.6 million from $83.4 million in the prior year's fourth quarter. Annual operating income for the Color Group was up 12.7% to $67 million from 2006 operating income of $59.4 million. Color Group operating income in the fourth quarter increased 20.3% to $16.6 million from $13.8 million. Operating margins for the Color Group in 2007 improved 70 basis points to 17.7%. Asia-Pacific Group revenue grew 23.4% in 2007 to a record $51 million. For the fourth quarter Asia-Pacific revenue was $12.8 million, an increase of 19.5%. Sensient's strategies over the past several years have created a strong foundation for additional growth in the coming year. As Mr. Manning stated, Sensient is increasing its 2008 guidance for diluted earnings per share to a range of $1.74 to $1.78. Our previous guidance had been between $1.73 and $1.77. I will now turn the call over to Rob Edmonds, President and Chief Operating Officer for some concluding remarks on this year's results.

Thank you, Dick. I'd like to wrap up the discussion with some brief comments on our performance. The company has had a very good year, as well as an exceptionally strong fourth quarter. All of Sensient's groups contributed to these favorable results. The Flavors and Fragrances Group reported record revenue and operating income in the fourth quarter and for the year, as you heard from Dick's presentation. Price increases, as well as greater volume contributed to higher revenue and operating margins which increased 80 basis points from the last year. Performance in the Flavors and Fragrances Group benefited from higher sales of savory and dehydrated flavors and we saw continued improvements in our European operations. The Color Group experienced strong demand from food and beverage colors and for cosmetics colors and those sales helped drive operating income higher. We continue to create value for our customers with new products, and as Dick mentioned, operating profit rose 20% in the fourth quarter and operating margins increased 70 basis points for the year. Sales in the Asia-Pacific Group also grew to a record level in 2007, on greater flavor demand in Australia and Thailand, and we have excellent potential for future growth in the Asia-Pacific region. In summary, business is well positioned for the coming year and as Mr. Manning said, we anticipate that the company's superior performance will continue throughout 2008.

Thank you very much. We will now open the call for questions.

(Operator Instructions). Your first question comes from the line of Mike Sison with KeyBanc.

Hey guys. Congratulations. Pretty good (inaudible) for the year.

Thanks.

Thank you, Mike.

Good morning.

A couple of questions, in the Color Group, you had a very nice quarter there. It was a lot stronger than you had at the end of the year. Is there a lot of momentum here that is going to continue into 2008 or were there some orders that sort of pushed into the fourth quarter from the future?

Mike, we had a very strong quarter to finish the year. We're seeing extraordinary growth in our natural colors, in particular. US performed well, Europe performed well, and we're seeing a year-over-year growth in natural colors that are above 20%. There is no reason that we shouldn't continue going forward. It's driven by the health and wellness theme, and we continue to expect strong performance in our Color Group.

And when you take a look at 2008 for the Color Group, do you have a backlog of what that growth rate is, will it be in the mid to high single-digit range for next year?

Yeah, certainly. Absolutely, we track our pipeline on an ongoing basis and we have a very healthy pipeline, in particular, the beverage sector, which also marries up with that natural color theme. So we're very pretty excited about the future.

In terms of the outlook for 2008, what type of organic sales growth for the total company underpins the forecast?

Mike, what we are looking at in 2008, is mid to high-single digit growth in the top line. And with that, and with the EBIT increase, certainly north of 10%, in that 10% to 12% range, and we feel very good about our forecast for the year.

Does the sales outlook include a positive for foreign currency?

If we get some foreign currency that could put us up in the higher single digits, certainly. And certainly, we will probably not lap the foreign currency for one or two quarters. We'll probably get some boost in the early part of the year.

Fine. If I think about that gross and op income, '08 versus '07, being north of 10%, your EPS growth is a little bit less than that. Are there some below the items that meet the EPS? Is the interest expense or tax rate going up?

Yes, certainly. When we look at the tax rate and put our forecast together, we use the mathematical rate, which is 32% to 33%.

Okay

As you know, with the counting as it is, you can get debits or credits. We've been fortunate over the last couple of years and received credits, more so in '06 than in '07.

Okay.

But certainly, that could be a factor that could come into play one way or the other. And right now we're just forecasting in that range.

We would not want to disappoint with anything we give you, Mike.

Right. So should we be using 32 to 33 on the tax rate for '08?

That's correct.

That's right.

Then, last question, I'll get back in queue. Can you give us an outlook that's longer term? It seems like you hit it already for 2007, in terms of the operating margin. Any feel of giving us an update of what the potential is? It seems like you've almost hit the 12.5% for '07.

Well, first of all, as I said, we would never want to disappoint.

