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Edited Transcript of IFF earnings conference call or presentation 5-Nov-19 3:00pm GMT

Q3 2019 International Flavors & Fragrances Inc Earnings Call

NEW YORK Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of International Flavors & Fragrances Inc earnings conference call or presentation Tuesday, November 5, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andreas Fibig

International Flavors & Fragrances Inc. - Chairman & CEO

* Michael DeVeau

International Flavors & Fragrances Inc. - VP of Corporate Strategy, IR & Communications

* Richard A. O'Leary

International Flavors & Fragrances Inc. - Executive VP & CFO

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Conference Call Participants

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* Adam L. Samuelson

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Brett Michael Hundley

Seaport Global Securities LLC, Research Division - Research Analyst

* Faiza Alwy

Deutsche Bank AG, Research Division - Research Analyst

* Gunther Zechmann

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

* Heidi Maria Vesterinen

Exane BNP Paribas, Research Division - Financial Analyst

* James Targett

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* John Ezekiel E. Roberts

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals

* Jonathan Patrick Feeney

Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner

* Lauren Rae Lieberman

Barclays Bank PLC, Research Division - MD & Senior Research Analyst

* Mark Stiefel Astrachan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Michael Joseph Sison

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Silke Kueck-Valdes

JP Morgan Chase & Co, Research Division - VP

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Presentation

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Operator [1]

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At this time, I would like to welcome everyone to the IFF Third Quarter 2019 Earnings Conference Call. (Operator Instructions) I would now like to introduce Michael DeVeau, Head of Investor Relations. You may begin.

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Michael DeVeau, International Flavors & Fragrances Inc. - VP of Corporate Strategy, IR & Communications [2]

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Thank you. Good morning, good afternoon and good evening, everyone. Welcome to IFF's Third Quarter 2019 Conference Call. Yesterday evening, we distributed a press release announcing our financial results. A copy of the release can be found on our IR website at ir.iff.com. Please note that this call is being recorded live and will be available for replay.

Please take a moment to review our forward-looking statements. During the call, we'll be making forward-looking statements about the company's performance, particularly with regard to our outlook for the fourth 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 our forward-looking statements, please refer to our cautionary statement and risk factors contained in our 10-K filed on February 26, 2019, and in our press release, all of which are on our website.

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 that we issued yesterday and is on our website.

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.

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Andreas Fibig, International Flavors & Fragrances Inc. - Chairman & CEO [3]

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Thank you, Michael. On the call today, I would like to provide comments on our third quarter financial results and give an update on our integration progress. Once finished, I will ask Rich to give a more in-depth financial review of our business performance and provide an update on our outlook for the balance of the year. Then we will take any questions that you may have.

Let me start by saying that positive momentum is building at IFF. In the third quarter, we delivered a sequential improvement in our combined currency-neutral top line growth rate and continued to perform well, growing low single digits with growth in all regions and nearly all categories.

On a stand-alone basis, Frutarom sales increased 5%, including the net contribution of acquisitions and divested businesses. Organically, sales were flat in the third quarter, a sequential improvement for the second quarter results as an improvement across many subcategories.

In Taste, our win rates remain at the high level. However, performance continued to be impacted by volume erosion, primarily with multinational customers. It should be noted that on a 2-year basis, growth remained solid when we factor in the 7% growth we achieved in the year-ago period.

We are pleased to also report a continued improvement in profitability as we grow a 60 basis point improvement in adjusted operating profit margin, ex amortization, as we delivered productivity savings in our core business and benefits from acquisition-related synergies.

Our integration efforts at Frutarom are progressing well. Cost synergies continue to be a source of strength as we achieved approximately $30 million through the first 9 months of 2019 and now expect to deliver approximately $50 million for the year, significantly ahead of our $40 million estimate that we announced last quarter.

We also substantially completed our review of the Russia and Ukraine allegations as well as a secondary review of Frutarom operations in certain other jurisdictions, including those that we deem as high risk. This review supplement our prior global compliance initiatives that we were conducted subsequent to the closing of the Frutarom transaction.

While I will speak in more detail in a moment, I want to state that we have confirmed in recent investigation that total affected sales represents less than 1% of IFF's and Frutarom's combined net sales for 2018 and that the impact of the review is including the costs associated with them to date have not been and are not anticipated to be material to IFF's financial conditions or results of operations. In addition, no evidence has been uncovered suggesting that any of these comments might have had any connections with the United States.

Finally, as we look to the fourth quarter, we have started strong as all 3 segments grew mid-single digits in October. As a continuation of this trend, we believe our full year 2019 sales and adjusted EPS, excluding amortization, will finish in line at the low end of our previously stated guidance range.

As I reflect on the year in entirety and acknowledge the many moving parts, both good and bad, that have occurred, I'm pleased to say that we are on pace to deliver solid top and bottom line results on a combined company and currency-neutral basis, a testament of our industry, our exceptional business and unbelievable employees that make it happen. And as we build a stronger, more competitive organization for the future, 2019 provides a foundation grounded in resilience that gives us confidence and optimism for our journey ahead.

