Good day, ladies and gentlemen. At this time, I would like to welcome everyone to the IFF Third Quarter 2020 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 Third Quarter 2020 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.

I ask that you please take a moment to review our forward-looking statements..

During the call, we will be making forward-looking statements about the company's performance, particularly with regard to our outlook for the fourth quarter and full year 2020. 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 our forward-looking statements, please refer to our cautionary statement and risk factors stated in our yesterday's press release. .

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 available on our website as well. .

With me on the call today is our Chairman and CEO, Andreas Fibig; and our Executive Vice President and CFO, Rustom Jilla. We will begin with prepared remarks and then take any questions that you may have. .

With that, I would now like to introduce Andreas. .

Thank you, Mike. Good morning, good afternoon, everyone.

Before I dive into our third quarter performance, I would like to, once again, take a moment to thank all of our frontline workers and dedicated colleagues around the world who have worked tirelessly throughout the course of this year to continue fueling our global supply chain and meeting our customers' needs.

But every business is built to weather pandemic. But over the last few months, we have continued to show that our business is well equipped to navigate the most unpredictable of storms. I can't thank each and every one of our passionate employees enough of their continued hard work, dedication and focus throughout this difficult year. .

On today's call, I will start, as usually, by reviewing IFF's recent third quarter performance and summarizing the trends that we are experiencing across the business before providing a more in-depth review of our year-to-date performance. Rustom will then provide a more detailed look at our third quarter financials.

I will then provide an outlook on the road ahead for our business and provide an update on our merger with DuPont N&B and the integration planning efforts that are well underway..

Despite the COVID-related headwinds, we saw a strong sequential improvement across all key financial metrics in Q3. We achieved 1% currency-neutral sales growth in the third quarter, a 500 bps improvement relative to our second quarter 2020 results.

Outside of Fine Fragrance and Food Service, IFF's portfolio remains resilient with growth of 3% in the quarter on a currency-neutral basis and 4% year-to-date. Nearly every category, including Fine Fragrance and Food Service, is growing, led by a third consecutive quarter of double-digit currency-neutral growth in Consumer Fragrance..

We continue to experience challenges in Fine Fragrance and Food Service, which saw improve relatively in Q2 sales, declined 14% this quarter on a currency-neutral basis. These segments continue to be the most affected among our portfolio by pandemic-driven trends in retail and away-from-home channels.

On our second quarter earnings call, we presented this monthly chart to provide increased transparency during the uncertain period. At the time, July finished was about 2% growth.

In the subsequent months of August and September, we saw a modest deceleration in sales performance versus July, actually, largely due to weakness in Fine Fragrance and Food Service. .

Now let's turn to Slide 7, where I would like to review our year-to-date performance 2020 basis. Our Flavors category, excluding Food Service, is resilient, growing low single digits. Outside of Food Service, all categories are growing.

Inclusions led the segment with impressive double-digit growth, followed by mid single-digit growth in Natural Product Solutions and Savory Solutions, again, all excluding Food Service. From a regional perspective, growth was led by a double-digit improvement in North America and Greater Asia, where new win performance is strong.

In EAME, results were challenged, which is in an area where we are focused on improving as we move forward. .

I want to take a moment to formally welcome our new Taste division leader, Kathy Fortmann. On October 1, Kathy officially took over leadership of our Taste division. She is an outstanding executive with experience across our industry and joined IFF early in 2020 as part of our succession planning for IFF as well as post our combination with N&B.

In her short term with IFF, Kathy has already brought tremendous expertise and insights to our team, leading IFF integration of Taste with N&B food and beverage platform.

With a proven track record of delivering growth and innovation at global food and beverage ingredients organizations, I'm confident Kathy will do an exceptional job leading our Taste business now and the Taste, Food and Beverage division following transaction close..

I also want to thank Matthias Haeni who has retired from IFF after 30 years in our industry. He had a long and successful career. And during his tenure with IFF he has advanced our position as leader within the taste industry. I wish him the very best for his next chapter. Overall, IFF Scent division continues to perform very well.

I'm proud to share that we have achieved double-digit sales growth in Consumer Fragrance, with double-digit growth in Fabric Care, Home Care, Air Care and Personal Wash.

Our new core list customers where we recently gained access, core to our 2021 strategy, are growing more than 50% this year, in the third quarter provided a double-digit contribution to Consumer Fragrance growth.

Particularly, I want to note that our entire Consumer Fragrance team have worked diligently through the pandemic to differentiate our offerings, win new business and achieve strong market share gains. .

In our Fragrance Ingredients business, demand is strong. Yet the pandemic created a raw material headwind in Q2 as we prioritized the use of our Fragrance Ingredients to support our Fragrance Compounds business foregoing external sales. As restriction has eased, the business improved sequentially, but on a year-to-year basis remains down slightly.

The areas most impacted by COVID-19 have been Food Service and Fine Fragrances. On a year-to-date base, Food Service and Fine Fragrances are down almost 20% as COVID-related actions impacted consumer behavior as well as retail channels have been temporarily closed, and travel retail is down..

As I stated earlier, we are encouraged that the Fine Fragrance and Food Service improved in Q3 relative to Q2 sales on a currency-neutral basis. Yet we remain cautious about trends given the increase in COVID-19 infections more recently.

Excluding Fine Fragrance, Scent has achieved strong currency-neutral growth rate of plus 8% year-to-date, while Taste has improved 2% on a currency-neutral basis, excluding Food Service. .

