Q3 2020 International Flavors & Fragrances Inc Earnings Call

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Good day, ladies and gentlemen at this time I would like to welcome everyone to die. If that's third quarter 2020 earnings conference call. All participants will be in a listen only mode until the formal question and answer portion of the call.

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I would now like to introduce Michael Deveau head of Investor Relations you may begin.

Thank you good morning, good afternoon, and good evening, everyone welcome to our second third quarter 2020 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> or <unk> Dot <unk> Dot com. Please.

Please note that this call is being recorded live and will be available for replay I ask that you. Please take a moment to review our forward looking statements.

During the call we will make forward looking statements about the company's performance, particularly with regard to our outlook for the fourth quarter.

Full year 2020. These statements are based on how we see things today and contain elements of uncertainty.

For additional information concerning the factors that can cause actual results to differ materially from our forward looking statements. Please refer to our cautionary statement and risk factors as stated in our Yesterdays press release.

Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability a.

A reconciliation of these non-GAAP financial measures to their respective GAAP measures is available on our website as well.

With me on the call today is our chairman and CEO, Andreas Fibig, and our executive Vice President and CFO worsening Jill will.

We will begin with prepared remarks, and then take any questions that you may have with that I would now like to introduce Andreas.

Thank you Mike Good morning, good afternoon, everyone before it I'd be dollars third quarter performance I would like to once again take a moment to say all front line workers and dedicated colleagues around the world worked tirelessly throughout the course of this year to continue shooting all global supply chain and meeting.

Our customers needs.

What every business is built to weather pandemic, but over the last few months. We have continued to show that our business is well equipped to navigate the most unpredictable storms.

I can thank each and every one all all pushing them. Please enough of their continued hard work dedication and focus on this difficult year.

On today's call I'll start, it's usually by reviewing I passed recent quarter performance and summarizing the trends that we're experiencing across the business before providing a more in depth review of all year to date performance Rustom will then provide a more detailed look at also at quarter financials. I will then provide an.

Outlook on the road ahead, all business and provide an update on merger was before at MB and the integration of blending of course that are well underway.

Despite the cold weather related headwinds, we saw strong sequential improvement across all key financial metrics in Q3.

Good 1% currency neutral sales growth in the third quarter of <unk>.

I find it gives a boom, but relative to our second quarter trendy trendy results.

Outside of fine fragrances at foodservice.

AFS portfolio remains resilient with girls Wall Street gross adds in the quarter on a currency neutral basis, and 4% year to date.

Nearly every category, including fine fragrance in food service is growing that's.

Why its third consecutive quarter of double digit currency neutral growth in consumer fragrance.

We continue to experience challenges in fine fragrance and foodservice.

We saw improved relatively in Q2 Q2 sales declined 40% this quarter on a currency neutral basis. These segments continue to be the most affected the mall portfolio by pandemic revenue trends in retail and away from home channels.

Although our second quarter earnings call. We presented this monthly chart could provide increased transparency Judy uncertain period.

At the time July finished was about 2% gross and the subsequent months I've always in September we saw a modest deceleration in sales performance was July actually largely due to weakness in fine fragrance and foodservice.

Now, let's turn to slide seven I would like to review our usually performance.

Twentytwenty basis.

Our flavors category, excluding foodservice is resilient growing low single digits outside of foodservice all categories are growing inclusions, let the segment was impressive double digit growth followed by mid single digit growth in natural products solutions and cyber solutions again, all excluding foodservice for marine.

Oh perspective growth was led by a double digit improvement in North America agreed to Asia.

When you when performance is strong in EMEA results were challenged which is in an area, where we are focused on improving as we move forward I want to take a moment to formally welcome our new taste Division leader Catsix Fortman.

On October 1st Casio officially took over leadership award taste Division. She is an outstanding executive with experience across our industry enjoyed I've that early and Twentytwenty as part of our succession planning for that as.

As well as post all combination was and then b.

No short term was laughing because he has already brought tremendous expertise and insights on what team leading I've. That's integrational taste was and then be put in beverage platform.

With a proven track record of delivering growth and innovation global food and beverage ingredients organizations I'm confident Kathy will do an exceptional job, leading our taste business no other taste food and beverage division following transaction close.

I also want to thank but he is he was retired from why if that's off the study used in our industry. We had a long and successful Korea and during his tenure was I associate here's advance our position as a leader within the taste industry I wish him the very best for his next chapter.

Overall I've sent division continues to perform very well I'm proud to share that we have achieved double digit sales growth and consumer fragrance. This double digit growth in fabric care home care hair care and personal wash.

Our new core list customers will be recently gained access to core toward Twentytwenty. One strategy are growing more than 50%. This year in the third quarter provided the double digit contribution consumer fragrance gross apart.

Not particularly I want to note that whole entire consumer fragrance team have worked diligently to depend I make that differentiate all funds win new business and achieve strong market share gains.

No fragrance ingredients business.

Mark a strong yet depends enemy created a raw material had been in Q2 as we progress the use of our fragrance ingredients to support all fragrance compounds business ongoing external sales. That's restriction has eased the business improved sequentially, but on a year to year basis remains down slightly.

The areas most impacted by cool with 19 heft in foodservice and fine fragrances, our year to date base, who serves a fine fragrances are down almost 20% as covert related actions impacted consumer behavior as well as retail channels have been temporarily closed and travel retail is down.

As I stated earlier, we are encouraged with the fine fragrance in foodservice improve in Q3 relative to Q2 sales on a currency neutral basis, yet remain cautious about trends given the increase in cost 19 infections more recently.

