International Flavors & Fragrances, Inc.

At this time, I would like to welcome everyone to the IFF Third Quarter 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 2024 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 .IFF.com. Please note that this call is being recorded live and will be available for replay. 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 10K and press release. Today's presentation will include non-GAP financial measures, which exclude those items that we believe affect comparability. A reconciliation of these non-GAP financial measures to their respective GAP measures is set forth in the press release. With me on the call today is our CEO, Eric Feerwald, and our Executive Vice President, CFO, and Business Transformation Officer, Glenn Richter. We will begin with prepared remarks and then take questions that you have at the end. With that, I would now like to turn the call over to Eric.

Well, thank you, Mike, and hello, everyone. I'm glad to be here with you all today to discuss our solid third quarter results. On today's call, I'll begin by providing an overview of our performance and the solid results across each of IFF's businesses, which gives us confidence to increase our full year 2024 guidance. I will also provide commentary on our efforts to continue to strengthen IFF for now and the future. I will then turn the call over to Glenn, who will provide a more detailed look at our third quarter financial results and discuss our outlook for the remainder of 2024, and we will then open up the call for questions. If you go to slide six, IFF delivered another quarter of solid results and significant bottom line improvement compared to a year ago. IFF achieved growth across all our business units with notable volume improvement across the entire portfolio. The combination of improved market conditions and our global team's passion and drive to serve our customers and address evolving needs across end markets was a major contributor to our performance. The actions we have taken this year to strengthen our business and capital structure, as well as our push to drive productivity in today's dynamic marketplace, are producing encouraging results. Importantly, we delivered high single digit volume growth with broad based contributions across each of our businesses. Equally encouraging, comparable adjusted operating EBITDA grew by double digits in the third quarter, primarily driven by volume performance and productivity gains. Considering our solid performance in the third quarter, specifically flowing through our over delivery in the quarter, as well as our continued cautiously optimistic outlook for the fourth quarter, we are modifying our full year 2024 financial guidance. We are making solid progress against our targets and are confident we will achieve net sales between $11.3 and $11.4 billion, which is almost $100 million higher than our previous guidance range. Bri Vida, we are tightening the range and are now targeting the high end of our previously communicated range of $2.1 to $2.17 billion. Lastly, I am pleased to share that we remain on track to complete the previously announced divestiture of our Pharma Solutions business in the first half of 2025, marking another significant milestone in our portfolio optimization and deleveraging journey. Now moving to slide seven. I want to highlight a few key achievements so far this year. While we continue to operate in a challenging end market environment, our performance over the last nine months has bolstered our position as a preferred innovation partner and growth enabler for our customers. Over the last nine months, currency neutral sales grew 7%, primarily driven by double digit growth in cent and high single digit growth in health and biosciences. Comparable adjusted operating EBITDA has increased 19% year to date, fueled by our strong recovery and sales volume growth versus prior year lows and our productivity initiatives. Since announcing our new business led operating model, operating philosophy and strategy refresh earlier this year, our focus on getting back to the basics is translating into stronger financial performance with greater end to end responsibility and accountability. With a reinvigorated mindset and a simplified structure, IFF is better positioned to navigate today's complex and fast moving operating environment. Now these steps also include sharpening our focus on key end markets and increasing our investments in high growth areas for the benefit of our teams and our customers. In the third quarter, we also opened a creative center in Shanghai and have started to invest in additional creative centers in Mexico City and India. Together, these innovation hubs and important markets expand our global footprint and ensure we have the regional expertise required to serve customers on a more intimate level and address their unique needs. With our people at the heart of IFF's revised strategy, I'm equally excited to announce that our employee engagement has improved significantly over the last 10 months. As I've said before, empowering and enabling our global team to do what they do best is essential to our shared success as a global organization. And earlier this month, much of our global team had the opportunity to come together and celebrate IFF's 135 year legacy and 60th anniversary of being listed on the New York Stock Exchange. A true honor and reminder of the incredible legacy of this great company. I have no doubt that that legacy of IFF will continue for the next 135 years, but for now, I'll pass it on to Glenn for a closer look at our quarterly results.

