International Flavors & Fragrances Inc Q1 FY2020 Earnings Call

Thank you. Good morning, good afternoon, and good evening, everyone. Welcome to IFF's first 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 ir.iff.com. Please note that this call is being recorded live and will be available for replay. Please take a moment to review our forward-looking statements. During the call, we will be making forward-looking statements about the company's performance, particularly with regard to the outlook for the second quarter and 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 contained in our 10-K filed on March 3, 2020, and in our press release. Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP measures to their respective GAAP measures is set forth in our press release that we issued yesterday. With me on the call is our Chairman and CEO, Andreas Fibig; and our Executive Vice President and CFO, Rustom Jilla. 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. At IFF, with global operations in 44 countries and sales into approximately 200 countries, we have seen firsthand how the coronavirus pandemic has touched our world. This is truly a remarkable moment in history. It presents all of us with new challenges, but also reveals the best of humanity at the same time. On behalf of everyone at IFF, I want to express my sincere sympathy for all those affected by the pandemic. I also want to thank everyone in the global healthcare community who exemplifies the best of all of us in responding to this crisis with courage and grace. Everyone on the frontlines continues to keep our society moving forward. Our thanks go to all the essential workers in the consumer goods supply chain, of which IFF is proud to play an important role. We thank you for responding so quickly and moving swiftly to deliver for consumers around the world. It is very clear that we are still in the early stages of adjusting to the challenges that the pandemic poses to our world. As we will review in more detail later, the IFF business is strongly positioned to be resilient through economic cycles, given our substantial portfolio delivering needed solutions to vital consumers and markets. The steps we have taken in recent years, including diversifying our customer base and expansion into more categories, have only served to further strengthen our ability to be a vital partner to our customers and affirm our ability to be resilient through the cycles. Like many, we are seeing uneven impacts on our business due to the pandemic and the resulting economic challenges. While some end markets are seeing increases in demand, others are seeing notable declines. We are fortunate that only about 15% of our revenue, not including Fragrance Ingredients, is currently subject to downward pressure. However, the unpredictable nature of the pandemic and the early stage of the economic impact creates enough uncertainty for us that we have made the decision to withdraw our full-year financial guidance. Rustom will cover this in more detail later, but while we navigate through this challenge, we are committed to providing as much of an outlook as we can so you understand the trends driving earnings. On today's call, I will provide an executive overview of our operational and financial performance for the first quarter 2020, before offering a more in-depth review of IFF's management of the ongoing and evolving COVID-19 situation. Following this discussion, I will ask Rustom to provide a more detailed financial review of the business, including additional insight into our liquidity and capital structure, which is very strong given the uncertainty of the pandemic going forward. As you may also have seen today, we announced important progress related to our pending combination with DuPont Nutrition & Biosciences, including a new guiding purpose and vision for the future combined company as well as our operating model and executive management team post-close. Following Rustom’s remarks, I will provide an overview of these important integration updates. Upon the completion of all prepared commentary, we will take any questions that you may have. Our strong performance for the first quarter of 2020 affirms the strengths of our organization and the essential position in serving vital end markets through economic cycles. We achieved a strong start to the year with mid-single digit sales and double-digit adjusted EPS growth, most of which are on a currency-neutral basis. Importantly, we continue to achieve financial benefits related to the integration of the Frutarom business, both revenue and cost synergies. As I mentioned before, we have also made significant progress with integration planning to support our combination with DuPont’s Nutrition & Biosciences business, and I must acknowledge our teams that have worked hard to build the foundation for this combination by continuing to contribute to IFF's day-to-day operations. All the teams have worked tirelessly to deliver for our customers and have gone above and beyond to support our communities around the world during this time. Our strong quarter is a testament to their unwavering dedication, the underlying strength of our business and our role as an essential partner in the global food and consumer product supply chains. While we have certainly faced many challenges through this unprecedented situation, our operations and global network remain strong, and we have taken appropriate steps to ensure our business is well positioned to successfully manage through the pandemic. Looking at our financial performance in the first quarter, I am pleased to say we delivered strong improvements across key financial metrics. In the first quarter, we achieved sales of $1.3 billion, which represents a 6% growth on a currency-neutral basis, driven by our performance in both our Taste and Scent businesses. We also achieved strong adjusted earnings per share of $1.62, excluding amortization, reflecting a 13% year-over-year increase on a currency-neutral basis, led by currency-neutral adjusted operating profit of 9% to $271 million. In addition, we expanded our operating margin, excluding amortization, by 60 basis points to 20.1%, driven by volume growth and productivity. In summary, IFF entered 2020 with solid momentum and continues to deliver currency-neutral sales growth in the high single digits through the end of February. However, from March onwards, we started to see the global impact of COVID-19 on our business, and we expect this to impact our results in the second quarter as we have seen uneven impacts across end markets. Rustom will touch on this in more detail later. I would like to spend a few moments outlining the key characteristics and drivers of