International Flavors & Fragrances Inc ($IFF) Q4 2025 Earnings Call

Thank you Eric and thanks everyone for joining. In the fourth quarter, IFF generated revenue of nearly 2.6 billion with growth in nearly all divisions. Performance was led by mid-single digit growth in health and biosciences and scent as well as low single digit growth in taste. Our sales grew 1% for the quarter against the 6% year-ago comparable and were up approximately 4% on a 2-year average basis. EBITDA totaled 437 million for the fourth quarter, a 7% increase primarily driven by volume growth and our ongoing productivity initiatives. Our EBITDA margin also increased by 90 basis points to 16.9%. On slide nine, I'll provide a closer look at our performance by business segment. In taste, sales increased 2% to 588 million with growth in all regions, including high single digit growth in North America driven by new wins. The segment also recorded a very strong quarter of profitability with EBITDA of 94 million, a 17% increase. Profitability gains were driven primarily by favorable net pricing and cost discipline. Food ingredient sales of 802 million were down 4% as softness in protein solutions and emulsifiers and sweeteners offset growth in systems and inclusions. It is worth noting that a part of our top line decline in the fourth quarter and on a full year basis for food ingredients was driven by a proactive exit of low margin business as well as sales loss due to sanctions in Russia in emulsifiers. Profitability for food ingredients declined 11% in the quarter to 82 million stemming from the volume declines and unfavorable net pricing. Our health and bioscience segment achieved sales of 589 million, an increase of 5% with growth across nearly all businesses. The standouts in the quarter were food biosciences and animal nutrition both growing double digits. Home and personal care also continued to be strong, increasing high single digits. As we shared last quarter, health, while improved sequentially from Q3, was down low single digits. Under new leadership, the team has started to execute their improvement plan, and we continue to believe trends will improve over the course of 2026. From a profitability standpoint, health and biosciences delivered EBITDA of 155 million in the fourth quarter, an increase of 20% due to volume growth and productivity gains. Lastly, our scent segment delivered sales of 610 million representing 4% growth. Performance in the fourth quarter was driven by continued strength in fine fragrance which increased 10% and mid-single digit growth in consumer fragrance. Fragrance ingredients remained under pressure due to continued market softness and price competition on the commodity portion of our portfolio. EBITDA for this segment increased 1% to 106 million as benefits from volume growth and productivity gains were partially offset by unfavorable net pricing specifically in fragrance ingredients. Turning to slide 10, cash flow from operations totaled 850 million for the full year and capex totaled 594 million for approximately 5.5% of sales. Our free cash flow position for the full year totaled 256 million. Included in this number is approximately 300 million of restructuring related charges primarily driven by our divestiture activities which accelerated in the second half of the year due to the potential sale of food ingredients. Working capital also represented an outflow of approximately 166 million reflected higher inventory levels in strategic areas along with changes in accounts receivable and accounts payable. We made meaningful progress improving inventory in the second half of the year and as we look ahead, disciplined execution across all elements of working capital will be a key priority for us in 2026. Year-to-date, we returned 49 million to our shareholders through dividends and an additional 38 million through share repurchases as we started our repurchase program in the fourth quarter. As a reminder, at minimum, we expect to offset annual share dilution of approximately 80 to 100 million per year. Our cash and cash equivalents finished at 590 million and our gross debt at the end of the year was approximately 6 billion, which is a decrease of nearly $3 billion compared to 2024. Our trailing 12-month credit adjusted EBITDA totaled 2.1 billion. Our net debt to credit adjusted EBITDA ended 2025 at 2.6 times, improving from 3.8 times at the end of 2024. Before turning to our outlook for 2026, I'd like to briefly reiterate a point Eric made earlier on food ingredients. We believe pursuing a sale for the food ingredients business remains the right path forward. With our capital structure now strengthened and improving operational performance and margin expansion ahead for food ingredients, we are under no pressure to sell. The business has a strong operating plan and we are confident it can continue to create value. Whether a transaction occurs or not, this potential sale is about capturing full value for our shareholders and doing what is right for both food ingredients and our broader portfolio. Throughout the process, we remain focused on long-term shareholder value and taking actions that make the most strategic sense. Now, on slide 11, I'd like to share our outlook for 2026. We believe we are well positioned for the year ahead and we are cautiously optimistic that we can deliver growth, margin improvement, and cash flow generation this year. As we navigate the volatile geopolitical landscape and uncertain market conditions, the strength of our pipeline and the benefits of our reinvestment efforts give us confidence moving forward. We believe our outlook reflects a balanced consideration of both current market conditions and the potential for unforeseen opportunities and challenges throughout the year. Hence the ranges we are providing. Coming off a solid year we had in 2025, we expect to continue to drive financial performance across the company. For the full year 2026, we expect sales to be in the range of 10.5 billion to 10.8 billion, representing comparable currency neutral growth of 1 to 4%. We believe taste, health and biosciences, and scent will continue to drive our top line growth supported by new wins and our innovation pipeline. We expect that growth will primarily be driven by year-over-year improvements in volume. From a profitability standpoint, we expect to deliver full year 2026 EBITDA between 2.05 billion and 2.15 billion, representing comparable currency neutral growth of 3 to 8%. It is important to note that we will also continue to selectively reinvest in the business while maintaining a disciplined focus on near-term profitability. We expect our productivity and efficiency gains will fully fund our ability to reinvest in innovation and commercial capabilities across our highest value businesses. We believe these investments will continue to enhance performance, strengthen our competitive position, and deliver attractive returns over time. For the full year, we expect FX will have approximately 1 percentage point positive impact to sales and a negligible impact on EBITDA. From a calendarization perspective, our year-over-year comparisons are strongest in the first half, particularly in Q1, where we have certain favorable one-time items from last year, including the contribution of divested businesses. As a result, we expect sales and EBITDA will be more muted in the first quarter 2026. More specifically, we expect modest EBITDA growth in the first quarter versus our like-for-like first quarter 2025 base of approximately 505 million adjusting for divestitures. As we move through the year, comparisons will ease and we expect performance to improve supported by our pipeline and ongoing productivity actions. We expect that this will drive improved leverage across the P&L and year-over-year growth should progressively improve each quarter. As I said earlier, operating cash flow will be a key priority for 2026. We expect overall cash generation will improve year-over-year, excluding restructuring and one-time costs, which will most likely be higher than 2025 as we pursue a potential sale of food ingredients. Teams across the businesses are driving working capital improvements across inventory, payables, and receivables. And when combined with profitability growth and lower incentive compensation payouts, we should see a meaningful cash flow improvement versus 2025. Capex is expected to be around 6% of sales and will be carefully managed focused on highest return opportunities including capacity expansion, network optimization, and innovation to support long-term growth. To further embed disciplined cash management, we've introduced an incentive compensation metric for 2026 tied to operating cash flow conversion defined as EBITDA minus capex minus the change in net working capital. We are also evaluating additional cash flow metrics for our long-term incentive program to strengthen alignment on cash flow generation, particularly for 2027. With that, I would now like to turn the call back over to Eric.