Glenn? Thank you, Eric, and thank you all for joining us today. As Eric noted, IFF had another very solid quarter, achieving revenue just north of $2.9 billion, an increase of 9% on a comparable currency-neutral basis. We delivered broad-based growth across Nourish, Health and Biosciences, Scent, and Pharma Solutions, with notable volume improvements across all four business units. Our ongoing productivity initiatives also contribute to a 16% increase in comparable adjusted operating EBITDA in the quarter. Building on our margin strength from the prior two quarters, we also realized another successful quarter of margin expansion, with our comparable adjusted operating EBITDA margin of 19.4%, improving by 180 basis points versus Q3 of 23. Adjusted EPS, excluding amortization, was $1.04 in the quarter, increasing 17% versus the prior year period, as strong profit performance and lower interest expense were mitigated by foreign exchange impacts in other expenses. Turning to slide 9, our improved performance was broad-based this quarter. Nourish comparable currency-neutral sales increased 7%, and we delivered an adjusted operating EBITDA increase of 18%. This was led by Flavor's third consecutive quarter of double-digit growth and modest sales improvement in functional ingredients. In functional ingredients, high single-digit volume growth was mostly offset by our pricing actions, which were very consistent with our planned price investments this year. Overall, we are very pleased with our functional ingredients recovery plan that has delivered three consecutive quarters of volume growth, with strong expansion in margins and EBITDA. Health and Bioscience achieved double-digit improvements in all of its businesses due to strong volume growth and productivity gains. H&B's comparable currency-neutral sales increased 12%, and we delivered comparable adjusted operating EBITDA of 173 million, a 15% increase from the year-ago period. Incent, double-digit increases in both consumer fragrance and fine fragrance, as well as high single-digit growth in fragrance ingredients, led to a strong quarter for both revenue and profit growth. Net sales in the quarter totaled 613 million, up 10% on a comparable currency-neutral basis, and we delivered adjusted operating EBITDA of 127 million, up 7% on a comparable basis. Lastly, Pharma Solutions returned to growth, delivering sales of 256 million, an 8% increase on a comparable currency-neutral basis, while adjusted operating EBITDA surged to over 32% to 62 million on a comparable basis. This notable performance was driven by strong double-digit growth in industrial and -single-digit growth in core pharma. Once again, margin expansion was primarily driven by volume and productivity gains. Turning to slide 10, cash flow from operations totaled 702 million -to-date, a 366 million increase from last quarter, while capex -to-date totaled 303 million, or roughly .5% of sales. Our free cash flow position totaled 399 million -to-date, a sequential increase from 136 million last quarter. -to-date, we also distributed 411 million in dividends to our shareholders. Our cash and cash equivalents totaled 569 million at the end of the third quarter, including 2 million in assets held for sale. Additionally, gross debt for the quarter totaled approximately 9.1 billion, with a net -to-credit adjusted EBITDA of 3.9 times, a decrease from 4.5 times at the end of 23. Our trailing 12-month credit adjusted EBITDA totaled approximately 2.2 billion, largely in line with last quarter. As we look ahead to the fourth quarter and into the first half of 25, we remain committed to achieving our net -to-credit adjusted EBITDA target of below 3 times, following the completion of our Pharma Solutions Investiture. This sale, which again we expect to complete in the first half of 25, reflects our near-term focus on optimizing our portfolio and improving our leverage position to further strengthen our capital structure. On slide 11, I'd like to turn to our consolidated outlook for the full year 24. Given our improved financial and operational performance in the first three quarters of the year, tempered by some caution due to continued soft end consumer demand, we are modifying our full year 24 financial guidance. We now expect net sales to be in the range of 11.3 to 11.4 billion, up from our previously communicated range of 11.1 to 11.3 billion. We also now believe that volumes will be in the range of 5 to 6% growth versus our previous expectation of 3 to 5% increase. Pricing is also now expected to be roughly flat for the full year versus 1% growth previously, as real pricing remains consistent with what we expected at the beginning of the year, but FX-related pricing in emerging markets is expected to be slightly less than originally expected. Our outlook for the fourth quarter remains unchanged despite our performance in Q3, given macro trends as we closely monitor food, home and personal care and markets, order phasing due to potential customer inventory adjustments at year end, and a slightly tougher -over-year comparison. On the bottom line, we now expect to deliver full year 24 adjusted operating EBITDA near the high end of our previously communicated range of 2.1 to 2.17 billion. The high end of this range includes the upside we delivered in the third quarter and assumes continued productivity improvements, a greater level of annual incentive compensation given the relative strength of our performance versus budget, and incremental reinvestments in the business with a focus on profitable long-term growth. Lastly, based on current market foreign exchange rates, we now expect that foreign exchange will have an approximately 3% full year adverse impact to sales growth, assuming a EURUSD exchange rate of 1.12 at the time of our forecast was developed versus the previous expected range of 3 to 4%. I'll now turn it back to Eric for closing remarks.

