Q2 2020 International Flavors & Fragrances Inc Earnings Call
[music].
At this time I would like to welcome everyone to the <unk> second quarter 2020, <unk> earnings Conference call. All participants will be any listen only mode until the formal question and answer portion of the coal.
Good question at that time, Please press star one on your Touchtone phone, if you would like to remove your name from the Q. Please press the pound key.
Participants will be announced by their name and company in order to give all participants an opportunity to ask their questions. We request a limit of one question per person.
I'd now like to introduce Michael develop head of Investor Relations you may begin.
Thank you good morning, good afternoon, and good evening, everyone welcome to <unk> second quarter 2020 conference call.
Yesterday evening, we distributed a press release announcing our financial results.
You've been released can be found in our IR website, I Arden, Todd I have fast dot 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 Weve, making forward looking statement about the company's performance, particularly with regard to our outlook for the third quarter and full year 2020. These statements are based on how we see things today contain element uncertainty.
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 March Threerd 2020, and in our press release, all of which are on our website.
Today's presentation include non-GAAP financial measures, which exclude those items that we believe affect comparability.
A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release, having issued yesterday.
Which is posted on our website.
With me on the call is our chairman CEO, Andreas Fibig, and our executive Vice President and CFO Rustom Jilla.
Well begin with prepared remarks, and then take any questions that you might have.
With that I would now like to introduce Andreas.
Thank you Mike Good morning, and good afternoon, everyone before getting into some of the highlights and key accomplishments for the first.
Oh, Twentytwenty I would like to take a moment to recognize essential workers around the world, including some of <unk> that was who continue to fuel our global supply chain and keep boy pardon me moving forward.
Your strengthen dedication I truly commendable and then thank you for your airports.
We continue to operate in challenging times I'm proud to say that all amply have continued to meet and exceed the needs and expectations all customers around the world.
Today I'll focus my remarks on a review of the highlights from the first talk Twentytwenty as well as an update on business dynamic dynamics with regards to cope with 19 Rustom will then provide a more detailed review of all Q2 financial performance.
Lastly, we will provide an update on our progress towards completing the previously announced transaction was due Paul and then B.
There's no question that over the last several months all business has been operating in a very difficult environment. Nevertheless, we have acted quickly to maintain continue G across our global operations in 44 countries, while simultaneously integrating the who don't business and establishing the foundation fault.
Pending combination, which do all and then B I.
I'm extremely proud what our teams around the world has accomplished as we continue to move ball business forward and tirelessly circle of customers.
And this uncertain environment, our business has proven to be resilient.
Fortunately approximately 85% of all portfolio Serbs and markets that we made and in high demand struggle with 19, including food beverage hygiene and disinfection.
Strong performance in grows in these areas, which is the first talk twentytwenty was approximately 5% on a currency neutral basis helped to particularly offset expected weakness in all segments that have been most affected by the pandemic.
These markets, including fine fragrance in foodservice I've been particularly sensitive to the downward pressure all depend dynamic and that's seen a double digit decline for the first hall twentytwenty.
The challenges of 20 trend. It also comes to us that I've that plays a vital role in the global CPG supply chain, especially for the world's most important manufacturers in food and beverage as well as essential home personal care and sanitation supplies.
I was broad based exposure across regions categories and customer positions.
To be remain resilient and so the ongoing challenges board about why the pandemic.
I'm at these challenges we remain on track with all of whom integration esports is only modest delays due to cope with 19, achieving very good cost synergies. We continue to expect stuff a majority of the integration completed by the end of this year.
Finally, we continue to make significant progress with our airports are complete all merger was and then b.
Yeah, no in chief regulatory clearance in the United States, China, Colombia in Serbia.
Filed definitive proxy statement look forward to the Shell Award on August 20 Sevens.
We continue to make significant strides no integration planning, which is very exciting when you consider the long term potential of the combined businesses.
As we shared all business update in June the age 2020, we remain cautiously optimistic in our outlook for the remainder of the yet.
And then it continues to be significant and the volatility like doing all lives.
It creates uncertainty around the world this rapidly changing operating environment, an economic impacts.
We are fortunate that image majority of oil markets continue to operate was relative strengths, but as we have discussed before all business, it's not totally immune from disruption all depend dynamic.
Turning to slide seven and an overview of all financial performance in the first top twentytwenty.
The first two quarters, we achieved 2.5 billion in says it was currency neutral sales gross 1%, which is largely attributes of the strong growth. We saw in the consumer fragrances, which grew double digits and Sabres solutions, which was up mid single digits.
We also generated an adjusted operating profit of 478 million, an adjusted as of 2.99 U.S. dollar us both excluding amortization.
Well this performance is moderately down year over year. These metrics reflect pressure from lower sales volume and adverse mix as well as higher cost as a result of cool with 19.
So that part relational capex and improving all coal working capital I'm pleased to report that we are able to generate significant free cash flow.
Well first top 20, trendy cashflow improved double digits, but operating cash flow increased 12% and free cash flow growing a very strong 94%.
I'm encouraged by the resilience of all business, it's really incredible challenging environment of the second quarter, what we saw the global peak two days of regulatory restrictions.
