International Flavors & Fragrances Inc (IFF) Q4 2018 Earnings Conference Call Transcript

IFF earnings call for the period ending December 31, 2018.

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International Flavors & Fragrances Inc  (NYSE:IFF)

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Q4 2018 Earnings Conference Call
Feb. 14, 2019, 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

At this time, I would like to welcome everyone to the International Flavors & Fragrances Fourth Quarter and Full Year 2018 Earnings Conference Call. All participants will be in a listen-only mode until the formal question-and-answer portion of the call. (Operator Instructions)

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

Michael DeVeau -- Head of Investor Relations

Thank you. Good morning, good afternoon and good evening, everyone. Welcome to IFF's Fourth Quarter and Full Year 2018 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 will be making forward-looking statements about the company's performance, particularly with regard to the outlook for the first quarter and full year 2019. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially from forward-looking statements, please refer to the cautionary statement and risk factors contained in our 10-K filed on February 27, 2018 and in our press release that we filed yesterday.

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

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

With that, I would now like to introduce Andreas.

Andreas Fibig -- Chairman and Chief Executive Officer

Thank you, Mike. On the call today, I will give an executive overview of our operational performance for 2018. Once finished, I will ask Rich to give a more in-depth financial review of the business before leading into our integration priorities for 2019 of the Frutarom acquisition. We will then provide an update on our financial expectations for 2019. And then, as usual, take any questions that you may have.

I'm very pleased to say that 2018 proved to be a historic year in a long and successful history of IFF. As we recently celebrated our 130th year birthday, we delivered on all of our key financial metrics and completed the acquisition of Frutarom, the largest deal in our industry to date, all while successfully navigating a challenging and dynamic market environment. We achieved strong advancements in both top and bottom line results in 2018, but we're in line with our guidance range that we set forth. Highlights include our record-setting sales of approximately $4 billion, which was a 17% increase over last year.

This performance was driven by mid single-digit growth in both taste and scent, as well as additional sales related to Frutarom. We also delivered strong adjusted earnings per share, excluding amortization, of $6.28 as adjusted operating profit growth and a lower year-over-year FX rate more than offset higher interest expense and shares outstanding, most related to the Frutarom acquisition. Throughout 2018, we had many strategic accomplishments that drove significant value creation.

To highlight just a few. With the acquisition of Frutarom, we established ourselves as a global leader in taste, scent, and nutrition. This combination helps us create a truly differentiated portfolio with an increased focus on naturals and health and wellness. It also provides us opportunities to expand into attractive and faster-growing categories and broadens our complementary and growing customer base. We believe this plus strong sales and cost synergies will translate into accelerated financial performance as a combined company.

Beyond the transaction, we continue to strengthen our innovation platforms by successfully commercializing three new natural taste modulators, two new fragrance molecules, 41 new natural fragrance ingredients and fragrance body care capsules, as critical to driving future growth. Through the execution of our vision 2020 strategy, we're truly the partner of choice as we expanded our cordless (ph) with key global scent customers. This expanded access will help fortify our market leading position and offer significant future growth opportunities as we now can compete on incremental business opportunities.

We also leveraged our exposure to faster growing small and mid-sized customers to drive results, as Tastepoint in North America continued its strong performance by growing double-digits. Productivity continues to be paramount to our way forward, as cost and productivity initiative once again contributed approximately 5 percentage points of adjusted currency neutral, adjusted operating profit and currency neutral adjusted EPS growth in 2018.

And in terms of sustainability, IFF continued its global sustainability leadership, as we exceeded already three out of four of our 2020 Eco efficiency targets. We also established our 2025 goals, which focuses on emission reductions, zero waste to landfill and water stewardship. I'm pleased that we continue to be acknowledged externally for our sustainability efforts. In 2018, we were named to Barron's 100 most sustainable companies, an honor we received again in 2019. And we were named to the Euronext Vigeo World 120 index most recognizing companies for exceptional environmental, social and governance performance. More recently, in January 2019, we were once again included on CDP's A List for climate change, our fourth consecutive year. And we received an A for water security for the first time, naming IFF as a global leader on environmental responsibility.

We also made tremendous progress, as it relates to our integration of Frutarom. First and foremost, we instilled an integration management office to provide visibility for all critical initiations and enhance decision making. This key group of individuals, the best of IFF and Frutarom, have been instrumental in developing go forward plans and supporting the day-to-day execution. We also refined and confirmed our plan to achieve approximately USD145 million of cost synergies by 2021. Synergies are expected to come from procurement, footprint optimization and streamlining of overhead expenses.

In addition, we identified initial cross-selling opportunities to drive incremental growth going forward. These opportunities are expected to provide revenue synergies, which we believe will further value create to the shareholders over time. As we mentioned last quarter, we've already capitalized on a few quick wins. We integrated Frutarom's North America taste business in our North America business and we'll leverage our Tastepoint go-to-market strategy for small and mid-sized customers.

