International Flavors & Fragrances, Inc.

question at that time please press star 1 on your touch-tone phone if you would like to remove your name from the queue please press the pound key participants will be announced by their name and company in order to give all participants an opportunity to ask their questions we request a limit of one question per person I would now like to introduce Michael DeVoe head of investor relations you may begin

Thank you. Good morning, good afternoon, and good evening, everyone. Welcome to IFS first quarter 2021 conference call. Yesterday evening, we issued a press release announcing our financial results for the first quarter, as well as our outlook for the full year 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 please take a moment to review our forward-looking statements. During the call, we were making forward-looking statements about the company's performance and outlook based on the current state and our expectations for 2021. These statements contain elements of uncertainty, which we have laid out on slide two under 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'll be using combined historical results for the first quarter as defined as three months of legacy IFF results and two months, February and March, of NMD results in both the 2020 and 2021 periods to allow for comparability in light of the merger completion on February 1st, 2021. With me on the call today is our Chairman and CEO, Andreas Fibig, and our Executive Vice President and CFO, Rustem Gila. We'll begin with our prepared remarks and then take any questions that you may have. With that, I would now like to turn the call over to Andreas.

Thank you, Mike, and thank you to everyone for joining us today. I will begin today's call by providing an overview of our first quarter results, including a review of our performance by region and segment. I would also like to share with you an update regarding our efforts to integrate the DuPont NMB business, which continues to progress well following the completion of our transaction in February. Wilson will then provide a more detailed financial review of the business highlighting, segment-level business dynamics, and performance and cover cash flow and leverage as well. IFF is off. to a strong start in 2021. And I'm confident that the momentum we have built will continue for the remainder of the year and beyond. Now, beginning with slide six, I would like to review our performance and notable developments in the first quarter. We achieved 3% in combined sales growth or 1% in currency neutral basis compared to the first quarter of 2020. Also, because of our change to a fiscal calendar, Rather than a traditional 4-4-5 calendar, we have had two days less in first quarter. If we were to normalize for that, our combined currency neutral growth in the first quarter would also have been approximately 3%. And on a two-year average basis, to factor in our strong 7% year-ago comparison, growth would be strong at approximately 5%. Our adjusted operating EBITDA margin improved by 30 basis points, reflecting our team's diligent execution of our cost management strategy. IFF also continues to generate strong free cash flows, and we remain on track to meet our deleveraging target. For the first quarter, our leverage ratio was 4.3 times. I'm also pleased to say we have reached an agreement to divest our food preparation business to full luck. who specializes in food preparations for the food and beverage industry. The divestiture is expected to close in the third quarter of 2021, pending customary closing conditions, including regulatory approvals. The food preparation business contributed approximately $70 million to IFF's newer segment pro forma sales in 2020. This is our first step in terms of our portfolio optimization strategy So expect more news as we progress through 2021. As you can see, we have established a solid foundation to carry us forward. We have started with solid momentum, thanks to our disciplined focus on execution. As we have said before, the opportunity is in front of us, and our mission is to execute on our plan to deliver industry-leading returns for our shareholders. As we move into the second quarter, we will remain squarely focused, leveraging our new capabilities to reach our business objectives and further establish ourselves as an innovation leader in a global value chain for consumer goods and commercial products. Now on slide seven, I would like to briefly discuss the regional sales dynamics that have influenced our first quarter financial results. As you all know, there are notably significant differences in how different countries are managing the continued impacts of the pandemic. So we want to talk to the dynamics we are seeing in our business across the world. We are pleased to report that most of our operating regions saw sales growth in Q1. In North America, we achieved solid performance across our portfolio, which grows in nearly all our segments. This performance in North America reflects the impressive results in our ascend segment. We continue to see healthy performance across our Asian markets, achieving a 6% increase in combined currency neutral sales, primarily driven by double-digit growth in China and India. While we are pleased to see growth across many of these key markets, we must recognize that our growth in India could be challenged in the near term as the country is grappling with hardship related to the pandemic. We wish everyone in India, our Indian colleagues, and their loved ones the very best and hope to see rapid improvement in conditions. In Latin America, we saw an 11% increase in overall sales for the region, with growth primarily driven by local currency sales. Two highlights that I would like to call out in Brazil and South Korea, who both grew double digits in Q1. COVID-19 and related ongoing restrictions continue to heavily impact Western and Central Europe, which has resulted in challenges across the entire EMEA region and a 5% decline in overall sales. That said, we remain optimistic about the region's recovery as global vaccination rates increase and related restrictions ease. As we press ahead, we will continue to work diligently with our regional teams and communities, particularly those that remain under most pandemic-related pressure, to adapt our supply chain, ensure that our customers continue to receive the leading solutions they have come to expect. Let's move to slide eight. I would now like to review our first quarter sales performance across IFF's key business segments so you can get a more granular view. We are pleased to report solid growth across our Nourish, Farmer Solutions, and Scent divisions. Our largest group, Nourish, achieved combined currency-neutral sales force of 1%, led by robust performance in flavors. We continue to see pandemic-driven headwinds in food design, which is driven primarily by continued declines in food service. This channel, while improved for the sports quarter trends, was down mid-single digits in the first quarter. Scent continued its strong performance, achieving combined currency-neutral sales growth of 5%, the largest growth driver across our four divisions, led by continued strengths in consumer fragrances, double-digit growth in cosmetic actives, and a strong rebound in fine fragrance. For our pharma solutions division, we achieved combined currency-neutral sales growth of 3%, with continued strong performance across the entire division and all subcategories. Our Health and Bioscience Division combined currency neutral sales decreased 3% against a strong double-digit year ago comparison. Increases in both health and home and personal care were offset by pressures in microbial control and grain processing. Together, we have an in-demand and diversified portfolio that is meeting the needs of our core and markets. I feel that we are very well positioned to continue executing our ambitious growth initiatives and the complexity of the global marketplace. Now turning to slide nine, I want to show a summary that highlights our business performance, particularly with regards to segment level adjusted operating EBITDA margin. As you know, we are focused on driving overall group operating efficiencies as we execute on our integration plans. Rustin will cover our first quarter segment performance in much more detail, but I wanted to present this slide as it will be included in our standard earnings package going forward, specifically focusing on year-to-year performance. Some highlights for Q1 that are worth mentioning. Within our largest division, Nourish, I'm very pleased to see early progress on margin expansion. We achieved strong results in our scent division. The team did a great job driving higher volumes, benefiting from the rebound and fine fragrance, with both favorable mix and continued the effort to capture productivity savings. In H&B and pharma solutions, adjusted operating EBITDA margins were pressured by increased warm materials and logistics costs, which overshadowed the strong cost of discipline the team has accomplished. Now on slide 10, I would like to provide you with an update on our integration progress with NMB. Since completing our combination in February, we have achieved several financial and organizational integration milestones, which reflect the incredible efforts of our global team. From an organizational perspective, we have established a comprehensive operating and leadership structure for our combined company, having identified and announced roles all the way from CEO down to third-level leaders. These leaders are working closely with the Integration Management Office to ensure that all employees are provided with the tools and resources they need to succeed. We've also completed all IT migration from DuPont to IFF and are on schedule regarding exiting many of our transition service agreements with DuPont. On the revenue synergy front, we have a robust pipeline of projects, including both cross-selling and integrated solutions. that we expect will accelerate our ability to meet our 20 million synergy target this year. This quarter, we achieved a significant cross-selling win within our health and bioscience divisions by detergents, and we have invoiced our first sales in April. We are pleased with our project pipeline and with the efforts so far and continued expressions of demand from customers. We are confident in our ability to meet our three-year run rate synergy target of 400 million. From a cost synergy perspective, we are unaware and already seeing modest P&L benefits, given we are in early days. We expect these cost savings to increase over the course of the year, putting us well on track to meet our 45 million cost synergy target in the full year 2021 and our year three run rate cost synergy target of 300 billion U.S. dollars. I would now like to pass the call over to Rustam, who will provide a more detailed review of our financial performance in the first quarter.

