International Flavors & Fragrances Inc.
Q3 2015 Earnings Call Transcript

Published: 10 Nov 2015

[Operator:]

At this time, I would like to welcome everyone to the International Flavors & Fragrances' Third Quarter 2015 Earnings Conference Call. All participants will be in a listen-only mode until the formal question-and-answer portion of the call. Participants will be announced by their name and company. In order to give all participants an opportunity to ask their questions, we request a limit of one question per person. I would now like to introduce Michael DeVeau, Vice President, Global Corporate Communications and Investor Relations. You may begin.

[Michael DeVeau:]

Thank you. Good morning, good afternoon and good evening everyone. Welcome to IFF's third quarter 2015 conference call. Yesterday we distributed press release announcing our financial results. A copy of the release can be found on our IR website at iff.com. Please note that this call is being recorded 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 of 2015. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning factors that can cause actual results to differ materially from forward-looking statements, please refer to our cautionary statement and risk factors contained in our 10-K filed on March 2, 2015 and our press release that we filed yesterday. Today's presentation will include non-GAAP financial measures, which excludes those items that we believe affects comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release. With me on the call today is our Chairman and CEO, Andreas Fibig; our Executive Vice President and CFO, Alison Cornell; our Group President of Flavors, Matthias Haeni; and our Group President of Fragrances, Nicolas Mirzayantz. We will start with prepared remarks from Andreas and Alison and then the entire team will be available for any questions that you may have. Before turning the call over to Andreas, I would like to let you know that we continue to explore options to improve our liquidity on Euronext Paris. We remain optimistic that we can enhance our liquidity on Euronext to allow more European investors access to our shares. We will continue to keep you updated on our progress as we move forward. With that, I would now like to now introduce our Chairman and CEO, Andreas Fibig.

[Andreas Fibig:]

Thank you, Mike. I would like to start by providing an executive overview of our operational performance this quarter. In addition, similar how we structured the quarter two conference call, I want to provide an update on the execution of our four-pillar Vision 2020 strategy. Once finished, I'll ask Alison to review our financial results in greater detail, including the specifics on each business unit; as well as our cash flow statement and our outlook for the balance of the year. I'm pleased to report that our financial results for the third quarter accelerated versus our second quarter performance. Both in terms of currency-neutral sales and currency-neutral adjusted operating profit growth, as we continue to benefit from diversity of our business as well as our recent acquisitions. Currency-neutral sales in the third quarter improved 7%, including approximately 3 percentage point relating to the acquisition of Ottens Flavors and Lucas Meyer Cosmetics. Organic top-line performance, which increased 4% this quarter, continued to be driven by new wins, particularly in Fragrance Compounds by the contribution of new wins were the highest level in nearly two years. This was favorable to profitability as adjusted operating profit and adjusted EPS both grew 10% on a currency-neutral basis. On a year-to-date base, results remain strong, as currency-neutral sales growing 6% comprised of 8% growth in Flavors and 5% growth in Fragrances. For the first nine months in 2015, consolidated adjusted operating profit increased 9% on currency-neutral basis, driven by sales growth, the benefit of productivity programs and manufacturing and RSA cost leverage. Complementing our expansion in gross margin and adjusted operating profit margin, lower interest expense, a more favorable effective tax rate and the reduction of our shares outstanding led to an 11% increase in our currency-neutral adjusted EPS. From a strategic perspective, I would like to talk about a couple of areas. In the areas where we are targeting a market leadership position defined by number one or two market share position, we believe we are taking the right steps to deliver on our ambition of accelerated growth. North America, the Flavors team has done a nice job integrating our recent acquisition of Ottens Flavors, leveraging their defined go-to-market strategy, which focuses on winning with key regional accounts in the U.S. Our Flavors North America business was up 19%. In Flavors Latin America, our proprietary delivery system continues to perform well, as evident with its eighth consecutive quarter of double-digit growth. The third quarter growth was very strong, up 20% on a currency-neutral basis. Within Fragrance, North America Fragrance Compounds grew 7%, with 8% growth in Consumer Fragrances and a 4% growth in Fine Fragrance. The quarter three sub category performance that we're most notable in North America were Hair Care and Home Care both of which grew double digits, plus Fabric Care which grew high-single digits. The third quarter, China Fragrances, another area where we have ambitions to accelerate growth grew 6% on a currency-neutral basis, as we continue to have success with many of the strong regional Consumer Fragrance brands. From a category perspective, Home Care, another area of focus for us, improved high single-digits globally, on a currency neutral basis, led by double-digit growth in North America and Latin America. Delivery systems across both Flavors and Fragrance continues to drive growth. The strong trends in Fabric Care and Beverage continued in the third quarter, driven by our industry-leading encapsulation technology in Fragrances and proprietary delivery systems in Flavors. Fabric Care grew double-digits on a currency-neutral basis in the third quarter, with all geographic markets posting strong growth. This is a direct result of our differentiated encapsulation technology. Given our success in Fabric Care, we have begun to expand into other categories as well. In the third quarter, while still early in terms of strategic execution, we have seen strong results in encapsulation-related sales in Toiletries and Home Care, both which grew double digits. Supporting the expansion of this technology into more categories, our R&D team developed the next generation capsule technology that allows us to further penetrate personal care applications. This technology should allow us to efficiently customize solutions to deliver Fragrance at the points desired by consumers. In Fragrances, building on our legacy of pioneering first, one of our Vision 2020 goals is to launch more new captive molecules to give our perfumers a competitive edge, when creating the next-generation fragrance. Tracking this initiative, we have recently launched two new highly-anticipated ingredients to our perfumers, cosmo fruit (07