At the same time, we combine Frutarom's cosmetic active ingredients business called IBR into our Lucas Meyer's cosmetics business. Concurrently, we moved all savory solution capabilities and innovation on a single leader to form Frutarom global savory solutions group. This will enable the Group to work together in a unified direction. From a global footprint standpoint, we have already begun to execute the optimization of our manufacturing sites in order to realize significant cost synergies. This plan has already led to closings in the UK, as we consolidated our (inaudible). While this is the first step in the process and we have much more work to be done, we are moving forward as planned.

Lastly, we are finalizing plans for next stage of taste integration like we did in North America, combining like taste businesses together to build a strong platform. More to be shared in due course.

I would like now to turn it over to Rich.

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

Thank you, Andreas. I'd like to now give you more in-depth review of taste, scent and nutrition. Turning to this taste business, in the fourth quarter 2018, currency neutral sales grew (inaudible) with 3 of the 4 regions expanding year-over-year. This performance was led by mid single-digit growth in North America and Greater Asia. All categories contributed to growth, led by dairy and beverage. Segment profit was challenged due to higher RSA expenses and several other ongoing costs, which I don't expect to be continuing in a more of a one-off nature in the quarter.

For the full year 2018, currency-neutral sales increased 5%, driven by growth in all regions and across all categories. Improvements were led by high single-digit growth in North America with strong double-digit growth at Tastepoint. Mid single-digit growth in EAME, led by double-digit growth in Africa and the Middle East. And in Latin America led by strong double-digit growth in Argentina. Taste currency neutral segment profit on a full year basis grew approximately 6%, led by volume growth and the benefits from our ongoing cost and productivity initiatives.

In terms of segment profit margin, we continue to see margin expansion, improving 60 basis points to an industry leading 22.7%. In the scent business, fourth quarter 2018 currency-neutral sales grew 3%. Performance was driven by mid single-digit improvements in fragrance ingredients and low single-digit growth in consumer fragrances. Fine fragrances were down slightly year-over-year, reflecting strong double-digit growth in the year ago comparison.

For the year 2018, currency-neutral sales grew 4% with the strongest improvement coming in fragrance Ingredients, which grew high single digits. This was led by price increases and strong double-digit growth in cosmetic active ingredients. Consumer fragrances grew mid-single digits, including price as performance was driven by double-digit growth in Hair Care and mid single-digit growth in Fabric Care, Home Care and Toiletries. All led by innovation platforms.

Scent currency neutral segment profit decreased approximately 2%, as the benefits from cost and productivity initiatives were more than offset by unfavorable price to input costs, reflecting unprecedented raw material inflation, including the previously announced citral supply issue as well as higher manufacturing costs due to these supply chain challenges. It should be noted that over the course of 2018, due to external events, we continued to be impacted by incremental pressures in raw material costs.

Our pricing, as expected, accelerated throughout the year and was near 3% in the fourth quarter. However, it was not enough to cover the cost increases. As always, we'll continue to work with our customers on actions to mitigate the cost increases. In terms of segment profit margin, year-over-year performance was pressured, however, profit margins remained strong at 17.5%.

Turning to Frutarom. In the fourth quarter, sales totaled approximately $360 million. Please note and as a reminder, we closed the acquisition on October 4th and the financial results for Frutarom reflect the closing date and as such, does not include a full quarter's activity. We're pleased to report that Frutarom returned to growth in the fourth quarter as like-for-like sales increased 3%, driven by strong improvements in natural product solutions and FNF ingredients. The core business, which excludes trade and marketing, grew 4% versus the prior year on a like-for-like basis.

In terms of segment profit, the Frutarom division delivered $27 million and $66 million, excluding amortization. The margin profile for Frutarom in the fourth quarter was strong at 18.5%, excluding amortization. This was a strong improvement when you compare to what they reported in Q4, 2017 as a stand-alone company. In terms of cash flow, operating cash flow increased $46 million or 12% to $437 million compared to $391 million in 2017. The year-over-year increase was driven by increased earnings, depreciation and amortization and lower pension contributions, offset by increased inventories.

Core working capital was impacted by higher inventory to ensure business continuity during the supply chain challenges as well as higher raw material prices. From a capital allocation standpoint, we spent approximately $170 million in capital expenditures or about 4.3% of sales, driven by new plant and capacity investments mainly in Greater Asia. As we discussed in the past, some of these investments include a flavors manufacturing facility in the Zhangjiagang free trade zone, which opened on October 9th, 2018 and a Natural Products Research Lab located in the Nanjing Life Science Park, which opened on October 15th 2018.

The Flavors plant is our second in China and is designed to supplement our existing flavors and manufacturing operations in Guangzhou. The naturals lab is our first outside of the US. China is a critical component of our long-term research strategy. The opening of these new facilities will support our efforts to be a partner of choice and grow in this exciting region. Regarding cash returned to shareholders, we paid approximately $230 million or about 50% of adjusted net income in dividend payout and $15 million on share repurchases.

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

Andreas Fibig -- Chairman and Chief Executive Officer

Thank you, Rich. I wanted to spend a few moments to highlight our integration priorities moving forward, as we enter year one of this three-year journey. As we spoke about earlier, integrating IBR into LMC is imperative to strengthen the product offering and drive accelerated growth in cosmetic active ingredients. As a reminder, cosmetic active ingredients is a very high growth and high profitable sector that we have prioritized moving forward. We want to ensure a seamless combination of the global savory solutions group to address customer needs by leveraging the technologies and expertise in our various categories.

