International Flavors & Fragrances, Inc.

This time, I would like to welcome everyone to the IFF Second Quarter 2025 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'd 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 will request a limit of one question per person. I would now like to introduce Michael Bender, Head of Investor Relations. Michael, you may begin.

Thank you. Good morning, good afternoon, and good evening, everyone. Welcome to IFF's Second Quarter 2025 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'll 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, both of which can be found on our website. 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 the press release. Also, please note that all the sales and adjusted operating EBITDA growth numbers that we will be speaking to on the call are all on a comparable currency neutral basis, unless otherwise noted. With me on the call today is our CEO, Eric Fierwald, and our CFO, Michael DeVoe. 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 Eric. Thanks, Mike,

and good morning, everyone. Thanks for joining us today. Our second quarter results reflect continued progress with growth, improved profitability, and our vestiges that have strengthened our financial position and our net debt to EBITDA is now down to 2.5 times. This progress shows that the steps we are taking, including creating and bringing leading innovation to customers and driving operational excellence, is paying off. I will start with an executive summary of some accomplishments so far this year, and then I'll turn the call over to Mike DeVoe, who will provide a more detailed look at our financial results for the second quarter and our current outlook for the rest of 2025. Then we'll open it up for your questions. On this next slide, I'd like to summarize our recent results and the progress we are making towards building a more competitive, growth-oriented IFF. We achieved solid growth and profitability in the first half of 2025 with 3% sales growth and 7% operating EBITDA growth. I'm also very pleased that during the quarter, we completed the divestitures of our Pharma Solutions and Nitrocellulose businesses and successfully completed our debt tender offering. These actions enabled us to reduce our leverage to 2.5 times ahead of our target of less than three times, further solidifying our financial position. This is the first time IFF has been below 3.0 times net debt to credit adjusted EBITDA since 2018. And yesterday, we also announced the divestiture of our Soy Crush, Concentrates, and Lessothin business to Bungie. These products better fit with Bungie, and it's another step in our focus on products with differentiated innovation that enhances margins. And this will get us closer to our team's EBITDA margin goal for our food ingredients business. And as we streamline our food ingredients portfolio, it also strengthens our ability to continue evaluating strategic alternatives for this business. We also announced a new $500 million share repurchase authorization to return capital to our shareholders. This board authorization shows the confidence we have in the future of IFF and marks an important step toward a balanced and disciplined capital allocation strategy, which prioritizes both business and reinvestment to drive sustained growth and return of capital to shareholders. Looking ahead, we remain on track to deliver our full year 2025 guidance that we outlined earlier this year, despite an increasingly challenging operating environment and the time it is taking for the increased investments in R&D and in health and biosciences capacity that we started to action through last year to show up in increased sales. We continue to focus on the factors within our control, and as we said on the first quarter earnings call, have prepared for a more difficult second half, particularly given the strong prior comparison in the third quarter of last year. And while we expect to be at the lower end of our one to four percent currency neutral sales growth in 2025, we are confident in our ability to navigate evolving conditions, respond swiftly to emerging challenges and opportunities, and maintain discipline execution throughout the remainder of the year. We have strengthening commercial and R&D pipelines that I am confident will begin to show more impact in 2026 and build for full benefit in 2027. Before I pass it over to Mike, I want to take a moment to thank our IFFers all around the world for driving our progress so far this year. They've started to build positive momentum, including developing leading innovations that will show increasing value in the coming years. And they are doing this while strengthening our productivity muscle to enable us to continue to invest in growth despite increasing market challenges. With that, I'll pass the call over to Mike to take a closer look at our consolidated results for the quarter. Mike?

