At this time, I would like to welcome everyone to the IFF Second Quarter 2019 Earnings Conference Call. Participants will be announced by their name and company 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 2019 conference call. Yesterday evening, we distributed a press release announcing our financial results. A copy of the release can be found on our IR website at ir.if.com.
Please note that this call is being recorded live and will be available for replay. Please take our moment to review our forward looking statements. During the call, we will be making forward looking statements about the company's performance particularly with regard to the outlook for our third quarter, second half and full year twenty nineteen. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially from forward looking statements Please refer to our cautionary statement and risk factors contained in our 10 K filed on February 26, 2019 and in our press release, all of which are available 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 the respective GAAP measures is set forth in our press release that we issued yesterday and is on our website. With me on the call today is our Chairman and CEO, Andreas Fibig and our Executive Vice President and CFO, Rich O'Leary. We will start and prepare remarks and then take any questions that you may have. With that, I would now like to introduce Andreas.
Thank you, Mike. On the call today, I would like to provide a recap of our vision 2021, which we shared at our Investor Day the past June. After that, I will provide comments on our 2nd quarter financial results and give an update on our integration progress. Once finished, I will ask Rich to give a more in-depth financial review of our business performance and provide an update on our outlook for the balance of the year. Then we will take any questions that you may have.
We are very confident in the long term outlook for our business. Thanks in large part to our industry leading innovation, both in diverse customer base and superior product portfolio. IFF has a history of strong sales growth and proven profitability. We are excited about the future as we believe the combination of IFF and Frutarom will create significant value for our customers, employees and shareholders. At our Investor Day in June, we outlined our new Vision 2021 strategy.
The Vision 2021 strategy been designed to leverage our newly combined organization, our enhanced product portfolio, increased natural position, expanded market access broader customer base and greater innovation pipeline, all with our customer at the center of everything we do. Our 4 strategic pillars include unlocking growth opportunities, while we will capitalize on our expanded product portfolio, broader customer base, an extensive geographic presence. We also expect that cross selling and integrated solutions, a relatively new capability set will lead to 100,000,000 sales over the 2019 to 2021 period. Driving in innovation while we will invest in high growth and high return platforms to continue to drive our industry leading R&D pipeline. I'm pleased to say That was a combination of IFF and Frutarom, our R and D, is the strongest it has been in the company's history.
We have expanded R&D capabilities with cutting edge research, all carefully prioritized platforms based on future return potential. Managing the portfolio, where we will focus on optimizing our portfolio to maximize value creation, Our business portfolio is much more broad and diverse with a range of growth potentials and margin profiles. To maximize value creation, we are focusing on disciplined resource allocation, where we establish clear guidelines to prioritize our investment decisions as we move forward. Accelerating business transformation, while we will successfully integrate Frutarom, delivering $145,000,000 of synergies, but also continuing our strong productivity agenda in our legacy business for an incremental $100,000,000 in savings. And of course, culture, technology, sustainability, M and A and talent all remain critical enablers to our strategy.
From a long term perspective, we're excited about where we compete. Our market potential is now approximately EUR 50,000,000,000 with an estimated 4% total market growth rate. This is a significant increase from just 1 year ago, while our estimated market was approximately $26,500,000,000 with an average growth rate of 2% to 3%. So Frutarom, we have gained broad exposure into many attractive adjacents agencies where growth is approximately 6% in the next 5 years. This additional access not only provides us with incremental market potential, but we believe growth over the mid and long term should accelerate as nearly all these adjacent markets have higher intrinsic growth rates.
To ensure we capture the opportunities ahead, we are realigning our business to take effect in 2020. Frutarom's taste and savory solutions will transition on our legacy taste business unit, We are also adding Frutarom's inclusion business, which comprises Tara, Inventive And Leagel, our ice cream ingredients business into legacy taste. The remaining parts of Frutarom will be grouped into a new nutrition and ingredients division. This high growth, high margin business will include Frutarom's natural product solutions as well as the flavor ingredients business. At the business unit level, we are focused on prioritized our strategy to ensure we capture future growth potential.
Within Centimeters, we serve customers across wide spectrum of sizes, However, the bulk of all market is composed of Multinational Companies who work via core lists. We recently won new cordless access, providing us with the opportunity to compete for $450,000,000 of market potential we previously didn't have access to. This poses a significant opportunity for growth and as such we are focused on capitalizing on our new axis was maintaining strong improvements with regional and local customers. Our go forward goal in Cent is to drive value creation through disciplined portfolio management, investing in high margin businesses and fixing profitability in categories that have disproportionally impacted by higher raw material costs. In addition, we have identified and executed a on opportunities to streamline our organization within the scent business unit, which already contributing approximately $4,000,000 of savings to the first half of 2019.
