At this time, I would like to welcome everyone to the International Lavers and Fragrances Fourth Quarter and Full Year 2018 Earnings Conference Call. All participants will be in a listen only mode until the 4 question and answer portion of the call. We request a limit of one question per person. I would now like to introduce Michael Deboe, Head of Investor Relations. You may begin.
Thank you. Good morning, good afternoon, and good evening, everyone. Welcome to IFS 4th quarter and full year 2018 conference call. Yesterday evening, we distributed press release announcing 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 will be making forward looking statements about the company's performance, particularly with regard to the outlook for the first 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 the cautionary statement and risk factors contained in our 10 K filed on February 27, 2018, and in our press release that we filed yesterday.
Today's presentation will include non GAAP financial measures, which excludes 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 the purpose of this presentation, please note that we've 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 Olear. 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 executive overview of our operational performance for 2018. Once finished, I will ask Rich to give a more in-depth financial review of the business before leading into our integration priorities for 2019 of the Frutarom acquisition. We will then provide an update on our financial expectation for 2019, and then as usual, take any questions that you may have. I'm very pleased to say that 2018 proved to be a historic year and a long and successful history of IFF.
As we recently celebrated our 130th year birthday, we delivered on all of our key financial metrics and completed the acquisition of Frutarom, the largest deal in our industry to date, all while successfully navigating a challenging and dynamic market environment. We achieved strong advancements in both top and bottom line results in 2018 that were in line with our guidance range that we set forth. Highlights include our record setting sales of approximately $4,000,000,000, which was a 17% increase over last year. This performance was driven by mid single digit growth in both taste and scent as well as additional sales related to Frutarom. We also delivered strong adjusted earnings per share, excluding amortization of 6.28 as adjusted operating profit growth and a lower year over year effective tax rate more than offset higher interest expense and shares outstanding.
Was related to the Frutarom acquisition. Throughout 2018, we had many strategic accomplishments that drove significant value creation. To highlight just a few. With the acquisition of Frutarom, we established ourselves as a global leader in taste scent and nutrition. This combination helps us create a truly differentiated portfolio with an increased focus on naturals and health and wellness.
It also provides us opportunities to expand into attractive and faster growing categories and broadens our complementary and growing customer base. We believe this plus strong sales and cost synergies will translate into accelerated financial performance as a combined company. Beyond the transaction, we continue to strengthen our innovation platforms by successfully commercializing 3 new natural taste modulators, 2 new fragrance molecules, 41 new natural fragrance ingredients and fragrance body care capsules. As critical to driving future growth. So the execution of our Vision 2020 strategy, we're truly the partner of choice as we expanded our cordless access with key global Send customers.
This expanded access will help fortify our market leading position and offer significant future growth opportunities as we now can compete on our incremental business opportunities. We also leveraged our exposure to faster growing small and midsized customers who drive results as Tastepoint in North America taste continued its strong performance by growing double digits. Productivity continues to be paramount to our way forward as cost and productivity initiative once again contributed approximately 5 percentage points of adjusted currency neutral adjusted operating profit and currency neutral adjusted EPS growth in 2018. And in terms of sustainability, IFF continued its global sustainability leadership as we exceeded already 3 out of 4 of our 2020 eco efficiency targets. We also established our 2025 goals, which focuses on emission reductions, 0 waste to landfill and water stewardship.
I'm pleased We were named to Barron's 100 most sustainable companies, an honor we received again in 2019. And we were named to the Euronext VGO World 120 Index, both recognizing companies for exceptional environmental social and governance performance. More recently, in January 2019, we were once again included on CDP's A list for climate change, our 4th consecutive year, and we received an A for water security for the first time naming IFF as a global leader in our environmental responsibility. We also made tremendous progress as it relates to our integration of Frutarom. 1st and foremost, we instilled an integration management office to provide visibility for all critical initiations have been instrumental in developing go forward plans and supporting the day to day execution.
We also refined and confirmed our plan to achieve approximately $145,000,000 of cost synergies by 2021. Synergies are expected to come from procurement, footprint optimization and streamlining of overhead expenses. In addition, We identified initial cross selling opportunities to drive incremental growth going forward. These opportunities are expected to provide revenue synergies, which we believe will further value create to the shareholders over time. As we mentioned last quarter, We have already capitalized on a few quick wins.
We integrated Frutarom's North America Taste business in our North America business and will leverage our Tastepoint go to market strategy for small and midsized customers. At the same time, we combined Frutarom's cosmetic active ingredients business called IVR into our Lucas Meyer's cosmetic business. Concurrently, we moved all savory solution capabilities and innovation under a single leader to form Frutarom Global Savory Solutions Group. This will enable ching sites in order to realize significant cost synergies. This plan has already led to closings in the UK as we consolidated our site in Manningtree.
