International Flavors & Fragrances Inc ($IFF) Q4 2024 Earnings Call

Thank you for the kind words, Eric, and hello everyone. After more than 15 years at IFF, it is an honor to join my first call as CFO, and I look forward to working closely with all of you in my new role. Moving to slide eight, as Eric noted, our strong performance and execution through 2024 continued in the fourth quarter and drove solid results. IFF generated revenue of 2.7 billion in the fourth quarter, an increase of 6% on a comparable currency neutral basis driven by broad-based growth across all our businesses and led by mid single-digit volume improvement. We continue to realize the benefits from our ongoing productivity initiatives leading to the third consecutive quarter of margin expansion on a comparable basis. Adjusted operating EBITDA totaled 471 million in the quarter, a 5% increase on a comparable basis and their comparable adjusted operating EBITDA margin expanded by roughly 30 basis points. This performance was led by volume growth and our ongoing productivity initiatives that were partly offset by increased incentive compensation expense and business reinvestment.

On slide nine, I'll provide a closer look at our performance by segment. In Nourish, sales were 1.4 billion, a 4% increase year-over-year on a comparable currency neutral basis. Comparable adjusted operative EBITDA also increased by 4%. This was led by the fourth consecutive quarter of double-digit growth in flavors, a testament to that team's continued outperformance. In functional ingredients, mid single-digit volume growth was mostly offset by our pricing actions. This was consistent with our previously announced price strategy for 2024. Double-digit gains in home and personal care and grain processing alongside growth across nearly all our businesses resulted in another solid quarter for the health and biosciences segment. Sales came in at 553 million, a 6% year-over-year increase on a comparable currency neutral basis. Comparable adjusted operating EBITDA decreased by 3% largely due to strong year ago comparable as well as business reinvestments that Eric mentioned earlier. In scent, broad-based growth was led by double-digit increase in fragrance ingredients and high single-digit growth in fine fragrance. Net sales in the quarter totaled 579 million up 7% year-over-year on a comparable currency neutral basis and we delivered adjusted operating EBITDA of 97 million up 1% on a comparable basis as volume growth and productivity gains were partially offset by higher reinvestment. Finally, Pharma Solutions delivered another strong quarter, achieving sales of 228 million, a 12% year-over-year increase on a comparable basis, while also recording excellent profitability growth of 81% to 47 million. Strong margin expansion was driven by volume and productivity gains in a favorable year ago comparable.

Turning to slide 10, cash flow from operations totaled 1.1 billion for the full year and capex totaled 463 million or approximately 4% of sales. Our free cash flow position for the full year totaled 60 million which is consistent to where we expected it to be at the beginning of the year. Year-to-date, we also distributed 514 million in dividends to our shareholders. Our cash and cash equivalents finished at 471 million at the end of the fourth quarter, including 2 million in assets held for sale. Our gross debt at the year end was approximately 9 billion, a decrease of more than 1 billion compared to the year ago period following the completion of our divestiture of the cosmetic ingredients business. Our trailing 12-month credit adjusted EBITDA totaled 2.22 billion in line with last quarter and our net debt to credit adjusted EBITDA improved to 3.8 times. We remain committed to achieving our net debt to credit adjusted EBITDA target of below three times following the completion of our pharma solutions divestiture which we expect to be complete in the first half of 2025.

