At this time, I would like to welcome everyone to the International Flavors & Fragrances first quarter 2019 earnings conference call. All participants will be in a listen-only mode until the formal question-and-answer portion of the call. Participants will be announced by their name and company. In order to give all participants an opportunity to ask their questions, we request a limit of one question per person. I would now like to introduce Michael DeVeau, Head of Investor Relations. You may begin.
Thank you. Good morning, good afternoon, and good evening, everyone. Welcome to IFF's first quarter 2019 conference call. Yesterday evening, we announced our financial results. A copy of the release can be found on our IR website at ir.iff.com. Please note that this call is being recorded live and will be available for replay. Please take a moment to review our forward-looking statements. During the call, we are making forward-looking statements about the company's performance, particularly with regard to our outlook for the second quarter and full year 2019. 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 our press release that we filed yesterday.
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. For purpose of this presentation, we calculated combined numbers by combining our results with the results of Frutarom prior to the acquisition on October 4, 2018, and adjusting for divestitures of Frutarom businesses since October 4, 2018. 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 with prepared remarks and then take any questions as you may have. With that, I would now like to introduce Andreas.
Thank you, Mike. On the call today, I will give an overview of our operational performance for the first quarter of 2019. After that, I will go through our integration progress and priorities as we see them today. Once finished, I will ask Rich to give a more in-depth financial review of our business performance, and then I will provide an update on our outlook for the balance of the year and take any questions that you may have. I am pleased to report that our first quarter performance was in line with our expectations as we achieved double-digit sales and adjusted operating profit growth, including benefits related to the acquisition of Frutarom. In the quarter, we delivered a record-setting quarterly sales of approximately $1.3 billion, a 39% increase over last year.
On a comparable basis, excluding the impact of divestitures, currency neutral growth was achieved in all three segments, led by scent at 4%, Frutarom at 3%, and taste at 2%, or 3% overall growth. We also maintained strong profitability levels as productivity initiatives, cost synergies, and price realization offset higher year-over-year raw material cost. This, combined with the addition of Frutarom, led to a very strong 13% increase over the prior year period. Earnings per share, excluding amortization, came in at $1.57. As adjusted operating profit growth was more than offset by higher interest expense and shares outstanding, both related to the Frutarom acquisition. In the first quarter, we continued to strengthen our portfolio via acquisitions and collaboration that expand our innovation platforms and product offerings beyond traditional flavors and fragrances.
In January, we completed the acquisition of 60% of the share capital of Mighty, a leading savory solutions provider in Thailand. Mighty develops, produces, and markets reaction flavors with particular expertise in savory solutions. The company's portfolio includes flavors, seasoning blends, marinades, and special function raw materials for the food and beverage industry. We also established an industry-exclusive collaboration with Aryballe, a pioneer in digital olfaction technology based in France, to refine and further develop the flavor and fragrance capabilities and applications of Aryballe's technology in portable universal odor detection sensors. Together, we will focus on the development of odor sensing and quality control application with the goal of creating a platform for applications in the food, fragrance, cosmetic, and other industries.
In February, we announced that we expanded and strengthened our delivery capabilities for scent, taste, and active ingredients through the acquisition of The Additive Advantage, a company that develops novel technologies with diverse capabilities that span many application and industries. TAA has the expertise to develop the next generation 3D delivery systems, technology platforms that will enable the printing of flavors, fragrances, cosmetic, and health nutrition actives onto a variety of consumer products. We're excited about this technology as it builds upon our market leadership position and capabilities in delivery technology. Lastly, in March, we announced that we completed the acquisition of 70% stake in Leagel, a leading producer of ice cream and gelato ingredients in Europe. A family-owned company based in San Marino, Italy, which specializes in artisanal taste, texture, and toppings sold directly to ice cream and gelato shops.
We see great opportunities to combine Leagel with SDFLC, our existing Brazilian ice cream and dessert business, to create a global platform for gelato ingredients, expand our geographic reach, and leverage cross-selling opportunities. All four provide opportunities for us to develop strong innovation and differentiate ourselves from the competition. In terms of integration, I'm pleased to say that we are executing very well against our priorities. We have made strong advancements year to date on our year one cost synergy target of approximately $30 million-$35 million. In the first quarter, we achieved approximately 15%, and we expect savings benefit will accelerate throughout the year. Based on where we are today, we are confident that we can achieve our $30 million-$35 million cost savings goal as our current run rate savings are already in excess of this target.