While this is a first step in the process and we have much more work to be done, we are moving forward as planned. Lastly, we are finalizing plans for our next stage of taste integration, like we did in North America, combining like taste businesses together to build a strong
Thank you, Andreas. I'd like to now give you a more in-depth review of taste and nutrition. Turning to this Taste business, in the fourth quarter of 2018, currency neutral sales grew 2% with 3 of the 4 regions expanding year over year. This performance was led by mid single digit growth in North America and Greater Asia. Led by dairy and beverage.
Segment profit was challenged due to higher RSA expenses and several other ongoing costs, which I don't expect to be continuing, in a more of a one off nature in the quarter. For the full year 2018, currency neutral sales increased 5% driven by growth in all regions and across all categories. Improvements were led by high single digit growth in North America, with strong double digit growth at Tastepoint, mid single digit growth in EMEA, led by double digit growth in Africa and the Middle East and in Latin America led by strong double digit growth in Argentina. Taste currency neutral segment profit on a full year basis grew approximately 6% led by volume growth and the benefits we continue to see margin expansion improving 60 basis points to an industry leading 22.7 percent. In the scent business, 4th quarter 2018 currency neutral sales grew 3%.
Performance was driven by mid single digit improvements in ingredients and low single digit growth in consumer fragrances. Fine Fragrances were down slightly year over year, reflecting strong double digit growth in the year ago comparison. For the year 2018, currency neutral sales grew 4% with the strongest improvement coming in fragrance ingredients, which grew high single digits. This was led by price increases and strong double digit growth in cosmetic active ingredients. Consumer fragrances grew mid single digits, including price as performance was driven by double digit growth in hair care, and mid single digit growth in fabric care, home care, and toiletries, all led by innovation platforms.
Scent currency neutral segment profit decreased approximately 2% as the benefits from cost and productivity initiatives were more than offset by unfavorable price to input costs, reflecting unprecedented raw material inflation, including the previously announced citral supply issue, as well as higher manufacturing higher manufacturing costs due to these supply chain challenges. It should be noted that over the course of 2018, due to external events, we continued to be impacted by incremental pressures in raw material costs. Our pricing as expected accelerated throughout the year and was near 2 3% in the 4th quarter. However, it was not enough to cover the cost increases. As always, we'll continue to work with our customers on actions to mitigate the cost increases In terms of segment profit margin, year over year performance was pressured.
However, profit margins remained strong at 17.5%. Turning to Frutarom. In the 4th quarter, sales totaled approximately $360,000,000. Please note, and as a reminder, we closed the acquisition on October 4th and the financial results for Frutarom reflect the closing date and as such does not include a full quarter's activity. We're pleased to report that Frutarom returned to growth in the 4th quarter as like for like sales increased 3% driven by strong improvements in natural product solutions and FNF Ingredients.
The core business, which excludes trade and marketing, grew 4% versus the prior year the Frutarom division delivered $27,000,000 $66,000,000, excluding amortization. The margin profile for Frutarom in the 4th quarter was strong at 18.5%, excluding the amortization, This was a strong improvement when you compare it to what they reported in Q4 2017 as a standalone company. In terms of cash flow, operating cash flow increased $46,000,000 compared to $391,000,000 in 2017. The year over year increase was driven by increased earnings depreciation and amortization and lower pension contributions offset by increased inventories. Core working capital was impacted by higher inventory to ensure business continuity during the supply chain challenges as well as higher raw material prices.
From a capital allocation standpoint, we spent approximately $170,000,000 in capital expenditures or about 4.3 percent of sales, driven by new plant and capacity investments, mainly in Greater Asia. As we discussed in the past, some of these investments include a flavors manufacturing facility in the Zhejiang free trade zone, which opened on October 9, 2018, and a natural products research lab located in Nanjing Life Science Park which opened on October flavors and manufacturing operations in Guangzhou. The Natural's lab is our 1st outside of the U. S. China is a critical and component of our long term research strategy.
The opening of these new facilities will support our to be a partner of choice and grow in this exciting region. Regarding cash return to shareholders, we paid approximately $230,000,000 or about 50 percent of adjusted net income in dividend payouts and $15,000,000 on share repurchases. With that, I'd like to turn
I wanted to spend a few moments to highlight our integration priorities moving forward as we enter year 1 of this 3 year journey. As we spoke about earlier, integrating IVR into LMCs is imperative to strengthen the product offering and drive accelerated growth and cosmetic active ingredients. As a reminder, cosmetic active ingredients is a very high growth and high profitable sector that we have prioritized moving forward. We want to ensure seamless combination of the Global Savory Solutions group to address customer needs by leveraging the technologies and expertise in our various categories. By establishing a globally coordinated team, we will support strong local presence with global expertise as we offer a full range meat ingredient provider, novel flavors, functionality and technical expertise and tech color, oxidation, plant protein and aromas to our entire customer base.
