At this time, I would like to welcome everyone to the International Flavors and Fragrances First Quarter 2019 Earnings Conference Call. All participants will be in a listen only 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 IFS first quarter 2019 conference call. Yesterday evening, we announced our financial results. A copy of the release can be found on our IR Web site at ir.if.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're making forward looking statements about the company's performance, particularly with regard to our outlook for the second quarter 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 GAAP financial measures to the 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 that 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'm 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 1,300,000,000 a 39% increase over last year. On a comparable basis and 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 of the shared capital of MITI, a leading Savory solutions provider in Thailand. MITI develops, produce it and market's reaction flavors with particular expertise in savory solutions. The company's portfolio includes flavors, seasoning blends, marinades, and specialty function raw materials for the food and beverage industry. We also established an industry exclusive collaboration with Aribel, a pioneer in digital olfaction technology based in France to refine and further develop the flavor 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 So the acquisition of Via Additive Advantage, a company that develops novel technologies with diverse capabilities that spend many application and industries. TAA has the expertise to develop the next generation 3 d delivery systems technology platforms that will enable the printing of flavors, fragrances, cosmetic and health nutrition actives on the variety of consumer products. We are excited about this technology as it builds upon our market leadership position and capabilities delivery technology. And lastly, in March, we announced that we completed the acquisition of 70 fenced 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 resilient ice cream and dessert business, to create a global platform for gelato ingredients, expand our geographic reach and leverage cross selling opportunities. All 4 provide opportunities for us to develop stronger innovation and differentiate ourselves further 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 1 cost synergy target of approximately 30% to 35 $1,000,000. In the first quarter, we achieved approximately 15% and we expect saving savings benefit will accelerate throughout the year.
Based on where we are today, we are confident that we can achieve our 1,000,000 to 1,000,000 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 will discuss I disclose more details at our upcoming investor day, I'm happy to report that we are already have achieved approximately 7,000,000 of annualized new businesses from the quick wins. For those businesses where we have aligned to our go to market approach with IFF, North America taste and IBR growth was very strong, increasing double digit. 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 midsized customers.
The alignment of Frutarom's cosmetic active ingredients business with our Lucas Myles Cosmetics business is now complete. We are seeing strong benefit with sales up double digits in quarter 1, 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 UK.
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 savings and are adjusting our saving 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 $30,000,000 or $35,000,000 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
Thank you, Andreas. In the scent business, 1st 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 Consumer fragrances grew mid single digits with double digit growth in home care, and mid single digit growth in Fabric Care. Fragrance Ingredients was down year over year as price increases related to Continuing higher raw material costs were more than offset by volume declines.
Scent currency neutral segment profit decreased approximately 3 percent 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 work to continue to work with our customers on actions to mitigate these increases. And are confident in our ability to year over year performance was down.
However, our margin profit remained strong at 17.6%. Turning to the Taste business. In the first quarter 2019, currency neutral sales grew 2%. With growth in 3 or 4 regions. Performance in the quarter was driven by mid single digit growth in Greater Asia, where India and Indonesia grew double digits and in EME, led by strong growth in Africa, Middle East and Western Europe.
In North America, year over year improvements continued to be led by TACE point. In Latin America, year over year declines were primarily due to weak demand for 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 $364,000,000, 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 FNF ingredients was pressured as a result of order patterns in their CitraSource business and raw material driven price decreases in the natural colors. In terms of segment profit, Frutarom delivered $29,000,000 and $69,000,000, excluding amortization. The margin profile for Frutarom in the 1st 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, $939,000,000 from IFF and $402,000,000 of Frutarom. We represent a combined $1,330,000,000 top line for the company in the first quarter of 2018.
In the third bar, we had approximately $23,000,000 of divestitures related to non core Frutarom businesses in Central Europe and the U. S. Resulting in a combined first quarter 2019 sales of $1,310,000,000 of the $23,000,000 of divestitures that we outlined, most of it was driven by the cruel business that was previously announced as a divestiture as part of the Enzymotek acquisition last year. In the 5th bar, we estimate approximately $51,000,000 of currency headwind to bring us to a currency neutral combined first quarter 2018 sales base of $1,260,000,000. Bridging to our $1,300,000,000 that we reported in the Q1 twenty nineteen, we achieved 3% sales growth on a combined currency neutral basis.
