U.S. Markets closed

Edited Transcript of GIVN.VX earnings conference call or presentation 18-Jul-19 1:00pm GMT

Half Year 2019 Givaudan SA Earnings Call

Vernier Jul 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Givaudan SA earnings conference call or presentation Thursday, July 18, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Gilles Andrier

Givaudan SA - CEO

* Tom Hallam

Givaudan SA - CFO

================================================================================

Conference Call Participants

================================================================================

* Celine A.H. Pannuti

JP Morgan Chase & Co, Research Division - Head of European Food, Home & Personal Care and Tobacco and Senior Analyst

* Daniel Jelovcan

Mirabaud Securities Limited, Research Division - Analyst

* Jean-Philippe Bertschy

Bank Vontobel AG, Research Division - Head of Consumers Team

* Katy Hutchinson

Davy, Research Division - Food Analyst

* Patrick Rafaisz

UBS Investment Bank, Research Division - Director and Chemical Research Analyst

* Ranulf Orr

Redburn (Europe) Limited, Research Division - Research Analyst

* Theodora Lee Joseph

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Thomas P Wrigglesworth

Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to the Givaudan 2019 Half Year Results Conference Call and Live Webcast. I'm Sandra, the Chorus Call operator. (Operator Instructions) The conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Mr. Gilles Andrier, Chief Executive Officer; accompanied by Mr. Tom Hallam, Chief Financial Officer of Givaudan.

Please go ahead, gentlemen.

--------------------------------------------------------------------------------

Gilles Andrier, Givaudan SA - CEO [2]

--------------------------------------------------------------------------------

Thank you, operator. Dear, ladies and gentlemen, good afternoon as well as good evening to Asia, and good morning to the Americas. Welcome to this conference call on our 2019 half year results. I will make this call together with Tom Hallam, our CFO. We will take you through the presentation before answering your questions at the end. The investor news on our half year results 2019 was published on our Givaudan website at 7:00 Swiss Time this morning, 18th of July 2019. This is where you will also find the slides for today's presentation. Along with the investor news on our website, you will find also our 2019 half year results.

I would now like to start going through the presentation and invite you to turn to Slide #3 to go through our performance highlights. So I'm very happy to announce an excellent sales growth in the first half of 2019, substantially above-market growth. Furthermore, we are fully on track to achieve our ambitious 2020 goals, and the Naturex integration is making perfect progress. As a landmark event, on the 14th of June, we inaugurated our new state-of-the-art innovation center in Zurich, housing research activities for both divisions. This center is certainly second to none in the industry. On the 15th and 16th of October during our Investor Days, we'll show to the financial community why we are especially proud of this cornerstone facility for our future success.

In the first half year of 2019, we have reached sales of more than CHF 3 billion, a growth of 6.3% on a like-for-like basis and 15.7% in Swiss francs. This means being on a good track to pass the CHF 6 billion mark by the end of the year.

Both divisions contributed to this robust growth, which was supported by a further encouraging recovery of the high-growth markets. Our project pipeline and win rates improved strongly testifying the good innovation momentum we have with our clients. The strategic focus areas as well as the acquired businesses contributed substantially to the growth. We achieved an EBITDA of CHF 660 million, representing an EBITDA margin of 21.3%. The free cash flow was CHF 148 million, up by 31% and amounted to 4.8% of sales compared to 4.2% in 2018.

The implementation of GBS, Givaudan Business Solutions, is making excellent progress, delivering all the planned benefits. We are satisfied with the overall performance in the first half of 2019, making us further confident to deliver on our 2020 midterm targets.

On a like-for-like basis, our Fragrance division grew 8.6% and our Flavours division grew 4.4%. Again, we saw an excellent growth with local and regional customers, whilst sales with our multinational customers regained a very good momentum. Global demand for natural flavors and ingredients continue to remain strong. The multiple acquisitions we did in this area, namely Spicetec, Activ, Vika, Centroflora and last but not least, Naturex at the end of last year, created a very rich pallet of flavors and natural ingredients to perfectly satisfy this growing demand, making us the very clear leader in Naturals.

All other strategic areas continued to outperform in their respective markets. Health and Wellness, Active Beauty, Integrated Solutions grew all from high-single to double-digit. Our high-tech encapsulated fragrances contributed again to -- strongly to the good results of our consumer products in the Fragrance division, especially in the household and personal care sectors.

Finally, after 3 years of very strong results, our Fine Fragrances achieved another outstanding performance with 8.5% increase, with a balanced contribution of the broad range we have across geographies and customers.

Let's turn now to Slide 5. In the first half of 2019, high-growth markets lived up to our expectations by further improving to double-digit growth, 3x the growth rate of mature markets, a clear improvement over the past year. The emerging markets of Asia Pacific grew very strongly, led by Indonesia, the Philippines, Vietnam. Eastern Europe and the Middle East contributed as well to a record growth levels as well as Latin America. In the mature markets, we grew with a solid 3.5%, led by Southern Europe and Korea.

