Q4 2019 Earnings Call
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I'd now like to introduce Michael devote head of Investor Relations you may begin.
Thank you good morning, good afternoon, and good evening, everyone. Welcome to <unk>, that's fourth quarter and full year 2019 conference call yesterday evening, we distributed a press release announcing our financial results a copy of the release can be found on our IR website at <unk> IR <unk> Dot com.
Please note that this call is being recorded lives and will be available for replay on our website.
Let's take a moment to review our forward looking statements during the call, we'll be making forward looking statements about the company's performance, particularly with regard to the outlook for the first quarter and full year 2020. These statements are based on how we see things today and contain elements of uncertainty for additional information concerning factors that can cause.
Actual results to differ materially from our forward looking statements. Please refer to our cautionary statement and risk factors contained in our 10-K filed on February 26, 2019, and in our press release.
Today's presentation include non-GAAP financial measures, which exclude those items that we believe affects comparability.
A reconciliation of these non-GAAP financial measures to their respective GAAP measures set forth in our press release, we issued yesterday.
And is posted on our website.
With me on the call today is our chairman and CEO, Andreas Fibig, and our executive Vice President and CFO Rustom Jilla will begin were prepared remarks, and then take any questions that you may have.
With that I would now like to introduce Andreas.
Thank you Mike.
In a very special welcome to list Oh recently appointed CFO.
Well George does about three weeks ago, we could not be more excited to welcome him to the I've had the team as he brings a strong strike a track record over 30 years of operational and financial leadership across several international markets significant experience emerging global finance teams developing strategy driving efficiency.
Initiatives and completing acquisitions so welcome Rustom.
I would like to take the opportunity to think ritually for service as always CFO and looking forward to his contributions.
As the O. integration lead for the coupon nutrition and Biosense combination is deep institutional knowledge insides of perspective sports financially and strategically and movie enormously valuable as he takes on his new role is always integration officer.
On today's call as usual I will give an executive overview of outperformance for the fourth quarter and full year 2019.
Including an update on the progress we are making was integration of Frutarom.
Following the discussion.
<unk> to provide the financial review all the business and take you through all financial expectations for Twentytwenty.
We will also we kept I've asked transformational journey and the exciting opportunities. We see was all combination was deposits nutrition that biossance business.
Which we announced in the fourth quarter 29 gene.
Upon the completion of all prepared remarks, we will take any questions that you may have.
That's come to 2019.
<unk> was a transformational year in <unk> history, it can be categorized as a year of great progress.
Despite some challenges.
Over the course of the year there were many positive accomplishments, including the development of our new strategy strong progress against so integration synergy targets.
Looking incremental access to new businesses would be a call is at an accounting.
Our combination was and then be unparalleled in our industry as it will broaden our product offerings agreed a global leader an intuitive integrated solutions.
I've also to acknowledge that there were several challenges I like continued raw material cost increases impactful and market dynamics like de stocking isolated says push a including delayed launches and dis synergies as well as a Russia and Ukraine compliance issue, which I'm pleased to say that is now being fully completed.
And closed.
And that context, we surpassed 5 billion sales for the first time and expanded adjusted operating profit margin, excluding amortization, a testament to our team's focus dedication and commitment to delivering strong results and executing all long term strategy.
We ended 2019 was meaningful roles in the fourth quarter, seeing 7% currency neutral revenue growth, including a full percentage points related to the 50 Threerd week.
We also achieved currency neutral adjusted EPS growth of 23%, excluding amortization that by volume gross integration synergies productivity initiatives, the Brazil, Brazil, techs recovery as well as more favorable tax rate at high other income.
And the fourth quarter. The team was able to continue to exceed expectations on food on cost synergies, capturing approximately 20 million cost synergies driven by procurement harmonization and manufacturing optimization.
That's very sustained focus across the organization ultimately positioned I, if after accelerate or vision. So denounced culmination was due Paul and then be business at the end of the exciting combination will allow us to develop integrated solutions was greater global scale to meet what or customers demand high quality pro.
Oh, that's innovative solutions and strategic partnerships to deliver gross.
Well, let's take a step back and look at the full year 2019, I'm pleased to say, we delivered solid top and bottom line results in a very challenging environment.
We were lost sales of 5.1 billion expanded adjusting operating profit margin, excluding amortization by 70 bips to 19.2%.
We also delivered strong adjusted earnings per share excluding amortization of 6.17, U.S. dollar us principally led by adjusted operating profit gross realized synergies and improved productivity.
Ultimately, we had many strategic accomplishments that momentum throughout the year and drove significant value creation.
Oh investment innovation include the opening of I've F. centers are excellent and innovation hubs, and New Jersey, and Texas, specifically, our new center of excellence for Foodservice and seasonings and Carrollton, Texas, the opening of a home and fabric innovation Center at Bell works and Holmdale, New Jersey, and the openings of all go.
