International Flavors & Fragrances, Inc.

Please stand by. Your program is about to begin. If you should need any audio assistance during your call today, please press star and zero. At this time, I would like to welcome everyone to the ISF's second quarter 2021 earnings conference call. All participants will be in a listen-only mode until the formal question and answer portion of the call. To ask a question at that time, please press star 1 on your telephone keypad. 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 IFF's second quarter 2021 conference call. Yesterday, we issued a press release announcing our second quarter financial results and outlook for 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've been 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 note that we'll be using combined historical results for the second quarter defined as three months of legacy IFF results and three months of legacy NMD results. And for the first half 2021 defined as six months of legacy IFF January to June and five months of legacy NMD February to June in both the 2020 and 21 periods to allow 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, Ruth Mangiello. We will begin with prepared remarks and then take any questions that you may have at the end. I would now like to call, turn the call over to Andreas.

Thank you, Mike, and thank you everyone for joining us today. I will begin today's call by providing an overview of our performance during the first half of 2021. followed by an update on regarding our ongoing efforts to fully integrate the NMD business following the completion of the transaction in the first quarter of the year. Rustem will then provide a detailed review of our second quarter financials, highlighting segment level business performance and the market dynamics we saw in the quarter. Before we jump into the question and answer session, Rustem will also conclude with an overview of our expectations for the remainder of 2021. Now, beginning with slide six, I would like to review our business highlights for the first half of the year. I'm pleased to report that IFF has delivered a strong performance in the second quarter, which is a robust acceleration versus our combined Q1 growth, and so the first half of the year. As I've said before, execution is everything. And IFS has delivered strong financial results while advancing our ongoing integration efforts, following the completion of the NMB merger in February. In the first half of 2021, IFS achieved 5.6 billion in sales, representing 8% growth or 5% on a currency neutral base. For comparable purposes and to reflect the portfolio differences between our peers, I want also to highlight that both businesses performed well with legacy IFF achieving a very strong high single-digit growth rate with nearly 100 basis points of EBITDA margin expansion and legacy NMP growing in mid-single digits. At the same time, we continue to operate in a challenging global environment with significant headwinds in material cost and supply chain logistics. And the first half combined EBITDA growth was a solid 6% and a combined EBITDA margin of 22.5%. Importantly, our strong free cash flow of 533 million enables IFF to maintain significant financial flexibility, including our efforts to de-lever. We remain on track to achieve our de-leveraging targets of under three times by year three post-transaction close, and we improved our net debt to credit adjusted EBITDA leverage from 4.3 times in the first quarter to 4.2 times in the second quarter. Finally, we are also well on track with integrating the NMB business and continue to realize synergies in line with our expectation for the transaction. As we sharpen the IFF portfolio, we continue to progress on the divestiture of our food preparation business, which we expect to be completed late in the third quarter or early fourth quarter. As I mentioned last quarter, the divestiture of this non-core business will create a more efficient IFF with an enhanced ability to grow and innovate across the key business segments. We are committed to ongoing active portfolio management and will continue to seek ways to increase value creation. Stepping back to reflect on the first half of the year, I'm very pleased with what we have been able to accomplish. We delivered strong sales growth, which is an acceleration versus historical performance for both legacy IFF and legacy NMB in the midst of a transformational integration as well as a global pandemic. This is a validation of our strategy, motivates our team to continue defying industry expectations as we continue to see the benefits of our expanded product offering and capabilities. The long-term growth prospects of our business are strong, and we are making investments in capacity, R&D, and plant technologies, as well as increasing inventory levels and incurring higher logistic costs to maintain our growth momentum in the interim. specifically in the NMB business, as we maximize our growth opportunities going forward. As we look to the third quarter and second half of 2021, our objectives are clear. Build on this momentum while executing on our integration plans, allowing IFF to fully leverage our new capabilities and achieve our long-term expectations. Turning to slide seven, I would like to briefly discuss the regional sales dynamics that influenced our results for the first half. Despite persisting global challenges and varied economic recoveries, we are pleased to report growth in each of our four key operating regions. In North America, we achieved growth in all of our business segments, led by a single-digit growth in Cent, Nourish, and H&B. Similar to the first quarter, our Asian markets continued to perform well, achieving a 5% increase in sales led by double-digit growth in India and a mid-single-digit performance in China. While we had anticipated that growth would have been impacted in India due to COVID in the second quarter, the business was resilient and finished higher than we expected, with strong double-digit growth in Q2. From a segment perspective, in Asia, strong increases across our Nourish, Scent and Pharma Solutions businesses all contributed to this sustained growth in this key region. Latin America. Our strongest performing region, we achieved 12% serious growth driven by double-digit performance in nearly all of IFF's business segments and underpinned by favorable currency and movements. Indian Pact, Brazil, Mexico, and South Corn all achieved growth in the first half. We are particularly pleased to report that our EMEA region has impressively rebounded in the second