By establishing a globally coordinated team, we will support strong local presence with global expertise, as we offer a full range meat ingredient provider, novel flavors functionality and technical expertise and texture, color, oxidation, plant protein and are almost to our entire customer base. We will continue to consolidate the Frutarom taste business under the IFF taste leader, as we move to capitalize on efficiencies and drive accelerated growth.

The plan is to leverage our strong blueprint of our Tastepoint North America go-to-market approach to strengthen our exposure with small and mid-tier customers in every market around the world. In terms of synergies, which I will touch more in a moment, we plan to capitalize on significant make versus buy initiatives across our spend to drive strong year one cost synergies and we will continue to execute our global site rationalization for improved efficiency.

Lastly, we will broaden our cross-selling activities and begin the execution on opportunities. A cross functional, global team has been established and is working diligently to generate incremental opportunities to capture greater value. As I've said previously, I continue to believe this will provide the largest value creation opportunity in the medium to long term.

Slide 16 provides an overview on the anticipated cost synergies in year one of our three year integration plan. Our integration program is well under way, developing and refining the work plans to unlock these value creation opportunities. As you can see, we anticipate approximately 30 million to 35 million of expected savings in year one. The 30 million to 35 million will come from accelerating the rationalization and harmonization of our procurement spend. We will leverage higher spend on overlapping direct raw materials and rationalize.

We will also leverage production capabilities, where we are currently buying materials or intermediates at a higher price. We will also continue to rationalize the global footprint to optimize our global sites. Note that over time, the contribution of our manufacturing rationalize will increase as it takes time to work with site closures. Lastly, we will be streamlining overhead expenses by reducing non-strategic costs and eliminating redundant expenses. This will ensure that we create an organization that focuses and direct spend to the most value enhancing opportunities.

I would now like to turn the call back over to Rich who will give us an outlook for 2019.

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

Thanks, Andreas. Over the last few years, we've seen the global operating environment continued to be volatile. There are several things that have direct implications on our industry and business in 2019 that I'd like to highlight. A clear headwind within our industry is the continued rise of raw material costs. In 2019, we expect mid-single digit inflation on our legacy IFF business as synthetic materials continued to rise, driven by several supply chain disruptions that we have faced over the last 12 to 15 months. These market disruptions continue to disproportionately impact the scent business and is more -- as it is more broadly exposed to these raw materials. It should be noted that when you combine 2018 and 2019, raw material cost inflation in the scent division is near 20%. Our strategic priority is to protect our customers' business, which we were successful in doing in 2018.

However, this comes at an incremental cost. This will require us to continue to work with our customers, taking additional price increases as we move through 2019 to ensure that we ultimately recover these cost increases over time. It should be noted that natural ingredients costs like vanilla and citrus markets remain elevated near historical levels. We expect to see more muted cost increases for taste in 2019.

From an economic perspective, GDP growth on a global basis remains positive, however, many estimates were recently revised downward. There continues to be geopolitical tension and uncertainties around the world with examples like trade wars and Brexit. All in all, we are optimistic about our top line, but recognize that there is risk given the constantly changing operating environment. The US dollar continues to fluctuate versus the world currency, as we are in generally a strong USD environment year-over-year. The euro to USD exchange rate is the most relevant to IFF. So, you'll see the euro to USD exchange rates stabilizing. It is positive. From a profitability perspective, the euro represents approximately 30% of our profits, including the addition of Frutarom.

Our rolling hedging program helps limit any volatility, as we are currently hedged approximately 45% at an average rate of $1.21. Lastly, we've seen improved global consumer staples volumes in 2018, which we expect to continue in 2019. At the same time, local and regional customers continue to grow rapidly. A great opportunity, as this is even more prevalent to our business when incorporating 30,000 small and mid-sized customers that we acquired from Frutarom.

Before reviewing full year expectations for 2019, I want to highlight a few go-forward modeling assumptions. First of all, we will be referencing a combined 2018 result, as if all aspects of the Frutarom transaction were retroactive to the start of 2018. First in 2019, we expect a modest benefit from M&A and yes, an additional week of sales or 53rd week. Currency is expected to be a headwind in 2019. We expect the headwind of approximately 3 percentage points on a combined sales growth and approximately 2 percentage point on adjusted EPS ex-amortization.

We expect approximately 30 million to 35 million in cost synergies in 2019 coming from procurement operations and overhead expenses, as Andreas explained. Following successful debt raise for the Frutarom acquisition, our debt outstanding is about 4.4 billion and combined interest expense associated with this debt is approximately $150 million. Currently, we are assuming an annual effective tax rate of approximately 19% for 2019. But the dynamics around this remain fluid.

For the purposes of calculating adjusted diluted EPS on a going forward basis, we estimate that there will be approximately 113 million shares outstanding, including 6.3 million shares related to the tangible equity units. Annual amortization of intangible assets is expected to be about $190 million to $195 million, down from our previous estimate.

