Ladies and gentlemen, thank you for standing by. I am Sabrina, your call operator. Welcome, and thank you for joining the Symrise AG Half Year 2018 Results Conference Call. In the beginning of today's call, all participants will be in listen-only mode. The presentation will be followed by a question-and-answer session. If any participant has difficulty hearing the conference call, please press the star key followed by zero for operator assistance. I now hand over to your host for today's call, Mr. Tobias Erfurth. Please go ahead, sir.
Thank you very much, Sabrina. Good morning, and welcome to our analyst and investor call on the occasion of the publication of our half-year results for the period January to June 2018. All corresponding materials, including the presentation, have been published on our IR website this morning. A replay of the call will be available later today. Today's call will be held by our CEO, Dr. Heinz-Jürgen Bertram, and our CFO, Olaf Klinger. After their presentations, we are open for your questions. With this, I hand over to our CEO, Dr. Heinz-Jürgen Bertram. You may begin.
Thank you, Tobias. Good morning, everyone. Welcome, and thank you for joining our earnings call on the results for the first half of 2018. In today's call, I want to give you an update on our latest performance and the strategic initiatives ahead. Our CFO, Olaf Klinger, will guide you through the financials in detail. After we close our presentation with our updated outlook, we will give you an opportunity for questions. Let us kick off with the highlights on slide three. After a dynamic first quarter, we accelerated our growth course between April and June. Given the challenges in the market, we think that is excellent news. We report organic sales growth of 9% to EUR 1.6 billion. Our EBITDA amounts to EUR 317 million, with an EBITDA margin of 20.1%. We remained very profitable. Net income increased to EUR 142 million, with earnings per share rising to EUR 1.10.
Against the background of our strong performance in the first half, we raised our sales guidance for 2018. We now expect organic sales to exceed 7%. The stock market appreciates our performance as well as our ambition. Our market cap reached EUR 10 billion. Symrise has continued to be a frontrunner with respect to growth on slide four in the street. During the first half of this year, we increased organic sales by an excellent 9% to EUR 1.6 billion. We picked up pace in the second quarter and grew sales by even 10.6%. Taking into consideration our foreign effects and increased headwinds from unfavorable exchange rates, our sales growth amounts to solid 4%. Let me give you more details on the regional developments on slide five. Latin America was our strongest region, with a sales growth of more than 16%.
In the second quarter, the region delivered an even stronger result and increased its top line by even more than 20%. Asia-Pacific ranks second with a sales growth of more than 12%. In EMEA, we grew revenues by 7%, and in North America, we realized solid growth of 5%. In emerging markets, we also operated extremely well with a double-digit sales growth of about 13%. Overall, we generated 43% of our total group sales in these dynamic markets. Chart six illustrates the individual effects on group sales in detail. On an organic basis, sales grew by EUR 137 million. The acquisitions Citratus and Cobell contributed EUR 32 million. Currency effects in the volume of EUR 109 million impacted our top line by minus 7.2%. Let us come to the segments now. Please turn to chart seven. Scent & Care increased sales by 3.4% to EUR 660 million.
On an organic basis, this segment grew its top line by more than 10%. Dynamics were particularly good in aroma molecules and cosmetic ingredients. Each business delivered double-digit growth rates. The segment's performance is particularly remarkable against the background of the raw material shortages. The availability of citral, which is a key component for fragrance compositions, has further declined during the second quarter due to ongoing manufacturing difficulties amongst major market suppliers. Thanks to our comprehensive backward integration and our direct access to fragrance ingredients via Pinova, we have compensated this shortage. In other words, we had no disruption in our customer supply chain whatsoever. Our deliveries have been as reliable as always. Our strategic investment in Pinova clearly pays off. Let's turn to slide eight for an overview of our flavor business.
