Givaudan's (GVDNY) CEO Gilles Andrier on Q4 2015 Results - Earnings Call Transcript

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Givaudan SA ADR (OTCPK:GVDNY) Q4 2015 Results Earnings Conference Call February 2, 2015 9:00 AM ET

Executives

Gilles Andrier - CEO

Matthias Währen - CFO

Analysts

Celine Pannuti - JPMorgan

Bernd Pomrehn - Mirabaud Securities

Adam Collins - Liberum

Patrick Lambert - Raymond James

Martin Flueckiger - Kepler Cheuvreux

Jaap Pannevis - Goldman Sachs

Jean-Philippe Bertschy - Vontobel

Andreas Heine - MainFirst

Gilles Andrier

Thank you. Dear ladies and gentlemen, good afternoon as well as good evening to Asia and good morning to the Americas. Welcome to this Conference Call on our 2015 Full Year Results. Together with Matthias Währen, our Chief Financial Officer, we will take you through the presentation before answering your questions at the end.

The media release about our full year and year end results was published on our Givaudan website 07:00 this morning. This is where you will also find the slides of today's presentation. Along with the media release, you will find also our 2015 annual year report on our website.

So I invite you to turn to Slide 3; reviewing the financial highlights. I will start now by going through the presentation through those financial highlights. In a difficult environment of slowing emerging markets, we achieved a respectable performance with a like-for-like sales growth of 2.7%. Both divisions have contributed in an equal way to this encouraging result. Our growth in developing markets was contrasted in 2015, a slow start in the first half of the year 1.8%, followed by a strong recovery 7.7% in the second half of the year.

Delivering on our plan, we further improved our profitability with an EBITDA reaching 24.3% and we achieved a record free cash flow of 16.4% of our sales. This allows our Board to propose to the AGM on March 17th a dividend of CHF54 per share. 2015 was the last year of our last five years business cycle and with these solid annual results achieved in 2015, I'm pleased to announce that we've delivered on all of the ambitious mid-term projects that we had set in 2010.

So let's turn now to Slide 4. In 2015, our sales grew 2.7% in local currency and declined 0.2% in Swiss francs, resulting in group sales of CHF4.4 billion. With a compounded annual growth rate since 2008 of 4.9%, we achieved our mid-term target despite the crisis year of 2009. Both divisions have contributed to this excellent average sales growth. Fragrance grew on average of 5% and Flavours 4.8%, both on a like-for-like basis. We clearly outpaced the market.

Looking back since the time of our stock exchange listing in 2000, we achieved an average like-for-like growth of 4.5% and in the coming five years, our ambition is to continue grow at this pace in average between 4% and 5%. We are therefore confident to achieve this despite a temporary slow market growth practically around the globe and with many of our clients.

Let's turn now to Page and Slide number 5. Let's have a look at the average growth rates of the three business units for Fragrances and of the four regions for Flavours, reflecting the way both divisions are being managed. Among these overall strong sales results that you can see for both divisions, I'd like to emphasize two points.

The first one, the excellent performance of our Fragrance consumer product business, which is striking at an average of 6.2% since 2008. This business gets the full benefit of its exposure to the fast developing market, but also our ability to grow significantly faster than the market in all parts of the world, partnering with our clients with innovation, success and capsulation technologies, our diverse team of perfumers and our efforts to understand consumers in all parts of the world. The second highlight, the outstanding growth of our Flavours business in Latin America striking at an average of 11% since 2008 and where consumer understanding and an undisputed leadership in beverage made the clear difference to our peers.

Please now turn to Slide number 6. Our presence in emerging markets has always been a key driver for our growth and it is one of our key strategic ambitions to generate an estimated 50% of our total sales in the developing markets in the very near future. We measure this ratio in an ever appreciating Swiss franc, it's therefore difficult to make a precise forecast by when this is going to happen. Despite a significant slowdown in emerging markets over more than a year, it's importance for us remains unbroken and the growth gap to the mature markets remains substantial.

Last year, emerging markets grew for us more than four times faster than the mature ones. On an annual compounded growth of about five years, the ratio was over five times. Furthermore, it remains a fact that today around 80% of the world population live in the high growth markets but the levels of the urbanization and consumer spending per capita are below those of the mature markets and especially in Asia, the middle class will grow substantially. The growth potential in China, in India, in Southeast Asia and in selected parts of Africa, therefore remains intact. High growth markets is one of the four strategies we have outlined in our 2020 roadmap.

Our size and our operations footprint gives us a unique exposure to the growth diversity of these markets in which we continue investing both with additional talent and new sites. In 2015, we continued on expanding our footprint with significant new facilities. The first one, a large Flavours site in Nantong, north of Shanghai to expand our capacity in savory. This is our second Flavours facility in China. The second one, also in China, we will ramp up production of commodity Fragrance ingredients in our newly opened joint venture facility.