Now circling back to our third quarter 2019 financial performance. We delivered broad-based improvements in sales, profitability and cash flow. Our sales totaled approximately $1.3 billion, one of our highest in company history. On a combined basis, we saw sequential acceleration of currency-neutral sales growth as we grew 2% driven by acquisitions and our Scent performance. In absolute value, the addition of Frutarom provided a strong benefit to currency-neutral adjusted operating profit, excluding amortization, which increased 45% over the prior year period. This, combined with margin improvement initiatives and acquisition synergies, led to a 60 basis point expansion in adjusted operating profit margin, excluding amortization. The net result was a benefit to cash flow generation while we achieved improvements in both operating and free cash flow.

Our integration efforts are well (inaudible) and delivered against our plan. We are currently strengthening our go-to-market approach with the expansion of our Tastepoint model in key markets around the world as a blueprint for success. Our intent is to continue to serve the fast-growing local and regional customers with a differentiated service model built on speed and agility to help them win in their marketplace.

In terms of cross-selling and in integrated solutions, we have already achieved approximately $14 million run rate sales and have identified greater than 800 projects in the pipeline, representing approximately $110 million of sales. And while we are on track to deliver our stated target of $100 million by 2021, we expect that this number will only increase over time as we capitalize on our innovation pipeline, broad category exposure and vast customer base.

We continue to strive towards our ultimate operating model of Scent, Taste and Nutrition & Ingredients, which will define our organization moving forward. Talent and culture within the organization remains paramount as we execute our talent agenda to enhance our high-performing corporate culture with extreme accountability, bias for action and effective collaboration.

We also continue to deliver strong cost synergies, achieving $30 million for the first 9 months. Based on our progress to date and our expectation that savings benefits will continue to accelerate in the fourth quarter, we are now forecasting that we will achieve approximately $50 million in cost synergies in the year 2019.

In terms of cash flow, our operating cash flow was strong, up $181 million in the first 9 months of 2019 compared to the previous year period. We also improved our net debt-to-EBITDA ratio from 3.6x in the second quarter to 3.4x. As a reminder, debt repayment continues to be our #1 priority in our capital allocation as we progress towards our net debt-to-EBITDA target of below 3x by the end of 2020.

As I just mentioned, we are further increasing our year 1 cost synergy target to approximately $50 million. With this, we are now expecting to deliver greater than 60% higher synergies in 2019 against our initial target of $30 million to $35 million. In the areas where we are focusing on our cost energy efforts, we continue to see significant progress against our goals. We are meaningfully outpacing our original procurement savings target driven by purchasing power, make versus buy and tail spend. We also have completed the closure of 5 plants and announced an additional 11 closures via our manufacturing network optimization program.

Expanding our focus, we are driving operations excellence initiatives to generate incremental savings. Some examples include logistics and packaging synergies, which will benefit all of our segments.

Assessing where we are today, our team has done a very good work generating incremental savings. Looking at our $145 million goal, I believe we are on track to over-deliver upon this target, further supporting the business and driving value for our shareholders.

As a follow-up to our compliance disclosure in the second quarter, I want to take a few moments to provide a more formal update. As a reminder, as disclosed last quarter during integration of Frutarom, we were made aware of allegation that 2 Frutarom businesses, operating principally in Russia and Ukraine, made certain improper payments to a number of customers. We are pleased to report that we have now substantially completed a robust review of the Russia and Ukraine allegations. We have substantiated the allegations and have confirmed that key members of Frutarom's senior management at the time were aware of such payments. As a result, we have taken appropriate remedial actions, including replacing senior management in relevant locations, and believe that such improper customer payments have stopped.

We have also conducted robust secondary review of Frutarom's operations in certain other jurisdictions, including those that are deemed high risk. This review supplement our existing global compliance initiatives that were implemented at Frutarom in connection with the closing of the Frutarom transaction. These secondary reviews were conducted with the assistance of outside legal and accounting firms, including Freshfields, Bruckhaus Deringer and Deloitte. These reviews are substantially completed.

Following the extensive review, we confirm that the total affected sales represents less than 1% of IFF's and Frutarom's combined net sales for 2018 and that the impact of reviews, including the costs associated with them to date, have not been and are not anticipated to be material to our results of operations or financial condition. In addition, no evidence has been uncovered suggesting that any of these compliance matters had any connection to the United States.

With that, I would like to turn it over to Rich to take you through our financial performance in more detail.

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [4]

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Thank you, Andreas. Combined currency-neutral sales grew 2 percentage points over the prior year driven by the contribution of acquisitions as well as growth in the Scent division and a stabilization at Frutarom. From a profitability perspective, we were also pleased that adjusted operating profit margins, excluding amortization, improved 60 basis points year-over-year driven by an increased emphasis on productivity savings and the benefit of acquisition-related synergies.

From a legacy IFF standpoint, we delivered very strong operating profit leverage with currency-neutral adjusted operating profit, up 6% on 1% top line growth.

