At this time, I would like to welcome everyone to the IFF Fourth Quarter and Full Year 2019 Earnings Conference Call. All participants will be in a listen-only mode until the formal question-and-answer portion of the 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 fourth quarter full year 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 on our website.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 the first 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 contained in our 10-K filed on February 26, 2019, and our press release.Today’s presentation 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 posted on our website.With me on the call today is our Chairman and CEO, Andreas Fibig; and our Executive Vice President and CFO, Rustom Jilla, who 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. And a very special welcome to Rustom, our recently appointed CFO, who joined us about three weeks ago. We could not be more excited to welcome him to the IFF team, as he brings a strong track record over 30 years of operational and financial leadership across several international markets with significant experience in managing global finance teams, developing strategy, driving efficiency initiatives and completing acquisitions. So, welcome Rustom.I would like to take the opportunity to thank Rich O’Leary for his service as our CFO and looking forward to his contributions as our integration lead for the DuPont Nutrition & Biosciences combination. He has deep institutional knowledge, insights and perspectives, both financially and strategically and will be enormously valuable as he takes on his new role as our Integration Officer.On today’s call, as usual, I will give an executive overview of our performance for the fourth quarter and full year 2019, including an update on the progress we are making with the integration of Frutarom. Following the discussion, I will ask Rustom to provide the financial review of the business and take you through our financial expectations for 2020.We will also recap IFF’s transformational journey and the exciting opportunities we see with our combination with DuPont Nutrition & Biosciences business, which we announced in the fourth quarter 2019. Upon the completion of our prepared remarks, we will take any questions that you may have.Let’s come to 2019. 2019 was a transformational year in IFF’s history. It can be categorized as a year of great progress, despite some challenges. Over the course of the year, there were many positive accomplishments, including development of our new strategy, strong progress against our integration synergy targets, unlocking incremental access to new businesses via core lists and announcing our combination with N&B…

Thank you, Andreas.First, let me say how delighted I am to have joined IFF at this exciting time as we move past the integration of Frutarom to the combination with DuPont’s N&B business, and the many opportunities and challenges this will bring.For my part, I expect to focus on first, improving execution and accountability; second, enhancing effective collaboration across the business, that’s legacy IFF, Frutarom, and soon N&B; third, strengthening our cost discipline; and finally, delivering solid ROI.Now, on to the numbers. Reported sales increased by 29% in 2019 with three additional quarters of Frutarom being the major driver. Excluding Frutarom, currency-neutral sales grew 3% with 2019’s 53rd week contributing 1%. I’ll provide more color on sales by segment as we go through those slides.Our full year adjusted operating profit margin excluding amortization, rose by 30 basis points, driven by productivity initiatives, acquisition-related synergies and a Brazilian tax recovery. It’s also worth noting that in our fourth quarter, our currency-neutral EPS ex-amortization, grew a robust 23%, driven mostly by acquisition-related synergies, volume growth, lower incentive compensation, a Brazilian tax recovery, and a lower effective tax rate, which more than offset a headwind from higher raw material costs and mix.As the IFF team has done in previous quarters, I would like to highlight the impact of emerging market pricing on our growth rates to better compare to our peers. As a reminder, 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 our index to hard currencies when we have to invoice in local market currencies. So, when reporting our currency-neutral sales growth, we exclude foreign exchange-related price changes in emerging markets. But, this is different from our peers. We believe that our reporting standard provides investors…

Thank you, Rustom. Very well done.I now want to spend a few moments and highlighting the evolution of IFF from a traditional leader in the flavor and fragrance space to now as it uniquely positioned to redefine our industry at a time when consumers’ demands are forcing changes across our customers.With Frutarom, we took the first big step. We can now reach one of the broader set of our CPG customers of all sizes in the world and added critical depth to our proposition as a top provider of flavors, savory solutions and natural taste solutions.As I mentioned, we are seeing some excellent cross-selling opportunities further supported by our Tastepoint model. With N&B, we take the next leap forward in delivering integrated solutions that allow us to partner with our customers to solve their most pressing problems. It is a truly powerful combination. IFF’s leadership in natural solutions and N&B’s leadership in clean label, including cultures, enzyme and soy proteins, will be a vital component in creating solutions that meet customer needs for better-for-you products.Our complementary product portfolio will be among the most balanced in the industry. Together, we will have number one or number two positions in the high-value most in-demand ingredients categories across our shared end markets of food and beverage, health and wellness, and home and personal care. Ultimately, what we are doing is strengthening IFF’s position to serve our customers.We are witnessing powerful trends that are forcing all of us to think differently, and we have received very positive customer feedback about that combination. We will be a very powerful leader with even better R&D and application development capabilities and even deeper and more robust product development pipeline in addition to a portfolio that will be among the most balanced in the industry. Importantly, our shared…

[Operator Instructions] We’ll take our first question today from Mark Astrachan with Stifel. Your line is open.