High-growth markets make up 42% of our overall sales, still below past levels. This is the consequence of the acquisitions we made in mature markets, combined with the currency situation in the high-growth markets. Our presence in high-growth markets has always been a key driver for our growth and continues to be one of our key strategies for 2020.

Midterm, the demographics, the ever-growing middle class and the strong urbanization trends will continue to support the growth of these markets, especially in Asia, where the urbanization and the middle class are still below average. Our size and our operation footprint give us a unique exposure to the diversity of these high-growth markets in which we continue investing both with additional talent and new facilities to service the wide diversity of our clients.

Let's turn now to Slide 6. Now I'd like to highlight the sales development by region for the group. Sales in Latin America and Asia Pacific continued to perform very well. Latin America recorded another outstanding growth with 16.2%, driven mainly by Argentina, Brazil, Mexico and Colombia. Volume growth contributing to 2/3 of the growth in the Latin American region. The growth in Asia Pacific was 5.6%, with double-digit growth in the high-growth markets. North America grew 3.8% on the back of last year's strong comparable. EAME grew 5.4%, with double-digit growth in the southern part of Europe as well as in the high-growth markets, namely Eastern Europe, Poland, Africa and the Middle East, which are all high-growth markets.

Let's turn now to Slide 7. The Fragrance division grew 8.6% on a like-for-like basis and 11.3% in Swiss francs. Fine Fragrances increased 8.5% like-for-like. We continued to sustain our clear market leadership in Fine Fragrances. A high level of new business wins across all customer groups, combined with an excellent market performance of the recent launches were the main contributors to this further outstanding result.

Consumer Products grew 8.7% like-for-like. We delivered good growth in both high-growth and mature markets. Growth stemmed from all regions and customer groups with a remarkable new momentum of multinational customers.

Fragrance, Ingredients and Active Beauty grew 8.2% like-for-like. In Active Beauty, we achieved an encouraging double-digit sales growth again, driven by all customer types and active ingredients. With a little bit of tailwind, we will already achieve our 2020 target this year in '19 sales of CHF 100 million.

Now let's turn to the next slide, #8. Sales of the Flavours division grew 4.4% on a like-for-like basis and 19.4% in Swiss francs. All of our strategic focus areas, Naturals, Health and well-being, Integrated Solutions as well as local and regional customers contributed strongly to the overall performance.

Sales in Asia Pacific increased by 6.2% on a like-for-like basis. Indonesia, Malaysia, the Philippines and Vietnam where the division recorded double-digit growth and achieved a good growth in Beverages and Savory segment.

EAME increased 2.8% like-for-like, led by double-digit growth in Spain and Portugal and a good single-digit growth in the U.K., Italy and Switzerland.

Segment wise, a good growth was seen in Beverages and Sweet Goods. North America decreased 1% on a like-for-like basis despite the good performance from local and regional customers as well as in Naturals. Latin America increased 22.8% on a like-for-like basis, driven by a very strong growth in Brazil, Argentina, Mexico and Colombia.

Let's turn now to Slide 9. When we presented our 2020 strategy in August 2015, we clearly stated that acquisitions will be an important part of our 5 years growth path. Since 2014, we have, including Naturex, Albert Vieille, AMSilk and Golden Frog acquired 11 businesses for a total of over CHF 2.5 billion, each one with a very strong and natural strategic rational as well as a perfect cultural fit. These businesses, once fully integrated, will have a yearly contribution to Givaudan of more than CHF 1 billion.

Across all activities, Fragrances, Active Beauty and Flavours are success in providing winning solutions to our customers and creating value is also a demonstration of our efficient and successful acquisition strategy. We aim at further value-creative acquisitions to complement our core capabilities and increase the portfolio of Naturals, Integrated Solutions, local and regional customers as well as new adjacent business areas, with which we believe we can further provide value to our customers and to our shareholders.

Let's turn now to Slide 10, with a focus on Naturex. The acquisition of Naturex fits fully with our 2020 strategy to expand our offering to our customers with natural products with Integrated Solutions and with Active Beauty as well as to further complement our customer base, especially with smaller and regional clients.

Givaudan is the global leader in the area of natural flavors and Naturex complements perfectly our capabilities with its strong portfolio of plant extracts and natural ingredients across the food and beverage, nutrition, health and personal care sectors.

In 2018, we completed the acquisition and developed an overall growth strategy. We defined and communicated financial targets and put the new organization in place as of 1st of January 2019. We received throughout this transformation very good feedback from all customers. Already in the first half year of 2019, we have improved significantly the service levels of Naturex and transformed the business back to growth.