As I have done the last few quarters, I would also like to highlight the impact of emerging market pricing on our growth rates to better compare with our peers. As a reminder, for a variety of reasons, many of our sales transactions in the emerging markets occur either in U.S. dollars or other hard currencies or our indexed to 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, but this is different from our peers. We believe our reporting standard provides investor 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's important to help all of you understand our performance relative to our competition.

During the first 9 months of 2019, the stronger USD environment, plus significant emerging market devaluations year-over-year in several key markets, had approximately a 2% currency impact if we include emerging market pricing. You can see from the chart that 3 countries outlined represented less than 10% of Scent and Taste sales but had significant devaluations.

Turning to business unit performance for the third quarter. In Scent, currency-neutral sales grew 3% with growth in all regions and nearly all categories. Performance was strongest in Fine Fragrances, growing mid-single digits, led by robust growth in EAME and Greater Asia.

Consumer Fragrances grew low single digits with increases in nearly all categories, led by Home care, Hair Care and Fabric Care. Fragrance Ingredients was flat as price increases were offset by volume declines related to the supply chain destocking.

Scent currency-neutral segment profit was flat as the benefits of productivity initiatives and mix were offset by unfavorable price to input cost. We believe that the timing impact of raw materials between inventory and the P&L that we saw in Q2 reversed in the current quarter. We are starting to see signs of raw materials easing, but the cost remain elevated given the 20% increases we experienced over the past 2 years.

In Taste, third quarter currency-neutral sales declined approximately 2% against a very strong growth of 7% in the year ago period. Growth was strongest in Greater Asia with higher single-digit growth. Contributing to this growth were improvements in key markets such as Indonesia, India and China. However, as expected, the volume erosion with multinational customers that we outlined last quarter continued into the third quarter, offsetting growth. From a category perspective, it should be noted that performance was strongest in Beverage and Savory, led by new win performance.

Despite a challenging top line, Taste segment profit grew 4% on a currency-neutral basis driven primarily by productivity initiatives and cost management. This focus drove a 90 basis point margin improvement year-over-year.

Before moving on to Frutarom, I want to share some additional context on Taste. The fundamentals of this business remain quite strong. Our project pipeline and win rates are both up about 25% year-over-year. This bodes well for the future.

As I just mentioned, volume erosion worsened further in Q3 and is now more than 5x our 3-year average. However, I'm pleased to say that we have already begun to see this inflection in the fourth quarter of 2019 as new win contribution is high and volume erosion has begun to normalize.

In the third quarter, Frutarom sales totaled $364 million. On a stand-alone basis, currency-neutral sales increased 5% driven by the net contribution of acquisitions and divested businesses as organic sales remained constant. Performance was driven by growth in Taste and Savory but was offset by some of the same dynamics that we shared in the second quarter, with continued pressures in the F&F ingredients, mostly -- most notably CitraSource and Natural Product Solutions, particularly raw material -- more material-driven price declines in Natural Colors.

We have seen growth stabilize in the third quarter and are expecting an improvement in the fourth quarter as we start to lap some of the transitory issues. I'll discuss this in more detail in a moment.

In terms of segment profit, the Frutarom division delivered $28 million and $68 million of profit, excluding amortization. Third quarter margin profile continues to be strong at 18.7% if you exclude amortization. Margin continues to be strong by -- driven by cost management, acquisition-related synergies.

Turning to cash flow dynamics. Operating cash flow in the first 9 months of 2019 was up significantly from $202 million last year to $383 million this year. The performance was driven primarily by higher cash earnings, core working capital, defined as inventories, accounts payable and accounts payable, improved year-over-year with progress in all 3 metrics. Inventory still remained at elevated levels primarily due to raw material cost increases and safety stocks within the Scent division. However, in the third quarter, we saw a positive inflection and the levels are continuing to improve.

In the first 9 months of 2019, CapEx as a percentage of sales was 4.2% driven by new plant and capacity investments, mainly in Greater Asia, as well as creative centers and integration-related investments. For the full year, we continue to believe that CapEx as a percentage of sales will be between 4.5% and 5% of sales. Bringing this all together, we had a strong $123 million increase in free cash flow in the first 9 months of 2019.

Before turning to our outlook for the remainder of the year, allow me to bridge our expected full year 2019 organic growth to our long-term growth aspiration of 5% to 7%. In '19, we have been impacted by 2 specific challenges: one in our Taste segment; and the second in our Frutarom segment.

Starting with our combined organic growth, we expect to finish 2019 at approximately 2% organically. As we communicated throughout the year, we have been impacted by higher-than-normal volume erosion on our core Taste business, particularly with multinational customers. The impact of this on our consolidated growth is approximately 0.5 point on a full year basis.

At Frutarom, the combination of the transitory issues we outlined, including CitraSource, Natural Colors, trade and marketing as well as the compliance investigation, had approximately a 1.5 point adverse impact on our top line growth relative to expectation. If we adjust for these items, our normalized combined organic growth would be approximately 4%. This would be in line with the long-term organic growth guidance we communicated at our Investor Day in June this year.

