The operator welcomes everyone to the IFF Third Quarter 2023 Earnings Conference Call and introduces Michael DeVeau, Head of Investor Relations. DeVeau reminds listeners to review the forward-looking statements and mentions the use of non-GAAP financial measures. CEO Frank Clyburn and Executive Vice President and CFO Glenn Richter will provide prepared remarks and answer questions. Clyburn will discuss the company's third quarter performance and their strong execution to position IFF for long-term success.

The third quarter results for the company showed a sequential improvement in volumes and adjusted operating EBITDA margin. This was driven by enhanced productivity initiatives and favorable price to inflation. The company also saw strong free cash flow generation, mostly due to a reduction in inventory. Commercial excellence initiatives and a targeted operational improvement plan are also contributing to improvements in sales and reshaping the portfolio.

The company expects its plan for Functional Ingredients to result in low single-digit sales growth and a mid-teen operating margin over the next 3 years, with improvements in volume performance. They are confident in meeting their full year 2023 sales guidance and are targeting the mid- to high end of their adjusted operating EBITDA guidance range. There are signs of stabilization and improvement in the fourth quarter, and they have made progress in divesting noncore businesses to support their deleveraging priorities. In the third quarter, the company saw a 3% decline in sales, driven by strong performance in some segments but offset by weakness in others.

In the third quarter, volumes improved across most of the businesses, with strong performance in Scent and Health & Biosciences. However, excluding Functional Ingredients, which continues to have a disproportionate impact, overall volume declined slightly. Adjusted operating EBITDA for the quarter was $506 million, down 10% year-over-year, primarily due to lower volumes and unfavorable manufacturing cost absorption. Adjusted EPS was $0.89, impacted by lower profitability. Glenn Richter then provided more detail on the profitability performance, highlighting the impact of ongoing volume pressures and the success of their inventory reduction program.

In the third quarter, the company saw a decline in sales in the Nourish segment due to the continued weakness in Functional Ingredients. However, there was sequential improvement and this is expected to continue in the fourth quarter. The Health & Bioscience segment delivered strong results, with growth in various areas and an increase in adjusted operating EBITDA. Scent was the strongest performer, with growth in both Consumer Fragrance and Fine Fragrance.

In the Scent and Pharma Solutions segments, IFF saw strong growth in adjusted operating EBITDA driven by favorable pricing and productivity gains. However, Pharma Solutions' growth rate was impacted by a strong comparison to the previous year. In terms of cash flow and leverage, IFF saw a significant increase in cash flow from operations and free cash flow, as well as a reduction in inventory levels. The company also distributed dividends to shareholders and is focused on reducing its debt levels through portfolio optimization.

The company is selling its Cosmetic Ingredients business in the first quarter of 2024, which will help improve their financial position. They are reaffirming their revenue guidance for the year and expect to deliver strong adjusted operating EBITDA. They also anticipate an improving trend in the fourth quarter and have some known one-off items that will positively impact their financials in 2024.

The company plans to continue cost and productivity initiatives and expects a carryover benefit from the restructuring program. They have also reduced payments for incentive compensation and believe that destocking will be completed by the end of the year. The CEO is proud of the company's progress and reaffirms their financial guidance. They will continue to pursue portfolio optimization initiatives to strengthen their business.

The company's goal is to ensure that all of its businesses have the necessary resources and ownership to accelerate growth and maximize returns. The Functional Ingredients business is showing signs of improvement, with sequential growth in key product lines. The company is focusing on enhancing its go-to-market approach, driving operational efficiencies, and reshaping its product portfolio. This includes adding commercial professionals and adjusting the operating model to drive greater efficiencies.

The company has completed a review of its product lines and is investing in its strongest products while rationalizing underperforming ones. The team is focused on driving better performance in Functional Ingredients and expects to grow sales in line with the market and achieve a mid-teen adjusted operating EBITDA margin over the next 3 years. The company is also focused on deleveraging and has recently announced the sale of Lucas Meyers Cosmetics for $810 million. There are other portfolio actions underway, including the potential sale of Pharma, which is a good business but has limited overlap with the company's end customers. The company is confident that these actions will help it achieve its goal of a 3x or less leverage ratio.

