At this time, I would like to welcome everyone to the International Flavors & Fragrances First Quarter 2016 Earnings Conference Call. All participants will be in a listen-only mode until the formal the question-and-answer portion of the call. Participants will be announced by their name and company. In order to give all participants an opportunity to ask their questions, we request a limit of one question per person. I would now like to introduce Michael DeVeau, Vice President, Global Corporate Communications and Investor Relations. You may begin.

Thank you. Good morning, good afternoon, and good evening, everyone. Welcome to IFF's first quarter 2016 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 and will be available for replay. 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 the outlook for the full-year 2016. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning 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 March 1, 2016 and our press release that we filed yesterday, all of which are on our website. 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. With me on the call today is our Chairman and CEO, Andreas Fibig; and our Executive Vice President and CFO, Alison Cornell. We will start with prepared remarks and then take any questions that you may have. I would now like to introduce Andreas.

Thank you, Michael. I would like to start with an executive overview of our operational performance for the first quarter. Then I will provide an update on the progress we are making in terms of our long-term Vision 2020 strategy. Once finished, I'll ask Alison to cover our financial results in greater detail, including specifics on each business unit as well as our cash flow statement and outlook for the remainder of the year. Then I will provide some concluding remarks and we'll finish by taking any questions that you may have. I'm pleased with how we started 2016. Given the volatile global operating environment and against our strong year-ago growth comparison, currency-neutral sales grew 6%, which was comprised of 5% growth in Flavors and 8% growth in Fragrances. On a consolidated basis, our top-line growth benefited by approximately 4 percentage points related to the contribution of our recent acquisitions of Ottens Flavors and Lucas Meyer's Cosmetics. Our organic business, which had stronger performance than we anticipated, grew 2% on currency-neutral basis. The driver of out-performance can be attributed to improved volume trends versus what we have experienced in the fourth quarter 2015. In addition, we also benefited from an increased contribution of commercial performance, as new win growth was strong, particularly in fragrance compounds. On profitability perspective, we strategically reinvested and our business was simultaneously delivering 7% currency-neutral adjusted operating profit growth and a 20 basis points expansion in adjusted operating profit margin. The driver of our profit improvement was strong gross profit performance driven primarily by volume growth, the benefits of productivity initiatives, and contribution of acquisitions. Currency-neutral EPS improved 11%, as we gained additional leverage from a more favorable effective tax rate and a reduction in shares outstanding. With respect to Vision 2020, we continue to make…

Thank you, Andreas. I would like to reiterate our strong financial performance for the first quarter. I am pleased that we were able to deliver sales growth of 6%, adjusted operating profit growth of 7%, and adjusted EPS growth of 11%, all on a currency-neutral basis. Our performance can be attributed to improved volume trends, which we believe includes the timing of orders from fourth quarter of 2015 to first quarter of 2016, and strong new win performance. I would also like to take an opportunity to provide commentary on our adjusted EBITDA, given M&A has become a larger component of our strategy and is a key indicator of comparison to our largest competitors. We continue to see profitability and margin progression as our adjusted EBITDA grew 6% versus the prior-year period, inclusive of currency. Adjusted EBITDA margin expanded a very strong 120 basis points, principally driven by volume leverage, the benefits of cost and productivity initiatives, and mixed benefits resulting from the inclusion of IFF | Lucas Meyer Cosmetics and IFF | Ottens Flavors. Turning to business unit performance. Flavors currency-neutral sales increased 4%, primarily driven by approximately 4 percentage points relating to the acquisition of IFF | Ottens Flavors. It is important to note that this growth was on top of strong 9% currency-neutral growth in the first quarter of 2015. The improvement was led by high-single-digit increases in North America, inclusive of our acquisition of IFF | Ottens Flavors, and Latin America, reflecting double-digit growth in Savory, Sweet and Dairy. Greater Asia posted low-single-digit growth, as increases in India and Thailand were more than offset by softness in China, although trends in China improved sequentially. Within Greater Asia and on a category perspective, growth was driven by new win performance, particularly with relative strength in Dairy and…

Thank you, Alison. In summary, I am pleased with how we started off the year. Financially, the entire organization collectively achieved strong results as evident by our 6% sales growth, 7% adjusted operating profit growth, and 11% adjusted EPS growth all on currency-neutral basis. As Alison just commented, we are on a pace and have increased confidence to achieve our previously stated currency-neutral financial guidance for 2016. Simultaneously, we continue to be focused on the execution of Vision 2020 as we believe our emphasis on building great differentiation and accelerating profitable growth will create incremental shareholder value over the long term. With that, I would now like to open up the call to questions.