Thank you, Glenn. I am tremendously proud of what our teams have accomplished both in the last quarter and through 2024 to advance our operating philosophy, our strategic direction, and our execution capabilities. Together, we are building a stronger, more resilient IFF backed by a global team whose relentless dedication to innovation and winning in the marketplace continues to energize me quarter after quarter. Our solid performance this year is a direct reflection of the strength of our team and the shared buy-in for our strategic vision, and I am so grateful to work alongside such talented colleagues. While I'm energized by our recent performance, I am clear-eyed and recognize that there is lots more work to be done. As Glenn mentioned, we remain committed to reinvesting in our businesses, particularly our highest return businesses, over the long term to ensure we are well positioned to deliver sustainable, profitable growth to our shareholders. In the near term, however, we remain laser focused on achieving our 2024 financial guidance and encouraging our global teams to unleash the full potential of IFF with our incredible customers. Thank you all for your ongoing support. I would like to now open the call for questions.

Thank you. We will now begin the question and answer session. As a reminder, if you would like to ask a question, please press star 1. If you would like to remove your name from the queue, please press star 2. Additionally, if you are using a speakerphone, please remember to pick up your handset before asking your question. We do request a limit of one question per person. The first question comes from the line of Josh Spector with UBS. Your line is now open.

Hey, good morning, guys, and congrats on a solid quarter. I was wondering if you could walk sequentially to your 4Q guide versus 3Q. I guess when we look at it, it looks like a bit more than normal seasonality, and even counting for conservatism, it seems a little bit lower than what we would have expected. So what are the assumptions that you have behind that, and is there anything you're seeing now that maybe gives you some pause on some of the trends or any incremental data you could share there? Thanks.

Thanks for the question, Josh. Let me just say that the fourth quarter has started as we expected, which is very encouraging. But the pattern we have seen in the last few quarters is a strong start and then a bit of deceleration through the quarter. And we've got limited visibility to December at this point. So we are cautious given the potential that customers could adjust inventory at the end of the year, which has happened in the last few years. But let me just say that we want to make sure that we continue to deliver what we say we will deliver. But the quarter started off as expected.

Thank you. The next question is from the line of Nicola Tang with BNP Paribas. Your line is now open.

Hi, everyone. Thanks for taking the question. I wanted to ask a bit about nourish. Can you help us understand what drove the sequential decline in margins despite the strong top line performance? And again, can you provide a bit more color between flavors and functional ingredients and how you're thinking about the progression into Q4 as well? Thank you.

This is Glenn. Good afternoon, Nicola. Appreciate the question. Just as a reminder, you know, typically our high watermark for margin is Q2 for nourish. So that's a very positive mix as they go into the summer season here. What you see as it relates to the quarter to quarter progression between basically two and three, and then ultimately from three to four, there'll be a slight contraction of margin as well. As it relates to two to three, you have sort of mixed more normalizes. And then secondarily, as we've mentioned, we are increasing our investments in the business. So those are beginning to basically show through relative to the margin as well. So as you look out into Q4, you should expect because of the seasonality, i.e., lower volumes for nourishing Q4, that you will have some degradation of 50 to 90 basis points in terms of margin quarter to quarter.

