International Flavors & Fragrances, Inc.

I would like to welcome everyone to the IFF fourth quarter and full year 2022 earnings conference call. All participants will be in a listen-only mode until the formal Q&A 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 2. Participants will be announced by their name and company. In order to give a participant an opportunity to ask their questions, We request a limit of one question per person. I would now like to introduce Michael Duvall, Head of Investor Relations. You may begin.

And good morning to everybody. I want to start today's call by recognizing our teams and the incredible work they've done throughout 22. To bolster IFF's industry leadership and also to continue delivering innovative solutions for our customers amid the challenging operating environment. As part of our investor day in December, we unveiled the next phase of our strategic transformation, including our strategic priorities and a refreshed operating model that will better position IFF to drive long-term profitable growth and capitalize on the market opportunities ahead of us. The plan seeks to maximize our competitive advantage and ensure that we are operating as an even more innovative, efficient, and disciplined company. As we delivered a solid 2022 result and 2023 is in full swing, I am pleased to share that we are advancing key elements of this plan and excited to update you on today's call. It is a true privilege to work along such talented and dedicated colleagues. Across our global platform, it is clear that our teams are committed to IFS continued transformation as we delivered unmatched innovation, service, and quality in the solutions that meet the needs of our customers both today and tomorrow. Now on slide six, I'd like to reiterate the financial and strategic initiatives central to the strategic refresh that we were discussing during investor day last December. Following an extensive assessment with our key stakeholders, including our customers, shareholders, and key partners, we've identified several top priorities that will guide IFF's next chapter. First, we're focused on jump-starting even stronger growth across the business. There's no question that our robust portfolio provides a clear strategic advantage. By doubling down on customer excellence and making strategic investments in the opportunities that will reap the greatest returns for our business, we'll be better positioned to drive sustained profitable growth. We have many of the pieces in place to support future growth, a highly diversified offering, serving attractive end markets, global talent, and world-class R&D organization. Our long-term success requires a more disciplined approach to ensure that growth does not come at the cost of profitability. We must deliver on this objective and we are laser focused on doing so. Particularly amid the macroeconomic pressures we are facing today, it is essential that we target enhanced cost and productivity initiatives. In 2022, we implemented several productivity and cost reduction efforts that have proven effective towards offsetting market challenges. Ultimately, our goal is to realize net annual savings of approximately $350 to $400 million between 2023 and 2025, including the additional $100 million in run rate savings we announced at our investor day to support this reinvestment and increase profitability. Moving forward, we will be disciplined to focus on the areas of our business that will best support our profitable growth. investing in R&D to get projects to market more efficiently, enhancing end-to-end productivity to drive improved costs and processes, and further improving our supply chain to be more efficient. An essential component of our value creation plan is our work to simplify our operating model to closely align with our three core end markets, food and beverage, home and personal care, and health, and become one IFF, This new model will be critical to achieve the goals I just outlined, as we enhance our ability to grow profitably through a more customer-centric and market-backed approach. As a result of these efforts, we are building a stronger financial profile for IFF and are targeting sales growth of 4% to 6%, and adjusted operating EBITDA growth of 8% to 10% on a comparable currency neutral basis over 24%, 25%, and 26%. We also remain committed to be leveraging our balance sheet below the three times net debt to credit adjusted EBITDA objective for 2024. Underpinning these efforts will be an intense focus on enhancing our ESG leadership and accelerating our efforts to contribute to a more sustainable world through our operations and initiatives. We will also continue efforts to optimize our portfolio. ensuring we have the offering needed to support future growth while pursuing non-core divestitures like our recent announced sale of our Savvy Solutions business to improve our capital structure. Doing so will allow IFF to reinvest in the high growth areas of our business while ensuring we're operating most efficiently as an organization. Lastly, we continue to take steps to evolve our board in line with best-in-class governance standards. with plans to reduce the size of our board from 14 to a target of no more than 10 IFF directors and one ICON capital designee director by the 2023 annual shareholder meeting. With this initiative, we are also focused on the composition of the board and prioritizing the inclusion of senior executives with the most relevant skills, leadership experience, and business expertise needed to support IFF's long-term vision. As you may have seen, we have some additional board changes since our investor day where we announced Mark Costa was joining us. I would like to welcome Dawn Willoughby and Gary Hu to our board as well. I also want to take the opportunity to thank several board members that have recently come off the board or has been announced and will do so at the annual meeting. We are grateful for the years of tremendous contribution and for all of their hard work and service to IFF. Thank you to Dale Morrison, Michael Ducker, Eileen Gordon, and Cora Schultz. In addition, I would like to congratulate Roger Ferguson on his upcoming appointment to the chair of the board and look forward to continuing to work together. Moving to slide seven, I would like to spend a moment highlighting our new strategic framework. This recently introduced framework will be guided by three key pillars. Be the premier partner, build our future, and become one IFF. Our recently introduced strategic framework is designed to support our mission to do what matters most and drive sustained, profitable growth. With our refreshed approach, we are zeroed in on customer excellence, incremental cost reductions, consistent execution, and disciplined investments to advance the opportunities with greatest potential returns. This strategy deeply embeds ESD plus priorities across our entire enterprise, strengthening IFF's commitment to positively impact our environmental footprint in the communities in which we