Moving to slide eight I would like to walk you swipes airports and approach to managing some depend dynamic while ensuring the safety local employees and all continued uninterrupted partnership was all customers around the globe as our teams have led to a truly admirable performance to deliver soon.
Challenging period, we've also begun to look ahead all operations in this new normal.
Like I said before ensuring the health and safety of employees has and always will be our utmost concern and this number one priority at <unk>.
As many countries in cities have begun to reopen and I'm moving out of complete locked on keeping a close eye on the recommendations on local and global public health officials.
Especially as it relates to Len implementing I'll return to walk protocols.
Which each region recovering along bearing timelines approach is to evaluate each of all facilities and offices on a case by case basis.
Why all of our manufacturing sites are open and operating fully most remain limited to essentially I'm pleased to only.
As for corporate offices, all of our non essential I'm pleased to continue to work from home as off right now.
Logistics remain on operating challenge with lead times still higher than they would would be on a normal basis, but we have been able to that fairly quickly to new local policies with minimal incremental expense.
On the procurement side cost remain elevated as is still some challenges in obtaining various raw materials.
We have core actively addressing the situation to secure these necessary materials going forward and evaluating opportunities to men processes, a whole supply chain for the future.
Finally, when it comes to or create to send us I'm proud to say that even amid a global pandemic and typical I, especially we are creating innovative solutions to support all customers whether in person or remotely that's restrictions that closes he's we've already seen significant improvement.
In all pipeline with that I will turn the call or what your Wilson, who will discuss the Q2 results in greater detail.
Thank you Andrea good morning, and good afternoon everybody.
Slide nine we've outlined a more detailed look at our financial performance in the last quarter.
On a currency neutral basis, I said generated 1.2 billion in sales down 4% when compared to Q2, 2019, and primarily driven by weakness in fine fragrance and foodservice.
Represent approximately 16% <unk> portfolio.
The remainder of thought portfolio, which includes food beverage hygiene and disinfection product collectively grew 2% in the quarter on a currency neutral basis.
Oh offset by a 38% decline on a currency neutral basis in fine fragrance and foodservice combined.
In addition to Louis sales volume, we were impacted by an adverse sales mix and unfavorable price to raw material costs in the quarter, which pressured our operating profit, excluding amortization and offset operation expense savings in the quarter.
Despite lower effective tax rate and more favorable other income.
Therefore, adjusted earnings per share, excluding amortization, but similarly impacted in Q2, driven by the decline in operating profit.
Before moving into the details I want to take a moment to remind those that are new to the eyes that story about the currency neutral sales growth growth methodology difference between the way we reported growth.
Our competitors report.
Part of their I didn't reason, many if not sales transactions in the emerging markets that are either in U.S. daughters, all other hot currencies or a index to hard currencies. When you have to invoice in local markets currencies.
Reporting currency neutral sales growth, we exclude these foreign exchange nascent prices and emerging luck.
But this is different so my peers.
We believe our reporting standards provides investors with the true assessment of underlying currency neutral group, especially when there are lodge emerging market devaluations relative to the U.S. soda or euro. However, it's important has all if you understand outperformance relative to competition.
During the second quarter of Twentytwenty, the stronger U.S. the environment like significant emerging market devaluations year over year in several key mountains had approximately two percentage points currency impact on group. If we include emerging market pricing factoring in this compatibility adjustment.
Second quarter sales decline would have been 2% rather than focusing.
Turning to slide that.
It's important to take a closer look at the underlying dynamics at various business segment.
Yeah first quarter Twentytwenty conference call I presented this slide and the outlook section as they believed it provides a good summary of the many moving parts, we thought that play sitting tight.
As we now see much of what we expected and communicate that came to fruition.
As we've said before we remain fortunate that most suffice it to the business those end markets and category is relative strength.
The categories, most exposed to temporary disruption of the customer access to retail markets such as fine fragrance.
And away from home channels, such as foodservice suffered.
And yet increased demand for products used in packaged food beverage hygiene and disinfection categories has led to strong results in taste, excluding food service and in consumer fragrances.
You know fragrance ingredients business demand is strong get dependent me created a raw materials headwind as we prioritize the use of our fragrance ingredients to support our fragrance compounds business publishing external sales.
I'm happy to report that in the month in July as restrictions that means we have seem that the business has returned to drill a trend that we expect to continue into the <unk>.
As we approach the new normal in many regions across the world, we expect that the supply chain complications with ease and demand for away from home products will slowly with huh.
Looking at slide 11.
I'd like to review the underlying drivers impacting our profitability in the quarter <unk>.
What was 19 has clearly has an impact on profitability significantly influencing volume mix and cost.
Yeah really your change in profitability is mainly a result, a significant drop in body.
Representing approximately half the five adjusted operating profit declined.
I'm favorable price the raw material costs also impacted profitability, primarily in fragrance ingredients that prices, where it used to reflect future commodity cost reductions and where we are working through through higher cost inventory.
[laughter] Unfortunately with the steep decline in fine fragrance sales mix was on favorable and we also saw incremental Colby 19 manufacturing and procurement costs.