Despite negative effects of Ipsitrix, the segment delivered sales growth of 9% to around EUR 605 million. Our U.K.-based beverage business, Cobell, continued EUR 27.5 million. We also strongly grew on an organic basis with a plus of about 11%. All application areas and regions expanded their business significantly. Flavor particularly benefited from new business and high price levels with vanilla applications. In addition, we have seen strong demand for sweet, savory, and beverages. For details on nutrition, please turn to chart nine. The segment posted sales of about EUR 311 million, with very good dynamics in pet food and food. The slight decline compared to the prior year is due to a temporary slower order intake of one of Probi's main customers. Without this temporary customer effect, nutrition grew sales by a very good 7.6%.
We have already seen a stronger order intake in the second quarter and expect Probi's customers to be fully back in the second half. Let me now hand over to Olaf for more details on our financials. Olaf?
Thank you, Heinz-Jürgen. Ladies and gentlemen, also a warm welcome from my side. As usual, I will walk you through our financial performance in some more detail. Let me also give you some more context around our results, which we think are strong given the environment we are navigating through right now. In fact, Symrise very successfully managed the challenges from exchange rates as well as from the market-wide shortage of raw materials. We continued to face stiff foreign exchange headwinds in the second quarter. They were primarily a result of depreciation of the euro against the U.S. dollar and led to a negative effect from foreign exchange rates of -6.5% in Q2, following -7.9% in Q1. Although the overall effect has slightly improved, we do expect this negative FX trend to continue in the second half of the year, but with less magnitudes.
On a full-year basis, we now foresee a headwind of 4%-5%. On top of the currency headwinds, the raw material situation remained tense due to the shortage in certain raw materials and a supply disruption by some of the biggest suppliers. Raw material costs continued to rise, especially for our Scent & Care segment, but for different reasons also in the Flavor and Nutrition segments. While we were able to counterbalance parts, we could, however, not compensate for it entirely. Given the current imbalance of supply and demand, as well as the uncertainty in the supply chain, we remain somehow cautious. For the second half, we expect price levels to remain high and clearly above prior year, where prices were already up by about 4%. For the full year 2018, we anticipate an increase in raw material prices between 4%-5%, more to the higher end.
These challenges neither have nor will they stop us from making thoughtful strategic investments into growth initiatives. The underlying drivers of our business are fully intact. Our ongoing investment in R&D and in capacity expansion are thus a consequent implementation of our growth strategy. Although these steps cost and will temporarily impact profitability this year, they will pay off in the mid to long term. We are setting the basis for our future profitable growth by focusing on organic growth opportunities. Following these opening remarks, let us turn to the earnings development on chart 11. Group EBITDA came in at EUR 317.1 million, after EUR 322.9 million in the comparative period, 2017. EBITDA growth was impacted by mainly three factors: higher raw material cost, unfavorable exchange rates, and our investment in strategic growth initiatives. Despite these effects, Symrise continued to operate highly profitably.
Our group EBITDA margin remained at a good level of 20.1% for the first six months and 20.2% for Q2. Coming to our segments, Scent & Care was impacted the most by the tense raw material situation. However, despite the significantly higher raw material costs, segment EBITDA came in at EUR 127.9 million and was hence almost on prior year level. Accordingly, the EBITDA margin amounted to a solid 19.4%. The segment profitability speaks a clear language and once more very directly illustrates the benefits of our strong raw material access. Please also note that the prior year EBITDA included a one-off gain of EUR 4.7 million from the purchase price adjustment following the sale of the Pinova industrial activities. The flavor segment increased EBITDA by 3.2% to EUR 127 million.
The EBITDA margin was at 21% and therefore on an excellent level, taking the temporary diluting impact of the Cobell acquisition into consideration. Nutrition saw a temporary earnings decline during the first half. As Heinz-Jürgen outlined, the reason behind it were lower sales contributions from Probi. In addition, the segment recorded ramp-up costs for the new Georgia site in the U.S. and the magnitude of EUR 2 million. EBITDA came in at EUR 62.2 million and profitability saw the solid level with an EBITDA margin of 20%. Please turn now to slide 12 for our bottom line. Despite higher manufacturing costs, gross profit slightly increased to EUR 630.9 million. Our gross margin, on the other hand, was down 1.4 basis points, reflecting higher raw material costs. Depreciation increased by 2.1% and reflects our investment in various business areas.
