International Flavors & Fragrances Inc. (IFF) Q3 2016 Earnings Report, Transcript and Summary

Now, I would like to welcome everyone to the International Flavors & Fragrances Third Quarter 2016 Earnings Conference Call. All participants will be in a listen-only mode until the formal question-and-answer portion of the call. I would now like to introduce Michael DeVeau, Vice President, Global Corporate Communications & Investor Relations. You may begin. Michael DeVeau - International Flavors & Fragrances, Inc.: Thank you. Good morning, good afternoon, and good evening, everyone. Welcome to IFF's third quarter 2016 conference call. Yesterday evening, we distributed a press release announcing our financial results. A copy of the release can be found on our website at ir.IFF.com. 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 the outlook for the fourth 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 filed on March 1, 2016 and our press release that we filed yesterday. 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, Rich O'Leary. We will start with prepared remarks and then take any questions that you may have. With that, I would now like to introduce Andreas. Andreas Fibig - International Flavors & Fragrances, Inc.: Thank you, Michael. As usually, we would like to start with an executive overview of our third quarter and year-to-date performance. Then, I will provide an update on the progress we are making in terms of our long-term Vision 2020 strategy. Once finished, Rich will review our financial results in greater detail, including specifics on each business unit as well as our cash flow statement and outlook for the remainder of the year. And I will provide some concluding remarks and we will be finished by taking any questions that you may have. In the third quarter, currency neutral sales grew 3%, lead by an improved performance in Flavors. Thus, approximately 1 percentage point related to the acquisition of IFF | Lucas Meyer Cosmetics. Our top line performance continued to be driven by new wins across both business units, along with increased volumes in Fragrance ingredients. From a currency neutral operating profit perspective, we expected quarter's three performance to be muted, given the timing of planned investments. Yet, results came in softer than expected. This is largely attributed to lower than expected gross margin performance. Rich will provide more details in a moment. As a result, currency neutral adjusted EPS in quarter three was challenged. Despite the benefits from lower year-over-year shares outstanding due to our share repurchase program and a more favorable effective tax rate. On year-to-date basis, currency neutral sales growth for the first nine months of 2016 improved 4%, with 4% growth in Flavors and 5% growth in Fragrances. Currency neutral adjusted operating profit grew 3%, driven by sales growth, benefits of our productivity initiatives and the contribution from acquisitions. It should be noted that this is inclusive of approximately 3 percentage points of planned strategic investments, as well as litigation and compliance-related cost made over the course of 2016. A proportion of this investment is intended to help drive improved productivity and greater P&L leverage in the future. This, combined with lower shares outstanding and a more favorable effective tax rate, had had a positive effect on our currency-natural adjusted EPS, which increased 5% in the first nine months of 2016. Reviewing our progress against our Vision 2020, we continue to achieve strong results in the key areas that we've identified as strategic priorities for us: encapsulation, modulation, North America, Africa and the Middle East, to name a few. From innovating first perspective in flavors, sales of our sweetness and savory modulation portfolio continued its trend of strong double-digit growth, currency neutral growth across all categories. In Fragrances, encapsulation-related sales of Personal Wash & Home Care improved strong double digits in a currency neutral basis, demonstrating that our technology is starting to gain traction in areas outside of Fabric Care. In the third quarter, we also launched four new flavor molecules in the key tonalities of citrus, onion and garlic to help our flavors continue to build consumer preferred products that perform in the marketplace. In Fragrances, building on our legacy of pioneering first, one of our Vision 2020 goals is to launch more new captive molecules to give our perfumers a competitive edge when creating the next great fragrance. Tracking this initiative, we have recently commercialized a new captive fragrance ingredient called Saffiano (6:14) to further drive differentiation. This particular fragrance ingredient is a strong rich natural leather with powdery soft sweet quality, providing a unique modern twist and is very additive to many fragrance creations. It enhances strength and increases both facets and fragrance accords by providing a very clean natural effect. The combination of the two molecules we have released so far this year, plus the two we expect to commercialize in the fourth quarter, puts us on track to double our annual fragrance molecule output average from two per year to four per year. In addition to this expansion, we have also adjusted our commercial fragrance ingredient strategy to release these types of captive molecules to the external market sooner to accelerate value creation. In the areas where we are targeting a market leadership position, our growth has accelerated. Our strong growth momentum in the Middle East and Africa continued in the third quarter, as currency neutral sales improved strong double-digit, with both businesses achieving very strong growth. In North America Fragrance, we saw 6% increase for the third quarter, driven primarily by strong double-digit growth in Fabric Care. This was led by our encapsulation platform as we continue to leverage this technology to gain market share. Another strategic area for us is Home Care, where lower single digits on a currency neutral base, led by double-digit growth in Greater Asia. We also continued to position ourselves to be our customers' partner of choice and go to supplier. Our ongoing commitment to provide our customers with in-depth local consumer understanding, superior innovation, outstanding service and the highest quality of product allowed us to continue to capture the growth of both local and faster-growing regional accounts, with regionals outpacing global accounts. This should strengthen as our acquisition of Ottens Flavors and, more recently, David Michael and Fragrance Resources, the one we announced our intention to purchase last week, are all very strong from their regional customer bases. We are also collaborating with Delos and Mayo Clinic to be a part of their Well Living Lab, which is a new research facility dedicated to understanding the interaction between health and well-being in indoor environments through human-centered research. This world-class Living Lab leverages and expands upon the principles of the WELL Building Standard, which focuses on seven concepts relevant to indoor health: air, water, nourishment, light, fitness, comfort and mind. We are excited about the opportunity to leverage our expertise in scent to help improve the lives of individuals. In the third quarter, we also became the first flavor and fragrance company to join the World Economic Forum. As pioneers of the senses for more than 127 years, we embrace this unique opportunity to exchange ideas with other leading organizations who are interested in making positive lasting changes in society. This collaboration with the Forum aligns with IFF Vision 2020 strategy, which underscores how we are as a