We also outlined our cross-selling priorities and execution plan to provide a foundation for cross-fertilization opportunities across the organization. While we'll discuss and disclose more details at our upcoming Investor Day, I'm happy to report that we already have achieved approximately $7 million of annualized new businesses from the quick wins. For those businesses that we have aligned to our go-to-market approach with IFF, North America Taste and IBR growth was very strong, increasing double digits. In the U.S., Frutarom's North America Taste business has successfully been merged into Tastepoint, our go-to-market approach to service small and mid-sized customers. The alignment of Frutarom's Cosmetic Active Ingredients business with our Lucas Meyer cosmetic business is now complete. We are seeing strong benefit with sales up double digits in quarter one 2019.
We have also created a global savory solutions organization under one leader to share best practices globally and collaborate with our Taste division to ensure we continue to capture market share in this growing segment. I will let Rich discuss the financials in greater detail, including debt repayment and cash flow in a moment. Going deeper into our cost synergies, we continue to optimize our global footprint and have closed our Manningtree site in the U.K. In addition, our operations team is actively completing the necessary steps for further network consolidation, and we expect additional sites to be closed throughout the year, all in line with our plan. In regard to procurement savings, we have renegotiated a significant portion of our spend for leverage savings and are adjusting our savings strategy to benefit from significant make versus buy opportunities.
With these in mind, we confidently believe that we are on track to achieve our full year target of approximately $30 million-$35 million, and again, our current run rate savings are well in excess of our plan. With that, I would like to turn the call over to Rich to take you in the details for our financial performance.
Thank you, Andreas. In the Scent business, first quarter currency-neutral sales grew 4% versus a strong 8% year-ago comparison, with growth in nearly all regions and categories. Performance was strongest in fine fragrances, increasing double digits led. Consumer fragrances grew mid-single digits with double-digit growth in home care and mid-single-digit growth in fabric care. Fragrance ingredients were down year-over-year as price increases related to continued higher raw material costs were more than offset by volume declines. Scent currency-neutral segment profit decreased approximately 3% as the benefits from cost and productivity initiatives were more than offset by unfavorable year-over-year price to input costs, which reflects the unprecedented raw material inflation we have been facing since late 2017. Scent pricing was approximately 3.5% in Q1. However, not enough to recover the full cost increase.
As communicated previously, we will continue to work with our customers on actions to mitigate these increases and are confident in our ability to fully recover the dollar impact. In terms of segment profit margin, year-over-year performance was down. However, our margin profit remains strong at 17.6%. Turning to the Taste business, in the first quarter 2019, currency-neutral sales grew 2% with growth in three of four regions. Performance in the quarter was driven by mid-single-digit growth in Greater Asia, where India and Indonesia grew double digits, and in EAME, led by strong growth in Africa, Middle East and Western Europe. In North America, year-over-year improvements continued to be led by Tastepoint. In Latin America, year-over-year declines were primarily due to weak demand from multinational customers and market conditions in Argentina and Mexico.
Taste currency-neutral segment profit decreased approximately 1% as volume growth and the benefits from productivity initiatives were more than offset by unfavorable price to raw material costs and weaker mix. For Frutarom, in the first quarter, sales totaled approximately $364 million. On a standalone basis, Frutarom sales grew 3% against a strong year-ago comparison, excluding the contribution of acquisitions and divested businesses. Sales were driven by strong growth in Taste, led by double-digit growth in North America and solid increases in savory solutions despite challenges in certain segments. F&F Ingredients was pressured as a result of order patterns in their Citrosource business and raw material-driven price decreases in the natural colors. In terms of segment profit, Frutarom delivered $29 million and $69 million excluding amortization. The margin profile for Frutarom in the first quarter continues to be strong at 18.7% if you exclude amortization, driven by disciplined cost management.