Thank you, Eric, and good morning everyone. IFF delivered second quarter sales of just greater than 2.75 billion, a three percent increase year over year. We achieve sales growth across all our businesses, primarily driven by volume gains, including -single-digit growth in taste and health and biosciences. In the second quarter, we delivered adjusted operating EBITDA of 552 million, a solid six percent increase, with our adjusted operating EBITDA margin increasing 50 basis points year over year. Turning now to slide eight, I will provide a closer look at our performance by segment. I will begin with Pharma Solutions, which had a strong month, delivering sales of 103 million, a 21 percent year over year increase, while also recording 5 percent growth in profitability. As Eric mentioned, we successfully completed the Investiture of Pharma Solutions on May 1st, and this will be the last time we report figures for that segment. In taste, sales were 631 million, a six percent increase, driven by another strong quarter of commercial performance. Growth was strongest in Latin America and the Europe, Africa, and Middle East region. The segment also recorded another quarter of profitability growth, with adjusted operating EBITDA totaling 125 million, a three percent increase from the prior year. Profitability gains were driven primarily by volume growth and savable net pricing. In the first half, taste finished with six percent sales growth and 12 percent adjusted operating EBITDA growth. Food ingredients had sales of 850 million, a one percent increase from the prior year, driven by growth in inclusions and emulsifiers and textures. The segment also delivered an excellent quarter of profitability, where adjusted operating EBITDA grew 21 percent, with volume, favorable net pricing, and productivity driving margin expansion. It is worth noting that we continue to execute our operational improvement plan to strengthen margins within our food ingredients business. We significantly improved profitability in the segment this quarter, with 170 basis point improvement in adjusted operating EBITDA margin, finishing at 14.6 percent. We will continue to drive improvement in food ingredients as we move through 2025 and into 2026. Our health and bioscience segment grew four percent in the quarter, as broad-based growth was led by strong gains in health, food biosciences, and animal nutrition. We also delivered adjusted operating EBITDA of 151 million, a three percent increase, as volume growth and productivity gains more than offset reinvestment. Lastly, SENT also achieved sales growth with net sales of 603 million, up one percent year over year, against a strong double-digit year-ago comparison, driven by double-digit growth in fine fragrance and low single-digit growth in consumer fragrances. Fragrance ingredients was down, as growth in specialty ingredients was more than offset by declines in commodities as a result of low-cost competition. To counteract this and to build long-term competitive advantage, we are investing in new molecule development to over-index toward specialty ingredients. In the quarter, SENT delivered 130 million in adjusted operating EBITDA, as profitability was impacted primarily by unfavorable net pricing due to a timing lag. Turning now to slide nine, cash flow from operations totaled 368 million -to-date, while CapEx was 274 million, or roughly five percent of sales. Our free cash flow position in Q2 totaled 94 million, a sequential increase of more than 140 million from last quarter. We paid 204 million in dividends through the end of the second quarter, and our cash and cash equivalents totaled $816 million. As of June 30th, our gross debt was approximately $6.2 billion, a decrease of more than $3 billion compared to the year-ago period. Our trailing 12-month credit-adjusted EBITDA totaled approximately $2.2 billion. I'm happy to report that we reached our net -credit-adjusted EBITDA target in the quarter, where we finished at 2.5 times. Now that our leverage is within our target range, I would like to take a moment to talk about our focus on free cash flow generation and walk you through our revised capital allocation strategy. At IFF, we are committed to increasing our free cash flow conversion. This business is very cash-generative, and we are aware of the responsibility to invest our free cash flow carefully on our shareholders' behalf. We view every investment decision through a lens of return on invested capital. This means we are focused on prioritizing capital deployment where it can generate the highest long-term returns for our shareholders. First, we prioritize reinvestment in the highest return areas of our portfolio. Our CAPEX is being carefully directed towards businesses and initiatives that offer strong value-creation potential, particularly in innovation, capacity expansion, productivity, and digitalization. Second, we have made meaningful progress in strengthening our balance sheet. Maintaining this new level of financial flexibility is a priority, as it enables us to navigate through macroeconomic uncertainty while preserving the capacity to reinvest in the business and return capital to shareholders. Third, we remain committed to delivering consistent returns to shareholders. Our dividend continues to be a central component of our investment proposition. We are focused on maintaining and, over time, growing our dividend as we grow earnings. Fourth, today we've launched our Dilution Plus Share Repurchase program. At minimum, this program is designed to offset annual dilution from equity compensation, which equates to approximately $75 to $109 million per year. We also retain the flexibility to increase our repurchases as we increase our free cash flow generation and when IFF shares are trading below intrinsic value. We plan to begin our share repurchase program in the fourth quarter of 2025. Finally, we continue to evaluate highly selective, value-accretive bolt-on acquisitions and strategic partnerships. We are very mindful of our track record in this area and we are committed to being very disciplined going forward. These opportunities must meet clear financial and strategic criteria, including alignment of our core capabilities, potential to expand our addressable markets, and have a clear path to synergies. In summary, as we increase our free cash flow generation, we will execute a balanced and disciplined capital allocation strategy, one that enables us to reinvest in the business, return capital to shareholders, and maintain financial flexibility and strength. Above all, we will be very disciplined with our decisions guided by a clear focus on generating long-term returns. Now turning to slide 11, I'd like to walk you through our outlook for the remainder of 2025. As we've discussed in previous quarters, the macroeconomic environment continues to be dynamic and at times challenging. From evolving trade policies to weakening consumer demands, we are a broader set of external pressures. That said, we want to underscore that we remain confident in our ability to execute through this environment and importantly remain on track to deliver our 2025 guidance we set out earlier this year. With solid first half of the year behind us, we are reiterating our full year 2025 guidance. We continue to expect sales to be in the range of $10.6 billion to $10.9 billion. While the dollar ranges remain consistent with our prior outlook, it is worth noting that this now reflects modestly softer volume expectations that is being partially offset by favorable movements in currency. As Eric shared, this translates into the lower end of our 1 to 4% currency neutral growth sales guidance range. On the bottom line, we continue to target adjusted operating EBITDA of $2 to $2.15 billion, reflecting currency neutral growth of 5 to 10%. As we look ahead to the second half, we expect growth will moderate, particularly in Q3 due to a very strong year over year comparison. In the third quarter of 2024, we saw double digit growth across several key segments where taste was up 15%, H&B was up 12% and cent was up 10%, creating a high bar for comparison. In particular, our health business had an exceptionally strong Q3 last year, and this combined with ongoing softness in both North America and Chinese markets will present some headwinds in the upcoming quarters. And while the business will be challenged, we have made solid progress, improving our innovation pipeline, and will continue to reinvest in R&D and commercial to ensure we grow our business at or above market, recognizing that it will take some time. Additionally, beginning the third quarter, pharma solutions will be fully excluded from our results following the completion of the divestiture on May 1st. As a reminder, Q2 included one month contribution from pharma business, so we expect to see a step down in absolute EBITDA levels in Q3, reflecting the full absence of this business. With that, I would now like to turn the call back over to Eric for closing remarks.