company, and businesses in general can innovate in the area of artistry, science, technology and sustainability to produce positive results for both business and society. I'm also proud to be elected to the World Business Council for Sustainable Development Executive Committee. The WBCSD is a CEO-led organization of forward-thinking companies that galvanizes the global business community to create a sustainable future for business, society and the environment. I'm extremely excited to represent IFF and about our journey as an organization to help leave the world a better place for generations to come. We continued our trend of strengthening and expanding our portfolio by accelerating our efforts in M&A with the addition of approximately $160 million in expected annualized sales from the acquisition of David Michael and Fragrance Resources, both of which complement our strategic vision well. I will speak in more detail about each of these acquisitions in a moment. I'm happy to report that IFF | Lucas Meyer Cosmetics continues to perform well, achieving double-digit growth on a standalone basis. We believe their performance is a good indication that we are putting our capital towards long-term value-creating opportunities. Turning to our more recent acquisition announcements, David Michael is a privately held flavors company headquartered in Philadelphia. The company is well known in the industry for its vanilla expertise, strength in Dairy and Beverage categories, and the relationships with dynamic faster-growing middle market customers. David Michael complements our Ottens Flavors acquisitions from last year by strengthening our ability to serve the faster-growing mid-market customers in North America and solidifies our strong number one position in Flavors North America, a strategic priority for us. The deal, which closed on October 7, is expected to add approximately $85 million of sales in 2017 and expected to be EPS accretive in year one and economic profit breakeven between years three and year five. This bolt-on acquisition is another important milestone in IFF's Vision 2020, helping us win where we compete in the world's largest flavor market as we look to further accelerate growth. Late last week, we also entered into an agreement to acquire Fragrance Resources, a privately held family owned fragrance company, who for nearly 30 years, has distinguished itself by exceptional creative talent and quality service to faster-growing regional customers. This highly complementary bolt-on acquisition further will increase our penetration in Specialty Fragrances, a faster growing sub-category within Fine Fragrances, and is expected to strengthen our market share position with the regional customer base within the key markets of North America and Germany. Fragrance Resources is expected to add about $75 million of sales in 2017, and is also be EPS accretive in year one, and economic profit breakeven between year three and year five. Right now, we expect an early 2017 close. And we look forward to welcoming Fragrance Resources to IFF. The combination of both acquisitions is expected to contribute approximately 4.5 percentage points to our currency neutral sales growth in 2017. This, plus expected cost synergy benefits, will lead to greater financial performance in the years to come. With that, I would like to turn the call over to Rich. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Thank you, Andreas, and good morning, good afternoon to everyone on the call. Building on Andreas' commentary, sales growth on a currency neutral basis for Q3 came in as expected, growing 3%, with 3% growth in Flavors and 2% growth in Fragrances. On a consolidated basis, our top-line growth benefited from approximately 1 percentage point related to the contribution of our Lucas Meyer Cosmetics acquisition. On an organic basis, we grew 2% on a currency neutral basis, driven by new wins across both businesses. I want to provide you with greater insight with respect to our performance, including foreign exchange-related pricing for Q3. As a reminder, our industry indexes the majority of its pricing in emerging markets to movements in foreign exchange rates. For example, in Brazil, while actual invoicing is done in Brazilian real, the invoice amount is indexed back to hard currencies such as the euro or the U.S. dollar. On a predetermined basis, prices are adjusted up or down to reflect the underlying movements of currency and the product profile. When reporting, we exclude the indexation effect on local currency invoicing from our currency neutral sales growth calculation. This is different from our competition. In Q3, adjusting our currency neutral sales growth calculation to a basis similar to how our competition reports, our currently neutral sale growth would have increased to approximately 3% organically and 4% inclusive of the acquisition of IFF | Lucas Meyer Cosmetics. On a two-year basis, to factor in the year-ago performance, organic-currency neutral sales would have increased to an average of 4.5%, which is ahead of our largest competitor by approximately 150 basis points. From a profitability perspective, currency neutral adjusted operating profit was down 4% year-over-year, principally due to year-over-year decline in gross margin, and I'll walk you through that in greater detail in a moment. We benefited from the lower year-over-year shares outstanding and a more favorable tax rate that helped offset the impact of our operating performance on a currency adjusted EPS basis. Looking at our Q3 currency neutral operating profit results, I want to provide more clarity on our performance drivers year-over-year. In the second bar, you'll see the contribution of our cost and productivity initiatives. Due to likes of formula optimization, indirect procurement savings, and manufacturing efficiencies in both compounds businesses, we delivered approximately 6 percentage point benefit, year-over-year to overall profitability. In the third bar, you can see that growth added approximately 5% to profitability. From a headwind perspective, there are several items that I need to elaborate on. In the fourth bar, RSA expenses represented approximately a 5 percentage point drag on operating profit. It should be noted that this includes approximately 3 percentage points related to planned investments that we mentioned earlier in the year, and another 1 percentage point in compliance and litigation-related costs. The strategic investments, while they challenge profitability in the short-term, are expected to yield P&L leverage in the years to come. The greatest gap to our previous guidance came in the form of weaker sales mix. Beverages, our highest margin category in Flavors, had limited growth in the quarter. While Savory, a less profitable category, performed very well, growing high single digits. On the Fragrance side, we experienced a similar dynamic, with Fine Fragrances, a strong margin category, declining year-over-year, while we experienced growth for the first time in approximately two years in our Fragrance Ingredients business, which is a less profitable category. Net-net, this led to an unfavorable sales mix, which represented a 3% drag to operating profit. In addition, we were also pressured by year-over-year manufacturing performance, principally related to manufacturing yields in our Fragrance Ingredient manufacturing network. Rounding out our performance, price and input costs and other miscellaneous items, including the year-over change in incentive compensation, were the remaining headwinds. Turning to our business unit performance for the third quarter, Flavors currency neutral sales increased 3%, driven by mid-single-digit growth in Savory, Dairy and Sweet. From a