Amortization, on the other side, decreased by about 3% as an amortization period of an acquisition in the flavor segment back in 2008 came to an end. Net financial results improved by EUR 3 million to minus EUR 19.9 million, primarily due to the lower interest expenses related to our convertible bond. Net income grew to EUR 142.3 million and earnings per share rose to EUR 1.10. Our tax rate remained fairly stable at 28% compared to 27.9% in the prior year period. It is also below our long-term rate expectations of below 30% tax rate. Let us move now to our cash flow analysis on slide 13.
Operating cash flow amounted to EUR 151.3 million, and we saw a continuing increase in working capital and in that context, drivers were the strong business activities, higher raw material cost, both volume and price driven, as well as strategic inventories which we accumulated. Cash flow from investment activities was up EUR 22 million due to two factors. Recent M&A activity and the acquisition of Citratus, which we closed at the beginning of the year. Second, growth and expansion projects in the U.S. and China, which Heinz-Jürgen will present in a minute. Financing cash flow decreased to minus EUR 21 million. It has to be taken into account, however, that the prior year figure included a one-time effect related to the convertible bond issuance. Now to slide 14, it presents our balance sheet. Total assets increased by 3.7%. Receivables were up corresponding to top-line growth and recent M&A activity.
As outlined earlier, we saw an increase in inventory due to strong business dynamics as well as higher raw material prices. Current liabilities also increased primarily as a consequence of an increase in short-term borrowings. Net debt, excluding pensions, amounted to 2.4x EBITDA or EUR 1.5 billion, including pension provisions, the ratio of net debt to EBITDA ratio amounted to 3.3, which is slightly above our target range. Our increasingly strong focus on operating cash flow will help to bring this ratio down on a full year basis to an expected 2.6x-2.9x EBITDA. With an equity ratio of 37%, Symrise continued to operate on a very solid capital base. All in all, we see ourselves financially in very well positioned to further drive forward our business and growth initiatives. With that, I would now like hand back to Heinz-Jürgen. Thank you.
Thank you, Olaf. I also want to take the opportunity to provide you with an update on our latest strategic investment and our expectations for the months ahead. I explained during our earnings call in March, our CapEx will be at the higher end this year, which means it will be at around 6% of sales. We experienced positive dynamics in all our regions and see strong opportunities for growth. It is therefore absolutely consequent to leverage those opportunities. We thereby set the basis for continuing our profitable growth course. Some of our current projects are presented on Chart 16. In Shanghai, we now work in a new development center for health and care. In this modern facility, we develop fragrances in close cooperation with multinational and local clients for the Chinese market. In Spain, we have just extended our manufacturing capacity for pet food applications.
In addition to the recent expansion in France, we now have another strong site for deliveries into various European markets. What are our plans going forward? In this month, we are going to open a new production facility for cosmetic ingredients in Charleston, South Carolina. That is where we also ramp up our menthol capacities until early 2019. In October, we will start our new spray drying facility for flavors in New Jersey, and we will open our new food ingredient site in Georgia. Beginning of Q2 2019, our new fragrance encapsulation center in Auckland will become operational. Also next year in Q4, our new facility for fragrances and flavors in China will take up operations. We invest more than EUR 80 million. Construction has already been done. The various growth initiatives we undertake across different regions of the world underline our confidence.
The long-term growth drivers of our business, as listed on Chart 17, are fully intact. In addition, Symrise is very well-positioned in the marketplace. We have a strong presence in developed and emerging markets, a broader customer base of global, regional, and local customers, and a diversified product portfolio, which we constantly expand. Equally as important, our backward integration. The results of the first half of this year speak a clear language. We have been able to manage the shortages in the market as we cover more than 60% of the raw materials which we use through our backward integration. Please turn to Chart 18. Following our strong performance during the first six months of 2018, we are positive for the second half. We have therefore raised our sales guidance. We now aim at organic sales growth of above 7% in 2018.
