International Flavors & Fragrances Inc (IFF) 2019 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the IFF Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Thank you. 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 will 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, 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 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 will 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 would 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, broad and 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 the 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 natural position, expanded market access, broader customer base and greater innovation pipeline, all with our customer at the center of everything we do.

Our 4 strategic pillars include unlocking growth opportunities, while we will capitalize on our expanded product portfolio, broader customer base and extensive geographic presence. We also expect that cross-selling and integrated solutions, a relatively new capability 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 that with the combination of IFF and Frutarom, our R&D is the strongest it has been in the company's history. We have expanded our R&D capabilities with cutting-edge research, all carefully prioritized platforms based on future return potential.

Managing the portfolio. While we will focus on optimizing our portfolio to maximize value creation, our business portfolio is much more broad and diverse with a range of growth potentials and margin profiles. To maximize value creation, we are focusing on disciplined resource allocation while we establish clear guidelines to prioritize our investment decisions as we move forward.

Accelerating business transformation. While we will successfully integrate Frutarom delivering $145 million of synergies, but also continuing our strong productivity agenda in our legacy business on incremental $100 million in savings.

And of course, culture, technology, sustainability, M&A talent all remain critical enablers to our strategy.

From a long-term perspective, we're excited about where we compete. Our market potential is now approximately $50 billion, with an estimated 4% total market growth rate. This is a significant increase from just 1 year ago, while estimated market was approximately $26.5 billion with an average growth rate of 2% to 3%.

So Frutarom, we have gained broad exposure into many attractive adjacencies where growth is approximately 6% in the next 5 years. This additional access not only provides us with incremental market potential, but we believe growth over the mid and long-term should accelerate as nearly all these adjacent markets have higher intrinsic growth rates.

To ensure we capture the opportunities ahead, we are realigning our business to take effect in 2020. Frutarom's Taste and Savory Solutions were transitioned under our legacy Taste business unit. We are also adding Frutarom's inclusion business, which comprises Taura, Inventive and Leagel; our ice cream ingredients business into legacy Taste. The remaining parts of Frutarom will be grouped into a new nutrition and ingredients division. This high-growth, high-margin business will include Frutarom's natural product solutions as well as a flavor ingredients business.

At the business unit level, we are focused on prioritize our strategy to ensure we capture future growth potential. Within Scent, we serve customers across a wide spectrum of sizes. However, the bulk of our market is composed of multinational companies who work via core lists.

We recently won new core list access, providing us with the opportunity to compete for $450 million of market potential we previously didn't have access to. This poses a significant opportunity for growth and, as such, we're focused on capitalizing on our new access with maintaining strong improvements with regional and local customers.

Our go-forward goal in Scent is to drive value creation through disciplined portfolio management, investing in high-margin businesses and fixing profitability in categories that have been disproportionately impacted by higher raw material cost. In addition, we have identified and executed on opportunities to streamline our organization within the Scent business unit, which already contributing approximate of $4 million of savings to the first half of 2019.

In Taste, the focus on effectively integrating the Frutarom businesses and our go-to-market approaches by expanding our Tastepoint model to ensure we serve and capture opportunities with faster growing small and midsize customers in other key markets around the world.

We are also targeting higher-growth geographies, for example, Africa and the Middle East, and enhancing our portfolio by expanding Savory Solution and inclusions globally.

In Nutrition & Ingredients, it's all about geographic expansion. Focusing on differentiating natural and clean label technologies and targeting value-enhancing acquisitions. The majority of the categories within the division, natural health ingredients, natural food protection and natural colors, all have strong future growth potential. And we are focused on increasing our scale to disproportional growth at accelerated rates. At the core, we anticipate that our baseline currency-neutral growth to be approximately 3% to 5%. Then we believe that we have incremental opportunities to long term to add an additional percentage point for cross-selling and integrated solutions as well as another percentage points for acquisitions. The net result is that we expect overall currency-neutral sales growth to average 5% to 7% over the next 3 years.