[Alison A. Cornell:]

Thank you, Andreas. Looking at our third quarter results, similar to what I did on our Q2 conference call, I want to continue to lay out a bridge from our adjusted financial results to our adjusted currency-neutral results. In the first column, which is inclusive of currency, sales contracted by 1%, while adjusted operating profit increased 7% and adjusted EPS grew 5%. Consistent with what we communicated previously, in the third quarter, we benefited from our euro transactional hedging program, which ultimately protected our euro-denominated profits. Including this benefit, our growth rate in terms of adjusted operating profit and adjusted EPS accelerated to 7% and 5% versus the 1% and 4% we reported in the first half respectively. Yet, even with the benefits of hedging, foreign exchange still proved to be a headwind in the third quarter, as the U.S. dollar remains strong against many global currencies. From a sales adjusted operating profit and adjusted EPS perspective, currency represented an 8 percentage point, 3 percentage point and 5 percentage point impact respectively. On a currency-neutral basis, we continued to deliver strong results, achieving leverage within our P&L with sales improving 7% and adjusted operating profit growing 10%. The increase in adjusted operating profit was driven by gross margin expansion and cost leverage, which led to an approximately 50 basis point improvement in currency-neutral adjusted operating profit margin. Currency-neutral adjusted EPS also improved by 10%, as the year-over-year decrease in our average shares outstanding resulting from our share repurchase program offset a slightly higher effective tax rate and an increase in interest expense relating to both of our acquisitions. The acquisitions we made earlier this year are adding to our performance, evidence that we are investing in strategic value add opportunities that deliver high returns. In the third quarter, the acquisitions of Ottens and Lucas Meyer added approximately 3 points to currency-neutral sales growth, about 2 points to currency-neutral adjusted operating profit, and 3 points to currency-neutral adjusted EPS growth. It should be noted that the amortization of intangibles relating to the Ottens and Lucas Meyer acquisitions represented about $3.5 million in the quarter. If we add this back to understand the cash component of the business, adjusted operating profit and adjusted EPS growth would have improved another two percentage points to 12% respectively on a currency-neutral basis. Pausing here, I would like to provide you with some insight into the trends we saw throughout the quarter. In September, while at a sell-side investor conference, I made some cautionary comments relating to our organic business. Following the Chinese currency devaluation, we saw several customers take a more cautious approach to managing their inventory, which ultimately meant sequential softness as we progress through the quarter. This perpetuated, particularly in emerging markets, which while still positive, up 3% in Q3, was slower than our first half performance of 8%, despite relatively strong performance in Latin America. And while we remain fully committed to the long-term growth of these key markets, in the short-term, we're working to manage the uncertainty and focusing on the levers we can pull to deliver results and strengthen our business. Fortunately, we experienced strong orders the last week of the quarter, leading to the 4% organic growth rate we reported in Q3, ahead of where we thought we would finish the quarter. Turning to business unit performance; Flavors posted its 43rd consecutive quarter of growth, increasing 8%, including approximately 4.5 percentage points relating to the acquisition of Ottens Flavors. All