Ladies and gentlemen, good morning or good afternoon. Welcome to the Givaudan 2018 half-year results conference call and live webcast. I am Alice, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Gilles Andrier, chief executive officer, accompanied by Mr. Tom Hallam, chief financial officer of Givaudan. Please go ahead, gentlemen.
Thank you. Dear ladies and gentlemen, good afternoon, as well as good evening to Asia and good morning to the Americas. Welcome to this conference call on our 2018 half-year results. I will make this call together with our CFO, Tom Hallam. We'll take you through the presentation before answering your questions at the end. Investor news on our half-year results 2018 was published on our Givaudan website at seven o'clock this morning, Swiss time, 19th of July, 2018. This is where you will also find the slides for today's presentation. Along with the investor news, you will find also our 2018 half-year report on our website. I would now like to start going through the presentation and invite you to turn to slide number three to go through our performance highlights.
The first half of 2018 was marked by our game-changing acquisition of Naturex, which makes us now the clear leader in naturals, the world's mega trend in food and beverage. We delivered a solid like-for-like sales growth of 5.6%, and including the contribution of our latest acquisitions, a growth of 7.7% in Swiss francs. All this in an ongoing challenging environment. Both divisions contributed to this solid business momentum, which was supported by an encouraging recovery of the high-growth markets honoring their name. We achieved an EBITDA of CHF 601 million, representing a margin of 22.5%. The net income amounted to CHF 371 million. The free cash flow represented 4.2% of our sales, impacted by substantial investments in our future, namely in our Givaudan Business Solutions, GBS program, and in our new state-of-the-art research center in Zurich to be opened next year in 2019.
Both the ongoing Naturex public tender and the Givaudan Business Solutions implementation are making good progress as planned. These results, along with the full project pipeline and high win rates, are again a convincing demonstration of the continued value we bring to our customers across all regions and all segments, delivering high levels of performance while making substantial investments in our future success. We are satisfied with the overall performance in the first half year 2018 and are confident to deliver on our 2020 midterm targets. Let's turn now to slide four. In the first half of 2018, we achieved sales of CHF 2.7 billion, a growth of 5.6% on the like-for-like basis and 7.7% in Swiss francs. On a like-for-like basis, our fragrance division grew 6.5% and our flavors division grew 4.9%. I'd like now to highlight some of the key growth drivers.
We saw again an excellent growth with local and regional customers, while sales with our multinational customers picked further up. Global demand for natural flavors and natural ingredients continued to remain strong. One of the reasons we continue adding to our rich palette of flavors and natural ingredients with acquisitions like Naturex and Centroflora. Today, natural flavors and ingredients combined with health and wellness flavors, namely our Taste Solutions, which are also all-naturals, represent 70% of our flavor sales growing at a high single-digit rate. Our high-tech encapsulated fragrances again contributed strongly to the good result of our Fragrance Division. After 2016 and 2017 strong results, our Fine Fragrances continues with an outstanding performance, growing 15.6% with many perfumes recognized at the major award ceremonies in Europe and North America this year. Let's turn now to slide five.
In the first half year of 2018, high-growth markets lived up to their expectation and grew 7.8%, nearly twice as much as mature markets. China, India, Argentina, Brazil, Mexico, and Russia were at the forefront of this development with double-digit growth rates. The whole of Latin America again grew double digits. In the mature markets, we grew with a solid 4%, led by Japan, Spain, and Italy. A strong contribution came also from Northern Europe and Germany. High-growth markets make up 43% of our overall sales, still below past levels. This is the result of the acquisitions we made in mature markets, combined with the continued weakening currency situation in the high-growth markets. Our presence in high-growth markets has always been a key driver for our growth and continues to be one of our key strategies for 2020, despite a few remaining weaknesses at present.
Midterm, the demographics, the ever-growing middle class, and the strong urbanization trends will continue to support the growth of these markets, especially in Asia, where urbanization and the middle class are still below average. Our size and our operations footprint gives us a unique exposure to the diversity of these high-growth markets in which we continue investing, both with additional talent, new facilities to service the wide diversity of our clients. Please now turn to slide six. I'd like now to highlight the sales development by region for the group. Sales in Latin America and Asia Pacific picked up strongly in the first half of 2018. Latin America is back on a double-digit growth with 10.8%, driven by Argentina, Brazil, and Mexico. The growth in Asia Pacific was 7.1%, with double-digit growth in the largest markets of India and China.
