Q2 2019 Earnings Call
Appreciate your patience and continued just standby.
Time, I would like to welcome everyone to the <unk> second quarter 2019 earnings Conference call.
All participants will be in a listen only mode until the formal question and answer portion of the call. If you would like to ask a question at that time. Please press star and one on your Touchtone phone, if you want to remove yourself from the queue 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. Thank you.
I would now like to introduce Michael Deveau head of Investor Relations you may begin.
Thank you good morning, good afternoon, and good evening, everyone. Welcome type that's second quarter 2019 conference call yesterday evening, we distributed a press release announcing our financial results.
A copy of the release can be found on our IR website at IR Dot ISS 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 we will be making forward looking statements about the company's performance, particularly with regard to the outlook for our third quarter second half and full year 2019.
These statements are based on how we see things today and contain elements of uncertainty.
For additional information concerning the factors that can cause actual results to differ materially from forward looking statements. Please refer to our cautionary statement and risk factors contained in our 10-K filed on February 26, 2019, and in our press release, all of which are available on our website.
Today's presentation will include non-GAAP financial measures, which excludes 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 to be issued yesterday and is on our website.
With me on the call today is our chairman and CEO , Andreas Fibig, and our executive Vice President and CFO Rich O'leary.
We will start the prepared remarks, and then take any questions that you may have with that I would now like to introduce Andreas.
Thank you Mike on the call today, I would like to provide a recap of our vision 2021.
Which we shared at our Investor day, the past June .
After that I will provide comments on our second quarter financial results and give an update on our integration progress.
Once finished I will ask rich to give a more that financial review of our business performance and provide an update on our outlook for the balance of the year and we will take any questions that you may have.
We are very confident in the long term outlook fall business.
Thanks in large part to our industry leading innovation.
Both in diverse customer base and superior product portfolio.
I bet has a history of strong sales growth improving profitability.
We are excited about the future as we believe the combination of life at Pudong will create significant value for customers employees and shareholders.
I'd only investor day in June we outlined our new vision 2021 strategy.
The vision 2021 strategy has been designed to leverage our newly combined organization all enhanced product portfolio increased natural position expanded market access broader customer base and greater innovation pipeline always our customer at the center of everything we do.
Our four strategic pillars include unlocking growth opportunities, while we will capitalize on a like spend that product portfolio broader customer base. An extensive geographic presence. We also expect that cross selling and integrated solutions, a relatively new capabilities that will lead to a 100 million says over the two at the 19 to 21 period.
Driving any <unk> innovation, while we will invest in high growth and high return platforms to continue to drive our industry, leading R&D pipeline.
I'm pleased to say it was a combination of Ifetroban Frutarom R&D is the strongest it has been in the company's history.
We have expanded R&D capabilities was cutting edge research.
All kept pretty pricewise platforms based on future return potential.
[noise] managing the portfolio.
Well, we will focus on optimizing our portfolio to maximize value equation.
Our business portfolio is much more broad and diverse with a range of growth potentials and margin profiles.
To maximize value creation, we are focusing on disciplined resource allocation, while we establish clear guidelines to prioritize our investment decisions as we move forward.
Accelerating business transformation, we will successfully integrated patrol delivering $145 million of synergies, but also continuing our strong productivity agenda in our legacy business, what it grew into a 100 million in savings.
And of course culture technology sustainability M&A talent, all remain critical enabled us to our strategy.
From a long term perspective, we're excited about where we compete all market potential is now approximately 50 billion with an estimated 4% total market growth rate.
This is a significant increase from just one year ago, well estimated market was approximately 36.5 billion was an average growth rate of 2% to 3%.
So if were to home we have gained broad exposure to many attractive adjacent adjacent fees where growth is approximately 6% in the next five years.
This additional excess not only provides us with incremental market potential, but we believe gross over the mid and long term should accelerate as nearly all of these adjacent markets have higher intrinsic growth rates.
To ensure we capture the opportunities ahead.
We are realigning our business to take effect in 2020 .
Photos taste of Sabre solutions will transition on our legacy taste business unit. We are also adding food items inclusion business, which comprises Torah inventus and the Joe Oh ice cream ingredients business into legacy taste.
The remaining parts off total libbey group into a new nutrition ingredients Division. This high growth high margin business Willi food food items natural product solutions as well as the flavor ingredients business.
At the business unit level, we have focus at par to west Alice strategy to ensure we capture a future growth potential.
Within said, we serve customers across a wide spectrum of sizes. However.
The bulk of all market is composed of multinational companies or acquire core lists.
We recently won new core list access providing us with the opportunity to compete for $450 million of market potential. We previously didn't have access to.
This was a significant opportunity for growth and as such we are focused on capitalizing on our new excess was maintaining strong improvements with regional and local customers.