With that, I would like to pass it over to Rustom to provide more details on the third quarter. .

Thank you, Andreas. Slide 8 provides a high-level overview of Q3's financial performance. On a currency-neutral basis, IFF generated $1.3 billion in sales, a 1% increase from 2019's third quarter. Scent was up 4% and Taste down 1%, and I'll provide additional divisional color in a few minutes.

As Andreas noted, Q3 sales recovered from Q2's low point and over 3/4 of our $69 million sequential improvement came from Scent, and total IFF sales improved in all 4 regions..

In the third quarter, our adjusted operating profit, excluding amortization, increased 1% to $241 million on a currency-neutral basis from 2019's Q3. Our gross profit and gross margin were both higher than the third quarter of 2019 despite higher COVID-19-related manufacturing expenses and logistics costs.

Continued OpEx controls and lower T&E essentially offset additional personnel-related COVID-19 costs and other inflationary increases. On a currency-neutral basis, interest, other income and expenses, taxes and noncontrolling interests together amounted to an additional $1 million headwind versus last Q3.

And adjusted EPS, excluding amortization, was $1.40, up 1%. .

Note that FX movements adversely impacted our reported numbers. On a reported basis, Q3 sales were flat and adjusted operating profit, excluding amortization, was down 4%.

Balance sheet revaluation FX losses had a large negative impact in other income and expenses as a result both of weaker emerging market currencies against the dollar and a stronger euro. Currency volatility has impacted OIE all year, with Q1 and Q3 negative and Q2 positive. .

We believe our reporting standard provides investors with a truer assessment of underlying currency-neutral growth, especially when there are large emerging market currency devaluations relative to the U.S. dollar or euro. However, it's important to help all of you understand our performance relative to competition.

So on Slide 9, I want to take a moment to show what our currency-neutral growth in the third quarter would be using the same calculation methodology of our peers. For a variety of reasons, many of our sales transactions in the emerging markets occur either in U.S.

dollars or other hard currencies or are indexed to hard currencies when we have to invoice in local currencies..

So when reporting our currency-neutral sales growth, we exclude those foreign exchange-related price changes in emerging markets, but this is different from our peers.

During the third quarter of 2020, continued currency devaluations year-over-year in several key emerging markets would have added approximately 2 percentage points to growth if we include those foreign exchange-related price changes in our emerging market pricing.

Factoring in this comparability adjustment, we estimate that our third quarter currency-neutral sales growth would have been 3% versus the 1% we have shared. And using this methodology Scent with its strong LatAm businesses would have 8% plus Q3 growth, while Taste would have been flat. .

Moving on to Slide 10. It is worth taking a closer look at the underlying business and market dynamics influencing our overall profitability in the quarter. In the third quarter of 2020, our sequential improvement in sales was accompanied by a strong rebound in profitability relative to our Q2 performance.

Our currency-neutral adjusted operating profit, excluding amortization, grew 1% in Q3, clearly not what we want, but substantially better than the year-on-year decrease of 19% we reported in the second quarter. As expected, price to raw material costs was a gross margin headwind as was unfavorable mix due to our Fine Fragrance business..

Also affecting profitability for the third quarter were incremental COVID-19 costs, which essentially doubled from Q2. The incremental manufacturing and logistics expenses related to COVID-19 that we had incurred in Q2 flowed into the P&L in Q3 as inventories were used.

And we also paid a bonus to our essential workers around the world as they continued their exceptional service to our customers during this unprecedented time. In the end, we were able to offset these negatives through a combination of productivity initiatives in Scent and Frutarom cost synergies in Taste and tight cost management throughout IFF..

We have been very careful with hiring, with headcount down over the course of the year, have been tighter in general within expenses and, of course, have had lower T&E costs like most businesses. Overall, adjusted operating expenses were up less than 1% despite absorbing the usual inflationary increases and COVID-19-related costs.

As we forge ahead, especially in this uncertain environment, we will continue to drive growth but also review our cost structure to find additional opportunities to support overall profitability levels. .

Now turning to Slide 11, where we take a closer look at the performance of the Scent division in the quarter. Scent sales totaling $503 million were up 4% overall as Consumer Fragrance continues to outperform.

Specifically our Fabric, Home, Hair Care and Personal Wash product categories all experienced robust growth and are also benefiting from the pandemic-related increase in global consumer staples purchases. As Andreas noted earlier, it's not all COVID-19 related.

We are seeing strong growth from our new core list customers that we recently gained access to..

While Fine Fragrance sales remain challenged, Q3's 14% decrease is a significant improvement from last quarter, where sales were down 40%. Importantly, our Fragrance Ingredients business, which was impacted by COVID-19-related supply constraints in Q2, returned to growth, led by double-digit gains in Cosmetic Actives.

These metrics are encouraging and reflect the recovery this summer in global retail markets and consumers' ability to reach them. In addition, the Scent division saw meaningful profit improvement this quarter, as segment profit grew 20% to $101 million.

This was driven by higher sales volumes, strong benefits from management productivity initiatives and cost discipline and tight OpEx controls. .

Moving on to Slide 12, where we focus on the performance of our Taste division.

While we saw sequential improvements in Food Service compared with a 36% decline in the second quarter of 2020, this remained under pressure in the third quarter, declining 13% on a currency-neutral basis versus the prior year as the pandemic limited food consumption away from home.

