International Flavors & Fragrances Inc (IFF) 2013 Q1 法說會逐字稿

At this time I would like to welcome everyone to the International Flavors & Fragrances first-quarter 2013 earnings conference call. All participants will be in a listen-only mode until the formal 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 Shelley Young, Director of Investor Relations. You may begin.

Thank you, operator. Good morning and good afternoon, everyone, and welcome to IFF's first-quarter 2013 conference call. Earlier today we issued a press release announcing our first-quarter 2013 financial results. A copy of the release can be found on our website at IFF.com.

Please note that this call is being recorded live and will be available for replay for up to one year on our website. Before turning the call over to our senior management team, I would like to read our forward-looking statement.

Please keep in mind that during this call, we will be making forward-looking statements about the Company's performance, particularly with regard to the first quarter and our outlook for 2013. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning factors that could cause actual results to differ materially from forward-looking statements, please refer to our forward-looking statements and risk factors contained in our 2012 10-K filed on February 26, 2013, and our press release that we filed this morning, all of which are available 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 we issued earlier today and on our website.

I'd like to introduce the participants on today's call. With me on the call is Doug Tough, our Chairman and CEO; Nicolas Mirzayantz, our Group President of Fragrances; Hernan Vaisman, our Group President of Flavors; and Kevin Berryman, our Executive Vice President and CFO. Now, I'd like to turn the call over to Doug Tough.

Thank you, Shelley, and good morning and good afternoon, everyone. Our focus on the call this morning is to provide an overview of our first-quarter results and operating performance and provide you with a more in-depth review of our fragrance and flavors business segments. We will also provide our current outlook for 2013, and after our prepared remarks, we will leave time for questions.

Turning to our first-quarter results, we delivered solid local currency sales growth of 3%. On a like-for-like basis, which excludes the exit of low-margin sales activities and flavors, we delivered local currency sales growth of 4%, which reflects underlying momentum in both our fragrance compounds and flavors compounds businesses, supported by strong new wins based on our innovations and growth across diverse categories and geographies.

Our top-line performance continues to be driven by 9% growth in the emerging markets, which now account for nearly half of our sales. This is due to strong growth in many countries, including Brazil, Russia, China, and Turkey.

Turning to the business segments, flavors delivered modest growth of 2%. But on a like-for-like basis, which is a more consistent measure of growth, flavors delivered growth of 6%. The 6% growth overlaps 6% like-for-like growth in the first quarter of 2012 and is consistent with historical growth rates in this business, once again showing the strength and stability of the business.

Our fragrances business delivered growth of 3% in total. Fragrance compounds, which excludes fragrance ingredients, achieved growth of 7%. Our fragrance compounds business, which consists of fine and beauty care and functional fragrances, was supported by strong new wins, including products using our encapsulation technology as well as increased core list participation.

Turning to our margins, this quarter our adjusted margins improved 270 basis points over the prior year to 42.9%. The overall improvement reflects the combined benefit of pricing and declining raw material costs, volume growth, the benefits of our hedging programs, as well as other cost improvement initiatives.

Kevin Berryman, our CFO, will address our margin progression in more detail later in the presentation. Our margin gains this quarter were also due to exit of low-margin sales activities in flavors business, which has had an overall 30 basis point favorable impact on our margins.

The solid top-line performance in margin expansion more than offset increased RSA costs this quarter and resulted in 13% growth in our adjusted operating profit. And adjusted earnings per share, which includes a lower effective tax rate, increased 19% to $1.19.

As we have done in the past, this quarter we continued to optimize our manufacturing footprint by making the decision to close both our flavors plant in Sweden and our fragrances plant in, Jakarta, Indonesia; and transferring the production from these facilities to our larger facility in the Netherlands and our new facility in Singapore, respectively. The Company looks to operate as efficiently as possible to remain competitive, and these actions were taken with this objective in mind.

Last week we also announced our intention to close our fragrance ingredients plant in Augusta, Georgia, and consolidate the production into existing facilities. We provided a strategic review of our ingredients business to our Board and are now executing on our plan to improve the profitability and the competitiveness of our fragrance ingredients business, thereby strengthening our competitive cost position in the fragrance business.

We are also taking steps to strengthen our innovation platform. During the quarter we issued a press release on the successful outcome with an outside partner, Evolva Holding, in the production and scale-up of a natural, sustainable vanillin through a biosynthetic process. We are very pleased with our partnership and believe the program with Evolva will increase the availability and sustainability of vanillin, which is a key flavor ingredient in many food products.

Last week we entered into a multiyear collaboration with Amyris, a leading biotechnology company, to develop and commercialize renewable, cost-effective fragrance ingredients. We continue to work with R&D and creative teams to commercialize products that will provide us with a competitive edge in the market. These two biotechnology programs are complementary, and we believe collaborations such as this are critical to driving our future growth and profitability. Our earnings per share growth this quarter enables us to continue making investments that will secure our future.

I would now like to turn the call over to Nicolas Mirzayantz, our Group President of Fragrances.