Strategies have been defined for each category, and the preparations for cross-selling and integrated solutions are well advanced, supported by an engaged and aligned workforce. In the coming years, we aim at executing the exciting growth plan for Naturex and reach an annual growth rate of 10% in 3 years. Our objective is also to improve the Naturals financial performance up to the Flavours division level by the end of 2021.

Let's turn now to Slide 11. This slide gives us a short follow-up on Anne Tayac's GBS update from our Annual Investor Conference on April 9 in Vernier. The transitions in EAME and North America are now fully completed and the teams in Buenos Aires and Budapest are fully operational for these 2 regions. In Latin America, the transition is completed, and we are in the stabilization phase in Brazil. Argentina and Chile are now fully operational, and we are currently going live in Mexico and Central America, as I speak.

In Asia Pacific, the most complex region in terms of cultures, languages and businesses, we have completed the Phase 1 and the implementation of Phase 2 is ongoing, to be finished by mid-2020. All our 3 delivery centers, Budapest, Buenos Aires and Kuala Lumpur work in an efficient way within the broader Givaudan organization and financial benefits are delivering according to plan.

With this, I'd like to hand over to Tom who will give you more granularity on our financial results. Tom, please go ahead.

--------------------------------------------------------------------------------

Tom Hallam, Givaudan SA - CFO [3]

--------------------------------------------------------------------------------

Thank you, Gill. I would also like to welcome you all to our conference call. Gill has taken you through the main aspects of the market development and the business performance of the group. On the next slide, I would like to focus on the operating performance of the group and the 2 divisions.

Let me start with the performance highlights on Page 13. As Gill mentioned, group sales increased by 6.3% on a like-for-like basis, which excludes any currency impact as well as the recent acquisitions. In Swiss francs, sales increased by 15.7%. The absolute EBITDA increased to CHF 660 million compared to CHF 600 million in 2018. And our underlying EBITDA margin remained strong at 22.3%. Our net income was CHF 380 million or 12.3% of sales. The free cash flow as a percentage of sales was 4.8% compared to 4.2% in 2018.

Please turn to Slide 14, which shows the exchange rate development. Overall, the major mature market currencies in which the group operates were relatively stable against the Swiss franc in the first half of the year. Despite certain volatility in some emerging market currencies, our operational and geographical spread continues to provide good natural hedges, and our EBITDA margin remains well protected against these currency fluctuations.

Please turn to Slide 12 -- 15. In 2019, the group continued its efforts to reach productivity gains and cost discipline. But nevertheless, the gross margin declined to 41.2% in 2019 compared to 44.2% in 2018 as a result of the higher input costs and the lower margin of Naturex. We have successfully increased prices in collaboration with our customers in the first half of 2019 and continue to do so in the second half. However, as a reminder, this has a dilutive impact on the gross margin.

The EBITDA increased to CHF 660 million in the first 6 months of the year. In this period, we incurred costs of CHF 19 million related to our GBS project compared to CHF 25 million in the same period in 2018. As you can see on the bottom right of the chart, our underlying EBITDA margin was 22.3% in 2019 compared to 23.4% in 2018.

On the next few -- 2 slides, I would like to spend a few minutes on the operating performance of the 2 divisions. Please turn to Page 16. The Fragrance division recorded a sales increase of 11.3% in Swiss francs and 8.6% on a like-for-like basis. The division recorded CHF 270 million of EBITDA compared to CHF 250 million in 2018. Including the CHF 19 million of GBS costs mentioned before, the EBITDA margin was 19.8% on a reported basis and 21.3% on an underlying basis. The margin showed a slight decrease compared to last year as a result of the higher input costs and the dilution of pricing actions with our customers.

If you turn to Page 17, I will comment on the Flavours performance. The Flavours division recorded a sales increase of 19.4% in Swiss francs and 4.4% on a like-for-like basis. The reported EBITDA increased to CHF 390 million from CHF 351 million in 2018, an increase of 11.1%. The reported EBITDA margin was 22.5%. And on an underlying basis, the EBITDA margin was 23.1%. The margin decreased compared to last year, mainly as an impact of the lower margin of Naturex.

Please turn to the Slide 19, which shows the forecasted amortization of intangible assets. At the year-end 2018, we showed you the forecasted amortization. The projects shown here have been updated -- or the projections shown here have been updated to reflect the latest acquisitions of Albert Vieille and AMSilk. Please note that this chart will be changed again once we have completed the acquisition of Golden Frog.

Please turn to Slide 19, which shows the net income. The income before tax increased to CHF 437 million from CHF 431 million in 2018. The nonoperating expenses were relatively flat compared to the prior year. The group incurred higher financing costs as a result of the increase in debt of the group; however, these were offset by lower foreign exchange losses. As a reminder, in 2018, the group incurred increased foreign exchange losses, most notably as a result of higher foreign currency losses in Argentina. The net income was CHF 380 million or 12.3% of sales. The group's effective tax rate decreased to 13% in 2019 compared to 14% in June 2018.

