Jon Erik Fyrwald:

Well, thank you, Mike, and hello, everyone. I'm excited to join you all today to discuss our solid performance in the first quarter and what we are seeing across the business so far this year. Today, we'll focus on our financial results, our outlook for the balance of the year and our increased confidence in our reiterated guidance, where we now see us trending toward the upper end.

Glenn Richter:

Thank you, Erik, and thanks to everyone for joining us today. As Erik mentioned earlier, we're encouraged by the momentum across our business as we start the year, and we are excited to continue to build on these positive early signals throughout 2024 and beyond.

Jon Erik Fyrwald:

Thank you, Glenn. Now as I shared at the top of the call, my first 90 days on Team IFF have been energizing as I see so much potential. We have great talent and capabilities across our global teams, and our solid top and bottom line results from the first quarter show that we are building positive momentum. And it's an honor to lead IFF during this transformative time, and I am encouraged by our positive start to the year and our outlook.

Matthew Hettwer:

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?

Operator:

Our next question comes from the line of Nicola Tang with BNP Paribas.

Glenn Richter:

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.

Operator:

Our next question comes from the line of Josh Spector with UBS.

Jon Erik Fyrwald:

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.

Glenn Richter:

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%.

Operator:

Our next question comes from the line of Mike Sison with Wells Fargo.

Glenn Richter:

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.

Operator:

Our next question comes from the line of Patrick Cunningham with Citi.

Glenn Richter:

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.

Operator:

Our next question comes from the line of David Begleiter with Deutsche Bank.

Jon Erik Fyrwald:

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.

Adam Samuelson:

Would love to get your perspective on volume trends by region in the first quarter and if there's anything you would call out as notable areas of outsized strength or weakness versus the portfolio as a whole up mid-single digits. And I think we could probably exclude pharma from that discussion. And again, given that first quarter performance, is there anything where the regional performance would differ materially kind of over the balance of the year?

John Roberts:

Best wishes, Glenn, thanks for all your help. Erik, IFF has had more opportunities than most companies to promote from within for the CEO and CFO positions. Do you think there's anything that needs to change in the organization to develop a deeper bench, so the C-suite transitions are smoother? Or is there just a culture on the Board to look outside for C-suite positions?

Ghansham Panjabi:

I guess, Erik, first off, on the -- as you sort of meet with customers and go on your listening tour, et cetera, how would you sort of objectively assess the moats of the residual businesses that are going to be part of IFF going forward? And then just related to that, in terms of Scent, what did drive the first quarter in terms of high performance, especially Consumer Fragrances? Was that sort of share gains? And if it was, what was that driven by?

Salvator Tiano:

If I remember correctly, you had talked about $150 million productivity gains for the year. So can you talk a little bit -- can you quantify what was the benefit in Q1? What do you expect for the rest of the year? And given obviously the strong gains in the first quarter, is this number upsized for the rest of the year?

Lisa Hortense De Neve:

Congratulations on the strong first quarter. My first question, so with the announcement of the pharma division, which is expected to complete in the first half of next year, can you just share where you see potential scope for optimizing your balance sheet position and maybe where you see some debt that could be reduced or be up for redemption or that may not require any refinancing?

Glenn Richter:

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.

Jon Erik Fyrwald:

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.

Operator:

Our next question comes from the line of Mark Astrachan with Stifel.

Lauren Lieberman:

I had two questions. First was just on the Nourish performance in the quarter and volumes being up. Food industry volumes are still quite weak. So I was just kind of curious if you could square for us your performance outside of inventory rebuilding versus kind of what we're seeing in end market demand.

Jon Erik Fyrwald:

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.

Laurence Alexander:

Just want to follow up on the comments about sort of the inventory dynamics downstream. If you look a little bit further out, what are you hearing from customers about either them shifting their innovation strategies and therefore having more demand pull for your product or longer term, they're needing to reset inventory levels in terms of working capital days or other metrics? And then would that be a net tailwind or headwind for you from current levels?

Jeffrey Zekauskas:

Given your revenue forecast for the second quarter, which at the midpoint is down about 5%, are your April volumes down 5%, on a sequential basis, that is? Or can you talk about what's happened sequentially? And then second, when you look at your first quarter performance versus your fourth quarter performance, your revenues were up about $200 million and your cost of goods sold was up, I don't know, maybe $30 million. Can you discuss what the dynamic is behind that, which allowed your...

Jeffrey Zekauskas:

Yes, exactly right. Yes, because there's not much change in cost of goods sold and revenues were up a couple of hundred million.

Operator:

There are no questions registered at this time. So I will pass the call back over to Erik for concluding remarks.

Michael DeVeau:

Thank you. Good morning, good afternoon and good evening, everyone. Welcome to IFF's fourth Quarter and full year 2023 Conference Call. Yesterday afternoon, we issued a press release announcing our financial results. A copy of the results can be found on our IR website at ir.iff.com. Please note that this call is being recorded live and will be available for replay. Please take a moment to review our forward-looking statements. During the call, we'll be making forward-looking statements about the company's performance and business outlook. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially, please refer to our cautionary statement and risk factors contained in our 10-K and press release both of which can be found on our website. Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release. With me on the call today is our CEO, Erik Fyrwald; and our Executive Vice President and Chief Financial and Business Transformation Officer, Glenn Richter. We will begin with prepared remarks and then take any questions you may have at the end. With that, I would now like to turn the call over to Erik.

Glenn Richter:

Thank you, Erik, and hello, everyone. Moving to slide seven, as Erik mentioned, the board and management have taken this opportunity to accelerate the improvement of our capital structure as we work towards our deleveraging target of three times net debt to credit-adjusted EBITDA. Consequently, we reduced our quarterly dividend to $0.40 per share. We believe this dividend change provides a dividend yield that is consistent with industry peers and is aligned with IFF's long-term cash flow generation and target payouts. The dividend remains an important part of our capital allocation framework, and we expect this new base to grow alongside our profit over time. IFF remains committed to providing competitive returns to our shareholders and firmly believes these actions set us up for more durable value creation in the long-term. Now, on slide eight, as Erik mentioned, our performance for the fourth quarter reflects the operational and strategic initiatives that our team has implemented over the last several months to deliver strong results amid an uncertain operating environment. Despite some continued challenges in the market, volume trends continue to improve sequentially, with increases in nearly all businesses resulting in growth for total IFF. IFF generated $2.7 billion in sales, representing a 1% increase in comparable currency-neutral sales. This improvement reflected strong growth in our scent business with continued volume pressure in Nourish and Pharma, both impacted by de-stocking. Volumes continue to improve sequentially from down mid-single digits in Q3 to down low single digits in Q4, and if excluding the impact of functional ingredients, volumes for the fourth quarter would have increased low single digits. Adjusted operating EBITDA total $461 million in the fourth quarter, a 17% increase on a comparable currency-neutral basis. We also realized a year-over-year increase of approximately 260 basis points to our comparable currency-neutral-adjusted operating EBITDA margin. This growth in EBITDA was supported by both internal steps IFF has taken, including continued gains and efficiencies from our productivity initiatives and favorable net pricing. Before moving on, I wanted to share that we recorded a non-cash goodwill impairment charge of $2.6 billion for the fourth quarter related to our nourish business. The primary drivers of the goodwill impairment are related to lower business projections due to volume declines, mainly in functional ingredients, continued cost inflation, and unfavorable foreign exchange rate fluctuations. Now moving to slide nine, taking a closer look at our profitability performance for the fourth quarter, we delivered $461 million, which equates to a robust comparable currency-neutral adjusted operating EBITDA growth of 17%. I'm happy to report that in Q4, IFF realized strong productivity gains and in conjunction with favorable net price to inflation, helped us overcome ongoing volume pressures to deliver against our objectives. Importantly, IFF has remained focused on executing upon our productivity program to improve our operational effectiveness and efficiency. In 2023, we continued to launch additional steps as part of these programs while also making strategic investments in key growth areas. Now on slide 10, I'll provide a closer look at our performance by business segment during the quarter. In nourish, sales declined 3% on a comparable currency-neutral basis as strong growth in flavors was offset by continued softness in functional ingredients. While functional ingredients remained the main driver of weakness for nourish in the quarter, it is worth noting that we again saw meaningful sequential improvement. In terms of profitability, the positive impact from our ongoing pricing actions and productivity initiatives drove improvements and led to a 3% increase in comparable currency-neutral adjusted operating EBITDA. Health & Biosciences continues to show robust top and bottom line growth. Price increases, volume growth and productivity gains led to growth across most H&B business segments led by double-digit growth in health. Overall, H&B delivered a comparable currency-neutral sales increase of 5% year-over-year and a 35% year-over-year increase in comparable currency-neutral adjusted operating EBITDA. Our scent segment continued to deliver a very strong performance in Q4, including 11% growth in comparable currency-neutral sales, driven by double-digit growth in consumer fragrance, as well as mid-single-digit growth in Fine fragrance. Like Health & Biosciences, scent also saw significant growth in adjusted operating EBITDA, increasing 34% on a comparable currency-neutral basis, driven by favorable net pricing, volume, and productivity gains. While Pharma Solutions experienced significant pricing and productivity gains, these improvements were offset by lower volume, driven primarily by continued de-stocking trends, as well as strong year-ago comparison. This led to comparable currency-neutral sales declining 10% and comparable currency-neutral adjusted operating EBITDA declining 13% in the quarter. Turning to slide 11, I'll discuss our progress in improving our cash flow and leveraged positions. In the fourth quarter, cash flow from operations totaled $1.44 billion, a significant increase from the previous year, reflecting the strong improvement in inventory levels. CapEx of the year was $503 million, or approximately 4.4% of sales. Our progress on working capital improvement, led by an intense focus on right-sizing our inventories, helped enhance our free cash flow position, which saw a sequential increase of over $500 million, totaling $936 million for the full year and ahead of expectations. Included in our free cash flow is about $430 million of costs, primarily related to integration and transaction-related items. We also delivered $826 million in dividends to our shareholders in 2023. Our cash and cash equivalents totaled $729 million, including $26 million in assets held for sale in Q4. Additionally, we realized a $200 million sequential reduction in gross debt, which totaled approximately $10.1 billion for the quarter, with a net debt to credit-adjusted EBITDA a 4.5 times, our trailing 12-month credit-adjusted EBITDA totaled approximately $2.1 billion. With the announced sale of our Lucas Meyer Cosmetics business, which we still expect to close in the first quarter of 2024, the right-sizing of our quarterly dividend and additional portfolio actions we are planning to make, we are taking decisive action to strengthen our balance sheet and achieve our leveraged targets. On slide 12, I'd like to now turn to our outlook for 2024. Due to a combination of improvements across our business and in the broader market toward the tail end of 2023, we are cautiously optimistic about the year ahead. For the full year 2024, we expect sales in the range of $10.8 billion to $11.1 billion. This reflects our prudent approach to volume expectations and the impact of modest negative pricing in 2024, which is largely isolated to more price-competitive categories such as functional ingredients and fragrance ingredients, given lower input costs and competitive dynamics. We expect overall pricing to decline approximately 2.5% in 2024, following a 10% increase in 2022 and a 6% increase in 2023. Strategically, we believe this will position us to be more cost-competitive in the market and allow us to regain market share in select businesses. In terms of volume, the visibility to the degree and pace of the recovery remains a bit fluid and has been explicitly incorporated in our 0% to 3% range. The most significant variable impacting this range will be the pace of recovery in functional ingredients. However, this is a marked improvement from 2023, where we finished down mid-single digits and '22 we were down low single digits, as we believe our industry will return to more normalized growth rates. On the bottom line, we expect to deliver full year '24 adjusted operating EBITDA between $1.9 billion and $2.1 billion. Our guidance assumes not just improved volumes from 2023, but also solid profitability and a margin expansion across our segments. We are hyper-focused on continuing to execute our productivity initiatives to help mitigate expected inflation, primary labor costs, and incentive compensation reset, while continuing to reinvest in the higher-return businesses. It's also worth noting, we have some benefit of one-time items such as the negative impact in 2023 from the inventory reduction program and the previously announced write-down of inventory related to Locust Bean Kernel or LBK that will not repeat in 2024. In particular, there was an approximately $130 million impact from the negative absorption in 2023 related to our inventory reduction program and some volume declines, which is down from an estimated $165 million we provided in the third quarter. A portion of this will be offset by higher annual incentive compensation expense as we reset our payout to target levels in 2024. While there's still work to do, efforts to bolster our financial profile and portfolio are providing effective, and while its hard to predict the timing and details of the market recovering and its impact on our results, we see opportunity for improvement in 2024 with all divisions targeting better volumes, with improvements in profitability and margin expansion across all four divisions. For the first quarter, we expect sales to be approximately $2.7 billion to $2.8 billion, with an adjusted EBITDA of approximately $475 million to $500 million. Throughout 2024, we will be relentlessly focused on our efforts to optimize our portfolio, improve financial performance, and reach our deleveraging targets. I'm confident that the actions taken in 2023 and our outlook for improving performance in 2024 will position IFF to capture significant value creation. With that, I'll turn the call back over to Erik for closing remarks.

Operator:

We will now begin the question and answer session. [Operator Instructions] Our first question comes from the line of Ghansham Panjabi with Baird. Your line is now open.

Erik Fyrwald:

Thank you.

Glenn Richter:

Sure. Yes, good morning, Ghansham. Easily done and a frequently asked question. So if you'll indulge me, I'll start with last year's results at 1980. There are two adjustments to get that to a normalized basis. One is the divestitures, which you're aware of. It's a half a year of savory solutions in FSI, and the LMC will be closed at the end of the quarter, so it's roughly three-quarters of LMC. That's roughly $78 million of normalized impact. And the other factor, which is the same, basically, we had discussed before, we also have included our updated view of foreign exchange, that's $50 million reduction. I'm not sure that was previously discussed from a standpoint. So that gets to a like-for-like base of $18.50. Our volume mix impact for this year is forecasted to be $170 million positive. That is inclusive of the $130 million of positive overlap on absorption. As we noted on our call, that actually came down as the fourth quarter volumes were higher from a production standpoint, so that was slightly different than we had guided. Our net price for the year is basically is zero. That is inclusive of the $44 million of LBK, so that's netted in that number. We can certainly talk more about the pricing dynamics this year. Then we have about a $35 million reset for AIP, so that's a negative, but that's better than we thought. We thought that would be in the 70 range from the standpoint. So I think all of the one-timers being absorption slightly lower, the negative reset on AIP is slightly lower, FX is new, and then the deals basically were all known. The last items are sort of wage, inflation, that's about $120 million, and the productivity is about $150 million in the P&L, so that's sort of consistent with our three-year view. So that adds up to the midpoint of our range of $2 billion. And then relative to the volume question, I think it's very simple to think about our view of this year. The functional ingredients, which is circa less than 25% of the business, we are projecting that to be relatively flattish for the year. All the other businesses actually have growth directly in the 2% to 3% range on a full year basis, a little bit more slower in the beginning of the year and ramping up in the latter, but that's why we mentioned. As we think about that range of guidance, it's functional ingredients is the area that probably gives us the most pause and we've been the most cautious, and that sort of is the difference between the high end of the 3% versus the 0% range. So hopefully that answers the question.

Glenn Richter:

Next question.

Josh Spector:

Hi. Good morning.

Josh Spector:

Hey. So I just wanted to -- hey, so I wanted to ask on the dividend. So I think it's been pretty clear that it's been a pretty big use of cash for a couple of years now. So, really the question is, why was now the right time versus when you looked at that probably a year ago or maybe two years ago? And what does that mean as it relates to the divestment strategy or timing? Has anything changed as you think about what's next?

Operator:

Thank you.

Operator:

The next question comes from the line of Gunther Zechmann with Alliance Bernstein. Your line is now open.

Erik Fyrwald:

Thank you, Gunther, and glad to be back in the public market. My priorities for 2024, I should say, our priorities for 2024 are to continue the portfolio optimization work and have that be part of improving our balance sheet. But again, more importantly, we're going to strengthen each business. We're going to make sure that each business is clear on how they can strengthen their customer focus to profitably grow market share, strengthen the R&D and innovation in each business so that we better delight customers with our innovation so that we bring innovation that they value, that we can grow our market share with them. And then thirdly, we're going to keep driving productivity and strengthen productivity in each business unit and then also corporately. We want a very effective and efficient back office. What will reduce the amount of engagement we've had with consultants, advisors, and others that have caused us to be too internally focused. We're going to get back to focus on winning with the businesses by better serving our customers than our competition. In terms of how I'm thinking about the midterm targets, it's too early for me to comment, but I'll look at them with the team here and we'll do it by business and then we'll roll it up for the company and we'll get back to you in the not too distant future on that, but on the last one, Glenn?

Operator:

Thank you. The next question comes from the line of David Begleiter with Deutsche Bank. Your line is now open.

Erik Fyrwald:

Thanks David.

Erik Fyrwald:

I'll take the first one, and, Glenn, you can have the second piece, because I'm not that familiar with the details at this point, but I'm getting into it. But in terms of any portfolio optimization, we're not going to comment on rumors. All I can tell you is we continue to work on portfolio optimization, and we will not sell a business at a price that doesn't make sense, but we're looking at what does make sense for IFF and for our employees and any business that we might consider divesting. So with that, Glenn?

Operator:

Thank you. The next question comes from the line of Lisa De Neve with Morgan Stanley. Your line is now open.

Erik Fyrwald:

Thank you, Lisa. And I'll take the first part of that question. I've looked very hard at the data over the last five years, and clearly we have underperformed, as all of you know. We have pockets of strength, scent as an example I mentioned in the opening comments, but we have some businesses that are challenged, like food ingredients. What I can tell you is we're going to have each business be very clear on what is their strategy to win. How are they going to delight their customer set and make sure that we profitably grow our market share? How are we going to make sure that we have our innovation targeted and needs the customer's value? And how are we going to make sure we're driving productivity? So each of the business end-to-end, how do we drive the businesses? And as you know, we've got strong businesses in great markets, like our flavors and our fragrances or scent business, terrific businesses that should be able to fully compete with margins and growth rates with Givaudan and others. We've got a strong business unit in Health & Biosciences in great markets, and we should be able to fully compete with margins and growth against Novonesis. In our challenged businesses, we've got very good markets in food ingredients and protein solutions, and we should be able to be fully competitive with Kerry and other food ingredient players. And we've got a very good business and very good markets with pharmaceutical ingredients, and we need to be fully competitive with our ingredients set there, Ashland and others. So, we have not performed as a company, across the company in the last five years like we should. In the next five years, we'll get back on track.

Operator:

Thank you. The next question comes from the line of Nicola Tang with BNP Paribas. Your line is now open.

Glenn Richter:

Thanks. Two very good questions. So on the pricing of our 2.5%, 80% of our downward pricing is concentrated in functional ingredients and the scent ingredients business. Those areas, by definition, are more commoditized, and in addition, those areas have seen some more meaningful deflation in terms of commodities. So it's natural. As I mentioned previously, we were doing a very good job of making sure we're competitive in the market by product, by region, and we feel good that that 2.5% sort of is reflective of the environment. The second question regarding why are we not more optimistic? Honestly, we're just cautious. We're very cautious and prudent given the environment. The last year was extremely bumpy. We do believe that de-stocking for most of our business is largely behind us, and we're seeing positive signs, but we need a couple of quarters of positive momentum, I think, and stabilization before we can move from cautious to optimistic.

John Roberts:

And welcome back, Erik, two-part or if I could. Is the functional ingredients business significantly different today than when you were at DuPont? It sounds like you think it's just more of a cyclical problem that can be addressed through productivity, but do you think there are structural changes you need to make there? And then, your predecessor was targeting going from four segments to three segments. Have you gone back to the whiteboard to start over on those plans, or was that nearing completion and there's just some fine-tuning left to complete it?

Operator:

Thank you. The next question comes from the line of Kevin McCarthy with Vertical Research Partners. Your line is now open.

Glenn Richter:

Yes, so I think for the H&B had a very good year and that was a result of a progressive improvement in volumes. As we noted, the health business, one of our largest segments, actually had a very good fourth quarter. Secondarily, productivity, so we've driven a lot of productivity across the business. And third, really net price. So there's been -- to your second question, a decline in input cost in that business as well. So that got us to the 30% range for the business. I did note on the call that we are anticipating H&B like all four of our businesses that demonstrate both EBITDA growth and margin expansion this year. So we expect that to be the case for H&B. In general, our input costs, as I mentioned, are anticipated to be down this year. Energy is flattish at this point, logistics are down, and we're seeing some raw materials deflation. As a reminder, it takes about four months for a purchase to run through the balance sheet. So that's a positive momentum. That's a net zero, as I mentioned, for the overall enterprise for the year. So thanks for the question.

Laurence Alexander:

Good morning. If end markets do not cooperate, can you provide more granularity on how you can de-lever in 2024 and 2025 in terms of reviewing business lines, Brexit, productivity relative to comp and so forth? And Erik, given your initial impressions on IFF operating culture and discussion around productive solutions, can you speak more to the mindset around productivity and R&D? Is it more about operational fixes, or do you see structural or philosophical issues around how the firm has targeted ROIC margins or profit growth?

Erik Fyrwald:

Now, on your second question, Laurence, my initial impressions of IFF's capabilities are we've got really great people. We've got really great capabilities in each of our businesses, and we have just under-performed. But there are pockets of examples where we are performing tremendously well that give me so much confidence that we can make this happen across the company. I spent time with the leadership of arguably the largest consumer products company in the world, where we have a very strong relationship, very much innovation-driven, their innovation people to make sure that the best consumer products are being developed. And we were meeting both with our scent teams and their fragrance team, and with our Health & Biosciences team and their consumer products teams. And it was the best relationship, the best dynamic that I've ever experienced in my 42 years of customer interactions. And then I had another interaction with the top management of a leading beauty care company in Europe. And same thing, our people were working hand in glove with their people to create great, great consumer products that consumers love. So we can do it. We do it. We just need to do it more across the company. And I'm really excited by helping our teams, stop being so internally focused, get more focused by business unit on winning with customers, and then collaborate where it makes sense to enhance across our portfolio, to bring even more to customers so that the customers win more and we win more. Now in terms of productivity, as Glenn mentioned, their pocket's there where we're doing very well, but there's more we can do on productivity. Ralf Finzel and his production team are really driving tremendous productivity in our operations, and it's still early phase, but they're ramping that up very nicely. We've already had efforts in back office productivity for our corporate functions. That's going okay, but we're going to accelerate that. You'll see more shared service centers and more activity with IT systems to make sure that we're effective serving the businesses and very efficient. So I love what I see. There's so much excellence here, but we've got to get it across the company, and we will.

Patrick Cunningham:

Hi, good morning. Just a question on the Q1 guide. So, it's about 487 [ph] 488 [ph] at midpoint in a seasonally weak quarter. And you noted some nice volume ramping productivity throughout the year. So even annualizing that is above the low end of the guide. So can you help us understand if that guide is just conservative? And then just a small follow-up, when do you expect to see the end of de-stocking within your Pharma Solutions business?

Operator:

Thank you. The next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is now open.

Erik Fyrwald:

Thank you, Adam. I'll start, and then Glenn can add on. First of all, I fully am aligned with and agree with a target of three times net leverage debt as a target to get to. I think the year end '24, I'd like to see us get there by the end of '24, but we're not going to do something stupid that destroys significant value to get there in '24, but I can tell you we're going to make very good progress at least towards that goal in '24. In terms of high return growth investments alluded to, I'll just reinforce that flavors and fragrances, we call it scent, and health & biosciences are strong business units in great markets. I've been in many chemistry and biological markets. These are great markets, and we're going to invest in them to win.

Operator:

Thank you. The next question comes from the line of Mike Sison with Wells Fargo. Your line is now open.

Erik Fyrwald:

Well, thanks, Mike. And I'll start with the functional ingredients question. First of all, I like the functional ingredients business. It is a very good business with lots of opportunity to bring value to customers. And by having multiple elements of the solution set, you can bring value in terms of helping customers achieve their goals and what food products they want to have to delight customers, delight consumers. So I think what we really have to do here is, and the team is working on this, is make sure that we're clear on what is our strategy, how are we going to create value in this business, how are we going to make sure that we're focused on the right consumers, excuse me, the right customers in the right way, profitably growing our market share, and how do we make sure that our assets are very competitive, that our costs are very competitive, that we're driving productivity so that we can be competitive with our product portfolio both in terms of the value we bring and the costs to deliver that value. And then we're spending money on innovation. We've got lots of great innovation. Make sure that innovation is tied to real customer needs that they're willing to pay for that can be part of the solution set. And I think that we've taken our eye off the ball, as I said before, too much internal focus, listening to too many consultants going all different directions. We get clear what we're trying to do, what the goals are, and execute well against those goals. This business will significantly improve in 2024 and beyond.

Operator:

Thank you. The next question comes from the line of Mark Astrachan with Stifel. Your line is now open.

Erik Fyrwald:

Okay. Thank you. I'll start by saying that I believe that the historical IFF plus the DuPont nutrition and biosciences business are stronger together than they were separately. The potential, the opportunity is greater than it was separately. So I believe in that combination very strongly. Now, as I said before, we haven't executed it well, and I've seen this happen before. When I got to Syngenta almost eight years ago, the seeds in the crop protection businesses had been mushed together, and the focus was on synergies versus having a great crop protection business and a great seeds business. We made clear that we were going to have those two businesses as business units, end-to-end business units. And as soon as we did that, we found out that we had been losing share, losing margin versus the competition. We started regaining that, and by the way, when the business units were clearing what they were trying to do, the synergies grew a lot because there were synergies. I see the same thing here at IFF as we're really good at flavors, at fragrances or scents, at health & biosciences, at food ingredients, those businesses, when they're performing well the synergies will increase, not decrease. The ability to help each other, the different businesses to help each other, to help customers more together will increase, but we've got to get the businesses performing extremely well by themselves and not have synergy of the goal, have synergy of tools. When we do that, I can assure you that the combination will be very strong.