Moving on to adjusted combined adjusted operating profit at the company would have been $237,000,000 for the first quarter of 2018. We had approximately $2,000,000 in divestitures related to the noncore Frutarom business I just discussed. Next is approximately $30,000,000 related to step up amortization, fruit following the Frutarom acquisition, This represents a combined Q1 twenty eighteen adjusted combined operating profit of $205,000,000. From the year, we estimated approximately $7,000,000 headwind due to currency brings us to a currency neutral combined first quarter of $198,000,000. And finally, our $205,000,000 in operating profit for Q1 2019 resulted in approximately 3% growth on a combined company basis.
And finally, in terms of adjusted EPS amortization, combining the first and second bars, of $1.78 for IFF and $70 from Frutarom, it would have been represented it would have represented $2.48. On 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 80,000,000 shares outstanding in the first quarter of 'eighteen to approximately 113,000,000 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.
He then bridged to our $1.57 that we reported in Q1 2019. We achieved approximately 10% growth on a combined company basis. Before moving onto 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 transaction in emerging markets occur either in U. S.
Dollars or other hard currencies, or our intakes to the hard currencies, when we have to invoice in local market currencies. We exclude foreign exchange related price changes in emerging markets. We believe this is 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. However, it is important to help put our performance in perspective relative to the competition. For the first quarter 2019, adjusting our currency neutral sales book calculation to a basis, which we believe is comparable to how our competition reports Our consolidated organic currency neutral sales would have been 3 percentage points higher or approximately 6%. As you can see, the largest variances On a consolidated basis, 4 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 58,000,000 in 2019 compared to negative $11,000,000 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 $58,000,000 in CapEx or about 4.4% of sales, led by new plant in capacity investments, mainly in Greater Asia, which we have disclosed in the past.
Regarding cash return to shareholders, we paid approximately $78,000,000 or about 42% of our adjusted net income and 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, 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 goals 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 $5,200,000,000 $5,300,000,000 in sales in 2019.
Which represents 5% to 7% combined company growth, including M And A. We also expect to deliver between $6.36.50 in adjusted EPS excluding amortization or 8% to 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. Achieved solid growth across all three divisions, all while maintaining strong profitability levels. We continue to make strong progress the company's transformation following the Fulstrom acquisition as we combine 2 strong organizations.
We are executing well against our integration roadmap. For those businesses where we have aligned our go to market approaches 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 $30,000,000 to $35,000,000 cost savings goal in 2019. Given this, plus extended expected improvements in the second half of twenty nineteen, where we confirmed our financial guidance for 2019. Before I open 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 question, please feel free to reach out to our Investor Relations department. With that, I would now like to open up the call for
Your first question comes from the line of Mark Estrachan of Stifel Nicolaus.
Thanks, and 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 in this morning. So I guess specifically do you anticipate your earnings sales growth to improve as comparisons get easier over the balance of the year, including in 2Q and what is the current outlook for the expectations for that business, please?
Thank you, Mark, for the question. Yes, 1st of all, first quarter was in line with our expectations. We have seen some weakness in parts of our Russian business and the FNF business in particular with SITRA source. And, let's say, material, prices, price decreases with natural colors. We don't believe that this will change in the short term, but we're working on it to make it grow significantly in the future.
So we expect actually a higher growth rate in the second half of the year. And that's what we project. What we have seen so far is that, in particular, the Taste business has very good growth with the smaller and midsize customers. And the businesses we have integrated in our, let's say, Tastepoint organization or Tastepoint like organization, whether it's in the U. S.
Or in Latin America that they're growing quite nicely. So which is good. And it reinforces, let's say, our strategy to have a much more balanced customer portfolio, not just with a big CPG, but with some of the smaller and midsize companies here as well, which probably is very helpful going forward in the mid and long term.
Okay. So mid single digits would still be the expectations for the business. And 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 really it's immaterial. I mean, we had some divestitures on going out and then the 2 deals were small. So it was clearly immaterial for Q1.
And expectations for the year, does that change anything in the calculus either?
No, because I mean, we had These were in the pipeline. So it's part of the overall guidance of 5 to 7. So I don't think that's changed materially in terms of the components. In terms of what gets us to the full year guidance. So I think we're on track to where we thought we were going to be from an M and A standpoint.