I'll go forward goal incentive is to drive value equations for disciplined portfolio management investing in high margin businesses and fixing profitability in categories that have been disproportionately impacted by higher raw material cost.
In addition, we have identified and executed on opportunities to streamline our organization was innocent business unit, which already contributing approximately 4 million of savings through the first half of 2019.
In taste the focus on effectively integrating the food home businesses and our go to market approaches by expanding our pace point metal model to ensure we serve and capture opportunities with foster growing small and midsized customers in other key markets around the world.
We are also targeting higher growth geographies for example, Africa, the middle East and enhancing our portfolio back spending savory solution and inclusions globally.
And nutritional ingredients, it's all about geographic expansion.
Focusing on differentiating.
Natural and clean label technologies and targeting value enhancing acquisitions.
The majority of the categories within the Division natural health ingredients natural food protection and natural colors, all have strong future growth potential.
And we are focused on increasing our scale.
To this proportion will grow at accelerated rates.
At the core we anticipate that old based on currency neutral growth to there.
To be approximately 3% to 5%.
Then we believe that we have incremental opportunities to long term to add an additional percentage point for cross selling and integrated solutions as well as another percentage points for acquisitions.
The net result is that we expect overall currency neutral sales growth average, 5% to 7% over the next three years.
Taking a step back.
We now have the broadest deepest portfolio of businesses and our long history.
One that provides a verity of investment options.
To maximize value creation, we have established portfolio roles and clear guidelines to prioritize our investment decisions.
Yes, three approaches.
Managing our portfolio gross well, we will accelerate margin accretive categories for incremental investments such as fine fragrance cosmetic active ingredients.
Balanced we will self fund investments to maintain gross margin and cash flow and fix.
But we will have limited investments on for margin goals achieve targeted levels or we deployed to rise. An example of this is trade and marketing while we have deeper characterized our approach given the margin profile.
For the businesses, we have exited earlier this year.
As you can see we have categories in all of these three portfolios specifications.
This does indications will scream them, all category management and fine tune, our strategic efforts to ensure we grow sales and also improve.
Our margins.
Their strong programs in place to drive profitability.
I'm 2019 to 21, we expect margin improvements to be driven by our portfolio optimization strategy and the $145 million of integration savings from the food or the transaction.
As discussed portfolio optimization is expected to improve profit as margin management pricing cost leverage and selective pruning of our low margin and non strategic sales will drive overall margin expansion.
Within our planned integration synergies from the federal make acquisitions, we are rationalizing and harmonizing all procurement activities, we are levered to spend and make versus buy.
We are also optimizing the global footprint as we expect approximately 75 sites globally to be optimized.
Which will generate additional efficiencies the last piece is streamlining of overhead expense.
Which is intended to reduce non strategic cost and eliminating redundant expenses expenses.
We are highly confident in our ability to achieve 145 million cost savings target at the end of 2021.
In addition to our integration synergies, we expect approximately 100 million savings in additional productivity programs beyond margin expansion. These initiatives are key in a journey to fundamentally transform how we operate.
Focusing on process improvements simplifications and centralization. This will provide flexibility to drive bottom line results and reinvest in our growth engines.
Our long term financial objectives are clear these inclusive.
Top cert total shareholder return or drivers are 5% to 7% currency neutral gross margin expansion to be less than three times net debt to EBITDA in 18 to 2024 months, 10% plus adjusted EPS growth, excluding amortization and approximately 2% dividend yield.
Our vision 2021 strategy is focused on disciplined execution and integration we remain steadfast in our approach and belief in the long term value creation for all of our stakeholders.
Turning now to the second quarter year over year results on a consolidated basis, where strong including the contribution of food at home.
[noise] reported sales increased 40% with the largest driver being the country contribution of additional sales related to fruitful.
As communicated at our June Investor day currency neutral performance on a combined basis was soft due to a significant volume erosion was done with multinational customers within taste and a continued pressure within food on driven by decline in FNF ingredients most of lead CJR source natural colors.
Pricing parts of Savard solutions and trade and marketing.
By which we go into details at moment I feel it is important to highlight several strong performances within the quarter to ensure we do not lose sight of the progress we're making.
And send their delivered mid single digit sales growth with growth in all categories and double digit adjusted segment profit growth both on a currency neutral basis.
But then the rest of the business several of the high growth categories continue to have solid performances led by beverage and savory and taste and natural food protection.
Jim outdoor.
Scrum ingredients business and I'll gain for the home. In addition, the businesses we have acquired since the beginning of the year Mikey Viejo, and Beaver, Canada are all growing at or above our expectations.
From a profitability perspective, we are also pleased that adjusted operating profit margin, excluding amortization improved 80, bips year over year, driven by productivity initiatives and acquisitions related synergies.
The market.
Accelerations frozen.
Our first quarter performance.