To minimize needs and that was a focused and disciplined cost management and continued productivity both helping to protect profitability during this difficult side.
We were encouraged by the realization of cost synergies from the Frutarom deal and expect this we remain cautious about profitability story as we see revenues return in the coming quarters.
Now looking at US since division on Slide 12.
Currency neutral sales declined 4% in the quarter.
I'm happy to share that for the third quarter in a rule, we achieved double digit sales growth into the dealer fragrance, which can be attributed to robust growth in fabry home healthcare and personal wash and why we did benefit from Covidien 19 in some areas through higher volume commercial performance on new wins.
Was very strong nearly 50% higher than our previous five year average for the second quarter.
Also the new core list were called it's very recently gained access calling for about 2021 strategy grew more than 85% in the second quarter and represented nearly 20% to pop in Zillow fragrance group.
At the Bu level. This was offset largely by the 40% sales decline in fine fragrance.
Due to the disruption off our consumers the ability to retreat in markets and reduced travel needs.
Just had an adverse impact on volume and the existing business, which was down double digits as well as new wins, which traditionally have very strong but were also down as a result of call. It 90.
We also saw little a fragrance ingredients external sales as we prioritize that fragrance compounds business due to supply restrictions in India. This has now improved and we expect performance will continue to improve going forward.
Cumulatively dissent business at sales of 450 million down 4% at a segment profit was 17 million down roughly 25% at a 15.6% profit budget.
Now moving to taste on slide 13.
We saw currency neutral sales declined 5% in the quarter.
Got any perspective, its covert 19 restrictions kept consumers for anything outside their home away from coal channels, such as foodservice soda significant 36% decline in the quarter.
To put this in context the decline in foodservice represent represented about five percentage points of the safety clay, meaning the business would have grown excluding food service.
Other regional perspective, North America showed resilience, yes emerging markets underperformed given significant cold with 19, driven regulatory restrictions in places like India Latin America.
India, as though which represents about 4% to fill to the taste sales so sales dropped by almost 30%.
For the customer perspective, we saw weakness across smaller local and regional customers mainly foodservice.
This was most evident in frutarom with Standalone sales declined high single digit to the second quarter.
Continued frutarom businesses, which was which was not being the comparative periods going forward remained a headwind in Q2.
So the taste overall business at 748 million in sales down, 5% and segment profit a 107 million down 15% for a 14.3% profit logic.
Now turning to slide 14.
I'd like to provides an overview of classes cash flow performance, it's probably more useful to look at this year to date.
The chart other that's designed to show the reconciliation from reported net income to free cash flow inclusive of all the drivers.
Operating cash flow was up 12% in the first half.
Which was primarily due to improvements in coal working capital levels in Q2.
We didn't call working capital improvements is largely driven by days payable outstanding was days sales outstanding and a better than expected.
We will continue to effectively manage our balance sheet by taking actions to generating strong cash flow and to maintain ample liquidity, even during a pro though no goes down to.
We also continue to invest in the business, especially as we work towards completing the Frutarom integration.
Capital expenditure as a percentage of sales was roughly 3.1% compared to 4.6% the previous here.
The improvements in coal working capital levels combined with the prioritized Capex structure has led to strong free cash flow of Hundredd 28 million up 94% from the year ago period.
Reflecting our confidence in our future cash flow generation, we're pleased to announce that we're raising our quarterly dividend by 3% to 77.
77 cents per share.
This March 11 years of consecutive dividend increases and underscores our confidence in our business I long term strategy and strong cash flow generation.
Moving forward, we continue to take a thoughtful approach to meant to managing cash flow continuing to prioritize the focus on core working capital and cafe.
Before bouncing back to address I want to take a moment to provide an update through the first month of the third quarter.
On Slide 15, you can see our sales trajectory during the first half of Twentytwenty and Dimmock rebound, we have seen unfold in the third quarter so far.
We started the year strong in January with mid single digit currency neutral sales growth and although the emergence of coal with 19 infected sales from made much. We are starting to see is notable performances and improvement in performance in July.
I still do mobility is gradually improving and restrictions and closures that east categories and dockets invested in Q2, I showing promising signs of improvement should.
So the environment continues to improve quite hopeful that we can regain a more normalized levels of growth.
And with that let me turn back the unwrap [laughter].
Thank you Rustom.
No as we consider what we are what the remainder of 2020 will look like for that we're doing on best to anticipate performance in a global environment that remains quite volatile an unpredictable.
We actively evaluating evolving global market dynamics and regulatory conditions to understand and anticipate all these factors will impact our business performance or people and our customers.
We are proud to supply solutions and ingredients for essential products in the food beverage hygiene and disinfection product categories, especially as these glass, 85% of all current portfolio.
That's Rustom has stated earlier all July sales performance has improved growing low single digits consumer fragrances continues to grow double digits, and we're seeing a double digit trends and cosmetic actives.
Fragrance ingredients had also improved as restriction is growing mid single digits in July and taste gross in flavors in North America led by taste born is more than offsetting pressure and Latin America, and we're seeing robust double digit growth it helps oriented products as well as an improvement in natural colors.