Thanks, Mike. We're just a little more than halfway through the year, and I am proud of what our IFF team has already achieved, serving customers, strengthening our innovation pipeline for the coming years, and strengthening our productivity efforts. And we have done this while successfully selling and separating pharma and nitrocellulose to fix our balance sheet. We know that market conditions are getting tougher and that the second half comparisons are difficult given our high growth in the second half of 2024, but we are clear on our strategy, are getting stronger at commercial innovation, production, and productivity execution, and we'll get through this as we build strength for 2026 and beyond. Thank you, and I'll now open up the call for your questions.

We will now begin today's Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would remove that question, please press star followed by two. Again, to ask the question press star one. As a reminder, if you are using a speakerphone, please remember to pick up your headset before asking a question. Also remember to limit one of your questions per person. We'll pause it briefly while your questions are registered. The first question is from the line of Patrick Cunningham with SOTY. You may begin.

Hi, good morning. On the divestiture to Bungie, can you walk through the strategic rationale, any disenergies that you see and help us size the business from a margin perspective?

Thanks for the question, Patrick. This is Eric. First of all, what we sold was our soy or what we're selling is our soy crush, our soy protein concentrate and lecithin products. They are very commoditized and I would say much better run by Bungie than what we're being run by us. They were low single digit EBITDA margins for us and they were distracting from our very differentiated isolated soy protein business, which now we can focus on driving the application development, the innovation in that business because we no longer have to worry about the commodities. So overall, that's going to improve our margins in the food ingredients business significantly and allow us to focus where we need to focus.

The next question is from the line of David Beljeeter with Deutsche Bank. You may begin.

Thank you. Good morning. I'm Eric. Just on food ingredients, when do you expect to complete your evaluation of strategic alternatives? And if you do decide to pursue a sale of this business, is there any portion that could be retained going forward? And lastly, do you still expect that there would be strong interest in this asset amongst strategic and private equity? Thank you.

Thanks for that question, David. Very important to us. Let me just start by saying I think we're making very good progress here. As you know, we separated Nourish into taste and food ingredients, which I believe has significantly strengthened us in both taste and in food ingredients. They're very different businesses. That was step one. Step two was we brought in a world-class food ingredients leader, Andy Muller, and he's got that transformation with his team going forward. Very, very strongly, consistently improving our EBITDA margins. And then the next really important step was divesting these commodities that can't consistently achieve our margin targets and allow us to focus on the areas that can. And now with those three pieces done, it's giving us the chance to really dig into what are the strategic options. And I expect that we'll be able to update you on where we stand with the fourth quarter earnings call early next year, and I believe we'll have absolute clarity in 2026. But I'll just finish by saying that there's already been strong proactive interest by both private equity and strategic's incoming that we can now really start to engage with as we consider our options.

