At this time, I would like to welcome everyone to the International Flavors & Fragrances First 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 First Quarter 2019 Conference Call. Yesterday evening, we announced 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 our outlook for the second quarter 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. For purpose of this presentation, we calculated combined numbers by combining our results of -- with the results of Frutarom prior to the acquisition on October 4, 2018, and adjusting for divestitures of Frutarom businesses since October 4, 2018. 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 give an overview of our operational performance for the first quarter of 2019. After that, I will go through our integration progress and priorities as we see them today. Once finished, I will ask Rick to give a more in-depth financial review of our business performance, and then I will provide an update on our outlook for the balance of the year and take any questions that you may have. I'm pleased to report that our first quarter performance was in line with our expectations as we achieved double-digit sales and adjusted operating profit growth, including benefits related to the acquisition of Frutarom. In the quarter, we delivered a record-setting quarterly sales of approximately $1.3 billion, a 39% increase over last year. On a comparable basis and excluding the impact of divestitures, currency-neutral growth was achieved in all 3 segments led by scent at 4%, Frutarom at 3% and Taste at 2% or 3% overall growth. We also maintained strong profitability levels as productivity initiatives, cost synergies and price realization offset higher year-over-year raw material cost. This combined with the addition of Frutarom led to a very strong 13% increase over the prior year period. Earnings per share, excluding amortization, came in at $1.57 as adjusted operating profit growth was more than offset by higher interest expense and shares outstanding, both related to the Frutarom acquisition. In the first quarter, we continued to strengthen our portfolio via acquisitions and collaboration that expand our innovation platforms and product offerings beyond traditional flavors and fragrances. In January, we completed the acquisition of 60% of the share capital of Mighty, a leading Savory Solutions provider in Thailand. Mighty develops, produces and markets reaction flavors, with particular expertise in Savory Solutions. The company's portfolio includes…

Thank you, Andreas. In the Scent business, first quarter currency-neutral sales grew 4% versus a strong 8% year ago comparison with growth in nearly all regions and categories. Performance was strongest in Fine Fragrances, increasing double digits, led by strong new wins. Consumer Fragrances grew mid-single digits with double-digit growth in Home Care and mid-single digit growth in Fabric Care. Fragrance Ingredients was down year-over-year as price increases related to continued high raw material costs were more than offset by volume declines. Scent currency-neutral segment profit decreased approximately 3% at the benefits from cost and productivity initiatives were more than offset by unfavorable year-over-year price to input costs, which reflects the unprecedented raw material inflation we have been facing since late 2017. Scent pricing was approximately 3.5% in Q1, however not enough to recover the full cost increase. As communicated previously, we will work to continue -- we will continue to work with our customers on actions to mitigate these increases and are confident in our ability to fully recover the dollar impact. In terms of segment profit margin, year-over-year performance was down, however our margin profit remained strong at 17.6%. Turning to the Taste business. In the first quarter 2019, currency-neutral sales grew 2% with growth in 3 or 4 regions. Performance in the quarter was driven by mid-single digit growth in Greater Asia, where India and Indonesia grew double digits and in EAME, led by strong growth in Africa, Middle East and Western Europe. In North America, year-over-year improvements continued to be led by Tastepoint. In Latin America, year-over-year declines were primarily due to weak demand from multinational customers and market conditions in Argentina and Mexico. Taste currency-neutral segment profit decreased approximately 1% as volume growth and the benefits from productivity initiatives were more than offset by unfavorable…