We will continue to consolidate the Frutarom taste business under the IFF taste leader as we move to capitalize on efficiencies and drive accelerated growth. The plan is to leverage our strong blueprint, while our Tastepoint North America go to market approach. So strengths in our exposure with small and mid tier customers in every market around the world. In terms by initiatives across our spend to drive strong year 1 cost synergies. And we will continue to execute our global site rationalization for improved efficiency.
Lastly, we will broaden our cross selling activities and begin execution on opportunities. Across functional, global team has been established and is working diligently to generate incremental opportunities to capture greater value. As I have said previously, I continue to believe this will provide the largest value creation opportunity in the medium to long term. Slide 16 provides an overview on the anticipated cost synergies in year 1 of our 3 year integration plan. Our integration program is well underway, developing and refining the work plans to unlock these value creation opportunities.
As you can see, we anticipate approximately $30,000,000 to $35,000,000 of expected savings in year 1. The $30,000,000 to $35,000,000 will come from accelerating the rationalization and harmonization of our procurement spend. We will leverage production capabilities where we are currently buying materials or intermediates at a higher price. We will also continue to rationalize the global footprint to optimize our global sites. Note that over time, the contribution from manufacturing rationalized will increase as it takes time to work through site closures.
Lastly, we will be streamlining overhead expenses by reducing non strategic costs and eliminating redundant expenses. This will ensure that we create an organization that focuses and direct spend to the most value enhancing opportunities. I would now like to turn the call back over to Rich will give us an outlook for 2019.
Thanks, Sanjay. Over the last few years, we've seen the global operating environment to continue to be volatile. There are several things that have direct implications on our industry and business in 2019 that I'd like to highlight. A clear headwind within our industry is the continued rise of raw material costs. In 2019, we expect mid single digit in on our legacy IFF business as synthetic materials continue to rise, driven by several supply chain disruptions that we have faced over the last 12 to 15 months.
These market disruptions continue to disproportionately impact the scent business, and as more as it is more broadly exposed to these raw materials. It should be noted that when you combine 2018 2019, raw material cost inflation in the scent division is near 20%. Our strategic priority is to protect our customers' business, which we were successful in doing taking additional price increases as we move through 2019 to ensure that we ultimately recover these cost increases over time. Should be noted that natural ingredients costs like vanilla and citrus markets remain elevated near historical levels. We expect to on a global basis remains positive.
However, many estimates were recently revised downward. There continues to be geopolitical tension and uncertainties around the world with examples like trade wars and Brexit. All in all, we are optimistic about our top line, but recognize that there is risk given the constantly changing operating environment. The U. S.
Dollar continues to fluctuate versus the world currency as we are in generally a strong USD environment year over year. The euro to USD exchange rate is the most relevant to IFF. So we see the euro to USD exchange rate stabilizing. It is positive. From a profitability perspective, the euro represents approximately 30% of our profits.
Including the addition of Frutarom. Our rolling hedging program helps limit any volatility as we are currently hedged approximately 45% at an average rate of 1.21. Lastly, we've seen improved global consumer staples volumes in 2018, which we expect to continue in 2019. At the same time, local and regional customers continue to grow rapidly, a great opportunity as this is even more prevalent to our business when incorporating 30,000 small and mid sized customers that we acquired from Frutarom. Before reviewing full year expectations for 2019, I wanna highlight a few go forward modeling assumptions.
First of all, we will be referencing a combined 2018 result as if all aspects of the Frutarom transaction were retroactive to the start of 2018. 1st in 2019, we expect a modest benefit from M And A and yes, an additional week of sales or 53rd week. Currency is expected to be a headwind in 2019. We expect a headwind of approximately 3 percentage points on a combined sales growth and approximately 2 percentage point on adjusted EPS ex amortization. We expect approximately $30,000,000 to $35,000,000 in cost synergies in 2019 coming from procurement operations and overhead expenses as Andreas explained.
