At this time, I would like to welcome everyone to the IFF Second Quarter 2019 Earnings Conference Call. [Operator Instructions]I would now like to introduce Michael DeVeau, Head of Investor Relations. You may begin..

Thank you. Good morning, good afternoon and good evening, everyone. Welcome to IFF's second quarter 2019 conference call. Yesterday evening, we distributed a press release announcing our financial results. A copy of the release can be found on our IR website at ir.iff.com.

Please note that this call is being recorded live and will be available for replay.Please take a moment to review our forward-looking statements. During the call, we'll be making forward-looking statements about the company's performance, particularly with regard to the outlook for our third quarter, second half and full year 2019.

These statements are based on how we see things today and contain elements of uncertainty.

For additional information concerning the factors that can cause actual results to differ materially from forward-looking statements, please refer to our cautionary statement and risk factors contained in our 10-K filed on February 26, 2019, and our press release that we filed yesterday.Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability.

A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release that we issued yesterday and is on our website.With me on the call today is our Chairman and CEO, Andreas Fibig; and our Executive Vice President and CFO, Rich O'Leary.

We'll start with prepared remarks, and then take any questions that you may have.With that, I would now like to introduce Andreas..

Thank you, Mike. On the call today, I will like to provide a recap of our vision 2021, which we shared at our Investor Day the past June. After that, I will provide comments on our second quarter financial results and give an update on our integration progress.

Once finished, I will ask Rich to give a more in depth financial review of our business performance and provide an update on our outlook for the balance of the year. Then we will take any questions that you may have.We are very confident in the long-term outlook for our business.

Thanks in large part to our industry leading innovation, both in diverse customer base and superior product portfolio. IFF has a history of strong sales growth and proven profitability.

We are excited about the future as we believe that combination of IFF and Frutarom will create significant value for our customers, employees and shareholders.At our Investor Day in June, we outlined our new vision 2021 strategy.

The Vision 2021 strategy has been designed to leverage our newly combined organization, our enhanced product portfolio, increased naturals position, expanded market access, broader customer base and greater innovation pipeline, all with our customer at the centre of everything we do.Our four strategic pillars include, unlocking growth opportunities, while we'll capitalize on our expanded product portfolio on a customer base, and extensive geographic presence.

We also expect that cross selling and integrated solutions are relatively new capabilities set will lead to 100 million sales over the 2019 to '21 period, driving innovation while we will invest in high growth and high return platforms to continue to drive our industry leading R&D pipeline.I'm pleased to say, with the combination of IFF and Frutarom on R&D is the strongest it has been in the company's history.

We have expanded R&D capabilities with cutting edge research, all carefully prioritized platforms based on future return potential.Managing the portfolio, while we will focus on optimizing our portfolio to maximize value creation, our business portfolio is much more broad and diverse with a range of growth potentials and margin profiles.

To maximize value creation, we are focusing on disciplined resource allocation, where we establish clear guidelines to prioritize our investment decisions as we move forward.Accelerating business transformation, while we were successfully integrated Frutarom on delivering 145 million of synergies, but also continuing our strong productivity agenda in our legacy business for incremental 100 million in savings.

And of course, culture, technology sustainability, M&A and talent all remain critical enablers to our strategy.From a long-term perspective, we're excited about where we compete. Our market potential is now approximately 50 billion with an estimated 4% total market growth rate.

This is a significant increase from just one year ago, while estimated market was approximately 26.5 billion with an average growth rate of 2% to 3%.So Frutarom, we have gained broad exposure into many attractive adjacencies where growth is approximately 6% in the next five years.

This additional access not only provides us with incremental market potential, but we believe growth over the mid and long-term should accelerate as needed as nearly all these adjacent markets have higher intrinsic growth rates.To ensure we capture the opportunities ahead, we are we aligning our business to take effect in 2020.

Frutarom's tastes and flavor solutions were transitioned under our legacy taste business unit. We are also adding Frutarom's inclusions business, which comprises Taura, Inventive and Leagel, our ice cream ingredients business into legacy taste. The remaining parts of Frutarom will be grouped into a new nutrition and ingredients division.

This high growth high, margin business will include Frutarom's natural product solutions, as well as the flavor ingredients business. At the business unit level, we are focused on prioritize our strategy to ensure we capture future growth potential.Within scent we serve customers across a wide spectrum of scientists.

However, the bulk of our market is composed of multinational companies who work via co-lists. We recently won a new co-list access, providing us with the opportunity to compete for 450 million of market potential we previously didn't have access to. This was a significant opportunity for growth.