Thank you, Doug, and good morning and good afternoon, everyone. Turning to our top-line results, our overall fragrance business delivered 3% local currency sales growth, which reflects 7% growth in fragrance compounds, partially offset by an 11% decline in ingredients.

Our growth was supported by strong new wins plus the benefit of increased core list participation. Growth this quarter was also supported by strong growth in the emerging markets.

The emerging markets accounted for 54% of our fragrance compounds sales. Within fragrance compounds, the emerging markets grew at 18%. In compounds we achieved very strong growth in many areas of the world, including Brazil, the Middle East, Mexico, Turkey, and Indonesia, among others. Brazil continues to be one of our leading markets and had strong double-digit growth again this quarter. We had a solid first quarter, and we're seeing strong momentum on many fronts.

Our fine and beauty care category, which includes fine fragrances, toiletries, and hair care, grew by 4% this quarter, driven by double-digit growth in Latin America of 25% and greater Asia of 11%, which more than offset volume softness in North America and EAME. To put this quarter's growth into perspective, this quarter followed exceptional growth in the fourth quarter of 2012.

As you may recall, in the fourth quarter of 2012 fine and beauty care delivered growth of 19%, driven by 17% growth in North America. We believe that part of the softness in North America in the first quarter is related to the Christmas holiday, which appears to have impacted first-quarter demand in the industry.

Still, there are many new launches in 2013, including recent launches with Balenciaga; and new launches, such as L'EAU DE LACOSTE and Katy Perry Killer Queen, which had its press launch last week, which we believe will help improve sales momentum going forward.

Functional fragrances, which includes fabric care, home care, and personal wash, achieved local currency sales growth of 9% this quarter on top of 12% growth in the fourth quarter, with positive growth in every region, led by double-digit growth of 13% in both Latin America and greater Asia, and strong growth in EAME. This marks our 19th consecutive quarter of growth in functional fragrances, led by double-digit growth in fabric care and high single-digit growth in personal wash. The strong growth reflects the new wins, our increased core list participation, and increased use of products using our encapsulation technology.

Turning to fragrance ingredients, we saw continued top-line pressure in our external portfolio, primarily in commodity products, and overall fragrance ingredient sales declined 11%. As you know, we have developed a strategy to improve our overall profitability and competitiveness in our external fragrance ingredient business and have been continuing to finalize our execution plan.

As Doug mentioned last week, we announced our intention to close our Augusta, Georgia, facility and consolidate production into existing fragrance ingredient facility. This is in line with our plan to improve manufacturing efficiencies and increase the competitiveness of this business. Kevin will speak about the financial impact related to the Augusta closure.

I want to underscore the strategic importance of our ingredients business. Our ingredients business provides innovative and cost-effective ingredients to our perfumers for their use in creating winning solutions, winning fragrances for our customers, thereby providing a significant strategic benefit to our overall fragrance business.

We do not take decisions such as this lightly, as you know. But moving production to existing locations and further consolidating our manufacturing footprint will create synergies and improve operating efficiencies. Our decision is based on an ongoing business review and is one of several actions we will be taking to improve the competitiveness of our fragrance ingredient business.

Turning to profitability, our segment operating profit increased $12 million or 22% to $68 million in the first quarter. Modest decreases in raw material costs, combined with residual pricing, volume, and mix improvements; as well as other cost and margin improvement initiatives more than offset increased RSA, resulting in a 290 basis points segment margin improvement this quarter to 18.4% versus 15.5% in the prior-year quarter.

Although our margins this quarter benefited from modest input cost reduction, input costs remained at very high levels, and the margin improvement that we are seeing over the past two years is driven less by pricing and more by our strategic initiatives. Kevin will discuss this further later on in our presentation.

In accordance with our strategic priorities, we have implemented many programs to improve the profitability of our portfolio and optimize our geographic footprint. During the quarter, we made a decision to close our fragrance facility in Jakarta, Indonesia, and transfer production to our new facility in Singapore, which is a state-of-the-art manufacturing plant.

We also took action to strengthen our innovation platforms by announcing our multiyear collaboration with Amyris to develop and commercialize sustainable, cost-effective fragrance ingredients. We're excited to strengthen our biotechnology platform and continue exploring additional opportunities that biotechnology offers.

Looking ahead, in the second quarter of 2013 we expect we will benefit from new wins in fine fragrance and beauty care and functional fragrance, and we'll see continued sustained performance in our fragrance compounds category. We also expect to see some improvement in our ingredients performance.

I would like now turn the call over to my colleague, Hernan Vaisman, our Group President of Flavors.

Thank you, Nicolas. Good morning and good afternoon, everyone. Turning to our top-line performance. In the first quarter flavors delivered local currency sales growth of 2%. Excluding the exit of low-margin sales activities, which included sales in both savory and sweet, flavors' like-for-like growth would have been 6%.

The 6% growth is consistent with our historical growth rate and reflects strong new wins from our [Malaysian tools]. The first quarter is going to mark our 29th consecutive quarter of local currency sales growth and was supported by mid-single-digit like-for-like growth in every region.

This quarter we exit over $10 million on sales activities affecting both savory and sweet end use categories. We expect to exit the same level of business in the second quarter of 2013, and after that we are largely finished with this program. As a percentage of sales we would expect the impact in the second quarter of exited sales to be approximately 3 percentage points.