In taste, the focus on effectively integrating the Frutarom businesses and our go to market approaches by spending our Tastepoint model to ensure we serve and capture opportunities with faster growing small and midsized customers in other key markets around the world. We are also targeting higher gross geographies. For example, Africa, the Middle East, and enhancing our portfolio by expanding savory solution and inclusions globally. In nutrition ingredients, It's all about geographic expansion, focusing on differentiating natural and clean label technologies and targeting value enhancing acquisitions. The majority of the categories within the division, natural health ingredients, natural food protection, and natural colors all have strong future growth potential.
And we are At the core, we anticipated our baseband currency neutral growth to be approximately 3% to 5%. Then we believe that we have incremental opportunities to long term to add an additional percentage point for cross selling and integrated solutions. As well as another percentage points for acquisitions. The net result is that we expect overall neutral sales growth to average 5% to 7% over the next 3 years. Taking a step back, We now have the borders and deepest portfolio of businesses in our long history, one that provides a variety of investment options.
To maximize value creation, we have established portfolio roles and clear guidelines to prioritize our investment decisions. There are 3 approaches to managing our portfolio, growth, where we will accelerate margin accretive categories through incremental investments such as fine fragrance and cosmetic active ingredients balanced, while we will sell fund investments to maintain gross margin and cash flow, and fix, where we will have limit investments until margin goals achieve targeted levels or we deprioritize. An example of this is traded marketing, while we have deprioritized our approach given the margin profile, all the businesses we exited earlier this year. As you can see, we have categories in all of these 3 portfolio classifications. These certifications will streamline our category management and fine tune our strategic efforts to the tour We grow sales and also improve our margins.
We have strong programs in place to drive profitability. From 2019 to 2021, we expect margin improvements to be driven by our portfolio optimization strategy and the $145,000,000 of integration savings from the Frutarom transaction. As discussed, portfolio optimization is expected to improve profit as margin management, pricing, cost leverage and selective pooling of our low margin and non strategic sales will drive overall margin expansion. Within our planned integration synergies from the Frutarom acquisitions, we are rationalizing and harmonizing our procurement activities. We are leveraged, spent, and make mergers buy.
We are also optimizing the global footprint as we expect approximately 35 sites globally to be optimized. Which will generate additional efficiencies. Which is intended to reduce nonstrategic costs and eliminating redundant expenses. We are highly confident and our ability to achieve $145,000,000 cost savings target at the end of 2021. In addition to our integration synergies, we expect $100,000,000 savings in additional productivity programs.
Beyond margin expansion, these initiatives are key in a journey to fundamentally transform how we operate, focusing on process improvements, simplifications and centralization. This will provide flexibility to drive bottom line results and reinvest in our road engines. Our long term financial objectives are clear. This includes top cert total shareholder return, our drivers are 5% to 7% currency neutral growth, margin expansion to be less than 3 times net debt to EBITDA in 18 to 20, 24 months, 10% plus adjusted EPS growth, excluding amortization, and approximately a 2% dividend yield. Our Vision 2021 strategy is focused on disciplined execution and integration.
We remain steadfast in our approach and believe the long term value creation for all of our stakeholders. Turning now to the second quarter. Year over year results a consolidated basis were strong, including the contribution of Frutarom. Reported sales increased 40% with the largest driver being the contribution of additional sales related to Frutarom. As communicated at our June Investor Day, currency neutral performance on a combined base was soft due to a significant volume erosion with multinational customers within taste.
And a continued pressure was in Frutarom driven by decline in FNF Ingredients, notably citrus source, natural colors, pricing, parts of saver solutions and trade and marketing. By which we'll go into details in a moment, I feel it is important to highlight several strong performances within the quarter to ensure we do not lose sight of the progress we are making. Incent, we've delivered mid single digit sales growth with growth in all categories and double digit adjusted segment profit growth, both on a currency neutral basis. Within the rest of the business, several of the high growth categories continue to have solid performances, led by beverage and savory and taste, Natural Food Protection, gelato, the ice cream ingredients business, and Allgain Frutarom. In addition, the businesses we have acquired since the beginning of the year, Mikey, Leagio and Beaver Canada are all growing at or above our expectations.