Also sent them would have pest at least so you put them yet and Grosse Francois reflects our commitment to environmentally responsible real estate development.
In addition, we also modernized our largest send creative centers in New York at Paris, and continued investment in greater Asia, including two new plans in India, and China, which we will complete will be completed in twentytwenty.
In June.
Took another bold step forward and leading our industry on sustainability, when we articulated ipads new purpose.
To redefine and transform our we live and careful the resources of the world.
And I was this mission accelerated or global industry leadership and sustainability opening the industry's largest solar array of all facilities in new Jersey, and signing on to the United Nations pledged to help limit global temperature rise.
Most recently I've eplus named once again to Cdps, a list for climate change and water security.
Facing our company among a prestigious group of global environmental leaders with double a distinction.
Just a week ago, where name to Burns hundred more sustainable companies list for the Cert consecutively you.
So all to you we continue to complete the important work of bringing our colleagues at food room more fully into the <unk> family.
You have addressed the most significant outselling challenges related to bringing these businesses together and I know in a position to accelerate growth by capturing new opportunities and delivering good solutions or customers need.
But perhaps most importantly, we have continued to achieve significant cost synergies throughout integration process.
Well ahead of our year, one cost synergy target.
Including approximately 50 million cost synergies in 2019.
This mainly driven by procurement excellence, but we also have made progress and operational footprint.
We have closed 10 sites in 2019.
And I really believe we're on track to deliver more than 145 million in synergies further supporting the business and driving value to all shareholders.
We expect this is.
Essentially complete the food from integration by the end of Twentytwenty.
The efficient operational execution was complemented by solid year, one run rate revenue synergies.
Of approximately 50 million if I didn't if you identified a strong pipeline of cross selling opportunities of more than a solid and projects representing approximately 150 million of says and plan to build on this momentum in twentytwenty.
We have accelerated expansion cohort taste, one model to so the fast growing local and regional customer segment through increased speed and agility, enabling them to win in the marketplace.
We will fully consolidate frutarom.
Into a legacy I've asked business as we find all structure and reporting were lining or tenant organization and responsibility based on our new structure.
With this in mind, starting in Q1 of Twentytwenty will report financial results as taste and send incorporating most of food room within our taste segment.
Lastly, we continue to generate strong cash flows as operating cash flow was up 261 million year over year 29 gene.
We continue to deliver which all balance sheet, improving our net debt to EBITDA ratio from 3.6 times, those 3.2 times, putting us on track to deliver on our commitment.
To be below three times by the end of Twentytwenty.
Is that I would like to turn it over to Rustom to take us through all financial performance and greater detail. Thank you Andreas.
First let me say, how delighted I haven't who have joined I said that this exciting time as we move boss the integration of Frutarom to the combination with Dupont and then be business and the many opportunities and challenges this will bring.
My thoughts I expect to focus on first improving execution and accountability second enhancing effective collaboration across the business. That's like the CIA fast foods are and soon and then b.
Third strengthening our cost discipline, and finally delivering solid our away.
Now onto the numbers.
Reported sales increased by 29% in 2019 with three additional quarters of foods around being the major driver excluding foods, Rob currency neutral sales grew 3% with 29 teens 50, Threerd week contributing 1%.
I'll provide more color on sales by segment as we go through those sites.
AFUDC adjusted operating profit margin, excluding amortization rose by 30 basis points, driven by productivity initiatives acquisition related synergies and a Brazilian tax recovery.
It's also worth noting that enough fourth quarter of currency neutral as exam authorization grew a robust 23% driven mostly by acquisition related synergies volume growth lower incentive compensation.
Brazilian tax recovery, and a lower effective tax rate, which more than offset headwinds from higher raw material cost and mix.
As the assets team has done in previous quarters, I would like to highlight the impact of emerging market pricing on our growth rate to better compared to appears.
As a reminder for a variety of reasons many of US sales transactions in the emerging markets occur either in us dollars or other hard currencies. All the index Jihad currencies, when we have to invoice in local markets currencies. So when reporting currency neutral sales growth, we exclude foreign exchange related price stream.
Changes in emerging markets.
This is different from our peers.
We believe that are reporting stand it provides investors with a true assessment of underlying currency neutral growth, especially when there are large emerging market devaluations relative to the U.S. dollar or euro.
It's important to help all of you understand the performance relative to competition.
For the fourth quarter of 29 seen the stronger us dollar environment, plus emerging market devaluations year over year in several key markets at approximately a 1% currency impact on growth. If we include emerging market pricing for the full year. This impact represented approximately.
The a 2% currency impacts on growth.
Right here.
Let's move on to set on slide 11.
In the fourth quarter currency neutral sales increase year over year by 6% to 478.3 million.