And as such, we are focused on capitalizing on our new access with maintaining strong improvements with regional and local customers.Our go forward goal in scent is to drive value creations with disciplined portfolio management, investing in high margin businesses and fixing profitability in categories that have been disproportionately impacted by higher raw material cost.

In addition, we've identified and executed on opportunities to streamline our organization within the scent business unit, which is already contributing approximately 4 million of savings through the first half of 2019.In taste, the focus on effectively integrating the Frutarom businesses and our go to market approaches by expanding our case point model to ensure we serve and capture opportunities with faster growing small and mid-sized customers in other key markets around the world.

We are also targeting higher growth geographies, for example, Africa and the Middle East and enhancing our portfolio by expanding savory solution and inclusions globally.In nutrition and ingredients, it's all about geographic expansion, focusing on differentiating natural and clean label technologies and targeting value enhancing acquisitions.

The majority of the categories within the division natural health ingredients, natural food protection and natural colors all have strong future growth potential. And we are focused on increasing our scale to disproportional growth at accelerated rates.At the core, we anticipate that based on encouraging natural growth to be approximately 3% to 5%.

Then we believe that we have incremental opportunities to long-term to add an additional percentage point for cross selling and integrated solutions, as well as another percentage points for acquisitions.

The net result is that we expect overall currency neutral sales growth to average 5% to 7% over the next three years.Taking a step back, we now have the broadest and deepest portfolio of businesses in our long history, one that provides a variety of investment options.

To maximize value creation, we have established portfolio roles and clear guidelines to prioritize our investment decisions.

There are three approaches to managing our portfolio growth, where we will accelerate margin accretive categories through incremental investments, such as fine fragrance and cosmetic active ingredients.Balanced, while we'll self fund investments to maintain gross margin cash flow and fix.

But we will have limited investments until margin goals achieve targeted levels or we de-prioritize. An example of this is creative marketing, while we have de-prioritized our approach given the margin profile or the businesses we exited earlier this year. As you can see, we have categories in all of these three portfolio certifications.

These certifications will streamline our category management, and fine tune our strategic efforts to ensure we grow sales and also improve our margins.We have strong programs in place to drive profitability.

From 2019 to '21, we expect margin improvements to be driven by our portfolio optimization strategy and 145 million of integration savings from the Frutarom transaction.

As discussed, portfolio optimization is expected to profit as margin, management, pricing, cost leverage and selective pooling of our low margin and non strategic sales will drive overall margin expansion.Within our planned integration synergies from the Frutarom acquisitions, we are rationalizing and harmonizing our procurement activities via leverage spent and make versus volume.

We are also optimizing the global footprint as we expect approximately 35 sites globally to be optimized, which will generate additional efficiencies. The last piece is streamlining our overhead expense, which is intended to reduce non-strategic costs and eliminating redundant expense expenses.

We are highly confident in our ability to achieve on 145 million in cost savings target at the end of 2021.In addition to our integration synergies, we expect approximately 100 million savings and additional productivity programs.

Beyond margin expansion these industries are key in a journey to fundamentally transform how we operate, focusing on process improvements, simplifications and centralization. This will provide flexibility to drive bottom line is results and reinvest in our growth engines.Our long-term financial objectives are clear.

This includes total shareholder return on drivers of 5% to 7% currency neutral gross, margin expansion to be less than three times net debt to EBITDA in 18 to 24 months, 10% plus adjust EPS growth, excluding amortization and approximately 2% dividend yield. Our vision 2021 strategy is focused on discipline execution and integration.

We remain steadfast in our approach and belief in the long-term value equation for all of our stakeholders.Turning now to the second quarter, year-over-year results on a consolidated basis were strong, including the contribution of Frutarom.

Reported sales increased 40% with the largest driver being the contribution of additional sales related to Frutarom.

As communicated at our June Investor Day, currency neutral performance on a combined base was soft due to significant volume erosion with multinational customers within taste and a continued pressure within Frutarom driven by decline in F&F ingredients, notably citrus source, natural colors, pricing, parts of savory solutions and trade and marketing, While Rich will go into details in a moment, I feel it's important to highlight several strong performances within the quarter to ensure we do not lose sight of the progress we're making.In scent we delivered mid single digit sales growth with growth in all categories and doubled digit adjusted segment profit growth rose on a currency neutral basis.

Within the rest of the business, several of the high growth categories continue to have solid performances led by beverage and savory and taste, natural food protection, gelato, the ice cream ingredients business and algae in Frutarom.

In addition, the businesses we have acquired since the beginning of the year, Mighty, Leagel, and Wiberg Canada are all growing at or above our expectations.From a profitability perspective, we are also pleased that adjusted operating profit margin excluding amortization improved 80 bps, year-over-year driven by productivity initiatives and acquisitions related synergies, a market acceleration as opposed to our first quarter performance.