From profitability perspective, we are also pleased that adjusted operating profit margin, excluding amortization, improved 80 bps year over year driven by productivity initiatives and acquisitions related synergies, a market accelerations for our first quarter performance. I am pleased to report that our integration efforts are well underway and we are making excellent, excellent progress. For those businesses where we have aligned Our go to market approach with IFF growth was strong increasing high single digits. In terms of cross selling and in great solutions, we have already achieved $8,000,000 in run rate sales. Longer term, we believe that we can deliver at least 100,000,000 of top line sales by 2021.
We are leveraging the compelling combination of R&D Technologies and capabilities of both organizations. As stated many times, innovation drives differentiation and is critical for long term success. I'm pleased with the progress Turning to cost synergies. We've made strong advancements year to date as we have achieved approximately $15,000,000 in the first half of twenty nineteen. Based on our progress to date and our expectation that savings benefit to accelerate throughout the year.
We are now forecasting that we will achieve approximately $40,000,000 in cost savings in 2019, up from our previous estimate of $30,000,000 to $35,000,000. In terms of debt repayment and cash flow, our operating cash flow was up 130,000,000 in the first half of twenty nineteen compared to the previous year period and we repaid $47,000,000 in the first half of twenty nineteen. With that, I would like to turn the call over to Rich.
Thank you, Andreas. In the second quarter, we delivered quarterly sales of approximately 1,300,000,000 On a combined basis, currency neutral switch sales grew 1%, driven by acquisitions and strong growth in Cent. We also maintained strong profitability levels led by productivity initiatives, acquisition related synergies, and favorable price versus input costs. This, combined with the additional Frutarom, led to a very strong 29% increase over the prior year period and adjusted operating profit Our financial results were in line with percent depending upon how June progressed. And while we did not finish as strong as we would have liked in terms of sales, we did a good job delivering overall profitability in line with our expectations.
We had significant year over year increases in operating cash flow and free cash flow, driven primarily by higher earnings and amortization. As we've done previously, I would like to highlight the impact of emerging market pricing on our growth rates to better compare with our peers. Occur either in U. S. Dollars or other hard currencies or our index to hard currencies when we have to invoice in local market currencies.
Reporting our currency neutral sales growth, we exclude foreign exchange related price changes in emerging markets, but this is different from our peers. We believe our reporting standard provides investors with a truer assessment of underlying currency neutral growth. Especially when there are large emerging market devaluations relative to the US dollar or euro. However, it's important to help all of you understand our performance relative to competition. During the second quarter dollar environment plus significant emerging market devaluations year over year in several key markets had approximately a 2% currency impact of growth.
If we included emerging market pricing. This is essentially driven by large devaluations in 3 countries. Which represent less than Turning to business unit performance. Incent, 2nd quarter, currency neutral sales grew 4% against a solid year ago comp of 5 end, with growth in nearly all regions and categories. Performance was strongest in fragrance ingredients and consumer fragrances both increasing mid single digits.
Consumer fragrances was led by high single digit growth in home care and fabric care. Fine fragrance also grew low single digits following a double digit performance in Q1, led by strong new wins, particularly in EMEA. It should be noted that raw material driven price increases represented approximately 4% in the second quarter on a consolidated basis. With the strongest increases in fragrance ingredients. In fragrance compounds, the composition of growth was balanced with equal contribution between volume and price.
Sendcurrencyneutralsegmentprofitincreased19% benefiting cost and productivity initiatives and more favorable price to input costs. We believe that this was due to the timing of raw materials the inventory and our P and L as we continue to see year over year increases in our purchases. Law material costs remain elevated, significantly above historical levels and we will continue to work with our customers on actions to mitigate these increases. In terms of segment profit margin, year over year performance was up approximately 200 basis points to 19.2%. In taste, 2nd quarter currency neutral sales decreased approximately 1%.
Against a strong growth of 6 in the ASEAN region. We also posted growth in EMEY, led by strong performance in Africa and Middle East. In Latin America and North America, volume erosions with multinational customers were significant and intensified throughout the quarter. When comparing to historical averages, our volume erosion rate in the second quarter was approximately 3 times or historical average. Peace currency neutral segment profit was adversely impacted by volume declines unfavorable price to material costs and a weaker mix.
Nevertheless, segment profit margins will remain best in class amongst our industry peers. For Frutarom in the 2nd quarter, sales totaled approximately $382,000,000. On a standalone basis, Fluor and Home sales were flat, driven by the contribution of acquisitions. Excluding the contribution of acquisitions and divested businesses, Frutarom's sales declined low single digits or 4%. Similar to what we communicated at our Investor Day, results were primarily driven by declines in FNF ingredients, most notably, citrus source, where one of our competitors are no longer purchasing from us, as well as raw material driven price decreases in natural colors and weakness in savory solutions related to weather conditions in Europe and Canada and trade and marketing.