North America grew 1.9% on the back of last year's very strong comparables. Italy, Iberia, Northern Europe, Russia, and Germany contributed strongly to the good results of 5.6% for the EAME region. Let's turn now to slide seven. The Fragrance Division grew 6.5% on a like-for-like basis and 7.5% in CHF. Fine Fragrances increased by 15.6%. This performance was driven by double-digit growth in all regions and by sustained high level of new perfumes won across all customer groups, combined with volume growth on established business at key accounts. Sales of the Consumer Products grew 3.9%, showing a balanced development in both mature and high-growth markets, as well as across all customer segments. Fragrance Ingredients and Active Beauty increased by 8.2%. Active Beauty sales were mainly driven by a strong performance with local and regional customers. Fragrance Ingredients showed a strongly improved growth compared to 2017.
Now let's turn to the next slide, number eight. Sales of the Flavors division grew 4.9% on a like-for-like basis and 7.8% in CHF. Naturals, health and wellbeing, integrated solutions, and local and regional customers all contributed strongly to this overall performance. Asia Pacific grew 7% on a like-for-like basis. This growth was fueled by double-digit growth in India, China, Singapore. Local and regional customers continued to grow strongly, and all segments contributed positively to this encouraging development in Asia Pacific. Europe, Africa, Middle East grew 5% with good growth in Central and Eastern Europe, led by Russia. In Africa and the Middle East, Egypt and South Africa made a good contribution to the regional performance, which was partially offset by challenging market conditions across the Middle East. The mature markets of Western Europe delivered good results with double-digit growth in U.K., Ireland, Belgium, Switzerland and Sweden.
On a like-for-like basis, sales in North America grew by 1.3% in 2018 against the strong comparable of 8.9% in 2017. The performance was a result of new wins and the growth of existing business in the segments of beverages and dairy. Finally, sales in Latin America increased by 11.7%, with double-digit sales growth in Argentina, Mexico, Colombia and Brazil, where the economic situation is recovering. The strong growth came from all segments led by beverages, dairy, savory and snacks. Let's turn now to slide nine. When we presented our 2020 strategy in August 2015, we clearly stated that acquisitions would be an important part of our five-year growth path. Since 2014, we have, including Naturex, acquired eight businesses for a total of CHF 2.5 billion. These businesses, once fully integrated into Givaudan, will have a yearly contribution of CHF 1 billion to our total group sales.
The integration of Soliance, Induchem, Spicetec, and Activ International are, to a large extent, completed, and the integration of Givaudan and Centroflora is well on track. In all activities, Fragrances, Active Beauty and Flavors, our success in providing winning solutions to our customers is a demonstration of our value creation and efficient acquisition strategy. We aim at further value-creative acquisition to complement our core capabilities and increase the portfolio of naturals, integrated solutions, local and regional customers, as well as new business areas where we believe we can further provide value to our customers. Let's turn now to slide 10. The acquisition of Naturex fits fully our 2020 strategy to expand our offering of natural products to our customers, to expand our portfolio of integrated solutions and Active Beauty natural ingredients, as well as to further complement our customer base.
Givaudan is the global leader in the space of natural flavors, and Naturex complements perfectly our capabilities with its strong portfolio of plant extracts and natural ingredients across the food and beverage, nutrition, health, and personal care sectors. The final steps of the acquisition of Naturex are progressing well. All regulatory approvals have been secured, and financing for the transaction is completed. The purchase of 40.5% of the shares of Naturex was completed on 4th of June 2018. The mandatory cash tender offer was launched on 28th of June and will continue until early September. We expect the closing of the transaction in September 2018. Let's turn now to slide 11. While we grow, we are determined to maintain our agility and excellence in execution in order to offer a superior customer experience. This is the rationale of Givaudan Business Solutions, GBS, the formation of which was announced last year.
