International Flavors & Fragrances Inc. (IFF) Q1 2017 Earnings Report, Transcript and Summary

At this time, I would like to welcome everyone to the International Flavors & Fragrances' First Quarter 2017 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 first quarter 2017 conference call. Yesterday evening, we distributed our press release announcing our financial results. A copy of the release can be found on our IR website at ir.iff.com. Please take a 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 our second quarter and full-year 2017. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially from forward-looking statements, please refer to our cautionary statement and risk factors contained in our 10-K filed on February 28, 2017 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. I would like to start with an executive overview of our operational performance for the first quarter. Then I want to provide an update on the progress we made in terms of our long-term Vision 2020 strategy. Once finished, I would ask Rich to cover 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. Then, I will provide some concluding remarks and we will finish by taking any questions that you may have. I'm pleased to report that our first quarter sales growth was strong and in line with our expectations. Currency-neutral sales increased 7%, which was comprised of 10% growth in Flavors and 3% growth in Fragrances. Sales performance was predominantly driven by the contribution of our recent acquisitions of David Michael and Fragrance Resources and a strong performance in our Organic Flavors business, while we achieved growth across all categories and regions. In Fragrances, we were successful in offsetting challenging macroeconomic conditions in Latin America, primarily Brazil, driven by Fragrance Ingredients and Fine Fragrance, in particular in the EAME region. In terms of currency-neutral adjusted operating profit, the contribution from our recent acquisitions was strong and support our overall profitability as we are ahead of our acquisition plans. Organically, our currency-neutral adjusted operating profit came in consistent to the prior year as volume growth and productivity initiatives were offset by unfavorable price to input cost, as well as several unplanned expenses that Rich will go through in more detail later in the presentation. We also benefited from a lower effective tax rate and reduced shares outstanding in the quarter, which supported a 9% improvement in currency-neutral adjusted EPS. We continue to make progress each quarter with respect to our Vision 2020 strategy. I'm happy to report that the two of our key R&D-focused areas continue to be growth drivers in the first quarter. In Fragrances, our encapsulation technology continues to expand beyond the traditional Fabric Care category with strong growth in Personal Wash. In Flavors, sales of our sweetness and savory modulation portfolio continue to post strong growth and proving strong double-digits on a currency-neutral basis, led by savory, dairy and beverage. This is further proof that our innovative solutions are allowing us to meet our customers' demand by healthier and better-for-you products. Looking towards the future, we also commercialized two new flavor molecules to enhance our Flavors palette for (5:04) in order to continue to build winning solutions for our customers. We continue to see accelerated growth in the areas where we are targeting market leadership position, benefiting from our recent strategic acquisitions, as well as from solid growth in our Organic Flavors business, we saw a 14% increase in North America in the first quarter 2017. Our ongoing commitment to provide our customers with in-depth local consumer understanding, superior innovation, outstanding service and the highest quality products allowed us to continue to capture the growth of both global and faster growing regional accounts with regionals outpacing global accounts. This continues to strengthen as our recent acquisitions of David Michael and Fragrance Resources are all well strong from a regional customer base. I'm also happy to report that IFF | Lucas Meyer Cosmetics continued its strength in the cosmetic active ingredient segment as it won several beauty industry awards on CosmeticsDesign, including Best Skin Care Active Ingredient for Americas with Miniporyl, Best Hair Care Ingredient for Americas with Defenscalp, and Best Skin Care Active Ingredients Global with Miniporyl. All of which are showcased at CAGNY earlier this year. In addition to the slides, we have made from a market share and innovation perspective, we continue to position ourselves to be our customers' partner-of-choice and to-go supplier. In the first quarter of 2017, we expanded our business access by gaining core list status with a multinational Flavor customer to ensure we continue to increase our participation, ultimately leading to continuous growth. We also received an innovation award from a top Flavors customer, validating that our innovation, collaborative work and inspirational sessions are driving the success in achieving solutions that meet end consumer demands. During the first quarter, we launched our 2016 Sustainability Report entitled Circular by Design. It is an in-depth state testament to all we have accomplished over the past year and provides insight into our aspirations as we move forward with our journey to make IFF a deeply greener company. If you haven't already, I invite you to check out our report and companion video are found online at the iff.com/sustain. Beginning in 2014, IFF-LMR took a step forward and partnered with the Institute of Marketecology, a leading provider for international inspection and certification services for organic, ecological and social standards to certify that our strategic supply chains and operating platforms meet with the For Life criteria. During the first quarter, we were proud to announce that IFF-LMR achieved its 9th For Life Certification, this time for Burgundy Blackcurrant Bud. Our responsible sourcing platforms in naturals demonstrates our commitment to traceability and towards progressively more responsible ingredients. Certification For Life is a guarantee from IFF to our customers and their consumers. We are also targeting opportunities within our industry and near adjacencies to develop new technologies and to expand our geographic and business access. All of this must be done in a way that make strong strategic sense and leverages our expertise in science and technology. Over the past two years, we have successfully acquired five companies, three of which closed in the past seven months. Our acquisition of David Michael in October 2016 helped further reinforce our differentiated service model is the U.S. for Flavors middle-market customers, focused on innovation, agility and enhanced collaboration. In early 2017, we acquired Fragrance Resources, which is a key player in a fast-growing specialty Fine Fragrance category, also increasing our exposure to regional customer base. In the first quarter of 2017, these two acquisitions contributed approximately 5 percentage points of our sales growth and 3 percentage points of operating profit growth already, as we are tracking ahead of our acquisition case, driving sales growth and extracting synergies. Last month, we also announced the purchase of PowderPure to further expand our expertise and offerings for clean label solutions that satisfy consumer demands. Founded in the early 2000s and based in Oregon, PowderPure utilizes its patented Infidri drying technology to create all-natural food ingredients by eliminating water while leaving the taste, nutrition and color matrix intact. Using minimal processing, PowderPure currently focuses on all fruits and vegetable powders, juice powders, as well as other specialty products. PowderPure's technology has also been used to effectively repurpose valuable materials resulting from other food processing systems, turning them into useful and nutritious products and saving them from waste streams. The global trend in natural food formulations and the delivery of taste was options for the cleanest possible label. It's clear and we found the combination of powders, product quality, and the unique benefits of their technology very compelling. This platform further expands our access to fast-growing natural, clean label food ingredients and potentially creates opportunities in adjacent markets of nutraceuticals, specialty extracts, and coloring food stuffs. Overall, we are very excited about this addition to our organization and the future growth prospective it brings. With that, I would like to turn the call over to Rich. