International Flavors & Fragrances Inc. (IFF) Earnings Call Transcript & Summary

Hello. I'm Glenn Richter, CFO of IFF, and I'm delighted to join you today at CAGNY to talk about the new IFF story. Let me just cover off a couple of housekeeping items first. I would advise you to read the cautionary statement around our presentation. And on the next slide, I would also encourage you to be aware of our non-GAAP financial measures that we'll be using in the presentation. So if we talk about on the next slide, the agenda, what I will be talking about today is basically 5 things. First of all, I'll give you a quick overview of the competitive position of the new IFF. Talk secondarily about how we win with customers and sustainable set of advantages for us in the marketplace. Third, very importantly, describe the multitude of value-creation drivers that we have for our shareholders. Fourth, we'll discuss a combination of the '21 financial results and then our outlook for this year. And then I'll summarize with our key operating priorities. So let's move to the next slide and talk about the new IFF competitive position. Through the combination of legacy IFF and the DuPont legacy Nutrition & Biosciences business in 2021, we've created a clear global leader within our space. Today, we are 24,000 colleagues strong. We serve over 50,000 customers with 110,000-plus products. Importantly, we have a global platform with 150 manufacturing facilities, over 50 research creative application centers, serving in over 65 countries and customers in over 150 countries. As of last year, we had nearly $12 billion in revenue, nearly $2.5 billion of EBITDA, close to a 21% margin and generated over $1 billion of free cash flow. Let's move to the next slide and talk about our footprint across the globe. Today, we serve the entire global market. Importantly, we are very diversified geographically relative to our revenue. Our largest region, EMEA, is 35% of our total sales. We have about 30% of our sales in North America. But very importantly, Latin America, 11%; and Asia Pacific, 24%, are rapidly growing markets for us in the future. If you move to the next slide, we'll talk a little bit about, very importantly, the diversification and overall mix of our business. We are organized around 4 business units. Our largest, Nourish, has leadership positions in Flavors, Ingredients and Food Design, representing 54% of our revenue. Our Health & Bioscience business at around 20% of our business are leaders in enzymes, probiotics, and the cultures and enzymes space as well. Our third business, Scent, is a leader in Consumer and in Fine Fragrances at 19% of our sales. And then our Pharma Solutions business is 7% and a leader in the excipients business. Importantly, as I mentioned on the previous slide, we're diversified geographically. So about 40% of our sales are in the developed markets and nearly 60% in faster-growing emerging markets. And then importantly, from a customer standpoint, we're pretty evenly split between large global multinational CPG firms and regional players. So we're able to basically grow at in multiple ways. So we move to the next page. I would like to talk a little bit about the strength we have in R&D. With the combination of legacy DuPont and the IFF businesses, today, we are the largest R&D platform in our space. Last year, we spent nearly $630 million in R&D or about 5.5% of sales. Importantly, we have over 12,000 patents, over 3,000 individuals in our R&D, engineering applications and support across 50 centers in the globe. So we're able to meet our customer needs in multiple ways in multiple geographies. Moving on to the next slide, we'll talk a little bit about basically how we bring value to our customers. On the left side, we have a range of solutions that we can provide our customers. Starting at single ingredients, we can move into multiple ingredients, packaging multiple ingredients into a single solution for a customer, moving to a much more complicated integrated solution or increasingly moving up the value chain to market first products that we're able to deliver in terms of finished products completely for our customers. Importantly, there is a wide host of benefits that we provide to our customer. So in addition to quality, we're able to supply resiliency from a supply chain standpoint. We are able to deliver increased speed to market, which provides agility for our customers in terms of bringing products quickly to market. We often supplement the R&D capabilities of our customers. This enables us to have products that actually maintain a stickier, longer-term relationship with our customers and give us the benefit of durability relative to our customer relationships. Moving to the next slide, I want to talk a little bit about the breadth of our platform. With the combination of our business a year ago, we now have by far the widest range of product offering in the marketplace. In most of our product categories, we are either #1 or #2 in terms of our market space. That allows us to drive deeper penetration within individual product categories. In addition, cutting across the businesses, we're able to offer more solutions for our customers by reaching across the different businesses as well. So that allows us to do a combination of cross-sell as well as developing additional products for our customers and solutions for them going forward as well. And if you move to the next slide, I would also like to basically point out that very, very