The third one, we open a new Fragrance creation and production centre in Singapore serving the whole of Southeast Asia and including a perfumery school to train our future talents for the whole of Asia. For Fragrances, this is the largest investment in the history of the division. Fourth and not last, we broke ground in India for a new Flavour facility to be started in 2017. Furthermore, we established new sales offices in Pakistan, Nigeria and Algeria.

In 2015, Givaudan generated 46% of its overall sales in this fast growing market. Sales in developing markets increased with a CAGR of 9.3% on a like-for-like basis since 2008. Again, like in 2014, the whole absolute growth in Swiss francs came from the emerging markets. This is due to the faster growth rate in developing markets, despite the weakening of some developing market currencies.

Please now turn to Slide 7. I would like to highlight the sales development by region for the Group. Sales in Latin America increased by 10.1% on a like-for-like basis with Brazil and Argentina being the strongest contributors. Asia-Pacific showed a growth of 4.3%, substantially weaker than the past year's average. Growth in Asia for the first half was 1.9%, but it improved to 6.6% in the second half led by a sharp improvement in China and Indonesia, our two largest markets in this region. Our sales in both China and India grew close to 10% for the full year. North America grew by 1.3% with a good development in Flavours and in Europe, Africa and the Middle-East, sales remained flat compared to 2014 due to the difficult market of Germany, the U.K. and Eastern and Central Europe.

Let's turn now to Slide 8. The Fragrance division reached CHF2.1 billion growing at 1.9% on a like-for-like basis and declining 0.6% in Swiss francs. Fine Fragrances grew 3% in a number of flat markets. This growth was driven by Latin America, the Middle-East and North America. After a long period of triple market growth, consumer products grew 2.7% in local currency showing a very good momentum with regional and local customers. The strongest contributors were the developing markets of Latin America with double-digit growth.

After a strong 2014, Fragrance ingredients showed a decline, whereas cosmetic ingredients continued to grow double-digit supported by the successful combination of our recent acquisitions namely Soliance and Induchem. Our efforts to make our Swiss manufactured Fragrance ingredients cost competitive made good progress with production transfers to our facility in Mexico and to the new joint venture in China. The EBITDA declined in Swiss francs by 1.5% to CHF498 million and EBITDA margin of 23.7%. The Fragrance division incurred in 2015 a one-time charge of CHF12 million, which means an improvement of the underlying EBITDA margin as compared to 2014.

Now let's turn to the next Slide number 9. Sales of the Flavours division reached CHF2.3 billion, growing 3.5% on a like-for-like basis, increasing slightly in Swiss francs. The division achieved once more a good growth in health and wellness taste solutions as well as a very solid growth in the developing markets of Asia and LatAm, especially with local and regional customers. Sales in Asia-Pacific grew 2.9% on a like-for-like basis. The developing market of Asia-Pacific grew 4% driven by a regained momentum in China and Indonesia in the second half.

In Europe, Africa, and the Middle-East, sales grew slightly by 0.4% on a like-for-like basis. The strong growth in the Middle-East was mitigated by difficult market conditions in the U.K., Ireland, Germany, Turkey, and Eastern Europe. Sales in North America increased strongly by 5.6% with a solid growth in beverages, dairy and snacks. Growth in Latin America was 10.9% on a like-for-like basis with strong increases in all three main markets; namely Brazil, Argentina, and Mexico.

The EBITDA increased by 4.4% to CHF572 million from CHF548 million in 2014. The EBITDA margin increased substantially to 24.9%, partially also due to ancillary income of CHF32 million from pension funds. Matthias will explain this further. But like for Fragrances, the underlying EBITDA of Flavours further improved compared to 2014.

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

Matthias Währen

Thank you, Gillies. Hello everybody and also from my side, welcome to our conference call. Gilles has taken you through the main aspects of the market developments and the business performance. On the following slides, I would like to focus on the operating performance of the Group, the financial results, the cash flow and the financial position of Givaudan.

Let me start with the financial highlights on Slide 11. Group sales have increased by 2.7% on a like-for-like basis. This excludes currency impacts as well as the Induchem acquisition, which we made last summer. The EBITDA increased to CHF1.070 billion, up by 1.6% in Swiss francs and if measured in local currency, an increase of 8%. The EBITDA margin improved to 24.3% from 23.9% in 2014. As mentioned before, this includes a one-off non-cash gain of CHF20 million. Don't forget that last year, in 2014, the Group recorded a one-off gain of CHF42 million.

The net income increased by 12.7% to CHF635 million. The underlying investments were 3.6% of sales and remained at the same level as in 2014. The free cash flow was CHF720 million or 16.4% of sales compared to 13.7% in the previous year. The net debt was slightly reduced, and as a result, the leverage ratio declined to 15%. Thanks to the continued solid cash flow, the Board of Directors will propose to the shareholders at the AGM another increase of the dividend to CHF54 compared to CHF50 in 2014. This represents an increase of 8%.