I'm pleased to report that our integration efforts are well underway, we are making excellent excellent progress while those businesses, where we have aligned.
Our go to market approach with I. FF growth was strong increasing high single digits.
In terms of cross selling and integrated solutions, we have already achieved 8 million run rate sales longer term. We believe believe that we can deliver at least 100 million of topline sales by 2021.
We are leveraging the compelling combination of R&D technologies and capabilities of both organizations.
As stated many times innovation drives differentiation and is critical for long term success.
I am pleased with the progress the team is making and as they strengthen our product offering to our customers.
Turning to cost synergies, we've made strong advancements year to date as we have achieved approximately $15 million in the first half of 2019.
Based on our progress to date and our expectation that savings benefit.
To accelerate throughout the year, we are now forecasting that we will achieve approximately 40 million in cost saving and 2019 up from our previous estimate of 30 to 35 million.
In terms of debt repayment and cash flow operating cash flow was up 130 million.
First half of 2019 compared to the previous year period, and we repaid $47 million in the first half of 29 team.
With that I would like to turn the call over to rich.
Thank you Andreas in the second quarter, we delivered quarterly sales of approximately 1.3 billion.
On a combined basis currency neutral Swiss sales grew 1% driven by acquisitions and strong growth in center.
We also maintained strong profitability levels led by productivity initiatives acquisition related synergies.
And favorable price versus input costs.
This combined with the additional food room led to a very strong 29% increase over the prior year period.
And adjusted operating profit margin, excluding amortization improved 80 basis points year over year.
Our financial results were in line with my comments at our Investor Day, when I said, we would be between 1% to 3% depending upon how June progressed.
And while we did not finish as strong as we had would have liked in terms of sales. We did a good job delivering overall profitability in line with our expectations.
From a cash flow projective perspective.
We had significant year over year increases in operating cash flow and free cash flow to drive improvement perlin, primarily by higher earnings and amortization.
As we've done previously I would like to highlight the impact of emerging market pricing on our growth rates to better compare with our peers.
As a reminder for variety of reasons many of our sales transactions in the emerging markets.
Occur either in us dollars or other hard currencies for our index to hard currencies, when we have to invoice in local market currencies.
When reporting our currency neutral sales growth, we exclude foreign exchange related price changes in emerging markets.
But this is different from our peers.
We believe our reporting standard provides investors with a tour assessment of underlying currency neutral growth.
Especially when there are large emerging market devaluations relative to the us dollar or euro.
However, it's important to help all of you understand our performance relative to competition.
During the second quarter and first half of 2018, the stronger us dollar environment, plus significant emerging market devaluations year over year.
In several key markets had approximately a 2% currency impact of growth.
If we included emerging market pricing.
This is essentially driven by large devaluations in three countries.
Which represent less than 10% of our consolidated sent into sales.
Turning to business unit performance and sent.
Second quarter currency neutral sales grew 4% against a solid year ago year ago comp of 5%.
With growth in nearly all regions and categories.
Performance was strongest in fragrance ingredients and consumer fragrances.
Both increasing mid single digits.
Consumer fragrances was led by high single digit growth in homecare and fabric care.
Fine fragrance also grew low single digits following a double digit performance in Q1.
Led by strong new wins, particularly any.
It should be noted that raw material driven price increases represented approximately 4% then second quarter on a consolidated basis with the strongest increases in fragrance ingredients.
In fragrance compounds the composition of growth was balanced.
With equal contribution between volume and price.
Same currency neutral segment profit increased 19% benefiting from cost and productivity initiatives and more favorable price to input costs.
We believe that this was due to the timing raw materials between the inventory and our piano.
As we continue to see year over year increases in our purchases.
Raw material costs remain elevated significantly above historical levels, and we will continue to work with our customers.
On actions to mitigate these increases.
In terms of segment profit margin year over year performance was up approximately 200 basis points to 19.2%.
In taste second quarter currency neutral sales decreased approximately 1%.
Against a strong growth of 6% in the year ago period.
Growth was strongest in greater Asia.
With year over year improvements in China, India, and the ASEAN region.
We also posted growth in EMEA led by strong performance in Africa and Middle East.
In Latin America, and North America volume erosions with multinational customers were significant.
And intensified throughout the quarter.
When comparing to historical averages.
Our volume erosion rate in the second quarter was approximately three times.
Our historical average.
Peace currency neutral segment profit was adversely impacted by volume declines.
Unfavorable price.
Sameer to material costs and a weaker mix.
Nevertheless segment profit margins remain best in class amongst our industry peers.
For further on in the second quarter sales totaled approximately 382 million.
On a standalone basis for room sales were flat driven by the contribution of acquisitions.
Excluding the contribution of acquisitions and divested businesses.
Froome sales decline most at low single digits or 4%.
