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International Flavors & Fragrances Inc (IFF) Q1 2019 Earnings Call Transcript

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International Flavors & Fragrances Inc (NYSE: IFF)
Q1 2019 Earnings Call
May. 7, 2019 , 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

At this time, I would like to welcome everyone to the International Flavors & Fragrances First Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode until the formal question-and-answer portion of the call. Participants will be announced by their name and company. In order to give all participants an opportunity to ask their questions, we request a limit of one question per person.

I would now like to introduce Michael DeVeau, Head of Investor Relations. You may begin.

Michael DeVeau -- Head, Investor Relations

Thank you. Good morning, good afternoon and good evening, everyone. Welcome to IFF's first quarter 2019 conference call. Yesterday evening, we announced our financial results. A copy of the release can be found on our IR website at ir.iff.com. Please note that this call is being recorded live and will be available for replay. Please take a moment to review our forward-looking statements.

During the call, we'll be making forward-looking statements about the company's performance, particularly with regard to our outlook for the second quarter and full year 2019. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially from forward-looking statements, please refer to our cautionary statement and risk factors contained in our 10-K filed on February 26, 2019 and our press release that we filed yesterday.

Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release. For purpose of this presentation, we calculated combined numbers by combining our results with the results of Frutarom prior to the acquisition on October 4, 2018 and adjusting for divestitures of Frutarom businesses since October 4, 2018.

With me on the call today is our Chairman and CEO, Andreas Fibig; and our Executive Vice President and CFO, Rich O'Leary. We will start with prepared remarks and then take any questions that you may have.

With that, I would now like to introduce Andreas.

Andreas Fibig -- Chairman, Chief Executive Officer

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 $1.3 billion, 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 costs. 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 continue to strengthen our portfolio via acquisitions and collaborations that expand our innovation platforms and product offerings beyond traditional Flavors & Fragrances. In January, we completed the acquisition of 60% of the share capital of Mighty, a leading savory solutions provider in Thailand. Mighty develops, produced a markets reaction flavors, its particular expertise in savory solutions. The company's portfolio includes flavors, seasoning blends, marinates and specialty function raw materials for the food and beverage industry.

We also established an industry exclusive collaboration with Aryballe, a pioneer in digital olfaction technology based in France. To refine and further develop the Flavor & Fragrance capabilities in applications of Aryballe's technology in portable universal order 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 The Additive Advantage, a company that develops novel technologies with diverse capabilities that span many application and industries. TAA has the expertise to develop the next generation 3D delivery systems, technology platforms that will enable the printing of flavors, fragrances, cosmetic and health nutrition actives on the variety of consumer products. We are excited about this technology as it builds upon our market leadership position and capabilities in delivery technology.

And lastly, in March, we announced that we completed the acquisition of 70% stake in Leagel, a leading producer of ice cream and gelato ingredients in Europe. A family owned company based in San Marino, Italy, which specializes in artisanal taste, texture and toppings sold directly to ice cream and gelato shops. We see great opportunities to combine Leagel with SDFLC, our existing Brazilian ice cream and dessert business to create a global platform for gelato ingredients, expand our geographic reach and leverage cross-selling opportunities. All four provide opportunities for us to develop stronger innovation and differentiate ourselves versus competition.

In terms of integration, I'm pleased to say that we are executing very well against our priorities. We have made strong advancements year-to-date on our year one cost synergy target of approximately $30 million to $35 million. 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 $30 million to $35 million cost savings goal as our current run rate savings are already in excess of this target.

We also outlined our cross-selling priorities and execution plan to provide the foundation for cross-fertilization opportunities across the organization. While we will discuss and disclose more details at our upcoming Investor Day, I'm happy to report that we already have achieved approximately $7 million of annualized new businesses from the quick wins. For those businesses where we have aligned to our go-to-market approach as 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 serve small and mid-sized customers. The alignment of Frutarom's cosmetic active ingredients business was our Lucas Meyer's Cosmetics business is now complete. We are seeing strong benefit with sales up double-digits in quarter one 2019.