Alright.

So as the year goes on, I'd rather give you pleasant surprises than unpleasant ones. Go ahead, Dick.

Mike, certainly, we did well on the operating margins. If you look at the total company, it's 12.4%.

Right.

As we look at next year and we look at our forecast, we certainly have some room to continue to have some improvement. We've gotten the Flavor Group now up to 15%. And certainly we'd want to be focused on all of our different operations in the Flavor Group, and certainly try to improve on that if we can. And as well in the Color Group, certainly, we've increased that in the last year from 17% up to 17.7%. We are more in the historical ranges for the Color Group. And as Rob indicated, we have a lot of interesting things going on that are higher margin, nice items in the product mix. So, certainly we're always looking to do better, and we're looking up to 18%. We're not forecasting there yet, but we're certainly looking at it and trying to do anything we might be able to do to reach that direction.

Right. And last question, in terms of the Flavors market demand, I think there is some concern that the US economy is slowing, so on and so forth. Maybe, could you give us a feel for what typically happens to your customer order patterns? If the US does slow down, do you have international business? Just give me a perspective of both, the Color and Flavor side, as we move forward here?

Some people regard the food stocks and the like as defensive stocks. In fact, there was an article in Barron's this week which I thought was very good. Typically during a recession, people don't buy big articles like cars and other big articles. They tend to go a little bit more towards higher end food articles. We see an increase in those things in the last several recessions. We've seen an increase in things like premium ice cream. So we're really not worried about the Flavor business, certainly because of a recession. We think people will give themselves a treat as they have in the past in terms of certain higher-end items. And as the article in Barron's pointed out, people have to eat. So, the regular business tends to be very steady during a recession. It's a good business for that.

Alright. Thank you.

Thanks, Mike.

Your next question comes from the line of Christopher Butler from Sidoti & Company. Christopher Butler - Sidoti & Company: Hi. Good morning, guys.

Good morning, Chris. Christopher Butler - Sidoti & Company: I wanted to touch on one of the points that was just brought up. As far as natural colors, and to some degree, natural flavors, I want to get an idea of the progress into the United States on that front. Is that a move that we're starting to make it domestically, at this point here?

Yes, I don't think we've started to make it recently. We've been doing it over time. We're seeing the fruits of those efforts in 2007. We have a full slate of natural products in the US, which mirrors what we offer in Europe. We have two sites that are organically certified, and we're seeing some demand for organic products as well in both Flavors and Colors. So this is clearly not a flash in the pan theme, and we're seeing a continued demand for our natural products. Christopher Butler - Sidoti & Company: And looking at your 2008 guidance, could you give us an idea of the assumptions on raw materials that you have baked in that?

As we've had changes in our raw material costs, we've been able to have pricing offset that, so we've been able to maintain our margins. We're not expecting anything of any significance in any areas like [wooded], but we do have some areas that we have covered for 2008. And I would say there are probably a couple of areas that might get hit more than other areas, or could are pretty nicely covered and are being covered. So we're not anticipating any kind of dramatic hit.

But we don't have the dependence on raw materials that the typical specialty chemical company would have. We don't have a big dependence on oil-based products such as resin, or anything of this sort. Really, we have a very broad raw material base and typically, as Dick said, we can pass on the increases in higher pricing, when increases do arise. Christopher Butler - Sidoti & Company: And finally, looking at the corporate and other segment which includes Asia-Pacific. The top line growth was pretty good there, yet, we are seeing increased losses. Could you give us an idea of what's going on?

Well, that includes the corporate administration costs of the company, and actually what we do for that line. Sorry if it's sometimes a little confusing, but we have to break things down into segments, so we want to feature flavors and colors, so we put everything else in that one line. And so when you look at that line, it's reasonable. That's what we might expect --

But Asia-Pacific's profits are up, there are no losses. The line that you're looking at, as Dick said, could be a little bit confusing, because it has the worldwide IT expenses and it has legal expenses. It typically has every corporate expense that the company has, so it may have been a little bit misleading, but Asia-Pacific is doing extremely well.

What I'd like to point out, one item certainly that gets into there, is selling and administrative or certainly at least the administrative expense. And if you look at the company as a whole, selling and administrative expense as a percentage of revenue, has improved quite a bit this year. In 2006, SG&A expenses were 18.5% of revenue, and in 2007 SG&A expenses were 18.5% of revenue. We are constantly paying attention to that, so certainly feel that we are constantly on top of in those administrative cost areas. Christopher Butler - Sidoti & Company: Following up though, if we assume that Asia-Pacific did better in the quarter than the fourth quarter of last year, and SG&A was contained and shown on the P&L, what are the additional expenses that we are seeing in the fourth quarter that's making that number going up?

