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

Thank you. Good morning, good afternoon and good evening, everyone. Welcome to IFF's second quarter 2019 conference call. Yesterday evening, we distributed a press release announcing our financial results. A copy of the release can be found on our IR website at ir.iff.com. Please note that this call is being recorded live and will be available for replay.Please take a moment to review our forward-looking statements. During the call, we'll be making forward-looking statements about the company's performance, particularly with regard to the outlook for our third quarter, second half and full year 2019. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially from forward-looking statements, please refer to our cautionary statement and risk factors contained in our 10-K filed on February 26, 2019, and our press release that we filed yesterday.Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release that we issued yesterday and is on our website.With me on the call today is our Chairman and CEO, Andreas Fibig; and our Executive Vice President and CFO, Rich O'Leary. We'll start with prepared remarks, and then take any questions that you may have.With that, I would now like to introduce Andreas.

Thank you, Mike. On the call today, I will like to provide a recap of our vision 2021, which we shared at our Investor Day the past June. After that, I will provide comments on our second quarter financial results and give an update on our integration progress. Once finished, I will ask Rich to give a more in depth financial review of our business performance and provide an update on our outlook for the balance of the year. Then we will take any questions that you may have.We are very confident in the long-term outlook for our business. Thanks in large part to our industry leading innovation, both in diverse customer base and superior product portfolio. IFF has a history of strong sales growth and proven profitability. We are excited about the future as we believe that combination of IFF and Frutarom will create significant value for our customers, employees and shareholders.At our Investor Day in June, we outlined our new vision 2021 strategy. The Vision 2021 strategy has been designed to leverage our newly combined organization, our enhanced product portfolio, increased naturals position, expanded market access, broader customer base and greater innovation pipeline, all with our customer at the centre of everything we do.Our four strategic pillars include, unlocking growth opportunities, while we'll capitalize on our expanded product portfolio on a customer base, and extensive geographic presence. We also expect that cross selling and integrated solutions are relatively new capabilities set will lead to 100 million sales over the 2019 to '21 period, driving innovation while we will invest in high growth and high return platforms to continue to drive our industry leading R&D pipeline.I'm pleased to say, with the combination of IFF and Frutarom on R&D is the strongest it has been in the company's history. We…

Thank you, Andreas. In the second quarter we delivered quarterly sales of approximately 1.3 billion. On a combined basis currency neutral sales grew 1% driven by acquisitions and strong growth in scent. We also maintained strong profitability levels led by productivity initiatives, acquisition related synergies and favorable price versus input costs.This combined with the addition of Frutarom led to a very strong 29% increase over the prior year period and adjusted operating profit margin excluding amortization improved 80 basis points year-over-year.Our financial results were in line with my comments at our Investor Day, when I said we would be between 1% to 3% depending upon how June progressed. And while we did not finish as strong as we had would have liked in terms of sales, we did a good job delivering overall profitability in line with our expectations.From a cash flow projective perspective, we had significant year-over-year increases in operating cash flow and free cash flow driven primarily by higher earnings and amortization. As we've done previously I would like to highlight the impact of emerging market pricing on our growth rates to better compare with our peers.As a reminder for a variety of reasons, many of our sales transactions in the emerging markets occur either in US dollars or other hard currencies for our index to hard currencies when we have to invoice in local market currencies. When recording our currency neutral sales growth, we exclude foreign exchange related price changes in emerging markets. But this is different from our peers.We believe our reporting standard provides investors with a true assessment of underlying currency neutral growth, especially when there are large emerging market devaluations relative to the US dollar or euro. However, it's important to help all of you understand our performance relative to competition.During the second quarter…

Thank you, Rich. In summary, we believe we have the framework to achieve our long-term ambitions with our 2021 strategy, which is focused on disciplined execution and integration. With that context, we have a long-term commitment to 12% total shareholder return which is expected to be driven by about 10% EPS growth and a 2% dividend yield. In the second quarter we achieved broad based improvement in sales, margin and cash flow. For the full year we believe we can deliver solid operational results. We're taking actions of strengthen to the overall growth profile of our business, as well as ensuring we capture synergies to generate strong margins and returns for our shareholders. Expressing our confidence in our long-term strategy and future prospects, we also raised our dividend, the 10th yearly consecutive increase.With that operator, we are now happy to take questions.

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

Thanks and good morning everybody.

Good morning, Mark.