We have although (ph) 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, close our manufacturing 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 our plan. In regard to procurement savings, we have renegotiated a significant portion of our spend for leverage savings and are adjusting our savings strategy to benefit from significant -- make versus buy opportunities.

With these in mind, we confidently believe that we are on track to achieve our full year target of approximately $30 million to $35 million. And again, our current run rate savings are well in excess of our plan.

With that, I would like to turn the call over to Rich to take you in the details for financial performance.

Richard O'Leary -- Executive Vice President and Chief Financial Officer

Thank you, Andreas. In the Scent business, first quarter currency neutral sales grew 4% versus a strong 8% year ago comparison, with growth in nearly all regions and categories. Performance was strongest in Fine Fragrances increasing double-digit's led (inaudible) 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 -- continue higher material costs were more than offset by volume declines.

Scent currency neutral segment profit decreased approximately 3% as the benefits from cost and productivity initiatives were more than offset by unfavorable year-over-year price to input costs, which reflects the unprecedented raw material inflation we have been facing since late 2017. Scent pricing was approximately 3.5% in Q1, however not enough to recover the full cost increase.

As communicated previously, we will work to continue to -- we will continue to work with our customers on actions to mitigate these increases and are confident in our ability to fully roll it recover the dollar impact. In terms of segment profit margin, 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 three regions or four regions. Performance in the quarter was driven by mid-single-digit growth in Greater Asia where India and Indonesia grew double-digits and in EAME led by strong growth in Africa, Middle East and Western Europe. In North America, year-over-year improvements continue to be led by Tastepoint. In Latin America, year-over-year declines were primarily due to weak demand from multinational customers and market conditions in Argentina and Mexico. Taste currency neutral segment profit decreased approximately 1% as volume growth and the benefits from productivity initiatives were more than offset by unfavorable price to raw material costs and weaker mix.

For Frutarom, in the first quarter, sales totaled approximately $364 million. On a stand-alone basis, Frutarom sales grew 3% against a strong year ago comparison, excluding the contribution of acquisitions and divested businesses. Sales were driven by strong growth in Taste led by double-digit growth in North America and solid increases in savory solutions, despite challenges in certain segments. F&F ingredients was pressured as a result of order patterns in their CitraSource business and raw material driven price decreases in the natural colors.

In terms of segment profit, Frutarom delivered $29 million and $69 million excluding amortization. The margin profile for Frutarom in the first quarter continues to be strong at 18.7% if you exclude amortization driven by disciplined cost management.

Given the several moving parts, we wanted to give you an overview of year-over-year combined company results. In this chart, you can see from the first and second bars, $930 million from IFF and $402 million of Frutarom will be represented combined $1.33 billion top line for the company in the first quarter of 2018. In the third bar, we had approximately $23 million of divestitures related to non-core Frutarom businesses in Central Europe and the U.S., resulting in a combined first quarter 2019 sales of $1.31 billion. Of the $23 million of divestitures that we outlined, most of it was driven by the (inaudible) business that was previously announced as a divestiture as part of the Enzymotec acquisition last year. In the fifth bar we estimate approximately $51 million of currency headwind to bring us to a currency neutral combined first quarter 2018 sales base of $1.26 billion. Bridging to our $1.3 billion reported in the Q1 2019, we achieved 3% sales growth on a combined currency neutral basis.

Moving on to adjusted operating profit, if you combine the first and second bars, combined adjusted operating profit of the company would have been $237 million for the first quarter 2018. We had approximately $2 million in divestitures related to the non-core Frutarom business I just discussed. Next is approximately $30 million related to the step-up amortization, following the Frutarom acquisition. This represents a combined Q1 2018 adjusted combined operating profit of $205 million. From there, we estimated approximately $7 million headwind due to currency, brings us to a currency neutral combine first quarter of a $198 million. And finally, our $205 million 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 $0.70 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 we had a $0.24 impact. The share count dilution from the equity issuance going from approximately 80 million shares outstanding in the first quarter of 2018 to approximately 113 million shares outstanding now creates a $0.67 per share dilution impact on a combined company basis. This drives a $1.57 adjusted EPS for the combined first quarter of 2018. We then estimated approximately $0.14 of currency headwind on EPS to bridge you to a currency neutral combined first quarter ex-amortization of $1.43. We then bridge to $1.57 that we reported in Q1 2019, we achieved approximately 10% growth on a combined company basis.

