At this time, I would like to welcome everyone to the IFF Second Quarter 2020 Earnings Conference Call. All participants questions. I would now like to introduce Michael DeVoe, Head of Investor Relations. You may begin.
Thank you. Good morning, good afternoon, and good evening, everyone. Welcome to IFF's second quarter 2020 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 atir.if.com.
Please note that this call is being recorded live and will be available for replay. Please take a moment to review particularly with regard to our outlook for the third quarter full year 2020. 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 our forward looking statements, Please refer to our cautionary statement and risk factors contained in our 10 K filed on March 3, 2020 and in our press release all of which are on our website. Today's presentation will include non GAAP financial measures, which exclude those items that we believe affect comparability.
A reconciliation of these non GAAP financial measures to their respective GAAP measures is set forth in our press release that we issued yesterday. And which is posted on our website. With me on the call is our Chairman and CEO, Andreas Fibig, and our Executive Vice President and CFO, Rustom Gillum. We will begin with prepared remarks and then take any questions that you may have. With that, I would now like to introduce Andreas.
Thank you, Mike. Good morning and good afternoon, everyone. Before I get into some of the highlights and key accomplishments for the first half of twenty twenty, I would like to take a moment to recognize essential workers around the world, including some of our IFS who continue to fuel our global supply chain and keep our economy moving forward. Your strengths and dedication are truly commendable. And I thank you for your efforts.
While we continue to operate in challenging times, I'm proud to say that our employees have continued to meet and exceed the needs and expectations of our customers around the world. Today I will focus my remarks on a review of the highlights from the first half of twenty twenty as well as an update of business dynamic Dynamics with regards to COVID-nineteen. Rostom will then provide a more detailed review of our Q2 financial performance. Lastly, we will provide an update on our progress towards completing the previously announced transaction with DuPont NNV. There's no question that over the last several months, our business has been operating in a very difficult environment.
Nevertheless, we have acted quickly to maintain continuity across our global operations in 44 countries, while simultaneously integrating the Frutarom business and establishing the foundation for our pending combination with DuPont NMB. I'm extremely proud of what our teams around the world has accomplished as we continue to move our business forward entirelessly serve our customers. In this uncertain environment, our business has proven to be resilient. Fortunately, approximately 85% of our portfolio serves end markets that remain in high demands for COVID-nineteen including food, beverage, hygiene and disinfection. Our strong performance and growth in these areas which in the first half of twenty twenty was approximately 5% on a currency neutral basis, helped to partition offset expected weakness in our segments that have been most affected by the pandemic.
These markets including fine fragrance and food service have been particularly sensitive to the downward pressure of the pandemic and have seen a double digit decline over the first half of twenty twenty. The challenges of 2020 have also affirmed to us that IVF plays a vital role in the global CPG supply chain, especially for the world's most important manufacturers in food and beverage as well as essential home, personal care, and sanitation supplies. IFF's broad based exposure across regions, categories and customer positions us to be remain resilient to the ongoing challenges forwarded about by the pandemic. Amid these challenges we remain on track with our Frutarom integration efforts, There's only modest delays due to COVID 19 achieving very good cost synergies. We continue to expect to have a majority of the integration completed by the end of this year.
Similarly, we continue to make significant progress with our efforts to complete our merger with NMB. We have now achieved regulatory clearance in the United States, China, Colombia and Serbia. We have filed our definitive proxy statement look forward to the shareholder vote on August 27. We continue to make significant strides in our integration planning, which is very exciting when you consider the long term potential As we shared our business update in June 8, 2020, we remain cautiously optimistic in our outlook for the remainder of the year. The pandemic continues to be significant and a volatile factor in our lives.
It creates uncertainty around the world with rapidly changing operating environment and economic impacts. We are fortunate that the majority of our end markets continue to operate with relatives strengths, but as we have discussed before, our business is not totally immune from disruption of the pandemic. Turning to Slide 7 and an overview of our financial performance in the first half of twenty twenty. The first two quarters we achieved $2,500,000,000 in sales with currency neutral sales growth of 1%, which is largely attributed to the strong growth we saw on the consumer fragrances. Which grew double digits in savory solutions, which was up mid single digits.
We also generated in adjusted operating profit of $478,000,000 and adjusted EPS of US2.99 dollars. Both excluding amortization. While this performance is moderately down year over year, these metrics reflect pressure from lower sales volume and adverse mix as well as higher costs as a result of COVID-nineteen. So the prioritization of CapEx and improving our core working capital, I'm pleased to report that we are able to generate significant free cash flow. For the first half of twenty twenty, cash flow improved double digits.