regional perspective, growth was led by high single-digit increases in Latin America and mid-single digit growth in Greater Asia and Europe, Africa and the Middle East. North American results were challenged, reflecting low single-digit growth in Savory and Sweet that was offset by softness in Beverage. Europe, Africa and Middle East increased 5% on a currency neutral basis, as growth was led by new win performance, particularly in Savory and Sweet. Africa and the Middle East continue this impressive growth trend, improving strong double digits in the current third quarter. Greater Asia posted 5% currency neutral growth, led by strong growth in India, Asia, Indonesia and China, which returned to growth after several quarters of decline, partly due to the manufacturing odor issues that we saw in early 2015. We're happy to see that the business is stabilizing and returning to growth as the odor issue is behind us. On a category basis, within Greater Asia, we achieved double-digit growth in both Beverage and Dairy. Growth in Latin America rebounded, improving 7% on a currency neutral basis, led by strong double-digit growth in both Brazil and Mexico. Flavors currency neutral segment profit was challenged, as volume growth and the benefits from productivity initiatives were offset by weaker mix, unstable price to input costs and increases in RSA. Fragrances currency neutral sales improved 2%, including approximately 1 percentage point associated with the acquisition of IFF | Lucas Meyer Cosmetics. Growth was led by high single-digit growth in Ingredients and low single-digit growth in Consumer Fragrances. From a category perspective, Fine Fragrances was challenged; on a currency neutral basis, as strong double-digit growth in Greater Asia and low single-digit growth in North America was more than offset by softness in Latin America and Western Europe. It should be noted that we believe that a part of our softness in Finer Fragrances can be attributed to a large fine fragrance customer, who is going through a portfolio transition via a divestiture. Consumer Fragrances grew 1% on a currency neutral basis, led by mid-single-digit growth in Fabric Care and Personal Wash. On a geographic basis in Consumer Fragrances, growth was led by a high single-digit increase in Greater Asia, and mid-single-digit growth in North America. Fragrance Ingredients sales were up 8% on a currency neutral basis, driven by low single-digit growth on an organic basis, and the contribution of sales related to IFF | Lucas Meyer Cosmetics. From a profit perspective, Fragrances currency neutral sales profit declined, as volume growth and the benefits of cost and productivity were offset by weaker mix, unfavorable price and input costs, manufacturing performances and increases in RSA. From a cash flow perspective, operating cash flow improved 12% versus the same period in 2015. Our operating cash flow was 14% of sales, up from 12.8% in the first nine months of 2015. This change was driven by our core working capital levels improving versus year ago period, principally driven by improvements in accounts receivable. In terms of capital deployment, capital expenditures through the first nine months totaled $70 million, and we're on track to spend approximately 5% of sales in 2016. As previously noted, this increase were be principally driven by capacity projects in Greater Asia and investments in technology expansions. Switching gears to cash returned to shareholders, during the first nine months of 2016, we spent approximately $134 million on dividends and $94 million in share repurchases. This puts us on target to deliver on our commitment to return 50% to 60% of adjusted net income to our shareholders. As we finish up 2016, we expect business trends to improve sequentially in the fourth quarter. We expect stronger currency neutral top line growth in Q4 versus Q3, driven by improvements in both Flavors and Fragrances and the benefits of our acquisitions of David Michael. For modeling purposes, we have assumed that David Michael will add about 200 basis points to currency neutral sales growth in Q4, while providing limited benefits on an operating profit basis, given the increase in purchase price accounting impacts. From a currency neutral operating profit basis, growth is expected to strengthen in the fourth quarter. And while we do expect pressure on gross margins to continue given the sales mix dynamics we've discussed earlier, we believe that improvement in volume trends and the benefits associated with cost and productivity initiatives will drive operating profit growth year-over-year as we compare to our largest year-over-year quarterly reset in incentive comp during the fourth quarter last year. The combination of this currency neutral operating profit performance, plus lower shares outstanding and some benefits in our effective tax rate, is expected to lead growth in currency neutral EPS also. Upon entering 2016, we expected challenging conditions, given the high level of economic uncertainty and a more cautious volume outlook of consumer packaged goods companies. As evident in today's marketplace, this is indeed the case, as volume consumption remains challenged across many end market categories and economic volatility and visibility in key markets around the world remains challenging. We acknowledge that we are slightly lowering the previous guidance we provided earlier this year. Nevertheless, the viability of our business remains strong and we expect to deliver growth across all of our key financial metrics on a currency neutral basis. For the full-year, we see currency neutral sales improving 4% to 5% versus 2015, with broad-based contributions from organic and inorganic business. Currency neutral operating profit is expected to grow 3.5% to 4.5%, in large part due to the benefits of cost and productivity improvements, increased volumes and the benefits of acquisitions. It should be noted inclusive in our guidance is approximately 3 percentage points of litigation and compliance-related costs, as well as planned strategic investments made over the course of 2016. As I mentioned earlier, these investments are intended to help drive improved productivity and greater P&L leverage in the years to come. From a currency neutral adjusted EPS perspective, we expect a modestly lower effective tax rate and the continuation of a share repurchase program to lead to 5% to 6% improvement on an EPS basis. In terms of foreign exchange, we have tweaked the impact of currency on our guidance, as it is slightly more favorable. On a sales basis, we expect currency to impact results by approximately 1.5 percentage points. And for adjusted operating profit and EPS, we expect a 2 percentage point impact. With that, I'd like to now turn the call back over to Andreas. Andreas Fibig - International Flavors & Fragrances, Inc.: Thank you, Rich. In summary, despite the challenging global operating environment, our year to-date results are solid, with 4% growth in Flavors and 5% growth in Fragrances. Progressing in quarter four, we expect business trends to improve sequentially versus quarter three, as all of our key financial metrics return to growth on a currency neutral basis. Longer-term, we continue to be focused on the execution of Vision 2020, which is geared towards accelerating our growth, increasing differentiation and driving cost efficiency, which, in turn, should lead to sustainable profitable growth. Our R&D pipeline is the strongest it has been. We are winning in key markets' categories that we have identified as strategic and we are executing our M&A agenda, all of which will lead to greater value creation for our shareholders. With that, I would now like to open up the call to questions.