Before moving on the 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 for (inaudible) to the hard currencies when we have to invoice in local market currencies.

When reporting our currency neutral sales growth, 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 growth calculation to a basis which we believe is comparable to how our competition reports, our consolidated organic currency neutral sales would have been three percentage points higher or approximately 6%. As you can see, the largest variances come from countries with significant currency devaluations versus hard currencies.

In the first quarter, on a consolidated basis, four countries Argentina, Brazil, Turkey and Indonesia, represented approximately 95% of the difference in the way we report and how our competition reports. We feel this is important to highlight the difference in reporting and assessing industry performance given the potential significant impacts the currency movements can have on top line growth rates.

Turning to the operating cash flows, our cash flow for the quarter increased $58 million to $47 million in 2019 compared to negative $11 million in the first quarter of 2018. The year-over-year increase is driven by higher earnings, excluding the impact of depreciation, amortization and improved working capital performance. Core working capital improved driven by continued progress in accounts payable and more favorable inventory turns.

From a capital allocation standpoint, we spent approximately $58 million in CapEx or about 4.4% of sales led by new plant and capacity investments mainly in Greater Asia, which we have disclosed in the past. Regarding cash returned to shareholders, we paid approximately $78 million or about 42% of our adjusted net income in dividend payout . As a reminder, as part of the Frutarom combination, we paused our share repurchase program as we prioritize debt repayments going forward.

In the first quarter 2019, our debt repayment was approximately $36 million. We remain committed to reaching our three 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.

Andreas Fibig -- Chairman, Chief Executive Officer

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, given more favorable year ago comparisons. In terms, profitability, we also anticipated that adjusted operating profit will improve driven by higher integration savings, continued cost control and productivity savings and more favorable year-over-year price raw material cost trends. For the full year, we expect to deliver between $5.2 billion and $5.3 billion in sales in 2019, which represents 5% to 7% combined company growth including M&A. We also expect to deliver between $6.30 and $6.50 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. We achieved solid growth across all three divisions, all while maintaining strong profitability levels. We continue to make strong progress in the company's transformation following the Frutarom acquisition as we combine two strong organizations. We are executing well against our integration road map.

For those businesses where we have aligned our go-to-market approach as IFF, growth is very strong. We also continue to make great progress in terms of cost synergies and are very confident that we will achieve our $30 million to $35 million cost savings goal in 2019. Given this, plus extended expected improvements in the second half of 2019, we have reconfirmed our financial guidance for 2019.

Before I open the call up to questions, I would like to take a moment to invite every one to our Investor Day on June 5 here in New York City. We are excited to provide an update on our long term strategy, give you deeper insights into our integration efforts and provide each of you with an opportunity to experience the best innovation of our organization. Registration links have been sent out, but if you need it again or have any questions, please feel free to reach out to our Investor Relations department.

With that, I would now like to open up the call for questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Mark Astrachan of Stifel Nicolaus.

Mark Astrachan -- Stifel Nicolaus -- Analyst

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 this morning. So I guess specifically, do you anticipate your 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?

Andreas Fibig -- Chairman, Chief Executive Officer

Thank you, Mark for the question. Yeah, first of all, the first quarter was in line with our expectations. We have seen some weakness in parts of our Russian business and the F&F business in particular with CitraSource and let's say material 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 Taste business has very good growth with the small and mid-sized customers. And the businesses we have integrated in our let's say Tastepoint organization or Tastepoint like organization whether it is in the U.S. or in Latin America that they are growing quite nicely. So which is good and it reinforces let's say our strategy to have a much more balanced customer portfolio not just with the big CPG, but with some of the smaller and mid-sized companies here as well, which probably is very helpful going forward in the mid and long term.

Mark Astrachan -- Stifel Nicolaus -- Analyst

Okay. So mid-single-digits it would still be the expectations for the business?