Where we are deeper prioritizing. While all of these are very similar to what we have discussed previously, it is worth noting that Frutarom's pace volumes decelerated throughout the second quarter, driven by weakness in the UK and Ireland. In terms of segment profit, The Frutarom delivered $37,000,000 $77,000,000 of profit excluding amortization. The margin profile for Frutarom in the 2nd quarter continues to be strong at a robust 20.1% if you exclude amortization, This has been driven by acquisition related synergies and continued cost discipline For the first half of twenty nineteen, we have delivered $15,000,000 in integration synergies As Andreas mentioned earlier, we are now expecting to achieve approximately $40,000,000 in cost synergies in 2019. Up from our previous estimate of $30,000,000 to $35,000,000 driven predominantly by procurement optimization.
Addition, we continue to deliver on our core productivity program where we drive process improvement simplification and centralization. On a year to date basis, we achieved approximately $25,000,000 of core productivity savings in the first half of twenty nineteen. Together we delivered approximately $40,000,000 in year over year savings or about 19% expressed in terms of operating profit growth on a combined from $55,000,000 last year to $185,000,000 this year. Performance was driven by higher earnings and amortization. Core working capital defined as inventory's accounts receivables and accounts payable improved modestly driven by receivables and payables.
Inventories continue to remain at elevated levels, primarily due to raw material cost increases and safety stocks within the scent division. We expect that inventories will begin to improve in the second half of the year. In the first half, CapEx as a percentage sales was approximately 4 as well as creative centers and integration related investments. For the full year, we continue to believe that CapEx as a percent of sales will be between 4.5% to 5%. Bringing all this together, we had a strong $78,000,000 increase in free cash flow in the first half of twenty nineteen.
A key component of our overall TSR algorithm for our shareholders is a competitive and attractive dividend yield. We believe that the 2% threshold is important on that broadens our potential shareholder base. Together, and today, we are pleased to announce we have authorized 2% increase in our quarterly dividend. Expressing it in our confidence to execute on our long term strategy and our strong financial position. It should be noted that this marks the 10th consecutive year of dividend increases.
Considering our year to date performance, as well as our outlook For the full year, we at or approaching the low end of our original guidance of $5,200,000,000 to $5,300,000,000. On a combined basis and excluding the impact currency, growth is expected to be 3% to 5%. The forecast now reflects low versus mid single digit growth for Frutarom, driven by 3 areas: F And F Ingredients, Savory solutions and trade and marketing. Within FNF ingredients, CitraSource is the primary contributor of the decline as one of our large competitors has significantly reduced its purchases. We are shifting our focus of this business to make versus buy to drive value creation.
In savory solutions, performance was impacted by first half weakness as well as a modestly revised second half outlook related to reductions in volume. We also will be prioritized trade and marketing based on our strategic category management approach. From a taste perspective, continued multinational volume erosion in Latin America And North America has lowered our expectation. It should be noted that we do not expect second half growth to be stronger than the first half but trace performance in the third quarter will be challenged by a strong prior year comp. We now expect adjusted EPS excluding amortization to be 6 15 to 6 35 and I will go through the changes in a moment.
On a combined basis and excluding the impact of currency, adjusted EPS excluding amortization is expected to be 6% to 9%. To provide additional detail related to the adjusted EPS ex amortization change, I would like to walk you through the drivers. Our original guidance was $6.30 to $6.50. In the second bar, I highlighted the 10% impact related to the change in at low margins given the impacted businesses, like trade and marketing, Citrusource and PTI. Minigating this is the incremental $5,000,000 in integration savings that we announced earlier today.
Combining the two The net operational impact is a reduction of approximately $0.05 to our adjusted EPS, excluding amortization. The larger impact on adjusted EPS excluding amortization is related to a change in the average effective check tax rate on the amortization of intangible assets, the net impact of these combined is approximately $0.10. In the end, our revised guidance for adjusted EPS excluding amortization is now 615 to 635. With that, I would like to turn the call back over to Andreas.
Thank you, Rich. In summary, we believe we have the framework to achieve our long term ambitions with our Vision 2021 strategy, which is focused on disciplined execution and integration. With that context, we have a long term commitment to 12% total shareholder return, which is expected to be driven by above 10% EPS growth and a 2% dividend yield. In the 2nd quarter, we achieved both base improvement and sales, margin cash flow. For the full year, we believe we can deliver solid operational results.