And your first question comes from the line of Mark Astrachan with Stifel, Nicolaus. Mark Astrachan - Stifel, Nicolaus & Co., Inc.: Yeah, thanks. Morning, everybody. So, Rich, productivity outpaced reinvestment in the quarter I think a little bit more favorable, too, than expectations going in at the beginning of the year. So I guess I'm curious your thoughts from here about anticipated productivity initiatives and reinvestment. As I recall in June last year, you had talked about anticipation of reinvestment being net neutral versus productivity initiatives, and now it's obviously more favorable. So, I guess how should we think about that dynamic in the fourth quarter, but also into 2017 and beyond and sort of what level of productivity initiatives are now required to grow EBIT in line with those long-term targets? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Okay. Thanks, Mark. More clearly, as I talked about last year in the current situation, productivity gains are clearly a key component of our financial algorithm. When we do better, we have more ability to reinvest. When we don't, we've got to adjust our spending and control our costs. The combination of volume growth and productivity gains are really what drive the foundation of our P&L leverage, and we've got to manage all three of those dynamics, volume growth, productivity and how much we reinvest and invest in the business. In the current environment, as you've seen, it's challenged. Growth is below our historical trends and below our long-term financial long-term guidance. And, as a result, we've had to adjust how we allocate those resources. Mark Astrachan - Stifel, Nicolaus & Co., Inc.: Got it. Okay. And just related to that last point, so and I'll preface it by saying macros have clearly become a bit worse probably than anticipated last June, but I am curious how you think about the company's ability to achieve the revised long-term targets that you set out for sales, EBITDA and EPS last June, given since then, I don't think the numbers have really hit those targets, certainly not on an average basis. So, are those metrics still reasonable or considering the market conditions, do they need to be reassessed, particularly sales growth, given its important to driving the other two? Andreas Fibig - International Flavors & Fragrances, Inc.: Maybe, Mark, it's Andreas. I'll take it. We believe it's reasonable on a long term. I believe what's important for us always that we can't manage our business quarter-to-quarter because it's a long-term business here as well. And what we are doing actually to make sure that that we hit our long-term targets is, first of all, we believe that we are capable to produce solid top-line results, given our focus on innovation. Our pipeline, as I said, is actually very strong. It was never as strong as it is right now. Emerging markets, we had a dip in the last, let's say, 18 months. We believe that the emerging markets will eventually come back. Also, the currency situation here was challenging for us, and we're diversifying our portfolio as well. In terms of the mix, I believe we have to focus right now on the mix improvement, which we have done in the past. The fixed cost leverage will help as with the productivity initiatives. And here, I think what's important, and maybe Rich can talk about it, some initiatives are the initiatives we're doing always on manufacturing, but with ZBB, we have now, let's say, a new lever, which we are pulling, but, Rich, you might comment on that one. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Sure. Thanks, Andreas. Yeah. I mean, for me, as Andreas mentioned earlier, we've got to look at both the short-term profitability, but also make sure we protect the long-term growth prospects and strategy of the business. And, look, clearly, we're under-delivering in 2016 versus our long-term targets. We're not going to be able to make that up overnight. And we're still in the early stages or still in the stages of planning for next year. But I think as Andreas talked about, focusing on innovation, those are things that drive expansion of our gross margins, as with the productivity gains. ZBB, that's part of the strategic investments we made during this year. We are starting to embed that in the organization and we'll start to get benefits. We've seen some of the benefits this year, but I think it will continue to ramp up next year into the future. And I think we've got to look at everything we do and look at our business model on a broad basis. How do we operate and how do we leverage our capabilities across the business. How do we continue to drive process efficiency, at a functional level. And all those things will enable us to manage our cost structure and provide the balance between profitability and our ability to reinvest and grow the business on a long-term basis. Andreas Fibig - International Flavors & Fragrances, Inc.: And if I might add, one of our pillars in the strategy is actually our M&A ambition. And if we assume for a moment that we close on the Fragrance Resources, we have done actually four deals in the last 15 months, which will roughly add just right now without the growth in the future, $264 million in sales. And they're actually quality assets, which will help us in terms of mix and in terms of diversifying our customer base as well. So that's something, plus the synergies which might come out of these acquisitions, which will help us to achieve our goals. I think all of that taken together, we believe that we can make that. Mark Astrachan - Stifel, Nicolaus & Co., Inc.: Great. Thank you.