Andreas Fibig -- Chairman, Chief Executive Officer

Yeah.

Mark Astrachan -- Stifel Nicolaus -- Analyst

And then, also Rich, what was the impact from the Frutarom (ph) like-for-like to organic for that business?

Richard O'Leary -- Executive Vice President and Chief Financial Officer

In the -- for the first quarter it's really -- it's in material. I mean we had some divestitures going out and then the two deals were small. So it was clearly in material for Q1.

Mark Astrachan -- Stifel Nicolaus -- Analyst

And any expectations for the year? Does that change anything in the calculus either?

Richard O'Leary -- Executive Vice President and Chief Financial Officer

No, because I mean we had -- 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're going to be from an M&A standpoint.

Mark Astrachan -- Stifel Nicolaus -- Analyst

Okay. Thanks guys.

Andreas Fibig -- Chairman, Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Lauren Lieberman of Barclays.

Lauren R. Lieberman -- Barclays Capital -- Analyst

Great, thanks. Good morning.

Andreas Fibig -- Chairman, Chief Executive Officer

Good morning, Lauren.

Lauren R. Lieberman -- Barclays Capital -- Analyst

My first -- good morning. My first question was on Latin America. So actually, I mean, Rich it 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 talk a little bit what might be going from a market share standpoint, in the release you specifically called out multinational customers. So we're just curious a little bit more about Latin America? Thanks.

Richard O'Leary -- Executive Vice President and Chief Financial Officer

Yeah look, I think that there is two -- there is couple of things. One, overall and also in Latin America specifically growth with the multinationals was basically flat, whereas the rest of the Taste business was growing high single-digits or higher. So I think that's certainly a big piece of it. Then we're also seeing particularly in Argentina, the effects from a macro standpoint in terms of the devaluation and what it's having in terms of consumer disposable incomes and purchase underlying demand.

I think we -- the third thing that we talked about in the release was in Mexico. There has 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 things that business that we didn't have before. But I don't see any major shifts in market shares in LatAm. I think it's mostly the macro stuff and then just our mix of customers versus the competition.

Andreas Fibig -- Chairman, Chief Executive Officer

Yeah. 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. It's a bit contrary for what we heard 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.

Lauren R. Lieberman -- Barclays Capital -- Analyst

Okay, great. And then also just read the 10-Q last night and there was a comment around that for the next several quarters lower margins and increases in selling and admin expenses. 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 have EBIT margins down probably for another, call it two quarters and a lot of the improvement is really fourth quarter weighted, is that fair?

Richard O'Leary -- Executive Vice President and Chief Financial Officer

I think certainly. Yeah, I think that certainly second half is going to be better. I think as we get through -- as we start or continue to get the traction on the price increases in the price realization, which the teams have done a really good job and 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 was going to be one of the strongest quarters. Q4 sequentially is always down versus Q3, but we should -- we still expect to see year-over-year improvements in Q4.

Lauren R. Lieberman -- Barclays Capital -- Analyst

Sorry. So what's -- so Q3 you expect EBIT margins to be up or just sequentially improving?

Richard O'Leary -- Executive Vice President and Chief Financial Officer

Yeah.

Andreas Fibig -- Chairman, Chief Executive Officer

Yes, up.

Richard O'Leary -- Executive Vice President and Chief Financial Officer

Up.

Lauren R. Lieberman -- Barclays Capital -- Analyst

Okay. Okay. So the comments in the Q is really more focused on 2Q, because it does say -- it says several quarters and that's what I was trying to just parse out?

Andreas Fibig -- Chairman, Chief Executive Officer

Yeah.

Richard O'Leary -- Executive Vice President and Chief Financial Officer

Yes.

Lauren R. Lieberman -- Barclays Capital -- Analyst

Okay. Okay, thanks.

Operator

Your next question comes from the line of Jeff Zekauskas at JPMorgan.

Jeffrey J. Zekauskas -- JP Morgan -- Analyst

Thanks very much. I have two questions. What are the total revenue -- what is the total revenue divestitures from Frutarom on an annual basis? And in the quarter did Frutarom prices rise? And if they did, by how much?

