At this time, I would like to welcome everyone to the International Flavors & Fragrances Fourth Quarter and Full Year 2015 Earnings Conference Call. All participants will be in a listen-only mode until the formal question-and-answer portion of the call. [Operator Instructions] I would now like to introduce Michael DeVeau, Vice President, Global Corporate Communications and Investor Relations. You may begin.

Thank you. Good morning, good afternoon, or good evening, everyone. Welcome to IFF's fourth quarter and full year 2015 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. Please note that this call is being recorded live and will be available for replay on our website. 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 our outlook to the first quarter and full year 2016. 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. Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release. With me on the call today is our Chairman and CEO, Andreas Fibig, and our Executive Vice President and CFO, Alison Cornell. We will start the call with prepared remarks and then take any questions that you may have. With that, I would now like to introduce Andreas.

Thank you, Michael. I would like to start with an executive overview of our operational performance for the full year. Then I want to provide an update on the progress we are making in terms of our long-term 2020 strategy. Once finished, I will ask Allison to cover our financial results in greater detail, including a comprehensive review of our fourth quarter, cash flow statement, and cash return to shareholders. Then we will both provide commentary as it relates to our outlook for 2016 and finish by taking any questions that you may have. Starting with a financial review of our consolidated results for the full year 2015, I'm pleased to report that currency-neutral sales grew 5%, which encompasses 6% growth in flavors and 4% growth in fragrances. Overall, top line growth benefited from a two percentage-point contribution from the acquisition of Ottens Flavors and Lucas Meyer Cosmetics. In addition, our organic business, which grew 3% on a currency-neutral base, continued to benefit from strong new win performance, particularly in fragrance compounds, as sales related to new wins finished above our five-year average. For the full year 2015 and on a currency-neutral basis, consolidated adjusted operating profit increased 8% and adjusted operating profit margin expanded by 50 basis points as a result of our sales growth, the benefit associated with cost savings and productivity initiatives, mix gains related to acquisitions, and lower incentive compensation expense. This improvement in operating profit, when combined with a more favorable effective tax rate and a reduction of shares outstanding, led to an 11% increase in our currency-neutral adjusted EPS in 2015. While I am pleased with our results on a full year base, I'm not satisfied with our top line performance in the fourth quarter. That is driven by a combination of a challenging…

Thank you, Andreas. Given the softness that we experienced in the fourth quarter, I want us to reconcile to what we communicated on our third quarter conference call to actual Q4 results. On November 11, we stated that we expect to have moderate currency-neutral sales growth in the fourth quarter with organic sales flat to down slightly in Q4. At that time, as shown in the chart, currency-neutral sales on an organic basis was up 2% in October. As we moved through November, our growth trajectory continued with currency-neutral sales up nearly 3% for the month. Then, unfortunately, our performance in December came in softer than we expected. While we knew we faced a strong year-ago comparison that included an extra week of sales, which we quantified to be 200 basis points in the quarter or approximately 600 basis points in the month of December, there were a few other factors that further pressured results. First, in flavors, we experienced unprecedented fluctuations in terms of customer order patterns. While traditionally we have good visibility around the commercialization of products and our customers’ recurring order patterns, we ultimately are dependent on our customers in terms of launches and inventory levels. In December, we unexpectedly experienced several large flavors customers reducing their overall order intake, which impacted results. This was also the case in consumer fragrances, where customers did not reorder at the same level as they did in the year-ago period excluding the 53rd week impact. In fragrances, our ingredients business remained under pressure as one of our largest fragrance ingredients customers continued to rationalize their product portfolio. In Q4, the impact was even more pronounced, which further pressured results. And lastly, we continued to see pressure in flavors in China, partly due to a weaker economic environment, but also some…