GBS is a global organizational unit providing best-in-class internal processes and services. It is designed to increase internal efficiencies and leverage best practices from across the organization, enabling the company to deliver with excellence. GBS is well on track. We are fully on track with our cost and benefits plan, which was initially communicated. The GBS centers in Budapest, Buenos Aires, and Kuala Lumpur are fully operational. Many countries have already migrated to GBS, with transitions successfully completed. The implementation efforts are now active in all regions, with Europe scheduled to be fully transitioned by the end of 2018, followed by North America, Latin America, and Asia-Pacific. With this, I'd like to hand over to Tom, who will give you more granularity on our financial results.
Thank you, Gilles. I would also like to welcome you to this conference call. Gilles has taken you through the main aspects of the market development and the business performance. On the following slides, I would like to focus on the financial performance of the two divisions and the group. Let me start with the financial highlights on page 13. Group sales increased by 5.6% on a like-for-like basis, which excludes any currency impact as well as the recent acquisitions. The absolute EBITDA was flat at CHF 601 million, whilst the underlying EBITDA margin remained strong at 23.4%. Net income was CHF 371 million or 13.9% of sales. The free cash flow as a percentage of sales was 4.2% compared to 5.3% in 2017. Please turn to the next slide, which shows the exchange rate development.
Despite some significant currency fluctuations which occurred during the year, our operational and geographical spread continued to provide good natural hedges, and our EBITDA margin remains well protected against these currency fluctuations. We incurred some FX losses in certain markets, which I will come back to later. On the next slide, the continued productivity gains and cost discipline were offset by a lower gross margin of 44.2% in 2018 compared to 45.6% in 2017, mainly as a result of the lower gross margin in the Fragrance Division. We continue to increase prices in collaboration with our customers. As a reminder, this has a dilutive impact on the gross margin. The EBITDA was CHF 601 million. In the first six months of 2018, we incurred costs related to the preparation of our GBS project of CHF 25 million.
As you can see on the right of the chart, our underlying EBITDA margin was 23.4% in 2018, compared to 25% in 2017, driven exclusively by a lower gross margin. On the next two slides, I would like to spend a few minutes on the operating performance of the two divisions. If you turn to the next slide, we can start with the Fragrance Division. As Gilles has mentioned, the Fragrance Division recorded a sales increase of 7.5% in Swiss francs and 6.5% on a like-for-like basis. The division recorded CHF 250 million of EBITDA, a decline from 2017, largely due to the impact of a supply disruption of a major supplier of the fragrance ingredients industry, which impacted the whole industry. Including this, as well as the CHF 25 million of GBS cost, the EBITDA margin was 20.4% on a reported basis and 22.4% on an underlying basis.
If you now turn to the next slide, we can cover the Flavors performance. The Flavors division recorded a sales increase of 7.8% in CHF and 4.9% on a like-for-like basis. A strong focus on internal costs and continued productivity gains meant that the reported EBITDA increased to CHF 351 million, an increase of 9.3%. As such, the EBITDA margin in 2018 was 24.2%, an increase versus 2017. We have updated the projected amortization of intangibles to reflect the latest acquisitions of Centroflora and Expressions Parfumées. Of course, this chart will change again once we have completed the acquisition of Naturex, foreseen for September 2018. The net income before tax decreased to CHF 431 million from CHF 451 million in 2017. Overall, a flat operating income was impacted by higher non-operating costs, most notably as a result of the high foreign currency losses in Argentina.
The net income was CHF 371 million, or 13.9% of sales, down slightly when compared to 2017. The group's effective tax rate decreased to 14% in 2018 compared to 15% in June 2017. Finally, I'm particularly happy with the free cash flow that we generated in the first half of 2018, despite a number of headwinds. During the first six months of 2018, Givaudan generated a free cash flow of CHF 113 million, or 4.2% of sales. The operating cash flow for the first six months of the year was CHF 269 million, flat when compared to 2017. Of course, this includes the cost that we incurred with the implementation of GBS, as well as the impact of the lower growth margin in the Fragrance division.
As both Gilles and I have previously commented, we continue to invest in our future with significant CapEx projects driven by the new flavors facility in India and the innovation center in Zurich. As such, total net investments in property, plant, and equipment and intangible assets was CHF 143 million, or 5.3% of sales. Working capital increased slightly in the half year, mainly as a result of higher inventories driven by crop cycles and increases in raw material prices. With this, I would like to conclude my part of the presentation and hand back to Gilles.