importantly, ESG is embedded in everything we do. The Do More Good Plan in our new ESG+ strategy is comprised of a combination of very ambitious goals for 2030 and a combination of basically meeting metrics for environmental, socially responsible, governance and sustainable solutions for our clients. Importantly, this is an area that represents a differentiator for IFF. Through the investment in sustainability platform, not only are we meeting the fundamental needs of our customers, increasingly, it's a must do in the marketplace in terms of our offer. So with that, now let me move on to the next section of the presentation and really talk about our framework for success. And specifically, what are the multiple drivers we have to generate high returns for our shareholders. I'll start in terms of top line growth. We have a platform that can drive profitable growth through multiple climates. As I mentioned, we're well diversified in terms of our product offering. We're also very well diversified in terms of our customer and our geographic footprint. And we're continuing to make investments and focus on our highest growth and return categories in the business. In addition, we're putting more money into sustainable solutions, so investing in new products that capture a combination of the strong consumer trends in wellness, health and sustainability to bring new products to the market to further drive top line growth. Importantly, we're also focused on operational excellence. So we are spending a lot of time in making sure that we can drive better efficiencies across our global platform. A big benefit of bringing the legacy companies together is the ability to actually drive more scale in the marketplace going forward. As we will mention here in a few minutes, we're also evaluating our portfolio. So we're taking specific actions to divest a number of noncore businesses that actually generate lower returns and have a lower growth profile for our business using these proceeds to delever our balance sheet over the coming years. And lastly, we're rapidly working on the integration of the new enterprise, which will drive both top line benefits through synergies and importantly, also substantial cost synergies as we complete the integration. So if we move to the next slide, I'd like to discuss a little bit about our disciplined capital approach. Our primary focus of the use of our cash flow over the coming couple of years is deep leveraging our balance sheet. So number one, we will be using proceeds from the sale of businesses plus excess cash flow from the business to reduce our overall net debt to adjusted EBITDA ratio to below 3x within 36 months of the close of the deal. Secondarily, we're going to continue to maintain our dividend policy going forward as we have in the past. Third, as I mentioned, we're going to continue to look at noncore businesses in the portfolio and further optimize the overall business and find additional opportunities to generate cash flow for the business. And lastly, as we delever the business, we will evaluate the potential to reimplement a share buyback program. If we can move to the next page, I'd now like to talk a little bit about our results, starting off with a snapshot of 2021. Last year, as I mentioned, we delivered nearly $12 billion in reported revenues. That was a 10% year-over-year increase in terms of revenues and importantly, an 8% currency-neutral percentage growth with very strong growth driven by our Nourish and Scent businesses, but importantly, in the fourth quarter, all of our businesses delivered very, very strong performance. Our adjusted EBITDA margin was just short of 21% for the year. Our free cash flow, as I mentioned, was well over $1 billion in the full year. That's about 9% of our gross sales. Our net debt-to-EBITDA ratio dropped from 4.3x in the first quarter of 2021 to 4.1 at the end of the year. Our synergy realization, both in terms of revenues and expenses in our first year of the integration exceeded our targets. And lastly, we've made a couple of very important steps relative to our portfolio optimization. We closed the sale of our Fruit Prep business, and we announced the transaction, which will close in the first half of this year, the sale of our Microbial Control business. So before I talk to the numbers regarding our expectations for 2022, I want to put them in perspective relative to how we're thinking about the environment. We recognize that we still face a number of challenges in 2022: global supply chain challenges exist from last year, we're in a very unprecedented inflationary environment that began in the second half of last year, we recognize that the macroeconomic environment presents a level of uncertainty and there are a number of geopolitical risks relative to the business as well. So as a result of that, we've been fairly prudent in how we've constructed our 2022 plan. In terms of our revenue outlook, we are anticipating to deliver on a full year 2022 basis, $12.3 billion to $12.7 billion. In addition, looking at earnings, we're anticipating that our EBITDA will be between $2.5 billion and $2.6 billion on a full year basis. And I would also note that we are anticipating a modest increase in our full year CapEx, increasing it to 5% of sales for the full year in order to make sure that we make the investments to meet the increased demand in our business that will drive both top line as well as efficiencies as well. So with that as a backdrop, let me begin to unpack