Erik Fyrwald:

The only thing I would add is that even in the 75%, there is significant improvement opportunity, and we've got businesses that are looking at that, and we're going to work with those businesses to support them, both for the businesses to win more and for the corporate cost overheads to be lower and more effective at supporting the businesses. So there is great opportunity, of course, in food ingredients to turn it around, but even the rest of the company to significantly improve performance, and we're going to do it.

Salvator Tiano:

Yes, thank you very much. I want to ask a couple of questions on the -- I guess, strategy shifts to grow that you mentioned a little bit more, a few more details. And essentially, as you're trying to reposition the business and gain market share that's becoming the clear focus. What would that mean for R&D spending, SG&A spending, and CapEx in the next few years, not necessarily 2024, but that's almost three or four-year basis? And you made a comment about the 2024 price, that's 2.5% negative, in part being because of competitive pressures, but also because it will allow you to gain some market share. So how are you thinking in this new strategy about the tradeoff between price and volume?

Glenn Richter:

And I would just add to that, as we mentioned, we're going to be up about 8% year-over-year in CapEx, and at core operational CapEx, which is really supporting growth in our core products is up 10%. So we're in the right range from a CapEx, around 5% of sales in terms of what we need to maintain and grow the business.

Erik Fyrwald:

Great. Well, thank you for joining the call this morning. Again, I just want to finish by saying that I'm thrilled to be at IFF. We've got a tremendous team at IFF. We've got great capabilities. We haven't performed to our potential in the past, but I can tell you we're all completely committed to making sure that we unleash the full potential of our businesses and drive the right kind of synergies that enhance each of the businesses, and make customers very pleased, delighted with what we bring in our innovation. And by doing that, possibly grow our market share and through their productivity efforts, make sure we do that with leading margins. Thank you.

Michael DeVeau:

Thank you. Good morning, good afternoon and good evening, everyone. Welcome to IFF's Third Quarter 2023 Conference Call. Yesterday afternoon, we issued a press release announcing our financial results. A copy of the release can be found on our IR website at ir.iff.com. Please note that this call is being recorded live and will be available for replay. Please take a moment to review our forward-looking statements. During the call, we'll be making forward-looking statements about the company's performance and business outlook. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially, please refer to our cautionary statement and risk factors contained in our 10-K and press release. Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release. With me on the call today is our CEO, Frank Clyburn; and our Executive Vice President and Chief Financial and Business Transformation Officer, Glenn Richter. We will begin with prepared remarks and then take any questions you may have at the end. With that, I would now like to turn the call over to Frank.

Glenn Richter:

Thank you, Frank, and good morning, good afternoon and good evening, everyone. Taking a closer look at our profitability performance on Slide 8. As Frank mentioned, we delivered higher-than-expected EBITDA of $506 million in the third quarter. While we continue to benefit from favorable price to inflation and productivity gains, as you can see from the slide, ongoing volume pressures impacted our profitability in the quarter. While we are encouraged by the sequential volume improvement, we have seen across most of our portfolio, it remained the primary pressure in Q3. If we look at our profitability performance, absent the unfavorable manufacturing absorption related to our inventory improvement program, adjusted operating EBITDA would have declined 6% year-over-year on a comparable currency-neutral basis. Note that our negative absorption in the quarter was less than expected as our inventory reduction program for the year has run its course and volumes have improved. We have done a good job at driving working capital improvement through our inventory reduction program, driving more than $600 million reduction in inventory since the end of '22. As a result, at this time, we are now expecting approximately a $165 million impact from negative absorption to profitability for the full year, down from $180 million. This could also flex further as the fourth quarter unfolds. To reiterate, this is a onetime transitory impact to the P&L in order to maximize cash flow moving forward. Turning to Slide 9. I'll provide a closer look at our Q3 performance by business segment. In Nourish, sales declined 7% on a comparable currency-neutral basis, driven mainly by the continued weakness in Functional Ingredients. While Functional Ingredients remained a main driver of weakness in Nourish in the third quarter, we did see sequential improvement and expect this to continue as we move into the fourth quarter. Good growth in our Flavors business and the positive impact of IFF's ongoing pricing actions and productivity initiatives were more than offset by lower volumes and unfavorable manufacturing absorption. Together, this led to a 26% year-over-year decrease in comparable currency-neutral adjusted operating EBITDA. Health & Bioscience continued to deliver strong results in Q3, led by meaningful growth in Cultures & Food Enzymes, Grain Processing, Home & Personal Care and Animal Nutrition leading to comparable currency-neutral growth of 2% year-over-year. Price increases and productivity gains led to a 12% year-over-year increase in comparable currency-neutral adjusted operating EBITDA. Scent was once again our strongest performer, delivering 7% growth in comparable currency-neutral sales driven by double-digit growth in Consumer Fragrance and high single-digit growth in Fine Fragrance. Like Health & Biosciences, Scent also saw strong 19% growth in comparable currency neutral adjusted operating EBITDA with profitability driven by favorable net pricing and productivity gains. Pharma Solutions growth rate was pressured this quarter, in large part due to a very strong prior year comparison with a 28% 2022 sales growth comparison and a 76% '22 adjusted operating EBITDA comparison. Price increases and productivity gains for this business were more than offset by lower volumes and comparable currency neutral sales declined 9% and comparable currency-neutral adjusted operating EBITDA declined 34% in the quarter. Now on Slide 10, I'll discuss our cash flow and leverage position. Cash flow from operations totaled $795 million, a significant increase, reflecting a strong improvement in inventory levels. CapEx year-to-date was $390 million or approximately 4.4% of sales. Our inventory reduction program and working capital improvements have also greatly contributed to IFF's improved free cash flow performance, which totaled $405 million, a significant increase of $320 million from the second quarter. Year-to-date, we also distributed $619 million in dividends to our shareholders. Our cash and cash equivalents totaled $652 million, which includes $23 million in assets held for sale. Additionally, gross debt for the quarter totaled approximately $10.3 billion, with a net debt to credit adjusted EBITDA of 4.6x. Our trailing 12-month credit adjusted EBITDA totaled approximately $2.1 billion. We are making good progress on working down our debt levels. And as Frank mentioned earlier, portfolio optimization remains a near-term priority as we work to reduce our leverage position and ensure our resources are focused on the businesses that will carry our success into the future. The sale of our Cosmetic Ingredients business, which is expected to close in the early part of the first quarter 2024 will further support our strength in capital structure as we pay down debt in line with our net debt to credit adjusted EBITDA targets. Now on Slide 11, I would like to focus on our consolidated outlook for the rest of the year. First, we are reaffirming our full year revenue guidance range of $11.3 billion to $11.6 billion, which reflects the improved momentum we are seeing across the majority of our business and accounts for the macroeconomic environment and foreign exchange impact, which we expect will persist through the end of the year. On the bottom line, we are now expecting to deliver full year 2023 adjusted operating EBITDA at the mid to high end of our previously announced guidance of $1.85 billion to $2 billion, driven primarily by favorable price to inflation and improved productivity. We also now expect full year interest expense to be slightly higher at approximately $450 million. Our projected effective tax rate for the year is expected to be approximately 21%, the same estimate we provided last quarter. Finally, as we look to the fourth quarter, we continue to expect an improving trend in the majority of our businesses as we navigate the macroeconomic challenges impacting our industry. We are seeing signs of green shoots in the fourth quarter, with stabilization improvements across several parts of our business. As we near the end of the year, I know many of you have questions on 2024. While the macroeconomic environment remains volatile with low visibility, we are optimistic heading into the new year. We have several known one-off items that we have high level of confidence will be tailwinds, including significant negative absorption related to our successful inventory reduction program and onetime Locust Bean Kernel inventory write-down. Also, we will continue to execute on our cost and productivity initiatives and have a carryover benefit from this year's restructuring program. These, of course, will be partially offset by a reset of our annual incentive compensation program where we have reduced payments in 2023 related to our performance versus target. In the end, improved volume performance will be critical to our success, and we believe that destocking will largely be done as we exit the year and we also believe we will benefit from acceleration of our strategic transformation initiatives. We will provide our 2024 guidance with our fourth quarter results, which we expect to be towards the end of February. With that, I'll turn the call back over to Frank for closing remarks.

Operator:

[Operator Instructions] Our first question comes from the line of Gunther Zechmann with Bernstein.

Frank Clyburn:

Gunther, it’s Frank. A couple of things. One, with regards to Functional Ingredients, the business clearly across all of ingredients is stabilizing, Gunther, and we saw good sequential improvement when I look at Q2 to Q3, in particular, in 3 of the biggest business lines, core texturants, some multipliers, sweeteners and protein solutions, good sequential improvement. So that’s a very positive sign for us. And obviously, those products are going into some of our key dairy and bakery end market categories. As far as the Functional Ingredient plan overall, we’re focused in 3 areas

Mike Sison :

Nice quarter. Frank, deleveraging is an important part of your thesis going forward. And can you maybe provide an update on your divestiture process? I think there's press out there that Pharma potentially is up for sale and how that fits in your strategy?

Frank Clyburn:

No, I think we can go. Yes.

Nicola Tang:

Actually, Frank and Glenn, you both commented that volume performance improved sequentially through Q3, and you pointed to signs of green shoots. So I was wondering if you could give more color either by division or by specific end markets in terms of where you're seeing that improvement? And what's your latest assessment of customer inventory levels overall, do you think that destocking is now behind us?

Operator:

Our next question comes from the line of John Roberts with Mizuho.

Glenn Richter:

John, this is Glenn again. By the way, welcome to your new home. So relative to Scents, sequentially, it’s relatively neutral, Q2 to Q3 in terms of the net price versus cost, although it is less moving, less price and more cost. So we’re now seeing the effects of the deflation basically moving through more so. And year-over-year, slightly higher in the third quarter versus the second quarter. As a reminder, in our core markets being the consumer and Fine Fragrance, our final pricing actions were implemented at the beginning of this year. So really what we’re now beginning to do – and there was some implementation in the second quarter of last year, so we’re now sort of fully overlapped last year from a neutrality standpoint, and what we’ll be seeing more is the cost reduction. One important asterisk, we have a percent of our business, as you know, that’s basically sells ingredients. About 50% of the production is used for our own products and 50% sold. There’s a commodity component such as turpentine as an example, Galaxolide, which is somewhat commoditized. So the pricing dynamic is a little bit more on a downward cycle given those categories. But in general, the net price cost is generally very stable in the Scent business. So thanks for the question.

Mark Astrachan :

So I guess I'm curious about how you think about your volume performance relative to peers as it appears that they're still outgrowing you all. I suppose somewhat related maybe to the last question, but bigger picture, it looks like pricing was a much smaller contributor sequentially. Does that factor into how you think about volumes? And then just lastly, tied together, when do you think your sales can go back to the long-term algorithm?

Operator:

Our next question comes from the line of David Begleiter with Deutsche Bank.

Frank Clyburn:

Yes, David. So Pharma, as we mentioned, the comparison versus prior year, as we highlighted, was a 28% growth. Last year with a lot of shipment catch-up as we implemented in some SAP shipments that went into Q3 of ‘22. And then EBITDA growth last year was 76%. So that was the comparator versus last year. And obviously, you can see that we’re down 9% on the top line this year because of that comparator. If you look sequentially, Mark, you do see some choppiness, as Glenn highlighted earlier. There are some distributors that are starting to rightsize inventory in this business. That is something that we see more of a destocking as we ended kind of Q3. And as we go into Q4, we anticipate that the inventory destocking will continue. With that said, we think it’s temporary in nature. I have no concerns about the overall outlook for the Pharma business, very sticky business. Our core Pharma position is – what should I say, our core Pharma business is well positioned with our customers. So destocking by our distributors, rightsizing inventory, temporary in nature, and we feel good about the growth potential performance as we go into ‘24 and beyond.

Adam Samuelson :

So Glenn, in your prepared remarks and hoping you could just maybe elaborate a little bit around some of the high-level puts and takes as they stand today for 2024 EBITDA versus 2023. Obviously, there's the absence of the inventory absorption charges, the inventory write-off in the second quarter. You've got headwinds on incentive comp, and if you can quantify that? It doesn't sound like there's a lot -- at this point, should we be thinking about a lot of price cost tailwinds? You're going to have the divestiture kind of impact. But can you help us think about productivity kind of savings that we should be kind of thinking about going into 2024 on a year-over-year basis? And then from there, is the major swing really just volumes and the operating leverage associated with that? Or is there anything else that you would highlight?

Operator:

Our next question comes from the line of Patrick Cunningham with Citi.

Glenn Richter:

Yes. And I wouldn't say that those that are built-to-order don't have absorption impact because they do. But to answer your question, we're roughly 55% build-to-stock, 45% build-to-order in terms of the overall portfolio. So the build-to-stock is more the legacy DuPont or N&B portfolio versus a legacy FNF for the build-to-order. So as a result, that Nourish is split, probably slightly more build-to-stock and build-to-order, but a combination of the Ingredients business, the food systems and then the -- obviously, the Flavors business, the H&B and Pharma businesses are largely build-to-stock and the Scent business is largely build-to-order.

Lauren Lieberman :

I was curious if you guys could talk a little bit about pricing. Pricing in the quarter came through a bit stronger, I think, than we had anticipated. And so just curious about that because I didn't think that there was any incremental pricing going through. So maybe it was just sort of stickiness, but would love some detail on that.

Operator:

Our next question comes from the line of Josh Spector with UBS.

Glenn Richter:

So the second part – Josh, this is Glenn. So the second part of your question, we are largely done with the inventory reductions. We’re basically going to be largely flatlined for the balance of the year. Relative to our free cash flow estimates for the year, they are unchanged versus our previous quarter. We will be, call it, circa $450 million on reported free cash flow for the year. I will note, once again, that includes about $440 million-ish of Reg G items. So we’re right around $900 million of adjusted free cash flow for the year. Just as a reminder of those Reg G items, they’re broken down into about a little over half of them, call it, about $240 million are literally associated with our divestitures. A big portion of those are taxes, not surprisingly. We also have another roughly $80 million of the final integration costs. Those are associated with systems conversion and legal entity changes from DuPont. Those will be completed this year. And then there’s about $75 million-ish related to restructure. That’s from the implementation of this year, and then, call it, $50 million-ish sort of all other related expenses. So that’s sort of a breakdown of the Reg G items.

Laurence Alexander :

Can you update how much of your business ex Pharma is in the fix or shift category? And how much it needs to improve in aggregate or on average for you to be happy with it? I mean like not just like a minimum threshold, but what your like 3- to 5-year target might be?

Laurence Alexander :

Most of it, but I guess I'm fishing for if you have anything else that you're now putting in that category?

Frank Clyburn:

And this is Frank. What I would add is on that 20% Glenn mentions and a number of those have – assets have been disposed and we continue down the path of optimizing our portfolio as we’ve highlighted. And then within Functional Ingredients, as we’ve mentioned, we are making good progress, as I highlighted earlier, and that’s really where the majority of the improvement area needs to be. But I don’t want to lose also sight of the 80% or so of the businesses we’ve been highlighting today that has seen good sequential improvement in a number of businesses that actually grew versus prior year.

Silke Kueck:

Is there a $70 million SG&A benefit this year from the compensation changes? And did most of that occur in the third quarter? And secondly, if there's a $160 million headwind from unfavorable manufacturing absorption, which is 150 basis points headwind to gross margin. Do you expect as a base case, your gross margin to be up by 150 basis points next year? And do you need volume growth in order to achieve that?

Operator:

Our next question comes from the line of Salvator Tiano with Bank of America.

Glenn Richter:

I would say 2 things. We have a very, very large basket of raws. So there’s lots of things moving in either direction. In general, the cost trends or deflation trends are working in our favor. So that’s a general statement. Relative to soy, we do actually lock in over time. We typically hedge out for a period. So we don’t necessarily always capture either the immediate upside or downside, but over the longer arc, obviously, as those prices decline, we capture it.

Andrew Keches:

Congrats on the quarter. Just to confirm, in the past, you've mentioned the 3.0x net debt-to-EBITDA as a level you plan to hit in 2024. So I guess just based on where you are in the asset sale discussions, do you still have confidence and visibility into achieving that level next year? Or is there some risk that, that gets extended? I know the covenant horizon was pushed out about a year to early '26. So any help on the time line would be great.

Operator:

That will conclude the question-and-answer session. I will now turn the call over to Frank for closing remarks.

Operator:

That concludes today's conference call. Thank you for your participation. I hope you have a wonderful rest of your day.

Michael DeVeau:

Thank you. Good morning, good afternoon and good evening, everyone. Welcome to IFF's second quarter conference call. Yesterday afternoon, we issued a press release announcing our financial results. A copy of the release can be found on our IR website at ir.iff.com. Please note that this call is being recorded live and will be available for replay. Please take a moment to review our forward-looking statements. During the call, we will be making forward-looking statements about the company's performance and business outlook. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially, please refer to our cautionary statement and risk factors contained in our 10-K and press release. Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in the press release. With me on the call today is our CEO, Frank Clyburn, and our Executive Vice President and Chief Financial and Business Transformation Officer, Glenn Richter. We will begin with prepared remarks and then take any questions that you have. With that, I would now like to turn the call over to Frank.

Glenn Richter:

Thanks, Frank. Turning to Slide 15. In Q2, IFF generated $2.9 billion in sales with comparable currency neutral sales declined 4% as strong performance in Scent and Pharma was offset by softness in Nourish and Health and Biosciences. Our pricing continues to remain strong in the second quarter as it was up high single digits. However, volume in the quarter declined low double digits about twice the decline anticipated in the quarter. To provide some more color on volumes, Sent and Pharma were largely in line with expectations, while H&B underperformed in large part due to softer volume performance in health. The majority of our underperformance of our overall volume decline in the quarter, approximately 60% was attributable to Functional Ingredients. Excluding the impact of Functional Ingredients, IFF volume would have only been down mid-single digits. Adjusted operating EBITDA was $510 million, down 18% year-over-year on a comparable currency-neutral basis, largely driven by unfavorable manufacturing cost absorption of approximately $55 million and a $44 million write-down of inventory related to unprecedented cost fluctuations for Locust Bean Kernel. As Frank mentioned earlier, excluding this onetime LDK write-down, our adjusted operating EBITDA would have been $554 million, within our previously communicated guidance range of $540 to $590 million. Adjusted EPS, excluding amortization, was $0.86 in the quarter, impacted by lower profitability. Taking a closer look at our profitability performance on Slide 16. Excluding the unfavorable manufacturing absorption related to our inventory reduction program and the inventory write-down of LBK comparable adjusted operating EBITDA would have declined 3% on a currency-neutral basis versus the previous year. We continue to benefit from strong pricing and productivity gains. However, as you can see from the slide, the biggest driver impacting profitability in the quarter was the decline in volumes. This volume decline is most pronounced in our Nourish business, driven by Functional Ingredients. As noted, volumes across our Scent and Pharma Solutions businesses met expectations and H&D was modestly behind. Turning now to Slide 17. I'll provide a look at our second quarter performance by business segment. As we've noted, continued weakness in functional ingredients impacted Nourish performance overall, with strong results in Flavors and Food Design and in line with peers. Pricing and productivity gains were more than offset by lower volumes, unfavorable manufacturing absorption and the LBK inventory write-down. Turning to Health & Biosciences, strong results from certain segments, including Cultures and Food Enzymes, Grain processing and Home and Personal Care, were offset by volume decline in health, driven primarily by the continued soft market conditions across the probiotics and broader dietary supplements markets. From a profitability perspective, pricing and productivity gains were more than offset by lower volume and unfavorable manufacturing absorption. Scent continued to remain resilient, performing strongly this quarter, led by double-digit growth in Consumer Fragrance, and high single-digit growth in Fine Fragrance with solid contributions from both volume and price. This, coupled with strong productivity, led to growth and margin expansion across the division. These initiatives also drove strong growth in Pharma Solutions, which saw a 16% increase in adjusted operating EBITDA on a comparable currency-neutral basis, led by solid performance in our core Pharma business, and ongoing pricing and productivity gains. Turning to Slide 18. Cash flow from operations totaled $375 million this quarter, as a result of our very focused efforts to drive strong working capital improvements and right-size our inventories. We are ahead of target, having achieved approximately $320 million inventory reduction year-to-date, after normalizing for LBK write-down. I would like to reiterate that while this inventory reduction program is adversely impacting the P&L through negative manufacturing absorption, it is a short-term impact that we will be recovering over time. CapEx for the first half was $290 million or approximately 4.9% of sales. Given this, our free cash flow position for the quarter has improved sequentially from last quarter and was $85 million in Q2. Included in our free cash flow is about $160 million of cost primarily related to integration and transaction-related costs. We also distributed $413 million of dividends to our shareholders. In Q2, our cash and cash equivalents totaled $641 million, additionally, net debt for the quarter totaled approximately $10.6 billion with net debt to credit adjusted EBITDA of 4.5 times. Our trailing 12-month credit adjusted EBITDA totaled approximately $2.2 billion. Improving our leverage profile and ensuring IFF continues to meet its deleverage commitments remains a top priority and I am pleased with the strong working capital improvements made to date. With the initiatives in play, including our portfolio optimization efforts, IFF is on a path to delever according to our plan through the rest of 2023 and into 2024. As we mentioned, we remain laser-focused on achieving our target leverage profile to improve cash flow and the portfolio actions and other strategic initiatives we discussed today. Moving to Slide 19. Like many in our sector, we continue to navigate this unprecedented market environment. Consequently, we now expect many of the challenges that we faced through the first half of the year to continue through the second half of the year, including customer destocking and related consumer demand visibility constraints. And as a result, we have revised our second half outlook. Importantly, we remain intently focused on the levers that we can control, including accelerating sales growth, delivering positive price inflation margin, delivering on our identified productivity initiatives while also seeking additional efficiency opportunities and driving continued improvement in cash flow. Ultimately, these actions will strengthen the platform and better position IFF who when the environment improves. On Slide 20 is our updated financial guidance. We are now expecting net sales to be in a range of $11.3 billion to $11.6 billion, while our new guidance reflects softer revenue expectations across all businesses, our lower expectations and Functional Ingredients accounts for the majority of the revenue change. For the full year 2023, we are expecting Functional Ingredients volumes to be down double digits. However, the rest of the business to be down low single digits amid continued and temporary customer destocking. For the second half of 2023, we expect sales to be between $5.3 billion and $5.6 billion, with comparable volumes flat to down high single digits. At the midpoint, of our volume guidance range, our 2-year average volume is down 4%, which is consistent with what we delivered in the first half. Also, please remember that included in our first half '23 results are approximately $300 million in sales and approximately $30 million EBITDA related to our Savory Solutions and FSI divestitures. With these transactions closed at the beginning of June and August, respectively, our second half '23 financials will be lower by these amounts. For full year '23, adjusted operating EBITDA we now expect to be between $1.85 billion and $2 billion, which is lower than our previous guidance. This is driven by three factors, our reduced volume expectations, $80 million more of higher absorption costs and the $44 million LBK inventory write-down. We are now expecting our full year inventory reduction to be approximately $425 million, and as a result, the absorption related to our inventory reduction will be approximately $180 million impact to profitability for the full year. To reiterate, this is a onetime transitory impact to the P&L in order to maximize cash flow moving forward. We remain committed to driving working capital improvements through our inventory reduction program as we navigate this near-term complexity. And finally, and very importantly, in light of this environment, we are maintaining strong cost discipline to drive enhanced productivity across the organization in order to protect profitability. For our full year expectations for interest expense, we now expect it to be around $425 million mainly due to higher interest forecast on short-term debt and factory programs and a higher balance of short-term debt due to lower earnings. And we also expect our effective tax rate for the year to be 21% or no change. Foreign exchange headwinds are expected to continue to pressure sales in comparable currency neutral adjusted operating EBITDA growth which we now expect will adversely impact us by 2% and 6%, respectively. This incremental pressure is due to a handful of hyperinflationary currencies that have moved against us in the first half of '23, where FX was a 3-point headwind to sales and a 7-point headwind to adjusted operating EBITDA and we expect that many of these currencies will continue to significantly to value in the second half of '23. Now I'll turn back to Frank for closing remarks.

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Adam Samuelson with Goldman Sachs. Your line is open.

Glenn Richter:

Yes. Adam, thanks very much, good morning. And great questions to start off here. Let me start off by reassuring everybody, I am quite confident that we will not trip our covenants and the reason I am is because there are multiple levers that we can pull, and I'll get to your question about cash flow, but we've made very strong progress on working capital and other improvements in cash flow this year. In addition, we are well downstream on divestitures from a portfolio standpoint as well. And I would also remind you that there's a credit-adjusted definition of EBITDA, which is different than the adjusted EBITDA number. So obviously, there are a number of add-backs relative to that calculation. So point one, very confident we will not have an issue with our covenant. Point number two is currently a change in our dividend is not on the table. And then point number three, relative to our cash flow forecast for this year on a free cash flow basis reported we're expecting to be about $100 million lower than our original guide. As a reminder, we had a $600 million free cash flow for this year. We're forecasting $475 million. As a reminder, within that $475 million, there are 450 million Reg G charges. So on an adjusted basis, we expect to be over $900 million. That compares to the $1 billion we started off, that $450 million, by the way, includes $250 million of transaction related. So it's taxes, it's M&A, separation fees for the microbial control FSI and say solutions of the residual, $75 million is related to the final integration activities with DuPont this year, and there's another $100 million plus that are largely related to the restructure that we performed this year. So - so again, on an adjusted basis, we expect our free cash flow to be around $900 million versus the original $1 billion. Thank you.

Ghansham Panjabi:

Thank you, operator. Good morning, everybody. I guess how does the operating backdrop in 2023 change how you're thinking about the financial commitments through 2026, I think you outlined at the Investor Day back in December. Maybe you can touch on the internal offsets you're pulling to count or the lower volume baseline. And I'm just asking because at this point, your dividend outlay is unsustainable relative to your rebased EBITDA starting point as Adam pointed out.