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Thank you, Andreas. Our first quarter results in sales growth was strong and in line with our expectations. Currency-neutral sales grew 7%, including approximately 5 percentage points related to the contribution of David Michael and Fragrance Resources, and 2 percentage points from our Organic business. Currency-neutral adjusted operating profit grew 3% as the benefit of acquisitions, volume growth, and cost savings initiatives more than offset unfavorable price to input costs, as well as unplanned expenses, including unfavorable manufacturing variances, bad debt, a product recall, and litigation loss. I'll go through these in more specifics on my next slide. Below the line, we had strong leverage as we benefited from a more favorable effective tax rate, which we expect to normalize over the next three quarters to approximately 22.5% on a full-year basis, and a reduction in shares outstanding related to our share repurchase program. These two factors led to a robust currency-neutral adjusted EPS growth in the quarter of 9%. Looking at our Q1 currency-neutral operating profit growth, I want to provide some more clarity on our performance drivers year-over-year. In the second bar, you can see that volume growth added 6 percentage points to profitability. In the third bar, we have highlighted the benefits of our cost and productivity initiatives. Due to the likes of formula optimization, procurement savings, and restructuring program savings, we delivered approximately 4 percentage points of benefit year-over-year. As Andreas stated earlier, the contribution of David Michael and Fragrance Resources added 3 percentage points to operating profit growth, as shown in the fourth bar, as we are growing and realizing synergies. From a headwind's perspective, as seen in the next bar, price to input costs were unfavorable by about 4 percentage points, driven by a reduction in pricing within Fragrance Ingredients, as well as volume-related rebates in core listing agreements in Fragrance compounds. The area where I'd like to elaborate more on is in the next box, which is related to unplanned expenses that negatively impacted our operating performance in the quarter by approximately 4%. About half of that amount relates to manufacturing variances in Fragrance Ingredients. We have a reactor temporarily suspended for approximately two to three weeks in one of our plants, and manufacturing yield variances due to the implementation of new manufacturing processes at another Fragrance Ingredient plant. The other half of the variance is – the headwinds, was driven by bad debt for a single customer based in Latin America, a litigation loss, and lastly, a charge of $1.8 million related to the write-off associated with the product recall. The remaining items, grouped together in other, primarily relates to deferred compensation expense, where we make mark-to-market adjustments based on the performance of the equity market. Net-net, had we not had these unplanned items, currency-neutral adjusting operating profit would've been more in line with our expectations. Looking at the business unit performance for the first quarter, Fragrance currency-neutral sales improved 3%, driven by growth in Fine Fragrances, Fabric Care, and Fragrance Ingredients. From a category perspective, Fine Fragrance improved 10% on a currency-neutral basis, inclusive of additional sales related to the acquisition of Fragrance Resources. Three of the four regions, led by EAME, achieved strong growth, with the exception of Latin America, which continues to experience abnormally high volume erosion due to weak economic conditions. Consumer Fragrances grew 2% on a currency-neutral basis, principally driven by the additional sales related to the acquisition of Fragrance Resources and improvements in Fabric Care. In the first quarter, Fabric Care grew low single-digits on a currency-neutral basis, with three of the four geographies posting strong growth, led by double-digit increase in North America and high single-digit growth in EAME and Greater Asia. Fragrance Ingredients sales were up 2% on a currency-neutral basis, as double-digit growth in EAME and LatAm were offset by softness in North America and Greater Asia. From a profit perspective, Fragrance's currency-neutral segment profit decreased 6%, as volume growth and the benefits from productivity initiatives were more than offset by unfavorable price to input costs, as well as several of the unplanned expenses that I mentioned earlier. In terms of currency-neutral segment profit margin, our profile remained strong, yet was under pressure year-over-year, driven by the above items I mentioned. Plus the Fragrance Resource acquisition, inclusive of a step-up in purchase price accounting and before realizing all the synergies. Flavors' currency-neutral sales increased 10%, driven by broad-based organic growth across all categories, as well as the contribution of sales related to David Michael. From a regional perspective, each region delivered growth led by strong double-digit performance in North America, which improved 27%, reflecting additional sales related to the acquisition of David Michael, as well as strong double-digit growth in dairy and savory in the Organic business. EAME increased 6% on a currency-neutral basis, led by high single-digits in Western Europe, Central, and Southeastern Europe. This performance was primarily driven by strong new wins. Greater Asia posted 3% currency-neutral growth, led by strong double-digit growth in India, Thailand and the Philippines. On a category basis within Greater Asia, performance was led by double-digit growth in beverages. Growth in Latin America continue, improving 7% on a currency-neutral basis, led by double-digit growth in Mexico and the Andean Pact, as well as mid-single-digit growth in the Southern Cone. Flavors currency-neutral segment profit grew approximately 12%, led by volume growth, the benefits from productivity initiatives, and the contribution of David Michael's acquisition. In terms of currency-neutral segment profit margin, we delivered year-over-year improvements, principally driven by our savings related to the productivity initiatives as well as volume growth. Turning to our cash flow, our core working capital levels continued to show improvement, principally driven by the timing of payables. Operating cash flow for the first quarter was $22 million compared to $40 million in the first quarter of last year. While we experienced lower outflows from working capital, we were negatively impacted by the timing of higher pension payments, which will normalize throughout the year, as well as higher incentive compensation payments. From a capital allocation standpoint, we spent approximately $27 million in CapEx and we continue to believe we expend approximately 5% sales in 2017. Regarding cash return to shareholders in Q1, we spent approximately $51 million on dividend payouts and $38 million on share repurchases. For the full-year, we expect to meet or exceed our total payout objective of 50% to 60% of adjusted net income. As we look to the balance of the year, we are optimistic that we can achieve our previously stated total financial guidance on a currency-neutral basis. Please note that this is absent of any additional costs and/or recovery related to the product recall, as it's not estimable at this time. We do not believe that the ultimate settlement of the claim will have a material impact on our financial condition; however, it may have an impact on any one quarter. We are reiterating our previously stated currency-neutral sales growth projection of 7.5% to 8.5%, including approximately 4.5 percentage points' contribution from the acquisitions of David Michael's and Fragrance Resources. Embedded in the acquisition impact is the sales benefit related to recent acquisition of PowderPure, which is expected to have a negligible impact on a full-year basis. From adjusted operating profit and EPS perspective excluding the impact of currency, we expect to achieve 5.5% to 6.5% and 6.5% to 7.5% respectively, inclusive of a 2.5 percentage point contribution from M&A for each. Given our performance in the first quarter and the outlook for the balance of the year, we raised the contribution from acquisitions which provided an offset to the unplanned expenses in our Organic business in the first quarter. For modeling purposes, please note that we expect the momentum in terms of currency-neutral adjusted operating profit to accelerate in the second half of the year as we fully realize the benefits of our previously announced productivity improvement initiatives. While our currency-neutral guidance has not changed, the effects of currency movements on our results have. From a top line perspective, the impact of currency improved by approximately 1 point to 1.5 percentage point headwind, primarily driven by an improvement in the euro to U.S. dollar exchange rate. On a profit and EPS basis, movements in several currencies such as the Brazilian real, Argentinean peso, Indonesia rupiah and Mexican peso versus the dollar has had an adverse effect on our guidance as well as transaction rate differences on the timing of inventories. We are hedged approximately 75% on euro profit exposure at $1.12 for 2017. As a result, on a full-year basis, we expect the impact of foreign exchange on adjusted operating profit to be approximately 2.5 percentage points and approximately 3 percentage points on adjusted EPS. With that, I'd like to turn the call back over to Andreas. Andreas Fibig - International Flavors & Fragrances, Inc.: Thank you, Rich. In summary, we are pleased that we achieved currency-neutral growth across all metrics in the first quarter of 2017. Sales growth was strong and overall currency-neutral adjusted operating profit was supported by a successful integration of recent acquisitions, evidence that we are allocating capital to the highest return initiatives. Simultaneously, we continue to refocus on the execution of Vision 2020 as we believe our emphasis on building great differentiation and delivering profitable growth that will create incremental shareholder value long-term. For the full-year, we are optimistic that our financial growth rates should accelerate as our 2016 performance as we have confirmed our currency-neutral financial guidance. With that, I would now like to open up the call for questions.