Certainly, if we have expenses that relate to employee costs, we have expenses that relate to benefits. The company spends very well, and there are some expenses related to that. So, these are all normal expected clots that were in our forecast. So there is nothing in here that we didn't anticipate.

We have an ESOP when we make our contribution in the fourth quarter. But, I would add, and I also want to make sure that this is clear, that because of the big flavor business in China and Japan, those are consolidated in the Flavor and Fragrance Group, and not in the Asia-Pacific Group. The Asia-Pacific Group tends to be smaller profit centers such as Thailand, which is doing extremely well, The Philippines, Australia, and a much smaller profit center in Indonesia and Singapore. Christopher Butler - Sidoti & Company: Thank you for your time.

You are welcome.

Your next question comes from Matt Reams with Buckhead Capital

Good morning.

Good morning Matt.

What's your capital expenditure guidance for 2008?

We have been running in the low to mid-40s. Certainly, we are kind of at the tail-end of some of the major global projects, but we do have a couple. We have an expansion that's actually a new factory, which has just been completed in Canada. And in addition we have a new factory in Guangzhou, China. With those two factories, they put the company in pretty good shape. I would say, as they finish up those projects, we could end up in the low 50s.

Okay. What amount is for actual growth and what would you consider maintenance spending?

Typically, we expect that we're going to have about $30 million of costs in replacing items and government requirements, and all the things you really need just to maintain operations. And then in addition to that, we're going to have costs for items which are going to have a big impact on the bottom-line. I think these two factories are a good example. So about $30 million maintenance, and then the amounts above that are for the profit improvement, that's just kind of a back of the envelope way that we look at it.

Okay. Great thanks.

You are welcome.

For depreciation and amortization, do you have any guidance there for 2008?

I'll let Steve handle that.

It should not be far off from what we've been running at. So I would say between $44 million and $45 million.

Okay, great. And how do you feel about your working capital right now?

Well, certainly we feel that there is a little bit of room there. We feel that if we look at working capital as a percentage of the top line, we feel that it's pretty good, and could get better. It's not going to get worse. So if you look at things like day sales outstanding, these inventories on hand, those kinds of areas, we have definitive programs throughout the company to improve in those areas. We have incentives for people throughout the company to improve in those areas. So, if anything, we might be able to shave a little bit off of those numbers.

Can you tell us what your targets are internally for those improvements?

Typically, we attempt to get something in the range of 5%. There might be some cases where you might get a big chunk of inventory orders or something like that. But we're trying to save 1% to 3%, in general, on the working capital on a percentage of revenue basis.

Okay.

So, 23% of the numbers. So if the days sales outstanding is 50, we try to get that down by 1.5 days or something like that, 3% of 50, not 3% of 100.

Okay, great. That's all I've got. Good luck.

Thank you.

The next question comes from Susan McGarry with Granahan.

Hi. I have a couple of questions. I was wondering if you could talk about how international margins are trending, not the Asia Pacific but the other international businesses.

Well, as we've said during 2007, we've certainly seen improvement in that area and we see that certainly as an opportunity. We have state-of-the-art factories in Europe and those factories are being better utilized every year.

But as Dick is saying, they are trending up, and we see a lot of room there for them to continue to trend up.

Okay. And you mentioned that Thailand, I think, is doing extremely well.

Yeah.

What's driving that actually?

Typically, they don't like to have us identify as a product, but we have a very, very large pharmaceutical business in Thailand. It's a beverage and it has worldwide distribution. In fact, you'll see it advertised everywhere from the New York Times Magazine section to you name it. But some of our customers got a little sensitive if we mentioned their name.

Okay. And just one last question, when you talk about in terms of raw materials, some areas where the company is covered, what exactly do you mean by that?

We use some natural gas for our dryers. And although, as you may have seen from a recent article in the Wall Street Journal, the price of natural gas is expected to decline. We are very, very careful about that. So, we will cover as we get opportunities. We don't do that on a spot basis. But that's more of a fuel for drying and there is a lot of drying in the Flavor and Color business. So that would be where most of the coverage goes. But it could be in something like propylene glycol, which is a staple of the business or sulfanilic acid or [shaker salt], something like that.

Okay. Thank you.

Thank you.

Your follow-up question comes from Mike Sison with KeyBanc.

Hi, guys, just a couple of quick follow-ups. In terms of cost-saving initiatives or cost savings benefits heading into 2008, do you have any sort of plans or savings there from what you've done, particularly on the European front?