Glenn Richter:

Yes. And if I could just tag on to the end of that regarding your comment regarding the unsustainability of the dividend, I just will piggyback on my response to Adam's question, again, on an adjusted basis, $900 million of free cash flow and in addition, as we've called out, there's over $200 million of onetime items between LBK write-off and then the negative absorption. So we are confident as we exit this year, we're going to be in a much, much better trajectory, particularly as the environment improves. So I'm not sure the assertion on sustainability is correct.

Mark Astrachan:

Yes, thanks, and good morning, everybody. I guess the first question is just what gives you confidence in the back half outlook? I think you talked, Glenn, about the volume assumptions essentially being the same on a 2-year basis, 2H versus 1H - you've cut numbers now, not necessarily your fault, partly industry stuff, now three times since the Investor Day. So what gives you confidence, what should investors take that would give you - give them any confidence that you can hit the numbers that you laid out there? And then helpful on the divestiture commentary. Curious how integrated the businesses are today such that more divestitures aren't disruptive that they don't create significant fixed cost deleverage and having to staff up and absorb costs? Thank you.

Glenn Richter:

I would add. It's a very, very legitimate question, Mark, is a, we feel we're being very prudent relative to the range in terms of what the guide is here. Secondarily, we have July in our belt at this point, and it's negative 4% volume August is trending a little bit lower than that, but very, very consistent with what we think the quarter is unfolding. So a combination of bringing down to a 2-year consistent with the first half, a couple more months largely closed gives us a pretty good sense that we're going to be in a good place. And obviously, we wanted to make sure we were prudent relative to the construction of this outlook. Your question on M&A is a good one, and there's no simple answer. Some businesses are more integrated than others. It is clearly a consideration relative to our portfolio strategy. The good news is we have acquired substantial experience over the last 3 years now through a combination of the sale of the microbial control business, Savory Solution and Atlas as well as other ones we're working on. So we've got a pretty good track record in sort of being able to navigate through that. But it is an important consideration as we think about which parts of the portfolio we trim.

Gunther Zechmann:

Good morning, Frank. Good morning, Glenn. I know you don't guide for next year yet, but what do you think are the main moving parts if we want to build the bridge for 2024 considering your comparables. You talked about you're excited about the pipeline growth, destocking to subside. What are some of the potential negatives as well that we should take into account? So refineries for 2024, please?

Frank Clyburn :

Yes. And I would add, Gunther, and I highlighted this in the prepared remarks. We've been spending a lot of time with our key customers. I can tell you that I've had discussions with many of with those CEOs with those companies and Chief Technology Officers. And what we highlighted is the 15 new R&D launches this year, the strong platforms that we have and as Glenn mentioned, if you look at our business performance in Scent, if you look at Pharma, if you look at Health & Biosciences overall, we're in really good shape, and the businesses are performing well in a challenging environment and backdrop. And even within Nourish, one of the things I wanted to highlight after is that our Flavors business, our system ingredients business as we help customers solve some of their challenges is in good shape as well and benchmarks extremely well versus our peers. And now we have a plan that we will be getting after improving our functional ingredients and that's something that we'll continue to monitor very closely. We have a new team that's been put in place to really improve that business. And as volumes start to normalize, as you head into next year, we feel really good that you'll start to see improvement in that business, which gives us a lot of confidence for '24.

Josh Spector:

Yeah, hi. Thanks for taking for taking my questions So I was wondering if you could provide some more detail kind of walking through your second quarter EBITDA to your second half run rate. So I mean, as you mentioned earlier, you exclude the inventory write-down you did about 550. Your guide at the midpoint is maybe $450 million a quarter. I guess the inventory adjustment isn't changing. It's maybe getting a little bit better price cost, you had some benefits from volumes you're guiding similar. I guess I'm not sure what's driving that magnitude of decline. So more color there would be helpful. Thank you.

Operator:

Thank you. Our next question comes from the line of Nicola Tang with BNP Paribas. Your line is now open.

Frank Clyburn:

Yes. Nicola, this is Frank. I'll take both. On the first question, we are looking at all options. However, as we've communicated, we will not pursue any options that aren't accretive to our shareholders. And we think right now, in particular, within Functional Ingredients, we are focused on the improvement plan that we outlined, and we do see really good early progress starting to emerge within that business. As far as the first part of your question, if we look at Functional Ingredients, underneath that, I'll use the example of protein solutions with Soft, Nicole of this quarter primarily due to destocking and these are isolated soy proteins that go into nutritional bars and beverages. I've had a chance to meet with a couple of the customers and the positive news is we're very well position within those end markets. The destocking has been the impact primarily for isolated soy proteins going into those beverages and bars. So that's an example, Nicole, of what we've seen, and that's been the impact we've seen across Functional Ingredients primarily destocking. There has been some customer softness in some of the meat alternative products that are within Functional Ingredients as well. But hopefully, that helps give us a little bit more color of what we're seeing. And then as we come out of destocking, as I mentioned, we do anticipate things to start to normalize as we get into '24.

John Roberts:

Thank you. What's the threshold for deciding when to take a write-down in raw material inventory. You've had spikes in citral, vanilla, other ingredients in the past, I don't recall this kind of a write-down before. And then I think your earlier comments on price raws were year-over-year. Could you give us a sense of sequential and whether or not LDK is kind of affecting the sequential number significantly?

Operator:

Thank you. Our next question comes from the line of Christopher Parkinson with Mizuho. Your line is now open.

Frank Clyburn:

Yeah, hi. This is Frank. Thanks for the question. We do work very closely with, in particular, our large global key accounts and then also our large regional accounts. And I do think supply chains have improved, so they are willing to adjust some of their inventories. What we are hearing from them is mixed. Some customers are saying that destocking will start to come to an end as we kind of go through the third quarter and into the fourth quarter. Some are saying that it really is depending on end market consumer demand and are thinking more that the destocking persists through the rest of this year and starts to improve as we get into 2024. So what we have done is, as we mentioned, in our approach is to really be prudent in the approach and to derisk our plan. However, we are very much focused on working with them to prepare for once temporary destocking is over to improve, obviously, our performance. And I can tell you that when we look at - as I mentioned, our pipeline win rate and some of the commercial activities we have underway, we feel really good and well positioned. But your question on visibility is one that we are working with them on. But clearly, we are making sure we're doing everything we can prepare for as we head towards the end of this year and into next year. Thanks for the question.

Patrick Cunningham:

Hi, good morning. Thanks for taking my question. I really appreciate the transparency on the Functional Ingredients deep dive. What percentage of the Functional Ingredients business would you characterize as a commodity, low-margin business? And are any of these businesses separable now? Or is the bias more towards optimization and the prioritization of investment?

Glenn Richter:

Yes. I would just add two other comments is these are somewhat more commoditized than the rest of our portfolio. But to bring up Frank's point, our portfolio is very much focused on high value add. So you think about our cellulosics business, you think about Xylitol, you sort of think about our soy isolates, really as it relates to specialty proteins, et cetera, alginate, et cetera. We really are focusing a part of our strategy of maximizing the value-add opportunities in our portfolio and have been super turbocharging our customer pipeline activity to focus on those categories.

Mike Sison:

Hey. Good morning, guys. Frank, The DuPont transaction was designed to help you generate better organic growth longer term. And it seems like functional ingredients has been more of a challenge there. So when you think about the potential value of the deal, is there any left? Or can you give us some thoughts of can this - can any of their businesses really help improve your organic growth? And then longer term, how do you think you rebuild the EBITDA from '23 to what level do you think is possible?

Operator:

Thank you. Our next question comes from the line of Lisa De Neve with Morgan Stanley. Your line is now open.

Glenn Richter:

I'll start, Lisa, I think technically at six questions, but let's unpack them. So on the M&A front, there are both PE firms, but more importantly, strategics out there that would have a high level of interest relative to our portfolio, relative to the former of the credit markets have stabilized. So there's tons of PE money out there being put to work and the credit market is actually in a pretty good place. But more importantly, on the strategic side, there is a very broad appetite relative to partnerships, various assets in the portfolio. As you know, most of the peers in this space actually have very good balance sheets. There's value to consolidation in this space, et cetera. So we feel very good about the robustness relative to the opportunities out there. We will be smart in terms of how we do that. It's got to make sense for us strategically in terms of what's in the portfolio - in the portfolio and it needs to be smart from a value creation for our shareholder. As we mentioned earlier, we're not interested in divesting assets cheaply. We'd rather actually maintain them, fix them, grow them from that standpoint before we did that. So I think that was your first set of questions. Frank, do you want to take that?

Operator:

Thank you. Our next question comes from the line of Lauren Lieberman with Barclays. Your line is now open.

Frank Clyburn:

Yes, Lauren, I would say that when I look at Functional Ingredients, I'll give you an example, where we bring significant differentiating value is within our systems business where we're bringing in combining multiple ingredients. And for example, emulsifiers are used in over 50% of our systems applications and what we're bringing for customers. So we still believe that there is integrated solution opportunities as we work across all of Nourish. What we're highlighting is due to destocking, we need a very quick rapid improvement plan based on the need to improve the financial profile of Functional Ingredients. But we still do see that the integration with in particular, with regards to emulsifiers as well as some of our protein solutions is still bringing a lot of benefit and advantages to customers.

Michael DeVeau:

Maybe operator, we'll go to the next one.

Laurence Alexander:

Just very quickly, how much of an EBITDA drag do you have from the working capital reductions that you've done this year? And secondly, for the target for Functional Ingredients to sort of match the market. Do you see yet a path for functional greens to get above-market growth in, say, 5, 7 years? Or is matching the market kind of sort of the best fix?

Operator:

Thank you. Our next question comes from the line of Silke Kueck with JPMorgan. Your line is now open.

Frank Clyburn:

You don't need to rebuild them. You just need to may be flat. So as a reference point, our total production will be down around 15% this year. As we mentioned, we expect sales volumes to be down 6. So there's - that 9% incremental is basically to eat through that $0.5 billion of inventory still getting there. So assuming you - that's one and done, then you get the pickup of the 180 next year because obviously, production is at zero at that point going forward. So as you - if you rebuild inventories over time as you grow the business, that actually creates a positive absorption going forward.

Andrew Keches:

Thanks, I appreciate the question. Glenn, if I could ask a time line for that three times net leverage target changed. I heard you reiterate I didn't hear the time line though. And do you still expect to get there by the end of 2024 with asset sales I think even with Lucas Meyer and [indiscernible] sort of in, it still seems like you'd have additional work cut out for you?

Andrew Keches:

And then related to that, Yes, related. I appreciate that - so your messaging deleveraging is still a priority. But at the end of the day, the agencies have you very close to high yield at this point, and that dividend is still effectively two times what your cash flow is. So is maintaining IG rating a significant importance to you? And yes, that's intentional emphasis on maintaining?

Frank Clyburn:

Great. Thank you, Glenn. And as we come to a close today, a couple of key points I would like to just reiterate. And first, I want to make sure that we reemphasize that the majority of our business is doing well and is very resilient as we manage through temporary destocking. Second, we are taking action very rapidly to improve our business trajectory and our capital structure. We've implemented a functional ingredients operational improvement plan, and we look forward to sharing more with you of the progress. We're driving divestitures, as you've heard, such as the announced sale of LMC as well as additional opportunities that we're looking at to delever, and we're executing on our strategic priorities with strong improvements in commercial and operational excellence, as you heard today. We do remain confident in our value creation potential, given the relative strength of our pipeline and we highlighted just within the first half of this year, over a 50% increase versus prior year and is the transitory nature of destocking ends, that's going to really position us well as we head into 2024, as the environment normalizes.

Operator:

That concludes the IFF second quarter conference call. Thank you for your participation. I hope you have a wonderful rest of your day.

Michael DeVeau:

Thank you. Good morning, good afternoon and good evening, everyone. Welcome to IFF's first quarter conference call. Yesterday afternoon, we issued a press release announcing our financial results. A copy of the release can be found on our IR website at ir.iff.com. Please note that this call is being recorded live and will be available for replay. Please take a minute to review our forward-looking statements. During the call, we'll be making forward-looking statements about the company's performance and business outlook. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially, please refer to our cautionary statement and risk factors contained in our 10-K and press release. Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release. With me on the call today is our CEO, Frank Clyburn; and our Executive Vice President and Chief Financial and Business Transformation Officer, Glenn Richter. We will begin with prepared remarks and then take any questions at the end. With that, I would now like to turn the call over to Frank.

Glenn Richter:

Thank you, Frank, and thanks to everyone for joining us today. Turning now to slide 9, let me review our first quarter performance across each of our four business segments. In Nourish, sales were flat on a comparable currency neutral basis with growth in Food Design and Flavors, all set by continued volume declines in ingredients. As Frank shared, Nourish ingredients, which includes protein solutions, emulsifiers and sweeteners, core texturants and cellulosics and food protection had the most pronounced volume declines in the quarter representing approximately 60% of our total company volume decline. Despite our pricing actions and productivity initiatives in the quarter, within our Nourish segment, the lower volumes and the unfavorable manufacturing absorption due to our inventory reduction program that I mentioned earlier, more than offset those efforts, contributing to a 27% year -⁠over -⁠year decrease in currency ⁠neutral adjusted operating EBITDA at $208 million. Those same pressures impacted Health and Biosciences this quarter, with a 3% year -⁠over -⁠year decrease in comparable currency ⁠neutral sales and a 19% year -⁠over -⁠year decrease in comparable currency ⁠neutral adjusted operating EBITDA, despite price increases and strong productivity gains. While we saw solid growth in Cultures and Food Enzymes and Home and Personal care, lower volumes and unfavorable manufacturing absorption also pressured our performance. As Frank mentioned earlier, our Scent division continues to perform quite well, delivering an 8% increase in comparable currency ⁠neutral sales and a 1% increase in comparable currency ⁠neutral adjusted operating EBITDA, driven by double ⁠digit growth in Fine Fragrance and Consumer Fragrance. Scent’s growth this quarter was driven by higher volumes, pricing, and productivity gains, as the division has remained resilient. Lastly, I'm pleased to share the Pharma Solution has delivered a 4% increase in comparable currency neutral sales, led by continued growth in core pharma. That said, like Nourish and Health and Biosciences, the segment was also impacted by lower volumes and unfavorable manufacturing absorption, leading to a 6% decrease in comparable currency ⁠neutral adjusted operating EBITDA. Overall for the quarter, sales and EBITDA were slightly ahead of our expectations, with pricing on track, modestly better volumes, and favorable productivity. Now on slide 10, I'll discuss our cash flow and leverage position for the quarter. Cash flow from operations grew $127 million this quarter, which is an improvement versus the negative $4 million we reported in a year ago period. One bright spot in the quarter was approximately a $200 million decrease in inventory versus our year end 2022. As I discussed on our fourth quarter call, we have initiated a number of actions across our business and supply chain, genes, including system process enhancements, to rapidly reduce our inventories over the course of the year. While this is adversely impacting the P&L through negative manufacturing absorption, it is a short-⁠term impact that will be recovered over time. Looking ahead, while the majority of our efforts to reduce inventories for 2023 are behind us, we do have near-⁠term headwind in Q2, albeit to a lesser degree than Q1, as we continue to correct our over inventory position and maximize cash flow. I also want to note that accounts payable on the quarter was adversely impacted as a result of season payment patterns, and by our inventory reduction program, whereby we slowed the purchase of raw materials, which had a direct impact on our AP. We expect this will improve over the course of the year as we achieve our target inventory level. CapEx spending for the quarter was $175 million, or approximately 5.8% of sales. This was elevated due to project timing and we expect to moderate through the balance of the year. We continue to believe that we will be around $500 million in CapEx for full year 2023. Our cash flow for the first quarter was negative $48 million. This is consistent with the seasonality of cash flows for our business. Included in our free cash flow is about $100 million of costs, primarily related to integration and transaction related costs. In terms of leverage, we finished the quarter with cash and cash equivalents of $594 million which includes $4 million in assets currently held for sale. While net debt totaled $10.7 billion, our trailing 12-month credit adjusted EBITDA totaled approximately $2.3 billion, and our net debt to credit adjusted EBITDA was 4.6x for the quarter as we mentioned earlier. While our leverage position is slightly higher than in the past few quarters, we were proactive in renegotiating our debt covenants in the first quarter. To ensure that we have appropriate capital flexibility as we execute on our strategic priorities in what may continue to be a challenging market. Importantly, we continue to actively evaluate the portfolio with consideration for further divestitures that provide additional financial flexibility and debt pay down without impacting our long term aspirations. Turning to slide 11 for our consolidated outlook for the fiscal year 2023. As we look ahead to the balance of the year, we continue to believe our volume performance will improve, yet acknowledge that market conditions remain uncertain. In our discussion with customers, the majority have signaled that their destocking efforts are ending, as they believe the consumer will remain resilient in the second half. Nevertheless, we have yet to see a broad based volume improvement across our business, but we remain steadfast in our focus to control what we can control to protect profitability, maximize cash flow, and drive portfolio optimization. For the full year, we now expect sales to be approximately $12.3 billion versus $12.5 billion previously. This change is largely related to energy and raw material pass-through price adjustments. In addition, we have a modest increase in unfavorable impact from foreign exchange. As we noted on our February earnings call, about 30% of our original 6% pricing guidance was related to energy inflation, much of which is pass-through via surcharges with energy prices having moderated significantly. We are maintaining our expectation of flat comparable currency neutral adjusted operating EBITDA growth and continue to believe adjusted operating EBITDA will be approximately $2.34 billion. Foreign exchange headwinds are expected to continue to pressure sales and comparable currency neutral adjusted operating EBITDA growth which we now expect will adversely impact us 1% and 3% respectively. This incremental pressure is due to a handful of hyperinflationary currencies that have and we expect will continue to significantly devalue over the course of 2023. On a comparable currency neutral basis, all the above noted items translate into approximately 5% versus is approximately 6% previously. The sole driver once again is the energy and raw material pass-through price adjustments as we continue to believe volumes will be flat for the full year. In terms of calendarization, we believe volume will sequentially improve each quarter with a growth rebound expected in the second half of the year as the market challenges are expected to subside and our year ago comparisons are more favorable. To provide additional context, first quarter volume performance was modestly better than we anticipated, with the second quarter modestly lower. The net result is that on a first half basis we are broadly in line with our expectation, which we believe will be offset by a favorable second half. On a two year average basis, we expect first half volumes to be approximately negative 2%, reflective of destocking, and second half volumes to be up plus 2%. For the second quarter specifically, we expect sales to be approximately $3 billion to $3.1 billion, with volume performance down mid-single digits and adjusted operating EBITDA of approximately $540 million to $590 million. We remain intensely focused on improving our inventory levels and driving cost savings through productivity and restructuring initiatives to ensure we generate strong cash flow for the full year. As a result, we continue to target 2023 adjusted free cash flow of more than $1 billion, excluding cost related integration, restructuring and geo related items. Turning to slide 12, we recognize that we continue to face a challenging environment, including reduced visibility on consumer and customer demand outlook and the path of inflation. However, we remain intently focused on what we can control with the goal of continuing to strengthen IFF's operating foundation and execution performance. As we've discussed, there are a few top operational priorities that will enable IFF to not only manage these complexities, but also to drive long-term profitable growth. Our highest long-term priority is accelerating top line growth. To achieve this goal, we are making key strategic investments in key areas of our business and continue to be more surgical in our pricing actions to ensure we recover inflationary pressures while supporting volume growth. We have also made great progress in enhancing our customer service and supply chain agility to reduce bottlenecks and increase efficiency. In the first quarter, we maintained strong service levels while also reducing our inventories, improving approximately $200 million from December ’22 in conjunction with this, we will be rolling out a redesigned sales, inventory and operations planning process. Enhancing productivity also remains essential as part of our transformation. As mentioned earlier, during the quarter we successfully achieved approximately $60 million of productivity benefits and began seeing initial results from our restructuring program. I expect this benefit will rapidly increase over the balance of the year. And be a strong contributor to our EBITDA performance this year. Last, we remain laser focused on improving our cash flows and delivering our long-term deleveraging target. We expect to continue to make improvements in net working capital through the balance of 2023 and into next year. We are in parallel executing against our portfolio optimization efforts, continuing to divest noncore business, In Q2 and Q3, we expect to complete the sale of our Savory Solutions and Flavored Specialty Ingredients businesses with proceeds used to pay down debt. Going forward, this is a central part of our strategy and we continue to evaluate additional portfolio optimization opportunities to strengthen our capital structure. With that, I would like to turn the call back over to Frank.

Operator:

[Operator Instructions] Our first question comes from the line of Heidi Vesterinen with BNP Paribas.

Frank Clyburn:

Hi, Heidi. It's Frank. A couple of things. So in Q1, we had guided to your point high single digits volume decline, and we actually performed a little bit better than what we had assumed in that original guidance, sales were up 1%, as you know, on a currency neutral basis. So a little bit of ahead in Q1. Q2 is slight down from what we had assumed originally. However, when we take a step back, Heidi, think about the first half of the year, mid-single digit volume decline, which is pretty much right on what we had expected at the beginning of the year. So really what you're seeing is a phasing and shift for the first half of the year, mid-single digit decline in volume. And we'll talk a little bit more about some of the different areas here in just a bit. The second half of the year, what we are anticipating and assuming is obviously against a much easier comp as we get to the back half of the year. We are making the assumption that we will have mid-single digit growth in the second half of the year, which then, when you look at the full year, has our volume being flat year-over-year. So let me unpack a little bit about some of the key assumptions as we get into the back half of the year and even into the second quarter. First, destocking, we are assuming that ends pretty much in Q2. So if you think about destocking, Heidi, we saw this really come to fruition in Q4, the volumes were down high single digits of Q4 of ‘22. We continue to see destocking in Q1 and some destocking is continuing in Q2. But we think destocking at the end as we head into the second half of the year. This is really important for our protein solutions business and health business that were significantly impacted by destocking. Second, the assumption is that consumer trends do remain resilient. There's some uncertainty in that but if we look at what we have heard from our customers and as we're working with them and bringing innovative solutions. In Home and Personal Care, we saw good growth in the first quarter. We anticipate that will continue, dish detergent, a lot of innovative projects that we're working on and we see good progress and acceleration as we go into the second half of the year. We think food and beverage will still remain resilient. Obviously, our flavors business is really important there grew in Q1 and we anticipate we will see accelerated sequential performance as we go throughout this year and in the back half. We also are focused on improving our ingredients business. We've discussed that really a focus on putting some additional resources behind ingredients. Our customer service has improved significantly. We have the capacity to serve customers. So that's something that we are also assuming as we go forward and in our ingredients business. And then we're seeing resilience in consumer and fine fragrance, and we anticipate that to continue. And then also pharma continues to be resilient as well. So when we take a step back from a volume perspective, Heidi, think of first half down mid-single digit volume, second half up mid-single digit volume, and then ultimately volume flat for the full year. The third thing that we are seeing that we believe will accelerate in the back half of the year and improve sequentially is geographical volume growth in the back half. For instance, China, this quarter, Heidi was up 2% in sales. Asia Pacific, or I should say Greater Asia, was up 1%. As we talk to our teams in Asia and in China, while the opening is still slow in parts of China, we are seeing improved signals from customers. And that gives us confidence as we get into the back half of the year that you will see geographical improvement. And then we've also noted that North America has been challenged for us over the last couple of quarters. We anticipate sequentially that will improve as we get to the back half of the year. So that's the assumptions from a volume perspective, a lot of like we said, there's some uncertainty, but we're believing that those three assumptions and drivers are what gives us the assumption at this point in time to hold our volume flat for the year. In addition to that, as you look at the back half of the year, there's a couple of other things I will highlight. On the call, we spoke about the fact that absorption in the first quarter was a headwind for us. It will be a headwind in Q2 to a lesser degree, obviously, as you get to the back half of the year, that will go positive and help us. And then in addition to that, if you recall, we highlighted that we have our cost reduction program. Full year, we highlighted a cost reduction program of $100 million. We highlighted a run rate of $70 million to $75 million for the year. And if you look at the back half, that is where you'll see the majority of that benefit in the second half of this year as we execute on our cost and people reduction program. So when we take all those things into account, Heidi, that is why we feel as though holding our EBITDA guidance to the $2.34 billion that Glenn highlighted was the appropriate assumption at this time.

Mark Astrachan:

Yes, thanks. And good morning, everyone. I wanted to ask about guidance and then some of the troubled areas within the business. So in your opinion, are you being more conservative or optimistic than you were previously? It seems like underlying assumptions, maybe from a consumer dynamic, has changed to be more positive within the underlying guidance. I'm curious if you could comment on that. And then for the more challenged portions of the portfolio, things like the legacy and [inaudible] and ingredients. In terms of what you highlighted, what proactive steps are you taking to offset what seems like perhaps more permanent and structural volumetric share loss? Meaning like improving service levels doesn't seem like it could be enough to change the trajectory of the business, but perhaps I'm wrong. So sort of curious how you're thinking about what you can do to improve those pieces of the business which have been dragging performance and losing share. Thanks.

Operator:

Our next question comes from the line of Gunther Zechmann with Bernstein.

Glenn Richter:

Good afternoon, Gunther. Thanks for the question. I think the summarized version is we're actually tracking quite well against our objectives. And I'll sort of unpack, as you know, the two big contributors relative to our adjusted free cash flow combination of achieving our earnings guidance and then secondarily all the work on working capital. We had a very good quarter relative to our expectations around working capital. As a reminder, our full year objectives for working capital are consisted of a $200 million point on point, yearend reduction in inventory and then $100 million increase between payables and receivables for a net $100 million reduction in net working capital. The biggest driver of that, obviously, is inventory at that $200 million, that $200 million reduction is actually a $350 million volume reduction with $160 million of basically price escalation, i.e. raw material cost increases coming through. In the first quarter, focusing on inventory, we actually were over $200 million down inclusive of around $80 million of price escalation. So the volume component in the first quarter was $280 million against our full year objective of $350 million. So we're trending quite well. We will probably actually get to the full sort of, our initial level of inventory reduction by the end of the second quarter at this point in time. Payables and receivables, they're a little lumpy seasonally. We're feeling very good about achieving those objectives at the end of the year. So overall we feel very good, particularly relative to the working capital improvements.