Thank you. The next question is from the line of Gansum, Punjabi with Baird. Your line is now open.

Thank you. Good morning, everybody. You know, I know it's still early, but could you give us a sense as to how you're thinking about 2025 at this point as it relates to some of the high level variances such as volumes, price, maybe compensation expense, and also cost savings flow through?

Thanks Gansum. First of all, it's too early to give you any specifics. And as you know, we normally guide in February and right now we're finalizing our budgeting process. But I will make a couple of comments. First of all, as you'll recall, we will have over $100 million in incentive comp reset in 2025, which is a positive for next year. And then let me just add that we continue to work really hard on customer focus on driving innovation and productivity to drive our performance. And I got to say that nine months in, I love how our teams are stepping up and driving performance, driving execution.

Thank you. The next question is from the line of John Roberts with Mizuho. Your line is now open.

Thanks. First, just to check on, are you on track for reporting flavors separately from functional ingredients next year? And then where was the incremental volume strength in the quarter or actually in the fourth quarter as well? I guess it's the second half volume strength. And do you think that was more driven by promotional activity by your customers and some easing in their pricing?

Yeah, it's a great question, John. So relative to where we are with separation of functional ingredients and the flavors business, we are on track to basically have that set up as two completely separate businesses. Actually, most of the organizational changes have been announced and implemented. We will start reporting it starting next year, which means in the first quarter. So May of next year is when you'll see the first cut between the businesses, and we plan on providing some historical context as well.

And just to add to that, we have announced internally – we didn't see a need for a press release – but internally that we have named two presidents. A president of what we'll now call taste and a president of what we'll call food ingredients.

Yeah. And then relative to the performance in the third quarter volumes, we actually pretty much – it was fairly broad-based, John, across all the businesses. Farm was right on track, but the rest of the businesses generally sort of exceeded expectations. We had very strong flavors, very strong scent, and certain businesses with H&B are very, very strong. We believe it is a combination – as you're well aware, the end consumer, there's very few signs that the consumer is getting any stronger in terms of what's going on in terms of consumption. But we do think that we're picking up share and winning in the marketplace, and that's a function of sort of the renewed focus on innovation, commercial excellence across the businesses, and the new operating model. As Eric had mentioned at the start as it relates to Q4, we're just being a little more cautious because we had been surprised in December the last couple of years.

Thank you. The next question is from the line of Lawrence Alexander with Jefferies. Your line is now open.

Good morning, everyone. This is actually Dan with the line for Lawrence. Given the progress you've made this year, what do you think the right margin structure and ROIC is for your portfolio longer term once the farmer is gone?

The way I would answer that is we are focused on driving continuous improvement in both margins and ROIC, and we're tracking them very closely by business now. And the levers that we have, driving customer focus, driving innovation and productivity, are all helping us gain confidence that we'll be able to continuously improve both. Also, I just add that we are prioritizing capital allocation to our higher margin and higher return businesses, scent, flavors, now we're going to call it taste, and health and biosciences. And we continue to have strong emphasis on driving functional ingredients turnaround, which we're making good progress on. So that's that we are. We are focused on these two metrics and we're doing the things to continuously improve over time.

Thank you. The next question is from the line of Patrick Cunningham with city. Your line is now open.

Hi, good morning. Is there any update to the adjusted free cash flow guidance for the year? I think last time you got into 600 million, should that trend higher now that we're at the higher end of the guide or is it mostly offset by working capital or other items?

Yeah, so two numbers up. Give you Patrick. Good morning. One is our reported free cash flow. I'm sorry, our full year free cash flow. We expect you basically largely unchanged versus previous guide. You sort of already mentioned the reason why the earnings trajectory is higher, but we also are building more working capital, which is almost exclusively related to higher sales. So it's sitting in receivables. So met in that we're sort of in a neutral position for the full year. So no change in the forecast.