Given the several moving parts, we felt it was important to give you an overview of the drivers between combined 2018 and 2019 sales. In terms of sales growth, we are targeting to achieve 5.2 billion to 5.3 billion in sales during 2019, representing a combined growth of 5% to 7%. In the chart, as you can see from second bar, approximately 9 months of Frutarom adds 1.1 billion to our combined 2018 sales. In the third bar, we've estimated approximately $45 million of divestitures related to non-core Frutarom businesses in Central Europe and the US that takes us to a combined full year 2018 sales of 5.1 billion.

In the fifth bar, we estimate approximately 150 million of headwinds due to currency, resulting in a currency-neutral combined sales number of $4.95 billion. If you then use our expected 2019 growth of 5% to 7%, you get our guidance of 5.2 billion to 5.3 billion in sales during 2019. We expect broad based growth across all of our segments with pricing driving scent and volumes a key component of taste and food performance.

Moving onto a reconciliation of our 2019 adjusted EPS. We expect adjusted EPS of $4.90 to $5.10 and adjusted EPS ex-amortization of $6.30 to $6.50. On the left side of the slide, you can see what we've -- you can see that we expect 10% to 15% of growth in 2019 for adjusted EPS to get us to a range of $4.90 to $5.10. For adjusted EPS ex-amortization, I'll walk you through the key drivers.

Starting with the second bar in that section, $2.06 will be added to our full year 2018 number, representing the first nine months of Frutarom. On the next bar, you can see that the full effect of the $4.4 billion debt issuance has a negative $0.55 impact. When you add that together with the share count dilution from the equity issuance going forward, from approximately $80 million before issuance to approximately 113 million shares outstanding, it has approximately $1.71 share dilution impact on full year combined results. Combine that with approximately $0.13 related to other impacts including tax rate, Frutarom minority interest and lower other income and expense in 2019, it gets you to $5.95 for the combined 2018 year.

We expect approximately $0.12 related to currency in 2019 to bridge it to a currency-neutral combined adjusted EPS of $5.83. When you apply the 2019 expected growth rates of 8% to 11%, our guidance for 2019 comes out to be $6.30 to $6.50. While we expect to see solid top line growth across the entire business, scent profitability is being adversely impacted by the additional raw material cost inflation, where pricing actions take time to achieve, given the nature of our business. As we move beyond 2019, we would expect to see the results to accelerate as raw materials tend to begin to -- trends begins to normalize and we generate the majority of integrations related in 2020.

Debt repayment continues to be a critical focus of ours. We are committed to reaching a 3 times leverage ratio by 2020, down from our current 3.6 times. Our intent is to retain an investment grade rating and our management teams and centers are now aligned with the repayment -- repayment debt metrics.

With that, let me turn it back over to Andreas.

Andreas Fibig -- Chairman and Chief Executive Officer

Thank you, Rich. That was a very complicated slide, but I hope it helps. As we look to the future, we are reconfirming our long-term targets. We expect to deliver between 5% to 7% currency-neutral combined sales growth CAGR between 2019 and 2021. We also expect to deliver 10% plus adjusted EPS ex-amortization combined gross for the same period. So 2019 is a first very important step in the journey and the foundation to achieve our long-term targets.

In summary, we are pleased with our financial performance for 2018 as we delivered on all of our key metrics. We made strong advancement in both top and bottom line results as we recorded record setting sales and adjusted EPS, ex-amortization. We also built an organization for accelerated profitable growth, combining two strong organizations to create a truly global leader in taste, scent and nutrition. As we look forward, full year 2019, we expect sales to be between $5.2 billion to $5.3 billion, adjusted EPS to be between $4.90 and $5.10 and adjusted EPS ex-amortization in between $6.30 and $6.50, as Rich said.

The coming together of IFF and Frutarom was a momentous achievement in 2018 and we are excited to be moving forward as one company and pursuing new opportunities that benefit all of our stakeholders around the world.

And with that, I would now like to open up the call to questions.

Questions and Answers:

Operator

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

Mark Astrachan -- Stifel Nicolaus -- Analyst

Wanted to ask about Frutarom. So sales growth improved sequentially, but was still below longer-term expectations. I guess, given tough comparisons in the business prior to the deal, I assume it doesn't meaningfully accelerate until 2Q. So maybe just verify if that's kind of what you believe, and then what gives confidence that 6% remains achievable, the only thing that you've seen so far that would increase confidence in that. And I guess sort of related to that, any idea what shipments looked like in that business, relative to demand in quarters prior to the deal close, meaning, like, could they have over shipped demand?

Andreas Fibig -- Chairman and Chief Executive Officer

Okay, Mark. So first of all, good morning. Let me answer the question. First of all, from a technical point of view, we certainly have much easier comparables in the second half of the year. So that's something which makes us very optimistic. We are also happy that after a softer third quarter last year, the fourth quarter was turning around. People are again focusing on the business after we have done the close on the 4th of October. We have started the integration very, very well. And as we said before, we were happy that we could close a deal a couple of weeks ahead of our original timing and that pays off because everything is going according to plan. So people can go back and focus on the customers. I believe that's super important. Leadership is clear and we really can make sure that we see the customers and sell.