John Roberts:

Thank you. How do you explain what appears to be underlying consumer strength in fragrances versus the underlying consumer weakness in food, ingredients? Or maybe the question should be how did the channels get so overstocked in food, ingredients and not so overstocked in fragrance consumer products? And are there significant divergences in the current point of sale volumes between packaged food and fragrance products?

Operator:

Our next question comes from the line of Joshua Spector with UBS.

Glenn Richter:

Yes. Hey. Thanks for the question. This is Glenn. Within the first quarter, the negative absorption impact was $100 million, which translates actually into 330 basis points of impact on EBITDA margin. That represented a year-over-year volume decline of about 20%. So think about our annual fixed cost base for our manufacturing base of about $2 billion. Every one point on an annualized basis is basically worth about $20 million. So hence why we're able to reduce our inventory so significantly, we took production down significantly, so I'll say a onetime event of $100 million. We are expecting, as I mentioned, to continue to make progress on reducing inventories and expecting to have mid-single digit down volume in the second quarter. That translates into another $50 million of negative absorption. We are anticipating actually positive absorption in the second half of the year as Frank mentioned. We're expecting mid-single digit growth in the second half of the year. So production volumes being up year-over-year. Again, the context of the risk associated or opportunity associated with declines or increases in manufacturing, one point on a full year basis is equal to $20 million of negative absorption. So if you think about two points in the second half, that would be the equivalency of that $20 million. We have discussed in the past. We will have to continue to consider that if we continue to see volume softer than our expectations, what will be the balance of continuing to manage cash flow and keep our inventories in the right place for production efficiency purposes versus basically the earnings profile. So they're clearly in a softer environment than anticipated. There is some risk of further negative absorption in the second half of the year. Thanks for the question.

Ghansham Panjabi:

Hi, everyone. Good morning. Yes, just judging by some of the comments from your major customers out of this earnings season, it clearly looks like the global consumer is a little bit weaker. Just curious, given inflation has peaked and just your more recent conversations with your customers, do you get a sense as to whether some of the promotional activity that your customers typically resort to during periods of weakness, are they starting to contemplate that? Just trying to get a sense as to the risk profile as we cycle through the rest of the year because you will be passed these talking, but we still have a weaker consumer. Thanks.

Operator:

Our next question comes from the line of Andrew Keches with Barclays.

Glenn Richter:

Hey Andrew, this is Glenn, thanks for the question. Agree relative to wood chopping, that's why I have a hatchet with me today. But relative to your assumption for this year, you're correct. We were a little over 4x at the beginning of the year. We will be receiving net proceeds after tax distributions transaction over $750 million, combination of this quarter and next quarter related to the sales saving solutions and FSI which will all go to debt pay down relative to getting to the 3x times or less by the end of next year. We are fully committed to that. That will be achieved through a combination of three elements. One, we continue to have opportunity to improve our working capital position. We expect to continue to make progress next year from this year. Secondarily, we do expect the earnings trajectory will improve significantly next year. Part of it is overlapping some significant items, such as $100 million of negative absorption and then getting the top line going with our productivity program. So that's the second thing either denominator improving, but that all being said, divestitures clearly play a role in getting to that less than 3x. We have been very active reviewing the portfolio. We are proceeding on multiple fronts. We are fully confident that we have an attractive set of assets that actually aren't ideal fits for our portfolio. We are past the two year anniversary of the Reverse Morris Trust considerations as of February this year of note, and we are proceeding quite well on that path. So I'd say our confidence remains high and commitment remains high to get to less than 3x. And regarding cutting the dividend, that is not on the table at all.

Christopher Parkinson:

Thank you. You adjusted your revenue guidance a little bit. You're citing some energy and raw movements. Just can you remind us of just how much of your portfolio passes through? And just as a corollary of that, can you also just give us a real quick update on price cost movements, yes, for the balance of ‘23 and just what portion of your portfolio you believe will reign resilient in terms of pricing? Thank you.

Operator:

Our next question comes from the line of Lauren Lieberman with Barclays.

Frank Clyburn:

Yes. Hey, Lauren, it's Frank. On the pricing strategy, we are working with customers to balance price volume opportunities. So clearly this is not across the board, but very surgical, Lauren, in our practices, in particular, in certain geographies and I would highlight in great areas of China and certain markets where there is more price sensitivity. We are looking at price volume, but not across the board. So very surgical approach to pricing. Margins will improve, Lauren, over this year and over time. Remember that Nourish based on the first quarter, a lot of the manufacturing absorption impacted the Nourish division in Q1. There'll be some impact, as we've highlighted in Q2. And then things will improve in the back half for Nourish and for the company.

Matthew DeYoe:

Good morning, everyone. Frank, can you talk a little bit about the enzymes business? I know it's a big consumer of energy and footprint is pretty European based. So the gas price in Europe, with that coming off a lot, is that an area where energy will be given back in price? Do you think you can hold on to it there? And I guess, given all the volatility on the cost center, where are margins now for enzymes versus maybe where they were in 2021? And where do you think they may be by the end of the year?

Operator:

Our next question comes from the line of Silica Cook with JPMorgan.

Glenn Richter:

Hey Sopha, this is Glenn. We are expecting charges of roughly $75 million full year for the cost reduction program. That will be an annualized impact of about $100 million. We expect kind of around $72 million to hit the P&L this year. For obvious reasons, I'm not going to describe sort of the pace at which exits in the organization are happening from the standpoint. So that covers that. Can you remind me the second question again?

Glenn Richter:

Yes. As we had mention, the softish part of our business from a volume standpoint was in Nourish. But more specifically that really was in the ingredients portfolio, which is roughly $3 billion of Nourish on an annualized basis. So that's where it was concentrated for flavors and food designs generally were fine. Thank you. There are no further questions. I would like to turn the call back over to Frank Clyburn for closing remarks.

Operator:

That concludes today's call. Thank you for your participation. You may now disconnect your lines.

Michael DeVeau:

[Audio Dip]

Glenn Richter:

Thank you, Frank. Greetings, everyone. Let me add my apologies for the technical issue. You should have seen we're both sweating. So I'll start off by just reiterating, as Frank mentioned, the financial and operational initiatives we implemented during the year, they have proven valuable in helping buffer the broader economic headwinds. But at the same time, we recognize, while we've taken some important steps, we have not fully delivered against our financial objectives. We recognize we have more room for improvement to realize our goals and create a more profitable organization, and I assure you we continue to be intently focused on this going forward. Looking at fourth quarter results, IFF generated $2.8 billion in sales revenue. On a comparable currency-neutral basis, sales were up 4% for the quarter with growth achieved across nearly all divisions. Our adjusted operating EBITDA in the fourth quarter was $441 million, and our comparable currency-neutral adjusted operating EBITDA declined 5%. As it was significantly impacted by lower volumes more than anticipated, which led to meaningful impact from negative manufacturing fixed cost absorption despite continued strong pricing and productivity gains. Because of this, we saw a year-over-year decline of approximately 200 basis points to our adjusted operating EBITDA margin. Despite being partially offset by lower effective tax rate, our Q4 EPS ex amortization was 12% lower due to lower adjusted operating profit. Currency headwinds also present a significant challenge in the quarter with a 7 point adverse impact on sales and an 11 point adverse impact on adjusted operating EBITDA versus the prior year. Encouraging recent trends within the currencies have been promising. Clearly, a difficult market environment has weighed on our performance in the fourth quarter. However, I am confident in the steps that IFF is taking as part of our strategic refresh to create a stronger, more resilient business moving forward. Urgency is key and controlling what we can control is our focus

Operator:

Absolutely. [Operator Instructions] The first question comes from the line of Heidi Vesterinen with BNP Paribas. You may proceed.

Frank Clyburn:

Heidi, it’s Frank, and thanks for the question, and it’s really an important one. One, we did provide in our Capital Markets Day a preliminary view into 2023. With that said, I think we all feel that we own some of which you’ve mentioned maybe the change. And let me unpack what has happened and especially in Q4. As we went through Q4, Heidi, we had assumed that we would have mid-single-digit volume decline. And as you saw now our full quarter four results, we ended up having growth of 4% overall, but we saw high-single-digit volume decline. We saw that change really accelerate the decline in the month of December, in particular, Heidi. I had spoken about what we were seeing in the Health North America Probiotic business, also parts of our Nourish business, Ingredients and Protein Solutions. And in fact, in the month of December, we did see many of those businesses have double-digit volume decline primarily due to destocking. There is some end market demand impact as well. So when we saw the volume changes in particular that came through in December as well as the impact that it had on our manufacturing cost and absorption, we felt as though we had to really take a look into 2023, obviously, as we’re coming out now to guide. As I look at the trends in January, they are continuing to be very similar, Heidi, to what we saw in December. So when we think of the first quarter, especially against our first quarter comparison where we grew last year 5%, we have made the assumption that this is going to be a challenging first quarter, similar trends as what we have seen in Q4. And then as we get into the first half of the year, we also continue to see challenges from inflation and other pressures. We do see growth in the back half of the year. But when we look at it overall, we see the year having pretty much flattish volume year-over-year, Heidi, but we also feel good about our 6% overall sales growth. When we look at the entirety of the P&L, we also feel it’s really important as you heard from Glenn to focus on cash flow. So one of the things that we’re going to be doing is focusing on reducing our inventory to improve cash flow that is going to have a several percentage point impact on our EBITDA profit growth. We think that’s the right thing to do. And then also as we continue to look at the volume dynamics, we clearly are going to continue to focus on everything we can to control our cost. We have announced accelerating our productivity program, and you heard that from Glenn, and we talked about that at Capital Markets Day. In addition to that, we are instituting a much stronger S&OP process that’s going to be co-led with Ralf Finzel, our new Head of Operations. We have a new Head of Procurement that’s come in, and Glenn’s going to help to co-lead that team, and that team is going to meet on a weekly basis. Also, we’re going to continue to focus on our customers by improving our key account management activity and also continuing to invest in R&D to make sure that we have the innovation needed as things improve as we get in particular towards the back half of the year and as we head into 2024. So we feel confident in the guidance, Heidi, we think it’s prudent and we felt as though it was the right thing to do based on what we saw the trends in the fourth quarter, in particular in the month of December. Your second question, I’m sorry, real quick. Yes, Heidi. The Reverse Morris Trust now in February is – allows us to look at the entire portfolio that work is underway, Heidi, and we will, as we discussed on Capital Markets Day, continue to look at the entire portfolio to make sure that we’re maximizing for our shareholders as well as making strategic decisions to benefit our customers and to drive profitable growth.

Operator:

The next question comes from the line of Gunther Zechmann with Bernstein. You may proceed.

Glenn Richter:

Yes. Thanks, Gunther. So first of all, to reconcile for 2022, our GAAP free cash flow was negative $160 million. We had approximately $300 million of deal-related integration restructure. So on a like-for-like adjusted basis, that’s roughly $150 million positive versus the $600 million. So the $450 million difference we had communicated last year – the largest by far is working capital. We were $300 million higher on working capital for the year. The inventory of that driven by higher inventories, the total increase in working capital was nearly $1.1 billion for the full year. So it was a significant drain on our cash flow. We also – the earnings were shorter than we had anticipated, and there were some miscellaneous items, but the largest by far is working capital, which then goes to your question regarding 2023. The big swing for 2023 is largely going to be driven by the working capital area of focus where it was a use of $1 billion plus last year. We expect it to be neutral to slightly positive. The biggest focus there is obviously within the inventories, which is the biggest component of our working capital, and that decision to focus on generating $1 billion plus of adjusted free cash flow will put some pressure on the P&L. So we’re taking a hit for some negative absorption and fixed costs because volumes actually will be lower than sales. So we actually can have a decline of year-over-year production volumes, negative absorption. But basically, that is the big driver. Cash interest, cash taxes, CapEx largely will be flattish year-over-year, but the biggest difference by far is the focus on our working capital and namely inventories.

Glenn Richter:

Yes. Good question. We’re anticipating $350 million to $400 million of reduction from volume and about $150 million increase in price. So think about that as basically, I’ll call it roughly $200 million-ish of reduction of absolute inventory, which is $150 million increase in price and about a $300 million increase – or decrease or so driven by volumes.

Operator:

Thank you.

Operator:

The next question comes from the line of Mike Sison with Wells Fargo. You may proceed. Mike, your line is now open.

Glenn Richter:

We can.

Mike Sison:

Yes. Sorry about that. Given recent commentary from consumer products companies, your peers, any insight into your performance in North America and China, both look notably weak relative to some of these comments. Thank you.

Operator:

Thank you. The next question comes from the line of Josh Spector with UBS. You may proceed.

Glenn Richter:

Yes. Josh, good question. So let me unpack the roughly 6% inflation expectation for this year. That’s about 70% raws and zero logistics and the residual 30% energy. Energy, by the way, is highly volatile. So that generally is moving more favorable than when we put the plan together, although an awful lot of our energy pricing is now through surcharges. So we’re sort of hedged one way or the other relative to that. So I’ll focus on the 70%. The other thing I would note that remember the first quarter will be impacted by the inventories from last year. So sort of what hits relative to our cost structure is really already baked into sort of what’s sitting in the plants to some extent. We are expecting actually fairly ratable i.e. price equals costs pretty much quarter-to-quarter relatively neutral. So we’re not expecting any sort of big upside or downside. And part of that’s the pacing of the inventories as well. I would say that we are seeing some early signs of deflation on the raw side. However, there are certain commodities that actually have seen more increases, but I would say that you could maybe be a little cautiously optimistic that we probably have seen the peak of inflation in raws and the back half of the year may be experiencing maybe some deflation, which will be favorable for the business. In general, our pricing is pretty much locked in for the year. Most of our pricing is beginning of the year or contractually based on indices that are tracked. So I think the pricing dynamic, the pricing risk is not as significant relative to what’s locked in. Of course, if there’s a rapid level of deflation in the second half of the year, we would adopt relative to our customer dialogues and pricing actions against that. But I would say I’d have a slight lean towards a little more optimism in terms of the price/cost dynamic this year versus last year.

Ghansham Panjabi:

Thank you. Good morning, everyone. Given that it’s clear that consumer is exhibiting greater elasticity, just given the extent of price increases, a lot of your CPG customers have been instituting. Frank, just based on your direct conversations with customers, do you sense that there will be a change in their price or volume strategy as we push further into 2023? And just your sense as to how the elasticity dynamic varies globally?

Operator:

Thank you. The next question comes from the line of John Roberts with Credit Suisse. You may proceed.

Frank Clyburn:

John, it’s Frank. I’ll get started. So one, no, we do not think that the volume declines are specific to any transition in Nourish. I think they’re much more market-driven as we’ve been discussing around destocking. And in fact, in our Flavors business, which is one of our most important businesses. I think we’ve honing very well versus competition. As far as the process, I am working very urgently, John, to get that position filled and my hope is to be able to announce something very shortly on who will be leading theirs going forward. Glenn?

John Roberts:

Thank you.

David Begleiter:

Frank, with the change in the 2023 guidance relative to the IR Day, does this change your expectations the 2024 to 2026 period in terms of 4% to 6% sales growth and 8% to 10% EBITDA growth. And just on the productivity program, I know you’re looking to accelerate it. Any plans potentially to expand it as well? Thank you.

David Begleiter:

Thank you.

Mark Astrachan:

Thanks and good morning, everyone. So I wanted to follow up on an earlier question and ask a related question. So it just seems from the outside perhaps that this business could be too big an unwieldly to run effectively and efficiently. What would you have to see and by when would you consider a more larger scale divestiture – divestitures to essentially shrink and deemphasize some of the acquisitions, which have been made. And related to that, recent volume trends have been pretty consistently below peers last year, year before, et cetera. So what is that attributable, and when should investors expect IFF to at least grow in line with the peer group? And how do we measure that?

Glenn Richter:

And Mark, I'd add a couple of other items to the Frank's point is, lots of benefits across the portfolio. A lot of our work is on aligning and integrating and maximizing the portfolio. So aligning against three divisions, customer-backed, making sure that we have all the sales and operating teams focusing on the revenue synergies across the how systems work relative to advancing that is important. And then on the simplification of the portfolio, Microbial Controls exit, Savory Solutions. These are businesses that add a lot of complexity. Savory as an example, is a business that has 16,000 customers, 8 different businesses for the ERPs. And to Frank's point, we're going to continue to look at our portfolio and what they may be less core to the overall portfolio as we go forward to continue to simplify as well.

Adam Samuelson:

Hi, thank you. Good morning, everyone. I want to – Frank, you referenced in an earlier response kind of 2024 kind of still thinking growth could get back in that high single-digit range. I just want to maybe unpack that a little bit in the context of 2023, where it would seem like one of the bigger deltas obviously, volume is not growing, but there's a pretty significant cost under absorption issue as you worked on inventories and presumably, that's weighted in the P&L in the first half of the year. If you're going to 2024, and we presume that there's some growth in the underlying market and your working capital inventories are in a better position, why would we not have faster growth in 2024 on an earnings basis if we're lapping pretty significant under-absorption charges this year.

Operator:

Thank you. The next question comes from the line of Jonathan Feeney with Consumer Edge. You may proceed.

Glenn Richter:

Yes, this is Glenn, Jonathan. Relative to the first part of your question, clearly, in the last now 18 months, we have significantly improved the discipline, awareness and processes relative to pricing from tools and cross-training to best practices, to much, much surgical application by customer geography, et cetera. And I think that is here to stay in terms of optimizing the business going forward. Not all segments and regions are created equal. Some have greater ability to price than others and some geographies such as Greater Asia, in general, are more competitive, particularly in this environment. So we're being very, very thoughtful. In general, I would say that the N&B portfolio is about equivalency to the F&F portfolio relative to pricing capabilities or ability to pass through pricing, some of the ingredients portfolio are a little more difficult just given slightly more commoditized nature of this businesses. But I do not think there's really a significant difference in what we've seen from an execution standpoint between the legacy IFF and the legacy DuPont businesses and would again iterate that we've done a lot to actually tremendously sort of advance our capabilities to basically be much, much smarter and surgical in our pricing capabilities.

Christopher Parkinson:

Great. Thank you so much. Just going back to the portfolio optimization comment a couple of questions ago, you had a very helpful slide in your Analyst Day, I think Slide 12 of Frank's presentation about optimizing some of the underperformers. You mentioned Protein Solutions. I would love to get a little bit more color there on how you see that progressing throughout the year and what's embedded in your assumptions and then perhaps multipliers as well. And then on the positives, any update on Food Design ex Savory? Thank you so much.

Operator:

Thank you. The next question comes from the line of Jeff Zekauskas with JPMorgan. You may proceed.

Glenn Richter:

Yes. Hey, thanks, Jeff. Good morning. Good question. So you already harken back a year ago, which seems like a decade ago, we originally had $600 million of inflation, pricing/inflation embedded. What happened is two additional rounds of inflation. So we had another $400 million last year, and we have circa $600 million-ish plus in this year. So there's a lag effect. So we're sort of kind of just running through the cycle from a kind of a timing standpoint and standpoint. We haven't sort of talked about sort of how this flows through the 2024, but I think it's reasonable to assume either a combination of stabilization and some deflation in the environment. On the back end, we will pick it up. So I think that's still a very reasonable assumption over the time horizon. The horizons just extended because there's been more sort of systemic inflation over the last few years than we anticipated at that point in time. Relative, we have – as Frank had mentioned, we have an incremental cost productivity program of $100 million targeted. We expect to get probably circa $70 million of that to hit the P&L this year. We're estimating around $70 million-ish to $75 million of onetime expenses associated with that restructuring.

Lauren Lieberman:

Great. Thanks so much. We covered a lot. So I guess I have a couple of questions still. But I guess, primarily, when we think about 2023, I think, Frank, Glenn, the three of us have discussed it being a transition year, and there's a lot of things that you laid out on kind of what you want the business to look like as you hit 2024. But now you're talking about not just the curtailing production, but also accelerating cost savings going after G&A and so on. So to what degree do you think – should we worry about you being able to manage through the cash flow situation kind of shoring up working capital and making these short-term changes you need to make, but still being able to fully execute and get to where you need to be so that this can be the transition year that you discussed it being?

Operator:

Thank you.

Operator:

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.

Michael DeVeau:

Thank you. Good morning, good afternoon, and good evening everyone. Welcome to IFF's third quarter 2022 conference call. Yesterday afternoon, we issued a press release announcing our financial results. A copy of the release can be found on our IR website at ir.iff.com. Please note that this call is being recorded live and will be available for replay. Please take a minute to review our forward-looking statements. During the call, we'll be making forward-looking statements about the company's performance and business outlook. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially, please refer to our cautionary statement and risk factors contained in our 10-K and press release. Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release. With me on the call today is our CEO, Frank Clyburn; and our Executive Vice President and CFO, Glenn Richter. We will begin with prepared remarks and then take any questions that you may have. With that, I would now like to introduce Frank.

Glenn Richter:

Thank you, Frank and welcome everyone. Starting on slide eight, I would like to provide an overview of our third quarter performance. In Q3, IFF generated approximately $3.1 billion in sales, representing 10% year-over-year growth on a comparable currency-neutral basis, primarily driven by double-digit growth in our Nourish and Pharma Solutions divisions. Pricing was a strong contributor to growth and as expected, volumes were down marginally in the quarter. It should be noted that on a two-year average basis, which factors our strong 8% year ago comparison, volume growth is running at about 4%. And while we have seen strong volume growth across most parts of our Pharma and Scent businesses in the third quarter, Nourish and H&B volumes were challenged. To provide some more color, nearly two-thirds of our volume decline in the quarter came in Protein Solutions, which is part of the Nourish business, where we have seen customer destocking to address higher inventory levels in response to sluggish end consumer demand. In H&B, our held volumes were also challenged in the third quarter, a direct result from weakening market demand in the US and Europe reflected in public market data. Gross margin was negatively affected by the significant inflationary pressures we faced across our markets. Yet through strategic pricing and productivity gains, IFF delivered adjusted operating EBITDA growth of 3% on a comparable currency-neutral basis. We also delivered solid adjusted earnings per share excluding amortization of $1.36. The strong dollar continued to be a headwind to our business. In the third quarter, we saw an approximately 7% impact on sales, an 8% adverse impact on EBITDA due to foreign exchange. Before moving on, I want to share that we recorded a non-cash goodwill impairment charge of $2.25 billion for the third quarter related to our Health & Biosciences business. The primary drivers of the goodwill impairment are related to increases in interest rates and lower business projections due to adverse macroeconomic impacts on volume, continued cost inflation and unfavorable foreign exchange rate variations. Now moving to slide 9, I will provide a brief overview of the performance across our business segments. In the third quarter, we achieved year-over-year currency-neutral sales growth of 10% driven by broad-based sales growth across all of our business segments and nearly all of our sub-business units. Nourish had another strong quarter with double-digit growth and particularly encouraging performance from Flavors, Ingredients and Food Design. Health & Biosciences also saw strong single-digit growth despite pressure in our Grain Processing business. Scent again saw continued currency-neutral sales growth in the high single-digits, thanks to our Fine Fragrance, Consumer Fragrance and Ingredients businesses. Pharma Solutions rebound continues with an impressive 28% increase in sales driven by continued strength in both industrial and pharma. Turning to slide 10 and looking at our profitability for the quarter. Third quarter adjusted EBITDA totaled $612 million. Comparable currency-neutral adjusted operating EBITDA grew 3% year-over-year due to the disciplined pricing actions to fully recover total inflation. We also achieved meaningful productivity gains and operational efficiencies from our productivity program, which have helped offset volume headwinds. As discussed last quarter, while we are clearly seeing signs of raw material inflation easing, we will continue taking appropriate targeted actions to offset inflation to maintain profitability. Now on slide 11, I'd like to discuss the underlying dynamics impacting the third quarter performance of each of our business segments. Nourish delivered another strong top-line quarter. Nourish's 10% year-over-year sales growth on a currency-neutral basis was driven by double-digit growth in Food Design and Ingredients, and sustained growth in our Flavors business. Health & Biosciences also maintain strong performance delivering 3% in comparable currency-neutral sales growth driven by mid single-digit growth in our Culture & Food Enzymes, Health, Home & Personal Care and Animal Nutrition offerings. However, for each of these segments we saw 4% and 1% year-over-year decreases, respectively in comparable currency-neutral adjusted operating EBITDA as our price increases and productivity gains we discussed earlier were offset by lower volumes. Our Scent division once again delivered a strong performance with 9% currency-neutral sales growth this quarter, driven by mid-teen growth in Fine Fragrance and Fragrance Ingredients and high single-digit growth in Consumer Fragrance. The division also saw 3% growth in currency-neutral adjusted operating EBITDA due to volume growth, our price increases and productivity gains. Pharma Solutions contributed very strong performance, with 28% growth in currency-neutral sales, led by strong double-digit growth in pharma and industrial. Similar to Scent, Pharma Solutions also benefited from strong volume, our pricing actions and the productivity gains we achieved in the quarter leading to an impressive 76% growth in currency-neutral adjusted operating EBITDA. Turning now to Slide 12, I would like to cover our cash flow and leverage position. Through the first nine months, we generated $189 million in cash from operations, with CapEx finishing at $344 million or approximately 3.6% of sales. The net result is that our free cash flow through nine months was a negative $155 million. Our free cash flow has been significantly impacted by much higher inventories due to a combination of inflation, strategic increases and improved customer service levels and to slowing volumes. In addition, included in our free cash flow numbers are one-time deal and integration-related costs. As a result, we are implementing a series of initiatives to improve our cash flow with an intense focus on managing inventories down. Much of this will be driven by leveraging new S&OP processes and tools in concert with specific targets for each business unit, which we believe will improve our inventory efficiency across all parts of the business while continuing to maintain high service levels to our customers. In addition, we will be taking targeted actions to reduce CapEx spend and improve other working capital metrics to further improve our cash position. Importantly, we continue to make progress towards achieving our deleveraging target. As Frank mentioned earlier, we improved our net debt to credit-adjusted EBITDA ratio to 3.9 times from 4.4 times, which was supported by proceeds from our recent Microbial Control divestiture. We finished the third quarter with cash and cash equivalents of $538 million, while gross debt for the quarter totaled $10.8 billion. Turning to our consolidated outlook on Slide 13, I want to provide some update on our expectations for the remainder of the year. Our business and broader industry continues to face challenging operational conditions with persistent foreign exchange, inflationary and other economic pressures. These challenges have only increased since last quarter. We are certainly encouraged by the consistent sales growth achieved across each of our businesses this quarter, especially in this environment. However, we are adjusting our sales expectations for Q4, as we expect volume to further decelerate due to lower end-market demand and we expect foreign exchange to remain a significant headwind. These factors will also present challenges to adjusted operating EBITDA. In light of these factors, we are adjusting our full year guidance and now expect full year sales between $12.4 billion and $12.5 billion and comparable currency-neutral sales growth of 9% to 10%. We are reconfirming our adjusted operating EBITDA guidance of $2.5 billion to $2.6 billion, though we anticipate results to be at the bottom end of this range as we maintain strong cost discipline and accelerate productivity to offset persistent headwinds and softer volumes. Looking into 2023, the current macroeconomic environment makes us cautious. And as a result, we anticipate that we will be in a low-volume growth environment, particularly in the first half of next year. In addition, while we see raw material inflation easing, we do anticipate some year-over-year increases in raw materials and continued volatile energy markets, which will require additional pricing actions. As a result, we will continue to examine and refine our resource allocation to focus on strong cost discipline and accelerating our productivity across our business. We will also continue to implement pricing actions surgically, to support our profitability ensure our business remains resilient. And while it's still early in our planning process, we are targeting strong comparable currency-neutral sales growth in 2023, to be driven more predominantly by price with more modest EBITDA growth on a comparable currency-neutral basis, as we reinvest in the business to accelerate sales momentum and drive long-term profitable growth. Foreign exchange will continue to be a headwind, as we roll forward current spot rates. We will spend more time on 2023 at our Investor Day, in a few weeks. I'll now turn it back to Frank, for closing comments.