Yeah, we do. We have a plan. We haven't gone public with it because, as you know, more recently we take these costs into our budgets. So when you look at our forecast for 2008, which includes the cost of executing our cost savings plan. But we do have a plan. It's a detailed plan that we follow each month, and we track it and track where it's going. So we have a definitive plan, we just haven't made a big announcement about it.

Is that in addition to the 10% to 12% EBIT growth you've talked about? Would you be above that with the cost-savings plan or was that embedded inside that 10% to 12%?

I would say that when you look at that kind of a range, certainly the cost program gives us a little bit of an insurance policy. And I'm not going to say that it's going to drive us way past that.

We don't want to give guidance on upsides, Mike. We want to give guidance on things that we're going to hit.

Fair enough. In terms of sort of the market for Flavors, we have others who have commented that the growth rate for the market has been in the mid single digits. Do you have any thoughts on how much the market is growing for the Flavors business?

That's our expectation too, mid single digits to high single digits. There are, like any markets, niches which are going faster and some of that are going slower. For Sensient, our savory sector is growing high single digits.

Okay.

And that's a very strong sector for us.

Okay. Then, on the Color side, you've talked about cosmetics growing pretty well for you, and food and beverage growing very well for you guys. Are you taking some share or is that just market growth?

We could be taking some share, there is no question about that. But it's more. The cosmetic market is growing worldwide and we are entering new markets. We do not only have a very strong cosmetic business in France and the United States, we're doing an increasingly strong business in Brazil and in the Far East. The Far East is probably growing a little bit faster than some of the other markets, but they are all growing. And its market share, you wouldn't see it in the price. Generally, you see kind of some price decline when you're taking shares, and our prices have been very good.

Right. And then in the corporate and other, Asia-Pacific, if you will, in terms of the top line, do you mean with the new facilities coming online for Canada and Guangzhou? Should we expect sales growth similar to what you saw in '07?

Well, the Canadian is embedded in the Flavor and Fragrances Group.

I got you.

And so is China.

So, that's where we're going to see it. But let me just give you an example, if I can here, with Canada, on the kind of thing that you get out of a facility like that. When we announce a facility to our customers, we're approached with some rather specialized product requests, and we're putting equipment into this factory, which will be producing some higher-end flavor products for specific customer targets. These customers have pretty much indicated they will take the volume coming off from there. So, that's kind of neat, because you get the volume as new add-on volume. You get a higher margin, so it improves your product mix. You have more utilization of this factory absorbing a fixed cost. So, that's the kind of a happy thing that happens when you come in and build what will be on of the finest flavor factories in Canada. And that's an area we've done very well in. We've been very successful with our business in Canada.

Great. And I just have a last couple of quick ones here. In terms of your balance sheet being in pretty firm shape, what sort of priority is there for cash at this point? Acquisitions, stock buyback, debt reductions, can you give us a feel for that?

Most people ask this question, Mike, all day.

Yeah.

Here you go.

All right. Looking at 2008, we are very upbeat about the balance sheet. As a matter of fact, let me start with the flow of cash. We will see EBITDA over $200 million which certainly has been a goal that we've had. I think last year we said that was a three-year goal. Well, we are expecting to be seeing that range of over $200 million of EBITDA in 2008. In addition to that, we would say that certainly cash flow would certainly follow it, and be over $100 million, again. Looking at the impact on the balance sheet itself, we would see debt-to-capital at the end of 2008 at 35% or thereabouts. We would expect to see at the end of 2008 a debt-to-EBITDA ratio at 2.2. So, that's what we are looking at, and we expect that with the cash flow. I think that's important to come back and know it again in the fourth quarter. Not only did we have a significant 18.2% increase in the earnings per share, but the cash flow was up 34%. So with the strong cash flow, and the company will continue to generate strong cash flow, that balance sheet will be at those levels that I indicated by the end of 2008.

I guess the priority is debt reduction at this point?

At this point we feel that that debt reduction is healthy for the company. It puts us in a very good position for the future, and we're just focused on growing the businesses. We're focused on new products. Our facilities are up to speed, they're state-of-the-art, and there are none better in our industries. So, we're just in a very good position to optimize the business.

Okay. Great, thank you.

Thanks.

Your final question comes from [Tim O'Toole with Delta Management].

Hi guys. A couple of little fill in the blank things, that usually someone else gets to. On the asset side of the balance sheet, could you go through and give me a year end actual receivables breakout inventory, and then also payables, if you would?

Sure, receivables at 12-31-2007 were $196.4 million.

Okay thanks.

Inventories were $361.5 million.

Okay.

Our trade payables were $88.8 million.

Alright.

And then our short-term debt, including current liabilities, was $57.5 million.