This quarter growth was supported by strong new wins, particularly those using sun-powered health and wellness modulation technologies. We ended the quarter with a strong pipeline of new wins. Beverage and dairy are benefiting from these technologies, all contained under our [flavor fleet] umbrella, and much of our growth in these categories is being greatly invigorated by our health and wellness programs.

We also saw some momentum in our citrus toolbox offerings. Citrus is one of our biggest flavors profiles in the beverage category.

In North America, like-for-like growth was 4%, excluding the exit of low-margin sales activities. The best-performing category was beverage, which was up strong single-digits on local currency basis. On account of the strong new wins in the citrus area as well as increased volume of product using our sweetness modulation tools.

Within our EAME region, local currency growth was led by strong results in Western Europe, specifically Spain, Portugal, and the UK, with our new business using natural flavoring as well as increased customer orders in beverage and savory. Greater Asia, which is our largest region, achieved 6% local currency growth due to the strength in Australasia, China, and India. We saw strong growth in both dairy and savory.

In Latin America we saw strong growth in beverage and dairy. We recently won new business in the region, and we have a lot of new projects in the pipeline. We expect to have stronger growth in Latin America in the quarters to come, and we are pleased that we are picking up momentum in these regions.

Turning to our profitability this quarter. This quarter our segment profit improved 4%, or $3 million, to $83 million. The exit of low-margin sales activities contributed 60 basis points to our gross margin improvement. This quarter we benefited from the favorable relationship between raw material costs and pricing, although our input prices remained at historically high levels. Kevin will talk more about this.

The gross margin improvement more than offset increased RSA costs associated with R&D. For this first quarter, our segment operating margin improved 50 basis points to 23.3% versus the prior year of 22.8%.

As we mentioned on our fourth-quarter conference call, this quarter we announced that we have entered into a preproduction phase to develop and scale up via a third-party natural vanillin for commercial application through a cost effective, sustainable route. This collaboration with Evolva is gaining traction and is consistent with our strategy to strengthen our innovation platform.

Also, this quarter we took several actions to consolidate our manufacturing footprint, improve efficiency, and better meet our customers' changing needs. We made the decision to close our flavors plant in Sweden and transfer production to our plant in the Netherlands.

We also announced the formal opening of our flavors plant in Guangzhou, China, and we continue to build out our plant in Gebze, Turkey. We also continue to invest in commercial offices and satellite labs in Asia to better serve our customers in the regions, with locations in Chengdu and Beijing now fully operational.

For the second quarter, we expect to see improved top-line growth, although our overall growth will still be impacted by the exit of low-margin sales activities for one final quarter. On a like-for-like basis we expect to achieve mid to high single-digit growth, fueled by broad-based geographic growth. Although it is still early in the second quarter, based on our orders in-house we believe we are off to a very strong start.

With that, I would like to turn the call over to Kevin Berryman, our CFO.

Thank you, Hernan, and good morning and good afternoon, everyone. Turning to our summary quarterly results, reported revenues for the first quarter totaled $728 million compared with $711 million in the prior-year quarter, or an increase of 2%. Excluding the impact of foreign currency, our local currency sales increased 3%. And on a like-for-like basis, which excludes the impact of the exit of low-margin sales activities in flavors, our local currency sales growth was 4%.

Our growth was again fueled by our geographic footprint in the emerging markets. Importantly, we continue to see momentum behind our fine and beauty care, functional, and flavors businesses. We collectively refer to this business as our compounds business, which represents our total business excluding the internal sales of our fragrance ingredients.

The growth momentum in the first quarter for the compound portion of our business remains quite healthy, even with some softness in fine fragrances. As Nicolas mentioned, we believe this short-term softness is due to the impact of the very strong fourth-quarter sales we realized just last year. And as Nicolas previously noted on the call, fine and beauty care growth in Q4 was 19% and was driven by strong growth in fine fragrances.

Importantly, our consolidated compound like-for-like growth levels over the last 12 months have consistently remained at 6% or better and have represented an annual growth over the last 12 months of 8%. We believe that this is an indication of our traction against our strategic initiatives of focusing on our advantaged positions; driving innovation into our portfolio; and providing winning, value-added solutions to our customers.

Adjusted gross margins this quarter improved 270 basis points to 42.9%, up from 40.2% in the prior-year quarter. The improved performance was due to the impact of moderating input costs and the benefits of residual pricing as well as an improved sales mix, including the benefits of exiting lower-margin sales activities in flavors, continued cost improvement initiatives, and gains associated with our foreign currency hedging program. I will provide more detail on our trends in gross margins in a moment.

These gross margin improvements more than offset increases in RSA due to higher compensation expenses, pensions, and training costs, and resulted in adjusted operating profit improvement of 13%, or plus $16 million, to $139 million for the quarter. The adjusted operating profit improvement, combined with a lower effective tax rate due to the reinstatement of the US R&D tax credits in 2013, resulted in adjusted EPS growth of 19% to $1.19 this quarter.