Yeah, thank you Kristen for that question. I'll take it. First of all, our expected growth for 2026 is volume driven and as you mentioned, CPG companies shifting emphasis to more volume growth. That is a good thing for IFF and the industry as a whole. So we like seeing that trend as you mentioned. And then finally, incremental margins are roughly 30 to 35% on volumes depending on the business segment.

I'll take this one. Nola, thank you for the question. As I think about 2026, I think we'd say we're cautiously optimistic going forward, really driven by a strong pipeline and the reinvestment we made over the last 18 months. In addition, as our CEO just said, we're hearing customers talk more about volumes for 2026, which is a good thing for us as well. And so, when you think about our 1 to 4% guidance range, it assumes essentially the current market conditions that we see today. And as we exited the fourth quarter, for us to achieve the higher end or the 4% range, I think we would need to see volumes at the end market improve more broadly and kind of return to what I'd say is more normalized levels in terms of market growth. And the opposite is probably true on the lower end of the guidance range or the 1%. To your point on Q4 2025, it was marginally better than we expected from a top line perspective with good improvements in taste, scent, and H&B. This was primarily driven by new wins, which is a positive signal, but it's only one quarter. And so as I think about again 2026 overall, we do believe that the three businesses will grow in 2026 within the kind of sales guidance range, but we also do expect food ingredients will also grow maybe just a little bit to a lesser extent overall. Fortunately, we have a very diverse business, we're balanced region, category, and customer exposure, and that gives us our confidence that we are resilient and that we believe we can as we go into 2026.

No, thanks John. You're correct that the fine fragrance business is our highest margin business. So that was a positive contribution to mix overall. Pricing actually in the quarter was flat year-over-year and so really the margin pressure came on the input cost side where, as you know, there's a bit of a lag in terms of overall price. This was primarily related to some of the index pricing agreements that we have and so similar to previous years, as we move forward we expect to fully recover this over time. One of your points on just the fragrance ingredients business overall, that shift from more commodity to more captive or proprietary ingredients. We started that migration, but it will take some time. And so as we go through 2026, we will make continuous progress, but I do want to just level set to make sure that's something that will be a theme as we go through 2026. And as we get through the second half, that's when we'll start to see some stuff come online overall. But it's a process that will take somewhat of all of 2026 to make that migration overall.