Taking a step back, we now have the broadest and deepest portfolio of businesses in our long history, one that provides a variety of investment opportunities. To maximize value creation, we have established portfolio roles and clear guidelines to prioritize our investment decisions. There's 3 approaches to managing our portfolio: growth, where we will accelerate margin-accretive categories through incremental investments such as fine fragrance and cosmetic active ingredients; balanced, while we will self-fund investments to maintain gross margin and cash flow; and fix, where we will have limited investments until margin growth achieve targeted levels or we deprioritize. An example of this is trade and marketing where we have deprioritized our approach given the margin profile, all the businesses we exited earlier this year.

As you can see, we have categories in all of these 3 portfolio classifications. These stratifications will streamline our category management and fine-tune our strategic efforts to ensure we grow sales and also improve our margins.

We have strong programs in place to drive profitability. From 2019 to '21, we expect margin improvements to be driven by our portfolio optimization strategy and the $145 million of integration savings from the Frutarom transaction.

As discussed, portfolio optimization is expected to improve profit as margin, management, pricing, cost leverage and selective pooling of our low-margin and nonstrategic sales will drive overall margin expansion.

Within our planned integration synergies from the Frutarom acquisitions, we are rationalizing and harmonizing our procurement activities, we are leverage-spent and make versus buying. We are also optimizing the global footprint as we expect approximately 35 sites globally to be optimized, which will generate additional efficiencies. The last piece is streamlining of overhead expense, which is intended to reduce nonstrategic cost and eliminating redundant expenses.

We are highly confident in our ability to achieve $145 million in cost savings target at the end of 2021. In addition to our integration synergies, we expect approximately $100 million savings in additional productivity programs. Beyond margin expansion, these initiatives are key in a journey to fundamentally transform how we operate, focusing on the process improvements, simplifications and centralization.

This will provide flexibility to drive bottom line results and reinvest in our growth engines. Our long-term financial objectives are clear. These includes top third total shareholder return. Our drivers are 5% to 7% currency-neutral growth, margin expansion to be less than 3x net debt to EBITDA in 18 to 24 months, 10%-plus adjusted EPS growth, excluding amortization, and approximately a 2% dividend yield. Our Vision 2021 strategy is focused on disciplined execution and integration. We remain steadfast in our approach and believe in the long-term value creation for all of our stakeholders.

Turning now to the second quarter. The year-over-year results on a consolidated basis were strong, including the contribution of Frutarom. Reported sales increased 40%, where the largest driver being the contribution of additional sales related to Frutarom. As communicated at our June Investor Day, currency-neutral performance on a combined base was soft due to a significant volume erosion with multinational customers within Taste; and a continued pressure was in Frutarom, driven by decline in F&F ingredients, notably CitraSource, Natural Colors, pricing, parts of Savory Solutions and trade and marketing. By which we go into details in a moment, I feel this is important to highlight several strong performances within the quarter to ensure we do not lose sight of the progress we are making.

In Scent, we've delivered mid-single-digit sales growth, with growth in all categories and double-digit adjusted segment profit growth, both on a currency-neutral basis.

Within the rest of the business, several of the high-growth categories continue to have solid performances, led by Beverage and Savory and Taste, Natural Food Protection, gelato, the ice cream ingredients business and algae and Frutarom. In addition, the businesses we have acquired since the beginning of the year, Mighty, Leagel and Wiberg Canada are all growing at or above our expectations.

From profitability perspective, we are also pleased that adjusted operating profit margin, excluding amortization, improved 80 bps year-over-year, driven by productivity initiatives and acquisitions-related synergies. A market accelerations was our first quarter performance.

I'm pleased to report that our integration efforts are well underway, and we are making excellent, excellent progress. For those businesses where we have aligned our go-to-market approach with IFF, growth was strong, increasing high-single digits.

In terms of cross-selling and integrated solutions, we have already achieved $8 million in run rate sales. Longer term, we believe that we can deliver at least $100 million of top line sales by 2021. We are leveraging the compelling combination of R&D technologies and capabilities of both organizations. As stated many times, innovation drives differentiation and is critical for long-term success. I'm pleased with the progress the team is making and as they strengthen our product offering to our customers.