And your first question comes from Mark Astrachan.

Thanks, and good morning, everybody. I appreciate the color on the benefit to first quarter results from the 4Q weakness in terms of some of the pull-forward or push-back. I guess, modeling-wise, is there anything we should be aware of that would impact the two-year stack in sort of thinking about how the second quarter trends would be shaping up? And if you don't want to specifically comment on that, how do we think about progression relative to 4Q/1Q levels through 2016, would be helpful.

Thanks for the question, Mark. So, from a second quarter perspective, we do not plan to comment on second quarter. If we think about the fourth quarter, fourth quarter especially if we neutralize for the 53rd week was abnormally low. We did have relative strength in the first quarter, our volumes improved sequentially, we had strong commercial performance. But despite that, as you look at the relatively low performance in Q4 to Q1, we do think that it was impacted. So, with respect to Q2, we think it's too early to talk about it as we're only one month in and especially given the volatility in our customer order patterns. Having said that, though, we do expect growth to accelerate as we progress throughout the year and remain committed to our guidance.

Great. And just to follow up on that, if you look at the two-year CAGR average 4Q 2015 to 1Q 2016, it's somewhere in the high 2%s. So, I guess, the question is, A, that's relative to 2% to 3% that you've talked about for the year organically. But in that context, what does it say about the current end demand general in terms of what you see from a customer standpoint, maybe even specifically comment on global versus local/regional. You've talked about that dynamic in the past. And then, if you could tie it into the acceleration needed to get back to your long-term targets of 4% to 6%, will be helpful.

So I think if we step back, coming into 2016, we noted that our organic business would be softer than our long-term targets overall given the macroeconomic conditions, customer order volatility, limited volume growth from our customers, as indicated. Having said that, if we bifurcate first half versus second half, we expect our growth to accelerate throughout the year as we exit our 2016 business based on additional access to new business, strong new win performance that we know that we already have that will manifest itself in the second half and also the benefits that we're seeing from our innovation, continued benefit. And so, feel good as we exit 2016, going into 2017 and believe that we are on target to deliver our long-term targets that we indicated.

Thank you.

Your next question comes from Lauren Lieberman with Barclays Capital.

Great. Thank you. First, I was wondering if you could comment, though, overall on market growth trends. Throughout last year, acknowledging it was very choppy, there were points at which you felt that local customers were still kind of performing relatively well and their consumption was up versus the global. So, where do you think things sort of stand now in terms of market growth?

Lauren, This is Andreas. Thank you for the question and, unfortunately, we believe that the global environment is still pretty volatile and choppy, as you were saying, because we see in some areas of the world, we see actually very good growth trends. We just came back, Alison and myself, from the Middle East and Africa. We see good double-digit growth in the region despite the political unrest. We have other areas, for example in China, where we are seeing basically a slowdown in growth. So you see from the geographic point of view, it's very volatile at the moment and even in the U.S., it's not super consistent what we are seeing. On top of it, we see differences in between the different categories. Let me give you an example. If you look, for example, to modulation, our sweetness modulation, that's something which is certainly facilitating our growth, because we see more countries moving in towards sugar tags. UK just did it. South Africa is going to bring to do it. So that's something which is driving growth in the category. But in other categories, we don't see as much growth because it goes against it. So it's a very complex picture, and that's the reason why we say we really have to deal with that kind of volatility around the globe. So we believe that the market probably has a growth for Flavors and Fragrances between 2% and maybe 3%, but that's very much on the high end. On the active Cosmetics, we still see much higher, higher growth trends between, let's say, 5% and 6%. So it's a pretty difficult picture at the moment.