What makes me optimistic is that first of all, we are in some of the faster growing segments, which is super helpful, particularly in the adjacent business. You know that we are, with some of the faster growing customers as well and particularly in Europe and in the US and we haven't even tapped into the cross-selling opportunity. But we see already that our teams are generating really good ideas and having implemented a couple of pilots and that makes us pretty optimistic on the Frutarom piece.

So all in all, a very, very positive picture from our point of view.

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

Yeah. I think Mark from -- as you said, I think, Q1 will be the most challenging from a comp standpoint, a little bit better in Q2, obviously Q3 and the second half is Andreas talked about, will be -- we'll see the fastest acceleration. I think the other thing to me is clearly North America was one of the challenged markets. I think we've done -- we've put the leadership in place now. There was vacancy, particularly prior to the closing. And I think now we are getting much, much more alignment and integration between Frutarom's business -- taste business in North America and our Tastepoint business. So that I think that will enable us to accelerate growth. I think we've already seen very, very quickly, some real opportunities in terms of where we combine our two capabilities to drive growth on projects that these two companies individually weren't able to tackle.

Mark Astrachan -- Stifel Nicolaus -- Analyst

Got it, OK. So just to be clear then, 6% remains the target. And then, I just want to switch to a separate question on free cash flow, Rich.

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

Yeah.

Mark Astrachan -- Stifel Nicolaus -- Analyst

It's diverged from net income in recent years. Does this normalize in your view in 2019? I think you'd mentioned inventories be inflated, given the supply chain challenges. So does the inventory piece specifically improve and are there any other anticipated items that will impact cash generation in '19 as far as you can tell?

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

Yeah. I think to your first comment, our expectations in terms of the 6% certainly are -- that's still our expectations for the Frutarom business going forward. In terms of cash flow, yeah, I think that in the last two years, if I look at cash flow from operations compared to adjusted net income, it was in the 80% to 90% range. '19 was -- or '18 was clearly challenged by the inventories, which were up $130 million something. In '19, I would expect the inventory number to stabilize. I don't think it's going to get better yet, we're going to be challenged with, the mid-single digit cost increases that I alluded to on our legacy business.

But I think that's where we see going forward stabilization in '19 and then improvements beginning in '20 going forward. Overall, I would expect that cash from working capital impacts in 2019 to actually be favorable versus a big outflow in 2018 and overall, I would say. when you take that into consideration, plus the increased D&A, I would expect our conversion of cash from operations versus adjusted net income to be above 100%, so much better than what we have been for the last two years.

Mark Astrachan -- Stifel Nicolaus -- Analyst

Great, thank you.

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

Yeah.

Operator

Our next question comes from the line of Faiza Alwy from Deutsche Bank.Your line is open.

Faiza Alwy -- Deutsche Bank -- Analyst

To talk about the Flavors business, I think the organic growth of 2% in the quarter was a bit disappointing, relative to what it had done in the rest of 2018. So, just as you talked about, your expectation for the Frutarom business, I'd love to hear how you're thinking about your base business. So Flavors and Fragrances, it seems like you're embedding a bit of an acceleration in 2019. So if you could just break those two components out that would be helpful?

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

Yeah, Faiza. It's Rich. I mean I think that clearly there has been -- Q4 was a disappointment, but I think you also got to keep in mind the prior year comparable is in a very strong Q3. I think that -- with 2020 hindsight, it looks like a portion of the strong growth that we saw in Q3 is some element of inventory because we see -- we saw a positive impact from volume erosion, which was actually favorable in Q3 in the taste business and it turned unfavorable in Q4. So I think there's clearly an element associated with inventory adjustments and movements on the part of our customers.

On a two-year basis, growth for Flavors is probably around 4% and on a full year basis, growth rates for on a two-year basis are probably in the 5% range. So I think partly the fundamentals of our taste business haven't changed, our expectations haven't changed. We are clearly seeing, particularly in the fourth quarter, some volume erosion and lower volumes with global customers, large CPGs, it's hard to say right now whether that's again a continuation of inventory correction. But I think overall, our expectations are -- going forward, have not changed significantly. I think it's still going to be a challenging year, but the potential of the business hasn't changed.

Andreas Fibig -- Chairman and Chief Executive Officer

And on the fragrance side, we can say we are winning good businesses. We had for the Fine Fragrance business a very tough comparison for the fourth quarter. But looking forward, in particular, if you look at the win rates we have in-house already, we're very optimistic on the Fine Fragrance business. I think for for the fragrance and Scent business, it is not too much about the, let's say, the growth rate in terms of sales and the win rate. I think we're doing extremely well here. It's more about managing the raw material crisis, making sure that we can realize our price.

And what makes us super optimistic on it is that that we have won three more global (inaudible) we never had -- we didn't have before. And that gives us just a more expanded reach of our business opportunities. Whether we can, big times, already capitalize in '19, I'm not sure because it takes a little bit of time, but on the mid-term, I'm very optimistic on this one, because these were significant wins the team brought in end of last year.