Excluding fine fragrance and has achieved strong crowd senior girls, great, Oh, plus 8% year to date, while taste as improved 2% on a currency neutral basis, excluding food service.

With that I would like to pass it over to us than to five more details on the third quarter.

Thank you Andrea.

Slide eight provides a high level overview of our Q3 financial performance.

On a currency neutral basis I assume that's generated 1.3 billion in sales a 1% increase from 29 teams the quarter cent was up 4% and taste down 1% and I'll provide additional divisional color in a few minutes.

As unrest noted Q3 sales recovered from Q2's loop line.

And over three fourths of our 69 million sequential improvement came from said.

Total assets sales improved in all four regions.

In the third quarter adjusted operating profit, excluding amortization increased 1% to do want it in 41 million on a currency neutral basis from 29 teams Q3, our gross profit and gross margin were both higher than the third quarter of 2019, despite higher coli 19 relates.

Manufacturing expenses and logistics costs continued opex controls and let's see any essentially offset additional personnel related go with 19 cost and other inflationary increases.

On a currency neutral basis interest other income and expenses taxes and non controlling interests together amounted to an additional 1 million dollar headwind versus last Q3, and adjusted EPS. Excluding amortization was one dollar in 40 cents up 1%.

[noise] note that FX movements adversely impacted our reported numbers on a reported basis Q3 sales were flat and adjusted operating profit excluding amortization was down 4% balance sheet revaluation FX losses had a large negative impact in other income and expenses as a result, both of the weaker emerging market currencies.

As against the dollar and a stronger euro.

Currency volatility has impacted the way all year with Q1, and Q3 negative and Q2 positive.

We believe our reporting standard provides investors with a true assessment of underlying currency neutral group.

Especially when there are large emerging market currency devaluations relative to the U.S. dollar or euro.

However, it's important to all of you understand the performance relative to competition.

So on slide nine I want to take a moment to show what our currency neutral growth in the third quarter would be using the same calculation methodology off up years.

For a variety of reasons many of us sales transactions in the emerging markets occur either in U.S. dollars or other hard currencies, all REIT index to hard currencies, when we have to invoicing local time in local currencies.

So when reporting our currency neutral does currency neutral sales growth, we still those foreign exchange related price changes in emerging markets, but this is different from our peers.

During the third quarter of Twentytwenty continued currency devaluations year over year in several key emerging markets would have added approximately two percentage points to group.

If we include those foreign exchange related price changes in the emerging market pricing.

Factoring in this compatibility adjustment, we estimate that that third quarter currency neutral sales growth would have been 3% versus the 1% we have shed and.

Using this methodology send with its strong lifetime businesses would have eight 8% last Q3 growth while taste would have been flat.

Moving onto slide 10.

It is worth taking a closer look at the underlying business and market dynamics influencing our overall profitability in the quarter.

In the third quarter of Twentytwenty, a sequential improvement in sales was accompanied by a strong rebound in profitability relative to our Q2 performance.

Our currency neutral adjusted operating profit, excluding amortization grew 1% in Q3, clearly not what we want but substantially better than the year on year decrease of 19% who reported in the second quarter.

As expected price to raw material costs with a gross margin headwind as was unfavorable mix due to our fine fragrance business.

Also affecting profitability for the third quarter, well incremental coal with 19 cost with which essentially doubled from Q2.

The incremental manufacturing and logistics expenses related to call. It 19 that we had incurred in Q2 flowed into the PNM in Q3 as inventories we used and we also paid a bonus to essential workers around the world as they continue their exceptional service to our customers. During this unprecedented time.

And then we were able to offset these negative through a combination of productivity initiatives and said and foods around the cost synergies and taste and tight cost management throughout life.

We have been very careful with hiring with head count down over the course of the year have been tightly in general within expenses and of course that had lower t. any cost like most businesses overall adjusted operating expenses were up less than 1%. Despite absorbing the usual inflationary increases and cool with 19 related costs.

As we forge ahead, especially in this uncertain environment, we will continue to drive growth, but also review our cost structure to find additional opportunities to support overall profitability levels.

Now turning to slide 11.

We take a closer look at the performance of the center division in the quarter.

Since sales totaling 503 million were up 4% overall as consumer fragrance continues to outperform specifically fabric whole hair care and personal wash product categories. All experienced robust growth and are also benefiting from the pandemic related increase in global consumer sales.

Impulse purchases.

As address noted earlier, it's not all cool with 19 related.

We are seeing strong growth from our new core list customers that we recently gained access to.

Well fine fragrance sales remain challenged Q threes like 14% decrease is a significant improvement from last quarter, where sales are down 40%.

Importantly, our fragrance ingredients business, which was impacted by cool with 19 related you know some of the supply constraints in Q2 returned to growth led by double digit gains in cosmetic actives.

These metrics are encouraging and reflects the recovery this summer in global retail markets and consumers the ability to reach them.

In addition, the sense division saw meaningful profit improvement this quarter.

Segment profit grew 20% to 101 million. This was driven by higher sales volumes strong benefits from management and productivity initiatives and cost discipline and tight opex controls.

Moving on to slide 12, where the focus on the performance of our taste Division.

Why we saw sequential improvements in foodservice compared with 36% decline in the second quarter of Twentytwenty. This remained under pressure in the third quarter declining 13% on a currency neutral basis versus the prior year as the pandemic limited food consumption away from home.

To put this in context foodservice to taste overall sales growth down by roughly two percentage points.