Turning to cost synergies. We have made strong advancements year-to-date as we have achieved approximately $15 million in the first half of 2019. Based on our progress to date and our expectation of net savings benefit to accelerate throughout the year, we are now forecasting that we will achieve approximately $40 million in cost savings in 2019, up from our previous estimate of $30 million to $35 million.

In terms of debt repayment and cash flow, our operating cash flow was up $130 million in the first half of 2019 compared to the previous year period, and we repaid $47 million in the first half of 2019.

With that, I would like to turn the call over to Rich.

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 cost. 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 would have liked in terms of sales, we did a good job delivering overall profitability in line with our expectations. From a cash flow project of -- 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.

And 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 are indexed to hard currencies when we have to invoice in local market currencies.

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 our reporting standard provides investors with a truer assessment of underlying currency neutral growth, especially when there are large emerging market devaluations relative to the U.S. dollar or euro. However, it's important to help all of you understand our performance relative to competition.

During the second quarter and first half of 2019, the stronger U.S. dollar environment, plus significant emerging market devaluations year-over-year in several key markets, had approximately a 2% currency impact of growth if we included emerging market pricing. This is essentially driven by large devaluations in 3 countries, which represent less than 10% of our consolidated Scent and Taste sales.

Turning to business unit performance. In Scent, second quarter currency-neutral sales grew 4% against the solid year ago comp of 5%, with growth in nearly all regions and categories. Performance was strongest in Fragrance Ingredients and Consumer Fragrances, both increasing mid-single digits.

Consumer Fragrances was led by high single-digit growth in Home Care and Fabric Care. Fine Fragrance also grew low single digits following a double-digit performance in Q1, led by strong new wins, particularly in EAME, and should be noted that raw material-driven price increases represented approximately 4% in the second quarter on a consolidated basis, with the strongest increases in Fragrance Ingredients. In Fragrance Compounds, the composition of growth was balanced, with equal contribution between volume and price.

Scent currency-neutral segment profit increased 19%, benefiting from cost and productivity initiatives and more favorable price to input costs. We believe that this was due to the timing of raw materials between the inventory and our P&L as we continue to see year-over-year increases in our purchases. Raw material costs remained elevated, significantly above historical levels, and we will continue to work with our customers on actions to mitigate these increases. In terms of segment profit margin, year-over-year performance was up approximately 200 basis points to 19.2%.

In Taste, second quarter currency-neutral sales decreased approximately 1% against a strong growth of 6% in the year ago period. Growth was stronger in Greater Asia, with year-over-year improvements in China, India and the ASEAN region. We also posted growth in EAME, led by strong performance in Africa and the Middle East.

In Latin America and North America, volume erosions with multinational customers was significant and intensified throughout the quarter. When comparing to historical averages, our volume erosion rate in the second quarter was approximately 3x our historical average. Taste currency-neutral segment profit was adversely impacted by volume declines, unfavorable price to material costs and a weaker mix. Nevertheless, segment profit margins remained best-in-class amongst our industry peers.

For Frutarom in the second quarter, sales totaled approximately $382 million. On a stand-alone basis, Frutarom sales were flat, driven by the contribution of acquisitions. Excluding the contribution of acquisitions and divested businesses, Frutarom sales declined low-single digits or 4%. Similar to what we communicated at our Investor Day, the results were primarily driven by declines in F&F Ingredients, most notably CitraSource, where one of our competitors are no longer purchasing from us, as well as raw material-driven price decreases in Natural Colors and weakness in Savory Solutions related to weather conditions in Europe and Canada and trade and marketing, where we are deprioritizing.

While all of these are very similar to what we have discussed previously, it is worth noting that Frutarom's taste volumes decelerated throughout the second quarter, driven by weakness in the U.K. and Ireland.

In terms of segment profit, the Frutarom delivered $37 million and $77 million in profit, excluding amortization. The margin profile for Frutarom in the second quarter continues to be strong at a robust 20.1% if you exclude amortization. This has been driven by acquisition-related synergies and continued cost discipline.

