International Flavors & Fragrances Inc. (IFF) Q3 2017 Earnings Report, Transcript and Summary

At this time, I would like to welcome everyone to the International Flavors & Fragrances' Third Quarter 2017 Earnings Conference Call. All participants will be in a listen-only mode until the formal question-and-answer portion of the call. Participants will be announced by their name and company. I would now like to introduce Michael DeVeau, Head of 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 2017 conference call. Yesterday evening, we distributed a press release announcing our financial results. A copy of the release can be found on our IR website at ir.IFF.com. Please note that this call is being recorded live and will be available for replay on our website. Please take a moment to review our forward-looking statements. During the call, we will be making forward-looking statements about the company's performance, particularly with regard to our outlook for the fourth 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 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 that we issued yesterday. With me on the call 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, Mike. As usually, I would like to start with an executive overview of our financial performance for the third quarter. Then, I want to provide some key highlights of our strategic progression. Once finished, I will 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. We are pleased with our third quarter results, as we achieved growth across all categories and regions. Currency neutral sales grew 12% on a consolidated basis, with an equal contribution from Flavors and Fragrances. Both business units delivered marked improvements versus the first half, moving from a low single-digit organic performance to mid-single-digit organic growth in quarter three, led by strong new win performance as well as improved volume trends on existing business. Our top line also continues to benefit from our recent acquisitions, contributing approximately 6 percentage points of growth in the quarter. At the same time, our focus on driving greater efficiencies throughout our business, via costs and productivity initiatives, continue to support overall profitability, as currency neutral adjusted operating profit grew 7% this quarter. Rich will take you through the drivers of year-over-year profit performance. Currency neutral adjusted EPS increased 5%, driven primarily by operating profit growth, a lower effective tax rate and a year-over-year reduction in shares outstanding, which more than offset high interest expense related to dual carrying cost on our recent $500 million bond as well as existing private placements which matured in September. Fully recognizing that we have and continue to operate in a challenging global environment, we are pleased with our financial performance through September 2017. Our team continues to deliver winning innovative solutions to our customers, while achieving sustained profitable growth for shareholders. On a year-to-year basis, currency neutral sales growth for the first nine months was strong at 9%, with 11% percent growth in Flavors and 7% growth in Fragrances. Adjusted operating profit grew 5% and adjusted EPS increased 8%, both on currency neutral basis. I wanted to take a few minutes to highlight a few of our strategic accomplishments in the third quarter. In terms of innovating, first, in Flavors, sales of our sweetness and savory modulation portfolio continued its trend of strong double-digit currency neutral growth across all categories, led by Savory (sic) [Sweet] (5:00) and Dairy. In the Fragrance side, encapsulation-related sales grew high single digits, led primarily by Fabric Care and Personal Wash. Tastepoint, our new brand within IFF, designed to service the dynamic and faster growing middle market customers in North America, improved strong double digits in the third quarter. This early success shows that our efforts have been very well received by our middle market customers and that combining the long-established and well-regarded relationships of Ottens Flavors and David Michael is the right approach to serve these critically important growth accounts. Lucas Meyer Cosmetics, acquired now two years ago, remains a primary growth driver as Cosmetic Active Ingredients continues its strong growth, improving double digits in the third quarter. We also opened a fully-renovated and expanded facility in Cairo, Egypt. This investment supports both our regional focus on growth in the Middle East and Africa, as well as our focus on key categories, providing enhanced services to customers and strengthening our presence in the key market. The expanded labs will allow us to better serve our Egyptian customers and strengthen our market presence in Africa and the Middle East, as it remains a critical component of our long-term strategy. I should note that in the third quarter, our Middle East, Africa region improved high single digits. I'm also happy to announce that we recently launched our Re-Imagine programs in flavors to accelerate innovation and increase agility to capture unmet opportunities in the changing food and beverage market. Based on a combination of future trends analysis, consumer insight and a modernized cross-category development process, the programs guide our research and development efforts to ensure an innovation pipeline that addresses the evolving consumer needs and desires. It is another way in which we show how we are dedicated to being our customers' partner of choice as we progress our business strategy, imbue sustainable thinking throughout the creation process, and continue to strengthen our industry-leading innovation platforms. The programs focus on six key areas, including culinary, citrus, delivery systems, naturals, modulation and protein, and were selected based on market potential, customer input, expert industry collaboration and versatility across end-use categories. They consider a rapidly changing world from the expectation of sophisticated consumers too busy to cook for themselves, to the realities of a warming climate and its impact on key crops and ingredients, to an increased awareness of our role in the health of the planet. This extensive innovation platform requires an innovative approach to taste creation. To address this, our bespoke IFF Taste Design is a combination of artisanal, handcrafted techniques and proprietary technologies that drive consumer preference and market differentiation. We believe that both our Re-Imagine programs and our IFF Taste Design approach will provide our customers with winning tastes and further establish us as their essential partner. In terms of sustainability, I'm pleased to announce that we have joined FReSH, a project of the World Business Council on (sic) [for] (8:39) Sustainable Development designed to improve the health of people and the planet while recalibrating the global system of consumption, transportation, production, and agriculture, thus achieving the initiatives goal to make responsibly-produced healthy, enjoyable diets available for all. As a standing member of the WBCSD, IFF will join forces with the EAT Foundation and 25 leading businesses and science companies to accelerate transformational change in global food systems. We are passionate about doing the right thing and happy to have the opportunity to contribute in areas where we can make a positive difference in the world. With that, I would like to turn the call over to Rich. [07BDC1-E Rich O'Leary]: Thank you, Andreas. Before reviewing our results by business unit, I'd like to start by walking you through the drivers of currency neutral adjusted operating profit growth. On this slide, we show you the year-over-year impact in terms of contribution of growth, expressed as a percentage of our restated third quarter 2016 adjusted operating profit. Starting with the second bar, you can see that volume represented 15 percentage points of operating profit growth. In the third bar, the net contribution of acquisitions added 5 percentage points of operating profit growth, but please note that this also includes both operating performance and synergies. We also continued to benefit from our cost and productivity initiatives. Through the likes of formula optimization, procurement savings plus the restructuring program savings, we've delivered approximately 4 percentage points of benefit year-over-year. If we combine all cost and productivity programs into one bucket, including both organic and inorganic components, it would represent approximately 7 percentage points expressed as a percentage of operating profit. From a headwind perspective, as