Thank you, Tom. We had a good start in 2018 with a good pickup in high-growth markets. North America has returned to its usual growth, whereas Fine Fragrances, to our great pleasure, continues to strongly outperform the market and competition, culminating in a growth of 15.6%. Local and regional customers continued to deliver strong growth in both divisions. Recent acquisitions and areas of strategic focus, health and wellbeing, naturals, integrated solutions, all contributed positively to the good first half year results. Raw materials, as forecasted early this year, will increase by 5%-6% for 2018, and we see so far no relief with a similar development in 2019. We face a short-term one-off impact due to a key supplier disruption, mainly affecting the first half 2018 profitability of the Fragrance division. We continue to implement price increase in collaboration with our customers to reflect the raw materials increase.
The implementation of GBS is well on the way with the previously communicated outlook of cost and benefits, which is fully confirmed. It will this year deliver the first financial benefits of CHF 20 million for 2018. Let's turn now to slide 23. Our 2020 roadmap is centered on responsible growth, shared success. Our ambitions and the roadmap for the next three years seek to ensure responsible growth and shared success for shareholders, customers, and all key stakeholders. Building on the success of the 2011-2015 strategy, we want to create further shareholder value through profitable, responsible growth with the additional contribution of acquisition. To create long-term value, we will capitalize on our market leadership, and most importantly, continue to build close partnerships. Givaudan's 2020 strategy is built on the pillars of growing with its customers, delivering with excellence, and partnering for shared success.
Ambitious financial targets are part of the roadmap to 2020. We aim at outperform the market by growing ourselves on a like-for-like basis of 4% to 5% on average over the five-year period from 2016 to 2020. In this period, we aim at delivering an average free cash flow as a percentage of sales ranging from 12% to 17%. As part of the company's 2020 strategy, Givaudan also seeks to create value through targeted acquisitions which complement existing capabilities in providing winning solutions for its customers. Since 2014, Givaudan has announced eight acquisitions, which are fully in line with the growth pillars within the company's 2020 strategy. It is Givaudan's intention to maintain its current dividend practice as part of this ambition. They are an essential part of successful consumer products for our clients.
I'm confident about Givaudan's strength and our DNA built over the last 250 years, actually 250 years this year, to continue to create value for our customers, our shareholders, and all our stakeholders. With the significant contribution Givaudan's employees around the world make every day, I'm convinced that we have the right people, the right strategy, and plans in place to continue on our successful path. Ladies and gentlemen, many thanks for your attention. Tom and I, we look now forward to your questions.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. You will hear a tone to confirm that you entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets when asking a question. Anyone who has a question may press star and one at this time. First question comes from Heidi Vesterinen from Exane. Please go ahead, madam.
Hi. Good afternoon. A few, please. First of all, on growth, do you expect like-for-like growth to decelerate in H2 given comps are tough, especially in fragrances? I actually wondered if you might feel more optimistic on growth given you have more visibility on pricing now, and also LatAm pricing should be a tailwind as we go into the second half. Secondly, could you comment on North America, please? You talk about tough comps, which is true. We're hearing a lot of bad news on North America. You would've seen Unilever report today. What are you seeing, and is the sluggishness in any sort of specific category or customer type? Last question on the fragrance margin. When we think about the phasing of GBS and the citral issues fading, you said most of the impact was in H1, if I heard correctly.
It would make sense to assume a strong margin in H2, because we have less negative impacts. Are there other factors that I should be thinking about? I wondered about operating leverage if your growth slows linking to question one. Fine, we have tough comps in Fine Fragrances. Does that have an impact on mix? What should I be thinking about? Can we have a comment on H2, please? Thank you.
Okay, Heidi. I'll start by covering your first two questions. On the like-for-like growth. Obviously, maybe I'll start maybe on the flavors one. Unlike fragrances, flavors last year had a sort of pretty equal pattern of growth between H1 and H2. There is no sort of difference in terms of comparables in flavors. As you've seen, we have seen a good pattern of growth for flavors in H1, and we don't see anything different going forward. On the fragrance side, there is a significant difference in terms of growth between H1 and H2 2017, creating a difference in comparables. That's why we remain cautious for H2 in fragrances. Even if you are right, we will see some pricing coming through in H2. We sort of difficult to have a good sort of line of sight for H2.