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

Mark, thank you for the question, I'll take it. And given that we have done compliance disclosure here. I'll take a moment to reiterate what we have said in our former disclosure. During the integration of Frutarom, we were made aware of allegations that two Frutarom businesses operating principally in Russia and Ukraine made certain improper payments, including two representatives of a number of customers. So we promptly commenced investigations. We have a very robust program in place here in particular when we take over companies. So that's very clear and it's clear SOP on our side, we have notified relevant US regulatory authorities and relevant Israeli regulatory authorities. So I think that's good and done. We have not uncovered any evidence suggesting that payments had any connections to the US. Based to the information we have, we believe that these improper payments are no longer being made. The estimated affected sales represents less than 1% of combined pro-forma net sales for 2018.So we do not believe the impact from these methods is or will be material to our results of operations or financial conditions. I believe that's a super important point as well. We've taken or we'll take appropriate remedial actions with respect to the matters I have described. And I want to assure you that we have committed to the highest standards of ethics and compliance and have strict compliance policies in place. Although, investigation are continuing, based on the results to date and other compliance related integration activities. We are not currently where similar instances of this conduct in any other geographies. So I would say all in all, we stick to what we have said in our disclosure, we feel very comfortable that we have a good handle on it. And I'm actually very proud about the program we are running here and how all the teams are working together to get these things done in the appropriate manner.

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

Yeah, sure. I think Mark that's a fair question. Principally, despite that investigation, nothing has changed since our Investor Day because we feel very good about our strategy. We see also that the portfolio of the acquisition is helping us in terms of getting exposure to some of the higher growth areas like the health ingredients or natural food protection, which is even shown in the second quarter or the inclusion business as well. So portfolio wise, we are very happy. What we do certainly is that we prioritize our portfolio as we said, we are trying to maximize returns and we are de-emphasizing the marketing and trade business for example, because there's not a lot of profitability in and that obviously shows. We are very, let's say clear and happy about the customer portfolio. We haven't lost too many customers here and I think still, we believe that some of the small and midsized customers have good growth rates and that will help us with the business. The portfolio is proving to towards naturals and that's a trend which is not changing through that event.Talking about the integration, I believe what is important to see here is that in general, despite the compliance topic we just talked about, we are very happy with what is happening during the integration because you see it on the cost synergies, everything in terms of integration whether it's North America, Latin America, Asia or Europe is working as planned. We see that we get more cost synergies and Rich just mentioned that in his presentation, all of them we saw then that's predominantly driven by procurement, which is good news because first of all, it has no impact on our employees and no impact on our customers as well. So that's an important…

Andreas, may be just – Mark a couple of quick comments on my part. I mean, I reiterate what Andreas said, I think we feel strongly in the ability of the Frutarom business to grow mid single digits, mid to long term, I think we're still going to some of the challenges that we've seen for the last three quarters like citrus source and trade and marketing and the savory business are not going to correct overnight. I think we would expect to see low single digit growth for Frutarom ex M&A in the second half of this year. But we're not going to get – I think it doesn't change our long-term perspectives, in terms of the potential of the business.

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

Okay.

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

Hey guys. I guess the two –

Mike, good morning.

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

Okay. Let me let me take the compliance piece first. We have taken very remedial actions on the involved people. The good thing is it is very contained to geographically, so that that makes it makes it easier for us to act on that. Culturally, we have started with actually day one and all of our town hall meetings in the new company, as we usually do when we take over companies that we educate people on the compliance codes, on the code of conduct. Everybody is going through the sort of training whether it's a live training or training via their computers. So we feel good about this. And this is coming actually nicely together. This is an unfortunate event, but as I said, it's geographically very limited. And then I hand over to Rich on the margin question.

Yeah, so my two things, one on your question on the second half, I just want to clarify the answer I gave the Mark. Frutarom, second half of the year, I think it's low single digits on a two year average basis. Given the week Q3 last year for Frutarom, it will be a stronger Q3 versus Q4. In terms of in terms of margins, I think we had a very strong quarter, Q2 despite the challenges from the top-line standpoint. You heard the comments I made regarding the very strong quarter and margin performance for scent. I think some of that, as I said in my comments were timing and so I don't expect that. I think this Q3 and Q4 will be a bit more pressure on the scent side in terms of margins with input costs remaining elevated, the teams have done a very good job in terms of mitigating that, in fact, they did the price realization, but there is timing in terms of inventory when the raw materials flow through the P&L. And then when you get to Q4 obviously, there's a bit of seasonality where our margin profiles in Q4 are generally the weakest of the full year. So I would expect the second half to be modestly below where we were in the first half of this year.

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

Yes, thanks. Good morning, everyone.

