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.