Importantly, to reiterate what Doug, Nicolas, and Hernan have already noted, we recently took several proactive steps to ensure we maintain a cost-effective structure as part of our continuing efforts to drive efficiencies in all that we do. We will be initiating the closure of three facilities over the course of the next year -- our flavors plant in Sweden; our fragrances plant in Indonesia; and our fragrance ingredients plant in Augusta, Georgia.

In Q1, we recognized restructuring costs for Sweden and Indonesia which totaled $1.2 million. Our closure of the Augusta plant is the most material and represents a commitment to ensuring our fragrance ingredients operations remain competitive longer term. Our fragrance ingredients plant closure will be a second-quarter accounting event.

To summarize the impact of this initiative, we expect to incur one-time costs of $6 million to $9 million, including personnel-related costs and plant shutdown and other related costs. We also expect to take a charge of $10 million to $12 million related to accelerated depreciation of fixed assets associated with the facility.

As for the phasing of the costs and savings, approximately $3 million to $4 million of these costs will be recorded in the second quarter, with the remainder expected to be recognized over the following four quarters. Once fully implemented by mid-2014, the plant closure is expected to generate savings of approximately $6 million to $8 million per year.

Turning to our gross margins, with gross margin growing 270 basis points to 42.9%, as noted earlier, this quarter we again achieved improvements from the year-ago figure. We are pleased with our success in driving this margin improvement, but it certainly is important to understand what continues to be the fundamental driver in the improvement of this critical metric.

As you know, our industry has seen substantial input costs increases over the last 2 plus years, resulting in input cost increases to IFF of approximately 14% in our raw materials, with an increase that was even more pronounced in fragrances. The increased costs have had a significant impact on our gross margins in Q1 2013 versus pre-inflation levels. We estimate the negative impact on our margins from these cost increases to be roughly 400 basis points versus the pre-inflation level.

As you also know, we have of necessity been very active in implementing price increases over the 2011 and 2012 years to help offset the impact of these input cost increases. Importantly, the Company has been able to effectively recover the absolute dollar costs through price increases, allowing us to recover nearly 250 basis points of that input cost pressure. While pricing was enough to recover the absolute increases in input costs, it was not enough to cover the full impact of input cost increases on gross margins.

The net effect is that our gross margins still remains pressured by 170 basis points in the current quarter versus the pre-inflation period prior to the run up in raw material costs. This drag on our margins is shown by the red bar on the chart. As a result, the improvement that we are now seeing in gross margins is less about the net impact of pricing and input costs and more about our strategic initiatives. The improvement is effectively being driven by our strategic plans and the disciplined execution of same.

Our strategy to accelerate our innovation, drive efficiencies in all that we do, and fix underperforming assets while focusing on our advantaged positions has translated into strong improvement in our gross margins. In fact, these efforts have resulted in 330 basis points of improvement, as can be seen on the green bar on the chart. Importantly, these actions have more than offset the net 170 basis point pressure from input cost and pricing and have resulted in the Company realizing an overall increase of 160 basis points over the last three years, since before the input cost inflation began.

You can see why we are pleased regarding the execution of our strategy, as our margin progression ensures that we will be able to continue to make investments in R&D and other business-building initiatives, all to drive our growth plans into the future.

Turning to our RSA costs, this quarter RSA expense as a percent of its sales increased 100 basis points to 23.9%, up from 22.9% of sales in the prior-year quarter. The higher RSA reflects higher compensation expense, incentive compensation accruals, pension costs, increases related to our deferred compensation plan program, and training. In addition, spending on key R&D initiatives showed double-digit growth this quarter, consistent with our strategy of investing those opportunities which we believe can deliver the greatest incremental value to IFF. IFF's R&D spending remains an important focus area for the Company.

Turning to foreign currency impacts, foreign currency translation this quarter had a limited impact on our reported sales growth. However, as a result of our hedging activities, foreign currency had a 40-basis point favorable impact on our gross margin, thereby contributing to our $0.19 EPS improvement. Again, to remind you, in 2013 we remain nearly 80% hedged against the euro at levels that approximate [$1.29], effectively consistent with the average exchange rate levels for the full year 2012.

Turning to our cash flow, our cash flow from operations for the three months ended March 31, 2013, was $19 million or $34 million lower than the prior-year quarter. The decrease this quarter primarily reflects higher year-over-year incentive compensation payments, as last year's incentive payments in Q1 2012 were abnormally low. In addition, we also made additional pension contributions in the US. These incremental outlays were offset in part by an improvement in the cash flow versus last year in core working capital of $7 million and increased net income due to our improved operating performance in the first quarter 2013 versus the year-ago period.

As you may know, our Q1 cash flow is historically our lowest cash-generative quarter, and the results in Q1 of this year indicate solid cash flows as compared to historical levels. It is worth noting that we paid out our normal fourth-quarter dividend in late December as opposed to early January, so our net cash flow in Q1 also benefited from not having this normal outflow during the first quarter.

Finally, turning to our capital structure, during the quarter we began implementing our share buyback program by buying back approximately 200,000 shares at an average price of $70 a share. As you know, we announced the $250 million share buyback program at the end of last year as a way of providing value to our shareholders.