Good morning, Adam.

So first just on the compliance question, can you detail how long were the alleged payments actually happening? And specifically, you've cited in the last couple quarters of some sales declines in the savory business and through in Eastern Europe. Is there any nexus or common customer overlap between those, just want to be clear on that point? And then secondly, on the taste business, maybe just a little bit more color on the volume declines that you're seeing in the Americas in the second quarter and the first half of the year, they seem to be a bit darker than what we would see from the food and beverage companies. So just a little bit more color, perhaps by category or kind of where you're seeing the greatest pressure is? Thank you.

So let me start with the last one in terms of the volume side of it. As I've said in the comments, and I think Andreas said also, I mean, what we're seeing on the taste side is significant volume erosion on the existing business. Again, if you look at our fundamentals, we don't believe we're losing share, when you look it up on the pricing, adjusted volume growth or total top line growth in on a two year basis for the first half of the year, we're very much in line with competition, so we have confidence that we're not losing share. We are seeing significant volume erosion on existing business. Our win rates remain good for both businesses, pretty much at five year averages, so we're not seeing any erosion in the business. We've talked about in the past that we see significant upside going forward on the scent business in terms of access to new business.So we believe is very much a volume erosion piece where Q2 was much worse than what we saw in Q1. It's one of those things that I've seen. These trends occur over time and it's hard to predict when those things sort of return to the norm. And it can vary from their underlying product mix and the categories where we operate with a particular customer, their supply chain, so it's hard to predict, but I don't see this as being a long-term trend. As I said in my comments related to the Frutarom piece, it was primarily an issue in Europe. Again, it was quite strong with mid to low single digit growth in the EAME taste business for Frutarom through the end of May and then it was a very disappointing and challenging June which drove the declines that was a bit unexpected from where we felt we were going to be. From a compliance standpoint, based on what we've seen through the investigation, they may have been occurring for a few years. But we there's never been indication that there are material amount in any particular year.

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

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

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

Hi, good afternoon. So if we step back and think about your performance over the past year, we've seen that you've tended to underperform on your top-line targets and once again this year despite help from a 53rd [indiscernible] and strong pricing in response to exceptional inflation, you're still below targets in terms of organic growth. So can you help us understand what you're doing internally both on the legacy IFF side and the Frutarom side to get back on track? You think maybe some more radical changes might be needed, may it be in terms of investment or personnel or so on to ensure that you can get back to your long-term targets? Thank you.

So Heidi, that's a good – it's a good point, because I would say all the other parameters and KPIs are going actually pretty well. And we focus a lot on the top-line growth and for me or actually for us as a management team, the recipe is very, very clear. What we need is we have to focus our activities on the most driving parts of the portfolio where we have now a much better portfolio than we had before. So we have a couple of let's say areas, which might be small at the moment, but still from the market perspective, really nice growth for us, like the inclusions, like the health ingredients or natural foods or even the active cosmetic. So we believe that's the first one. The second thing is, where we have to look in is, our customer structure. And here we have to drive through and particularly on the taste side, with some of the smaller and midsized customers. Here certainly the acquisition helps a lot. We take the blueprint we have from our Tastepoint. We will drive it through. We have now integrated the Frutarom taste business into Tastepoint already in the US.And actually in that regard, if I can give the detail, we have a double digit growth on this side. It's a very nice growth of the business, so we like that a lot. The next thing is on the scent side, because I don't want to shortchange us too much, but we have no access to more our co-lists, our most important customers. And I know that there are a lot of activities are ongoing. And you know, these are all big customers it takes let's say nine to 12 to 15 months to really capitalize on it. But we see strong interest, we see strong first let's say wins on our side. And that will help us to let's say accelerate the top-line side on the scent business as well. On top of it and that's what's in the works and we will report on this is the cross selling aspect. We have now moved the leader of our bigger key accounts from the taste business into the role of being the head of cross selling and total solutions business. He is building a small, but very, let's say powerful and nimble organization to facilitate the cross selling between the two organizations. And we believe that can deliver very nicely on our top-line growth. So if I add this all together, I think we can come back to the good growth rate we have outlined the 5% to 7%. We believe it's very, very doable. And the first, let's say – initial, let's say, signs we see are going in the right direction.

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

Hi, guys. I just wanted to put some numbers to what's going on in the taste with the 3x erosion, so is it like, normally you see 10% to 15% of product discontinued in any given year by taste customers. And normally they replace that, but now you're seeing something like 30% to 45% kind of discontinued older products and even though you're having the new wins, they're not launching the new products at an offsetting rate here, is that the dynamic that we're talking about?