Thank you. The next question is from the line of Kristen Owen with Oppenheimer. Your line is now open.

Hi, good morning. Thank you for taking the question. Just wanted to double click on functional ingredients. Can you talk about what you're seeing in terms of order activity coming into the contracting period and if you could provide an additional update on the functional ingredients turn around. Thank you.

Sure. Yeah, this is Glenn. Thanks, Kristen, for the question. The reality is we don't typically have a long order book and certainly there's very essentially zero into next year. The contracting period largely is around pricing with our relationships from the standpoint. It is going extremely well. We feel that this is a byproduct of the now two year work we've had in place to basically remediate the business. So we are seeing very, very good progression in the business and expected to continue into next year. And there's nothing in the annual negotiation process to suggest that we're not in a very good place to sustain the momentum within the business. As a reminder, we have taken a tremendous amount of effort to fix our service issues starting two plus years ago. Our service levels are extremely high. Secondarily, we reinvested deflation and giving price back to basically be much, much more competitive in the marketplace. Third, we basically re-energized our sales pipeline so work very closely with the front line and the innovation resources to identify how to win customers back and win new business. That has been working extremely well. And those collective efforts have actually resulted in us having mid single digit volumes this year. We feel like we've gained back about half of the lost volume at this point. And at the same time, we've been expanding margins, both gross margin and ultimately EBITDA year over year growth very, very well. The last piece is we are in the beginning phases of a fundamental restructure of our global supply chain footprint. That means actually making sure that we have the assets in the best locations from a cost perspective and the best supply chain to support that. That will take several years, but we think that's the final step as we've committed to in the past of moving this business back to the mid-teens range in terms of overall EBITDA margins. We're circa 12, 13 this year, but we should be able to get to 15 plus in the coming years. So we feel very good. The team has done a phenomenal job. It has been working nonstop to basically make this happen and feel very good with the businesses.

Thank you. The next question is from the line of David Begleiter with Deutsche Bank. Your line is now open.

Thank you. Good morning. I'm Eric. Nine months into your tenure, how would you characterize the progress you've made on the R&D organization and the innovation pipeline? And what could that mean for new product sales in 25 and even 26? Thank you.

Thanks for the question, David. And I feel very good about the progress we're making. First of all, let me start by saying that each of our BUs have developed very strong strategies with very clear priorities. And now with R&D embedded in the BUs, we can already feel both the power and the energy created by the focus and the better connection of our R&D efforts to customer needs. And I tell you, it energizes our R&D people and it makes the whole system work better. And just one example, our SENT team now has a very clear plan and is already taking actions to strengthen our pipeline of naturals, synthetic chemistry, and biotech molecules. So it's great to see that. What I would say in terms of the impact is I think that the main impact of the new projects will be in 2026 and beyond. But I can tell you that the energy is already helping now and will help in 2025 in terms of seeing that pipeline strengthen and having discussions with customers and also our sales force energized by that, I think will benefit us, is already benefiting us. And I think we'll have benefits in 2025, but the specific project benefits will really come in 2026 and beyond.

Thank you. The next question is from the line of Salvatore Tiano with Bank of America. Your line is now open.

Thank you very much. I just want to ask a little bit about the disconnect between the very strong organic growth you're reporting and the more and the slower growing market. So can you bridge a little bit the degree of performance that you have across the board versus slower consumer demand and specifically on SENT, it's been on a roll for several quarters. And that's where I think your customers are also doing well in fine fragrance. But how long can this extremely strong growth last?