That said the rest of the taste portfolio, excluding food service delivered positive currency neutral growth across all those markets.

One particular bright spot with North America, where is it realized double digit growth in taste across nearly all categories.

We continue to see weaker growth in the other regions due to coal with 19 and related regulatory restrictions such as.

As such as Eva Latin America, and Greater Asia natural products solutions, our food ingredients business and our North American flavors businesses were the strongest performing in the quarter.

Savory and inclusion book more impacted by foodservice when they go live in the quarter.

Who's the ROM declined 2% compared to the prior year as their strong presence in foodservice and customer base of mostly smaller local and regional customers continued to be more adversely impacted like what was 19.

The taste overall.

The segment achieved a 13.3% profit margin with 102 million in segment profit on 765 million in sales.

Benefits from acquisition related synergies and tight opex controls were more than enough offset by lower sales volume and favorable price raw materials costs and higher coal with 19 related costs.

Turning to slide 13.

I'd like to provide an overview of life at strong and growing cash flow position.

The chart on the left illustrates the reconciliation from reported net income to free cash flow and includes all key drivers.

Operating cash flow and free cash flow were up 8% and 30% this quarter respectively.

Led by core working capital improvements and stepped up reviews of capital expenditure.

Thoughtful and disciplined approach to investments amid the pandemic has resulted in capex of approximately 3.3% of sales versus 4.2% in the prior year.

While continuing to support our customers and suppliers. Our teams have also been very focused on optimizing working capital and our cash conversion cycle has improved eight days year over year.

We clearly need to generate cash given our leverage and the impending merger within Andy. So it's good to see the improvements in days payables outstanding and days sales outstanding.

Our inventories concern we did see a small improvement in inventory days with more originally projected for Q4, but now with coal with 19 picking up again, we will increase our safety so.

Note that we are not really expecting to repeat last skew for strong cash flow performance. This year, primarily because of the benefit last year from extra sales and collections and the 50 Threerd week.

Further despite continued stress in all industries across the globe. We believe that this quarter's strong balance sheet is a testament to our continued capital allocation focus and discipline.

Moving to slide 14.

As we look to the remainder of Twentytwenty and into Twentytwenty. One we remain laser focused on maintaining discipline across our balance sheet to ensure that I asked that is well positioned as we navigate a prolonged challenging market environment and market environment.

The situation remains highly uncertain given the steady increase in doble, coupled with 19 infections and the potential for additional regulatory restrictions in various regions.

We're incredibly fortunate that the majority roughly 85% or five assets portfolio has remained resilient and essential around the world for food beverage hygiene and disinfection products.

Unfortunately, the persistence or even worsening of the pandemic will likely translate into continued weakness for fine fragrance and food service in Q4.

I would also remind you that we face a very strong Q4 comparison to last year, which had a 50 threerd week of sales and profit contributions as we noted at the time. This represented about 400 basis points of growth in the fourth quarter last year and is a large roughly 50 million dollar headwind. This.

Water and will occur all in the last week of December Twentytwenty impacting our month to date performance competitive significantly.

This extra week last year also clearly came with a substantial operating profit contribution and while it is hard to be precise we estimate that this will represent a 15 to 20 million dollar headwind for us in Q4.

We began the fourth quarter with low single digit growth in October.

On a currency neutral basis in line with Q3's results based on this first month at given the uncertainty it's unlikely that we will see higher growth for the full fourth quarter than the 1% we achieved in Q3.

That is before taking into account the headwinds from the 50 Threerd week.

In this uncertain and difficult environment, we are more than ever controlling what we can control such as Opex and also capital expenditure.

And of course, we remain focused on driving strong cash flow and reducing leverage.

And with that I'll hand, it back to address to discuss the near term road ahead for Isis.

Thank you Rustom before providing an update on our pre integration work within and B I want to spend a moment on the progress we have made on our food room integration on slide 15, I'm pleased to share that we have made strong strides with our whom integration work.

Well the third quarter Twentytwenty. We've competed integration our business teams I believe that by the first quarter 2021, we will will substantially complete our manufacturing optimization plan essentially up 90% of the consolidated consolidation complete as a result of the outbreak of coal with Nike and the related complexity.

We are delayed about six to eight weeks was our original projection, but remain on track to be largely completes the first quarter of 2021 around the time of Heartlands actually close was going to be.

As a reminder, that as part of the fruit aroma integration should we expect to close proximity so department affecting sites. So the end of Twentytwenty. We're on track to close between 20 to 24 sites around the world and expect to be completely finished by the end of 2021.

It was integration of food. We are we have learned a lot. This experience has been important for that and we will leverage these experiences and apply lessons learned as we take next step was to point MB first with two more ability to deliver value through cost synergies, we know how to build teams to quickly and efficiently.

To find capture these opportunities in ways that create real shareholder value second revenue synergies need to align with the product development lifecycle, we need to recognize that our planning that this can mean that these synergies take more time to cheap, but the key takeaways being start early to ensure delivery as of today, we have strong pipeline, though.

Boudreau Mulatos cross selling projects over 2000 with a pipeline of potential of approximately $275 million. We believe we are on track to meet or exceed our target for 2021.

Third we need to recognize the potential for sales just synergies plan accordingly to properly mitigate anticipated, but it can't be avoided horse, we must build teams and organizational functions that protect base business gross this.

This was a major concern consideration how we designed the organization structure at our future combined company gross synergies and innovation have to be incremental to core business gross and says we need to move with speed and be decisive there's always an urge to be cautious so integration as two clubs just learn to work together, we have to break down there.