For the first half of 2019, we have delivered $15 million in integration synergies. As Andreas mentioned earlier, we're now expecting to achieve approximately $40 million in cost synergies in 2019, up from our previous estimate of $30 million to $35 million, driven predominantly by procurement optimization. In addition, we continue to deliver on our core productivity program where we drive process improvements, simplification and centralization. On a year-to-year -- year-to-date basis, we achieved approximately $25 million of core productivity savings in the first half of 2019.

Together, we delivered approximately $40 million in year-over-year savings or about 19% expressed in terms of operating profit growth on a combined basis. Operating cash flow in the first half of 2019 was up significantly from $55 million last year to $185 million this year. Performance was driven by higher earnings and amortization. Core working capital, defined as inventories, accounts receivable and accounts payable, improved modestly, driven by receivables and payables. Inventories continue to remain at elevated levels, primarily due to raw material cost increases and safety stocks within the Scent division.

We expect that inventories will begin to improve in the second half of the year. In the first half, CapEx as a percentage of sales was approximately 4.6%, driven by new plant and capacity investments, mainly in Greater Asia, as well as creative centers and integration-related investments.

For the full year, we continue to believe that CapEx as a percentage of sales will be between 4.5% to 5%. Bringing all these together, we had a strong $78 million increase in free cash flow in the first half of 2019.

A key component of our overall TSR algorithm for our shareholders is the competitive and attractive dividend yield. We believe that the 2% threshold is an important one that broadens our potential shareholder base. Together, and today, we are pleased to announce we have authorized a 3% increase in our quarterly dividend, expressing in it our confidence to execute on our long-term strategy and our strong financial position. It should be noted that this marks the 10th consecutive year of dividend increases. Considering our year-to-date performance as well as our outlook for the remainder of the year we are adjusting our full year sales and adjusted EPS, excluding amortization guidance.

For the full year, we now expect to deliver between $5.15 billion and $5.25 billion in sales in 2019 at or approaching the low end of our original guidance of $5.2 billion to $5.3 billion. On a combined basis and excluding the impact of currency, growth is expected to be 3% to 5%. The forecast now reflects low versus mid-single-digit growth for Frutarom, driven by 3 areas: F&F ingredients, Savory Solutions and trade and marketing.

Within F&F ingredients, CitraSource is the primary contributor of the decline as one of our large competitors has significantly reduced its purchases. We are shifting our focus of this business to make-versus-buy to drive value creation.

In Savory Solutions, performance was impacted by first half of weakness as well as a modestly revised second half outlook related to reductions in volume. We also will deprioritize trade and marketing based on our strategic category management approach. From a Taste perspective, continued multinational volume erosion in Latin America and North America has lowered our expectation. It should be noted that we do not expect second half growth to be stronger than the first half, but Taste performance in the third quarter will be challenged by a strong prior year comp. We now expect adjusted EPS, excluding amortization, to be $6.15 to $6.35, and I will go through the changes in a moment.

On a combined basis and excluding the impact of currency, adjusted EPS, excluding amortization, is expected to be 6% to 9%. To provide additional detail related to the adjusted EPS, ex amortization change, I would like to walk you through the drivers. Our original guidance was $6.30 to $6.50. In the second bar, I highlighted the 10% -- $0.10 impact related to the change in top line expectation, which is essentially $50 million in sales at low margins given the impacted businesses like trade and marketing, CitraSource and PTI.

Mitigating this is the incremental $5 million in integration savings that we announced earlier today. Combining the 2, the net operational impact is a reduction of approximately $0.05 to our adjusted EPS, excluding amortization. The larger impact on adjusted EPS, excluding amortization, is related to a change in the average effective tax rate on the amortization of intangible assets as well as the small changes in redeemable noncontrolling interests. The net impact of these combined is approximately $0.10. In the end, our revised guidance for adjusted EPS, excluding amortization, is now $6.15 to $6.35.

With that, I would like to turn the call back over to Andreas.