Thank you, Andreas. First, let me go a bit deeper into our consolidated financial results. In the first quarter, IFF generated $2.5 billion in sales, a 3% combined year-over-year increase, including foreign exchange benefits, or up 1% on a currency-neutral basis. primarily led by strong performances in our Scent and Pharma Solutions divisions. As you may recollect, from 2021 onwards, we are applying prior year average FX rates to our current year non-US dollar revenues to derive currency neutral growth rates. This is the more common practice and makes us more comparable to our competitors. Our gross margin was impacted in Q1 at Nourish, H&B, and Pharma by higher raw material and logistics cost headwinds arising from input cost inflation and higher freight rates, tight inventories, and weather-related plant disruption. Meanwhile, our aggressive cost management program led by headcounts and other expense reductions enabled us to improve RSA to sales by 120 basis points, and deliver year-on-year adjusted operating EBITDA growth of 4%. As an aside, Q1 2020 was our most difficult comp, with 7% combined currency-neutral sales growth and strong adjusted operating EBITDA growth. ISF also delivered adjusted earnings per share, excluding amortization, of $1.60 for the first quarter. Now on slide 12. I'd like to discuss the first quarter performance of Nourish, which now includes the enhanced capabilities of NNB's former food and beverages business. Nourish sales totaled 1.3 billion for the quarter, representing 1% growth on a combined currency neutral basis. Adjusted operating EBITDA grew 6% with a 60 basis point margin expansion led by strong cost management. Looking at Nourish's performance by business, flavors drove growth in nearly all our regions. Within ingredients, which was flat year over year, protein solutions grew double digits, but this was offset by softness in emulsifiers and sweeteners. Continued pandemic-related challenges impacted food design, particularly food service, which declined mid-single digits year over year. As the effects of the COVID-19 pandemic lessen and retail and away-from-home channels continue to recover, Returning to growth in this area while maintaining our strong performance in Nourish's other segments will remain a top priority for the remainder of 2021. Moving to health and biosciences on slide 13. As Andreas noted, H&B had a combined currency neutral sales decline of 3%, but this was against a robust 11% positive year-over-year comparison. It should be noted that on a two-year average basis, currency neutral growth was solid at 4%. Adjusted operating EBITDA was also pressured and operating margin declined by 70 basis points, primarily driven by lower segment volumes and higher raw material and logistics costs. Our home and personal care business grew strong double digits this quarter, supported by evolving consumer buying trends related to the pandemic that have persisted through Q1. But declines in animal nutrition this year when compared to mid-teen growth in the prior year period, offset that performance and impacted overall year-over-year growth. Microbial control and grain processing were also impacted by continued pre-COVID cycling, which impacted H&B's overall growth by approximately five percentage points. We are pleased to say that over the course of the first quarter, these businesses showed improvement and were positive in April as recycled and comparable. We are encouraged by the tremendous performance of home and personal care, which is a testament to evolving consumer trends that prioritize individual health more than ever before. Turning now to slide 14 to discuss the results of our CENT division. Overall, we are very pleased with CENT's strong performance, which has been a significant contributor to our company-wide growth. Our CENT division generated $569 million in total sales, representing 5% combined currency neutral growth against a strong 7% growth in the year-ago period as well. On a two-year basis, growth is exceptional at approximately 6%. Adjusted operating EBITDA improved 8% with a 70 basis point margin expansion predominantly driven by volume growth across the entire segment as well as favorable mix from fine fragrance recovery and continued productivity. As we began to see last quarter, Our fine fragrance business experienced a solid recovery as away-from-home restrictions continued to lift and consumer behavior returned to more traditional levels. Coupled with this rebound, continued strength in consumer fragrances and mid-teens growth in cosmetic actives resulted in another quarter of strong performance for the entire division, driven by volume recovery and new business wins across the segment. Our new call lists are also providing strong contributions, with all three customers growing double digits in the first quarter. Now on slide 15, I would like to discuss the results of Pharma Solutions, our fourth division. As previously mentioned, Pharma Solutions had an impressive quarter of broad-based growth and made a solid contribution to IFF's overall higher Q1 sales. Pharma Solutions delivered 162 million in net sales, representing 3% in combined currency neutral growth, while adjusted operating EBITDA grew 2%. Taken in the context of their 11% growth in the prior year period, growth is impressive on a two-year basis, average basis, at approximately 7%. Looking at Pharma Solutions' performance by business, Core Pharma and Industrial Pharma led the division with volume growth for Metocell, seaweeds and coatings proving instrumental to core pharma, and global specialty solutions and nitrocellulose supporting the success of industrial pharma. While we're very pleased with Pharma Solutions' sales performance in the first quarter, we saw adjusted EBITDA margin decline due to higher cost of goods related factors. More specifically, gross margin was hurt by higher raw material and logistics costs related to supply chain challenges and force majeures due to the bad weather in the Midwest earlier this year. We had two plants shut down temporarily, which impacted raw material availability and caused higher distribution costs. Now turning to slide 16, I'd like to review our cash flow dynamics and capital allocation, which remain a top priority. As