our business, which leave IFF very well positioned to navigate today’s new reality. More than ever, it is clear that IFF plays a vital role in the global CPG supply chain, especially for the world’s most important manufacturers in food and beverage, as well as essential home personal care and sanitation supplies. IFF's broad-based exposure across regions, categories, and customer positions us to remain resilient to the ongoing challenges brought about by the pandemic. As a result of regulatory actions and corresponding economic challenges, we are seeing certain reductions in demand in our Fine Fragrance, Cosmetic Active, and Food Service offerings where end markets are experiencing significant impact. This represents approximately 15% of our revenue. At the same time, we are experiencing tremendous pickup in areas with the solutions that IFF is poised to provide that are absolutely critical to the production of essential products. Our categories exposed to packaged food and beverage and hygiene and disinfection saw continued strong growth during the quarter. That is about 85% of our revenue. Fortunately, our operations remain strong as we continue to deliver the creative solutions that our customers and end consumers demand during these unprecedented times. Our goal from the outset of this crisis has been twofold. First, we are deeply determined to ensure the wellbeing of all people. Second, we are committed to preserving operations across the network so that we can continue meeting the needs of our customers. Our global, regional, and local crisis teams are working around the clock to do what is best for people and our business. A core working group, including representatives from our executive team and cross-functional support groups and business teams, meets daily to ensure alignment from top to bottom across our teams. This team is putting in place plans and protocols to ensure we are anticipating what is to come and keeping all of our stakeholders engaged during this extended period of disruption. We have been proactively reviewing our resiliency plan to address COVID-19 developments, and we are coordinating our response with federal and local health and government entities around the world. We have updated internal protocols as the situation has evolved, taking significant measures to protect our people, including implementing enhanced disinfection and sanitation measures at operational facilities and taking precautions to minimize contact among employees as part of social distancing by grouping our professionals into smaller pods and separating their work shifts. For those able to work from home, we are instituting a remote working policy across many of our locations as well. Given IFF’s vital role in the consumer product supply chain, we continue to secure essential designations that provide our company with permission to manufacture our products around the world as governments extend workplace restrictions. A good example of our team working through these unexpected challenges has been India. Recently, our Chennai facility, which has secured essential business designations, was still forced to shut for several days due to regulatory restrictions. Thanks to the diligence of our team and a strong working relationship with regulators, we were able to respond ahead of time to the shutdown to meet all customer demands while keeping employees safe. In terms of operations, we are seeing some challenges with logistics, and our lead times have increased, but the team is doing an excellent job navigating the transportation restrictions. We realize we are certainly not alone in this challenge. For these reasons, we have also seen some limitations on raw material distribution and have activated our contingency plans to limit the disruption that any material shortages might have for our customers. While we have seen disruptions to our supply chain, it has mostly been limited to the regions where the most significant government restrictions are in place, including Italy, Spain, and India. On the new project and innovation front, most of our creative centers remain open and are engaging remotely as needed, and I’m happy to say that our project pipeline remains solid across our entire portfolio. As I mentioned from the outset, while our business has displayed impressive resilience through the evolving situation, we continue to proactively take steps that will ensure that IFF is operating from a position of financial strength. Specifically, we are adapting an especially disciplined approach to cost management. This means we are tightening any nonessential spend and reviewing new opportunities for efficiencies that can preserve our margin profile. We also are looking at CapEx and considering near-term priorities while pushing out our longer-term investments as appropriate, and we are considering additional ways to optimize our net working capital by closely reviewing existing inventories and pursuing collections. Lastly, we have a strong cash position with $1 billion of untapped credit revolver available, giving us confidence and ensuring our strong position even in the event of a prolonged economic downturn. Even in the midst of increased demand and the challenging operating environment, our teams have mobilized to support frontline healthcare workers and first responders across the global IFF network. IFFers across the globe have found very creative ways to leverage the company’s unique capabilities and innovative spirit and have led a number of exciting community-focused initiatives, including from New Jersey to the Netherlands, IFF has modified our production facilities to allow for the manufacture and distribution of hand sanitizers. Today, IFF has donated more than 65 metric tons of hand sanitizers globally to first responders and other organizations in need. Our North America Scent creative team quickly developed a new scent, HOPE 2020, that has been used by IFF and other partners in the production of hand sanitizers. Our Scent team has also partnered with Harvard Medical School and Mass General Hospital to create an early detection smell test for asymptomatic carriers, the first developed globally. In India, our facilities donated food and other necessary sanitation items to local orphanages, hospitals, and police stations. These actions speak to how pleased I am that we continue to embody our commitment to care for the resources of our world, and nothing could be more important than caring for our communities. I could not be more proud of the spirit of caring that IFF has demonstrated throughout the global pandemic. With that, I would like to turn it over to Rustom, who will discuss our first-quarter financial performance in greater detail.