After the quarter end we also successfully executed a $300 million bond offering in the public markets. This 10-year senior note carries a rate of 3.2%, and this was our first public offering in more than 10 years. By issuing this bond it has enabled us to take advantage of attractive rates while diversifying our sources of funding as well as our investor base. We also maintained our quarterly dividend at $0.34, and per our normal course of action we will be evaluating our dividend payout in our July meeting, when we will decide on future actions relative to dividend increases.

In summary, before handing it back over to Doug, we ended the year with increased optimism and see many areas of the business positioned for future growth and profitability. Here are some key takeaways.

First, we delivered solid top-line growth led by new wins, owing in part to our innovations and to our expanded core list participation. Our growth this quarter was supported by 9% growth in the emerging markets, as we continue to grow with our customers in the developed markets. Our ability to anticipate consumer preferences with innovative products, such as those using our sweetness and sodium modulation tools in flavors or those using our encapsulation technology in fragrances, were critical drivers to our new win successes.

Our diversification with regards to categories, products, and customers provides us with ongoing stability and supports our growth. Our compound growth in the quarter of 6% combined with our latest fourth quarter's trailing growth of 8% indicates a continued momentum in this portion of our business. We also made investments in our future growth, as evidenced by our recent announcement of our multiyear collaboration with Amyris to develop and commercialize sustainable ingredients.

Second, we improved our gross margins again this quarter owing to moderating raw material costs, residual benefits of previously taken pricing, innovation, and improved product mix and cost reductions. Over the last few years our ability to protect and expand our margins has been less about the net impact of pricing and input costs and more about our efforts to maximize our portfolio. Importantly, the improved margin profile enables us to strategically invest in innovation and business-building initiatives, such as those involving Evolva and Amyris.

Third, we are looking to continue to leverage our geographic presence. We're in the process of building at our facility in Gebze, Turkey, and this quarter we announced the formal opening of our plant in Guangzhou, China, which we expect to commence commercial production in the third quarter of 2013. In addition, satellite labs and creative centers that have opened in the last 12 months include Chengdu in Beijing in China and Delhi in India. We believe we are very well positioned for the near and longer terms and continue to execute on our plans.

Fourth, we are taking continued action to consolidate our manufacturing footprint and realize operating efficiencies, and we have recently decided to close three plants, including our fragrance ingredients plant in Augusta, Georgia.

Fifth, we have made changes to our capital structure to provide us with ample liquidity and added financial flexibility while continuing to return cash to shareholders, both through a share repurchase program and quarterly dividend payment. Clearly, a lot is happening at IFF, and all of it is about driving our strategic agenda forward.

With that, I would like to turn the call over to Doug for his outlook on 2013.

Thank you, Nicolas, Hernan, and Kevin. We are pleased with the progress we have made over the past few years in driving growth across both businesses based on our innovations and our capable teams. The diverse and stable nature of our business, combined with our customer intimacy and consumer insights, enabled us to deliver solid results again this quarter. We feel confident that based on our diversification in terms of our portfolio, geographies, and customers, we will continue to expand our presence along with our customers and continue to achieve solid growth.

The accelerated momentum we see in the flavor and fragrance compounds businesses is fueled by the strategic investments we have made in the emerging markets over many years, combined with our ability to provide customers with products that meet or surpass consumer expectations and potentially lead to market share growth for both our customers and for us. We are committed to driving the business for the long term, creating new and innovative products that will appeal to customers, consumers all around the world, and collaborating with global and local customers to bring these products to market.

We continue to execute on our three strategic pillars, which are helping us to chart our growth. At the same time we are focused on our performance and making sure we produce strong results. Our outlook for the full year 2013 is to deliver growth and profitability in line with our long-term targets.

We believe will be able to deliver these results based on our current view of the environment and our performance within it. In addition, our R&D pipelines should provide us with longer-term growth while also providing us with sustainable, cost-effective raw materials that give us a competitive edge and enable us to grow our gross margin.

For the second quarter of 2013, we expect to see improved local currency sales growth in flavors even though we will continue to be impacted by the continued exit of low-margin sales activities. In fragrances, we expect momentum to increase in fine and beauty care and maintain our solid growth in functional. While we expect to see improved volume trends in ingredients for the full year, we still expect year-over-year declines in second quarter. Of note, notwithstanding fragrance ingredients sales softness centered on high-volume and low-cost items, we expect to maintain fragrance ingredients margins.

We have a committed and dedicated group of people whose mission is to see the Company succeed. We are pushing ahead to meet our internal financial objectives and expect to be able to deliver top-line growth in line with our long-term targets due to our diversity and our ability to provide value to customers year after year in every region.

In conclusion, we believe our strong performance at IFF this quarter is the result of our geographic footprint, our product diversity, and our ability to work with our customers to develop new products that will help shape the industry and delight consumers. We believe we are very well positioned in the market, and we plan to continue to selectively invest in those areas where we see the most growth.

We're investing in the future, making daily changes to advance the business. We will continue to proactively manage our performance and calibrate costs in line with our top-line growth as we continue to execute against our business plans. We will continue to focus on excellence in the execution of our strategies.