categories experienced broad-based growth, with the strongest results in Beverage and Dairy. In our Europe, Africa and Middle East region, sales increased 4%, led by high-single digit growth in Beverage. Western Europe reported the highest growth, improving 9%, driven by strong new win performance. North America grew 19%, reflecting additional sales related to the acquisition of Ottens Flavors and high double-digit growth in Dairy. If we exclude the benefit of Ottens, organic performance improved sequentially versus Q2, up low-single digits. Latin America increased 20%, as all categories reported positive growth. The strong double-digit trend in Beverage continued for the eighth consecutive quarter, led by our proprietary delivery system. Savory and Dairy also grew double-digits, as a result of strong new win performance, which leverages our proprietary delivery system, as well as our modulation portfolio. Greater Asia remained constant, as growth in Indonesia, India, Singapore and Japan was offset by softness in China, which was primarily driven by a challenging economic environment. Flavors' currency-neutral segment profit improved approximately 9%, as gross margin expansion and cost and productivity benefit more than offset the inclusion of amortization of intangibles related to the acquisition of Ottens Flavors. This led to a 10 basis point improvement in operating profit margin, despite incremental cost in Q3 relating to the China order issue. If we exclude this impact, our operating margin would have expanded by 80 basis points in the third quarter, or growth would have been 12%. It should be noted, however, that we expect a portion of this expense to continue as we work through this issue. Specifically in Q4, we would expect the similar impact in terms of expense as we experienced in Q3. Fragrances' currency-neutral sales improved 6%, including approximately 2 percentage points associated with the acquisition of Lucas Meyer Cosmetics, with all regions posting growth, led by high single-digit growth in Latin America and mid-single digit improvement in Greater Asia. From a category perspective, Fine Fragrance was up 1%, led by Europe, Africa and the Middle-East, which improved 5%, as a result of very strong pipeline of new wins, including Olympea by Pouge (21

[Andreas Fibig:]

Thank you, Alison. I briefly want to reiterate that despite ongoing volatility in several key markets around the world, we were able to deliver strong financial results in the third quarter, thanks in large part to the diversity of our business, as well as the benefits associated with our recent acquisitions. Also, based on our strong year-to-date results and our outlook for the fourth quarter, we continue to believe we can deliver 6% currency-neutral sales growth and approximately 9% adjusted operating profit growth both on a currency-neutral basis. Going forward, continuing our execution of Vision 2020 is a top priority for us. Vision 2020 is focused on increasing differentiation, accelerating profitable growth and creating shareholder value. All three of which we believe are achievable in the years to come. With that, I would now like to open the call for questions.

[Operator:]

. And your first question comes from Mark Astrachan with Stifel, Nicolaus.

[Mark S. Astrachan:]

Yeah, thanks and good morning everybody. Wanted to get some clarity on the fourth quarter expectations from a revenue standpoint. So, if you back out the benefit of acquisitions, are you talking about flattish organic like-for-like, however you want to think about it, sales growth? And then sort of more broadly elaborating on sales growth, I know it's early, but how do you think about 2016 just broadly given continued pressure from customer volumes, as well as the tough first quarter comparisons?