Fourth quarter performance was strongest in consumer fragrance, increasing in the high single digits from the prior year driven by growth in whole fabric enhancer. Okay.
Fine fragrance grew in the mid single digits year over year led by double digit growth in both Green <unk> Asia and Latin America at the same time fragrance ingredients declined in the low single digits from last year as price increases were offset by volume declines mainly as a result of industry de stocking.
For the full year.
Currency neutral sales increased by 4% I'm 2018 to 1.9 billion with growth across all regions and it all categories, especially those that are a strategic focus.
Both fine fragrance with record new when contribution and consumer fragrance grew in the mid single digits from 2018.
Our performance in fine fragrance was driven by double digit growth in Eva and greater Asia, while as in the fourth quarter consumer fragrances led by strong improvements in home in fabric care.
For the year fragrance ingredients improved by low double by low single digits driven by price increases.
For the full year.
Currency neutral segment profit grew 6% and margin expanded 30 basis points to 17.3%.
Drivers included raw materials, driven price increases as well as benefits from productivity initiatives that runs the gamut from manufacturing procurement and make versus buy to innovation.
Moving onto the taste on slide 12.
In the fourth quarter currency neutral sales increased year over year by eight cents to 429.9 million.
This performance was led by double digit growth in greater Asia and high single digit growth in North America.
Sales to multinationals, which had been under pressure in the last few quarters grew mid single digits, indicating an inflection point in Q4.
We also saw a much stronger growth from regional and local customers.
Okay perspective, we was strongest in beverage savory has greatly by strong new in the fall.
For the food your currency neutral sales increased by approximately 2% to 1.7 billion driven by high single digit growth in greater Asia at low single digit growth in either.
As discussed during the year, we had some challenges in North America, and Latin America related volume declines with multinational customers.
And as in the fourth quarter full year 2019 growth was strongest in beverage unsavory.
For the full year.
Taste posted industry, leading 22.1% segment profit margin with 383 million segment profit, which was supported by productivity increases integration related synergies and lower incentive compensation expense.
Now, let's move on to foods Rovs performance on slide 13.
In the fourth quarter Frutarom currency neutral sales increased year over year by 6%, including the net contribution of acquisitions and divested businesses, which is a sequential improvement in underlying performance.
Organic currency neutral growth for the quarter was 2% essentially led by our taste unsavory businesses.
As discussed in past calls, whose ROM experience compliance and portfolio related transitory headwinds. Excluding these organic currency neutral growth would have been 6%.
For the full year sales were 1.5 billion for the segment up 3% on a currency neutral basis for the prior year, including the net contribution of acquisitions and divested businesses.
In 2019 organic sales growth was flat and if you exclude the transitory issues organic currency neutral sales growth was 3% driven by solid growth in taste and savory solutions the fastest growing categories. It foods are all include double digit increases in food protection.
Susan's analogy.
For the first for the full year.
Mr. Rob segment profit was 127 million or 286 million excluding amortization.
And we finished the year with a strong quarterly segment profit increase of 24% led by acquisition related synergies.
The full year operating margin excluding have authorization was 19.2% supported by delivering on a acquisition related synergies.
And by disciplined cost management.
Slide 14 provides some additional color on cash flow.
As you will see operating cash flow for the full year was up significantly.
From 438 million in 28 theme.
The 699 million this year.
HM 261 million or 60% increase.
This was driven primarily by higher cash earnings from foods are up with food Robyn do that for the entire year.
Call working capital defined as inventories accounts receivables and accounts payables improved year over year with progress in all three metrics.
Inventories to remain at elevated levels, primarily due to raw material cost increases and safety stocks within the sent division. However in the fourth quarter. We saw continued positive trends.
For 29 theme Capex as a percentage of sales approximately 4.6%.
Which is a significant investment in the future.
Throughout the year, we made new capital.
New plant and capacity investments, mainly in greater Asia, as well as creative centers and we invested in high return integration related synergy projects such as manufacturing optimization.
Bringing all this together we had a strong and the did 95 million increasing free cash flow for 2019, representing a 73% increase year over year [noise].
Moving on to Slide 15, we expect food your Twentytwenty sales of between 5.15 and 5.35 billion.
With adjusted EPS, excluding amortization between dollars Sixtwenty and dollars 645.
At this point in time, we expect a modest impact on sales from the recent Corona virus outbreak, but we are unable to quantify this is there are just too many variables that uncertainties.
In addition, we have already incurred some relatively modest costs related to the outbreak as we acted to mitigate the impact on our supply chain right now it's too early to quantified the impact on our results, but we did white boot sales and adjusted EBIT ex amortization guidance ranges to make some allowance for this.
As well as for continued volatile operating environment.
The next I'll provide some additional color about what we expect to drive our core sales growth for the year.
Looking into our Twentytwenty sales growth expectations and given the several moving parts. We felt it was important to give you an overview of the drivers.