Given the several moving parts, we wanted to give you an overview of year-over-year combined company results. In this chart, you can see from the first and second bars, $939 million from IFF and $402 million of Frutarom, would represent a combined $1.33 billion top line for the company in the first quarter of 2018. In the third bar, we had approximately $23 million of divestitures related to non-core Frutarom businesses in Central Europe and the U.S., resulting in a combined first quarter 2019 sales of $1.31 billion. Of the $23 million of divestitures that we outlined, most of it was driven by the Krill business that was previously announced as a divestiture as part of the Enzymotec acquisition last year. In the fifth bar, we estimate approximately $51 million of currency headwind to bring us to a currency neutral combined first quarter 2018 sales base of $1.26 billion.
Bridging to our $1.3 billion that we reported in the Q1 2019, we achieved 3% sales growth on a combined currency neutral basis. Moving on to adjusted operating profit. If you combine the first and second bars, combined adjusted operating profit of the company would've been $237 million for the first quarter of 2018. We had approximately $2 million in divestitures related to the non-core Frutarom business I just discussed. Next is approximately $30 million related to the step-up amortization following the Frutarom acquisition. This represents a combined Q1 2018 adjusted combined operating profit of $205 million. From there, we estimated approximately $7 million headwind due to currency, brings us to a currency neutral combined first quarter of $198 million. Finally, our $205 million in operating profit for Q1 2019 resulted in approximately 3% growth on a combined company basis.
Finally, in terms of adjusted EPS amortization, combining the first and second bars of $178 for IFF and $70 from Frutarom, it would've represented $2.48. The next bar, you can see the debt issuance last year had a $0.24 impact. The share count dilution from the equity issuance going from approximately 80 million shares outstanding in the first quarter of 2018 to approximately 113 million shares outstanding now, creates a $0.67 per share dilution impact on a combined company basis. This drives $1.57 adjusted EPS for the combined first quarter of 2018. We then estimate approximately $0.14 of currency headwind on EPS to bridge you to a currency neutral combined first quarter ex amortization of $1.43. We then bridge to our $1.57 that we reported in Q1 2019. We achieved approximately 10% growth on a combined company basis.
Before moving on to cash flow, I'd like to take a moment to provide you greater insight with respect to our organic top-line performance relative to our peers. As a reminder, for a variety of reasons, many of our sales transactions in emerging markets occur either in U.S. dollars or other hard currencies or are indexed to the hard currencies when we have to invoice in local market currencies. When reporting our currency neutral sales growth, we exclude foreign exchange or related price changes in emerging markets. We believe this is a much more accurate representation of underlying performance, but it 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 U.S. dollar or euro.
It is important to help put our performance in perspective relative to the competition. For the first quarter of 2019, adjusting our currency neutral sales growth calculation to a basis which we believe is comparable to how our competition reports, our consolidated organic currency neutral sales would've been three percentage points higher for approximately 6%. As you can see, the largest variances come from countries with significant currency devaluations versus hard currencies. In the first quarter, on a consolidated basis, four countries, Argentina, Brazil, Turkey and Indonesia, represented approximately 95% of the difference in the way we report and how our competition reports. We feel this is important to highlight the difference in reporting and assessing industry performance, given the potential significant impacts that currency movements can have on top-line growth rates. Turning to operating cash flows.
Our cash flow for the quarter increased $58 million to $47 million in 2019 compared to negative $11 million in the first quarter of 2018. The year-over-year increase is driven by higher earnings, excluding the impact of depreciation and amortization, and improved working capital performance. Core working capital improved, driven by continued progress in accounts payable and more favorable inventory trends. From a capital allocation standpoint, we spent approximately $58 million in CapEx, or about 4.4% of sales, led by new plant and capacity investments, mainly in Greater Asia, which we have disclosed in the past. Regarding cash return to shareholders, we paid approximately $78 million or about 42% of our adjusted net income in dividend payout. As a reminder, as part of the Frutarom combination, we paused our share repurchase program as we prioritize debt repayments going forward.
In the first quarter of 2019, our debt repayment was approximately $36 million. We remain committed to reaching our 3 times leverage ratio by the end of 2020, down from approximately 3.6 times at the end of 2018. With that, let me turn it back over to Andreas.
