Frutarom Industries' (FRUTF) CEO Ori Yehudai on Q4 2016 Results - Earnings Call Transcript

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Frutarom Industries Ltd. (OTCPK:FRUTF) Q4 2016 Earnings Conference Call March 23, 2017 8:30 AM ET

Executives

Ori Yehudai - President & CEO

Alon Granot - CFO

Analysts

Tavy Rosner - Barclays

Ian Hunter - Investec

Cathal Kenny - Davy Research

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Frutarom Industries Limited Fourth Quarter and Full Year 2016 Results Conference Call. All participants are at present in listen-only mode. [Operator Instructions] As a reminder this conference is being recorded March 23, 2017.

With us on the line today are Mr. Ori Yehudai, President and CEO; Mr. Alon Granot, CFO; and [Indiscernible], Director of IR and Business Development. I'd like to remind everyone that forward-looking statements for the respected company's business, financial conditions and results of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated.

Such forward-looking statements include but are not limited to product demands, pricing and market acceptance, changing economic conditions, risks in product and technology development and the effect of the company's accounting policies as well as certain other risk factors, which are detailed from time-to-time in the company's filings with various security authorities.

Mr. Yehudai would you like to begin.

Ori Yehudai

Yes, thank you very much. Good morning, good afternoon and many thanks for your participation in our call. We are very, very happy to share with you our results for the year and the quarter, and much more than that trying to share with you our view about the [Indiscernible] market, and Frutarom position within the market that we believe is very interesting and very positive looking at the main market trends.

2016 is another very positive milestone in Frutarom journey for profitable growth. We are able to walk through our strategy combining profitable internal growth, double than the markets where we are operating together with strategic acquisitions that brings us to another record year both in revenue, in profit and in cash from operations.

We are happy from the positive internal growth of our flavor business, our main core business that is growing faster and more profitable than the other activities of Frutarom growing at the rate of above 6% this year and the year before. These positive trends coming from few main attributes. One, the improvement in the geography spread of Frutarom more towards North America, a growing energy markets, our special unique position with our customer list, mainly niche-added value solutions for the global multinational and more than 70% of our business with midsized and local customers with a special emphasis on the private label sectors, we believe that in today's world those sectors are growing in many cases faster than the global multinational.

Our main focus in natural products that are coming closer to being 75% of our total sales in the combination of taste, health, natural color, natural food protection and so on, we believe in the right junction that billions of consumers want to see their food. On top of that, we believe that an important boost to our internal growth in the last year and in the coming few years come from the huge cross-selling opportunities following 20 acquisitions that were made in the last two years, and the 34 in the last five years. I will try to elaborate later on these main factors.

Frutarom in 2017 is a growing company with a turnover that more than doubled itself in the last couple of years, reached already above $1.2 billion with an EBITDA from our core business of above 20% and this will continue to improve during the next year and two. Strong management stronger than before and we continue to strengthen management in the right area in order to really meet the very interesting challenges of the market and continue to grow faster than the market and absorbing the additional acquisitions that we will be making.

A global sales and marketing organization operating in more than 170 countries, supported by 57 production sites, 72 R&D and application labs, and 95 central marketing offices with more than 650 active salespeople and more than 600 people in our R&D and application laboratories supporting almost 40,000 different customers. This is our base. This is our assets. This is where how we grow, and this is how we continue to grow.

10,000 new customers were added in the last five years through the 34 acquisitions that we made. These are some of the basic properties I would say or assets that allow us to use the cross-selling and the much broader product portfolio that was developed through both internal R&D and acquisitions that will allow us to leverage on these cross-selling opportunities.

Looking at the customer focus, we believe that the midsized, the smaller, the local companies and among them the private label sector is growing faster in many markets as opposed to the global multinational. We have seen some of the global multinational reporting reduction in sales or more or less stable sales. These customers are less than 30% of Frutarom sales and it is typically in niche-added value solutions and that is why we are maybe less affected than other players.

Through a very, very interesting I believe product and technology that we develop, combining the taste, the health, the new areas for us, the natural color, the natural food protection, algae-based product and the combination of them, I believe, are the direction that consumers want to see in their food as opposed to [chemicals] and the many, many names on the label of our food.