As you see from this night.
Sales growth for Twentytwenty is expected to be approximately 1% to 5% on a currency neutral basis.
This includes the headwind of about <unk> 0.5 percentage points impact from portfolio adjustments, namely the carryover impact some compliance and Citrusource and estimated one percentage point impact related to the 50 Threerd week in the prior year period.
Excluding these impacts are all currency neutral sales growth is expected to be approximately two and a half a cent. The six it offset which includes approximately two to five at the half percentage from the organic business quite 5% to 1% from cross selling and little to no impact from any.
Now, let's move to slide 17 to some additional color on what is driving EPS growth.
Adjusted EPS, excluding amortization growth Twentytwenty is expected to be approximately 3.5% seven after said on a currency neutral basis.
This includes the headwind of approximately five percentage points related to an incentive compensation reset.
Which is due to our performance versus our internal budget in 2019.
And anticipated 0.5 per cent impact due to a due to the portfolio adjustments and an estimated one percentage point impact related to the 50 Threerd week in the prior year.
Excluding those impacts coal currency neutral adjusted Vps ex amortization.
Is expected to grow at a is a range of 4% 8%.
Let's say expect to have a 6% positive contribution from integration synergies, which when added to our full growth puts us at the double digit growth range.
Moving on to Slide 18, I'm pleased to tell you that we remain on track to deliver on our commitment of de levering down to below 3.3 times net debt to EBITDA by the end of Twentytwenty, while maintaining an investment grade rating.
We're already down to approximately 3.2 times down from 3.6 times, a year ago, and we do continue to focus on improving working capital tightly managing our capex, while making the necessary investments and of course growing our cash earnings.
To further support achieving this goal management incentives are aligned to repayment of debt.
With that let me turn call back to address thank you rustom very well done.
I don't want to spend a few moments and highlighting the evolution of I FF from a traditional either in the flavor and fragrance space to know sit uniquely positioned to redefine our industry at a time when consumers demands are forcing changes across our customers.
Was further on we took the first big step we cannot reach one of the broader set of or CPG customers of all sizes in the world and edit critical depth to our position as a top provider of flavors savory solutions and natural taste solutions.
As I mentioned, we're seeing some excellent cross selling opportunities further supported by what taste point model.
Was NB, we take the next leap forward in delivering integrated solutions that allow us to partner with our customers to solve their most pressing problems.
It is a truly powerful combination.
That's leadership and natural solutions and it'd be its leadership in clean label, including cultures enzyme in soy proteins will be a vital component in creating solutions that meet customer needs for better for you product.
Our complimentary product portfolio will be among the most balance in the industry together, we will have number one or number two positions in the high value more Sunday Monday ingredients categories across all our shared and markets of food and beverage health and wellness and home and personal care.
[noise] ultimately.
What we're doing a strengthening I've asked position to serve our customers.
We are witnessing Paul flow trends that are forcing all of us to think differently.
We have received very positive customer feedback about that combination we will be a very powerful leader was even better R&D and application development capabilities and even deeper and more robust product development pipeline. In addition to a portfolio that will be among the most balance in the industry.
Importantly, or shit cultures led by size and creativity will drive core strengths to unlock the potential of this combination.
And again, it's really about how we can deliver highly compelling value propositions to all of our customer types for many of our global multinational customers. We will bring deep experience was high growth segments fastest speed to market and very deep consumer insights.
For local and regional organizations, we will provide global reach to support regional and or global expansion. There was a strong local presence and a culture of collaboration.
For new Brent we will be that end to end partner from idea to production, providing the reliability of scale and the power of globally.
The opportunity before us is clear and compelling and we're taking the wide steps to ensure that we're positioning position to bring these two businesses together as efficiently as possible.
As we announced along with systems appointment back in December, which really has been named US a lead the NSP integration efforts for FF Similarly, Angela UNEV and MBS SVP of global taken innovation will oversee the SMB integration lead.
Each brings unparalleled knowledge of their respective businesses and a diverse operating perspective to this team. We believe that their combination of experience and leadership best positions us to bring this combination to life.
As I have had the opportunity to meet with leaders from across in SMB business. Each of these conversations has reaffirmed that I ever and then be up perfect partners.
Look forward to hitting the ground running the deal closes targeted for the first quarter of 2021, providing significant runway for planning and integration related execution.
As you can see we have already been diligently working on planning to execute our roadmap to integrate these businesses.
On slide 22, we are showing that while our NSP integration planning has started and is working in parallel was ongoing food from integration work. We do expect the business integration work of food room to be completed in the third quarter of Twentytwenty was 90% of the manufacturing consolidation complete as planned.
This ensures that we are ready to begin the dewpoint it'd be integration.
We will attempt to combine integration muscle of both I F and and then be along with robust external subject matter experts.