The next question is from the line of Gasham Punjabi with the beard.

Thank you, operator. Good morning, everybody. I guess, you know, just stepping back a little bit on the second quarter, could you just give us more color on how the quarter unfolded from a monthly cadence standpoint and also what your embedded volume assumptions are for the back half of the year by segment? You know, you called out challenges. Can you be a little bit more specific as relates to what specific challenges you're referring to? Thank you.

Yeah, thanks. It's a great question. You know, overall, the operating environment in Q2 was consistent what we expected coming into the quarter. And so despite some of the volatility we see in the world, all businesses actually delivered growth. When you look at it on a volume perspective, all the businesses were actually moving into positive territory. And compared to strong year ago comparison on a two year basis, they actually had all had mid single digit growth on a two year average basis. So, you know, the health of the business is relatively strong from a Q2 standpoint in a more challenging operating environment. So we feel good about that. As we look ahead, we are more cautious in the second half outlook. Part is because we're comparing and I said it in my prepared remarks that we're comparing to strong comps in Q3. It was a plus nine last year, year over year. So that's that's a tough comp. But then in addition, we are seeing some weakening trends in H&B, where we do actually expect to see some negative growth in Q3, specifically driven by health. And now Eric talked about it previously, and I mentioned in my in my career remarks as well, we are taking actions to address this via reinvestment and capacity investments, and confident that over time, we will accelerate growth back to market trends or above.

The next question is from the line of Josh Spector with UBS. You may begin.

Hi, good morning. I was wondering if you could specifically talk about the outlook for scent in 3Q and 4Q. You've clearly seen divergent trends between growth in markets between fine fragrance and consumer versus the ingredients, which looked like it was more of a drag. So wondering if you see that drag and ingredient continue into the back half, or if that's more contained within second quarter. And then similarly, your views around growth for some of the stronger areas you've seen in that segment. Thank you.

Yeah, thanks, Josh. So maybe I'll take this one again. You know, in the scent business overall, we expect to continue to see good and strong performance in fine fragrance through the balance of the year. So the team is doing a really exceptional job at driving their performance. A lot of it is driven by new wins and commercial performance, and they continue to be successful there. So that's a great story. In addition, on the consumer fragrance, you know, they're comparing to stronger year ago comparisons kind of all year. So on a two year basis, it looks good. But on a headline number, it's actually trending more low single digits. And so there's been a lot of work being done to kind of recruit and to make sure that we're driving that performance going forward. And so as we go into the second half of the year, we'll probably be in that low single digit kind of range in terms of overall growth. Your specific question on fragrance ingredients, I think that is the pressure point in the quarter, specifically in Q2, and will be for the back half of the year. And so for for fragrance ingredients in the back half of the year, we expect it to be down at similar levels that we had in Q2, which was pretty pretty meaningful. Now there's a story that's happening there that the more commodity elements of our portfolio are under the most pressure. And part of that is absence of really what I'd say strong innovation, absence of a specialty portfolio, which is a little bit different than kind of where we've been historically IFF. And so really, the focus now as we go forward is how do we make reinvestments to bring molecules to market to making sure we're driving that competitive difference. And so as we go through the second half of the year, that commodity portion will be pressured. The specialty ingredients portion, while small and growing, will continue to be the focus as as we move into 2026.

Next question is from the line of Christian Owen with Oppenheimer. You may

begin. Hi, good morning, and thank you for the question. I'm just going to zoom out a bit. Eric, reflecting on the last year plus, it feels as though the company has hit this inflection point in terms of the balance sheet. You're moving through the portfolio efforts, but perhaps less obvious are some of the changes that you've made to the board. So if we're just taking a two to three year outlook, help us understand what the board refresh helps IFF to accomplish as you move into this next phase. Thank you.

Well, thank you, Kristen. So first of all, what we want to do, our goal is to get IFF on the right track to be a world-class leader in innovation, percent, taste, and health and biosciences. And to do that, we need the right leadership, executive leadership, and the right board. And what I would say is we have both now at full strength. And the leadership team, we recently added, as you know, Leticia Conchalves to run health and biosciences, a terrific leader, has a biotech chemistry background that's ideal for health and biosciences leading that forward. On the board front, I would say we're also now at full strength. Kevin O'Byrne became our chairman, who's been a terrific partner to me and the management team and the rest of the board to work with, great retail experience. We've also added Memud Khan, an ideal world-class R&D leader with great experience, not only in health, but also in food R&D and home and personal care. And he's already tremendously helping our R&D teams to make sure that we're driving the right pipelines in the right way. We also brought in Jesus Montas, who's a digital AI systems expert. And as you know, we've got complicated systems and we've got a need to drive AI. And so he's already helping our teams in those areas, which is tremendous. We recently brought in Cindy Jamison, who's got terrific CFO experience with a number of companies, helping Mike and his team make sure that we're doing the right things to have a streamlined, very efficient and effective finance team. Gina Drossos joined us with great proctor and gamble background, great CEO experience. And as you know, we have Don Willoughby on our board from Clorox with great home and personal care experience. So we now have a board that has world-class governance capability, but also market experience and innovation experience to help us drive the company forward. So I feel really good about our executive team and our board.