Again, on the positive we have here some price increase. The comparable is very high, especially in the fourth quarter. On North America. North America, yes, there is a high comparable. As we see it today, we are growing for the group 1.9% for North America. There is no, as we see it in the different parts of the business, whether if I look at flavors. If I look at flavors, we have a very high comparable last year that was very much driven both by volumes growth, which were coming from many wins in North America, by price increase, which had to do with vanilla, where North America is a big market. That's for flavors, we have a good momentum still in 2019, there is nothing to report which would be alarming on the flavor side.
On the fragrance side, I would say that it's a bit the same, high comparables. If I look at Fine Fragrances, the 15.6% for the world, well, they have a big part also in the U.S. where we are making good progress. In Consumer Products, there is nothing to report which would be of any issue in North America. It's really a question of comparables, and I can't think of any sort of concern of so. Unilever is obviously a large client for Givaudan, but we have many other clients in North America. Maybe I pass on now to Tom on the fragrance margin.
Thank you, Gilles. Heidi, just on the fragrance EBITDA margin for the second half of the year. Firstly, maybe on the citral, we estimated the full year impact for citral will be around $50 million, of which two-thirds impacted in H1 and one-third will impact in H2. As you rightly comment, GBS will actually be less of a cost in the second half of the year. As Gilles mentioned, we're fully on track. We announced that we would have $40 million of costs for the full year, $25 million booked in the first half, therefore $15 million in the second half. Of course, we have more of the savings coming in the second half of the year, split equally between fragrances and flavors.
Thank you.
Next question comes from Patrick Rafaisz from UBS. Please go ahead.
Thank you. Three questions from me as well, please. The first is a follow-up on the last question about the GBS in H2. I'm clear on the cost side, but what about the benefits? Was there already anything booked in H1, maybe a few million CHF helping the flavors margin, which was up 30 basis points? The second question around raw materials. You're already guiding now for a 5%-6% increase in 2019 as well. That's pretty early. I was just wondering if you can add a bit of color in which areas you see that inflation happening already, with the crystal ball into 2019. Last question, free cash flow as a percentage of sales lower again, as in 2017. I understand that we are looking here at a five-year average framework, right, not a year-on-year target.
Last year, you did make some reassuring comments indicating that you were still confident that you could reach that range with the full year as a bulk of the cash flows generated in H2. Would you be comfortable to repeat that for 2018 as well? Do you think you can catch up in H2 with the cash flow generation? Thank you.
I'll start maybe with the raw materials question, and then Tom will take care of the GBS and free cash flow. On raw materials, just to be very clear again, the raw materials increase, if you look at H1 and actually the full year, there are really two parts. There is this, let's call it, the BASF impact, which is for the full year, which impacts entirely fragrances, which amounts to $50 million for the full year, and it is two-thirds in H1, one-third in H2. There's the other part, which is the general raw materials increase of 5%-6% in 2018. The large amount of which is really impacting on the fragrances in other families than the citral families. This has a lot to do with, let's say, the fact that volumes are growing for Givaudan but also for many companies.
That puts a strain on the demand. When we look at the offer side, you have actually a lot of capacity which has been diminished. When I'm thinking there China, for example, on the synthetic ingredients, which puts pressure now on the offer side. Really a scissor effect between the two concerning very much the synthetic ingredients. 5%-6% for 2018. The reason we say that there is no sign of relief for at least 2019, at least the first part of 2019, is that we have cycles of negotiations, which gives us a bit of an outlook of 6-12 months. In any case, let's not forget that raw materials are being purchased at one point. That gives us clarity on where we stand on the pricing.
We hold two, three months of inventory, that means until it goes in the P&L. There is always a time lag on the P&L impact. That is why we see also a sort of a trailing effect on 2019, which we will have to compensate with price increase on the client side. Maybe now, Tom, you can clarify on GBS and free cash flow.