[Alison A. Cornell:]

So, Mark, from a Q4 perspective, we expect to be flat to slightly positive. We have our first month of orders in, which are positive and although one month doesn't make the quarter, it reflects positive results there. If we look into 2016, specifically Q1, while we're still in our budget process, remember in Q1 of 2016 we're facing our toughest comps year-on-year in terms of growth comparison, specifically in, say, Flavors where we grew 9% in Q1 of 2015. So at this point in time as we enter the year we're facing our toughest comps and so we expect Q1 to be challenging. But as we traditionally do expect to share more in our February call regarding our 2016 full-year guidance.

[Mark S. Astrachan:]

Okay. Just elaborating on that though, again preliminary as it is, do you expect long-term targets to be attainable given what's going on from a customer standpoint?

[Alison A. Cornell:]

I mean, at this point, as I mentioned, we're still in our budget process and we really don't want to comment further on 2016.

[Mark S. Astrachan:]

Okay. Fair enough. Just quickly on gross margin. So ex the hedge gain this year, will gross margin – would it still be positive in 2015 and then how do you think about expansion on a longer-term basis if you normalize for that and say on a longer-term basis how should we think about gross margins?

[Alison A. Cornell:]

So, Mark, let me talk first about – so in Q3, our adjusted gross profit margin expanded 170 basis points. And this was driven by our currency heading benefits, as we hedge our raw material purchases to protect our transactional exposure, as well as our cost and productivity savings, volume growth and mix improvement. In Q3, there was roughly a $9.5 million benefit from our hedge, which was included in the gross – in our gross profit. This accounted for the majority of the expansion, but there was also benefit, as I mentioned, from cost and productivity savings, volume growth and mix improvement. As we move into Q4, we expect our currency hedging benefit to be a little less than half of the expansion in Q4, with the other half coming from cost and productivity savings initiatives, minus volume growth and M&A. We believe that our – there is sustainability of gross margin expansion, excluding the FX hedge, as we enter into Q4. As we look in 2016, from a raw materials' perspective, based on what we've seen so far, it's similar to 2015, where we've seen naturals are up, synthetics are slightly down and if anything we're probably flat to slightly up.

[Operator:]

Your next question comes from Lauren Lieberman with Barclays Capital.

[Lauren Rae Lieberman:]

Thanks, good morning.

[Andreas Fibig:]

Good morning.

[Lauren Rae Lieberman:]

Good morning. So just speaking following on that question. In the Q, there was a mention of some derivative gains that are going to be reclassified as income next year. So does that also flow through gross margin, so maybe kind of takes the place of these raw material hedging gains?

[Alison A. Cornell:]

So, Lauren, let me talk a bit about that. And so, we indicated on our Investor Day that we intended to finance our M&A activity through balance sheet leverage. And so between Ottens and Lucas Meyer acquisitions, we executed about $500 million in acquisitions. Initially these were paid for using our existing credit facility and on-hand cash, and now we're looking at longer-term financing opportunities to better align our maturities with the nature of those acquisition. So in September, we entered into interest swaps in anticipation of a long term debt financing and the deferred charges in that table and our 10-Q are being accounted for right now as a hedging instrument, as they are related to these swaps. We still are in the process of evaluating our options for financing and at this point, we haven't finalized the timing or nature of the financing and we expect to have more clarity on that in Q1 of next year.

[Lauren Rae Lieberman:]

Okay. That's great. But is that also – does that conversation cover, I think there was like $8.7 million that was in comprehensive income that was called out as being reclassified over the next 12 months. Are those the swaps?

[Michael DeVeau:]

Lauren, it's Mike. It's okay. Maybe just as I go through the Q, maybe we can touch base offline on that, I'm not sure...

[Lauren Rae Lieberman:]

Yes, absolutely.