Okay. Thanks guys.
Your next question comes from the line of Lauren Leberman of Barclays. Great,
thanks. Good morning.
Good morning, ladies.
My first Good morning. My first question was on Latin America. So actually, I mean, Richard was helpful when you pointed out, the FX piece of it, but that was a total company number. So I was just curious, it does still seem like Latin America decelerated pretty significantly. Is that can you just talk a little bit what might be going from a market share standpoint in the release you've specifically called out Multinational customers.
So we're just curious a little bit more about Latin America. Thanks.
Yes, Luke, I think that, there's 2, there's a couple of things. 1, overall and also in Latin America specifically, growth with the multinationals was was basically flat, whereas the rest of the Taste business was growing high single digits or higher. So I think that's certainly a big piece of it. In Argentina, the effects from a macro standpoint in terms of the devaluation and what it's having in terms of consumer, you know, disposable incomes and purchase underlying demand. I think we the third thing that we talked about in the release was ago, 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 small there is some business that I think we did we lost, but it was more, it was things that business that we didn't have before, but I don't see any major shifts in in market shares in LatAm. I think it's mostly the macro stuff and then just our mix of customers versus the competition.
It's actually 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. A bit contrary for what we heard during the CAGNY conference. So I guess it will take a bit of time until it turns to good growth again, but we will see in the months to come.
Okay, great. And then also I
was just we read the 10 Q last night and there was comment around that for the next several quarters, lower margins, and increases in selling and admin expenses. So 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 EBIT margins down probably for another, call it, 2 quarters. And a lot of the improvement is really 4th quarter weighted. Is that fair?
I think certainly, yes, I think that certainly second half is going to be better. I think, as we get through, as we start continue to get the traction on the price increases and the price realization, which the teams have done a really good job in in the scent business so far, but that's going to continue to build. That obviously has a dilutive impact. I mean, Q3, again, I think we've talked about it all in what's going to going to be one of the strongest, quarters. Q4 sequentially is always down versus Q3, but we should we'll still expect to see year over year improvements in Q4.
Sorry. So Q3, you expect EBIT margins to be up? Or just sequentially improving?
Yes.
Okay. So the comment in the queue is really more focused 2Q? Because it does say it says several quarters, and
that's why I was trying to just
parse out.
Your next question comes from the line of Jeff Zekauskas at JP Morgan.
Thanks very much. I have two questions. What are the total revenue What is it total revenue divestitures from Frutarom on an annual basis? And in the quarter, did Frutarom prices rise? And if they did by how much?
Okay.
So probably I'd take the second one first. So there was no price increase on the Frutarom side. That's number 1. And the total year, Rich, is It's about $45,000,000, Jeff, in total.
Your next question comes from the line of John Roberts of UBS. Thanks for the current
Thanks for the currency adjusted organic sales growth numbers. I was a little surprised that Natural Colors was weak. Thought that was an area of some early revenue synergies. Could you give us some more color on that? No pun intended.
Yes, look, for me, the organic or 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. So all of the decline in the color stuff is really driven by cost pass through. And so it's impacting the top line growth, really no significant change into overall operating margins.
So it's really, I think we feel good about, structurally about the health of the business and the growth opportunities. So it's more just a market dynamic around the pricing.
And then 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 precursors associated with it?
I guess for me, the way I think about it, I mean, still the majority the legacy IFF business is driven by the briefs. We still have there's still a piece of it, which proactive us going to our customers within 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. So I think it's more a big think that we had a 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.
So we talked about how eight 2 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?
Heidi, it's Andreas. Good afternoon. It's probably a bit early right now to talk about this and the different different 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 slower as well around here. But for the rest, I would say it's still a bit too early to comment.
Yes. Heidi, look, I think we're seeing, I would say some similarities between what we saw in Q1. We're slow start to the quarter. And look, some of the things that we talked about with the savory business, the citrus source business, we are making changes. We are addressing those issues, but they're not going to change overnight.
So I think, but as we're confident in the full year, but I would not expect a major dramatic change between Q2, Q1.
And 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. But I mean, that's clearly the pass through of the, 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 5 year average. So I think we've seen new improvement, particularly in the last two quarters. Volume erosion, was well above the historical average, more than double from what over a 5 year average.