Operator:

Thank you, Frank. We will now begin the Q&A session. [Operator Instructions] Our first question today comes from the line of Adam Samuelson with Goldman Sachs. Adam, your line is now open.

Glenn Richter:

Yes. Hey, good morning, Adam. Thanks very much for the question. Clearly, it has been more challenging than expected this year and that's principally been driven by our inventory balances. So, maybe, if I can actually even start back in the first of the year, you cited the $800 million. We began the year at $1 billion target. And since that, it's been a combination of incremental pricing/inflation that was outside of plan. That's costing us about $125 million. And in addition, there's another $200 million of additional inventories we expect to be at year-end. By the way, that's a reduction of about $100 million from where we are. We ended the third quarter with inventories up $600 million from the start of the year. That was a large -- about $200 million of that is basically based on raw material inflation. About $400 million is basically based on, as Frank had mentioned, building inventories for service levels. But importantly, basically demand has slowed down and we've ended up with higher inventory. So, again, that's about $200 million delta from our original target. We are fully confident, we're going to get that $200 million back. We expect to get that back targeted in the first half of next year and even targeting more. On top of that our business has slowed down and there's been some differences in terms of our tax payments, really a timing element for us. That's collectively about $150 million. So those adjustments get us to sort of north of $500 million. So its $1 billion, minus $200 million higher volume-related inventories about another $125 million related to inflation, about $150 million slightly softer earnings than previous outlook and in addition some timing on tax. So that's a little over $500 million. I would note as we mentioned in our script, within our free cash flow that reported, its a GAAP basis in terms of free cash flow, so take it directly from our cash flow statement. That includes deal-related and integration costs. That's very material for us this year, given the sale of our Microbial Control business. So all the transaction-related costs, number of items for the standup at set were basically paid for as part of the deal and some integration-related costs. So there's about $225 million this year, that's sort of in -- it will be netted against that $525 million. So on it's a reported basis, if you will. That's more than $300 million. But frankly the $200 million is really a charge against operating cash flow when it's really related to sales of businesses. It's a little bit of an apples and oranges. So I'd sort of point to maybe $500 million as the true sort of operating cash flow this year. Of the gaps this year, clearly, $200 million inventory will get back. I'd say taxes clearly timing of another $100 million. That gets us to north of a little bit $800 million. And over time, we would expect the incremental raw materials that are sitting in our inventory this year, we'd expect to get that back over time. And again, that's over $250 million from the start of the year. So over time, we expect that to reverse as well. So hopefully, that was helpful.

Mark Astrachan:

Yeah. Thanks and morning, everyone. I guess just to start I wanted to follow-up on the last question. So thinking about free cash flow more broadly, you wrote down the H&B business. I assume that implies incremental investment for that. So the question maybe sort of broadly is, how do you fund that? Obviously, you just talked about free cash flow improvement kind of over the next 12, 18 months with other sort of underlying drivers. But can you comment on what a reasonable rate of free cash flow productivity for the business would look like kind of 2024 and beyond? Certainly, in the context of some of your competitors having targets out there, are those reasonable levels? And then second question is just on volumes. You're implying the volumes will be down mid single-digits in the fourth quarter. Which categories are driving that? And then how do you think about those trends through at least the first half of 2023 I would guess are challenged before comparisons get easier? Thank you.

Frank Clyburn:

Hey, Mark, good morning. A couple of things that I wanted to highlight. You are correct. We are in the fourth quarter assuming volumes do decelerate versus the Q3 number that we just posted. And it's really two factors and I'll give you where the areas that are a focus for us right now what we're seeing. I'll start with our health business under the Health & Biosciences division, Mark. In health and I signaled this I think even earlier in the quarter, we are seeing both end-market demand slow as consumers are making choices between probiotics dietary supplements. So we are seeing some slowing end-market use in health and we are also seeing destocking in that business in particular in North America. And we expect that to continue through the fourth quarter as also well in Europe. So that's what we're seeing in our health businesses. And we went through the quarter, Mark. We did see July down. We saw August come back. September was down. And as we now started to see in October, we're seeing a similar trend of the deceleration I mentioned in that business. In Ingredients under Nourish and we highlighted this on our prepared remarks, Mark, we are also seeing more inventory destocking is the primary aspect of what we're assuming will continue as we go into the fourth quarter. We also within the Ingredients business did make some trade-offs from a pricing perspective. We had some of our Protein Solutions business that was capacity-constrained, where we did increase price made some volume trade-offs to preserve some margin, but it's primarily destocking. So that is the main reason and we're also assuming in that business that will continue in the fourth quarter. As we go into '23, we're expecting at least in the first half moderate volume growth. We'll explain a lot more of what we're anticipating for '23 as we get to Capital Markets Day, Mark, but that's what hopefully gives you some color on what we're seeing in the business. The other thing, I would highlight though and I think it's an important reminder for us that, if you do take a step back over the two-year time period and we mentioned this through Q3, we are growing our volumes 4%. And we are still seeing good growth in particular in Scent and Pharma that we highlighted as well. So, the isolation that I highlighted is really primarily in those two areas, which is where we're anticipating seeing the deceleration continues as mentioned.

John Roberts:

Great. Thank you. The goodwill write-downs seem to only affect Health & Bioscience, but I assume the higher discount rate would have affected goodwill on the other segments as well. So, the difference must be in the longer-term assumptions for Health & Bioscience relative to the macro assumptions for the other segments. Could you discuss a little bit why the longer-term macro assumptions for Health & Bioscience appear to be worsening relative to the other segments?

Operator:

Thank you. The next question is from the line of Gunther Zechmann with Bernstein. Gunther, your line is now open.

Glenn Richter :

Good afternoon, Gunther. I'll actually start by talking about the inflationary environment. I think then Frank will probably pick it up to talk about pricing dynamics relative to volume. First of all, we are clearly seeing a deceleration environment relative to raw materials in the marketplace. So that's happening in certain commodities going forward. But let me kind of step back and talk about our overall outlook for 2023 in terms of three components. One logistics is actually looking very favorable flat to maybe slightly down. We are encouraged by an ease up of the supply chain, which is helping not only in terms of cost for freight, but in addition just making sure that we're able to deliver on time to our customers. So that's a plus. Energy is incredibly volatile as everybody knows. And it's very difficult to call that. What we have been doing with our customers as many have been doing is implementing direct surcharges or variable pricing that's tied to energy prices. So that will ebb and flow depending upon the market dynamic. And again, that's fairly consistent with what's happening with many players. That tends to be as you're well aware more concentrated in the European market globally in terms of the impact. And then as it relates to raws, we are seeing -- we're still seeing inflationary pressure. I would basically put that in three buckets where there are certain commodity groups that are impacted by the energy environment and/or supply chain so synthetics; chemicals as an example; pulp as an example. Secondarily, we're clearly seeing some roll-off on contractual pricing we had or hedging this year. So that's actually impacting. And while there are certain price commodity categories that are beginning to decline year-over-year, they represent some modest increases for us, such as soybean, palm oil, et cetera. And related to that, we are expecting next year's raw inflation to be about half of what we had this year, so call it, high single digits in terms of the impact. You are correct in pricing environment continues to tighten up. By definition with a slowdown in consumer, everyone's trying to be a little bit more thoughtful in terms of commodity prices would be passed through. We are about to go to market for 2023 pricing. We have spent a lot of energy being very surgical relative to what makes sense or customer in terms of pricing tied directly to what we're seeing in the marketplace. So we are -- again, it will be a much lower number versus what we have, but we are expecting another round of 2023 pricing actions to offset the residual raw materials.

Operator:

Thank you, Mr. Zechmann. Our next question today is from the line of Heidi Vesterinen with BNP Paribas. Heidi, your line is now open.

Frank Clyburn:

Yes. Heidi, it's Frank. And as I highlighted, as we went through the quarter and in particular in September, Heidi, we did start to really see the destocking that I mentioned. And also, we are seeing that in the month of October. So, as we look at now for our forecast for this fourth quarter, we're obviously taking those most recent data points into consideration. And that is why we feel as though appropriately so we have guided to the top line sales that we've mentioned in our prepared remarks. The one thing I do want to take a step back though Heidi and do highlight though is we still are confident that for the full year growing the business, 9% to 10%, if you were excluding exchange, we feel as though is a very good overall performance. Like I said clearly, the fourth quarter is where we're seeing some challenges, and this is primarily due to our customers wanting to manage the inventory. And we think it's the prudent approach to take based on what we're seeing in the last couple of months end of Q3 and then as I mentioned in October.

Anthony Mercandetti:

Good morning. This is Anthony Mercandetti on for David. You touched on it a bit throughout the call, but I was wondering if you can maybe elaborate on how much more destocking you're expecting into 2023 will be a headwind in Q4. And then maybe what particular end markets and regions you expect the destocking to be more pronounced in regards to maybe the first half of 2023?

Operator:

Our next question comes from the line of Mike Sison with Wells Fargo. Mike, your line is open.

Frank Clyburn:

Yeah. So thanks Mike for the question. A couple of things. As I look at the total portfolio, one would say that overall we feel as though -- and going into a recession, we are very resilient when you look at our portfolio overall. If I start with Nourish, Mike clearly if you think about ingredients in the end markets of food and beverage, we should be very resilient there. Our Flavors segment is a resilient business and then also Food Design. So if you were to exclude some of the near-term challenges that we're talking about from an inventory destocking perspective, we think that our nearest division would be overall very resilient in recessionary times. If I look at the Scent business what is really interesting Mike is that the one area that we have thought would be more of a challenge in a recession would be Fine Fragrance. However, we are seeing really good growth in our Fine Fragrance business this year and our Scent business overall has continued to hang in there very well with overall good strong volume growth. As I look at Health & Biosciences, clearly, we think that holds up very well, also Mike. In particular, if you think about Cultures & Food Enzymes or Home & Personal Care business within Health & Biosciences, we think is a really good business and holds up during a recession. Obviously we've highlighted on this call, the challenges we're seeing in that health segment in the probiotic marketplace, but overall fairly resistant. And then clearly we see pharma as being very resilient in a recessionary period of time. With all of that said, as you mentioned, we do see some challenging headwinds on the horizon. That's something that we are obviously spending time as a team. We'll share much more on our 2023 outlook. But think of the overall business we feel very resilient across our different businesses Mark -- or Mike I should say, and it's something we will clearly spend a lot of time here at Capital Markets Day unpacking even more for you.

Matt Krueger:

Hi. Good morning. This is actually Matt Krueger sitting in for Ghansham. So I was hoping that we could touch on some of your own internal initiatives here. So what are some of the internal offsets across the business that can counter the tougher macroeconomic backdrop as we cycle into 2023 and into the back half of this year? And what are some of the primary concerns when entering a downturn for the business? Are you already taking actions to offset this? And if so what might those be?

Operator:

Thank you for your question. Our next question is from the line of Josh Spector with UBS. Mr. Spector, your line is open.

Glenn Richter:

Hey, Josh. Good morning. Yeah. We're very pleased by the progress that our Scent business is making. Two things are exhibited in the third quarter trend versus the first half of the year. One is, we are beginning to sort of normalize for price versus inflation. So there was another round of pricing year to sort of catch-up for what's been happening with raw materials. That has been implemented. So it's been extremely helpful relative to the gross margin performance, and we expect that to normalize into the first half of next year. But then secondarily, the team has also undertaken actions to continue to manage their costs very tightly. So you'll notice that their RSNA expenses, also showed improvement from the first half to the third quarter as well. So the team is smartly and on a paced manner implemented pricing maintaining volumes quite well and on top of that taking additional productivity actions to make sure they manage the bottom line, and had a nice currency-neutral year-over-year growth as a result of that.

Christopher Parkinson:

Great. Thanks so much. You kind of hit on a few of these just tangentially your other remarks. I just want to circle back to it. Despite the 3Q result it being solid, it still appears the cost backdrop is still challenging. I understand you want to save a lot for your Analyst Day, but just can you currently just highlight what you're seeing in raws transportation and logistics, and then just also general operating costs just how we should be considering those at least on a preliminary basis entering 2023? Thank you so much.

Operator:

Thank you. Our next question comes from the line of Jonathan Feeney with Consumer Edge. Jonathan, your line is now open.

Glenn Richter:

Well, let me attempt to answer it in a couple of dimensions, Jonathan. Obviously, with the consumer under pressure from inflation, there is a visible movement from branded to private label. So that's happening both in Europe and the US, although more pronounced in Europe. We play across the customers that play in both spaces. So we serve both markets. In general, not all cases, but in general our margins are fairly consistent between branded and private label from the standpoint. So from that standpoint, while the consumer is moving across branded to private label generally, we hold up well relative to the shift of our business. The customer also will look at formulations and how do they think about saving money through reformulations, it's very constant. It actually happens in all environments, but it's more pronounced in this type of environment. So we work very closely with them in terms of helping them, reformulate products basically to take cost out and deliver the same solution for the consumer. The third thing, I would say relative to the behavior of consumer is and this is clearly happening in the marketplace is, while the consumer may still actually stay within branded oftentimes they will reduce dosage. So think about that as sort of less home and personal care products usage, or less fabric softener as an example. So that is another factor that's happening that affects our business, as well as the customers' business. But it may in essence, also result in sort of lower volumes in the marketplace as well. So, hopefully, that's helpful.

Operator:

Thank you, Mr. Feeney. Our last question today comes from the line of Matthew DeYoe with Bank of America. Matthew, your line is now open.

Glenn Richter:

Yes. Matt, one underlying factor relative to the quarter is how we're trying to correct manufacturing volumes to offset the decline in demand in order to address our cash flow and inventory problems. So as a result of that the production volumes in the third quarter for Nourish were dropped even more so than demand. So there's an absorption issue relative to that's hitting the business. So that does affect sort of the marginal flow-through of the dollar if you will. Also quarter-to-quarter there was some inflationary pressures like energy and some other things that were, sort of, not outside of the period per se in terms of kind of the effects. So it's a little bit hard to, sort of, normalize one quarter to another as being, sort of, an apples-to-apples. But the reduction in volumes in order to get our inventories down is a factor that's hitting our business collectively in Q3 and also in Q2. And it's more pronounced in Nourish and H&B we've seen a more pronounced volume decline. So that's a factor in that calculus you cited.

Operator:

There are no further questions waiting at this time. So it's my pleasure to turn the call back over to Frank Clyburn, for closing remarks.

Operator:

That concludes the IFF third quarter 2022 earnings call. Thank you all for your participation. You may now disconnect your lines.

Michael DeVeau:

Thank you. Good morning, good afternoon and good evening, everyone. Welcome to IFF's Second Quarter 2022 Conference Call. Yesterday afternoon, we distributed a press release announcing our financial results. A copy of the release can be found on our IR website at ir.iff.com. Please note that this call is being recorded live, and will be available for replay. Please take a moment to review our forward-looking statements. During the call, we're making forward-looking statements about the company's performance, particularly with regard to the outlook for the second half and full year 2022. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially from our forward-looking statements, please refer to our cautionary statement and risk factors contained in our 10-K and press release, both of which can be found on our website. Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release. With me on the call today is our CEO, Frank Clyburn; and our Executive Vice President and CFO, Glenn Richter. We will begin with prepared remarks and then take any questions you have at the end. With that, I would now like to turn the call over to Frank.

Glenn Richter:

Thank you, Frank, and good morning and good afternoon to everyone. Accelerating our productivity and expense synergy efforts represents one of our top priorities, and is increasingly important in a more challenging economic environment in order to maximize financial performance. To this end, we want to provide additional transparency to our multi-year productivity program and the expected results. First of all, let me describe the scope of our efforts. Overall, we have established 4 productivity efforts that cover approximately 85% of IFF's total cost structure, focused primarily on operations and overhead expenses. The 4 teams include supply chain, which includes our procurement and global logistics operations. Opportunities include driving additional efficiencies in direct and indirect material spending through enhanced procurement strategies and demand management, particularly for indirect spend and reduced logistics costs driven by improved global S&OP processes. The second team is focused on end-to-end manufacturing operations and includes a broad-based set of initiatives, including accelerating our digital manufacturing efforts, driving yield improvements, system-wide best practices and energy savings programs. The third initiative is our economic profit team that is focused on leveraging improved technology and disciplined processes to optimize product mix, rationalize SKUs and enhance make versus buy decisions. And our fourth team is focused on building out our global shared service platform in with technology, to drive increased centralization and process standardization to drive efficiencies across our administrative and business support functions. In total, the combined programs are targeting a preliminary net annualized P&L impact of $250 million to $300 million that we expect to be achieved between 2023 and 2025. Two important notes. First, this $250 million to $300 million annual impact is net of reinvestments that are targeted to strengthen our innovation pipeline, expand our commercial efforts across key products, customers and regions, deepen our technology and digital capabilities and strengthen our talent. Secondly, the net savings will be slightly more skewed to 2024 and 2025. We look forward to sharing more details with you at our Investor Day in December. With that, I'll turn it back to Frank.

Glenn Richter:

Thanks again, Frank. Turning first to our consolidated second quarter results. IFF generated more than $3 billion in sales, representing 11% year-over-year increase on comparable currency-neutral basis, primarily driven by double-digit growth in Nourish and Pharma solutions. In terms of our growth contribution, pricing represented the majority, with volumes up modestly. Our focus coming into 2022 was to fully recover inflation through pricing actions, and for the full year, we are on track to recover approximately $1 billion in cost inflation. We are doing so in a very thoughtful and strategic manner, over on lower margin and capacity-constrained businesses. While foreign exchange rates have had an adverse impact on our sales and EBITDA in the second quarter, I'm pleased to report that adjusted operating EBITDA grew 3% year-over-year on a reported basis or 7% on a comparable currency neutral basis driven by productivity gains and pricing actions we implemented in the quarter. We also achieved solid year-over-year earnings per share growth of 3%, excluding amortization. Before moving on, I wanted to share that during the second quarter of '22, we took an impairment charge of $120 million within certain entities in Russia due to a number of factors, including reduced business focus as we have restricted our operations to essential consumer products that include food, hygiene and medicine, supply chain issues, reduced product demand and exchange rate volatility, all as the result of the Russia-Ukraine conflict. It was determined that such declines in operating performance were not expected to reverse in the near future, and future expected growth is expected to be limited given the operating conditions in Russia. This non-cash impairment charge was allocated pro rata to intangible assets and property, plant and equipment within the asset group in the amount of approximately $92 million and $28 million, respectively. Moving now to Slide 12, I'll provide a brief overview of the underlying performance across our business segments. As I mentioned, sales growth across each of our business segments, including Nourish, Health & Biosciences, Scents and Pharma Solutions contribute to IFF's year-over-year comparable currency-neutral sales growth of 11%. Nourish was once again our largest growth driver, with a significant broad-based growth across our Flavors, Ingredients and Food Design businesses. Scent had another strong quarter, with currency-neutral sales growth in the high single digits led by Fine Fragrance, Consumer Fragrance and Ingredients. Health & Biosciences delivered mid-single-digit growth due to consistent performance in Health, Cultures & Food Enzymes and Animal Nutrition, as well as Microbial Control prior to the official divestiture completed in July. Both Home & Personal Care and Grain Processing were negative in the second quarter as each business had very strong double-digit comparison in the prior year period. Lastly, we are pleased by Pharma Solutions continued rebound, having achieved double-digit growth driven by continued strength in our Industrial and Pharma businesses. Turning to Slide 13, I'd like to provide a review of our profitability for the quarter. Second quarter adjusted EBITDA totaled $700 million, exceeding our expectations and representing 7% in year-over-year comparable currency-neutral growth driven by the pricing actions and productivity gains that I mentioned earlier. Our comparable adjusted EBITDA margin in the second quarter was 21.3%, and on an inflation-adjusted basis would have been approximately 220 basis higher or approximately 23.5%, if we normalize for the impact of pricing contribution to sales. This compares to an EBITDA margin of 22% in Q2 of 2021. As a result of our strategic pricing actions, we have fully recovered total inflation cost to date, and we are optimistic that we will achieve full dollar cost recovery for the full fiscal year. As we continue navigating this uncertain market, we will continue to closely monitor raw materials and logistics costs in the quarters ahead and take appropriate action to offset additional inflationary pressures and maintain profitability. On Slide 14 is an overview of our second quarter performance by business segment. Nourish, which delivered year-over-year comparable currency-neutral sales growth of 15% and 18% growth in comparable currency-neutral adjusted operating EBITDA, saw strong demand, particularly in Food Design and Flavors. In Health and Biosciences, high single-digit increases in Health and Cultures & Food Enzymes, and mid-single-digit growth in Animal Nutrition drove 4% comparable currency neutral sales growth for the division. While we implemented strategic pricing actions and saw notable productivity gains similar to Nourish this quarter, lower volumes and an unfavorable mix led to 2% year-over-year decrease in comparable currency neutral adjusted operating EBITDA. In Scent, Fine Fragrances continue to lead the way with double-digit growth, followed by high single-digit growth in Ingredients and low single-digit growth in Consumer Fragrance. Collectively, Scent achieved year-over-year comparable currency neutral sales growth of 9%, though inflationary pressures outpaced our strategic pricing actions, which led to a 17% decrease in comparable currency neutral adjusted operating EBITDA. Our teams are continuing to work with our customers to address these ongoing inflationary pressures, and we fully anticipate to recover all inflationary costs over time. Lastly, Pharma Solutions was one of our strongest performers this quarter, achieving 10% in year-over-year comparable currency-neutral sales growth and an exceptional 25% increase in comparable currency neutral adjusted operating EBITDA, driven by double-digit growth in Industrial and high single-digit growth in Pharma. The division's profitability was further supported by pricing actions and productivity gains. Turning to Slide 15, I would like to discuss our cash flow and leverage position for the first half results. In our first 6 months, our free cash flow position was impacted by higher inventory values. This was a result of a combination of continued inflationary pressures and rebuilding inventories to support customer service levels. million in the first half, representing approximately 3.6% of sales, as we continue to make necessary investments in our business. In addition, IFF delivered $402 million in dividends to our shareholders. From a leverage perspective, we remain well positioned as we advance our strategic refresh. We finished the second quarter with cash and cash equivalents of $569 million while gross debt for the quarter totaled $12.15 billion. Note that we received the $1.3 billion gross proceeds from the sale of our Microbial Control business in July. At the end of Q2, we maintained a 4.4x net debt credit adjusted EBITDA ratio. In addition, just last week, we proactively amended our existing term loan credit agreement and revolving credit agreement in order to ensure we maintain adequate flexibility to navigate near-term market uncertainties. The associated amendment fee was approximately $800,000. The amended agreements delayed certain step-downs from maximum permitted leverage ratio of 4.5:1, stepping down to 3.5:1 over time, with the first step down now occurring at the end of the third quarter 2023 versus the end of the fourth quarter 2022 previously. Trailing 12-month credit adjusted EBITDA totaled $2.644 billion. As Frank mentioned, on August 3, our Board of Directors authorized a 3% or $0.02 increase in the quarterly dividend to $0.81 per share of the company's common stock. The quarterly dividend is payable on October 5, 2022 to shareholders of record as of September 23. Including this authorization, we increased our quarterly dividend payment for the 13th consecutive year. Let's now turn to our consolidated outlook on Slide 16. As we look to the remainder of 2022, we remain on track to deliver our commitments and are reconfirming full year guidance projected sales of $12.6 billion to $13 billion and currency-neutral sales growth of 9% to 12%. While we are reconfirming our outlook, we also are increasingly cautious on the overall market environment outlook as we navigate continued foreign exchange fluctuations, ongoing inflation and potentially recessionary pressures. We expect to achieve our sales targets through pricing actions as we press ahead toward full dollar cost recovery. We expect foreign exchange pressures to impact sales by approximately 5 percentage points compared to our previously forecasted 4 percentage points. We are also reconfirming adjusted operating EBITDA to be $2.5 billion to $2.6 billion, which equates to currency-neutral operating EBITDA growth of 4% to 8%. Please note that we expect foreign exchange to impact that growth by approximately 6 percentage points versus 5 percentage points previously. As always, we remain laser focused on mitigating the many macroeconomic challenges with an emphasis on controlling what we can control during these uncertain times, notably focusing on pricing execution and productivity. In terms of the third quarter, we expect sales growth to be strong driven by pricing actions, with sales coming in modestly above $3 billion and impacted by incremental foreign exchange headwinds, some seasonality of our business and the divestiture of Microbial Control. The sale of Microbial Control will impact Q3 revenues by approximately $110 million. For the third quarter, we expect adjusted EBITDA to be approximately $600 million to $610 million. Before passing the call back to Frank, I want to revisit the 4 core business objectives we outlined at the beginning of the year. Overall, we are executing well against our operational priorities so far this year. Relative to maintaining strong sales momentum, we achieved 12% year-over-year currency-neutral sales growth for the first half of '22 and are targeting currency-neutral growth of 9% to 12% for the full year. In terms of executing our broad-based pricing actions, we've fully recovered the total cost of inflation, and we remain on track to achieve a full dollar cost recovery for the full year '22. Importantly, we are closely monitoring inflationary trends in the broader market environment to ensure we are well equipped to stay ahead and, where necessary, quickly respond to future challenges. On the productivity front, we continue to make tremendous progress towards our productivity savings goals for the full year. In the first half of the year, we delivered over $70 million operational efficiencies and deal-related synergies, well above our expectations. We are well on track to exceed our $100 million full year savings target. Finally, relative to accelerating non-core divestitures, we successfully completed the sale of our Microbial Control business on July 1 and are continuing to assess our portfolio to identify additional portfolio optimization and divestiture opportunities in this uncertain market. These divestitures will help us delever our balance sheet and enable us to reinvest in our highest performing businesses. With that, I'll pass the call back over to Frank.