John, put it in perspective, I mean, on a five year trend volume on existing businesses slightly negative, so call it low single digits and is down 1%. For the last – and now at the current rates particularly in Q2, we're in a mid single digit range. So that's by far the single biggest driver. I mean, as I said earlier, our win rates are in line with long-term five year trends. Pricing is slightly positive a little bit below the five year average, but part of that's been driven by what we've seen over the last three years with vanilla. So I would not say it – fundamentally, it's all the volume erosion on existing business. Some of it may be driven by shorter cycle times, but that's the fundamental driver in terms of the biggest change in the last two quarters.

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

Hi, thanks for taking my question. Just a quick one on margins, in both the scent and taste division you've sort of explained what's happening in the top-line dynamics, but when I look at taste, could you break up how much that margin decline is driven by volume versus – also the pricing versus growth. And then on the flip side is margin development has expanded quite decently. I expect because the managed the pricing in scent, but could you please break down that margin expansion both between pricing versus growth and volume?

Sure, Alexandra. I mean, in terms of taste, I mean, the pricing impact was pretty negligible. And the biggest driver for taste is on the input costs in terms of it's more of a mix issue. I mean, I think our overall view in terms of mix of consumption as opposed to mix a product, I think that's a smaller impact from a mix standpoint. But as similar to what we've seen on the taste side as we consume individual lots or product by product, we can have some fluctuation there. So the biggest driver into the margin pressures in taste is, one, the input costs and two, is the lower volumes hurting us from an absorption standpoint. From a taste standpoint, you heard in the comments that pricing is a bigger driver from a taste standpoint, certainly on the scent standpoint, certainly on the ingredient side, but also in the compounds.As I said earlier in my comments and teams have done a very good job of aggressively pursuing price realization to offset that. And I said earlier, we had – why we call it a unique situation in Q2, where we had mix of consumption of raw materials, which drove a favorable margin progression in Q2, which I don't expect to repeat in the second half of the this year for scent. So that's why I said earlier, I would expect margin profiles in scent to come down from where they were in Q2, given the mix of raw materials. We still are seeing elevated prices from scent. They're at near all time highs. I think we've seen that the rate of increase has slowed. So I think that's starting to be a positive trend, but we don't expect to see any relief in the near term from a input cost standpoint.

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

Thanks. Thanks very much. Can you talk about the change in global expenses from the first quarter to the second? I think you went from about 19 million to 13 million. And then to go back to 13 million sequential decrease in cost of goods sold. I would think maybe 3 million is from volume and maybe there's 2 million or 3 million from Frutarom. But I take it there are some hedging gains in there. And can you describe what went on from a raw material standpoint a little bit more precisely, if you don't mind?

Sure, Jeff. So from a corporate expensive standpoint, the single biggest driver is the cash flow hedging as you said, it's about a $5 million impact. And so that's the biggest driver as you said, it also impacts COGS. I think, clearly the volume impact is further reasoned in terms of $15 million impact. I think the other thing that keep in mind, as I said earlier, we did have I'm going to call it a mix impact in terms of scent, in terms of the raw material consumption, as it flowed through from finished goods and raw materials into COGS. So there's a timing impact there. I think those are the biggest drivers. In terms of the sequential performance, from an overall perspective we still expect to see mid single digit inflation from a raw material standpoint for the full year. But that's in line with what we've seen our expectations from the beginning of the year. And as I said just a moment ago, I think starting to see some slow down in terms of the rate of the increase, but we're still at very elevated levels.

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

Hey, thank you. Good morning, guys. Rich, I just have one detailish type question for you. So if I go to the change in EPS guide for the year. I wanted to focus in on the change in non-controlling interest piece and just ask you whether is that related to like the carrying value of those fruit subs dropping below the redemption value? Is it due to a changeover to consolidated status away from non-consolidated status because I will admit your other income line in Q2 was less of a benefit than I thought it would be relative to Q1. So sorry for the detailish type question, but just wanted to understand that better.

No, look, I mean, I think – so you added that $0.10 – I'd say probably $0.06 to $0.07 of that is the change in the average effective tax rate on the amortization, so that one's clear. On the non-controlling interest, it's really a mark-to-market adjustment that we have to monitor and adjust each quarter based on the results and the outlook for the individual entities in which the minority interest had – there is a redeemable component of the minority interest. So it's based on the underlying performance and the projection is for those businesses and so there's been a slight change between where we were at the beginning of the year and based on latest projections.

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

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

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