Thank you, Andreas. Now to Slide 12, I am taking a more detailed look at our quarterly financial performance. On a currency-neutral basis, IFF delivered broad-based sales growth of 6% compared to the 2019 first quarter. Adjusted operating profit margin improved in both Taste and Scent with procurement synergies, volume leverage, and productivity initiatives driving this improvement by discipline in research, sales, and administration cost containment. This helped produce our operating expenses as a percentage of sales. I am therefore pleased to say that we also saw solid profit growth with roughly 60 basis points of currency-neutral margin expansion on an adjusted operating profit mix amount basis. COVID-19 did impact our P&L in Q1, but more in terms of sales mix rather than in total dollars, and only in the final weeks of the quarter. It did have a modest negative impact on our adjusted operating profit in the quarter, causing us to incur extra manufacturing costs, additional freight expenses, and higher raw material costs. But most of these went into inventory and will not appear as expenses. Our currency-neutral earnings per share, excluding amortization, grew a strong 13%, with robust operating profit growth boosted by lower year-over-year interest expenses and a lower effective tax rate. FX adversely impacted our reported numbers, pulling sales and adjusted operating profits down a couple of percent. It had a much larger negative impact on other income/expenses in March as a result of currencies collapsing globally against the dollar and the Euro. So, on a reported basis, this pulled down year-on-year adjusted EPS growth. Now looking at our Scent division. In the first quarter, currency-neutral Scent sales grew 7%, with growth in all regions and nearly all categories. Sales performance was strongest in consumer fragrance with a double-digit increase led by robust growth in fabric, home, and hair care. While we did experience a volume lift due to COVID-19, especially from the increase in hygiene and disinfection categories, we also benefited from strong new wins with customers where we have recently gained access. We also saw high single-digit growth in Fragrance Ingredients led by robust volume growth. At the same time, Fine Fragrance sales declined as the disruption of consumer access to the retail market and a pronounced drop in global travel due to COVID-19 led to deceleration late in the quarter. Fine Fragrance started 2020 well and was growing until the last couple of weeks of the quarter, even against last Q1’s double-digit comp. Then, we saw a significant contraction as our customers adapted their supply chains for new store closures and travel realities. This trend has continued in Q2 with a far greater impact and I will elaborate on this shortly. For the entire Scent segment, we posted a 20.4% segment profit margin, and segment profit grew to $105 million, up 19% on a currency-neutral basis driven by volume growth and lower operating expenses. Moving to Taste, we saw currency-neutral sales growth of 5% in the first quarter, having achieved increases in all regions. We saw mid-to-high single-digit growth in Latin America, Greater Asia, and EAME. From a category perspective, we again saw significant mid-teens growth in Savory Solutions with very strong growth in EAME, our largest market, and also LATAM. Flavors grew low single digits led by Greater Asia and Latin America, driven by strong commercial performance in new wins, particularly in the attractive categories of beverage and dairy. Though Frutarom is now mostly incorporated into the Taste business, we did commit to continue providing updates on how sales are doing as if this were on a stand-alone basis. If we had measured Frutarom as a stand-alone, currency-neutral sales would have grown by roughly 4% versus the prior year. For the entire Taste business, we had a 16.5% margin with segment profit growing 6% to $137 million led by volume benefits and Frutarom integration-related synergies. You may have noticed that Taste segment profit margin appears lower than you are used to seeing. This is because Frutarom is now included, and there is approximately $44 million of amortization of intangible assets. Now I would like to provide an update on cash flow through the first quarter of 2020. The chart on Page 15 is designed to show the reconciliation from reported net income to cash flow inclusive of all the drivers. Operating cash flow was $17 million in the first quarter, down from $47 million in 2019's first quarter, primarily due to higher core working capital levels. Within core working capital, we had solid improvements in inventory that were offset by higher accounts receivable as a result of strong sales in Q1 2020 as well as the 2019 calendar effect. We expect the portion of this will normalize as we move through the year. Nevertheless, our cash conversion cycle in Q1 2020 was consistent with 2019's first quarter. We continue to invest in the business, particularly for planned capacity increases and Frutarom integration. Our capital expenditures as a percentage of sales in the first quarter of 2020 were 3.6%, versus last year's 4.5%. The net impact on our free cash flow, defined as operating cash flow less CapEx, was a negative $31 million. As a reminder, Q1 is a seasonally low quarter of the year, and last year it was a negative $11 million. In terms of cash usage, M&A and earn-outs and dividends amounted to $94 million versus $112 million in the prior year's first quarter, and this was all due to lower M&A and earn-outs. As Andreas noted before, we are taking steps to preserve our strong financial position at this time, given