Then when you layer on approximately 1 percentage point of cross-selling benefits, which we will see a significant ramp-up in 2020, and 1 percentage point from additional M&A, similar to the 1 percentage point we achieved in 2019, you get to 6%, which is the midpoint of our long-term range of 5% to 7%.

Looking at the cadence of our growth in 2019, compared -- combined company currency-neutral sales, inclusive of M&A, has improved sequentially from Q2 to Q3. And while we're early in the fourth quarter, we do expect the improving sales trend to continue, up mid-single digits in Q4. As noted by Andreas, the start to Q4 puts us on a trajectory to exceed this level. We are seeing a strong rebound in Taste as volume erosion is normalizing, and we are targeting positive growth at Frutarom as we begin to lap several of the isolated issues I mentioned a moment ago.

Taking into account our year-to-date performance and if the strong start to Q4 sales trends continue, we expect to be at the low end of our previous guidance range for sales and adjusted EPS, excluding amortization. Delivering upon the low end of our previous guidance represents very good results in a challenging year with currency-neutral sales growth of approximately 3% and adjusted operating profit, ex amortization, increasing mid-single digits, both on a combined basis. The operating leverage is even more pronounced in the second half, in excess of 3x.

With that, I'd like to turn the call back over to Andreas.

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Andreas Fibig, International Flavors & Fragrances Inc. - Chairman & CEO [5]

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Thank you, Rich. As we look ahead, there are several potential near-term catalysts that we believe will provide tailwinds. From a sales perspective, Taste volumes are starting to rebound, as Rich just mentioned, which we expect to increase mid-single digits in quarter 4 as destocking ends. In Scent, we will capitalize on a $450 million incremental access by our additional 3 global core lists, assuming we only achieve our fair share which can provide a couple of percentage points of growth over the next few years.

In Frutarom, we expect to see improving trends as Q3 was better than Q2, and Q4 is expected to be better than Q3. Then as we cycle transitory issues Rich highlighted, growth will return to our mid-single-digit trend. To complement this, cross-selling benefits are expected to add approximate $100 million by the end of 2021.

From a profitability perspective, we expect to benefit from acquisition-related cost synergies. 2019 have only had great success, achieving $50 million in savings for the full year, and expect the incremental benefit we will be no less than additional $50 million in 2020 as we are internally targeting more.

At the core, we will also deliver on $100 million productivity initiatives we outlined at our Investor Day. About 1/3 will be achieved in 2019, 2/3 coming in 2020 and 2021. And finally, we're starting to see signs of raw material deflation following the 20% increase we experienced over the past 2 years.

Translating this into go-forward financials, we continue to expect to deliver 5% to 7% currency-neutral sales growth and a 10%-plus in adjusted EPS, excluding amortization, including both cross-selling benefits and bolt-on acquisitions.

In summary, the third quarter was a quarter of good progress with positive momentum building. We delivered sequential improvement in growth and achieved adjusted operating profit margin expansion, excluding amortization, via synergies, productivity and cost management.

We are confident in our execution of our integration plan and in turn have delivered increased cost synergies in year 1. We have started quarter 4 strong, and given the strength, we are reconfirming our full year 2019 financial guidance.

Looking beyond 2019, we have strong value-creation opportunities. We have many near-term catalysts. Our path forward is clear: deliver strong value creation for all of our stakeholders through growth acceleration, margin expansion and a successful integration.

With that, operator, we are now happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Mark Astrachan with Stifel.

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Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

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I guess a few questions. So maybe to start, the commentary about the strong start to the fourth quarter, I guess, what gives confidence that you can sustain the improvement through the quarter? Last quarter sequentially worsened through the quarter, so what gives confidence that this time is different?

And I guess two, if you're talking about October being better, you've got the extra week at the end of the quarter, so then by definition, wouldn't the number be materially better for the full fourth quarter? So I guess maybe can you reconcile some of that for us? And then also confirm whether Frutarom is like-for-like in that it is excluding the 3 days at the beginning of the quarter that weren't in the base.

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Andreas Fibig, International Flavors & Fragrances Inc. - Chairman & CEO [3]

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Okay, Mark. First of all, it's Andreas. Let me get started. So from the visibility point of view, we have already 5 weeks, which I think is good. We see what we have in the order book. And we have, in particular, on the Taste side, very, very strong win rates. So these are the things which make us confident for the fourth quarter. And as you just mentioned, we have the 40 -- 53rd week as well. So all in all, we see good development starting into the fourth quarter. And in particular, we are happy about Taste. We had a couple of quarters which were not going so well. Certainly, again, a very, very strong comparison last year, but that's just turning the corner quite, quite rapidly and absolutely in the right direction. But Rich might add to that.

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [4]

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Yes. Mark, I think you're right. I mean if you recall the comment I made was that if the trend continues through the end of the quarter, we're on target to exceed the mid-single-digit, which includes the 53rd week, so -- and doing that would enable us to get to low end of the guidance.