Okay great. And then my recollection is that typically your approach to structuring the debt-side of the balance sheet is to have about half floating and about half-fixed over time. How are you situated right now to still benefit, at least domestically, from rates coming down on the short-end of the curve? My guess is that you also have some balance over in Europe where your assets are. Could you walk me through that, both in terms of what debt balance you had in Europe, as well as what's fixed versus floating at this point?

Well, certainly when you talk about Europe, you're talking about the Euro debt. So, as we note in our footnote to the financials, and I don't have that figure from here, the last time I looked it was about $150 million or something like that. And so, our exposure to Euro debt is in that that kind of a range, in excess of $100 million. Steve is looking the exact number up.

Okay. So is it about maybe a third of the total debt, or something?

Yeah.

Okay.

And so, we did that years ago to cover the balance sheet. And so as the Euro debt has gone up due to the exchange rate, at the same time, for example, during 2007 the shareholders equity went up by $107 million. The shareholders' equity went up from $700 million to $814 million. So as the Euro debt goes up, and the total assets and equity value of the corporation goes up. So we're fine with that. That's worked out okay. But there is another thing that is going to be an opportunity for us. In April of 2009, $150 million of 6.5% debt will be coming due. We see that as an opportunity. And we are not announcing right now that we're going to go and do something, but certainly we see that as an opportunity during 2008. And Tim, since you asked the question, it gives me an opportunity to talk about another thing that we feel good about going into 2008, and that's our interest expense. As you're correctly noting, as we see our average debt coming down every quarter, in the fourth quarter of 2007, the interest expense is now below the prior year. And so, now you're going to start to see that. You're going to start to see us showing some pretty decent reductions in our interest expense going forward. And that's another opportunity that certainly we have built into our forecast. But I don't want to say that it's an insurance policy, because things are going to happens to rates, something will without warning. But we feel we're pretty well-positioned in that area. And Steve, I don't know if we have any details.

I'll just confirm the number you gave for the Euro debt is accurate. We do generally try to be within a range of roughly 50/50 on fixed to floating. Right now, we're just a little bit more on fixed than floating.

Okay. But that also would include that 6.5% debt of course?

That's correct.

Right.

We see all this as an opportunity.

Okay. And then the only other thing that I was curious about, at least, I mean you've actually spoken about it, but just to see if I can get a little more kind of direct color. You've been working on costs in Europe for years actually, but you've been making a point, as you've really gotten some traction in those areas, to discuss that a little bit in the last couple of years. And if I think back, your rough numbers three years ago or something, the operating profitability in the European, I think, Flavors business was probably in the order of magnitude at half of the operating line of what it was in the US or North America. That gap may never close all the way I understand. Some structural differences may exist, although if you can get top line leverage, then maybe that's not necessarily a safe assumption. But how much do you feel that this gap is closed? If it was 600 basis points to 800 basis points three years ago, is it half of that now, or is it tightening up more? And I understand, obviously, that the profitability has actually been creeping up as well?

I would say right now Tim, we feel we're probably maybe a third of the way there. We feel there is more opportunity there. We see there is a lot of opportunity.

Yeah. I think we see it as a great opportunity. The first third is the hardest, the next third is a lot easier and the last third is the easiest. And somebody had asked that question, where we saw the trend. The trend is clearly up where we're seeing more and more out of Europe. It's clearly going in the right direction, and it's a real opportunity.

On the North American operating profitability, do you see that as being stable or is there still 10 basis points to 20 basis points that you can still go after there?

Well, that's certainly the sweet spot of the business and that's gone very well for us. But as it has gone well, we've gotten more inroads, and you get noticed more by the customer base. I talked a little bit about Canada, which is part of that North America. So, yeah, and I am speaking mainly towards flavor, but color in North America, has also done very well and has been a great business for us.

Yeah, let me build on that by saying that it's very much related to new product launch and as we have new products going into every market, that's an opportunity to re-price that piece of business, and we've been successful in doing that.

I know you discussed this a bit also, but the growth in color is up fairly dramatically here in the fourth quarter. Does it just have to do with some of the product areas that you talked about, or have you backfilled some of the ink volume, or found some other things to do with some of that capacity, and finally sold into some of those markets?

Mostly in the fourth quarter it was food and beverage growth. We are seeing some improvement in our technical color in terms of margins, but that's not reflecting up in the growth line, and in the top line.

Okay. Alright, thank you very much gentlemen.

Thanks, Tim.

You are welcome.

Congratulations on the quarter too.

Thank you.

There are no further questions. I'll turn the call back over to the presenters.

Okay. Thank you very much for your time this morning. If anyone has any follow-up questions, feel free to call the company and thank you again. Goodbye.

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