the current environment and the possibility that the global economy could face a protective downturn. We are constantly refining our scenario planning to ensure we are well prepared. This starts with controlling what we can control, targeting reductions in operational and capital expenses. We are being very cautious with hiring, mainly just critical replacement positions and a handful of critical new hires, and we are reducing any and all nonessential spending in the near term, including travel, entertainment, consulting, etc. COVID-19 does bring some working capital headwind. We have experienced supply chain disruptions as various countries enacted lockdown actions. We value our long-term customer relationships, so we are adding raw materials to serve as safety stocks, giving us the capability to move manufacturing around and, in general, to help insulate against supply chain disruption, as we’ve seen in India. We also are paying some of our smaller and/or COVID-19 impacted suppliers more promptly if warranted. We are experiencing an increase in receivables, particularly from Food Service and Fine Fragrance customers. Of course, we are working to offset these working capital pressures where we can. For inventory, we are constantly balancing the need to ensure business continuity during COVID-19 with the need to not overorder. Where we could extend our payables, we are working with suppliers to do so. We are pursuing collections from customers, being proactive with those where there is credit risk. For capital expenditures, we are targeting reductions across the business. Specifically, we are prioritizing the highest returning projects while delaying longer-term investments that are not absolutely necessary at this time. Practically, COVID-19 is making it much harder to launch or complete projects where significant travel is required. But moving forward, we also have to be smart to ensure that we invest in a flexible and healthy ecosystem. Turning to Slide 17. As we consider our current capital structure and manage our balance sheet moving forward, we’ve outlined our upcoming debt maturity schedule, which includes a good balance of short- and long-term tiers. We have strong and ample liquidity well within our debt covenants as our net debt-to-EBITDA at the end of Q1 2020 was 3.3 times. Our cash position at the end of Q1 is strong at $433 million, with $1 billion of untapped credit revolver available should we need it. Looking ahead, following the close of the DuPont, N&B transaction, we are committed to maintaining our investment-grade rating. As stated in December, we intend to quickly delever after the close of the transaction to get below three times net debt-to-EBITDA within the following 24 months. Now turning to our outlook. To conceptualize, I expected sales dynamics in Q2. I wanted to highlight the many moving parts we are seeing and expecting this quarter. COVID-19 presents both opportunities and challenges as we forge ahead. Starting on the left side of the slide, we expect to see continued robust growth in our Taste business, excluding Food Service, as well as in our Consumer Fragrance business. The demand and consumption of the products that these businesses are supporting remain high, and we are well positioned with our global footprint to capitalize on this. In the middle box, there’s Fragrance Ingredients where demand is strong. However, we are facing challenges in the supply chain, particularly the Indian lockdown. This means that we have to forgo external sales to ensure that we protect our Fragrance Compounds business. The last category is where demand has been adversely impacted by COVID-19: Food Service, where the vast stay-at-home orders across the globe, as well as changes in consumer behaviors, have impacted away-from-home consumption; Fine Fragrance; and Cosmetic Actives, where retail channels have been temporarily closed and travel retail is down both due to COVID-19, as well as these categories being discretionary in nature. Now more than ever, IFF's broad-based exposure across the regions, categories, and customers positions us to remain resilient through the ongoing challenges. We are fortunate that the majority of our revenues comes from categories exposed to packaged food and beverage and from hygiene and disinfection. So parts of our business are experiencing higher sales volumes in this current environment. Having said this, we are not totally immune. Not surprisingly, April’s currency-neutral sales were challenged, with strong Consumer Fragrance and Flavors offset primarily by weakness in Fine Fragrance and Food Service. For the second quarter, while we are not giving specific guidance, it is worth noting that with the pressure in Fine Fragrance, operating margin mix will be a headwind as well as the additional COVID-19-related costs. We continue to evaluate what evolving global market dynamics will need for our business performance and projections moving forward. As the second quarter progresses and we gain greater visibility, as Andreas noted, we will provide updates as appropriate. While our ability to pivot quickly and modify our daily operations has enabled us to responsibly operate our business, the constantly evolving global responses to COVID-19 have created uncertainties for IFF and for other companies and our partners as well. Even the extent of the current uncertainty globally and the potential for uneven impact on our businesses, we have decided to withdraw our fiscal 2020 guidance. We will continue to manage our business by taking actions to generate strong cash flow and maintain ample liquidity. With that, let me turn the call back over to Andreas.