We are confident that we have everything it takes to further expand customer relationships and drive our top line. Our ambition to be amongst the most profitable players in our industry is also unchanged. We therefore confirm our margin targets despite the pressure on raw material prices. We aim an EBITDA margin of about 20% for the current year. Accordingly, our midterm targets for 2020 remain fully in place. We want to deliver an annual growth rate of 5%-7%, and we aim for an EBITDA margin in the corridor of 19%-22%. We would now like to open the call for your questions. Tobias, please go ahead.
Many thanks, Heinz-Jürgen. Many thanks, Olaf. Turning to Q&A, we are now happy to take your questions. We kindly ask you to put only two questions. If we cannot take all your questions during the conference, we will answer the remaining questions later today. Many thanks, and first question please.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker placement today, please make enhancements before making your selection. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from Patrick Lambert of Raymond James. Please go ahead.
Congratulations from me. A 10.6% growth in Q2. Just regarding that 10.6%, could you break it between volume and prices by segments, in particular on the Scent & Care, which was also very strong. The impact of raising prices, how much you could pass on to customers? That's a question, number one. Related to that, it's the 20% growth in LatAm in Q2. How much is actually pricing versus FX type of growth? Thank you.
Thank you, Patrick. I think Heinz-Jürgen can take that. On the volume price question which you had, you saw on a half year basis about one quarter price and three quarter volume. If you break that down a little bit further into the three segments, the picture for flavors is pretty much now moving to one quarter price and three quarter volume. Nutrition is 50/50, we see a lot of price there at the moment, which is necessary to compensate also for raw material price increases in nutrition. Then Scent & Care, very specific situation still. On a half year basis, there is some price now which came in in the second quarter. More to come in the second half of this year, but still, the majority of the growth is volume-driven in Scent & Care. We are working on price increases with customers.
We have done a substantial round with the majority of the customers. It's definitely also necessary that we will work on further price increases. On your question regarding LatAm, the growth is hardly impacted by foreign exchange related to the U.S. dollar-euro development. This is a very good growth momentum, which we experience at the moment in LatAm, and a good recovery compared to last year, especially also for Scent & Care.
Hope that answers your question.
Yes. Thank you very much.
You're welcome.
The next question is from Gunther Zechmann of Bernstein. Please go ahead.
Hi. Good morning, everyone. I've got two questions, one on raw materials, and the other one coming back to prices. The first one, what inflation do you include in your budget for raw material costs in 2019, if you can give us an outlook there? The second one, more a clarification, the 4%-5% Olaf that you mentioned in the prepared remarks for cost inflation this year, is that including or excluding the Citral supply disruption? If I can tag on a question to be, do you expect to get any compensation for that supply interruption, either from the suppliers themselves or from insurance?
On the Citral situation, the guidance we gave, the 4%-5%, is more to the upper end of the range with everything. We are not distinguishing between Citral and the big picture situation, especially in Scent & Care. Maybe also to add to that, we saw a further increase in raw material price development in Scent & Care in the second quarter. It was slightly less in flavors, but still for the group perspective, at the higher end of 4%-5%. This is also continuing, especially for Scent & Care when we look into 2019. Hopefully, it will ease a little bit, but it's now very clear that the driver is not only the Citral situation, it's the big picture which we see in the world at the moment, pretty much also driven by China and some incidents in India, which you're well aware of.
We remain cautious, and as I said, we will have to work further on prices with customers to fully compensate the situation. I hope that gives you a little inkling where we are.
Sure. Thanks. Anything on potential compensation for the current Citral supply disruption?
The majority of the compensation has to come through price with customers. That is where we need to work and what we are actually doing.