Thank you, Rich. As we look at the balance of the year, we reconfirm our full year financial guidance. We expect our sales growth to accelerate in the second half, give more favorable year-ago comparisons. In terms of profitability, we also anticipate that adjusted operating profit will improve, driven by higher integration savings, continued cost control and productivity savings and more favorable year-over-year price raw material cost trends. For the full year, we expect to deliver between $5.2 billion and $5.3 billion in sales in 2019, which represents 5% to 7% combined company growth, including M&A. We also expect to deliver between $6.30 and $6.50 in adjusted EPS, excluding amortization or 8% to 11% combined company growth. In summary, we're pleased with our performance for the first quarter as we delivered strong double-digit sales and adjusted operating profit growth. We achieved solid growth across all 3 divisions, all while maintaining strong profitability levels. We continue to make strong progress in the company's transformation following the Frutarom acquisition as we combine two strong organizations. We're executing well against our integration road map. For those businesses where we have aligned our go-to-market approaches IFF, growth is very strong. We also continue to make great progress in terms of cost synergies, and I'm very confident that we will achieve our $30 million to $35 million cost-savings goal in 2019. Given this, total expected improvement in the second half of 2019 that we confirmed our financial guidance for 2019. Before I open the call up to questions, I would like to take a moment to invite everyone to our Investor Day on June 5 here in New York City. We're excited to provide an update on our long-term strategy, give you deeper insights into our integration efforts and provide each of you with an opportunity to experience the best innovation of our organization. Registration links have been sent out, but if you need it again or have any questions, please feel free to reach out to our Investor Relations Department. With that, I would now like to open up the call for questions.

[Operator Instructions]. Your first question comes from the line of Mark Astrachan of Stifel, Nicolaus.

I wanted to ask about expectations for Frutarom sales growth going forward, given some of the positives and negatives, which you outlined in the earnings release this morning. So I guess, specifically, do you anticipate your annual sales growth to improve as comparisons get easier over the balance of the year, including in 2Q? And what is the current outlook for the expectations for that business, please?

Yes. Thank you, Mark, for the question. Yes, first of all, the first quarter was in line with our expectations. We have seen some weakness in parts of our Russian business and the F&F business, in particular with CitraSource and that's it, material price decreases with natural colors. We don't believe that this will change in the short term, but we're working on it to make it grow significantly in the future. So we expect actually a higher growth rate in the second half of the year, and that's what we project. What we have seen so far is that, in particular Taste business has very good growth with the small and mid-size customers. And the businesses we have integrated in our, let's say, Tastepoint organization or Tastepoint like organization whether it's in the U.S. or in Latin America that they are growing quite nicely. So which is good and it reinforces, let's say, our strategy to have a much more balanced customer portfolio not just with the big CPG, but with some of the smaller and mid-size companies here as well, which probably is very helpful going forward in the mid and long erm.

Okay. So mid-single digits would still be the expectations for the business?

Yes.

And then also, Rich, what was the impact from the switch from like-for-like to organic for that business?

For the first quarter, it's really -- it's in the material. I mean, we had some divestitures going out and then the two deals were small. So it was clearly immaterial for Q1.

And then expectations for the year, does that change anything in the calculus either?

No, because I mean, we had -- these were in the pipeline, so it was part of the overall guidance of 5% to 7%. So I don't think that's changed materially in terms of the components, in terms of what gets us to the full year guidance. So I think we're on track to where we thought we're going to be from an M&A standpoint.

Your next question comes from the line of Lauren Lieberman of Barclays.

My first question was on Latin America. So actually, I mean, Rich, it was helpful when you pointed out the FX piece of it, but that was a total company number. So I was just curious, it does still seem like Latin America decelerated pretty significantly. Is that -- can you just talk a little bit what might be going from a market share standpoint in the release you specifically called out multinational customers? So we're just curious a little bit more about Latin America.

Yes. Look, I think that there's two -- there's couple of things. One, overall and also in Latin America specifically, growth with multinationals was basically flat, whereas the rest of the Taste business was growing high single digits or higher. So I think that's certainly big piece of it. Then we're also seeing particularly in Argentina, the effects from a macro standpoint in terms of the devaluation and what it's having in terms of consumer disposable incomes and purchase underlying demand. I think we -- the third thing that we talked about in the release was in Mexico, there has been some market changes from a legislation standpoint, that's also we're seeing some pressure from a market standpoint in terms of the consumer behaviors. Other than that, I think, there is some small -- there is some business that, I think, we did -- we lost, but it was more it was things -- business that we didn't have before, but I don't see many major shifts in market shares in LatAm. I think it's mostly the macro stuff and then just our mix of customers versus the competition.

