International Flavors & Fragrances, Inc.

Please stand by, your program is about to begin. If you need audio assistance during your conference today, please press star zero. At this time, I would like to welcome everyone to the IFF third 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 one 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 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'll be using combined historical results for the third quarter, defined as three months of legacy IFF results and three months of NMV results, and for nine months year-to-date, defined as nine months of legacy IFF, January to September, and eight months of NMV, February to September, in both the 2020 and 2021 periods to allow for comparability in light of the merger completion on February 1, 2021. With me on 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.

Thank you, Mike. Good morning, good afternoon, and good evening, everyone, and I thank you for joining us today. Before I dive into our performance results, I would like to take a moment to thank all of our dedicated colleagues around the world who have continued to work tirelessly in a challenging environment to fuel the global consumer goods supply chain and meet our customers' needs. I can't thank each and every one of you enough for your hard work, dedication, and focus. I also want to take a moment and welcome Glenn Richter, who is joining us on today's call for the first time. As you know, Glenn joined us a little over a month ago as our new Executive Vice President and Chief Financial Officer. I'm sure you will all find that his experience aligns perfectly with our strategic goals, making him an incredible asset to our team. I also want to thank Rustem for his leadership and contributions during his time as IFF's CFO. Rostrum played an important role in our combination with Dupont NNB, and for that, we are immensely grateful. He has been important in putting IFF in the strong position it is today. We wish him all the best in his future endeavors. On today's call, I will begin by providing an overview of year-to-date performance, including the progress we have made so far on our integrations. I will then turn it over to Glenn, who will provide a more detailed look at our third quarter financial results. Before we conclude today's call with a question and answer session, Glenn will also speak to our outlook for the remainder of the year. Now, as I mentioned, I'd like to kick us off on slide six by discussing our financial highlights for the first nine months of 2021. Throughout the third quarter, we remained laser focused on extending the momentum IFF established in the first half of 2021. In the first nine months of 2021, IFF achieved 8.6 billion in sales, representing 10% growth or 7% on currency-neutral basis, a strong reflection of the strengths of our market-leading platform and the compelling position we have established with our customers as a combined company. We delivered a 22% adjusted operating EBITDA margin and a combined EBITDA growth of 5%. As we will discuss in more detail, we continue to confront meaningful inflationary pressure due to higher raw material, logistic, and energy costs. We have maintained our robust cost discipline efforts and are entering the fourth quarter with continued financial strength, having achieved $884 million free cash flow for approximately 10% of our trading nine-month sales, driven by strong cash generation. This cash generation has enabled us to stay on track to meeting our deleveraging target. Finally, as I've mentioned in previous quarters, continued refinement and optimization of our portfolio is a critical component of our ongoing integration efforts. I'm pleased to share that we have completed the divestiture of our food preparation business and are on track to complete the divestiture of our microbial control business in the second quarter of 2022. Together, these two important divestitures will create a more focused IFF, allowing us to hone in on the strengths of our core business segments and create a stronger, more focused business. We will continue to evaluate and optimize our portfolio as we move forward with our integration, looking for opportunities to rapidly divest in other non-core businesses. We started this year with a simple commitment to focus on execution and deliver on the potential of the new IFF. I'm pleased to say that even in a very challenging global environment, our team has met our integration objectives while delivering strong results with continued sales momentum and profit growth. Now turning to slide seven, I'd like to walk you through some of the regional sales dynamics underpinning our results for the last nine months. First, I'm excited to share that we continue to experience strong growth in all four of our key operating regions, despite ongoing and unique market uncertainties that have persisted across each geography. In North America, we achieved 7% growth across all four of IFS business divisions, led by high single-digit growth in Norwich and Send. These two divisions have continued to perform exceptionally well quarter after quarter. In Asia, we experienced a 7% increase in sales led by continued double-digit growth in India, as well as a low single-digit growth in China, even amidst particularly strong recent market complexities in the region. From a business unit perspective, Nourish, Cent, and Pharma Solutions continue to carry the region's growth throughout the year to date. Latin America continues to be our strongest performing region and sales growth leader, having achieved 12% growth, largely fueled by double-digit growth in our Nourish and Cent divisions, and continued local currency strengths. Perhaps most impressive is the 7% sales growth that our EMEA region achieved to date. which includes a robust double-digit increase in the third quarter. Impressive performance on our scent and nourish divisions broke this encouraging rebound, with scent delivering double-digit growth led by our fine fragrance business and nourish delivering high single-digit growth led by our food service business. We expect this momentum to continue through the remainder of the year, and we will stay diligent to ensure our business remains nimble, positioned to perform against any new supply chain challenges that may arise. Moving now to slide eight, I'd like to take a closer look at our nine-month year-to-date sales performance across IBF's key business segments. Our largest division nourished has been a strong performer throughout the year, achieving currency-neutral sales growth of 9% with broad-based strengths from our