To put this in context, Food Service took Taste's overall sales growth down by roughly 2 percentage points. That said, the rest of the Taste portfolio, excluding Food Service, delivered positive currency-neutral growth across all global markets.

One particular bright spot was North America, where IFF realized double-digit growth in Taste across nearly all categories..

We continue to see weaker growth in the other regions due to COVID-19 and related regulatory restrictions such as EAME, Latin America and Greater Asia.

Natural Product Solutions, our food ingredients business, and our North American Flavors businesses were the strongest performing in the quarter, while Savory and Inclusion both more impacted by Food Service were negative in the quarter.

Frutarom declined 2% compared to the prior year as their strong presence in Food Service and customer base of mostly smaller local and regional customers continued to be more adversely impacted by COVID-19. For Taste overall, the segment achieved a 13.3% profit margin, with $102 million in segment profit on $765 million in sales.

Benefits from acquisition-related synergies and tight OpEx controls were more than offset by lower sales volume, unfavorable price to raw materials costs and higher COVID-19-related costs..

Turning to Slide 13. I'd like to provide an overview of IFF's strong and growing cash flow position. The chart on the left illustrates the reconciliation from reported net income to free cash flow and includes all key drivers.

Operating cash flow and free cash flow were up 8% and 30% this quarter, respectively, led by core working capital improvements and stepped up reviews of capital expenditure. Our thoughtful and disciplined approach to investments amid the pandemic has resulted in CapEx of approximately 3.3% of sales versus 4.2% the prior year..

While continuing to support our customers and suppliers, our teams have also been very focused on optimizing working capital, and our cash conversion cycle has improved 8 days year-over-year. We clearly need to generate cash, given our leverage and the impending merger with N&B.

So it's good to see the improvements in days payables outstanding and days sales outstanding. Where inventory is concerned, we did see a small improvement in inventory days with more originally projected for Q4. But now with COVID-19 picking up again, we will increase our safety stocks.

Note that we are not expecting to repeat last Q4's strong cash flow performance this year, primarily because of the benefit last year from extra sales and collections in the 53rd week.

Further, despite continued stress in all industries across the globe, we believe that this quarter's strong balance sheet is a testament to our continued capital allocation focus and discipline. .

Moving to Slide 14. As we look to remainder of 2020 and into 2021, we will remain laser-focused on maintaining discipline across our balance sheet to ensure that IFF is well positioned as we navigate a prolonged challenging market environment.

The situation remains highly uncertain, given the steady increase in global COVID-19 infections and the potential for additional regulatory restrictions in various regions.

We're incredibly fortunate that the majority, roughly 85% of IFF's portfolio, has remained resilient and essential around the world for food, beverage, hygiene and disinfection products. Unfortunately, the persistence or even worsening of the pandemic will likely translate into continued weakness for Fine Fragrance and Food Service in Q4..

I will also remind you that we face a very strong Q4 comparison to last year, which had a 53rd week of sales and profit contributions.

As we noted at the time, this represented about 400 basis points of growth in the fourth quarter last year and is a large, roughly $50 million headwind, this quarter and will occur all in the last week of December 2020, impacting our monthly performance comparative significantly.

This extra week last year also clearly came with a substantial operating profit contribution. And while it is hard to be precise, we estimate that this will represent a $15 million to $20 million headwind for us in Q4. .

We began the fourth quarter with low single digits growth in October on a currency-neutral basis, in line with Q3's results. Based on this first month and given the uncertainty, it's unlikely that we will see higher growth for the full fourth quarter than the 1% we achieved in Q3. That is before taking into account the headwinds from the 53rd week.

In this uncertain and difficult environment, we are more than ever controlling what we can control such as OpEx and also capital expenditure. And of course, we remain focused on driving strong cash flow and reducing leverage. .

And with that, I'll hand it back to Andreas to discuss the near-term road ahead for IFF. .

Thank you, Rustom. Before providing an update on our pre-integration work with N&B, I want to spend a moment on the progress we have made on our Frutarom integration. On Slide 15, I'm pleased to share that we have made strong strides with our Frutarom integration work.

As of the third quarter 2020, we have complete integration of our business teams and believe that by the first quarter 2021 we will substantially complete our manufacturing optimization plan essentially at 90% of the consolidated -- consolidation complete.

As a result of the outbreak of COVID-19 and the related complexity, we are delayed about 6 to 8 weeks was our original projection, but remain on track to be largely complete in the first quarter of 2021 around the time of our transaction close with N&B..

As a reminder, as part of the Frutarom integration initiative, we expect to close approximately 35 manufacturing sites. For the end of 2020, we are on track to close between 20 to 24 sites around the world and expect to be completely finished by the end of 2021. With the integration of Frutarom, we have learned a lot.

This experience has been important for IFF, and we will leverage these experiences and apply lessons learned as we take next step with DuPont N&B. First, we have put more ability to deliver value through cost synergies.

We know how to build teams to quickly and efficiently identify and capture these opportunities in ways that create real shareholder value..

Second, revenue synergies need to align with the product development life cycle. We need to recognize in our planning that this can mean that these synergies take more time to achieve, but the key takeaways being start early to ensure delivery.

As of today, we have a strong pipeline of Frutarom-related cross-selling projects, over 2,000 with a pipeline potential of approximately $235 million, and we believe we are on track to meet or exceed our target for 2021.