Thank you, Rich. As we look at the balance of the year, we reconfirm our full-year financial guidance. We expect our sales growth to accelerate in the second half, give more favorable year-ago comparisons. In terms of profitability, we also anticipate that adjusted operating profit will improve, driven by higher integration savings, continued cost control and productivity savings, and more favorable year-over-year price raw material cost trends. For the full year, we expect to deliver between $5.2 billion-$5.3 billion in sales in 2019, which represents 5%-7% combined company growth, including M&A. We also expect to deliver between $6.30-$6.50 in adjusted EPS, excluding amortization, or 8%-11% combined company growth. In summary, we are pleased with our performance for the first quarter as we delivered strong double-digit sales and adjusted operating profit growth.
We achieved solid growth across all three divisions, all while maintaining strong profitability levels. We continue to make strong progress in the company's transformation following the Frutarom acquisition as we combine two strong organizations. We are executing well against our integration roadmap. For those businesses where we have aligned our go-to-market approach with IFF, growth is very strong. We also continue to make great progress in terms of cost synergies and are very confident that we will achieve our $30 million-$35 million cost savings goal in 2019. Given this, plus extended expected improvement in the second half of 2019, we have reconfirmed our financial guidance for 2019. Before I open the call up to questions, I would like to take a moment to invite everyone to our Investor Day on June 5th, here in New York City.
We're excited to provide an update on our long-term strategy, give you deeper insights into our integration efforts, and provide each of you with an opportunity to experience the best innovation of our organization. Registration links have been sent out, but if you need it again or have any questions, please feel free to reach out to our investor relations department. With that, I would now like to open up the call for questions.
Sorry.
At this time, I would like to remind everyone, if you would like to ask a question, please press star one on your telephone keypad. Again, that's star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Mark Astrachan of Stifel , Nicolaus.
Thanks, good morning, everybody. I wanted to ask about expectations for Frutarom sales growth going forward, given some of the positives and negatives that you outlined in the earnings release this morning. I guess specifically, do you anticipate your initial sales growth to improve as comparisons get easier over the balance of the year, including in 2Q? What is the current outlook for the expectations for that business, please?
Thank you, Mark, for the question. First of all, the first quarter was in line with our expectations. We have seen some weakness in parts of our Russian business and the F&F business, in particular with Citrosource and, let's say material price decreases with the natural colors. We don't believe that this will change in the short term, we're working on it to make it grow significantly in the future. We expect actually a higher growth rate in the second half of the year, that's what we project. What we have seen so far is that, in particular, Taste business has very good growth with the small and midsize customers. The businesses we have integrated in our, let's say, Tastepoint organization or Tastepoint-like organization, whether it is in the U.S. or in Latin America, that they are growing quite nicely.
Which is good, it reinforces, let's say, our strategy to have a much more balanced customer portfolio, not just with the big CPG, with some of the smaller and mid-size companies here as well, which probably is very helpful going forward in the mid and long term.
Okay, some mid-single digits would still be the expectations for the business.
Yep.
Then also, Rich, what was the impact from the switch from like-for-like to organic for that business?
For the first quarter, it's in the material. We had some divestitures going out, then the two deals were small, it was clearly immaterial for Q1.
In expectations for the year, does that change anything in the calculus either?
No, because these were in the pipeline, so it's part of the overall guidance of five to seven. I don't think that's changed materially in terms of the components, in terms of what gets us to the full-year guidance. I think we're on track for where we thought we were going to be from an M&A standpoint.
Okay. Thanks, guys.
Thank you.
Your next question comes from the line of Lauren Lieberman of Barclays.
Great. Thanks. Good morning.
Good morning, Lauren.
Good morning. My first question was on Latin America. Actually, Rich, it was helpful when you pointed out the FX piece of it, but that was a total company number. I was just curious, it does still seem like Latin America decelerated pretty significantly. Can you just talk a little bit what might be going from a market share standpoint in the release you specifically called out multinational customers? We're just curious a little bit more about Latin America. Thanks.