I'm pleased to report that our integration efforts are well underway. We're making excellent progress. Those businesses where we have aligned our go to market approach with IFF growth was strong, increasing high single digits.In terms of cross selling and integrated solutions, we have already achieved 8 million in run rate sales.

Longer term, we believe that we can deliver at least 100 million of top line sales by 2021. We are leveraging the compelling combination of R&D technologies and capabilities of both organizations. As stated many times, innovation drives differentiation and is critical for long- term success.

I'm pleased with the progress the team is making and as they strengthen our product offering to our customers.Turning to cost synergies, we've made strong advancements year-to- date, as we have achieved approximately 15 million in the first half of 2019, based on our progress to date and our expectation in savings benefit to accelerate throughout the year.

We're now forecasting that we will achieve approximately 40 million in cost savings in 2019 up from our previous estimate of 30 million to 35 million.

In terms of debt repayment and cash flow, our operating cash flow was up 130 million in the first half of 2019 compared to the previous year period and we repaid 47 million in the first half of 2019.With that I would like to turn the call over to Rich..

Thank you, Andreas. In the second quarter we delivered quarterly sales of approximately 1.3 billion. On a combined basis currency neutral sales grew 1% driven by acquisitions and strong growth in scent.

We also maintained strong profitability levels led by productivity initiatives, acquisition related synergies and favorable price versus input costs.This combined with the addition of Frutarom led to a very strong 29% increase over the prior year period and adjusted operating profit margin excluding amortization improved 80 basis points year-over-year.Our financial results were in line with my comments at our Investor Day, when I said we would be between 1% to 3% depending upon how June progressed.

And while we did not finish as strong as we had would have liked in terms of sales, we did a good job delivering overall profitability in line with our expectations.From a cash flow projective perspective, we had significant year-over-year increases in operating cash flow and free cash flow driven primarily by higher earnings and amortization.

As we've done previously I would like to highlight the impact of emerging market pricing on our growth rates to better compare with our peers.As a reminder for a variety of reasons, many of our sales transactions in the emerging markets occur either in US dollars or other hard currencies for our index to hard currencies when we have to invoice in local market currencies.

When recording our currency neutral sales growth, we exclude foreign exchange related price changes in emerging markets.

But this is different from our peers.We believe our reporting standard provides investors with a true assessment of underlying currency neutral growth, especially when there are large emerging market devaluations relative to the US dollar or euro.

However, it's important to help all of you understand our performance relative to competition.During the second quarter and first half of 2019, the stronger US dollar environment plus significant emerging market devaluations year-over-year in several key markets had approximately a 2% currency impact of growth if we included emerging market pricing.

This is essentially driven by large the evaluations in three countries, which represent less than 10% of our consolidated scent and taste sales.Turning to business unit performance, in scent second quarter currency neutral sales grew 4% against a solid year ago comp a 5% with growth in nearly all regions and categories.

Performance was strongest in fragrance ingredients and consumer fragrances, both increasing mid single digits. Consumer fragrances was led by high single digit growth in home care and fabric care.

Fine fragrance also grew low single digits following a double digit performance in Q1, led by strong new wins, particularly in EAME.But should be noted that raw material driven pricing increases represented approximately 4% in the second quarter on a consolidated basis, with the strongest increases in fragrance ingredients.

In fragrance compounds, the composition of growth was balanced, with equal contribution between volume and price.

Same currency initial segment profit increased 19% benefiting from cost and productivity initiatives and more favorable price to input costs.We believe that this was due to the timing of raw materials between the inventory and our P&L as we continue to see year-over-year increases in our purchases.

Raw material costs remain elevated significantly above historical levels and we will continue to work with our customers on actions to mitigate these increases.

In terms of segment profit margin, year-over-year performance was up approximately 200 basis points to 19.2%.In taste, second quarter currency neutral sales decreased approximately 1% against the strong growth of 6% in the year ago period. Growth was strongest in Greater Asia with year-over-year improvements in China, India, and the ASEAN region.

We also post the growth in EAME led by strong performance in Africa and Middle East.

In Latin America and North America, volume origins with multinational customers were significant and intensified throughout the quarter.When comparing to historical averages, our volume erosion rate in the second quarter was approximately three times our historical average.

Taste currency neutral segment profit was adversely impacted by volume declines, unfavorable price, the material costs and a week or mix. Nevertheless, segment profit margins will remain best in class amongst our industry peers.For Frutarom in the second quarter sales totaled approximately 382 million.

