• sold in powder or liquid form, in amounts ranging from a few pounds to several tons depending on the nature of the end product in which they are used;

• a small percentage of the volume and cost of the end product sold to the consumer; and

• a major factor in consumer selection and acceptance of the product.

The flavors and fragrances industry can be impacted by macroeconomic factors in all product categories and geographic regions. Such factors may include the impact of currency exchange rate fluctuations on the price of raw materials, and operating costs, as well as on translation of reported results. In addition, IFF is susceptible to margin pressure due to customers' cost improvement programs and input cost increases. However, these pressures can often be mitigated through a combination of product reformulation, sourcing strategies and material substitution plus internal cost containment efforts, and the development of innovative and streamlined solutions and processes.
STRATEGIC DRIVERS
To increase shareholder value, we pursue three key strategies: investing in research to develop new, innovative materials and delivery systems; developing a deep understanding of consumers' preferences and values; and maintaining superior creative teams to support our flavors and fragrances' customers. Our goal is to deliver differentiated solutions that enable our customers' brands to win in the marketplace.
In order to pursue these strategies, our three key missions are: customers, people and innovation. We believe we are well positioned to achieve success by targeting strategically important global and regional customers in both developed and emerging markets; attracting, developing and retaining top talent; investing in research and development; and fostering a culture of innovation and continuous improvement.

CHANGE IN MANAGEMENT
Effective September 30, 2009, Robert Amen has resigned as Chairman of the Board of Directors ("Chairman") and Chief Executive Officer ("CEO") of the Company. Douglas D. Tough, currently a Company Board member, assumed the position of non-executive Chairman effective October 1, 2009 and will assume the position of executive Chairman and CEO no later than the end of the first quarter 2010. Pending Mr. Tough's assumption of his title and duties as CEO, beginning October 1, 2009, the Company established a temporary Office of the CEO, which is comprised of three current Company executives, Chief Financial Officer, Kevin Berryman; Group President, Fragrances, Nicolas Mirzayantz; and Group President, Flavors, Hernan Vaisman. Each of these executives remain in their current positions while carrying out their Office of the CEO responsibilities. The Office of the CEO reports to the Board of Directors. Operations
Third Quarter 2009
Sales Commentary
Third quarter 2009 sales totaled $613 million, down 1% from the prior year period, as both Flavor and Fragrance sales declined 1%. Foreign currency parity continued to have a negative impact on year-over-year sales performance, reducing reported sales in the third quarter of 2009 by $19 million or 3% versus the comparable 2008 period. Excluding the impact of foreign currency, local currency sales grew slightly above 2% versus the prior year period.
Local currency (LC) sales for the Flavors business were up 2% year-over-year for the quarter. All regions delivered LC sales growth for the quarter, led by North America at 5%. LC growth was driven by new wins in North America (NOAM), particularly in Savory, combined with stronger volumes and new wins in Confectionary and Dairy in Europe, Africa and Middle East (EAME) and Latin America (LATAM). These wins were partially offset by lower volumes in the Beverage business with specific customers in LATAM and Greater Asia who have seen a drop in their demand, and the comparison to a very strong year ago quarter.
Fragrance sales grew 3% in LC terms. This represents the first quarter of year-over-year LC sales growth since the second quarter 2008. The improvement was driven by 3% growth in our Fragrance compounding sales, as 10% gains in our Beauty Care and Functional Fragrance categories more than offset the lower demand for our fine fragrance products. The Fragrance compounding business was led by our emerging markets, as Greater Asia was up 26% and LATAM at 6%. Strong growth in Greater Asia reflects new wins and increased demand from both our global and regional customers. While demand in the developed markets of NOAM and EAME remains soft, our overall Fragrance performance in the third quarter (-1 and -2%, respectively) represents a significant improvement versus the first half of 2009 (-6% and -15%, respectively). Ingredients sales grew 3% in LC terms as a result of the elimination of customer de-stocking and better price realizations.
Sales performance by region and product category in comparison to the prior year quarter in both reported dollars and local currency, where applicable, was as follows:

