The IFF Second Quarter Conference Call is being moderated by Megan and is being recorded live. Michael DeVeau welcomed everyone to the call and provided instructions for the call. Frank Clyburn and Glenn Richter will be joining him on the call. The press release announcing the financial results can be found on the IR website. The call will include forward-looking statements and non-GAAP financial measures. After prepared remarks, they will take any questions.

In the second quarter of 2023, IFF is performing in line with peers, except for Functional Ingredients. They are taking steps to optimize their portfolio, including strategic noncore divestitures, and have a plan to improve Functional Ingredients. They are also strengthening their organization behind the scenes to ensure IFF is well positioned for long-term success when market conditions improve.

Q2 results were mixed, with strong results in Scent and Pharma Solutions offset by softness in H&B and Nourish. Adjusted operating EBITDA was in line with guidance, excluding a one-time inventory write-down. For the full year, IFF has adjusted their expectations for sales and adjusted operating EBITDA due to soft consumer demand and customer destocking. They are focusing on improving their Functional Ingredients business through an operational improvement plan.

IFF is continuing to accelerate its portfolio optimization initiatives, which includes the sale of the Microbial Control Savory Solutions and Flavor Specialty Ingredients businesses as well as Lucas Meyer Cosmetics. JPMorgan has been hired to explore additional divestiture actions to reduce outstanding debt and unlock further value for shareholders. IFF will not look to divest assets at depressed multiples, but instead will focus on improving businesses before divesting.

The majority of IFF's portfolio has performed near or at expectations volumetrically, and is in line with their peers. Functional Ingredients has seen a 6% decline in quarterly average volumes and a 20% decline in the first half of 2023, due to a decline in alternative protein consumption, supply chain challenges, and aggressive inventory management by customers. Going forward, customer destocking is expected to persist through the second half of the year, and will continue to pressure Functional Ingredients volume.

IFF has developed a plan to improve performance in Functional Ingredients, which includes hiring more commercial professionals, improving the operating model, reshaping the portfolio, and eliminating transitory challenges. This plan is expected to result in increased sales in line with the market and a mid-teen adjusted operating EBITDA margin over the next three years.

IFF has implemented commercial excellence initiatives to improve customer service, identified over $250 million in new growth opportunities, expanded the sales pipeline by 50%, launched 15 new technologies, and saved $140 million through productivity initiatives. They have also appointed a new President of their Nourish division and are transitioning to a new customer line operating model. All of these measures have enabled them to focus on their highest growth, highest margin businesses and are setting them up for sustainable, profitable growth.

IFF has seen a significant increase in opportunities in 2023 compared to 2022, with notable wins in Xylitol, Boost Powder Detergent, probiotics, and METHOCEL. The management team is focused on accelerating growth and maximizing shareholder value, expanding margins, enhancing return on capital, and improving leverage ratios.

In the second quarter of 2023, IFF generated $2.9 billion in sales with a 4% comparable currency neutral sales decline. Pricing was up high single digits while volume declined low double digits. The majority of the volume decline was due to Functional Ingredients, and excluding this, volume would have only been down mid-single digits. Adjusted operating EBITDA was $510 million, down 18% year-over-year, largely due to unfavorable manufacturing cost absorption and a $44 million write-down of inventory related to cost fluctuations for Locust Bean Kernel. Adjusted EPS, excluding amortization, was $0.86, impacted by lower profitability.

The second quarter saw a decline in volume across the company's Nourish, Health & Biosciences, and Scent divisions. Excluding unfavorable manufacturing absorption and an inventory write-down, adjusted operating EBITDA would have declined 3% on a currency-neutral basis. Despite strong pricing and productivity gains, the volume decline was too great to make up for. Nourish was impacted by a decline in functional ingredients, while Health & Biosciences saw strong results from Cultures and Food Enzymes, Grain processing and Home and Personal Care, but was offset by a volume decline in health. Scent, however, remained resilient, with double-digit growth in Consumer Fragrance, and high single-digit growth in Fine Fragrance.

In Q2, IFF saw a 16% increase in adjusted operating EBITDA, driven by strong performance in the core Pharma business and pricing and productivity gains. Cash flow from operations totaled $375 million, and free cash flow was $85 million after CapEx of $290 million and dividend payments of $413 million. Cash and cash equivalents totaled $641 million, and net debt for the quarter totaled $10.6 billion with a net debt to credit adjusted EBITDA of 4.5 times. IFF is focused on improving its leverage profile and is on a path to delever according to plan by the end of 2023 and into 2024.

IFF has revised its second half outlook due to customer destocking and consumer demand visibility constraints. Its updated financial guidance is expecting net sales to be in a range of $11.3 to $11.6 billion, with Functional Ingredients volumes down double digits and the rest of the business down low single digits. For the second half of 2023, sales are expected to be between $5.3 and $5.6 billion, with comparable volumes flat to down high single digits.

The company has lowered its full year '23 adjusted operating EBITDA guidance due to reduced volume expectations, higher absorption costs, and a $44 million LBK inventory write-down. They are expecting their full year inventory reduction to be approximately $425 million, with an associated $180 million impact to profitability. They are also expecting their full year interest expense to be around $425 million and their effective tax rate to be 21%. Finally, foreign exchange headwinds are expected to adversely impact sales and adjusted operating EBITDA growth by 2% and 6%, respectively.

Glenn discussed the headwinds of the hyperinflationary currencies in the first half of '23, and Frank followed up by emphasizing the progress IFF is making in its strategic plan despite the current environment. He highlighted the investments in growth, innovation, and productivity as well as the portfolio optimization efforts. He concluded by expressing his confidence in IFF's ability to deliver value for shareholders and stakeholders.