Please turn to Slide 20, which shows the cash flow performance of the group. During the first half of 2019, Givaudan generated a free cash flow of CHF 148 million or 4.8% of sales compared to CHF 113 million or 4.2% in 2018. The operating cash flow for the first 6 months was CHF 271 million, almost flat when compared to 2018. Of course, as in the prior year, this includes the cost that we incurred with the implementation of GBS.

As both Gill and I have previously commented, in 2019 we continued our investments to support the growth in high-growth markets, most notably the construction of an additional fragrance facility in China. As such, total net investments were CHF 94 million. And as a percentage of sales, net investments were 3% compared to 5.3% in 2018. Excluding the proceeds of the sale of the Zurich Innovation Centre, net investments were 4.6% of sales.

Working capital remained relatively flat compared to 2018, despite higher inventory levels from Naturex. I'm very happy with the free cash flow delivery in the first 6 months of the year. We are preparing for the growth of Naturex and are thus building inventories, and we have significant investments in high-growth markets.

With this, I would like to conclude my part of the presentation of the half year results, and I hand back to Gill.

--------------------------------------------------------------------------------

Gilles Andrier, Givaudan SA - CEO [4]

--------------------------------------------------------------------------------

Thank you, Tom. So we had an excellent start in 2019, and we are proud of our achievements in the first half year. We saw an encouraging pickup in high-growth markets and all our strategic areas are growing to our expectations. Fine Fragrances to our great pleasure continues on its successful journey, strongly outperforming the market and the competition, and we have entered the fourth consecutive year of outstanding growth, making us the clear #1 in Fine Fragrances. High-growth markets are back to double-digit growth. Local and regional customers continue to be a strong growth driver across both divisions, and we have seen a substantial pickup from multinationals, mainly in household and personal care. Recent acquisitions in areas of strategic focus, Health and well-being, Naturals, Integrated Solutions, all contributed positively to those good results.

Like in 2018, raw material prices will increase by another 5% to 6% in 2019, and we are very confident to fully compensate these increases by further implementing price increases in collaboration with our customers. The implementation of GBS and the integration of Naturex are fully on track as previously communicated, and we are very confident to deliver the respective benefits.

Let's turn to Slide 23. Our 2020 roadmap is centered on responsible growth and shared success. Our ambitions and the roadmap for the next 2 years seek to ensure responsible growth and shared success for shareholders, customers and all key stakeholders. Building on the success of the 2011-2015 strategy, we want to create further shareholder value through profitable, responsible growth with the additional contribution of acquisitions. To create long-term value, we will capitalize on our market leadership and most importantly, continue to build those close partnerships.

Givaudan's 2020 strategy is built on the pillars of growing with our customers, delivering with excellence and partnering for shared success. After 3 years, we are fully on track, and our ambitious financial targets, an average 4.9% like-for-like growth and an average free cash flow of 12.4% puts us in the right frame to achieve our goals. Flavors and fragrances are consumed every day around the world, and they are an essential part of successful consumer products for our clients. I'm confident about Givaudan's strength and our DNA built over the last 250 years to continue to create value for our customers, our shareholders and all our stakeholders. With the significant contribution Givaudan's employees around the world make every day, I am convinced that we have the right people, the right strategies and plans in place to continue on our successful path.

Ladies and gentlemen, many thanks for your attention. Tom and I are looking forward to your questions now.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Patrick Rafaisz, UBS.

--------------------------------------------------------------------------------

Patrick Rafaisz, UBS Investment Bank, Research Division - Director and Chemical Research Analyst [2]

--------------------------------------------------------------------------------

I have 3 questions, please. The first one will be on the GBS update. You mentioned you're fully on track here, but the costs you've booked for the first half of CHF 19 million are already almost the budget for the full year of CHF 20 million. Did you bring forward some costs or are we seeing some additional cost? And could you tell us how much the net savings, how much savings you already had in the first half from GBS? Second question on Naturex. You disclosed the sales amounts that the business contributed to the first half of the year. Can you also talk about the EBITDA contribution? We understand that it's diluted from the margin, but it would be nice to know the absolute number. And then the last question is on cash flow and working capital. Tom, you already talked about inventories, the buildup in anticipation of Naturex growth. Can you also talk about receivables and payables, which both metrics went up quite significantly from H1 '18? These are my 3 questions.

--------------------------------------------------------------------------------

Tom Hallam, Givaudan SA - CFO [3]

--------------------------------------------------------------------------------

Okay. So thanks very much. So I'll take the first question on GBS. As you noted, we have CHF 19 million of costs. We guided CHF 20 million. And actually, we had -- we guided CHF 11 million, Patrick, for 2020. If you look, and as Gill mentioned, we're making good progress, which means that actually it's more cost moving into 2019. So it's not really overspend. It's just more the phasing of the costs coming into 2019 from 2020. And from a savings perspective, as in previous years, really we expect 1/3 of savings in the first half and 2/3 in the second half of the year, always incremental, of course, to the prior year.