Faiza Alwy -- Deutsche Bank -- Analyst

Okay. So, Andreas you mentioned managing the pricing, amid this raw material inflation, like what is sort of -- what is embedded in your outlook for '19 for pricing and how much of that pricing have you already taken and how much do you have to go back to your global customers and try to get that pricing?

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

I mean, Faiza, that process is already under way. I think when you look at the guidance and our expectations, excuse me, for 2019, it's about a point and a half of pricing and all in the scent business and that process is already under way. I think it's -- it's the same thing if I rewind button. It's a tough discussion, but Nicolas' teams have done an -- they understand the importance, our customers understand that we work through the normal mechanisms of price and other activities to do that. I think we did an excellent job in 2018 and our price realization was in line with our expectations. What was the surprise was the cost impact, as we progressed through the year, continued to increase and accelerate. So I'm confident in the medium and long-term that we're going to recover the price increases, but '19 is going to be another challenging year.

Andreas Fibig -- Chairman and Chief Executive Officer

And actually if you compare ourselves to one of our bigger competitors, then you see that the erosion of the EBITDA margin was actually less, so that basically is a testament for me that the teams are doing a good job here.

Operator

Our next question comes from the line of Kate Grafstein from Barclays. Your line is open.

Kate Grafstein -- Barclays -- Analyst

Thanks. If we could just talk a little bit about gross margins for 2019. If you could walk through some of the moving pieces and how should we think about incremental pricing needing to cover inflation in Fragrances and we assume gross margins could actually be up as that pricing comes through in the back half of the year.

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

I mean actually, no. I think as I said, we've got about a point and a half built in to the target for our objectives for 2019 in terms of pricing. Again, all of that -- substantially, all of that in the scent business. I think on the T-side, it's more flat from a pricing standpoint. From a margin standpoint, it's going to be dilutive because we're going to have the sales and we're recovering -- we're looking to cover the cost increases and we're playing catch up again versus what we -- the way we exited 2018. And then on top of that, we've got additional increases expected in 2019.

So there's going to be a time lag, as it has been and in time, there is a level of this magnitude of 20% over a 2 year basis. From an overall margin standpoint, I think the other thing to keep in mind is a mix impact between the three businesses. And so you've got Frutarom that's going to represent about a third, about 30% of the overall total from a sales standpoint. Their margins (inaudible) when you look at how we report from a US standpoint, US GAAP standpoint.

They are in the high 30s, about call it 38% in that range -- in that high-30s. So that has a dilutive impact. So our margin year-to-year is going to be -- it's going to be diluted and kind of go up in 2019. I think it will help -- some of the synergies will help, but that synergies are going to get split between overhead expenses as well as cost of goods sold. I think we'll get some, but it's not going to be a significant step up from '18 to '19.

Andreas Fibig -- Chairman and Chief Executive Officer

You will see it probably in 2020, because the synergies on the manufacturing sides are kicking in and taking into, let's say, taking the assumption, which I think is fair that the raw material inflation hopefully will stop this year, then you will see a significant improvement in 2020.

Operator

Our next question comes from the line of Mike Sison from KeyBanc. Your line is open.

Mike Sison -- KeyBanc -- Analyst

Hey, guys. In terms of Frutarom, could you walk us through what the expectation should be for sales in '19. I guess from the 1.1 billion that you noted in the presentation and then I guess when you report operating income for '19, what should that look like -- if you'll be reporting it with amortization, right?

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

Correct. Yeah. So if you take the 1.1 billion, we've got, we've adjusted for the -- you basically take out about, as I said, about $45 million of business that we -- the biggest piece that we sold in the fourth quarter, there is a small piece that will be discontinued, and we expect to be discontinued in early 2019. So then the basis, net of that to, those two elements and then from there, I would say the 6% that we've talked about is our expectation for 2019.

From a profitability standpoint, the amortization will be included in the division results as it is for all three divisions. We do that to maintain, that's how we measure the business performance. It's how we look at it from an incentive comp standpoint and it's how we keep things tied back to our economic profit principles and that's why we look at it both at a division level, on a segment profit basis, including amortization and on a corporate level. We've added the element of ex-amortization from an overall cash flow standpoint.

Operator

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

Gunther Zechmann -- Bernstein -- Analyst

He, Andreas. Hey, Mike and Rich. Two questions. Just, can you talk a bit about the sales leverages that we are expecting from the Frutarom business. I think I remember you saying 50 bps, when do you see that really kick in. And also if you can discuss what the incremental margins are that you expect from that. That's the first one.

The second one is pretty quick I have, in the 5% to 7% sales growth guidance for 2019 that you put, is it fair to assume that's organic sales growth or is it just local currency with some bolt-ons as well. Thanks.

Andreas Fibig -- Chairman and Chief Executive Officer

Maybe you take the last one and then I'll take the other one.

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

Yeah. Do you want me go to first?

Andreas Fibig -- Chairman and Chief Executive Officer

Yeah.

