International Flavors & Fragrances Inc. (NYSE:IFF) Q4 2023 Earnings Call Transcript
International Flavors & Fragrances Inc. (NYSE:IFF) Q4 2023 Earnings Call Transcript February 21, 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 Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions]. Participants will be announced by their name and company. In order to get all participants an opportunity to ask their questions, we request a limit of one question per person. 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 fourth Quarter and full year 2023 Conference Call. Yesterday afternoon, we issued a press release announcing our financial results. A copy of the results 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. Please take a moment to review our forward-looking statements. During the call, we'll be making forward-looking statements about the company's performance and business 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 both of which can be found on our website.
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 our press release. With me on the call today is our CEO, Erik Fyrwald; and our Executive Vice President and Chief Financial and Business Transformation Officer, Glenn Richter. We will begin with prepared remarks and then take any questions you may have at the end. With that, I would now like to turn the call over to Erik.
Erik Fyrwald: Thank you, Mike, and hello, everyone. I'm excited to join you all today. I would like to begin by sharing some initial perspectives since joining IFF. I will then turn the call over to Glenn, who will provide a look at the fourth quarter and full year 2023 financial results before providing commentary on our current outlook for the full year 2024. After that, we'll open the call for Q&A. Now I officially joined IFF on February 6th, and I have been impressed by the world-class teams globally and the strong innovation across our company. I spent the last few weeks visiting our operations and teams in some of our U.S. and overseas businesses. I spent that time listening to our teams, meeting many of our customers, and assessing the current status of our businesses.
IFF has a proud history as a global leader in high-value ingredients and solutions and a great platform from which-to-build and expand our partnerships with customers across the value chain to help them create leading consumer products. I believe in our purpose to help create a better world through science and creativity applied to sustainably meet customer and consumer needs. The opportunity we have ahead of us is very big, and that is why I joined IFF. We have solid businesses and will take the actions needed to unleash our full potential to start to deliver profitable market share gains by bringing great innovation to win with our customers. A perfect example of this is in our scent business, where we have been outperforming competition, something we must do also across our other businesses.
IFF also has other high-quality businesses such as flavors and health and biosciences where we will leverage our innovation to deliver higher growth rates with very attractive profitability. And in some of our challenge businesses, such as functional ingredients, with focus and attention, we can significantly improve performance. In both instances, we will do so by putting the business first, eliminating unnecessary processes and overhead, driving empowerment and strong leadership. And by doing so, IFF will be a more innovative and customer-centric organization that will be effective and efficient. We also must be better executors, focus the IFF team away from distractions to continuously grow market share across all our businesses, put more of our investments into our high-return businesses and transformative R&D initiatives and our IT infrastructure, and achieve our capital structure targets by reducing outstanding debt.
And when we do this, over time, I see strong upside and value creation for all IFF's stakeholders. Moving to the next slide, I'll walk through the achievements and factors that marked IFF's progress through the fourth quarter and full year 2023. Now, throughout the past year, IFF FERC [ph] have continued to take important steps to strengthen our financial and operational foundation and position this company to deliver value for the near, mid, and long-term. Our performance in the fourth quarter demonstrates progress. While reported sales were down, comparable currency-neutral sales increased 1% and comparable currency-neutral EBITDA grew 17% with an adjusted margin expansion of 260 basis points. We've also seen notable improvements in volume trends across the majority of our business segments in the second half of the year, enabling us to perform within previously stated guidance ranges for full year 2023 sales and adjusted operating EBITDA.
Now, with this progress and the improving performance through the second half of 2023, we exited the year on solid footing, and we are optimistic about our ability to build on this momentum and are targeting getting back to year-on-year growth for the full year 2024 while strengthening for 2025 and beyond. Now, as I said earlier, we are committed to reducing our level of debt. We have therefore announced an update to our dividend policy to reduce the quarterly dividend by approximately 50% to $0.40 per share. This is not a decision the board and management have taken lightly, as we know the dividend is important to shareholders. However, it will enable us to reduce debt faster, strengthening our capital structure, which will create additional long-term value.
This will also give the company greater financial flexibility, which will, when required, give us the ability to make more high-return growth investments. I'll now turn it over to Glenn. Glenn?
Glenn Richter: Thank you, Erik, and hello, everyone. Moving to slide seven, as Erik mentioned, the board and management have taken this opportunity to accelerate the improvement of our capital structure as we work towards our deleveraging target of three times net debt to credit-adjusted EBITDA. Consequently, we reduced our quarterly dividend to $0.40 per share. We believe this dividend change provides a dividend yield that is consistent with industry peers and is aligned with IFF's long-term cash flow generation and target payouts. The dividend remains an important part of our capital allocation framework, and we expect this new base to grow alongside our profit over time. IFF remains committed to providing competitive returns to our shareholders and firmly believes these actions set us up for more durable value creation in the long-term.