Look, I think that there's a couple of things. One, overall, and also in Latin America specifically, growth with the multinationals was basically flat, whereas the rest of the Taste business was growing high single digits or higher. I think that's certainly a big piece of it. We're also seeing, particularly in Argentina, the effects from a macro standpoint in terms of the devaluation and what it's having in terms of consumer disposable incomes and purchase underlying demand. I think the third thing that we talked about in the release was, in Mexico, there's been some market changes from a legislation standpoint. That's also we're seeing some pressure from a market standpoint in terms of the consumer behaviors. Other than that, I think there is some business that I think we lost, but it was things that business that we didn't have before.
I don't see any major shifts in market shares in Latam. I think it's mostly the macro stuff and then just our mix of customers versus the competition.
Yeah, it's a good point on the large CPGs. We don't see too much volume growth, in particular on existing business. It's not that strong. I guess it will take a bit of time until it turns to good growth again. We will see in the months to come.
Okay, great. Also, we read the 10-Q last night, and there was a comment around that for the next several quarters, lower margins and increases in selling and admin expenses. It sounds like then the right way to think about it might be that even with the second half sort of acceleration that you're talking about, that we still have EBIT margins down probably for another, call it two quarters, and a lot of the improvement is really fourth quarter weighted. Is that fair?
Yeah, I think that certainly second half is going to be better. I think as we continue to get the traction on the price increases and the price realization, which the teams have done a really good job in the scent business so far, that's going to continue to build. That obviously has a dilutive impact. Q3, again, I think we've talked about it all along, was going to be one of the strongest quarters. Q4 sequentially is always down versus Q3. We'll still expect to see year-over-year improvements in Q4.
Sorry. Rich, Q3, you expect EBIT margins to be up or just-
Yes
sequentially improving?
Yes. Up.
Up.
Okay. The comment in the Q is really more focused on 2Q, because it does say several quarters, that's what I was trying to just-
Yeah.
Yes
work out. Okay. Thanks.
Your next question comes from the line of Jeff Zekauskas at JPMorgan.
Thanks very much. I have two questions. What are the total revenue divestitures from Frutarom on an annual basis? In the quarter, did Frutarom prices rise? If they did, by how much?
Okay. Probably I'd take the second one first. There was no price increase on the Frutarom side. That's number one. The total year, Rich, is?
It's about $45 million, Jeff, in total.
Okay, great. Thank you so much.
Yep, you're welcome.
Your next question comes from the line of John Roberts of UBS.
Thanks for the currency adjusted organic sales growth numbers. I was a little surprised that natural colors was weak. I thought that was an area of some early revenue synergies. Could you give us some more color on that? No pun intended.
Yeah. You want me to go first?
No, you go. Sure.
Yeah. Look, for me, the volume, actual unit volumes are quite strong. They're quite good growth. What's happening is in one of the key raw materials, the cost is coming down and similar to what we see in the other parts of the business, like the vanilla, there's a pass-through component of it. All of the decline in the color stuff is really driven by cost pass-through. It's impacting the top line growth. Really no significant change into overall operating margin. I think we feel good about structurally about the health of the business and the growth opportunities. It's more just a market dynamic around the pricing.
Secondly, as you've been changing your portfolio, would you guess how much of your sales are still via a formal brief process and how much of your sales would be with no formal brief process associated with it?
I guess, for me, the way I think about it, still the majority of the legacy IFF business is driven by the briefs. There's still a piece of it which is proactive, us going to our customers with new technologies. I would characterize the majority of the Frutarom business as being more of a push business where we're contacting them on a daily, weekly basis saying, "Here, what do you need? Here's what we have available." Think of more big picture between legacy IFF is still the majority is brief driven and Frutarom is a slightly different model.
Thank you.
Your next question comes from Heidi Vesterinen of Exane.
Thank you. We talked about how H2 will be a lot better than H1. Would you be able to talk about what you're seeing so far in Q2 by segment, please? Thank you.
Heidi, it's Andreas. Good afternoon. It's probably a bit early right now to talk about this and the different segments. The only I might say is that we still see good growth out of the scent business because of pricing, because we are going through our rounds here. For the rest, I would say it's still a bit too early to comment.
if I could.
I think for me, Heidi.
Yeah.
Heidi, look, I think we're seeing, I would say, some similarities between what we saw in Q1 where it's a slow start to the quarter. Look, some of the things that we talked about, with the savory business, the Citrosource business, we are making changes. We are addressing those issues, but they're not gonna change overnight. We're confident in the full year, but I would not expect a major dramatic change between Q2, Q1.