Yeah, thank you. On the first point on GBS, as we have said, we expect to deliver CHF 20 million of savings in 2018. You have seen the program actually and how it is phased. If you look at the split, we would expect probably that CHF 20 million, about three quarters of the savings to come in the second half. We had small savings in the first half of 2018. It is actually in both divisions. It is equally split, and it will be equally split for the full year. It is just clearly more transparent in flavors. I think if you look at many of the programs that we have adapted or adopted in GBS, when we talk about productivity and lean manufacturing and lean programs, you really see the benefit of that in flavors, and it is very transparent. On the free cash flow.
You are right that our guidance is 12%-17% on average, over the next three years. We have achieved that in the first couple of years. Of course, with three years to go, we need to have a good next couple of years in order to make the average. We feel very confident in hitting the 12%-17% for the five-year period. As such, I am confident that we will have a stronger free cash flow in the second half of 2018.
Okay. There is lower confidence that you would meet that range this year, right? I mean, last year we are a little bit below. This year may be a bit more below, right? Given where we stand at H1.
I think it depends very much on things like inventories. If you look in the first six months of the year, we have the GBS impact. We have the impact of inventories. We're investing 5.3% of our sales in CapEx. Despite that, actually, and a lower EBITDA margin, the drop in the free cash flow is only 1% versus last year.
It's very difficult over the phone to show my confidence, but I'm confident in the next three years.
Okay, thanks. That's very clear. Thank you.
The next question comes from Annabel Hazlitt from Goldman Sachs. Please go ahead.
Hi. Thank you for taking my question. I was wondering how you see demand in the second half with particular reference to fragrances. Related to that, are you able to comment at this stage on the fragrance pipeline for Christmas? Thank you.
I think I answered partially on the fragrance side. Again, we have a very high comparable for the second half, especially the fourth quarter for fragrances. On the other hand, we have, let's say, a strong pipeline of projects, a very good pipeline of new wins, which is always an indication at least on how we can generate new businesses overcoming erosion. Net-net, we'll have a good development of fragrances in the second half aside this strong comparable. You're referring to Christmas. Christmas, that's very much Fine Fragrances. Fine Fragrances is 10% of the whole group, 20% of fragrance sales. Wherever it goes, it has a minimal impact on Givaudan. Next question.
The next question comes from Jean-Philippe Bertschy from Vontobel. Please go ahead.
Hi, everyone. I would have two questions. The first one on pricing. If you can share with us the pricing in H1 and what you expect in H2, maybe if you can split between what you are pricing in terms of raw mats and as well the FX or the currency-related pricing. The second one is on Active Beauty, another double-digit growth in H1. Can you put a little bit of color, two or three years after having entered the markets where you stand, and as well maybe in terms of profitability, whether this is accretive to the fragrances margin? Thanks.
On the active cosmetics that we call Active Beauty, when we decided to actually enter this space, which we thought would fit very well to Givaudan, especially leveraging the common clients that we have between fragrances and skincare active cosmetics. We actually had CHF 5 million, but we really clearly set an ambition to say if we wanted to be a very strong leader in this space, which we estimate at roughly CHF 1 billion. The market of active cosmetics is CHF 1 billion. We set as a target, we said we need to reach CHF 100 million. We went after acquiring as you know, and then Induchem. Over the last 3 to 4 years, we have had a strong development. I can report now that we are at the level of CHF 70 million.
With Naturex, we'll bring CHF 10 million of active cosmetics, entirely naturals, which will take us close to between CHF 80 million and CHF 90 million. The rest, next 2 years with double-digit growth will do the job. We are quite happy with the development, hitting this target and really creating out of Givaudan, a strong player in this space. As it relates to pricing, on the flavor side, because the flavor side, we are incurring raw materials increase, not to the same amount as fragrances, not to the level of 5%-6%. We clearly, in the first half and in 2017, we managed to recover the raw materials increase by price increase. There we have managed to work with our clients and passing pricing through.
Maybe it didn't come so clearly in the whole presentation, the result of the Flavors division is very good. Let's not forget this point. As you see, the EBITDA of Flavors is actually increasing, which means that we both manage to overcome the slight dilution that you get when increasing prices to reflect raw materials increase. In addition, we are overcoming or compensating or bringing at least the assets that we acquired to the same level of EBITDA already today. We are actually improving the EBITDA margin of Flavors. Let's not pass this strong result.