Thank you, Rich. In summary, we believe we have the framework to achieve our long-term ambitions with our Vision 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 above 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 are taking action to strengthen the overall growth profile of our business as well ensuring we capture synergies to generate strong margins and returns for our shareholders. Expressing our confidence in our long-term strategy and future growth prospects, we also raised our dividend with the 10th yearly consecutive increase.

With that, operator, we're now happy to take questions.

(Operator Instructions) And our first question will come from Mark Astrachan with Stifel.

I guess just on Frutarom, I'm 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 U.S. authority to investigate the goings-on there at this point?

Mark, thank you for the question. I 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 2 Frutarom businesses, operating principally in Russia and Ukraine, made certain improper payments, including to 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 U.S. 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 U.S. 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 matters 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 will 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. Also, investigation are continuing. Based on the results to date and other compliance-related integration activities, we are not currently aware of similar instances of misconduct 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. Just staying with Frutarom, I guess the organic sales decline was much worse than was expected, I think, including your own expectations. So what gives confidence it can get back to growth in the second half of the year, absent 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 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?

Yes. 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 the 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 reemphasizing 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 midsize customers have good growth rates and that will help us with the business. The portfolio is proving toward naturals and that's a trend which is not changing through that demand.

Talking about the integration, I believe what is important to see here is that, in general, despite the compliance topic, which I've 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 [even then] sought, and 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 one.

On the sales side, certainly, the second quarter was softer than I would like to have it. But we will see that this will turn around in the second half, as we said during the Investor Day as well. And we believe a mid-single-digit growth rate for the business is very doable. In particular, if we emphasize the strong parts and the high-growth parts of our portfolio.

Having said this, we have now a real good team in place for the cross-selling synergies. You will hear more about this over the next couple of calls. We haven't seen too much of a result. Rich just mentioned the $8 million, but there are certainly more to come, and actually very exciting opportunities for us to cross-sell the portfolios to the different customer groups on both sides of the business.

Having said this, I would like to mention as well that we have seen now a nice turnaround on the Scent business side that has not too much to do with Frutarom, just a smaller -- a part of it. But we see that we're turning around despite the crisis we had with raw materials in the last year. Nicolas' businesses is going in the right direction growth-wise as well. So we're very optimistic on this front as well. As you know, there was a bit of a pickle at -- in the last, last year as well and the turnaround is pretty strong here. So that's how I would, let's say, characterize where we stand in terms of the Frutarom business, but making the remark on the total portfolio as well.

Andreas, maybe just -- Mark, a couple of quick comments on my part. I mean I reiterate what Andreas said. I think we feel strongly about the ability that Frutarom business to grow mid-single digits in the medium and long term. I think we're still going to -- some of the challenges that we've seen last for the last 3 quarters, like CitraSource 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- or long-term remark is, on the R&D technologies, we are very, let's say, very optimistic what that can deliver for us going forward, but you know that takes more time to realize. Okay?

Our next question will come from Mike Sison on with KeyBanc.

Hey, guys, I guess just two quick ones. I think in the -- your compliance commentary mentioned that there were some senior management at 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?

Okay. Let me take the compliance piece first. We have taken remedial actions on the involved people. The good thing is it's very contained geographically so that makes it easier for us to act on that. Culturally, we have started with actually day 1 in 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 quotes, on the code of conduct. Everybody is going through the training, whether it's a live training or training via their computers. So we feel good about this. And that's coming actually nicely, 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.

Yes. So Mike, 2 things. One, on your question on the second half. I just want to clarify what I -- the answer I give to Mark. Frutarom second half of the year, I think it's low-single digits on a 2-year average basis. Given the weak Q3 last year for Frutarom, there will be a stronger Q3 versus Q4. In terms of margins, I think we had a very strong quarter Q2 despite the challenges from a top line standpoint. You heard the comments I made regarding the very strong quarter in 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 pressured 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 impact related to the price realization. But there is timing in terms of inventory when the raw materials flow through the P&L. So -- and then when you get to Q4, obviously that -- 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.

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 of quarters some sales declines in the Savory business in Frutarom 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 starker than what we would see from the food and beverage company. So just a little bit more color perhaps by category or kind of where you're seeing the greatest pressures.