Thanks, Alison. As we look ahead to 2016, I want to provide an assessment of our vantage point as we stand here today. Basically, there are four key themes that we believe are relevant when planning our financial goals for 2016. From an economic perspective, there's a lot of fluidity around the world. While the developed markets of the U.S. and Western Europe appear to be improving slowly and the emerging markets, the volatility we experienced in the second half of 2015 continues. Large markets like China appear to be decelerating and Brazil continues its decline. These two markets account for approximately 15% of our total sales. With regard to multinational consumer product companies, volume expectations seem to be muted as many organizations appear to be focused on improving margins while taking pricing actions in emerging markets to protect profitability. Fortunately, regional players continue to exhibit stronger volume trends, whether it be in the U.S. or in the emerging markets. This economic uncertainty has led to sharp declines in hard commodities such as oil, which is beneficial in terms of costs. This large decline in petrochemical should help in terms of input cost, although we continue to see naturals, such as vanilla and citrus, remaining elevated. Finally, in terms of foreign exchange, the US dollar continues to strength against world currencies. This continues to be a challenge for most multinational companies based in US, both in terms of translation and transaction exposure. With all that as context, we are preparing ourselves for even more challenging conditions, given the higher level of economic uncertainty and the more cautious volume outlook of consumer packaged goods companies. We expect 3.5% to 4.5% currency-neutral sales growth, including approximately a 1.5 percentage-point contribution on the acquisitions of Ottens and Lucas Meyer. From an organic perspective,…

Given the many moving parts, I wanted to provide additional insight and transparency into our expected profitability goal for 2016. In the table, we anchored on full-year 2015 adjusted operating profit and built out a reconciliation to bridge to 2016 operating profit. Starting with the second bar, you will note that we expect approximately a 4.5 percentage-point headwind related to the resetting of our annual incentive compensation program. For those of you who are not familiar, we at IFF are highly incentivized to deliver on our financial commitments. From time to time, there are variations in incentive compensation, as it is based on our performance relative to our annual plans. If we achieve our full-year financial targets, which are comprised of currency-neutral sales growth, gross margin as a percentage of sales, and absolute level of operating profit, and working capital as a percentage of sales, we will receive 100% of our designated payout. Should we over-perform or underperform our annual plan, our incentive compensation is adjusted higher or lower, respectively. Since in 2015, we underperformed on a few components of our plan, our payout was below 100%. Now, as we reset our targets in 2016, we budget for 100% payout, which ultimately is a driver behind the year-over-year variance. In the third bar, we've identified the incremental investments we are making in Vision 2020. These are critical strategic investments, for example, R&D, application and commercial, geared toward delivering our long-term strategic and financial objectives. As we communicated at our Investor Day, we committed to self-fund our reinvestment opportunity. In the fourth bar, you can see that we are aggressively attacking our cost base to not only cover our incremental investments, but also help to deliver on our short-term profitability objectives. In addition to our standard cost and productivity initiatives, which…

In summary, 2015 was a successful year for IFF. We were able to deliver solid financial performance, while also implementing our new Vision 2020 strategy, geared towards accelerating profitable growth, building greater differentiation, and maximizing shareholder value. Our focus now continues to be on the execution of our strategy. In addition in 2015, we integrated two acquisitions, strengthened and further prioritized our R&D initiatives, achieved our sustainability objectives, grew our talent, and invigorated IFF's brand with the launch of our new purpose statement and enhanced branding elements, all of which helps spotlight our vision, imagination, and innovative focus. Looking forward, we are committed to our long-term targets and continue to believe that over the 2016-2020 horizon we can deliver strong financial results. And while 2016 is more challenging in terms of the operating environment, we believe we can deliver solid financial results, while simultaneously reinvesting in our business. With that, I would now like to open up the call for questions.

[Operator Instructions] And your first question comes from Mark Astrachan with Stifel.

