International Flavors & Fragrances Inc. (NYSE:IFF) Q1 2024 Earnings Call Transcript May 7, 2024
International Flavors & Fragrances Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: At this time, I would like to welcome everyone to the IFF First Quarter Earnings Conference Call. [Operator Instructions] I would now like to introduce Michael DeVeau, Head of Investor Relations. You may begin.
Michael DeVeau: Thank you. Good morning, good afternoon and good evening, everyone. Welcome to IFF’s first 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 ir.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 outlook. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially, please refer to our cautionary statement and risk factors contained in our 10-K and press release.
Today’s presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in the press release that we issued yesterday. With me on the call today is our CEO, Erik Fyrwald and our Executive Vice President, CFO and Business Transformation Officer, Glenn Richter. We will begin with prepared remarks and then take any questions you have at the end. With that, I would now like to turn the call over to Eric.
Erik Fyrwald: Well, thank you Mike and hello everyone. I’m excited to join you all today to discuss our solid performance in the first quarter and what we are seeing across the business so far this year. Today, we’ll focus on our financial results, our outlook for the balance of the year and our increased confidence in our reiterated guidance, where we now see us trending toward the upper end. Now, before moving forward, I want to acknowledge Glenn, who today is announcing his plan to retire at the end of 2024 after three successful years with the company. During his tenure, Glenn has driven multiple actions to improve our balance sheet and position the company for financial success. We’ve benefited from his experience and commitment to transformation and his ongoing leadership to position IFF to drive long term profitable market share growth.
He’s also been very helpful to me already as I’ve come on to the IFF team. Now with this announcement, we have started a succession plan to evaluate internal and external candidates to succeed Glenn. The board and I are grateful for all Glenn has helped IFF accomplish and look forward to his continued leadership as we identify a successor and ensure a smooth transition. Now, turning to Slide Six, we are off to a good start at IFF. We achieved volume growth for the first time since the first quarter of 2022 as volumes grew mid-single digit in the first quarter of 2024, with strong contributions from scent, nourish and health and biosciences. We are also encouraged by the double digit comparable adjusted EBITDA growth as we not only benefited from volume growth, but also from productivity gains across our businesses.
At the same time, we made important progress focusing our portfolio, with closing the divestiture of the cosmetics ingredients business and the announced sale of our Pharma Solutions business. We expect to complete the Pharma transaction in the first half of 2025. The proceeds from these divestitures will help further strengthen our capital structure, address our deleveraging goal of three times net debt to credit adjusted EBITDA and refocus us on high growth areas of our business. With our solid performance in the first quarter and our expectations for the remainder of the year, we are cautiously optimistic about the remainder of 2024 and now expect full year 2024 results to trend toward the high end of our previously announced guidance ranges.
It’s still early in the year and there is a lot more work to be done, but we are focused on building on our momentum to energize our team and return to sustainable, profitable growth. Turning to Slide Seven, let me take a step back for a moment and share what I’ve learned during my first 90 days here at IFF. I’ve spent time getting to know our teams all over the world and meeting with many of our customers, and I’m grateful for the productive discussions and what I’ve found is that IFF has lots of top talent and incredible innovation capabilities, but we’re not yet realizing our full potential. With a new leadership perspective on our priorities and a renewed focus on execution by our executive leadership team, we are getting back to basics and I’m optimistic about what we will do from here.
First, we are strengthening our balance sheet and capital structure to create the flexibility we need to achieve our long term goals. My assessment is we have not consistently delivered on our financial commitments, largely due to a need for more strategic and organization operating model clarity to enable us to better execute against our goals. I think we are now getting the clarity we need and have taken some decisive steps in the first quarter to help us start to realize more of our potential. We recently rightsized our quarterly dividend to align with the market and our long term cash flow generation, and have made divestiture moves, including cosmetics and pharma solutions, to focus our portfolio and drive debt reduction. We also recently announced and are implementing our refocused IFF operating model, which is now business-led supported by lean functions.