[Michael DeVeau:]

We're following from that point (37

[Lauren Rae Lieberman:]

Absolutely. Okay. And then just on Asia Flavors, so I was surprised that flat just felt very strong to me given the commentary at our conference in September and I know, Alison, you talked about strong orders the last week of the quarter. Was that comment specific to Asia Flavors and what have you seen from those customers in the first month? You said that overall orders were up, but I just wondered about the volatility or choppiness of orders from that particular customer base you've been concerned about.

[Alison A. Cornell:]

So, Lauren, you did comment – we did experience softness in China, so if you looked at China by itself, as a subset for Greater Asia in Flavors, it was negative growth. Why it looks flat is because there was offsetting growth in Indonesia, India, Singapore and Japan. And so that's really why it looks flat. I'll ask, Matthias to comment on what we've seen so far in October in terms of the customer make-up.

[Matthias Haeni:]

Well, Lauren, good morning. We have seen a very similar pattern also in the first month of the quarter. I think we made good in-road with new business in all the markets, Alison just referred to, yet we see also continuous challenges in China. We expect that these challenges will continue throughout the quarter, and we're working very diligently with the team, with our customers to strengthen our business in China. And we're still good and confident that we will see a reverse situation in the quarters to come.

[Lauren Rae Lieberman:]

Okay, great. And then just finally on Fine Fragrance, you called out some of the strength, some of the pipeline still on really great new wins in Europe. So does the outlook sort of assume that all the sell-in is kind of done that would cover holiday sell-through of those wins?

[Andreas Fibig:]

Nicolas?

[Nicolas Mirzayantz:]

Hi, Lauren. This is Nicolas.

[Lauren Rae Lieberman:]

Hi.

[Nicolas Mirzayantz:]

Yes, you're right, very strong pipeline of the new wins, and as you pointed out, it's really to cover the period of Christmas. So according to the way the sales progress at the retail level, we will see what will be the replenishment (39

[Lauren Rae Lieberman:]

Okay, great. Thank you.

[Andreas Fibig:]

Thank you.

[Alison A. Cornell:]

Thanks.

[Andreas Fibig:]

Thank you.

[Operator:]

And your next question comes from Mike Sison of KeyBanc Capital Markets.

[Michael J. Sison:]

Hey, good morning. Nice quarter.

[Andreas Fibig:]

Good morning.

[Alison A. Cornell:]

Thank you.

[Michael J. Sison:]

Just trying to getting a feel for the tempo of demand. It looks – I think you sort of noted that fourth-quarter currency adjusted sales growth will be slower. So what are your customers telling you? Are things actually slowing or stable? Just trying to get an understanding in both Flavors and Fragrances where the tempo of demand is headed.

[Andreas Fibig:]

Mike, this is Andreas, I'm taking that. What we see is that for some of our – particularly our global customers the volumes are slowing, but it's actually not a one-fits-all answer, because we see in some areas like still Latin America on the Flavor side, we see strong growth as in the third quarter, which is really double digit. We see countries in Asia with strong growth for both businesses. And we see Europe at least on, for our business, recovering as well. So at the end of the day, it's a very mixed picture region-by-region. The only thing which is probably universal is that the volume for some of the global customers is really challenged. So that's how I would comment on that one, so it's very different and it depends also on the technologies and let me elaborate on that. If you have a technology, which helps the customers to grow the business like our Sweetness Modulation for example, which we are selling very well or the encapsulation on the Fragrance side, then the wins are strong and you really can even against the market trends make great strides. I know it's probably not a general satisfying answer, but it's a very diverse picture we are dealing with here.

[Michael J. Sison:]

Okay. I understand. And then your acquisitions have performed really well, it seems. Can you talk about your pipeline given that could be a good use of cash and growth going forward?

[Andreas Fibig:]

So, you mean the pipeline for M&A?

[Michael J. Sison:]

Of acquisitions, yes. Are you seeing good opportunities out there?