Hi, good morning, everybody. I wanted to ask on cost savings. So is the plan still to have the previously announced cost savings of 1% to 2% of sales fully reinvested back into the business, given what looked in the slide that Alison was walking through that there is a 2% benefit to EBIT growth embedded in 2016 guidance? In other words, does the benefit become a drag to EBIT in 2017? And then, just more broadly on the same topic, does the current macro environment, which is clearly worse than it was in June 2015 when those original savings were outlined, require more cost savings to grow in line with long-term targets today?

Mark, thank you for the question. Let me start and then I hand over to Alison. First of all, what we have started to be - and you have seen it in the call in terms of pretty aggressive, let's say, savings targets to make sure that we have good cost base, which will help us going forward in the years to come as well. And we will take part of it to reinvest in particular in R&D because we believe we have to build differentiation and new molecules. And as I hopefully have shown you during the presentation that we have already some early successes in terms of our pipeline, just mentioning going from two fragrance to four fragrance and new patented molecules, which will help us to grow our base over the years to come. I agree with you. The economic environment has worsened compared to, let's say, eight to nine months ago and that's the reason why we are cautious in terms of our outlook as well because the volatility is just very, very high right now. Let me hand over to Alison.

Hi, Mark. In addition to what Andreas said, the other thing that - we are being very aggressive from a cost-cutting perspective. And what you see on the bridge chart that we provided from 2015 to 2016 is one of the items that we need to cover is our bonus reset back to 1X. And so the cost-cutting is not only to cover the Vision 2020, but also to cover our bonus reset, and so we don't anticipate having that same issue as we move into 2017.

And your next question comes from Mike Sison with KeyBanc.

Hi, guys. Good morning.

Hi, Mike. Good morning.

Andreas, when you think about 2016 and what you are hearing from your customers, is the slowdown in terms of the demand coming from less new-product starts? Is it basically just customers, their customers not buying as much? Can you maybe touch on some of the underlying dynamics of what you are seeing in terms of the slowing in the markets?

Okay. Mike, thank you for the question. It's probably a bit of a long one to answer because a couple of the puzzle pieces we have to piece together. So if we look, for example, to fine fragrance, we can say it was a good Christmas season, so we basically saw good performance here, so we don't expect that we see a restocking effect here, so that's the first part of the business. We have a good project pipeline, particularly on the fragrance component side and also on the flavors side, so we see that this is good and very, very solid. In compounds fragrance, I would see it even over the average we have seen before. So that's good. On the flavors side, we see that projects are happening and we have projects that we have always executed by our customers, and it depends how, let's say, how much they are selling them of the product, especially on the category side. On the geographic side, what we see is US and Europe are actually pretty okay and coming back. We see a bit of a softness in particular in some of the emerging markets, like China, and we should not forget that if we look at our customers, in particular the big CPG customers, that the outlook for volume is relatively muted. The good thing is, we don't see this with all of our regional and local customers, and as you know our customer split is 50-50 with the big clients and the small ones. So bit of a long-winded answer, but they are really different pieces to be looked at for 2016. I hope that helps.

Your next question comes from Lauren Lieberman with Barclays.

Thanks. Good morning. Just first following up on that, my sense is that the CPG customers, that at least over the last six months, I mean, their outlook certainly haven't improved, but I don't really feel like there's been that much change in their outlook in terms of global market growth or volume growth. Maybe that it's not getting better as quickly as they had hoped, but it certainly doesn't sound to me like it's worse. So, I'm wondering if you are also seeing end-market demand slow for those regional and local customers that the macro is now trickling into total market demand, not just a bit of the share shift that you had seen happening. So that was my first question. The second was on the decision to invest in the new China flavor facility. How does that tie into the existing manufacturing plant or I guess there's two, but the one where you had kind of the emissions issues this summer? If you can just give us a little more color on that, it would be great. Thank you.