We are taking action to strengthen the overall growth profile of our business as well ensuring we capture synergies to generate strong margins and returns for our shareholders. Expressing our confidence in our long term strategy in future growth prospects, we also raised our dividend, the 10th yearly consecutive increase. With that, operator, we're now happy to take questions.
And our first question will come from Mark Asperhan with Stifel. Please go ahead.
Thanks, and good morning, everybody. Mark, I guess just on Frutarom, not really sure where to begin, but but maybe starting, how confident are you? There won't be further discoveries at Frutarom related to the alleged bribery negatively impacting sales in other geographies or any sort of things that you can find from an accounting standpoint or anything else. And do you know of or anticipate any US authority to investigate the goings on there at this point?
Mark, thank you for the question. I take it. And given that we have done a compliance disclosure here, I will take a moment to reiterate what we have said in our former disclosure. During integration of Frutarom, we were made aware of allegations that 2 Frutarom businesses operating principally in Russia and Ukraine made certain improper payments. Including 2 representatives of the number of customers.
So we promptly commence investigations. We have a very robust program in place here, in particular when we, when we take over companies. So that's very clear. And it's a clear SOP on our side. Have notified relevant U.
S. Regulatory authorities and relevant Israeli regulatory authorities. So I think that's good and done. We have not uncovered any evidence suggesting that payments had any connections to the U. S.
Based to the information we have we believe that these improper payments are no longer being made. The estimated effective sales represents less than 1% combined pro form a net sales for 2018. So we do not believe the impact from these matters is or will be material to our results of operations or financial conditions. I believe that that's a super important point as well. We have taken or we'll take appropriate remedial actions with respect to the matters I have described.
And I want to assure you that we have committed to the highest standards of ethics and compliance and have strict compliance policies in place. Also, investigation are continuing, based on the results to date and other compliance related integration activities, we are not currently aware of similar instances of misconduct any other geographies. So I would say all in all, we stick to what we have said in our disclosure. We feel very comfortable that we have a good handle on it. And I'm actually very proud about the program we are running here and how all the teams are working together to get these things in the done in the appropriate matter.
Okay. Staying with Frutarom, I guess, the organic sales decline was much worse than was expected, I think, including your own expectations. So what gives confidence it can get back to growth in the second half of the year absent easier comparisons and what is a reasonable long term growth rate, for the business going forward. And I just wanted to follow-up on the first question. Just so how confident are you that there's not going to be another stone unturned that finds something else that you're not anticipating at this mean, how thorough has the investigation been by the board and the committees?
Yes, sure. I think Mark, that's a fair question. Principally, despite that investigation, nothing has changed since our investor day. Because we feel very good about our strategy. We see also that the portfolio of the acquisition is helping us in terms of getting exposure to some of the higher growth areas, like the health ingredients or natural food protection, which is even shown in the second quarter or the inclusion business as well.
So portfolio wise, we are very happy What we do certainly is that we prioritize our portfolio. As we said, we are trying to maximize returns And we are deemphasizing the marketing and trade business, for example, because there's not a lot of profitability in, and that obviously shows We're very, let's say, clear and happy about the customer portfolio. We haven't lost too many customers here, and I think still we believe that some of the small and midsized customers have good growth rates and that will help us with the business. The portfolio is pruned toward naturals, and that's the trend which is not changing so that event. Talking about the the integration.
I believe what is important to see here is that in general, despite the compliance topic we just talked about, we are very happy with what is happening during the integration because, you see it on the cost synergies, everything in terms of integration, whether it's North America, Latin America, Asia or Europe is working as planned. We see that we get more cost synergies and which just mentioned that in his, in his presentation, often we saw it, and that's predominantly driven by procurement, which is good news. Because first of all, it has no impact on our employees and no impact on our customers as well. So that's an important one. On the sales side, Certainly, the second quarter was softer than I would like to have it, but we will see that this will turn around in the second half as we set during the Investor Day as well.
And we believe a mid single digit growth rate for the business is very doable. In particular, if we emphasize the strong parts and the high growth parts of the portfolio. Having said this, We have now a real good team in place for the cross selling synergies. You will hear more about this over the next a couple of calls. We haven't seen too much of a result.
It's Rich just mentioned the 8,000,000, but there's certainly more to come. Actually very exciting opportunities for us to cross sell the portfolios to the different customer groups on both sides of the business. Having said this, I would like to mention as well that we have seen now a nice turnaround on the scent business side that has not too much to do with Frutarom, just a small part of it. But we see that we're turning around despite the crisis we had with raw materials in the last year. Nicholas's business is going in the right direction, growth wise, as as well.