So 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 global. So I think the other thing we feel really good about long term is, we talked about it last year. We've gotten access, more access to new business with the core list extensions we got last year. And that's going to provide a tremendous amount of upside to us over the next 3 to 5 years.
Which is actually, let me supplement on this. Well, these 3 new cordless access will give us, access to 400,000,000 additional business didn't have before. And we see, out of these 3 new customers that already, 2 of active and in briefing and where we're getting business in actually earlier and faster than we had expected.
I think the other thing, Heidi, mean, to put in perspective, I mean, we're still seeing good growth, solid, really solid growth on volumes in the compounds business. And where we're really seeing declines are on the ingredient business partly between because we're prioritizing 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.
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 will still be down year over year in Q3. But it sequentially will improve through the 1st 3 quarters. Just to clarify my earlier comment.
Your next question comes from the line of Gunther Zechmann of Bernstein.
Hi, Gunther. Hi. I'm just
on the Centivision, you said already that the majority of the growth is driven by price. I would have thought that the mix double digit you said. But the margin is down so much. So can you just elaborate how much you are you're still losing to raw material cost inflation and if there is any other factors in there in your cost?
Sure. Yeah, I mean, keep in mind, Gunther, I mean, we 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 were 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.
So I think we're on the right track. We're confident that we're going to be able to fully over those costs during the course of over the course of the year and into early next year, but 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 wind performance here.
And that's helped to offset mitigate the impact of not being able to fully recover the input cost increases in Q1.
And on the raw material costs, just to follow-up, the 10% increase that you mentioned Is that just for scent or is that for the group? And also what's your outlook? How much how fast do you expect those costs to flatten or partly reverse like seen with vanilla and a few synthetic inputs over the course of the year?
The 10% is just sent. So I think, again, for the full year, I expect input cost percent to be up high single digits and 4% to 5% on a total company basis. So the full year guidance and expectations haven't changed. I would say it's a little early to to say when and if, we would see some normalization right now for the year, we're not seeing anything significant.
Your next question comes from Mike Sison of KeyBanc Capital Markets.
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. And then when you think about sort of that metric longer term, where do you think we should be for Frutarom in the 2021, 2022 timeframe?
Luca, Mike, I think it's going to it will, 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. So I think we're going to see improvement. Obviously, growing, they return to our long term expectations from a growth standpoint of being in the 5 to 6 range versus 3%.
You get the fixed cost leverage there. So I think long term, we still see significant upside in terms of profitability.
Okay. When the synergies roll in, you know, and that's the brunt of the synergies will come in next, next year and that will have a significant impact on margin, obviously.
Right. Okay. And then so at what point do you think operating income will grow year over year? Will that 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 2nd half. I mean, certainly, again, Q3 should be the strongest quarter of the year
Your next question comes from the line of Adam Samuelson of Goldman Sachs.
Good morning.
Just going back to the raw material question, Rich, and just want to be clear. So are you implying that you haven't seen the synthetics come off yet or 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 1, we have the inventory impact, but we have not seen any significant movements in the pricing, for the input costs yet. So that's it's both of those factors.
And is that would you say, I mean, are you surprised at that just given Brent, I mean, it's rallied year to date, but of the highs that you saw in the second half of last year and especially with better, seems like some of your major suppliers haven't had some of the bigger disruptions again. Just are you surprised you haven't seen any of those pricing declines at all?
Look, I think there's 2 things. 1, from an oil standpoint, remember, we're the derivative impact were 4 or 5 steps down the chain, so the actual oil impact has a much smaller influence on it versus the conversion costs. 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. And that's really what we continue to see issuances. I mean, it started, as you know, it started with the BASF stuff, but I think that's as equal and important as it is really just the Brent pricing impact.
Okay. And then just separately, just in the Taste business, I mean, I know that the organic growth this quarter was similar to where you were in 4Q and this is the hardest comp, but you had the comps, the comps are still are tough. But were you, just from a demand perspective, just seems like Latin America got worse as you looked at or Argentina and Mexico and some of the issues you called out there. Is there anything in any 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 is the lack of growth from a global standpoint the multinational companies, as I said earlier, growth was essentially 0, flat for the Q1, as opposed to being high single digits up for the small and midsized customers. So that's the that's what we're seeing. I think it was more acute in Latin America the things that I mentioned, as you said, for Argentina and Mexico.