On the scent business, it seems like it's been a few quarters now where most of the growth is pricing and there's minimal volume growth. What has been driving that and what is the outlook?
Well, the pricing, it's still the majority of it is pricing. That's clearly the pass-through or the recapture of the input cost increases. I think we are seeing good win performance and the commercial performance in terms of new wins are near the five-year average. I think we've seen continued improvement, particularly in the last two quarters. Volume erosion was well above the historical average, more than double from what it was over a five-year average. I think that's, again, more, some of that gets into the customer mix. We're seeing similar trends that the growth rates in the small and medium sized customers are double digits, and more challenged on the globals. I think the other thing we feel really good about long term is, we talked about it last year.
We've gotten more access to new business with the core list extensions we got last year, that's gonna provide a tremendous amount of upside to us over the next three to five years.
Which is actually, let me supplement on this one. These three new core list access will give us access to $400 million additional business we didn't have before. We see out of these three new customers that already two are very active and in briefing and we're getting business in actually earlier and faster than we had expected.
I think the other thing, Heidi, just to put it in perspective, we're still seeing good growth, really solid growth on volumes in the compounds business. Where we're really seeing declines are on the ingredient business, partly between because we're prioritizing the internal consumption and partly because we are raising prices and there are certain customers out there that have more elasticity in their demand.
Okay. Thank you.
Yep.
One thing, Lauren, just to go back to your question earlier in terms of the performance during the course of the year. We'll see sequential improvement Q1, Q2, Q3. We'll still be down year-over-year in Q3, but it sequentially will improve through the first three quarters. Just to clarify my earlier comment.
Your next question comes from the line of Gunther Zechmann of Bernstein.
Hi, good morning, Andreas, Rich, and Mike.
Hi, Gunther.
Hi. Just on the scent division, you said already that the majority of the growth is driven by price. I would've thought that the mix in scent should be very favorable as well. Finally find fragrances growing very strongly, double digit, you said. The margin is down so much. Can you just elaborate how much you're still losing to raw material cost inflation and if there is any other factors in your cost?
Sure. Keep in mind, Gunther, the teams have done a really good job, but we're not fully recovered in terms of the price realization. Year-over-year, Q1 input costs are up 10%, so that's still a significant headwind. You take that plus the cumulative effect of the price realization we had last year, plus the first quarter, has the dilutive effect on the overall margin. I think we're on the right track. We're confident that we're gonna be able to fully recover those costs over the course of the year and into early next year. It does have a negative impact in terms of the margins.
In general, we are very happy with the performance of our fine fragrance business. As you were saying, we are up quite significantly, and that certainly is because of the good win performance here.
That's helped offset mitigate the impact of not being able to fully recover the input cost increases in Q1.
Thanks. On the raw material cost, just to follow up, the 10% increase that you mentioned, is that just for scent or is that for the group? Also what's your outlook? How fast do you expect those costs to flatten or partly reverse, like we've seen with vanilla and a few synthetic inputs over the course of the year?
The 10% is just scent. I think, again, for the full year, I expect input cost for scent to be up high single digits and 4%-5% on a total company basis. The full year guidance and expectations haven't changed. I would say it's a little early to say when and if we would see some normalization right now. For the year, we're not seeing anything significant.
Okay, thanks.
Your next question comes from Michael Sison of KeyBanc Capital Markets.
Guys, just curious on Frutarom's operating margin. We saw what it was in the first quarter. How do you think that improves throughout the year and maybe run rate exits the year? When you think about that metric longer term, where do you think we should be for Frutarom in the 2021, 2022 timeframe?
Look, Mike, I think we expect it to improve. I think similar to what we see in the IFF business, Q2, Q3 will be stronger. Q4, I still would expect it to be better than Q1. I think we're gonna see improvement. Obviously, growing, they return to our long-term expectations from a growth standpoint of being in the five to six range versus 3%. You get the fixed cost leverage there. I think long term, we still see significant upside in terms of profitability.
Okay.
In particular when the synergies roll in. That's the brunt of the synergies will come in next year, and that will have a significant impact on margin, obviously.