Your first question comes from Mark Astrachan with Stifel, Nicolaus. Mark Astrachan - Stifel, Nicolaus & Co., Inc.: Yeah. Hey. Morning, everybody. So, wanted to ask, if I heard correctly, the organic sales growth expectation is unchanged while EBIT and EPS are a little bit lower. So, I guess, on the top line, confidence in achieving accelerating organic sales growth through the year, including now off of a lower 1Q base. And I guess maybe putting it differently, too, what would have to happen for you to hit the low and the high end of that 3% to 4% range? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Thanks, Mark. Look, I think from a top-line standpoint, the first quarter was challenging. I think when we look at our full-year expectations, it's based on our current views in terms of confirmed new wins. We do expect that volume erosion and the effects of destocking, expect to have less of a drag as we proceed through the balance of the year. We are expecting to see improved performance particularly in the second half of the year related to Lucas Meyer's. And we'll continue to see greater contribution from the faster growing acquisitions and their impact associated with local and regional customers. Andreas Fibig - International Flavors & Fragrances, Inc.: If I might add, and if you look at the acquisitions, you have certainly an impact from David Michael, which was done in the fourth quarter, but it's not the total quarter, so we have technically more sales than Fragrance Resource, which was closed basically mid of January, so that has an effect here as well. Mark Astrachan - Stifel, Nicolaus & Co., Inc.: Okay. Maybe just following on that. You sort of look at the business performance relative to peers. Clearly, IFF has been underperforming, depending on which you want to -you benchmark against at least of the other big public four companies. So, I guess, I'm curious what your thoughts are that has contributed to that. And then, sort of related to it from a geographic standpoint, why do you think developed markets contribute more than developing markets, in terms of the expected growth? And what are you specifically seeing that would be the underlying behind that? Andreas Fibig - International Flavors & Fragrances, Inc.: Okay. Mark, I'll take it. First of all, we don't see an underperformance compared to competitors on a FX-neutral basis, that's number one. Last year, the first quarter is the first quarter, and I think we should look at the year. Looking at the developing markets, we see actually right now a pretty good performance for certainly North America, in many regards, organically, but also through the acquisitions. Europe is actually amazingly strong for us, which is a good one. Coming to the emerging markets, here, we see a lot of headwinds in terms of currency. I think all the currencies with exception of the euro, Rich just mentioned are all in the emerging markets, which are creating a lot of headwind for us. We see a lot of economic turmoil and volatility in Latin America, which is obviously an important customer not just for the Fragrance business – or region for the Fragrance business, in particular, Brazil is really not easy to manage right now. We see certainly more turmoil in the Middle East as well, and China is volatile. So, you see that the emerging markets or the contribution of the emerging market was not as good or as, let's say, important as it was many years or the years before. We believe that we still – as our exposure to the emerging market that many of these markets will come back over time and will create again a growth engine for us looking forward during the, let's say, strategic planning horizon. Mark Astrachan - Stifel, Nicolaus & Co., Inc.: Okay. Thank you.