We believe that based on these we will be able to continue to grow internally at a double rate in the markets where we operate and add to that a strong pipeline of future acquisitions that I believe will continue to do. And these will lead us in the right direction to continue to improve our revenue, profit margins, cash flow from operations and reaching our ambitious, attainable strategic goals.

A few words about 2016. 31% increase in our sales reaching almost $1.15 billion. Internal growth, excluding acquisitions and currency effect, for the total activity of 5.3%, and in our flavors and fine ingredient business over 6% internal growth. Our taste business is already 74% of our total business and is growing in the last 16 years at a CAGR of 24% a year. In 2016, our flavors business grew by 39% and reached $847 million, organic growth of 6.1%.

Growth in our fine ingredients natural product 23%, reached $228 million, again organic growth of 6%.

Our gross profit increased by 31%, with a gross margin of above 40%, while our EBIT grew by 28% with an EBIT margin of our core business of 16%. EBITDA at the same time grew by 28%, reached $217 million, EBITDA of 20% for our core business. Net profit grew by 16.6% and reached a record of $129 million. The same happened to the – profit per share increased by 15.6%.

Strong cash flow from operations grew for the year by 36% and reached a record of $125 million, 13% increase in the cash flow in the fourth quarter. All of these contributed nicely to a strong balance sheet and a level of debt of around 2 times to EBITDA and this is after we financed the 20 acquisitions that we made in the last two years.

The effect of currencies was much lower this year compared to the year before, but still reduced sales and profits by 2.6%. All these results are when we exclude the one-time cost structure that were mainly attributed to the very significant integration in building of a one leading savory business following the acquisition of Wiberg, the largest acquisition we did end of January last year. I will refer to the progress later on.

In addition, we are working on one of the most fascinating project that I was involved with in the last 30 years, and this is growing and improving significantly our leadership position in the natural botanical extract. A few other one-time expenses in the integration of some smaller acquisitions and the additional one-time expense for the acquisitions that we made.

As far as our strategic growth, we are focusing on several main building blocks. In the geography part, we continue to grow in North America and growing emerging markets. Our product, I believe a very interesting product portfolio in the right junction between taste, health and natural color and so on. Our profitable taste solution business continued to above other. This also helps us to continue to improve our performance.

A few words about building our savory position and leadership position. Over the last 10 years we made many acquisitions, many of them between West Europe, Central Europe, East Europe, but recently Canada, Mexico, South Africa and [Indiscernible]. The first acquisition in Mexico was done in December. We acquired 75% of Piasa, a leader in the savory area in Mexico, where 120 million people are eating quite spicy hot food that consume a lot of flavors and seasoning solution that we are providing. A lot of cross-selling opportunity between Frutarom and Piasa, some of them we already see contributing to our growth through very, very close relationship of Piasa with one of the leading global players in the world with whom they have a very strategic relationship, a customer called [Sigma].

We are very, very optimistic also about the plan to develop a sweet flavor business in Mexico. I mean that is a start up that we are starting now but with a very, very strong base of Piasa in this important market.

The second building block, our unique natural product portfolio will continue to enhance this product portfolio. We entered into the growing area of natural colors, natural food production, antioxidant, natural preservative, biotechnology based product, including based on algae that were added to our portfolio in the last year.

We continued to invest in a very, very focused way in internal R&D, even more so external R&D with collaboration with universities, start-ups, and a lot of collaboration with companies that develop unique technologies, and Frutarom can be an excellent platform to take these into the market, use our infrastructure both in production, marketing, sales and so on.

No doubt the change and the growth in natural products is being enhanced. We all want to see more natural product back to basic, back to nature healthier food replacing synthetic chemically based products by natural products. But there is a big but, the cost of many of these natural products is preventing many food companies to use this type of solution and replace the synthetic ingredient that they are using by natural products. In many cases, cost of natural product are 3,5 and 10 times higher than those of the chemically based for the product which made them really in many cases more niche product than common product that are used in many markets no doubt in emerging markets but also in many developed market. There are couples of months I would say and following the big project of increasing significantly our capacity and position in natural botanical extract. We came to the conclusion that we should invest that's what we are doing. In changing in a way the landscape of our position in the natural extract business by not only increasing capacity moving products to more efficient operation like we are doing but also go back to nature mother nature where Frutarom started in 1933 and through a lot of collaboration with universities and including in Israel with the institute of agriculture to develop and find the best place that we include the highest possible active ingredient that we are looking for when we want to extract natural color, natural antioxidant, and natural antibacterial product and so on.