seen in the next bar, sales mix had a negative impact as we experienced stronger share of sales growth in Savory, specifically snacks; Fabric Care; and Fragrance Ingredients, which have lower than average margin profiles. In the sixth bar, price to input costs was unfavorable by about 4 percentage points, as favorability in Flavors was offset by Fragrance. This reflects targeted adjustments with select customers as well as strategic price reductions within Fragrance Ingredients. In the next bar, we have highlighted RSA expenses, which represented a 9 percentage point headwind. Please note that included in the bar is incentive compensation, where we have a large year-over-year variance, and represents approximately two-thirds of the change. Regarding incentive compensation, we are highly incentivized to deliver on our financial commitments. There are variations in incentive compensation, as it is based on our performance relative to our annual plan. If we achieve our financial targets, we receive 100% of our designated payout. Should we over or under-perform versus plan, our incentive compensation is adjusted higher or lower. In terms of the year-over-year comparison in the third quarter, we have large delta as we are comparing to a lower base period due to under-performance (12:14) in the prior year quarter versus strong results in the current year quarter. For simplicity purposes, we grouped several miscellaneous items into Other, as they're negligible. Turning to the business unit reviews for the third quarter, Flavors currency neutral sales increased 12%, with a strong contribution related to the acquisition of David Michael and, to a much lesser extent, PowderPure, as well as mid-single-digit organic growth where all categories, led by Savory, improved year-over-year, driven by new wins. From a regional perspective, all four regions delivered growth, led by strong double-digit performance in North America, which improved 28%, reflecting additional sales related to acquisitions, principally David Michael, as well as high single-digit growth on an organic basis, driven by new win performance in Savory and Beverage. EAME increased 12% on a currency neutral basis, inclusive of the additional sales related to the acquisition of David Michael, with the strongest growth in Beverage, (sic) [Savory] (13:28) and Dairy. On a geographic basis, Western, Central and Southeast Europe, as well as Africa and Middle East all reported strong growth. Greater Asia grew 2% on a currency neutral basis in the third quarter, driven principally by double-digit growth in India and high single-digit growth in Thailand. Latin America increased 1% on a currency neutral basis, as growth in Colombia and Argentina more than offset softness in Brazil. In the third quarter, we experienced isolated pressure with a limited number of customers who are experienced challenges on a volume metric basis. On a currency neutral segment profit basis, Flavors grew approximately 19%, led by volume growth, the contribution of acquisitions and the benefit from productivity initiatives. Overall price versus input cost was slightly favorable in the quarter. The situation regarding raw materials, such as vanilla and citrus, remains fluid and volatile. And we continue to pursue price increases where appropriate. In terms of currency neutral segment profit margin, we achieved margin expansion year-over-year of approximately 130 basis points to 22.3%. Fragrance currency neutral sales improved 12%, as overall growth was broad-based, with a balanced contribution between organic and acquired businesses. Regionally, growth was strongest in EAME and Latin America, increasing double digits, followed by mid-single-digit growth in Greater Asia. From a category perspective, Fine Fragrance improved 18% on a currency neutral basis, including Fragrance Resources. Organically, performance was driven by strong new wins in EAME, Greater Asia and North America, as well as improved volume trends in Latin America. Some of those new launches included YSL Y, Armani Because It's You by L'Oreal, At The Beach by Limited Brands, and Pure XS by Pooch (15:37-15:47). Consumer Fragrances grew 11% on a currency neutral basis, with a balanced contribution from organic business and additional sales related to the acquisition of Fragrance Resources. Organically, nearly all categories achieved growth, led by strong double-digit growth in Home Care and high single-digit growth in Fabric Care, driven primarily by wins. I'd like to note that Consumer Fragrances showed a marked improvement relative to second quarter of 2017, growing 6% year-over-year, as volume on existing business was positive in Q3. Fragrance Ingredient sales were up 8% on a currency neutral basis, primarily driven by double-digit growth in EAME and Latin America. IFF Lucas Meyer Cosmetics also continued to perform well, as it grew double-digits in the third quarter. From a profit perspective, Fragrance currency neutral segment profit increased 6% on a currency neutral basis, as volume growth, the contribution of acquisitions and the benefits from productivity initiatives more than offset unfavorable price to input cost, weaker sales mix and higher incentive compensation expense. We do expect to see input costs rising as we exit 2017 and, as such, have already initiated discussions with our customers regarding the need for price recovery in 2018. In terms of currency neutral segment profit margin, our profile remains strong at 20.2%. Moving on to cash flow, operating cash flow was $199 million year-to-date which compares to $342 million in the first nine months of 2016. Performance was adversely impacted primarily by the previously-announced ZoomEssence litigation settlement, which was about $56 million, and higher working capital requirements, in particular, accounts receivable. It should be noted that we expect accounts receivable to improve going forward, partly due to timing, regarding stronger sales in Q3 with collections in Q4, and as well as traction on our improvement program. From a capital allocation standpoint, we spent approximately $77 million on capital expenditures or about 3% of sales, and we believe we will spend approximately 4% to 4.5% of sales in 2017. Regarding cash return to shareholders, through the first nine months, we've spent approximately $152 million on dividends and $53 million on share repurchases. Last week, our Board of Directors approved an extension of our existing share repurchase authorization through 2022 with a total value of $300 million, including approximately $50 million remaining on our prior authorization. This share repurchase authorization is consistent with our established return of capital strategy and reinforces our belief that IFF is well-positioned for the future. Our strong financial position and cash generation enables us to return cash to our shareholders, as we continue to strategically invest both organically and through acquisitions to create long-term value for our shareholders. Based on our year-to-date performance and our outlook for the fourth quarter, we remain optimistic that we can achieve our previously-stated currency neutral guidance for the full year 2017. We are reiterating our currency neutral sales growth projection of 7.5% to 8.5%, with the expectation that we could be at the higher end of that range. We expect high single-digit growth across both business units, with broad-based contributions from acquisitions and organic performance. From an 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. While our currency neutral guidance has not changed, the effect of currency movements on our results has moved. From a top-line perspective, the impact of currency improved approximately 100 basis points, essentially having no impact for the full year, primarily driven by an improvement in the euro to U.S. dollar exchange rate. On a profit and an EPS basis, we anticipate a 50 basis point (20:51) improvement versus last quarter. And on a full-year basis, we expect that the impact of foreign exchange on adjusted operating profit to be approximately 1% and approximately 2 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 very pleased with the strong financial performance we achieved in the third quarter. We continue to be focused on the execution of our long-term strategy, accelerating growth, increasing differentiation, and driving cost efficiencies to drive sustainable, profitable growth in the future and maximize value creation for our shareholders. And, as Rich just stated, we are on track to deliver our previously-stated 2017 financial goals on a currency neutral base. With that, I would now like to open up the call to questions.