Third, we need to recognize the potential for sales dis-synergies plan accordingly to properly mitigate and anticipate when it can't be avoided. Fourth, we must build teams and organizational functions that protect base business growth. This was a major consideration how we designed the organization structure at our future combined company.

Growth through synergies and innovation have to be incremental to core business growth..

And fifth, we need to move with speed and be decisive. There's always an urge to be cautious through integration as 2 cultures learn to work together. We have to break down these barriers with focused, accountable leadership towards clear shared goals prioritizing profitable growth.

I will also add that moving towards a transformational merger and working through the challenges of a global pandemic has forced all of us at IFF to work in new ways.

We have learned quite a bit in these last several months and in many ways it has forced us to take a fresh look at our business in a way that I think will prove beneficial as we continue in our transformation journey. .

Turning to Slide 16. I'm pleased to share an update on our integration planning process for our previously announced merger with DuPont N&B. As you can see, we have reached all targets for the second half of 2020 and are on track with our targeted close date of February 1, 2021.

The 3 notable milestones we achieved in the third quarter 2020 include a successful shareholder award, the completion of the permanent financing and the announcement of the executive team minus 1 leadership teams.

I'm pleased to have received a strong support of IFF shareholders who have recognized this unique opportunity to create significant long-term value..

With more than 99% of the votes cast in favor, IFF shareholders have overwhelmingly approved the issuance of shares pursuant to the merger agreement, through which IFF and N&B will combine to create a global leader in high-value ingredients and solutions for global food, beverage, home and personal care and health and wellness markets.

We also completed a successful pricing of the $6.25 billion bond offering in September. This financing, together with the previously procured term loan facility, will provide N&B with the funding needed to make the special cash payment of USD 7.3 billion to DuPont in connection with the completion of our merger with N&B.

I'm happy to report that there was tremendous interest in the bond offering. The interest rates were favorable and the offering was significantly oversubscribed. .

I'm also happy to announce that at the end of last week, we received antitrust approval in Mexico, which was 1 of the 2 remaining jurisdictions where we needed for approval. As we move towards close, we have only a few integration milestones left to reach and are confident in our abilities to execute on our post-closing time line.

We anticipate receiving antitrust approval for Europe in December and will be filing our amended S-4 with updated pro formas in the coming months. .

I continue to be very excited about the combination between IFF and N&B. I believe we have a significant amount of opportunities to create strong shareholder value in the future.

We actively review our portfolios on a constant basis, especially in light of the future combination with N&B to look to maximize our returns by driving growth in accretive categories and deprioritizing our low-value businesses by reducing allocations of expense and capital fixed or exit completely with divestitures. .

Moving on to Slide 17. In summary, I continue to value the continued resilience of our portfolio during an exceptionally challenging time for all industries and communities across the globe.

Despite this unpredictable environment, we have delivered sustained growth across some of our largest segments and returned to growth in others in the third quarter. Our 1% currency-neutral growth for the quarter marks an important sequential improvement from Q2.

And excluding Fine Fragrance and Food Service, we are pleased to have delivered 4% year-to-year currency-neutral growth with improvement across nearly all categories. We also made great progress in our N&B pre-integration planning and remain on track to close the transaction in the first quarter of 2021..

As global conditions remain volatile and unpredictable, we will continue to focus on controlling the controllable, to drive strong cash flow, maintain strong operational capital discipline and leverage the strength of our portfolio to depth and succeed.

I'm proud and grateful to all of our employees across the globe who have gone above and beyond to ensure the continuity and resiliency of our business, all while delivering for our 30,000 customers across the globe and executing on the integration process for Frutarom and N&B.

While we recognize we always have opportunities to improve, in particular, on within our Taste division, I'm confident that as we move ahead, we will improve our performance as we did in our Scent division over the past few years, both in terms of sales through new customer, core lists and margins through operational performance programs.

I believe that we have the strategy and the team in place to position our organization for long-term success both now and upon uniting with N&B. .

With that, I would now like to open the call for questions. .

[Operator Instructions] We'll go next to Mark Astrachan with Stifel. .

I wanted to ask about adjusted EBIT and EBITDA performance versus your peers. So the European peers, at least by my math, have seen profit growth in the first half and anticipated for the full year. Based on what you just walked through, Rustom, I get down mid-single digits or so for your business on each in 2020.

So I guess the question is why has IFF underperformed? And perhaps, could you walk through the specifics of pressures on gross margin and SG&A? And when do you anticipate those trends to normalize versus peers? And just related to that, a quick one for you, Rustom, probably.

Could you just provide the Frutarom synergies in the third quarter as that was no longer provided in the Q?.

Will do. And yes, a long question, so let me make sure I cover all of it. Look, first of all, on the competitors' performance, I mean, I can't really comment on our competitors' performance. But let me take you through ours and give you some context.

So our year-to-date -- so, see not Q3, our year-to-date adjusted operating profit, excluding amortization, is down 4%, and that's on currency-neutral sales growth of plus 1%. So that's clearly not good, but here are the drivers. So we had a negative type this quarter. We had a negative sales mix.

I mean, Fine Fragrance -- I mean you've seen the impact in Q2 in particular and minus 40% and then Q3 as well, much lesser, but you've seen it in there. There's unfavorable price to raw material costs. Now that's mainly Fragrance Ingredients, and that's mainly price reductions in advance of raw material declines.

There's COVID-19-related incremental costs. I mean, we put the -- we've shown you the bridge on the slides in the quarter..