On slide 11, I'd like to share our outlook for 2025. While the current operating environment remains dynamic, we are cautiously optimistic about the year ahead as we look to build on our recent momentum. Coming off the strong year we had in 2024, we believe our 2025 plan strikes the right balance as we're targeting strong year-over-year improvements on a currency neutral basis and investing for the future growth of our business. Please note that our full-year guidance includes 6 months of pharma solutions with the divestiture assumed to close June 30th, 2025. For comparability purposes, we expect that divestitures will have approximately a 5 percentage point adverse impact to sales growth and approximately a 6 percentage point adverse impact to adjusted EBITDA growth in 2025. In the event that we can close the pharma transaction earlier, we will adjust our guidance accordingly and reflect the lower contribution of the business. For the full year 2025, we expect sales to be in the range of 10.6 to 10.9 billion, representing comparable currency neutral growth of 1 to 4%. We believe that this will be driven by continued volume growth against a strong year ago comparable with increases across all our divisions led by HMBB, taste and scent. It should be noted that we expect the 2025 operating environment to be more normalized relative to 2024 which did benefit from the absence of destocking. Pricing is expected to be modestly favorable inclusions of FX related pricing as raw material costs remain elevated and in some cases increasing year-over-year. On the bottom line, we expect to deliver full year 2025 adjusted operating EBITDA between 2 to 2.15 billion. On a comparable currency neutral basis, this translates to five to 10% EBITDA growth, which will be driven by gross margin expansion as a result of volume leverage and strong COGS productivity. Following a year of strong margin expansion and double-digit profitability growth in 2024, we will continue to reinvest in long-term value creation opportunities while balancing our near-term profitability objectives. What this means is that we will continue to drive strong productivity to mitigate general inflationary pressures and at the same time reinvest a large portion of our incentive compensation reset in R&D, innovation, and commercial capabilities across our businesses. Similar to the actions we've taken in the second half of 2024. We believe that by doing so, not only will we drive short-term performance, we will further enhance our competitive positions and generate strong returns on these organic investments. Based on foreign exchange rates, we expect foreign exchange will have approximately 4% full-year adverse impact to sales growth and a 6% full-year adverse impact to adjusted operating EBITDA growth. This is primarily driven by the strength of the euro where the current rate is down relative to the 109 average in 2024. In addition, there are several other emerging market currencies such as the Brazilian Real and the Argentine peso where we assumed a modest devaluation versus the USD over the course of 2025. As previously communicated, we plan to increase our capex investments targeting approximately 6% of sales in 2025. Approximately half of this investment is maintenance capex while the rest is split evenly between deferred investment, specifically in food ingredients growth investments such as capacity expansion in H&B and India creative center and scent, and a creative center in Mexico in both taste and scent, as well as digital transformation specifically related to our SAP HANA upgrade. We believe these investments will yield strong returns providing us with incremental growth and efficiency opportunities. As a reminder, we have resegmented the business into five divisions: taste, food ingredients, scent, HMBB, and pharma, and have adjusted our corporate allocations starting in 2025. Prior to the first quarter of 2025 earnings release, we plan to provide historical information for comparable purposes so that when we report first quarter earnings, you will have the appropriate baseline. Let me close by sharing that we are pleased with the strong progress and foundation we built in 2024. Our recent success gives us confidence in our outlook as we continue to execute our strategic and financial priorities. With that, I'd like to turn the call back to Eric.

Great. Thank you Lisa. Maybe Eric I'll start on the first.

Yeah. Perfect. I'll start on free cash flow and then I'll pass it back to you. In terms of the full year for 2025, we expect free cash flow to be about $500 million. Note that this does include a significant impact of taxes related to the pharma divestiture. So that's about $350 million is our estimate at this point in time. If you adjust for that, our free cash flow will be about $850 million, which is kind of consistent to the last couple years, but more importantly, an improvement versus where we finished 2024. In terms of working capital, we are targeting a slight inflow versus an outflow in 2024. This is really driven by the work that we're doing around payables and selective strategic inventory reductions. As we stated on the call, we expect capex to be about 6% of sales. This is really around increasing the investments to catch up on some deferred spend. Eric mentioned it moments ago specifically in food ingredients also to make some growth investments and so capacity expansion new technologies in health and biosciences some commercial facing operations for taste and scent and then lastly really start to drive the migration of our digital transformation. And so those are the biggest drivers from a capex piece of it going forward. And so maybe Eric, I'll turn it over to you for the second part of the question.

Hey, thanks John. Appreciate that very much. In terms of the tariff situation, it's ever evolving. It changes on a constant basis as we assess the various situations or potential situations. We do not expect to have a material impact from any tariff change. As you know, John, we have an expansive and global supply chain which provides us with a lot of flexibility to adapt. So, should things change, we're working with our customers to make sure we mitigate that to the fullest. We lived through this a couple years ago in this administration's first term. And so similar to that approach we've taken now, we're going to work with our customers on mitigation strategies including price surcharges as appropriate, but that will become a secondary methodology to it. The focus is really seeing what we can do on supply chain to mitigate a lot of our exposure. Again, not material in nature. More to come as things develop and we'll keep you updated there.