Andreas Fibig -- Chairman, Chief Executive Officer

Okay. So probably I'd take the second one first. So there was no price increase on the Frutarom side. That's number one. And the total year, Rich is?

Richard O'Leary -- Executive Vice President and Chief Financial Officer

It's about, it's about $45 million, Jeff, in total.

Jeffrey J. Zekauskas -- JP Morgan -- Analyst

Okay, great. Thank you so much.

Andreas Fibig -- Chairman, Chief Executive Officer

Yeah. You're welcome .

Operator

Your next question comes from the line of John Roberts of UBS.

John Roberts -- UBS -- Analyst

Thanks for the -- yeah, thanks for the currency adjusted organic sales growth numbers. I was little surprised that natural colors was weak, I thought that was in the area of some early revenue synergies. Could you give us some more color on that no pun intended?

Richard O'Leary -- Executive Vice President and Chief Financial Officer

Yeah. You want to go first?

Andreas Fibig -- Chairman, Chief Executive Officer

No, you go. Sure.

Richard O'Leary -- Executive Vice President and Chief Financial Officer

Yeah 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 in similar to what we've seen in other parts of business like the Vanilla, there is 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 margin. 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.

John Roberts -- UBS -- Analyst

And then secondly, as you've been changing your portfolio, how much -- would you guess how much of your sales are still via a formal brief process and how much of your sales would be with no formal brief process associated with it?

Richard O'Leary -- Executive Vice President and Chief Financial Officer

I guess for me, the way I think about it, I mean still the majority of the legacy IFF business is driven by the briefs. We still have -- there is still piece of it which is proactive us going to our customers with new technologies. We've characterized the majority of the Frutarom business as being more of a push business where we are 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 big -- I think we're on a more big picture between legacy IFF is still the majority is brief driven and Frutarom is a slightly different model.

John Roberts -- UBS -- Analyst

Thank you.

Operator

Your next question comes from Heidi Vesterinen of Exane.

Heidi Vesterinen -- Exane BNP Paribas -- Analyst

Thank you. So we talked about how H2 will be a lot better than H1, would you be able to talk about what you're seeing so far in Q2 by segment please? Thank you.

Andreas Fibig -- Chairman, Chief Executive Officer

Heidi that's -- it's Andreas. Good afternoon. It's probably a bit early right now to talk about this and to different segments. The only I might say is that we still see good growth out of the Scent business because of pricing, because we are going through our owns here, but for the rest, I would say it's still a bit too early to comment.

Heidi Vesterinen -- Exane BNP Paribas -- Analyst

Then if I could...

Richard O'Leary -- Executive Vice President and Chief Financial Officer

Yeah. I think for me, Heidi...

Heidi Vesterinen -- Exane BNP Paribas -- Analyst

Yeah.

Richard O'Leary -- Executive Vice President and Chief Financial Officer

Heidi look, I think we're seeing I would say some similarities between what we saw in Q1 where it's a slow start to the quarter. And look, some of the things that we talked about with the savory business, the CitraSource business, we are making changes, we are addressing those issues, but they're not going to change overnight. So I think -- but we're confident in the full year, but I would not expect a major dramatic change between Q2, Q1.

Heidi Vesterinen -- Exane BNP Paribas -- Analyst

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?

Richard O'Leary -- Executive Vice President and Chief Financial Officer

Well, the pricing, 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 in the commercial performance in terms of new wins are near the five year average. So I think we've seen continued improvement, particularly in the last two quarters. Volume erosion was well above the historical average, more than double from what it was over a five year average. 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. 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 three to five years.

Andreas Fibig -- Chairman, Chief Executive Officer

Which is actually, let me supplement on this one. These three new colors (ph) access will give us access to $400 million additional business we didn't have before. And we see out of these three new customers that already two are very active and briefing and we're getting business in actually early on, faster than we had expected.