Your first question comes from the line of Mark Astrachan with Stifel. Mark Stiefel Astrachan - Stifel, Nicolaus & Co., Inc.: Yeah, hey, thanks. Good morning, everybody. Andreas Fibig - International Flavors & Fragrances, Inc.: Morning, Mark. Mark Stiefel Astrachan - Stifel, Nicolaus & Co., Inc.: It's afternoon where I am, actually, but nonetheless, wanted to ask about the top-line expectations for the year. So that implies fourth quarter with pretty nice acceleration on the tough comparison. I guess, trying of figure out exactly how to think about what's improving in the business, what gives you visibility that you're going to be able to see that improvement, given those comparisons? Maybe you could talk a bit about category and what sort of has surprised you. Obviously, with a strong third quarter number as you head into year-end and I know (22:33) preliminarily, but how you think about that heading into the first half of next year as well, when you have more favorable comparisons? Andreas Fibig - International Flavors & Fragrances, Inc.: Okay, Mark, let me take it. So if we look into the fourth quarter, we had a strong start into the fourth quarter up to the end of October. So that's a good thing. What we see is that our performance, and particular in Fragrance, is just pretty, pretty strong. And it's continuing and has a very, very good momentum. On 2018, I prefer not to comment right now. You know, we do this usually in February because, first of all, we have to close our fourth quarter, but the start was pretty good. Rich, any... Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. A couple of things from my perspective, Mark, I mean, I think we did expect to see improvements in the second half of the year versus the first half of the year. I think we've got good strong win performance in both businesses, particularly Fine Fragrance. In that category, you heard in our commentary regarding the third quarter, there's a strong volume component in terms of on existing business. Some of that, we believe, is event-driven and potentially timing. So the impact between Q2, Q3, Q4 is still a little bit volatile, but I think we feel, again, as Andreas said, looking at the start to the quarter, we definitely feel like it's the trend. I don't think it's going to be at the same level as Q3, but certainly an improvement versus what we saw in the first half of the year. Andreas Fibig - International Flavors & Fragrances, Inc.: Yeah. Mark Stiefel Astrachan - Stifel, Nicolaus & Co., Inc.: Got it. That's helpful. And just on gross margin, wanted to try to understand the puts and takes there and specifically try to figure out the puts and takes between mix and price concessions or pricing that you're giving customers. And maybe can you help us sort of explain exactly what is going on there. And I guess just lastly, how do you think about that going forward? I mean, I guess just fourth quarter, if you don't want to talk about 2018, but what the puts and takes are would be helpful. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Sure. I mean, I think from the first standpoint, I mean, let me take mix as a starting point. As I said in the comments, I think mix is driven by our customers. And what they order is what we're going to deliver. And I think we saw, as I said: really strong growth, strong double-digit growth in Savory, particularly snacks, in the Flavors business, that has below average margins from an overall standpoint; Fragrance Ingredients, similar story, good growth, high single digits, below average margins; and Fabric Care, good growth. So I think that's clearly the drivers of mix. I think that we're going to still see mix headwinds in Q4. The second component of that, price to input costs, really, I would say, two different dynamics going on there. On the flavor side, as I said in my commentary, overall price to input cost was flat to slightly favorable. And we've been able to recover and pass through the increases that we're seeing in the naturals, that we've talked about previously, like citrus and vanilla. On the Fragrance side, we've got Fragrance Ingredients. We've talked about the strategic pricing changes we made late last year to rebalance and drive growth in that business by making modest changes in there. The impact related to that has been fairly stable. Where we're seeing the greatest amount of pressure is on the compound side. We've got large customers that have significant improvement objectives of their own. We have to work with them and balance their short-term objectives, but do it in a way that provides us long-term growth opportunities. We're not going to jeopardize the entire business. On top of that, we're starting to see an acceleration of input costs in the second half of this year. Input costs were up slightly in Q2 year-over-year for the Fragrance business. That accelerated in Q3. And that's why we talked about the need to drive and realize price realization going forward for the Fragrance business. Andreas Fibig - International Flavors & Fragrances, Inc.: Yeah. Mark Stiefel Astrachan - Stifel, Nicolaus & Co., Inc.: Got it. Could you just quantify the impact in gross margin between mix and price concessions? Richard A. O’Leary - International Flavors & Fragrances, Inc.: I would say mix on gross margin was probably 60 basis points, more or less, and about 80 basis points for price and input costs. Mark Stiefel Astrachan - Stifel, Nicolaus & Co., Inc.: Great. Thank you.