On Naturex, so the dilution on the group is 0.8% on the EBITDA margin. And just on the cash flow, I mean, as you mentioned, we have quite a significant increase in inventories for Naturex. As always, I remind you, particularly with inventory, it tends to be seasonal, particularly with Flavours. It depends very much on the crops, and we have a relatively high inventories certainly in mid Q2, early Q3, and then it tends to go down towards the end of the year.

The receivables and payables, as you remarked, I mean, receivables depends very much on the timing of sales. And also, as Gill mentioned, we have a very good sales growth. We've seen that all the way through the first 6 months. So of course, that means that we have higher receivables at the end of June. So those are really the 3 points on your questions.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

The next question comes from Celine Pannuti, JPMorgan.

--------------------------------------------------------------------------------

Celine A.H. Pannuti, JP Morgan Chase & Co, Research Division - Head of European Food, Home & Personal Care and Tobacco and Senior Analyst [5]

--------------------------------------------------------------------------------

I wanted to ask first a question on the market. You seem to be talking about the pickup in high-growth. Could you specifically tell us where do you think it comes from and which countries? And it's a bit surprising given some of your competitors, not direct competitors, having commented on the potential for that. So if you could comment on that. Still on the market, the North American market has slowed down quite substantially for Flavours. Could you as well give us some color of what's happening in the demand there? And then finally, Tom, I think you partially answered my question on Naturex, but my question is on gross margin, the 300 basis decline. Could you give us the breakdown of what is the Naturex impact, the impact from raw material cost because it seems that there was quite an elevated impact from the raw material inflation in H1? Is that really what it was?

--------------------------------------------------------------------------------

Gilles Andrier, Givaudan SA - CEO [6]

--------------------------------------------------------------------------------

Okay. Thank you, Celine. So yes, so what I said is that we are a bit back to the sort of normal or at least the growth rates we are used to in the past on high-growth markets, which is roughly 10%. So I would say that all of them are growing strongly. And the first one being, obviously, Latin America, which had a very strong growth. And 2/3 of that, 2/3 of the growth is really about volume growth. So this is not just about pricing and foreign exchange rate. Then you have a very good growth in the whole of Southeast Asia. I mean, there is not one single market part of Southeast Asia which is not growing. So the whole Southeast Asia, which is, again, very substantial. I mean, it's 2x or 3x the size of China, in Asia Pacific. Then you have the whole region now which is quite substantial, which is basically the Africa, Middle East, which is also growing strongly. That has never really slowed down. But again, this is contributing to the overall growth. And finally, even the Eastern Europe, Turkey, Poland are also growing strongly. The only one which is not growing as strongly as we wish is China. So China is roughly 6% of the overall group sales of Givaudan. So there is no sort of structural issue there. The first reason is to do a bit with comparables because we are growing against a high comparable. And our confidence in China remains intact. We are building, as you know -- as you may know, the largest compounding plant for Fragrances in China, as I speak. And the market has many opportunities going forward. So I would say that all high-growth markets, maybe except China are really delivering great growth.

Then on North America Flavours. So for sure, this is not to the level we wished, minus 1% for Flavours. I would say that the key areas which are really Naturals, but also locals and regionals are delivering up to our expectations. So by difference, it's more on the multinationals that we see a decline, which basically we hope will turn back in the next months to come.

Then I will hand over to Tom to give you the breakdown on GPM, but obviously, one of the elements, which is important, is the whole raw mats and pricing. So I would like myself to, again, reiterate 2 things. On the raw mats side, we said 5% to 6% increase in 2018 and the same increase in 2019. So if you add both, you have roughly CHF 200 million of additional raw materials over 2 years that we have to compensate for. And as I speak now, we have fully compensated with all the negotiations and the work we have done with our clients this total amount. Obviously, the largest portion was in Fragrances as compared to Flavours. But I would say on both sides, we are fully compensated with price increase. The only thing, obviously, is a question of timing. So the 2 -- as I said, on the CHF 200 million, let's say, of price increase, we had a number in 2018 which had already been implemented, which was roughly 1% of the growth in '18. The lion's share is in '19. And slight tail end will be in 2020. That has to do with contractual terms, timing of negotiations and all of that. But the lion's share is in '19. And then if we look at specifically '19 half year, first half against second half, we have a bit of a, let's say, different timing when looking at raw mats and pricing. So all the raw mats increase is very much front-loaded in H1. The whole raw mats increase of the whole year is much more front-loaded in the first half, and the price increase is more -- we have a lot of price increase in the first half, but much more to come in the second half. Both will be, again, compensation -- I mean, the price increase will fully compensated -- compensate the raw mat increase again. So again, there is the question of timing, differences between the 2 halves. So this is really looking at it from a commercial end.