operate. With this refreshed strategic framework, we are better positioned to meet evolving customer expectations. We're aligning even more powerfully with our customers while fulfilling our purpose of applying science and creativity for a better world. Now on slide eight, there are eight key areas that underpin our strategy to advance our growth agenda and pursue cost reduction and enhance our operating plan. Our growth strategy will rely on improvements to our supply chain, enhance commercial execution, geographic expansion, and advantages from harnessing our innovation advantage. As I mentioned, our focus on driving greater productivity and efficiency are equally important to our sustained success. And finally, introducing our in-market driven operating model, strengthening our talent pipeline and culture, and improving our digital capabilities will complement our ongoing growth and productivity initiatives to support our long-term strategy. Together, these focus areas will enable us to unlock incremental value for our stakeholders and pursue profitable growth in 2023 and beyond while staying nimble through macroeconomic conditions. Moving to slide nine, I'd like to review IFS performance for the full year in which we delivered solid top and bottom line performance despite a very volatile market environment. These results and the progress we've made toward our key operational priorities demonstrate the strength of our global teams, the demand for our offerings, and the effectiveness of our productivity initiatives. In 2022, we delivered $12.4 billion in sales, a 9% growth over the previous year on a comparable currency neutral basis. Adjusted operating EBITDA was approximately $2.5 billion, which equated to comparable currency neutral adjusted EBITDA growth of 4% versus the prior year. While we were challenged by inflationary pressures over the year, our pricing actions and productivity initiatives helped us to offset and address these challenges over the course of the year. All in, IFF recovered more than $1 billion in revenue through strategic price increases in 2022. This allowed us to fully offset our raw material, energy, and logistics inflation seen throughout the year. We also continue to execute on a productivity agenda where our focus on greater efficiency and the optimization of our supply chain to reduce costs, delivering nearly $150 million in productivity benefits in 2022. Aligned with our portfolio optimization initiative, we also successfully completed the sale of a microbial control business. and announce the sale of our Savory Solutions business. Together, these transactions will contribute more than $2 billion in gross proceeds to strengthen our capital structure. We will continue to examine our business and explore additional non-core divestitures and other timely optimization opportunities to further reduce our debt and direct focus to our core parts of the business. At year end, our net debt to adjusted EBITDA ratio was 4.1 times. While we made progress against our deleveraging target, this will be a priority for us moving forward as we prioritize cash flow generation in 2023. Now on slide 10, I am pleased to share that IFF delivered $12.4 billion in revenue for the full year, representing 9% growth in year-over-year currency neutral sales. Our nearest business was a major growth driver, though we saw growth across our four divisions in nearly all of our sub-markets. I will cover this in a bit more detail in a minute. As expected, foreign currency impacted our results through the year, given the significant volatility across the global markets in which we operate. Looking at our overall profitability in 22 on slide 11, despite the combination of inflation and global supply challenges pressuring our profitability margin, IFF delivered 4% growth in comparable currency neutral adjusted operating EBITDA. As I mentioned earlier, the strategic pricing actions taken throughout the year were essential in managing the significant inflation we face. The productivity initiatives we undertaken in 22 more than offset volume weakness as we delivered nearly 150 million in operational efficiencies, which drove our full-year profitability in the challenging operating environment. Moving forward, we'll continue to closely monitor the macroeconomic environment and take the steps in the areas which we can control to ensure we deliver for our customers, our shareholders, and our stakeholders. On slide 12, now our strong performance across business segments showcase the resilience of our portfolio and the underlying dynamics contributing to our overall top line growth. For the full year, NARISH achieved currency neutral sales growth of 11% compared to the previous year, with $6.8 billion in overall net sales. This was led by double digit growth in food designs and ingredients, as pricing actions and productivity initiatives led to a 5% increase in adjusted operating EBITDA. Although impacted by lower volumes, price increases in health and bioscience enabled the business to deliver 4% currency neutral sales growth in 2022, primarily driven by strong performance across all segments, particularly in culture and food enzymes and animal nutrition. Scent also delivered strong 8% currency neutral growth, with total net sales totaling $2.3 billion, led by double-digit growth in fine fragrance and strong single-digit increase in ingredients and consumer segments. Pharma Solutions achieved 15% currency neutral growth, driven by demand in our pharma business and mid-single-digit growth in industrial. Due to volume growth and successful results from our pricing and productivity initiatives, Pharma Solutions enhanced profitability and achieved an impressive 25% increase in adjusted operating EBITDA. Before turning it over to Glenn, I want to provide a comment on our fourth quarter performance. While we anticipated a challenging quarter, the combination of volume deterioration throughout the quarter accelerated in December. as well as its impact on our P&L in negative manufacturing absorption and higher inventories led to a shortfall relative to our expectation. Much of this can be attributed to customer destocking and also softening consumer demand, consistent with what many of our customers have already reported. Nevertheless, as an organization, we need to be better at driving volume growth with our customers, an imperative part of our go-forward strategy. In addition, we will enhance our demand management efforts, process, and tools as it relates to inventory management to ensure we are maximizing cash flow generation. I am confident that the addition of new leadership, particularly in NARISH Division when our new leader is named, and in operations with the recent addition of Ralph Finzel. I have no doubt that through greater commercial execution and more defined processes, we have a lot of opportunity ahead to maximize value creation for our shareholders. I'll now turn the call over to Glenn to provide an update on fourth quarter results and an overview of business level performance.