Thank you, Rustom. I’m also very pleased that today we are introducing the next step in our planned integration process with N&B. As you know, we are extremely excited to combine our two customer-focused and consumer-led organizations with leading positions in higher-value categories. Together, our product portfolio will be among the industry's most robust and diverse. We have a coveted R&D program with an industry-leading pipeline, and most importantly, we will be poised to redefine our industry by delivering essential solutions to our customers. We will remain on target to close the transaction in the first quarter of 2021. Until then, IFF and N&B will remain independent entities and will operate separately. Since we announced our merger in December 2019, our teams have been hard at work bringing this combination to life. We have formed an integration management office, created the U.S. regulatory process, filed for regulatory clearance in Europe and China, and filed our initial registration statement. The potential of this combination continues to excite our teams, and we are working diligently to make sure we can hit the ground running on day one. Some of our important highlights over the past four months include completing a strategic assessment of the future combined company portfolio, a joint cross-functional integration program in place, and operational ideation frameworks to identify, assess, and prioritize synergy opportunities. Today, we took another significant step forward. We have announced our purpose, vision, operating model, and executive committee for the future combined company. In short, we are announcing who we will be, what we intend to do, and who will lead our incredible team once we combine forces with N&B in the first quarter of 2021. Our purpose is the why that drives everything we do. The combined company's purpose is applying science and creativity for a better world. We’re focused on our intent to push past traditional industry boundaries and commit to being a force for better, more sustainable future. We will shape the future of our industry with best-in-class solutions at the intersection of science and creativity, where passionate organizations, made up of team members who see their job as so much more. Our collective purpose inspires us every day to strive for better. It’s not just that we are talented scientists and creators, but that we are passionate about using those talents to generate results for customers and for the world. We need both the rigor of scientific expertise and the imagination of new possibilities to create the best results. The fusion of both will lead us to realizing the full potential of this combination. Everything we do is for the purpose of improving the world: lengthening life spans, replacing our sustaining resources, enhancing sensorial experiences, solving house problems, and more. Together, we can do even more good. Creative science is scientific art. When science and creativity intersect, the possibilities are endless. Here, innovation isn’t a business department; it’s our business. Incredible curiosity, relentless drive, purposeful impact - innovation is simply our way of operating, and now with double the R&D resources unmatched in the industry. If you are keeping track, our people can’t wait to start collaborating on something new. We are shaping the future of the industry for the better. Our vision is our strategy for future success. It articulates our aspirations and guides the development of future strategies and initiatives. It serves as a filter through which our endeavors can be evaluated. Our vision is to be the partner for essential solutions. From day one, we will bring unmatched innovation and leading-edge insight to anticipate what will be essential to tomorrow's consumers. Helping all customers meet consumers' needs is at the heart of our business. We are more than a vendor or supplier. Yes, we supply the ingredients, components, and solutions you require, but we also unite in understanding and meeting the challenges of today and tomorrow. Essential solutions mean that we will work to make both our relationship and what we provide invaluable to our customers' businesses. It pushes us to supply the technology and know-how that no one else can offer. For customers of all sizes across the globe, from startups to multinationals, we have the agility and expertise to deliver more of what you need. Unmatched innovation and leading-edge insight mean we are already anticipating what will be essential to tomorrow's consumers. As we come together as one organization, we can help our customers meet consumers' needs faster. On the operational model, we will leverage the capabilities and offerings of both organizations to create a sustainable framework that best positions our teams, customers, and shareholders for success on day one and well into the future. The complimentary structure will focus the organization into four divisions: taste, food and beverage, scent, health and bioscience, and pharma solutions. We carefully examined how each division goes to market, including customer overlap, R&D focus, and service level requirements, among several other factors to ensure we create global divisions that are built for success. Just as important as our four operating divisions will be our global centralized functions, each of which will work in collaboration across our divisions. I want to particularly note that we will be establishing a new integrated solutions center of excellence to focus on incubating new business opportunities and total product solutions. We’re also creating a center for commercial excellence to support our business and commercial teams through the development of best practices, customer insights and analysis, resource deployment, and the optimization of pricing strategies and solutions. These two are extremely important, as they will be instrumental in collaborating with the business to achieve all revenue synergy goals. We also noticed the executive committee for the combined company, including highly qualified and diverse leaders with deep knowledge and expertise. If you are interested in the teams' backgrounds, please check out strongerinnovationtogether.com. I won’t go through all of these distinguished leaders here, but I will note that this was a particularly challenging process. Most organizations have tremendously talented individuals. We are fortunate that, as a significant large organization, we will be able to create many challenging, exciting new opportunities to further the careers of all employees. I’m also very encouraged by the world-class Board of Directors we are beginning to assemble. As shared at the deal announcement, DuPont Executive Chairman and CEO, Ed Breen, will join the board of the combined company as the DuPont designee following the close of the transaction and will serve as Lead Independent Director starting June 1, 2021. I am also pleased to say that Matthias Heinzel, President of Nutrition & Biosciences at DuPont, will be joining the Board of Directors of IFF following the close of the transaction. Under his leadership, Matthias has strategically transformed the N&B business, driving customer-focused innovation, operational effectiveness, and multiple business integrations. As an Independent Director, his extensive global management experience and deep knowledge of the industry will support the future company as it unlocks the value of the merger. Additionally, Carol A. Davidson will also be appointed to join the Board of Directors of the future combined company following the close of the transaction. Mr. Davidson is a CPA with more than 30 years of leadership experience across multiple industries. He has held a variety of leadership roles at Tyco International Ltd. and Dell Incorporated and financial leadership roles at Eastman Kodak Company. Mr. Davidson is an elite Independent Director like Mason and serves on the Board of TE Connectivity. For this team, both Board and management, I know our combined company will chart a new path forward for our industry and have a powerful impact on the world around us. Stepping back, I want to say that I’m deeply impressed, even more so during COVID-19, by the dedication and focus both the IFF and N&B teams have brought to this effort. We knew early on that these companies would be a strong cultural match, and our excitement and conviction behind the potential of this combination have only grown as our teams began collaborating more and more. As we look ahead, we are focused on executing the next key milestones, and we will do so with the same speed and diligence we have achieved thus far. In summary, we are pleased with our strong financial performance despite an unprecedented first quarter of 2020. We delivered on all of our key metrics and saw broad-based growth in both divisions with mid-single-digit sales and double-digit adjusted EPS growth on a consolidated basis. We continue to make important progress in the integration of the Frutarom business and have taken substantial steps forward in bringing our combination with DuPont and N&B to life. I am also incredibly proud of each and every one of my colleagues at IFF for what they have achieved during these challenging times, not just for our business but for our partners, our customers, and all communities. While global conditions remain volatile in the near term, our order book for Q2 looks solid as we are successfully navigating through these unprecedented times to emerge as a stronger company. I would now like to open the call for questions.