Operating cash flow increased 12% and free cash flow growing a very strong 94%. I'm encouraged by the resilience of our business through the incredible, challenging environment the second quarter, but we saw the global peak to date of regulatory restrictions. Moving to Slide 8, I would like to walk you through IFF's efforts and approach to managing through the pandemic. While ensuring the safety of our employees and our continued uninterrupted partnership with our customers around the globe As our teams have led a truly admirable performance to deliver through the challenging period, we have also begun to look ahead to our operations in this new normal. Like I said before, ensuring the health and safety of our employees has an always will be our utmost concern and is number one priority at IFF.
As many countries and cities have begun to reopen, and are moving out of complete lockdown, we are keeping a close eye on the recommendations of local and global public health officials. Especially as it relates to implementing our return to work protocols, which each region recovering along varying timelines Our approach is to evaluate each of our facilities and offices on a case by case basis. While all of our manufacturing sites are open and operating fully, most remain limited to essential employees only. As for our corporate offices all of our non essential employees continue to work from home as of right now. Logistics remain on operating with lead times still higher than they would be on a normal basis, but we have been able to adapt fairly quickly to new local policies with minimal incremental expense.
On the procurement side, costs remain elevated as as still some challenges in obtaining various raw materials. We are proactively addressing the situation to secure these necessary materials going forward and evaluating opportunities to mend processes of our supply chain for the future. Finally, when it comes to our creative centers, I'm proud to say that even amid a global pandemic, in typical IFF fashion, we are creating innovative solutions to support our customers, whether in person or remotely. As restrictions and closures ease, we've already seen significant improvement in our pipeline. With that, I will turn the call over to Rustom, who will discuss the Q2 results in greater detail.
Thank you, Andreas. Good morning and good afternoon, everybody. On Slide 9, we've outlined a more detailed look at our financial performance in the last quarter. On a currency neutral basis, ISS generated 1,200,000,000 in sales, down 4 dollars when compared to Q2 2019 and primarily driven by weakness in fine fragrance and food service. Which represents approximately 15% of our portfolio.
The remainder of our portfolio which includes food, beverage, hygiene, and disinfection products collectively grew 2% in the quarter on a currency neutral basis. Though offset by a 38% decline on a currency neutral basis in fine fragrance and food service combined. In addition to lower sales volume, we were impacted by an adverse sales mix and unfavorable price to raw material costs in the quarter. Which pressured our operating profit excluding amortization and offset operational expense savings in the quarter. Despite a lower effective tax rate and more favorable student amortization was similarly impacted in Q2, driven by the decline in operating profit.
Before moving into the details, I want to take a moment to remind those that are new to the IFS story about the currency neutral sales growth methodology difference between the way we report our growth and our competitors report. For a variety of reasons many of our sales transactions in the emerging markets occur either in US dollars or other hard currencies or our index to hard currencies when we have to invoice in local market currencies. When reporting our currency neutral sales growth, we exclude these foreign exchange related prices in emerging markets, but this is different from our peers. We believe our reporting standard provides them that us with a truer assessment of underlying currency neutral growth, especially when there are large emerging market devaluations relative to the U. S.
Dollar or euro. However, it's important to help all of you understand our performance relative to competition. During the second quarter of 2020, stronger USD environment plus significant emerging market devaluations year over year in several key markets had approximately a 2 percentage point currency impact on growth if we include emerging market pricing. Factoring in this comparability adjustment, our 2nd quarter sales decline would have been 2% rather than 4%. Turning to Slide 10.
It's important to take a closer look at the underlying dynamics of our various business segments. In our first quarter 2020 conference call, I presented this slide in the outlook section as I believe it provided a good summary of the many moving parts we saw at that point in time. As we now see much of what we expected and communicated came to fruition. As we've said before, we remain fortunate that most of IFF's business serves end markets of customer access to retail markets such as fine fragrance and the way from home channels such as food service suffered. And yet increased demand for products used in packaged food, beverage, hygiene and disinfection categories has led to strong results in taste, excluding food service and in consumer fragrances.
In our fragrance ingredients business, demand is strong yet the pandemic created a raw materials headwind as we prioritize the use of our fragrance ingredients to support our fragrance compounds business foregoing external sales. I'm happy to report that in the month of July as restrictions of ease, we have seen that the business has returned to growth. A trend that we expect to continue in third quarter. As we approach the new normal in many regions across the world, We expect that these supply chain complications will ease and demand for away from home products will slowly return. Looking at Slide 11, I'd like to review the underlying drivers impacting our profitability in the quarter.
COVID-nineteen has clearly had an impact on profitability, significantly influencing volume, mix and cost. The year over year change in profitability decline. Unfavorable price to raw material costs also impacted profitability, primarily in fragrance ingredients, where prices were reduced to reflect future commodity cost reductions and where we are working through higher cost inventory. Unfortunately, with the steep decline in fine fragrance, sales mix was unfavorable and we also saw incremental COVID-nineteen manufacturing and procurement costs. To minimize these impacts, we were focused on disciplined cost management and continued productivity, both helping to protect profitability during this difficult time.