--------------------------------------------------------------------------------

Tom Hallam, Givaudan SA - CFO [7]

--------------------------------------------------------------------------------

So thank you, Gill. So Celine, maybe I give you the elements, both on gross margin and on EBITDA margin. So as a reminder, last year, we had this so-called citral issue. It cost us CHF 50 million, 2/3 in the first half, 1/3 in the second half. This, of course, was a one-off. So if we add this back, this is 1.2% or 120 bps on the gross margin. If we look now at the net price raw materials, it's negative 270 bps on the gross margin. And then acquisitions is negative 130 bps. And then there's, obviously, currency makes up the difference. Then if I translate that into EBITDA margin. So the 1.2% on gross margin for citral is exactly the same on EBITDA. The price increase, raw materials net impact is minus 240 bps. And then the GBS savings and the impact of IFRS 16 is 100 bps, so half and half. And as I already mentioned to Patrick, the acquisitions is negative 80 bps. And I think with both gross margin and EBITDA margin, I gave you all of the elements.

--------------------------------------------------------------------------------

Celine A.H. Pannuti, JP Morgan Chase & Co, Research Division - Head of European Food, Home & Personal Care and Tobacco and Senior Analyst [8]

--------------------------------------------------------------------------------

That's very clear. Just one thing, could you share as well China growth? You said you were a bit disappointed. What was the growth in China?

--------------------------------------------------------------------------------

Tom Hallam, Givaudan SA - CFO [9]

--------------------------------------------------------------------------------

Well, essentially, flat, low single digits. Yes. But previous year was plus 11%.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

The next question comes from Theodora Joseph, Goldman Sachs.

--------------------------------------------------------------------------------

Theodora Lee Joseph, Goldman Sachs Group Inc., Research Division - Equity Analyst [11]

--------------------------------------------------------------------------------

My first question is actually -- it will be helpful if you could provide some breakdown of volumes and pricing by each of the division? And also, just to clarify, in terms of what Gill explained before in terms of pricing and raw material headwinds that we should actually expect. Is it fair for us to actually expect a net positive impact from the pricing actions you've taken, especially in the second half of this year considering that, actually, you will be able to recoup some of the raw material headwinds that in 2018, which you didn't recoup last year? And then my second question is on some of the actions, which you have taken in terms of pricing. So as your business shifts towards more natural raw material ingredients, one would expect that actually there's going to be more volatility in raw material prices. So just curious to hear if there's any lessons that you've learned over the last 2 years? Or any changes in your business model would you might consider implementing from this episode in order to kind of mitigate future volatility?

--------------------------------------------------------------------------------

Gilles Andrier, Givaudan SA - CEO [12]

--------------------------------------------------------------------------------

So I'll start reverse from your last question. So actually, the volatility has been more on the synthetic ingredients than the natural ingredients. But your question is still valid. What have we learned? So obviously, anything which has to do with improving our vertical integration, but also securing long-term contracts with everyone. So basically, this is in works but applies more on the synthetic ingredients. And again, which go more on to the fragrance side. Then we don't disclose the pricing increase for the respective divisions. But, obviously, by what I referred, the raw mat increase was much high on the fragrance side. So therefore, the price increase was also higher on the Fragrance side and on the Flavours side. And then maybe Tom, you...

--------------------------------------------------------------------------------

Tom Hallam, Givaudan SA - CFO [13]

--------------------------------------------------------------------------------

Yes. I mean, I can only reiterate what Gill said. I mean, if you look at the split of raw materials and price, most of the raw material is front-loaded and there is price increases in the first 6 months, and the majority of the price increase to come in the second half of the year. When Gill talked about recuperating over a 3-year period, that's going into 2020. So as we mentioned, we recoup -- we have raw materials, 2018, 2019, and we have price increases '18, '19 and into 2020.

--------------------------------------------------------------------------------

Gilles Andrier, Givaudan SA - CEO [14]

--------------------------------------------------------------------------------

To your point about, will the second half be easier from a profitably standpoint as opposed to the first half, it’s true, given, as I mentioned, there were much more raw mat increase in the first half than price increase and it's going to reverse in the second half.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

The next question comes from Katy Hutchinson, Davy Research.

--------------------------------------------------------------------------------

Katy Hutchinson, Davy, Research Division - Food Analyst [16]

--------------------------------------------------------------------------------

2 questions from my side, please. Just firstly, the decline in North American Flavours. Could you give an indication as to what channels you're seeing the decline in? And I know you called out dairy, but if you could explain the moving parts in more detail, please. And then secondly, you seem to have experienced a recovery in Flavor in the second quarter in APAC, you might explain some detail behind that.