Right. Okay. At what point do you think operating income will grow year-over-year? Will that start in 2Q or is that more of a second half phenomenon for Frutarom?
I would expect we would see it in the second half.
Okay.
Certainly, again, Q3 should be the strongest quarter of the year.
Great. Thank you.
Your next question comes from the line of Adam Samuelson of Goldman Sachs.
Yes, thanks. Good morning, everyone.
Good morning.
Just going back to the raw material question, Rich, want to be clear. Are you implying that you haven't seen the synthetics come off yet? It's just because of the way the lags that you have in terms of your procurement and your inventory, that any decline really wouldn't be felt till the end of the year?
I think it's both. I think that, number one, we have the inventory impact, we have not seen any significant movement in the pricing for the input cost yet. It's both of those factors.
Are you surprised at that, just given Brent, it's rallied year to date, off of the highs that you saw in the second half of last year, especially with better, seems like some of your major suppliers haven't had some of the bigger disruptions again. Are you surprised you haven't seen any of those pricing declines at all?
Look, I think there's two things. One, from an oil standpoint, remember the derivative impact we're four or five steps down the chain, so the actual oil impact has a much smaller influence on it versus the conversion cost. I think the second thing is a big piece of what we've seen over the last 15 months has been more driven around supply and interruptions. That's really what we continue to see issuances. It started with the BASF stuff, but I think that's as equally important as it is purely just the Brent pricing impact.
Okay. Just separately, just in the taste business, I know the organic growth this quarter was similar to where you were in four Q, and this is the hardest comp. The comps still are tough. Were you, just from a demand perspective, just seems like Latin America got worse as you looked at Argentina and Mexico and some of the issues you called out there. Is there anything in any of the other regions that you would call out as noteworthy, positively or negatively?
No, I think the biggest thing to me is what I mentioned earlier, is really the lack of growth from a global standpoint. The multinational companies, as I said earlier, growth was essentially zero, flat for the Q1 as opposed to being high single digits up for the small and mid-sized customers. That's what we're seeing. I think it was more acute in Latin America for some of the things that I mentioned, as you said, for Argentina and Mexico.
Okay. All right, that color is very helpful. I'll pass it on. Thanks.
Your next question comes from Daniel Jester of Citi.
Yeah. Hi, good morning, everyone.
Good morning.
Just first on the synergies comments you made about hitting the run rate for the full year already. I'm just wondering, we still have six plus months left to go in the year. Is there a reason why you're not lifting that synergy goal? Just maybe walk us through about how we should be thinking about the progression of that through the rest of the year.
The thing is that we have the most improvement on the procurement savings, the run rates are really strong here. It's also driven by our inventory. That's the reason why it takes some time that it falls through the P&L. We have the better contracts in place, but we still, until it hits the P&L, we have to decrease our inventory and bring new material on. That's the reason. For us, we're optimistic because it will have a very good impact for next year already because the team is doing an extraordinary job to make that happen. That's basically the main reason.
Yeah, I think it's the inventory impact is the primary driver at this point.
Okay. That's very helpful. Thank you. Then on taste margins, they've been down year-over-year for a couple of quarters. I think the raw material issue seems like it's a lot more of a scent related issue. I'm just wondering if you can talk about margins and taste and how you see those progressing. Thank you.
On the taste side, I think Q1 was certainly impacted from a mix standpoint, it was unfavorable. There was some price to input cost, more timing related to, I would say, on the vanilla side. Overall, I would expect us to see more or less in the same range. I think it's still quite healthy at the levels we're at. The margins are still quite healthy in the 24% range. I don't see any major change in it.
No.
We're happy where they are. The business is performing quite well when you look at the underlying details.
Yep.
Okay. Thank you very much.
You're welcome.
Your next question comes from Brett Hundley of Seaport Global.
Hey, good morning, everyone. I just have two questions. My first one relates to raw materials. You guys sound pretty confident in being able to recover the inflation that you've seen as you move into next year. I acknowledge that this is a tough question, but just taking U.S. and China trade as a backdrop, citral, PG, a number of chemicals are on that tariff list. Can you just speak to that a little bit insofar as describing your confidence in being able to recover raw material price increases, whatever they may be, into next year? Separately, my second question relates back to a comment that you made, Rich, in just talking about legacy IFF and the composition of your sales contracts or briefs rather, and how they've dominated that commercial side of the business for a long time now.