And this question is from the line of John Roberts with Mizuho. You may begin.

Thank you. Health and biosciences is pretty diversified. I think you called out animal feed and food at the stronger end and sounds like health is going to be at the lower end. Maybe could you give us some quantification for how high the good businesses are performing and how low some of the declines are that you're expecting?

Sure, John. So first of all, food biosciences and home and personal care are performing very well. And I see them continuing to perform well. Just for example, in our home and personal care, in addition to the strength we have in enzymes, really good capabilities there, we also commercialized our first application with DEB, our Design Enzymatic Biomaterials, with a leading home and personal care company, CPG company. And we see lots of opportunity there, but it was nice, you know, after many, many years of development to see the first application commercialized. So very good strength in both of those. Our animal nutrition business, we're very strong there. What I would say is the market's slowing down a bit, but we continue to perform well versus the market. The real challenging area is health. And we're hearing from our customers that in the second half, they're seeing slow down. And so what we're doing there is, as we talked about last year, continuing to invest more aggressively and really excited about our R&D pipeline that will start to play out in 26 and come to full strength in 27. Leticia is also strengthening our commercial capabilities and health. So we will see a slow second half in our health business, very important business. But we'll see it start to come back in 26 and I would say get to full strength in 27.

The next question is from the line of Lisa Deneve with Morgan Stanley. You may begin.

Hi, thank you for taking my question. I have one question, one small follow up on the previous question actually. So my first question is, can you outline what drove the strength in the second quarter for taste in particular, and also how you see the midterm growth prospects for this subsegment, especially in the light of potential regulatory changes under the US administration? That's my first question. And then a small follow up. If I recall, your HMB health business was soft to actually negative in the fourth quarter of last year. So can you just remind me how it traded last year? Because I'm a bit confused of why it would be negative in the second half, especially the fourth quarter when it was already weak in the fourth quarter of last year. Thank you.

I'll start with the taste question. Taste is delivering solid growth. And I'm very glad that we separated nourish into taste and food ingredients because it enables our taste leader and his team to really focus on what it takes to continue to win in taste. And what I would say is we now have seven quarters in a row of performing with or ahead of the market in taste. And I see us continuing to perform strongly versus the market. Now the market is slowing down in the second half in taste. So we will have lower growth rates, but it will still be significant growth, particularly getting slower in the US and in Asia, China and Southeast Asia. But still solid growth. And we've got a building commercial pipeline and we've got strength in our R&D pipeline. So very pleased with where we are in taste.

Yeah, maybe just Lisa on the H&B business on the second half of the year. I think the comparable when I look at the business was plus 12 in Q3 and I think it was plus six in Q4. So the comp is still pretty meaningful. When you double click on the health side, it was a little bit softer in Q4 last year. But right now I think what we're saying is we're flagging some weakness in Q3 specifically. And really because of the year ago comparison, I think it was mid-teens in terms of growth. And so part of it really is a comp issue. As we get into Q4, it will be less challenged. And then as we go on to 2026, it's a full player.

The next question is from the line of Sopacore. Tiana with V of A, you may begin.

Yes, thank you very much. So, you know, although we haven't really seen much for actual regulatory change coming from the Department of Health and Human Services and R&K Jr., there's certainly a lot of discussions, requests, rumors. So what are you hearing from your customers regarding their response to any potential changes, including needs to reformulate?

Thank you, Sal. What we're hearing is, I would say, an even stronger desire for cleaner labors, cleaner labels, for innovation to help reduce sugar, salt, fat, increased protein, all the things that we are good at. And we're seeing the continued healthy reformulation to do those things. And I would say the Maha movement in the US is helping that. And I think that's a good thing. But we're also seeing that around the world. In Latin America, I've spent some time in Latin America in the last couple of months. And you've got this labeling where products are being labeled if they have high sugar, high salt, or high fat. And the desire to help reformulate to get rid of those labels is very strong. And that's opening up opportunities for us. And we've had very good growth in Latin America. So I think that it's a global trend, certainly a little bit more push in the US now. And it's very good for IAVET.