                                                               % Change in Sales-Third Quarter 2009 vs Third Quarter 2008
                                               Fine &
                                             Beauty Care       Functional       Ingredients       Total Frag.       Flavors         Total
North America            Reported                   -3 %              0 %               0 %              -1 %            5 %            2 %
EAME                     Reported                  -22 %             -1 %               0 %              -9 %           -6 %           -8 %
                         Local Currency            -15 %              6 %               6 %              -2 %            1 %           -1 %
Latin America            Reported                    0 %              9 %              -9 %               3 %           -5 %            0 %
                         Local Currency              2 %              9 %              -8 %               4 %            1 %            3 %
Greater Asia             Reported                   19 %             28 %               8 %              22 %            0 %            8 %
                         Local Currency             20 %             28 %               4 %              21 %            1 %            8 %
Total                    Reported                   -9 %              7 %               0 %              -1 %           -1 %           -1 %
                         Local Currency             -6 %             10 %               3 %               3 %            2 %            2 %

† NOAM sales increased 2% as a result of new wins and good demand in our Savory and Beauty Care categories, partially offset by lower Fine Fragrance sales as we continue to experience a challenging market.

† EAME LC sales for this quarter were essentially flat as Fine Fragrance sales continue to be negatively impacted by poor demand, offset by solid growth in Flavors and Functional Fragrance. This is an improvement over the prior two quarters.

† The emerging markets of LATAM and Greater Asia saw solid LC sales growth across all Fragrance segments, except LATAM Ingredients. Flavor sales in Greater Asia and LATAM were positive, but unfavorably impacted by the drop in volumes from certain beverage customers who realized volume declines. As noted previously, Flavor sales in LATAM were negatively impacted by lower Beverage volumes and isolated losses.

Consolidated Operating Results
     The percentage relationship of cost of goods sold and other operating
expenses to reported sales is as follows:

                                                        Third Quarter
                                                       2009       2008
               Cost of goods sold                      59.4 %     60.0 %
               Research and development expenses        8.5 %      8.4 %
               Selling and administrative expenses     16.0 %     15.0 %

Cost of goods sold includes the cost of materials and manufacturing expenses; raw materials generally constitute 70% of the total. Research and development expenses are for the development of new and improved products, technical product support, compliance with governmental regulations, and help in maintaining relationships with customers who are often dependent on technological advances. Selling and administrative expenses support our sales and operating efforts.
Cost of goods sold, as a percentage of sales, was 59.4% compared with 60.0% in 2008. This improvement year-over-year is mainly attributable to a stabilization of input costs combined with cost recovery and margin improvement efforts.
Research and development (R&D) expenses were up slightly from the prior year, driven by $3.0 million of incentive compensation expense in 2009 compared to a net reversal of $(0.3) million last year that was substantially offset by cost containment efforts and a stronger U.S. Dollar.
Selling and administrative expenses (S&A), as a percentage of sales, increased to 16.0% as compared to 15.0% in the third quarter 2008. The third quarter 2008 expense was favorably impacted by a cumulative adjustment to its provision for incentive compensation that resulted in net reversal of $(0.4) million compared to $6.6 million of expense in the 2009 period. The 2009 quarter also includes $5.4 million in employee separation and one-time costs associated with the change in CEO. Excluding CEO related costs and the effects of incentive compensation provisions, S&A expenses in 2009 decreased approximately 100 basis points (bps) as a percentage of sales versus the prior year. The change is mainly attributable to tight cost control and a stronger U.S. Dollar. Interest Expense
In the third quarter 2009, interest expense totaled $13.5 million as compared to $18.0 million in 2008. The reduction reflects the elimination of cross-currency interest rate swaps during the second half of 2008 and first quarter 2009, combined with lower outstanding borrowings and slightly lower interest rates.
Other (Income) Expense, Net
Other income was minimal in 2009 versus other expense of $3 million during the 2008 period. The change was mainly due to losses on foreign exchange transactions in the prior year.
Income Taxes
The effective tax rate for the third quarter of 2009 was 27.9% as compared to a rate of 27.5% in the prior year quarter. The higher effective tax rate versus last year reflects the mix of earnings in countries in which we operate and higher repatriation costs.
Operating Results by Business Unit

