International Flavors & Fragrances, Inc.

At this time, I would like to welcome everyone to the IFF Third 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. You may begin.

Thank you. Good morning, good afternoon, and good evening, everyone. Welcome to IFF's third quarter 2023 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 will be making forward-looking statements about the company's performance and business outlook. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially, 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 and Chief Financial and Business Transformation Officer, Glenn Richter. We will begin with prepared remarks and then take any questions you may have at the end. With that, I would now like to turn the call over to Frank.

Thank you, Mike, and hello, everyone, and thank you for joining us. On today's call, I will begin by providing an overview of our performance in the third quarter and an update on our strong execution to position IFF for long-term success. I will then turn the call over to Glenn, who will provide a more detailed look at our third quarter financial results by business and discuss our outlook for the remainder of 2023. We will then open the call for questions. Moving to slide six, our third quarter story is one of sequential improvement. As we've discussed, improving volumes has been a top priority, and we are pleased with the sequential volume improvements that we have achieved across the majority of our business. On a total company basis, while our volume in the third quarter was down mid-single digits, it was a marked improvement from our Q2 lows, where we saw a double-digit decline. Similarly, our enhanced productivity initiatives as well as favorable price to inflation led to strong adjusted operating EBITDA results. Sequentially, our adjusted operating EBITDA margin finished at 17.9%, which is a 50 basis point improvement versus the second quarter of 2023. And our focus on ongoing working capital improvements drove strong free cash flow generation. In particular, the continued execution of our inventory reduction program has resulted in more than a $600 million reduction in inventory since the end of 2022. This was the largest driver of our free cash flow, which improved $320 million versus the second quarter of 23. The net result is that we delivered higher than our expectations on both the top and bottom line. At the same time, our commercial excellence initiatives and our R&D platform continue to drive improvements in our sales pipeline. In addition, in functional ingredients, as discussed on our second quarter call, we are implementing a targeted operational improvement plan to improve sales execution, strengthen our operating model, and reshape the portfolio. As we shared previously, we expect this plan for functional ingredients will translate into low single-digit comparable currency neutral sales growth in line with the market and a mid-teen adjusted operating EBITDA margin over the next three years with a strong improvement in 2024. And while this will take time, we are seeing improvements in our volume performance, where we finished the quarter down mid-teens versus low 20% declines in Q2 of 2023. With this momentum, we have increased confidence in our ability to deliver within our previously announced full year 23 sales guidance range and we are now targeting the mid to high end of our full year 2023 adjusted operating EBITDA guidance range. As Glenn will highlight, we are seeing signs of green shoots in the fourth quarter with stabilization and improvements across several parts of our business. Lastly, we've made important progress against our portfolio optimization initiatives as we are rapidly addressing our capital structure. Most notably, aligned with our best owner mindset, we announced an agreement to sell Lucas Meyer Cosmetics to specialty chemical company Clarion for $810 million, which is equivalent to a high teens multiple based on our projections. We expect to complete the transaction in the early part of the first quarter of 2024 and all proceeds will support our deleveraging priorities. Moving forward, we continue to pursue strategic non-core divestitures that will drive further deleverage and enable us to further prioritize our fastest growing margin accretive businesses and deliver long-term value for shareholders. Moving to slide seven, in the third quarter, IFF generated $2.8 billion in sales, representing a 3% decline on a comparable currency neutral basis. A strong performance and scent in health and biosciences was more than offset by softness and nourish in pharma solutions. As I mentioned, volumes improved sequentially across nearly all businesses with particularly strong performance and scent in health and biosciences. Excluding functional ingredients, which continues to disproportionately impact our results, overall volume declined low to single digits in the third quarter. Adjusted operating EBITDA for the quarter was $506 million, down 10% year-over-year on a comparable currency neutral basis. Our favorable net price to inflation as well as enhanced productivity gains were more than offset by lower volumes due primarily to temporary customer destocking and unfavorable manufacturing cost absorption. Adjusted EPS excluding amortization was 89 cents, primarily impacted by lower profitability. Now I'll turn it over to Glenn to provide more detail on profitability and our performance by business segment.