This includes the appointment Ana Paula Mendonça, who has dedicated her career to the advancement of fragrance at IFF as the President of Scent. This enables Simon Herriott to focus his full attention on driving profitable growth in our health and biosciences business unit. We will also put more focus on our flavors and functional ingredients units within our nourish division. With this operating model change, we have also changed the reporting structure of several of our functions, including R&D, operations, finance and HR, to go directly into our business unit presidents, so they have the full end-to-end responsibility and accountability for business execution. Their goals will include delivering growth above market with a margin structure that gets us in line with or better than leading peers.
Now, to make this work, we have also established an operating system, which is a simple set of management processes that collectively define how IFF makes decisions and creates value, provides a framework for standardized processes, responsibilities and metrics and defines the tools to help managers drive continuous improvement. We believe this will create greater visibility to track performance, so we drive execution to deliver results in the current period in ways that strengthen us for the coming years. We are also introducing an operating philosophy based on four main pillars; number one, customer focus, to drive profitable market share growth; number two, innovation powerhouse, to create sustainable new products and other innovations customers value and do this faster; number three, operational excellence, to lead our relentless focus on safety, quality, continuous improvement and competitive cost structures and four; people, people who are engaged across the organization.
We expect that our business-empowered model and operating system will enhance collaboration to profitably win with customers and by doing so, deliver strong financial performance over time and while it’s still early, I am pleased and encouraged by the energy and commitment of our teams all around the world. With that, I’ll now pass it over to Glenn to dive deeper into our results for the first quarter. Glenn?
Glenn Richter: Thank you, Eric and thanks to everyone for joining us today. As Eric mentioned earlier, we’re encouraged by the momentum across our business as we start the year, and we are excited to continue to build on these positive early signals throughout 2024 and beyond. In the first quarter, IFF generated roughly $2.9 billion in sales. On a comparable currency neutral basis. Sales increased 5% year-over-year. Our strong quarterly revenue performance was led by mid-single digit volume growth with sequential improvements across most of our businesses, including scent, health and biosciences and nourish. Pricing was modestly positive, inclusive of FX-related pricing in emerging markets, in particular, the Argentine Peso, where we, like the industry, have indexed pricing to US and or Euro exchange rates that drive pricing changes.
Absent of this benefit, pricing would have been negative in the quarter, largely in line with our plan. We delivered strong profitability in the quarter with adjusted operating EBITDA of $578 million. This represents a 20% increase on a comparable year-over-year basis, led by volume growth and the contribution from productivity initiatives. As a result, margins improved by approximately 310 basis points to nearly 20% adjusted operating margin in the quarter. Turning now to Slide Nine, I’ll dive deeper into the business performance across our segments. In nourish, sales increased by 3% on a comparable currency-neutral basis, with strong double-digit growth in flavors with improvements in both volume and price and we saw very strong growth in our flavors business across nearly all markets.
Functional ingredients volume was up low single digits the first time since the fourth quarter of 2021. Overall, comparable currency neutral sales declined year-over-year due to our planned pricing actions. In terms of profitability, productivity gains and volume growth drove a 13% increase in comparable adjusted operating EBITDA with solid gross margin improvements in both flavors and functional ingredients. Our health and bioscience segment had another strong quarter, with both top and bottom line growth. Solid performance in our H&B portfolio, led by double-digit sales, growth in cultures and food enzymes, animal nutrition and grain processing, and mid-single digit growth in home and personal care drove a 6% increase in comparable currency neutral sales.
Improved volume and productivity gains led to a 21% increase in year-over-year comparable adjusted operating EBITDA. Scent delivered another excellent quarter, including 16% growth in comparable currency neutral sales, driven by double digit growth in consumer fragrance and fragrance ingredients and mid-single digit growth in fine fragrances. Segment also excelled in terms of profitability, primarily led by volume growth and productivity improvements, which delivered an outstanding adjusted operating EBITDA growth of 55% on a comparable basis. Lastly, in pharma solutions, while we saw some improvements from productivity initiatives, these were offset by lower volumes driven as expected due to continued destocking trends, which began late last year.