you will see, our operating cash flow was very strong at $358 million. We are quite pleased with Q1 cash generation. For legacy ISF, Q1 is usually the lowest cash flow quarter of the year. We typically have net working capital headwinds as we reset off Q4's lows, and we make annual bonus payments in March. And this year, we also had large deal-related costs, such as cost to achieve, investment banking fees, consulting expenses, et cetera. A large part of our Q1 success came from core working capital, where we generated 193 million a great job by our global team and a great outcome, but we don't expect this quarter after quarter as we'd like to build inventory up in some of our legacy NNB business areas to support future growth. In the first quarter, CapEx was approximately 93 million, or 3.5% of sales, up from last Q1's combined comparative 76 million, or 2.6% of sales. Free cash flow generation was therefore a strong $265 million, and we distributed $82 million in dividends to our shareholders. Our leverage, which is net debt divided by credit, as Andreas noted back on slide six, this is ahead of our expectation of 4.5 times first quarter post-merger leverage. Now to provide some full-year context. Legacy IFF generated $520 million of free cash flow in 2020, And combined, we expect to generate $1 billion in 2021. In 2021, we will invest more in legacy NNB production capacity to meet expected strong future demand, but will only be slightly above our original full-year CapEx projection of approximately 4.5% of sales. The dividend payment this quarter will be $197 million, reflecting our higher post-merger share count. and we remain on track to meet our long-term deleveraging target of three times net debt to credit-adjusted EBITDA in 24 to 36 months from deal close. Turning to slide 17, I'd like to provide an update on our full year 2021 consolidated financial outlook. But before doing so, I want to remind everyone that in mid-April, we provided sales and adjusted EBITDA metrics for each of IFF's four segments on a 2020 pro forma and combined basis, and additional detail on a segment level via our Learning Lab series. We are now, in the appendix of this presentation, providing an additional look back at the combined company's historical quarterly results for 2020 as part of our commitment to transparency and helping our shareholders understand the new IFF. On a combined basis, ISF generated 10.6 billion of revenue for the full year 2020 with currency neutral growth of approximately 2%. And our combined adjusted operating EBITDA margin for 2020 was approximately 22%. Please remember that combined includes 11 months of NNB and 12 months of ISF in 2020 and 2021. In our fourth quarter conference call in February, we gave initial pro forma guidance which resumed the full 12 months of ISS and NNB in order to be directly comparable to our previously provided S4. Moving forward, to be more aligned with actual results and reporting, we are transitioning to guiding on 11 months of NNB, which excludes January, and 12 months of ISS in the 2021 year, in light of the merger completing on Feb 1st. Also, please note that in January 2021, NNB's actual sales were approximately $507 million, and adjusted operating EBITDA was $107 million. Given our first quarter results, our April preliminary sales, our rest of year FX expectations, incremental pricing to recover costs, and the fact that Q1 was our toughest comparative period quarter, we are forecasting stronger sales growth through the rest of 2021. We have therefore increased our sales expectations for 2021 to be approximately 11.25 billion in combined revenues or plus 6% growth with an approximately 23% adjusted operating EBITDA margin. Since the beginning of the year, we have seen a rise in the cost of goods driven by input costs, including raw materials and logistics. In terms of raw material costs, we are seeing a large increase in selected commodities, soy, locust bean kernel, vegetable oil, turpentine, and propylene glycol. In addition, freight costs are higher as a result of greatly increased rates. For example, the global freight index is up three times due to non-availability of containers at contracted rates. And we're also seeing an uplift in air freight volumes due to strong demand and supply chain challenges like force majeure earlier this year. This has required us to go back to have additional pricing discussions to cover our exposure. While we are confident that over time we can fully pass along the increase, there is a time lag before pricing is fully realized, which can pressure gross margin in the short term. Ultimately, by the end of the year, we are confident that through pricing and our ongoing focus on cost reduction, we can achieve our full year adjusted operating EBITDA goal on a combined basis. With regard to Q2, we are pleased that we've started the quarter strong, a nice growth acceleration versus where we ended the first quarter. We're optimistic that for the full second quarter, revenue growth, including currency benefits, should be in the high single digits range, with an adjusted EBITDA margin also around 23%. To assist with understanding and modeling the new IFF, we are also sharing our expectations with regard to depreciation and amortization, interest expenses, CAPEX, our adjusted effective tax rate, excluding amortization, and our weighted average share count, all on a combined basis. While most of these metrics probably don't need to be elaborated upon, it's worth noting that we expect moderately higher capex in 2021 as we invest for growth and work to exit some of our IT-related transition services agreements with DuPont more quickly than planned. providing a 2021 adjusted effective tax rate excluding amortization for the first time. And the 21.5% is broadly in line with our early expectations. This is still preliminary and will change as we finalize purchase accounting and intangibles by jurisdiction. The equivalent for Heritage IFF on a similar basis for the full year 2020 was approximately 18.5%. These metrics and decisions reflect our confidence in IFF's ability to deliver solid results, even in this volatile global environment. With that, I'd now like to turn the call back to Andreas, who will provide some closing remarks.