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Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [5]

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And on the Frutarom piece, so that -- excluded in the fourth quarter numbers?

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [6]

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It's the standard 4 4 5 and excludes the M&A also.

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Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [7]

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Got it. Okay. And then thinking about 2020, I realize it's early and you may not want to talk about it, but I guess, just a couple of puts and takes to it. So you've got a bunch of headwinds in terms of things that you're lapping like the extra week, incentive comp, reset hedge gains, FX, et cetera. So it seemed like maybe it's a little harder to get to the longer-term earnings algorithm for next year unless sales growth accelerates. So I guess A, is that directionally a reasonable way to think about it? And then B, from a currency-neutral sales growth, obviously, it's a longer way off. But directionally, how should we think about the commentary you just gave about the bridge from the 2% fiscal '19 organic to this normalized growth of 6% next year, which would seem like you need a little bit to go right to get to?

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Andreas Fibig, International Flavors & Fragrances Inc. - Chairman & CEO [8]

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Look, we -- Mark, we have a lot of positives, and I actually believe we will start in the next year with quite a bit of tailwind. Let me talk about it.

The first one is certainly that we see that the Taste volumes are rebounding very, very strongly. So that's one which is really important because it has tracked us down in 2019. Then we have now the 3 more core lists with our Scent business, which gives us access to $450 million in incremental sales potential. And we see that we have already won some businesses with this customer this year, which will then materialize next year. So that's another important move forward.

We are lapping some of the Frutarom transitory challenges like CitraSource, for example, and then the Russia case. So that's a good thing as well. And I think Rich talked always to it that we can see a good mid-single-digit growth for the asset for mid of next year. So that's good.

And what really makes me very optimistic is that we see the first nice cross-selling wins. We have this as an extra budget line in. We have a very, very strong pipeline of more than 800 projects already, which is really, really, really good.

And on top of it, if you take a very close look to the cost synergies, we are very happy with what the organization has delivered this year, in particular, on procurement savings, because procurement is so important because it doesn't distract the organization from anything. And we're delivering now cost savings in general this year of $50 million, which is way above what we had expected, and we go with that tailwind into 2020 -- as 2020 as well with the usual core productivity programs, which are running. And then we see some tailwind on the raw mats as well. So that's -- I think these are a lot of very strong positives going forward.

Certainly, hedging and FX might be a bit of a headwind, but it all depends how the currencies develops. But Rich, you might comment on that.

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [9]

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Yes. Look, I think, Mark, there are, as you said -- I think when you look at absolute year-over-year, there's going to be some headwinds from currency. We don't have the 53rd week so that could be 50, 60 basis point headwind year-over-year. We do get the benefits from cross-selling. I think the fundamentals are strong, and I think that's what we feel good about.

As I said, as Andreas mentioned and as I said on the last call, I think it's going to be more towards the middle of next year when we lap some of these transitory issues. So I'm not ready to say we're going to get to the 60% next year because I think we have clearly some transitory issues we have to work through, but the foundation is solid. And I do think the long term -- our beliefs are that the long-term growth potential is there, and that deal hasn't changed.

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Operator [10]

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And we'll take our next question from John Roberts with UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [11]

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I'm looking at Slide 15 and the 1.5% sales headwind from transitory issues at Frutarom. I think that's about $20 million or that would've been about a 5% sales headwind to the Frutarom segment sales. So is a way to think about this is that underlying business trends at Frutarom, excluding these headwinds, is mid-single-digit currently? And do we -- that should accelerate to be above the corporate average still? Or you still consider Frutarom to be one of the highest growth longer-term segments in the company?

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [12]

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Yes. John, I think it's -- look -- you look at the underlying mix of businesses in the categories, that's the right way to think about it, that it's an above-average grower. Once we cycle through that, those transitory issues, some of which will continue into next year, but yes, that's consistent with our view.

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Andreas Fibig, International Flavors & Fragrances Inc. - Chairman & CEO [13]

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We see a couple of these segments within the legacy Frutarom business like conclusions where we have good double-digit growth, and we believe that this will continue going forward.

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Operator [14]

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And we'll take our next question from Mike Sison with Wells Fargo.

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Michael Joseph Sison, Wells Fargo Securities, LLC, Research Division - Senior Analyst [15]

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Nice quarter. In terms of the Frutarom effect on earnings, yes, you noted it was 1.5% hit on sales. What was the hit on earnings or EPS, which way do I look at it? And does that come back with higher leverage longer term as you got more cost savings and synergies to support that growth?

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [16]

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Yes. Look, I mean, from an overall profitability standpoint, if you include the synergies, it's not a hit, right, I mean from -- exclusive of the borrowing cost and the cost of capital. But from a growth standpoint, as we move forward, some of these businesses that we're cycling through that we've talked about in the past, CitraSource, the trade-in marketing, some of the compliance-related stuff, our lower margin is lower-than-average margin profiles compared to the overall Frutarom level. So as we've cycled that, there's actually a favorable pick-up going forward. So I think overall, it's not that much of a drag in terms of -- from a P&L standpoint.