We were encouraged by the realization of cost synergies from the Frutarom deal and expect this will remain core to our profitability story as we see revenues return in the coming quarters. Now looking at our scent division on Slide 12, currency neutral sales declined 4% in the quarter. I'm happy to share that for the 3rd quarter in a row we achieved double digit sales growth in consumer fragrance, which can be attributed to robust growth in fabric, home, hair care, and personal wash. And while we did benefit from COVID-nineteen in some areas through higher volume, our commercial performance or new wins was very strong nearly 50% higher than our previous five year average for the second quarter. Also, the new core lists where core lists where we recently gained access core to our 2021 strategy grew more than 85% in the 2nd quarter and represented nearly 20% of our consumer fragrance growth.
At the BU level, this was offset largely by the 40% sales decline in fine fragrance due to the disruption of our consumers' ability to reach retail markets and reduce travel needs. This had an adverse impact on volume in the existing business, which was down double digits. As well as new wins, which traditionally are very strong, but are also down as a result of COVID-nineteen. We also saw lower fragrance ingredients external sales as we prioritized our fragrance compounds business due to supply restrictions in India. This has now improved and we expect performance will continue to improve going forward.
Cumulatively, the scent business had sales of 450,000,000, down 4% and a segment profit of $70,000,000, down roughly 25% at a 15.6% profit margin. Now moving to Taste on Slide 13. We saw currency neutral sales declined 5% in the quarter. From a category perspective, as COVID-nineteen restrictions kept consumers from eating outside their homes away from home channels such food service saw a significant 36% decline in the quarter. To put this in context, the decline in food service represents represented about 5 percentage points of the taste decline meaning the business would have grown excluding food service.
From a regional perspective, North America showed resilience, yet emerging markets underperformed given significant COVID-nineteen driven regulatory restrictions in places like India and Latin America. India alone, which represents about 4% of total taste sales saw sales drop by almost 30%. From a customer perspective, we saw weakness across smaller local and regional customers, mainly good service. This was most evident in Frutarom where stand alone sales declined high single digits in the second quarter. Discontinued fruit run businesses, which will not be in the comparative periods going forward, remain the headwind in Q2.
So for taste overall, the business had 748,000,000 in sales, down 5% and segment profit 107,000,000 down 15% for a 14.3 percent profit margin. Now turning to Slide 14. I'd like to provide an overview of IFF's cash flow performance and it's probably more useful to look at this year to date. The chart on the left is designed to show the reconciliation from reported net income to free cash flow inclusive of all the drivers. Operating cash flow was up 12% in the first half, which was primarily due to improvements in core working capital levels in Q2.
Within core working capital, the improvement was largely driven by days payable outstanding, while days sales outstanding ended better than expected. We will continue to effectively manage our balance sheet by taking actions to generate strong cash flow and to maintain ample liquidity even during a prolonged global downturn. We also continue to invest in the business, especially as we work towards completing the Frutarom integration. Our capital expenditure as a percentage of sales was roughly 3.1% compared to 4.6% the previous year. The improvements in core working capital levels combined with the prioritized CapEx structure has led to strong flow of GBP 128,000,000, up to 94 percent from the year ago period.
Reflecting our confidence in our future cash flow generation, we are pleased to announce that we are raising our quarterly dividend by 3 percent to 0 point 77 dollars per share. This marks 11 years of consecutive dividend increases and underscores our confidence in our business, our long term strategy, and strong cash flow generation. Moving forward, we'll continue to take a thoughtful approach to managing cash flow continuing to prioritize the focus on core working capital and CapEx. Before passing back to Andreas, I want to take a moment to You can see our sales trajectory during the first half of twenty twenty and the marked rebound we have seen unfold in the third quarter so far. We started the year strong in mid March, we are starting to see a notable performance improvement in performance in July.
Global mobility is gradually improving and restrictions and closures are eased. The categories and markets impacted in Q2 are showing promising signs of improvement. Should the environment continue to improve, we're quite hopeful that we can regain a more normalized level of growth. And with that, let me turn back, Andreas.
Thank you, Rooster. Now as we consider what we what the remainder of 2020 will look like for IFF, we're doing our best to anticipate performance in a global environment that remains quite volatile and unpredictable. We're actively evaluating evolving global market dynamics and regulatory conditions to understand and anticipate how these factors will impact our business performance, our people and our customers. We are proud to supply solutions and ingredients for essential products in the food, beverage, hygiene, and disinfection product categories, especially as these drive 85% of our current portfolio. As Rustom has stated earlier, our July sales performance has improved, growing low single digits.
Consumer fragrance continues to grow double digits, and we are seeing a double digit trend in cosmetic actives. Fragrance ingredients had also improved as East growing mid single digits in July. In taste, growth in flavors in North America, led by Tastepoint, is more than offsetting pressure and Latin America, and we are seeing robust double digit growth in health oriented products as well as an improvement in natural colors. We do, however, anticipated fine fragrances and food services will remain impacted by market pressures in the second half of the year, but expect improving trends versus what we experienced in Q2. A good example of this is that our gelato ingredients, a category severely impacted by COVID-nineteen in the second quarter is now up low single digits to date in third quarter.