On a standalone basis for Frutarom sales were flat, driven by the contribution of acquisitions. Excluding the contribution of acquisitions and divested businesses, Frutarom sales declined low single digits or 4%.

Similar to what we communicate at our Investor Day, results were primarily driven by decline in F&F ingredients, most notably citrus source where one of our competitors are no longer purchasing from us, as well as well as raw material driven price decreases in natural colors and weaknesses in savory solutions related to weather conditions in Europe and Canada, and trade and marketing, where we are the de-prioritizing.While all of these are very similar to what we have discussed previously, it is worth noting that Frutarom's taste volumes decelerated throughout the second quarter driven by weakness in the UK and Ireland.

In terms of segment profit, the Frutarom delivered $37 million and $77 million in profit excluding amortization. The margin profile for Frutarom in the second quarter continues to be strong at a robust 20.1% if you exclude amortization.

This has been driven by acquisition related synergies and continued cross discipline.For the first half of 2019, we have delivered 15 million in integration synergies.

As Andreas mentioned earlier, we are now expecting to achieve approximately 40 million in cost synergies in 2019, up from our previous estimate of 30 million to 35 million driven predominantly by procurement optimization.

In addition, we continue to deliver on our core productivity program, where we drive process improvement simplification and centralization. On a year-to- date basis, we've achieved approximately 25 million of core productivity savings in the first half of 2019.

Together we delivered approximately $40 million in year-over-year savings are about 19% expressed in terms of operating profit growth on a combined basis.Operating cash flow in the first half of 2019 was up significantly from 55 million last year to 185 million this year. Performance was driven by higher earnings and amortization.

Core working capital, defined as inventories, accounts receivables and accounts payable, improved modestly driven by receivables and payables. Inventories continued to remain at elevated levels, primarily due to raw material cost increases and safety stocks within the scent division.

Expected inventories will begin to improve in the second half for the year.In the first half CapEx as a percentage of sales was approximately 4.6% driven by new plant and capacity investments, mainly in Greater Asia, as well as creative centers and integration related investments.

For the full year we continue to believe that CapEx as a percentage of sales will be between 4.5% to 5%. Bringing all this together, we had a strong $78 million increase in free cash flow in the first half of 2019.A key component or overall TSR algorithm for our shareholders is a competitive and attractive dividend yield.

We believe that the 2% threshold is an important one that broadens our potential shareholder base.

Together and today we are pleased to announce we have authorized 30% increase in our quarterly dividend executing on our long-term strategy and our strong financial position and should be noted that this marks the 10th consecutive year of dividend increases.Considering our year-to-date performance as well as our outlook for the remainder of the year, we are adjusting our full year sales and adjusted EPS excluding amortization guidance.

For the full year we now expect to deliver between 5.15 billion and 5.25 billion in sales in 2019 as we're approaching the low end of our original guidance of 5.2 billion to 5.3 billion.

On a combined basis and excluding the impact of currency, growth is expected to be 3% to 5%.The forecast now reflects low versus mid single digit growth for Frutarom driven by three areas, F&F ingredients, savory solutions and trade and marketing.

Within F&F ingredients, citrus source is the primary contributor of the decline as one of our large competitors has significantly reduced his purchases. We are shifting our focus of this business to mid versus high to drive value creation.

In savory solutions, performance was impacted by first half weakness, as well as a modestly revised second half outlook related to reductions in volume.

We also will de-prioritize trade and marketing based on our strategic category management approach.From a taste perspective, continued multinational volume erosion in Latin America and North America has lowered our expectation. It should be noted that we do not expect the second half to be strong in the first half.

But taste performance in the third quarter will be challenged by a strong prior year comp. We now expect adjusted EPS excluding amortization to be 615 to 635 and I will go through the changes in a moment.

On a combined basis and excluding the impact of currency, adjusted EPS excluding amortization is expected to be 6% to 9%.To provide additional detail related to the adjusted EPS ex amortization change, I would like to walk you through the drivers. Our original guidance was 630 to 650.

In the second bar, I highlight the $0.10 impact related to the change in top line expectation, which is essentially $15 million in sales at low margins given the impacted businesses like trade and marketing, citrus source and PTI. Mitigating this is the incremental 5 million in integration savings that we announced earlier today.

Combining the two, the net operational impact is a reduction of approximately $0.05 to our adjusted EPS excluding amortization.The larger impact on adjusted EPS excluding amortization is related to a change in the average effective tax rate on the amortization of intangible assets, as well as the small changes in redeemable non-controlling interest.

The net impact of these combined is approximately $0.10. In the end, our revised guidance for adjusted EPS excluding amortization is now 615 to 635.With that, I would like to turn the call back over to Andreas..