Your next question comes from the line of Lauren Lieberman with Barclays.

Thanks. Good morning. So, looking at the outlook for the balance of the year, and Andreas, you just mentioned – sorry, I think it was Rich – about volume erosion and destocking being less pressure as we go through the year. Just when we look at the results of some of your customers, largely in the U.S. more so for the food companies, but also the HPC (28:35) players, the first quarter was a shocking turn to the negative, and they all seemed very surprised. So, I'm curious with degree to which you've seen that, sort of inventory adjustments for customers make its way to impact your business yet, or is that something we should still be anticipating in the second quarter? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Hi, Lauren. It's Rich. I think couple of things from me. One, I would say that, again, while I expect and we expect to see less of an impact, it's not like it's based on a significant turnaround. We still expect to see pressure, and it's less about having less of a headwind, but it's still going to be headwind. Our expectations are not based on having a significant turnaround, for example, in Latin America for Fragrances. Latin America for Flavors is quite strong and our full-year outlook for Flavors in Latin America is pretty consistent with what we saw in the first quarter. I think when we look at our relationship to our customers, I think as there is a downward correction, we are more lagging. And I think when conditions are improving, we're probably an earlier indicator. Andreas Fibig - International Flavors & Fragrances, Inc.: And I might add on – if you look at the market and you have seen this between the big companies and the small or mid-market companies, it's really bifurcation of the market. And now for us, in particular in North America, increasing our share in the smaller customers is really beneficial for us, and it will help us with our growth rates as well going forward.

But, Andreas, were those – and I understand that and I know that's been a big piece of the strategy and the acquisitions, it all makes a ton of sense. I just wonder if those businesses are yet large enough to offset some of the pressure that may be ahead, even if it's a short-term, again, as Rich said, kind of lagging the correction that your larger customers in North America have seen in the last three months? Andreas Fibig - International Flavors & Fragrances, Inc.: Actually, we see it now through, because it is now five acquisitions if we include PowderPure, and we are building critical mass. And what we see here is new wins as well going forward. And actually, all of these acquisitions – okay, I can't talk for PowderPure, it's probably between you. But all of the four acquisitions have at least double to triple the growth rate of regional business, and they are becoming an engine of growth for us. And I think it's helping. I agree with you. At the beginning, when we had our first acquisition, it was very small. It was not moving the needle, but now accumulating more of these growth engines that's really, really helpful for us, and that's actually moving it forward. Particularly in North America, we see it actually big times, big times.

Okay. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Lauren, I would...

