International Flavors & Fragrances Inc. — 2024 Q1

This is Matthew Hettwer on for Kevin. It's nice to see a strong start to the year. Erik, could you give us some additional context and detail regarding how you've seen the individual businesses react to your new operating philosophy through the first 90 days?

Yes. Thanks for the question, Matthew. As you probably know, I've been on a listening tour or a discussion tour since right after the January 11 announcement of the change of my joining IFF. And it's been really great to hear from our employees all around the world and our customers all around the world. And what I've discerned from that is that we've had multiple companies coming together with different operating models, different philosophies.

Okay. I'll start and then hand it over to Glenn. And thanks for the question, Nicola -- or questions. So on the portfolio, first of all, the Pharma Solutions business will be with us for another year. And we see a lot of opportunity to further strengthen the performance of Pharma Solutions over the next year and then beyond that with Roquette.

Thanks, Erik. Thanks for the question, Nicola. We're actually trending more favorable in terms of our full year outlook for free cash flow and adjusted as well. As mentioned, a combination of earnings momentum -- actually, working capital is actually performing better than planned, and we expect actually some improvement and then just some timing on taxes. We're probably going to be closer to $600 million versus the $500 million.

Thanks, Josh. And let me start and then Glenn can give you more details. But as I see it, still fairly new coming into the company, clearly, CPG company volumes are still soft in the U.S. and the EU. And so we can't expect a whole lot of market tailwind growth. I do think we've seen the end of most of the destocking outside of Pharma Solutions. And Glenn alluded to the Pharma Solutions destocking, both a market destocking and our change in channel strategy. But bottom line is we can expect a lot of growth from the marketplace, although there are some emerging markets that we're going after that are seeing very attractive volume growth.

Thanks, Erik. Again, Josh, I think, as Erik mentioned, until we see a strengthening in the consumer environment, which has yet to appear, and until we have a few more months underneath our belts, it's sort of hard for us to be sort of incredibly optimistic on the second half. As a reference point, the first half volumes of circa 4% to 5% and the second half, basically 1% to 2%.

Thank you, Mike. So good question. So 20% for Q1, sort of the implied balance of the year is around 18.5%. That 150 basis points of change, half of that is related to volume and mix, inclusive of LMC. So LMC, you take out about $12 million per quarter and about $25 million of revenue. So it's relatively high margin. So everything normalized, that gets you from the 20% down to basically 19% in a quarter.

Yes, Eric, you're right. I mean, the full year, we're expecting a small net positive, as I mentioned, little more biased towards Q1 than the balance of the year. Our pricing actions, which were largely givebacks this year, were highly focused in the Functional Ingredients space. We are tracking well against the expectations that we set for the year. We do believe that the improved performance in the business is in part related to these pricing actions on top of the other actions. And we don't see sort of any additional kind of pricing for the balance year at this point in time.

Thanks for the question, David, and glad to be back with you again after some years. Absolutely, it marks the beginning of improvement in the Functional Ingredients business and very pleased to see that after a long, tough spell. And what I would say is that we are putting more focus on the Functional Ingredients business. And I'm very pleased to see the start of what the team are working really hard to make a sustained turnaround.

Yes. And I would just add to that, David, as we've mentioned in the past, we've stated we didn't think we're going to get to sort of full recovery until '25. We're pleased by the start of this year. A lot of the service elements are 100% back to where they should be. Pricing actions have been effective, more innovation in the pipeline.

Adam, good question. Regionally, we have seen greater strength in the combination of Asia and LatAm, so more of the emerging markets from a volume standpoint and sort of across the board, generally a little softer in North America and in EMEA. That's probably not dissimilar than what others are seeing in the marketplace.

Well, thanks for the question, John. And I think it's a really important one. To me, the most important thing we do as leaders is make sure that we have the right talent in the company, that we develop the right talent and we give them the opportunities through promotion to continue to advance their careers. And so I always prefer internal promotions. But sometimes external talent needs to come in to fill gaps or when we don't have the right talent inside.