So, two questions for me. First, on the sales forecast range, so it’s a bit wider than we’re accustomed to seeing. It’s a bit wider, I think, too, relative to some of your peers. I guess I’m curious why you’re giving a wider range. I hear the China commentary, but I was under the impression, it wasn’t particularly large as a percentage of business. So is there something from a macro standpoint? Or is there something from a customer standpoint that you’re hearing or worried about? And then the second question is Frutarom. So I get organic growth for 4Q down about 4%, if you back out the acquisition contribution and the piece of the business from the closing of prior year that you did known for the full quarter, so that gets a full year number down about 1%. So, I guess, the question there is you’ve owned the asset now for a little over one year. What’s a reasonable run rate of growth? You’ve talked about 6% of that target longer term, but it just seems like it’s not the case anymore. So maybe you’re still thinking 6%, but if you could kind of walk through how you’re thinking about it, if that’s the case. Or what are the moving parts today? That would be helpful.

Mark, thank you. First of all, on the guidance range, that was certainly a discussion we had internally. What do we do in an environment where we are in, which is a pretty, let’s say, volatile. It’s on one hand, certainly, the corona situation, I’ll come to that in a second. And then also tariffs, which are not easy to plan. But corona was probably the tipping point for us because it’s very hard to quantify, but we know that it will have an impact. With our manufacturing plants actually closed up to last Monday, Tuesday, well, we opened it. We have relatively soft demand. We will see whether we will make it up. We have seen that we have also modest cost increases already on particularly on transportation.We have to make sure that we manage our inventory well in this situation because you have, let’s say, disruptions in the supply chain. And one of our bigger customers also said that the travel retail is actually pretty down because people are not traveling too much any longer. Just to give you one very personal example, my family came back from Europe yesterday. My wife told me in Frankfurt that the at the border control, there was nobody else. And the airplane, Lufthansa airplane was a smaller one than before, and it was just half booked, so just as to validate what we are seeing and reading. So we said it’s probably a prudent thing to widen the guidance range because we just don’t know. We hope at least that we will make it up. And as I said, our manufacturing plants are open again, and we are starting to manufacture, and it seems to be all good. But that’s how we see it. And I hand it over to Rustom to talk a bit about the guidance.

Sure. Thanks. Thank you, Mark. Very little to add there except specifically, we didn’t quantify on the coronavirus because it’s too early. It’s just too early to tell and understand it. And but what we did do was widen the ranges, and we can come back at some point subsequent in the year as we know more.

Yes. Let me take now your second question on Frut. We believe when we cycle through, as we said, probably over the course of last year, through some of the onetime effects, we see that this business has good potential of mid-single-digit growth in average, and I come to some of the exceptions here. What we have to cycle through is our compliance issues, we issue we had in Russia. Thanks God, it’s solved on the legal front now. We have to make sure that on the business side, it’s running well. The second thing is the CitraSource, where one of our peer companies lost their big customer, and they are our biggest customer in that business. And then we had the impact on raw material prices on Natural Colors. So we believe that within the second quarter, we will cycle through these effects and we will grow this business around about mid-single digits. We have actually if you look at the different categories, some of these businesses are doing extremely well and have even double-digit growth like inclusions, where gelato is part of it, and the Food Protection business. So we are driving this, and we see also that these businesses are helping us with our cross-selling activities, which is basically reflected in the guidance, by the way. And most of it, it’s a Frutarom business. Okay?

Okay.

Thank you. We’ll take our next question from Mike Sison with Wells Fargo. Your line is open.

I didn’t want to get a little bit of color in terms of what’s driving the growth, the 2.5% to 6.5%. I know you have a nice little color, columns there. But in terms of the organic business, can you maybe walk through I think you’ve won some business in Taste or maybe it’s Scent, I can’t remember. And what gives you confidence that you can actually grow organically in 2020?