Thank you, Frank. Greetings, everyone. Let me add my apologies for the technical issue. should have seen DeVos 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 in creating 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 X 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 difficult market environment has weighed on our performance in the fourth quarter. However, I am confident in the steps that ISF 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. Enhancing sales execution disciplines, continuing to price surgically to offset ongoing inflationary pressures, accelerating and importantly expanding our productivity efforts and more aggressively managing cash flow. On slide 14, I want to provide more color on our sales performance in the quarter. In a very difficult operating environment, including strong currency headwinds, we realized 4% comparable currency neutral sales growth. For the quarter, we saw growth in nourish, scent, and pharma solutions. Health and bioscience, which overlapped strong double digit growth from prior year, experienced a revenue decline. Factoring the strong year ago comparison, H&B is up 5% on a two-year average in the fourth quarter. I'll go into more detail on the following slides. In the fourth quarter, we also saw a more pronounced slowdown in terms of volume than we initially expected, down high single digits for the quarter, due mainly to consumer demand slowdowns and significant customer destocking actions. We estimate that about 75% of the drop in volume in Q4 is related to destocking. with the balance coming from softer consumer demand. Turning to slide 15, the fourth quarter market challenges also significantly affected our margins. Comparable currency neutral adjusted operating EBITDA decreased by 5%, impacted by volume declines, including negative manufacturing fixed cost absorption and currency pressures. However, pricing actions allowed us to recover the total cost of inflation Additionally, we delivered notable productivity gains in operational efficiencies, which helped offset some of the volume pressures we faced in the market. Now let's take a look at segment performance on slide 16. Overall, we saw top-line growth across most of our segments in the quarter. Nourish's solid comparable currency neutral sales growth of roughly 4% year-over-year was driven by continued growth in food design and ingredients. Health and Bioscience, which saw a 3% decrease in comparable currency neutral sales, delivered solid performance in animal nutrition and cultures and food enzymes, despite declines in health and grain processing. Both Nourish and Health and Bioscience faced profitability pressures, with 11% declines in comparable currency neutral adjusted operating EBITDA across both due to lower volumes. Our Scent division performed particularly well in quarter. delivering 6% year-over-year sales growth on a comparable currency-neutral basis that was supported by double-digit growth in fine fragrance and mid-single-digit growth in consumer fragrance. We were also encouraged by CENT's 25% growth in comparable currency-neutral adjusted operating EBITDA due to a combination of favorable product mix, the catch-up in pricing to raw material costs, and productivity gains. Our pharma solution segment again delivered excellent performance in the quarter, totaling $221 million in sales, a 15% increase on a comparable currency neutral basis, driven by another quarter of double-digit growth in our core pharma business. However, like Nourish and H&B, price increases and productivity were more than offset by lower volumes and higher energy costs. Moving to slide 17, I would like to provide some additional commentary on our free cash flow dynamics in the year and the progress towards our deleveraging targets. For the full year 2022, cash flow from operations totaled $345 million, while 2022 CapEx was $504 million, or roughly 4.1% of sales. Our free cash flow for the full year was candidly disappointing. at a negative 159 million. Our free cash flow included about 300 million of costs related to integration and transaction-related items. As we discussed in last quarter's call, our free cash flow for the year has been significantly impacted by growth in working capital, predominantly by higher inventories caused by inflation, demand slowdown, and destocking by our customers. Our priority, as Frank mentioned, in 2023 is to take significant actions to improve networking capital, with a major focus on inventories to drive cash flow. Accordingly, we have initiated a number of actions across our business and supply chain teams, including systems and process enhancements, to rapidly reduce our inventories over the course of the year. And while we understand that this will result in negative manufacturing absorption adversely impacting the P&L in the short term, we are prioritizing improved working capital to maximize cash flow results. In keeping with our commitment to return value to our shareholders, we also paid out $810 million in dividends in 22. As I mentioned during our investor day, we are committed to continuing to grow the dividend and will balance dividend growth as we consider reinstituting our share repurchase program once we get debt below three times net debt to credit-adjusted EBITDA. In terms of leverage, we remain focused on efforts to reduce our debt and finish 22 at 4.1 times net debt to credit-adjusted EBITDA ratio. Our cash and cash equivalents total 535 million, including 52 million of assets currently in assets held for sale, while gross debt for the year totaled 11 billion. As part of our strategic priorities, we remain committed to achieving our deleveraging target of three times net debt to credit adjusted EBITDA by 2024, including through deploying proceeds from completed divestitures. Importantly, as Frank mentioned, we will be exploring further opportunities to streamline our portfolio while dedicating resources to our highest growth businesses. Turning to our consolidated outlook on slide 18 for the fiscal year 2023, we expect revenue to be approximately $12.5 billion and adjusted operating EBITDA to be approximately $2.34 billion, representing comparable currency neutral sales growth of approximately 6% and comparable currency neutral adjusted operating EBITDA flat versus prior year. We expect year-over-year foreign exchange to have no impact to sales growth and have a modest or approximately 1% negative impact to operating EBITDA growth. Let's move to slide 19. Given the number of moving parts affecting our 23 outlook, we thought it would be helpful to unpack each of the components impacting year-over-year adjusted EBITDA. Adjusting for portfolio, which includes the health right products acquisition, the 22 sale of the microbial control business, and the anticipated close of our savory solutions divestiture in May of this year, comparable 2022 EBITDA starts at 2.37 billion. As previously mentioned, we expect four year pricing to fully offset inflation with a net zero EBITDA impact in the year. In our plan, we've assumed volume will be flat with high single-digit negative volumes in Q1, modestly down in Q2, and volume growth in the second half. In addition, we are anticipating mix to be slightly unfavorable for the year as we expect some of our higher margin categories will experience volume pressure, particularly in the first half of 23. In order to rebalance our inventories and with driving cash flow generation as an imperative for us this year, We anticipate negative manufacturing absorption will impact us significantly. Specifically, we expect that our actions to reduce inventory will adversely impact our adjusted EBITDA growth by several percentage points expressed in year-over-year growth terms. We anticipate that this will yield a strong improvement in inventories and be a core driver to our targeted 23 adjusted free cash flow of more than $1 billion excluding costs related to restructuring and deal-related items. In terms of cost savings, we plan to drive significant productivity by accelerating our previous launch programs, which focus on end-to-end operations improvements, supply chain efficiencies, procurement, and demand management. We are also undertaking additional actions to cut costs across the organization and reduce our overall spend where possible, including in our D&A line. We anticipate that these additional actions to deliver an annualized run rate savings of $100 million. We will also be reinvesting some of our productivity to drive our top line through strategic growth initiatives, specifically in R&D, our commercial teams, and technology as we begin executing our long-term strategy. Finally, we expect currency to have a modest year-over-year negative impact on EBITDA growth of approximately 1%. As mentioned in terms of the cadence throughout the year, we are anticipating the first half to be more challenging, particularly the first quarter, with a back half improvement. In particular, we expect first quarter copper performance to be impacted by more challenging volume conditions, offset by pricing benefits. For the quarter, we expect sales to be approximately $2.9 to $3 billion. with adjusted EBITDA of approximately 470 to 490 million. As I conclude on the next slide, I want to highlight our four key areas of focus for 23 and provide further perspectives relative to our detailed execution plans for each. First, we are committed to accelerating sales growth as we move through 2023. While we do expect volume to be under pressure from the items I discussed earlier, we are sharpening our sales execution disciplines and continue to be more surgical with our pricing actions with the goal of progressively improving throughout the year. The build-out of the commercial excellence team, targeted growth investments, and increasing our focus on revenue synergies will allow us to capture new wins. Second, as previously outlined, we are focused on enhancing our customer service levels and supply chain efficiencies. With this in mind, we will be setting more granular customer service and related inventory goals by business, utilizing our ROIC framework to guide those goals. Supporting these efforts, we will be rolling out our redesigned sales, inventory and operations planning process. Third, as mentioned, we are determined to accelerate our synergy and productivity efforts this year as well. For your reference, included in our 23 guidance, we are targeting more than $200 million of gross cost reductions from productivity and restructuring benefits. Fourth, and very importantly, we're intently focused on maximizing our cash flow and accelerating the leverage of our balance sheet. We are being extremely aggressive in managing our working capital through heightened focus and improved processes and systems, and we are also actively working to complete our additional non-core divestitures and evaluating additional portfolio opportunities. With that, I'd like to turn the call back over to Frank.