Barriers with focused accountable leadership towards clear shared goals part driving profitable growth I would also add that moving towards a transformational merger and working through the challenges of the goal and then make has forced all of us at I've. After work in new ways, we've learned quite a bit in these last several months.

And in many ways. It has forced us to take a fresh look at our business in a way that I think will prove beneficial as we continue in our transformation journey.

Turning to slide 16, I'm pleased to share an update on our integration planning process for previously announced merger was two point MB as you can see were reached all the targets for the second half of 2020 and on track with our targeted close date of February 1st 2021.

The three notable milestones we achieved in the third quarter trends, you're tracking towards a successful shareholder vote. The completion of the permanent financing and the announcement of the executive team minus one leadership teams I'm.

I'm pleased to have received strong support of our shareholders, but recognize this unique opportunity to create significant long term value.

With more than 99% of the votes cast in favor I've shareholders overwhelmingly approved the issuance of shares pursuant to the merger agreement, So which I have happened and then B will combine to create a global leader in high value ingredients and solutions for global food beverage home and personal care and health.

Wellness markets.

We also completed a successful pricing of the 6.25 billion bond offering in September that's.

This financing together with the previously procured term loan facility will provide and then b with the funding needed to make the special cash payments of 7.3 billion euros dollars to do Paul in connection with the completion of our merger merger was and then B I'm happy to report that there was tremendous interest in the bond offering.

Interest rates were favorable at the offering was significantly oversubscribed.

I'm also happy to announce that at the end of last week, we received anti trust approval in Mexico, which was one of the two remaining jurisdictions, where we need it for pool.

As we move towards close we have only a few integration milestones left to reach.

Consolidated all our abilities to execute in all post closing timeline, we anticipate receiving antitrust approval for Europe in December and we'll be filing our amended S. Four was updated pro forma in the coming months.

I continue to be very excited about the combination between FX and then B I believe we have a significant amount of opportunities to create strong shareholder value in the future.

Actively review our portfolio is on a constant basis, especially in light of the future combination was an empty to look to maximize our returns why a driving force an accretive categories and deep fried rising or low value businesses by reducing the locations of expense and capital fix or exit completely with that.

Mr Trust.

Moving on to slide 17 in summary, I continue to value. The continued resilience of our portfolio during an exceptionally challenging time all industries in communities across the globe.

Despite this unpredictable environment, we have delivered sustained growth across some of our largest segments and return to growth in others in this third quarter.

Our 1% currency neutral goes for the quarter marks an important sequential improvement from Q2, and excluding fine fragrance in food service. We are pleased to have delivered 4% year to year currency neutral growth was a proven across nearly all categories.

Also made great progress in our and then be pre integration planning and remain on track to close the transaction in the first quarter of 2021.

As global conditions remain volatile and unpredictable we will continue to focus on controlling the controllable to drive strong cash flow maintained strong operational capital discipline and leverage the strengths of our portfolio to adapt and succeed.

I'm proud and grateful to all of our employees across the globe, who have gone above and beyond to ensure the continued tea and resiliency of our business all while delivering for our 30000 customers across the globe and executing on the integration process for full room and then b.

While we recognize we always have opportunities to improve and particular on within our taste Division.

I'm confident that as we move ahead, we will improve our performance as we did in our sand division over the past few years, both in terms of sales through new customer Corliss and margins through operational performance programs I believe that we have the strategy and the team in place to position the organization for long term success.

Or snow and appalling uniting was and then B was that I would now like to open the call for questions.

And at this time you see it Itasca question. Please press star and one on your Touchtone phone me, which I guess, how some of the question queue I press the pound key.

My goal is to get to everyone's questions. We request you ask one question okay.

Well go next to Mark Astrachan with Stifel.

Thanks, and good morning, everybody.

Wanted to ask about adjusted EBITDA and EBITDA performance versus your peers. So European peers at least by my math obscene profit growth in the first half of the anticipated for the whole year based on what you just walk through some I I get down mid single digits or or.

So for your business on an EPS in 2020, So I guess the question is why.

As I underperformed and perhaps could you walk through the specifics of pressures on gross margin and that's DNA and when do you anticipate those trends to normalize versus peers.

And just related to that a quick one for you and roosting probably could you just provide the suit around synergies in the third quarter is that was no longer providing gil. Thanks.

Bill do a high end good body mass and he has a long question. So let me let me make sure I I cover all of it.

Look first of all on the competitor's performance I mean, I can't really comment on our competitors performance, but let me take you through hours and and give you. Some context. So our year to date was in our Q3, yeah yesterday's adjusted operating profit excluding amortization is down 4% and that's on currency neutral sales growth.

One thing.

That's that's clearly not good.

But here the drivers so we had a negative the negative drivers we had a negative sales mix I mean fine fragrance and you've seen the impact in the in bound to in particular, and then minus 40% and then Q3 as well a much lesser that you've seen it in there there's unfavorable price to raw material costs now that mainly.

Reagan's ingredients.

And that's mainly price reductions in advance of raw material declines, there's COVID-19 related incremental costs I mean, we put the we've shown you the the bridge and on the slides in the quarter, but if you look at the year I mean, we're talking about you know almost just a little under 20 million in cost that we've actually incurred.

On coated and incentive comp I mean incentive comp as well year on year. If you remember we expected the year on year headwind very finished because of everything that happened.

Last year and that has played through into little extent in the quarter and certainly in the in the full year as well.