Thanks, [ Laurence ]. It's also good to be back with you. We had some history that dates back quite a ways. The way I would say it is that in the businesses that are remaining, we've got a lot of great innovation capability and a lot of really terrific people that understand customers, have consumer insight capability. So we have the people and the capabilities, including the innovation capabilities, to be very successful.

Good question, Salvator. We are trending at around $200 million full year in terms of productivity and, hence, some of our commentary about guiding towards the higher range of our EBITDA guide. And that's about $50 million per quarter. So it's fairly ratable in terms of kind of the achievement. I would note, as we've said in previous calls, we have made tremendous progress with our operations and procurement leadership teams in really driving a very disciplined approach that is taking cost out, everything from SKU rationalization to literally looking plant-by-plant in terms of best practices. And behind that -- and by the way, there's plenty of additional opportunities. As I mentioned, we're taking a [ zero-based ] approach to our ingredients platform, which will provide additional opportunities.

Sure. Lisa, this is Glenn. So we're in the early innings of deciding sort of our liability management strategy. As you know, we will bring in circa net proceeds of $2.4 billion from pharma. Coincidentally, we have maturities cumulatively for '25 and '26 that are $2.4 billion. But we're actually taking a more holistic look, and we're actually going to be balancing the trade-off between interest cost savings, notional debt repayment, so how we think about basically bringing in some of the cheaper debt, as well as refinancing risk.

Yes. So on the functions feeding into the business units, reporting into the business units, it's clearly being done so that the business units can drive their performance. And there will be no changes to the 2024 plan because everybody is set and clear about it and we're not making changes.

Yes. So your second question, Mark, hard to definitively understand kind of what's going on downstream in terms of the supply chain. However, I think in general, there was a little bit of volume that went from Q4 into Q1, but directionally probably less than 0.5 point. We were reducing prices, as you know, in certain segments. So customers decided to push some orders into Q1. But I think it's fairly de minimis. In general, the feeling is that there's not any restocking in the marketplace. There's an absence of destocking. But there's no view, I think, generally, in terms of the customers are restocking at this point in time.

No, no, I'll start and then Glenn can add to it. First of all, in the organization structure, the idea was to have market-based organization structure. So for example, Health & Biosciences would have been split up into four different units. As we've come together as an executive leadership team and talked about it, the belief is that you gain the most by having -- making sure that your innovation, that your R&D engine is -- stays within the business and the manufacturing and the commercial so that you have that end-to-end and you're going to customers with expertise that they can connect all the way back to R&D and what we call IC&D, the innovation, creation and design capabilities that we bring, that really needs to stay within a business and be there end-to-end.

Yes. So if I can add, the original premise, which actually predates me, Lauren, was that combining Flavors and Ingredients would represent a significant "revenue synergy opportunity" through cross-sell. And the axis was put on synergies as opposed to how do you optimize the individual businesses. That is being shifted the other way, where the reality is these businesses will run much, much better with a single focus either on Flavors or Ingredients.

And what I would just add to that is, I think Flavors, it was really a good pipeline that the commercial team was able to land. And in Ingredients, it was a combination of a strengthening pipeline but also pricing actions that led to regain some share that was lost due to overpricing increases. And now we've recovered some of that with some price givebacks.

So in the last -- since I've joined, I think I've met with more than 20 customers, maybe 30 customers. And very consistently, what we're hearing back is that they're pivoting from being able to grow with price increases to now needing innovation and innovation being more important than ever.

And Jeff, that second part of your question, was it Q4 to Q1? What was your reference point?

Yes, yes, yes. Well, there are a number of timing elements in the fourth quarter and sort of the mix of the business in the fourth quarter vis-à-vis Q1. Generally, the productivity and net price dynamics are very similar, so I'd say the fundamentals were. But you really have some mix dynamics and then some one-time items related to that as we think about Q4 to Q1.

Thank you all for joining today. Let me just close with two comments. First of all, Glenn did announce his pending retirement. But I just want to make sure, he's not leaving yet. There's lots more work to do. And we're enjoying him as part of the ELT, executive leadership team, to get us unleashing our full potential.