Similar to what we communicated at our Investor Day results were primarily driven by declines in FNF ingredients.
Most notably most notably Citrusource.
Well one of our competitors are no longer purchasing from us.
As well as well as raw material driven price decreases in natural colors.
And weakness in say receive solutions related to weather conditions in Europe and Canada.
And trade and marketing, where we are due from de prioritizing.
While all of these are very similar to what we have discussed previously it is worth noting the fruity food rooms piece fines.
Decelerated throughout the second quarter, driven by weakness in the UK and Ireland.
In terms of segment profit.
The full room delivered $37 million and $77 million of profit excluding amortization.
The margin profile from them in the second quarter continues to be strong at a robust 20.1% if you exclude amortization.
This has been driven by acquisition related synergies and continued cost discipline.
For the first half of 2019, we have delivered.
15 million in integration synergies.
As Andreas mentioned earlier, we're now expecting to achieve approximately 40 million in cost synergies in 2018.
Up from our previous estimate of $30 million to $35 million Turin.
Predominantly by procurement optimization.
In addition, we continue to deliver on our core productivity program.
Where we drive.
Process improvement simplification and centralization on a year to year year to date basis, we achieved approximately 25 million.
A poor productivity savings in the first half of 2019.
Together, we delivered approximately $40 million in year over year savings or about 19% expressed in terms of operating profit growth on a combined basis.
Operating cash flow in the first half of 2018 was up significantly.
From 55 million last year to $185 million this year.
Performance was driven by higher earnings and amortization.
Core working capital defined as inventories accounts receivables and accounts payable.
Improved modestly driven by receivables and payables.
Indeed inventories continue to remain at elevated levels.
Primarily due to raw material cost increases and safety stocks within the scent division.
We expect that inventories will begin to improve in the second half of the year.
In the first half Capex as a percentage of sales was approximately 4.6%.
Driven by new plant and capacity investments, mainly in greater Asia as well as creative centers any integration related investments.
For the full year, we continue to believe that Capex as a percentage of sales will be between four and a half to five per se.
Bringing all this together we had a strong $78 million increase in free cash flow.
In the first half of 2019.
A key component of our overall TSR algorithm for our shareholders is a competitive and attractive dividend yield.
We believe that the 2% threshold is an important one that broadens our potential shareholder base.
Together.
And today, we are pleased to announce we have authorized a 3% increase in our quarterly dividend expressing in their confidence to execute on our long term strategy and our strong financial position.
It should be noted that this marks the 10th consecutive year.
Of dividend increases.
Considering our year to date performance as well as our outlook for the remainder of the year. We are adjusting our full year sales and adjusted EPS, excluding amortization guidance.
For the full year, we now expect to deliver between 5.15 and $5.25 billion in sales in 2019.
At or approaching the low end of our original guidance of $5.2 billion to $5.3 billion.
On a combined basis and excluding the impact of currency growth is expected to be 3% to 5%.
The forecast now reflects low versus mid single digit growth for full room.
Driven by three areas FNF ingredients safety solutions and trade and marketing.
Within FNF ingredients Citrusource is the primary contributor of the decline as one of our large competitors a significantly reduced his purchases.
We are shifting our focus of this business to make versus buy to drive value creation.
And say, we solutions performance was impacted by first half weakness as well as a modestly revised second half outlook related to reductions in volume.
We also will de prioritized trade and marketing based upon our strategic category management approach.
From a tax perspective continued multinational volume erosion in Latin America, and North America has lowered our expectation.
It should be noted that that we do not expect significant second half growth to be stronger than the first half.
But trees performance in the third quarter will be challenged by a strong prior year comp.
We now expect adjusted EPS, excluding amortization to be 615 to 635.
And I will go through the changes in a moment.
On a combined basis and excluding the impact of currency adjusted EPS, excluding amortization is expected to be 6% to 9%.
To provide additional detail related to the adjusted EPS ex amortization change I would like to walk you through the drivers.
Our original guidance was 630 to 650.
In the second bar I highlight the 10% 10 cents impact related to the change in topline expectation.
Which is essentially $50 million in sales.
At low margins given the impacted businesses.
Like trade and marketing Citrusource and Pts.
Mediating. This is the incremental 5 million in integration savings that we announced earlier today.
Combining the two the net operational impact is a reduction of approximately five cents.
Two our adjusted EPS, excluding amortization.
The larger impact on adjusted EPS, excluding amortization is it related to a change in the average effective chat tax rate.
On the amortization of intangible assets.
As well as a small changes in redeemable non controlling interest.
The net impact of these combined is approximately 10 cents.
In the end our revised guidance for adjusted EPS, Excluding amortization is now 615 to 635.
With that I would like to turn the call back over to Andreas.
Thank you rich in summary, we believe we have the framework to achieve our long term ambitious with our vision 2021 strategy, which is focused on disciplined execution and integration.