As we enter the second half of twenty twenty, we will continue to effectively manage our business by taking actions to generate strong cash flow by targeting reductions in operational and capital expenses. With the positive signs of improvement in our performance that we are beginning to see in the third quarter, we remain cautiously optimistic that we will see further market improvements I'm very pleased to share with you now an update on where we stand with the integration planning of our previously announced merger agreement was DuPont NMB. We made a lot of headway in the first half of twenty twenty, reaching key milestones like clearance in the US China, Colombia, Ukraine, and Serbia regulatory processes and announcing our combined company focused vision, operating model and leadership team. We are well on our way to establishing the foundation and framework that will be essential see and set the date for our special shareholders meeting in connection with the merger, which will occur later this month on August 27. We expect to earn our shareholder support for this exciting combination in the coming weeks and remain on track to completing our transaction and uniting our organization in the first quarter of 2021.
In summary, I'm proud to say that IFF has stayed resilient the first half of twenty twenty, amidst the unprecedented circumstances of COVID-nineteen. We've achieved solid financial performance while delivering for 30,000 plus customers globally and executing on the integration processes for Frutarom and NMB. As we have said before, I have placed a central role in the global CPG supply chain as a vital partner to world renowned brands, regional leaders and new innovators alike. Our position across end markets, customers with our global reach has created a real resilience in our business that shines through these difficult times. With Frutarom, we are realizing a significant potential that our enhanced capabilities and expanded customer base will have for the IFF's long term roles.
Similarly, we look forward to joining forces with DuPont NMB and have made significant advancements in our integration planning and pass to regulatory and shareholder approval. I'm deeply grateful to our employees across the globe whose commitment and dedication to IFF and our customers has been unwavering. We have started to see improvements in our performance in July and remain cautiously optimistic about how this may translates into financial performance in the second half of twenty twenty. And our balanced portfolio remain well equipped to adapt and succeed in this unpredictable global environment. With that, I would now like to open
We'll take our first question from Marcus Ratchen with Stifel. Please go ahead. Your line is open.
Hey, good morning, everybody. I guess just to start, so if you look at the broader share trends, even normalizing for how your counting for FX relative to peers. It seems there's a bit of an increasing divergence in your results for sales versus those largest F and F peers. I guess I'm curious, do you see the same thing? It seems somewhat obvious to folks from the outside in I'd be curious that perspective.
And then if so, what is driving it? And when should we anticipate those trends to normalize and sort of related to that, it would seem maybe to trace back to the Frutarom deal. So, you know, true what are you doing, best practices and such that you're putting in place so to not repeat those when you close the DMV deal early next year?
Sure. Thank you, Mark, for the question. I take it. As you alluded, certainly it's good to take the FX reported numbers and compare apples to apples. I think that's number 1.
Number 2, I would say, we should judge our performance beyond just 1 quarter and should look at multiple quarters And if you see, for example, at the first quarter, we let our industry in growth. I think that's a topic. The second one is, if you look at the Q2, the emerging markets where, pretty much on the pressure And you see that we are a bit over indexed in the emerging markets. For example, India, we are market leader in India with our taste business, for example, that was actually a pretty, a bad hit on that business, which is, by the way, rebounding. And then we are, certainly overnights on smaller smaller customers, which plays a role here as well.
Fundamentally, I believe both will help us with our long term growth. The smaller customers and the emerging markets as well as soon as we see the, the cohorts pressures are easing. And if you look at July, I expect actually that the third quarter already will be will look much than the second quarter. That's what we have seen in our numbers for July. I think Rustom has shown it in his in his slide.
We see it in particular in some of these areas, where we have a good and strong performance on consumer fragrances, for example, you see that categories like home care or personal wash are really up in very, very high single digits. We believe that's a trend to stay. So hygiene products will stay even, after the let's say acute COVID crisis, crisis strong. We see a good rebound already in fine fragrances. So not as bad as we have seen it seen it before.
And the same holds true actually for food service. I just looked it up. We were April was our number and food service was down by 44.1 percent in July. It's down by minus 7.7. Just to tell you that the weak spots I think are improving and the strong pieces of the portfolio are staying strong and helping us to grow our business going forward, which will help us with our mix, going forward in the third quarter, as well.
I hope that helps, Martin.
Sure. Thank you. I guess just somewhat related to that, maybe sticking on the commentary about June versus July. So I was surprised a bit. The June was worse given that most of your customers kind of talked about sequentially improving trends through the second quarter.
So maybe why beyond the obvious comparisons for your easier in 3Q, why did you see this improvement beginning in July? Why was June of it worse? Does it speak to inventory levels for customers? Is it just simply third quarter people started ordering your product? Where do you think inventory levels are for those customers?