Following successful debt raise, for the Frutarom acquisition, our debt outstanding is about $4,400,000,000 and combined interest expense associated with this debt approximately $150,000,000. Currently, we are assuming an annual effective tax rate approximately 19% for 2019, but the dynamics around this remain fluid. For the purposes of calculating adjusted diluted EPS on a going forward basis, we estimate that there will be approximately 113,000,000 shares outstanding including 6,300,000 shares related to the tangible equity units. Annual amortization of intangible assets is expected to be about $190,000,000 to $195,000,000, down from our previous Given the several moving parts, we felt it was important to give you an overview of the drivers between combined 2018 2019 sales. In terms of sales 18, representing a combined growth of 5% to 7%.
In the chart, as you can see from second bar, approximately 9 months of Frutarom adds $1,100,000,000 to our combined 2018 sales. In the third bar, we've estimated approximately $45,000,000 of divestitures related to non core Frutarom businesses in Central Europe and the U. S. That takes us to a we estimate approximately $150,000,000 of headwinds due to currency, resulting in a currency neutral combined sales number of $4,950,000,000. If you then use our expected 2019 growth of 5% to 7% you get our guidance of $5,200,000,000 to $5,300,000,000 in sales during 2019.
We expect broad based growth across all of our segments, with pricing driving scent and volumes Moving on to a reconciliation of our 2019 adjusted EPS. We expect adjusted EPS $4.90 to $5.10 and adjusted EPS ex amortization of $6.30 to $6.50. On the left side of the slide, you can see what we you can see that we expect 10% to 15% of growth in 2019 for adjusted EPS to get us to our range I'll walk you through the key drivers. Starting with the second bar in that section, $2.06 will be added to our full year 2018 number, representing the 1st 9 months of Frutarom. On the next bar, you can see that the full effect When you add that together with the share count dilution from the equity issuance going forward, from approximately $80,000,000 before issuance to approximately 113,000,000 shares outstanding, it has approximately $1.71 share dilution impact on full year combined results.
Combined that with approximately $0.13 related to other impacts, including tax rate, fruutaroment earning interest and lower other income and expense in 2019, it gets you to $5.95 for the combined 2018 year. To bridge you to a currency neutral combined adjusted EPS of $5.83. When you apply the 2019 expected growth rates of 8% to 11%, our guidance for 2019 comes out to be $6 $1.15. While we expect to see solid top line growth across the entire business, cent profitability is being adversely impacted by the additional raw material cost inflation where pricing actions take time to achieve the to achieve given the nature of our business. As we move beyond 2019, we would expect to see the results to accelerate as raw materials tend to begin to normalize, and we generate the majority of our integrations related into 2020.
Debt payment, debt repayment continues to be a critical focus of ours. We are committed to reaching a 3 times leverage ratio by 2020, down from our current 3.6 times. Pardon, our intent is to retain an investment grade rating and our management teams and centers are now aligned with the repayment debt repayment debt metrics. With that, let me turn it back over to Andreas.
Thank you, Rich. That was a lot of very complicated slides, but I hope it helps. As we look to the future, we are reconfirming our long term targets. We expect to deliver between 5% to 7 percent currency neutral combined sales growth CAGR between 2019 2021. We also expect to deliver 10% plus adjusted EPS ex amortization combined growth for the same period.
So 2019 is the first very important step in the journey and the foundation to achieve our long term targets. In summary, we are pleased with our financial performance for 2018 as we delivered on all of our key metrics We made strong advancement in both top and bottom line results as we recorded record setting sales and adjusted EPS ex amortization. We also build an organization for accelerated profitable growth, combining 2 strong organizations to create a truly global leader in taste, scent and nutrition. As we look forward, Full year 2019, we expect sales to be between $5,200,000,000 to $5,300,000,000, adjusted EPS to be between $4.90 $5.10 and adjusted EPS ex amortization in between $6.30 $6.50. As Rich said.
The coming together of IFF and Frutarom was a momentous achievement in 2018, and we are excited to be moving forward as one company and pursuing new opportunities that benefit all our stakeholders around the world. And with that, I would now like to open
up At this time, Our first question comes from the line of Mark Aftochen from Stifel. Your line is open.
Wanted to ask about Frutarom. So sales growth improved sequentially, but was still below longer term expectations. I guess given tough comparisons in the business prior to the deal, I assume it doesn't meaningfully accelerate until 2Q, maybe just to verify if that's kind of what you believe. And then what gives confidence that 6% remains achievable? Anything that you've seen so far that would increased confidence in that and I guess sort of related to that.
Any idea what shipments looked like in that business relative to demand in quarter prior to the deal close, meaning like could they have overshipped demand?
Okay, Mark. So first of all, good morning. Let me answer the question. First of all, from the technical point of view, we certainly have much easier comparables in the second half of the year. So that's something which makes us very optimistic.