And of course, you've got basically ER and then on the other side some of the positives the in in the a year to date, it's been it's been a negative on volume and that's because of Q2, but in Q3 volume was actually a positive and synergies I mean synergies have been a positive all year long and what what we've seen and a and then of course, there's part.

Activity and cost discipline right. So.

So how comfortable from in a second earlier in the year, we were unsure as to the severity and the duration of course with 19. So you know we took back up we took back hiring and a and b and reacted to controlling expenses, but we decided against taking cost out of it.

And and now within Texans, rising and no line of sight as the countermeasures I mean, a vaccine comments notwithstanding a year, we're planning on acting to reduce costs over the coming months.

And then foods, Rob you asked about Frutarom and ER and look up despite call. It 19, where were still on track to deliver on the procurement and manufacturing optimization and cost synergy of 50 million that we outlined earlier. This year. We didn't modify the 10-Q is not required to disclose the exact amounts every quarter, but I can tell you we had 10.

Plus million of synergies in Q3, so when you combine that with the first half savings of 32 million that puts us at 42, 43, something like that and I clearly on track to achieve our full year 50 million goal and not just to remind you. Our target was 100 million by year, two and 145 million by by year three.

Did I cover everything in there that you asked.

His line, maybe muted risk Im sorry, so maybe we'll go to next question market, even other questions feel free to jump back in queue. So.

So.

Yeah, Hi, do you for scarce.

Exane BNP.

Good morning, So a question on taste I understand that pandemic related times and I looked at her long, but it does appear that you've had additional challenges. This year, you have negative organic and marching to buying because your peers are not talking about it.

Last year I think it was de stocking by multinational customer at your peers. We're not seeing that can you talk about what explains this underperform and Easter presentation talking about there being a strategy in place to change taste. So could you maybe tell us about your absolutely. Thank you.

Sure I I can I can take it I I think first please remember that we need to adjust the reporting differences, specifically FX related pricing, but I think with some talked and talked about that.

Certainly all we have an impact on the on the foodservice, which is happening in the whole market for the competition as well, but despite that we are not entirely happy and there's more work to be done we see a few zeroed down in particular, some weakness in Europe, where we have to take in and figure out how.

Are we all we go forward, we see a actually a very strong performance in North America, and we have to model what we have I've done over the last let's say two or three years in North America in other other regions as well. So that's a it's a program underway and I'm I might remind you of a couple of years.

Go we had a similar questions on or our sales business, we're taking it very seriously and I think we have turned around the scent business Oh quite quite significantly and I would say in that area. We're outperforming our competition now in particular on the on the consumer fragrances right. So that's that's will be sales.

And we will take take action to make sure that we fix what we have to fix it.

And I think you and just as a follow up you also talked about not having it with small and mid size customer.

He had talked about it last quarter as well they didnt show journey, II or R&D, you know business opportunity.

They disappear like a customer and you're exiting the market or what is happening there.

Yes, sure absolutely and that's a quite important Oh, a question because it's strategic in a sense a we still believe that you need a good exposure to the small and midsize customers over the long term to grow to grow your business certainly are the small customers had.

The impact of the crisis and then some of the of the of the Big ones. We believe that most of them will come back to growth and let me give you. Two examples we see right now are still quite a bit of an impact on the small customers in India. For example, where we are market leader with a lower or taste business saw that as an as an impact.

On on our business on the contrary, we see achieve very good results of our taste point business here in the U.S. and we are starting to accelerate again with small a small customers.

And I.

I think what we're seeing is no since the let's say supply line. So again very robust and delivering I think it gets better he has as well. So you see it depends on the region. It depends on the country, but we believe in the in the long term, but this is a customer a base, we would like to keep it could be.

Yes, we believe we will get some good growth out of it I hope that helps I'd.

Well go next to the line Nathan please.

Great. Thanks.

I wanted to just dependent on two things one was just thinking about some of the puts and takes to fourth quarter. I know that's anywhere specific you know on the 50 Threerd week dynamic, but just.

How we should be thinking about Adam.

Yeah increased calls it cost if there's any other one off swaps that we should be aware of for for Q.

And then the second thing was just looking back at that July EPS for the management projections that are shared there for it that the MMP transaction [noise]. It just struck US is interesting that you're pegging and growth for IR fats at 5% and for anybody at 4% and and for sure I sat for delivering at that level.

Before further on that not not since then N.B. I don't think it hit that number I'm not sure ever.

So I just wanted to hear a little bit about the build up of that that projection on how much of that already assumes what you think you can do in terms of integrated solutions, but I'm curious if there's kind of baseline projection for the businesses. Thanks.

Sure.

I I take the first piece of it on the sales for the for the fourth quarter than what you can Oh I'll comment on the on the cost and then I come back on the on the EPS for Lauren [laughter] in all honesty. It it's tough on the fourth quarter EPS as Wilson said, we had a good start into the.

Into the fourth quarter basically on on on on on.

On all measures or in particular also on the on the sand business very very strong start into it but we are cautious fall for couple of reasons first of all we see no in Europe again, though many of these are lets say lockdowns, even if they call. It soft locked down so we will see what that brings a a force.

In terms of foodservice, but fine fragrance business as well, but started well in October, but but we will see what what what's happening here, but what we know is that we are running against a very strong fourth quarter last year first of all good cause but then also driven by the by the 40 or 50 search third week.

So still a good start in the quarter also a good order book, but we remain cautious because of the 50 Threerd week and also about the the new locked down we have seen seen in Europe. That's the reason why we are taking a bit more of a conservative stance, but go someplace. So our comment on the on the cost and.

Then the operating profit side, yes.