Yeah, thanks, Sal. It's a good question. One just to remind obviously everybody is that there is a bounce back effect this year from the lack of these stockings. There was a mathematical sort of performance that the entire industry is seeing as we overlap last year. So that's obviously explains some of the incremental growth above what is happening at the consumer level. Fine fragrance continues to be a unique case as everyone's well aware over the last several years. Since COVID, the category has exploded. We believe that that is a function of multiple things happening at the consumer level, a plethora of new brands being launched, the impact of social media. Ultimately, the digital channel has become a very, very meaningful channel for the growth in the business as well. And the use of fine fragrance has expanded beyond sort of a special occasion as a result of that. We, like everybody in the industry, have seen that hitting the fine fragrance space. We believe that that will continue to some degree, that there still are lots of new channels and new brand opportunities and certainly regional opportunities. I would also say that we believe because we do track how we're doing in the market versus others is we are winning share. So as Eric had mentioned, the investments we have been making relative to new geographies, adding perfumers, adding new creative centers, et cetera, is the other way that basically we're winning in the business. And we're very committed to continuing to do that, not only within the scent business, but more broadly across the higher growth and higher margin businesses within IFS. So appreciate the question.

Thank you. The next question is from the line of Kevin McCarthy with Vertical Research Partners. Your line is now open.

Yes, thank you and good morning. Can you discuss your expectations for price cost dynamics in the coming quarters? And related to that, would you touch on tariff scenarios? How do you think about potential for higher tariffs? Maybe you could talk about the experience in the past and how you're planning to manage through various international trade scenarios moving forward.

Yeah, good morning, Kevin. Generally, our price cost dynamic is flatish. We have seen throughout this year some continued deflation, not to the degree of last year. And our early outlook for next year's things are fairly stable. We believe there's certain parts of the basket that increases, but others some level of deflation. So generally, the price environment, our view is fairly static and the price cost dynamic is fairly static as a byproduct of that. Difficult to forecast at this point in time regarding tariffs. There is obviously some some history here with the first Trump administration that was more focused as it relates to food in China as one country versus broad based. So it depends upon what if anything ultimately happens in the arena of terror. So it is something that maybe yesterday people weren't very focused on. But as of this morning, members of the team are very focused on. I would note that when there was basically escalation of terrorists in China, it's probably intuitively good for our business relative our footprint, global footprint, our ability to react. As you're well aware, there's a more competitive environment within China. So those tariffs could actually intuitively be advantageous to our overall business broadly. But obviously, stay tuned. And as we we think about kind of next year and provide guides in February, there'll probably more to speak about at that point.

Thank you. The next question is from the line of Mike Sisson with Wells Fargo. Your line is now open.

Hey, guys, nice quarter and outlook. Just on the fourth quarter, if you're at the high end of your outlook range, it does imply that EBITDA will be down. You're here despite positive growth. Just want a little bit of color on that. And you know, is that more conservatism? And then quick follow up. When you think about, you know, 25, you know, a lot of companies thus far in chemical land have noted, you know, the first half not likely better than the second half. Could you sort of talk about what you what you're seeing from customers and do you think they're feeling better about next year? About the same any sort of green shoots of improvement there? And and just kind of wanted to leave it at that.

Thanks. Yes. So, hey, good morning, Mike. I'll take the first part, which is the year over year. We were 440 on it. We were 460 on a reported basis last year. As a reminder, we have FX and then portfolio changes from last year as well that actually turns that into around a 440 like for like. And as you pointed out, our guide currently would get us around 440 for this year as well. It's very simple. Honestly, it has all to do with our incentive compensation. As you know, last year on the full year, we were below 100 percent. As we've mentioned, we are materially above 100 percent in excess of an incremental hundred million dollars of variable comp. That is a nearly 40 million dollar year over year impact in the quarter alone. So that sort of normalized impact is a huge, huge impact. The rest of the equation is basically productivity is offsetting basically some modest level of inflation and investment. It's really that incentive comp, you know, growth year over year. That's the biggest piece.