We are also happy that after a softer third quarter last year, the fourth quarter was turning around. People are again focusing on the business. After we have done the close on the 4th, 4th October. We have started the integration very, very well. And as we said before, 4, we were happy that we could close the deal a couple of weeks ahead of our original timing.
And that pays off because everything is going according to plan. So people can go back and focus on the customers. I believe that that's super important. Leadership is clear and we really can make sure that we see the customers and sell What makes me optimistic is that, 1st of all, we are in some of the faster growing segments which is super helpful, in particular in the adjacency adjacent business, you know that we are with some of the faster growing customers as well. In particular in Europe and in the U.
S. And we haven't even tapped into the cross selling opportunity, but we see already that our teams are generating really good ideas and having implemented a couple of pilots. And that makes us pretty optimistic on the, on the Frutarom piece. So all in all, a very, very positive picture from our point of view.
Yes, I think, Mark, from a as you said, I think Q1 will be most challenging from a comp standpoint a little bit better in Q2. Obviously, Q3 and the second half as Andreas talked about will be we'll see the fastest acceleration. I think the other thing to me, is clearly North America and when it was one of the challenged markets, I think we've done We put the leadership in place now. That was a vacancy, particularly prior to the closing. And I think now we're getting much and much more alignment and integration between Frutarom's taste business in North America and our taste point business.
So that I think that will enable us to accelerate growth. I think we've already seen very, very quickly, some real opportunities in terms of where we combine our 2 capabilities to drive growth on projects that the 2 companies individually weren't able to tackle.
Got it. Okay. So just to be clear, then 6% remains the target. And then I just want to switch to a a separate question on free cash flow, Rich. It's diverged from net income in recent years.
Does this normalize in your view in 2019, I think you had mentioned inventories being inflated given the supply chain challenges. So does the inventory piece specifically improve? And are there any other anticipated items that will impact cash generation in 2019 as far as you can tell?
Yes, I think to your first comment, our expectations in terms of the 6% is certainly our, that's still, our expectations for the Frutarom business going forward. In terms of cash flow, yeah, I think that in the last 2 years, if I look at cash flow from operations compared to adjusted net income, it was in the 80% to 90% range. 2019 was our 2018 was clearly challenged by the inventories, which were up $130 something 1,000,000, in 2019, I would expect the inventory number to stabilize. I don't think it's going to get better yet. We're going to be challenged with the mid single digit cost increases that I alluded to on our legacy business.
But I think that's where we see going forward. Stabilization in 2019 and then improvements beginning in 2020 going forward. Overall, I would expect that cash from working capital impacts in 2019 to actually be favorable versus a big outflow in 2018. And overall, I would say when you take that into consideration, plus, the increased D and A I would expect our conversion of cash from operations versus adjusted net income to be above 100 so much better than what we have been for the last 2 years.
Our next question comes from the line of Faiza Albi from Deutsche Bank.
To talk about the Flavors business, I think the organic growth of 2% in the quarter was a bit disappointing relative to what it had done in the rest of 2018. Around business. I'd love to hear how you're thinking about your base business, so Flavors and Fragrances. It seems like you're embedding a bit of acceleration in 2019. So if you could just break those 2 components out, that would be helpful.
Yes Faiza, it's Rich. I mean, I think that clearly there's been Q4 was a disappointment, but I think you also got to keep in mind the prior year comparables and a very strong Q3. I think that with 2020 hindsight, it looks like the portion of the strong growth that we saw in Q3 is some element of inventory, because we see we saw a positive impact from volume erosion, which was actually favorable in Q3 in the Taste business and it turned unfavorable, in Q4. So I think there's clearly an element associated with inventory adjustments and movements on the part of our customers. On a 2 year basis, growth for flavors is probably around 4%.
And on a full year basis, growth rates for on a 2 year basis are, probably in the 5% range. So I think the fundamentals of our taste business haven't changed, our expectations haven't changed. We are clearly seeing particularly in the 4th quarter some volume erosion and lower volumes on with global customers, the large CPGs, It's hard to say right now, whether that's, again, a continuation in inventory correction. But I think overall, our expectations are going forward have not changed significantly. I think it's still going to be a challenging year, but the potential of the business hasn't changed.
And on the fragrance side, we can say we are winning good businesses. We had for the Fine fragrance business, a very tough comparison for the fourth quarter. But looking forward, in particular, if you look at the win rates, we have in house already. We have very optimistic on the fine fragrance business. I think for the fragrance or scent business, it's not too much about the, let's say, the growth rate in terms of sales and the win rate.