Yes, absolutely and rather than hiring yeah look I mean, the situations pretty uncertain I mean, the unrest made that point on the cost end of things right and you know we are fortunate the majority of our portfolio is the resilience and essentially into food beverage I'd hygiene disinfection all the rest of that but we are looking right now as far as we can.

So that the worsening of the pandemic and that will likely translate into a into continued weakness in Q4 and I'll go with 19 impacted areas fine fragrance and food service right.

Right. So we are kind of the 100% sure how that plays out but food service already as we as we as we think about it we will and we think that it's going to be a.

You know probably slightly worse than the Q3 was uncoated cost by the way Lauren I mean, we had Q3 was big I mean had you know close to around 13 million of corporate costs and Thats, because we had about a.

Several million for the a one off costs for the for the special payments that were made in Q4, you know based on the run rate and how things flow through from our inventories and all the rest of it we'll expect a oh lead costs, but much smaller number probably closer to around the 5 million type range.

So yeah. You you you you are right and you do remember that last year as well he talks about the 50, Threerd week and it being 400 basis points in revenue and all the rest of that that's a roughly $50 million sales headwind when you come around to this Q4.

And the extra week also comes with that came with the substantial operating profit contribution and a light it's hard to be precise. Okay. We estimate that this represents a roughly 15 to 20 million dollar headwind in Q4.

So if you think about that I mean, that's a big one and then ER and then Ah.

And then and then the.

And then if you look at the other the other numbers in there and what a and what we may have we also have in <unk> in Q4 in Q4 last year, we had a a Brazilian.

A resilient and ER.

Yes.

Indirect and indirect taxes last year that we got and that was a and that had been subject to litigation, we disclosed that in our 10-K that was roughly about a about a.

$8 million. So if you look at that I mean, those those items between them and finally was the IP. Okay. We mentioned that the idea was nothing for the whole year, we talked about the IP being EUR 40 million dollar headwind last year for the whole year projections in 20 and about half of that amount will come in the fourth quarter. The delta year on year, there wasn't too much.

In Q3, but also going in the other direction. So you don't think it's all simply a simply negative.

I have some positives in last year in Q4.

You may remember that we had inventory impacted much lower gross profit margins and so this year, we fully expect to be at least 10 million better on that account and then we have the synergies as a you know mark asked about the synergies to start with and so we'll have a similar positive amount compared to last years before and the synergy and productivity benefits.

So oh.

I think that okay awesome.

Thank you. Thank you for that so in summary, a.

I would say good start, but we are very cautious about the situation. We are having and I think the put and takes on the cost side with some extent a quite well are coming back to the EPS for question and I think what what plays an important role here is all first of all the area, where we want to focus on.

We have done is quite extensive let's say, we view our hall, our new portfolio and there's certainly a couple of areas, which have really a good gross or gross perspective, and I'm I'm not giving you a our our guidance all budget for next year, but I would like to.

Give you some background how do we think about next year in terms of the different categories. So look the or the consumer fragrance business has performed very well in the last couple of a couple of quarters and we don't see any change in the fourth quarter and we don't see too much change there for the for the next year, that's a quite significant business could be month.

On one to 1.22 billion because we believe that the demand for hygiene products will stay a stay high next next next year, all and personal wash as well and EPS was some commented in his comments on the on the on the earnings or the three new Colas are really producing now.

Really nice growth and have enough critical mass to give us some additional color. So that will be a good focus area fine fragrance or will come back eventually as soon as as corporate is is normalizing over the course of next year and that gives us just technically already a nice nice growth go.

And going forward into into the into the Twentys 21, and then we see a clear a good performance on the on the active cosmetic business and the ingredients business as well since we have so for the let's say raw material issues or out of India, I think thats working working well so that should give.

It was good growth going going forward on the taste side as I as I said, we have to to focus on the most important oh categories, where we can you can get a good growth one of the fastest growing areas was a the beverage area for US a particular heart sales in the U.S., we believe that as a good growth driver.

Costs going forward, we see some of the natural product solutions are driving forward, which is good for the internet business. The the food protection business and that helps us to grow nicely at foodservice over the course of next year. The quick service restaurants should normalize as soon as.

As as we see some some more regular business often in the post school vertical that period. So we believe that could give us good growth drivers going forward on the NMG side, even it's not our business business no, but what I see from from the outside and the pre integration or you have a couple of business like that.

Yeah, our refinery business, our microbial control business, which has its challenges which should normalize after after the covert crisis as well and then you see certainly businesses like the probiotics a business or the coaches are and then business, which are going going quite nicely. So we believe that could drive all grow.

Always going forward in Twentytwenty, one you mentioned integrated solutions, that's certainly a growth driver as well, but I would expect this more in year two after the after the integration.

Regression, because it needs a bit of time or that our customers not just let's say buying that concept, but launching these products in the marketplace as well and then it will drive a quite nice or revenue synergies and certainly pockets synergies as well going forward I hope that helps to unpack, how we see the debt.

When portfolio pieces, maybe just a a remark on the regions.

As I said before.

Well, we have nice schools in North America, and the great momentum on both sides of our business, which is which is fantastic I think Latin America is better than than you might might think and hopefully it will go better next year as well, we have a bit of a topic on on on Europe.

Which is certainly driven by by covert because fine fragrance has to pick a a footprint and in Europe. As you well know lots comes out it comes out of funds and the the foodservice business as well. So we will focus here to fix as much as we can and then hopefully we'll see a let's say introduction of the of the vaccine.