We do however, I anticipate that fine fragrances, and food services remain impacted by market pressures in the second half multi year, but expect improving trends versus what we experienced in Q2. Good example of this is at our July two ingredients categories severely impacted by cold with 19.
In the second quarter, there's no up low single digits to date in a sort of quarter.
As we entered the second half of Twentytwenty, well, we continue to effectively manage all business by taking actions to generate strong cash flow by targeting reductions in operational and capital expenses as a positive signs of improvement in our performance that we are beginning to see in the third quarter we remain.
Mistake that we will see further market improvements in the quarter and beyond.
Turning to slide 17.
I'm very pleased to share with you know an update on where we stand with the integration planning of all previously announced merger agreement was two point Mb.
We made a lot of had way in the first half of Twentytwenty, reaching key milestones like clearance in the U.S.
China, Colombia, Ukraine, and Serbia regulatory processes and announcing all combined companies purpose vision operating model and leadership team.
We are well on our way to establishing the foundation and framework that will be essential to achieving the potential of this exciting combination more recently in July we filed definite just proxy and set the baseball, especially shareholders meeting in connection with a merger which will occur later this month.
On August 20 Sevens.
We expect to earn or shareholder support well this exciting combination in the coming weeks and remain on track to complete you know transaction and your 19 organization in the first quarter of 2021.
In summary, I'm proud to say that I have that has stayed resilience of the first off of Twentytwenty MST unprecedented circumstances of core with 19.
Achieved solid financial performance, while delivering four so resolved plus customers globally and executing on the integration processes for whom and then b.
Yes, we have set before I've plays a central role in the GOGAS CPG supply chain, it's a vital part though to world renowned brands regional leaders and new innovators alike.
Oh position across end markets customers. There's all global reach has created a really resiliency and all business that shines through the through these difficult times.
It was frugal, we're realizing that significant potential, but the way enhanced capabilities and expanded customer base well have for the <unk> long term gross similarly, we look forward to joining forces with people and then B and have made significant advancements in our integration planning and pasta regulatory and shareholder tool.
I'm deeply grateful to all employees across the globe, whose commitment and dedication to I.S.S. and our customers has been and bayberry.
They have started to see improvements in all performance in July and remain cautiously optimistic about how this may translates into financial performance in the second half of Twentytwenty.
Hi, Fs and all balance portfolio remain well equipped the depth and succeed and this unpredictable global environment was that I wouldn't know like to open the call for questions.
And at this time, if you would like to ask your question It Star and one on your Touchtone phone you can waste removal yourself on the Q by pressing the pound key star and worn on your Touchtone phone.
Well take our first question from Mark Astrachan with Stifel. Please go ahead. Your line is open.
Hey, good morning, everybody.
I wanted.
I guess just to start so if you look at the broader share trends, even normalizing for how youre accounting for FX relative here it seems there's.
I believe in increasing divergence in your results for sale versus those are the largest after it appears like I guess Im curious.
You see the same thing seems.
Someone obvious to hopefully outside in so I'd be curious that perspective, and then if so what is what is driving it and when should we anticipate those trends too.
Normalized in your sort of related to that it would seem maybe to trace back to the Frutarom deal. So you have true what are you doing.
Best <unk> best practices, and such that you're putting in place. So it's not repeat the when you close the Dnbi deal early next year.
Sure. Thank you Mark for for the question I I take it as you lose it though certainly it's good to take the FX a reported numbers and compare apples to apples I think that's number one number two I would say we should judge outperformance beyond just one.
In one quarter and books should look at multiple quarters and if you see for example, or the first quarter, we let our industry and and gross I think that's that's that's a topic. The second one is if you look at a a Q2 the emerging markets where pretty much on the pressure and you see that we are.
A bit over indexed in the emerging markets for example, in India, where market leader in India with our taste business. For example that that was actually a a pretty a bad hit on that business, which is by the way rebounding and then we are sub Neal winning some small a a smaller customers which plays a role here yes.
Oh, Oh fundamentally I believe boards will help us with all a long term goals, the smaller customers and emerging markets as well as soon as we see the a the courts pressures are easing.
And if you look at July I expect that she that to sort of quarter over there will be well look much different than the second quarter. That's what we've seen a in our numbers for for July Oh, I see gruesome as a as shown in this in the slide we see in particular in some of these area.
Yes.
Well, we have good and strong performance on on consumer Fragrances. For example, you see the categories like home care, all personal wash, all really up and very very high high single digits. We believe that's it that's a trend to stay so hygiene products will stay even after the let's say acute cole with cole which crisis surprised.
Strong we see a goods a rebound already in fine fragrances, so not as bad as we have seen it.
Got it before and the same hosts to actually for foodservice I just looked it up we were April more so a worst number and food service was down by 40% to 44.1% into livestock and by minus 7.7, just due to tell you that the weak spots I I think are improving and the strong pieces.
Of the portfolio are staying strong and helping us to grow all business going forward, which will help us with on mix going forward into sort of quarter are as <unk> as well I hope that helps mark.
I'm sure. Thank you.
<unk>.
Somewhat related to that maybe sticking on the commentary about June versus July. So I guess it was surprised a bit the Jews worse, given you look to your customers kind of talking about sequentially improving trend through.