I think we're doing extremely well here. It's more about managing the raw material crisis, making sure that we can realize our price. And what makes us super optimistic on it is that we have won 3 more global Qualys. We never had we didn't have before and that gives us just a more expanded reach of our business opportunities. Whether we can big times already capitalize in 2019, I'm not sure because it takes a little bit of time, but on the midterm, I'm very optimistic on this one because these were significant wins.
The team brought in end of last year.
Okay. So I don't know if you mentioned the pricing, the managing the pricing amid this raw material inflation, like what is sort of what is embedded in your outlook for 2019 for pricing? And how much of that pricing have you already taken? And how much do you have to go back to the to your global customers and try to get that pricing?
That I mean, Pfizer, that process is already underway. I think when you look at the guidance and our expectations, for 2019. It's about a point and a half of pricing and all in the scent business. And that process is already underway. I think it's as it's the same thing.
It's like rewind button. It's a tough discussion, but Nicholas's teams have done They understand the importance our customers understand it. We work through the normal mechanisms of price and other activities to do that. I think we did an excellent job in 2018 and our price realization was in line with our expectations. What was the surprise was the cost impact as we progress through the year continue to increase and accelerate.
So I'm confident in the medium in long term that we're going to recover the price increases, but the 2019 is going to be another challenging year.
And actually if you compare ourselves to to one of our bigger competitors, then you see that the erosion of the EBITDA margin was actually less. So that basically is a testament for me that the teams are doing a good job
Our next question comes from the line of Kate Grafstein from Barclays. Your line is open.
If we could just talk a little bit about gross margins for 2019, if you could walk through some of the moving pieces And how should we think about incremental pricing needing to cover inflation in fragrances? And can we assume gross margins could actually be up as that pricing comes through in the back half of the year?
I mean, Actually, no, I think as I said, we've got about a point and a half, built in to the targets for our objectives for 2019, in terms of pricing. Again, all that substantially all that in the, in the scent business. I think on the taste side, it's more flat. From a pricing standpoint. From a margin standpoint, it's going to be dilutive because we're going to have the sales and we're recovering, we're looking to cover the cost increases and we're playing catch up again versus what we the way we exited 2018.
And then on top of that, We've got additional increases expected in 2019. So there's going to be a time lag as it has been. And anytime there's a level of this magnitude of 20% over a 2 year basis. From an overall margin standpoint, I think the other thing to keep in mind is a mix impact between the three businesses. And so you've got Frutarom, that's going to represent about about 30% of the overall total from a sales standpoint.
Their margins are gross margins when you look at how we report it from a U. S. Standpoint, U. S. GAAP standpoint.
There in the high 30s about, call it, 38% in that range, 30 in that high 30s. So that has a dilutive impact. So our margin year to year is going to be, it's going to be diluted, and not kind of go up in 2019. I think will help some of the synergies will help, but that synergies are going to get split between overhead expenses as well as, cost of goods sold. I think we'll get some, but it's not gonna a significant step up from 'nineteen to 'eighteen, 'eighteen to 'nineteen?
You will see it probably in 2020 because then the synergies on the manufacturing side, so I kick kicking in and taking into, let's say, taking the assumption, which I think is fair that the raw material inflation hopefully will stop this year. Then you will see a significant improvement in 2020.
Our next question comes from the line of Mike Sison from KeyBanc.
In terms of Frutarom, could you walk us through what the expectations should be for sales in 2019, I guess from the $1,100,000,000 that you noted in the presentation. And then I guess when you report operating income for nineteen, what should that look like, if you'll be reporting it with amortization, right?
Correct. Yes, so if you take the $1,100,000,000, we've got, we've adjusted for the, you basically take out about as I said, about $45,000,000 of business that, we the biggest piece of that we sold in the fourth quarter. There's a small piece that will be discontinued and expect to be discontinued in early 2019. So then the base is net of that too. Those 2 elements.
And then from there, I would say the 6% that we've talked about is our expectation for 2019. From a profitability standpoint, the amortization will be included in the division results as it is for all three divisions. We do that to maintain. That's how we measure the business performance. It's how we look at it from an incentive comp standpoint.
And it's how we keep things tied back to our economic profit principles. And that's why we look at it both at a division level on a segment profit basis, including amortization and on a corporate level, we've added the element of ex amortization from an overall cash flow standpoint.
Our next question comes from the line of Gunther Zechmann from Bernstein. Your line is open.
Hey, Andreas. Hey, Mike. Hi, Mike, Andrew. Two questions. And just can you talk a bit about the sales synergies that you're expecting from the Frutarom business?
I think I remember you saying 50 bps per annum when do you see that really kick in? And also if you can discuss what the incremental margins are that you ex from that. That's the first one. And the second one is pretty quick. I have in the 5% to 7% sales growth guidance for 29 team that you put, is it fair to assume that organic sales growth or is it just local currency with some bolt ons as well?