Your next question comes from Lauren Lieberman with Barclays.

Great. Thanks. Good morning. Andreas Fibig - International Flavors & Fragrances, Inc.: Good morning, Lauren. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Morning, Lauren.

Great thanks. I want to focus first on the North America Flavors; that business came in a bit lighter than I had expected. And I remember there being some business that was expected to be commercialized in the second half, a big win. So just wondering if that happened, if there was another delay or what the situation is there? Thanks. Andreas Fibig - International Flavors & Fragrances, Inc.: No. I would say it's just a challenging environment in North America for us at the moment. No, I think that's what I would comment. And that makes it even more important for us that with the two acquisitions, David Michael and Ottens, that we bring it together as our platform for the mid-market, because that's where we see the growth. And that's our main objective right now to become the leader for the mid-market and the smaller customers. And I think when that's happening, you will see growth as well, because now with these two companies in our portfolio, we have enough critical mass to move a big market like North America for us. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah, Lauren, from a category standpoint, I'd say Beverage was down. And on the other side, Savory and Sweet were up slightly, but not enough to offset the weakness that we saw in Beverage.

Okay, great. And then, also, it just looked like the comments in the release and in the earnings bridge on the difference between input costs and pricing, and then I think in the Q, you talked about a fairly benign input cost environment. So could you just help me understand, triangulate those two? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah, sure. I mean, it's a combination of factors, Lauren. I think we saw price input pressures in both businesses. On the Flavor side, it's really driven by the price increases on naturals, and the inventory levels that we have, where we're experiencing the impacts of those very, very quickly. Vanilla is certainly one of the key aspects that we're seeing that pressure. As Andreas talked about, I mean, the acquisition of David Michael will help us on that aspect. On the Fragrance side, it's really a of couple things. One, from a pricing standpoint, it's been more about pricing pressure from a customer standpoint. And then, the second piece is really related to our Ingredients business, being aware we've wanted to address the declines in that business. And we've gone and looked at our go-to-market strategy. And we want to protect our market share more aggressively. And so we've had to adjust pricing accordingly. On the compound side, it's more about pricing pressure from the customers and what's necessary to defend the business that we have today.

Okay. So, then look forward into next year, and that would suggest we're in a sort of more price-constrained marketplace than maybe we would have expected 6, 9, 12, 24 months ago. Is that reasonable? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah, Lauren, I don't want to go into too much detail. I mean, we'll have more clarity in February, but I would say that what we're seeing today and what we expect today, that input costs will be up next year; not huge amounts, like we've seen in the past, but it's going to be up. And that's principally going to be driven by naturals in both businesses, as well as some of the downstream effects of oil-related derivatives as we've gone from $30, $40 a barrel up to $50 a barrel.

Right. Okay. But at the same time, your ability to price to recover some of that is more constrained? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. I mean, certainly on the Fragrance side, yes.

Okay. And then, would the thought be to accelerate productivity to try to make up that gap, because it definitely sounds like the Fragrance business, where there's a little bit less ability to recover costs, and the naturals exposure? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah, I think, as I mentioned earlier on Mark's question, we're going to have to look at productivity and what we can do from a productivity standpoint at the manufacturing level. We're going to have to look at what we can do to simplify and streamline the organization and the overhead levels. And we're going to look towards, as I mentioned earlier, benefits associated with embedding ZBB-type principles across the organization. And all three of those things are going to enable us to, as I said earlier, manage the dynamic between profitability growth, our expectations and our ability to invest in the business long term.

Okay. Thank you. Andreas Fibig - International Flavors & Fragrances, Inc.: Yeah.

Your next question come from Mike Sison from KeyBanc.

Hey, guys, and... Andreas Fibig - International Flavors & Fragrances, Inc.: Hey, Mike. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Good morning.

Congrats on the new role there, Rich. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Thanks.