Your next question comes from the line of Kate Grafstein with Barclays.

Thanks. So I just wanted to ask a question on the emerging markets growth. The 7% growth is the highest level I think since 2015. Do you see this as a sustainable inflection point? And I guess how much of the acceleration is about true market growth and an improvement in consumer demand or optimism from customers ahead of real consumer acceleration? And then just if you could also discuss the improvement in the context of both local, regionals and multinationals, that would also be helpful. Thank you. Andreas Fibig - International Flavors & Fragrances, Inc.: You can get started. (28:23) Richard A. O’Leary - International Flavors & Fragrances, Inc.: Sure, Katie. I mean, I think it's still quite volatile. I think that, as I talked about, I mean, I think that we've seen on the last call and then we talked about in today's call that I think we've seen improvements in Latin America on the Fragrance side, improvements in Brazil. One of our largest customers, a local regional customer, has had a strong turnaround in their business in Brazil and Latin America in the third quarter. We feel good about that. But I would not say that we're sort of out of the woods. We saw strength in, I think, Middle East, Africa, Eastern Europe, certainly for Flavors; continues to be a positive and a bright spot. I think that on the Fragrance side, Indonesia and India had strong growth in the quarter. There's still uncertainty and challenges in Indonesia and China for the Flavors business. So I would say it's better. I'm not sure I'm ready to say it's an inflection point, but, again, there's a big piece of what we saw in both businesses in Q3 versus Q2, in particular, was the volume component on existing business was much better in Q3 versus Q2. Andreas Fibig - International Flavors & Fragrances, Inc.: Yeah. On the local and regional customers, that's certainly a source of growth for us and a growth engine within the company, not just in emerging markets, but in particular in North America in the Flavors division with the setup of Tastepoint we have installed. We believe that this business model truly can help us to grow the business substantially. And it's shown in the numbers so far.

Thanks. And then, I guess also just talking about the acceleration in the developed markets, it's interesting just as the customers are talking about slower market conditions. So was wondering if maybe you can talk about that disconnect. Andreas Fibig - International Flavors & Fragrances, Inc.: Yeah. Well, what we see is, in particular in Western Europe but also in North America, good performance on both sides of the business. It's certainly driven by good win performance, in particular with the bigger ones. But as I said and reflected, the customer mix plays a super important role here. And with our setup, in particular in North America, that positions us very well for good growth rates and further growth to come. Richard A. O’Leary - International Flavors & Fragrances, Inc.: I think the other thing for me as I mentioned a couple times is the volume component is definitely stronger this quarter than five-year long-term trends. So I think some of this may be event-driven, whether it's timing between Q2 into Q3 as our customers adjust their order patterns, as they look at what's going on in their market. So I think it's a combination of factors. I mean, we feel good about the win performance. The volume component is hard to predict from quarter-to-quarter.

Great. Thank you.

Your next question comes from Heidi Vesterinen with Exane BNP Paribas.