Our situation is slightly different than with some other competitors. That's why we do not break out Citral. As we continue to say, we have the material we need. The impact we see is more on higher cost impact due to transportation, getting the material there where we need it. The good news is our backward integration clearly pays off. We have fulfilled all customer orders, that is a clear distinction between us and some others. We have the material, but as Olaf said, we are impacted. Getting compensation from anyone, that will be somewhat difficult.
Okay, great. Thank you both.
The next question is from Heidi Vesterinen of BNP Paribas Exane. Please go ahead.
Hi. First a question on growth. I think earlier this year, we had the impression that the step-up in growth would be more 2019 story as the CapEx turns into volume. Now you're raising guidance today. Do you think the step-up this year is driven by the tense raw material situation where you had a clear advantage and maybe you gained share? Is the CapEx story for next year still intact, or are you seeing that some of the CapEx benefits that you were expecting are coming through earlier than expected? Maybe some of the expected growth from 2019 is just appearing earlier. Could you clarify that, please? Secondly, on margins, could you talk a bit more about the soft margin in flavors? You mentioned it was Cobell related. Is it purely that?
It was a bit surprising because everyone else has reported flavor margins up this season. If I can sneak in a related question, do you have an outlook for group margins into the second half? I think Olaf, you had talked about progressive improvement. Taking into account what you've said about raw material costs, et cetera, are you still confident that margins could be a bit better as we go into the second half? Thank you.
Thanks, Heidi. Let me first take the first question, Olaf you just pick up the margin part. On the CapEx, first starting with the point that at least I hope it becomes obvious. Our CapEx expansion projects come in in time and are being completed in time. The second good news is obviously they start to delivering some of the growth momentum which we were looking for. Having said that, the other positive news, our cosmetic ingredients plant, let me add that, is already in operation, also completed in time, and we're ramping it up as we're speaking. To the point, do we see the CapEx project already contributing to the growth this year? Yes. Will they contribute also to growth next year? Yes.
The good news to this is obviously our long-term strategy clearly pays off. Heidi, we have not taken back anything on our long-term ambitious growth targets. That means we are still very confident in our business model. The only differentiator is for this year, as some of the momentum picked up very early, we even increased the guidance for this year. I think these are all positive news.
Olaf, you want to go through the margin?
Yes. Let me take up the flavor margin. As I said, Cobell is definitely impacting the margin situation, which is now with us for a year. That comes with the subcritical margin, we knew that. We are, of course, working on group level margin also for Cobell. That will take some time, as we said before, but it's definitely under control. The second element which we tend to forget is that the vanilla price situation was quite intensive. This is going into the margin situation. We have done a tremendous job in flavors to manage through this dramatic price increase in vanilla. This is, I would say, the second small explanation why we see a little bit weaker margin environment in flavor. But given the extremely strong growth profile, I think this is definitely compensated through the absolute EBITDA development in flavors.
When it comes to the margin situation in the second half, I think we remain cautiously optimistic that we will further improve this. I would like to hint to the first quarter situation that we had the prior year effect in Pinova. This was a one-timer last year. We also still see the Probi impact, which is not only the top line, it's also the EBITDA impact. We should see the positive impact from the price negotiations, which we had on the Scent & Care side, coming through in the second half more prominently. All this gives us some optimism with the challenge that the raw material price situation will be probably longer with us than we expected. As I said, it's not only citral, it's the overall environment which is a challenge.
Thank you.
Yes. I do see we even answered your third question to the bullet strength.
I appreciate that. Thank you.
Welcome.
The next question is from Thomas Terborgh of Société Générale. Please go ahead.
Yes, good morning, gentlemen. I will try it too as well. Firstly, on vanilla, you might have a better crystal ball than we have. Obviously, the next crop is coming up, and eventually there will be some price decreases for vanilla. Could you just share your thoughts? How do you think that will play out for you in terms of an eventual burden on your organic growth rates and on margin? Secondly, just very quickly on citral. I understand perfectly that you were able to buffer most of the pressure via Pinova. The question still remains, with BASF producing again, do you expect a relief in terms of margin from the citral situation from Q3, or is it still too early? Thank you.