Now, on slide eight, as Erik mentioned, our performance for the fourth quarter reflects the operational and strategic initiatives that our team has implemented over the last several months to deliver strong results amid an uncertain operating environment. Despite some continued challenges in the market, volume trends continue to improve sequentially, with increases in nearly all businesses resulting in growth for total IFF. IFF generated $2.7 billion in sales, representing a 1% increase in comparable currency-neutral sales. This improvement reflected strong growth in our scent business with continued volume pressure in Nourish and Pharma, both impacted by de-stocking. Volumes continue to improve sequentially from down mid-single digits in Q3 to down low single digits in Q4, and if excluding the impact of functional ingredients, volumes for the fourth quarter would have increased low single digits.
Adjusted operating EBITDA total $461 million in the fourth quarter, a 17% increase on a comparable currency-neutral basis. We also realized a year-over-year increase of approximately 260 basis points to our comparable currency-neutral-adjusted operating EBITDA margin. This growth in EBITDA was supported by both internal steps IFF has taken, including continued gains and efficiencies from our productivity initiatives and favorable net pricing. Before moving on, I wanted to share that we recorded a non-cash goodwill impairment charge of $2.6 billion for the fourth quarter related to our nourish business. The primary drivers of the goodwill impairment are related to lower business projections due to volume declines, mainly in functional ingredients, continued cost inflation, and unfavorable foreign exchange rate fluctuations.
Now moving to slide nine, taking a closer look at our profitability performance for the fourth quarter, we delivered $461 million, which equates to a robust comparable currency-neutral adjusted operating EBITDA growth of 17%. I'm happy to report that in Q4, IFF realized strong productivity gains and in conjunction with favorable net price to inflation, helped us overcome ongoing volume pressures to deliver against our objectives. Importantly, IFF has remained focused on executing upon our productivity program to improve our operational effectiveness and efficiency. In 2023, we continued to launch additional steps as part of these programs while also making strategic investments in key growth areas. Now on slide 10, I'll provide a closer look at our performance by business segment during the quarter.
In nourish, sales declined 3% on a comparable currency-neutral basis as strong growth in flavors was offset by continued softness in functional ingredients. While functional ingredients remained the main driver of weakness for nourish in the quarter, it is worth noting that we again saw meaningful sequential improvement. In terms of profitability, the positive impact from our ongoing pricing actions and productivity initiatives drove improvements and led to a 3% increase in comparable currency-neutral adjusted operating EBITDA. Health & Biosciences continues to show robust top and bottom line growth. Price increases, volume growth and productivity gains led to growth across most H&B business segments led by double-digit growth in health. Overall, H&B delivered a comparable currency-neutral sales increase of 5% year-over-year and a 35% year-over-year increase in comparable currency-neutral adjusted operating EBITDA.
Our scent segment continued to deliver a very strong performance in Q4, including 11% growth in comparable currency-neutral sales, driven by double-digit growth in consumer fragrance, as well as mid-single-digit growth in Fine fragrance. Like Health & Biosciences, scent also saw significant growth in adjusted operating EBITDA, increasing 34% on a comparable currency-neutral basis, driven by favorable net pricing, volume, and productivity gains. While Pharma Solutions experienced significant pricing and productivity gains, these improvements were offset by lower volume, driven primarily by continued de-stocking trends, as well as strong year-ago comparison. This led to comparable currency-neutral sales declining 10% and comparable currency-neutral adjusted operating EBITDA declining 13% in the quarter.
Turning to slide 11, I'll discuss our progress in improving our cash flow and leveraged positions. In the fourth quarter, cash flow from operations totaled $1.44 billion, a significant increase from the previous year, reflecting the strong improvement in inventory levels. CapEx of the year was $503 million, or approximately 4.4% of sales. Our progress on working capital improvement, led by an intense focus on right-sizing our inventories, helped enhance our free cash flow position, which saw a sequential increase of over $500 million, totaling $936 million for the full year and ahead of expectations. Included in our free cash flow is about $430 million of costs, primarily related to integration and transaction-related items. We also delivered $826 million in dividends to our shareholders in 2023.