Maybe you take the last one.
Yes, you want me to go first? Okay. So out of the in the 5 to 7, There's a, as I said, about a point and a half related to price. There's about somewhere a little bit between 50 basis points and 100 basis points, so call it a middle 75 of impact related to the 53rd week and a small amount of M and A and the balance is organic volume.
Yes. And on the cross selling we will be 1st of all, we will be more, let's say, concrete on it when we do our Investor Day in the mid of the year. But what we see in the teams are working on it that we have the first, let's say, let's say pilots running, we had the first couple of wins, small ones, but we see that they are really good and significant sizable opportunities. So I believe it will actually start probably at the end of the year and then going into 2020 that we see an impact on the cross selling. Which is really, really good.
And we will make sure on the margin side to answer that question that we go into these more higher margin business that certainly put our resources behind the areas and categories where we can earn better margin than we have, and we probably let some of the lower margin business go. So that's as an answer. And by the way, on the growth rate, as Rich said in one of his bridges, we have lost a couple of sales as well. Because we are we have sold or we are selling some of the smaller business from Frutarom just as an FYI.
Our next question comes from the line of John Roberts from UBS.
Thank you. In the Frutarom shareholder filings, they had a 2018 projected revenue number of $1,750,000,000. And so on Slide 20, if I take your $1,100,000,000 and add your fourth quarter of 3.60 coming up about $300,000,000 short today finished the year like the was the 4th quarter $300,000,000 below what they were thinking earlier in the year that seems like way too big a gap. Like the math is wrong here somehow.
Yes. Hi, John. It's Mike. Just remember from a Frutarom guidance standpoint pre the acquisition, that was a 2020 guidance, right? So that $300,000,000 was was the number they had that was going to go out another couple of years.
Well, that, but look, clearly, John, I mean, 3rd quarter So at that point in the numbers, they were not expecting to have a negative growth in Q3 and they were not expecting, I don't think those numbers were based on having 3%, 4% growth in Q4. So the second half of the year was clearly weaker than what that was projected. There's a currency element between that and what we built into our assumptions for 2019. And clearly, there's, I think there was M and A that they had expected to occur during 2018 that has not occurred. So I think it's a combination of all that much, but it's not $300,000,000 in the fourth quarter that's causing the difference.
Our next question comes from the line of Daniel Jester from Citi. Your line is open.
Yes, hi, good morning, everyone. Just on the cost synergy side, now that you've had the asset for a couple of months, talk about your confidence level in getting that $145,000,000 target? And if we do see a slowdown from a macro perspective, is there anything you can do to accelerate those cost savings?
Yes, let me take it. First of all, the confidence level on the synergies is very, very high because we see it already on the run rates. We have put some of these elements like procurement and even the footprint rationalization, I'm saying run rate because of P and L impact we have to go circa through inventory in 2019 to make it happen, but confidence levels is very, very, very high. If the economy is going down or is not growing as fast as we saw it in 2019, We have other levers levers to play here as well to make sure that we reach our numbers, but I give it to you. Yes, I
think we've built into the guidance that we have for 2019 is investments that we want to make to drive future growth. I mean, on Nicholas Andre talked about Nicholas Business and the new core list that we've gained access to in order to realize that potential. We've got to invest in in resources, whether it's commercial people, boots on the ground, CNA resources, consumer insights and research, that's embedded in that in our guidance for 2019. It's probably 300 to 400 basis points of investment. If the year unfolds differently, we can certainly slow that down and make choices as we've done over the last 2 to 3 years as particularly in 2016 2017, we slowed back investment and we cut it back to try to mitigate the impacts of weaker top line.
That will always be part of our management process and then trade offs that we have to evaluate. Part of that 300 to 400 that I talked about is really, playing catch up. And we will as we progress through 2019, That's the first thing we'll do is say, are we on track from an external in looking viewpoint and what do we do as a result of that?
Our next question comes from the line of Jeff Zekauskas from JP Morgan. Your line is open.
Thanks very much. Just a couple of questions on Frutarom. In your descriptions of the taste and scent business, you talk about, local currency growth or currency neutral growth, but in the Frutarom business, you talk about 3% growth on a like for like basis. Can you remind me what like for like means and how that factors in acquisitions or currencies or whether it does or it doesn't? And then secondly, Frutarom's sales were much higher in the first and second quarter.
They were 3.85% 401%. Why were the sales for Frutarom so much higher in the First And Second quarters than they were in the 3rd and the 4th?
Right? Can you do the first piece?