Okay. I pick up first the question on vanilla. Thomas, it's too early. There is no clear guidance if the price will go up, will be on high level as it's currently, or will go down. The harvest season has begun, to your question, we have been talking with our people in Madagascar, and they have started to buy some vanilla, but just started, and it's by far too early at the moment in that market. Everyone is cautiously waiting what's going to see. I hope you will understand that we are also cautious as we don't know it better, and we would tell you otherwise. That is fresh information, I would say, from last week, talking with our people in Madagascar. Citral, on the other side, yes, BASF slowly coming back on track. They are not fully there yet.
They are distributing their citral not only to the fragrance industry, as you know, but also serving the vitamin industry. Must not forget, two other suppliers are still under force majeure. That leaves this material short in supply. We expect there will be constraints in raw material supply in Q3 and Q4 going onwards. As I said, for us, this is on the one side, challenge, on the other side, it opens opportunities. I hope that answers the question, Thomas.
This is very helpful. Thank you very much indeed.
The next question is from Patrick Schmidt of Warburg Research. Please go ahead.
Hi, gentlemen. Thanks for taking the question. I've got one regarding your currency situation, looking at the last slide of your presentation. Could you maybe give us more detail in terms of the volume of the FX effect you said of the EUR 109 million? Is it rather, let's say, 60% US dollar related or rather 80% and maybe the second and third largest currency effect positions? In terms of your raised guidance of the above 7%, could you also provide an upper end maybe? Thirdly, could you add some color in terms of your raw material prices you already discussed? Whether you've seen some other raw materials besides vanilla we would have to watch out for, or you are concerned about or maybe there are some favorable developments coming up, and maybe the impact on your growth margins.
This is further declining, your EBITDA margin seems to be under control. Thank you very much.
Olaf, I would say you take the currency part, right? You have it in front of you.
That's, of course, a very big part coming from the US dollar in absolute terms. Also keep in mind that the Latin currencies are not helping at the moment, quite to the contrary. It's very much also Brazil, it's Argentina, it's Mexico. You have many currencies where also the euro is strengthening at the end of the day. It's pretty broad, the majority clearly coming from the US dollar because it's about one-third of our environment, top-line wise. That's the picture. As I said, it will ease a little bit in the second half. Over the year, we expect 4%-5% through headwind for the group.
Patrick, may I pick up the question on the growth? Please bear in mind our long-term guidance, 5%-7% organic growth is already more ambitious than anyone else's. We're increasing it today for this year of more than 7% shows you we have a very strong confidence in our growth model, and it clearly shows our initiatives, backward integration, and also Pinova including going in that direction, clearly pays off. Today it's too early to give you a clear picture on what the year-end will be, I think for today, more than 7%, I think that shows we are a growth value and we have a working business model. That leaves us with the question on the raw materials.
About 75% of our raw materials are natural based, I would say, in general, with the trend going towards more natural material usage, the demand for the natural materials will continue to be strong. Overall, I would say there is not something from the important materials where we will see a relief on the price sector. About one quarter of our materials is mineral oil based, I would say the development of the oil price, it's obvious to you anyway, you can look this up on a day-to-day basis, that gives you a clear picture on the raw material situation at the moment. I hope that answers your question, Patrick.
I think there was one more on the vanilla side. I think given the environment we manage very well, as you well know, if you have to increase prices quite substantially, in fact, it has a diluting effect on the gross margin side. As you rightly said, the EBITDA margin situation in these circumstances is very much under control I'm pretty proud of what our flavor people did in this environment, they were definitely able to pass through this price situation very well. All in all, that is definitely more than under control.
All right. Thank you very much.
You're welcome.
The next question is from Daniel Huchta of Ringberg Bank. Please go ahead.