Let me start probably with the flavors plant first in China. We have made the decision that we will invest in the second plant. We plan to start groundbreaking at the end of the year and that will deliver us with, let's say, a backup plan for China for a market where we still believe we have to be present with a second plant for the volume. So that's actually on track. On our existing flavors plant, you know we had – earlier last year, we had the odor issue and we have salted so far on the flavors side, so that's working. We are back with our manufacturing. But having said all that, that has cost us some business over the course of 2015. Coming back to your first question, what we see is a deceleration of order patterns with our global customers and that's something which is certainly impacting the business. It depends certainly customer by customer and region by region, so we really have to go into more of a detail. But still for the smaller regional and local customers, it's – I would say the assessment stage that you have a couple of companies which have passed their growth here, and that's actually good for us because we do significant business with these customers as well. I hope that helps.

Your next question comes from Heidi Vesterinen with Exane.

Hi, if you could go back to slide 10, please I wondered if there is any chance you could break out how much growth you lost from each of the headwinds that you've identified, just to get some color on what had the most impact please. Thank you.

This is Mike, Heidi. So on slide – just to confirm, greater insight into Q4 2015 sales, okay. So we will address it that way, just from a deceleration perspective. I think, Alison, the question was about, in the bullet points we have here, kind of a standard value associated to each one of them to show part of the [indiscernible] in the quarter.

I'd say from an attribution perspective, the 53rd week we said in the quarter accounts for a 200 basis point deterioration and of that, there's 600 basis points associated with the month of December. And then beyond that in terms of timing of order patterns, that's about I'd say one percentage point, and then I'd say the difference between the portfolio rationalization I'd say – China flavors is maybe 1.2 and then the difference is the portfolio rationalization. So those are the big chunks that we tried to outline.

And your next question comes from Faiza Alwy with Deutsche Bank.

Yes, hi. Thank you. Good morning. So I have a couple of questions. The first question is, do you think you are losing share to some of your larger competitors? Because I know we talked about before how if you look at their organic growth, their definition is a little bit different than yours. But in talking to them, we've tried to quantify the difference and it seems like they are doing a lot better than you even on a two-year stacked basis in various sort of geographies and categories. And I'm particularly interested in China because they have been talking up China and telling investors that China is coming back and they are doing a lot better with the local regional players. So that indicates that you are losing share, so I just wonder if you can shed some light on that and if you are concerned about that.

Let me start and then hand over to Alison. Faiza, thank you for the question. First of all, we don't believe that we are losing share. In contrary, we believe that we win share. Particularly in some of the major categories, we are actually very, very strong. If we factor in the year-ago comparison, so for the year, and we believe actually that going forward that this trend will continue. In particular regarding China, we see a slowdown in the economy, but maybe Alison might comment on this one as well.

So I'd say it's probably two pieces from China. We see a deceleration of orders and we think that initially had to do with our odor abatement issues that we experienced. But beyond that, our current pipeline is lower from a new brief perspective because we believe our clients are concerned a bit about not having a backup site in China and looked for alternative suppliers in the short term. We believe once we rectify that issue, there will be no issue from a volume perspective. I think beyond that, I wanted to add to Andreas' comment about giving on FX. Because the way that our clients or our competitors measure, they actually take the benefit of pricing in terms of their growth rate and so it's not really an apples-to-apples comparison as reported. So you need to essentially factor the results down by maybe one-third to have an apples-to-apples comparison. If you do that, you will see on a full-year basis we are in fact performing better than our competition. The other distinction I wanted to make was when commenting in terms of China and share and briefs, the comment is in particular to flavors and not fragrance because we are growing in the fragrance space in China.

And your next question comes from John Roberts with UBS.

Good morning.

Hi, John.

Hi.

Do we have any other contingent payments from Ottens or Lucas Meyer ahead, and is Aromor now fully paid for?

So to answer your question, no, there are no other contingent payments associated with any of that – any of our acquisitions and Aromor is fully paid for.

And your next question comes from Jeff Zekauskas with JPMorgan.