The second quarter, so maybe why beyond the obvious that comparison for your easier in Threeq you why did you see this improvement beginning in July was due to the worse.
It does speak inventory levels for customers isn't just simply third quarter people started worry or product where do you think.
Inventory levels are for those customers and how do you think about the durability of what you just said about July through the quarter.
Oh look a I am inventory levels off the customers, it's tough to come to comment on because we see huge differences from customer to customer from region to region category. It could you go through category that that's a big Big difference I would say Oh <unk> July is better for us.
Of course, some of the categories, which were a hard kids in the second quarter like foodservice I, improving a better or that's that's certainly helping and that some of the emerging markets like India. For example are performing much much better in July we have actually a double digit growth going going forward.
And that helped US a lot why why June had a little bit off the often they even compared to compared to may if I look at our daily says it's not so much I think it's a comparable I would not take this to.
I think it depends also on the order pattern and won't be see right now as I said July pretty strong flaws and the order book for the third quarter is up mid single to high single digits as well. So I I believed that the Oh the trend will continue so it's a bit of phasing in there as well, but most of them you. Please so Mike you. Please.
Comment.
No I agree a unrest I would just ER and you've seen the phasing you've seen the average daily sales a you know there's no deceleration in the numbers and then coming through into July I mean, you've seen a very nice we've seen a very nice income side it does pick up and.
You know in areas that were like fine fragrances, when compared to where the they were going through May and June and July is and then Foodservices undress said, so nothing but reiterating what he said really there.
<unk>.
Okay.
Thank you we'll take our next question from Faiza Alwy with Deutsche Bank. Please go ahead.
Hi, good morning.
Morning.
Shifting gears, a little bit actually.
Talk about and I.
It feels like so.
Holder vote at the end of this month and it feels to me that the deals might close.
Soon after that maybe earlier than your target.
I'm looking at slide 17.
I was wondering Andreas maybe if you could give us.
A little bit more color around how you expect you know how do you expect to go from add to close like the second to last box said you have on that side to the revenue and cost synergy capture by end of your three so I'm sure we'll get into it in more detail as time goes on but I was wondering if you could give us a little bit of a preview.
Oh, it's how you are expected to play out from here.
Yeah. So first of all Oh assumption is still that we're closing all first quarter first quarter next year. That's that's actually the fine also for the call a cohort of the business I think that's that's important and right now we we are focusing a lot on let's say.
Closing on our food integration so the remaining piece of it which will happen in the early par adopt it off the force a fourth quarter I think that's that's important on the n. Besides as we said Oh, we are progressing actually absolutely. According according to plan and some.
The areas even a couple of days ahead, which is quite quite interesting during the call with schools environment. I think the teams are doing really it's a fantastic fantastic job.
We see also and justice and Essen remark on the and then be business, you're you've seen a one day under reported actually a bit of roles with was 1%.
Strong mix or 85% of a of the portfolio is pretty resilient against a corporate crisis as well so very very similar.
And a good mix sympathetic to a tendency towards the probiotics, but maybe it was some if you can ah I can comment as well on the a page 17.
Yes, absolutely I'd love to address a wait and good morning, Oh. We are also in a very detailed way on the synergies on the sales synergies you know we have themes from within the project from the from the IMO integration team you know working with our business unit people and specifically identifying opportunities to that.
Revenue synergies and what we work needs to be done as much as possible now obviously, we can work together with the and then be people, but we can blend together at this point in time and so we are trying to do that likewise on the costs I mean, I can I can put on a function or.
Had for a second I mean, we are looking at you know our structure looking at their structure looking at our systems that have their systems and basically in a very methodical way going through and trying to identify opportunities to optimize the business and you don't make it stronger and get greater revenue growth without a without costing.
I will say areas, where that duplications of costs that we get that we can take out so a just a bit more detail, but it's it. It's moving we wanted to be should be we want to basically hits the ground running.
Yep, absolutely and and I would say on on the cost savings. We a we're really on both a parts on the says savings or synergy certainly as well we're pretty robust plans in place I just give you a a two numbers. We certainly are for the cost savings internally.
The a higher number which we're working towards and secondly, we have started was I think 400 projects.
Which could help us with the same synergies we narrowed it down to around 100 to make sure that we really focus on on the most important ones.
And I wouldn't say these are really really good and robust well was plants, we have ever faced and we still have a couple of months until until day, one and the but it gives us a good a good feel because.
In some areas as with some sense its robust and we are probably even ahead of plan, which is which is great.
Thank you and we'll take our next question from John Roberts with you'd be yes. Please go ahead [noise].
Thanks, you noted double digit growth in consumer fragrance I assume that included a decline in emerging markets outside of China. So maybe you can peel that apart.
How much was emerging markets, excluding China down in consumer fragrances, and then how how actually how high was the rest of the portfolio.
Yeah sure I'm, so we see actually a good rebound to in our our China business, that's that's for sure but.
We have to say that it's not just a China. We saw for example in July already actually a very strong performance of all consumer fragrance ER business in a in India.