But if you look at the year, I mean we're talking about almost just a little under $20 million in costs that we've actually incurred on COVID. And incentive comp, I mean incentive comp as well year-on-year, if you remember, we expected a year-on-year headwind when we finish because of everything that had happened last year.

And that has played through and to a little extent in the quarter and certainly in the full year as well. Then, of course, you've got the basic. And then on the other side, some of the positives in the year-to-date, it's been a negative on volume, and that's because of Q2. But in Q3, volume was actually a positive.

And synergies, I mean, synergies have been a positive all year-long in what we've seen. And then, of course, there's productivity and cost discipline, right? So I'll come to Frutarom in a second..

Earlier in the year, we were unsure as to the severity and the duration of COVID-19. So we choke back hiring. And we acted to control expenses, but we decided against taking costs out of IFF.

And now with infections rising and no line of sight as to countermeasures, I mean vaccine comments notwithstanding, we are planning on acting to reduce costs over the coming months. And then Frutarom. You asked about Frutarom.

And look, despite COVID-19, we're still on track to deliver on the procurement and manufacturing optimization cost synergy of $50 million that we outlined earlier this year. We did modify the 10-Q and it's not required to disclose the exact amounts every quarter. But I can tell you, we had $10-plus million of synergies in Q3.

So when you combine that with the first half savings of $32 million, that puts us at $42 million, $43 million, something like that, and clearly on track to achieve our full year $50 million goal. And Mark, just to remind you, our target was $100 million by year 2 and $145 million by year 3.

Did I cover everything in there that you asked?.

His line may be muted. Rustom, sorry. So maybe we'll go to the next question. Mark, if you have another question, feel free to jump back in the queue. .

Heidi Vesterinen with Exane BNP. .

So a question on Taste. I understand the pandemic related challenge in out-of-home, but it does appear that you've had additional challenges. This year, you have negative organic and margin hit by input costs. Your peers are not talking about this. Last year, I think it was destocking by multinational customers. Your peers were not seeing this.

Can you talk about what explains this underperformance? And you finished your presentation talking about there being a strategy in place to change this.

So could you maybe tell us about your action point?.

Sure, Heidi. I can take it. I think, first, please remember that we need to adjust the reporting differences, specifically FX-related pricing. But I think Rustom talked about that. Certainly, we have an impact on the Food Service, which is happening in the home market for the competition as well.

But despite that, we are not entirely happy, and there's more work to be done. We see if you zero down, in particular, some weakness in Europe, where we have to dig in and figure out how we go forward. We see actually a very strong performance in North America.

And we have to model what we have done over the last, let's say, 2 or 3 years in North America, in other regions as well. So there's a program underway. And I might remind you, a couple of years ago, we had similar questions on our Scent business. We are taking it very seriously. And I think we have turned around the Scent business quite significantly.

And I would say in that area, we are outperforming our competition now, in particular, on the Consumer Fragrance side. So that's what we see. And we will take the action to make sure that we fix what we have to fix here. .

And just as a follow-up, you also talked about challenges with small and mid-sized customers. I think you had talked about it last quarter as well.

Is this a short-term issue or are these business opportunities that have simply disappeared like a customer and you're exiting the market? What is happening there, please?.

Yes. Sure. Absolutely. And that's a quite important question because it's strategic in a sense. We still believe that you need a good exposure to the smaller and midsized customers over long-term to grow your business. Certainly, the small customers had more impact of the COVID crisis than some of the big ones.

We believe that most of them will come back to growth. And let me give you 2 examples. We see right now still quite a bit of an impact on the small customers in India, for example, where we are market leader with our Taste business, so that has an impact on our business..

On the contrary, we see actually very good results of our Tastepoint business here in the U.S., and we are starting to accelerate again with small customers. And I think what we are seeing is now since the, let's say, supply lines are again very robust and delivering, I think it gets better here as well.

So you see, it depends on the region, it depends on the country, but we believe in the long-term that this is a customer base we would like to keep it because we believe we will get some good growth out of it. I hope that helps, Heidi. .

We'll go next to Lauren Lieberman with Barclays. .

I wanted to catch up on 2 things. One was just thinking about some of the puts and takes to fourth quarter. I know Rustom you were specific on the 53rd week dynamics.

But just how we should be thinking about the increased COVID costs, if there's any other one-off lapse that we should be aware for 4Q? And then the second thing was just looking back at the July S-4, the management projections that are shared there for the N&B transaction.

It just struck us as interesting that you're pegging growth for IFF at 5% and for N&B at 4%. And for sure, IFF was delivering at that level before Frutarom, but not since. And N&B, I don't think has hit that number, I'm not sure, ever. So I just wanted to hear a little bit about the buildup of that projection.

How much of that already assumes what you think you can do in terms of integrated solutions, but I am curious what those kind of baseline projections for the business is?.

Sure. I take the first piece of it on the sales for the fourth quarter, then Rustom can comment on the cost, and then I come back on the S-4. Look, Lauren, in all honesty, it's tough on the fourth quarter.

As Rustom said, we had a good start into the fourth quarter basically on all measures, in particular also on the Scent business, very, very strong start into it. But we are cautious for a couple of reasons. First of all, we see now in Europe, again, many of these, let's say, lockdowns, even if they call it soft lockdowns.

So we will see what that brings for us in terms of Food Service, but Fine Fragrance business as well, which started well in October, but we will see what's happening here. But what we know is that we are running against a very strong fourth quarter last year, first of all, good growth but then also driven by the 53rd week.