Yes, okay, absolutely. And I’ll take it, but please, Rustom, you add here. First of all, as we said before, we have basically access to three more very important core lists on the Scent side. What we see is that the team is executing with the customer very, very closely now on new projects. We will see already some good wins in 2020, but the bulk of it will probably come in 2021. But we see that this is working out very well. And I was myself at the BIC Congress, ACI, the American Cleaning Institute, and I talked myself to many customers. And particularly, the ones where we have won the new core lists, and that’s very positive because they’re happy with the innovation provided by IFF, and the projects are already starting to ramp up. That’s number one. Number two, and that was super important for us last year. We saw the inflection point now with the Taste business. We had basically three, almost four quarters, not so great growth. It was fourth quarter in 2018 and then up to the third quarter in 2019. And we saw that many of our bigger CPG customers had very slow volumes. Not that we were losing businesses but just the volume was very, very low of our business with these customers. And we had on the other hand a very good win rate over the course of the year, and that started to materialize now in the fourth quarter. And we see already a good start into the first quarter as well with good January numbers. So, it looks like that we are coming back on the Taste business to our usually average growth rates. And when I go back here on my spreadsheet, the last three years, the average CAGR was 3.9%, last five years 3.7%. And that’s certainly a number the business can achieve.Then, on top of it, we look at the Frutarom business, I just gave the answer to Mark. It’s a bit backloaded in general because of the cycling through of the topics I just mentioned. Well, what comes on top of it, we see actually a good activity now on the cross-selling. It started slower than we expected, but right now, we have run about 1,000 projects which have significant value for us, where we see that we can combine our products, that we can cross-sell products into combined customers. And that’s something which is really, really good and gives us confidence that the growth is will be good in our core business over the course of 2020. So that’s how we see it. I don’t know, Rustom, whether you want to add anything.

Just one thing probably in pricing and in Scent, pricing and Fragrance Ingredients. But otherwise, I think you covered it all.

We’ll take our next question from John Roberts with UBS. Your line is open.

Thank you. Welcome, Rustom. That was a good presentation for somebody only on the job a couple of weeks. Now that the year one guarantees have expired for the key Frutarom employees, are you seeing any increase in turnover?

Yes. John, that’s a very, very good question. Let me address it into two parts. The first thing, if I look at total employee population of legacy Frut, we have actually lower attrition rates, voluntary attrition rates than we had before, which is actually pretty good, knocking on wood, it stays like that. And on the key employees, we didn’t lose key employees we didn’t want to lose. And that’s a good, let’s say, message for us as well. Some of them are driving important businesses for us. For example, the leader of the Inclusions business, which is really driving it, the Savory solutions business. They’re all leader from the legacy Frut unit.

And do you have any update on the timing of a filing for the DuPont deal? And just remind us what are the key long lead time critical items on the path to closing on first quarter 2021.

So, it would be -- John, this is Mike. There’s no change from what we communicated back in December. As we progress through this year, obviously, there’s the separation component that the DuPont team is working on from that standpoint. And then as we progress concurrently, we’re working to look at doing the appropriate filings with the SEC, specifically, the Form 4, that will probably come, let’s call it, mid-year. And then after that, we’ll move into the voting discussion.

And closing has not changed. We believe that first quarter next year is very realistic. And we don’t expect any antitrust issues here with the two businesses.

We’ll take our next question from PJ Juvekar with Citigroup. Your line is open.

One question is on Taste. North America were challenged due to volume erosion from large multinational companies. I thought that destocking in packaged foods was mostly done by end of third quarter. So is there incremental destocking? Or is this issue with underlying demand with these multinational companies?

I think, PJ, good question. We are done with destocking for, let’s say, third quarter last year. Fourth quarter was already done. And I think it has reflected very nicely in the rebound of our business in the Taste division, so we are very happy with that.

And my second question is, one of your priorities was getting IFF’s technology into Frutarom and the cross-selling you had talked about. Can you give us an update on that and if that’s happening through Tastepoint?

Yes. Absolutely. It’s happening through Tastepoint, and we’re doing it for some of the bigger customers as well. What we see here is, in particular, on the Food Protection side, very good sales. So Food Protection is basically antioxidants to increase the shelf life. That’s something where cross-selling works very, very well. We see it in the first examples on Natural Colors and on the Inclusion business, which you see the legacy Taura one. We see it in the number of projects, as I mentioned. We have around about 1,000 different projects running with a value of more than $100 million. Not all of them will hit certainly this year, but it shows the strength. If I would look back maybe one year, 1.5 years, I would have hoped it comes faster. But I have to say now, since we are having a really dedicated good team on it and exploring it more, it comes much better than we have expected. So little slower than I would have wished for but higher in terms of the opportunities than we have seen before. I hope that helps, P.J.