So, when I take a look at the third quarter currency sales growth outlook relative to what you said in the second quarter, it's actually up. So it's a little bit better. And then you've talked about some of the headwinds you faced. And your currency neutral operating profit growth is lower than you said in the second quarter. How long do you think it will take to sort of flush through some of these issues? And I would imagine you think that the leverage on operating profit growth should be better than sales growth rate, right? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah, as I said in my remarks earlier, for Q4, operating profit leverage, in Q4, will be better than top line. I think that that's despite the incentive comp reset that I mentioned earlier. I think short, medium term, we still expect to see pressures on sales mix. Fine Fragrances is still going to be pressured, and I think, you think about early next year, Q1 was the strongest quarter we had for Fine, and so, I think it's going to be very challenging as we start next year. So, as we look into next year, we're planning and we're acting on a conservative basis, and I don't think that we're sitting here saying that there is going to be a robust environment or robust recovery next year.

Right. Right. Okay. And then, when I think about acquisitions, you mentioned you're going to add about $150 million in sales growth for next year, it's about 5%. Does that or should that lever to a similar amount of EPS growth next year? Andreas Fibig - International Flavors & Fragrances, Inc.: It's probably a bit early – that's Andreas taking it, because we will, let's say, integrate these companies fully next year. So, David Michael, we have closed the deal early October. So, we need some time to make sure that we integrate it well into our platform here. It's actually turning then organic in the fourth quarter next year. And the other deal with Fragrance Resources, we will hopefully close early 2017, so it will take some time, I expect let's say, to integrate it very well into our network as well. So, it will help us quite significantly on the top-line growth, as you just outlined, but Rich might comment on the cost side. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. So, Mike, from a profitability standpoint, EPS, I think as you saw in our commentary, we expect it to be EPS accretive, but it's not going to be anywhere near that impact from a profit standpoint, because we're going to have this step-up in basis. And so, as we saw with Lucas Meyer, as we saw with Ottens, particularly early on, it's not going to have much of an impact at all on operating profit, depending upon what comes out of the valuation work. On a cash basis, sort of an EBITDA basis, it certainly will be more positive. And then over time, as Andreas alluded to, as we're able to integrate the two acquisitions and drive the business rationale and the synergies, we'll be able to start to get more and more of an impact on an operating profit basis. Andreas Fibig - International Flavors & Fragrances, Inc.: And as we always said that, we started last year was our first two acquisitions, we haven't done too many over the last 15 years, but now I think we're getting a little bit more skilled, also integrating these assets into our network and as fast as we can do it, as fast as we can produce results here. So, we are actually pretty well on track with that and I'm very satisfied with our focus we are making on the M&A front here, because that gives us another, let's say, critical mass we can basically play with.

Great. Thank you.

Your next question comes from John Roberts with UBS.

Thank you. Could you actually elaborate a little bit more on the Fragrance Ingredients strength? It was up double-digit in most areas. And a little bit more detail on the North American Beverage weakness, what's behind that? Andreas Fibig - International Flavors & Fragrances, Inc.: I'll get started. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah, you'll get started. Andreas Fibig - International Flavors & Fragrances, Inc.: So, John, first of all, good morning, it's Andreas. On the Fragrance Ingredients, it's quite a remarkable turnaround we are seeing here. And it's basically led to a couple of factors. Let's start with the not so exciting one, it's technically, because we are cycling through with one of our big customers we lost before, so the comparison is a bit better for us, but also the strategy is revamped now. And Nicolas and his team have done a great job to look into the business and to our customers, made a good, let's say, approach in terms of target the right customers and started also selling of our more captive molecules earlier, which is actually bringing us a greater value equation already upfront. We have waited probably too long in the past. And these two, let's say, two measure has really helped us to revamp the Ingredients business after two years of really not so good performance. We are pretty happy with what we're seeing here. Does that answer your question, John?

Yeah. And then, North America Beverage? Andreas Fibig - International Flavors & Fragrances, Inc.: North American Beverage... Richard A. O’Leary - International Flavors & Fragrances, Inc.: I think some of it is, as we talked about, alluded to earlier, I mean, I think the win performance in both businesses is pretty good, but particularly on the Flavors side, the lifecycle of those wins has been shorter than what we've seen in the past, so the erosion impact is principally what's driving down or pressuring the performance year-over-year.

Okay. And then, Rich, I think you said compliance and litigation costs reduced margins by 100 bps versus a year ago. Could you provide some additional details on that? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. I mean, the drivers really are two things. One, you saw in the Q that we have a case going on and we're actively pursuing that and vigorously defending that, but that costs money. And as we prepare for trial, potential trial, early next year, we're getting prepared around. That's a piece of it. The bigger piece of that is really related to the REACH requirements in the fragrance business and it goes through a cycle where there is another – the next cycle is in 2018. And so we have to prepare for the registrations now, when we incur cost this year, we incur it again next year. And then the following year, potentially we get a little bit of money back from other companies that use our products. But it's really the registration and compliance costs associated with our materials that we operate within the European environment.

Thank you. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah.

Your next question comes from Faiza Alwy with Deutsche.