Actually Mike just because we looked at the number was more than 40% for July which was kind of amazing, but it is because we believe because we had a couple of good wins and going going very well and we have actually quite significant and good performance in Latin America, as well I believe it or not so it's not.
And not just China a it is also on the consumer fragrances side some of the emerging markets not all of them, but somewhat some of the emerging markets actually performing better than than we expected a expected as well, but maybe you will some you all and give even more more details.
Sure I mean, that's it so the emerging market as a John there's variation between the emerging markets thrived in treating them as a particular group right India has been the outlier in terms of underperformance.
We have also had an impact in a in Latin America in Brazil, and very has switching from from consumer from a in into fine maybe give a significant market over there that we had seen a come off we don't think come into and I mean.
We don't really think that what's going on in emerging markets business or the or you know predictive of what the future is going to be I mean, it's it's just as you look at different countries country by country on where they are in terms of the on the coal handling call. It is really what were seeing in terms of consumer foods. So that's a fine I mean, all the areas.
Basically.
What might be might be interesting John for you and and all that colleagues on on the phone as well wont be try because in this very volatile environment.
We have doubled down on or consumer insights studies, and we look or something to hold the consumer looks like during college and what can we expect a a after after college and we have no were drawn down on street, seamless, which were sharing with all customers as well it's held.
Whom and hygiene. So we believe that in some of the off the areas like for example, hygiene and we see it and all a sense products, where we are selling that this is a trip and which will stay used to even post a poor score would and as I said our home care.
In July.
Categories up by 27, and personal wash, but plus plus 16, just to show you a what the impact on the business is because these products are so much in demand on the other hand, it's a it's the home area. We believe that just kooning at home will stay at least a fall for a couple of months through the winter.
So clearly know everything which is cutting already products for home cooking wells will stay will stay up a we believe that model odor control is an important one and on the health side, we see that all the more helps ingredients. Most of them are we going through a super room are very much in highlights.
Beyond that the modulation off a sweet isn't high demand because governments, Oh again, starting to double down on on sugar and product. So what I tried to say years on that we have looked at the consumer insights quite carefully at.
And we are basically now looking Hoboken Orient our organization towards these trends Oh, well, we believe they will stay for a while to make sure that we get a more than a fair shelf grows out of these categories. So that's that's what we're doing just to give you a bit of a bigger picture and an outlook beyond.
Just sort of quarter.
And I didnt onto the specific question by the way, it's an emerging markets actually mid single digits just to put it in context.
So not negative or anything like that but not as strong as they develop markets which were.
Obviously, much higher to get us to the average.
And we'll take our next question from Adam Samuelson with Goldman Sachs. Please go ahead.
Hi, yes. Thank you good morning, everyone I'm good morning.
Well a lot of grounds in covered on the on on the revenue side. So maybe just pushing to the cost side, a little bit and a lot of moving pieces in the in the second quarter, given the volume declines in Mexican coffee costs and I'm, just trying to make sure I understand kind of what happened.
In Threeq you, if we're back to kill organic revenue growth.
Hi price cost its house.
We think about that.
Make playing out over the balance of the year kind of what's the incremental overhead related costs expenses, you expect to be absorbing and then the next couple of quarters and just thinking about kind of the operating leverage that is or is not in the business with it for revenue growth is back to the trend you saw.
In July.
I'll, let you are absolutely we take this was some you take it yes. Thanks. So yeah. So let me break it up a and then he would thing first of all I'll give you the cobiz related costs, Okay, and then primarily procurement logistics and manufacturing cost setting and in Q2, they were about $6 million, okay $6 million and we would.
They expect this to start declining as we as we go through the rest of the right because Q2 as we've already said is when we thought we had the highest point there will still be some continuing manufacturing because undress has said many times, we put the safety of up people first sensitive things that we're doing differently onto the vaccine comes into.
So how we manufacture and the second part of your question I had been even if I missed something ticked me back but the second part of your question was really about pricing and raw material costs right and what we have so in Q2. It was negative I mean, our pricing actions did not fully recover a higher costs and fragrance ingredients for example.
He talked about that as well.
Now moving forward, we have the oil related costs, so that did the helping us as we as we move forward and we had we should see a benefit from some of those come from engender the input costs, we'll see a benefit coming from that right definitely Hello, we'll have a negative on pricing and that comes up on bonilla.
I mean vanilla has dropped back within the five hundreds it's dropped back into the 200 I mean, you hit it could go even lower and so you will see that impact on pricing. So what we're projecting right now it is for a net price to raw material costs for the rest of the to remain a to remain negative.
Did I cover the Youre both aspects of your question there.
And then just maybe calling on them, but the cash flow performance.
The second quarter <unk> was very strong isn't there is there any reason why that wouldn't persistent and the second half a year or any cash flow dynamics, we should be used to Michael I.
No I mean, we'll continue to work on cash flow. So let me, let me sort of just break up the components right. I mean first of all on our Capex I mean, we've been very focused on our capex. So very early literally from probably hit on February or so and we set ourselves the targets of spending roughly about 10% less on our capex for the year than our budget.
And where we're running even below that by the way at this point in time, but but that's definitely continue that's the Catholics right.
We are we're watching our cash expenses and you know in general across the board and you.