So in summary, we delivered solid top and bottom line result.
And took cleared significant strategic steps on our journey to lead our industry as an invaluable partner for our customers.
And 29 team, we surpassed 5 billion in sales for the first time and expanded adjusted operating profit margin excluding optimization by 30 Bips.
I'm pleased that we ended the year was a significant acceleration in growth seeing a 7% currency neutral revenue increase and robust 23% increase in currency neutral adjusted EPS.
Excluding amortization, reflecting on the year, we're for lots to be proud of Waukegan accomplishments include significant integration related synergies strong progress and cross selling.
Great strides and sustainability and completion of the Russia, and Ukraine compliance issue.
At the end of the in the fourth quarter, which we also saw a fundamental improvement in our taste segment, a key inflection point as we head into Twentytwenty.
But I also want to acknowledge.
That's not everything went in our favor in 29 team, we experienced significant raw material cost increases across both segments and sales came in lower than expected across all segments for the various reasons we explained earlier.
As we look ahead and twentytwenty leveraging the key learnings from 19, our priorities are very clear drive growth and profitability in our business substantially complete the food room integration and lay the groundwork to begin successfully combining with NBC.
With continued focus on execution, we will be well positioned to become a global leader and innovative integrated solutions and be able to deliver value creation for all of our stakeholders.
And why we're early in Twentytwenty, we're pleased to say that started the year strong was growth in all segments with it I would like to open it up for questions.
At this time, if he would like to ask a question. Please press the star and one on your Touchtone telephone.
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Well take our first question today from Mark a star Sean with Stifel. Your line is open.
Thanks, and good morning, everybody Hey, good morning, Mark how are you guys great. Thanks.
So two questions for me.
First on the sales forecast range, so it's a bit wider than we're accustomed to seeing a it's a bit wider I think two relative to some of your.
Here is I guess I'm curious why you're you're giving a wider range I hear the China commentary, but was under the impression I wasn't particularly large as a percentage of.
Business arms is there something from a macro standpoint, there's me from a customer standpoint that.
Youre you are hearing are worried about and then the second question is frutarom. So.
I get organic growth for Fourq, you have down about 4% if you back out the acquisition contribution and B pieces of business from the closing of the prior year that you didn't known for the full quarter. So that gets a full year number down about 1% I guess in a questionnaire is you've owned the asset now for a little over a year or what.
The reasonable run rate of growth you've talked about 6% is that that target longer term, but but it just seems like it's not the case anymore. So maybe you're still thinking six but if you could kind of walk through how you're thinking about it if that's the case or what are the moving parts today that'd be helpful.
No more thank you first of all on the guidance range that was certainly a discussion we had internally what what do we do in an environment, where we are in which is a pretty let's say a volatile. It's a on one hand, certainly the corona situation that come to that in a second and then also tariffs, which oh not.
Not easy easy to plan, but Corona was probably the tipping point for us because it's very hard to quantify but we know that we'll have an impact we'd all manufacturing plants actually close up to last Monday Tuesday, where we all that we have a relatively soft demand people see whether we will make it up we have seen.
That.
We have also modest cost increases already and particularly on transportation. We we have to make sure that we manage our inventory well in this situation because you have let's say disruptions in the supply chain and one of all our bigger customers also said that a travel retail is actually pretty.
Pretty down because people are not not traveling to watch any longer just to give you. One very personal example, my family came back Europe yesterday, my wife to augment Frank were that the a at the border control there was nobody else and the airplane looked on their pay was a smaller one them before it was just half booked so just as [laughter] to validate what we assume.
Saying and reading so we said, it's probably a prudent thing to to widen the guidance right. Because we just don't know we hope at least said, we will make it up and as I said on our manufacturing plans are open again, and we're starting to manufacture and it seems to be all good.
But that's how we see it and I handed over there was some to talk a bit about the guidance sure. Thanks. Thank you hi, Mark.
That's very little to add the Ericsson typically we didnt quantify on the on the Corona virus because it's too early it's just too early to tell that understand it.
But what we did do was widen the ranges and we can come back at some point subsequent in the year as we.
As we know more.
Let me let me take no. Your second question on fruit, we believe when we cycle Swiss as we said probably over the course of last year. So some of the a onetime effects.
We see that this business has good potential of mixing a single digit growth in Oh in average and I come to some of the exceptions here, where we have to cycle through is our compliance issues. We will issue we had in Russia. Thanks God, It's often on the vigor front now we have to make sure that on a business side. It is.
It's running well.
The second seeing is a citrusource, where one of our peer companies lost a bit custom and they are our biggest customer in that business and then we had the impact on raw material prices on on natural colors.
So we believe that was in the second quarter, we will cycle through these these effect.
And we will grow this business around about mid mid single mid single digits they've actually.