Please turn to Slide 12, which shows the exchange rate developments. The slide shows the comparison of the average exchange rates of 2015 versus the average of 2014. The key currencies continue to be the U.S. dollar, the euro, the British pound, with some emerging market currencies gaining an importance. Despite some significant currency fluctuations, which occurred during the year, particularly the strong appreciation of the Swiss franc against the euro after the Swiss National Bank lifted the peg on January 15. But also the strong depreciation of some emerging market country currencies, the company's operational and geographical spread continue to provide good natural hedges. And our EBITDA margin remained overall well protected against these currency fluctuations.

Please turn to the next slide, which shows the operating performance. Gilles has already explained the sales development. Let me focus on the gross margin, the EBITDA, and the operating income. The gross margin increased slightly from 46% in 2014 to 46.2% this year. Lower operational costs in our Flavours division, following the successful completion of the product transfer to our new flavour production facility in Hungary, as well as further supply chain efficiencies in both divisions more than offset general increases in operational expenses.

The EBITDA increased by CHF17 million or 1.6%. If measured in local currency, the increase was 8%. This increase was driven by the improved gross profit, strict control of our operating expenses, and the one-off net gain of CHF20 million, mainly resulting from a change in pension plans. As a reminder, in 2014, the Group recognized a one-off gain of CHF42 million as I just mentioned before. The EBITDA margin was 24.3% compared to 23.9% last year. Excluding the one-off gains in both years, this year's EBITDA margin would have been 23.9% compared to 23% last year. The operating income of CHF794 million was up by 4.5% driven by the higher EBITDA and lower amortization charges.

Please turn to Slide 14, which shows the financial expenses. Financial costs were CHF61 million compared to CHF63 million in the previous year. In 2015, the Group continued to refinance debt at lower interest rate. Other financial expenses net of income were CHF27 million, up from CHF20 million in 2014. The increase is due to higher hedging costs and some exchange losses in markets where currencies could not be hedged. For 2016, we expect total financing costs and other financial expenses to stay at the level of between CHF85 million and CHF100 million depending mainly on the development of the currency volatility.

Please turn to Slide 15, which shows the net income. The net income before tax increased to CHF706 million versus CHF677 million in 2014. The increase was mainly driven by the higher operating profit. Due to a change in the Swiss accounting law and the change in the Group's operating structure, the Group's effective tax rate was reduced to 10% in 2015. Excluding these one-off items, the income tax expense as a percentage of income before taxes was 18%, 1 percentage point higher than in the previous year. The net income increased to CHF635 million or 14.4% of sales compared to 12.8% in the previous year. The main drivers for the increase were the higher operating income and the one-off tax impact. The basic earnings per share increased to CHF68.98 versus CHF61.18 a year ago.

Please turn to the cash flow on Slide 16. During 2015, Givaudan generated a free cash flow of CHF720 million or 16.4% of sales compared to CHF604 million or 13.7% in 2014. With this, we've achieved the ambitious mid-term target we set in 2010. The increase in 2015 was mainly driven by the slightly higher EBITDA and an improvement in working capital. As a percentage of sales, working capital decreased from 25.9% in 2014 to 25% in 2015. Total net investments were CHF160 million and as a percentage of sales net investments were 3.6%. Thus, they remained at the same level as last year.

As a reminder, please note that in 2014 the Group received CHF58 million in cash for the sale of land in Switzerland. In 2015, we continued our investments to support the growth in developing markets, most notably, in our new Flavours savory facility in Nantong, China and the new Fragrance creative centre and compounding facility in Singapore, which were both opened during the course of 2015.

Please turn to Slide 17, which shows the debt profile. Givaudan continues to have a conservative debt profile. As a result of the refinancing activity completed during the last couple of years, the duration of our debt profile was extended significantly. During 2015, we reduced our total debt by about CHF50 million to CHF1.155 billion. The average interest rate in 2015 was 2.4%. Givaudan's financial position remained strong and it provides the company with the necessary independence and flexibility also during more volatile times. At the end of the year, the net debt was about CHF680 million. We've a well balanced debt profile with interest rates, which have been locked in at attractive rates during the last two years.

Please turn to Slide 18, which shows the leverage ratio. As you know, it is our objective to keep the leverage ratio below 25% in the medium term. At the end of this year, this ratio was 15% compared to 17% at the end of 2014. The decrease was achieved in spite of the negative currency translation effect of the stronger Swiss franc on the equity.

Please turn to Slide 19. Over the last 16 years, the company has generated a accumulative CHF4.9 billion of free cash flow. Including the proposed dividends for 2015, Givaudan has returned over CHF3.1 billion to shareholders in the form of either dividends or share buybacks since its spin-off in 2000. This clearly underlines the strong commitment of Givaudan to return surplus cash to the shareholders. Based on the continued strong cash generation, the Board of Directors will propose a further increase of the dividend to CHF54 from CHF50 last year.