our overall expectations for 2022, starting with a look at the inflationary environment on the next slide. We, like everybody, have been experiencing very significant inflationary pressures that began in the second half of last year. Last year, total inflationary pressures for IFF in terms of our materials, combination of raw materials, energy, logistics and freight were high single digit. For 2022, we're anticipating that that's going to be approximately 10% on top of last year's increase. That represents a cumulative total inflationary pressure on the business of around $1 billion, $400 million last year and another $600 million anticipated for 2022. So if we move on to the next slide, we'll talk about our sales guidance. First of all, we need to make a couple of adjustments for comparability for 2021. In terms of comparability, first of all, we have to add in revenues for January of the prior year as the deal with DuPont was closed on February 1, 2021. That represents approximately $500 million of revenue. In addition, we have to back out divestitures as I commented, sale of our Food Preparation business as well as the elimination of 7 months of revenues associated with our Microbial Control. That reduces revenues by about $350 million, which gets us to a comparable base of $11.85 billion for 2021. Overall, our full year comparable guidance for sales is between 6% and 9% on a full year basis. That has broken down 2% to 3% associated with volume and then basically 4% to 6% associated with pricing. We also are experiencing headwinds from currency rates and are anticipating an impact on the top line relative to sales of approximately 2% in terms of a downdraft. That leads to our full year guidance, as I outlined on the prior slide of $12.3 billion to $12.7 billion for the full year. Let's move to the next slide and talk about our full year guidance for EBITDA. Looking at our 2022 guidance, first of all, we need to make a couple adjustments for comparability for 2021 as we did for revenue. Namely, we have to add in a full month for legacy N&B business. And in addition, we have to take out the impact for the sales of business. That results in our comparable 2021 EBITDA of $2.5 billion. In terms of the drivers to our guidance for full year '22, I'll break it down in terms of 4 major buckets. First of all, inflationary pressures. As I previously indicated, we're anticipating about $600 million full year of inflationary pressures. We also are fully expecting to offset that via pricing actions that will be implemented across every single business. So that will be net neutral from an EBITDA dollar basis, but will compress our margin a little over 100 basis points on a full year. Secondarily, we -- as I mentioned, we are anticipating between 2% and 3% volume growth for the year. And in addition, we continue to drive strong synergy and productivity gains. Collectively, those 2 elements are going to contribute about equally in terms of our contribution for the full year of about $100 million a piece. Offsetting that is foreign exchange. As I mentioned, we have a revenue drag. We also have an EBITDA drag of currency of about 4% on a full year basis. So a combination of neutral inflation, positive impact from volume, positive impact from net productivity slightly offset from foreign exchange impact results in full year guidance of $2.5 billion to $2.6 billion or 4% to 6% on a comparable growth basis versus 2021. So with that, let me now focus on the key priorities for 2022 on the next slide. Namely, we have 4 major areas of focus for the year. First of all, we want to continue to maintain the strong top line that we demonstrated for 2021. As mentioned, our full year guidance is 6% to 9%. What will drive the results is a combination of continuing to focus on innovation, continuing to invest in our supply chain to enable our ability to basically deliver and continuing to advance our work on revenue synergies. Secondarily, as mentioned, it's essential that we execute broad-based pricing actions to offset inflation for this year. We are anticipating to fully offset $600 million this year. However, we still have another $200 million of pricing we expect to be impacting positively our 2023 results. That's a result of the 2 years compounded inflation of $1 billion offset by $200 million of pricing in '21 and $600 million of pricing in 2022. Third and equally important is to continue to drive expense efficiencies across our entire business. That means delivering against the commitment of $300 million of synergies over time and in addition, continue to identify additional productivities across every aspect of IFF. And lastly, as I mentioned, is accelerating the divestiture of noncore businesses. We anticipate to announce 3 to 4 additional transactions this year that will be closed within 18 months. We anticipate that, that will deliver between $1.5 billion and $1.7 billion, which will be deployed to deleveraging our balance sheet and getting us to our target of 3x or less. In summary, in 2022, we are intently focused on execution for this year. That means continuing to drive strong top line growth through a combination of our breadth of product lines, innovation R&D and our scale platform. It also means continuing to drive productivity first and foremost as an opportunity to expand our margins with an overall objective of making sure that we deliver on our full year 2022 financial commitments. Thanks once again for the opportunity to join you at CAGNY today.