--------------------------------------------------------------------------------

Gilles Andrier, Givaudan SA - CEO [17]

--------------------------------------------------------------------------------

Yes. I mean the -- as I mentioned, in terms of channels, in terms of clients, that has a lot to do with more on the multinational side. And in terms of segment, that has more to do with the sweet side, which includes beverages and dairy. So that's where we've seen the headwinds. On the rest, on Savory and again, on local and regionals and Naturals in general it was much better.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

The next question comes from Jean-Philippe Bertschy, Vontobel.

--------------------------------------------------------------------------------

Jean-Philippe Bertschy, Bank Vontobel AG, Research Division - Head of Consumers Team [19]

--------------------------------------------------------------------------------

I would have 2 questions. The first one is on Expressions Parfumées. What's going on there? You invested, I think, CHF 20 million post-acquisition and based on my assumptions, it looks like in H1, you are growing like 30% or 40%. So what's going on there? Maybe the second one for Tom. In terms of free cash, can you maybe disclose the cash cost for GBS in H1? It looks like you have purchased some own equity of CHF 50 million, CHF 51 million in H1. How you see that in the second part of the year because it was a big -- it was a major development in H1?

--------------------------------------------------------------------------------

Gilles Andrier, Givaudan SA - CEO [20]

--------------------------------------------------------------------------------

So Jean-Philippe, so on the Expressions Parfumées, essentially, as you may notice, we actually operate Expressions Parfumées almost as a stand-alone business within Givaudan, but at the same time providing with all the means and capabilities of Givaudan. And the result is that we are -- you are correct, we are actually growing at 30%. So this is a very good success. Very happy with the way the 2 companies have been plugged back together, which is -- gives us confidence again on this whole strategy of locals and regionals with additional companies.

--------------------------------------------------------------------------------

Tom Hallam, Givaudan SA - CFO [21]

--------------------------------------------------------------------------------

And so Jean-Philippe on your -- on the other question. So firstly, on the purchase of own equity instruments. So as you know, we have a long-term incentive plan, which we fund through purchase of shares on the open market. We purchased all of the requirements for 2019 in the first 6 months. So we'll have nothing coming in the second half of the year. Actually, if you look at last year, it was more loaded towards the second half of the year than the first half of the year. So that was the CHF 51 million is all done for this year and nothing more to come for the remaining 6 months. Then on GBS, on the cash cost, I mean, you can imagine that the project cost is all cash. So that falls very much in straight through to free cash flow. And then if you look, we had around CHF 19 million remaining of cash impact, and that's probably split 50-50 between H1 and H2.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

The next question comes from Thomas Wrigglesworth of Citigroup.

--------------------------------------------------------------------------------

Thomas P Wrigglesworth, Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst [23]

--------------------------------------------------------------------------------

Strategic question, if I may. You mentioned about having a full -- a complete pallet in Naturals. Are there any technology areas that you still -- in the Naturals that you feel that would be interesting or you need to have? And in addition to that, you're always going into Active Ingredients in Beauty. Would you consider Actives within the Health and Wellness trend going forward? And just a point of clarification on Naturex CHF 235 million in the first half. Can you help me with seasonality in the second half of sales? And are you saying it's growth on the CHF 235 million that we should kind of bake in going forward? Just some color there would help.

--------------------------------------------------------------------------------

Gilles Andrier, Givaudan SA - CEO [24]

--------------------------------------------------------------------------------

Yes. So we certainly expanded our pallet from strictly flavors. Flavors, as you know, which are highly concentrated ingredients, which have a high impact as compared to the concentration that you put a flavor into a formula. Now what does Naturex brings us is, obviously, for 1/3 a whole range of natural extracts, which are healthy on taste, but which are not necessarily considered as flavors. So it's really natural extracts which contribute to taste and with combination with flavors, again, does a superb job on taste. And then the beauty with Naturex is that because Naturex by history, and let's say, by -- to their knowledge, the master, all those sourcing of naturals. Once you master, I will give you an example, rosemary, you can extract rosemary for its state, but you also have rosemary. You can extract rosemary for its taste, but you also have rosemary so you can extract it also for antioxidants and preservatives and all sorts of applications. So that's why in the remaining 2/3 of Naturex you find natural colors, natural preservatives and also functional ingredients in the space of Health and Wellness, which is what you referred -- what you just referred to. So already with Naturex we are in the space of active ingredients for Health and Wellness even with the small business in pharma.

So the intention, yes, is to be opportunistic to further grow not only on naturals for taste but also in other areas as we find opportunities going forward. Those things are what we call the adjacent spaces of Givaudan Flavours, which go to the same clients of food and beverages, but without losing our soul of who we are, which is really about pulling together customized solutions in a very intimate way with our clients backed by lot of innovation. So that -- by saying this, I'm not putting myself into commodities or things like that, which is also going to food and beverage.