Before we take your questions, I wanted to mention that we are gearing up for our 2013 Investor Day, which will be held on Wednesday, June 5, in New York from 8 AM until 1 PM. If you have already received an invitation, please access the online registration site and sign up by the end of the month.

If you have not received an invitation and you're interested in attending, please reach out to Shelley Young and let her know of your interest. The theme of this year's event is innovation, and we will be showcasing some of our leading technologies and providing you with an update on our three strategic pillars. We hope you can make it, and we look forward to seeing our IFF analysts, investors, and prospective investors at the New York event.

Thank you for your attendance and your participation. I will now open the call to questions.

(Operator Instructions) Mark Astrakhan, Stifel Nicolaus.

I guess a couple of questions -- try to try to clarify and sort of get some thoughts around the outlook. One is just trying to understand the confidence in the second-quarter sales improvement, including how much is pull-forward into the fourth quarter or push-out into the second quarter of this year in terms of just overall puts and takes of what the number was in the first quarter, including maybe some comments on what's going on with new wins or existing business.

And then, secondly, on a bit of a longer-term point of view, EBIT and EPS outlook, what is the full benefit from the facility rationalization that you have talked about so far? The three facilities, I guess? In particular the Sweden and Indonesia piece, since we know the Augusta Georgia benefit from an EBIT standpoint. So what's the incremental for those two? And then on a clarification, does several actions within ingredients specifically mean there's more to come in that specific business?

Mark, there were kind of several questions in there. Let me start to talk to a couple of them, and then I'll ask, frankly, each Hernan and Nicolas to talk to volume, and Kevin, the question on rationalization benefits.

Certainly on the volume, you'll know we almost always see a certain degree of lumpiness in the results, and I think Nicolas pointing out that the 19% performance in fine fragrance in the previous quarter was an indication of extremely solid results then offset by weaker results now. So when they in a moment talk about the volume performance and the outlook for Q2 and beyond, I'll let them address specific wins, specific commercial results, and so on.

But certainly as it relates to this quarter, and in particular -- we have a good line of sight on order book results and on both the results of the wins and then the forward orders. It's an encouraging picture, which is why we elaborated the way we did on the outlook for Q2.

I'll only -- because it might come up elsewhere, but in the context of the fragrance ingredients issues, we have had a comprehensive review with our Board of Directors. There are several opportunity areas to improve the business. We will be advising the marketplace as and when we are ready to commit to those. But certainly the first one we've done is the announcement on Augusta, and you are correct in assuming there might be more there. But we won't be talking about that today. And I'll come back to the volume discussion now and the projections, and we'll start with Hernan as it looks to flavors in Q2 and beyond.

Hi Mark, it's Hernan speaking. Regarding why we are confident in Q2 -- it is basically we have a visibility in our orders in-house. We have the high volumes coming solely because we placed some orders particularly in the first quarter, but also because we have a big wins in some regions that will be launching in that quarter. So basically, that's why we are really confident -- first the wins that it's going to impact; and secondly, we have some other issues, in other [pattern order] issues in the first quarter, and now it's correcting in the second quarter.

Mark, it's Nicolas. Regarding -- pretty similar comments regarding Q2, where we're seeing we have a very, very strong pipeline of new wins that already started in Q1. And looking at the way the quarter started and the order in house, we believe that we have good momentum going on.

Regarding your questions of pushing and pulling versus different quarters and the customer dynamics, obviously, if you add the Q4 performance in fine and beauty of 19% plus 4% in Q1, that's about 11% growth over the two quarters. And we know that the Christmas season was positive, but probably not as strong as expected. Therefore it is impacting our intake.

But it is fair to say that North America is probably not as strong -- starting the year not as strong as we could have expected in terms of consumer trends. But as far as new wins and our participation and pipeline of new projects, it remains very strong. And actually our new wins in Q1 were above historical levels.

Mark, this is Kevin. I'll follow up on one quick comment on the volume and then talk about the restructuring question that you had. The only other point to add to what has already been said is in Q1 our win rates were actually quite strong. So our growth associated with new business offset by any losses that we might have had was actually near strong levels, and not necessarily at historical levels, but very strong.

So if there was any weakness in Q1, it was relative to some of the erosion that we saw in our business. Underlying the growth outlook going forward is a continued momentum in terms of that win performance. So that's one comment.

Your second question on the ingredients -- excuse me, on the restructurings or closures of the additional plants, we already talked to the benefits associated with the fragrance ingredients effort. We do have the other two plants. We expect that the savings associated with those plants will -- once they are fully instituted -- probably be $4 million plus or thereabouts.

We'll start to see some of that this year, because the timing -- this will be phased in over the second half of the year. However, I would say that will largely be offset this year, because at the same time we'll be ramping up our facility, our new facility in Guangzhou, China, which is the new flavors facility. So that's probably a net wash, roughly speaking, in 2013 in the back half. So I think we would start to see those benefits in 2014 and beyond for Sweden and Indonesia fragrance.

Great. Thanks, everybody.