Yes, thank you very much for taking my two questions. The first one on organic growth and Scent & Care coming back again. I mean, you all have said that it is mostly volume driven. That would mean we have seen a massive sequential acceleration compared to the previous quarters. Can you put a bit more color on this, where this has come from, and whether this is just really order pre-shifting or why it is so strong now in Q2? The second question on ramp-up costs, you were highlighting that you had EUR 2 million in nutrition from one side. Can you maybe give a bit more details on how it is for the whole group and how much ramp-up costs you had in Q2 or in the first half and a bit more color on the phasing, what we can expect here. Thank you very much.
Okay. Yeah. Damn it. Our first organic growth in Scent & Care. I kept saying we believe that Pinova was the right acquisition, so a lot of the growth momentum came from the products from Pinova. Again, it's an environment which gives us a stable basis, and we just discussed in our question and answer session on the shortage of citral and citral-derived products. We have a stable basis, and we were always convinced that this would work out. You see this as a sign that we are making progress in Pinova acquisition. As I recently said, we will, until 2020, double the business in Pinova and Pinova-derived products, and this is clearly a sign that we deliver on our improvement projects with Pinova. That is the strongest driver for growth in the aroma molecules. Having said that, Daniel, the ramp-up costs, Olaf wants to say something.
Yeah. Let me take that up. I carved the EUR 2 million out for our Diana project in Georgia because it's a greenfield project. It's in comparison, a huge project for the Diana organization.
It will need to ramp up the facility, including some personal costs, which we will experience before this can start later this year. All the other projects are more in an ongoing environment, so we are expanding existing production facilities, and therefore, we are not carving out the ramp-up costs for these investments explicitly. I think that is something which we have to bear as we go along and should not be considered as one-time effects.
No.
You see some of these effects in our numbers. Just if I may add this, for example, in Menthol, we are preparing for the start of the production. We are accumulating starting materials so that we have a safe supply. Some of these things are visible if you go through our numbers.
Mm-hmm. Okay. Thank you very much.
The next question is from Knut Winther of Equinet. Please go ahead.
Yes. Good morning, gentlemen. Thanks for taking my question. A more general question on the margin involvement of new products. Could you elaborate a little bit how it is developing over the life cycle? My naive assumption would be when you launch a new product that is at the beginning below group average, then above, and then when it's maturing again below group average. Is that roughly okay or a little bit too simple?
I would say this is oversimplifying. It will work to help you do this with compositions and flavors and fragrances. Yes, in the beginning, we have ramp-up costs and marketing costs, and typically, a very good year if the product is successful in the second year, as then everything ramp up and everything is done, marketing introduction is done, and the product is in the early stages of the life cycle. As I said, that is for flavors and fragrances. This does not apply to the ingredient sector like nutrition or like aroma molecules or like cosmetic ingredients. Actually, there, if you have a great or a good product, it becomes typically more profitable going forward. Most of the products which we are producing, for example, cosmetic ingredients, are patent protected, which means you have a 20-year life span of harvesting the investment.
On the downside is typically the investments up front in particular in aroma molecules, cosmetic ingredients are more significant. You see that, for example, in our nutrition business, where we are investing. This is the other side. Please differentiate the picture into compositions, flavor and fragrance, and ingredients. For compositions, your picture roughly would be correct. I hope that answers your question.
Yes. Thank you very much.
The next question is from Sebastian Bray of Berenberg. Please go ahead.
Good morning, gentlemen. Two questions to you, please. Firstly, could you elaborate further on the free cash generation that we saw in the first half? I know you mentioned the CapEx spend for this year. As you look into the end of 2018 and 2019, can you give us a sense of how you think the working capital situation will evolve this year as well as into next year, particularly as you ramp up the new capacity? What do you expect for the right flow as well as your CapEx expectations? Secondly, in terms of the growth delivered in the first half, can you give us a sense in terms of the growth rates between maybe the global customers and some of your more local regional customers?