Thank you, Rich. In summary, we believe we have the framework to achieve our long-term ambitions with our 2021 strategy, which is focused on disciplined execution and integration. With that context, we have a long-term commitment to 12% total shareholder return which is expected to be driven by about 10% EPS growth and a 2% dividend yield.

In the second quarter we achieved broad based improvement in sales, margin and cash flow. For the full year we believe we can deliver solid operational results. We're taking actions of strengthen to the overall growth profile of our business, as well as ensuring we capture synergies to generate strong margins and returns for our shareholders.

Expressing our confidence in our long-term strategy and future prospects, we also raised our dividend, the 10th yearly consecutive increase.With that operator, we are now happy to take questions..

[Operator Instructions] And our first question will come from Mark Astrachan with Stifel. Please go ahead..

Thanks and good morning everybody..

Good morning, Mark..

I guess it's done on Frutarom not really sure where to begin, but maybe starting, how confident are you, there won't be further discoveries at Frutarom related to the alleged bribery negatively impacting sales in other geographies or any sort of things that you can find from an accounting standpoint or anything else.

And do you know of or anticipate any US authority to investigate the goings on there at this point?.

Mark, thank you for the question, I'll take it. And given that we have done compliance disclosure here. I'll take a moment to reiterate what we have said in our former disclosure.

During the integration of Frutarom, we were made aware of allegations that two Frutarom businesses operating principally in Russia and Ukraine made certain improper payments, including two representatives of a number of customers. So we promptly commenced investigations.

We have a very robust program in place here in particular when we take over companies. So that's very clear and it's clear SOP on our side, we have notified relevant US regulatory authorities and relevant Israeli regulatory authorities. So I think that's good and done.

We have not uncovered any evidence suggesting that payments had any connections to the US. Based to the information we have, we believe that these improper payments are no longer being made.

The estimated affected sales represents less than 1% of combined pro-forma net sales for 2018.So we do not believe the impact from these methods is or will be material to our results of operations or financial conditions. I believe that's a super important point as well.

We've taken or we'll take appropriate remedial actions with respect to the matters I have described. And I want to assure you that we have committed to the highest standards of ethics and compliance and have strict compliance policies in place.

Although, investigation are continuing, based on the results to date and other compliance related integration activities. We are not currently where similar instances of this conduct in any other geographies. So I would say all in all, we stick to what we have said in our disclosure, we feel very comfortable that we have a good handle on it.

And I'm actually very proud about the program we are running here and how all the teams are working together to get these things done in the appropriate manner..

Okay, staying with Frutarom, I guess your organic sales decline was much worse than was expected, I think including your own expectations.

So what gives confidence that can get back to growth in the second half of the year apps and easier comparisons and what is a reasonable long-term growth rate for the business going forward? And I just wanted to follow up on the first question, just so how confident are you that there's not going to be another stone unturned that that finds something else that you're not anticipating at this point? I mean, how thorough has the investigation been by the board and the committees?.

Yeah, sure. I think Mark that's a fair question. Principally, despite that investigation, nothing has changed since our Investor Day because we feel very good about our strategy.

We see also that the portfolio of the acquisition is helping us in terms of getting exposure to some of the higher growth areas like the health ingredients or natural food protection, which is even shown in the second quarter or the inclusion business as well. So portfolio wise, we are very happy.

What we do certainly is that we prioritize our portfolio as we said, we are trying to maximize returns and we are de-emphasizing the marketing and trade business for example, because there's not a lot of profitability in and that obviously shows. We are very, let's say clear and happy about the customer portfolio.

We haven't lost too many customers here and I think still, we believe that some of the small and midsized customers have good growth rates and that will help us with the business.

The portfolio is proving to towards naturals and that's a trend which is not changing through that event.Talking about the integration, I believe what is important to see here is that in general, despite the compliance topic we just talked about, we are very happy with what is happening during the integration because you see it on the cost synergies, everything in terms of integration whether it's North America, Latin America, Asia or Europe is working as planned.

We see that we get more cost synergies and Rich just mentioned that in his presentation, all of them we saw then that's predominantly driven by procurement, which is good news because first of all, it has no impact on our employees and no impact on our customers as well. So that's an important one.

On the sales side, certainly, the second quarter was softer than I would like to have it. But we will see that this will turn around in the second half as we've said during the Investor Day as well. And we believe a mid single digit growth rate for the business is very doable.

In particular, if we emphasize the strong parts and the high growth parts of portfolio.Having said this, we have now a real good team in place for the cross selling synergies. You will hear more about this over the next couple of calls.