With.
That contacts we have a long term commitment to.
12% total shareholder return, which is expected to be driven by above 10% EPS growth and a 2% dividend yield in the second quarter.
We achieved broad based improvement in sales margin and cash flow for the.
Full year, we believe we can deliver solid operational results.
We are taking action to strengthen the overall growth profile of our business as well, ensuring we capture synergies to generate strong margins and returns for our shareholders.
Expressing our confidence in our long term strategy and future growth prospects. We also raised our dividend the tens yearly consecutive increase with that operator, we are now happy to take questions.
If you would like to ask a question today. Please press star and one on your Touchtone phone you may remove yourself from the queue by pressing the pound key.
As a reminder, in order to give all participants an opportunity to ask their questions. We request a limit of one question per person.
Again that is star and one.
We'll pause a moment to allow questions to queue.
And our first question will come from Mark asked for him with Stifel.
Please go ahead.
Thanks, and good morning, everybody.
Hi, Good morning, Bart I guess just done on fruit around.
And not really sure where to begin but maybe starting how confident are you.
There will be further discoveries at frutarom related to the alleged bribery negatively impacting sales in other geographies or any sort of things that you can find from an accounting standpoint, or anything else and do you know of or anticipate any U.S. authority to investigate the goings on there at this point.
Mark. Thank you for the question I I take it and given that we have done the compliance disclosure here I'll take a moment to reiterate what we have said in all former disclosure.
During the integration of whom we were made aware of allegations that to food or home businesses operating principle, principally in Russia, and Ukraine made shorten improper payments, including two were presented to us off a number of customers. So we promptly commerce investigations, we have a very robust program in place here in particular, when we when we take over companies so that.
That's very clear that it's clear FOP on all aside WEX notified relevant us regulatory authorities and relevant Israeli regulatory authorities. So I think that's that's group and done.
We have not uncovered any evidence, suggesting that payments had any connections to the U.S.
Based on the information we have we believe that these improper payments are no longer being made.
We estimated the affected sales represents less than 1% of combined pro forma net sales were 2018. So we do not believe the impact from these meadows is or will be material to our results of operations or financial conditions. I believe that that's a super important point as well, we've taken or will take appropriate remedial actions with respect to the matters.
I have described and I want to assure you that we have committed to the highest standards of ethics and compliance and have strict compliance policies in place.
Also during this investigation are continuing based on the results to date and other compliance related integration activities. We are not currently aware similar instances of this conduct any other geographies. So I would say all in all we we stick to what we have said in our our Discloser RP, we feel very comfortable that we have a good handle on on it.
And I'm actually very proud about the program, we are running here and how all the teams are working together to get these things in the <unk> done and the appropriate manner.
Okay and <unk>.
Staying with free ROM to get the organic sales decline was much worse than than was expected I think including your own expectations. So what gives confidence it can get back to growth in the second half of the year absent easier comparisons in what is a reasonable long term growth rate for the business going forward and I just wanted to follow up on the first question just.
So how confident are you the theres not going to be another stone unturned that did find something else that you're not anticipating at this point I mean, how thorough has the investigation by the the board and the committees.
Sure sure.
I think more debt that's a fair question on principally despite that that into the investigation nothing has changed since our investor day, because we feel very good about our our strategy as we see also that the portfolio off of the acquisition is helping us in terms of getting exposure to some of the higher growth areas like the healthy ingredients or the natural food protection, which is even shown in the in the second second quarter or the lead inclusion business as well so portfolio wise, we are very happy what we do certainly is that we probably through rice our portfolio. As we said we are trying to maximize returns and.
We are deemphasizing, the marketing and trade business for example, because this novel lower profitability in and that obviously shows.
We're very.
Let's say CLIA and happy about the customer portfolio, we haven't lost too many customers here and I think still or we believe that some of the small and midsize customers have have good growth rates and that will help us with the business. The portfolio is proving towards naturals and thats, a trend, which is not a not changing so that that event.
Talking about too.
The integration I believe what is important to see here is that in general despite the the compliance topic. We just talked about we are very happy with what is happening during the integration because.
You see it on the cost synergies everything in terms of integration, whether this North America, Latin America, or Asia, or Europe is working as planned we see that we get more cost synergies and which just mentioned that in his.
In his presentation all of them, we solved and thats predominantly driven by procurement, which is good news because first of all it has no impact on our employees and no impact on our customers as well. So that's that's an important one.
On the sales side certainly on the second quarter was softer than.
I would like to have it but we will see that this will turn around in the second half as we said during the Investor day, as well and we believe a mid single digit growth rate for the business is very doable in particular, if we emphasize the strong parts into high growth parts off all of the portfolio.
Having said this we have now a real good team in place for the.
Cross selling synergies you will hear more about this over the next.