We are involved today with a better integration with some interesting partnership with farmers, both in Israel, Latin America and in East Europe to grow specially for us with two years contract. These types of place that we believe will support our ability to come to the market with much lower cost product still making a very decent margin but more importantly allowing many more food manufacturer to use these types of natural product that will become hopefully much more affordable. We believe that this project will yield a significant contribution towards the beginning of next year.

The project that we are going through in growing capacity include four acquisitions that we made in Europe, two in Spain, on Slovenia and one Germany in botanical extract operation on top of the business that we acquired in these we acquired capacity and we are investing in increasing these capacity in improve efficiency and cost structure.

All these the growing capacity, the improvement in yield of a certain key plants will significantly enhance our position maybe just to give two examples where Frutarom became a very, very strong player. One, is Rosemarie that we are using as a main antioxidant [indiscernible] that is very fast growing natural color both we are growing today and will continue to grow more by our own connection and partnership with farmers that will allow us to reduce cost and important to have enough ability to be able to be market growth in this interesting product. This will allow us to enhance our position both with the visiting customers and we believe also will customers that are not buying from us including some very large food companies with whom we are having serious discussions about our ability to supply them in the attractive prices much more attractive than the market now these type of natural product. Few words about the cross-selling. Again personally and we as management believe that this is one of the main growth engine for Frutarom and great opportunity to use the beautiful product portfolio that we deal and presented to our 40,000 different customers, 10,000 of them were added as I mentioned only in the last five years.

Most of these customers were acquired while we acquired small family owned businesses that have very, very limited product portfolio. When we come to these customers today and these are again primarily smaller and midsized customers they love the idea to be able to get one solution, combined solution and much less supplier. They don't need really three suppliers that will supply them different natural color and some that will supply them flavor, some will supply them antioxidant, some will supply them different functional ingredient. We can make the right solution for them, reduce their cost and make the supply chain much more efficient and with much lower risk that is also a very-very important factor in their consideration.

We believe that this is very interesting competitive advantage that we have both in our product portfolio and unique customer portfolio. Few words about the geography leaks that was improved nicely over the last five years through both fact internal growth and acquisitions that we made starting with North America we continue to enjoy a nice internal growth supported by the acquisitions that we made. Business grew in the last five years four times the North America while flavor business grew eight times.

The North America are now around 15% of total Frutarom sales compared with only 8% in 2010 in the same time Frutarom much more than doubled itself. We continued to actively pursue strategic acquisition in North America and I believe that we will grow our North American business nicely over the next two years. Emerging markets we continued to put very focused effort in the growing emerging market. Our business in emerging market is today four times bigger than what it was in 2010 and emerging market share out of total Frutarom sale is above 40% compared to only 27% in 2010. I will refer to some of the main markets. I will start with Asia where we grew last year by 45% but still our market share in Asia is much-much smaller than what we would like to see and much-much smaller than our global presence and this is a very important challenge for Frutarom to continue make acquisition and grow internally in the growing market of Asia.

The nice growth last year come from a combination of the acquisition that we made, double-digit internal growth supported by the new -- we inaugurated in China last year that is producing not only sweet solutions but also savory solutions a lot of cross-selling opportunities and I am also happy to say that I believe that we will be able to make more acquisitions in additional market where we are not operating to-date in Southeast Asia.

Latin America was zero business for Frutarom for flavor five years ago in the last year we grew by 20% in the last four years we did five acquisitions that allow us to grow the business significantly and the Latin America business today is around 70% of total Frutarom business compared with I believe 1% five-six years ago. Here again we are actively pursuing interesting potential acquisitions including in markets where we don't have any operations today. We are also happy with our progress in Africa. We built our business over the last four years. Double-digit internal growth last year, a new plan inaugurated last year in South Africa supported the growing sub-Sahara market beginning of this year we did another acquisition of unique flavors strong savory in South Africa and in some key growing markets like Ghana, [indiscernible] Zimbabwe and some others and in today we are actively integrating the unique business together with the Frutarom South African business both will operate under one roof within more or less year.