Thank you, Rustem, and thanks again to all for joining us today. I would like to wrap up today's call by first giving an enormous thank you to our thousands of employees around the world who have worked tirelessly over the last quarter to successfully execute our business initiatives, deliver for our customers and achieve solid top and bottom line business results, all while making exceptional strides integrating NNB into the IFF family. It has truly been a busy quarter, and we all have much to be proud of, especially as this all was accomplished during a global pandemic. Looking beyond our solid Q1 financial results, I want to reemphasize the important first step that we took in tightening our business and optimizing our portfolio strategy by agreeing to divest our food preparation business. By divesting this non-core business, IFF will be a more efficient organization with a greater capacity to focus on growth and innovation across our key businesses, ultimately generating greater value for our shareholders. As we enter Q2 together, we are confident that we have the right team and the right structures in place to ensure that our newly combined company will meet our financial and operational goals. As I mentioned, we are targeting strong year-over-year financial improvements with accelerated sales growth over the coming quarters. leading innovative products and services to our customers around the world. And as Wisdom stated, we are pleased that we have started Q2 strong and optimistic that our full second quarter sales growth should be in a high single-digit range. I'm tremendously proud of all we have accomplished and I firmly believe that the best is yet to come. We're taking each and every learning from the NMB integration process to create a stronger, more agile, and diversified company that defines the future of our industry and showcases what it means to be a leading ingredients and solutions partner. With that, I would like to open the call for questions. Thank you.