A couple of calls we haven't seen too much of a result, it's Rick just mentioned the $88 million, but there's certainly more to come and actually very exciting opportunities for us to cross sell the portfolios to the different customer groups on both sides of the business.
Having said this I would like to to mention as well that we have seen now a nice turnaround on the sensors business side that has not too much to do with food or Im just as small as a part of it.
But we see that.
We are turning alone despite the crisis, we had with raw materials in the last year or Nicolas This business is going in the right direction growth wise as as well.
So we're very optimistic on this front as well and you know that was a bit of a FICO or in the last year as well and the turnaround. This is pretty strong yet. So that's how I would let's say characterize where we stand in terms of the pudong business, but making the remark on the total portfolio as well.
Hi, guys, maybe just mark a couple of quick comments on my part and I reiterate what Andreas said I think we feel strongly that the ability then food ambitions to grow mid single digits.
In meeting the long term I think we're still going to some of the challenges that we've seen for the last three quarters like Citrusource and trade in marketing in the say revisions are not going to correct overnight I think we would expect to see.
Low single digit growth for Froome ex M&A in the second half of this year, but you know, but we're not going to get I think we've done it doesn't change our long term perspectives in terms the potential of the business.
What we see and I might add this but is more mid mid to long term remark is on the R&D technologies, we are very.
They are very optimistic what that can deliver for us going forward, but you know that that takes more time to realize.
Okay.
Our next question will come from Mike Sison with Keybanc. Please go ahead.
Hey, guys.
Hi, guys. Thank you.
Good morning, two quick ones I think Andy.
You know your your compliance commentary.
I mentioned that yeah. There were some senior management at for DRAM involved or are they still around how how have you started change that dynamic call, Chile, and then as a quick follow up.
What are you looking for for further on in the second half of the year in terms of.
Hi, there I'm constant currency growth was down 4% you mentioned into Q and maybe just kind of thoughts on on on profitability. I think you said operating margins ex.
Amortization, but still pretty healthy do you expect it to stay at that levels in the second half of the year. Thank you.
Okay. Let me, let me take the compliance piece first we.
We have taken a very remedial actions.
On the involved in both people. The good thing is it is very contained to geographically so that that makes it makes it easier for us to act on that.
Culturally we have started with actually day, one and all of our town Hall meetings in the New company as we usually do when we take over companies that we educate people on the on the compliance court on the code of conduct everybody is going through the through a training whether is is a life training or training via on why that their computers. So we feel good about this and this is coming actually nicely nicely. Together. This is an unfortunate event, but as I said is geographically very.
Very limited and then I hand over to rich on the on the margin question. Yes. So so my two things one on your question on the second half I just want to clarify what eight times answer I gave to Mark from second half of the year I think it's in the low single digits on a two year average basis, given the weak Q3 last year for fruit it will be a stronger Q3 versus Q4.
In terms of in terms of margins I think we had a very strong quarter Q2. Despite the challenges from a topline standpoint, you heard the comments I made regarding.
The very strong quarter in margin performance percent I think some of that as I said in my comments were timing and so I don't expect that I think this in Q3, and Q4 will be a bit more pressured on a cent side in terms of margins with input costs remaining elevated the teams have done a very good job in terms of mitigating that impact related to the price realization.
But there is timing in terms of inventory when when the raw materials flow through the piano. So and then when you get to Q4, you know obviously that season, there's a bit of seasonality, where our margin profiles in Q4 are generally the weakest of.
Oh, there over the full year, so I would expect the second half to be modestly below where we were in the first half of this year.
Okay.
Our next question will come from Adam Samuelson with Goldman Sachs. Please go ahead.
Yes, thanks, good morning, everyone.
Moving items. So first just on the compliance question.
Can you detail how long what were the alleged payments actually actually happening.
And specifically you've cited in the last couple of quarters. So some sales declines in the savory business in for Rob any certain Europe .
Is there any nexus are common customer overlap between between those just want to be clear on that point.
And then secondly.
On the taste business.
Maybe just a little bit more color on the volume declines that you're seeing in the Americas in the second quarter and the first half of the year they seem to be a bit darker than what we would see from the food and beverage companies are just a little bit more color, perhaps by category or.
Kind of where you're seeing the greatest pressures. Thank you.
So let me start with the last one in terms of.
The the volume side of it it's.
As I said in the comments and I think Andre said also I mean, what we're seeing in on the Tayside is significant volume erosion on existing business again, if you look at.
When we look at our fundamentals, we don't believe we're losing share and when you look at us on and the pricing adjusted.
Volume growth or total topline growth in on a two year basis for the first half of the year, we're very much in line with the competition. So we are confident that we are not losing share. We are seeing significant volume erosion on existing business. Our win rates remain good for both businesses pretty much at five five year averages. So we're not seeing any erosion in the business. We've talked about in the past that we see significant upside going forward on the scent business in terms of access to new business.