Okay. And then, if you could offer a little bit more color on North America Flavors performance, both excluding Ottens, organic still down as expected. But at what point do you think that turns? I believe there have been some big wins on sweetness modulation around this time last year, so maybe we are starting to lap tough comps. And then also on Ottens, I think the language in the deck changed, that previously you have been talking about that business growing double-digits and now it's sort of, quote, solid. So, anything that changed there would be helpful as well.

Let's talk about the organic business first. We believe it will change in the second half of the year, so that's very, very clear. And Ottens is still performing, let's say, above our business case, and we have actually pretty tough comps here as well on the Ottens business. And what we have said before is that we see, in particular with the customer base we have with this business, a higher growth rate than with some of our more bigger and more established customers.

Okay. And then just one last one, if I may. Latin America was just very strong seemingly across the board. And in the press release, anyway, you didn't specifically mention Beverages. I believe that had been – the Beverage encapsulation had been a driver of the Flavors growth there. So if you can talk anything more specifically about what's driven Latin America to be so strong in obviously such a very tough macroeconomic environment would be great.

Yes. Absolutely. So we still see it in the Beverage category for us on the Flavors side, and we're actually pretty proud, because it looks like this category in particular is a certain delivery system for powders. It's helping us because it facilitates growth in a population category, which is lower middle class and lower income, which is really helping us to drive our growth there. And we see it basically on the modulation as well. And here again, the scene comes back. I just touched on it with the sweetness modulation. So, replacement of sugar and helping with sweetness modulation is something which is a big trend and which helps us with our sales in that category.

Okay. Thanks so much.

You're welcome.

Your next question comes from Mike Sison with KeyBanc Capital Markets.

Hey, guys. Nice start to the year. Any thoughts on when you think Flavors can sort of turn the corner in total for currency-neutral sales growth this year, excluding acquisitions?

It's second half, very, very clearly.

And back to the kind of normal growth rates we've seen historically, and what's driving that?

I would say normal growth rate depends on how you define the normal, because what we are seeing is a bit of a slowdown in market, and I think that's what you hear from many of our competitors as well. The new normal might be, let's say, 2.5% market growth and we believe that we can outperform the market. But the question is how much it is at the end. And we see certainly a softer trend in greater Asia, which is certainly driven by China, because remember, we had for many years, we had high double-digit growth rates in China. And these times might be over. And Western Europe is certainly also not a super bright spot here. So we are probably back to the new normal.

Okay. Great. And then just one quick follow-up. Acquisitions seem to have worked out well for you this year and just in general. How is the environment, particularly in the Cosmetics active? That seems to be an area where there could be a lot of opportunity to buy attractive assets.

Yeah. So, first of all, we are very happy with the two acquisitions we did last year because they are performing very, very, very well and driving revenue growth. So when we look at M&A in general, we look what could provide technology to us, because we really believe that differentiation comes through technology and through innovation. So that's something. We really look whether it could provide us access to customers and regions where we are right now not very well representatives. And we're certainly looking at adjacencies. And you just mentioned the active Cosmetics, and that's certainly one of the areas where we ventured in and where we want to build our position, first of all, through high organic – double-digit organic growth, but through some more M&A activities here as well. We are certainly screening the market as usually and we are conducting due diligence on a number of potential opportunities and, if it makes good sense, like last year, we are moving forward. And we certainly have a good financial discipline, but Alison might comment on that one.

Yeah. So in addition to the strategic filters that Andreas went through, we also have a series of financial filters, one being EPS-accretive year one, and then economic profit positive in years three to five. So to the extent it meets the strategic filters and the financial filters, we would potentially move forward. But we do those things in tandem.

Yes.

Great. Thank you very much.

And your next question comes from Faiza Alwy with Deutsche Bank.

Hi. Good morning.

Good morning, Faiza.

I just wanted to talk about your trends to-date relative to what your guidance was three months ago. So, clearly you have exceeded your plan for the first quarter. So, maybe if you could just go through what were the specific areas, whether it's countries or categories where you exceeded your expectations for the first quarter. So what was surprising to you on the upside?