Thank you, Glenn. Before I open the call for questions, I want to take a moment to reflect on what has continued to make IFF a strong resilient organization, and a category-defining leader in our industry. I joined IFF almost a year ago and an important moment in the company's transformation and while our global business sought to navigate an incredibly complex operating environment. As I've mentioned before, what attracted me to IFF was its enterprise-wide purpose to apply science and creativity for a better world. Since then, I have seen this purpose serve as a guiding light as we have continued to build out our teams, expand into new markets, and strengthen our innovation portfolio and pipeline together. In 2022, we have executed tough pricing actions, rolled out new productivity initiatives, and found successful ways to optimize and streamline our portfolio. So we're investing in areas that will generate growth, enhance our profits, and reduce our debt. Most significantly, we have unveiled our Refresh Growth Strategy and are focused on carrying out those initiatives to ensure we are delivering for our customers while also creating strong returns and sustain profitable growth into the future. Our teams here at IFF have rallied to meet the challenges in front of us, and I am confident in our future heading into 2023 and beyond, especially based on the excellent reception from all of our stakeholders following the announcement of our strategic refresh in December. Although we enter 2023 with a cautiously optimistic outlook. I am confident that we have the strategy and the people to address any challenge and deliver long-term value for shareholders and other stakeholders. IFF continues to play an essential role in the daily lives of so many people around the world, and I am energized by the unique opportunity in front of us. IFF has built an incredible foundation as a trusted partner with world-class talent, a robust R&D pipeline, broad portfolio, and I'm confident that our refreshed strategic framework and new operating model will allow IFF to increase our customer centricity, more closely aligned with today's marketplace, and deliver most efficiently for our customers around the world. With that, I would like to now open the call up for questions.