We will take a question from Mark Astrachan of Stifel. Your line is open.

Thanks and good morning, everybody.

Hey. Good morning, Mark.

Speaking of promotions, by the way, congrats.

Thank you.

So I guess I wanted to talk a bit about just general sales ordering patterns. You basically talk a bit about whatever you can on emerging versus developing markets, anything notable there as well as between multinational and local and regional customers, especially related to the Frutarom business. And what are you hearing from customers regarding timing new product launches? And how does any change impact that or even just category dynamics? Thanks.

Okay, Mark, I will take it. The emerging markets in the first quarter were particularly strong, Latin America by around about 10% and Greater Asia by five plus nine. What we see in terms of the different categories, in particular, the Consumer Fragrance in Latin America, in high teens, as well as Flavor’s high single and Savory Solutions in high teens as well, so really, really good results, probably strongest from the multinationals specifically in the HPC field. In Asia, it was all about Consumer Fragrance as well. So mid-teens, really good, Taste in high single digits, mostly related to COVID-19, I would say. And here, in Asia, it is very much across both multinationals, as well as regional and locals. Frutarom, as we said, is probably around about 4% growth with some benefits of small M&A, but still, very, very good performance. I would say country-wise it depends where the COVID-19 wave has started. We have seen the first impact in Asia, particularly in China, then it moved to Europe, then to the U.S. and Latin America. So that’s probably what you can see in the first quarter. In terms of the pipeline, our pipeline remains strong also into the second quarter. But having said all of that, it is really different from customer to customer. I can say, also for us, our creative labs are basically almost all open. They are working on new launches. They are working on, let's say, better, let's say, improvements of some of the products. So all in all, I would say a very strong picture, certainly with an impact on Fine Fragrance because – and you heard this from our customer base as well, which is not positive, but all the essential products are really going strong. Rustom, you might comment on that.

Yes. No, I actually agree. There’s not much to add there, Andreas, you covered it.

Good.

We will move next to Mike Sison of Wells Fargo. Your line is open.

Hey guys, you all sound happy and a nice start to the year. Andreas, you’ve made some progress on the transaction, getting your operating model and leadership team in place. How much can you do before you close the deal to get the integration synergies accelerated? And then maybe just talk about how you think about the business and the transaction differently now given the current environment.

Let me start probably with the second part of your question first. The combination with the DuPont N&B business is fully on track. And if you look at the product portfolio, it’s now among the industry, particularly in this COVID-19 situation, one of the most robust and very diverse. We are in all of the categories, number one and number two in the market. We have a great R&D pipeline with combined spending of around about $550 million, more than 9,000 patents granted. So I believe we are in a very, very robust position. As you have seen the N&B results in the first quarter, it shows it is an essential business. Probiotics are going gangbusters and many of the other portfolio areas, as well. Coming back to the integration piece, so as you know, we have formed an Integration Management Office; we cleared antitrust in the U.S., filed in Europe and in China. The combined integration planning team can do a lot, which is still working well, even in these challenging times, and I’m very pleased with how they work together all over Zoom or Skype. Of course, it’s very interesting. So we really make sure that we are ready for day one. The next up on the schedule is the shareholder vote in September, then the financing, and then the close, hopefully in the first quarter of 2021. So I must say that this COVID-19 situation has further solidified our position. Strategic logic is very strong; a very resilient business, with a great market position. I believe we’re in a very, very good spot right now.

We will move next to John Roberts of UBS. Your line is open.

Thank you. For the 15% of sales that are impacted by COVID-19, have you had two sequential weeks of stable sales yet, or were they still declining at the end of April? And where are those product lines' sales in China versus the start of the year?

Good morning. John, it’s Rustom, let me take that. No, we have still had sales declines even as we go through and look at that area. It’s Fine Fragrance and Food Services that we really see. But let me just step back for a second. From March onwards, as the COVID-19 pandemic spread globally, we had lockdowns and changes in customer order patterns. We are fortunate that most of our revenue comes from the packaged food and beverage categories, as well as hygiene and disinfection, so we have continued strength there. The part that you’re referring to is that the part that we’re not immune to is the categories most exposed to retail end markets where stores closed and travel dropped sharply, and that hasn’t changed as of now, so it’s Fine Fragrance and Cosmetic Actives as well, and also the away-from-home channels. So, we’re seeing that impact, and we are choosing to be resilient, flexible, and close to our customers as we possibly can, and always sort of trying to be cognizant of the safety of our employees and wellbeing. As for the China part of your question, Fine Fragrance is a very small part of the portfolio, I mean based on category demand, I mean less than 2% of total Fine. And although it was quite strong in Q1, I mean, let’s see, China is opening up as well. Now Food Service in China was particularly challenged in Q1 and that’s obviously related to COVID. I think that answers your questions, John.