The paragraph discusses the limited revenue and synergy between the Pharma division and the rest of IFF. The Pharma division has a mix of high and low return businesses, with the high-return excipients making up 75% of its business. The company saw a sequential improvement in volumes in all its sub-businesses in Nourish, H&B, and Scent, except for Pharma, which had a strong third quarter last year. The company is unable to determine if destocking is behind them.

The majority of customers are winding down their business by the end of the fourth quarter, but the Pharma segment is lagging behind due to later destocking and a significant distributor component. The competitive side of the Pharma business has also been affected. Scent prices were favorable compared to raw materials, but this trend is expected to decrease as cost reductions take effect. 50% of the production is used for their own products and the other 50% is sold, with some commodities like turpentine and Galaxolide being somewhat commoditized.

The speaker discusses the pricing dynamic and net price cost in the Scent business, stating that it is generally stable. They also mention that they have spent time analyzing their competitive dynamics and highlight their growth in Flavors, Health & Biosciences, Home & Personal Care, Grain Processing, and Scent business. They specifically mention growth in Consumer Fragrance and Fine Fragrance, indicating that they are gaining market share in these areas.

The speaker discusses the overall business performance, highlighting good sequential improvement in most areas except for Functional Ingredients and Pharma, which had a strong quarter last year. The decline in Pharma's margins is attributed to a tough comparison with the previous year, but there is also some choppiness due to distributors destocking inventory. Overall, the business is in a good position heading into 2024.

The speaker discusses the outlook for the company's Pharma business in Q4 and beyond. They mention that inventory destocking will continue but it is seen as temporary and not a concern for the overall outlook. The speaker also talks about the high-level factors that will affect EBITDA in 2024, including the absence of one-time charges and the impact of divestitures. They mention that there may be some headwinds from incentive compensation, but there could also be productivity savings and operating leverage that will contribute to growth in 2024.

The speaker mentions that they have to add back the impact of absorption related to inventory reduction, which amounts to around $165 million. They also mention a write-off of $44 million and an additional $25 million benefit from a headcount reduction program. However, there will be a decrease in incentive plan payouts of around $70 million. The speaker promises a more detailed discussion of future plans in February. When asked about the percentage of build-to-order versus build-to-stock in the portfolio, the speaker states that it is roughly 55% build-to-stock and 45% build-to-order.

The company's Nourish segment is split between build-to-stock and build-to-order, with the Flavors and H&B/Pharma businesses being build-to-stock and the Scent business being build-to-order. The company's pricing was stronger than expected due to deflation, not pricing actions. The company has largely completed its inventory reductions and its free cash flow estimates for the year are unchanged at around $450 million.

The speaker reiterates that the adjusted free cash flow for the year is around $900 million, with $440 million of that being related to Reg G items. These items are broken down into divestitures, integration costs, restructure costs, and other expenses. The next question from a conference call asks about the business outside of Pharma that falls into the "fix or shift" category, which makes up about 90% of the Ingredients business. The speaker mentions that the business is about 20-25% of the total portfolio and that there are ongoing initiatives to improve its earnings and growth, but it will take some time to fully implement them.

The company's goal is to increase their EBITDA margin from high single digits to mid-teens and to align their growth with the industry average of 1-2% per year. They have disposed of some assets and are focusing on improving their Functional Ingredients segment. There was a $70 million SG&A benefit from compensation changes in the third quarter, and a $160 million headwind from unfavorable manufacturing absorption, but the company expects to see a 150 basis point improvement in gross margin next year. However, the ultimate margin dynamics for next year will depend on a combination of factors such as mix, volume growth, and price inflationary pressures. A more detailed discussion on this will be provided in February.

The company has implemented a cost reduction program and has achieved $70 million in savings this year, with an additional $25 million expected in annualized impact. The savings are from headcount reductions and there may be some choppiness in quarterly results due to variable incentives. The company has a large basket of raw materials and hedges against soy prices. The company plans to reach a 3.0x net debt-to-EBITDA level in 2024, but this may be impacted by ongoing discussions about asset sales.

Glenn Richter, in response to a question about the timeline for the covenant horizon, states that they are confident they will achieve their goal of 3x or less by the end of next year, barring any unexpected delays. Frank Clyburn thanks all IFF FERC colleagues for their work and shares the company's vision to be an innovative leader in essential solutions. He also announces that the next update on the fourth quarter and full year guidance for 2024 will be in February.

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