And then, Mike, to the second part of your question, we're not really seeing strong green shoot comments yet from our customer base for 2025. But the good news is that we're taking aggressive actions to strengthen our position by getting back to basics. As we said before, heavy customer focus, heavy focus on innovation. And by the way, as customers see slowing end markets, what they want to do is have more innovation so that they can drive growth relative to the market. And that's when they come to us. And that's a good thing. And I'll just also say we're doing lots of customer visits, lots of focus on customers and co-creation with them of leading products around the world. In the third quarter, I personally visited with other executive team members, 11 countries and representing over 4 billion people. And it was just great. And by the way, up to now, I've visited about 40 percent of our customer base and just see how our people are in front of our customers. And I feel a lot of energy with our teams in front of customers, whether it's our salespeople, with our perfumers or our flavorists or our biotech scientists, co-creating products and you feel the energy. And I would love it if you guys could feel the energy. But just as an example, I was just in India and Indonesia and was super excited to not only hear about our double digit growth across scent, flavors, health and biosciences and food ingredients, but met with customers that are very bullish about their growth in these high growth markets, but also about the innovation that we're bringing with these creative centers to help them grow. So tough market, but I believe that we're putting in place the right things to grow above market.

Thank you. The next question is from the line of Mark Astrochan with Stiefel. Your line is now open.

Yeah, thanks. And morning, everybody. I wanted to go back to the question on end demand and maybe ask it in a bit of a different way. You know, one is if you could just maybe try to give some framework around how much of the sales growth is from restocking. And then more specifically, we all can look at the big multinational public companies volume trends and you can see it's clearly lower, even if roughly half of your sales growth is attributable to the stocking. So I guess the question is, are you seeing more growth out of local and regional companies and private label relative to some of these big multinationals? And maybe there's a bit of a shift there, you know, reversal relative to recent years. And then just remind us how you think about, you know, whether the customer is a local, regional, private label compared to a multinational. I recall that you're fairly agnostic and want to make sure that's the case. Thank you.

I would start by saying that both are very, very important to us. And the multinationals that are focused on innovation and driving superior products are wanting more of our innovation and we're doing more projects with them. And that's helpful to their growth and to our growth. But also the regionals and the locals are also growing and we're, I think, strengthening our strategies and our capabilities to serve them locally. And that's what I'm seeing around the world. That's why we're building more creative centers to service both the global companies, but also the locals, the regionals and the locals. So we're seeing growth opportunities across, but of course there's some geographies and there's some segments that are growing faster than others. But we're, I think, now very clear on making sure that we're able to grow in all three customer segments.

Thank you. The next question is from the line of Lauren Lieberman with Barclays. Your line is now open.

Great. Thanks. Good morning, everyone. I just want to talk about reinvestment rates because I think initially seeing the implied EBITDA for 4Q, and I know you just clarified and said it's more or less all the incentive comp dynamic, there had been a thought that some of it was reinvestment, reinvestment ahead of next year, pulling some activity forward, which is completely typical to see from companies when there's flexibility. So I wanted to talk a bit about reinvestment for next year. This year there was a lot of flexibility created in the P&L as you had the restocking dynamics and strength on top line. So how should we think about reinvestment next year? And Erica, you've gotten closer and closer and closer to the business and looking to build back R&D, build back capabilities and set this stage for a big pipeline in 26. How should we think about rates of reinvestment spending in 25 versus what we saw in 24? Thanks.

Yeah, Lauren, I'll start handing it over to Eric. I just sort of clarified the 24 impact as we communicated last time, which is the same, is 20 million in the P&L. So it's roughly 10 and 10, Q3, Q4. So that will annualize by another 20 million in the first half of next year. That's independent of any additional level, but that's our starting point.

And then from there, we're planning on continuing to grow our top line and with that be able to invest the same percentage of sales in our innovation and other areas to drive growth. And that 20 million dollars is going to commercial people, to technical sales experts, to increase more perfumers, more flavorists, and R&D people. So really strengthening our ability to drive innovation. At the same time, we're strengthening our ability to drive productivity and make sure that we're able to drive productivity in a way that we keep continuously improving our margins and our ROIC and be able to invest even more in innovation. So I think it's a virtuous cycle that we drive the innovation, which gives us sales growth, which enables us to invest more in innovation. At the same time, we drive productivity to help our margins, but also enable us to invest more in innovation. And that's what we've started to be able to do in 2024 and intend to continue to do in 25 and beyond.