Yes. Actually, it's a good point on the large CPGs. We don't see too much volume growth, particularly on existing business. It's not that strong. It's a bit contrary for what we heard during the CAGNY conference. So I guess, it will take a bit of time until it turns to good growth again, but we will see in the months to come.

Okay. Great. And then also I just read about the 10-Q last night, and there was a comment around that for the next several quarters lower margin and then increases in selling and admin expenses. So it sounds like then the right way to think about it might be that even with the second half sort of acceleration that you're talking about that we still have EBIT margins down probably for another, call it, two quarters and a lot of the improvement is really fourth quarter weighted. Is that fair?

I think certainly -- yes, I think that certainly second half is going to be better. I think, as we get through -- as we start -- continue to get the traction on the price increases and the price realization, which the teams have done a really good job in the scent business so far, but that's going to continue to build. That obviously has a dilutive impact. I mean, Q3, again I think we've talked about along was going to be one of the strongest quarters. Q4 sequentially is always down versus Q3, but we should -- we still expect to see year-over-year improvements in Q4.

Got it. So Q3 you expect EBIT margins to be up or just sequentially improving?

Yes.

Yes. Up.

Up.

Okay. Okay. So the comment in the Q is really more focused on 2Q because it does say for several quarters and that's why I was trying to adjust...

Yes.

Yes.

Your next question comes from the line of Jeff Zekauskas at JPMorgan.

I have two questions. What is the total revenue divestitures from Frutarom on an annual basis? And in the quarter, did Frutarom prices rise? And if they did, by how much?

Okay. So probably, I'd take the second one first. So there was no price increase on the Frutarom side. That's #1. And the total year, Rich...

It's about $45 million, Jeff, in total.

Your next question comes from the line of John Roberts of UBS.

Thanks for the currency adjusted organic sales growth numbers. I was little surprised that Natural Colors was weak. I thought that was in the area of some early revenue synergies. Could you give us some more color on that, no pun intended?

Yes. Look for me, the organic -- the volume -- actually, unit volumes are quite strong. They are quite good growth. What's happening is in one of the key raw materials the cost is coming down and similar to what we see in the other parts of the business like the vanilla, there is a pass-through component of it. So all of the decline in the color stuff is really driven by cost pass-through, and so it's impacting the top line growth. Really no significant change into our overall operating margins. So it's really -- I think we feel good about -- structurally about the health of the business and the growth opportunities. So it's more just a market dynamic around the pricing.

And then secondly, as you've been changing your portfolio, would you guess, how much of your sales are still via a formal brief process? And how much of your sales would be with no formal brief associated with it?

I guess, for me the way I think about it, I mean, still the majority of the legacy IFF business is driven by the briefs. We still have -- there is a still piece of it, which is proactive us going to our customers within technologies. I was characterized the majority of the Frutarom business as being more of a push business, where we are contacting them on a daily, weekly basis saying here what you need, here is what we have available. So I think it's more big -- I think we have a big picture between legacy IFF is still the majority briefs driven and Frutarom is a slightly different model.

Your next question comes from Heidi Vesterinen of Exane.

So we talked about how H2 will be a lot better than H1. Would you be able to talk about what you're seeing so far in Q2 by segment, please?

Heidi, that's -- it's Andreas. Good afternoon. It's probably a bit early right now to talk about this and to different segments. The only I might say is that we still see good growth out of the scent business because of pricing, because we're going through our [indiscernible] but for the rest, I would say, it's still a bit too early to comment.

Heidi, look, I think we're seeing, I would say, some similarities between what we saw in Q1, we had a slow start to the quarter. And I -- look, some of the things that we talked about with Savory business, the CitraSource business, we are making changes, we are addressing those issues, but they're not going to change overnight. So I think we're confident in the full year, but I would not expect the major dramatic change between Q2, Q1.

And on the scent business, it seems like it's been a few quarters now where most of the growth is pricing and there is minimal volume growth. What has been driving that? And what is the outlook?