We evaluate the performance of business units based on operating profit before interest expense, other income (expense), net and income taxes. See Note 10 to our Consolidated Financial Statements for the reconciliation to Income before taxes.
Flavors
In the third quarter of 2009, Flavors operating profit totaled $55 million, or 20.0%, as a percentage of sales, compared to $52 million or 18.5% of sales in 2008. The improvement in profitability reflects higher pricing, margin and cost recovery efforts combined with lower overhead expenses that more than offset the effects of higher input costs and manufacturing expenses, and unfavorable foreign exchange impacts.
Fragrances
Fragrance operating profit for the third quarter of 2009 was $46 million, or 13.7%, as a percentage of sales, compared to $55 million or 16.2% of sales during 2008. The reduction in operating profit margin was mainly due to the recording of $10.5 million of restructuring charges related to our EAME rationalization plan during the third quarter 2009. Excluding the restructuring charges, operating profit margins improved 60 bps as higher pricing, cost reductions efforts and lower overhead expenses more than offset the effects of unfavorable mix due to lower Fine Fragrance volume, higher input costs and unfavorable foreign exchange impacts.
Global Expenses
Global expenses represent corporate and headquarters-related expenses which include legal, finance, human resources and other administrative expenses that are not allocated to an individual business unit. In 2009, Global expenses for the third quarter were $14 million compared to $6 million during 2008 (including $2 million of implementation costs related to the global shared service center). The increase is due to $5.4 million of expense related to employee separation and one-time costs associated with the CEO change and higher incentive compensation charges.
First Nine Months 2009
Sales Commentary
Sales for the first nine months of 2009 totaled $1.74 billion, decreasing 6% from the prior year period of $1.85 billion, as Flavor sales declined 4% and Fragrance sales decreased 8%. Foreign exchange had a 5% negative impact on reported sales for the first nine months of 2009 as the U.S. dollar strengthened against most currencies; at comparable exchange rates, sales would have decreased 1% year-over-year.
On a local currency (LC) basis, Flavor sales increased 2% year-over-year. North America and Latin America delivered solid growth resulting from new business and price increases, despite weak economic conditions whereas sales in EAME were down 2% as a result of the economic slowdown and ongoing inventory reductions by our customers. Greater Asia sales in LC were up 1% for the nine month period, as new wins (Savory) were offset by some erosion in Beverages and the postponement of shipments to the fourth quarter.
Fragrance LC sales declined 3% year-over-year. Fine and Beauty Care sales declined 11%, reflecting weak consumer demand and excess inventories through the supply chain primarily in North America and EAME. Functional Fragrance sales grew 4% globally due to new wins in the fabric care and personal wash categories combined with good growth in emerging markets, especially in Greater Asia. Ingredients sales declined 5% on a LC basis primarily due to erosion in the Fine Fragrance category and customer de-stocking.
Sales performance by region and product category in comparison to the prior year period in both reported dollars and local currency, where applicable, was as follows:

                                                                  % Change in Sales-Nine Months 2009 vs Nine Months 2008
                                                Fine &
                                             Beauty Care        Functional       Ingredients        Total Frag.         Flavors         Total
North America            Reported                   -14 %              2 %                1 %               -4 %             4 %           0 %
EAME                     Reported                   -31 %             -8 %              -19 %              -20 %           -12 %         -17 %
                         Local Currency             -22 %              1 %              -11 %              -11 %            -2 %          -7 %
Latin America            Reported                     7 %              4 %                0 %                4 %            -2 %           2 %
                         Local Currency               9 %              5 %                0 %                5 %             6 %           6 %
Greater Asia             Reported                    12 %             11 %               -1 %                9 %            -2 %           2 %
                         Local Currency              15 %             12 %               -3 %               10 %             1 %           4 %
Total                    Reported                   -16 %              0 %              -10 %               -8 %            -4 %          -6 %
                         Local Currency             -11 %              4 %               -5 %               -3 %             2 %          -1 %