Thank you. The next question is from the line of Jeff Sakowskis with JP Morgan. Your line is now open.

Thanks very much. You talked about being satisfied with your volumes in October. Roughly were they up mid single digits? That is sort of continuing the pattern of what you experienced in the third quarter. And then secondly, in functional ingredients, you have some volume growth and you have some price degradation. In general, is the EBITDA or operating profit of functional ingredients growing nicely for you this year or not growing or shrinking? Can you give us an idea of how that business is performing?

Sure. Yeah. Good morning, Jeff. So we're mid single digit up in the month of October. So same pattern we've seen for the last few quarters, as Eric noted, sort of drops there sort of fairly significantly with the last quarter being last month of the quarter rather being pretty tough. And functional ingredients is sort of following that pattern. Functional ingredients from a volume metric standpoint is going to be five to six percent volumes this year. They had very, very strong performance. That is largely been offset with price. So currency neutral are sort of flattish to slightly up. But to remind you, the beginning of this year, there was a lot of deflation in the underlying commodities supporting the business. We basically took those dollars to reinvest back with our customers on a very targeted basis. And it's helped us not only deliver the top line turnaround from results, but your final question, gross margins are up very nicely, fairly consistent with flavors in terms of a year over year. And EBITDA itself is up very strongly. So last year, the business was, I'll say, circa a eight, nine percent EBITDA margin. It'll probably finish this year north of 12 percent. And it's sort of on its way to our stated objective to get to sort of mid teens over the next two years. So hopefully that answers the question.

Thank you. The next question is from the line of Lisa Deneve with Morgan Stanley. Your line is now open.

Hi, thank you for taking my question. I just want to come back a little bit to the growth. We've talked a little bit about segmental growth and growth across divisions. But can you share how growth has been different across your regions and across the segments in that? And maybe can you also share how your performance has been in China and maybe also in India, given a lot of your customers had very big volatility of delivery in these regions? Thank you.

Yeah. Good morning, Lisa. So I'll provide some general perspectives and then turn it over to Eric. Generally, all of our businesses have performed well across the board. Pharma lagged as we expected. The de-stocking was a little bit more later in the cycle. Pharma is now back in the very strong positive territory the second half of the year as expected. But all of the businesses have actually done very well from the start of this year standpoint. China and India are two different stories. China, while there's been some improvements, still is a little bit choppy in terms of the growth trajectory given the local market. India is extremely strong. We are, as Eric mentioned, early comments, really doubling down on investments within India to really continue to capture that share in terms of the kind of the growth opportunities. So I don't know, Eric, other?

I would just add that we're investing in creative centers and the growth markets, including India, very aggressively to ensure that we continue to grow strong in those markets.

Thank you. The next question is from the line of Chris Parkinson with Wolf Research. Your line is now open.

Great. Good morning. Could we just dig in a little bit more into the HMB result? Obviously, it's been pretty solid, but just the composition of kind of the subsegments, the probiotics recovery, and anything that we should be thinking down and considering as we enter 2025. Thank you.

Yeah, good morning, Chris. Every single business within HMB had a very good performance within the quarter. Probiotics bounced back a lot, as you're well aware, over the last couple years, there has been softness in the business, in part given the situation in China. It's our second largest market. It's very close to the size of North America. So as goes China, it does whipsaw the business sort of back and forth. But the third quarter was a very, very strong quarter across the board.

Thank you. This will conclude the question and answer portion of today's call. I would now like to turn the call back to Eric for closing remarks.

Well, first of all, I want to thank you all for joining today. Appreciate your questions and your interest in IFF. I've now been here for just about 10 months. And I've got to tell you that I'm more excited than ever about the prospects for our company. I love team IFF. I love our customers. I love spending time with them. I love our innovation. And really appreciate the work that our teams are doing to have delivered the first three quarters. And I can tell you that we're all very much focused on making sure that we deliver the fourth quarter, but do it in a way that strengthens us for 25 to 26 and beyond. So thank you very much and have a great day.

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.