Well, the pricing -- still the majority of it is pricing, but -- I mean, that's clearly the pass-through of the -- or the recapture of the input cost increases. I think we are seeing good win performance in the commercial performance in terms of new wins or near the 5-year average. So I think we've seen continue improvement, particularly in the last 2 quarters. Volume erosion was well above the historical average, more than double from what it was over a 5-year average. So I think that's again more some of that gets into the customer mix. We've seen similar trends that the growth rates in the small- and medium-sized customers are double digits and more challenged on the global. So I think the other thing we feel really good about long term is we talked about it last year, we've gotten access -- more access to new business with the core list expansions we got last year, and that's going to provide a tremendous amount of upside to us over the next 3 to 5 years.

Which is actually, let me supplement on this. These three new core list access will give us access to $400 million additional business we didn't have before, and we see out of these three new customers that already two are very active in briefing and where we're getting business and actually early and faster than we had expected.

I think the other thing, Heidi, just, I mean, to put in perspective, I mean, we're still seeing good growth -- really solid growth on volumes in the compounds business. And where we're really seeing declines are on the Ingredients business, partly between because we're prioritizing the internal consumption and partly because we're raising prices and there are certain customers out there that have more elasticity in their demand. One thing I want to just go back to your question earlier in terms of the performance during the course of the year, we'll see sequential improvement Q1, Q2, Q3 will still be down year-over-year in Q3, but it sequentially will improve through the first 3 quarters, just to clarify my earlier comment.

Your next question comes from the line of Gunther Zechmann of Bernstein.

Just on the scent division, you said already that the majority of the growth is driven by price. I would have thought that the mix in scent should be very favorable as well. Finally find Fragrance is growing very strongly, double-digit is that, but the margin is down so much. So can you just elaborate how much you're still losing to raw material cost inflation? And if there was any other factors in there -- in your cost?

Sure. I mean, keep in mind, Gunther, I mean, we -- the teams have done a really good job, but we're not fully recovered in terms of the price realization. Year-over-year, Q1 input costs were up 10%. So that's still a significant headwind. You take that plus the cumulative effect of the price realization we had last year plus the first quarter as the dilutive effect on the overall margin. So I think we are on the right track. We're confident now we're going to be able to fully recover those costs during the course of the year and into early next year, but it does have a negative impact in terms of the margins.

But in general, we're very happy with the performance of our Fine Fragrance business as you're aware we're saying we're up quite significantly and that certainly is because of the good win performance here.

And that's helped to offset -- mitigate the impact of not being able to fully recover the input cost increases in Q1.

And on the raw material cost, just a follow-up, the 10% increase that you mentioned, is that just for scent? Or is that for the group? And also what's your outlook? How fast do you expect those costs to flatten or partly reverse like we've seen with Vanilla and a few Synthetic inputs over the course of the year?

The 10% is just scent. And so I think again for the full year, I expect input cost percent to be up high single digits and 4% to 5% on a total company basis. So the full year guidance and expectations haven't changed. I would say, it's a little early to say when and if we would see some normalization right now for the year. We're not seeing anything significant.

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

Just curious on Frutarom's operating margin. We saw what it was in the first quarter. How do you think that improves throughout the year and maybe run rate exits the year? And then when you think about sort of that metric longer term, what do you think we should be for Frutarom in the 2021, 2022 time frame?

Look, Mike, I think it's going to -- we expect it to improve, I think, similar to what we see in the IFF business Q2, Q3 will be stronger. Q4, I still would expect it to be better than Q1. So I think we're going to see improvement, obviously growing the return to our long-term expectations from a growth standpoint of being in the 5% to 6% range versus 3%. You get the fixed cost leverage there. So I think long-term, we still see significant upside in terms of profitability.

And when the synergies role in, and that's the brunt of the synergies will come in next year and that will have a significant impact on margin, obviously.

Right. Okay. And then so at what point do you think operating income will grow year-over-year? Will that start in 2Q? Or is that more of a second half phenomenon for Frutarom?