Hi. I wanted to ask a bit more about the Re-Imagine initiative you talked about. Could you maybe help us understand, maybe with an example, what the initiative is? Is it kind of like an integrated solution? And is what you're proposing here – what is the margin profile here compared to the rest of the group, please? Thank you. Andreas Fibig - International Flavors & Fragrances, Inc.: Hi. Let me try to answer that in a way. It's actually a creative process to build our solutions. And it tries actually to look what the customers and consumers really need from the consumer insight perspective, figure out what are the most important trends, and then come up with solutions which bring as many of our technologies together as we can to make sure that we are well-positioned vis-à-vis our competition certainly, but also to satisfy the customer needs and that we basically focus our investments in R&D and applied R&D on the right areas like, an example, like naturals protein delivery systems. Talking about the margins, usually the margin should be very good because we combine a lot of technologies together to come up with these solutions.

Thank you.

The next question comes from Mike Sison with KeyBanc.

Hey, guys, nice quarter. Andreas Fibig - International Flavors & Fragrances, Inc.: Thank you, Mike. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Hi, Mike.

I think you noted Cosmetic Active's another really strong quarter. Can you maybe talk about the momentum there? And are there other potential acquisitions to continue to build on to this business? Andreas Fibig - International Flavors & Fragrances, Inc.: Mike, let me take it. First of all, what we see is that this part of the market has a nice growth also compared to the core F&F markets. So that's number one. Number two, in the segment where we play with Lucas Meyer, we are in the upper premium segment, which is usually more dynamic than the other segments of the market. And now, it's going into the natural actives as well where we are in particular strong because, remember, with Lucas Meyer, we have access to SouthernCross Botanicals in Australia. We have access certainly to our own naturals palette and naturals ingredients here as well. So it's going actually very, very well and we had a good start into the fourth quarter as well. So we foresee good growth for this business going forward. And as you were asking, we always evaluate other opportunities, whether we can strengthen this business in an inorganic way as well.

Okay. Great. And then encapsulation is another one that has continued to post pretty good growth there. Is it still just in the laundry side that you're seeing the growth, or have you been able to move into other markets that maybe could continue to grow into next year? Andreas Fibig - International Flavors & Fragrances, Inc.: Yeah. Actually, the expansion goes in different directions. The first one is that we are evolving out our encapsulation technology, which is now more multi-cap systems which help us in the classic fabric care area. But we are moving technology into other categories like hair care, for example, as well, and that's ongoing and in full, full swing.

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

Your next question comes from Gunther Zechmann with Bernstein.

Good morning, gentlemen. Andreas Fibig - International Flavors & Fragrances, Inc.: Morning.

My question relates to the price and the raw material costs, just following up from that. What was the pricing effect on your top line in the quarter? And given the recent trends and increases we're seeing in petrochemical intermediates, do you feel an increased urge to push up prices, especially in the Fragrance division going into next year? Richard A. O’Leary - International Flavors & Fragrances, Inc.: In pricing itself, if you segregate it from the input cost piece, it was slightly favorable. I mean, it's less than 1 percentage point. On a combined basis, as I said, I think we are seeing what we believe the start of input cost increases on the Fragrance side and we're going to definitely have to work with the customers and get price increases to compensate for the input cost trend going forward. Andreas Fibig - International Flavors & Fragrances, Inc.: Yeah. Which we have done actually very well this year on the Flavors side already.

And if I can just follow up, and when are you going to lap the price rebates in the Fragrance Ingredients space? Richard A. O’Leary - International Flavors & Fragrances, Inc.: End of the year, we'll lap it in the fourth quarter.

Great. Thank you.

Your next question comes from Faiza Alwy with Deutsche Bank.

Hi. Good morning. Andreas Fibig - International Flavors & Fragrances, Inc.: Good morning, Faiza.

So a couple questions, can you just talk about what you're seeing from your multinational customers? So it seems like local regional customers, the performance with those customers was better. But are you seeing any improvement from the multinational customers at all? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah, look, I think that if you look at Q3 itself, I mean, the growth was pretty well balanced between local and regional and global customers. I think the drivers of that might be slightly different, as I talked about. I mean, I think the local (37:38) continue to execute well and gain share. On the global side, I think there is some element, again, of volume. The volume swings from quarter-to-quarter, so in recovery in volumes on base business.

Okay. And then, Rich, just drilling in on some of the comments you made around events-driven and sort of timing factors, is that something that you saw globally or was it more concentrated in a particular region or category? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Let's see. I mean, it was fairly broad-based. I think it was largest in North America for Fragrances, a little bit in Latin America and in Western Europe.

Okay. Okay. And then, just broadly, are you seeing any appetite for innovation from your customers across the board or do you feel like many are so just focused on whether it's short-term seasonal trends or sort of a quick pick-up from a new flavor or are you seeing sort of any sustained drive for innovation from your customers? Andreas Fibig - International Flavors & Fragrances, Inc.: Yeah. I would say we do. And in particular, it was really cutting-edge innovation if you talk about delivery systems or some specifics. So, that's what we see and that's actually very good and we try to drive this trend as well with our customers.

Okay. So, Andreas, is this like a change that you saw this quarter or is it something that you've been seeing all year? Andreas Fibig - International Flavors & Fragrances, Inc.: Actually, already for quite some time. It's not specific to the quarter, I would say.