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

Okay. So -- out of the, in the 5 to 7, there is, as I said about point and a half related to price. There is about -- little bit between 50 basis points and 100 basis points of, call it, a middle 75 of impact related to the 53rd week and a small amount of M&A and the balance is organic volume.

Andreas Fibig -- Chairman and Chief Executive Officer

Yeah. And on the cross selling, we will be, first of all, we will be more, let's say, concrete on it when we do our Investor Day in the middle of the year. But what we see and the teams are working on it that we have the first, let's say, pilots running. We had the first couple of wins, small ones, but we see that they are really good and significant sizable opportunities. So I believe it will actually start probably at the end of the year and then going into 2020 that we see an impact on the cross selling, which is really, really good and we will make sure on the margin side, to answer that question that we go into these more higher margin business that we certainly put our resources behind the areas and categories where we can earn better margin than we have and we probably let that some of the lower margin business go. So that's as an answer and by the way, on the growth rate, as Rich said in one of his bridges, we have lost a couple of sales as well, because we have sold or we are selling some of the smaller business from Frutarom just as an FYI.

Operator

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

John Roberts -- UBS -- Analyst

Thank you. In the Frutarom shareholder filings, they had a 2018 projected revenue number of $1.75 billion and so on slide 20, if I take your 1.1 billion and add your fourth quarter of 360 million, I'm coming up about 300 million short, did they finish the year like the -- was the fourth quarter 300 million below what they were thinking earlier in the year, that seems like way too big a gap, like the math is wrong here somehow.

Michael DeVeau -- Head of Investor Relations

Yeah. Hi, John, it's Mike. Just remember from a Frutarom guidance standpoint, pre the acquisition, that was a 2020 guidance. Right, so that $300 million was a number they had that was going to go out another couple of years. But look, clearly John, I mean third quarter built in, at that point, in the numbers. They were not expecting to have a negative growth in Q3, and they were not expecting. I don't think those numbers were based on having 3%, 4% growth in Q4. So the second half of the year was clearly weaker than what that was projected.

There is a currency element between that and what we've built into our assumptions for 2019 and clearly there's -- I think there was M&A that they had expected to occur during 2018. That has not occurred. So I think it's a combination of all of that that much, but it's not $300 million in the fourth quarter that's causing the difference.

Operator

Our next question comes from the line of Daniel Jester from Citi. Your line is open.

Daniel Jester -- Citi -- Analyst

Yeah, hi, good morning everyone. Just on the cost synergy side, now that you've had the asset for a couple of months, can you talk about your confidence level in getting that $145 million target. And if we do see a slowdown from a macro perspective, is there anything you can do to accelerate those cost savings?

Andreas Fibig -- Chairman and Chief Executive Officer

Yeah, let me take it. First of all, our confidence level on the synergies is very, very high, because we see it already on the run rates we have for some of these elements like procurement and even the footprint rationalization. I'm saying run-rate because of P&L impact, we have to go circa to inventory in 2019 to make it happen. But confidence levels is very, very, very high. If the economy is going down or is not growing as fast as we saw it in 2019, we have other levers to play here as well to make sure that we will reach our numbers.

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

Yeah. I think built into the guidance that we have for 2019 is investments that we want to make to drive future growth. I mean Nicolas -- Andres talked about Nicolas business and the new core list that we've gained access to in order to realize that potential, we've got to invest in resources, whether it's commercial people boots on the ground, C&A resources, consumer insights and research, that's embedded in our guidance for 2019. It's probably 300 to 400 basis points of investment. If the year unfolds differently, we can certainly slow that down and make choices as we've done over the last two to three years.

As particularly in '16 and '17, we slowed back investment and we cut it back to try to mitigate the impacts of weaker top line. That will always be part of our management process and the trade-offs that we have to evaluate. Part of that 300 to 400 that I talked about is really playing catch up and we will -- as we progress through 2019, that's the first thing we will do is, say, are we on track from an external in looking viewpoint and what do we do as a result of that.

Operator

Our next question comes from the line of Jeff Zekauskas from JPMorgan. Your line is open.

Jeff Zekauskas -- JPMorgan -- Analyst

Thanks very much. Just a couple of questions on Frutarom. In your descriptions of the taste and scent business, you talk about local currency growth or currency-neutral growth, but in the Frutarom business, you talk about 3% growth on a like-for-like basis. Can you remind me what like-for-like means and how that factors in acquisitions, currencies or whether it does or doesn't?

And then secondly, Frutarom's sales were much higher in the first and second quarter, they were 385 and 401, why were the sales for Frutarom so much higher in the first and second quarters than they were in the third and the fourth?

Andreas Fibig -- Chairman and Chief Executive Officer

You do the first piece.

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

Yeah. Let me take. I'll take the first one, Jeff. Yeah, you're right, it is -- it's a different methodology. I mean, they've always used like-for-like and we'll evaluate as we go forward, if there's a way to combine the two methodologies. Like-for-like represents that if what they do is they then back in and say, if there is an acquisition that was done in the middle of any year, they take the prior year growth and put it back -- prior year sales and compare prior sales for the acquisition to current year sales for the acquisition.