I would expect we would see it in the second half. I mean, certainly, again Q3 should be the strongest quarter of the year.

Your next question comes from the line of Adam Samuelson of Goldman Sachs.

Just going back to the raw material question, Rich, and just want to be clear. So are you implying that you haven't seen the Synthetics come off yet? Or it's just because of the way the lags you have in terms of your procurement and your inventory that any decline really wouldn't be felt till the end of the year?

I think it's both. I think that #1 we have the inventory impact, but we have not seen any significant movements in the pricing for the input cost yet. So that's -- it's both of those factors.

And is that -- would you say -- I mean, are you surprised at that just given brent -- I mean, it's valid year-to-date, but off of the highs that you saw in the second half of last year and especially with better -- seems like some of your major suppliers haven't had some of the bigger disruptions again? Just are you surprised you haven't seen any of those pricing declines at all?

Look, I think there's two things. One from an oil standpoint, remember we're the derivative impact were 4 or 5 steps down the chain. So the actual oil impact has much smaller influence on it versus the conversion cost. I think the second thing is a big piece of what we've seen over the last 15 months has been more driven around supply interruptions and that's really what we continue to see issuances. I mean, it started with the BASF stuff, but I think that is equally important as it is purely just a brent pricing impact.

Okay. And then just separately, just in the Taste business, I mean, I know the organic growth this quarter was similar to where you were in 4Q, and this is the hardest comp, the comps are still tough. But were you -- from a demand perspective, just seems like Latin America got worse as you looked at Argentina and Mexico and some of the issues you called out there? Is there anything in any other regions that you would call out as noteworthy positively or negatively?

No. I think the biggest thing to me is what I mentioned earlier is really is the lack of growth from a global standpoint, the multinational companies, as I said earlier, growth was essentially 0, flat for the Q1 as opposed to being high single digits up for the small and midsized customers. So that's what we're seeing. I think it was more acute in Latin America for some of the things that I mentioned, as you said for Argentina and Mexico.

Your next question comes from Daniel Jester of Citi.

Just first on the synergies comments you made about hitting the run rate for the full year already. I'm just wondering what we saw 6-plus month left to go in the year, is there a reason why you're not lifting that synergy goal? And just maybe walk us through about how we should be thinking about the progression of that through the rest of the year?

The thing is that we have the most improvement on the procurement savings and the run rates are really, really strong here, but it's also driven by our inventory and that's the reason why it takes some time that it falls through the P&L. So we have the better contract in place, but we still until it hits the P&L, we have to decrease our inventory and bring new material on. That's the reason. But for us, it's -- we're optimistic because it will have a very good impact on next year already because the team is doing an extraordinary job to make that happen. That's basically the main reason.

Yes. I think it's the inventory impact is the primary driver at this point.

Okay. That's very helpful. And then on Taste margins, they have been down year-over-year for a couple of quarters, I think the raw material issue seems like it's a lot more of a scent related issue. So I'm just wondering if you can talk about margins in case and how you see those progressing?

On the taste side, I think, Q1 was certainly impacted on from a mix standpoint, it was unfavorable. There was some price to input cost more timing related to, I would say, on the Vanilla side. Overall, I would expect this to see more or less in the same range. I mean, I think it's still quite healthy at the levels we're at. I mean, the margins are still quite healthy in the 24% range. So I think it's -- I don't see any major change in it. I mean, we're happy where they are. I mean, the business is performing quite well when you look at the underlying details.

Your next question comes from Brett Hundley of Seaport Global.

I just have two questions. My first one relates to raw materials. You guys sound pretty confident in being able to recover the inflation you've seen as you move into next year. I acknowledge this is a tough question, but just taking U.S. and China trade as a backdrop, citral, PG, a number of chemicals are on that tariff list. Can you just speak to that a little bit insofar as describing your confidence in being able to recover raw material price increases whatever they may be into next year? And then separately, my second question relates back to a comment that you made, Rich, in just talking about legacy IFF and the composition of your sales contracts or briefs rather than how they have dominated that commercial side of the business for a long time now. As MNCs revisit growth and innovation again just after years of cost cutting, I'm imagining that product technology and speed to market are going to become increasingly important just as they have been for the L&R customers out there for a while now. What does that mean for the briefing process and pricing in your view, if anything? Do you have any thoughts on that?