We haven't seen too much of a result, it's Rich just mentioned the 8 million, but there's certainly more to come and actually very exciting opportunities for us to cross sell the portfolios to the different customer groups on both sides of the business.

Having said this, I would like to mention as well that we have seen now a nice turnaround on the scent business side that has not too much to do with Frutarom, just a smaller part of it.

But we see that we're turning around despite the crisis we had with raw materials in the last year, Nicholas's business is going in the right direction, growth wise as well. So we're very optimistic on this front as well. And you know that was a bit of a trigger in the last year as well. And the turnaround is pretty strong year.

So that's how I would guess like characterize where we stand in terms of the Frutarom business, but making a remark on the total portfolio as well..

Andreas, may be just – Mark a couple of quick comments on my part.

I mean, I reiterate what Andreas said, I think we feel strongly in the ability of the Frutarom business to grow mid single digits, mid to long term, I think we're still going to some of the challenges that we've seen for the last three quarters like citrus source and trade and marketing and the savory business are not going to correct overnight.

I think we would expect to see low single digit growth for Frutarom ex M&A in the second half of this year. But we're not going to get – I think it doesn't change our long-term perspectives, in terms of the potential of the business..

What we see and I might add this, but it's more mid to long-term markets, on the R&D technologies, we have very optimistic what that can deliver for us going forward, but that takes bit of more time to realize..

Okay..

Our next question will come from Mike Sison with KeyBanc. Please go ahead..

Hey guys. I guess the two –.

Mike, good morning..

Good morning, two quick ones, I think in the – your compliance commentary mentioned that there were some senior management that Frutarom involved are they still around? How have you sort of changed that dynamic culturally and then as a quick follow up, what are you looking for, for Frutarom in the second half of the year in terms of either constant currency growth, it was down 4% you mentioned in 2Q and maybe just kind of thoughts on profitability.

I think you said operating margins ex amortization was still pretty healthy, do you expect it to stay at that levels in the second half of the year? Thank you..

Okay. Let me let me take the compliance piece first. We have taken very remedial actions on the involved people. The good thing is it is very contained to geographically, so that that makes it makes it easier for us to act on that.

Culturally, we have started with actually day one and all of our town hall meetings in the new company, as we usually do when we take over companies that we educate people on the compliance codes, on the code of conduct. Everybody is going through the sort of training whether it's a live training or training via their computers.

So we feel good about this. And this is coming actually nicely together. This is an unfortunate event, but as I said, it's geographically very limited. And then I hand over to Rich on the margin question..

Yeah, so my two things, one on your question on the second half, I just want to clarify the answer I gave the Mark. Frutarom, second half of the year, I think it's low single digits on a two year average basis. Given the week Q3 last year for Frutarom, it will be a stronger Q3 versus Q4.

In terms of in terms of margins, I think we had a very strong quarter, Q2 despite the challenges from the top-line standpoint. You heard the comments I made regarding the very strong quarter and margin performance for scent. I think some of that, as I said in my comments were timing and so I don't expect that.

I think this Q3 and Q4 will be a bit more pressure on the scent side in terms of margins with input costs remaining elevated, the teams have done a very good job in terms of mitigating that, in fact, they did the price realization, but there is timing in terms of inventory when the raw materials flow through the P&L.

And then when you get to Q4 obviously, there's a bit of seasonality where our margin profiles in Q4 are generally the weakest of the full year. So I would expect the second half to be modestly below where we were in the first half of this year..

Our next question will come from Adam Samuelson with Goldman Sachs. Please go ahead..

Yes, thanks. Good morning, everyone..

Good morning, Adam..

So first just on the compliance question, can you detail how long were the alleged payments actually happening? And specifically, you've cited in the last couple quarters of some sales declines in the savory business and through in Eastern Europe.

Is there any nexus or common customer overlap between those, just want to be clear on that point? And then secondly, on the taste business, maybe just a little bit more color on the volume declines that you're seeing in the Americas in the second quarter and the first half of the year, they seem to be a bit darker than what we would see from the food and beverage companies.

So just a little bit more color, perhaps by category or kind of where you're seeing the greatest pressure is? Thank you..

So let me start with the last one in terms of the volume side of it. As I've said in the comments, and I think Andreas said also, I mean, what we're seeing on the taste side is significant volume erosion on the existing business.

Again, if you look at our fundamentals, we don't believe we're losing share, when you look it up on the pricing, adjusted volume growth or total top line growth in on a two year basis for the first half of the year, we're very much in line with competition, so we have confidence that we're not losing share.

We are seeing significant volume erosion on existing business. Our win rates remain good for both businesses, pretty much at five year averages, so we're not seeing any erosion in the business.