Gilles, the improvement definitely came from the operating leverage of the existing business, was a very strong volume operating leverage. As you said, the improvement you made with the acquisition.
Yeah. It's only 4.9%, the operating leverage plays. I would say that don't forget that the acquisitions are quite material. We are talking Activ plus Vika plus Spicetec.
Indeed
which is not at 24% EBITDA levels. That's on one side. On pricing for the fragrance side, the increase of raw materials, aside the BASF impact obviously, has been very sharp, and it usually is. That's why we have taken time to really work with our clients to reflect that in price increases. That's why the price increase have been quite minimal.
Yes
in the first half of H1, but will come through fully in H2. What I'm referring to, in fact, is that there's obviously a time lag of three to six months between incurring raw materials increase and price increase, and which explains a bit the rest of the difference when you look at the EBITDA fragrances. You put the BASF impact aside, and the rest is explained by the time lag. Going forward, we are very confident to basically compensate fully for the raw materials increase on the fragrance side, and to continue working with our clients to reflect that.
Thank you. Maybe another one you said, I think, Jean-Yves, if I'm not mistaken, that you have the financing for Naturex in place. Can you give some details on that, please?
Yes, I can. Actually, we have the financing in place, as Gilles mentioned. It's a full financing package. We have a bridge facility already agreed with a group of core banks, and we also have a takeout plan already set for the refinancing. We're very well prepared for the financing as it arises over the next quarter.
It's the more than CHF 1 billion that we see in the short-term movement in the cash flow. This is it?
Actually, this is part of the 40%, which we will refinance with the refinancing package during the second-half of the year.
Thanks.
The next question comes from Ranulf Orr from Redburn. Please go ahead, sir.
Hi. Thanks for taking the question. Just on the CHF 20 million benefit from GBS you expect this year. Can you sort of clarify what the benefit is? Is that savings that will drop straight through to EBITDA, or is that in sales? What that is. Thank you. Secondly, the Expressions Parfumées acquisition, can you remind us what sort of margin that business had, please? Thank you.
On GBS, essentially this is true and straight savings, which come to the EBITDA, five of which were in the first half, 15 will be in H2. The CHF 60 million of savings of GBS, which should come at the end of the program in 2020, this is also, let's say, a mix of labor savings, of outside costs, but those are tangible and material savings outside any other savings, which would be like, for example, saving on inventories or improving the working capital. That's GBS. On Expressions Parfumées, just as a reminder, Expressions Parfumées is a significant but small fragrance compounds company, which was settled in Grasse many years ago, 30 years ago. Very much specialized in locals and regional clients, but also leveraging the image of Made in Grasse.
It's not just for Europe, it's actually growing also in Asia and other parts of the world. Many of their clients we don't have. The overlap on clients is extremely small. Obviously the EBITDA level of Expressions Parfumées is much lower than Givaudan, but we aim at increasing it to above the 20%.
Thank you very much.
The next question comes from Thomas Wigglesworth from Citi. Please go ahead.
Good afternoon, gentlemen. Two questions, if I may. The first is a point of clarification. Did you say that 70% of flavors is now based in naturals? Does that incorporate the Naturex effect? Where are you heading on naturals, given that you've clearly made a strategic ambition over the last, now three years to move significantly the portfolio towards naturals? My second question, which is, if the naturals is now complete, what next? Obviously, you made your move into Active Beauty, as you've spoken about, but are there other areas or other dynamics that we should be thinking about, just from an industry perspective in terms of where that M&A strategy will now fall? Thank you.
Yeah, thank you. That's a good question. To clarify, when I say 70% of what we sell in the flavor division is all naturals. To be very clear, that includes flavor compounds as we know them, flavor ingredients. The already acquired, let's say, assets such as Activ International, Spicetec, Vika, and now Centroflora. That does not include Naturex yet. It's a whole combination of, as I said, compounds, but also ingredients, which are all naturals. Clearly because, as I said, this is where consumers are going, this is where our customers is going. This is fueled by, obviously, also the whole trends around clean labels. Not only for flavors, but also moving from, for example, synthetic colors to natural colors or synthetic preservatives to natural preservatives. This is really where we are and what's the strategy.