At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may withdraw your question at any time by pressing the pound key. Once again, to ask a question, please press the star and 1 on your touch-tone phone. One moment while we queue. We'll take our first question from Mike Sison with Wells Fargo. Please go ahead.

Hey, guys. Nice start to the year. In slide 8, I thought that was really helpful. You do show, you know, some businesses at that 4% to 5% sales growth range. If you think about you've owned a business for about three months now, can you maybe talk about what needs to happen to the other businesses below that four to five percent and your confidence since you've owned a business now that you can get each of these product lines sort of in that range, you know, over the next couple of years?

Yeah, thank you, Mike, for the question. Yeah, first of all, I think that we really expect that the growth will accelerate over the course of the year. And that's driven, as Rustem said as well, with a good start into the second quarter, which was actually the first quarter was our toughest comparison. So that's the reason why we raised our sales expectations for the year. I think that's important. So now coming to the different parts of the business. I would say, first of all, we see, if you look at the scent business unit, a real good recovery on fine fragrances, which is really fantastic. In the first quarter and also starting the second quarter, which is good, we see still a great growth on cosmetic actives. So that's basically super important for us as well. And the consumer fragrances stay on an elevated level. If you go to the health and bioscience business, you see a couple of elements. You see that health and the cultures and food enzyme business should grow mid-single digits. And you will see a recovery of the microbial control business, which was very much hurt by the situation last year. So that's important as well. And then on the nourish side, very solid performance on taste, particularly the legacy flavors doing very well. But on the new parts, protein solutions via alternative proteins, are going very well. And then you will see a turnaround in the food service as well, if the countries and economies are opening up. And that's probably a general remark. We have seen good growth, as you have seen in the presentation, in most of the regions, but in Europe, and Europe will turn around as soon as these economies are opening up after the pandemic as well. So I hope, Mike, that gives you a bit more color here.

I'll take our next question from Mark Astrakhan with Steeple. Please go ahead.

Yeah, thanks, and morning, everyone. Morning. I guess a broader question, it's something that we hear probably most frequently from folks out there asking about your company is, Why or what gives confidence that IFF can sustain the share gains implied by the 4% to 5% currency neutral long-term targets that you have when growth has been below peers in recent years, even adjusting for FX changes? And I guess related to that, first quarter growth was below peers who also had tough comparisons, not as tough as yours, but still tougher comparisons. So what gives confidence that you can see an acceleration implied by the guidance over balance of the year as well as longer term. And I want to just kind of squeeze in a related question, which is just how do we measure or how do you measure maybe your peer performance? What is the group that you use to measure your peer performance versus peers? Traditionally, it's been Jiv and Simrise. Now it's Christian Hansen. Who should we all be paying attention to? Thank you.

Let me start with the last question first. I think you basically named all the companies which are relevant for us. Maybe you should put Cary in the mix as well, in particular for food service and some of the ingredients. And then you have actually a very nice peer group together. So what we want to do on the midterm is actually what we are doing, we have done a complete strategic assessment of all the categories where we believe that we have growth and margin potential. We certainly will emphasize in terms of our resources behind these categories. Some of these categories are just, for example, on health, like the probiotics business, for example, where we put good resources behind to make sure that we can outgrow the competition here. And I think if you look at the start into the year, It's 3% growth if you adjust for the days, and there was a very strong comparison with 7% in the last year. So we're actually quite happy with the start, and we have seen some of the portfolio pieces are performing very well. Like the flavors business is coming well. You see it in everything which is plant-based and protein-related. And we see some, let's say, turnaround as well. And I mentioned before when Mike Sisson asked on the microbial control, which is coming back. We see the food service business are coming back. And these are all good signals that we are on a really solid track now to accelerate our goals. And that's the reason why we said we raised our expectations for the rest of the year.

And we will take our next question from Adam Samuelson with Goldman Sachs. Please go ahead.

Yes, thanks. Good morning, everyone. Morning. Morning. So I was hoping to ask about some of the color on raw materials and cost trends. Obviously, a very dynamic kind of raw material environment. The increases in freight are noted. Just trying to make sure I understand kind of the magnitude of how much that has increased relative to your initial look at the year. provided a few months ago, how much incremental price you're calling for or expecting, and then it's reformulation and how we think we end the year on that kind of price-cost balance.

Right. Adam, it's Rustam. Let me take that. So we started 2021 expecting our inflation to be low single digits, okay, with some modest increases. mostly offset by cost declines, right, some cost declines. But since then, we've seen some large increases in raw materials. We've kind of talked about them, soy, locust bean kernel, a whole bunch of them, right? Also higher freight costs due to sharply increased rates plus higher air freight volume in specific areas where we have strong demand, you know, coupled with inventory and supply chain challenges. But in any case, to answer your last part of your question, We do now expect raw material and logistics inflation combined to be in the mid-single digits this year. And obviously, this requires us to go back to our customers.

And we will move next with John Roberts with UBS. Please go ahead.

Hey, guys. This is Lucas Berman. I'm for John. Thanks. for the learning lab videos on the website for the four segments. The extra details there were quite helpful. Just on the fifth one on R&D, could you provide some breakdowns of the new R&D budget? Do you spend roughly the same percent of sales for each segment? And how much of the R&D is centralized versus how much is in control of the four segments? Thanks.