The next question is from the line of Lawrence Alexander with Jeff Reiss. You may begin.

So good morning. So just to follow up on one of the earlier questions, can you give a bit more granularity about what's happening sequentially in end market trends in taste and scent, your confidence on the end markets into 2026, and to the extent that you have investments in innovation, will those be showing up and contributing to those two businesses in 2026? You alluded in your comment to sort of tailwinds for those.

Yeah, so thanks, Lawrence. So in taste, we do see a slowdown in particularly in the US, China, and parts of Asia. Latin America continues strong, Europe continues strong. What I would say there is we've got visibility in the second half to that happening. And that's what we're hearing from customers. We're pushing hard to bring more innovation. And our commercial pipeline is strengthening. Our win rate is strong. But we're also pushing harder in developing markets. The leadership has spent more time in India and parts of Asia. And obviously, we're pushing hard in Latin America continued and in the Middle East, we're seeing opportunities there. But no doubt, there'll be slowdown in the second half, continued growth, but a slowdown. And we're hoping that that reverses in 2026. But we're not waiting for that. We're pushing hard on our innovation pipeline, both our commercial and the R&D capabilities to ensure that we still see solid growth in 2026. Incent, as Mike alluded to, the fine fragrance business is doing well and continues to have been delivering double digit growth. I think we've seen recent wins that give us confidence into the second half and into 2026. We've got a very strong team there. Sabri and her team, supported by Anna, are very strong and what I would say are very enthusiastic, very energized, and are out making stuff happen. In consumer fragrance, as Mike alluded to there, we had low single digit growth in the first half. We see continued low single digit in the second half, driven by market conditions. But also, I would say we got a little distracted in consumer fragrance last year and the year before. We've got the right leadership in place. We've got our commercial pipeline strengthening. And I've got strong confidence that we'll see accelerated growth in 2026 in consumer fragrance. In fragrance ingredients, again, as Mike alluded to, negative growth in the first half, continued negative growth in the second half. As we put more emphasis on the specialties and growth specialties and naturals that we sell outside of our company to others, we see that growing, but we see the commodities continuing to be depressed both on volume and price. That's a little less than half of that business. So that will be challenged. We see that flattening out in 2026 and returning to growth in 2027 as we get more capacity and molecules in the specialty area and have de-emphasized the commodities.

The next question is from the line of Kevin McCarthy with the BRP. You may begin.

Thank you, and good morning. So, Eric, at a high level, you delivered some earnings upside in the first half, yet left the annual ranges unchanged and now expect some growth to maybe moderate in the back half. So just wondering if you could parse that out. I hear you on the health trend and the comparison issue there. Just curious, on the balance of the portfolio, if you're looking at the trends, do you think it's any better or worse than you would have previously expected? I'd like to get a feel for whether or not you think there's an element of conservativism embedded in the current guide, particularly with currency having trended more favorably in recent months.

I think that our guidance is appropriate. I do not feel like it's overly conservative at all. I think there are two elements facing challenges facing us. One is market challenges. The other is things that we continue to clean up, fix, get on the right track. I feel really good about what we've done in taste. I feel really good about what we're doing in health and biosciences, in the food sciences, the food biosciences, in the HPC, and a number of other areas, consumer fragrances, the things that we're doing across many of the businesses, food ingredients, transformation is going great. The areas that we have challenged right now are health. That's a combination of the market, but also our internal not being where we need to be, both on the innovation pipeline, which I said is coming, it's strengthening, and it'll start to expand next year and in 2027 will be strong. But we're also needing to strengthen our commercial capabilities in health. We're the leaders in this area, and we need to drive growth even when the markets are challenged. That's one area. The other area is fragrance ingredients. We clearly had a great year last year when commodities and specialties were growing like crazy and the prices were strong. This year the commodities, the volume has slowed, the prices are weak, and we're de-emphasizing the commodities, recognizing that's not where we bring our strength over time. We'll decrease the commodity piece of our portfolio and we'll strengthen the specialty piece. So we're on it. We've got the right team, focused, and it'll flatten out in 26 and it'll start to grow again in 27. But those are our two biggest areas of drag that are dragging below what the market is doing in the second half.

And there's questions from the line of Michael Siffin with WealthFargo. You may begin.