In central and East Europe we are no doubt a leading player following the acquisitions we did in Slovenia, Russia, recently in Poland. We did took advantage of the big change in the Russian market moving from import of food and raw materials into their own production to nicely to grow our business and to increase improve our margin in this interesting market that we believe is coming back into a growth best.

Currency effect last year was much-much better than the year before but still we suffered from a 2.6% erosion in dollar term in sale and profits. Few words about the actions we are taking to optimize our resources. These are going according to plan and successfully. These we bring the 20-22 million savings that we committed to. 12 million will come from the integration of the savory business following the Wiberg acquisition 6 million will come from the project of increasing capacities and reducing cost in our botanical extract business.

The Wiberg integration is a progressing well under one management acting from the nice modern R&D center in Salzburg. In the first quarter last year we finished transferring all production from our largest site in Stuttgart that was much less efficient than the other site for our savory business in Europe. These were transferred primarily to the Wiberg site. We are very, very happy to be able to tell you that we did not lose any customers. We held a very good service level that we continued to perform no claims regarding different qualities following this very, very significant change bearing in mind that we are dealing with more than 10,000 different customers and more than 7,000 different customers. Sorry 10,000 product and 7,000 different customers.

We are implementing now the project during the next few months we will finish the project of full optimization of the Wiberg site that was fully optimized but we increased capacity there by 40% and at the moment we do it manually because we didn't have this automatic equipment. We are installing it right now. This will be running fully before the end of second quarter will allow us to reduce more cost and reducing the employees that were added in order to meet the growing demand for the savory business that's continued to grow and we are very, very happy that this is the case following such big integration. In the next, say, six months we will also implement some more reduction in our sales force and R& D stuff something that we decided not to do in 2016 because we noticed that some of our competitors are trying to hire some of our key people.

This was of course something that we are not allowing and not going to happen but more importantly we decided to put more resources in the market both in sales and R&D in order to ensure the customers are satisfied getting the same level of service and so on. But still we believe that we have at the moment ability as start of the whole project and the 12 million reduction in cost to be able to optimize ourselves in R&D force to the right level that is really needed in order to continue grow this important market. The onetime expense that related to the savory business are almost over either completely over or maximum 1 million or 2 million additional expenses might be needed over the next two quarters but we are I would say at 90% of the project and this went very, very well for us. This onetime cost relates to lay-off about 100 people in Stuttgart working parallel in two site in order to have the right capacity even if we don't be needed because we wanted things to be smooth and give the right level of service. Our rental agreement in our Stuttgart will expire in November but we put all the cost last year logistics that were changed from outsider logistics facilities to internal and here again we cut the agreements that were in place and everything now worked from the integrated company and from internal resources that we have and work very, very efficiently at the much lower cost base.

We are sure that we will achieve our 12 million cost reduction on a yearly basis and believe that additional cost improvements will come from harmonization and the global purchasing organization. The global purchasing organization continue we have to include all the 20 acquisitions that we did over the last two years and that no doubt the challenge of harmonization of raw material but we are very happy to report that in the last couple of months we start seeing a very nice reduction in cost of raw material that we both through global contract something that we have not done up till very recently something where we have a big disadvantage compared with our big competitors but I believe are buying more than 75% of the total raw materials through global contract using the purchasing power that we are about to use within the next coming few quarters.

The combination of fast internal growth exploring and enjoying the operational efficiency project including the global purchasing organization we yield the expected improvement in our margin in our co-business flavors and fine ingredients. To sum up we are happy with the results of 2016 and the first quarter representing a successful implementation of our growth strategy. We are very optimistic about 2017 that will be another record year for us. We believe we will continue to see a fast internal growth. This will be based as mentioned on our unique proposition offering our 60,000 product, 75% of them natural to almost 40,000 different customers in more than 170 countries. A lot of cross-selling opportunities that we are enjoying in a strong pipeline both of project with thousands of customers and additional new acquisitions supported by a better geography base and operational efficiency program that we are going through.