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Operator [17]

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Our next question comes from Lauren Lieberman with Barclays.

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Lauren Rae Lieberman, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [18]

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So I noticed in the Q, you talked about raw material headwinds persisting to the next 2 quarters and then even partially offset by cost savings. So just -- does that imply that margins will be under pressure for the next 2 quarters, 4Q and 1Q?

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [19]

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I think, for me, Lauren, the way to think about it is that they're still at elevated levels. I mean I think we're starting to see some signs of stabilization.

As I look at sort of the net of input cost to raw material -- pricing of raw material cost, they were definitely a negative for the first half of the year. Q3, we're basically breakeven, and I expect it to be slightly favorable in Q4.

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Andreas Fibig, International Flavors & Fragrances Inc. - Chairman & CEO [20]

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And what helps us as well as is that Nicolas and his business unit have done a good job to keep -- let's say, take some structural cost out to be very competitive in this field, and that's helping me as well.

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Lauren Rae Lieberman, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [21]

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Okay. Great. And then, Rich, it wasn't in the Q. Could -- what was the incentive comp tailwind for the quarter? Because that will help also with modeling next year.

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [22]

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Between $5 million and $10 million.

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Lauren Rae Lieberman, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [23]

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Okay. All right. Great. And then if you can talk also -- just North America Tastepoint, I was just curious kind of your thoughts on why that business has slowed because I'd felt like that was sort of an advantageous model you put together and -- so any commentary you can offer there would be really helpful.

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Andreas Fibig, International Flavors & Fragrances Inc. - Chairman & CEO [24]

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Yes. Absolutely, and that's a very, very good point. We have seen it in that very quarter, but it's already rebounding strongly in the fourth quarter. I would say it's a transitory topic for the quarter driven by vanilla in a sense that some of the customers went from natural vanilla to more the one -- the synthetic solutions, which is good from profitability point of view, but not so good from the sales point of view. And we see now a good start into the quarter. So I would not interpret too much into it. The concept stays and the concept thrives, so we are doing very well here.

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Operator [25]

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We'll take our next question from Gunther Zechmann with Bernstein.

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Gunther Zechmann, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [26]

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Just a few to run through, please. The overall synergies with Frutarom, you kept unchanged, $100 million revenues over 3 years, $145 million cost synergies. You speak very confidently about achieving or overachieving those targets. What makes you hold on to the numbers that you originally came with then? Or what would trigger you to actually raise the synergy target? That's number one.

The second one is on the mid-single-digit growth that you've seen in October. Just wanted to clarify that this is local currency sales growth rather than organic. And is it right that in Q4, you should have just about over 1 percentage point of consolidation gains on the revenue line as well?

And then within my one question, question 1 fee, very briefly, just CapEx 2020, what should we expect?

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [27]

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Let me just make sure I get the 3 different items in the -- on the question, Gunther. So first, let me start with October. It is -- it's currency-neutral organic growth, so it excludes the M&A. And that's the results through the first 5 weeks of Q4.

In terms of CapEx, next year, I would expect us to be around 4.5%, plus or minus. We're still working through that, but it's the peak year in terms of '19 and '20 as we've talked about. We're finishing up a couple of the key investments in Asia -- or India and Indonesia. And we've got probably the peak of the integration CapEx. And then from there, we'll move down pretty quickly into 2021 going forward, along the lines of 3%, 3.5% that I've talked about previously.

In terms of the synergy guidance, just keep in mind where we're seeing the traction and where we've over-delivered in 2019 is really on the procurement side. I think that we're very, very confident in our ability to deliver that. Obviously, that plateaus, and I think we still have a lot of work to be done next year, particularly around the footprint and the site integration work. So it's a little bit early for me to raise the target for the $145 million. As I said in my comments, I think it puts us on a trajectory to do that, but I'm not ready to declare victory.

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Operator [28]

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We'll go next to Faiza Alwy with Deutsche Bank.

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Faiza Alwy, Deutsche Bank AG, Research Division - Research Analyst [29]

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So a couple questions. I guess first, if I look at some of your competitors and how they're doing, it seems to me that they haven't seen the type of volume erosion that you have this year and accepting that there seems to be a turn in October. But I wanted to see if you had any thoughts on why that is. And what can you do to align yourselves more with those that are winning?

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [30]

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The fact that -- I mean it's -- I think from a big picture standpoint, we're on all the core lists that we want to be on and where it makes sense is to be on the core lists from an economic standpoint. Certain of our customers are not performing as well. When you look at a 2-year trend, for the first 9 months of the year, you adjust for the pure-based currency dynamic, we're pretty -- we're very close to our largest competitor. So I think we don't believe that we are fundamentally losing share and that we're performing well in the market and once we pass the transitory issues.