Hey, good morning guys. Nice corner. You know, if you take out pharma from your first half EBITDA, somewhere around 1050, your outlook for the second half implies mid-900s at the midpoint. It's about down, you know, 10% sequentially. Is that sort of a normal sequential decline or does that represent more incremental flowing in consumer demand? And how does that compare on a pro-forma basis, as I don't recall getting the data for second half 24 on a -to-like basis?

Yeah, hey Mike, thanks for the question. Yeah, I don't have the numbers on a -for-like basis readily available, so happy to circle back. I think when you look at the reported numbers last year, you'll see that there is a step down second half to first half. Part of that is the seasonality of the business. If you remember, Q4 is the lowest margin quarter we have. And so last year, I think that was about 17%, which if you think the kind of where we are in the 20s now, you can see that step down. So that's a big portion of that. It really depends on where you anchor in in terms of the guidance range. If you look at it at the midpoint of the range, it's a small step down. Part of it, again, is the seasonality of it. Part of it is everything we talked around a little bit softening in terms of volume performance relative to where we were in the first half.

Our next question is from the line, Nicole with the BMP for us. You may begin.

Hi everyone. A question is a bit of a follow-up and an earlier one around food ingredients. Could you talk, how integrated are the activities within food ingredients overall? And do you expect any strategy costs from the bungie deal? And I was wondering if you see any scope for portfolio cleanup elsewhere beyond food ingredients?

Thanks. Thanks, Nicole. First of all, the biggest change was separating nourished into taste and food ingredients. And that took most of last year. We finished it at the beginning of this year. And then we've moved forward with food ingredients. And Andy and his team have been working, and will continue to work now even more, to stand up the food ingredients as a standalone business, which gives us more strategic flexibility there. That's working. The answer on the bungie sale, there's some stranded costs. We're already working to deal with those. And if we are to separate food ingredients, there will be stranded costs. And we're already working on how do we address those now versus waiting until later, because it'll be a good thing to do whether we separate it or not. So we're working hard on productivity. And that's part of it, of what type of costs can you afford and should be allocated to a food ingredients business. And those that the food ingredients business don't want, how do we get those out of the system? What I would say is on the pharmaceutical business that we sold, we waited longer than we should have. So we learned from that to deal with the stranded costs upfront rather than after the fact.

The next question is from the lawn of Lauren Lieberman with Parklabs.

Great, thanks. So I wanted to see if you could talk a little bit about what you're seeing at a market level from global multinational customers versus local and regional. Any sort of difference in performance and even in their level of optimism or lack thereof, maybe I should say, as we look towards the balance of the year and what they're seeing from a consumer standpoint. Thanks.

Thanks, Lauren. I would say that the global companies are putting more on innovation, which is good. So we've got lots of innovation projects. What I would say is that they're getting challenged, particularly in the developing markets, whether it's Indonesia or Malaysia or Thailand or the Middle East by local players. And smaller companies are coming up with some great innovations. I think Athletic Greens is an example or Fair Life is an example now owned by Coke is driving great growth with their core power products. And so we're seeing opportunity with both. What I would say is we are well positioned with the global players and we're well distributed between global players, mid-sized players and small players. But we are putting more emphasis on mid and small sized players and developing high growth markets. And we hope to see better and better results from that. We're doing it. But what I would say is some of our competitors are better positioned and some of our businesses in the developing markets with smaller customers. And that's an opportunity for us. And we're working on it.

Our next question is from the line of Jeff Zakakis, the JP Morgan. Thanks very

much. In your commentary, you say that your currencies will be negative year over year. The euro is flat for the first half and maybe it's eight or nine percent stronger for the second. The Brazilian Riai is maybe 10 percent stronger. Even the Chinese Remembi is a little bit stronger than it was last year. So was there a large hedging program that just didn't fit the current environment? Secondly, in food ingredients, is food ingredients a more capital intensive part of IFF relative to the other businesses? And in rough terms, how much of food ingredients do you might eventually retain? A billion dollars in sales? Something more? Something less?

Yeah, I'll take the first one. Jeff, great question on effects. Obviously, it's a big movement. We started out the year the euro was in that 105 range and kind of ramped to where it is. As you know, very, very well from covering IFF, it is a big exposure for us. It's outside the USD. It is our largest exposure. So that has been a tailwind. The reality is when you look at it on a comparable year over year basis, there are some emerging market currencies that are a headwind. And so you highlighted two, but there's other ones that are negating some of the benefits that you would think. And so on the top line perspective, I think we said it's about one percent of a drag on a full year perspective. You see that through the first half. That will actually flip to be a little bit more positive the second half of the year. So to your point, it's getting better from here at this time. But really the offset is going to be the emerging market currencies. There's no hedging program in place today. So there's nothing to flag from that perspective. It's truly the fully fungible aspect of year to year Delta in effects. So that's maybe part one. Eric, part two, you want to take food?