If you combine everything around naturals, natural extracts, the acquisition, we are talking CHF 800 million, which have been added to Givaudan portfolio, which gives us a very clear leadership. To be also specific on naturals. Naturals are there, and that's true for, especially Naturex. Those companies, what they are extremely good at is to master and to be the expert of the sourcing side. When you master a source of whatever the natural extracts, this is not just meant to service a taste function. This is also can be servicing other functions such as preservations, colors, and so forth. This is why, for example, Naturex, part of the natural extracts are there to add taste, but other parts are there to do other things, like I said, colors, preservatives, phyto actives.
This is a very interesting space because that gives Givaudan another set of ingredients which are doing other things than taste and which can complement taste, especially when you think integrated solutions. Going forward, what's next for Givaudan? Well, let us digest 8 acquisitions, make the best out of it in the first place. Now with Naturex, it's a significant large company. We're talking 1,400 employees. Actually, 1,700 employees, sorry. Once we complete the acquisition, we'll kick start the integration, trying to make the best out of Naturex, but also with the other acquisitions.
On the more long-term perspective, obviously, Givaudan has the means and the firepower to make other acquisitions, but we will always ring-fence how far we go by making sure that whether we are talking ingredients, whether we are talking solutions, that we always create value for our clients, meaning that we will never, for example, go into any commoditized business. I think this is where we are coming from, and this will be always the ring-fencing how far we go in terms of acquisitions, whether adding solutions or compounding capabilities, whether adding ingredients capabilities. I cannot be more specific than this, but this is where we are today. Maybe now we take the last question. One more question.
The last question for today comes from Fintan Ryan from Berenberg. Please go ahead.
Good afternoon, Gilles. Good afternoon, Tom. Just two questions from me, please. Firstly, I'm wondering, could you give us a sense in terms of the differing growth rates between the global customers you saw in the first half and with the local and regionals? If there's any sort of difference in the outlook going forward between those two different sets of customer groups. Secondly, just following on from what you just said around the Naturex deal and integration process. I wonder, could you give us a sense in terms of what you think initially the costs of integration or one-off costs associated with that will be in the second half of this year, potentially into 2019, as well as the step-up in amortization that you would expect to see once it is fully acquired?
Finally, related to that, given the acquisition of Naturex and on a standalone basis, they were targeting organic sales growth double that of Givaudan, ultimately obviously at a slightly lower margin. Given the potential of that portfolio on a standalone basis, as well as the ability to cross-sell between your existing customers and business, do you see scope for potentially in time increasing the midterm growth guidance from the current 4%-5% growth range? Thank you.
On the first question, I would say in the first half, we are still in the same sort of pattern. LNR clients, local and regional clients are growing 6%, and the multinationals are growing 3%. As a reminder, it's a 50/50 split if we look at the total sales of Givaudan between multinationals and LNR. One set is growing twice as fast as the multinationals. Multinationals are improving over last year, as a note. On Naturex, it's really early to give any sort of guidance on what the integration is going to cost or produce. We are going to engage into doing that in September. As a word of caution, Naturex, and you referred to it, is really with Givaudan, a question of accelerating the growth of Naturex.
Certainly, the ambition they had as a standalone company was maybe a bit too optimistic or too ambitious, however you look at it. At the same time, the way they've been growing, I'm sure we can do better in the frame of Givaudan. I'm very, let's say, positive and optimistic of the combination. Just without revealing any secrets, the share of multinational clients that Naturex handles is 15%, when it's 35% for Givaudan. The number of clients that we have in common is actually quite minimal. Really cross-leveraging Naturex with the portfolio of clients of Givaudan, already we can hope to really accelerate the sales of Naturex. Geographic expansion is another way of doing it. Accessing all those markets, which are also very much growing around naturals is also one way to do it.
The integration will help us to really have the best sort of commercial setup to leverage Naturex with Givaudan, and really offer that to our clients around the world. We'll come with more precise figures, expectations, and so forth once we started the integration.
Great. Thank you very much.
Thank you for your questions, for your attention, and I look forward to seeing you again on the 30th of August for half year conference in Zurich. Thank you.
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