Richard O'Leary -- Executive Vice President and Chief Financial Officer

I think the other thing, Heidi, just -- I 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've really seen declines are on the ingredients business, partly between because we've prioritized an internal consumption and partly because we are raising prices and there are certain customers out there that have more elasticity in their demand.

Heidi Vesterinen -- Exane BNP Paribas -- Analyst

Okay. Thank you.

Andreas Fibig -- Chairman, Chief Executive Officer

Yeah.

Richard O'Leary -- Executive Vice President and Chief Financial Officer

One thing, Lauren just to go back to your question earlier in terms of the performance during the course of the year. We'll see sequential improvement, Q1, Q2, Q3. We'll still be down year-over-year in Q3, but it sequentially will improve through the -- for the first three quarters. Just to clarify my earlier comment.

Operator

Your next question comes from the line of Gunther Zechmann of Bernstein.

Gunther Zechmann -- Bernstein -- Analyst

Hi, good morning, Andreas, Rich And Mike.

Andreas Fibig -- Chairman, Chief Executive Officer

Hi Gunther.

Gunther Zechmann -- Bernstein -- Analyst

Just on the Scent division, you said already that the majority of that growth is driven by price. I would have thought that the mix in Scent should be very favorable as well. Finally, Fine Fragrance is growing very strongly, double-digit you said, but the margin is down so much. So can you just elaborate how much you're still losing to raw material cost inflation and if there is any other factors in your cost?

Richard O'Leary -- Executive Vice President and Chief Financial Officer

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 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 are on the right track. We're confident now we're going to be able to fully recover those costs during the course -- over the course of the year and into early next year, but it does have a negative impact in terms of the margins.

Andreas Fibig -- Chairman, Chief Executive Officer

But in general, we are very happy with the performance of our Fine Fragrance business. As we're saying, we're up quite significantly and that certainly is because of the good win performance here.

Richard O'Leary -- Executive Vice President and Chief Financial Officer

And that helped to offset, mitigate the impact of not being able to fully recover the input cost increases in Q1.

Gunther Zechmann -- Bernstein -- Analyst

Thanks. And on the raw material cost, just a 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 fast do you expect those costs to flatten or partly with us like we've seen with Vanilla and a few synthetic inputs over the course of the year?

Richard O'Leary -- Executive Vice President and Chief Financial Officer

The 10% is just Scent. And so I think again for the full year I expect input cost for Scent to be up high single-digits 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 say when and if we would see some normalization. Right now, for the year, we're not seeing anything significant.

Gunther Zechmann -- Bernstein -- Analyst

Okay, thanks.

Operator

Your next question comes from Mike Sison of KeyBanc Capital Markets.

Michael J. Sison -- KeyBanc Capital Markets -- Analyst

Thanks. 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, what do you think we should be for Frutarom in the 2021, 2022 timeframe?

Richard O'Leary -- Executive Vice President and Chief Financial Officer

Look Mike, I think it's going to -- it will -- we expect it to improve I think similar to what we've seen 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.

Michael J. Sison -- KeyBanc Capital Markets -- Analyst

Okay.

Andreas Fibig -- Chairman, Chief Executive Officer

When the synergies roll-in, and that's the brunt of the synergies will come in next, next year and that will have a significant impact on margin obviously.

Michael J. Sison -- KeyBanc Capital Markets -- Analyst

Right, OK. And then, so at what point do you think operating income will grow year-over-year? Will that start in 2Q or is that more of a second half phenomenon for Frutarom?

Richard O'Leary -- Executive Vice President and Chief Financial Officer

I would expect we would see it in the second half. I mean certainly, again, Q3 should be the strongest quarter of the year.

Michael J. Sison -- KeyBanc Capital Markets -- Analyst

Great. Thank you.

Operator

Your next question comes from the line of Adam Samuelson of Goldman Sachs.

Adam Samuelson -- Goldman Sachs -- Analyst

Yes, thanks. Good morning, everyone.

Andreas Fibig -- Chairman, Chief Executive Officer

Good morning.

Adam Samuelson -- Goldman Sachs -- Analyst

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 lag that you have in terms of your procurement in your inventory that any decline really wouldn't be felt pulled the end of the year?