And how do you think about the durability of what you just said about July through the quarter?
Look, on the inventory levels of the customers, it's tough to come, to comment on because we see huge differences from to customer from region to region and categigo to category. That's a big, big difference. I would say July is better for us because some of the categories which were hard hit in the second quarter like food service I am proving a better. That's certainly helping. And that some of the emerging markets like India, for example, are performing much, much better in July.
We have actually a double digit growth going forward. And that helped us a lot. Why why June had a little bit of a dip even compared to May. If I look at our daily sales, it's not so much. I think it's a comparable.
I would not take this to, I think it depends also on the order pattern and what we see right now, as I said, July, pretty strong for us. And the order book for the third quarter is up mid single to high single digits as well. So I believe that the trend will continue. So it's a bit of phasing in there as well. But, Rustom, you please or Mike, you please comment.
No, I agree, Andreas. I would just, you've seen the phasing. You've seen the average daily sales. There's no deceleration in the numbers. And then coming through into July.
I mean, you've seen a very nice, we've seen a very nice, in comparative terms, pickup in in areas that were like fine fragrances where compared to where they were going through May and then June and where July is. And then food services, Andreas said So nothing but reiterating what he said really there.
Okay.
Thank you. We'll take our next question from Faiza Alwy with Deutsche Bank. Please go ahead.
Yes. Hi. Good morning.
So I
wanted to just shift gears a little bit actually and talk about NMB. Because it feels like so you have your shareholder vote at the end of this month. And it feels to me that the deal might close soon after that, maybe earlier than your target. And I'm looking at Slide 17. And I was wondering, Andreas, maybe if could give us a little bit more color around how you expect how do you expect to go from at close, like the second to last box that you have on that slide to the revenue and cost synergy capture by end of year 3.
So I'm sure we'll get into it in more detail as time goes on, but I was wondering if you could give us a little bit of a preview of how you are expecting things to play out from here?
Yes. So first of all, our assumption is still that we are closing our first quarter 1st quarter next year. That's that's actually the plan also for the carve out of the business. I think that's that's important. And right now, we are we are focusing a lot on, let's say, closing on our foot integration.
The remaining piece of it, which will happen in the early part of the 4th quarter. I think that's important. On the NMB side, As we said, we are progressing actually absolutely according according to plan. In some of the areas, even a couple of days ahead, which is quite quite interesting during the COVID environment. I think the teams are doing really a fantastic, fantastic job.
We see also just as a remark on the NMB business, you have seen, one day when they reported actually a bit of growth with 1% a strong mix 80 5 percent of the portfolio is pretty resilient against the corporate crisis as well. So very, very similar. And a good mix in particular, tilted towards the probiotics. But maybe Rustom, if you can, can comment as well on the, Page 17.
Yes, absolutely. I'd love to address where and good morning. We are also in a very detailed way on the synergies, on the sales synergies, we have teams from within the project from the IMO, the integration team, you know, working with our business unit people and specifically identifying opportunities to have revenue synergies and what pre work needs to be done as much as possible. Now, obviously, we can't work together with the NNB people, but we can plan together at this point in time so we are trying to do that. Likewise, on the costs, I mean, I can I can sort of put on a functional, hats for a second, I mean, we are looking at our structure, looking at their structure, looking at our systems, looking at their systems and basically in a very methodical way going through and trying to identify opportunities to optimize the business and, you know, make it stronger and get greater revenue growth without without costs and also areas where there's duplication of costs that we can take out?
So, just a bit more detail, but it's moving. We want to be sure we want to basically hit the ground running.
Absolutely. And I would say on the cost savings, we are We're really on both parts on the sales savings or synergies certainly as well. We're pretty robust plans in place. I'll just give you 2 numbers. We certainly have for the cost savings internally a higher number, which we are working towards.
And secondly, we have started with, I think, 400 projects, which could help us with the sales synergies. We narrowed it down to around 100 to make sure that we really focus on the most important ones. And I would say these are really, really good and robust robust plans we have to have in place and we still have a couple of months until day 1. And, but it gives us a good, a good feel because, in some areas, as Ryston said, it's robust and we are probably even ahead of plan, which is great.
Thank you. And we'll take our next question from John Roberts with UBS. Please go ahead. Thanks. You noted double digit growth in consumer fragrance I assume that included a decline in emerging markets outside of China.
So maybe you could peel that apart. How much was emerging markets, excluding China down and consumer fragrance and then how actually how high was the rest of the portfolio?
Yes, sure. So we see actually a good rebound in our China business. That's for sure. But we have to say that it's not just China. We saw, for example, in July, already actually a very strong performance of our consumer fragrance business in India.