Please turn to Slide 20, which shows the amortization of intangible assets. I have included this slide because we have also shown it in previous presentations, but I do not intend to go through the details. Compared to the slides, which I presented one year ago, the numbers have not materially changed. The only changes are the updates for amortization related to the Induchem acquisition and the amortization of additional IT projects.

Let me turn to Slide 21, which shows the financial summary. The company showed a strong financial performance in a challenging environment. After a slow start into the year, the top line growth accelerated during the second half. Sales overall grew by 2.7% on a like-for-like basis. The brief pipeline and the win rates remain strong. The operating leverage and the strong cost focus were the key drivers for further improvement of our EBITDA margin. The net income is up by 12.7% and reached CHF635 million or 14.4% of sales.

Besides the operating performance, also one-off items as explained contributed to this increase. The cash generation of the company remained strong. The free cash flow was 16.4% of sales, thus exceeding our mid-term guidance of 14% to 16%. We have further reduced the net debt to approximately CHF680 million. At year-end the leverage ratio was 15%. As a result of this strong performance, the Board of Directors will propose a further dividend increase to CHF54. The distribution will be paid in two tranches; CHF43.50 will be paid at the tax rate distribution out of the reserves for additional paid-in capital, and CHF10.50 as a normal dividend.

With this, I would like to conclude my part of the presentation. And I would like to hand back to Gilles.

Gilles Andrier

Thank you, Matthias. So I invite you now to turn to Slide 24. In 2008, as we were integrating Quest, we have set our sales ambitions to a range of 4.5% to 5.5% in average per year. In 2010, as we were communicating, our five years business plans onto 2015, we added to our guidance a free cash flow target of 14% to 16% of sales by 2015. We also committed on an industry leading EBITDA margin and we promised to payout a minimum of 60% of our free cash flow, once we had de-leveraged our balance sheet to below 25%.

Today I am very proud to announce that in a very challenging environment, we have achieved and some even overachieved, all of these goals. We reached an average sales growth of 4.9%. Our business runs at an industry leading EBITDA margin of 24.3%, second to none. We achieved the free cash flow ratio to sales of 16.4%. In 2012, we achieved our leverage ratio and since then our payout ratio was on average 69% of our free cash flow with the year-on-year continuous increase of our dividends.

Please turn to Slide 26. In August 2015, we communicated our next plan, our 2020's aspirations outlined by our motto, responsible growth with shared success. Our ambitions and the roadmap for the next five years seek to ensure responsible sustainable growth and shared success for our customers, our shareholders, our employees, our partners and suppliers. Building on the success of the 2008 to 2015 strategy, we want to create further shareholder value through profitable, sustainable growth combined with acquisitions.

To create long-term value, we'll capitalize on our market leadership and most importantly continue to build close partnerships. Continued ambitious financial targets are a part of the roadmap to 2020 and we aim to outperform the market by growing sales on a like-for-like basis by 4% to 5% on average over the five year period from 2016 to 2020. In this period, we aim at delivering an average free cash flow as a percentage of sales ranging from 12% to 17% over the period.

Givaudan's 2020 strategy is built on the pillars of growing with its customers, delivering with excellence and partnering for shared success. The global environment at present is providing us with a demanding agenda ahead for 2016. Listening to our customers and to leading economic institutions, this difficult deflationary environment will continue, but we are well positioned in a defensive industry. Flavours and Fragrances are consumed everyday around the world, and they are an essential part of successful consumer products for our clients.

I am confident about Givaudan's strength and our DNA built over the last 250 years to continue to create value for our customers, our shareholders, and all our stakeholders. With the significant contribution of Givaudan's employees around the world made in 2015, I am convinced that we have the right people, the right strategies and plans in place to continue on our successful path.

Ladies and gentlemen, many thanks for your attention. Matthias and me look now forward to your questions.

Question-and-Answer Session

Operator

The first question is from Celine Pannuti, JPMorgan. Please go ahead.

Celine Pannuti

My first question is just to rebound on what you were saying, Gilles, about the global environment, that it's pretty difficult. Can you give us a bit of an outlook on how you see the demand for the industry in 2016 versus 2015? And in particular, two points; you mentioned deflationary environment. Is it something that you see for your business or pressure from your clients? And second, how do you think emerging markets volume demand is going to pan out, given what the prices we are seeing in this market? And then my second question is relating to the EBITDA progression. Beyond -- I mean, if you could give us a raw material outlook -- raw material cost inflation outlook. But as well beyond this, is there any savings that the organization is counting on this year in order to achieve the EBITDA margin? Thank you.

Gilles Andrier

Thank you, Celine and good afternoon. So to -- as you know our business -- the outlook that we have in our business is limited. If we look at the portfolio of orders we have, being in a just in-time environment of five to six weeks, so not much to give a precise outlook on 2016. The other elements that we can control is the amount of new wins that we have for both divisions. I can confirm that for 2016, our new wins is in very good shape. On the other hand, what I'm mentioning is the part which we don't control, which is essentially the existing business, the existing business which depends obviously on consumers and therefore on our clients.