So Adam, let me start with the last one in terms of the volume side of it. It's -- as I 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 an existing business. Again, if you look at -- if we look at our fundamentals, we don't believe we're going to be losing share. When you look at us on the pricing adjusted volume growth or top line growth on a 2-year basis for the first half of the year, we're very much in line with competition, so we're confident 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 5-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 it is very much a volume erosion piece where Q3 -- or 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 be -- vary from their underlying product mix and the categories where we operate with a particular customer, their supply chains, 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 Taste, 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 thought we were going to be.

From the compliance standpoint, based on what we've seen through the investigation, they may have been occurring for a few years, but there's never been an indication that they're a material amount in any particular year.

Maybe I add to the first point Rich made. If I look at our Taste business, we had, particularly 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 a slightly better start into the third quarter for the Taste and for the Frutarom business. I think that's important.

Yes. And the last question, which I forgot, Adam, was in terms of customer overlap, there's pretty -- the pretty negligible customer overlap particularly in this business.

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

So if we step back and think about your performance over the past year, as we've seen that you've tended to underperform on your top line targets and once a year -- once again, this year, despite help from a 53rd (inaudible) 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? Do you think maybe some more radical changes might be needed, maybe in terms of investment or personnel or so on, to ensure that you can get back to your long-term targets?

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 show from the market perspective, really nice growth-wise. Like the inclusions, like the health ingredients, our natural foods or even the active cosmetics. So we believe that's the first one.

The second thing is, what we have to look in is in our customer structure, and here we have to drive through, and particularly on the Taste side, with some of the small and midsize customers, where 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 U.S. 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, 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 now access to more our core list of 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, 9 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 key account, 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 2 organizations, and we believe that can deliver very nicely on our top line growth.

So if I add this all together, I think we come -- 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 things -- 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 Robert (sic) [John Roberts] with UBS.

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% products 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, to put it in perspective, I mean on a 5-year trend, volume on existing business is slightly negative. So call it low single digit, 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 5-year trends. Pricing is slightly positive, a little bit below the 5-year average, but part of that's been driven by what we've seen over the last 3 years with vanilla. So I would not say it -- fundamentally, it's all the volume erosion on an 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 2 quarters.

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

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 of that margin decline is driven by volume versus -- also the pricing versus raws? And then on the flip side is, margins have obviously expanded quite decently in -- I expect because of -- mainly because the pricing in Scent, but could you please break down that margin expansion, both between pricing versus raws and volume?

Sure, Alexandra. I mean in terms of Taste, I mean, the pricing impact was pretty negligible. I think 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 of 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 cost; and two is, the lower volumes is hurting 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 ingredient -- or Scent standpoint. Certainly on the ingredients side, but also in the compounds. As I said earlier in my comments, the teams have done a very good job of aggressively pursuing price realization to offset that.

And I said earlier we had -- I would 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 this year for Scent. So that's why I said earlier, I'll expect margin profiles in Scent come down from where they were in Q2 given the mix of raw materials.

We still are seeing elevated prices from Scent. They are 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 not -- we don't expect to see any relief in the near term from an input cost standpoint.

Our next question will come from Jeff Zekauskas from JPMorgan.

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 the $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's 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 expenses 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. And as you said also, it also impacts COGS. I think clearly, the volume impact is a further reason in terms of $13 million impact. I think the other thing to 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 flow 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 we are starting to see some slowdown in terms of the rate of the increase, but we're still at very elevated levels.

We will take our next question from Brett Hundley with Seaport Global.

Rich, I just have one detail-ish 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 noncontrolling 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 detail-ish type question, but just wanted to understand that better.

No. Look, I mean I think -- so you -- out of that $0.10, I'd say probably $0.06 to $0.07 of that is the change in the effect -- average effective tax rate on the amortization. So that one's clear.

On the noncontrolling 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's a redeemable component of the minority interest. So it's based on the underlying performance and the projections for those businesses. And so there's been a slight change between where we were at the beginning of the year and based on the latest projections.

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

Yes. 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 the 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.