Actually, Mike just because we looked at the number. It was more than 40% for July, which was kind of amazing, but it is because, we believe because we had a couple of good wins and it's going very well. And we have actually a quite significant and good performance in Latin America well, believe it or not. So it's not and not just China. It is also on the consumer fragrance side, some of the emerging market not all of them, but some of the emerging markets are actually performing better than we have expected as well.
But maybe you will assume you give even more details.
Sure. I mean, that's it. So the emerging market, there's, John, there's variation between the emerging markets rather than treating them as a particular group, right? India has been the outlier in terms of underperformance, but we have also had an impact in in Latin America and Brazil and where we have switching from consumer from into fine where we have a significant market over there that we have seen come off. We don't think I mean, we don't really think that what's going on in emerging markets is necessarily of what the future is going to be.
I mean, it's just as you look at different countries country by country on where they are in terms of the on the curve of handling COVID, is really what we're seeing in terms of consumer food service, fine. I mean, all the areas basically.
What might be, might be interesting, John, for you and for all the colleagues on the phone as well. What we try because in this very volatile environment, We have doubled down on our consumer insights studies and we looked, certainly how the consumer looks like during COVID And what can we expect after COVID? And we have narrowed down on 3 seams which we're sharing with our customers as well as health, home, and hygiene. So we believe that, in some of the of the areas, Like for example, hygiene, and we see it in our scent products where we are selling there. This is a trend which will stay even post, post COVID.
And as I said, our home care in July, category is up by 27% and personal by +16, just to show you what the impact on the business is because these products are so much in demand. On the other hand, it's, it's the home area. We believe that this cocooning at home will stay at least for couple of months through the winter. So culinary, everything which is culinary products for home cooking will stay up. We believe that malodor control is an important one.
And on the health side, we see that all of our health ingredients Most of them, we got through, through Frutarom, are very much in high demand that the modulation of suite is in high demand because governments are, again, starting to double down on sugar and products. So what I try to say is that we have looked at the consumer insights quite carefully. And we are basically now looking how we can orient our organization towards these trends, where we believe they will stay for a while to make sure that we get more than a fair share of growth out of these categories. So that's what we're doing. Just to give you a bit of a bigger picture and an outlook beyond the third quarter.
And I didn't answer that specific question, by the way. It's an emerging market that's actually mid single digit just to put it in context. So not negative or anything like that, but not as strong as the developed markets, which were obviously much higher to get us to the average.
And we'll take our next question from Adam Samuelson with Goldman Sachs. Please go ahead.
Yes, thank you. Good morning, everyone. A lot of ground's been covered on the revenue side. So maybe just if you change the cost side a little bit, and a lot of moving pieces in the second quarter, given the volume declines in mix and COVID costs. And then just trying to make sure I understand kind of what happened in 3Q.
If we're back to organic revenue growth, top price cost, just how do we think about that, dynamic playing out over the balance of the year? Kind of what's the incremental COVID related expenses you expect to be absorbing in the next couple of quarters? And just thinking about kind of the operating leverage that is or is not in the business with if the revenue growth is back to the trend you saw in July.
Sure. Absolutely. We take the first time you take it.
Yes, thanks. So let me break it up and give you a thing. First, of all, I'll give you the COVID related costs, okay, and then primarily procurement logistics and manufacturing costs. And in And in Q2, they were about $6,000,000, okay, $6,000,000 and we will expect this to start declining as we go through the rest of right, because Q2 as we've already said is when we thought we had the highest point. There will still be some continuing manufacturing because as Andreas has said many times, we are put the safety of our people first.
And so there's things that we're doing differently until the vaccine comes in terms of how we manufacture. Then the second part of your question, I believe, and if I missed something, take me back. But the second part of your question was really about pricing and raw material costs, right, and what we have. So in Q2, it was negative. I mean, our pricing actions did not fully recover higher costs.
Fragrance ingredients, for example, we talked about that as well. Now moving forward, we have the oil related costs are definitely helping us as we move forward. And we should see a benefit from some of those from in general the input costs, we'll see a benefit coming from them, right? Definitely. We have a we'll have a negative on pricing and that comes a lot from Vanilla.
I mean Vanilla has dropped back. It was in the 500. It's dropped back into 200s. I mean, it could go even lower and so you will see that impact on pricing. So what we are projecting right now is for the net price to raw material costs for the rest of the year to remain negative.
Did I color your both aspects of your question there?
And then just maybe following on the cash flow performance in the second quarter, was very strong. Is there any
reason why that wouldn't persist in the second half of
the year? Any cash flow dynamics should we stream my thought?
No. I mean, we'll continue to work on cash flow. So let me sort of just break up the components, right? I mean, 1st of all, on our CapEx, I mean, we've been very focused on our CapEx. Very early, literally from probably around February or so.
And we set ourselves the target of spending roughly about 10% less on our CapEx for the year than our budget. And we're running even below that by the way at this point in time, but that will continue. That's the CapEx, right? We're watching our cash expenses in general across the board and some things are obvious and you'll see that like something to benefit EBITDA like travel, which will keep coming through. But the other biggest one is working capital.