Hey Matt, I'll take this one. Thank you for the question. In terms of the incremental impact on EBITDA relative to sales, it's entirely driven by our purchases. Our sales are based in local currency while a large portion of our input costs are denominated in euro and US dollar. So essentially that's what's driving the multiplier effect between the sales piece of it and the EBITDA contribution. I think your second question was around margin structure globally versus domestic operations. It's actually pretty agnostic and pretty constant. The real differential comes when you compare the category exposures. Let me give you an example: in EI you have the strongest margin profile just given the exposure to fine fragrance, while in India you'll have a lower margin profile just because the portfolio is geared towards savory as an example. So really when you look at it on a like-for-like basis adjusting for the portfolio, you're pretty agnostic from the margin aspect. It really comes down to the category percentages within each one of the regions.

Sure. Sure. Thanks, Mark, for the question. When you look at the portfolio, the way I would categorize it is you basically have one-third global customers, one-third midsize, and one-third small and local customers including some of the private label aspects. When you look at the dynamics across there on a global perspective, the growth is a little bit more muted than you see at some of the regional local including private label customers. So for us, a big part of the focus on the taste strategy is really to prioritize private label and smaller customers as we go forward. So that dynamic, that growth that you referenced, Mark, is true. The good thing is that there's still a lot of growth opportunities at the big global customers that's much more geared towards new innovation and what we can do to help them have winning products or consumer preferred products in the market.

Eric, I'm happy to start. Yeah, I'll start on this one and then pass it over to you for more comments. Look, the team has done a fantastic job in the fragrance ingredients business. They really looked at their portfolio. When you look at that portfolio, there's really high valued ingredients and I would say more general kind of industry-led ingredients. So what they did, they bifurcated that and targeted the market to go after some of the high value ingredients. So what we've seen over the course of this year, in 2024, performance has been strong. As you noted, Katie, for the quarter, we actually finished kind of in that mid-teens range. So very, very good. And that's really about being proactive and making sure they have adequate capacity to ship product for that. And they've had some good success there in 2024. In 2025, I think you'll see the growth start to subside a bit. That is a business that's going to be driven by the end market consumption, so as you go forward from here, I think the team has some good volume growth but they will have some reductions in overall price because of some of the deflationary environment they see in the fragrance ingredients market overall. But they're working through that. I think their long-term strategy is very strong and I think it's still going to be a growth driver as we go forward. It's just managing the next couple quarters in terms of overall growth. So that's fragrance ingredients. On the fine fragrance side, the business is performing very well. It finished a quarter at high single digit growth rates on a two-year basis. It's kind of in the mid single-digit basis factoring in the year-ago comparable, so very strong based on the access to business and new win potential they have. They expect growth to continue into 2025 and be one of the areas that will lead scent in terms of overall growth. And that's really around the strategy they have in some of the emerging markets like the Middle East and Africa and winning some of the core big businesses and brands that are in Europe and North America alone.

Yeah, I'll start that first. Maybe let me just start with the flavors or taste business. Silka, you're absolutely right. The way I think about it, $6 billion, 2.5 billion taste side, 3.5 billion food ingredient side. The flavors or taste side of the business has been running very strong. Over the course of the year, you see four quarters of very strong double digit growth. As you go into 2025, the taste business growth will more normalize relative to historical averages just because the comp is strong, so that is going to be a big piece of the equation in terms of growth for the total company. Food ingredients will be a little bit more muted as some volume gains are going to be offset by price reductions associated with deflation. So to your point, you have to grow disproportionately faster on the taste side. The one X factor caveat is that in the rest of the business, we expect growth. So that's making it up and is actually taking us into a better trajectory in 2025 overall and offsetting some of the food ingredient softness year-over-year in terms of total topline growth. In H&B with respect to enzymes versus probiotics at the subcategory levels, I think broadly speaking all the businesses are targeting modest growth year-over-year. The health business, the one area on the probiotic side that has been a bit of a pain point over the last couple years, is expecting to recover a bit as we go into 2025 as well. So that will help us both from a topline perspective but also from a margin aspect. So Eric, back to you.

Can you repeat that second part of the question? I'm not sure I heard the second part.

Yeah. Perfect. Eric, do you want to from a customer standpoint? I know you engage a lot with customers. Have you?

No, I think that's covered well. On the second point about margin and ROIC evolution of IFF over the next 3 years, I think Eric addressed it before. The simple answer is higher on both. For us, we're making a concentrated effort on return on invested capital as we go into 2025. We're making a big investment in terms of carryover and reinvestment incrementally this year. But the reality is, as we go forward, we are being very diligent on how we're thinking about return on every dollar we put in the business, both opex and capex. The team trajectory - we don't have a formal target yet and we'll come back later in the year as Eric alluded to, but over time we would expect improvements in terms of margin and return on invested capital.