flavors, ingredients, and food design businesses. Scent has had a similar strong year, delivering 8% in currency-neutral growth to date, led by impressive double-digit growth in fine fragrance, as well as strong growth in consumer fragrance and ingredients. Health and bioscience has seen strong demand in key focus areas, including home and personal care, animal nutrition, and culture and food enzymes. As you know, we are in the process of selling our microbial control unit, which has continued to experience headwinds through this year, but has rebounded from COVID-impacted lows with growth in both Q2 and Q3. This divestiture should further enhance the performance of this important division. Pharma Solutions, despite significant challenges, has fled so far for the year. Supply chain challenges have had an outsized impact on this division throughout the year. While we have seen encouraging growth in our industrial business, the division still struggles to meet customer demand due to raw material availability challenges and logistics issues. Now on slide nine, you will see that we have outlined some of the factors in each of our four divisions so far this year. As I previously mentioned, Nourish has had a strong year with flavors and ingredients experiencing double-digit growth. We have been working hard in our execution to manage volume and cost to limit margin impact from higher raw material costs, which continue to be a headwind on our profitability. While we have seen some margin impact of about 20 basis points in the year, we are proud of how our execution has mitigated much of the negative headwinds while delivering meaningful growth. Our team has did an exceptional job increasing prices to combat inflationary pressures, something that will continue to be critical as we move forward. In health and bioscience, we mentioned broad-based growth across the markets, but here we are seeing significant margin impacts from high logistic cost. As shared on our second quarter call, part of this, that freight rates have increased significantly, but also we are having higher logistic cost to balance robust customer demand and available capacity. We have increased capacity investments in this business to support long-term growth. investing in R&D at plant technology to increase output later this year and into 2022. The center vision has certainly realized the strongest all-around bounce back as consumer demand rises across end markets. Notably, fine fragrances alone has realized 36% growth year-to-date with double-digit growth in cosmetic active and continued solid performance in consumer fragrances. At the time, Sense profitability expansion of 110 basis points has been led by higher volume, favorable mix, and higher productivity. As I mentioned, our solution was the only division in which we did not experience sales growth due to continued global supply chain challenges that have impacted our ability to meet strong customer demands. These challenges, including supply and logistic constraints and ongoing inflation, have in turn significantly pressured our margin compared to the first nine months of 2020. Moving to the fourth quarter and entering 2022, we will be closely tracking supply chain dynamics and will continue to prioritize returning our pharma solutions business to the profitability we know is achievable. And in the fourth quarter, we're expecting year-over-year top- and bottom-line performance to improve. As we have been talking about today, IFF is realizing very strong sales momentum across our business. This is a reflection of the powerful new position we have created through our combination with the NMV business and the compelling value proposition we can offer to our customers. While we are pleased to put many of the growth headlines related to the pandemic behind us, it is important to understand that our growth this year is, in fact, meaningful above pre-pandemic results. If you look at the total business, you will see that on a comparable nine-months performer basis, the new IFF has realized 9% sales growth over 2019 results. This strength is broad-based, too. Each segment is realizing strong growth above pre-pandemic levels. Nourish as a business that was particularly hard hit through the pandemic is now strongly growing with sales growth of 9% compared to a performer 2019 nine-month period. Important, especially given that much of the integration work is coming from within this division. These results showcase how our position in the market has been fundamentally strengthened through the merger and how our teams are delivering the full potential of IFF to our customers. Moving to slide 11, I would like to discuss the strong progress we have made in terms of synergy realization. For just nine months since completing our merger with NMB, our synergy progress reaffirms the tremendous opportunity we have in front of us as a combined company. Having received significant and highly encouraging positive feedback from our customers, Along with persistent, robust customer demands, we are confident in our ability to meet our revenue target. To date, revenue synergies have started to contribute to our top-line performance, and we are pleased that our project pipeline is strong and growing. The first nine months of 2021, we've achieved approximately $40 million in cost synergies, representing nearly 90% of our 2021 cost synergy target with one quarter to go. This was largely a result of the comprehensive savings programs we have implemented, where we are leveraging our increased scale and optimizing our organization. I'm confident that we will more than exceed our 45 million year one synergy target. And I'm encouraged by the continued progress we are making towards achieving our three year runways of cost synergy target of 300 million. Now, Before I turn the call over to Glenn, I want to spend a second to really underscore what he brings to us here at IFF. His background is perfect, but there are two areas I think really stand out. First, he brings tremendous steps with private and public companies and leading finance teams to enhance discipline and build processes that drive towards a goal of shareholder value creation. He has time and time again shown an ability to help businesses accelerate top line growth while driving margin expansion. In this way, he consistently implements productivity initiatives with lasting impact. Second, he has been through several large scale M&A integrations with a track record of strong success. As we continue to execute in our multi-year transformational integration, this experience is invaluable. With that, I'd like to turn the call over to Glenn.