Absolutely. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause it briefly as questions are registered. The first question comes from the line of Heidi Zetterling with BNP Paribas. You may proceed.

Good morning, everyone. So the first question, why should we believe your full year guidance if you're having to downgrade guidance by such a magnitude in a space of two months? And then I have a separate question on portfolio moves, if I can squeeze another. Are there now more options for you now that it's been two years since the DuPont merger? Thank you.

Hey, Heidi, it's Frank, and thanks for the question, and it's really an important one. One, we did provide during our capital markets days a preliminary view into 2023. With that said, I think we all feel that we own some of what 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 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 business 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 costs and absorption, we felt as though we had to really take a look into 23, 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 SNIOP process that's going to be co-led with Ralph 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 can improve as we get in particular towards the back half of the year and as we head into 24. So we feel confidence 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 of 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 March trust now in February allows us to look at the entire portfolio. That work is underway, Heidi, and we will, as we discussed on capital markets, 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.

Thank you. Thank you. The next question comes from the line of Gunther Beckman with Bairstein. You may proceed.

Hi, good morning. I've got one for Glenn, please, if I can. Glenn, could you help us reconcile what the difference is between the $600 million of the adjusted free cash that you disclosed and we actually ended up, which is essentially flat. And then going on from that, can you talk us through the drivers for improvement in 2023, how confident are you? And I'm thinking about the $1.5 billion free cash that you outlined at the CMD in December last year, please.

Yeah, thanks, Sunter. So first of all, to reconcile to 22, our GAAP free cash flow was negative 160. We had approximately $300 million of deal-related integration restructure. So on a like-for-like adjusted basis, that's roughly 150 positive versus the 600. So the 450 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 majority of that driven by higher inventories. The total increase in working capital was nearly a billion one 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 working capital area of focus, where it was a use of a billion dollars plus last year. We expected 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 a 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, some fixed costs, because volumes actually will be lower than sales. We'll actually have a decline of year-over-year production volumes, negative absorption, and 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.

Thanks, Glenn. If I could just follow up with a quick one. How much of the inventory reduction would be driven by lower pricing from raw materials, and how much from less safety stocks, please?

Yeah, good question. We're anticipating 350 to 400 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. That's great. Thank you very much.

Thank you.

Thank you.

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

Yeah, hi guys, can you hear me? Can you hear me? We can.

Yes, Mike.

Yeah, sorry about that. You know given recent commentary from consumer products companies your peers Any insight into your performance in North America and China both you look notably weak relative to to some of these comments.