Richard O'Leary -- Executive Vice President and Chief Financial Officer

I think it's both. I think that number one, we have the inventory impact, but we have not seen any significant movements in the pricing for the input cost yet. So it's both of those factors.

Adam Samuelson -- Goldman Sachs -- Analyst

And is that, would you say, I mean are you surprised that just given Brent, I mean it's rallied year-to-date, but off of the highs hat you saw in the second half of last year and especially with better, seems like some of your major suppliers had some of the bigger disruptions again. Just are you surprised you haven't seen any of those pricing declines at all?

Richard O'Leary -- Executive Vice President and Chief Financial Officer

Look, I think there's two things. One, from an oil standpoint, remember, we're -- the derivative impact were four, five steps down the change. So the actual oil impact has much smaller influence on it versus the conversion cost. I think the second thing is a big piece of what we've seen over the last 15 months has been more driven around supply and interruptions 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 is equal importance as it is purely just the Brent pricing impact.

Adam Samuelson -- Goldman Sachs -- Analyst

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 still are tough, but were you -- just from a demand perspective, just seems like Latin America got worse as you looked at Argentina and Mexico and some of the issues you called out there. Is there anything in any of the other regions that you would call out as noteworthy positively or negatively?

Richard O'Leary -- Executive Vice President and Chief Financial Officer

No, I think the biggest thing to me is what I mentioned earlier is really is the the lack of growth from a global standpoint. The multinational companies as I said earlier, growth was essentially zero, flat for Q1 as opposed to being high single-digits up for the small and mid-size customers. So that's the -- that's what we're seeing. I think it was more acute in Latin America for some of the things that I mentioned as you said for Argentina and Mexico.

Adam Samuelson -- Goldman Sachs -- Analyst

Okay. That color is very helpful. I'll pass it on. Thanks.

Operator

Your next question comes from Daniel Jester of Citi.

Dan Jester -- Citi -- Analyst

Yeah, hi. Good morning, everyone.

Andreas Fibig -- Chairman, Chief Executive Officer

Good morning.

Dan Jester -- Citi -- Analyst

Just first on the synergies comments you made about hitting the run rate for the full year already, I'm just wondering what we saw the six plus months 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?

Andreas Fibig -- Chairman, Chief Executive Officer

The thing is that we have the most improvement on the procurement savings and the runways 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&L. So we have the better contract in place, but we still until it hits the P&L, we have to decrease our inventory and bring new new material on. That's the reason, but of course it's -- we are optimistic because it will have a very good impact for next year already because the team is doing an extraordinary job to make that happen. That's basically the main reason.

Richard O'Leary -- Executive Vice President and Chief Financial Officer

Yeah. I think the inventory impact is the primary driver at this point.

Dan Jester -- Citi -- Analyst

Okay. 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 lot more of a Scent related issue. So I'm just wondering if you can talk about margins in Taste and how you see those progressing? Thank you.

Richard O'Leary -- Executive Vice President and Chief Financial Officer

On the Taste side, I think Q1 was certainly impacted 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 us 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.

Andreas Fibig -- Chairman, Chief Executive Officer

No.

Richard O'Leary -- Executive Vice President and Chief Financial Officer

I mean we're happy where they are. I mean the business is performing quite well when you look at the underlying details.

Andreas Fibig -- Chairman, Chief Executive Officer

Yeah.

Dan Jester -- Citi -- Analyst

Okay. Thank you very much.

Andreas Fibig -- Chairman, Chief Executive Officer

You're welcome.

Operator

Your next question comes from Brett Hundley of Seaport Global.

Brett Hundley -- Seaport Global -- Analyst

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 this is a tough question, but just taking U.S. and China trade as a backdrop, Citrol, PG, a number of chemicals are on that tariff list. Can you just speak to that a little bit in so far 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, in just talking about legacy IFF and the composition of your sales contracts or briefs rather and how they have dominated that commercial side of the business for a long time now. As MNCs revisit growth and innovation again just after years of cost-cutting, I'm imagining that product technology and speed to market are going to become increasingly important just as they have been for the L&R customers out there for a while now. What does that mean for the briefing process and pricing in your view if anything? Do you have any thoughts on that? Thank you.