As MNCs revisit growth and innovation again, just after years of cost cutting, I'm imagining that product technology and speed to market are going to become increasingly important, just as they have been for the L&R customers out there for a while now. What does that mean for the briefing process and pricing, in your view, if anything? Do you have any thoughts on that? Thank you.
Let me take the first one. Keep in mind that our U.S. base is quite small. It's less than 25% of the totals of our sales base. When we look at right in the current environment, we're looking at the tariff discussions and what's in the current framework, it's not a material number. It's in the $10 million or $20 million range, potentially, if it went fully implemented, and we have alternatives on where we can source it. We don't see it as a significant headwind in terms of our overall operating model. Let me just turn it over to you, Andreas, for a second.
If I take the second part of the question on legacy sales and MNC performance, indeed, what we see in our discussions is that the topics are now more growth-related, and growth should be stimulated via innovation, which is great because we have, in IFF internally now, an excellent pipeline in terms of new technologies. As you have seen, even in the first quarter, we've acquired a couple of technologies which will help us to grow our business, which is good, because I wholeheartedly believe that the competition and the differentiation works through technology, and that will help us to win more business. By the way, some of these innovations or technologies we have or had in the pipeline helped us to win the three quarters last year. I'm very optimistic on this one going forward.
The only thing is we need the big MNCs getting their volumes up, and that certainly will lift the tide here.
Thanks, guys.
Your next question comes from Lauren Lieberman of Barclays.
Great. Thank you. I just had one follow-up, which is maybe a little bit more long-term and strategic. As you're managing the Frutarom business, I was just curious, this continued pace of acquisitions that currently looks as going to bear out. Why keep going so quickly? I'm just wondering if there wouldn't be benefit in slowing that down, getting your arms fully and completely around what it is that you now own. I don't know, maybe it's that there's a competitive landscape for these small deals and you're worried if you don't do them, you'll miss your window. I would just think there'd be a lot of benefit in kind of slowing that pace down while you work through understanding the portfolio you've acquired. Can you just explain why that wouldn't be the case? Why keep going at this type of pace? Thanks.
Yeah. Lauren, I think it's a very valid question, and super important. Look, there are probably two parts of these small M&As. The one part is, let's say, strengthening the business in some of the adjacent parts of our business, like the ingredients for gelato, which we believe is a fantastic business, and we will demonstrate during our Investor Day. We had already a piece of the business in Brazil, and now we are having a nice platform to grow. These small acquisitions in some of these adjacent business, you will see going forward. They will impact the integration, not so much because these are kind of standalone businesses who we are helping or who will help us to grow us in terms of sales, but profitability as well.
The second piece, you saw it for the first quarter, actually, two of these four smaller deals were technology deals, which were basically technology deals or investments in technology companies to help us to bring better innovation to our customers. One is a 3D printing. We have talked about this for quite some time, which will help us to win correlates, but also win business. That's not an integration in the business sense, it's an integration in R&D, and we believe it's the right thing to do. Aryballe, on the other side, brings us into the digital piece of olfaction and measurement. It's right now used in the first use cases in quality control. You will see these kind of technology ideas going forward, and they certainly are not a barrier or distraction for the integration of Frutarom.
I hope that helps to put context around these deals.
Yeah. For me, Lauren, in my mind, we're being more restrictive-
Yeah
in terms of the hurdle rates and the thresholds that we have for pursuing deals in terms of returns, in terms of strategic importance. As Andreas said, two of the deals were very technology-driven, that are fundamental to the scent business or to our delivery system platforms, which are, we believe, key strategic advantages. The other two deals were really in the pipeline already prior to the acquisition. There's close linkage to the Frutarom businesses already. I think I would characterize it as being quite selective already.
Yep.
There are no further questions at this time. I would like to turn the conference back over to Andreas for closing remarks.
Thank you very much for the participation. I hope it helped to put context around the results, and we're looking forward to see you at the investor meeting in June. Thank you very much. Have a great day.
Thank you for participating. This concludes today's conference. You may disconnect at this time.