Yeah. Richard A. O’Leary - International Flavors & Fragrances, Inc.: I would also say – sorry, Lauren. I would also say that – to what Andreas was talking about is, when you look at our win rates this year compared to our win rates last year, we feel good about where we are in both businesses. Volume erosion in the Q1 was above average, and as I said, I think we still expect to see pressure in the first half of this year. As that works out, we've got – certainly the situation in Latin America is challenging. We've got key customers there. Two of the key local and regional customers are clearly going through destocking. And again, as I said, we're not expecting that to turn around significantly, but we expect the impact to lessen as we progress through the year.

Okay. Great. And then, on the Ingredients business, so you mentioned that the spread between pricing and input costs, reading the Q, it just doesn't sound like the input cost basket is all that much worse, so it feels like maybe more pricing concessions or raw pressure in the business. So, can you just talk a little bit about that, and sort of plans to combat that dynamic? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Sure. Yeah. When you look overall, the net of pricing, the input costs is – as a percent of sales, the net impact in the quarter is little less than a point. Of that, about a third of that is price, so that's principally related to the Ingredients business. Two-thirds of that – the other part of that is really, as we talked about in the commentary, it's related to the Fragrance compound business, both the effects of core list agreements and getting on to new agreements, as well as the volume-related rebates. So, it's principally – those are the two factors in that split.

And is that core list, kind of fee and rebates, is that something that's always been a feature of the business, or has things gotten more competitive, that that's kind of a new dynamic to get access? Richard A. O’Leary - International Flavors & Fragrances, Inc.: No. I think that's always been there for – as we get access to more business, I mean, there's a bigger impact to that. But the effect of the global and the large customers using – requiring that, it's been around for years.

Okay. All right. I'll pass it on; I'll come back if there's time. Thank you. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Thanks. Andreas Fibig - International Flavors & Fragrances, Inc.: Thanks, Lauren.

Your next question comes from Silke Kueck with JPMorgan.

Good morning. It's Silke Kueck for Jeff. How are you? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Good. How are you doing? Andreas Fibig - International Flavors & Fragrances, Inc.: Thanks, Silke. I'm okay.

Good. If you look at your 2% organic growth in the quarter, was it 3% volume, negative 1% price? Was it 4% volume, negative 2% price? Like, how does one think about it? Richard A. O’Leary - International Flavors & Fragrances, Inc.: As I mentioned earlier, I would say that the new win commercial performance was strong. It's in line with our long-term averages. Pricing was slightly unfavorable, and I talked about that – just my previous comments with Lauren. And as I also said, volume erosion was a little worse than the long-term averages.

So you – okay. So, that's a volume erosion, but organic growth, and you think your price were down slightly, so that's down like 0.5%. Is that what slightly is? Richard A. O’Leary - International Flavors & Fragrances, Inc.: So, if you – I mean, overall....

So, how do you measure negative price versus the rebate? Because it seems to me, you seem to capture rebates... Richard A. O’Leary - International Flavors & Fragrances, Inc.: That's in price. That's embedded in the price number that I gave you.

Okay. Okay. In terms of the Fragrance Resources acquisition, I think there was like no benefit from the sales considered added this quarter. Is that just a one-time event, having to do with like the inventory write-ups and then you expect the business to contribute for the rest of the year? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Are you talking about in the 10-Q, Silke?

Well, just when I look at the Fragrance results and I look at the acquisition impact, like it looked like there was a sales impact that was positive, but no profit effect. So I was wondering, was that sort of like a one-time issue because you just bought it, you had to write-up inventories and you expect it to contribute to profits? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. There's two factors. One is, we have to write-up the inventory to basically selling price. So, the initial – as the initial sales of the inventory, we basically get no margin on it, or very little margin on it. I think that will continue probably for at least another quarter. On top of that, we have, obviously, we have the step up in intangibles which will continue, and we'll have that for multiple years and it really drives the impact, the synergies. Ultimately, as we ramp up the synergies, that's how we get back to cost of capital returns.

Okay. And I want to touch one more (36:38) like Latin America, because it seems that some of headwinds in Latin America has been – like when I look back, I think some of these we've seen now for like three quarters or four quarters and so. Like it does seem that by the time we get to the second quarter, your Latin America business should begin to get better. Well, like it seems you had these headwinds for that time, it's like four quarters whereas headwinds of the consumer side than on Ingredient side – I'm sorry, on the Fine Fragrance side than on the Ingredient side? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. Look, I mean, again, from a business standpoint, Latin America again I think Flavors is performing well. From our Fragrance standpoint, we've got a couple of factors. Again, the macroeconomic factors are certainly impacting the overall region. As I mentioned earlier, we've got a couple of key customers that their business is under pressure. And on top of that, we know that they're going through destocking. And that's – until they get to that process, it's going to continue to impact us. I think the other factor is when you look at our Fabric business, which is our biggest business in consumer. We are a little bit – we are more indexed to the value-added segment, particularly related to our encapsulation around, say, something like fabric conditioner in a market like Latin America, we see consumers trading down and are not purchasing fabric conditioners as much as they are doing basic detergents. So, that's part of what's dragging the Consumer Fragrance business down and providing the big headwinds that we've seen for multiple quarters.