quarter up to high single digits. we achieved a 2% increase in sales in the first half as COVID-19-related restrictions eased. Our send-and-nourish business performed particularly well in Q2, both achieving double-digit growth. Bearing any newly emerging COVID-19 challenges, we expect this growth to continue through the remainder of the year as global vaccination rates increase and Western and Central Europe continue to recover. Now, turning to slide eight, I will provide a more detailed look at our sales performance across IFF's key business segments to the first half of 2021, particularly those that significantly contributed to our overall 8% sales growth or 5% growth on a currency-neutral basis that I mentioned earlier. We are pleased to report solid growth across all of our four core divisions, nourish, health and bioscience, and then farmer solutions. NOSHA achieved currency-neutral growth of 6% driven by a strong performance in flavors, ingredients, and food design. Similar to the first quarter, SEND remains our largest sales driver on a year-to-date basis, achieving 8% in currency-neutral growth led by a strong performance in fine fragrance and consumer fragrance. Our health and bioscience business has returned to solid growth in the second quarter following a challenging first quarter. where sales were affected by COVID-19 pressures in microbial control and grain processing. While microbial control continues to be challenged, for the first half, we saw growth in grain processing, which showed a recovery in the second quarter, as well as home and personal care cultures and food enzymes and animal nutrition. Finally, our pharma solutions business also delivered growth to the first half of 2021 against a strong year-ago comparison. On slide nine, I would like to discuss the underlying dynamics influencing each of our four segments in the first half. As I mentioned, we saw broad base growth in all nourished categories, led by robust performance and flavors. Despite strong volume and continued cost discipline, higher raw material costs continue to affect margin when compared to the first half of 2020. However, on a year-over-year basis, EBITDA grew about 7%. Our health and bioscience businesses delivered growth in the first half, led by strong performance in home and personal care and grain processing. This growth offsets COVID-19-related pressures in microbial control and a strong year-go comparable in health. High logistic costs related to capacity and strong demand impacted our margin. Nonetheless, we are encouraged by this performance and expect continued improvement as we move into Q3. Our leading growth and profitability driver, Scent, achieved an operating EBITDA margin increase of 170 basis points and absolute EBITDA grew nearly 20%. This was driven by a strong rebound in fine fragrances as retail channels continue to recover, continued strength in consumer fragrances, and double-digit growth in cosmetic actors. Scent also delivered strong profitability led by higher volumes, favorable mix, and higher productivity, which we expect to continue through the remainder of the year. Lastly, informal solutions, the segments, 1% growth was driven primarily by improvements in industrials. So our margin was significantly challenged due to high energy costs, lower manufacturing utilization, and the result in a weather-related raw material shortages. Now on slide 10 and 11, I would like to discuss our continued synergy progress in connection with our merger with NMB. From a revenue synergy perspective, We remain on track to meet our 20 million revenue synergy target this year. Coupled with continued demand and positive feedback from our customers, we are also confident in our ability to meet our 2024 run rate revenue synergy target of approximately 400 million. I would like to spend the moment highlighting how we realized this significant opportunity and share additional context on some of our recent wins. In only six months since completing the merger, we are already seeing strong affirmation in the opportunity before us. Our home care segment is a perfect example of how our expanded portfolio and combined capabilities with NMV delivers creative solutions for our customers and creates new opportunities for our business. Recently, our health and bioscience division saw an opportunity to collaborate with our ascent division. since customers expressed a need for enzyme technology, and IFF's capabilities across divisions allowed us to deliver an integrated solution and ultimately create a superior dishwashing detergent. Together with IFF's leading fragrance capabilities, our enzyme technology ensures fit-for-purpose delivery and performance, which creates a differentiated product for our customers. This opportunity represents more than 5 million in annual sales potential. At the same time, we are actively working with other customers across the IFF network to develop solutions that require capabilities across our four divisions. In the food and beverage category, we continue to see demand for plant-based meat alternatives that showcase the best of our expanded portfolio. For low sugar, low fat yogurt, we are introducing new flavor technologies with improved texture and speed to market, which are key advantages for our customers. Lastly, In our health category, we're developing an integrated solution for fiber gummy that leverages our unmatched scientific and technical expertise combined with our best-in-class flavor offering. These are just a few examples of the cross-selling opportunities that we're seeing customers increasingly demand and differentiated for our business over the long term. We made significant strides in the second quarter from an integration perspective. ramping up our cost synergies from a few million dollars in the first quarter to a total of approximately 15 million on the first half basis. This was largely a result of the comprehensive savings program we have implemented in the second quarter, which allowed us to leverage our increased scale to reduce our indirect spend, benefit from various office consolidations and renegotiations, and right-size our organization. Additionally, Because of our operational strengths and commitment to the integration process, early on, we were all able to accelerate exiting our various transition service agreements with DuPont. I'm very encouraged by the continued progress on this front, and we are on track to deliver at least 45 million cost synergies for the full year, and ultimately our three-year run rate cost synergy target of 300 million. And now, I will hand it over to Ruslan.