Then you're talking about Active Beauty, which is also a very good success story. As a reminder, we started in 2014 from 0 sales. We acquired Soliance, acquired Induchem grew double-digit. With the addition of CHF 10 million of Naturex, AMSilk, we are going to hit the CHF 100 million mark, which puts us now in a very good position in terms of leading this segment of the cosmetic industry. And again, that fits the whole talk us around Health and Wellness, but more on the Fragrance side. And we see all the synergies that we have -- the commercial synergies that we have where the fragrance access -- I mean, France people will give access to Active Beauty with all sorts of clients. So going forward, again, opportunistic across those different segments.

--------------------------------------------------------------------------------

Tom Hallam, Givaudan SA - CFO [25]

--------------------------------------------------------------------------------

And maybe I can just take the Naturex question. So I'll start backwards. I'll start with the end and work backwards. So as Gill mentioned, we are targeting sales of 10% per year in 2021. It's not a hockey stick. So I think you can work back from that and say, okay, what do we need to achieve in 2020 and in 2019. If you look at the first 6 months, we are very -- at the early part of the integration on the front end on the customer end. So we grew low single digit, which is very good, particularly if you look historically Naturex on a stand-alone basis was not growing. And of course, we would expect that to accelerate in the second half of the year. Just as I refer back to one of the other questions, I mean, we are building inventories now in Naturex in anticipation of accelerating the growth into the second half of 2019.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

The next question comes from Daniel Jelovcan, Mirabaud.

--------------------------------------------------------------------------------

Daniel Jelovcan, Mirabaud Securities Limited, Research Division - Analyst [27]

--------------------------------------------------------------------------------

Yes. Just one small question left in -- you mentioned in flavor in Latin America, you grew 22.8% like-for-like. And then in the first quarter, you grew 9.2%, so that implies that your growth in the second quarter was more than the third actually. And you mentioned 4 countries, but can you be more specific? Was it a big order from a multinational? Or what was the reason behind that?

--------------------------------------------------------------------------------

Gilles Andrier, Givaudan SA - CEO [28]

--------------------------------------------------------------------------------

Yes. So as we mentioned, in Latin America, that was very much 2/3 volume and 1/3, I would say, pricing. Because we, as you know, we price in half currencies in dollars. And then Latin America is really very much about, let's say, 3 large countries. So Mexico, Brazil and Argentina. So I would say on the Flavours side, you really have a very strong growth in Argentina. But I would say, it's all double-digit, whether I look Argentina, Brazil, Mexico, Colombia, and then there is not much less. In fact, once you've covered those 4 countries, it's almost 90% of Latin America. So it's an excellent result. And if we compare on the Fragrance side, Argentina and Brazil are all double-digit and so is also Mexico. So I mean, both divisions are doing very well in the region. And it's not just pricing. That's what I want to reaffirm. It's very much about volume gains, meaning wins and driving market share gains.

--------------------------------------------------------------------------------

Daniel Jelovcan, Mirabaud Securities Limited, Research Division - Analyst [29]

--------------------------------------------------------------------------------

But my question was more why it was so extraordinarily strong in the second quarter with growth of more than 30%? I mean, that's quite high even for your terms, right?

--------------------------------------------------------------------------------

Gilles Andrier, Givaudan SA - CEO [30]

--------------------------------------------------------------------------------

Yes. But then, that has to do with comparables, timing of introduction of new wins. It's got to be signs that we refrain from going into splitting quarters, it's like splitting hell. It doesn't lead to anywhere.

Okay. So now we have the last question.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

The last question comes from Ranulf Orr, Redburn.

--------------------------------------------------------------------------------

Ranulf Orr, Redburn (Europe) Limited, Research Division - Research Analyst [32]

--------------------------------------------------------------------------------

Yes, just one last one for me. Just help us understand the growth in Flavours again a little bit more. Could you please just give an indication of what proportion of sales or earnings comes from your Health and Wellness products, your Integrated Solutions, et cetera?

--------------------------------------------------------------------------------

Tom Hallam, Givaudan SA - CFO [33]

--------------------------------------------------------------------------------

So if you go back to what we've said in the past, if you look, overall, I mean, it's around 50-50 split between what we call Natural or Health and Wellness. Obviously, sometimes there's -- there can be double counting within that, but that's more or less the split on a pro forma basis. So Natural is around 50%. If we -- if you look at our Health and Wellness, it's another 15% actually. But as I mentioned, sometimes there's a bit of double counting in there, but that gives you an indication of the split.

--------------------------------------------------------------------------------

Gilles Andrier, Givaudan SA - CEO [34]

--------------------------------------------------------------------------------

Okay. So thank you for your questions today. And as you know, I just remind you, we have a half year conference in Zurich in the Widder Hotel on the 29th of August, and you'll have an opportunity actually to look at what we are doing in Active Beauty. So that's going to be interesting. So I look forward to -- we all look forward to seeing you there. Thank you.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.