Let me take the first one. I mean, I think from a -- keep in mind that our U.S. basis is quite small, it's less than 25% of the totals of our sales base. So when we look at rate in the current environment, when looking at the tariff discussions and what's in the current framework. It's not a material number, I mean, it's in the $10 million to $20 million range, potentially if they weren't fully implemented then we have alternatives on how to -- where we can source it. So I don't -- we don't see it as a significant headwind in terms of overall operating model. Let me just turn over to Andreas for the second.

If I take the second part of the question on legacy sales and MNC performance, indeed what we see in our discussions is that the topics are now more growth related and growth should be simulated by innovation, which is great, because we have in IFF internally now an excellent pipeline in terms of new technologies. And as you have seen even in the first quarter, we've acquired a couple of technologies, which will help us to grow our business, which is good because I wholeheartedly believe that the competition and the differentiation works through technology, and that will help us to win more business. By the way some of these innovations or technologies we have or had in the pipeline helped us to win the 3 core list last year. So I'm very optimistic on this one going forward. Now the only thing we need the big MNCs getting their volumes up and that certainly will lift the tide here.

Your next question comes from Lauren Lieberman of Barclays.

I just have one follow-up, which may be a little bit more long-term and strategic. So as you're managing the Frutarom business, I was just curious like this continued pace of acquisition that you currently look is going to bear out, why are you going so quickly? I would just -- and just wondering if there wouldn't be benefit in slowing that down, getting your arms fully and completely around what it is that you now own. I don't know maybe it's the competitive -- that there is a competitive landscape for these small deals and you're worried if you don't do them you will miss your window, but I [indiscernible] a lot of benefit kind of slowing that piece down while you work through understanding the portfolio you've acquired. So can you just explain why that wouldn't be the case? Why keep going at this type of pace?

Yes. Lauren, I think it's a very valid question and super important. Look, there are probably two parts of these small M&As. The one part is, let's say, strengthening the business in some of the adjacent parts of our business like the ingredients for gelato which we believe is a fantastic business, and we will demonstrate during our Investor Day. And we had already a piece of the business in Brazil and now we are having a nice platform to growth. So these small acquisitions in some of these adjacent business, you will see going forward. And they will impact the integration not so much because these are kind of stand-alone businesses who we are helping -- who will help us to grow us in terms of sales but profitability as well. The second piece and you saw it for the first quarter, actually 2 of these 4 smaller deals were technology deals, which were basically technology deals or investments in technology companies to help us to bring better innovation to our customers. One is the 3D printing, we have talked about this for quite some time, which will help us to win core list, but also win business and that's not an integration in the business sense, it's an integration in our R&D, and we believe it's the right thing to do. Aryballe on the other side brings us into the digital piece of faction and measurement. It's right now used in the first use cases in quality control. So you will see these kind of technology deals going forward, and they certainly are not a barrier or distraction for the integration of Frutarom. I hope that, that helps to put context around these deals.

And for me, Lauren, I mean, we're certainly being -- in my mind, we're being more restrictive in terms of the hurdle rates and the thresholds that we have for pursuing deals in terms of returns, in terms of strategic importance. As Andreas said, 2 of the deals were very technology driven that are fundamental to the scent business or to our delivery system platforms, which are, we believe, key strategic advantages. The other two deals were really in the pipeline already is -- prior to the acquisition. So I think -- and there is close linkage to the Frutarom businesses already. So I think we are -- I would characterize it as being quite selective already.

And there are no further questions at this time. I would like to turn the conference back over to Andreas for closing remarks.

Yes. Thank you very much for the participation. I hope it helped to put context around the results, and we're looking forward to see you at the Investor Meeting in June. Thank you very much. Have a great day.

Thank you for participating. This concludes today's conference. You may disconnect at this time.