If you look at a different categories. Some of these businesses are doing extremely well and have even double digit growth like inclusions, where gelato as part of it and the food protection business. So we're driving this and we see also that these businesses are helping us with our cross selling activities, which is basically reflected in the guidance by the way.
And most of it it's a it's a food on business okay.
Thank you we'll take our next question from Mike Sison with Wells Fargo. Your line is open.
Hi, guys.
Hey, Mike.
Didn't Wanna get a little bit of color in terms of what's driving the growth out of 10 to have to take snap OSAT I I know you have nice little color column, there, but in terms of the organic business can you maybe walk through you know I think you've won some business and in case, there may be at Santa can't remember and.
And you know what gives me confidence that that you can actually grow organically and 25.
Yep, Okay, absolutely I I know taking that piece was some you you add here.
First of all as we said before we have basically access to three more very important callers on the send side. What we see is that the team is executing with the customer.
Very very closely not one on new projects, we will see already some good wins in twentytwenty, but the bulk of it will will probably are public comment twentytwenty, one, but we see that this is working out very well and I wasn't myself at the Big Congress Asia, The American cleaning Institute and the talk myself.
To to many customers and particularly the ones, where we where we have won the new quality and that's very positive because they're happy with innovation provided by F and and the project already starting to ramp up that's number one number two.
And then Watson was a super important for US last year, we saw the inflection point now with the with a taste business.
We had basically yes, three almost four quarters not so great great growth it was a.
Fourth quarter in 18, and then up to the third quarter in 19, and we saw that.
Many of our bigger CPG customers had very slow volumes not that we were losing businesses, but just the volume of US was very very low or all of our business with these customers.
We had on the other had very good win rate over the course of the year that started to materialize now in the force fourth quarter.
And we see already a good start into a into the first quarter as well. This was a prescription in January number. So it looks like that that we are coming back on the taste business to all usually average growth rates and you know when when I go back here My spreadsheet. The last three legacy average Cagar was 3.9 last five years three points.
Evan and that certainly the.
Number the business can can can achieve then on top of it.
We look at a difficult on business I, just gave the answer to Mark it's a bit.
Back loaded in general because of the cycling through all the topics I, just just mentioned well what comes on top of it we see actually.
Good activity, knowing the cross selling it started slower than than we expected, but right. Now we have brought about solving projects, which have significant value for us where we where we see that we can combine.
Our products that we can cross of products into a into combined customers and that's something which is really really good and gives us confidence that the growth is it will be a will be good in our core business.
Over the course of Twentytwenty. So that's that's how we obviously it I don't know Rustom, whether you want to add anything just one thing probably in pricing in incentive pricing in fragrance ingredients, but otherwise I think you covered it or okay great.
Well take our next question from John Roberts with you B.S. Your line is open.
Thank you and well Rustom there was some good presentation for somebody only on the job a couple of weeks.
Thank you.
Now this year one guarantees of expired for the key Froome employees are you seeing any increase in turnover.
Yeah, John that the very very good. Good question, let me address it into two two parts. The first thing if I look at total employee are.
Population of legacy fruit.
We have actually lower attrition rates voluntary attrition rates and than we had before which is actually pretty good knocking on what it stays like that and on the key employees. We didn't lose key employees, we didn't want to lose and that's that's a good good let's say message for us as well some of them are driving a important businesses for us.
For example, the leader of the inclusions business, which is really driving at the savory solution business. They are all leader from the or from the legacy fruit with unit.
Okay do you have any update on the timing of a filing for the Dupont deal and just remind us what are the key long lead time critical items on the path to closing on first quarter 21.
So it would be John this is Mike there Theres no change from what we communicated back in December as we progress this year, obviously theres this separation component.
Thats a dupont team is working on from that standpoint, and then as we progressed from currently we're working to look at doing today properly filings with the FCC specifically the form for Hello, probably com, let's call. It mid year, and then that will move into the voting.
Discussion and closing has not changed we believe that first quarter next years very very real realistic and we don't expect any anti trust issues here with the two businesses.
[laughter].
Well take our next question from P.J. Juvekar with Citigroup. Your line is open.
Yes, hi, good morning.
Yes. Good question is on cast.
Our company go what challenged due to volume erosion from large multinational companies.
No I thought that de stocking in packaged foods was mostly done.
End of third quarter. So is there incremental de stocking or is this.
Issue with the underlying demand we did multinational companies. Thank you.
I think PJ. Good. Good question, we're done with de stocking up for let's say third quarter last year fourth quarter was already done and I think that has reflected very nicely in the rebound of our business.
In the taste taste division. So we're very happy with was that.
And my second question as you know one off your priorities was getting I, perhaps technology into hooter arm and the cross selling you had talked about can you give us an update on that and if that's happening to this point. Thank you.