[Andreas Fibig:]

So what we do is, we look at with different lenses at the market, what kind of technology would be valuable for us? Second, where do we need, let's say, a local or regional strengthening of our presence or with certain customers, and in general, good quality companies like we have done with Ottens and Lucas Meyer. So we have a good pipeline, I can't comment further on this one, but we are further looking. And the good thing is that the acquisitions are going very well in terms of the integration. So it means after many years with very little M&A activity, I think, the organization is doing very well to get these quality assets into our portfolio, and they performed actually very well. Just one remark on the skin care or active cosmetic ingredients side, we are very pleased what we see in this market segment because it has just a higher growth than our core markets. So, all-in-all very positive, we have a pipeline and we will, let's say, continue our path here.

[Michael J. Sison:]

Great. Thank you.

[Andreas Fibig:]

Okay.

[Operator:]

Your next question comes from Jeff Zekauskas with JPMorgan.

[Jeffrey J. Zekauskas:]

Thanks very much. I just want to be sure that I can interpret your results reasonably. So what you said was that your adjusted sales were down 1% and your operating profit was up 7%. I assume that that includes the hedge gains and that if the hedge gains are excluded the operating profit is probably flat to up and in your adjusted currency neutral, where you grow sales 7% and your operating profit 10%, I assume that that excludes the hedge gains and other currency gains. Is that correct?

[Alison A. Cornell:]

So I'm going to ask Rich O'Leary to answer that.

[Jeffrey J. Zekauskas:]

Sure.

[Richard O’Leary:]

Hey, Jeff, it's Rich. So, yeah, I think there's two things to think about. When we talk about the margin evolution because the hedge gains are in there on a reported basis, we'll show the year – we'll talk to the year-over-year impact. When we're going to currency neutral, we did what we basically do is restate last year's to reflect the current year gains. So we're stripping out the year-over-year impact and we're making consistent year-over-year from the cash flow hedging impact.

[Jeffrey J. Zekauskas:]

So the hedges are – so again, so the hedges and the currency gains are stripped out of currency neutral, but the hedge gains are included in the first presentation, in the sales contracting 1% and operating profit up 7%?

[Richard O’Leary:]

Well, on a sales basis, we don't hedge the sales line.

[Jeffrey J. Zekauskas:]

Exactly right. It's really the operating profit that's the issue.

[Richard O’Leary:]

Yeah. So on an operating profit when we talk reported-to-reported, it will have the year-over-year impact of the cash flow hedging, either gains or losses; in the case of 2015, it's gains. When we go to currency neutral, we just reflect the current year impact of the gains, so we're not having a year-over-year impact because last year's cash flow hedging impact is really related to 2013 and so we're stripping that two-year basis out.

[Jeffrey J. Zekauskas:]

Right. And then in the course of the call you talked about a $9 million benefit, but when you go to the Q, it looks like it's something more like a $7 million benefit in terms of the cash flow hedging. Why the $9 million instead of the $7 million or what's the extra amount that's added on to the cash flow hedge benefit?

[Richard O’Leary:]

Again, that's the difference between – it's more or less – it's the difference between when we're trying to reconcile – when we're trying to talk to the change year-over-year for example in gross margin. Those are reported-to-reported and that's where you have the year-over-year impact, which is the higher number. When we talk to the operating profit impact, we strip out the last year's impact.

[Jeffrey J. Zekauskas:]

Okay, great. Thank you so much.

[Operator:]

Your next question comes from Faiza Alwy with Deutsche Bank.

[Faiza Alwy:]

Yes, hi, good morning.

[Andreas Fibig:]

Good morning.

[Michael DeVeau:]

Good morning, Faiza.

[Faiza Alwy:]

Good morning. So I just had a few clarifying questions first. One, I think at the Back-to-School Conference you had talked about local currency sales growth of 6% for the year with even contribution from acquisitions and organic growth. So does that still stand or should we expect a larger contribution from organic growth now?