So we believe it is very much a volume erosion piece, where see Q3 Q2 was much worse than what we saw in Q1.
You know, it's one of those things that I've seen.
These trends occur over time, and you know it's hard to predict.
It's hard to predict when those things.
Sort of return to the norm and you know we can be very from their underlying product mix and the categories, where we operate with a particular customer their supply chain. So it's hard to predict but you know I don't see this as being a long term trend as I said in my comments related to the food room pace. It was primarily an issue in Europe .
Again, it was quite strong with mid to low single digit growth in the meetings business for further on through the end of May and then it was a very.
Yes, disappointing and and challenging June which drove the declines that was a bit unexpected from where we thought we were going to be.
From from it the compliance standpoint based on what we've seen through the investigation you know they may have been occurring for a few years.
But we but theres never been indication that there is a material amount in any particular year.
Maybe I I had two the first point, which made quite a if I look at our base business, we had been particularly in 18 very very strong.
Growth in the person in the second quarter.
6% each saw its strong comparables.
And we can say that in the third quarter, we havent had to slightly better start into the third quarter or for the pace of for the food or.
I think thats important and last last question in English I forgot Adam was in terms of customer our lap is pretty limited pretty negligible customer overlap, particularly in this business.
Our next question will come from Heidi Vesterinen with Exane BNP Paribas. Please go ahead.
Hi, good afternoon. So if we step back and think about your around performance over the past few years, we seen that Tom you've tended to underperform on your top line targets in ones here. Once again this year despite help from a 50 threerd.
And strong pricing in response to exceptional inflation, you're still below targets in terms of organic milk. So can you help us understand what you are doing internally both in the legacy IMS insight into film side to get back on track you think maybe some more radical changes might be needed maybe in terms of investment or a person now or so on to ensure that you can get back to your around long term targets. Thank you.
So I'd that that's a good it's a good point before as a I would say.
All the other parameters and keep your eyes are going actually pretty pretty well and we focus a lot on the topline growth and for me Oh actually for us as a management team to recipe is a it is very very clear what we need is we have to focus our activities on the most driving parts of the portfolio, where we have now a much better portfolio than than we had before so we have a couple of let's say areas, which might be small at the moment, but show from the market perspective, really nice a nice growth for us like the inclusions like the healthy ingredients, so natural food door or even the active cosmetic. So we believe that that that's the first one the second thing is.
Well, we have to look and is in our customers' structure and the here we have to drive its true in particular on the pay side with some of the small and midsize customers via certainly the acquisition helps a lot. We take the group we have four more thoughtful pace point and we will we will drive it through we have now integrated the food are on pace business into taste point already in the U.S. and actually in that regard if I can give the detail we have a double digit growth on this side, it's a very nice nice growth of the business or so we like that a lot.
The next thing is.
On the on the send side, because I don't want to short change us too much but we have no access to more of our [noise] call list of our most important customers and I know that a lot of activity is ongoing and you know it. These are all big customers. It takes let's say nine to 12 to 15 months to really capitalize on it.
But we see strong interest we see strong purpose, let's say wins on our side and that will help us to let's say accelerate the top line side on the on the scent business as as well on top of it and that's what's in the works and we will report on this is the cross selling aspect we have now moved.
The the leader of our key account a bigger key accounts from the taste business into the role of being the head of cross selling and total solutions business.
He is building a small, but very let's say powerful and nimble organization to facilitate the cross selling between the two organizations and we believe that can deliver very nicely on our topline growth. So if I add this all together.
I think we come we can come back to a good growth rate. We have a we have outlined the five five to seven or 7% on we believe it's very very doable and the first thing. The first let's say initial let's say on signs we see all going in the right right direction.
Our next question will come from John Roberts with UBS.
Please go ahead.
Thank you I just wanted to put some numbers to what's going on in the taste with the three X erosion. So is it like normally you see 10% to 15%.
Products discontinued in any given year by taste customers and normally they replaced and now you're seeing something like 30% to 45% kind of.
Does continue to older products, and even though you're having the new wins, they're not launching the new products had an offsetting rate here is that the dynamic that we're talking about.
John put it in perspective I mean.
On a five year trend volume on existing business is slightly negative so call it low single digits.
Down 1%.
For for the last and now at the current rates, particularly in Q2 were in a mid single digit range. So that's that's by far the single biggest driver I mean, as I said earlier our win rates are in line with long term five year trends.
Pricing is slightly positive a little bit below the five year average, but part of that's been driven by what we've seen over the last three years with with vanilla. So I would not say, it's fundamentally it's all the volume erosion on existing business.
Some of it may be driven by.
Shorter sales cycle times, but that's the fundamental driver in terms of the biggest change.
In the last two quarters.