Lucas, thank you for the question. So the combined company budget for R&D is approximately $620 million. It's around about 5.5% of our annual sales. And we are certainly a leader in terms of R&D within the industry. What we have done is we went through all the different categories and technologies and looked what we can put actually the best R&D dollars behind. So we are prioritizing our investment towards the highest return opportunities. And that means that we spend actually a fair amount of money on health and bioscience. I think that's very, very important. So the biotech area is one of the main investment areas. For example, probiotics, enzymes, and cultures. Just to name one. And then we have certainly a centralized R&D approach, and we have probably at least half of it on the centralized R&D, and the rest goes into application labs. But as I said, a big piece of our investment goes into the biotech area. which I think is super important for our customers and certainly for the development of some of our technologies going forward. I hope that helps.

And we will take our next question from Fida Elwi with Deutsche Bank. Please go ahead. Yes, hi.

Good morning. So I wanted to ask about, you know, we're in a time when a lot of CPG companies are looking to reduce their COGS. And I know for legacy flavors and fragrances business, these only comprise about 2% to 5% of COGS. So often we've seen customers leaning in on these ingredients to differentiate their products while cutting some more expensive items or more expensive maybe active ingredients. But how should we think about this sort of in context of the combined business? enzymes can be used to lower other more expensive ingredients, but just would be great to get more color from you on this, and if there are any sort of early examples of how IFF is being impacted so far by your customers' need to lower costs, and if there are any sort of areas of the business that stand to benefit versus those that stand to get hurt.

Thank you. Thank you. Good question, and it ties very well with the R&D question previously. So certainly We are not just offering, let's say, the flavors and fragrances. So we have now a much broader set of technologies and innovative solutions so we can play with it. And that can, first of all, differentiate us in the marketplace. but also can help to reduce cost. For example, on the Legacy website, we can partner with our customers, reformulate, allowing them to reduce cost. For example, we can use our modulation technology for that, to reduce cost for sweeteners in their products. But also in terms of our new platforms, we have now really the leading biotech platform, and that gives us really endless opportunities to use the fermentation technology, reduce import costs, and basically create some of the ingredients via biotech pathways. So actually bringing everything together gives us a very synergistic approach to help our customers not just to find really super innovative solutions which are helping them to win their own clients and customers, but also reduce costs. I think we are in a very, very good spot and position here.

We'll take our next question from Matthew Dio with Bank of America. Please go ahead.

Hi. Yes. So, um, I made some comments about, uh, India exposure and the legacy N and B business on its one Q earnings call. Um, just kind of wondering if you could walk through what your exposure is to India and what, what you're seeing there, is it the commentary made it seem like there was some elevated exposure. Um, perhaps it's relative to their current portfolio, but, um, We did receive a number of questions on it into the quarter.

Yeah, Matt, thank you for the question on India. We have probably about 5% of our business in India. Actually, the Q1 was up double digits, so it was a very good performance. And it's interesting that you're asking because it's such a, let's say, desperate situation in terms of the pandemic right now. So I talk on a regular basis with our country manager and We haven't seen any slowdown of the business, which is kind of interesting, but we are cautious with India. So, so far, we haven't seen any negative impact on the business, but we are cautious, and the business is around about 5% of our total business.

We will move next with Ghanshyam Punjabi with Bird. Please go ahead.

Thank you. Good morning, everybody. You know, Andreas, as vaccines get deployed and, you know, mobility is improved in regions such as the U.S. and China, are you seeing a related increase in new product development at the customer level as they sort of position for perhaps a broader recovery? And then also separately to clarify the early question on raw material cost inflation, what are the positive offsets as it relates to the updated EBITDA guidance given your cost inflation has been raised from the low to mid single digits. Thanks so much.

Let me get started and then I hand it over to Rustin for the raw material part. So we see more demands coming in from our customers, which is really good. So new product development is happening. And we don't see it just with our big customers. We see it with some of the small customers coming back as well, which I think it's a good and excellent, excellent sign. And we see it in many of our categories, even on the fine fragrance side, which has shown actually very strong development in the first quarter and a good start or excellent start into the second quarter as well. So short answer, yes, we see an uptick, a second part to it, and we see it also with smaller customers as well. Rusten, if you go on the romance?

Yes, absolutely. So we do expect negative pressure on our gross margin this year. And that's because it takes us time to go back to our customers to have the additional pricing discussions and all the rest of it. So we do not expect to be able to, in this fiscal year, to be able to recover the full extent of the raw material increases that we are seeing and we envisage. However, I mean, we do have positives. We do have positives coming from FX coming through. We do have positives from higher sales volumes, and we do have the positives from lower RSA as a percentage of sales. So, you know, on an operating margin perspective, that reduces the negative down quite a bit. And at the end of the day, your EBITDA, I mean, you know, combined with our focus on, you know, everything we've talked about, the cost reduction, all the rest of it, we're confident that we can achieve our full-year adjusted operating EBITDA goal on a combined basis, the dollars.

I think that's an important point, what Rustem is just saying, because we have now, with the integration, good flexibility on the RSA side, basically to buffer these developments.

I will take our next question from Gunther Fitchman with Bernstein. Please go ahead.