[Alison A. Cornell:]

So, when I talked about even distribution at the Back-to-School Conference, I mean, some of it was relative to rounding as well. So, I would think about it as a 3.5% organic, about 2.5% acquisition related, to get to the 6%.

[Faiza Alwy:]

Okay. Great. And then I just wanted to talk a little bit more about Latin America, particularly on the Flavors side. Some of your competitors have been talking about a potential pricing benefit in Latin America. I don't know if that's because they're euro denominated and it's different for you. So maybe if you could talk about are you able to take some pricing in certain markets or categories to offset currency?

[Alison A. Cornell:]

So, let me start by making a comment in terms of comparison. And so when looking company-to-company, we need to make sure that things are compared on an apples-to-apples basis, organic-to-organic basis and comparable currency related to FX, because I think as reflected in reports, taken as written, they're not comparable. So I think you need to make sure before you compare two companies, you make sure that they are comparable. So with that let me ask Matthias to talk about Latin America market dynamics.

[Matthias Haeni:]

Faiza, we're really traveling well with the many new wins, which we had this year. We also feel very confident that we will continue to commercialize many of the projects, which we have. We have an exciting project pipeline throughout the region. Yes, we face some challenges on current volumes and we will offset it however with new wins, we feel good about it. We always reported that we had very good in-roads in Beverages. We're now expanding more also into Savory, into the Dairy category. And frankly overall, we'll feel pretty good about it also in Q4.

[Alison A. Cornell:]

If I could, just one more comment, just so you know what we do in your apples-to-apples comparison. We fully restate all currency.

[Faiza Alwy:]

Okay. And then could you maybe just tell us what percentage of the Flavors business is LatAm or maybe what percentage of the LatAm business is Flavors just so we could size it because the growth just seems really strong at 20%, so I'm just wondering is it – if you could talk about are these local customers, sort of what the size might be, maybe expand a little bit more on that?

[Michael DeVeau:]

Yeah, Faiza, it's Michael. I mean, we traditionally don't disclose from a Flavor standpoint our percentage of business. I think as you think about it, it's probably our smallest region with respect to the other regions that we have globally, but from a business standpoint maybe Matthias, if you want to provide additional commentary.

[Matthias Haeni:]

Yes, Mike outlined the smallest region, yet from a growth perspective for us very sizable, very impactful. We feel very good about the in-roads we make and I'm confident that we are gaining great market share in Latin America. Again what we are reporting here is the all like-for-like, this is currency neutral, there is no element of pricing in it, but volume and new wins.

[Faiza Alwy:]

Okay. Thank you.

[Operator:]

Your next question comes from Jon Feeney with Athlos.

[Andreas Fibig:]

Hi, Jon.

[Jonathan P. Feeney:]

Could you give us a sense how large right now the naturals business is globally for you and what its growth is and what sort of growth rate are you expecting in the naturals business across categories over the next couple of years?

[Matthias Haeni:]

Well, from a Flavor perspective, we have probably more than 50% of all the new briefs, which we are working on are calling for natural solutions, natural Flavors. We feel excited about the many requests for natural modulators. I cannot exactly give you an indication of the overall market growth. The underlying market growth of naturals, we only realize that definitely naturals are outperforming any other product offerings in the marketplace. It's not only here in North America where more and more consumers they're looking to organics, (51

[Jonathan P. Feeney:]

I got you. Thank you. Just a couple follow-ups on that, if you don't mind. You said more than 50% of all new briefs, but of the existing business can you give me a sense of how much revenue right now is going from – is in products that are already sort of meeting those kinds of natural specifications. And the second question is typically with these new briefs, does that involve a higher pricing or fully developed margin to IFF in the Flavors business as you reformulate with naturals?