We believe that we will continue to enjoy a healthy cash flow from operation that we support our acquisition strategy all these will help us to continue improve results, continue support our reaching our targets of 2 billion in sale with over 22% EBITDA in our co-business by 2020 I believe maybe even before. I would be very happy to answer any question you might have.

Question-and-Answer Session

Operator

Thank you. [Operator Instruction] The first question is from Tavy Rosner of Barclays. Please go ahead.

Tavy Rosner

Hi Ori. Thank you very much for the presentation. I had two big pictures questions if you don't mind. The first one was one of the large industry players recently that you talked about and during SME markets as oppose to being just focused on the very, very large players I was wondering if you see that as potential threat to you and the second one was with regards to emerging markets we think some macro headwinds in many geographies just like in Latin America is that something that you are filling in your orders? And I will start with that?

Ori Yehudai

Thank you for this excellent question. The first question is very difficult for me because you are asking me to talk about excellent companies that have very good solid performance. Let me tell you only one thing if one would offer me to become a CEO of one of the largest company which by the way I am not interesting in doing and assume that I will consider doing that I have to change completely my business model. I have to add additional 1,000 safe people as well as additional 700-800 R&D people I have to change my lead time from 4 to 6 weeks in many cases through the [indiscernible] to direct sale and lead time of 4 to 6 days that means a complete change in the business model. Is that will happen? We might have more competition but you have to bear in mind that there are 800 different small companies exist in the market but they of course don't have the same resources as the these guys as Frutarom has.

Also bear in mind that 60% of the food that we eat in the world is being produced by manufacturer, food manufacturer with the turnover of less than 1 billion meaning that you have a huge room for the competition. I to be honest don't see that is any real major risk to the Frutarom model based both on our relationship with these customers that are very, very close like for example on the other hand if I may Frutarom has no interest to go into the co-east big guys because we believe that the competition there is too tough anyhow and the large five or so companies are fighting there. As far as emerging market I am happy to say that the Latin America we are enjoying the very, very fast growth both last year and the first quarter this year and I don't see any headwinds but again Tavy bear in mind that Frutarom is a smaller player and we deal with smaller companies. Also bear in mind that it seems that from a lot of reports that the smaller and midsized customers are growing faster than the branded product that are the main base for our large competitors. All these I believe will lead to some answer that you might take as the conclusion. Hello?

Tavy Rosner

Hi, sorry. Can you hear me?

Ori Yehudai

Yes. Yes I hear you.

Tavy Rosner

Thank you. Just the last one with regards to the recent increase in the price of raw materials. I mean I remember the times few years ago when the prices went through the roof and then somehow you managed to compensate for that based on the number of raw materials that you are leading with. Is that something similar happening now and also can you really translate purchasing power that you are gaining into kind of mitigating the impact of the inflation you are seeing there?

Ori Yehudai

That's a very, very relevant question no doubt thank you for that Tavy. Look, we have seen a very significant price increases and prices went through the roof as you say both between 2006-2008 and 2010-2013. In the last three years we have seen more stabilization, but I do agree and confirm that in the last few months we see some more prices going up and prices going down. Some specific products like for example, citrus and vanilla went to the roof and we are dealing with price adjustment that I believe in most cases we are able to achieve some other price increases that we have seen we are working on referring to the right product and the right customers in order to ensure that we are able to maintain a margin.

I will add to your question the currency effect. I believe that important part of the challenge come from the currency effect while many of the raw material for Frutarom maybe more relevant because more than 75% of our raw materials are natural and many of them are based on dollar and not for example Euro or differently British Pound. So in this case again we are actively pursuing the right changes that we have to make in order to ensure that our profit is being maintained. I can also tell you that being to the close to the end of first quarter I don't see at the moment any real hit in our margin following these trends but we are very, very committed and also improve significantly our control tool to be able to monitor future trends in prices of raw material and be more proactive than before hopefully when dealing with price increases whenever they are needed.