Hi, good morning, Andreas, Rustem, and Mike. Can I just ask on your organic sales growth outlook? You have in the slide, page 17, 6%. I believe that's reported sales growth. Can you, first of all, split out how much of that is like-for-like, please? And then coming back, Rustem, to the discussions around raw materials, how much of that would be pricing? Because I believe when you last gave guidance still with a 12 months, you gave a 3% organic sales growth guidance, but most, if not all of that, would have been volumes. Thank you.

Yeah. So, look, maybe I get started, and then, as usual, Rustem can comment on the role. The organic sales growth will be 4%. That's what we are, currency neutral. That's what we are planning. Rustem?

Okay. So, I mean, that was the... I was going to say the same thing, that effectively FX is helping us as well in the six percent number as we see for the whole year. So, Gunter, the other part of your question was just in terms of recovery, right? And we do expect to recover part but not all. We haven't quantified that yet and specified part but not all of the increase in material costs. Does that clarify?

And we will take our next question from . Please go ahead.

Thanks very much. I was wondering what's the magnitude of the divestitures that you contemplate? Is it 500 million in sales or 700 million in sales or a billion? What's the scale? And secondly, in looking at your global sales review, it seems that the issue was Western and Central Europe, which contracted 5%. What is it about your business in Europe that's so different than your businesses in the other region, such that you have a negative growth rate? And how does that region look for the remainder of the year?

Yes. Let me, Jeff, thank you for the questions. The magnitude of the divestitures for the non-core businesses might be around about 5% of sales growth. That's what we are targeting. uh right now and in terms of europe uh i think what is really important that you see the covet impact on on europe and that's uh that's probably the biggest impact we we see right now because the composition of the business has a lot of food service in for example we have the uh at least up to end of last year fine fragrance was impacted because a lot of it comes out of out of europe as well And that was probably the main impact. And now with the hopefully opening up of the economies in Europe and increasing vaccination rates, we expect actually a good turnaround with our European business. And actually, we have seen the first signs already in April, which is really, really good for us. I hope it helps to answer the question here.

We'll move next with J.P. Juvikar with Citi. Please go ahead.

Yes, hi, good morning. Good morning. Andreas, you've talked about food service business and fine fragrances, two businesses that kind of took a hit during the pandemic. As the economy opens up and people start going out, how quickly can they get to pre-pandemic level? And then one question for Rustam. You mentioned your top raw materials to rattle them off, but can you talk about your top five or six, rank order them so we understand what is the raw material exposure of the combined company?

Thank you. Okay. Let me get started first. I would say on the fine fragrance side, faster than we had expected. I believe we expected end of last year still that it takes us until 22 to get back to pre-pandemic levels. But now I will be more optimistic in what we are seeing right now, which is really good. Food service might take a little longer, and particularly out of Europe, to get back to the pre-pandemic levels. I think we will hit it probably next year, but I would say it's very, very dependent what's happening now in the second and in the third quarter. But as we said, fine, more optimistic than end of last year. Food service, we will see, and the focus here is on Europe.

Yes, I would say that soy and locust bean kernel do stand out as two of the largest in there. And the vegetable oil is much smaller and several of them. And I mean, turpentine is something we have as well, but much smaller in dimension. And of the last one that we mentioned, propylene glycol, that one is fundamentally, it was force majeure related and will work its way back.

We'll take our next question from Brian Tompkins with Jefferies. Please go ahead.

Thanks very much. Hello, everyone. Yeah, I was wondering if you could give an idea now that you've secured your first invoice for cross-selling and solution selling of what you might think the profile of the customer will be or who you're getting better traction with, maybe in terms of size, geography, product, any information would be interesting there. And then just more of a housekeeping one. I noticed since Q4, the DNA guide has gone up a little bit and it looks like the tax rate guiding for is quite a bit higher than what was implied in Q1. So whether we could just have a comment about that, that would be appreciated. Thank you very much.

Sure, absolutely. I take the first one, Rosam takes the second one. So the first thing we are seeing in cross-selling is that we had the first big win with a big customer, and it was actually a cross-sell in between our scent business and our health and bioscience business. So it's a combination where basically we get something on the enzyme side because we have good access to our scent business. So bigger customer, a European but a global customer. And I think on the product side, As I said, it's in the detergent area, which I think is very, very good and very promising because we see a good pipeline now also on the food side coming in so far, our nourish division. So it's going actually very, very well, and I think we can make the 20 million we were promised for this year actually quite nicely in 21. And now I hand it over to Rustam.

Thanks, Andreas. Yeah, there's no change, really. I mean, we had never before actually specifically guided to the PNL-X AMOT. We thought that would be more useful because, as people have pointed out to us, that when doing the modeling, I mean, we are talking about our EPS-X AMOT, our EBITDA, all the rest of that. So that's really what we did. I mean, if you look at 2020, to clarify, I mean, the adjusted PNL number that we had for the whole year was 17.5%, and the P&L XMOS 18 1⁄2, right? And so the number this year, what we're going to at 21 1⁄2 is roughly about 100 basis points simply for the difference between those two. And then the rest of it is just the fact that NNB came with a higher tax profile, which we had communicated and expected.