Operator:

. And we will take our first question from Mark Astrachan with Stifel.

Franklin Clyburn:

Mark, this is Frank. A couple of comments. I'll start with first, the productivity program that we've announced, we see that as really important not only near-term, Mark, but really building a continuing productivity mindset. We want that build into the company. We also want to be able to use that to be able to invest in our growth opportunities. What we're trying to achieve, Mark, is really sustainable, profitable growth, and to start to really get leverage throughout the P&L. We think that's going to be really important for us from a profile perspective. This is why we've also done the ROIC work, Mark, on our portfolio, and we'll be able to share with you in December some of the specific targets from a financial perspective.

Heidi Vesterinen:

So if we look at your Q2 currency-neutral growth, I understand this is mainly price. While we see that most of your peers had strong volumes this quarter, why do you think you weren't able to grow volumes? And perhaps you could comment on the exit rate in Q2 in terms of volumes and momentum into Q3, please? And then somewhat linked to that, what was the reason for not upgrading your full year guidance after such a strong H1 in terms of EBITDA?

Operator:

And we'll take our next question from Gunther Zechmann with Bernstein.

Franklin Clyburn:

Gunther, it's Frank. I'll get started. So first, with regards to revenue synergies, and as Glenn mentioned, we did see really good performance, especially within Flavors, within Nourish, and we're excited about the significant opportunity we believe we have there. We also highlighted on the call some examples, Gunther, that we are really encouraged by some of the wins that we're seeing where we're utilizing our legacy N&B expertise, as well as legacy IFF expertise for vanilla flavor is an important win there. We highlighted an important win with regards to plant-based burgers. We're seeing good cross-selling opportunities. So overall, we're starting to see revenue synergies and we're hearing good positive feedback from our customers. With that said, Gunther, there's work to be done, and I highlighted that on the prepared remarks. This is something that's going to be a significant area of focus for myself personally as well as the executive team. We're going to be leaning into how we bring our broader platform portfolio technology to our customers. So this is something we'll share a lot more about in our December Capital Markets Day. Glenn, I don't know if you want to maybe touch on the inflation?

Operator:

We'll go next to Mike Sison with Wells Fargo.

Glenn Richter:

Yes. So good question, Mike. The sole impact is -- well, there's seasonality, as you know. So typically, in the first half of the year, first quarter, there's a build on working capital, namely inventories. Secondarily, there's the year-end of compensation that basically gets paid out, et cetera. We are running actually worse on cash flow than anticipated to the tune of about $200 million. That is 100% attributable to higher inventory levels that is principally related to basically higher costs. So as you may recall, when we entered the year, we had our kind of Wave 1 inflation subsequent very early in the year. We identified another significant round of inflation coming through. That is rolling into inventory. So as a byproduct of that, we had guided to the full year that we'd be relatively flat to prior year from a free cash flow standpoint of about $1 billion-ish. We're sort of targeting to be probably about $200 million less than that at this point in time. That being said, we are implementing a series of very important initiatives largely against the legacy N&B businesses. In terms of putting in new S&OP processes and enhancements, we're hopeful that those will drive some efficiencies, i.e., be able to bring some inventory levels. But I'd say best guess at this point is probably 800-ish versus the original $1 billion.

Adam Samuelson:

So I guess I wanted to come back to the inflation and cost question. I appreciate there's a business, but help us just balance, think about the price cost balance in the second half specifically? I think you entered the year having been behind on price cost from '21, and hoping you'd be catching up to that into '23. Is there still -- do you still see -- or still have line of sight to recapturing kind of that price-cost imbalance on a cumulative basis in '23? And I guess, along those lines, can you talk about the actions you're taking to try to shorten some of the price lags in some of the businesses, and probably see it a little bit more in the Scent segment this quarter? But how -- what can we do to maybe compress that -- the length of those inventories in cost cycles?

Operator:

And we will take our next question from John Roberts with Credit Suisse.

Glenn Richter:

Yes. Good question, John. So relative to our outlook for divestitures, we still think the $1.5 billion to $1.7 billion gross proceeds, 3 to 4 transactions completed by the end of next year is in the right ballpark. The market, as you're well aware, has slowed down, so the level of M&A activity is substantially less with the ball in the credit markets that has made it more difficult, particularly for private equity investors. However, the size of our transactions, you can just do the simple math, aren't that large. They tend to be sort of nice strategic fits for other businesses. So from an initial dialogue standpoint, the interest level seems very good. So we think that things may be a little slower from a process standpoint, but we're still fairly confident that we will hit our target. Relative to sort of broader global supplies or how one thinks about inventory over the longer cycle, about half of our growth, of our dollar growth of inventories is related to inflation this year, and about half is related to higher inventory levels. Those higher inventory levels, if you recall, would basically improve our customer service levels because we had low inventories, again, the legacy N&B businesses. I will say, though, I'm increasingly confident that through the implementation of improved S&OP processes across a number of our businesses, that will allow us actually to reduce some of those higher inventories. The third thing you mentioned is really the global supply chain. Clearly, we, like everybody, have an extended supply chain, i.e., there's more products sitting on the water for longer times. There's more inventory buffer stock in our system, et cetera, that basically accommodate for the volatility of the market. We're actually thinking about what that means longer term in terms of working capital. And I suspect by the end of this year, we'll be able to sort of come back and provide some visibility on that. But I do think at the end of the day, that will be a meaningful improvement opportunity not just for ourselves, but for everyone as the supply chain gets back to order.

David Begleiter:

Frank and Glenn, where are you seeing initial signs of demand weakness, either by geography or by business? And second, if we were to go into a deeper downturn, what levers can, would you pull to offset that downturn?

Operator:

We'll take our next question from Ghansham Panjabi with Baird.

Franklin Clyburn:

Yes. So on the resiliency, as I mentioned, we feel overall cautiously optimistic on the portfolio. Clearly, there's a lot of moving pieces right now. But if you think about Food and Beverage, you think about Health, you think about what we are seeing resiliency from our Pharma business, so we feel overall that the portfolio going into possibly some challenging times is really well positioned overall. And I've kind of highlighted that Fine Fragrances may be an area that we start to see some pullback from a demand perspective. As far as the innovation question in our portfolio, there are some customers that are going to really focus on our core offerings, that they're going to maybe not think about new offerings at this point in time. However, we still are seeing very strong signals of customers wanting to innovate, co-develop and work with us, and we're really excited about our pipeline and portfolio. And my belief is that's still going to be critically important for the future. It's something that we'll spend time in December really sharing with you why we're excited about our pipeline portfolio, but that's going to be really key for us. So yes, you'll see some customers focus in the near term maybe on core offerings. However, as we look out, we're still seeing signals from customers that are working with us on innovation. It's going to be really important to the future.

Operator:

We'll take our next question from Josh Spector with UBS.

Glenn Richter:

Yes, good question, Josh. It really is related to the sort of the matching of the build in inventories relative to the flow-throughs of sales. And as mentioned, we've sort of built inventories. And at this point, we think we're going to be fairly -- i.e., the raw materials have come through. Raw materials are generally sort of static from a cost standpoint. So we do expect them to sort of run through the next quarter or so, and we wouldn't expect to have this, I'll say, artificial pickup from a timing standpoint.

Christopher Parkinson:

We've hit on price cost, we've hit on productivity. When we look out -- obviously, there's some uncertainty in the second half of the year. But when we look out into '23, '24, and Frank, now that you've had some time to look at your 4 primary businesses, can you talk about just any potential mix enrichment, specifically in H&B, and anything else that could really help us try to compartmentalize your longer-term margin opportunities across segments? Just any quick thoughts?

Operator:

And we'll go next to Jeffrey Zekauskas with JPMorgan.

Glenn Richter:

Jeff, you want me to answer the first question or second question?

Glenn Richter:

Okay. Sorry. Okay. So your first question was relative to the Scent trend and --

Glenn Richter:

The reality is that -- 2 things. One, there were some one-time expenses in the second quarter relative to Scents. Secondarily, as we mentioned, that there's been 2 rounds of inflation. So as we talked, it's a little more of a lag in that business from a standpoint. So if you think about the 2 rounds of impact that's basically coming through and there's a bit of delay. And relative to taxes, there's lots of -- every year, Jeffrey, there's lots of ebbs and flows, depending on what's happening across various parts of the globe in terms of our tax positions and settlements. So everything is actually trending fine versus sort of our expectations at this point in time. There's nothing sort of abnormal from a year-over-year standpoint. But I do appreciate the question.

Glenn Richter:

We can go to the next one.

Matthew DeYoe:

If I were to look at the top line kind of just on a rough cut basis, what percent of your sales or businesses fall into the invest category versus maximize versus optimized?

Operator:

And there are no further questions at this time. I'll turn the call back over to Frank Clyburn for any closing remarks.

Operator:

Thank you, and this does conclude today's program. Thank you for your participation. You may disconnect at any time.

Michael DeVeau:

Thank you. Good morning, good afternoon and good evening, everyone. Welcome to IFF's first quarter 2022 conference call. Yesterday evening, we distributed a press release announcing our financial results. A copy of the release can be found on our IR website at ir.iff.com. Please note that this call is being recorded live and will be available for replay. Please take a moment to review our forward-looking statements. During the call, we'll be making forward-looking statements about the Company's performance particularly with regard to our outlook for the second quarter and full-year 2022. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially from forward-looking statements, please refer to our cautionary statement and risk factors contained in our 10-K filed on February 28, 2022 and in our press release, all of which are on our website. Today's presentation will include non-GAAP financial measures which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release that we issued yesterday. Please note that we will be using comparable results for the first quarter defined as three months of legacy IFF results, January through March and three months of legacy N&B results in both the 2021 and 2022 periods, these results also exclude the impact of divestitures and acquisitions. With me on the call today is our CEO, Frank Clyburn and our Executive Vice President and CFO, Glenn Richter. We will begin with prepared remarks and then take any questions that you may have. With that, I would now like to introduce Frank.

Glenn Richter:

Thank you, Frank. Good morning, and good afternoon to everyone. Let's start on Slide 11 with sales performance of each of IFF's core businesses. Together, Nourish, Health & Biosciences, Scent and Pharma Solutions achieved $3.2 billion in sales revenue in Q1, representing comparable currency neutral sales growth of 13%. Of note, all our sub-businesses posted year-over-year comparable currency neutral growth in the first quarter. Nourish delivered the most substantial growth with significant broad-based strengths in our flavors, ingredients and food design businesses. Health & Biosciences similarly achieved strong sales growth having managed headwinds in the Health business. The Scent division carried a strong momentum from last year through the first quarter with strong results in fine fragrance, consumer fragrance and ingredients. Lastly, Pharma Solutions also achieved currency neutral sales growth driven by the division's continued strength in its industrial business and resume demand for pharma. In terms of sales growth contribution, pricing increased approximately 8% and volume grew approximately 5%. Turning to Slide 12, let's walk through our profitability in the quarter. First quarter adjusted operating EBITDA totaled $702 million, representing 9% comparable currency neutral adjusted operating EBITDA growth versus the first quarter of 2021. Our adjusted EBITDA margin in the first quarter was 21.8% and on an inflation adjusted basis, would have been approximately 175 basis points higher or approximately 23.5%. Margin did come in better than we expected in the first quarter through the stronger than anticipated volume growth, better cost management as well as the fact that a significant amount of our higher inflationary cost remains in inventories and did not impact the P&L to the degree originally anticipated. However, this is largely timing-related and will change as we progress throughout the year. Including our results is a charge of approximately $20 million related to expected credit loss on receivables from customers located in Russia and Ukraine. While the macroeconomic environment remains incredibly dynamic with continuing inflationary pressures at the moment, we are pleased with the actions taken by our teams to manage through these challenges. We took a very proactive approach and quickly instituted broad-based pricing actions across our portfolio in response to these pressures. Consequently, the actions we have taken have resulted in a full dollar cost recovery of total inflation costs in the first quarter. Unfortunately, since our February earnings call, we have seen additional increases in raw material, logistics and energy costs and are diligently working with our customers on incremental pricing actions. One important note to call out is that we are seeing the strong cost increases flowing to inventory, which due to our inventory days means that the higher cost will eventually impact the P&L as we progress through the balance of the year. Now on Slide 13, I would like to highlight the underlying dynamics and first quarter performance of each of our business segments. In the first quarter, Nourish's strong comparable currency neutral sales growth of 16% was led by double-digit growth in food designs and ingredients. The segment's comparable currency neutral adjusted operating EBITDA growth was also strong at 14%, primarily driven by the division's pricing actions, volume growth and productivity gains. In Health & Biosciences, double-digit growth in health, microbial control and grain processing and high single-digit growth in animal nutrition and cultures in food enzymes show comparable currency neutral sales growth of 10% for the first quarter. Similar to Nourish, the segment's comparable currency neutral adjusted operating EBITDA growth of 8% was led by pricing, volume growth and productivity that helped offset mixed challenges. In Scent, fine fragrance continued the strong rebound with double-digit growth and cosmetic active and fragrance ingredients continue to perform above expectations. As for consumer fragrance, the business experienced modest growth in the first quarter. Overall percent on 6% comparable currency neutral sales growth, comparable currency neutral adjusted operating EBITDA declined 2% as inflationary pressures outpaced pricing for the quarter. As a reminder, in Scent, there is a delay in pricing recovery about 18 months before you fully recover inflation via price increases. Finally, in Pharma Solutions, we saw double-digit growth in both pharma and industrial to deliver 10% comparable currency neutral sales growth for the quarter. Volume growth and productivity gains help drive 10% comparable currency neutral adjusted operating EBITDA. Now on Slide 14, I would like to address our cash flow and leverage positions. In the first quarter, increased working capital requirements in part due to seasonality and in part due to increased values of inventory and accounts receivable driven by inflation as well as higher capital expenditures negatively impacted our cash flow results for the quarter. In the first quarter, CapEx totaled $132 million, representing approximately 4.1% sales. As a reminder, we anticipate our 2022 CapEx to be approximately 5% of sales due to 2021 CapEx carryover and increased investments in capacity expansion and key technologies, which will help support growth while also lowering logistics costs. From a leverage perspective, we are on plan and are continuing to make progress toward achieving our deleveraging target. Q1 ended net debt to credit adjusted EBITDA ratio was 4.2x. Gross debt for the quarter totaled $11.7 billion and we finished the first quarter with cash and cash equivalence of $662 million. Despite the global financial pressures, we remain on track to keep our deleveraging target of 3x or lower by year three post-close, which will be supported by our food preparation divesture, sale of our microbial control business and other non-core business divestitures. Slide 15 provides our revised business outlook for 2022. We are adjusting our expected full-year 2022 revenue up to $12.6 billion to $13 billion from $12.3 billion to $12.7 billion. This reflects the effects of additional anticipated pricing actions not incorporated in our original guidance, primarily due to the additional inflationary pressures. This revision also reflects the expected completion of our microbial controls divestiture on July 1, one month later than originally planned, and the acquisition of Health Wright Products completed in April. In addition, our outlook takes into account a weaker euro to dollar currency outlook for the balance of the year. We continue to expect adjusted operating EBITDA in the range of $2.5 billion to $2.6 billion as we continue to target full cost recovery of additional inflationary pressures via price increases. On a comparable currency neutral basis, this translates into sales growth of approximately 9% to 12% versus 6% to 9% previously for the full-year and comparable currency neutral adjusted operating EBITDA growth of approximately 4% to 8%, which is unchanged. It should be noted that while we have increased our sales expectations for the full-year due to incremental pricing, we have reduced our volume expectations given a more challenging environment, including loss revenues as a result of the Russia-Ukraine war, continued global supply chain issues and anticipated softer consumer demand as a result of higher energy prices and general inflation negatively impacting consumer spending. One data point is that in early Q2, we have already seen volume soften and for the full-year, we are now targeting low single-digit volume growth and high single-digit pricing contributions. Also, based on current market foreign exchange rates, we expect that foreign exchange will negatively impact sales in 2022 by approximately 4 percentage points versus 2 percentage points previously and adjusted operating EBITDA grew by approximately 5 percentage points versus 4% previously. These changes now reflect current market exchange rates, particularly the euro, where we are assuming that it remains at 106 to the dollar for the balance of the year or a blended full-year rate of approximately 108 to the dollar. We are also confirming our 2022 CapEx spend will be approximately 5% of sales. In terms of the second quarter, we continue to believe that sales growth will be driven by price increases with volumes contributing much less they did in the first quarter. From an adjusted EBITDA perspective, we expect to be in the range of $640 million to $650 million pressured by unfavorable impacts of currency as well as higher inflationary costs flowing from inventories to the income statement. As I wrap up, I want to revisit the four key areas of focus we touched upon in February to update you on our progress. As a reminder, our four key priorities for 2022 are maintaining strong sales momentum, executing broad-based pricing actions, capturing synergy and productivity and accelerating our non-core business divestitures. Overall, we feel good about our progress across all four areas in Q1 and are confidence in our ability to deliver on these commitments this year. In terms of supporting strong sales momentum, we are increasing our capacity across constrained portions of our portfolio, enhancing our supply chain efficiencies most notably in our H&B, Pharma Solutions and Ingredients business, to ensure that we maintain our volume growth in line with or above the industry. Relative to executing broad-based pricing actions in an effort to react more quickly to today's evolving environment and better prepared for tomorrow's challenges, we have significantly enhanced our processes, implemented new pricing tools and established core pricing teams to oversee each of our business units. Our focus has been centered around minimizing the amount of time lost between inflation signals and customer pricing actions to ensure that we quickly adjust to protect profitability. With these changes, we successfully implemented our first round of pricing actions and recover the total cost of inflation in Q1 2022. Given additional known inflationary pressures and a lot of uncertainty regarding the future path of inflation, this remains our highest priority. Accelerating our productivity expense synergy efforts also remains a key priority and increasingly important in a more challenging macroeconomic environment. To this end, we are able to deliver over $30 million of operational efficiencies and deal-related synergies in the first quarter above our expectations. As a result, we expect to exceed our original $100 million full-year cost reduction target, which is net of reinvestments. This higher level of productivity is helping offset lower full-year volume expectations. As we look to accelerate our long-term productivity opportunities, we have sharpened our focus on three large areas of productivity, procurement efficiencies, notably in indirect spend; end-to-end operations efficiencies, inclusive of digital enablement, yield and mix enhancements and logistics efficiencies and expanding the scale and efficiency of IFF’s global shared service platform. Importantly, we will remain prudent in protecting key topline investments, including R&D, customer sales and service and technology. We plan on providing more details of these initiatives at our Q2 earnings call. Finally, we made further headway in accelerating our non-core divestitures. We are on track to successfully complete the sale of our Microbial Control business by July 1. We are also targeting additional portfolio optimization in non-core business divestiture opportunities to delever our balance sheet and invest greater resources toward our higher return businesses. We are making very good progress in early non-core business marketing efforts and have already received strong interest from prospective buyers. Should these transactions go through? We anticipate that they will in aggregate be accretive to our go forward growth rate and margin profile. With that, I'd like to pass the call back to Frank.

Operator:

Thank you. And we'll take our first question from Gunther Zechmann with Bernstein. Please go ahead. Your line is open.

Frank Clyburn:

Sure. Gunther, I’ll let Glenn maybe to give some specific color on the different business segments.

Gunther Zechmann:

Great. And thanks, Glenn. And then 1b) can you provide an update where you see cost inflation for IFF this year? And as far as you can for next year, I know you don't guide for 2023 yet, but if you can share how much earnings you expect to recover next year from costs that you incurred last or this year, please?

Operator:

And we'll take our next question from Ghansham Panjabi with Baird. Please go ahead. Your line is open.

Frank Clyburn:

Yes. Ghansham, hi. It's Frank, and thanks for the welcome, and also for the question. A couple things I want to highlight is – and you look at that slide, I do want to start with the fact that, I am very still encouraged by the opportunity that we have in IFF. The industry trends look very strong overall in the long-term around sustainability, health and wellness and naturals. Also, IFF with this highly diversified business mix across categories, regions, and customers, I think positions us very well. When you look at that slide and we talk about the opportunities, I think a couple of things I would highlight there is one is we are focused on really doing everything around our culture of executional excellence, that's going to be really important for us through our talent, instilling accountability and also our strong link to incentives for our teams. As far as reinvesting, clearly, we are going to look at that. That's going to be a part of our strategy refresh process, and we'll be spending a lot of time on that in the second half of the year when we share our overall plans. But early view would be clearly, we need to continue to build our capabilities around digital, data analytics are going to be really important. And then also we'll invest in our commercial efforts as we see opportunities for continued profitable growth. And then we're also doing a deep dive in R&D portfolio, and we'll look at the best innovation in R&D opportunities to invest behind as well. But much more to come as we head to the second half of the year.

Operator:

And we'll take our next question from Jonathan Feeney with Consumer Edge. Please go ahead. Your line is open.

Frank Clyburn:

Yes. Jonathan, thanks for the question. I'll start and I'll let Glenn to add on as well. One, I think the teams have done a really good job starting off this year and working with customers to try to recoup the significant inflationary pressures we're seeing in the business. So we have, I think a strong value proposition. We have strong commercial teams that are working very closely with their customers to really understand the importance of us recouping our inflation, what we're seeing from an inflationary perspective. So I do feel we're off to a very good start. There are push backs. I think some of the push backs are in some of the smaller customers, some of our emerging market customers where price is much more sensitive. We are seeing pushback there. But all in all we feel as though, we are in a good place and will continue to work closely with our customers to navigate, which is, as we all know, unprecedented times. Glenn, anything you'd add?

Jonathan Feeney:

Thank you.

Mark Astrachan:

Yes. Thanks, and good morning, everyone. I guess, maybe to start, Glenn, what are you assuming for volumes throughout the rest of the year? Guidance would suggest flattish, I guess, 2Q through 4Q, you alluded to April trend softening, were they positive? Curious too if you've seen competitors pricing and is just a more IFF impact. And then Frank, I appreciate the commentary, I'm still evaluating the business. I guess the question that we get most often is the 26% EBITDA margin target most seem to think that that's just unrealistic at this point. Maybe if you could talk a bit about that, that would be helpful for folks. Thank you.

Frank Clyburn:

And hey, Mark. It’s Frank. Thanks for the question. And as I mentioned in some of the early remarks, we are working through our strategy refresh process and that does include our long-term plan in detail and we're looking at our current inputs into our plan. We will need some additional time to appropriately assess our long-term financial targets. And my immediate focus, our management team's focus is delivering our 2022 objectives and the financial goals that we're outlining here this morning, as which of course, there's a lot of focus on pricing as you continue to hear productivity an important levers in working with our customers to grow our absolute sales and dollar profit as we manage through the significant inflationary period. Longer term, Mark, there's no doubt in my mind, we have a lot of value creation ahead of us in the company, and I believe our business will generate sustainable profitable growth and it will yield margin expansion over time. As far as your specific question on the 26% adjusted EBITDA target, I think it's really safe to say as we look at where we are today, and you look at how the world has changed, we're not going to be able to achieve that 26% adjusted EBITDA target in 2023. With that said, as I mentioned, I do want the time to come back and share with you in the back half of the year, our plans, and also our focus on driving really strong profitable growth for the future.

Heidi Vesterinen:

Good morning. Just to clarify on pricing again. So you're looking to fully offset the dollar headwind from inflation for the full-year, I think you said. Can you, once again, explain how you hope to achieve this because it's normal industry practice for certain parts of your portfolio, like Scent to have a lag. So is there another segment of setting that lag for this full-year? Thank you.