So I think we're -- the best thing we're doing and we're focused on is executing on our plan. Andreas talked about the opportunity we have going forward on the Scent side in terms of nearly $450 million in core lists access. As we progress on that, that provides real upside to the Scent business.

I talked about some of the commentary around -- on the Taste -- legacy Taste business, about the order book and win rates being up significantly year-over-year. That bodes well for the future. So I don't know if there's -- look, we have to execute, and we battle every day. We compete every day, and that's what we're focused on.

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Andreas Fibig, International Flavors & Fragrances Inc. - Chairman & CEO [31]

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Yes. Absolutely.

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Operator [32]

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Our next question comes from Adam Samuelson with Goldman Sachs.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [33]

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I was hoping you could provide just a little bit more color on the Taste kind of growth outlook and the confidence you just have there about that kind of returning in 2020 just given the performance this year just -- you really think it's concentrated with the multinational customers and just categories where you feel your win rates would suggest an acceleration from the offing?

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Andreas Fibig, International Flavors & Fragrances Inc. - Chairman & CEO [34]

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Sure, Adam. Absolutely. Look -- listen, we will see the turnaround already in the fourth quarter. What we have seen the first 5 weeks and what is in the order book looks very, very strong. And usually, the business goes a little bit in waves here, and we're not -- on the upstream right now. We see a good demand in many areas, in particular in very innovative areas. We see it in the plant-based proteins, for example, which is becoming a really important driver of the business.

We see that we have more of these solutions available, so the portfolio we inherited through Frutarom, which is helping as well. Some of it will be counted in the cross-selling and to the solution space. So we are actually very optimistic that this is going in the right direction, and the team is driving.

What I just said for Tastepoint is actually important as well because certainly, the last quarter was not great for Tastepoint, but we are seeing -- see a good rebounding on this one with many of our core customers. And we see, in particular also, good winning on the Beverage side, which is very helpful.

So all in all, all the signs are very, very positive on that business. And I think that the theme is fairly optimistic and motivated for the next couple of quarters.

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Operator [35]

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And we'll take our next question from Jeff Zekauskas from JPMorgan.

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Silke Kueck-Valdes, JP Morgan Chase & Co, Research Division - VP [36]

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It's Silke Kueck for Jeff. I have a question on your productivity initiatives outside of Frutarom. Can you talk about like where you stand so far? So I think what you've announced is that you've taken like a $40 million charge in there out of 90 positions to be eliminated. And maybe like a total cost will be $20 million so there's like some to go. So where are you in terms of the program? And what do you think the savings might be that you'll see from it this year and next year?

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [37]

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Yes. So I mean it's -- I would say we're on track to deliver the $100 million that we've talked about. Remember, there's different components of it. A big part of it is in the Scent business. On the COGS transformation line, that start -- that part of it is in the early stages now. What you're seeing some of the charges for relate to, on the Scent side, the overhead realignment of the business.

Finance transformation is something that we're going through now. I think we're going to basically deliver probably a little less than 1/3 this year and then the remaining 2/3 equally over 2020 and 2021.

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Andreas Fibig, International Flavors & Fragrances Inc. - Chairman & CEO [38]

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What is really exciting on this area as well is that the reason why we spent actually good amount of CapEx this year is to modernize much of our manufacturing footprint where a lot of more robotics and AI goes in, which will help us in the mid- and long term to have very competitive manufacturing cost in place, and that's helping as well. And just -- and that's what Rich said because we have to finish up a couple of projects in Asia, which we are just building the most modern and biggest flavors and fragrance manufacturing plant in India. We're doing something in China and Indonesia. And also, with the optimization of the footprint, we bring in a lot of technology, which will help us to come to a very, very competitive manufacturing cost.

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Operator [39]

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We'll take our next question from Heidi Vesterinen with Exane.

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Heidi Maria Vesterinen, Exane BNP Paribas, Research Division - Financial Analyst [40]

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So you had a new comment in the 10-Q, highlighting potential risk of a goodwill impairment. What was your rationale for adding that comment this quarter? And are you prepared to roll out impairments at this stage given the underperformance?

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [41]

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Heidi, it's -- look, as we go through the normal process at the end of the year, it's a required update in the disclosure. Look, at this point, I consider it unlikely that we'll have an impairment. And as I said earlier, we haven't changed our view on the long-term impacts and potential of this business, so I consider it unlikely.

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Heidi Maria Vesterinen, Exane BNP Paribas, Research Division - Financial Analyst [42]

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And then if I could ask another one, another question from the 10-Q. So you've also announced you've entered into a new factoring agreement. What explains the rationale for this? And does this, in part, explain your confidence over cash flows?

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [43]

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Yes. I think it's consistent with our plan. To me, I look at it as it helps us accelerate the deleveraging plan. The cost of capital to do the factoring on our short-term borrowing rates versus our long-term cost of capital rates, it's an attractive trade-off, and so we're being opportunistic about that aspect.