And on our working capital, if you remember what we said, even a few months ago, we deliberately moved to build up our inventory. So as to avoid customer disruption, I mean, because that the two things we tried to do is keep our people safe and avoid seeing our customers, right? And so far we've managed to do both. So inventory, we had inventory actually because of lags in receiving it. We were actually a little bit better in Q1 than we expected a little bit worse in Q2.
We do expect that to start to come down now gradually as we go through 34 as we have built it up, right. On our DSO, which is the other big area where we flagged that we were expecting an increase we actually did particularly well in terms of compared to where we expected to be. And that was just a lot of focus management from teams and that should continue. And we would hope as the broad economic situation abates and things get a little bit better, we'd hope to do well on that too. Then as a last component of it was just payables, I mean, we managed that very tightly in terms of in terms of making sometimes accelerating payments and there's smaller suppliers that we want to keep afloat.
And other times, just managing it very tightly like you'd expect from any company of our size.
And we'll take our next question from Jeffrey Zekauskas with JP Morgan. Please go ahead.
Thanks very much. So first, could you update us on regulatory developments on the Nutrition And Biosciences transaction in Europe? Why haven't we received a ruling from Europe? And do you expect to get one before the shareholder vote?
We expect actually in the August, September time timeframe, the ruling We were going back and forth with them to answer the questions before the, before the summer break. And I think in the next couple of weeks, we should get the clearance in euro. That's what our lawyers are telling us. So I think we should be on track whether we can make it before the shareholder vote. I'm not 100% sure but early September will be my best guess right now.
And then secondly,
It looks like your fine fragrance business in the first half was down, I don't know, 25% And maybe your Key Swiss competitor was down 16%. Can you talk about the differences in like for like sales growth?
Yes. Look, the differences, I would say are probably with the customers. If you look at many of our big find fragrance customers. You see, even worse performance than the minus 20%, twenty five percent, And that's what's driving it because the win rate in our fine fragrance business is still pretty good. We see also a good influx of new projects coming.
And as we said, the start into the, third quarter was actually pretty, pretty encouraging what we have seen for, for fine fragrances. So I would say the main main differences is a customer structure and how much the customers are selling of their actual actual products. But I actually expect that this will normalize over the course of the year because in general, I think our win rate in that area is a very, very good one. And we will see the, you know, Jeff, the most important season is, right before for the holiday, before the holidays. That's where we sell most of our client fragrances.
So end of all end of third quarter, early fourth quarter is actually that's where you win the year. And that's what we have to watch. And I hope when we have a third quarter, announcement that we can give you more, more news on that one as well. I hope that helps.
And we'll take our next question from Lauren Lieberman with Barclays. Please go ahead.
Good morning.
I just wanted to, Maury, I wanted to ask a bit first about the U. S. So the business was down slightly 2nd quarter. It was a sequential improvement. So it was down closer to 1% in the 1st quarter.
So can you talk a little bit about what's going on there? Because given the first half performance, it wouldn't seem to be specifically COVID related. All consumer packaged goods sales are through the roof when you kind of look at what's going on from an end market standpoint. So what's going on in that business? Maybe have you lost any big contract or things like that, but it's kind of fallen off, because the performance there is candidly a bit surprising still.
Thanks.
Yeah. Swustom. Can you can you take the numbers?
So, yeah, I mean, I think, are you, are you, are you including sales of consumer fragrances in there as well with the fine fragrances or what what we're just talking about?
I'm just looking at just U. S. L.
See, in general, pace and fragrances, everything?
Correct. In general,
not in general, our North American business has held up relatively well. I mean, we've seen if you look at taste and look at some of the performance that we've had there, we haven't really seen any big disappointment. We did have the impact in fines specifically in North America and Europe and that could be coloring part of our numbers there because that's where our large global customers are concentrated, right. In terms of consumer, I mean, in terms of our consumer business, our consumer business did well across the board. I mean, in developed markets, and I don't have the, North American number in my fingertips, but if you look at developed markets, it was in the high teens, the growth in Q2 consumer specifically.
I mean, I want to Okay.
I think the numbers in the queue just that the U. S. Entirely did not grow in the second quarter, nor in the first. And North America, in total, with, like, 1 or 2%. So, again, it is a huge contrast to what the majority of the customers are doing.
But you know, that's just we'll look back at the queue and double check. I haven't misread something that could go filing. Thanks.
Sure, Sean. We can always follow-up later as well too.
Yeah, that will be good. Let's follow-up on that one.
We'll take our next question from James Targett with Berenberg. Please go ahead.
Hello, good morning. Two questions from me. Just firstly, on innovation, you mentioned that you see the project pipeline improving as restrictions are minimized. But generally, can you talk about what you're seeing in terms of customer appetite for innovation new product launches generally, obviously, we're hearing a lot of CPG companies talk about rationalizing their innovation programs, cutting tail innovations SKUs, etcetera. So any color you can give your position, that'd be great.