So again, it's almost on -- it's measuring on a pro forma basis, as if the acquisition -- any current year acquisition was affected as of the first of the prior year. So they're looking at the organic growth of that business, plus the organic growth of the existing businesses. So it's a slightly different methodology. It's almost like same-store sales. It is a bit different than what we're doing, but it was the most practical way for the time being for us to look at it on a combined basis.

Andreas Fibig -- Chairman and Chief Executive Officer

Okay. And I think that's important that we have to, let's say, bring it all at the same level that we can compare apples to apples. Let me take the second piece of your question, Jeff is on Frutarom first half to second half. Certainly, seasonality plays a role. Second, we are -- had an unfavorable currency situation at the second half of the year as well, because it's a lot of euro denomination in the sales. For the consolidation to our numbers, the three days we're missing because we close on October 4th and then what we should not underestimate, particularly in the third quarter that there was certainly a distraction of the organization to get the closing of the deal done.

We are happy that we closed actually ahead of time as we said, but that we're certainly a couple of weeks or months, even though the organization whether we're more focused getting the closing done than selling to those customers. And we are very happy and actually optimistic because it turned around already in the fourth quarter and that's a very good sign. So that's the explanation for the sales first compared to second half of 2018.

Operator

Our next question comes from the line of Jonathan Feeney from Consumer Edge Research. Your line is open.

Jonathan Feeney -- Consumer Edge Research -- Analyst

Good morning. Thanks very much. Just a quick one. Andreas, you were on the Board, and I know Rich, you were there, I think you were controller for a lot of the cultural changes under Doug and Kevin that took place, I think just focusing on more profitable brief, like that sort of business process stuff, could you compare the culture at Frutarom and the integration challenges or integration opportunities you see just as far as the cultural organizing from most profitable, least profitable basically risk adjusting all of that to what you went through back then and if there is that kind of opportunity, how that plays into your synergy plan? Thank you.

Andreas Fibig -- Chairman and Chief Executive Officer

I would say, Jon, a very interesting and good question because here are certainly opportunities for us to look at the profitability of the different businesses, and we are doing it even much broader that we look into all categories and all customers right now and we will present to the Board in May by the way to look where we put all the dollars behind and where we might walk away or make sure that we don't invest too much money to make sure that we're really going after the opportunities, which are giving us the best yield for our dollar. So that's good.

In terms of the culture, what is good is that with the acquisition, we got a lot of energy from a company which is very commercially focused and that will help us as well to focus on our customers and make sure that we get the best out of the customers and that we have a good service in place here as well, so that would be my answer, but Rich you please supplement.

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

Yeah, I think, Jon, it's -- in some ways, the fundamentals of the cultural change are similar in the sense that the biggest thing back under Doug, Kevin was a shift in focus in understanding from just topline growth to profitability and margins and accretive business. The whole EP focus and I think I can clearly tell you that the Frutarom mentality, Frutarom DNA is all about profitable growth and they focus on margins day in, day out. You've heard me talk about their executive information system and they lived through that day in day out, they're focused on what's the margin expansion, what's the mix improvement.

So I think from that standpoint, it's very similar in terms of we both companies recognize the importance of profitable growth. I think the challenge that we were going to have to manage through as an executive team is now, we have a much bigger business and the choices that we have are much bigger. And so we're going to have to manage through that because we don't have analyst resources. So it's both a benefit and a challenge that now we have to allocate those resources and prioritize across a much wider spectrum of businesses.

Andreas Fibig -- Chairman and Chief Executive Officer

And that was actually one of the reasons for the acquisition that we said we wanted to increase the option space for us, because now as Rich said, we can -- we have natural colors. We have health ingredients. We have food protection, we have flavors, we have fragrances, we've active cosmetics and that gives us good choices and actually it helps us as well to balancing very good global environment as well. So we believe it's good to have options and we have now more options than we had ever before, probably more options than many of our competitors and we believe that has positioned us actually in a very, very, very good, good spot.

With that, I think, Mike, we will close the call for today. But I would like to remind you that we are at CAGNY next week and we have a CAGNY dinner where we will display all of these new franchises and categories we have now in store and we'll give you an explanation, what we can do with it, and you can experience it, you can taste it, you can smell it and we believe it will be great. So I hope to see a lot of you next week in Boca, actually, it was much warmer and better weather and you will see it will be spectacular. Thank you very much. Take care.

Operator

This concludes today's conference call. Thank you for participating. You may all disconnect. Have a great day.

Duration: 60 minutes

Call participants:

Michael DeVeau -- Head of Investor Relations

Andreas Fibig -- Chairman and Chief Executive Officer

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

Mark Astrachan -- Stifel Nicolaus -- Analyst

Faiza Alwy -- Deutsche Bank -- Analyst

Kate Grafstein -- Barclays -- Analyst

Mike Sison -- KeyBanc -- Analyst

Gunther Zechmann -- Bernstein -- Analyst

John Roberts -- UBS -- Analyst

Daniel Jester -- Citi -- Analyst

Jeff Zekauskas -- JPMorgan -- Analyst

Jonathan Feeney -- Consumer Edge Research -- Analyst

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