Sales and the post covert period that can give us a more girls going forward. So I I talked a lot, but I hope that gives you a bit of a perspective, how we see the world's Cornell.

Next to cease our way with Deutsche Bank.

Yeah, Hi, good morning.

Yes, I have a I.

I guess two questions for you related to it some comments you made regarding allenby here since I am saying is you mentioned that you learned from you know there were some lessons that you learned from the food around integration and I would love for you to take a little bit more into that and how you see.

And that's one might go differently is or what are what are those lessons and how you intend to apply those to Andy and then secondly, you made some comments around the portfolio.

Sounds to me like you're suggesting that there might be some divestitures. So just wanted to see if there's anything more if I'm reading that right and if there's anything more you can say regarding that.

The timing of those sites that that thing.

Thanks, Yeah. Good thing. Thank you probably before the questions. Let me start with your with your last part as as I said, we have rigorously looked at our portfolio and their pieces, where we really want to accelerate our growth going going forward. Because we believe it's the right thing seem to do in their pieces, which might.

Not a a fit too much any longer or into our our portfolio on the on the EPS side and it's probably too early to talk about concrete pieces, a buck, but we are looking actively into it and we can make a decision on and then b. What we are we are looking into the fourth quarter here yes.

Oh I see your.

Yeah. We just this is quite a quite spot on.

On the on the lessons learned I would say that couple of lessons I'm. The first one is that you need some time if you bring these organizations together you have to start with an aligned team and do as much work before day one issue.

And let me give you and give you. An example look we have no mean announced basically up to the top hundred 5000, seven key leaders in the new organizations already and we are still two two and a half months ahead of closure and hopefully will go down one one.

Further we didnt.

Do it because it was a shorter timeframe with with through to them I think that's an incredible important step because we can hit the rubber.

Although we could hit the road much much faster than than the sort of on the second thing is we have done an extensive work on the.

Integrated solutions, and the cross selling opportunities and one of the learnings for US we were even in foods never short of ideas, but it took longer to realize this I realize that and I said that we will achieve our our topline synergies with was food, but it took longer than than we were sales.

Looking at net was mainly driven not just selling these ideas to our customers, but until the customer was launching the our actual products and that just takes takes a bit more time and here. We were lets say we started earlier, we tested more robustly our ideas and we have plans for more time to.

To to realize it I think that's that's an important one as well and then I think we have learned a lot in terms of let's say optimizing our footprint and that was going okay and well on the on the food side I think we are even better prepared now for for the.

ER for the merged with Swiss NMD on the side as well so tunnel of learnings I could talk.

Talk even further but this might be the most most important ones and it was very helpful. I think for us to take on something like that and then be without having had the tutor on before some integration exercise what has been a very very tough one but I think the key learnings have have helped.

Quite quite a bit to be very very well prepared and I would say right. Now we are light years ahead of what we had was all lost last integration. That's what I always hear when I talk to my my head of integration.

I hope that helps.

You can interact with Bernstein.

Hi, Andrea Hairston, Hi, Mike Thanks for taking my question can.

Can I ask two please firstly on the inter quarter trends in Q3, thanks for providing that slide with the monthly sales growth.

When I think back what you said with Q2 earnings call I think I remember you said that.

July order book was up in the mid to high single digits. So can you just talk about the difference between what you saw them in the order book and what actually came through certainly to the lower growth. That's the first question and the second one on the raw material side.

Revenue did I understand you correctly that raw material prices from Antero was still a headwind, but you included the cobi costs into or some of it at least in the raw material cost if you could clarify that and how much that would be if that's right how much that would be if you strip that out thank.

Thank you Karen good I I think I take the first one what we've seen in the covert a a crisis is that that that many customers have changed a bit there the behavior in terms of orders, we see it at the beginning of the quarter, probably more orders than than usual because everybody tries to get that stuff. Okay.

They need and that's true by the way for the fourth quarter as well, which is very high but we are cautious because we don't know how that will let's say good bye.

Good on over the over the over the quarter that that's the reason so we've seen let's say a a deterioration also in the in the third quarter over the course of the quarter. The daughter Order book went went down and you see sales went up a bit in a in a in October again, but who knows.

What will happen in September so I in in December so sorry for for that and also the comparison is certainly a tough one so as I said.

Sales of a different order of behavior off of all our our customers also depending on on that.

On the region, all we see no some movements in Europe, which is probably because of the of the lockdown situation, then and you use it in London and we see some movements are now for the for the Brexit, which would not have been probably finally and you see some some movements back.

Back and forth as well so that's the reason for that but on the raw materials. Please with some new comment.

Thanks, Andrea I go to the yeah.

In Q3, it was a negative right I mean, and then benefit was fragrance ingredients that I talked about really continue to use high cost inventory right and and core with the cobot part of or within our raw materials usage coming through was a few million dollars as well, which will be much less going into Q4 simply the lag of when we ordered in the inventory and when it gets.

Right in Q4, I mean are those that we expected to be still you know the net of pricing and raw material costs to be a negative, but a very slight negative because we actually expect and in general some positive input costs and the and the rest in there.

So hopefully that gives you the answer that.

Ill touch on Punjabi with Baird.

Good morning, this is not something that I forgot some how are you today.

Very well thank you good morning.

Hi, So I started with taste could you provide some additional details on margins in the quarter and why they were down more on a year over year basis versus Twoq, you, particularly in context to the sequential improvement and foodservice and what appeared to be solid results otherwise.

Let me take that Youre here.