Okay. Okay. Okay. And then, just last question from me on, Rich, I know you don't want to talk about 2018 at this point, but any guidance on FX would be really helpful in terms of the top-line and the bottom-line impact that you anticipate. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Let me think about this. I mean, I... Andreas Fibig - International Flavors & Fragrances, Inc.: You should have a crystal ball on FX. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. If I was, I would be on a beach somewhere probably.

Assume current spot rates. Richard A. O’Leary - International Flavors & Fragrances, Inc.: No, look, I mean, again, if we stay at where we are today, we're going to have a favorable impact from a currency standpoint in the first half of next year and probably more I'd say flat, mute-ish in the second half of this year.

Okay. All right. Thank you.

Your next question comes from Jeff Zekauskas with JPMorgan.

Good morning. It's Silke Kueck for Jeff. How are you? Andreas Fibig - International Flavors & Fragrances, Inc.: Good, very good. (40:20) Richard A. O’Leary - International Flavors & Fragrances, Inc.: Good morning, Silke.

My first question is in the quarter, you had you know 6% organic local currency growth and I think the profit improvement on that (40:35) was 15%, as you show in your slides and the acquisitions contributed 6% to sales growth, but the profit contribution was 5% and maybe if you strip out the synergies, maybe it contributed 2%. So the question is why is that and what type of contribution do you expect for 2018 from the acquisitions as you try to pull out cost synergies and you integrate these businesses? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yes. So a couple of things. Let me start with the organic business on the volume impacts, so then you've got the mix impact going as an offset to that. You've got pricing input costs offsetting that. And then particularly the incentive comp reset are all offsets that ends up bringing that number down. On the M&A side, keep in mind that we have the amortization expense that we have to get through all of our synergy programs before we start getting the incremental leverage. The sales come right away, but we've got to work through our integration plans. We've got to work through the cost savings programs before we start to get acceleration from an operating profit standpoint.

So that means like next year, the cost amortization still that means that even the contribution may not be... (42:05) Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. Once we start lapping the amortization and we continue the process next year on realizing the synergies and we get the growth, then we'll start to get acceleration from an M&A contribution standpoint.

What's the incremental amortization on the acquisitions year-over-year? Richard A. O’Leary - International Flavors & Fragrances, Inc.: $3.6 million.

Okay. My second question is what is behind the accounts receivable issue, why the receivables so high? Is it a regional issue where these sales took place, or is it just that you had most of your sales at the very end of the third quarter? Richard A. O’Leary - International Flavors & Fragrances, Inc.: I mean, it's a huge increase in sales. We go from 2% organic growth to 6% organic growth. I mean, the biggest piece of it is just purely the volume effect in the quarter compared to where we were. If you compare December last year to third quarter this year, we had an acceleration in our business. If you compare December 2015 to third quarter 2016, you had a deceleration of the business. So you have a different dynamic going on. I fully expect that we're going to recover that from a timing standpoint and then we'll collect those receivables in the fourth quarter. And then, fourth quarter is seasonally a slower quarter. So, we'll be able to recover a large portion of that outflow. Andreas Fibig - International Flavors & Fragrances, Inc.: Rich is already collecting. Richard A. O’Leary - International Flavors & Fragrances, Inc.: It is a focal point. Believe me, it's a focal point for us.

Right. Right, but the reason why I ask this is you had like an improvement in sales year-over-year in the second quarter as well and the receivable increase wasn't quite as big, but it's true, there is a large sales increase. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah, there is a big difference in the performance.

I have two more questions. One has to do with Fabric Care. Is the growth in Fabric Care, does that have to do with new product launches or is it the case that products that were previously launched are now reaching better penetration, you're selling more of it and maybe that it goes to the detrimental of like what you can charge on price because you said it's sort of like a lower margin contribution? Andreas Fibig - International Flavors & Fragrances, Inc.: It's a big volume component in this number for (44:39) existing business.

Okay. Okay. Richard A. O’Leary - International Flavors & Fragrances, Inc.: The win rates, they're good, but there's not been any significant uptick. It's driven primarily by the volumes on existing business.

Yeah. I understand. And lastly, can you pull out the acquisition a bit more specifically? Can you discuss what organic sales was like for North American Flavor excluding David Michael and what it was for European Flavors excluding David Michael? And maybe can do the same thing for North American Fragrances and European Fragrances if you strip out the Fragrance Resources acquisition, if you have that data. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. I mean, North American Flavors on an organic basis was 7%. North America organic for total Fragrances was down 3%. What other area were you...

And in Europe, I think there was an acquisition piece in European Flavors and also in European Fragrances. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Okay. So...

I was wondering what the organic piece was. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Okay. No problem, no problem. Organic in Flavors was 10% and organic in Fragrances was 11%.

Okay. Those are big numbers. Okay. Thanks very much. I'll get back into queue. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yes.