So still, good start into the quarter, also a good order book, but we remain cautious because of the 53rd week and also about the new lockdowns we have seen in Europe. That's the reason why we are taking a bit more of a conservative stance. But Rustom, please comment on the cost and then the operating profit side. .

Yes, absolutely, Andreas. Yes, look, I mean, the situation is pretty uncertain. I mean Andreas made that point on the cost end of things, right? And we're fortunate the majority of our portfolio is resilient and essential, the food, beverage, hygiene, disinfection, all the rest of that.

But we are looking right now as far as we can tell that a worsening of the pandemic, and that will likely translate into continued weakness in Q4 in our COVID-19 impacted areas, Fine Fragrance and Food Service, right? So we are kind of not 100% sure how that plays out.

But Food Service already, as we think about it, we think that it's going to be probably slightly worse than Q3 was..

On COVID costs, by the way, Lauren, I mean, we had -- Q3 was big. I mean, we had close to around $13 million of COVID costs, and that's because we had about several million for the one-off costs, for the special payments that were made.

In Q4, based on the run rate and how things flow-through from our inventories and all the rest of it, we'll expect a COVID cost, but much smaller number, probably closer to around the $5 million type range. So yes, you're right.

And you do remember that last year as well, we talked about the 53rd week and it being 400 basis points in revenue and all the rest of that. That's a roughly $50 million sales headwind when you come around to this Q4. And the extra week also comes with a -- came with a substantial operating profit contribution.

And while it's hard to be precise, okay, we estimate that this represents a roughly $15 million to $20 million headwind in Q4. So if you think about that, I mean, that's a big one..

And then if you look at the other numbers in there and what we may have, we also have in Q4 last year -- we had a Brazilian tax indirect, what is it -- indirect taxes last year that we got. And that was -- and that had been subject to litigation. We disclosed that in our 10-K. That was roughly about $8 million.

So if you look at that, I mean, those items between them. And finally was the AIP, okay? We mentioned that the AIP was nothing -- for the whole year we talked about AIP being a $40 million headwind last year for the whole year projections in '20. And about half of that amount will come in the fourth quarter, the delta year-on-year.

There wasn't too much in Q3. But also going in the other directions, you don't think it's all simply negative, right? We have some positives. And last year in Q4 you may remember that we had inventory impacted much lower gross profit margin. And so this year, we fully expect to be at least $10 million better on that account.

And then we have the synergies, as Mark asked about the synergies to start with. And so we'll have a similar positive amount compared to last year's Q4 in synergy and productivity benefits. So I think that... .

Okay, Rustom. Thank you for that. So in summary, I would say, good start, but we are very cautious about the situation we are having. And I think the put and takes on the cost side Rustom explained quite well. Coming back to the S-4 question. And I think what plays an important role here is, first of all, the area where we want to focus on.

What we have done a quite extensive, let's say, review of our new portfolio. And there are certainly a couple of areas, which have really good growth perspective. And I'm not giving you our guidance or budget for next year. But I would like to give you some background how we think about next year in terms of the different categories.

So look, the Consumer Fragrance business has performed very well in the last couple of quarters, and we don't see any change in the fourth quarter, and we don't see too much change for the next year..

And that's a quite significant business between $1.1 billion to $1.2 billion, because we believe that the demand for hygiene products will stay high next year and Personal Wash as well.

And as Rustom commented in his comments on the earnings, the 3 new callers are really producing now really nice growth and have enough critical mass to give us some additional growth. So that will be a good focus area. Fine Fragrance will come back eventually as soon as COVID is normalizing over the course of next year.

And that gives us just technically already a nice growth going forward into the 2021. And then we see actually a good performance on the Active Cosmetic business and the Ingredients business as well. Since we have solved for the, let's say, raw material issues out of India, I think that's working well. So that should give us good growth going forward..

On the Taste side, as I said, we have to focus on the most important categories where we can get growth. One of the fastest-growing areas was the beverage area for us, in particular, hard sales in the U.S. We believe that it's a good growth driver for us going forward.

We see some of the Natural Product Solutions driving forward, which is -- could be the INFAT business, the food protection business and that helps us to grow nicely. And Food Service, over the course of next year, the quick-service restaurants should normalize as soon as we see some more regular business after -- in the post COVID period.

So we believe that could give us good growth drivers going forward..

On the N&B side, even it's not our business now, but what I see from the outside and the pre-integration, you have a couple of business like the biorefinery business or microbial control business, which has challenges which should normalize after the COVID crisis as well.

And then you see certainly businesses like the probiotics business or the cultures or enzyme business, which are going quite nicely. So we believe that could drive our growth going forward in 2021. You mentioned integrated solutions. That's certainly a growth driver as well.

But I would expect this more in year 2 after the integration because it needs a bit of time that our customers not just, let's say, buying the concept, but launching these products in the marketplace as well. And then it will drive quite nice revenue synergies and certainly profit synergies as well going forward..

I hope it helps to unpack how we see the different portfolio pieces. Maybe just a remark on the regions. As I said before, we have nice growth in North America and a great momentum on both sides of our business, which is fantastic. I think Latin America is better than you might think. And hopefully, it will go better next year as well.

We have a bit of a topic on Europe, which is certainly driven by COVID because Fine Fragrance has a big footprint in Europe, as you well know. Lots comes out of France and the Food Service business as well. So we will focus here to fix as much as we can.