Lauren Lieberman, Barclays.

I was hoping you could give a little more color, first, on where you stand on those -- work to migrate ingredients business from ingredients into compound. Doesn't feel like there was much of that in the current period, and just thinking through it again, I would think it probably takes more than a -- you don't get a perfect match between ingredients -- losing ingredients business and getting that to flow through the compound. So could you talk a little bit about that? Thanks.

Good morning, Lauren; it's Nicolas. Lauren, you're right. It takes some time for the migration to occur, and the migration from the visibility that we have little occur in Q2. So we will see that migration from one part of our business to the other, and it will be progressive. So we have not seen that benefit yet, and it will come later in the year.

Okay. And then just following up on all the comments you all just shared on the volumes and answering the first question. Comparisons get a lot more difficult in the back half of this year, and so I just want to make sure I'm hearing it clearly, that when you talk about the run rate of the business and kind of -- I think, Kevin, you said 7% or 8% run rate for the fragrance compounds business that you think is indicative of where things stand this quarter. Bit of an aberration; it was deceleration. But even versus tougher comps in the second half, that should be sustainable?

Lauren, this is Kevin. If you think about the outlook that Doug has provided in terms of the full year, at the end of the day we're thinking that we're going to be able to deliver against our long-term financial targets of 4% to 6%, and we are comfortable with that. So by definition that translates into us having to have incremental performance in the back three quarters of the year relative to our start at 3%.

So I think that -- remember, our 4% to 6% has always been including the exit of low-margin business. So we said we would hit our long-term targets even with those exits -- the impact of the exits. So the fact that we are at 3% in Q1 by default indicates that we are going to have to see some improvements in the back three quarters.

Great, thank you; that's perfect. And my final thing, sorry, was just -- the partnership with Amyris. I was just curious, because I believe Firmenich also put out a press release earlier this year about having a similar relationship, or at least the way the press release read it is kind of similar. So if you're able to kind of offer any color around what is different with what you're doing versus your understanding of what competition is doing, what would be exclusive, what wouldn't be, and so on. Thanks.

Lauren, it's Nicolas again. In this type of collaboration and partnership, you can see it's really linked to your own portfolio. So everybody is really developing different agreement regarding -- they are using portfolio; their strengths; unique, complementary expertise from both the company we're partnering with and with ours.

So they're very, very specific to what we do, what we stand for, and our existing portfolio, which is different. As you know, in ingredients we don't compete with our key competitors on the same portfolio. We're not competing against them. Therefore it's very, very indicative to what we do, and probably -- I'm not aware of their program, but what they do on their side is indicated through their portfolio.

Okay, thanks so much.

Jeff Zekauskas, J.P. Morgan.

Good morning. This is Silke Kueck for Jeff. I was wondering whether you could clarify -- like, you know, what percentage of the ingredients business does the Augusta plant represent? My recollection is that that was a particularly large plant servicing the ingredient business.

And two follow-up questions -- I was also wondering what you thought about the sustainability of the fragrance margins in the second quarter and for the year, because these are margins that -- these are much higher margins than I would have expected. I know you've commented on ingredients, but not on the fragrance business as a whole.

And lastly, on the -- I also have an Amyris question. I was wondering whether you can just talk about what applications you're working on with Amyris, whether this is for fine fragrance applications or functional? Maybe you can just give a little bit more detail, if you wouldn't mind? Thank you.

I will start with your last question -- it is Nicolas -- regarding Amyris. One thing which is really critical to underscore in the strength or the critical importance of the ingredients to us that usually you can use one ingredient across all categories. So whatever progress, improvement, cost effectiveness you can gain or even access to a more longer-term source of supply really benefits not only your ingredients, but it benefits your compound business. And that's why for us to be vertically integrated has significant benefit to our compound business and everything else to win more business and to support the growth that we're making. That's why Amyris -- it's really broad-based in terms of impact in our business.

Regarding Augusta, we don't disclose the relative importance of our plant. So we cannot provide that detail. And regarding also the quality of the margin, I think it's important to recognize that we -- our focus has been in terms of margin protection, margin improvement, as you saw, for the last quarters. And also as a result of our greater focus and emphasis on economic profitability, we're really asking the team to focus on every part of the business that can improve our position. And as Kevin was talking about, the majority of our improvement came from this margin improvement efficiencies in the business to help to regain some of the margin pressure that we had faced.

So the way I take this answer is that you hope to sustain these margins, yes?

Yes, yes. I mean, I think it's important to understand some of the elements that Nicolas talked about. It's the wins, the briefs we're going after, the target margins we set, the basis for innovation, and a number of other internal productivity moves that have all contributed more to the margin improvement than did the pricing recovery. So the focus of that group is very much on margin preservation, enhancement, and increasing.

That is helpful. Thank you very much.

John Roberts, UBS.

Doug, you started with the strength in the emerging markets. Would you hazard a guess as to what percent of your sales now are to developed markets, but that the customers re-export their products to the emerging markets?

We don't have an exact read on that, but if you look at an overall basis, the emerging markets represent 49% of our overall sales. Now, included in that figure is the fact that ingredients, our fragrance ingredients business, is actually 80%/20% the other way, or 80%/20% focused on the developed markets.