No doubt no customer including us don't like price increases. So it takes time and that's why typically there is some lag between coming to these customers and talking about price increases and till we can finalize some price adjustment. In some cases, maybe slightly before slightly less than what we expected but I can assure you that even it might take time we will be able to use our pricing power that I believe here again might be stronger than some of our competitors that deal with much bigger customers to be able to mitigate this risk that might have a short term effect but we are not seeing at the moment.

Tavy Rosner

That is helpful. Thank you Ori.

Ori Yehudai

Thank you very much Tavy.

Operator

Thank you. The next question is from Ian Hunter Investec, please go ahead.

Ian Hunter

Good afternoon gentlemen. Ori maybe just a couple of questions maybe moving on from that last question as well. I did notice that the operating margins did deep a bit in the fourth quarter. Would you say that is a sign of the passing through increasing raw material prices or it's just a question of timing for profits coming through and can we see these margins coming back up again through the next year and if the raw materials then as you said is just the lag coming through?

Secondly, I am just wondering with 57 production sites, 72 R&D labs at the moment, is this too diverse for your model as you grow going forward. Is there a thought that you might try and make more regional center etc. I only think that against some of your larger players who you are now coming up to compete against with that two or three centers etc. or do you think that maybe gives you a competitive advantage given the fact that kind of move towards regional and local place?

Ori Yehudai

Thank you Ian, for questions. First of all, the first quarter margin refers more to typically first quarter lower margin because of the analytic and different product mix. And the second to the product mix following the acquisition like Wiberg that we said before will reduce our margin by around 1% but this will change when we finish with our efficiency program and improve the cost base to be able to continue improve the margin towards the 22% EBITDA margin that we want to see in our co-business. So I don't think or I don't see the first quarter margin relates to prices of raw material. In some cases slightly maybe yes, because it takes some time for example to adjust prices for example in a country like the UK where some people made the decision not myself about the sheet, but change dramatically the pound as compared to the dollar or Euro but that's not the main issue. The main issue is the timing of the seasonality and the mix.

And as far as our I would say – I would call it in my fool English inefficiency in operations R&D and sales and marketing officer. On one hand we continue to combine sites and operations whenever we can and no doubt that some improvement will be made over the next two years, assuming we don't do acquisition which is a completely wrong assumption I believe that few production sites will be eliminated and integrate with existing one and we are working on some project to do that.

But, generally speaking I believe that again that's Stuttgart to the previous question about some of the large companies want to serve and have a close intimacy with smaller customers. In order to do that you have to have a close production site, you have to be close with them with R&D and application lab. You have to have I believe this type of inefficiency and further on being more local player than some of the other larger global players I believe paying some price for these inefficiency but at the end of the day we are – our pricing power I believe and our margin are not different in any sector where we operate and that proves that the model works still we have a room for further improvement that we will do.

Ian Hunter

Okay. Thanks very much. There is not many, can I ask this I do have to ask if you can give us an idea of the business environment in Russia because that's such a part of your actual business. You have got a very good presence there. Are you seeing this you mentioned it in the past that this is improving. Just wondering an idea of the general atmosphere here in do you see this is coming back into our growth area?

Ori Yehudai

So atmosphere, no doubt much-much better than what it was in the last two years. The Russian food market generally was reduced by around 10% during the last two years and we have seen a huge transfer or move from import or finished product and raw material into their own production. Let me give you one example Russia used to import significant part of their consumption of chicken. Today Russia is exporter of chicken. I mean the government did a lot of actions I believe in very efficient way to be honest this to encourage local producer to produce local raw material and they become more and more important and that's why the importance of being local for us in Russia today help us to enhance our competitive advantage. We noticed in the last couple of months maybe following the political situation more optimistic approach and they believe that they will come back to growth this year.

Ian Hunter

Okay. Thanks very much.

Operator

The next question is from [indiscernible] of UBS. Please go ahead.

Unidentified Analyst

Hi, guys just two quick ones from me. First of all in terms of organic growth of the Q4 how much of that – how much of the 3.8% number is made up from price and you can sort of take how break the angle for raw material impact and secondly just on the phasing of the cost savings and how much have you seen already in the last six months and sort of another run rate should as you say gradually progress over 2017 but what can we expect to sort of first and second half? Thanks.