Yes, absolutely it's happening through through taste point, and we're doing it for some of the bigger bigger customers as well what we see here is in particular on the food protection sites are very good sales of will protect us basic antioxidants to increase.
Shelf life, that's something where cross selling works very very well, we see it in the first examples on a on natural natural colors and on the inclusion business, which we'll see the legacy tall tall once we see it.
In the number of projects.
As I mentioned, we have brought about solvent different projects running with the value of more than a than a 100 million not all of them. We'll hit certainly this year, but it shows the strength if I would would look back or maybe a year in half I would have hoped it comes faster, but I have to say no since we are.
Having a really dedicated good team on it and exploring it more it comes much better than we have expected so little slower than than I would have wish for but higher in terms of the opportunities than than ive than we've seen before.
I hope that helps PJ.
Thank you we'll take our next question from five not only with Deutsche Bank. Your line is open.
Yes, hi, thanks, the mining.
Two questions. One is just on gross margin. It looks like you took a step back this quarter and you know I was expecting an improvement. So maybe if you could share with us lots almost the puts and takes where there and how we should think about raw materials and gross margin in.
In 2020.
And then my second question is just if you could give us a sense of how we should think about cash flow on capex.
Thank you sure so hi, its rustom so that let me take this so.
In the fourth quarter gross margin was negatively impacted by higher raw material costs and unfavorable mix right.
So who have learned in my first couple of weeks raw material costs can fluctuate monthly quarterly due to inventory then in taste in Q4, that's really where we saw it primarily impacted by the timing of raw material costs for the balance sheet BNL and that's not much different from what happened to second quarter, where cents raw materials.
Came in much more favorable.
And then if you want to think about specific commodities in days. It was primarily vanilla and Incented continues to be turpentine than in China terrorists right.
Capital here, you wanted to but did the cash flow yet roughly about 4.5% next year's worth one opposite of sales sorry.
Following our percent of sales on on capital and then the final the final part of your of your question what is the in the intermediate part of your question was about raw materials and how that would.
Flow through into next year right.
And looking 20, we believe that raw material cost will stabilize specifically in the sense Division, where we had the largest raw material increases our current versus a stabilizing and and look it's important to note. They still remain elevated levels and that we will as we always have worked with our customers and actions including price.
Increases to cover that exposure I think those real questions writer victory I I think that's that's perfectly fine rexam fantastic in the third week.
No I just just one a one won the award on the Capex.
To give it to contextualize a bit as we said before last year was our highest capex spending for all the reasons I set and during the call because we did a lot of investments we have to finish up this year.
And from the next year onwards.
On the Capex plan is much lower than it goes more to a maintenance level of suite to suite our percent.
Because we are finishing up India and China. This this year the a the creative centers centers are done and then we have just the maintenance investments, which is actually a good sign for us and it will have a positive impact on on the cash flow.
Thank you well take our next question today from Adam Samuelson with Goldman Sachs. Your line is open.
Yes, thanks, good morning, everyone.
So.
Just thinking about the 2020 plan a little bit and maybe first just to clarify on the Corona virus, just impact and I know the guidance.
It doesn't officially kind of contemplate an impact but it also kinda you've put a wider range to give some bad.
Some some room there can you just contextualize for us.
The just the clear that China sales exposure and also just fine fragrance as far as you can tell how much you think that actually goes through global Kinda, Judy Judy free and travel channel's it's probably the two areas most at risk and similarly on the production side, how much have you.
Your raw material production do you do sourced from China.
Sure I get get started I start hey, Adam Good morning. So we do wrote about 6% of our combined sales in a in China, That's China for China, So to say on the on the travel retail.
I can tell you know because it has usually a time like it comes from our customers, but if you look at all or one of our big beauty and cosmetics customers. They just made in the loan announcement and that made us think as well what the impact impact might might be and then the cert piece is that we have we're sourcing some of our.
Audience, our out of out of China.
We certainly have other suppliers in China as well here, we feel much better because since the factories is and that specific factories opened since last Tuesday, we are probably unsafe grounds that we can supply or our ingredients to to the rest of rest of the company, but that was a bit of a very pause as well whether we can.
An export order out of China, So, 6% China for China.
Travel retail we don't know, we're just listening to our customers because they are closer to the frontier and then on a production out of out of China. We believe we are good on the on the side.
Okay.
And then just maybe following up on the prior question on the on the gross margin performance in the in the fourth quarter and clearly you came in below your plan and I just want to be clear I mean, if it was raw material cost and inventory just I.
Presumed you would've had more visibility too it was there a sharp kinda divergence in sales mix and the decline in fragrance ingredients I would if I wasn't it would've been a tailwind to the margin performance just trying to make clarify a little bit just the surprise relative to your own plan.
Cycling back a couple of months it seems like a bigger Barents I would've thought.
So so yes, I mean look at mic sales mix definitely him in sales mix was in there and nothing structural really as we look at our we and.