And then secondly, just on the, the sort of recovery momentum you're seeing in July, maybe talk about any sort of differences you're seeing between momentum in your large customers or global customers versus your smaller or more local ones? Thank you.
Sure. Absolutely. If I can touch on innovation, what we have seen actually when the COVID crisis was on its peak in Europe and in the U. S. So starting in March, April, even parts of parts of May, we've seen a slowdown in our innovation pipeline.
Also driven by the demand of some of the packaged food, for example, or some of the consumer fragrances, So everybody was trying to get the existing product on the shelf as fast as they could. Since then actually starting with May, we've seen actually a continuous influx of new projects in, actually across the board in all of our, all of our different categories we are playing in, and there's more coming we saw a soft first, obviously, in China because that was the 1st country basically out of the gates in, after the COVID crisis for them and they are already almost almost back to normal. So We see that, that many of the bigger CPGs and also that the smallest are now really back to normal. It's certainly depending a customer by customer, but many are coming again with new projects projects to us. So that's on the first one.
On the second one on the recovery, we see a recovery We should look at, country by country and, and category by let me start with not maybe our countries, but with regions. Here as well, in the recovery, Asia is now a big in particular, India is surging after India was very impacted in the 2nd quarter. It's really coming back. We see a good comeback on the on Europe as well. The U.
S. Is very, very good for us. Maybe it was exceptional of the fine fragrance, fragrance business. And we see an impact on, on newer projects in Latin America, where we see in, in particular, in Brazil and or not that the peak peak of the crisis. In terms of the categories, we are happy to report back that not just everybody is looking for solutions on, on hygiene products, but we see also more demand and new projects on food service products, which is really good.
I commented already on the on the fine fragrances, fine fragrance are coming back as well. On the customer base, we certainly see it with large customers, with smaller customers it's probably more of a mixed situation where we are in, but some of them are coming back back as well. So I hope that helps to, to picturize how we, how we see the situation right now terms of innovation, but in terms of recovery as well. And as I said, look, I don't want to bank too much on just the July results, but we see the order book is quite strong as well for the rest of the quarter. And that should help us actually with a positive performance.
As far as we see it. Wustom?
Yes. Thank you. And we talked a fair amount about center later on. And maybe a little bit of color on our taste right? If you look at flavors and if you exclude the impact of India, which we've covered and food service, right, the big negatives, All our other businesses grew at around 2.5%.
And that was mainly due to an increase in North America and Greater Asia, Asia, driven by strong commercial performance there and some decrease in EMEA, in EMEA due to some postponed new wins. And then of course Latin America where you have negative because of COVID. Savory was another was another strong quarter, I mean, from comparatively. I mean, the the in home consumption channels were up like over 5, call it mid single digits. And again, strong performance in North America and Greater Asia, offset by some weakness in, in EMEA and that was due to food service because, you know, we have a lot of small food service customers in EMEA.
And then inclusions, I mean, obviously impacted a lot by COVID, but this, as Andreas said, I mean, you know, with Gilato coming back, quite strongly. With what we're going there since in the last several weeks. And finally, MPS mixed performance in there, the health aspects of it extremely strong. And then in some of the other food protection areas, there have been some delayed launches and stuff like that. So all in all, I mean, that's that just gives a bit of additional that we didn't share with you.
Take our final question today from Mark Connelly with Stephens. Please go ahead. Thank you. Just two quick things. How much differently would you run your operations if we did have a long term shift to more meals at home, a limited restaurant recovery.
I'm wondering how big a restructuring that would be for you. And second, was just hoping you could help me understand your exposure between quick serve and regular restaurants and whether those 2 trends are differently as you start to see recovery.
But for the meals at home, actually we are pretty well positioned with our savory solutions business because we have an extra culinary area, which we are we're using for that area, we certainly would look and double down what we can develop here. I think that's an important, important aspect. So I think it, I wouldn't say it would benefit us more, but it would be certainly very manageable for us as well. He was on retail, restaurants, we have almost a similar, similar mix I think that's an important one. And what we see is that, some of the quick sales restaurants are really coming back now, which is good in helping us on the food service area as well.
But Rustom, you might comment if you are any more insights?
No. I mean, it's a mix. I mean, it's a mix of those 2. I mean, we're actually seeing the restaurants coming back as well too. If you looked at more recent at our most recent food service numbers.
But so apart from that, the quick service is clearly coming back faster.
Very good.
Thank you. And this will conclude today's Q And A session. I'll return the floor to Andreas for closing remarks.
Yes, thank you very much for your time and these very exciting booker times. I hope we gave you good insights how we see the business, even beyond the second quarter. And, we are looking forward to the one on ones. Thank you very much. Take care and stay healthy.
We'll conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.