So there are two just indications just to be cautious. One is listening at least to the publicly -- to the big clients who are obviously disclosing their results and giving a bit of an outlook to 2016. Obviously, you cover some of them Celine, so you know as well as I do that there is -- that they all are cautious on 2016 because of the uncertainties that everybody is looking at for 2016, whether good or whether bad. So it's really a word of caution on the fact that the visibility that we have from our clients just calls for being cautious. The second thing about the environment is essentially reading the same newspapers and financial institutions, there are many countries in the world where essentially it's also about being cautious from an economic environment.

Obviously, we sell Flavours and Fragrances, going into consumer goods itself being consumed on a daily basis, so from that standpoint, what we sell has certainly a great form of resilience. We saw that in the worst crisis in 2009. We started at minus 20% in January; we ended up at plus 2% for the full year. This year 2015, obviously, we have a slow pace in developing markets, especially in China, but we still ended up at 2.7% and for China by the way ending up at plus 10% for the full year. So there is a certain amount of resilience even if obviously all those indications from our clients and from economic indications call just for cautions. So that's all the -- as it relates to the first question.

The second one on EBITDA, there are many opportunities still at Givaudan to actually drive efficiency. This is actually, if you look at the 2020 strategy extremely explicit with the center --there are three pillars in our 2020 strategy. On the left hand side, you see that it's about growth. In the middle part, it's about driving excellence. And there are still many opportunities to actually be more efficient, gaining agility with our clients, but also drive savings and so forth. However, yes, that can lead to an improvement of the EBITDA, but going forward, this is also about reinvesting some of those savings in expansion of our commercial resources to actually go, for example, and accelerate some of the sales we have with all types of clients by the way, whether they're global and internationals or locals and regional. So some of those efficiency gains would be reinvested into driving top line growth, but still committing on sustaining a high level of EBITDA.

As it relates to raw materials, let's say over the last, I would say, two years and the same scenario for 2016, we see a slight increase of raw materials from let's say zero to 2%, but being compensated with effective price increases. So that's -- I would say on the raw materials side when pricing is really business as usual.

Operator

The next question is from Bernd Pomrehn, Mirabaud Securities. Please go ahead.

Bernd Pomrehn

This is the second year in a row where you over delivered on your EBITDA target but did not achieve your own top line target. Will this result in some additional growth efforts or, asked differently, are you willing to sacrifice margins for the sake of better growth?

Gilles Andrier

Good afternoon, Bernd. As you know in this business, the early part where you can actually influence your volumes through pricing is with the Fragrance ingredients part, which is, by definition, an ingredients business. So, on the other hand, so driving top line just by sacrificing your margins, you can divest to a certain extent, but it's not exactly the strategy that -- that for us and the strategy that work for us. So, I would let's say restate what you just said, we're committed on an average sales growth of 4.5% to 5.5%. As I mentioned, we achieved 4.9%. Obviously with the slowdown in 2015 and 2014 vis-à-vis the average, but essentially we are confident that with an improvement on the back of -- an improvement of the geographic market and additional efforts on the commercial side as I mentioned to Celine, we will deliver on our average growth rates for the next five years to come.

Bernd Pomrehn

And maybe one housekeeping question. What CapEx level should be put in our models for 2016? Thank you.

Matthias Währen

Bernd hello, this is Matthias. As in the past, all parties about 4%, for total CapEx this includes IT, so the ballpark in the average around 4%.

Operator

The next question is from Adam Collins from Liberum. Please go ahead.

Adam Collins

I had three questions, please. Firstly, could you talk about the expected benefits from the shift of ingredients productions in Mexico and China? Excuse me. That's the first one. Secondly, could you give us a sense of the profitability of Induchem? I know we had a half-year contribution of sales in the year just ended, so, full-year effects for the coming year. Just some sense of where the margin is Induchem today compared to the divisional average. And then the third question is on LatAm. Just going back to LatAm, do you think that you can sustain growth in the coming year, given the macro challenges in the region, particularly in Brazil? And just to sort of clarify, I think, in the past, you've talked about the fact that there is no price effects in the revenue growth numbers that you report because you have dollar-pricing. Could you confirm that's the case? There's no inflationary component to that volume growth that you saw in the last year?

Gilles Andrier

So, your first question is on the expected benefits -- on the ingredients. Essentially, as you know, in Fragrances, let's say half of the specific ingredients, Fragrance ingredients that we use in our formulations are being manufactured by Givaudan. And you see they come from our research and at some point they lose patent protection. At this point, you have new entrants, essentially in China and India, competing on prices as I have mentioned earlier. And then you're exposed to obviously losing volumes by not being cost competitive. So in the past, what we would traditionally do is just let go of those ingredients and just start sorting them from outside and losing on the third party sales.