Yes. Hi. Good morning. So, I just wanted to again go back to North American Flavors. So, Ottens was in the base this quarter. Can you talk about how that business performs, because I think the worry is that it's run separately, but do you think you're experiencing any dis-synergies as Ottens becomes part of a larger company and some of your customers are more used to doing business with a company that's more agile and quick to deliver a solution? Andreas Fibig - International Flavors & Fragrances, Inc.: We're actually not, because we keep that platform quite separate in terms of how they act. The only thing we are doing is that we are delivering our technologies to make sure that they can use these more high-tech solutions as well. So dis-synergies, we don't see actually. So now the next thing is actually to combine it with David Michael's because that's important. The good thing is that both companies are in Philadelphia, which makes it much easier than if they would have been in different cities. So no, we don't see dis-synergies and that would be my comment on that. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. So, Faiza, I think as I mentioned earlier, I think one market, I think, is pressured and certainly, certain key clients. The lifecycle on the wins was another factor. I think we expect to see improvement in a strong rebound in Q4. So, I think it's more short-term than we think anything long-term or structural.

Okay. Great. And then, Rich, could you just expand on the manufacturing cost? I think you said that was on the Fragrance Ingredients business. Was there something specific that happened this quarter and it's not expected to continue next quarter or just a little more detail around that? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Sure. No problem. I think it is primarily manufacturing yields in the Ingredients business that I alluded to earlier. Q3 last year was a very strong result, so I would say above average productivity. Our planning was to expect this to be more or less more in line with historical trends, so on average. And we came in below that in the quarter. So, the year-over-year impact is bigger than the absolute impact. I don't think it's structural. I think there is a lot going on in the Fragrance and Ingredient business, in terms of the runs and the product mix, which we're working through and working to optimize, but I don't think it's a long-term challenge. I think it's certainly the big impact was a function of year-over-year performance going two different directions.

Okay, great. Thank you. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yes.

Your next question comes from Jeff Zekauskas with JPMorgan.

Good morning, it's Silke Kueck for Jeff. How are you? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Hey, Jeff – Silke, sorry. Andreas Fibig - International Flavors & Fragrances, Inc.: Silke, good morning.

Good morning. What's the EBITDA that you expect from the acquisitions next year? So typically, EBITDA level is something like 50%. So, do you think the business can contribute, I don't know, $80 million EBITDA next year or it will be something lower than that? Richard A. O’Leary - International Flavors & Fragrances, Inc.: No, 50% – Silke, let's come back on that one offline. But, I mean, I think if you look at kind of the amortization levels that are in the Q, that we provide visibility in the Q and in the press release, I would expect similar levels. I mean, obviously, we have to go through the details.

Yes. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Over the next several quarters, but that I think that overall profitability is the two businesses are pretty close to our existing businesses. And I think the existing amortization levels for Ottens and Lucas Meyer is a close enough proxy to use to try to estimate what the EBITDA levels are.

I apologize, I didn't mean to imply that EBITDA was up 50%. So EBITDA was somewhere like in the mid-20%s and so, I apologize. I miscalculated something, but do you think like a mid-20% EBITDA level is something that's reasonable? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. Certainly, not short term, but long term, I think it should be. Again, it's our core business and there is no reason why it shouldn't be similar to what our existing business is.

It takes some time, okay. In terms of the strategic investments you are making, do you expect to make similar investments in 2017 and is there any quantifiable benefit that you can sort of like indicate? Like is this something where you see a benefit over like a two-year period or a three-year period, like what do you get from it? Richard A. O’Leary - International Flavors & Fragrances, Inc.: So I talked about the REACH expenses, which is more on the compliance end.

Yes. Richard A. O’Leary - International Flavors & Fragrances, Inc.: From a strategic investment standpoint, some of that work was related to embedding in the ZBB principles. And, as I mentioned earlier, we'll expect to begin to get those benefits next year. And I would expect those things to continue to build over the medium and long term. I'm not ready to say today exactly what those are, but we're going to get benefits related to that. Another key part of the strategic investments is more the overall profitability of the business and leverage not only at the operating profit line but at the EPS line.

And is there like a level of investment you expect for the next year, that's quantifiable? Richard A. O’Leary - International Flavors & Fragrances, Inc.: I think that, year-over-year, the level of investment will likely go down a little bit next year versus this year. It's part of the dynamic that I mentioned earlier of managing strategic investments versus growth versus reinvestment in the business. And we've got to work with the entire management team in working that balance. And so part of that will be moving those three levers, but I do expect some of those costs to come down year-over-year.

Okay. And then, my last question is in terms of your business in Europe, is the business, in general terms, is it the same, is it slowing, is it growing? Do you have any views on whether you're affect by the exit of the UK? What are business conditions like in Europe? Andreas Fibig - International Flavors & Fragrances, Inc.: I probably can take it. I would say, first of all, it depends on the category or on the business. We see still growth in Flavors, but in all parts of the region, there's Europe, Africa, Middle East, and that's one thing. We suddenly see stronger growth in Africa, Middle East here than we see in Western Europe. So, it's not great growth trends we are seeing. In general, also on our Fragrance business, it's slower than what we see in other regions of the world. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Certainly for Fine. Andreas Fibig - International Flavors & Fragrances, Inc.: Certainly for Fine Fragrance. So, I think it's a tough environment for us. The Brexit, I would say, there's no impact for us right now, despite the currency impact. We are all having it at the moment. And it all depends how finally the deal is negotiated with the UK and the rest of Europe. But right now, I think it's a pretty limited impact we are seeing. Richard A. O’Leary - International Flavors & Fragrances, Inc.: And then, I think the other thing on consumer is, we mentioned early about one of our large customers, and so, I think that's in the short and medium term, that's something that we have to work through.