Okay. The last question I have is, can you just explain – maybe I missed it – what the product recall relates to like and like in which region it affected? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. Sure. It's North America. There was a contamination issue that we traced back to one of our suppliers. Our own quality control and testing procedures identified the (38:49) contained the salmonella. We notified the customer and the FDA, and they've mandated a product recall. We don't believe it's reached the consumer, and there has been no reported illnesses. As a result of that, we wrote off our sales related to the inventory, and we wrote off our remaining inventory, and that was the total charge of about $1.8 million in the quarter. We do believe it's probable that we're going to have additional losses and costs, but we can't estimate it at this point in time. But we don't believe it's going to have a material impact on our financial condition, but it could have an impact on any particular quarter. And we'll also continue to pursue reimbursement. But again, it's very early in the process.

Thanks for the explanation. I'll get back into queue. Andreas Fibig - International Flavors & Fragrances, Inc.: Okay. Thanks.

Your next question comes from Heidi Vesterinen with Exane.

Hi. Sorry if I missed this earlier. Could you update us on input costs, please? What was the impact in Q1? What do you expect for the full-year? And could you also update us on what you're seeing in vanilla in Madagascar? Thank you. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Okay. Just a couple of things there, Heidi. Impact in the first quarter was slightly unfavorable. We've got and that's higher input costs for the Flavors business, particularly driven by the naturals and the vanilla that we talked about previously. Favorable on the Fragrance side of the business, but slightly unfavorable in total. For the full-year, I would say that we're looking probably at this point in the range of 3%. It could continue to go higher, depending upon what's going on with particularly vanilla. Vanilla continues to increase in the market. There's been supply constraints. There's a lot of pressure from a demand standpoint, and we continue to see vanilla prices going up.

And I guess you have a bit of stop, so you're incubated from these market crisis for a couple of quarters. Would that be the right way to think about it? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. I would say we're more incubated on the David Michael side. And on the rest of our business, particularly in North America and Europe, we're working with our customers on pricing.

Okay. Thank you.

Your next question comes from Faiza Alwy with Deutsche Bank.

Yes. Hi. Good morning. Andreas Fibig - International Flavors & Fragrances, Inc.: Good morning. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Good morning.

So, I just wanted to – morning. I just wanted to follow-up on the pricing. So, we're talking about that our price is going up 3%. Have you – I know you said you're in the process of having conversations with your customers. Have you sort of gotten any pushback on taking pricing? Has the environment changed at all from previous years? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. So, again I think it's primarily in – the pricing is primarily in the natural side of the business and more on the Flavors side, as I mentioned earlier. Overall, that's reflected in roughly 3% guidance that I just mentioned earlier, and we are working with our customers on that to recover those costs.

Okay. Okay. So, no change. And then just if you could talk a little bit about Ottens? And then I guess more broadly, if you could talk about what the organic growth of the business would've been assuming all of these acquisitions were in the base period? Andreas Fibig - International Flavors & Fragrances, Inc.: So, let me talk about the two acquisitions we did in North America and the Flavors side, Ottens and David Michael. This is all a lot of exposure towards the small and mid-size customers. We see here a good development. We see great new wins going forward, and we see that the performance is certainly outperforming the market. If we look at our market data right now, we should be the market leader for this segment of the market which was the intent of these two acquisitions to make sure that we increase our exposure towards these faster-growing customers. In terms of the sequencing, we acquired David Michael in October. So, I would say end of this October, it turns into organic. And Ottens is already organic. So, it's not accounted any longer as an M&A. Let's say, growth number is already an organic number and it's helping us with our organic growth acceleration anyway.

Okay. But if you assume that Fragrance Resources and David Michael were in the base, what would your pro forma organic growth would have been? Richard A. O’Leary - International Flavors & Fragrances, Inc.: I mean, as we indicated, when you look at the first quarter, it was about 5 percentage points, worth of growth.

Okay. I'll follow-up offline. I mean, the 5 percentage includes the incremental benefit of like the entire sales, right? So, I just want to know sort of on an organic basis how those businesses are doing. But I'll follow-up. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. We can follow-up on it. Andreas Fibig - International Flavors & Fragrances, Inc.: Yeah.

All right. Okay. Thank you.

Your next question comes from Curt Siegmeyer with KeyBanc Capital Markets.

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

Just a follow-up on unplanned expenses. I know you clarified on the product recall cost uncertainty related to that, but would you expect any costs related to the manufacturing or the bad debt litigation to carry into 2Q or beyond? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Bad debt, no. I think, we might have a little bit of carryover into Q2 on the manufacturing side. The reactor is back up and running, so that's not going to be an issue for Q2. But the other issue where we've ramped-up the new manufacturing process, there will be a little bit of carryover into Q2.