Certainly some of that going to the emerging markets, but we don't have a good ability to really indicate what that is. So probably at the end of the day, that means more than 50% of our business is supporting emerging markets business, but we don't have the clarity as it relates to what that number actually is.

And John, if I can maybe augment the comments regarding compounds. We say that now we are at 54% of our compound sales in emerging markets, and there is one category which is more global, which is fine fragrance, for which you really would typically capture sales in North America and Europe. But you know that these products are then reexported to the rest of the world.

Most of the other categories are manufactured locally and regionally. So if you think about fine fragrance now being reexported, our share of the emerging market would be greater than 54%.

And then secondly, a follow-up in the flavor side. I've seen a few specialty chemical companies recently talk about their specialty food ingredients businesses. I'm not talking about bulk ingredients, but the specialty additives in food. And they're looking to build out. Would you benefit or do you think you could create value by partnering in the food ingredient area beyond flavors?

Well, we are -- John, it's Hernan. We are always looking to enhance our portfolio. I do not know exactly what you are meaning by food ingredients -- which type of food ingredients? But definitely we have some partnership with some that put in ingredients -- or additives -- to help us to formulate better flavors.

Okay. But you are actually -- you're pretty narrowly in flavors, right? You're just talking about you work with other companies. You don't have anything formally in terms of a JV outside of the flavors area?

In fact we have; we have many. But we usually -- from a strategic point of view, we are not disclosing that. We have several partnerships with different companies to really enhance our portfolio.

Okay, thank you very much.

John, I think there's a broader question here, and it's really -- if you link it to what we're doing with Evolva and Amyris, we will be increasing the focus on external partnership and opportunities. So if there are innovation or beneficial commercial opportunities, perhaps in fragrance -- flavor ingredients, perhaps in other categories, the Company would have an interest in those.

Edward Yang, Oppenheimer.

Are any customers asking for price concessions now that raw materials are declining? I know in the past your pricing was relatively fixed once you were placed within the product. Or are they asking for any volume discounts?

Well, I think that the answer -- we'll always be having conversations with customers about whether we need a price increase or they are looking at opportunities in the context of a benign cost of goods environment for opportunities to perhaps renegotiate things with us. So that's an ongoing phenomenon. But I think Kevin touched upon it, I think, really well in one of the slides, which says we have still not fully recovered all that we had from the standpoint of our cost increases. So in some cases with customers, we continue to have dialogue surrounding getting back price increases to help us recover our margins.

And Doug, you mentioned Kevin's comments on that. You said you have effectively recovered the absolute cost increases, but you still have about 170 basis points in gross margin to recover. So are you thinking about it from a gross margin percentage standpoint? Or are you basically done in terms of looking at the absolute cost increases.

It's the former -- trying to regain the margins we had.

Okay. Nicolas talked about the Christmas impact on fine fragrance, and that was offset by some of the new wins that you've had. Typically, what is the volume overhang after a Christmas like we did? Are you satisfied that the inventory levels are now back to levels that it won't be a headwind?

I think we're looking really at the two quarters together. And we know that the market did not grow at 19% in Q4. I think the market was more moderate growth of maybe 3%, 4%. Therefore -- also, it was supported by a lot of new activities. We had a very, very strong new win pipeline last year, so a lot of the effort to promote this new launches at Christmas. So it has affected, obviously, our volume intake in Q1. But what I said earlier -- our pipeline of new wins and the benefit that we saw in Q1 going into Q2 gives us good perspective on the business moving forward.

If you are comparing about also the inventory level compared to two years ago, I think that the industry has learned a lot at every single level of the supply chain, and we're not seeing the same pressure that we have or exposure two years ago than -- and today. So the inventory period and what is in the trade is far less than it was two years ago.

That's helpful. And just the tax rate -- is 24% good for the rest of the year?

No, this is Kevin. Really, the benefits associated with the tax rate were associated with the carryover R&D tax credit. As you may recall, our friends in Washington finally decided on implementing the 2012 portion of the R&D tax credit after the end of the year. I think it was at 12.15 in the morning on January 1.

So effectively the reduction in the tax rate for the first quarter is really recognizing the full-year benefit of 2012 R&D tax credit in Q1 2013. A more normalized figure should be, when you're thinking about the balance of the year, 26% to 26.5%, perhaps a little higher in terms of the tax rate.

Thank you.

Lauren Lieberman, Barclays.

Thanks, just quickly. I want to make sure -- I don't know if I misunderstood. I think you talked about the ingredients obviously filtering down in Q2, but a more rate moderate rate of decline. And then did you say up for the full year?

No, this is Nicolas. I think your perception of Q2 is accurate, but it's not -- we should not expect any positive growth of ingredients for the year.

Okay fine, thank you. That makes more sense.

There are no further responses in the queue at this time.

Thank you to all of you who participated on the call today, and we look forward to seeing you at the Investor Day, if you can make it, on June 5 in New York. Thank you or we'll see you on our Q2 call in early August.

Thank you. This concludes today's conference call. You may now disconnect.