Yes, let me take I'll take the first one, Jack. You're right. It is, it's a different methodology. I mean, they've always used like for like and, we'll evaluate as we go forward if there's a way to combine the 2 methodologies. Like for like represents that if what they do is they then back in and say if there's an acquisition that was done in in the middle of any year, they take the prior year growth and put it back prior year sales and compare prior year sales for the acquisition current year sales for the acquisition.
So again, it's almost on a it's measuring on a pro form a basis as if the acquisition, any current year acquisition, was affected as of the 1st the prior year. So they're looking at the organic growth of that business plus the organic growth of the existing businesses. So it's a slightly different methodology. It's almost like same store sales. It is a bit different than what we're doing.
But it was the most practical way for the time being for us to look at it on a combined basis.
Okay. And I think that that's important that we have to, let's say, bring it all at the same at the same level that we can compare apples to apples. Let me take the second piece of your question, Jeff. Is on Frutarom First half to second half. Certainly, seasonality plays a role Second, we had an unfavorable currency situation and at the second half of the year as well because it's a lot of euro.
Denomination in their sales. For the consolidation to our numbers, the 3 days we're missing because we closed on October. October 4th. And then what we should not underestimate, particularly in the third quarter, that there was certainly a distraction of the organization to get the closing of the deal done. We are happy that we closed actually ahead of time as we said, but that we're certainly a couple of weeks or months even of the organization where they were more focused getting the closing done than selling to their customers.
And we are very happy and actually optimistic because it turned around already in the 4th quarter and that's a very good sign. So that's the explanation for the sales 1st compared to second half of twenty eighteen.
Our next question comes from the line of Jonathan Feeney from Summer Edge Research. Your line is open.
Good morning. Thanks very much. Just a quick one. Andreas, you were on the board and I know, Rich, you were there. I think you were a controller for a lot of the cultural changes under Doug and Kevin that took place, I think just focusing on more profitable briefs, like that sort of business process stuff.
Could you compare the culture at Frutarom and the integration challenges or integration opportunities you see just as far as the cultural organizing from most profitable, least profitable and basically risk adjusting all of that, to what you went through back then. And if there's that kind of opportunity, how that plays into your synergy plan? Thank you.
I would say, John, a very a very interesting and good question because here's certainly opportunities for us to look at the profitability of the different different businesses. And we are doing it even much broader that we look into all categories and all customers right now, and we will present to the board in May, by the way. To look where we put our dollars behind and where we might walk away or make sure that we don't invest too much money to make sure that we really going after the opportunities, which are giving us the best, best yield for our dollar. So that that's good. Terms of the culture, what is good is that with the acquisition, we got a lot of energy from a company, which is is very commercially focused and that will help us as well to focus on our customers and make sure that we get the best out of the customers and that we have a good service in place here as well.
So that will be my answer, but Richard, please supplement
Yes, I think, John, it's in some ways, the fundamentals of the cultural change are similar in the sense that The biggest thing back under Doug, Kevin, was a shift in focus and understanding from just top line growth to profitability and margins and accretive business. The whole EP focus. And I think I can clearly tell you that the Frutarom mentality, the Frutarom DNA is all about profitable growth. And they focus on margins day in, day out. You've heard me talk about their executive information system and they They live through that day in, day out.
They're focused on what are the what's the margin expansion, what's the mix improvement. So I think from that standpoint, it's very similar in terms of we both, we both companies recognize the importance of profitable growth. I think the challenge that we were going to have to manage through as an executive team, is now we have a much bigger business and the choices that we have are much bigger. And so we're going to have to manage through that because we don't have endless resources. So it's both a benefit, a benefit and a challenge that now we have to allocate those resources and prioritize across a much wider spectrum of businesses.
That was actually one of the reasons for the acquisition that we said. We wanted to increase the option space for us because now, as Rich said, we have natural colors. We have health ingredients. We have food protection. We have flavors.
We have fragrances. We have active cosmetics. And that gives us good choices. And actually it helps us as well to balancing a very weaker global environment as well. So we believe it's good to have options And we have no more options than we had ever before, probably more options than many of our competitors.
And we believe that has positioned us actually in a very, very, very good spot. With that, I think, Mike, we will close the call for today. But I would like to remind you that we are at CAGNY next week, and we have a CAGNY dinner where we will display all of these new franchises and categories we have now in store and we'll give you an explanation what we can do with and you can experience it, you can taste it, you can smell it, and we believe it will be great. So I hope to see a lot of you next week in Boca actually was much warmer and better weather. And you will see it will be spectacular.
Thank you very much. Take care.
This concludes today's conference call. Thank you for participating. You may all disconnect. Great day.