First with Quest we inherited from this site in Mexico, in Pedro Escobedo in which we have almost tripled the capacity. So that we could have a low cost U.S. dollar based production facility and then we expanded these concepts to China. So instead of being challenged and competed by Chinese, we became Chinese ourselves by forming a joint venture where we actually transferred some of those about to be commoditized ingredients in the joint venture. As I speak, the joint venture is now ramping up its third and fourth shifts, basically part of the production plan.

So what Pedro Escobedo in Mexico and the joint venture will give us is basically; first, instead of losing out on the third party sales on the ingredients, we will be much more cost competitive, both in terms of sales, in terms of profits for the Fragrance ingredients. But also the main benefit it will give us is be cost competitive for those categories of ingredients, for our perfumers to be formulating with a cost base, cost competitive as we say, [contents] of ingredients to maximize the chances of winning businesses. So, essentially it gives Givaudan both Mexico base and also the joint venture cost competitive let's say base for ingredients not only to sell the Fragrance ingredient business, but also to sell let's say the ability to win business in Fragrance compound.

Then the second question about the active cosmetics, maybe I pass on to Matthias on this question.

Matthias Währen

Yes, so let me start quickly first with your question about Latin America and then about -- no, so about dollar pricing, particularly in Latin America and then Induchem. Yes, we do have dollar pricing in some countries, particularly Latin America and some countries like Brazil and Argentina for the very strong devaluation. So in LatAm, our growth of about 10% and the bigger part was indeed driven -- currency driven. So it's difficult to give you an exact answer, but we would estimate about two-thirds, one-third. Two-thirds would be a price devaluation driven and one-third roughly about volume.

With regards to Induchem, I would assume about an average EBITDA maybe somewhere around 20%, but don't forget that what we really want to achieve with this small acquisition is to do two things. First of all, put ACI business, the active cosmetic ingredients business onto the Givaudan platform and leverage Givaudan over time and then also achieve synergies on the research side. So clearly, there we expect also improvement possibilities there, but at the moment, you can estimate about 20% EBITDA.

Adam Collins

So, is that for the unit overall? Is that reference to Induchem? Now, is Soliance a similar market?

Matthias Währen

Sorry, the reference was to all, to Soliance and Induchem and to the ACI active cosmetic ingredients unit.

Operator

The next question is from Patrick Lambert, Raymond James. Please go ahead.

Patrick Lambert

I had a few questions. I'll start with Celine's question again on trying to bridge the EBITDA margin in 2016. Do you expect further improvement on the Flavour side macro SAP? How can we -- is there more to come in terms of transfer to macro that we could see in 2016, 2017, in terms of your Flavours business? And what impact we could see from those over the next two years? That's question number one. Question number two, again, in ingredients, I think if I remove the active cosmetic growth, ingredients were down 8% like-for-like. Is that -- and I understand that the joint venture is not yet in place to compensate that. Is that a fair assessment that these numbers will steadily return to growth over the next few years when that joint venture starts? And will you consolidate the joint venture or I think you own, what, 49% of it? How will you treat that in terms of accounting? Third question, FX for next year. Have you -- that's for Matthias. Have you looked at what impact you could have next year if everything stays constant, as really for me on my model, actually you get a tailwind from FX? If you could comment on that, that would be good. And finally, a bit on Europe, which is, again, pretty weak. Could you remind us the split between mature Europe and emerging Europe briefly? A bit of granularity in terms of countries on split of sales? Thanks.

Gilles Andrier

So on your first question on the Flavours EBITDA, I would say we are back in a normal scenario where you should not expect any sort of further significant savings coming from macro, but when I say back to normal, it's continuous improvement and so forth. So that's true for Flavours and Fragrances. We don't stay inactive on driving efficiencies and so forth so that we can be again in a position to potentially reinvest into the business or reinvest in quality and so forth. So that's on the Flavours EBITDA margin. On the ingredients side, yes, we don't -- I mean, I cannot confirm your minus 8%. We don't disclose the split between active cosmetics and the rest ingredients, but true, it's been declining last year. I would not put all the let's say, the reason for this decline on ingredients is not just about losing volumes because of not being price competitive. There's been quite a significant destocking with some of our clients on Fragrance ingredients, which has nothing to do with not being price competitive. But going forward, clearly the China joint venture is ramping up as I speak and we clearly don't have the full benefit at all of this site which will in the next couple of years will improve our positions in Fragrance ingredients. The joint venture, maybe Matthias if you will?

Matthias Währen

So the joint venture in China we don't consolidate. That's clear. And maybe just to repeat once again, on the ingredients side, our active cosmetic ingredients grew double digits. So, within the total ingredients that's just one to reconsider.

Patrick Lambert

Yes. I know, but I took that out of the thing and it came out with minus 8%.