We've talked about in the past that we see significant upside going forward on the scent business in terms of access to new business.So we believe is very much a volume erosion piece where Q2 was much worse than what we saw in Q1. It's one of those things that I've seen.

These trends occur over time and it's hard to predict when those things sort of return to the norm. And it can vary from their underlying product mix and the categories where we operate with a particular customer, their supply chain, so it's hard to predict, but I don't see this as being a long-term trend.

As I said in my comments related to the Frutarom piece, it was primarily an issue in Europe.

Again, it was quite strong with mid to low single digit growth in the EAME taste business for Frutarom through the end of May and then it was a very disappointing and challenging June which drove the declines that was a bit unexpected from where we felt we were going to be.

From a compliance standpoint, based on what we've seen through the investigation, they may have been occurring for a few years. But we there's never been indication that there are material amount in any particular year..

Maybe I add to the first point Rich made, if I look at our taste business, we had, in particular in '18, very, very strong growth in the first and the second quarter, 6% each. So it's strong comparables. And we can say that in the third quarter, we have had to slightly better start into the third quarter, for the taste and for the Frutarom.

I think that's important..

And yeah, last question, which I forgot Adam was, in terms of customer overlap it's pretty negligible customer overlap, particularly in this business..

Our next question will come from Heidi Vesterinen with Exane BNP Paribas. Please go ahead..

Hi, good afternoon. So if we step back and think about your performance over the past year, we've seen that you've tended to underperform on your top-line targets and once again this year despite help from a 53rd [indiscernible] and strong pricing in response to exceptional inflation, you're still below targets in terms of organic growth.

So can you help us understand what you're doing internally both on the legacy IFF side and the Frutarom side to get back on track? You think maybe some more radical changes might be needed, may it be in terms of investment or personnel or so on to ensure that you can get back to your long-term targets? Thank you..

So Heidi, that's a good – it's a good point, because I would say all the other parameters and KPIs are going actually pretty well. And we focus a lot on the top-line growth and for me or actually for us as a management team, the recipe is very, very clear.

What we need is we have to focus our activities on the most driving parts of the portfolio where we have now a much better portfolio than we had before.

So we have a couple of let's say areas, which might be small at the moment, but still from the market perspective, really nice growth for us, like the inclusions, like the health ingredients or natural foods or even the active cosmetic. So we believe that's the first one. The second thing is, where we have to look in is, our customer structure.

And here we have to drive through and particularly on the taste side, with some of the smaller and midsized customers. Here certainly the acquisition helps a lot. We take the blueprint we have from our Tastepoint. We will drive it through.

We have now integrated the Frutarom taste business into Tastepoint already in the US.And actually in that regard, if I can give the detail, we have a double digit growth on this side. It's a very nice growth of the business, so we like that a lot.

The next thing is on the scent side, because I don't want to shortchange us too much, but we have no access to more our co-lists, our most important customers. And I know that there are a lot of activities are ongoing. And you know, these are all big customers it takes let's say nine to 12 to 15 months to really capitalize on it.

But we see strong interest, we see strong first let's say wins on our side. And that will help us to let's say accelerate the top-line side on the scent business as well. On top of it and that's what's in the works and we will report on this is the cross selling aspect.

We have now moved the leader of our bigger key accounts from the taste business into the role of being the head of cross selling and total solutions business. He is building a small, but very, let's say powerful and nimble organization to facilitate the cross selling between the two organizations.

And we believe that can deliver very nicely on our top-line growth. So if I add this all together, I think we can come back to the good growth rate we have outlined the 5% to 7%. We believe it's very, very doable. And the first, let's say – initial, let's say, signs we see are going in the right direction..

Our next question will come from John Roberts with UBS. Please go ahead..

Hi, guys. I just wanted to put some numbers to what's going on in the taste with the 3x erosion, so is it like, normally you see 10% to 15% of product discontinued in any given year by taste customers.

And normally they replace that, but now you're seeing something like 30% to 45% kind of discontinued older products and even though you're having the new wins, they're not launching the new products at an offsetting rate here, is that the dynamic that we're talking about?.

John, put it in perspective, I mean, on a five year trend volume on existing businesses slightly negative, so call it low single digits and is down 1%. For the last – and now at the current rates particularly in Q2, we're in a mid single digit range. So that's by far the single biggest driver.

I mean, as I said earlier, our win rates are in line with long-term five year trends. Pricing is slightly positive a little bit below the five year average, but part of that's been driven by what we've seen over the last three years with vanilla. So I would not say it – fundamentally, it's all the volume erosion on existing business.