Your next question comes from Adam Samuelson with Goldman Sachs. Adam Samuelson - Goldman Sachs & Co. LLC: Yes. Thanks. Good morning, everyone. Andreas Fibig - International Flavors & Fragrances, Inc.: Good morning, Adam. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Good morning, Adam. Adam Samuelson - Goldman Sachs & Co. LLC: A lot of ground's been covered, but maybe just a question on operating leverage in the quarter, because the volume growth, I mean, very healthy, sounded like a little bit above 5%. And I'm just trying to think about if we can sustain those kind of operating profit levels into 2018 and you don't have the comp issue for incentive compensation this year versus last, should the implied operating leverage that you did in the quarter ex the incentive comp, should we think about that being sustainable into the first half of next year, especially when your organic revenue comps are not particularly challenging? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. I mean, I'll sort of skip over the comment about not particularly challenging. But, I mean, look, I mean, I think as we head into next year, certainly incentive comp will be a significant less headwind than what we experienced in 2017. I think that we're going to continue to drive the productivity agenda that we've laid out at the beginning of this year. We've got to continue to execute against that. We've got to continue to look at investing in driving innovation that's going to help from a sales mix standpoint and a product mix standpoint. And we'll continue to look at our cost base and say how can we drive leverage through the P&L. It's a tough environment. It's volatile. As I talked about earlier, we're expecting input costs to go up next year, so our ability to pass those increases on to our customers on the Fragrance side is going to be critical to our success in 2018. Adam Samuelson - Goldman Sachs & Co. LLC: Okay. And then just a question specifically on Fine Fragrances, which did seem to improve in the third quarter, I think you alluded to some new customer wins in the prepared remarks, but any comments there on the sustainability, what you're seeing at the department store level, if you're seeing better buying activity and better expectations for foot traffic and just thoughts there. It's an important business in the Fragrance division. Andreas Fibig - International Flavors & Fragrances, Inc.: Yeah. So, Adam, what we see is actually on the Fine Fragrance side a tremendous development in Europe. It's going very well, in particular, for many of the other premium brands. So we see good demand and we certainly have a good win rate here as well. So for us, we see that this hopefully will be sustainable for the months to come. Adam Samuelson - Goldman Sachs & Co. LLC: And then in the U.S., are you seeing better activity at the retail level or is it more Europe that's driving the strength? Andreas Fibig - International Flavors & Fragrances, Inc.: No. It's more Europe what's driving it at this spot. (49:12) Adam Samuelson - Goldman Sachs & Co. LLC: Okay. That's all very helpful. Thank you.

Your next question comes from John Roberts with UBS.

Thank you. Can you hear me? Andreas Fibig - International Flavors & Fragrances, Inc.: Yes, very well. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Hey, good morning, John.

Good morning. I think you said you had positive price raws in Flavors. I would assume it was negative in vanilla and negative in citrus. What would be the kind of offsetting categories where the overall would be positive? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Well, no. I mean, we were able to get price increases related to those materials and get out ahead of it. And the Flavors business has done a great job in doing that. So I mean, it was slightly positive but it's really our ability to push through and anticipate those impacts. Andreas Fibig - International Flavors & Fragrances, Inc.: Yeah.

And then it's pretty hard to time acquisitions, but would you say you're ahead of plan or behind plan or on plan in terms of the number and size of acquisitions that you've done over the past year and a half, two years? Andreas Fibig - International Flavors & Fragrances, Inc.: We're absolutely on plan and we are a little ahead of plan with the performance of our acquisitions compared to our business cases. So we're very happy with all the five acquisitions we have done in the last two and two and a half years. (50:28) We are pretty much on plan.

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

Your next question comes from Patrick Lambert with Raymond James.

Hi. Good morning, everybody. Thanks for taking my question. A few questions, first on the M&A 2018 component of the growth, sorry for jumping to next year, but in our model, we have about 2% contribution for (51:01) M&A 2018, would like to get your views on that, if nothing else is being (51:06) acquired, of course. And also what's your view on operating income impact from M&A in 2018, again, looking at the synergies, looking at the integration was question number one. Maybe I'll let you answer that one first. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Sure, Patrick. I think from an M&A impact in 2018 on acquisitions, it's principally related to PowderPure. The Fragrance Resources was a couple weeks, so it's insignificant. So the 2% number that you're looking at seems way too high for me. So I think that impact, again, it's only going to be – PowderPure is really for half a year is the primary impact. Again from a profitability standpoint, all the other acquisitions go into organic and they'll be in our guidance for the full year from an organic standpoint. We'll embed our guidance for PowderPure in the full-year guidance also. But I think from a purely financial standpoint, it's what I said earlier, which is I would expect, once we lap the amortization impacts, that we'll continue to drive expansion through the synergies, growth of the business, and drive in improvements in the product mix of those businesses.

Great. Second question, CapEx, are you still targeting 4% to 5% for this year and next year, and any plans (52:48) we need to consider for next year in terms of increasing capacity? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. For this year, I expect us to be somewhere between 4% and 4.5%. We do expect that CapEx next year will be closer to plus or minus 5% because we've still got some of the big projects in Asia that we've got to execute against. We've got China. We've got India and some of those projects. So, 2018 and 2019 are going to be the elevated years.

Okay. And last question, I guess, would be (53:28) China in particular. Could you comment a bit more on details of what you're seeing in China, in particular, in both Flavors and Fragrances? Still weak organic developments there, so if you can comment on that. Thank you. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. I think it's still challenged. I mean, I think on the Flavors side, I know I mentioned in my comments that volume was down. We're going through and still working our way back up from some of the issues we've had. On the Fragrances side, we're seeing customers again trade down and not buying some of the categories where we're stronger at. We have a larger exposure to some of the globals in China also, and they're struggling in the marketplace on their volume basis compared to some of the local and regionals. So, it's still a challenge for both business units.