Matthias Währen

That's true. And the FX impact you have the average rates of course for 2015, and I think where the average rate will go in 2016, we all try to estimate. I don't want to give any forecast [to qualifies] as me to do that. And I think you asked with regards...

Gilles Andrier

On Europe essentially it has been flat but actually both Western Europe and developing markets has been essentially flat. So there is no -- obviously this is not a normal situation for the developing markets in Europe. But that's been very much slowed down by all the usual countries, which makes some of the headlines around Russia, around Eastern Europe, which has really slowed down the pace at which we were used to grow in the developing markets part of Europe. But I can say that both are essentially flat.

Patrick Lambert

So no granularity in terms of split though?

Gilles Andrier

Well I just gave it to you, Patrick. On the split [indiscernible], the size. One-third, two-thirds; one-third developing, two-thirds mature.

Operator

The next question is from Martin Flueckiger, Kepler Cheuvreux. Please go ahead.

Martin Flueckiger

Thanks for taking my question. Actually it's just -- well, there's two questions left. Firstly, I'd like to come back to the issue of these lagging customers. If I remember correctly -- in the last year, if I remember correctly, those were mainly in North America. And I was wondering, whether you could give us an update here? Have you seen new briefs from these customers? Any new wins just in abstract terms that you could talk about in Q4? And what is the customer feedback you are getting from these people with respect to expectations for the full year 2016? The second question will be again on the cosmetic ingredients business which is doing well. I was wondering, maybe you could talk about your expectations in terms of product launches and growth for 2016, and what your targets are with respect to Induchem for this year? Thank you very much.

Gilles Andrier

Yes. So you're referring to I would say what we explained half year of last year, like in customers, that was referring more on the front end side where it should essentially on the consumer products side, the slowdown in consumer products can be explained for 80% by just one single client. So, local and regional clients actually well I didn't mention that, but I can. Local and regional clients for Fragrance consumer products have grown double digit last year to compensate somehow for that. So, in terms of wins activity, let's say overall for both Fragrances and whether Fine Fragrances, consumer products or Flavours, the activity is strong and we have a good inflow of new wins. So whether we saw with some of those singled out clients or not, it didn't change the pace of innovation. Certainly looking at there are big consolidations ahead of us in terms of clients in the Fine Fragrance side as well as in the food and beverage, which have been disclosed and announced. So that obviously could have an impact on slowing down the pace, but that would be only sort of a -- that would have only a marginal impact on our pipeline of risk. And then as it relates to the active cosmetics, ATI, which combined obviously Soliance and Induchem. We still have within our target to reach CHF100 million in the mid-term, both through -- double digit growth that we have seen now for the last two years, combined if we can with acquisitions.

Operator

The next question is from Jaap Pannevis, Goldman Sachs. Please go ahead.

Jaap Pannevis

The first question really is of course pretty simple. I mean, your growth rates are in the range of 4% to 5%, and The Street is roughly around 4% for 2016. Your commentary sort of seems, to me at least, that we are sort of in a lower growth environment. So do you think you are still going to remain in the 4% to 5% range for '16 or are you going to see some bumps along the road in '16? That's the first question. And the second question really is around raw materials. I mean, obviously, who knows where the oil price goes but we are in a low oil price environment. So do you have any opportunities to sort of switch from naturals into synthetics in areas where some of the synthetic raw materials would be, let's say, in depressed pricing, and given that we have seen a lot of volatility around naturals? So, is there any room for you to sort of switch and have savings related to that? Thanks.

Gilles Andrier

So, yes, on the -- basically the growth, we are committing on giving a target of 4% to 5% as an average for the next five years, but as you mentioned, we don't commit on the 4% to 5% every year of this five years period. Looking at the uncertainties, for sure, we -- that maybe reflected in the consensus that is being published where our growth for 2016 would be around 3.9%. Still a lot of uncertainties whether on the downside or upside. So obviously, we control -- the thing that we control in our business is the amount of wins that we can win every year and that has an influence on the growth rate, but the part which is -- actually, which has the biggest influence on our sales is how well our clients are doing all around the world. That's 85% of our business where -- that's what we call the existing business and there we highly depend on basically our clients. So we are committed and we are quite positive on the wins we have for this year, but again, uncertainties on the other 85% and don't be mistaken, we are being asked to be as precise to the decimal point. We are talking 3.54%, 4.5%, it's a pretty difficult decimal point to be precise about. So as it relates to raw materials, yes, obviously, the crude oil is at historically low, but such that we in the combination of Flavours and Fragrances, only 50% of what we consume are specific products. And you only have a fraction of that which is let's say depending or has some remote correlation with the crude oil. So yes, you can have some positives about this the level at which we are on crude oil, but on the other side of the equation, we see that -- and we see for 2016 an increase on some of the naturals mainly vanilla, citrus, so that's why all-in-all for Givaudan, we see a flat development of raw materials.