Your next question comes from Daniel Jester of Citi.
Hi, good morning, everyone. Just first on the synergies comments you made about hitting the run rate for the full year already. I'm just wondering, we saw a 6 plus month left to go in the year. Is there a reason why you're not lifting that synergy goal and 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, we have the most improvement on the procurement savings and the run rates are really, really strong here. But it's also driven by our inventory. And that's the reason why it takes some time that it falls through the P and L. So we have the better contract in place, but we still until it hits the P and L, we have to decrease our inventory and bring new material on. That's the reason.
But for us, it's 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 make happened. That's basically the main reason. Yes, I
think it's the inventory impact is the primary driver at this point.
That's very helpful. Thank you. And 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. So 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 on from a mix standpoint, it was unfavorable. There was some price to input costs more timing related to, I would say, on the vanilla side. Overall, I would expect this to see, more or less in the same range. I mean, I think it's still quite healthy at the levels we are at. I mean, the margins are still quite in the 24% range.
So, I think it's I don't see any major change in it. I mean, we're happy where they are. I mean, the business is performing quite well when you look at the underlying details.
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 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? And then separately, my second question relates back to a comment that you made, Rich, and just talking about legacy IFF and the composition of your, 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 LNR customers out there. For a while now. What does that mean for the briefing process and pricing in your view, if anything? Did you have any thoughts on that? Thank you.
Hi, let me take the first one. I mean, I think from, I mean, keep in mind that our U. S. Basis is quite small. It's less than 25% of the totals of our sales base.
So when we look at rate in the current environment, we're looking at the tariff discussions and what's in the current framework, it's not a material number. I mean, it's it's in the $10,000,000 to $20,000,000 range in term potentially if it went fully implemented. And we have alternatives on how to where we can source it. So I don't we don't see it as a significant headwind, in terms of our overall operating model. Let me just turn it over to 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 simulated via innovation, which is great because we have in IFF internally now an excellent pipeline in terms of new technologies. And 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 3 quarters last year. So I'm very optimistic on this one going forward. Now the only thing is we need the big MNCs getting their volumes up and that certainly will lift the tide here.
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. So as you're managing the Frutarom business. I was just curious like this continued pace of acquisitions, that currently looks is going to bear out.
Why keep going so quickly? I would just, 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 because I don't know if maybe it's that the competitive that there's a competitive landscape for these small deals, you're worried if you don't do them, you'll miss your window. But would just think there'll be a lot of benefit in kind of slowing that pace down while you work through understanding the portfolio you've acquired. So Can you just explain why that wouldn't be the case? Why keep going at this type of pace?
Thanks.
Yes. Lauren, I think it's a very valid and super important. Look, there are probably two parts of these small M and 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. And we had already a piece of the business in Brazil and now we are having a nice platform to grow.
So these smaller acquisitions in some of these business adjacent business, you will see going forward. And they will impact the integration not so much because these are kind of stand alone businesses, who we are helping or who will help us to grow us in terms of sales, but profitability as well. The second piece, and you saw it for the first quarter, actually, 2 of these 4 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. 1 is a 3 d printing. We've talked about this for for quite some time, which will help us to win callers, but also win business.
And 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. Ari Bell on the other side, brings us into the digital piece of faction and measurement. It's right now used in the first use cases in quality control. You will see these kind of technology deals going forward and they certainly are not a barrier or distraction for the integration of Frutarom.
I hope that it helps to put context around these deals.
Yes. And for me, Juan, I mean, we are certainly being, in my mind, we're being more restrictive 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, 2 of the deals were very technology driven, that are fundamental to decent business or to our delivery system platforms, which are, we believe, key strategic advantages. The other 2 deals were really, in the pipeline already as part of prior to the acquisition. So I think and there's close linkage to the Frutarom businesses already.
So I think we are, I would characterize it as being quite selective already.
And there are no further questions at this time. I would like to turn the conference back over to Andreas for closing remarks.
Yes, 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 Me in June. Thank you very much. Have a great day.
Thanks for participating. This concludes today's conference. You may disconnect at this time.