Great. Thank you.

Your next question comes from Brett Hundley with Vertical Group.

Good morning. This is Brandon Groeger on for Brett Hundley. Andreas Fibig - International Flavors & Fragrances, Inc.: Good morning. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Hi. Good morning, guys.

Good morning. Perhaps you could give us some more detail on the new Chinese fragrance plant Does that plant replace any existing production or is it additive? And when do you expect that to come online? Andreas Fibig - International Flavors & Fragrances, Inc.: So, it will come online probably end of next year, and it will be in addition to the existing Flavors plant we are having there because for two years, in 2015, (55:03) we had an issue with our Flavors plant, and it is probably prudent to have a second opportunity here for us on the Flavors side as well. So it will be an additional plant for... Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yeah. There's actually two plants that we're dealing with. One was a smaller ingredient plant that we're finishing now. And it'll start up in the fourth quarter. Andreas Fibig - International Flavors & Fragrances, Inc.: Which is on the Fragrance side. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Which is on the Fragrance Ingredients side. And then, as you've seen in the footnotes to the 10-Q, we're in negotiations with the government regarding their request for us to relocate our other larger ingredient plant in China and that I would expect to happen over the next two years. (56:01)

So relocating that other plant is in addition to this plant as well? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Yes.

Okay. Richard A. O’Leary - International Flavors & Fragrances, Inc.: In both cases, they've asked us to leave existing sites and go to a new site, and we're going to put both of the plants in a single site over the next two years.

Okay. Thank you. And then, shifting to the balance sheet, it looks like it's in a good place. You're less than 2 times net levered. You recently announced the share repurchase. Ingredient valuations have been rebounding in recent months. I was thinking about your grid that dictates the repurchase of the shares. Do you intend to update that at all? And then, outside of that share repurchase activity, how are you thinking about putting the balance sheet to work? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Let me take the share repurchase first. Yeah. As I noted, we did get an updated authorization from the board. The matrix is stock price-driven, but I would say that there is a component of the new authorization that provides for a minimum amount of share repurchases that's targeted to offset dilution. And then on top of that, will depend upon where we are versus the share price grid. From a utilization of the rest of the capacity in the balance sheet, I think, as Andreas talked about, we continue to look and pursue our M&A agenda, but it all depends upon what's available. And we want to make sure we are targeting the right deals and have the proper return profiles.

Okay. Thank you very much.

Your next question comes from Jonathan Feeney with Consumer Edge Research.

Good morning. Thanks very much, guys. Andreas Fibig - International Flavors & Fragrances, Inc.: Morning.

Good quarter. I wanted to talk about active cosmetics. I'm trying to look at a couple of regions where you saw some real big lift in Fragrance Ingredients. Is active cosmetics growing in every region, and that's just two places where there's not offsets, if you could kind of comment on that and maybe dimensionalize how big that business could be going forward? Richard A. O’Leary - International Flavors & Fragrances, Inc.: Jon, the big drivers in terms of where ingredients are growing significant, which is the EAME and Latin America, is on our Fragrance Ingredients side. The growth on the cosmetic active side has been pretty consistent. It's in the double-digit range, so that's not driving the changes. What you're seeing is on our Ingredients business. Andreas Fibig - International Flavors & Fragrances, Inc.: Yeah. And it's pretty well-distributed across on the active cosmetic side. Region-wise, we are certainly stronger in Europe and North America, in terms of the size of the business. We still have a ways to go in Asia and in Latin America. Well, that's good. That gives us growth opportunities going forward.

Thanks. And just one follow-up, if I could. Rich, I went back and looked at 2006, 2007, like strong periods of Asia, basically global luxury fragrance development that would advantage a fine fragrance business like yours. Certainly, we're seeing that across some of your key end customers. What's different? You're seeing much better growth this time around than 2005, 2006, 2007, when you saw similar kinds of trends in beauty, particularly in Asia, but luxury globally. Could you comment on like why – how much of that – do you worry that some of that is economically cyclical and why the difference this time? What kind of capabilities do you have now, around Fine Fragrance particularly, that you maybe didn't have back then? Thank you. Richard A. O’Leary - International Flavors & Fragrances, Inc.: Well, there's a lot there in your question. But, I mean, I think, that certainly we're seeing good growth in some of the emerging markets, Middle East, Africa in particular, within the EAME region. As we've been talking about for several quarters, we need to and we have adapted our strategy on Fine to focus on those categories in the channels that are most attractive. Certainly, that profile has changed over the last 12 to 18 months, where there's a lot less going through the department stores and the brick-and-mortar. And we're going to continue to target our resources towards those, the premium and the prestige components of the Fine business. Look, it's a reflection of the team we have around the world and their ability to leverage the consumer insights, understand what's going on in the market, understand our customers and designing fragrances that are attractive to the consumer. And that's ultimately what it comes down to is our ability to put the right fragrance in the right place at the right time.

Okay. Thanks very much.

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

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