Thank you Yeah, my god, I'll take this one is Frank for China for the quarter, we did see sales down approximately 4%, Mike. So you're absolutely right. It was another tough quarter in China as we continue to manage overall the lockdowns and then the reopenings and then some of the COVID impacts that we're seeing throughout China. So China still for us is a cautious, I would say, market, and as you're well aware, that is our second largest market, so that's something that we are really continuing to work with our teams there. If you look at North America, you see a little bit of a tale of a couple different stories. Mike, for the full year, we did grow 5% in North America. But we did see an impact in Q4 of 4% decline versus prior year. And that really speaks to what we saw overall of the impact it's had in particular in Nourish, which was down approximately 4%. And then also we saw the significant reduction in North America in the health probiotic business that I've mentioned. And that actually had H&B down. in North America as well. So those are the two, I would say, dynamics in both China and in North America. And in particular, North America, I would seek more to de-stocking as we saw a big hit as we've been discussing here in Q4.

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

Yeah, thanks for taking my question. So just thinking about raw material inflation specifically, I guess first, you know, what's your assumption on the percent increase for this year? And I guess if I look at fourth quarter and how you're talking about first quarter, your top line is kind of the same. So your pricing is better. Fourth quarter, you saw some positive price-cost dynamics. I guess why aren't we seeing that in 2023? And, you know, what are the things we need to watch for in terms of better or worse inflation? Thanks.

Yeah. Hey, Josh. Good question. So let me unpack the roughly 6% inflation expectation for this year. That's about 70% rolls and zero logistics in 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 gets, you know, relative to our cost structures 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 cost, 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've probably seen the peak of inflation rolls 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.

Thank you. The next question comes from the line of Ghasham Kajabi with Beard. You may proceed.

Thank you. Good morning, everyone. Given that it's clear that consumers are 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.

Yeah, Goshen, thanks for the question. We do anticipate just as you think about what we saw in Q4 to continue as I mentioned in Q1, the elasticity question is a really important one. I would say that most of what we are seeing and in discussions with customers, you're seeing some trade down with regards to quantities. You are seeing some trade down to private label, but it's not significant. I mean, it's in different parts of the world. I think you're seeing more price elasticity, honestly, in some of the Asian markets where clearly you're seeing some trade-offs there. But overall, we're not seeing significant trade-offs at this time. With that said, Many of our customers are expecting, and I think you've seen some of them announce, that it's going to be likely to continue challenging first half of the year from a volume perspective. They are continuing to increase prices, and I think that's going to continue as well for the foreseeable future. So that's at least at this point in time how I kind of see the elasticity question. We're seeing some in Europe, one last geography I would mention, but nothing significant to really point to in other geographies.

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

probably for Glenn, so I'll just ask them together. Frank, I assume you're still interim head of Nourish. Can we get an update on that process and did less new wins or slowdown in new products contribute to the lower volume in Nourish? And then, Glenn, I have in my notes that there were two other small divestments expected to be announced by the end of this quarter, I think totaling about $300 million in gross proceeds. Is that still the case? And you didn't provide EPS guidance, so Could you talk about how EPS dilution or accretion could play out as the deals close through the year?

Hey John, it's Frank. I'll get started. So one note, we do not think that, um, the volume declines are specific to any transition and nourish. Um, I think they're much more, uh, market driven as we've been discussing around deep stocking. Um, And in fact, in our flavors business, which is one of our most important businesses, you know, I think we've honed in very well versus competition. As far as the process, I'm 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 NARISH going forward. Glenn?

Yeah, hey, thanks. Good morning, John. So just a reminder, a year ago we had talked about four transactions in total with a probability of 1.5 to 1.7 of gross proceeds. We announced the largest of those transactions, Savory Solutions, which will be over $900 million of gross proceeds in the fourth quarter. And we've mentioned we have two others sort of in the near window. We do believe one of them, circa $200 million, more likely than not, it's not final, will be announced within the quarter. The other two deals, which are relatively small, we are putting on hold. The reason is we are at this point actually taking a more comprehensive view of our portfolio and want to focus on sort of what makes sense sort of longer term relative to the overall portfolio. So our efforts are really against the larger portfolio opportunities at this point versus the residual. But I do anticipate between the Savory Solutions and the latest, probably $1.1 billion-ish or more of gross proceeds. Relative to full-year EPS X AMR, it's likely to be down circa 15%. That's really driven by the dynamics of the first quarter versus prior year. For the balance of the year, it'll be flat and modestly up for the last three quarters of the year. Thanks, John. Thank you.

Thank you. The next question comes from the line of David Bellinger with Dosha Bank. You may proceed.

Frank, with the change in the 23 guidance relative to your IRA day, does this change your expectations for the 24 to 26 period in terms of 46% 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.