Thanks very much. I have a question about your current assets. Your sales growth year-over-year was down 5%, but your receivables are up 9% and your inventories are up 4%, 4% and 9%. Why is that? And does that mean you have to really produce a lot less in the first quarter to get your inventories back in line?

So a couple things, so we had the impact of acquisitions. That was one item related to that. We had an increase in inventories – one associated with acquisitions, but also associated with the building of our Turkey and Indonesia plants where we ramped up over time and we expect to ramp that back down. And then from a receivables perspective, we also had an additional DSO increase associated with the extra week of sales that we had in 2014 versus 2015. So those are, I would say, the big three moving parts.

There were a couple of events, which will be not repeated in the current year, like the inventory from the acquisitions, for example.

Right.

You have a follow-up question from John Roberts with UBS.

Thank you.

Hi, John.

Hi. That’s okay. Fragrance ingredients seems like it's stepping down again here. Do you think it will decline further sequentially, or is it going to stabilize quickly and we go through four quarters of difficult comps and then maybe we'll start to see some growth after we anniversary the step-down?

A very, very good, good question, and we have a lot of, let's say, focus on our fragrance ingredients business here. First of all, let me say that it's around about 9% of our total sales and the majority of our production, so greater than 60%, is used for internal consumption, which is kind of a strategic vertical integration component of the fragrance compounds business. And the base fragrance ingredients business was negative and of course were largely related to the portfolio [indiscernible] by one – actually, our largest fragrance ingredients customers, and that will be not repeated. So, we don't expect another big step-down coming our way.

Just to clarify, Q1 will continue to be challenged, and then you will see the lapse, if you will, that you spoke to in your question occur in Q2, and then we should be good from there.

And your next question comes from Mark Astrachan with Stifel.

Thanks for the follow-up. I'm curious what underlying assumption is embedded in your sales growth outlook for the overall flavor and fragrance category for 2016. And then, just wanted to try to understand a bit on the progression as well. So I get it – October and November are better, December worse sequentially, but that was sort of before some of the global markets started to do what they've done over the last six weeks. So curious to what you're seeing from a quarter standpoint and maybe how you think about progression of sales growth through the year to get to your guidance.

Okay, Mark. Let me start with the first piece on the market growth. What we certainly see is the deceleration in the flavors market in general followed by 0.5% to 1%. The market on the fragrance side is kind of stable. That's what we see in the environment. And let me comment on the first, let's say, the first quarter of 2016 is we started actually off the month, January, well, growing low single digits, but this is month of January and we remain cautious in the first quarter as we are comparing to our very strong year-ago period where we had the growth of flavors 9% and fragrances of 5%. So we had an okay start, but, as we said before, we have to be very cautious because the volatility is very high at the moment.

And to comment as well, we talked about changing order patterns from a client perspective. I'd say we are experiencing more volatile order patterns, and so our visibility is, I'd say, a bit lower than we've historically experienced.

And we have a question from Jeff Zekauskas with JPMorgan.

Hi. If I could follow up, could you compare the pricing trends in the flavor business and the fragrance business? Sort of which pricing trend does better and which is worse, and just some rough idea of magnitudes. And then, secondly, the euro is now $1.13. So if the euro stayed at $1.13, how does that change your FX calculations for 2016?

So, let me start with your second question…

Sure.

… with the euro. We would see upside of a few million dollars in our forecast, based on an average rate of $1.05 for the year, and so it depends on how long the euro stays at $1.13 and really how it plays out across the year. But just assuming at this point it stays at that, it is a potential upside of a few million dollars. Going to your first question in terms of flavors versus fragrance, I would say fragrance from a pricing perspective is more pressured on the ingredients side, where flavors, I'd say, has more opportunity to increase.

At this time, I will turn the call back over to Andreas for closing remarks.

Yeah, thank you very much for all the good questions, and I would like to close the call right now and wish you a good day. Thank you.

Thank you for joining today's conference. You may now disconnect.