Ori Yehudai

Thank you Ben. First of all first quarter internal growth totally was 3.8 but we had the reduction in entire growth in our non-core business of trade and marketing and our flavor business grew by 5%. very-very-very little come from price increases because we started increasing prices again in a very limited way only towards the end of the first quarter beginning of first quarter this year. So, I would assume that a very negligible part come from price increases and as far as the timing of savings. I would assume that we will gradually see the 20-22 million savings coming in the P&L during the year. The first quarter will be lower. The second will be better and in the second half we should come closer to these numbers that's because we are finishing some last project in the savory as I mentioned like optimization of the plant and sales and R&D optimization and the 6 million savings from the botanical extract will start coming into effect second half. So I would assume first quarter will be more representative having almost the full impact.

Operator

The next question is from [indiscernible] of Excellence, please go ahead.

Unidentified Analyst

Hi Ori. How are you? Quick questions --

Ori Yehudai

Thank you very much. Congratulations on your new job.

Unidentified Analyst

Thank you. Thank you. Just going back to your acquisition organic growth strategy you referred to then – I am wondering do you see any changes in terms of evaluation deal multiples or overall number of companies in the pipeline when you look at and you compare it to your 2020 targets. Any change from the last conference call?

Ori Yehudai

I would say yes. There is some change. The change is not referring to the last conference call but the last year I would say. We have seen some of the large players in executing smaller acquisitions and what they used to do before I believe lowest in the range of 60 million - 70 million and mainly in the United States but bear in mind that there are at least 800 much smaller flavor companies around the world and around 400 different potential target of natural ingredients like health ingredient, natural color, natural antioxidant that most of them are much smaller player we have today about 200 companies on our short list with whom we have some sort of discussion and more importantly at least 20 acquisition in the pipeline most of them I have to say are smaller with reasonable evaluation model because Frutarom strategy will not be to meet very high multiple of EBITDA that we believe are not justified for us.

And will not bring the right return on investment for our investors. So we have seen some change while some of the big guys are executing midsized acquisition but bear in mind that there are so many of these most of the potential acquisitions are much smaller and I assume that there are not the right size or not the right customers for the big guys. Our 2 billion target should be reached with an average revenue acquisition on an yearly basis of around $150 million in the last two years by average we did 2020. I don't see at the moment any real risk that we will not be able to do 150 or more acquisition of revenue and that's why I believe that we will be able to achieve the 2 billion before 2020.

Unidentified Analyst

Thank you. That is very clear. Thank you.

Operator

[Operator Instruction] There are no further questions. I see we have a follow-up question from Ian Hunter, please go ahead.

Ian Hunter

Good afternoon again. With your exposure to Mexico and Central America I do have to ask if you have got – had any feedback from your clients there on any potential impact that could be from the American administration going to a more protectionist stand etc. I wonder if your clients have got exposure in the state whether that's going to affect their investment decisions going forward and therefore your service into those clients.

Ori Yehudai

That's a relevant question no doubt. On one hand in order to be on the safe conservative side I think -- happened until now and I don't know what's part of announcement and Twitter announcement will happen or not happen. But let me tell you that our Mexican business is mostly based on the local market that is serving 120 million people that and is exporting very little, if zero, I believe close to zero to United States and the export is more towards Latin America and central American markets that we intent to enhance. I can also tell you that we acquired the business end of last year and first quarter seems to be positive with a nice internal growth so up till now we don't see any really reason to be very concerned about.

Ian Hunter

That's great. Thanks very much.

Ori Yehudai

Thank you.

Operator

The next question is from Cathal Kenny of Davy Research. Please go ahead.

Cathal Kenny

Good afternoon Ori.

Ori Yehudai

Hi.

Cathal Kenny

Questions from our side. Firstly, if you look at the business. You obviously have been very active in M&A over lot of period of time and you have accelerated us in the last couple of years. Are we close to point where we start to see shift away from M&A and maybe towards organic capital allocation in terms of CapEx? I can't just know that you have I think close 57 individual sites globally, I just engine your thought process around that I come to another question after your answers.