Got it. And then just on Fine Fragrances in Latin America, the volume erosion that you experienced there. I know that's been an issue for several quarters in a row. But I'm just wondering, when you compare that to the Flavors side that showed really solid volume growth, is there a vast difference in the geographic exposure and that being part of the reason as the economic conditions that impacted Fine Fragrances not – is impactful on the Flavors side or maybe just some more color around that? Andreas Fibig - International Flavors & Fragrances, Inc.: I would say, Curt, that certainly the Fine Fragrances is in a, let's say, in a weak economic environment, more discretionary item and people save on it. But on the food side, probably not so much. And with all products, in particular, in Latin America, we are let's say exposed to let's say better cost solutions like with the powder drinks, for example. So, that we basically hitting actually an area which has good growth rates. Unfortunately, that's not the case with the Fine Fragrances and here we have to say as well as particularly two of our local customers where we are very strong, we have very high win rates, still they are suffering volume losses here. So, that's what it is. That actually is the difference between the Flavors and the Fragrance business as well. Richard A. O’Leary - International Flavors & Fragrances, Inc.: And the destocking that I mentioned earlier. Andreas Fibig - International Flavors & Fragrances, Inc.: And the destocking. Yeah.

Got it. That makes sense. Thanks.

Your next question comes from Adam Samuelson with Goldman Sachs. Adam Samuelson - Goldman Sachs & Co.: Yeah. Thanks. Good morning, everybody. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Morning. Andreas Fibig - International Flavors & Fragrances, Inc.: Morning. Adam Samuelson - Goldman Sachs & Co.: Maybe a question on customer activity and I know you talked about some, obviously the sales pressures that your customers are facing have been significant especially in Latin America. And you've talked about new business wins start to layer into the portfolio later this year. Can you talk about the activity level in terms of new briefs and if your larger MNC customers in particular have maybe shifted a little bit out of (47:30) kind of cost containment and are actually trying to accelerate that new product cycle to reinvigorate growth and how that provides visibility to get later into this year or into 2018? Richard A. O’Leary - International Flavors & Fragrances, Inc.: It's a very, very good question. We see it actually stable for the big ones compared with last year. But we are seeing increasing activity from the smaller customers and particularly on the Flavors side. And that's encouraging taking our strategy into account, while we are increasing our exposure here. But in the big ones, we haven't seen an increased level so far. It's just pretty stable compared to what it was last year. Adam Samuelson - Goldman Sachs & Co.: Okay. And then on the Fine Fragrance side, in your customers' distribution, it's disrupting, to say the least, with the department stores, especially in North America. Are you starting to see that flow back into your business in terms of the customer , as new distribution channels become much more important to that business? Andreas Fibig - International Flavors & Fragrances, Inc.: Yes. Absolutely. And you hit the nail here. It is, in particular, North America, where the distribution model that's changing, and particularly on the more Mass (48:43) Fragrance, Fine Fragrance part. And here, it's actually of the essence to make sure that we as well, and our customers, let's say, find the right mix of the products between the prestige, the premium, and the mass and masstige (49:00) market. I think that's really, really important. Interesting enough, it looks – at the moment, it's very much a North America issue. Europe looks still different. And if you look at our growth rates, you can reconcile that. But that's certainly a topic for our customers, and ultimately a topic for us as well. Adam Samuelson - Goldman Sachs & Co.: And can you talk about the margin implications of that? Do you see that presenting risks, as some of those Fine Fragrance can be particularly rich in terms of the margins? Andreas Fibig - International Flavors & Fragrances, Inc.: Yeah. At least not on our end so far. No, we don't see any risks. Adam Samuelson - Goldman Sachs & Co.: Okay. All right. That's helpful. Thank you. Andreas Fibig - International Flavors & Fragrances, Inc.: Okay. Thank you.

Your next question comes from Jonathan Feeney with Consumer Edge.

Good morning. Thanks very much. Andreas, I want to talk about, could you give us a rough sense, your split of business between – across the company – between the large global companies and smaller regional companies? I know you talked, gave us a little detail about the trends there, but what is that – how big have smaller regional companies, however you want to customers define that, become within your mix? It is – I mean, I know the trends are better, is the cost-to-serve those customers, because of increased complexity, a little bit higher than your larger customers, at least on a marginal basis? And is that maybe part of what we saw this quarter, or is there anything to that? I'd just like to understand it. Andreas Fibig - International Flavors & Fragrances, Inc.: Well, it's a good point. So, for us, our exposure, big two, the smaller one is roundabout 50/50. What we see is, or what you have to do if you serve the smaller customers is that you need a differentiated service model, which creates, let's say, actually a better approach for these customers which is more agile, faster, more nimble, and has certainly, also on our side, probably lesser exposure to cost, because the good thing is, many of these customers are making faster decisions, and you basically get the business earlier and faster than with the bigger ones. And usually, you don't have a core list exposure where you have to say, bigger rebates to get on this list, for example. And that's the reason why, on the Flavors side here, in the U.S., we are having kind of a standalone facility now serving these customers. And that's basically everything, the whole operation between Ottens and David Michael, with some of our smaller business together to make sure that we take into consideration a really differentiated service model here. That's the only way that you can become successful in this market segment. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Sorry. Go ahead.