Yes. Is that something that you will anniversary at a point in time because the divestiture happened a while ago? Richard A. O’Leary - International Flavors & Fragrances, Inc.: I'm not sure I... Andreas Fibig - International Flavors & Fragrances, Inc.: I'm not sure I...

I'm assuming that you're referring to like the fragrance divestiture by one of your larger customers to Coty or I'm imagining that's what it is, but that happened like some time ago. And so I was wondering whether you sort of like anniversary like the headwind from that? Richard A. O’Leary - International Flavors & Fragrances, Inc.: My comment around the large customer was more on a consumer side.

On the consumer side. Richard A. O’Leary - International Flavors & Fragrances, Inc.: So, I think, Fine, we talked about the issues with the customer, but I think we are seeing buying pressure and erosion in one of our big consumer Fragrance customers that we have to work through. And that's not going to be lapped yet.

How many more quarters are there to go? Richard A. O’Leary - International Flavors & Fragrances, Inc.: It's a least a couple more quarters.

So it's just begun then, okay. That's helpful. Thanks very much for the detail, appreciate it. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. Andreas Fibig - International Flavors & Fragrances, Inc.: Okay, Silke.

Your next question comes from Jonathan Feeney with Consumer Edge.

Good morning. Thanks. I wanted to dig in a little bit on the gross margin piece of this, especially the two-year progression. Am I right, Rich, that Fine Fragrance is a significantly higher gross margin than the rest of the business? Is there any way you could kind of quantify for us on a basis-point basis, just give us an indication like how much of the two-year slowdown here, which has been, on a two-year basis, pretty dramatic from the second quarter to the third quarter. Was that Fine Fragrance shortfall and just you're making a lot of money before and maybe how much is other things like currency or the contribution from Lucas Meyer and Ottens? Thanks very much. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Sure, no problem. I think, as I said earlier, I mean, Fine is our most profitable category on the fragrance side. Beverage is the most profitable category on the flavor side. And both of those were pressured in Q3. I'm not going to provide details in terms of how much that is, but they're well above average. So the mix impact is a significant pressure, and you saw in the quarter what kind of impact that can have.

And how about – maybe this is a simple question, but how does currency impact you at the gross margin line over the past couple of years, does it hurt you at all? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. I mean, we try to strip that out and so but it's a complex supply chain in term of where it can go. We start at the ingredients plants and go through our ingredient plant network and then through compounds plant, so there is a time lag impact. There is a multiple currency impact. We do our best to try to isolate that and pull that out of the individual drivers. So, what you see in terms of, as we talk about volume, price mix is our best estimates on ex-currency.

I understand. Thank you very much. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yes. No problem. Andreas Fibig - International Flavors & Fragrances, Inc.: Thank you.

And your next question comes from Gunther Zechmann with Bernstein.

Good morning, gentlemen. When you look at raw material costs, some of your competitors have started building strategic inventories. You seem to follow a different strategy and your net working capital and cash flow was strong, but you took a hit on the P&L. How should we think about the way you handle raw material cost inflation and what raw material impact also do you see going into year end and 2017, please? Richard A. O’Leary - International Flavors & Fragrances, Inc.: I think, Gunther, as I mentioned earlier, we do expect to see modest input cost pressures next year. There, we do have strategic stocks similar to our competitors. The exact strategy may not be the same. And so it's hard for me to comment versus what we're doing versus they're doing. As I had mentioned earlier in my comments, one of the key things that we're seeing pressure on the flavor side is on vanilla. David Michael has a tremendous amount of experience in that area. And we're already looking to leverage that to help us in that market going forward. So we do work with our procurement teams in terms of looking out 6 to 12 months on a rolling basis and make decisions around strategic stocks. Some of it can be driven by the mix of the business now.

What other than vanilla are strategic stocks for you? Richard A. O’Leary - International Flavors & Fragrances, Inc.: We got vanilla. Most of it's the naturals side of it, natural citrus, some of those things. Andreas Fibig - International Flavors & Fragrances, Inc.: Patchouli. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Patchouli, all key things that we have strategic stocks in.

Okay. Thank you. Andreas Fibig - International Flavors & Fragrances, Inc.: Yes.

Your next question comes from Heidi Vesterinen with Exane BNP Paribas

Hi. Just on the input cost question again, I wondered if your ability to recover input cost pressures to pricing differs by customer type or product area. I wondered, for example, is there a difference between globals and smaller customers? Thank you. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Go ahead. Andreas Fibig - International Flavors & Fragrances, Inc.: No. You go. Richard A. O’Leary - International Flavors & Fragrances, Inc.: No. I think, Heidi, clearly, our objective and our strategy has always been to cover our costs. It has an impact. It can have an impact on our margins, because as we recover it, by sort of the pure math of that, it can have a dilutive effect on our margins. The market is tough right now, that I mentioned earlier, with certain categories of customers, but our objective is always to cover the costs.

At this time, I would like to turn the call back to Andreas for closing remarks. Andreas Fibig - International Flavors & Fragrances, Inc.: Thank you very much for everybody participating. Thank you for the vivid Q&A, and we see each other, or talk to each other, for the next call. Thank you. Have a good day.

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