Thank you. We’ll take our next question from Faiza Alwy with Deutsche Bank. Your line is open.

So, I have two questions. One is just on gross margin. It looks like you took a step back this quarter, and I was expecting an improvement. So maybe if you could share with us what some of the puts and takes were there. And how we should think about raw materials and gross margin in 2020? And then my second question is just if you could give us a sense of how we should think about cash flow and CapEx in 2020.

Sure. So, it’s Rustom. So, let me take this. So, in the fourth quarter, our gross margin was negatively impacted by higher raw material costs and unfavorable mix, right? So from what I’ve learned in my first couple of weeks, raw material costs can fluctuate monthly, quarterly due to inventories. And in Taste in Q4, that’s really where we saw it. They were primarily impacted by the timing of raw material cost for the balance sheet, the P&L. And that’s not much different from what happened in the second quarter. We have Scent, raw materials came in much more favorable. And then if you want to think about specific commodities, in Taste, it was primarily vanilla, and incentive continues to be turpentine in China tariffs, right? Capital, you wanted to the cash flow, yes, roughly about 4.5%, next year as well. 4.5% of sales, sorry, 4.5% of sales on capital.And then, the final part of your question or at least the intermediate part of your question was about raw materials and how that would flow through into next year, right? And look, in 2020, we believe that raw material costs will stabilize, specifically in the Scent division, where we had the largest raw material increases. Our current purchases are stabilizing. And look, it’s important to note, they still remain elevated at levels and that we will, as we always have, work with our customers and actions, including price increases, to cover that exposure. And I think those were your questions, right, it’s good?

Actually, I think that’s perfectly fine. Rustom, fantastic in the third week. No, just one word on the CapEx to give it to contextualize it a bit. As we said before, last year was our highest CapEx spending for all the reasons I said during the call, because we did a lot of investments. We have to finish off this year. And from the next year onwards, the CapEx plan is much lower and it goes more to a maintenance level of 3% to 3.5%. Because we are finishing up India and China this year, the creative centers, centers are done. And then we have just the maintenance investments, which is actually a good sign for us, and it will have a positive impact on the cash flow.

Thank you. We’ll take our next question today from Adam Samuelson with Goldman Sachs. Your line is open.

And maybe first, just to clarify on the coronavirus, just impact. And I know the guidance doesn’t officially kind of contemplate an impact, but it also you’ve put a wider range to give some just some room there. Could you just contextualize for us the just to be clear, the China sales exposure? And also, just Fine Fragrance, as far as you can tell, how much you think that actually goes through global kind of duty-free and travel channels? It’s probably the two areas most at risk. And similarly, on the production side, how much of your raw material production do you source from China?

Should I get started? I’ll start. Adam, so we do own about 6% of our combined sales in China. That’s China for China, so to say. On the travel retail, I can’t tell you now because it has usually a time lag. It comes from our customers. But if you look at our one of our big beauty and cosmetic customers, they just made an announcement, and that made us think as well what the impact might be. And then the third piece is that we have, we are sourcing some of our fragrance ingredients out of China. And we certainly have other suppliers in China as well. Here, we feel much better, of course, since the factory is and that specific factory is opened since last Tuesday, we are probably on safe grounds that we can supply our ingredients to the rest of the company. But that was a bit of a worry for us as well, whether we can export out of China. So 6%, China for China. Travel retail, we don’t know. We’re just listening to our customers because they are closer to the frontier. And then on production out of China, we believe we are good on this side.

Okay. And then just maybe following up on the prior question on the gross margin performance in the fourth quarter. And clearly, it came in below your plan. And I just want to be clear. I mean, if it was raw material costs and inventory, just I presumed you would have had more visibility to it. Was there a sharp kind of divergence in sales mix and the decline in Fragrance Ingredients, I would have thought it would have been a tailwind to the margin performance. I just want to make clarify a little bit, just to the surprise relative to your own plan, cycling back a couple of months, it seems like a bigger variance than I would have thought.

So yes, I mean, look, mix sales mix definitely. I mean sales mix was in there. And nothing structural, really, as we look at our and we’re probably going to see gross margins recover as we go into the early part of this year in 2020.

Yes. Absolutely. And it’s more timing than anything else on that one. And the good thing is that the raw material prices are now softening, again, which is helpful for this year. We certainly have taken last year, in a couple of moments, inventory positions, just to make sure that we can supply our customers, but that seems to stabilize.

We’ll take our next question today from Lauren Lieberman with Barclays. Your line is open.