Heidi Vesterinen:

Okay. But on a full-year 2022 basis, I think you had said you're looking to fully offset, right? So you won't have a squeeze from raw materials?

Heidi Vesterinen:

Okay. And then the idea is to pass that on as we go into next year. Okay. Thank you.

Operator:

We will go next to John Roberts with Credit Suisse. Please go ahead. Your line is open.

Frank Clyburn:

Yes. Thanks John, for the question. I'll just sum it up in a couple of quick points and based on my experience, one, I have been very encouraged by some of the recent visits I've taken to our R&D centers. I just got back from Palo Alto, California, and really good innovation taking place. Some of the work we're doing in with regards to our enzymes, with regards to some of our Scent and sustainable delivery systems, flavor technology. So I'm encouraged early on of what I'm seeing. I think what I would highlight is from an R&D perspective, there's three things that come to mind. One is making sure you have the best talent, and that's a major focus for us in allowing our scientists to innovate. Number two is we have a process and model where you have very close connection with your commercial teams. So your arm in arm, your scientists and your commercial teams are really working on innovations that are going to be meaningful from a customer and consumer perspective. And that's a major focus that we're putting in place. And then number three is doing it in an efficient way and putting our capital against the biggest R&D opportunities. So early on, encouraging, this is going to be a focus for us, and this also will be a part of our second half Investor Day where we'll come back and share more about some of the exciting projects we're working on in our pipeline.

Matthew DeYoe:

Good morning, everyone. Frank, one of the criticisms we often here about IFF is the senior management churn has been pretty elevated following the N&B acquisition and that perhaps the broader leadership team is relatively inexperienced. How do you plan to address this as the new CEO when you think about the team that's around you?

Operator:

And we'll take our next question from Mike Sison with Wells Fargo. Please go ahead.

Frank Clyburn:

Yes. Mike, and I think you recognized as where we started, we also are in some unprecedented times from inflationary perspective. And also what's happening with regards to China and COVID lockdowns, and what's happening with the war and impossible recessionary pressure. So clearly, the world is changing significantly. Mike, the way I would say, is that we will spend time, like you said, in the second part of this year, but really look at our focus. And I keep using this phrase about driving sustainable, profitable growth. We want to have a company that's growing top-tier within our peer set. And from a topline perspective, good strong leverage throughout the company, a relentless focus on constant improving of productivity and making sure we're doing everything that we can to deliver for our customers and our shareholders. So I think that will be some of the metrics and we'll come back obviously, as we get to the second half and give you specific metrics, but that's how I would have you think about it. Glenn, I don't know if you want to add…

Frank Clyburn:

Yes. And Mike, just one last one, and I did mention that ROIC is now a part of our metrics as a team. So that's something that we've incorporated.

Lisa De Neve:

Hi. Good afternoon and thank you for taking my questions. I have two. First one is, can you talk a little bit on how the growth has been evolving in the first quarter through the different regions and how you expect volume growth to develop over the coming quarters or through the year? So the plus and minuses would be very helpful. And secondly, can you share a little bit what you're seeing in your innovation pipeline, in what segments are you seeing stronger levels of innovation. And also, do you see sort of any levels of reformulation activity? Thank you.

Frank Clyburn:

Yes. And just real quickly, we're doing a lot of R&D work in Health and Biosciences area with regards to our enzymes and focusing on probiotics and also, laundry dish programs with global key accounts. We have work in some of our plant-based protein and dairy alternatives, couple of other quick ones to highlight in the scent area, some of the renewable and biodegradable fragrance ingredients were also really focusing, in nourish around a lot of our flavor technologies. And I highlighted one of the big wins that we had with vanilla recently with one of our customers. So we'll spend a lot more time here on the pipeline and portfolio, as I mentioned, coming up in the second half of the year.

David Begleiter:

Thank you. Good morning, and Frank, congratulations as well on the new role. Frank, building off your early view of the company, do you think IFF does a good job capturing the full value of this products with the customers? And secondarily, what do you think the IFF does better than competitors and where do you think it is lacking versus competitors? Thank you.

Operator:

And we'll take our next question from Lauren Lieberman with Barclays. Please go ahead. Your line is open.

Glenn Richter:

Yes. Thanks for the question. We actually, as you recall, in the fourth quarter, signaled pretty quickly given we saw this large tsunami of inflation and went out very quickly, in the fourth quarter of the first round that press release was really in advance of the second round. And all our competitors are seeing exactly the same, inflationary pressures as well. So I think, that was intended really to help our teams relative to the customer dialogue, sort of understand the dynamics and the impact on the business. Hence the purpose of the press releases, I did mention all our competitors as you're well aware are basically in the market doing the same thing and are passing along prices and time as well. We just moved fast even we saw in the fourth quarter. And as I mentioned on the call, we really also invested in, I'll say in infrastructure around the organization to make sure we're more closely monitoring what's happening in the market and just moving much, much, much quicker because I think we are concerned that this – even the second round may be the second of others. So we just want to be prepared to do that. And that answer was the purpose of that, that press release.

Jeffrey Zekauskas:

Thanks very much. Originally, when you bought the DuPont business, the idea was to take out $300 million in costs and to spend about $335 million to do it. And to date, I think IFF has spent $32 million, so it seems that the original cost reduction program is moving more slowly. Is that fair? That is why aren't the charge is larger? And secondly, on Slide 8, where you lay out your return on invested capital distribution. It looks like about a third of the company has unsatisfactory returns. What conclusion do you draw from that? Does that mean that you really need to overhaul the structure of the company dramatically or do you draw a different conclusion from that?

Operator:

And we'll take our next question from Josh Spector with UBS. Please go ahead.

Glenn Richter:

Yes. Generally, we're looking out to the third or fourth quarter for the raw materials. Energy is more problematic as well as logistics that tends to sort of – it's really kind of here and now if you will, in terms of kind of what's happening in the marketplace, we've done best estimates based on sort of where the markets are trading relative to energy as well as logistics costs. But generally the raw materials are sort of about six months out. But some of them have been – a lot of them have been locked in, some of them not. So we are continuing – by the way, we're continuing to monitor every single week. We sort of have an update on how we're feeling about the market in general over the last sort of month, six weeks, there's been some ebbing and flowing so slightly higher in energy, some relief in raw materials, but it hasn't materially been different than that 350-ish number that I provided you to earlier. So relative to sort of the carryover for next year, we still have to sort of work that through. As I mentioned, it's a combination of, what the tail of this year's annualized raw materials and then very importantly, we got to figure out as well as the tail of the pricing actions in the next year as well?

Christopher Parkinson:

Great. Thank you. Frank, now that you've had just a couple weeks to evaluate the portfolio, you just name kind of the two to three sub businesses that you're the most excited about. I mean, in your remarks, you've mentioned, probiotics and proteins, just coming from your background, what's getting you the most excited on a go-forward basis? Thank you.

Operator:

And we will go next to Andrew Keches with Barclays. Please go ahead. Your line is open.

Glenn Richter:

Yes. So just a clarification, the reason we dropped the balance sheet metric is because we launched the new three-year plan. So to some extent, this is the window beyond sort of our deleverage. So I am very, very confident that we will hit three less. We will be closing on the Microbial Controls business at the end of this quarter, that's going to be net proceeds of $1.1 billion. As I mentioned in the past, we have three to four additional deals that will cumulatively add $1.5 billion to $1.7 billion of gross. They're proceeding nicely, by the way, despite the sort of volatility in the market, they are attractive property strategically. That alone will basically get us to the goal independent of cash flow. To the last point of your question, we're going to continue obviously to take a look at the portfolio, that's part of the strategy refresh, which will probably afford additional opportunities to continue to approving the portfolio, but nothing to announce at this point and nor do we need that to accomplish that goal. So thanks for the question.

Frank Clyburn:

So thank you to all for joining our call. I really appreciate your interests and the time we spent this morning discussing our first quarter results. And hopefully you could hear from myself, Glenn and on behalf of all of IFF, we're really encouraged and excited about the future. And we look forward to sharing more about our plans as we head to the second half of this year and also want to reiterate just how focused we are on a company, making sure we're executing and working with our customers to deliver important solutions for consumers around the world. So thank you and we look forward to speaking to you soon.

Michael DeVeau:

Thank you. Good morning, good afternoon and good evening, everyone. Welcome to IFF's fourth quarter and full year 2021 conference call. Yesterday, we issued a press release announcing our fourth quarter financial results and full year 2021 financial results and outlook for 2022. A copy of the release can be found on our IR website at ir.iff.com. Please note that this call is being recorded live and will be available for replay. I ask that you take a moment to review our forward-looking statements. During the call, we'll be making forward-looking statements about the Company's performance and outlook based on the current state of the business. These statements contain elements of uncertainty, which we've laid out on Slide two of the cautionary statement. For additional information concerning the factors that can cause actual results to differ materially from our forward-looking statements, please refer to our cautionary statement and risk factors stated in our press release. Today's presentation will include non-GAAP financial measures which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is available on our website. Please also note that we will be using combined historical results for the fourth quarter defined as three months of legacy IFF results, and three months N&B results and for the full year defined as 12 months of legacy IFF January to December and 12 months of N&B February to December in both the 2020 and 2021 periods to allow comparability in light of emerge of completion of February 01, 2021. With me on the call today is our Chairman and CEO, Andreas Fibig and our Executive Vice President and CFO, Glenn Richter. We will begin today's call with our prepared remarks and then take any questions you have at the end. I would now like to turn the call over to Andreas.

Glenn Richter:

Thank you, Andreas and welcome everyone. Thank you again for being with us today. As Andreas highlighted, 2021 was a strong year for sales growth, including a strong fourth quarter finish. Looking more closely at our consolidated fourth quarter results, IFF generated greater than $3 billion in sales representing a 10% year over year increase on a currency mutual basis, our third consecutive quarter of double-digit growth, primarily driven by double-digit growth in our Health and Biosciences division, as well as high single digit growth across our Nourish, Scent and Pharma divisions. As with our full year results, our fourth quarter margin performance continued to face inflationary pressures, much like our entire industry, which offset positive volume growth, solid price increases, and the benefits of synergies and productivity. Early in the fourth quarter, we recognized a significant escalation in inflationary pressures and as a result, we quickly mobilized to prepare to implement significant pricing actions across all businesses to protect overall profitability. I'll discuss these actions as well as our efforts to accelerate productivity and operational excellence when I discuss our 2022 outlook. On the next several slides, I will briefly dive deeper into the fourth quarter financials of each of our core business segments. Turning to Slide 13, I'll begin with our Nourish segment, which experienced both a solid quarter and overall performance in 2021. In the fourth quarter, Nourish achieved 9% year-over-year sales growth on a currency neutral basis, driven by strong volume growth and price increases. Our Flavors business in particular realized strong growth with increased sales across all regions. Ingredients grew by strong double digits to increasing customer demand and both food design and food service also drove growth for Nourish in the fourth quarter. Adjusted operating EBITDA declined slightly due to inflationary pressures. Pressure on profitability occured despite strong volume growth, increased productivity and strategic price increases in the segment. On Slide 14, our Health and Biosciences division delivered fourth quarter year-over-year sales growth of 13% on a currency neutral basis led by double digit growth in health, microbial control, animal nutrition and grain processing. Additionally, cultures and food enzymes and home and personal care each grew at a high single digits against strong year-over-year comparisons. Our adjusted operating EBITDA increased 4% due to volume growth and higher productivity, while margins faced pressure due to inflation and higher logistics cost. Turning now to Slide 15, our Scent division continued to perform well and achieved strong growth in the fourth quarter, delivering 6% year-over-year growth or 7% growth on a currency neutral basis. This performance was supported by a continued rebound in fine fragrances, which saw double digit growth driven by new wins and increased volume. Our Consumer Fragrances category delivered single digit growth against a strong high single digit year ago comparison. The ingredients business continues to contribute to the success of the overall segment with double digit growth in fragrance ingredients. Despite solid volume growth and favorable mix in the business, scent adjusted operating EBITDA growth was affected by higher cost of raw materials, which we continue to take action to mitigate. On Slide 16, our Performance Solutions segment delivered year-over-year currency-neutral sales growth of 9% from 2020 as a result of volume strength and price increases. Both our core pharma and industrial categories contribute to our strong performance in the quarter. Performance Solutions adjusted operating EBITDA and margin was also impacted by higher raw material and energy costs. We recognize the challenges the segment is experiencing due to the current market environment in macro supply chain constraints and are optimistic that as the global situation recovers, we will recognize the full potential of Pharma Solutions. Now on Slide 17, I would like to review our cash flow position and progress in de leveraging. For the full year 2021, we delivered strong cash of over $1 billion and our on track to meet our de leveraging goals. 2021, CapEx was $393 million or approximately 3.4% of sales as we made strategic investments in the most attractive segments of our portfolio. Overall, our capital expenditures were lower than originally planned in part due to slower implementation of projects due to some vendor delays and a continued of the COVID environment. We also paid out $667 million in dividends to our shareholders in 2021. From a leverage perspective, we continued to make substantial progress toward achieving our deleveraging target, finishing 2021 with $4.1, net debt to credit adjusted EBITDA ratio. IFF reduced gross debt by $124 million to $11.4 billion versus Q3 and we finished 2021 with cash and cash equivalence of $716 million. We remain competent that IFF is on track to achieve our deleveraging target of three times net debt to credit adjusted EBITDA by year three, post close, further supported by additional divestitures that I will touch on in a moment. Turning to slide 18, I'd like to provide commentary on our business outlook for 2022. For fiscal year 2022, we expect revenue between $12.3 billion and $12.7 billion with adjusted operating EBITDA in the range of $2.5 billion to $2.6 billion. We also are forecasting foreign exchange rates will be a headwind in 2022, approximately two percentage point headwind to our revenue and a four percentage point headwind to adjusted operating EBITDA in '22. As you are all well aware, we continue to operate in a complex market environment with ongoing uncertainties from pandemic, global political tensions and supply chain challenges, IFF, and our industry at large have been impacted by these issues and we expect and have planned for that these challenges will remain into 2022. As I shared on our third quarter call, we expect inflationary pressures to be significant in 2022, as we see large cost increases in raw materials, energy and logistics. As a result, we are taking significant pricing actions to fully offset our dollar cost exposure, which we expect will result in strong sales and profit growth, but will depress margin. Longer term, we remain confident in our ability to recover margin to pre-inflation levels as we are focused on improving returns to generate strong value creation for our shareholders. We also remain intently focused on driving cost reductions through synergies and increased productivity efforts throughout our business. In addition, we are increasing CapEx in 2022 to approximately 5% of sales as a result of '21 CapEx carryover and increased investments to the passive expansion in key technologies, which will help support growth while also lowering logistics costs. Finally, we will also be increasing inventory by approximately $300 million to more appropriate levels to ensure we can continue to serve our customers. Now moving to Slide 19, I would like to focus more specifically on the cost inflation trends that we saw in '21 and now forecasts to see in '22. Heading into 2022, we expect certain costs, including raw materials, energy and logistics will continue to rise much as they did in '21. Overall, we expect '22 cost increases to be double digits, call it approximately 10%. We are seeing most of these increases related to inflation in raw materials with double digit increases in oils, cellulose, pulp, turpentine, aroma chemicals, petrochemicals, fragrance specialty chemicals, savory ingredients, specialty chemicals, agriculture, grains and sweeteners. The inflationary pressures manifest themselves differently between the legacy N&B and IFF businesses. Most of the higher energy and logistics cost in '22 are related to legacy N&B. With added capacity coming online later this year, we hope to start to mitigate some of the logistics headwinds we have been facing due to an imbalance in supply and demand. If you look at legacy IFF portfolio, we are seeing high single digit raw material inflation similar to our flavor and fragrance peers. Recognizing these challenges, we have been aggressively pursuing broad based pricing actions and accelerating synergy and productivity efforts. Turning to Slide 20, I will provide a bit more insight into our sales guidance for 2022. Our $12.3 billion to $12.7 billion sales expectation represents continued momentum on top of our strong to 2021 results. To get a more comparable revenue basis, you must add back approximately $500 million of sales related to N&B in January of 2021 as N&B results were not part of IFF until February 01 of 2021. Our sales guidance also accounts for the removal of June to December '21 revenue results following the anticipated completed sale of our microbial control business, as well as the first nine months of '21 sales for their fruit prep divestiture which we closed in October of last year. That gets you to our comparable '21 revenue base of $11.85 billion as indicated on the slide. As I said earlier, we are significantly increasing our prices in order to fully offset the dollar cost exposure of our inflation for 2022. With that in mind, we anticipate pricing to be significantly larger contributor to the top line in '22. This pricing impact plus more months volume growth following a strong '21 will be central to our overall sales performance in '22, where we expect to grow approximately 6% to 9% year over year on a comparable currency neutral basis. Now, in terms of our guidance on the adjusted operating front, we also had to make adjustments for comparability. If you add that EBITDA related to N&B general results and subtract the EBITDA related to seven months of EBITDA as a result of the anticipated divetiture of our microbial control business, as well as the EBITDA related to the fruit prep business for the first nine months of '21, you get to a comparable '21 base of approximately $2.5 billion. As mentioned implementing broad base pricing actions to offset inflationary pressures is critical to our '22 plan. Over the last three plus month, each of our business has executed pricing actions across essentially our entire customer base. As a result, we anticipate to completely offset projected '22 install pressures with pricing actions. The majority of these actions will be implemented in the first and second quarter. I would also note that we anticipate that 2023 will benefit from an additional $200 million of net pricing benefit due to the full annualization of our pricing actions, which will be equal to a 100% capture of the combined 2021 and 2022 inflation impact on our business. Importantly, we also continue to closely monitor the global supply chain environment and will be prepared to execute additional price actions as appropriate. By adding anticipated volume leverage plus synergies and productivity, we expect comparable EBITDA growth in '22 to be strong, up approximately 4% to 8%. It should be noted that the synergy and productivity contribution here is a net number where it is a combination of the benefits of synergy and productivity, net of cost of living increases and reinvestments in the business. Our guidance implies that our adjusted operating EBITDA margin will be down modestly versus '21, principally due to our net dollar cost recovery, which equates to approximately 100 basis points. Over the course of '21 and '22, we will see more than $1 billion of total inflation and while we are working rapidly to cover the price increases, it has impacted margins significantly. To give you a perspective of the magnitude, our margin for full year '22 on an inflation adjusted basis will be approximately 300 basis points higher or approximately 23.5%. In terms of marching cadence throughout '22, we expect the first half to be down year over year with expansion coming in the second half. While sales are expected to be strong in the first quarter, year-over-year adjusted operating EBITDA margin performance will be the most challenged of the year down over 300 basis points versus our reported first quarter 2021 margin with each quarter after that concluding. Much of this will be driven by price to total inflation, where we expect to turn positive starting the third quarter. As I conclude, I want to highlight our four key areas of focus for '22 and provide further color into our detailed execution plans for each. First, we are committed to building on our strong '21 sales momentum. Our 6% to 9% targeted '22 currency neutral sales growth anticipates that we will continue to maintain volume growth consistent with overall industry growth rates. We believe that our exceptional R&D pipeline and scaled global commercial teams including targeted '22 investments will allow us to continue to deliver superior customer solutions and support strong growth. In addition, as I mentioned previously, we are making substantial investments to increase capacity across constrained portions of our portfolio and enhancing supply chain efficiencies. Lastly, we'll be sharpening our focus on our revenue synergy opportunities as we are behind our original planned pace, as much of last year was focused on addressing near term supply chain issues. That said, we are confident that the breadth and depth of our platform will allow us to build meaningful revenue synergies over time. Second, as previously outlined, we are intently focused on broad based pricing actions to offset inflation. And importantly, as the macro environment involves, we are prepared to quickly execute additional pricing actions throughout the year as needed. To enhance our ability to react more quickly to the dynamic environment over the last several months, we have undertaken a comprehensive end to end review of our procurement processes, implemented new pricing tools and established core pricing teams for each one of our businesses. Our focus has been to compress the time between inflation signals and customer pricing actions, ensuring we optimize product segment and customer specific pricing actions and closely monitor the level and pace of pricing utilization. Going forward, we are focused on further enhancing our procurement processes and pricing programs. Third, we are determined to accelerate our synergy realization and more broadly our productivity efforts in 2022. For your reference, included in our '22 guidance, we are targeting approximately $200 million of cost reductions from synergies, yield enhancements and reformulations, logistic efficiencies and other operational improvements. Net of wage inflationary pressures and targeted investments to help drive top line growth. we are targeting net cost efficiencies of approximately a $100 million for the year. While we feel this is good progress, we also recognize that there is more work to do. Consequently, in addition to the end to end review of procurement, we are undertaking a comprehensive review of our global manufacturing and logistics platform, constructing a plan to accelerate the scope and scale of our global shared service capabilities and developing a detailed technology and digital integrated roadmap all with the goal of driving meaningful efficiencies, while also ensuring we provide superior customer solutions and service. Fourth, we are actively working to accelerate our non-core divestitures. As we have discussed, we are on track to successfully complete the sale of our Microbial Control business, which will enhance the efficiency and profitability of our portfolio. We're also targeting additional portfolio optimization to further deliver our balance sheet and focus on core growth opportunities. Over the coming quarters, we will proceed with marketing a handful of nonstrategic businesses, call it three or four, where we believe that over the next 18 months, we can generate expected proceeds of approximately $1.5 billion to $1.7 billion. Similar to our fruit prep and Microbial Control business, these are non-strategic and the transactions will be accretive to our go-forward growth rate and margin profile. With this action plan together with our current sales momentum and strength, our leading portfolio, I am confident that IFF will deliver strong results in 2022. With that, I would like to turn the call back to Andreas.

Operator:

And we will take our first question from Gunther Zechmann with Bernstein. Your line is now open.

Andreas Fibig:

Yeah. good morning, Gunther. Thanks for the question. Your two questions are highly related because relative to the top line, we'd say the variable that's likely to be the bigger indicator of the range is we're going to be more volume than price. If anything, frankly, we feel very good about what we've implemented from price what's coming through. If there's additional inflationary price pressures, we may in fact push additional pricing, but volume to some extent, I think is the bigger question mark for us. We had a 2% to 3% assumption relative to volumes. That's probably a point lower than historically the market from a standpoint and that will probably drive the difference in terms of the top line. To your second question, we've actually have not seen much elasticity. i.e. as you know yourself sort of amp up on the consumer product companies have been releasing recently, those volumes generally have been sticking in the market. We have one month by the way, the month of January results, generally volumes are sort of holding in their Q4. So we're not seeing sort of a drop yet. That being said, when we put the plan together, recognizing this is going to be a very abnormal year, given the sheer degree of pricing, we got it prudent to plan accordingly and we actually expect, and what we've seen from an awful lot of our competitors is everybody is basically implementing the same range of pricing in the market.

Mark Astrachan:

Yeah. Thanks and morning, everyone. Wanted to follow up sort of related to the last question, so in the '22 guidance, I guess both top line and adjusted EBITDA expectations is really strongly predicated on this pricing. So yeah how do you think about this in kind of broader, longer term strokes. If you go back years ago, competitors or ebbed and flowed in terms of the ability to take price and how quickly they took price and how much they took price. So how do you think about how your competitors react? If you go back through those earnings calls, nobody's really talking about specifics, but you just laid out specifics. So yeah how do you think about or what's embedded in what your competitors are going to do from a pricing standpoint and how quickly can you adapt if your competitors don't directly follow how much you're taking at this point and just a related point, how do we think about it beyond '22 in terms of how much pricing is given back versus what you're taking this year?

Operator:

And we'll take our next question from Mike DeStefano with Wells Fargo. Your line is now open.

Andreas Fibig:

I think it, it is a -- it is the question in some sense, how do we think about our longer term goals? Obviously Frank joins us next week and we will be working very aggressively over the coming months to review our longer term targets. That being said, I would say two things certainly going from '25, '26 to call it 32, 33; it’s a big number for next year. As you pointed out, I think we have a clear line of sight to $200 million of incremental pricing at least another a hundred million of synergy productivity. I actually would hope for more, quite frankly, but we have a hundred million left on the extent synergy side that gets us directionally to 2285 to 29 range from the standpoint. So we're getting to close the gap, but there's still a gap there. And we have work to figure that out. I think on a qualitative basis I am optimistic there's lot year because of the operating environment has been very challenging. And again, he would, would've anticipated the level of inflation and what we had to deal with on top of that, the global supply chain issues, but we do feel a combination of the strength of the platform in terms of revenue opportunities for growth. And in addition, the more I time I spend here, the more I'm convinced that there are meaningful opportunities to enhance our overall performance in terms of productivity and operating margin. So I, until Frank has arrives and we sort of go through that very detailed process, we can't provide a number. But there's a clear line to call it 2829 next year, based on pricing and productivity. And I think we have additional opportunities on top of that.

John Roberts:

Thank you and best wishes Andreas. You're guiding to a 4% headwind from current seat there EBITDA in 2022 and that's more than the 2% impact on sales. This is our first time going through an FX headwind with the new portfolio. So maybe help us with how much your costs are in dollars relative to the revenues and foreign currencies. And your side of the Euro continues to be the key currency, but has the overall basket of important currencies changed with the new portfolio?

John Roberts:

Thank you.

Adam Samuelson:

Hi. Yes. Thank you. Good morning, everyone. I was open to maybe dig in a little bit more just on the cost energy capture and the assumption that are embedded in the '20 -- in the '22 guidance. Just, we're kind of what -- and what's left to capture post '22 and guess the corollary to that, and this kind of address a little bit in some of the other conversations, but as we think about where we are exiting 2022 with some of the pricing carryover just relative to the original and be merger plan, kind of the, the margin EBITDA potential in '23?

Operator:

And we'll take our next question from Jeff Zekauskas with JPMorgan, your line now open.