So I think Fragrances clearly did well across all regions, all categories, all geographies. From a Flavors perspective, we had strength in Sweet, Savory, Dairy, but we had volume strength, volume leverage. Along with that from a bottom line perspective, we also had cost productivity initiatives that benefited us. We also had net price to input costs favorability. And so – but I think the main driver of our strength in the first quarter was clearly Fragrances.

What do you think...

In consumer.

Okay. What do you think drove that strength? Do you think it was more -was there a recovery? Just the impact going from Q4 2015 to 1Q 2016 was just more than you had expected? Or was there something sort of underlying in the market that drove that upside?

Yes. So I think it's a number of things, so one item being the shift between – of course, possibly timing between Q4 and Q1. Another is stronger commercial performance and so we had less erosion combined with stronger commercial new win performance that contributed to the overall strength in the quarter.

All right. Thank you.

And your next question comes from Heidi Vesterinen.

Hi. So you've been talking about how you report organic growth or currency-neutral growth differently from your peers, and I think this is what you are alluding to in Alison's last slide. If we were to adjust the 6% growth rate, in line with peers, do you know what that number might be?

So, from an organic perspective, I mean, we don't have exact calculations, but I would double it.

So, 12%?

Organic.

Organic.

Organic is double? Okay. So, 4%.

Yes.

And then would you have the equivalent number for full-year 2015?

It's roughly 5%. This is Mike, Heidi.

Okay. Great. Thank you.

Your next question comes from John Roberts with UBS.

Thank you. I apologize if this got asked earlier since I just jumped on the call late. But some of your major customers have been implementing zero-based budgeting. Do you need to go to something like that model as well?

So, we as well are implementing a zero-based budgeting. We are in the early stages. We actually started – I would say we dipped our toe in the water last year as we did our 2016 budget, but are moving forward with that on a broader scale in 2016.

So basically for the budget, John, this is Andreas, for the budget 2017.

And then could you remind us of the split in business between local/regional customers versus global customers in both the Flavors and Fragrance segments? And was the gap in performance between those kind of two categories several percentage points difference in growth or was it much smaller than that?

It is – actually the difference in growth, I start with the last one, is smaller because we have seen one or two of our big customers was really, really good and nice growth rates in the first quarter. The business is still split by 50:50 roundabout for us between the two categories, local/regionals and global customers. And actually it's a split we really like, because as you well know, it's also the split in terms of emerging markets and mature market is 50:50. Flavors, Fragrances, almost a 50:50 relationship. That helps us in these volatile times actually to balance our business fairly well.

Thank you.

And your next question comes from Silke Kueck with JPMorgan.

Good morning. Do you have a sense for what the size of your sweetener modulation business is by now? Is it like in the tens of millions or is it larger than that?

Silke, this is Mike. Let us come back to you on that. Traditionally, the way we have to go back on our systems to kind of proportionately allocate it to determine what the actual size is. We talked about our encapsulation size on our CAGNY Conference when we were in CAGNY this past February. But on the modulation, we have to dimensionalize in terms of size. Let us come back for that one.

Yeah.

Okay. And secondly, I was wondering if you knew how much favorable price cost contribution was to your gross margin.

So, from a net price input, it was very small. About 10 basis points.

Yeah.

And my last question is, is the Lucas Meyer acquisition, does that contribute anything to EPS growth in the quarter? Or will it this year?

Yes.

Yes.

It's accretive

Yes. It's accretive.

Yes. Okay. Thanks very much.

Sure.

You're welcome.

And your next question is a follow-up with Lauren Lieberman with Barclays.

Thanks. Glad I got back in. So I did have a quick question about vanillin. I know that the relationship with Evolva is changing. I believe they're kind of taking that back and the commercialization didn't really go maybe as well as planned. It'd be great if you could just articulate why. What are kind of the learnings from that experience, particularly as vanilla was cited as an area of potential cost inflation this year? That'd be just really interesting to learn about. Thanks.