Some things are obvious and you'll see that like.
Pumping the benefit EBITDA, they travel, which will keep coming through but the other biggest run is working capital and that our working capital. If you remember what we said even a few months ago, we deliberately moved to build up by inventory so as to Hawaii customer disruption I mean, because that the two things we tried to do with keep our people say and the white disrupting our customers right and so far.
We managed to book.
Inventory, we act inventory actually because of lags in actually receiving it we've actually a little bit better in Q1 than we expected a little bit worse than Q2, we do expect that to start to come down now gradually as we go through Q3 and four as we had been stuff right on idea, so which is the other big Big area, where we flagged that we were expecting any.
Yes.
We actually did particularly well in terms of compared to where we are back to where the expected to be and that was just say other focus management from the teams and that should continue and we would hope as as the best the broad economic situation. A you know I made some things get a little bit better we'd hope to do well on that too and then at the last component of it was just fabulous I mean, we.
ER, we manage that a very tightly in terms of Ah you know in terms of making sometimes accelerating payments and they're smaller suppliers that we want to keep afloat and other times just managing if they take the electronics thinking from a any company if our size.
And we'll take our next question from Jefferies or cost goes with JP Morgan. Please go ahead.
Oh, thanks very much.
So first could you update us on regulatory developments on the nutrition Biocides transaction in Europe.
Why why haven't we received today.
Ruling from Europe, and do you expect to get one before the shareholder vote.
We expect actually in the August September time timeframe. The ruling we were going back and force with them to answer the questions before the before the summer break and Oh I think in the next couple of weeks, we should get a get the clearance and euro.
That's what or lawyers.
Selling so I think we should be on untracked, whether we can make it before the shareholder vote I'm not 100% sure but early early September would be will be my best guess right now.
And then secondly.
It looks like you're fine fine fragrance business in the first half was down I don't know, 25% and maybe or.
He Swiss competitor was down 16%.
Can you can you talk about that.
The differences and.
Like for like sales growth.
Yeah booked in this sense is a I would say I'll, probably a with the customers on what if you look at a many of our big fine fragrance customers are you see a even worse performance than the minus 2025, 5% and that's what's what's driving it because the window.
Great all in all fine fragrance business is still a pretty good we see also good influx. So oh you projects coming.
And as we set a the oh the start into the third quarter was actually pretty pretty encouraging won't we have seen fall fine fragrances. So I wouldn't say the main main differences is it's a customer structure and how much the customers or selling off the the actual actual products, but I am.
We expect that this will normalize a normalize over the course of the year because in general I single all win rate in that area. It's a very very good one and we will see the you know adjust the most important season is a right before the holiday or before the holidays, that's where.
We so most of all fine fragrances.
On the so end of all and the third quarter. All these fourth quarter is actually that's where you wouldn't be yet and that's what we have to watch and I hope when I'm here for third quarter. All in on spend that we can give you more off more than you saw that one as well I hope that helps.
Yeah, well take our next question from Lauren Lieberman with Barclays. Please go ahead.
Thanks, Good morning.
Good morning, I, just wanted to wait I wonder how can I get asked first about the last so the business was down slightly in the second quarter.
Sequentially I'm sure. It makes it got closer white sand in first quarter [noise].
Can you talk a little bit about what's going on there because you know given the first half performance. It would seem to be specifically closely related consumer pockets can tell you know our through the roof. When you kind of look at what's what's going on from the end market standpoint.
So what's going on that business immediately long funny, you know big contract, but it seems like pockets on off 'cause the performance it is candidate.
Thanks, Yes. So some can you can you take the numbers.
So yeah, I mean, I think you yields are you compare you, including sales of consumer fragrances in there as well with the fine fragrances, though oh, what what was it.
I'm just looking at U.S. out.
In general taste and fragrances everything.
Sure I do not in general on North American business has held up relatively well I mean, we've seen if you look at takes time look at some of the is the performance that we've had that we haven't really seen any any any beating disappointment. We did have the impact in find specifically in North America in Europe and that that could be coloring father taught on numbers that.
That's where a large global customers are concentrated.
Right in terms of consumer I mean terms about consumer business outcomes, you know business did well across the board I mean, the up in developed markets and I don't have the.
In North American number and I think that helps but if you look at developed markets. It was in the in the high teens the growth in Q2.
Specifically.
Simon I well okay.
Yeah, I think then the numbers in that in the queue suggest that the U.S.
Hi, early but not well in second quarter, Oh, I'm, sorry, and North America in total.
Like one or 2%. So again it is a huge contact to watch the majority the customers you're doing but.
Yeah, that's it's well look back at the killing that looks like a habit misread something that the filing thanks for allowing me to always follow ups or we can always follow on patrons as well too.
Yes that will be good let's follow up on that one.
Well take our next question from Jamie's target with Baird Remember please go ahead.
Hello, Good morning.
Two questions for me just firstly on on innovation, you mentioned that the <unk> you see the project pipeline improving has restrictions or minimize but just generally talk about what you're seeing in terms of custom appetite for innovation new product launches generally obviously, we're hearing a lot of CPG companies talk about rationalizing that innovation cars.