And then, hopefully, with the, let's say, introduction of the vaccine and the post-COVID period that can give us more growth going forward. So I talked a lot, but I hope that gave you a bit of a perspective how we see the world for now. .

Next to Faiza Alwy with Deutsche Bank. .

Andreas, I have, I guess, two questions for you related to some comments you made regarding N&B. I guess the first thing is you mentioned that you've learned from -- there were some lessons that you learned from the Frutarom integration. And I'd love for you to dig a little bit more into that and how you think this one might go differently.

So what are those lessons and how you intend to apply those to N&B? And then, secondly, you made some comments around the portfolio. It sounds to me like you're suggesting that there might be some divestitures.

So just want to see if there's anything more -- if I'm reading that right and if there's anything more you can say regarding the timing or the size of that. .

Yes. Thank you, Faiza, for the question. Let me start with your last part. As I said, we have rigorously looked at our portfolio and there are pieces where we really want to accelerate our growth going forward because we believe it's the right thing to do. And there are pieces which might not fit too much any longer into our portfolio on the IFF side.

And it's probably too early to talk about concrete pieces but we are looking actively into it, and we can't make a decision on N&B, but we are looking into the portfolio here as well. I think your read is quite spot on..

On the lessons learned, I would say there are a couple of lessons. The first one is that you need some time, if you bring these organizations together. You have to start with an aligned team and do as much work before day 1 as you can. Let me give you an example.

Look, we have now announced basically up to the top 150, 170 leaders in the new organizations already. And we are still 2, 2.5 months ahead of closure. And hopefully, we will go down 1 layer further. We didn't do it because it was a shorter time frame with Frutarom.

I think that's an incredible important step because we can hit the rubber or we can hit the road much, much faster than the Frutarom..

The second thing is we have done an extensive work on the integrated solutions and the cross-selling opportunities. And one of the learnings was, we were, even in food, never short of ideas, but it took longer to realize it. And as I said, we will achieve our top line synergies with food, but it took longer than we were thinking.

And that was mainly driven not just selling these ideas to our customers, but until the customer was launching the actual products. And it just takes a bit of more time. And here, we were -- let's say, we started earlier. We tested more robustly our ideas. And we have planned for more time to realize it. I think that's an important one as well..

And then I think we have learned a lot in terms of, let's say, optimizing our footprint. And that was going okay and well. On the food side, I think we are even better prepared now for the merge with N&B on this side as well. So a ton of learnings. I could talk even further, but this might be the most important ones. And it was very helpful.

I think for us, to take on something like N&B without having had Frutarom before as an integration exercise, would have been a very, very tough one. But I think the key learnings have helped that quite a bit to be very, very well prepared. And I would say, right now, we are light years ahead of what we had with our last integration.

That's what I always hear when I talk to my head of integration. I hope that helps. .

Gunther Zechmann with Bernstein. .

Can I ask two, please? Firstly, on the intra-quarter trends in Q3, thanks for providing that slide with the monthly sales growth. When I think back what you said with Q2 earnings call, I think I remember you said that July order book was up in the mid- to high single digits.

So can you just talk about the difference between what you saw then in the order book and what actually came through to lead to the lower growth? That's the first question.

And the second one, on the raw material side, Rustom, did I understand you correctly that raw material -- price to raw material was still a headwind, but you included the COVID costs into -- or some of it at least in the raw material cost? If you could clarify that, and how much that would be, if that's right? How much that would be if you strip that out?.

Sure thing. Gunther, I take the first one. What we've seen in the COVID crisis is that many customers have changed a bit their behavior in terms of orders. We see at the beginning of the quarter probably more orders than usual because everybody tries to get their stuff they need.

And that's true, by the way, for the fourth quarter as well, which is very high, but we are cautious because we don't know how that will, let's say, good on over the quarter. That's the reason. So we have seen, let's say, a deterioration also in the third quarter over the course of the quarter that the order book went down..

And you see sales went up a bit in October, again, but who knows what will happen in September -- in December. Sorry for that. And also the comparison is certainly a tough one. So as I said, a bit of a different order behavior of our customers, also depending on the region.

We see now some movements in Europe, which is probably because of the lockdown situation. And you sit in London, and we see some movements now for the Brexit, which will now happen probably finally. And you see some movements back and forth as well. So that's the reason for that. But on the raw materials, please, Rustom, you comment. .

Yes. Thanks, Andreas.

Yes, in Q3, it was a negative, right? I mean -- and one of it was Fragrance Ingredients that I talked about where we continue to use high cost inventory, right? And COVID -- the COVID part within our raw materials of usage coming through was a few million dollars as well, which will be much less going into Q4, simply the lag of when we order and the inventory and when it gets used, right? In Q4, I mean, Gunther, we expect it to be still the net of pricing and raw material costs to be negative, but a very slight negative because we actually expect, in general, some positive input costs and then rest in there.

So hopefully, that gives you the answer to that. .

Ghansham Panjabi with Baird. .

This is Tom Digenan on for Ghansham.

So starting with Taste, could you provide some additional details on margins in the quarter and why they were down more on a year-over-year basis versus 2Q, particularly in context of the sequential improvement in Food Service and what appeared to be solid results otherwise?.

Let me take that. .

You go, Rustom. You go. .