Some of it may be driven by shorter cycle times, but that's the fundamental driver in terms of the biggest change in the last two quarters..

Our next question will come from Alexandra Thrum with Morgan Stanley. Please go ahead..

Hi, thanks for taking my question. Just a quick one on margins, in both the scent and taste division you've sort of explained what's happening in the top-line dynamics, but when I look at taste, could you break up how much that margin decline is driven by volume versus – also the pricing versus growth.

And then on the flip side is margin development has expanded quite decently.

I expect because the managed the pricing in scent, but could you please break down that margin expansion both between pricing versus growth and volume?.

Sure, Alexandra. I mean, in terms of taste, I mean, the pricing impact was pretty negligible. And the biggest driver for taste is on the input costs in terms of it's more of a mix issue. I mean, I think our overall view in terms of mix of consumption as opposed to mix a product, I think that's a smaller impact from a mix standpoint.

But as similar to what we've seen on the taste side as we consume individual lots or product by product, we can have some fluctuation there. So the biggest driver into the margin pressures in taste is, one, the input costs and two, is the lower volumes hurting us from an absorption standpoint.

From a taste standpoint, you heard in the comments that pricing is a bigger driver from a taste standpoint, certainly on the scent standpoint, certainly on the ingredient side, but also in the compounds.As I said earlier in my comments and teams have done a very good job of aggressively pursuing price realization to offset that.

And I said earlier, we had – why we call it a unique situation in Q2, where we had mix of consumption of raw materials, which drove a favorable margin progression in Q2, which I don't expect to repeat in the second half of the this year for scent.

So that's why I said earlier, I would expect margin profiles in scent to come down from where they were in Q2, given the mix of raw materials. We still are seeing elevated prices from scent. They're at near all time highs. I think we've seen that the rate of increase has slowed.

So I think that's starting to be a positive trend, but we don't expect to see any relief in the near term from a input cost standpoint..

Our next question will come from Jeff Zekauskas with JP Morgan. Please go ahead..

Thanks. Thanks very much. Can you talk about the change in global expenses from the first quarter to the second? I think you went from about 19 million to 13 million. And then to go back to 13 million sequential decrease in cost of goods sold. I would think maybe 3 million is from volume and maybe there's 2 million or 3 million from Frutarom.

But I take it there are some hedging gains in there.

And can you describe what went on from a raw material standpoint a little bit more precisely, if you don't mind?.

Sure, Jeff. So from a corporate expensive standpoint, the single biggest driver is the cash flow hedging as you said, it's about a $5 million impact. And so that's the biggest driver as you said, it also impacts COGS. I think, clearly the volume impact is further reasoned in terms of $15 million impact.

I think the other thing that keep in mind, as I said earlier, we did have I'm going to call it a mix impact in terms of scent, in terms of the raw material consumption, as it flowed through from finished goods and raw materials into COGS. So there's a timing impact there. I think those are the biggest drivers.

In terms of the sequential performance, from an overall perspective we still expect to see mid single digit inflation from a raw material standpoint for the full year. But that's in line with what we've seen our expectations from the beginning of the year.

And as I said just a moment ago, I think starting to see some slow down in terms of the rate of the increase, but we're still at very elevated levels..

We'll take our next question from Brett Hundley with Seaport Global. Please go ahead..

Hey, thank you. Good morning, guys. Rich, I just have one detailish type question for you. So if I go to the change in EPS guide for the year.

I wanted to focus in on the change in non-controlling interest piece and just ask you whether is that related to like the carrying value of those fruit subs dropping below the redemption value? Is it due to a changeover to consolidated status away from non-consolidated status because I will admit your other income line in Q2 was less of a benefit than I thought it would be relative to Q1.

So sorry for the detailish type question, but just wanted to understand that better..

No, look, I mean, I think – so you added that $0.10 – I'd say probably $0.06 to $0.07 of that is the change in the average effective tax rate on the amortization, so that one's clear.

On the non-controlling interest, it's really a mark-to-market adjustment that we have to monitor and adjust each quarter based on the results and the outlook for the individual entities in which the minority interest had – there is a redeemable component of the minority interest.

So it's based on the underlying performance and the projection is for those businesses and so there's been a slight change between where we were at the beginning of the year and based on latest projections..

And there are no further questions at this time. So I'll turn it back to Andreas for closing remarks..

Yeah, thank you very much for participating. I think it was an important call with a couple of really important messages we wanted to make and we are now basically happy to take all the one on ones we want to do and give you more explanation around some of outcome of the businesses. So thank you very much and talk to you soon. Thank you..

This does conclude today's program. Thank you for your participation. You may now disconnect..