Sure. So food ingredients is more capital intensive than the other businesses. Although health and biosciences has capital needs. What I would say is the biggest capital exposure we had was the businesses that we just sold to Bungie, which they know how to handle the capital in those commodity businesses better than we do. So I think that was a helpful move. And there's some plants that we need to upgrade and do some things too that we have to proceed with. But as I look at the food ingredients business, it is still very different than taste, and health and biosciences. There are leverage points. There are collaboration opportunities between food ingredients and taste and health and biosciences, which we do today. And I foresee in any strategic change, we would continue to have collaboration between food ingredients wherever it ends up and those businesses within IFF. But I don't see carving up food ingredients significantly from where it is today. I think as an entity, it makes sense. I think it's an opportunity for a strategic player to add or a private equity firm to enhance the business by investing more in it. It's a great substrate to add other products to and enhance the business. So I think there's lots of options there, but I don't see it as being carved up significantly. I see it as a standalone business that we have various options with. But whatever we do, I see there's still going to be collaboration between our taste business, health and biosciences, and food ingredients.

Our next question is from the lawn of Chris Parkinson with Whoop Research. You may begin.

Great. Thank you so much for taking my question. Can you just hit on a little bit more on probiotics markets? It seems like there's been some inconsistencies not only in the market, but also geographic and also some of your peer commentary. So it'd be particularly helpful if we could just get your stance on where you are today and where you think the market is generally heading into 2026. Thank you so much.

Thanks, Chris. First of all, I think it's a great business to be in. And we've got a great position today. We've been the historical builders of the market. It's an important area of health for humans. There's some opportunities in pets, and we're well positioned. What I think we had lost the edge in was we had stopped really pushing hard on R&D innovation for the future to keep getting better probiotic strains and going in adjacent areas. We started doing that early last year, increasing that R&D spend and increasing the focus. Manmood Khan has joined us and is a great knowledge base of the health markets and is helping guide that and direct that research with our team, with Casper Vroman and his team. And so with that, we've been able to strengthen our pipeline that, again, starts to come out in 2026 and goes to full strength in 2027. We also, as we have done that, have not pushed hard enough. We've got great customers that are doing really great things, but we haven't pushed hard enough at expanding what we do with our current customers and driving for new customers. And that's where Leticia has come in and is working with the team to strengthen our commercial capabilities. So overall, the market is growing. I think it's going to continue to grow. I think it's a great area. In a world of GLP-1s, for example, there's even more opportunities that I see, that we see, and we're going to access those. We've got a tough second half challenge ahead of us with our current customers and their situation, but we're going to make sure that we do the right things to strengthen for 2026 and 2027 and beyond. And I see in this business really tremendous opportunities if we get some of these really exciting pipeline products out there with the right customers driving the growth opportunities.

There are no further questions registered at this time. I would like to pass the call back over to Eric for any closing remarks.

Thank you. So I've now been at IFF for a year and a half. And while I'm pleased with our progress on results, I'm really not satisfied. And as we've been very clear, we see the second half is even more challenging. But I can tell you, I'm more convinced than ever that we are taking the right actions to address our challenges, which we've talked about in health, for example, and fragrance ingredients. But I also believe that we are doing the right things across our businesses. We keep strengthening our innovation and commercial pipelines and taste, fine fragrance, and consumer fragrance, and our enzyme businesses, while also strengthening our productivity muscle. And we are absolutely focused on delivering what we committed to deliver in the second half of 25, while we also make sure that we're strengthening for 26. And I really see us starting to continue to improve in 26 as we also figure out what we're doing with food ingredients. And then in 27, as the investments that we started to make last year in CapEx and enzymes, as well as our R&D engines across the businesses, will really start to start the impact in 26, but will really come to full strength in 27. That's when I see us really starting to perform. But between now and then, we're going to be clear on what our goals are, what our expectations are, and we're going to do all we can to do what we say and keep strengthening IFF for the future. So thank you very much for your interest, and we appreciate and will now close the call.

Thank you. That concludes today's conference call. We appreciate your participation. We hope everyone had an amazing day, and you may now disconnect your line.