So we're taking the vanillin from Evolva for our own internal consumption, so not so much to sell it externally. And you are right; the vanilla prices are pretty high. We will see how the price trend will go on over time, but I can't make projections right now. I think for the rest the year, we should be fine because we think we have everything in stock we need, we are covered. But for 2017, we will see how the price trend moves on, but it's hard to predict right now.

And was the expectation that this was going to be – I mean, what changed I guess in the expectation that this was going to be a product you could commercialize more broadly externally than is proving to be the case?

It depends actually, Lauren, on the price because whenever we do – in this industry, when you do something in the biotech space, you try to get, let's say, stable supply to a certain price. And if the raw material is not any longer – let's say you can't buy enough, then the biotech version kicks in or if the price really goes through the roof and you have a good manufacturing price in place. And that's what helps us to balance these kind of movements. So as soon as if the price would go up even further, then there might be an opportunity to commercialize that, but that's not the case at the moment. So for us, basically it's a supply backup solution.

Okay, all right. Thank you.

You're welcome.

And your next question comes from Heidi Vesterinen with Exane.

Hi. So Symrise's CEO was talking on an interview recently that the M&A multiples are far too high and they're choosing to focus on CapEx. Are you still confident on your guidance of CapEx to sales falling through to 2020? I wondered if you don't find any accretive deals, is there scope to develop new technologies or even enter adjacencies organically or do you actually need to acquire to get into these new segments. Thank you.

Yeah. Thank you, Heidi, for the question. I certainly can't comment on Heinz-Jürgen's comments here. But what is clear for us is that in the last couple of years we have invested a lot in CapEx. You know we have built new manufacturing plants in Indonesia, in Turkey, in China, and that helped us a lot. On our agenda, as you well know, we have still India and a second plant in China, but that's basically built into our plan for the coming years. So we believe we might spend between 4.5% and 5% for the next two years, maybe three years on CapEx and then CapEx will go down to more of the maintenance level of 3.5 percentage points. So nothing has changed on our side. In terms of the valuation of M&A targets, I agree they're usually high, but they were high last year as well and we are very happy with the two acquisitions we have done. So I think it always depends what kind of targets you find and for what kind of price you can close and what kind of strategy you apply then afterwards to make the business grow. So I would be more optimistic that you still can find good targets, and you know we are not doing anything outrageous here. We really want to make sure that we are financially very disciplined with what we acquire.

Thank you.

And you have a question from Mark Astrachan with Stifel Nicolaus.

Thanks for the follow-up, all. Two questions unrelated. One, could you talk about the price-cost relationship over the balance of the year in terms of what anticipated benefit you might get from pricing versus what potentially happens from an input cost standpoint? And then secondly on China, following up on the question, I guess the last question, CapEx-wise. So there's been a bunch of moving parts even since last June's Investor Day about goings on in China. How much is incremental in terms of what the CapEx spend is going to be for potentially one, two new facilities? What's your current capacity utilization in that market? And how do you think about it when the dust settles in terms of what the ultimate number of facilities will be relative to what your needs are and relative to your competitors from a positioning standpoint?

Maybe I'll start with a very macro picture on China. First of all, what you see in China is nothing very specific to IFF. You have seen it through basically all of our competitors and many of our customers and other companies. So it seems to be the way you have to operate in China. That's number one. Number two is that we have made a decision that whatever we do in China was exceptional of our Ingredients plant for Fragrances, everything is for the local demand. We are not going to export out of China. So we do basically our manufacturing in China. I think that's important to know as well. It's not a big, let's say, export hub for us. And now, Alison can talk about the financials.

Okay. So you asked about incremental CapEx associated with China, at this point, it's $45 million that we've assumed. From a capacity utilization perspective, it's about 50%. But we're considering the second site as more of a contingency or backup site. So that's essentially how we're using it as needed. Your first question in terms of price-cost input, we expect it to be favorable for the remainder of the year.

Okay. Thanks, guys.

Thanks.

At this time, I will now turn the call back over to Andreas.

Yeah. Thank you very much for all of the questions. And in summary, I would say we are on track for the year and we are on track for Vision 2020. Thank you again and talk to you soon. Bye-bye.

Thank you for joining today's conference. You may now disconnect.