It’s worth noting that part of the destocking trend in the first quarter was market related and the other is due to Pharma Solutions initiative to reduce reliance on distributors and convert more of its core excipients business into a direct distribution model. We believe the shift to a more direct approach will enhance our customer relationships, reduce supply chain complexity and provide greater access to technical resources, while also improving margins. Also, as mentioned, we agreed to divest the Pharma Solutions business as part of our portfolio optimization efforts and are confident the business will be positioned to thrive and succeed in partnership with Roquette. Now on Slide 10, I’d like to discuss our cash flow and leverage position.
Cash flow from operations totalled $99 million this quarter, while CapEx was $118 million, or roughly 4.1% of sales. In the first quarter, normal seasonality impacted our free cash flow results. As a reminder, Q1 is usually the lowest cash flow quarter of the year as we make annual cash bonus payments in March. Our free cash flow position totalled negative $19 million in the quarter, versus negative $48 million in the year ago period. We also paid $207 million in dividends through the end of the first quarter. Our cash and cash equivalents totalled $764 million, including $32 million in assets held for sale. IFF continues to make progress in our deleveraging efforts and reduced our gross debt by almost $1 billion versus year ago, for a net debt to credit adjusted EBITDA ratio of 4.4 times at quarter end.
Our trailing twelve month credit adjusted EBITDA totalled approximately $2.2 billion. Please note that the proceeds from the sale of LMC of $810 million were received in April and consequently not reflected in the quarterly results. With the announced Pharma Solutions transaction, we are confident that we will achieve our net debt to credit adjusted EBITDA target of three x following the transaction close, which we expect will be completed in the first half of 2025. On Slide 11, I’d like to now turn to our outlook for 2024. Based on our improved financial and operational performance in the first quarter and our expectations for the balance of the year, we remain cautiously optimistic about the year ahead and as Eric mentioned, now expect results to trend towards the higher end of our previously announced guidance ranges.
This reflects our belief that volumes will also be towards the high end of our previously announced 0% to 3% with improving trends across the majority of our portfolio. We also saw pricing increases due to FX-related pricing in emerging markets in the first quarter and therefore raised our previously announced pricing guidance to approximately 1% for the full year 2024 versus previous expectation that pricing would decline approximately 2.5%. With these foreign exchange rate changes, we now expect currency will have an adverse impact of 3% to 4% versus 0% to 1% as previously expected on our sales growth, which is essentially offsetting the FX pricing contribution. On the bottom line, for 2024, we are now trending towards the high end of our previously announced adjusted operating EBITDA guidance range of $1.9 billion to $2.1 billion.
This assumes continued improvements in volumes as well as strong productivity. While it is still early in the year, volume trends are encouraging and consequently we have increased confidence in our ability to achieve our full year guidance. For the second quarter, we expect sales to be approximately $2.75 billion to $2.85 billion, driven by improved volumes with an adjusted operating EBITDA of approximately $500 million to $525 million. I’ll now turn it back to Eric for closing remarks.
Erik Fyrwald: Thank you, Glenn. Now, as I shared at the top of the call, my first 90 days on team IFF have been energizing, as I see so much potential. We have great talent and capabilities across our global teams and our solid top and bottom line results from the first quarter show that we are building positive momentum and it’s an honor to lead IFF during this transformative time and I am encouraged by our positive start to the year and our outlook. Yet we still have a lot of work to do. As the market continues to be very competitive, we are committed to bringing products and innovation that differentiate us from our peers and give customers what they need to win and in turn helps them and us drive sustainable profitable growth and with a solid start to the year, I’m excited to see what we can accomplish going forward. And with that, I’d like to now open it up for questions.
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