Richard O'Leary -- Executive Vice President and Chief Financial Officer

All right. Let me take the first one, I mean I think from -- keep in mind that our U.S. base is quite small, it's less than 25% of the totals of our sales base. So when we look at right in the current environment, we're looking at that the tariff discussions and what's in the current framework. It's not a material number. I mean it's in a $10 million to $20 million range 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 u Andreas .

Andreas Fibig -- Chairman, Chief Executive Officer

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 on now more growth related and the growth should be stimulated by innovation, which is great because we have been 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, 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 this three quarters year. So I'm very optimistic on this one going forward. Now the only thing as we need the big MNCs getting their volumes up and that certainly will lift the tide here.

Brett Hundley -- Seaport Global -- Analyst

Thanks guys.

Operator

Your next question comes from Lauren Lieberman of Barclays.

Lauren R. Lieberman -- Barclays Capital -- Analyst

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 acquisition 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 maybe it's the competitive -- that there is a competitive landscape for these small deals you're worried if you don't do them you'll miss your window. But I would just think that a lot of benefit kind of slowing their 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.

Andreas Fibig -- Chairman, Chief Executive Officer

Yeah. Lauren, I think it's a very valid question and super, super important. Look, there are probably two parts of these small M&As. The one part is that's say strengthening the business in some of the adjacent parts of our business, like the ingredients for gelato, which we believe this is a fantastic business. And we will demonstrate during our Investor Day, and we had already piece of the business in Brazil and now we are having a nice platform to growth. So these small 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 on terms of sales by profitability as well.

The second piece and you saw it for the first quarter, actually two of these four smaller deals were technology deals which were basically technology deals are investments in technology companies to help us to bring better innovation to our customers. One is a 3D printing, we have talked about this for quite some time, which will help us to to win qualities (ph) but also win business and that's not an integration in the business since it's an integration in R&D and we believe it's the right thing to do. Aryballe on the other side brings us into the digital piece of olfaction and measurement. It's right now used in the first used cases in quality control. So you will see these kind of technologies going forward and they certainly are not a barrier or destruction for the integration of Frutarom. I hope that helps to put context around these deals.

Richard O'Leary -- Executive Vice President and Chief Financial Officer

Yeah. And from me, Lauren, 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 (inaudible). As Andreas said, two of the deals were very technology driven that are fundamental to the Scent business or to our delivery system platforms, which are we believe key strategic advantages. The other two deals were really in the pipeline already as part -- prior to the acquisition. So I think -- and there is close linkage to the Frutarom businesses already. So I think we are -- I would characterize it as being quite selective already.

Andreas Fibig -- Chairman, Chief Executive Officer

Yeah.

Operator

And there are no further questions at this time. I would like to turn the conference back over to Andreas for closing remarks.

Andreas Fibig -- Chairman, Chief Executive Officer

Yeah. Thank you very much for the participation. I hope it helped to put context around the results. And we are looking forward to see you at the investor meeting in June. Thank you very much. Have a great day.

Operator

Thank you for participating. This concludes today's conference. You may disconnect at this time.

Duration: 54 minutes

Call participants:

Michael DeVeau -- Head, Investor Relations

Andreas Fibig -- Chairman, Chief Executive Officer

Richard O'Leary -- Executive Vice President and Chief Financial Officer

Mark Astrachan -- Stifel Nicolaus -- Analyst

Lauren R. Lieberman -- Barclays Capital -- Analyst

Jeffrey J. Zekauskas -- JP Morgan -- Analyst

John Roberts -- UBS -- Analyst

Heidi Vesterinen -- Exane BNP Paribas -- Analyst

Gunther Zechmann -- Bernstein -- Analyst

Michael J. Sison -- KeyBanc Capital Markets -- Analyst

Adam Samuelson -- Goldman Sachs -- Analyst

Dan Jester -- Citi -- Analyst

Brett Hundley -- Seaport Global -- Analyst

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