We probably going to see gross margins recover as we go into the early part of this year 20.
Yes.
Absolutely and it's more timing than anything else on on that one and the good thing is that the raw material prices are now softening again, which is which is helpful. For this year, we certainly if taken last year.
In a couple of moments inventory positions just to make sure that we can supply our customers, but that seems to stabilize.
Well take our next question today from Lauren Lieberman with Barclays. Your line is open.
Great. Thanks, good morning.
Hey, I just wanted to follow up again, I'm, just a bit and figure out until a few things here one is that with for I'm being folded into case, you know to what degree we really get visibility into this inflection you're expecting in 2020 <unk>.
When I look at it fruit in the fourth quarter, even if I can see you didn't say the four points. The other things that you're calling transitory are in fact transitory organic was still down 2%, even excluding the things in the fourth quarter. So I'm just struggling with why mid single digit this comfortable and how and therefore I get visibility.
And that would then again being folded into taste as we get into 2020. Thanks.
Hello, and its Rustom, let me, let me have a crack first at how were at that the second part of how we track and on and how we manage it. So yes. There we are going to report its two segments, but what we are going to do over the course of the year in Twentytwenty is willing to as much as possible track through the Rob element separately to now remember as we continue to integrate they will.
To be some sales that come from foods are on that now show up that naturally migrate over into the legacy Dave spot business right. So it won't be perfect, but we have wed be going into our absolute best for ourselves as much as anything else to track in control that.
Then.
Yeah I think the second question then just as a kind of a one point for just a reminder perspective I think long was asking are looking at the organic growth from our program perspective, actually 50, Threerd week exit three days.
I think the run rate number or the right number is probably flat in the quarter. So how does that transfer as we go forward the confidence level to the way I would say a confidence level is pretty high right now are that when we cycled through these one times and Lauren mentioned that and maybe one where next week at acne, we had more time to talk about.
Got it.
When we go through the Russia topic of from the commercial legally we are true when Citrusource is basically cycling through and we see a recovery of the of the net natural color or cut as raw materials. Then we will see actually good mid single digit growth going forward and we will.
Provide some visibility on this one as well where it is tough and I'm building here on the systems a comment.
On a two great visibility is on the cross sell cross sales and to see processes. All of this half a percentage to one percentage point gross for this for this year and most of it actually comes out of the Frutarom portfolio and that's tough to track, but I think you can model it that most part of it.
Further on portfolio and that should be a should be helpful. For you when the new model at the the legacy food business.
Bringing together was faced as actually too.
One is a very practical business reason it as it is helping with our cross selling activities and bringing that technologies and the people are very well well together. That's that's number one and the second one is in gearing up for the N.B. integration. It simplifies our structure because we will have than in the first quarter next year. Another another.
Change and we saw its a prudent thing to do exactly that.
I hope it outsourcing.
Thank you we'll go next to Jeff's the Cosco Swift J.P. Morgan Your line is open.
Hi, good morning.
Good morning, and hi, it in your remarks, you said that you knocked out 20 million in costs and further on.
At the year over year increase in operating income as about 5 million Dollarss and even if you compare it to the first quarter of 2019, maybe or 3 million up.
So why isn't frutarom, earning I don't know 45 million. If you if you have.
Lowered your cost structure by that much.
Why the numbers Hello.
So so part of this would be currency the currency impact as we go through the numbers and part of the I guess or the cost synergies that we have also tile have been associated with extra cost that we put in as we as we take out the synergies to do right, sometimes the double operation the factories and and the migration always.
As we consolidate yes.
That's it's a fair point, because we had for some of these.
Double running cost before when you close all the factory and basically the receiving and get to ramp up already and to get it into the into the new one I think thats that that's important.
And that will go away because we've closed on 10 factories lost last year, we will do another dozen probably until October of this year. So these double running costs at least for the 10, where process. It's gone I think that that's good and then we had a couple of a smaller dovish divestitures versus previous years.
Well that's impacting it.
So should your fruit from operating income grow at least 50 million next year as you realize incremental synergy costs quite that's not the right number I mean, even if the business doesn't grow at all.
That's so sorry, I was going to cut in there that that number is the right number, but it's going to be spread across the three the three businesses the business units as well too as we go into next year, Yeah, because and let me explain why.
Many of the savings are coming from procurement and we see procurement synergies also in the sense business, because we just get some of the raw materials or to better price transportation. We have significant savings for example, or packaging material and that's the reason why you see it in the different into different businesses as well, but in general the numbers.
Yes.
We have no further questions at this time I'll turn the call back to Andreas Fibig for any final or closing remarks.
Yeah. Thank you very much for further discussion and the good good questions.
I hope I will see many of you were doing a cagney next next week Thats number one and then we have certainly as usual lot of on one's plant have a good day and see you soon.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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