Thank you.

Our next question comes from Faiza Alwy of Deutsche Bank.

Yes, hi. Thank you. So I also just wanted to hone in on trends that you’ve seen since the quarter in April and May. In particular, I was wondering if it’s possible for you to maybe disaggregate the benefit from potential stockpiling versus underlying demand. And then particularly focus on Consumer Fragrance where you had double-digit growth. I know you mentioned that emerging markets were particularly strong, where I don’t think that was much stockpiling. But I was just wondering if you could offer more perspective there and how you’re thinking about sustainability of growth as we go through the year. Thanks.

Sure, absolutely, Faiza. Let me get started, and then I will hand it over to Rustom. It is hard to disaggregate the underlying demand versus stockpiling. When we talk with many of our customers, we believe on the Consumer Fragrance side, certainly, the activity in washing clothes and detergents, the softness – it’s very much demand; it’s not so much stockpiling here. I think we see this. We see also all the hygiene products are really used. It’s not just that people put it in the pantry. That’s what we see. And also on the food side, when you talk to some of our customers, the yogurt is going like there’s no tomorrow, which is probably not a big surprise to all of us because working-from-home, instead of going to the company cafeteria, you go to the fridge and pull yogurt, and that’s your lunch. So, we see some categories very much its consumption, its moving, but I can’t give you all the details. What is for us right now really important is on the consumer insight side. We do all of our studies; we know how the consumer behaves right now, but what is sustainable so that we can orient ourselves in terms of our R&D and new product development towards things which might, will come. We believe that everything in terms of sanitizing will stay. We believe also that many of the health products, in particular fortified with vitamins or probiotics, will stay. But there’s more and more to come. So, that’s the work we are doing right now. In many areas, the consumption is real. By the way, one last one, potato chips are also going like gangbusters. But Rustom, please comment.

Thanks, Andreas. Good morning, Faiza. Regarding your question on raw materials, we have faced some challenges in sourcing and logistics. We implemented our backup plans early to minimize the impact on our customers. The disruptions were a result of material shortages caused by various government restrictions, particularly in Italy, Spain, and India. However, we believe that the demand for Consumer Fragrance will remain strong, especially in hygiene and disinfection products. If you've visited a store recently, you'll notice how difficult it is to find these items. It's important to mention that our profitability is impacted by specific factors, and we need to refine our approach. Profitability without certain elements will likely be negatively affected in Q2. While I can't provide detailed specifics, our largest Fine Fragrance customers have indicated a significant decline in the category. I anticipate that IFF and our competitors will experience the same trend. Since Fine Fragrance is one of our highest margin categories, these declines will negatively affect our margins. Additionally, the extra COVID-related costs we incurred in Q2, for a full quarter, are another contributing factor.

It all depends right now when the economy is opening up and the stores are open. Some of these products can be sold again to all consumers. I think that’s what we are all waiting for. The big experiment is not so much China, because it’s very small for this category, as Rustom said. But what will happen now in Europe – you see Germany is basically open, and we will see next week France is opening again, and then Spain and Italy, and then we take it from there. So, it’s a very volatile environment, but we are very well prepared for it.

Yes, thank you.

We will move next to PJ Juvekar of Citi. Your line is open.

Yes, hi. Good morning.

Good morning, PJ.

Andreas, quick question for you. We talked about this restocking quite a bit here and so on and so forth. When do you think orders go back to normal levels? And then as the economies open up, is there some destocking in the pantries? And related to that, that’s the inventory at the sort of the core household level, but what are the inventory levels that you are applying and in the supply chain? Thank you.

Okay, yes. It’s a very, very important point actually, and we are looking at this. I would say in some of the countries we have seen already normalization because people are back to work and people see that they can buy everything. You might remember at the beginning; toilet paper was a very precious article around the world in many supermarkets, but that’s back to normal. So actually, we have seen already quite a normalization, not because COVID is gone, but people see and feel that they can buy whatever they need. There was not a big disruption in the supply chain. So we believe that the inventory has changed. It’s different than pharmaceuticals, for example, where people just keep the diabetes products for three or four months instead of one month to make sure that they are covered. But here I think in many cases we are already back to normal. On the plants, it’s a bit of a different situation because we are managing the supply chain almost by the week because India, which is a big country for raw materials in our industry, has some challenges with lockdown as well. So you really have to make sure that we get enough inventory in all the plants around the world to secure supply for our customers. Here you probably will see some elevated inventory levels for quite some time. But again, the situation is volatile. I expected this actually for the first quarter as well. But we were selling so much that the inventory actually went down. So that’s our plan or basically what we assume for now, but it might change because it’s very dependent on the demand as well. But Rustom, maybe you can comment.