Yes.
Our next question will come from Alexander from with Morgan Stanley .
Please go ahead.
Hi, Thanks for taking my question just a quick one on margins in both ascent and taste Division.
I mean, if you sort of explain what's happening in the topline dynamics, but when I look at taste could you breakout how much of that margin decline is driven by volume buses I'm also the pricing versus raws and then on the flip side is.
Margins above the sea expanded quite decently in because I expect because of <unk>, mainly because of pricing and send the could you. Please break down that margin expansion, both between pricing versus rose and volume.
Sure I was wondering I mean in terms of taste them in the pricing in fact was pretty negligible hey, the biggest driver for cases on the input costs in terms of you know it's more of a mix issue I mean, I think our overall view.
In terms of mix of consumption as opposed to mix of product I think that's that's a smaller impact from a mix standpoint.
But as similar to what we've seen on the TV side, you know as we consume individual lots or or.
Product by product, we can have some fluctuation and so the biggest driver into the margin.
Pressures in paste is one the input costs and two is the lower volumes is hurting us from an absorption standpoint.
When it from a taste standpoint, you heard in the comments that.
Pricing is a bigger driver from a pace standpoint, certainly on the green our sense Sam standpoint.
Certainly on the ingredient side, but also in the compounds.
You know as I said earlier in my comments the teams have done a very good job of aggressively pursuing price realization to offset that.
And I said earlier, we had.
I would call it a unique.
Situation in Q2, where we had mix of consumption of raw materials, which drove.
A favorable margin progression in Q2, which I don't expect to repeat in the second half of this year for sense right Thats why I said earlier I would expect margin margin profiles and sent to come down from where they were in Q2.
Given the mix of raw materials, we still are seeing elevated prices from sent there at near all time highs.
I think we've seen that the rate of increase has slowed so I think thats starting to be a positive trend, but we don't expect to see any relief.
In the near term from an input cost standpoint.
Our next question will come from Jeff Zekauskas with JP Morgan.
Please thanks, thanks very much.
Can you talk about the change in global expenses from the first quarter to the second I think you went from about 19 million to $13 million.
And then to go back to the.
The 13 million sequential decrease in cost of goods sold.
On.
I would think maybe maybe.
$3 million from volume and maybe there's two or 3 million from Frutarom.
But I take it there are some hedging gains in there and can you describe what went on from a raw material standpoint, a little bit more precisely if you don't mind.
Sure, Jeff So from a corporate expense or standpoint, the single biggest biggest driver is the cash flow hedging as you said, it's about a 5 million dollar impact.
And so thats the biggest driver isn't as you said also it also impacts Cogs I think clearly the volume.
Impact is there is a further reason in terms of the $13 million.
Impact I think the other thing that keep in mind as I said earlier.
We didnt have I'm going to call. It a mix impact in terms of scent in terms of the raw material consumption as it flow through from.
Finished goods and we're in.
Finished goods and raw materials into Cogs on there's a timing impact there.
I think those are the biggest drivers.
In terms of the sequential performance from an overall perspective, we still expect to see mid single digit.
Inflation from a raw material standpoint for the full year, our that's in line with what we've seen.
Our expectations from the beginning of the year and as I said, just a moment ago. I think you know we are seeing starting to see some.
Slow down in terms of the rate of the increase but we're still at very elevated levels.
We'll take our next question from Brett Hundley with Seaport Global.
Please go ahead.
Hey, Thank you good morning, guys.
Richard.
Rich I just have one detail ashish.
Take type question for you. So if I go to the change in EPS guide for the year.
I wanted to focus in on the change in non controlling interest piece and just ask you whether is that related to.
Like the carrying value of those fruit subs dropping below the redemption value is it due to.
Change over to consolidated status away from non consolidated status because I will admit your other income line in Q2 was less of a benefit than I thought it would be hum relative to Q1, so sorry for the detail ish type question, but just wanted to understand that better.
No look I mean, I think so you add that 10 cents you know I'd say, probably six to seven cents or that is the change in the effect average effective tax rate on the amortization. So that one is clear.
On the on the non controlling interest is really a mark to market adjustment that we have to monitor and adjust each quarter based on the results and the outlook for the individual.
Entities in which the minority interest had he knows are redeemable component of the minority interest. So it's basically is based on the underlying performance.
And the projections for those businesses and so there's been a slight change between where we were at the beginning of the year and based on lease latest projections.
And there are no further questions at this time, so I'll turn it back to Andres for closing remarks.
Yes. Thank you very much for participating I think there was an important goal.
Was a couple of really important messages, we wanted to make and.
We are now basically happy to to take all the one and once we want to do and give you more more explanation around some of the outcome of the businesses. So thank you very much and to talk to you soon thank you.
This does conclude todays program. Thank you for your participation you may now disconnect.