Our cash and cash equivalents totaled $729 million, including $26 million in assets held for sale in Q4. Additionally, we realized a $200 million sequential reduction in gross debt, which totaled approximately $10.1 billion for the quarter, with a net debt to credit-adjusted EBITDA a 4.5 times, our trailing 12-month credit-adjusted EBITDA totaled approximately $2.1 billion. With the announced sale of our Lucas Meyer Cosmetics business, which we still expect to close in the first quarter of 2024, the right-sizing of our quarterly dividend and additional portfolio actions we are planning to make, we are taking decisive action to strengthen our balance sheet and achieve our leveraged targets. On slide 12, I'd like to now turn to our outlook for 2024.
Due to a combination of improvements across our business and in the broader market toward the tail end of 2023, we are cautiously optimistic about the year ahead. For the full year 2024, we expect sales in the range of $10.8 billion to $11.1 billion. This reflects our prudent approach to volume expectations and the impact of modest negative pricing in 2024, which is largely isolated to more price-competitive categories such as functional ingredients and fragrance ingredients, given lower input costs and competitive dynamics. We expect overall pricing to decline approximately 2.5% in 2024, following a 10% increase in 2022 and a 6% increase in 2023. Strategically, we believe this will position us to be more cost-competitive in the market and allow us to regain market share in select businesses.
In terms of volume, the visibility to the degree and pace of the recovery remains a bit fluid and has been explicitly incorporated in our 0% to 3% range. The most significant variable impacting this range will be the pace of recovery in functional ingredients. However, this is a marked improvement from 2023, where we finished down mid-single digits and '22 we were down low single digits, as we believe our industry will return to more normalized growth rates. On the bottom line, we expect to deliver full year '24 adjusted operating EBITDA between $1.9 billion and $2.1 billion. Our guidance assumes not just improved volumes from 2023, but also solid profitability and a margin expansion across our segments. We are hyper-focused on continuing to execute our productivity initiatives to help mitigate expected inflation, primary labor costs, and incentive compensation reset, while continuing to reinvest in the higher-return businesses.
It's also worth noting, we have some benefit of one-time items such as the negative impact in 2023 from the inventory reduction program and the previously announced write-down of inventory related to Locust Bean Kernel or LBK that will not repeat in 2024. In particular, there was an approximately $130 million impact from the negative absorption in 2023 related to our inventory reduction program and some volume declines, which is down from an estimated $165 million we provided in the third quarter. A portion of this will be offset by higher annual incentive compensation expense as we reset our payout to target levels in 2024. While there's still work to do, efforts to bolster our financial profile and portfolio are providing effective, and while its hard to predict the timing and details of the market recovering and its impact on our results, we see opportunity for improvement in 2024 with all divisions targeting better volumes, with improvements in profitability and margin expansion across all four divisions.
For the first quarter, we expect sales to be approximately $2.7 billion to $2.8 billion, with an adjusted EBITDA of approximately $475 million to $500 million. Throughout 2024, we will be relentlessly focused on our efforts to optimize our portfolio, improve financial performance, and reach our deleveraging targets. I'm confident that the actions taken in 2023 and our outlook for improving performance in 2024 will position IFF to capture significant value creation. With that, I'll turn the call back over to Erik for closing remarks.
Erik Fyrwald: Thank you, Glenn. I'm truly excited to be joining IFF during this transformative time for the company. I have long admired IFF as the category-defining leader in the industry, and it's an honor to be able to work alongside our talented global teams to help us navigate and even thrive at a critical moment for our company and our industry. Through robust efforts from our teams worldwide and shared commitment to putting the customer at the center of all we do, IFF will continue strengthening our commercial execution and become a more nimble and efficient organization. Our global teams made progress towards ensuring we can meet the evolving needs of our customers and deliver industry-competitive returns, and we will accelerate the progress going forward.
While 2023 was a challenging year, our financial results in the fourth quarter highlight an improving trend. Based on this performance and some improving market conditions, we are expecting a return to volume growth this year, which should enable EBITDA growth and margin expansion. Our updated dividend policy and the additional divestitures we continue to work on reflects our commitment to improve our capital structure. While the global economic landscape is uncertain, IFF will be focused on strengthening our execution, and as I said, we have work to do to improve our businesses and achieve our vision, but I am confident we are well-positioned to build on our progress and create sustainable value for all stakeholders in 2024 and beyond. I'd like to thank our teams and partners for welcoming me to IFF and look forward to seeing what we'll achieve in 2024.
With that, I'd like to now open the call for questions.
See also 13 Best Short Squeeze Stocks To Buy Now and 11 Best Small-Cap Growth Stocks to Invest In.
To continue reading the Q&A session, please click here.