Yeah, David, thanks for the question. So the answer is we're still sticking with what we talked about at Capital Markets Day, the 4% to 6% top-line growth, 8% to 10% EBITDA growth over the 24 to 26 timeframe. If you take actually a two-year look back, David, which I did, you know, our business grew approximately volume about 3%. So if you recall, we're in a market that is 2% to 3% in more normal conditions, which obviously we're all looking forward to those coming back. But we still believe that profile that we put forward at this point in time is achievable for Capital Markets Day. And we are accelerating productivity, as we've mentioned. We are bringing forward cost reductions this year. Nothing else additional to announce at this point in time, but obviously myself, the management team, especially during some of the challenging macro environment we talked about, we're going to continue to look for ways to drive additional productivity as we go forward, but nothing additional than what we've already shared.

Thank you.

Thank you. Next question comes from the line of Mark Stanton with Stifle. You may proceed.

Thanks and 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 and unwieldy to run effectively and efficiently. What would you have to see and by when would you consider a more larger scale divestiture or divestitures to essentially shrink and de-emphasize 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. To 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?

Yeah, I'll get started, Mark. I think the volume question is a fair one, but let me look at the portfolio from a couple different lenses. In our scent business, we feel as though our volumes are very comparable to peers and the competitors. In fact, there is some instances, I think, where we're even gaining share in parts of the scent business, and we saw very strong volume growth and fine fragrance as an example. In health and biosciences, Mark, we clearly see good performance in food and culture enzymes. We feel as though we're very competitive in home and personal care. What you're really seeing is the dynamic and the impact on that business is really within health, and we've talked a lot about the shift and change in market demand as well as destocking, but we think overall our H&B business is very important for the future. but there are some clear volume challenges in that one segment, but good growth in other parts of that business. If you come to NARISH, NARISH, we are very competitive if you look on a two-year basis, Mark, because you have to take into account we had a very strong volume growth in 21. But two-year basis flavors is growing approximately 5%. So we feel as though we're in very good position within that business. I think the question really volume-wise is within the ingredients business. And we've spoken about we were capacity constrained in some of those businesses, which impacted some of our volume opportunities. And then we were very aggressive on pricing and made some tradeoffs to preserve margin in that business. And we did probably see some share loss within the ingredients segment, in particular protein solutions. So I think overall, Mark, to your broader question, we feel as though the portfolio is the right one. We hear from our customers, and in fact, many of our team was down at ACI just this or last week. A lot of excitement about the innovation, a lot of excitement about our portfolio. But the proof will be we've got to execute against it, like I mentioned, at Capital Markets Day, and that is our focus. We are going to continue to obviously, as Glenn mentioned, look at the entirety of the portfolio to make sure that it works strategically and also achieves our other objectives of driving profitable growth. But we feel as though the portfolio overall is the right one, and now we're focused on executing as we've been discussing.

Mark, I'd add a couple other items to that. Frank's points is lots of benefits across the portfolio. A lot of our work is on aligning and integrating and maximizing the portfolio. Aligning against three divisions, customer-backed, making sure that we have all the sales and operating teams, focusing on the revenue synergies across the house, systems work, you know, 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, eight different businesses, three 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.

Thank you. The next question comes from the line of Adam Samuelson with Goldman Sachs. You may proceed.

Thank you. Good morning, everyone. I want to, Frank, you referenced 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. 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 24 on an earnings basis if we're lapping pretty significant under absorption charges this year?

Yeah, and I'll get started. I think I will hold any additional comments on 24. I think you're right. It's a short-term impact that will be on the P&L, as you've mentioned, as we work down our inventories and have additional absorption. I think we need to really focus right now on 23. Like I said, we have a, you know, Guidance that's out there for 24 to 26 and then 8 to 10 percent range. I think at this point in time I'd like to hold it there for now and let us work through 23 and come back to you.

Okay Thank you The next question comes from the line of Jonathan Finney with the summer edge you may proceed Good morning and thank you.

So I it seems like it over the past decade i have enjoyed this ability to price and have good visibility regardless of the cost cycle and it just seems lately and and you know when there were problems it was internal it was you know getting the disciplines in place and awareness in place it you look at some of these more recently acquired businesses it just feels like maybe there were always less sustainable margins and and more volatility in terms of just, they're more opaque, particularly, you know, some of the businesses, that's all the volume variances this quarter. So, I mean, how would you comment on that? And is this kind of volatility in both margins and volume maybe more of a new normal? Thanks.

Yeah, yes, this is Glenn Johnson. Relative to the first part of your question, clearly in the last now 18 months, we have significantly improved the disciplines, awareness, and processes relative pricing from tools and cross-training to best practices to much, much surgical application by customer geography, etc. 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, you know, 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 and B portfolio is about equivalency to the F and 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 those 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 of 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.