I'll take our next question from Mark Connelly with Stevens. Please go ahead.

Thanks. Rostam, if we look past the nice progress on working capital, do you think that the normal progression of working capital has changed very meaningfully, you know, leaving out any discreet benefits you continue to get from the merger integration?

No, look, for the rest of the year, I wouldn't be expecting working capital to improve the same way at all. I mean, we had a very, very strong first quarter. I mean, we had roughly an eight-day improvement in working capital days, right? And that was driven by HIF and F inventory, legacy IFF inventory, and legacy NNB payables driving performance. As we go forward in the year, we'll actually be building inventory at legacy NNB to satisfy demand and lessen the strain on our supply chain. And also the raw material cost increases we're talking about are going to increase the dollars on hand. Right? I mean, DSO pretty stable through the rest of the year. And so we haven't specifically forecast core working capital, but basically by the end of the year, I would think we'd expect it to go up a little bit. And that's all factored in. We're still pretty much able to deliver the, you know, one billion of free cash flow that we have in mind for the year as well. And that's with the working capital, with the capex, with everything.

I'll take our next question from Lisa Deneve with Morgan Stanley.

Hi, guys. Just two from my side. So far, we've talked about the segments where you expect sales to return back to growth. So talking about the other side of the coin, I mean, which segments should we perhaps consider could normalize as we're going through the coming quarters, especially as it relates to, for example, consumer fragrance, immunity-exposed sales, which some categories have done incredibly well. But as well, some of your peers have flagged quite a level of stocking in some categories in the first quarter. So it would be very helpful to sort of get your view on this. Thank you.

Sure, Lisa, absolutely. If I look at the different categories here, the good news is if we look at our forecast, actually almost all of the categories will see some growth going forward. which is actually a great situation where we are being in. I agree with you on the consumer fragrance side where we had double-digit developments in the last year. We might see a bit of a normalization, but we still expect good growth and maybe single-digit growth in that very important category. Let's say category where we have very strong comparables is probiotics. You might have seen this for a couple of months. It was for legacy NMB double digit growth last year. So we will see a normalization here, but still a growth in the mid single digit range going forward. So these are the two categories which I would call out. All the others are looking actually quite strong going forward in terms of growth.

We'll take our next question from James Stargate with Burenberg. Please go ahead.

Hello. Good afternoon. I just wanted to go back to pricing and just ask about is there anything about the new NB business which makes past price through harder or easier than legacy IFF thinking in terms of how long pricing, sorry, input cost may take to pass on that? And just to follow up on the, I think on the last question, just in the health and biosciences division, you're flagging softer growth in health and negative in cultures and food enzymes. Is that just down to the tough comp or is there anything sort of more underlying in terms of market demand there? Thank you.

Yeah. Let me take it and start with the second question first. It is basically tougher comparisons. That's what it is because last year, end of first quarter and into the second quarter, it was very, very, very strong, very double-digit, and that was hard to, let's say, to make up this year. We have seen, let's say, in Q1, for example, on the health and bioscience piece, really double digit growth. And as soon as that normalizes, we will see good growth coming out of H&B as well. Because the underlying business is actually very good. and the demand is strong. On the pricing side, it's basically a pass-through. As you were saying, it's easier to raise prices compared with some of the legacy F&F businesses, and so the time is not as long as it is for some of the F&F businesses. I hope that answers the question, the first part.

And we will take our final question from Lauren Laberman with Barclays. Please go ahead.

Great. Thanks. Good morning. I know we've covered a lot. One more thing I was curious about was the free cash flow guidance being at a billion for this year. It just strikes me as a bit low given that I think the IFF, the management case for NNB, was originally calling for something closer to like 1.3 million. billion for 21. I know that's a 12-month number. We're only looking at 11. But that wouldn't really explain all the difference. So I was just curious, you know, kind of thoughts on why that lower free cash flow guidance for the year. Thanks.

Justin? Oh, yes. So, Lauren, hi. The 12 months versus 11 is a factor, of course, right, coming through the number. We expect slightly higher CapEx than we originally envisaged as we invest in the business. integration, capacity, normal run, maintenance, all the rest of that, right? We're also building, as we said, a little bit more inventory than we expected to in the legacy NNB end of the business, and so that's going to add as well. And fundamentally, I mean, the rest of it is strong EBITDA, and then the business just flows through. Yep.

and shows that we have no further questions at this time. I would now like to turn the call over to Andreas Fipek for any closing remarks.

Yeah, thank you for the participation. Certainly a very busy and good quarter for us because it was the first two months as a combined company, and you've seen lots of moving parts also in the external environment, but I believe IFF handled that well, and I would like to thank the employees again for that robust first quarter, and also we see actually a positive sales development and expectations for the rest of the year. With that, I wish you a productive and good day, and talk to you soon. Thank you.

This does conclude today's conference. Thank you for your participation, and you may disconnect at any time.