Andreas Fibig:

Yeah. it's a great question. We have some more work to do to figure out sort of where we're going to be longer term relative to cash generation. We're going to be actually making slightly higher investments in two areas this year. I think net of these investments will be sort of about equal on a cash flow basis. One is we're going to be adding inventories building, I should say, inventories of about $300 million. As a reminder, when the deal was closed a year ago, we were at artificially low inventory levels, about 111 days. This historically the combined entity was in the 1 25 range. We built some of that back at the end of the year. We were, but we're still sort of short of where we need to be. The second thing is our CapEx spending will increase this year as well, relative to last year. Those increases are twofold. We ended the year less than $400 million. Some of the CapEx we were unable to implement last year that was a by-product of suppliers, basically being delayed in terms of supplying steel and other products. And in addition, just we operate in COVID environment. So the speed at which we're able to implement the load as well. So we're ramping up. We're also ramping up simply to address some capacity constraints, supply chain, which will actually achieve, help achieve higher demand levels as well as lower costs on the logistics side. So net, there is about a combination of $500 million increase between inventories and higher CapEx year-over-year, but the overall cash-flow apart from the business would be felt relatively neutral, after that's done. Longer term, as I mentioned previously, we, really have some work to do, to think about our longer term sort of goals relative to the cash generation of the enterprise.

Lauren Lieberman:

Great, thanks. So I know you commented on there being in that residual $200 million benefit on, on pricing when we get into 2023, but I did think it was worth just referencing the fact that some of your competitors talk about it taking 18 to 24 months for inflation to be covered with pricing. So I'm just curious why that would be such a shorter timeframe for you. So that's kind of point one and point two is just, I think the N&B businesses, there are components of them. My understanding there are little bit more commodity in nature where switching costs would be low for your customers versus more and there's certainly plenty. It's very value add, and that's not true at all. But just any thoughts or the degree you have visibility on elasticity for those portions of the portfolio? I don't know how, what you know, data was like at, N&B and so on. If there's visibility into some history on that piece of business as well, that's informing your elasticity thoughts for this year? Thanks.

Operator:

And we'll take our next question from David Butler with Deutsche bank. You line is now open.

Andreas Fibig:

I, think we have been appropriately prudent in our planning process, given the sheer level of pricing that we have in the plan. We didn't want to sort of sort of push the envelope if you will, from a volume standpoint. As I mentioned previously, it's going to depend upon the consumer certainly in the very, very early days of the year. That seems to be holding up. But we have a lot of year ahead of us, as well. From a capacity standpoint as we've mentioned in the past, we are making very meaningful investments, a combination of CapEx, as well as inventory, to allow us to address some of the legacy issues we had last year. Those issues were principally and legacy N&B businesses that will feel better about having the capacity to meet and if it continues. But it's largely a function of just being prudent in this sort of a very, very unprecedented market from the planning standpoint.

Ghansham Panjabi:

Okay. Thanks. Good morning, everybody. Congrats again. And Andreas, I guess maybe a follow up to the last question in terms of your characterization of channel inventories, if you can you know, I'm looking at two subcategories on slide 9 ingredients and fine fragrance has obviously had a very, very big year. Are you assuming some sort of mean version as the year unfolds just from a demand standpoint as channel inventory comp against, pretty healthy comps from 2021. And then also, I'm sorry if I missed this, but did you break-up the sequencing go inflation in terms of what you're assuming the inflation trajectory as a year unfolds? I know you made comments on one queue.

Operator:

And we'll take our next question from Chris Parkinson with Mizuho Securities. Your line is now open.

Andreas Fibig:

Yeah. Good question. So maybe Andres going to add a little bit more on the revenue synergy, right? We feel very good about the longer term prospects on revenue synergies. We admit that we're behind, we, we basically are not on the original plan relative to the timing and for the pace of the revenue synergies. That in our view is simply a function of how we spent the last year. The last year because of the nature of supply chain issues inflation issues. We ended up dedicating resources more to the here and now from the standpoint. It's actually also allowed this for our commercial teams, our R&D teams to basically spend more time working together and a byproduct of that. We do feel like there's a very strong pipeline of opportunities going forward. So I very -- you will see basically the majority of the opportunities within our no division because by the nature of the products and the customer, it just goes very nicely together. If you just take all the plant based protein products where basically can, can offer almost a total solution on in many, many cases, even a total solution to our customers, so that that's one example. The other example is, and we had just one of the big customer meetings on, on the American cleaning Institute, Congress, this this month's where you see that the enzyme business for household care products and the fragrance business are going hand in hand. So these are certainly the biggest opportunities for us going forward and then something which we should not underestimate is that we have opportunities on the R&D side as well. And I give you just one very concrete example. Everybody is looking now for these the capsules for you put the fragrance into detergent and to produce a green capsule. And now with our enhanced capabilities, we have many more programs running to come up with really good solutions. They're already in generation two and three, and that is a synergy by themselves as, as well on the R&D area, which probably takes a little bit more time. And then Glenn, you should comment on the portfolio.

Operator:

And we have no further questions on the line at this time. I will turn the program back over to Andreas Fibig for any additional or closing remarks.

Operator:

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful time -- wonderful day.

Michael Deveau:

Thank you. Good morning, good afternoon, and good evening, everyone. Welcome to IFF's third quarter 2021 conference call. Yesterday, we issued a press release announcing our third quarter financial results and our outlook for the remainder of 2021. A copy of the release can be found on our IR website at ir.iff.com. Please note that this call is being recorded live and will be available for replay. I ask that you take a moment to review our forward-looking statements. During the call, we'll be making forward-looking statements about the Company's performance and business outlook. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially from our forward-looking statements, please refer to our cautionary statement and risk factors stated in yesterday's press release. Today's presentation will include non-GAAP financial measures which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is available on our website. Please also note that we will be using combined historical results for the Third Quarter defined as 3 months of legacy IFF results, and 3 months N&B results. And for 9 months year-to-date, defined as 9 months of legacy IFF, January to September, and 8 months of N&B, February to September in both the 2020 and 2021 periods to allow for comparability in light of the merger completion on February 1st, 2021. With me in the call today is our Chairman and CEO, Andreas Fibig and our recently appointed Executive Vice President and CFO, Glenn Richter. We will begin today's call with our prepared remarks, and then we'll take any questions that you may have at the end. I would now like to turn the call over to Andreas.

Glenn Richter:

Thank you for the warm welcome, Andreas, and good morning, afternoon and evening to everyone. Since joining IFF in late September, I've had the opportunity to briefly meet many in our investor community. And the most common questions I've been asked is why did I join IFF? And what are my near-term priorities? Consequently, before I review our financial results, I thought it would be helpful to briefly provide these perspectives as an introduction. There were 3 very compelling reasons for me to join IFF. First and perhaps most importantly, IFF is a Company that is truly making a difference in helping solve some of the world's biggest challenges. We're delivering reliable, innovative, and sustainable solutions that are directly helping address issues such as improved nutrition and wellness, reducing greenhouse gas emissions, and creating a more sustainable environment. Second, the industry has very attractive organic growth characteristics benefitting from continued strong consumer tailwinds. From increased consumer focus on wellness and natural and sustainable products, increased demand in emerging markets, and new consumer needs presented by aging demographics in developed markets. I also believe that scale will become an important basis of competitive advantage. As customers demand leading ESG platforms, increased innovation and speed-to-market, global supply chain resiliency and help in navigating increasingly complex regulations. Third, I firmly believe that the combination of IFF with DuPont's legacy N&B business has uniquely created an industry leading platform. And since joining IFF, I've tried to immersed myself in the business completely. Visiting sites, meeting with our business and operations teams, and spending time at our R&D in creative centers. I've also prioritized hearing from you, our investors and analysts and frankly, today I'm even more bullish on the strength of IFF 's global capabilities and the tremendous long-term potential we have to drive strong top and bottom-line growth. Relative to my near-term priorities, I have 4 primary areas of focus. By far, our most pressing priority is to tackle the challenges from the global inflationary environment and to successfully execute broad-based pricing actions across all of our businesses. Second, I'm also focused on enhancing our core financial processes and metrics, including better forecasting, improved business-level return metrics, and tighter disciplines for our investment decisions, so that we're maximizing our growth potential and return on invested capital. A third area of focus is ensuring we fully deliver on our merger synergies, while also accelerating our focus on sustainable productivity. And finally, while we have made very good progress to date on our portfolio optimization, there is significant opportunity remaining. In the days and months ahead, I look forward to learning even more about this organization and engaging with all of you. With that, I'd now like to provide an overview of our consolidated third quarter results. In Q3, IFF generated approximately $3.1 billion in sales, representing a 12% year-over-year increase, primarily driven by the continued double-digit growth in our Nourish division, and strong increases in both Scents and Health & Biosciences. In terms of contribution, volume performance was the primary driver of our growth. As pricing represented approximately 2% points in the quarter. So, our gross margin continued to be challenged by inflationary pressures. It was somewhat offset by our strong cost management focus, which resulted in adjusted operating EBITDA growth of 4%. While we had solid year-over-year EBITDA growth, our gross margin was down by 210 basis points, as our pricing actions recovered only about 65% of our raw material increases, or approximately 50% in the third quarter when we include raw material, logistics, and energy, increases. As we move forward, we are squarely focused on improving this recovery rate relative to the total inflationary basis. But expect that in the short term, specifically the fourth quarter, we will see a similar pressure given the time lag of price realization. Let me finish on this slide by saying that we achieved strong earnings per share, excluding amortization of a $1.47. On the next few slides, I will dive deeper into the third quarter financial results for each of our 4 divisions. Turning to slide 13, I'll start with our Nourish division, which had an exceptional quarter. In Q3, Nourish achieved 17% year-over-year sales growth, or 15% on a currency neutral basis. Driven by robust double-digit growth in Flavors for the second consecutive quarter. Ingredients also grew double-digits with all subcategories, protein solutions, pectin and seaweed extracts, emulsifiers and sweeteners and cellulosic, LPG and food protection increasing double-digits. Food Design also grew double-digits led by Food Service, where pandemic related restrictions continued to be lifted with away-from-home consumer behaviors returning to more typical levels. As a result of strong volume growth, price increases and our focus on cost management, Nourish achieved an adjusted operating EBITDA increase of 19% and margin expansion of 30 basis points. On Slide 14, you'll see that our Health and Biosciences division saw year-over-year sales growth of 7% or 5% on a currency neutral basis, led by double-digit growth in Home & Personal Care and high single-digit growth in Cultures and Food Enzymes. Our health category was soft this quarter due to a particularly strong double-digit year-ago comparison, so we are pleased with the results when we look at it on a two-year basis. As Andreas mentioned earlier, inflationary pressures and higher logistics, and energy costs to keep up with the robust customer demand has challenged our margins across our business with H&B particularly impacted, which drove an operating EBITDA decrease of 12%. Unpacking this a bit deeper, the bulk or 70% of our year-over-year EBITDA decline came from higher airfreight volumes, where we have increased inter-Company shipments to manage available capacity. As we shared last quarter, we have increased capacity investments in this business to support long-term growth and have also invested in R&D and plant technology to increase output. Until then, we will be incurring higher costs to support our customer demand, and this will impact our EBITDA margin. Turning now to Slide 15. Our Scent Division continues to perform extremely well and experience strong growth, achieving 10% year-over-year growth or 9% growth on a currency neutral basis. This performance was driven by Fine Fragrances continued rebound, which grew approximately 36%, led by new customer wins and improved volumes. Our ingredients category also continues to perform well, and contributed to Scent's overall success, seeing double-digit growth for the second consecutive quarter, led by strong performance in both cosmetic actives and Fragrance ingredients. While our consumer Fragrances business saw modest low single-digit growth against a strong double-digit year-ago comparison, this is a marked improvement from Q2 and we expect further growth as we move forward. On a 2-year average basis, Consumer Fragrance remains strong at 9% in the third quarter. Scent also experienced adjusted operating EBITDA growth of 10% driven by strong volume growth and favorable mix. Margin was down modestly to the higher raw materials and logistics costs a trend we see continuing. I will provide what content shortly. Lastly, in our Pharma Solutions business, we saw a current seat neutral sales decrease of 2% due to continued supply chain challenges related to raw material availability and logistic disruptions, which have made it challenging to meet persistent and growing customer demand. While has continued to recover from COVID-19 lows, our core Pharma business saw soft performance against its solid year-ago comparison. The division's adjusted operating EBITDA margin also continue to be impacted by higher sourcing, logistics, and manufacturing costs. We also continue to see the impact of force materials and raw material shortages with suppliers and shutdowns due to Hurricane Ida, resulting in unplanned outages in some of our product lines. While we expect the current market environment and macro supply chain problems to continue challenging the segment, we remain optimistic. And as Andreas mentioned earlier, we remained focused on returning the division to profitability as these injured sheet conditions stabilize. Now, on Slide 17, I would like to review our cash flow position, and leveraged dynamics for the first 9 months of 2021, both of which remain a top priority for us. So far this year, IFF has generated $884 million in free cash flow, with cash flow from operations totaling approximately $1.1 billion. As the team has mentioned in previous quarters, we are investing in our growth accretive businesses as well as integration activities. Year-to-date, we have spent $242 million or approximately 2.8% of sales on capex and expect a significant ramp-up in fourth quarter as our annual spend is traditionally more back-half weighted. From a leverage perspective, we are continuing to make substantial progress toward achieving our deleveraging target with our cash and cash equivalents at finishing at $794 million, including $122 million restricted cash with gross debt reduced by $446 million versus the second quarter to $11.5 billion due to our debt maturity schedule as part of our deleverage plan. Our trailing 12-month credit adjusted EBITDA totaled approximately $2.7 billion, with a 4.1 times net debt-to-credit adjusted EBITDA. With our continued strong cash flow generation, including proceeds from divested non-core businesses, we remain confident that IFF is on track to achieve our deleveraging target of less than 3 times Net Debt to EBITDA by within 20 to 36 months post transaction close. Turning to slide 18, I'd like to take a moment to discuss the cost inflation trends that have impacted our business this year. As I mentioned earlier, IFF's and the industry at large has seen significant year-over-year inflation increases, which have been accelerating in the recent quarter. The inflationary pressures we are seeing today are significant. Just as examples, vegetable oil prices hit a record high after rising by almost 10% in October. Price of wheat is up almost 40% in the last 12 months through October. Brent crude prices have more than doubled over the past 12 months to the highest level since October, 2018. In the U.S. natural grass prices are up 100% from a year ago. And in the U.K., they're up about 500%. And transportation rates have increased significantly given the high demand and limited capacity to ship. Across the raw materials, logistics, and energy markets, like many industries around the world, we have seen cost accelerate each quarter, which has led to our margins being adversely impacted. For example, in the first half of 2021, gross margin was down about 150 basis points. Following the third quarter, we were down about 210 basis points. As we look ahead, we are being prudent in our planning as we expect these inflationary pressures will continue throughout the fourth quarter and over the course of 2022. Consequently, this will require us to successfully implement significant pricing actions across each of our businesses, as well as improve our sourcing efficiencies, accelerate operational improvements, and capture targeted integration synergies to drive profit growth. Now moving to slide 19, I would like to share with this means for our consolidated financial outlook. For the full-year 2021, we are maintaining the increased total revenue forecast we announced in September to account for the strong demand. For the full year 2021, we are targeting $11.55 billion in total revenue, or approximately 8.5% growth up from the forecast of $11.4 billion or 7% growth that we disclosed in the second quarter. We also expect our sales growth to continue in the fourth quarter as our Q4 quarter-to-date sales trend is solid. As mentioned, unprecedented macro supply chain challenges and inflationary pressures continued to impact our industry. And we do expect this to continue in the foreseeable future. While we are intently focused on offsetting these inflationary pressures through pricing actions, these are lagging the inflationary pressures. And as a result, we have further revised our adjusted EBITDA margin to be modestly below 21% down from approximately 21.5% that was forecasted in September. About half of this reduction is due to lower gross margin in the third quarter, and the other half stemming from higher cost trends we see in the fourth quarter. For the full year, we are targeting low single-digit EBITDA growth, a solid improvement in light of the external challenges. We also adjusted our capex spend outlook down, as we have been very thoughtful in balancing near-term operating priorities with the need to add capacity to support accretive growth across our businesses. Overall, we are pleased of the progress we've made to-date. Strong, top-line growth, and the commitment to meet near-term macro cost pressures. And we're confident that IFF is on the right path. Employees continued success across our core business. I'll now turn the call back over to Andreas for some closing remarks.

Operator:

. In order to give all participants an opportunity to ask their questions, we request a limit of 1 question per person. Our first question comes from Heidi Vesterinen, with Exane BNP Paribas. Your line is open.

Glenn Richter :

Yeah, good morning. Thanks for the question. I would have to break them down relative to component parts. First of all, relative to topline, as we mentioned, we're very pleased for tracking extremely well versus the long-term targets and then when you take a look at how we're tracking versus competition, which is another great indicator. We're actually very pleased in terms of yards. So, we check that we'd say relative to our deleveraging target, getting below 3 times by year 3. We are feeling very comfortable with that. Combination of the cash flow generation from the business remains strong. And as you know, we've announced a couple of divestitures and we'll continue to look at other non-core businesses. So, I would check both that -- both the deleverage as well as our free cash flow. The area that really needs to work is around our long-term margin objective. As you know, we have a 26% EBITDA margin target that was easier when we started off with a higher number at the beginning of the year and versus the most recent guidance. We're now about 500 basis points off that relative to the guidance this year. So, as we approach our '22 plan, we're spending energy thinking about that multiyear target. I think structurally, there are couple of factors that we think still play in the favor of not only increasing where we are from an EBITDA margin, but potentially getting us back to that. 1, is clearly the biggest impact this year unexpected, has been the inflationary environment. And we thought would talk more about this, but we lost about 200 basis points this year at our margin, relative to inflation, net of what we expect to price, and in addition, we've had some pockets of higher use of freight costs in a couple of our business. So that's about 200 basis points. We still feel very confident on achieving the long-term synergy objectives, the cost synergies. And I would submit there are probably additional productivity in the business. I believe we strip out the material side of our business. We have over $4 billion of costs between our manufacturing operations and then our S&A, and I think we just sort of begun to scratch the surface relative to that with our synergy targets. That being said, we are working very intently right now to sort of think about -- and actually -- our pricing initiatives and also think about a longer-term productivity as well.

Glenn Richter :

Thank you.

Matthew Deyoe :

Good morning. I appreciate all the added detail in the slides on the cost side, but just trying to understand better the margin contraction a bit, and how we got to the point where we're cutting the guidance again. If I look at 3Q and then moving into 4Q, could you talk a little bit about how costs are coming in versus where you had budgeted them. And on that end, can you push price to offset logistics costs for businesses that you've just won recently, or is this just a cost of doing business in that margin component is going to come down or improve when cost and capacity come out.

Andreas Fibig :

Thank you. Thank you, Glenn, I think it's very comprehensive. So just on 1 aspect, you asked Matt on the logistics. Obviously, we go back on logistics as well, either as price increases or surcharges, and it's a bit tough up for newly won contracts, obviously, but we try what we can do because that has a huge impact in all businesses, particularly on the Health & Biosciences business. But here, I think there's another element in it is -- we are working to increase capacity because there's a lot of demand for -- in particular for Enzyme business. And we are building -- we just installed a new fermenters and . And there's more to come for the first half of next year which will help us to decrease logistic costs as well and pull through when we get in terms of demand from our customers. We're very optimistic on this one because the technology is superior and then certainly good growth driver for us going forward.

Mark Astrachan :

Yes. Thanks. And good morning, everyone. I guess just building on the last question, Glenn, maybe specifically, if you're willing to talk about it, and obviously you're early in the process, but how do you currently see inflation for '22? And how should we think about when you expect to have enough pricing implemented to cover inflation? Obviously, you talked about $0.50 on the dollar, but what's the timeline for more pricing to be in place? And also, how do you think about offsets in terms of dollars versus margin recovery in the timing they're in?

Operator:

The next question comes from Adam Samuelson with Goldman Sachs. Your line is open.

Andreas Fibig :

Yeah, thank you, Adam, for the question. So, what we have seeing in Q2 and Q3 is that we have grown about percent price. The risk was for volume going forward. We might see a little bit more in the fourth quarter in terms of price. But as you said, we had a good start sales wise into the fourth quarter. So, October can come in. Good that we don't have the final P&L here, so we can't talk about that. Synergy realization is going, actually, on the cost synergies extremely well. As you have seen, we have already realized the 40 million in the first 3 quarters of the 45-worth promised. So, it's very, very likely that we will over-achieve. On the sales synergies, we are very much on track. And I see, when I visit our facilities and I was basically out in the field, the last week in Europe, but the teams are working very nicely and very, very well together. So, we see that more sales synergies are coming in. And that shows that we are building a very, very strong position for the Company going forward. In terms of the different categories as well, we see still a good performance on the Fine Fragrance side, which is very, very helpful. So just a good recovery, but its growth -- with growth rate here as well. And that's helping the whole results for the Company going forward. I think that's what we can say about the fourth quarter.

Gunther Zechmann :

Hi, thanks for taking my question and welcome, Glenn. The photo on the flight looks very youthful so it must be an active ingredients from Lucas Meyer Cosmetics. Thanks for sharing the percentage change in raw materials. Can I just check if the numbers you gave earlier, Glenn are what you include in the full-year guidance, or current run rate. And then pricing is up to 2% of sales in Q3. Can you share the exit run rate out of Q3 or and October if you have it? And what further increases you expect to push through, please.

Operator:

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

Andreas Fibig :

So, I'm saying -- first of all, thank you for the question. It's -- we see reformulation. Is it massively more than what we have seen before? Probably not. But what we see in general, what comes in terms of projects, are bigger projects -- less projects, but bigger projects, which is actually good for us. Taking into consideration that we will win more of these projects, the cost for us is reducing in terms of the average projects, so that's what we see it at the moment. Indeed, many of our customers see good balance increases. But the discussion with the procurement people on the customer side is going okay and well because they know what's happening on the raw material front here. So, I think that's where we are, what we see is still that we have really good strong demand from most of our customers. And that's very helpful in terms of the business and also in terms of the momentum we have as a business growing going forward because we have to take into consideration, we are still in the integrational phase, and we're gaining share. That's what we see or some comparison to our competitors. And we are making good, good progress in the integration as well. So that's all what I am to.

Jeff Zekauskas :

Thanks very much. In your initial remarks, Glenn, you said that there remains significant opportunities for portfolio optimization. Does that mean that there's another, I don't know, $500 million to $1 billion in revenues that can be monetized? And second, can you describe or articulate your capital expenditures for 2022 and '23. And what's the arc of capital expenditures? And what are the priorities to spend on?

Glenn Richter :

Sure. Good morning. So, as you recognize, we updated our guidance for this year relative to our full-year capex spend at 4%. And that's in part because of just the ability to execute our capital programs well. given all of the different priorities we have in the business and far that is just continuing to be more surgical I'll say, relative to our investing capital. We do anticipate that that will ramp up next year as we're putting together our '22 plans, largely focused on our higher margin and higher growth businesses. And a big piece of that actually is really the bottlenecking and enhancing our capacity situation into next year. So, I'll say more to come around the plan standpoint. We had -- I think previously guided to having spent a little bit more capex around the business playing forward for capacity reasons. And then the other area I would just note although it's a much smaller portion around IT. So, IT through an integration activity. We have some additional activities as we go into next year as well.

Lauren Lieberman :

Great. Thanks. Good morning. I had two questions. First, was the generally operating expenses in the quarter, both SG&A and then R&D specifically, were down quite a bit. And I was curious if you could comment on how sustainable those changes were. If it reflects maybe incentive compensation again or more tactical reductions given the gross margin pressures. I was curious about that piece. And then the second thing unrelated, was on Pharma. You've given the capacity constraints that you've seen and demand outstripping supply, which is great. The question is, what -- where is that demand going? What's the risk that rebuilding, if you call it relative market share, when you do get capacity up is a challenge? I mean, where is that business going, and how confident can we be that that will come back when you get the capacity up? Thank you.

Glenn Richter :

Good morning, Lauren. As a relative to our R&D sales and administrative expenses, as I mentioned, we are favorable to plan and down from prior year, but that is not R&D. Actually, R&D is trending right on plan. And by the way, of our roughly 2.1 billion of annual spend for RS&A, about 30% is, R&D, and the residual is fairly equally split between sales, our commercial team, and an administrative. We're seeing actually more efficiencies in the commercial teams as they come together post-integration and the back-office. So, the administrative teams as well. So that's really where we're seeing and are pushing more of the productivity, not R&D, we're always looking for ways to more efficiently spend our R&D budget, but we sort of directionally want to make sure that we continue to stay within the guidance we provided relative to our ongoing R&D spend.

Operator:

The next question comes from Ghansham Panjabi with BaGird, your line is open.

Glenn Richter :

Yeah, relative to -- good set of questions. It's relatively inflation, we're seeing higher rates in legacy N&B then IFF, although we're seeing inflation across all businesses. But generally, we're in mid-single-digit range for legacy IFF and then low double-digit relative to legacy N&B. Catch-up period, generally 3 to 6 months. Certain businesses like H&B may have slightly larger percentage that are either an annual contract or a multi-year, so they might be slower.

Chris Parkinson :

Great. Thank you very much. Just based on the growth outlook for certain pieces of the acquired N&B assets, are there any parallels which may require additional capacity in the coming years just giving healthy outlooks? The legacy owner used to speak about some recent expansions already essentially being sold out, so just trying to gauge where the portfolio stands. Thank you.

Operator:

Our final question today comes from Jonathan Feeney with Consumer Edge. Your line is open.

Glenn Richter :

Well, I think one thing we have to consider is the legacy N&B businesses just has a higher ramp. So, the inflationary pressures are more significant in that side. So basically, it just requires, if you will, a bigger lift relative to the implementation from that standpoint.