In particular, are you seeing more difficulties in passing through the price increases with the globals versus the smaller customers? Thank you.
Okay. Free cash flow generation, Olaf, I think you pick that up and you take the numbers. I think on the global and regional, it's a bit oversimplifying saying the business with the global or with the local customers grows faster than with the global ones. Actually, I'm happy to report our business with the global customers has developed also very nicely. Price increases, I can tell you, SymTan, is always difficult regardless if it's with global, regional, or local customers. It depends on the customer basis. At least the momentum and the necessity that price increases in this environment are necessary is clear to everyone, regardless if it's a small or a big customer. It's a question of relationship you have with the customer. I would not say generally that it's more difficult with the global customer than with the local customer.
You have smart agents who run purchasing in all companies. We take it on a pragmatic basis. On the other side, the growth, also the strong growth we showed comes also from global customers. Olaf, you want to pick up with cash generation?
Yes. As Bernd already mentioned, the CapEx ratio is expected at 6% this year. That is the guidance for this part. For working capital, I think there are a few drivers, of course. One is the very strong growth. That necessarily also needs an increase in working capital. We have specific situations with raw material price increases, which of course also leads to higher valuation of inventory at the end of the day. Heinz-Jürgen also referred to that already. We are building some strategic inventory at the moment to prepare for the launch of our new menthol capacity. Those of you who are longer with us since 2012 might remember that we had shortages at that time. That should not happen again, and therefore we are building this downside hedge yet for a temporary period. The inventory situation will be higher because of this.
I think it's a worthwhile investment we are doing here to have a quick start early next year.
Thank you. Is it fair to say, not free cash generation, but this year or next year, it might be constrained and then hopefully acceleration in the outer years?
Oh, yeah, definitely. We work heavily on the working capital side through KPIs. There's a lot of attention in the organization in the meantime. On the other hand, as I always said, this business model which we are running is capital intensive and requires a certain amount of working capital. That's very clear. That doesn't mean that we are not sensitive around it. We are putting a lot of effort into managing this as tight as we can.
Thank you very much.
The next question is from Louise Coyne of JPMorgan. Please go ahead.
Thank you. Good morning, gentlemen. Two questions from me, please. Firstly, on the emerging market growth, which was very strong in H1, that is 12.8%. Maybe would you be able to split that between the segments, between Flavor and Nutrition and Scent & Care? Secondly, just to zoom in on North America within flavor, you reported double-digit organic sales growth there. Is there anything you particularly call out? On that, what would be your view in terms of the medium-term outlook for growth in North America? Thank you.
Thanks for the question. The emerging markets growth, yes, is impressive, but it is a confirmation of what we said. The opportunities for growth in population and in our customer base was, is, and will continue to be in the emerging markets. On the other side, yes, we are aware, and we all have to be aware that is a challenging environment. The winners today are the losers tomorrow in emerging markets. If you are agile enough and if you are responsive enough in the emerging markets, you typically find nice areas and nice opportunities, and the numbers which we just delivered and showed just confirm that. We do not see any reason why that should change. We also will continue to focus on emerging markets. As we said, we are aware that what drives the growth today will probably be having difficulties tomorrow.
That is something which is typical for the emerging markets. North America in flavor saw a very strong growth indeed, but that shows just a confirmation of our strategy building up that business, and we saw strong growth all over. One area being vanilla, the other one being beverages. There was not any weak area in flavors which I would pick out. It is just a confirmation of the initiatives which we have initiated in North America in flavor. Looking forward, we have no reason to be pessimistic in the future on that business. I hope that answers your question.
Okay. Thank you, sir. Yes, thanks very much.
Okay. Ladies and gentlemen, this brings us to the end of our conference call. Thank you very much for your time and your interest in Symrise. Nine months results will be published on November 7th. We are now looking forward to seeing you at upcoming conferences or roadshows. Goodbye, and have a nice day.
Bye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephones. Thank you for joining and have a pleasant day. Goodbye.