So we're very optimistic on this front as well. And you know, there was a bit of a picker in the last last year as well. The turnaround, this is pretty strong here. So that's how I would, let's say, characterize where we stand in terms of the Frutarom business, but making the remark on the total portfolio as well.
Andreas, maybe just, Mark, a couple of quick comments on my part. I mean, I reiterate what Andreas said. I think we feel strongly about the ability of the Frutarom business to grow mid single digits in the medium and long term. I think we're still going to some of the challenges that we've seen for three quarters like Citrusource and trade and marketing and the Sabre business are not going to correct overnight. I think we would expect to see low single digit growth for Frutarom ex M and A in the second half of this year.
But, you know, but we're not going to get I think it doesn't change our long term perspectives in terms of the potential of the business.
What we see and I might add but it's more mid to long term memory markets. On the R And D Technologies, we are very, very optimistic what that can deliver for us. Going forward, but you know that takes a bit of more time to realize. Okay.
Our next question will come from Mike Sison with KeyBanc. Please go ahead.
Hey guys. I guess just two quick ones. I think in the your compliance commentary mentioned that, you know, there were some senior management at Frutarom involved. Are they still around? How have you sort of changed that dynamic culturally.
And then as a quick follow-up, what are you looking for for food around the second half of the year in terms of you know, either, constant currency growth. It was down 4% you mentioned in 2Q. And maybe just kind of thoughts on on on profitability. I think you said operating margins ex, amortization was still pretty healthy. Do you expect it to stay at that levels in the second half of the year?
Thank you.
Okay. Let me take the compliance piece first. We, we have taken, very remedial actions on the involved and involved people. The good thing is it is very contained geographically so that that makes it easier for us to act on that. Culturally, we have started with actually day 1 and all of our town hall meetings in the new company as we usually do when we take over companies.
That we educate people on the compliance courts, on the code of conduct. Everybody is going through the training, whether it's is a live training or training, via their computers. So we feel good about this. And this is coming actually nicely, nicely together. This is an unfortunate event, but as I said, it's geographically very, very limited.
And then I hand over to Rich on the margin question.
Yes. So, Mike, 2 things. One on your question on the second half, I just want to clarify what I the answer I gave to Mark, Froome second half of the year, I think it's low single digits on a 2 year average basis. Given the weak Q3 last year for fruit, it will be stronger Q3 versus Q4. In terms of in terms of margins, I think we had a very strong quarter Q2 despite the challenges from a top line standpoint.
You heard the comments I made regarding the very strong quarter and margin performance percent. I think some of that, as I said in my comments, were timing. And so I don't expect that, I think the in Q3 and Q4 will be a bit more pressured on the scent side in terms of margins with input costs remaining elevated. The teams have done a very good job in terms of mitigating that impact related to the price realization, but there is timing in terms of inventory when the raw materials flow through the P and L. So and then when you get to Q4, obviously that season, there's a bit of seasonality where our margin profiles in Q4 are generally the weakest of, over the full year.
So I would expect the second half to be modestly below where we were in
Our next question will come from Adam Samuelson with Goldman Sachs. Please go ahead.
So first, just on the compliance question, can you detail how long were the alleged payments actually happening And specifically you've cited in the last couple of quarters some sales declines in the savory business if we were on any certain Europe. Is there any nexus or common customer overlap between those? Just want to be clear on that point. And then secondly, on the Taste business, maybe just a little bit more color on the volume declines that you're seeing in the Americas in the second quarter and the first half of the year. They seem to be a bit starker than what we would see from the food and beverage company.
So just more color perhaps by category or kind of where you're seeing the greatest pressures? Thank you.
So, Alan, let me start with the last one in terms of the volume side of it. It's as I said in the comments, and I think Andreas said also, I mean, what we're seeing on the taste side, is significant volume erosion on an existing business. Again, if you look at, when we look at our fundamentals, we don't believe we're losing share. When you look at us on the pricing adjusted, buying growth or top line growth, on a 2 year basis for the first half of the year. We're very much in line with competition.
So we have confident that we're not losing share. We are seeing significant volume erosion on existing business. Our win rates remain good for both businesses. Pretty much at 5 year averages. So we're not seeing any erosion in the business we've talked about in the past that we see significant upside going forward on the scent business in terms of access to new business.
So we believe there's very much a volume erosion piece where Q3, Q2 was much worse than what we saw in Q1. It's one of those things that I've seen these trends occur over time and it's hard to predict, it's hard to predict when those things sort of return to the norm. And, you know, it can be vary from their underlying product mix and the categories where we operate with a particular customer, their supply chain. So it's hard to predict, but I don't see this as being a long term trend. As I said in my comments, related to the Frutarom taste, it was primarily an issue in Europe.