Thanks, Josh. Great question. Yes, we expect the free cash flow to be

Modestly lower than 500 for the full year. Essentially, the difference of where we ended versus our commentary in the second and third quarter really related to three things. One, we did see a little bit of an increase in what I'd say is onetime reg G related cost. As we start to move forward with the food ingredients potential sale, we actually saw some step up in cost associated with that potential transaction. Number two, exactly what you said, working capital came in a bit higher than we expected. Part of this is driven by inventory. Now, while the team made a really good effort and progress in terms of where we were in the first half of the year to the second half improving inventory, we are being strategic on some elements where we're taking advantage of supply and potential pricing to make sure we keep adequate inventory that as we grow our business into 2026, we're in the best possible position. And so that was a little bit of a build. But in addition to that, we also had some payables that are really just timing issues. I think as we go through 2026, we'll see that come back. Now overall with respect to AP, as I explained in our prepared remarks, cash flow improvement for us in 2026 is a key priority and while we do expect the reg G costs will remain high, we are being very disciplined in terms of cash management. Now, to the point I made earlier on my prepared remarks, we even added the compensation metric in there to drive this. And so, for 2026, I do expect to see a meaningful improvement driven by profitability growth, working capital, lower interest expense, and a lower payout relative to what we had in 2025 with respect to incentive comp overall. And so, that meaningful progress will occur. I'm going to refrain on giving a specific target at this point only because I want to get a little bit more clarity on the food ingredients potential sale. I think once we have the visibility there, we will come back and we'll give more formal guidance on a cash flow number. But I will tell you that what I can confidently say is that we are doing everything we can in our power to make sure we drive cash flow performance in 2026.

Thanks, Gantum. The Taste team is doing a really good job overall in terms of their overall performance. When you look from a regional perspective, all regions in Q4 grew, with contributions from both volume and price. When we look at the drivers of growth, really what stood out is North America, and that's really driven by new wins. The team has been really focused on making sure they grow their pipeline and increase their win rate, and what you're starting to see materialize is some of the success that they had on some of those launches overall. In addition, Latin America was strong. And then when I balance it out, I think about EMEA and Greater Asia, they grew but to a little bit of a lesser extent. So when I think about the margin performance, the largest contributor was really productivity. When you actually look across COGS and SG&A, the team did an excellent job of really trying to drive that cost management and making sure we're driving productivity within the system of their business. So that was a big success to the overall performance and profitability. In addition, they also did have some positive contribution from favorable net price to input cost. So when you shape this up between volume growth, good productivity, and some favorability with respect to price to input cost, that shaped up to a really nice quarter from a profitability perspective overall.

Thanks. For 2026, we do expect some modest input cost inflation for our divisions. This really includes raw material cost, which includes the impact of tariffs, plus logistics, energy, and packaging cost more broadly. At a very high level macro statement, we're seeing inflation across all those key elements. The team today is collaborating with customers to mitigate this, and in the end we will recover it through reformulation, productivity, and pricing over time as we go forward. So when we think about our guidance for 2026, taking a step back, our 1 to 4% is really all driven by volume. We do expect pricing to be slightly down, which is primarily related to the commodity portion of our fragrance ingredients, which I mentioned earlier on a different question, and some residual carryover pricing impact in food ingredients specifically. But the team is really focused on making sure as they think about our business going forward, we're working with customers that where there are inflationary pressures, we do offset that from a direct cost perspective. More generally, there is a general increase in terms of overall working costs, so merit increases, inflation. We've done a very good job at looking to productivity to make sure that we're fully offsetting that as part of our plan. So that's embedded in our gross productivity plan to make that a net number more favorable as we progress through the year.

So, great question, Eric. I'll take this one. Just getting real specific on the incremental margins. As we think about the guidance range, take a step back. I always think that the quality of this business is that as you grow your business, you do have nice leverage within the P&L. So when I think about flowing from sales to EBITDA, it's usually around two times. All right? So if I grow four, I can get eight in terms of leverage within my P&L. Obviously, the higher we grow, we start moving towards the four, three, four or five range over time, then that's when we'll see the best leverage within the P&L overall. When you're at the lower end of that, then it becomes a game of how do we continue to drive productivity to make sure we're supplementing some of the lack of volume, fixed cost absorption overall. So as we think about the range for next year, the 1 to 4% of the cost, obviously if we're at the lower end of that range, then we need to think about stepping up the productivity even more to make sure we get that leverage to fit within the portfolio. And we do have opportunities to do that. Then as we get to the higher end of the range, then we have a little bit more flexibility. What's built into the guidance range very candidly are two things. One, it's a bit of reinvestment that we're funding through productivity overall, which normally some of that productivity could help support and drive bottom line, but we are being conscious and smart about how we want to continue to reinvest in the business as we make the migration towards 26 and then into 2027. So that is a little bit of the offset when you think about the flow through from the incremental margin piece. It's really the volume growth is critical. Productivity is driving support depending on if you're at the lower end of the range or at the upper end of the range. And then the third point is really around how do we take a step back and just make sure the reinvestment is balanced to how our performance and our productivity is overall. So those are the three levers that we're managing for 2025.

Sorry, Megan. I think Jeff, you had a question on the tax base that if we had a potential deal for food ingredients, we're still obviously working through that process. So we got to kind of see where we're landing, where we're heading from that perspective. Fortunately, we're in a good position with respect to tax attributes that can be leveraged to minimize some of the tax leakage that we have now. So the team is fully focused on making sure the net cash number maximizes its value for shareholders. That's what the team is focusing on overall. But more to come as we progress from here.