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Operator [44]

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We'll take the next question from Jonathan Feeney with Consumer Edge.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner [45]

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Just -- let me start with the detail. You talked about acceleration in Frutarom for the first few weeks of October. Can you confirm that means it's growing organically not just by acquisition, but growing organically where it was flat, I think, last quarter?

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [46]

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Yes.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner [47]

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That's quick. Related to that...

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [48]

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(inaudible) M&A.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner [49]

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How would a roughly flat organic for last quarter compared with your original plans when you laid out the $145 million synergy target? And I guess related to that finally, is there any kind of -- you've emphasized procurement as the main source of synergies, and that makes a lot of sense. But is there any rationalization going on here in Frutarom that is affecting the growth rate where you're going in and getting rid of unprofitable or tail business, and that's maybe slowing the business down versus what -- the kind of organic growth rate you've seen in [some] of the deal?

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [50]

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No. Jon, I mean I think there's a couple of different pieces there. I mean I think when you ask where the growth rates were and Q3 being flat versus our expectations, obviously, it's below where we wanted to be and where we expected to be. It's driven by some of the transitory issues that I talked about previously in terms of the callers issue and MTS, the trade and marketing, the CitraSource businesses.

So -- and if I look at the core Taste part of the business, as you recall on the Q2 call, we talked about a very challenging June in the Taste business, particularly in Europe. Some of that continued into Q3. But again, we've seen a good start to Q4 and higher than -- certainly higher where we saw in Q3 for all 4 regions in the Taste, the Frutarom as well as for the Savory business. And that's why I think ultimately, we have the confidence in the structural capability of that business.

In terms of impacts related to integration, the reason why we're highlighting the procurement savings is that's really what's accelerating and what's changed the biggest driver or difference in terms of our expected synergies for -- at the start of the year of $30 million to $35 million and where we are now in $50 million. We're making -- we are on target, and we are making good progress against the site rationalization.

You saw on, I think it was Andreas' comment, when we talked about the number of closures we've announced so far and completed in the second half of this year. That will accelerate into 2020, and that's a big part of the driver of the increased synergies year-over-year between '19 and '20.

I think from a -- you get to the point about businesses that are on a less attractive margin profile, profitability profile, I think that's more of a mix effect that we'll see going forward.

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Operator [51]

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Our next question's from Brett Hundley with Seaport Global.

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [52]

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Rich, I just wanted to go back -- just want to go back to the -- Heidi's question related to the -- your comment on the factoring agreement. Do you see that pulling anything forward from Q4, what's normally a pretty big working capital quarter for you?

And then if I can just follow on with a separate question. Just going back to raw materials, are we seeing any new synthetic production coming online out there that might help to combat some of the issues that we've seen in recent years? And does that play into some of your confidence about the go-forward there?

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [53]

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First part, on the working capital piece of it, it might have a small impact on what we typically have seen in the quarter, but I mean, it's not a huge program. I mean I still expect to get the improvement in Q4 that we typically see given the cyclicality and the way things operate in the fourth quarter.

In terms of new capacity input cost, I think, certainly, the first thing is that we've seen, I'll say, a stabilization of the supply chain, and that's a starting point. I mean if you think about what I talked about Q2, Q1 was -- there were still a lot of volatility out there. Inventory levels remain high in the Scent business for us and our competition, but we are seeing signs that, as I said, that it's starting to stabilize. And I think the industry, as a whole, is starting to rebalance inventories and get away from safety stocks. I talked that we saw some improvement in Q3 in terms of inventory levels coming down. I expect that to continue in Q4.

There's new capacity coming on from BASF in the fourth quarter. I think some of the capacity that was out of the market because of the fires is coming back on. And I think that helps provide a trajectory going forward for us to reduce inventory levels and provide -- as Andreas said, we're starting to see some signs that we may have some easing next year or going forward.

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Operator [54]

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Our next question's from James Targett with Berenberg.

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James Targett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [55]

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Just one question from me on the compliance update. Can you just confirm, and you talked about being substantially complete, when do you expect it to be complete and what's outstanding?

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Richard A. O'Leary, International Flavors & Fragrances Inc. - Executive VP & CFO [56]

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Yes. Look, I mean, we're substantially complete in terms of doing the investigation. As in anything like this, there's things that have to -- we have to finish putting, resolving issues, whether it's people that are on [garden] leave that have to then go through. But it's the normal sort of follow-up and cleanup that has as a result of something like that.

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Andreas Fibig, International Flavors & Fragrances Inc. - Chairman & CEO [57]

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Yes. It's also cleaning up all these thousands of documents we have screened, so Deloitte and some of our legal partners here as well. I think in the first quarter, we should be fine with that.

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Operator [58]

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And ladies and gentlemen, this will conclude today's Q&A session. I'd like to return the call to Andreas for final remarks.

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Andreas Fibig, International Flavors & Fragrances Inc. - Chairman & CEO [59]

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Thank you very much for all the good questions and the attendance here, and we will follow up with one-on-one sessions with many of you. Thank you. Take care.

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Operator [60]

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And this does concludes today's program. You may now disconnect.