Operator

The next question is from Jean-Philippe Bertschy, Vontobel. Please go ahead.

Jean-Philippe Bertschy

Thanks for taking my questions. The first one is on the use of cash, and considering your very low leverage ratio and perfectly good outlook for your cash flow. What is your strategy there? Before costs, you are making some buyback. If you could maybe share your view on what you would pay for dividends and maybe add a buyback on that? And the second one is on your 2020 targets. Why do you have such a conservative target for free cash flow as a percentage of sales of between 12% and 13%? It seems that the 12% is quite low.

Gilles Andrier

So, Jean-Philippe, first -- last, I'll start with the last question. Remember that for 2015 guidance, we were talking about an end point of 14% to 16% in 2015 and we went from 9% or 10% I think in 2010 growing to 16.4% in 2015. That was an endpoint on the given -- on the end of the period. Here it's a bit different, we're giving an average on five year which is a pretty -- it's five years, so it's a longer outlook. And as you know from a purely arithmetic standpoint, you can just have one year where suddenly for some reasons you have an increase in inventories or whatever like which happened in 2010 and your whole average drops down. So that's why this average is from 12% to 17%. Obviously, if everything would be -- the environment would stay exactly the same for the next five years, for sure, we could sustain a high level of free cash flow, but that's a bit how we -- what we are in terms of guidance for the free cash flow. Then in terms of use of cash, the priority in the first place is about business development, is about acquisitions and it's not just about looking after active cosmetics companies to be acquired. It's being reflected in our 2020 strategy under some of the pillars of growth that we have around health and wellness, around naturals, around integrated solutions. So we are very active at looking at different opportunities, which can be sort of small bolt-ons, but can also be bigger. But the timing we don't control is all based on the availability of the asset, the fit to Givaudan in terms of strategy and the ability to create value on top of that. You know that we have a strong balance sheet and that gives us many opportunities. So that's as it refers to the use of cash. So maybe the last question

Jean-Philippe Bertschy

[indiscernible] expense, it went up from CHF19 million to CHF42 million. If you can maybe just show us what these expenses are related to?

Matthias Währen

Can -- are you -- you were cut off. I only heard half of your question, but are you referring to other expenses.

Jean-Philippe Bertschy

Yes, to other operating expenses was the source, the split rates increased from CHF19 million in '14 to CHF42 million last year.

Matthias Währen

It includes additional provisions, and one we have mentioned. It's a one-off provision which we made this year, so it's mainly for provisions.

Operator

The last question is from Andreas Heine, MainFirst. Please go ahead.

Andreas Heine

Many thanks for taking my questions. Two questions are left. The first coming back on the interest costs. You said the average costs are 2.5%. If I see that your interest payments were CHF47 million, and I look on the gross spend, then I would derive to a higher number. Could you guide me what I do not see here correctly? And I would also expect the, let's say, to pay down the short-term debt so that you can even decline the interest costs more than you said was being just stable on a year-on-year comparison. And lastly, can you confirm on the interest that you pay -- negative interest rate on your cash, so that would basically cost something? And maybe lastly an operating question again. In the EMEA region on Flavours, is there any region where you see an improvement to the better EMEA or do you expect it to be more flattish again in 2016? Thanks.

Matthias Währen

Maybe Gilles can you start with the EMEA question.

Gilles Andrier

On EMEA, I think you're referring to let's say more the developing markets of EMEA, which includes Central and Eastern Europe, but as well as the Middle East and Africa. So, we've seen -- yes, we've certainly seen an improvement in the second half but not as big as in Asia. Just as a base for comparison, I can give you the figure. We still have the growth of 2.2% for Givaudan in the second half for the developing markets of EMEA, but in a very contracted way. So, what I mean by this is that the Middle East, for example, is doing very well, whereas Central and Eastern Europe, Russia and Poland, Ukraine, are still sluggish.

Matthias Währen

So back to your questions about interest costs, I can only confirm this in the average 2.4% I must admit I didn't quite understand that, how you phrased the question, but it is 2.4%. Our policy is always to have a good mix and we have locked in. Of course on the long term we have also hedged. In the longer term part of our debt, and that is then the mix and at the moment is 2.4%. We are not paying any negative interest rates even though it's of course I think more and more difficult to deposit surplus cash. I hope this answer the questions.

Andreas Heine

I was just looking on the interest payments shown in the Appendix of the Annual Report that shows CHF47 million interest expense. It looks more compared to the gross debt you have than 2.4% or is there something else included in this line?

Matthias Währen

But that's the cash. So, you have to go -- that's historic. So, you cannot compare it to the even debt on the historic payments, I think. Otherwise you take it offline and give us a call.

Andreas Heine

No, it's fine, thank you.

A - Gilles Andrier

Okay, thank you. This was our last question. So I look forward to seeing you all on the 12th of April for our Annual Conference in Geneva. Thank you.

Operator

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

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