So you go over some of you there. Thanks, let me take that quickly. It's a it's the it could impact right. If you think about the coal with costs coming through we are we saw that the you know the roughly $5 million of extra cost that we incurred in the quarter flow through and it was much more in a in taste than it was in the incident.

When we had done it there was also a incentive benefits that you are comparing sent and taste and disciplined sales benefited from a fine fragrance coming.

Coming back I mean like minus 17%.

At the at the end and ER and the minus 14% in the quarter those numbers considerably better than a than the minus 40 that we had in Q2. So you saw the benefit plus a lot of productivity and cost discipline coming through the numbers taste was good in terms of the it's a cost control up its a upper opex cost control as well, but just the.

Combination of of the food service or the different businesses I mean on the on gross margin, we we had a tough quarter.

Thanks, That's really helpful. And then just as a quick follow up you called out a positive trends in October you provide some more granularity on this from an end market and geographic perspective, and whether there's anything that's changed in November as a lock downs have been gradually reinstated.

Oh October I mean, unless you want me to take that.

Yes sure you take it you saw I mean are there I mean, the sales I mean, it's it's basically I mean basically the low single digits. I mean, it was it was pretty much in line with Q3, we're not really seeing anything or anything bigger from that perspective, the a as the drop downs coming to Europe, which which have been coming basically at the end of October into November right, We do expect thats going.

To.

I have a bit of an impact on a on a food service in particular unrest.

No I I think that's exactly right, but we have seen actually a stronger sales on fine fragrances, which was positive in October which is actually it's great. We will see our pencils over over the rest or less of the quarter. You know, it's an important season for us because it's it's ahead of the holiday season. So that's that.

That's important that's what we've seen and we've seen still a double digit goes on consumer fragrances, which is which is great as well, but not too much of a change as were some set of the of the previous previous quarter and as I said, we are we're really lucky you from from week to week, how we Oh, we are moving forward.

Good just a question was was the same as always the order book. The order book is strong, but we will see whether deteriorates over over the over the course of the of the quarter and that's a that's the reason why we are cautious in terms of regions.

Regions I think a rooster Miss his wife utilizes our focal area right now I think it's good for North America, most Americas, good Latin Americas is probably better than than you would expect Asia is okay. Our because now we see that the India is coming back which is which is great but to your question.

It's still a focus area and that's certainly driven by the but the new Lockdowns, we see all over all over Europe.

Well go next to John Roberts for Tvs.

Thank you I just have one question one of the NB revenue synergies. Examples cited earlier was plant based meat could we get an update on what's going on in that marketplace. Since it seems like there's been a lot of developments recently.

Yes. Thank.

Thank you John Porter for the question. It certainly one of our focus areas because I believe we are exceptionally strong position in that area going forward because we have all the ingredients.

To to satisfy the market here, what we see is that the right basically many companies are now moving into that area.

On the the category was was suffering at the beginning a bit from a quick service restaurants being down Oh that is coming coming back now and some of the geographies, which is good but you see more and more that this a these products are going into supermarkets, Michael foods and and others.

Others are like so what.

What I want to say, here's or they had a bit of a hard time at the beginning of the pandemic. So the quick service restaurants. They are coming back we see more companies moving into that area and we see that the whole category is growing and that's our expectation is for the for the years to come as well I hope that helps John.

Well go next to not to deal with Bank of America.

Hi, Yes, just a question on the way you report in walk through all the slapstick why not use the same currency neutral sales result is all your peers. It just seems like we're wasting time walking through all these quarter to quarter and candidly. It's odd that you plan to flag on kind of fundamentals, which is with us.

I couldn't agree more I give it to the roasted.

Look it's something we're looking at honestly I mean, we do believe that a that our way of looking at it is is more right as as I said earlier.

And but at the end of the day I mean, it is frustrating that.

You know when you compare it to our peers. It makes the report the numbers that we put out a you know we're doing ourselves at this service in an environment, where the emerging currencies, but emerging currencies are weakening.

As I as I said in then I have to say one quick thing in place like you just look at our sales performance and if you look at US and performance reported on an apples to apples basis right. I mean, we're talking about 8% type growth. So.

So.

Anyway, I'll leave it at that.

Yeah, It's it's a discussion with our audit committee, but we're working on it lets put it that way.

Adam Samuelson with Goldman Sachs.

Hi, guys good morning.

Hey, Adam.

Hi, So I want to come back to something you guys. You said in the prepared remarks around lessons from TRID Rahm address you made the point on sales the synergies.

And I was hoping if you could kind of maybe why there wasn't more tangible examples of where within the first round experience that has that has been a headwind today, just talking like Sars or other businesses. There that we should be we should be mindful of that but a.

A little more pressure.

Yeah sure absolutely look a there there were some some dis synergies we have seen maybe where it talks about the sucrose business, we had out out of Florida, where we have supplied one of our competitors.

They lost their big customers, but they also have built their own let's say capabilities here and we lost a quite significant part of the citrus business, that's actually probably be one of the premier examples for sales dis synergy we don't expect too many just a sales dis synergies from MB, but we have to.

To build we have build it in and we said that if you look at the sales synergies. It always has to be in that number as it does on the cost side the cost side as well. So we are very aware of that and we make sure that the that we really captured and the right in the right way I hope that.

For example, EPS.

Yeah, we're out of time for acuity I'll turn it back to Andrew asked for any closing remarks.

Yeah. Thank you for all of your questions. Thank you for that or was it was a good discussion and we're looking forward for the one on one thank you and stay healthy please I buy.

Hi, everyone.

And this does conclude today's program. We appreciate your participation and you may now disconnect.

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