Ori Yehudai

If I have to answer yes or no the answer is no. and the no is a combination of Frutarom made commitment and love to executing additional acquisition include 2017 and we believe that with our strong cash flow and strong balance sheet bear in mind that since I joined Frutarom 30 years ago when it was $3 million company the growth to 1.2 billion came from our internal resources. So I see no reason why should we change the allocation by the way through this acquisition we are acquiring in a way sites and assets and in a way create some sort of an inefficiency that was we referred to before.

This inefficiency we are working on for example, in the US every new acquisition will be in New Jersey, we integrated into our Cincinnati operation. Every new acquisition we will do in Europe that will make sense will move into our UK or Slovenia operation. Any new business in any new market like Brazil, like South Africa we are integrating now. So most of the acquisition because we already have now some figures we didn't have five years ago, we already have now production and existence in most of the important countries as long as we don't do new acquisition in a new market that we would love to do. We have the opportunity to melt, combine and use the assets more efficiently and yes we do need and we are working on improving our efficiency to 11 and the 11 was what was discussed before we don't want to give the best service to much smaller customers and this in a way cost or we pay for that by some inefficiency but at the end of the day our margin are not lower because these customers are paying the price for a supplier that give them the best service with quality, with innovation and so on.

Cathal Kenny

Okay. I have the question two. If you look at your annual reports in around pages 64, 65 you have outlined your production assets and within that you give us some days around the actual physical size of the facilities. If I look at those numbers I mean there is very significant spread. So I think the biggest is 63,000 square meters but you have a number of facilities that are less than 10,000 square meters. I mean are those facilities optimal as we look forward or do you think we can see a further adjustment or consolidation around that production base?

Ori Yehudai

Some limited consolidation because many of those smaller production sites are in small countries that are serving local customers and Frutarom as opposed to our large excellence competitors and I really mean it excellent competitors believe that these close to these small customers supply them within four, five days is the right node to grow with this market segment that is 60% of the global market and is very interested in getting such a service and focus 4 to 6 weeks lead time.

Cathal Kenny

Yes. I understand that. Just finally, on the same question. I mean most of your facilities are run five days a week looks like two shifts is that typical of the industry?

Ori Yehudai

I believe so for flavor company. For our ingredient business, and when we deal with our capacities of botanical extract we are moving towards three shifts and try giving to work more than five days. But it's not necessary for flavors because in flavors very, very well because you are really expert in this area maybe better than me you don't really need a lot of I would say equipment or CapEx in order to grow your capacity and you don't need to work in three shifts or anything like that. That is less efficient in these cases.

Cathal Kenny

Okay. Alright John has a follow up question.

Unidentified analyst

Good afternoon Ori. How are you?

Ori Yehudai

I am very well. So happy to hear you John.

Unidentified analyst

Yes I heard you yesterday.

Ori Yehudai

Thank you so much.

Unidentified analyst

I wonder the model which has served you well in the, if you like or the western world, if that as regards to growth. Is that one that you think and work as well in Asia or will you have to approach Asia from a developmental point of view very differently? I know to go back to the question do you think it will be there CapEx throughout the acquisition?

Ori Yehudai

Look that is a very little question because up till now we did only acquisition last year in China and this was not pure flavors but more flavor solution including fruits and other part. And that's why we build our own new facility in China. We did the same in South Africa and I would do the small acquisition there and we will do more of that in additional in South Asian market soon we will announce it. So in these markets even though there are acquisition of particularly in China the reason I might say some concern about doing the acquisition because of IP protection and that's why in those in some of those market we prefer to invest in our internal growth.

Unidentified analyst

Okay. Thanks very much Ori.

Ori Yehudai

Thank you. Thank you. Happy to hear you.

Operator

There are no further questions at this time. Mr. Yehudai would you like to make a concluding statement?

A - Ori Yehudai

Yes with pleasure. Really thank you for your participation for the excellent question. Most of for your continued support both Alon, Laurie and myself at your disposal if you have any other question, any other concern. I hope I could transform our positive feeling about the continuation of our journey going forward and the right place that we believe we have in this interesting fascinating market that is changing. So thank you very-very much and have a great day and evening.

Operator

Thank you. This conclude the Frutarom Industries Limited Fourth Quarter 2016 result conference call. Thank you for your participation. You may go ahead and disconnect.

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