I mean again, you covered it. PJ, this is really hard to predict, right, because we’re going into government regulations, consumer psychology, and also the possible fear of any wave twos or anything like that. I mean you never know. It’s hard to predict. But even after COVID-19, I mean, consumers might maintain higher stockpiles as a common practice. Who knows.

Our next question is from Adam Samuelson of Goldman Sachs.

Hi, guys. Thank you. Good morning everyone.

Hi, Adam.

Hi. I was hoping to get a little bit more on the performance in the first quarter in the Taste segment, specifically around the margins. I’m just trying to think about margins that were essentially flat year-on-year, and kind of just thinking about the healthy top-line growth. So how do you construct that in terms of mix, in terms of incremental Frutarom synergies, in terms of COVID-related costs? And then just thinking about the balance of the year, kind of has the expectation on Frutarom synergies changed? Specifically, kind of, can you do all the facilities closures you were looking for this year given the pandemic?

Hi Adam, it’s Rustom. Let me say that your triangulation is exactly on the factors. First of all, we are on track with our cost synergy target through Q1 Frutarom, with more than 25% of our $50 million full-year savings coming in Q1. In terms of geography, it’s about three quarters Taste and the rest in Scent, roughly, okay? The Scent synergies showed through, and as you saw Scent’s performance, there’s leverage. But Taste, where you’re homing in, did benefit some synergies as well. But it also had mix. I mean we went straight there. We also had mid-teens growth in Savory Solutions, which is a lower margin business. We had a lot of citrus sales and then we have some added costs, right—manufacturing and procurement—and unit costs added up in the balance sheet and everything. But we also had some bad debt dispositions of increased provisions, not bad debts, but the actual provisions. So there were all offsets in here.

Now, as for your second part of your question about the ongoing plans that we have, yes, there will be some delays. There is a little bit of disruption to achieving, in particular, the manufacturing synergies that we expected from Frutarom. That’s quite simply because we can’t – that people are not traveling out to various sites, even we are working from home quite effectively. But as Andreas has mentioned too, we do prioritize the safety of our people, and people are just not traveling out to sites. So there will be some delays in realizing the synergies from Frutarom. Coming to procurement, which has been a huge disruption due to raw materials and sourcing and all the rest of that, and that has not shown up in our P&L, but that’s because our teams have been sort of pulling in really hard yards, making sure that we handled all this without disrupting our customers. Something gives, and that something that has given is pushing through some of those other synergies. Andreas, is there anything you want to add there as well?

Actually, just one thing on the closure of the factories. We might have, in some cases, a delay of maybe two to three months. That’s what we are planning right now. We will be done with what we saw in the mid-end of the third quarter, mid and end of the fourth quarter. So that’s the planning right now. I hope, Adam, that helps.

It does. Thank you.

We will take a question from Lauren Lieberman of Barclays. Your line is open.

Great, thanks. It’d be good to actually just clarify that. I think in the queue on the food integration, there were risks associated with not being done this year and said it could even extend into not just fiscal 2021, but into 2022. So into 2020, could you clarify that versus what you had just said about only a three-month delay on synergy? More broadly on Frutarom, I was just curious to know kind of what drove the upside in the quarter. Is it sustainable? From what we can see, it looks like Savory was a big part of that. Is that also – we talked about some mix dynamics, the areas in Frutarom that are coming through maybe a bit better than expected. Is that also another driver on mix? Thank you.

Okay. Let me start with the second piece first. We have seen a couple of elements of the legacy food business that performed very well, and we believe it's sustainable. So everything which is connected to health, we believe will be sustainable because it’s an incredible drive for these healthy ingredients. That’s number one. The second one is on food protection because people really want to increase shelf life and make sure that this works out well, so that’s going extremely well, double-digit. But we believe it will also be sustainable. Then on Savory, we will see that Savory Solutions has made actually extremely progress in terms of bringing it together with the legacy flavors. We have seen good developments. This is certainly not sustainable in a double-digit growth rate; it is more dependent on how quickly the economies open up and how much of this is in the Food Service area because that’s certainly has more negative impact here as well. On the other hand, this is part of this famous butcher's business. People in Austria and Germany were eating meat like there’s no tomorrow because all the restaurants were closed, and that helped us with sales as well. These are interesting dynamics. But I hope it helps as an explanation.

And then on the food integration, risks associated with not completing integration work before merging with DuPont—there are basically some wanted to put a hold on our manufacturing plants; we just hold back because we believe with N&B now we have a different way forward where we can use these capacities and can utilize them for some of the N&B products. We are now doing everything we’ve said we are doing despite the things where we believe with the N&B combination, we have a better way forward when we have N&B on board as well. So that’s it. That’s the only thing. And that’s on Tilburg in Holland, but that’s it. We can talk more in detail. I hope it helps.

We are now past the top of the hour. And we will now conclude the call. I now want to hand it back to Andreas for closing remarks.

Yes, thank you very much for the time. I hope everybody is healthy and stays healthy. We certainly have time to speak over the next one or two days. Thank you very much. Take care. Bye-bye.

This does conclude today’s conference. You may now disconnect your lines, and everyone have a good day.