† North America sales were flat as the erosion and volume declines in Fine Fragrance compounds offset the benefits from new wins in our Savory, Beauty Care, and Functional Fragrance categories, as well as some price recovery. Ingredient sales growth was mainly attributable to cost driven price increases.

† EAME sales declines in LC were driven by de-stocking and weak economic conditions across all product categories. Functional fragrance sales in LC were aided by good growth in fabric care.

† Latin America LC sales saw solid growth and new wins across all product categories. Flavor sales were up 6% in LC as compared to a very strong performance during 2008.

† Greater Asia LC sales growth was driven by new product introductions and wins across most product categories and cost driven price increases in the fragrance business. Flavor sales performance was up slightly, despite the negative effects of a stronger USD on local demand.

Consolidated Operating Results
     The percentage relationship of cost of goods sold and other operating
expenses to reported sales is as follows:

                                                      First Nine Months
                                                       2009         2008
             Cost of goods sold                         59.8 %      59.1 %
             Research and development expenses           8.7 %       8.7 %
             Selling and administrative expenses        16.1 %      15.5 %

Cost of goods sold includes the cost of materials and manufacturing expenses; raw materials generally constitute 70% of the total. Research and development expenses are for the development of new and improved products, technical product support, compliance with governmental regulations, and help in maintaining relationships with customers who are often dependent on technological advances. Selling and administrative expenses support our sales and operating levels.
Cost of goods sold, as a percentage of sales, was 59.8% in 2009 compared with 59.1% in 2008. This increase reflects higher input costs, lower absorption and volumes, plus weaker sales mix that were partially offset by cost recovery and margin improvement efforts.
Research and development (R&D) expenses were down $9.1 million in 2009 compared to the prior year as tight cost control on applied research and development and the effects of a stronger U.S. dollar more than offset higher incentive compensation.
Selling and administrative expenses (S&A), as a percentage of sales, increased to 16.1% of sales for the first nine months of 2009 as compared to 15.5% for the first nine months of 2008. The 2009 period includes $6.3 million of employee separations costs and one-time expenses related to the change in CEO whereas the 2008 amount includes the benefit of a $2.6 million insurance recovery related to a prior period product liability claim offset by $3.4 million for employee separation costs. The reduction in S&A dollars reflects a stronger U.S. dollar and cost reduction efforts, which more than offset higher pension expense, higher incentive compensation expense and provisions for bad debts and product claims.

Restructuring and Other Charges
Restructuring and other charges consist primarily of separation costs for employees, including severance, outplacement and other benefit costs.
The Company recorded a net pre-tax charge of $4.1 million during the three months ended June 30, 2009. This amount includes $6.6 million for severance and related costs associated with the elimination of approximately 70 positions globally, less a $2.5 million reduction to previously recorded provisions. The reduction in prior reserves was attributable to lower estimated benefit costs on severance paid as well as fewer position eliminations requiring severance.
During September 2009, as part of the rationalization of our European fragrance manufacturing footprint, the Company announced that it had initiated a collective consultation process with employees regarding the closure of its Fragrances compounding facility in Drogheda, Ireland, as well as the partial closure of its Fragrance Ingredients chemical plant in Haverhill, UK. The Company has completed both consultation processes and has communicated its intent to proceed with the closures. The Company has now completed the negotiations with the Haverhill employee representatives and is actively engaged in the negotiation process with the employee representatives in Ireland to determine actual employee separation benefits.
We expect to incur total costs related to this restructuring plan of approximately $22-$29 million, consisting primarily of $11-$15 million of employee termination costs, $8-$10 million in plant shutdown and business transition costs and $3-$4 million in asset impairments and/or accelerated depreciation of related fixed assets. While some cost savings would likely be realized in the latter half of 2010, the annual benefit of $17-$20 million wouldn't be fully realized until 2011.
As a result of these plans, approximately 140 employees will be terminated. During the third quarter 2009, the Company recorded a provision for severance costs of $10.5 million to "Restructuring and other charges" in our Consolidated Statement of Income, based on reasonable expectations of separation benefits that are subject to ongoing negotiations with employee representatives. We expect to conclude the negotiations in upcoming quarters and will record any necessary adjustment then. The Company also recorded $0.2 million of accelerated depreciation in "Cost of goods sold" in our Consolidated Statement of Income related to depreciation of certain related assets. Other restructuring costs discussed above will be recorded as incurred as the Company moves forward with implementation.
The 2008 net charges primarily related to employee separation expenses in connection with the implementation of a global shared service center and a performance improvement plan. Positions eliminated and charges, net of reversal by business segment for the nine month periods ended 2009 and 2008 are detailed in the table below.