Yeah. I was just going to say, would you say the – is there a structural cost to service you here at the margin that it just gets harder – I mean, a lot – it seems to me like a lot of your growth in margin over the past five years has been making everything more efficient, focusing on more – larger briefs for huge customers, and this is a lot of what you've done. And now like a little bit more complexity maybe erodes that at the margin, but maybe brings some other things. So I just like to understand how that margin works structurally? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. So, let me just put some – a little bit in context. When you look at the year-over-year margin profile for the business, if you take the currency impact out, which is probably 80 basis points, if you take out the effect of the unplanned expenses that I mentioned earlier, which is probably 70 basis points at the margin level, so if you – absent those two factors, our margin year-over-year will be slightly positive. So, your cost-to-serve element, there's different components. Andreas talked about the Flavors side of it. If I look at the compound side for Fragrances, the smaller customers, we have less from a cost-to-serve standpoint, because more of that business is going to come off of our – out of our bank, and we have less of a creative demand related to the local and regional customers.

Okay. Thank you.

Your next question comes from Brett Hundley with Vertical Group.

Hey. Good morning. Thanks for taking my question, guys. First, just a quick one. I'm sorry if I missed this, but what is M&A now expected to contribute to currency-neutral sales and EPS growth? Before, it was expected to contribute 4.5% to sales and 1.5% to EPS growth. And I think you guys said that that stepped up a little bit. Did you give those revised figures? Richard A. O’Leary - International Flavors & Fragrances, Inc.: We didn't. I mean, it's about 1.5% at top line and 2.5% at the operating profit line. So it shifted a little bit, given the strong performance in the Q1 from the M&A business and the unplanned expenses on our Organic business in Q1.

I'm sorry, you said 1.5% top line, incremental 1.5%? Richard A. O’Leary - International Flavors & Fragrances, Inc.: The M&A impact, about 1.5% top line and 2.5% operating profit.

Okay. Thank you. I appreciate that. And then, just for you and/or Andreas, even with these regionals, these smaller customers increasing as a percentage of your mix, as you well know, M&A is an increasingly greater proportion of your sales growth today versus previous quarters or previous years, however you want to look at it. And when we talk to other ingredient companies in the industry, other adjacent companies, they are increasingly talking about blends – ingredient blends as getting more and more in focus from a customer standpoint, being in greater demand relative to just single Flavor and Fragrance compound. And I know some of these guys are obviously talking their book, because that's what they produce. So, maybe I'll give you guys a chance to talk your book and discuss if you are seeing that as well and maybe how you guys are set up to handle any related shift? Andreas Fibig - International Flavors & Fragrances, Inc.: So, I would not say that you see a trend in that, but we see certainly that this is an opportunity. And if you look at on the Flavor side at our PowderPure acquisition, then this is certainly going into an adjacent part of the business, which could certainly add to that quite significantly. On the Fragrance side, I'm actually not so sure. I would say on the Fine Fragrance, you deliver the whole package anyway despite the packaging material. But we haven't seen anything else on the Consumer Fragrance side. There's probably more trend we see towards the Flavors and Ingredients business. And then here, we are taking account of it, but we have to make sure as well as that you keep your margin profile because some of these, let's say, complete solutions are not the most profitable ones, but we have to make sure that we manage that in a very careful way here.

That makes sense. Thank you so much. Andreas Fibig - International Flavors & Fragrances, Inc.: You're welcome. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Brett, let me make one correction to what I just said. At the top line, it's about 4.5%. I transposed currency versus M&A.

Okay. Richard A. O’Leary - International Flavors & Fragrances, Inc.: So, it's about 4.5% top line.

Got you. So, no change to the top line impact and instead of 1.5% health now on the bottom line, it's 2.5% health? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Correct.

All right. Thank you so much.

Your next question comes from Lauren Lieberman with Barclays.

Great. Thanks. I was actually going to clarify that so that's helpful. And then the other thing was on reinvestment spending. Another unexpected expenses in the quarter, but I just want to check in where in that bridge which we could find kind of any reinvestment considering there was this quarter? Andreas Fibig - International Flavors & Fragrances, Inc.: It's basically going to get netted in the cost and productivity, but again it's been limited, given the environment. I mean, I think the big part of the reinvestment is going to come as we talked about later this year and into 2018 as we get the full benefits associated with the productivity program.

Okay. And then also on the bridge, the six-point contribution from volume. Is that inclusive of – that's including volume from acquisitions I would think, because I thought it sounded like total company volume wouldn't have that much positive leverage to it? Andreas Fibig - International Flavors & Fragrances, Inc.: So, the M&A's impact, all the M&A's in the...

Okay. Andreas Fibig - International Flavors & Fragrances, Inc.: ...is in the M&A line.

It is totally separate. So, is this level of volume growth which was – I would have thought was slightly down total volume. I was just surprised that there was this, again, positive leverage? Andreas Fibig - International Flavors & Fragrances, Inc.: I will go back and check it, but...

Okay. Andreas Fibig - International Flavors & Fragrances, Inc.: ...that's apples-to-apples.

Okay. Thank you. I appreciate it. Andreas Fibig - International Flavors & Fragrances, Inc.: Okay.

There are no further questions at this time. I would now like to turn the call over back over to Andreas for closing remarks. Andreas Fibig - International Flavors & Fragrances, Inc.: Thank you very much for your questions and have a good day. Thank you. Bye-bye.

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