[Matthias Haeni:]

Let me take first the question on the margin profiles. Whenever we are in a position to bring technology into a product offering, we typically have a higher margin profile. When it comes to 50% plus on naturals, keep in mind that we still have a lot of developing markets where natural as such may not necessarily be the major call. I'm referring here to many developing markets also in Africa and Middle East and in many other parts of the world. To the question on what the total percentage of the portfolio of natural is all about and we are not sharing this information. We feel good about what we currently have and frankly we made very good in-roads.

[Alison A. Cornell:]

And just to further comment in terms of model, we have a cost-plus model and relative to naturals as well.

[Jonathan P. Feeney:]

Cost plus. So that's actually very helpful, Alison. So when you say cost plus meaning your margin in terms of dollars tends to stay flat and you charge up on that, so you might see higher – same or higher penny profit, but lower percentage margin or do you actually – when you say cost plus, is it a percentage of cost?

[Alison A. Cornell:]

Yeah, so essentially what it means is if costs go up, the price goes up.

[Jonathan P. Feeney:]

Right.

[Alison A. Cornell:]

We maintain the margin.

[Jonathan P. Feeney:]

Okay. But your – is that – I guess that's a simple question. Is it a margin expansion opportunity in terms of total dollars coming into IFF when someone replaces, typically speaking, replaces an artificial with a natural product.

[Alison A. Cornell:]

No, not in and of itself.

[Matthias Haeni:]

It is more important, Jon, what kind of categories, whether it is Beverage or Savory that makes a difference in terms of the portability or margin perspective. But not whether it's synthetic or natural.

[Jonathan P. Feeney:]

Okay. Thank you very much.

[Operator:]

And your last question comes from John Roberts with UBS.

[John E. Roberts:]

Good morning. Can you hear me?

[Andreas Fibig:]

Yes, good morning, John.

[John E. Roberts:]

Sometimes your incentive compensation accruals in a quarter can be different from the other quarters, but the change in business tone in the fourth quarter, would you expect to under accrue or reverse any incentive compensation in the fourth quarter?

[Alison A. Cornell:]

So we can say this about incentive compensation, because we do not enclose our incentive compensation numbers other than calling out a variance and so I can't give you an exact number. I would say, it's marginally favorable in Q3, but will be a larger benefit in Q4, based on our projected performance.

[John E. Roberts:]

Okay. And then, secondly, when you talked about your global customers seeing some slowdown, it sounds like in the developed markets you're still seeing the smaller customers outperform the larger customers. I think that's a trend we've seen for several quarters now.

[Andreas Fibig:]

Yeah. Absolutely, John. That's what we see in many markets that the smaller and regional customers have just good growth rates. And if you're with these customers and then you really can do very well – very good business. And that was actually one of the reasons why we acquired Ottens here for Flavors in the U.S. and just participating in that segment of the market, a bit better in the U.S.

[John E. Roberts:]

Okay. Thank you.

[Operator:]

And your next question comes from Heidi Vesterinen with Exane. Heidi, your line is open. You may need to un-mute on your end.

[Heidi M. Vesterinen:]

Sorry, hi, I'm back. I wanted to go back to the naturals question. I heard from some other ingredients company, slightly different for Flavors, but still in naturals that a lot of the smaller companies have been faster at reformulating into naturals and we've seen a lot of reformulation announcements from the globals, but they still tend to be in the discussion or testing stage and we haven't actually seen the big volumes come through. Would you agree with this or are you already benefiting from this trend? Thank you.

[Andreas Fibig:]

Good morning, Heidi. I totally agree and support this, I think we have seen that smaller companies are faster in the implementation and they're also much faster in the replacement of either artificial nature identical (56

[Heidi M. Vesterinen:]

Thank you.

[Andreas Fibig:]

You're welcome.

[Operator:]

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

[Andreas Fibig:]

Yeah, thank you very much. Thank you much for your time. Good quarter, quarter three, we are on track for year 2015, and I believe we will have a good trajectory for years to come. Thank you very much.

[Operator:]

Thank you for joining today's conference. You may now disconnect.