Thank you. The next question comes from the line of Christopher Parkinson with Mizuho. You may proceed.

Great. Thank you so much. Just going back to the portfolio optimization comment a couple questions ago, you had a very helpful slide in your analyst, I think it's 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 emulsifiers as well. And then on the positives, any update on food design, X savory. Thank you so much.

Yeah, thanks for the question. And as we go in, as we were communicating on that framework, and remember it is a framework, what sits in that 20% is really we're going to look at it from two different lenses. One, and you mentioned protein solutions, and you have some of your specialty proteins, your value proteins that are going into meat alternative products. We're going to continue to look at that business right now. We see it as an important part of our overall offering that we bring to customers because that's oftentimes an entry point in the customers for driving some of our flavor opportunity and other opportunities in the portfolio. With that said, from an ROIC lens, we'll continue to look at it and look at ways to improve the profile of that business. Food design, Zach Savory, we see also as an important part of the portfolio going forward. This is all, like I said, aligned around our whole nourishing offerings. And if you think about where we're going to really shift to more of an end market focus, in particular around food and beverage, we think that business can really help us to bring a lot of integrated solutions and opportunities to customers going forward. So that's how I would answer it, and we are, though, continuing to stare at our portfolio in its entirety through that ROIC lens to make sure we're making the right portfolio choices and putting our resources against the winners that you see on that slide as well.

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

Thanks very much. I think during 2022, when you thought about raw materials and price, what you thought is that raw materials were worse than price in 2021 by 200 million. You'd be roughly even in 2023, in 2022. And then in 2023, you would be 200 million to the good in the price raw material balance. And now, you think that you'll be about flat with inflation. So what happened? That is, why did you think you'd make $200 million, but you didn't? What happened to, I assume, price conditions? And second, what are the cash restructuring outflows that you expect in 2023?

Yeah, thanks. Hey, thanks, Jeff. Good morning. Good question. So, you know, harking back a year ago, which seems like a decade ago, we originally had $600 million of inflation, pricing slash 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 just running through the cycle from a timing standpoint, from a standpoint You know, we haven't sort of talked about sort of how this flows through the 24, 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, you know, so I think that's still a very reasonable assumption over the time horizon. The horizon's 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 one-time expenses associated with that restructure.

Thank you. The final question comes from the line of Lauren Lemberin with Barclays. You may proceed.

Great. Thanks so much. Well, okay, 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, you know, 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 24. but now you're talking about, you know, not just a curtailing production, but also accelerating cost savings going after, you know, GNA and so on. So, you know, to what degree do you think, should we worry about you being able to manage through the cashflow situation, you know, 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 had discussed it being?

Yeah, Lauren, I'll get started. Thanks for that question. I think it's a really great question, an important one. What we've done, Lauren, is we're really focused on really prioritizing our activities across the company and the management teams. First priority, Lauren, is clearly doing everything we can to make sure that we do have the right investments in the innovation that we deliver in R&D and also making sure we can accelerate our sales performance. And we are spending a lot of time with our commercial teams working on ensuring good capability build and making sure that we are ready to enhance our pipeline as well as our win rate going forward. So that's priority one, Lauren, and that's a big focus for us. On the cash flow and inventory work, I think we're in a good position. We've brought in a new team. Glenn is going to be very intimately involved with our new head of operations and our business leaders. We are going to build that into our incentive system cash conversion this year, Lauren. And we feel as though there's a very good path forward to deliver the short term because we have to improve our cash flow and we have to reduce our inventory. And we have a laser focus on making that happen. And I feel like we've got the right team and we're putting in place the right processes to execute against that. That's pretty much number two. And then number three, we are... Working towards, as you mentioned, getting the organization aligned to more of an end market back view. We are starting that work. We'll have more to communicate here as we go throughout the year. But I feel good by the end of this year that alignment will be in place and we'll have the right people, right teams aligned with our customers. Just one anecdote. Many of our customers that I've spoken to as well as that we've engaged with really like the way we're thinking about operating and aligning IFF to how they're organized. So we think that is something we'll focus on. So while there are a lot of activities, think of it three laser-focused priorities the team are aligning behind on to execute, to your point, to make sure that we can deliver on the future profitable growth agenda that we have. Okay? So thank you.

Thank you.

With that, I want to, yeah, just a couple last comments. I want to first thank everyone for joining. Our apologies again on our start. We appreciate everyone hanging in with us. We know this went a little bit longer because of that, and we look forward to seeing you here and speaking to you very soon. Thank you, everybody. Have a good rest of the day.

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