International Flavors & Fragrances, Inc.

Good morning. At this time, I would like to welcome everyone to the IFF first quarter 2023 earnings conference call. All participants will be in a listen-only mode until the formal question and answer portion of the call. To ask a question at that time, please press star 1 on your telephone keypad. If you would like to remove your name from the queue, please press star 2. 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. Mr. DeVoe, you may begin.

Thank you. Good morning, good afternoon, and good evening, everyone. Welcome to IFS first quarter conference call. Yesterday afternoon, we issued a press release announcing our financial results. 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. Please take a moment to review our forward-looking statements. During the call, we're 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, please refer to our cautionary statement and risk factors contained in our 10-K and 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 set forth in our press release. With me on the call today is our CEO, Frank Clyburn, and our Executive Vice President, Chief Financial and Business Transformation Officer, Glenn Richter. We will begin with prepared remarks and then take questions at the end. With that, I would now like to turn the call over to Frank.

Thanks, Mike, and hello, everyone. We delivered first quarter 2023 results in line or ahead of our expectations amidst a challenging operating environment. Our team successfully navigated soft-end market demand and customer inventory destocking as they executed on our priorities to deliver on our financial commitments. We are proud of the results and want to thank the entire IFF team for their contribution. However, year-on-year comparisons in a number of areas show the backdrop in which we are operating remains challenging, as I acknowledged on our last call. As you will see from our quarterly financials, we have made solid progress on our objectives of reducing costs to improve efficiency, recovering inflation and materially reducing our inventories while improving our service levels to our customers. The key challenge remains volume growth and our management team remains keenly focused on accelerating profitable sales growth moving forward. Before I get into our first quarter performance, I do want to share an update on our search for our nourished president. Over the past several months, we have engaged with various leaders about the opportunity to run our largest division. At this time, our search continues as we are looking to attract a well-regarded leader with a strong track record of success that can drive performance in this division. I am pleased with the slate of candidates that we have and look forward to welcoming a new leader We will provide further updates going forward as we progress the process. Starting on slide six, I'd like to begin with a high-level look at our performance in the quarter before handing it over to Glenn to discuss our financials and full-year outlook in more detail. In quarter one, IFF generated $3 billion in sales, which reflects 1% comparable currency use for growth led by increases in scent and pharma solutions. As we expected, volumes in the first quarter, similar to what we experienced in the fourth quarter of 2022, remained under pressure, down high single digits due mainly to consumer demand slowdowns and significant customer destocking actions. It should be noted that we are also comparing to our strongest year-ago comparison, where our volume grew mid-single digits in the first quarter of 2022. Adjusted operating EBITDA finished at $503 million in the first quarter of 2023 and largely was impacted by the lower volumes, as well as our proactive effort to rebalance inventories to drive cash flow generation. As we shared earlier this year, we are executing our inventory reduction program, making strong progress in the first quarter. As expected, while it was cash flow positive, it did lead to a significant headwind in terms of profitability, as our fixed costs were absorbed over At the same time, we were successfully recovering our total inflation through increased pricing actions in the first quarter and executed on our internal productivity initiatives that continue to deliver strong cost and operational efficiencies. From a leverage perspective, our net debt to credit adjusted EBITDA for the quarter was 4.6 times As we disclosed earlier in the quarter, we have proactively renegotiated our debt covenants to ensure IFF's continued resilience as we navigate today's complex global macroeconomic environment. These amended agreements will provide us with maximum flexibility as we grow our business and continue to optimize our portfolio to achieve our target leverage profile. To this end, we continue to deliver on our portfolio optimization commitments. Our savory solutions divestiture is now on track to close at the end of May. In February, we also announced the sale of our flavor specialty ingredients business to UK-based private firm Exponent for $220 million in cash proceeds, which will be used for debt repayment. We expect that this transaction will close by the end of the third quarter of 2023, subject to customary closing conditions. Moving forward, portfolio divestitures remain a central part of our strategy, and we are evaluating several opportunities to further strengthen our capital structure as we drive towards our targeted leverage profile. Turning to slide seven, I'd like to provide a bit more detail on our sales performance in the quarter. As I mentioned, we delivered more than $3 billion in sales in the first quarter, which represents comparable currency neutral sales growth of 1%. Our revenue growth in the first quarter was led by continued strength in our Scent business and steady performance in pharma solutions. In a moment, Glenn will take you through the underlying factors driving the performance across our business segments. But first, it's important I provide high-level contacts on what we're seeing in the environment. Scent once again delivered a strong performance. Both fine fragrance and consumer fragrance grew double digits. Our pharma solution segment also delivered solid growth, driven once again by a strong performance in core form. Nourish was black this quarter as our ingredients business continued to be pressured by macroeconomic factors and destocking, which offset growth in flavors and food design. While certain businesses within our health and biosciences segment were also challenged this quarter, cultures and food enzymes and home and personal care were two strong performers in H&B that we expect will continue to gain share throughout the year. Taking a step back and reflecting on our performance, there are essentially a handful of categories that have disproportionately impacted our volume performance. Specifically, within our narrow segment, our ingredients division, which represents approximately 25% of total company sales and includes protein solutions, emulsifiers and sweeteners, core texturants, Cellulosics and food protection drove about 60% of our total volume decline in the quarter. As we outline at our December Investor Day, we are working to improve our performance and have largely addressed our capacity issues and have improved our service levels in these businesses. We're now working on modifying our pricing strategies, enhancing our commercial coverage, and simplifying our internal processes all to grow our project pipeline and deliver more robust growth going forward. And while this will take time and attention, we're doing so with a sense of urgency to ensure that when current market challenges like beef stocking subside, we are well positioned to capture market share. Looking at our profitability for this quarter on slide eight, first quarter adjusted operating EBITDA totaled $503 million, down 19% on a year-over-year comparable currency mutual basis as expected. As I shared on my last call, lower volumes related to consumer demand softness and significant customer inventory destocking, plus unfavorable manufacturing absorption related to our inventory reduction program. Meaningfully impacted our profitability despite continued strong pricing and productivity gains. We were successful in generating approximately $60 million of gross productivity gains in the first quarter. However, this strong benefit was offset by higher manufacturing related costs, such as lower yields, slower obsolete inventory, and higher manufacturing inflation. If we look at our profitability performance, absence of the unfavorable manufacturing absorption, comparable currency neutral adjusted operating EBITDA would have declined approximately 4%. Looking ahead, we remain intensely focused on controlling our controllables, including identifying additional opportunities to further optimize our operations and strengthen our balance sheets. While we certainly have work to do to fully execute on our refreshed strategic plan, we have taken significant action to ensure our business maintains the flexibility and resilience needed to deliver in any macroeconomic environment. While we do believe 2023 will continue to be impacted by many of these factors and dependent on an improving volume environment the back half of the year, We continue to believe we can deliver our long-term adjusted operating EBITDA growth target of 8% to 10% on a comparable currency neutral basis over the 24 to 26 time period. I'll now turn it over to Glenn to provide more context around our divisional performance, cash flow, and financial outlook going forward.