Glenn Richter reassured investors that the company will not trip its covenant due to multiple levers they can pull, such as working capital and other improvements in cash flow. He also stated that a change in the dividend is not on the table. The free cash flow for the year is expected to be $100 million lower than the original guide, but on an adjusted basis, it is expected to be over $900 million.

Frank Clyburn highlights the progress made in productivity and net working capital, as well as the cost reduction takeout of $100 million, in order to manage the operating backdrop in 2023. He is also excited about the opportunities that come with temporary destocking.

Management is confident in the outlook for the second half of the year, with volume assumptions remaining the same on a two-year basis. This confidence is based on the pipeline increase, improved customer service, and long-term guidance of 4-6% top line sales growth and 8-10% EBITDA. Furthermore, free cash flow is estimated to be $900 million and there are over $200 million of one-time items. The divestiture commentary was also discussed.

Frank Clyburn and Glenn Richter discussed the need for prudence in the company's plan for the rest of the year and the outlook for the future. They also noted that while some businesses are more integrated than others, the company has gained substantial experience through its sale of the microbial control business, Savory Solutions, and Atlas. M&A is a consideration in the company's portfolio strategy.

Glenn Richter and Frank discuss the main moving parts of building a bridge to 2024, including a stabilized consumer pullback, the normalization of items such as the $180 million associated with absorption and the LDK write-off, and the expectation that 75% of the business will trend well in an improving market while the other 25% will pick up next year due to remediation.

Frank Clyburn highlighted their strong platforms and performance in Scent, Pharma, and Health & Biosciences. They have a plan to improve their functional ingredients, which they will be monitoring closely. They are confident that they will see improvement in their business as volumes normalize in the next year.

Glenn Richter explains that there is a $200 million delta between the first half and second half of EBITDA adjusted EBITDA. This difference is due to lower GP from seasonal volumes in the fourth quarter, productivity timing, and a net price realization versus cost that was higher in the first half than the second half. He also notes that there was better progress in reducing input costs in the first half with 7% pricing compared to 3% in the second half.

Frank Clyburn discussed the volume weakness in Functional Ingredients seen in Q2, attributing it to destocking in protein solutions, specifically isolated soy proteins, in end markets such as nutritional bars and beverages. He also mentioned that Functional Ingredients is undergoing an improvement plan and that any potential options for the division would need to be accretive to shareholders.

Frank Clyburn explains that the company has taken a write-down in raw material inventory due to the volatility of prices, such as citral, vanilla, and LBK, dropping from €35 per kilo to 8 in less than 12 months. He also notes that inventories were slightly higher, resulting in a bigger write-off, and that raws trends are continuing to progress downward at a more modest rate compared to the second half of last year.

Frank Clyburn discussed the visibility of consumer sell-through and destocking at customer level. He noted that supply chains have improved, leading customers to adjust their inventories. He reported that customers are mixed in their feelings about destocking, with some expecting it to end in the third and fourth quarters.

Frank Clyburn discussed the Functional Ingredients business, which is made up of protein solutions, multipliers and sweeteners, core tax trends, cellulosis, and food protection and systems. He stated that they feel good about their specialty proteins and have good differentiation. They are taking a prudent approach to derisk their plan and are working to prepare for when temporary destocking is over.

The DuPont transaction was designed to help the company generate better organic growth in the long-term. The company is focusing on high value-add opportunities in its portfolio and has been turbocharging its customer pipeline activity to focus on those categories. They are also looking to optimize or discontinue ingredients that are more commoditized or where they don't bring a differentiated benefit.

Frank Clyburn and Glenn discussed the value of the deal and the potential of the Functional Ingredients business. They believe the value creation opportunities are still there, primarily due to destocking. Their Health & Biosciences business and Pharma business are performing well. Lisa De Neve asked about the market interest in M&A and the difficulty of obtaining financing in the current environment. She also asked about the visibility of the different business units and how quickly the company addresses underperformance in them.

Glenn Richter and Frank Clyburn discussed the opportunities for mergers and acquisitions, as well as the visibility into the business. They noted that there is a lot of private equity and strategic money available, and that they are focused on creating value for their shareholders while making smart decisions. They also mentioned that they are able to quickly adjust their business, focusing on productivity and cash flow, and have improved their net working capital.

Frank Clyburn explains that the Functional Ingredients portfolio offers customers a one-stop shop, and that the company is able to bring differentiating value within their systems business by combining multiple ingredients. He also mentions that emulsifiers are used in over 50% of their systems applications.

Frank Clyburn answered a question about the EBITDA drag from working capital reductions this year, stating that the cost was a negative absorption on the P&L for the year resulting in a net $400 million improvement, which was above what was planned. He also answered a question about Functional Ingredients, saying that the target is to match the market, though there may be potential for above-market growth in the future.

Frank Clyburn answered a question about the company's 5-7 year plan for low single-digit growth and optimizing returns. He mentioned that the company's total production will be down 15% this year and sales volumes will be down 6%. He also mentioned that there will be a benefit of $180 million in 2024 if the inventories do not need to be rebuilt. Glenn then reiterated the company's goal of achieving three times net leverage but did not provide a timeline.

Frank Clyburn states that they are committed to maintaining an investment grade rating and are working to deleverage to three times by the end of 2021. They have been working on M&A and portfolio revisit since the end of last year and have enough irons in the fire to accomplish their goals. He also reiterates that they are committed to maintaining an investment grade rating.

IFF has emphasized that the majority of their business is doing well despite destocking, and they are taking action to improve their business trajectory and capital structure. They are divesting assets and executing on their strategic priorities, while remaining confident in their value creation potential. Lastly, they thanked everyone for joining the call and expressed their confidence in their business and industry.

This summary was generated with AI and may contain some inaccuracies.