Hey. I just wanted to follow up again just a bit on Frutarom. So a few things here. One is that with Frutarom being folded into Taste, to what degree will we really get visibility into this inflection you’re expecting in 2020? Because when I look at Frut in the fourth quarter, even if I can see it and say, the four points, the things that you’re calling transitory are, in fact, transitory, organic was still down 2%, even excluding those things in the fourth quarter. So, I’m just struggling with why mid single digits is comfortable. And how and if will kind of get visibility if that would again being folded into Taste as we get into 2020?

So, Lauren, it’s Rustom. Let me have a crack first at how we’re -- the second part is how we track it and how we manage it. So, yes, we are going to report as two segments, but what we are going to do over the course of the year in 2020 is we’re going to, as much as possible, track the Frutarom elements separately too. Now, remember, as we continue to integrate, there will be some sales that come from Frutarom that now show up that naturally migrate over into the legacy Taste part of the business. Right? So, it won’t be perfect, but we’re going to do our absolute best for ourselves as much as anything else to track and control that. Then...

Yes. I think, the second question and then just as kind of a point for just a reminder perspective, I think Lauren was asking -- looking at the organic growth from a Frutarom perspective, ex the ex the 53rd week, ex the three days, I think the run rate number or the right number is probably flat in the quarter. And so how does that transfer as we go forward, the confidence level at...

I would say, confidence level is pretty high right now that when we cycle through these one-times, and Lauren mentioned it and maybe when we’re next week at CAGNY, we have more time to talk about it. When we go through the Russia topic from the commercial or legally, we are through. When CitraSource is basically cycling through and we see a recovery of the Natural Colors raw materials, then we will see actually good mid-single-digit growth going forward. And we will provide some visibility on this one as well. Where it is tough, and I’m building here on Rustom’s comment on to create visibilities on the cross sales. And you see cross sales is 0.5% to 1% point growth for this year. And most of it actually, it comes out of the Frutarom portfolio and that’s tough to track. But, I think you can model it that most part of it comes out of the Frutarom portfolio, and that should be helpful for you when you model the legacy Frut business. But we are bringing it together with Taste as actually two reasons. One is a very practical business reason. It is helping with our cross-selling activities and bringing the technologies and the people very well together. That’s number one. And the second one is in gearing up for the N&B integration, it simplifies our structure because we will have them in the first quarter next year, another change. And we thought it’s a prudent thing to do exactly that. I hope it helps, Lauren.

Thank you. We’ll go next to Jeff Zekauskas with JP Morgan. Your line is open.

In your remarks, you said that you knocked out $20 million in costs in Frutarom. But the year-over-year increase in operating income is about $5 million. And even if you compare it to the first quarter of 2019, maybe you’re $3 million up. So why isn’t Frutarom earning, I don’t know, $45 million if you’ve lowered your cost structure by that much? Why is the number so low?

So, part of this would be currency, the currency impact as we go through the numbers. And part of the, I guess, the cost synergies that we have also have been associated with extra cost that we put in as we take out the synergies to, right? Sometimes the double operation of factories and the migration as we consolidate.

Yes. It’s a fair point because we had for some of these, we had double-running costs because when you close down a factory, and basically, the receiving end, you have to ramp up already and to get it into the new one. I think that’s important. And that will go away because we have closed down 10 factories last year. We will do another dozen probably until October of this year. So these double-running costs, at least for the 10 we have closed, it’s gone. I think that’s good. And then we had a couple of smaller divestitures versus previous year as well, and that’s impacting it.

So, should your Frutarom operating income grow at least $50 million next year as you realize incremental synergy costs? Or that’s not the right number? I mean, even if the business doesn’t grow at all?

Sorry. I was going to cut in there. That number is the right number, but it’s going to be spread across the three businesses, the business units. Well, 2, as we go into next year.

Yes. Because -- and let me explain why many of the savings are coming from procurement. And we see procurement synergies also in the Scent business because we just get some of the raw materials to better price, transportation. We have significant savings, for example, of packaging material, and that’s the reason why you see it in the different businesses as well. But in general, the number is right.

We have no further questions at this time. I’ll turn the call back to Andreas Fibig for any final or closing remarks.

Yes. Thank you very much for the discussion and the good questions. I hope I will see many of you during CAGNY, next week. That’s number one. And then, we have certainly, as usual, a lot of one-o-ones planned. Have a good day. And see you soon.

This does conclude today’s program. Thank you for your participation. You may disconnect at any time.