Thanks. Let me take this quickly. It's the -- it's COVID impact, right? If you think about the COVID costs coming through, we saw that the roughly $5 million of extra costs that we incurred in the quarter flowed through, and it was much more in Taste than it was in Scent when we had.

I mean there was also -- Scent benefited -- you are comparing Scent and Taste implicitly and Scent benefited from Fine Fragrance coming back, I mean, like a minus 17% at the end and the minus 14% in the quarter. Those numbers is considerably better than the minus 40% that we had in Q2.

So you saw the benefit plus a lot of productivity and cost discipline coming through the numbers. Taste was good in terms of its cost control -- of its OpEx cost control as well. But just the combination of the Food Service and the different businesses, I mean, on the gross margin, we had a tough quarter. .

That's really helpful. And then just as a quick follow-up. You called out a positive trends in October.

Could you provide some more granularity on this from an end market and geographic perspective? And whether there's anything that's changed in November as lockdowns have been gradually reinstated?.

October, I mean, Andreas, do you want me to take that?.

Yes, sure. You take it. You start. .

I mean, October, I mean, the sales -- I mean, it was basically -- I mean, basically, in the low single digits. I mean it was pretty much in line with Q3. We're not really seeing anything bigger from that perspective.

The -- as the lockdowns come into Europe, which have been coming basically at the end of October into November, right, we do expect that's going to have a bit of an impact on our Food Service, in particular.

Andreas?.

No. I think that's exactly right. What we have seen actually is stronger sales on Fine Fragrances, which was positive in October, which is actually -- it's great. We will see how it pans out over the rest of the quarter. It's an important season for us because it's ahead of the holiday season. So that's important. That's what we have seen.

And we have seen still a double-digit growth on Consumer Fragrances, which is great as well, but not too much of a change, as was some said of the previous quarter. And as I said, we are really looking here from week-to-week how we are moving forward.

And Gunther's question was the same as how is the order book? The order book is strong, but we will see whether it deteriorates over the course of the quarter. And that's the reason why we are cautious. In terms of regions, I think Rustom is right. Europe is our focal area right now. I think it's good for North America. North America is good.

Latin America is probably better than you would expect. Asia is okay because now we see that India is coming back, which is great. But Europe is still a focus area. And that's certainly driven by the new lockdowns we see all over Europe. .

We'll go next to John Roberts with UBS. .

I just have 1 question. One of the N&B revenue synergy examples cited earlier was plant-based meat.

Could we get an update on what's going on in that marketplace, since it seems like there have been a lot of developments recently?.

Yes. Thank you, John, for the question. It's certainly one of our focus areas because I believe we are exceptionally strong positioned in that area going forward because we have all the ingredients to satisfy by the market here. What we see is that basically, many companies are now moving into that area.

The category was suffering at the beginning a bit from quick-service restaurants being down. That is coming back now in some of the geographies, which is good. But you see more and more that these products are going into supermarkets like Whole Foods and others alike.

So what I want to say here is they had a bit of a hard time at the beginning of the pandemics with the quick-service restaurants. They are coming back. We see more companies moving into that area, and we see that the whole category is growing, and that's our expectations for the years to come as well. I hope it helps, John. .

We'll go next to Matthew DeYoe with Bank of America. .

A question on the way you report and walked through all these slides.

Like why not use the same currency-neutral sales results as all your peers? It just seems like we're wasting time walking through all these quarter-to-quarter and candidly it's odd that you plan to flag on kind of fundamentals with this?.

I couldn't agree more. I give it to Rustom. .

Look, it's something we're looking at, honestly. I mean we do believe that our way of looking at it is more right, as I said earlier.

And -- but at the end of the day, I mean, it is frustrating that when you compare it to our peers, it makes the report, the numbers that we put out, we're doing ourselves a disservice in an environment where the emerging currency -- where the emerging currencies are weakening. As I said in there, I'll just say 1 quick thing in point.

So if you just look at our Scent's performance and if you look at our Scent performance reported on apples-to-apples basis, right, I mean we're talking about 8% type growth. So anyway, I'll leave it at that. .

Yes. It's a discussion with our Audit Committee, but we're working on it. Let's put it that way. .

Adam Samuelson with Goldman Sachs. .

So I wanted to come back to something, Andreas, you said in the prepared remarks around lessons from Frutarom. And you made the point on sales dis-synergies.

And I was hoping if you could kind of maybe provide a little more tangible examples of where within the Frutarom experience that has been a headwind? Are you just talking like resource or other businesses there that we should be mindful that they've been a little bit more pressured?.

Yes, sure. Absolutely. Look, there were some dis-synergies we have seen. Maybe we have talked about the citrus business we had out of Florida, where we have supplied 1 of our competitors. They lost their big customers, but they also have built their own, let's say, capabilities here, and we lost quite significant part of the citrus business.

That's actually probably 1 of the premier examples for sales dis-synergy. We don't expect too many sales dis-synergies from N&B. But we have built it in. And we said that if we look at the sales synergies, it always has to be a net number as it is on the cost side as well. So we are very aware of that.

And we make sure that we really capture it in the right way. I hope that example helps. .

We are out of time for Q&A. I'll turn it back to Andreas for any closing remarks. .

Yes. Thank you for all of your questions. Thank you for that. It was a good discussion, and we're looking forward for the one on ones. Thank you, and stay healthy, please. Bye-bye. .

Bye-bye everyone. .

And this does conclude today's program. We appreciate your participation, and you may now disconnect..