Again, it was quite strong with mid to low single digit growth in the EME Taste business for Frutarom through the end of May. And then it was a very disappointing and challenging June, which drove the declines that was a bit unexpected from where we thought we were going to be. From the compliance standpoint, based on what we've seen through the investigation, they may have been occurring for a few years, but we have, but there's never been indication that there's a material amount in any particular year.
Maybe I add to the first point, Rich made, if I look at our taste business, we had, in particular in 2018, very, very strong growth in the first and the second quarter, 6% each. So it's strong comparables. And we can say that in the 3rd quarter, we have had a slightly better start into the 3rd quarter, for the taste and for the food I think that's important.
Yes. And last question in which I forgot, Adam, was, in terms of customer overlap, there's pretty, they're pretty negligible customer overlap. Particularly in this business.
Our next
question will come from Heidi Vestering with Exane BNP Paribas. Please go ahead.
Hi, good afternoon. So If we step back and think about your performance over the past years, we've seen that, you've tended to underperform on your top line target. In once a year, once again, this year, despite help from a 53% and strong pricing in response to exceptional inflation, you're still below targets in terms of organic growth. So can you help us understand what you're doing internally, both on the legacy IFS side and the Frutarom side? To get back on track.
Do you think maybe some more radical changes might be needed? May it be in terms of investment or personnel or so on to ensure that you can get back to your long term targets? Thank you.
So Heidi, that's a good it's a good point because I would say, all the other parameters and KPIs are going actually pretty, pretty well. And we focus a lot on top line grows. And for me here, or actually for us as a management team, the recipe is very, very clear. What we need is we have to focus our activities on the most driving parts of the portfolio. Where we have now a much better portfolio than we had before.
So we have a couple of, let's say, areas which might be small at the moment, but show from the market perspective, really nice nice scores for us, like the, inclusions like the health ingredients or natural food or even the active cosmetics. So we believe that's the first one. The second thing is where we have to look in is in our customer structure. And here we have to drive, it's true, in particular on the taste side, with some of the smaller and mid sized customers. Here, certainly, the acquisition helps a lot.
We take the blueprint we have from our base point. We will drive it through. We have now integrated the Frutarom taste business into taste point already in the U. S. And actually in that regard, if I can give the detail, we have a double digit growth on this side.
It's a very nice, nice growth of the business. So we like that a lot. The next thing is, on the on the Send side, because I don't want to show changes too much. But we have now access to more of our, core list of our most important customers. And I know that there are a lot of activities are ongoing.
And you know, these are all big customers. It takes, let's say, 9 to 12 to 15 months to really capitalize on it. But we see strong interest. We see strong first, let's say, wins on our side. And that will help us to, let's say, accelerate the top line side on the scent business as well.
On top of it, and that's what's in the works and we will report on this is the cross selling aspect. We have now moved the, the leader of our key account, bigger key accounts from the Taste business into the role of being the head of cross selling and total solutions business. He is building a small, but very, let's say, powerful and nimble organization to facilitate the cross selling between the two organizations. And we believe that can deliver very nicely on our top line growth. So if I add this all together, I think we come we can come back to the good growth rate we have outlined, the 5% to 7%, We believe it's very, very doable.
And the first things the first, let's say, initial, let's say, science we see are going in the right direction.
Our next question will come from John Roberts with UBS. Please go ahead.
Thank you. I just wanted to put some numbers to what's going on in the taste with the 3x erosion. So is it like Normally, you see 10% to 15%, products discontinued in any given year by TACE customers. And Normally, they replaced that, but now you're seeing something like 30% to 45% kind of, discontinue to older products in even though you're having the new wins, they're not launching the new products at an offsetting rate here. Is that the dynamic that we're talking about?
John, put it in perspective, I mean, on a 5 year trend volume on existing business is slightly negative. So call it low single digit down 1%. For the last and now at the current rates, particularly in Q2, we're in a mid single digit range. So that's, that's by far the single biggest driver. I mean, as I said earlier, our win rates are in line with long term 5 year trends.
Pricing is slightly positive, a little bit below the 5 year average, but part of that's been driven by what we've seen over the last 3 years with vanilla. So I would not say fundamentally, it's all the volume erosion on existing business. Some of it may be driven by, you know, shorter cycle times, but that's the fundamental driver in terms of the biggest change in the last two quarters.