                           Restructuring Charges
                              ( In Thousands)              Positions Affected
                             2009            2008         2009            2008
            Flavors      $       (363 )     $   925             7              17
            Fragrances         15,349         2,480           200              19
            Global               (382 )       2,562             5              91

            Total        $     14,604       $ 5,967           212             127

Interest Expense
In the first nine months of 2009, interest expense totaled $47 million as compared to $55 million in 2008. The 2009 decrease reflects a lower average borrowing cost and the elimination of a cross-currency interest rate swap during the second half of 2008. The 2009 amount includes $4 million of interest paid on the close-out of a cross-currency interest rate swap classified as a net investment hedge. Average cost of debt was 5.2% for 2009 compared to 6.0% in 2008.
Other (Income) Expense, Net

Other expense for the first nine months of 2009 was $0.4 million compared to other expense of $1.2 million in 2008. The reduction was mainly due to lower levels of losses on foreign exchange transactions partially offset by lower interest income in 2009.
Income Taxes
The effective tax rate for the first nine months of 2009 was 26.2% as compared to a rate of 25.3% in the prior year period. The 2008 effective tax rate was 27.6% excluding $6 million of benefits pertaining to favorable tax rulings from prior periods. The change in the effective tax rate in 2009 is mainly attributable to an increase in non-U.S. investment tax credits and the mix of earnings across the countries in which we operate. Operating Results by Business Unit
We evaluate the performance of business units based on operating profit before interest expense, other income (expense), net and income taxes. See Note 10 to our Consolidated Financial Statements for the reconciliation to Income before taxes.
Flavors
For the first nine months of 2009, Flavors operating profit totaled $162 million, or 20.0% of sales, compared to $165 million or 19.6% of sales in 2008. The operating profit reduction is due to higher input costs and unfavorable currency parity. These declines were partially offset by higher pricing, spending control, and cost recovery and margin improvement efforts. The 2008 amount includes $0.9 million of restructuring expenses versus a net reversal of $0.4 million in 2009.
Fragrances
Fragrance operating profit for the first nine months of 2009 was $117 million, or 12.6% of sales, compared to $158 million or 15.7% during 2008. The 2009 amount includes $15 million of restructuring related expenses compared to $2 million in 2008. The decline in profit was driven by significantly lower volumes in Fine Fragrances and Ingredients, higher input costs and unfavorable mix, partially offset by higher pricing, margin recovery efforts and lower overhead expenses. Excluding the restructuring charges, operating profit margins declined 160 bps over the comparable prior year period. Global Expenses
Global expenses represent corporate and headquarters-related expenses which include legal, finance, human resources and other administrative expenses that are not allocated to an individual business unit. In 2009, Global expenses for the first nine months were $31 million compared to $26 million during the 2008 period. The 2009 period included $6.3 million of employee separation and . . .