You know cutting tail innovations SK use et cetera. So any color you can give oh youre positioned that'd be great and so he just on them. The the amazed to be sort of recovery the momentum you're seeing in July let me talk about little any sort of differences you're seeing between the momentum in your large custom to global customer as best as Youre well smaller.
Or more local ones. Thank you.
Sure absolutely.
If he'd like to touch on on innovation, but we have seen actually when the coal would crisis was on its peak in Europe and in the U.S. So starting in March April.
Or even parts of parts of May we've seen a slowdown in now why or why innovation pipeline and also driven by by the demand off some of the package food for for example, or some some of the a consumer fragrances. So everybody was trying to get the existing product on the shelf as.
Process as they could since then actually starting with was was may we've seen actually a continuous influx of new projects in a actually across the board in a in all of our all about different categories. We out we're playing in and there's there's there's more coming.
And we saw a solid first obviously in China because there.
Yes, it first country basically all the out of the gates in Oh after that covert crisis for for them and they're already almost almost back to normal. So we see that that many off of the biggest cpgs and also the smallness are now really all back to normal it's something.
Depending a customer by customer, but but many are coming again with new projects projects to us. So that's that's on the first one on the second one on the recovery, we see a recovery we should look at a country by country.
And ER and category by category, Let me start with no major countries, but this was a which was regions he as well in the recovery or Asia is no no bake in particular, India is a is surging opinion was wasn't very impacted in a second a second quarter. It.
It's just really coming back we see a good come back on the on on Europe as well. The U.S. is it's very very good flaws, maybe was exceptional two of the fine fragrance fragrance business and we see an impact on a on your project in Latin America, where we see and.
Perfect and Brazil, and Mexico, another tend to peak because the crisis in terms of the categories.
We are happy to report back that's not just everybody is looking for solutions on a.
On on hygiene products, but we see also more demand a new projects on food service products, which is really good.
Commented already on the Oh fine fragrances fine fragrance are coming back as well on the customer base, we certainly see it with large customers a with smaller customers, it's probably more of a mix situation, where we are in.
But some of them are coming are coming back a backed us as as well so I.
I hope that helps to picture wise, a whole we a how we see the situation, but right now in terms of innovation, but in terms of recovery recovery as well and as I said, they look I don't want to bank too much on adjusted July results, but we see that the order book is is quite strong as well for <unk> for the rest of the quarter.
And that should help us actually was it was a positive performance as far as we see it.
Lets them.
So thank you and as we talked a fair amount about center, Iran. Then made and maybe a little bit of color or not taste categories. Right. If you look at flavors and if you exclude the impact of India, which means covered and foodservice right. The big negative all our other businesses grew at around you know to enhance the sense and that was mainly due to an increase in North America and great age.
Yeah, driven by strong commercial performance, then and some decrease in a in EMEA and he not due to some postpone new wins and that of course, Latin America, where you have the big negative because of quoted.
Savory was another was another strong quarter I mean, some capacity I mean, the the in home consumption channels or you know up like over five you know call it mid single digit.
And again strong performance in North America, and Great Asia offset by some weakness in a in EMEA and that was new to food service because you know the of a lot of small foodservice customers in India, and then inclusions I mean, obviously impacted a lot like all of it but this as a method I mean, the averages out to coming back a quite strongly.
The with what they're going there since in the last in the last several weeks.
And finally, MPS I mean mixed performance in there that has that picks up in extremely strong and that in some of the other food protection areas you know there being some delayed the launch of ER.
After that so all in all I mean, that's a that's just gives a bit of additional color that we didn't show the.
Like our final question today from Mark Connelly with Stephens. Please go ahead.
Thank you just just two quick things how much differently would you run your operations. If we did have a long term shift to more meals at home a limited restaurant recovery I'm wondering how big a restructuring that would be for you and second I was just hoping you could help me understand your exposure between quick series.
And regular restaurants from whether those two trends it differently as you start to see recovery.
Mhm [laughter], but for the meals that at home actually we are pretty well positioned.
With our savory, Oh solutions business, because we have an extra culinary area, which we which were using fall for that for that area. We certainly will would look can double down what we can develop here. So I think that's it that's an important important aspect.
So I think it it I wouldn't say would benefit us more but it would be certainly a very manageable for us as well and he was on retail or restaurants, we have almost a similar similar mix.
I think that's that's an important more than what we see is that a some of the quick service restaurants are really coming back now a which is good and helping us on the on the food service area as well, but with some you might comment if youre a anymore insights.
No I mean, it's the it doesn't mean somebody that it's a mix of those willing we actually seeing the restaurants coming back as well too.
More recent had that most recent foodservice numbers, but the about them that the quick service clearly coming back faster.
Very good.
Thank you, Okay, and this will conclude todays QNX session I'll return to Florida Andreas for closing remarks.
Thank you very much pool for your time and these are very exciting book or times I Hope. We gave you a good insights how do we see the business or even beyond the second quarter and we're looking forward to the one once thank you very much take care and stay healthy.
Well conclude today's program. Thank for your participation you may now disconnect have a great day.
[music].
[music].
[music].
[music].