Our next question will come from Alexander Thrum with Morgan Stanley. Please go ahead.
Hi, thanks for taking my question. Just a quick one on margins in both the scent and taste division. You've sort of explained what's happening in the top line dynamics, but when I look at taste, could you break up how much of that margin decline is driven by volume versus, also the pricing versus raws? And then on the flip side, you've margins have obviously expanded quite decently. I expect because mainly because of the pricing in Cent could you please break down that margin expansion both between pricing versus raws and volume?
Alexander, I mean, in terms of taste, I mean, the pricing impact was pretty negligible. I think the biggest driver for taste is on the input costs. In terms of it's more of a mix issue. I mean, I think our overall view, in terms of mix of consumption as opposed to I think that's a smaller impact from a mix standpoint. But as similar to what we've seen on the taste side, as we consume individual lots or product by product, we can have some fluctuation in that.
So the biggest driver into the margin, pressures in taste is 1, the input costs and 2 is the lower volumes is hurting us from an absorption standpoint. When it, you know, from a taste standpoint, you heard in the comments that you know, pricing is a bigger driver from a taste standpoint, certainly on the ingredient or scent sampling, certainly on the ingredient side, but also in the compound. As I said earlier in my comments, the teams have done a very good job of aggressively pursuing price realization to offset that. And I said earlier, we had, you know, I would call it a unique, situation in Q2 where we had mix of consumption of raw materials. Which drove, this year for Centimeters.
So that's why I said earlier, I would expect margin profiles and Centimeters to come down from where they were in Q2, given the mix of raw materials, you know, we still are seeing elevated prices from scent there at near all time highs. You know, I think we've seen that the rate of increase has slowed. So I think that's starting to be a positive trend, but we don't expect to see any relief in the near term from an input cost standpoint.
Our next question will come from Jeff Zekauskas with JP Morgan. Please go ahead.
Can you talk about the change in global expenses from the first quarter to 2nd? I think you went from about $19,000,000 to $13,000,000 And then to go back to the $13,000,000 sequential decrease in cost of goods sold, you know, I would think maybe 3,000,000 is from volume and maybe there's $2,000,000 or $3,000,000 from Frutarom. But I take it there are some hedging gains in there. And can you describe what went on from a raw material standpoint a little bit more precisely, if you don't mind?
Sure, Jeff. So from a corporate expenses standpoint, the single biggest driver is the cash flow hedging, as you said. It's about a $5,000,000 impact And so that's the biggest driver, as you said, also it also impacts COGS. I think clearly the volume impact is a further reason in terms of the $13,000,000 impact. I think the other thing that keep in mind, as I said earlier, we did have, I'm going to call it a mix impact in terms of scent.
In terms of the raw material consumption as it flow through from finished goods and finished goods and raw materials into COGS. So there's a timing impact there. I think those are the biggest drivers. In terms of the sequential performance. From an overall perspective, we still expect to see mid single digit inflation from a raw material standpoint for the full year.
That's in line with what we've seen our expectations from the beginning of the year. And as I said, just a moment ago, I think we are starting to see some slowdown in terms of the rate of the increase, but we're still at very elevated levels.
We'll take our next question from Brent Huntley with Seaport Global. Please go ahead.
Hey, thank you. Good morning, guys. Rich, I just have one detail type type question for you. So if I go to the change in EPS guide for the year, I wanted to focus in on the change in non controlling interest piece and just ask you whether is that related to, like, the carrying value of those fruit subs dropping below the redemption value? Is it due to a change over to consolidated status away from nonconsolidated status because I will admit your other income line in Q2 was less of a benefit than I thought it would be relative to Q1.
So sorry for the details type question, but just wanted to stand that better?
No, Luke, I mean, I think so out of that $0.10, I'd say probably $0.06 to $0.07 of that is the change in the effect, average effective tax rate on the amortization. So that one's clear. On the non controlling interest, really a mark to market adjustment that we have to monitor and adjust each quarter based on the results and the outlook for the individual entities in which the minority interest had there's a redeemable component of the minority interest. So it's basically it's based on the underlying performance. And the projection is for those businesses.
And so there's been a slight change between where we were at the beginning of the year and based on the latest projections.
And there are no further questions at this time. So I'll turn it back to Andreas for closing remarks.
Thank you very much for participating. I think it was an important call, was a couple of really important messages we wanted to make. And We are now basically happy to take all the one on ones we want to do and give you more more explanation around the some of the some of the businesses. So thank you very much. And talk to you soon.
This does conclude today's program. Thank you for your participation. You may now disconnect.
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