Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- International Flavors & Fragrances Inc (IFF, Financial) reported a 7% increase in revenue on a comparable currency-neutral basis, reaching nearly $2.9 billion.
- Adjusted operating EBITDA increased by 22%, driven by volume growth and productivity initiatives.
- The company raised its full-year sales and adjusted operating EBITDA guidance, reflecting strong performance in the first half of the year.
- Significant progress in the strategic refresh, focusing on innovation, customer success, and operational excellence.
- Strong performance in key segments: Scent, Health & Biosciences, and Nourish, with notable volume growth and profitability improvements.
Negative Points
- IFF remains cautious about the economic outlook for the remainder of 2024, citing mixed results from CPG companies and economic indicators.
- Functional Ingredients sales declined modestly due to lower pricing, despite high single-digit volume growth.
- The company faces challenges in improving employee engagement and navigating a complex and fast-moving environment.
- IFF's Pharma solutions segment experienced a decline in profitability due to unfavorable mix and one-time items.
- The company is investing significantly in CapEx and OpEx, which may impact short-term free cash flow and profitability.
Q & A Highlights
Q: Hi, good morning and first, congrats on a really solid second quarter here. So I wanted to ask two related pieces here is, first, really around the sequencing of EBITDA in the second half. So the step down in 3Q versus 2Q and then your implied 4Q, is it pretty material seasonal step down. So what is driving that in your view versus the stronger 2Q?
A: Hey, morning, Josh. Thanks for the questions. We are expecting more modest volume growth in the second half of the year. Specifically in the fourth quarter, we are forecasting about a 4% volume uplift year over year in brief and flattish in Q4. The EBITDA first half versus second half is really a reflection of lower revenues in the second half a big portion of that is seasonal. We expect that basically we will be about $400 million less revenue based on our guide in the second half of the year and in the first half of the year. That is notably $300 million in the fourth quarter, which is always our seasonally our lowest. So that really drives the vast majority of the change in the first half versus the second half. But I will also add that we are investing about $20 million to $30 million incremental op ex in the back half of the year. Given the performance this year, we want to reinvest to begin to accelerate growth for '25 and '26.
Q: Hi, everyone, and thanks for taking the question. And it actually fits quite nicely from your last answer that, Glenn. I was wondering if you could give more color on some of those incrementally as around R&D and commercial efforts and capacity. Could you give a few more specific examples and how you expect that to feed through will contribute to '25 and '26? And you gave some helpful quantification on CapEx. And for the next few years in terms of this OpEx step-up, should we also extrapolate that going forward as well? Thank you.
A: Thanks for the question, Nicola, and we're very excited about the increased investment in OpEx, as Glenn mentioned, $20 million to $30 million that we're putting into the company this year to have impact in the coming years, '25, '26 and beyond that includes, of course, R&D. And we're increasing R&D spend in both Health & Biosciences, Scent and Flavors. And that includes by the way, accelerating our transformation to in biotech to come out with new fragrances and flavors with our biotech capabilities that will enhance our Scent & Flavors businesses. We also increasing the R&D to find more naturals, [12%]. And the for flavors, obviously a great market trend towards naturals were leaders in that area and we want to continue to strengthen our leadership position. Also across all three of those businesses we're adding commercial capability. And in our Functional Ingredients business, we're adding more technical service capability to better sell higher-value products that we have in our Functional Ingredients portfolio. On the OpEx -- excuse me, on the CapEx side, we're adding capacity, especially in Health & Biosciences, but across all three of those high-growth markets businesses, Health & Biosciences Scent & Flavors to ensure that we always have very reliable, high-quality supply for all of our customers around the world for all those product lines. So we're making significant investments now, and we'll continue to ramp that up in the coming years to ensure that we continue to profitably grow very aggressively those business units. Thank you.
Q: Thanks, and also congrats on the quarter. Erik, on slide 7, this expanded and operating model replaces the reorganization and your predecessor has started on home model fully in place? Or can you tell us where you are when will be fully in place?
A: We're making a lot of really good progress. John, thanks for the question. And what I would say is that the clarity has been very well received by our people. And I think that the uncertainty has been clearly cleaned up. The business teams are getting put in place, and they're very excited and very energized by the clarity of decision banking, their ability to set strategy and then to execute all elements of the business from R&D, operations, commercial and all the functions to support that, that those gears working together to drive each of the business units. And I can tell you that we're starting to feel the benefits of that by seeing that the strategy is being executed and being strengthened in terms of being able to take our innovation from R&D and get it through the creation and into a commercial operations product, produce it and then get it in there commercially. And it'll take a while to fully drive the benefits. But we're starting to feel the that is the strength and improvements in energy and ability to do that. The other thing that's really interesting here is with the focused business units having their strategy. And by the way from that comes the five-year plan, which gives us more clarity on where we're investing, we're able to better differentiate between the units on where we put more of the investment and where we put less of investment where we need more productivity and where we need to focus that productivity to make sure that we're competitive cost wise and able to drive margins. And then also as you get that clarity on each business unit on what they need to do to win it also increases the ability of businesses to collaborate effectively. And so that's the that that collaboration is the synergy is now much less driven corporately with corporate programs and lots of consultants and lots of complexity and much more from the businesses where they know the customers and where that, that synergy where that leverage makes sense. So we're making good progress in by the end of the year. We'll have all five units operating well, and that's when we'll start reporting the five business units.
Q: Thank you, operator. Good morning, everybody. And Erik, I just want to go back to the strategic refresh specific to on to R&D, does that entail more spending as it relates to R&D as a percentage of sales or is it more? We're repositioning resources with an overlay of accountability also on the CapEx piece. And the company has been spending roughly $0.5 billion in CapEx post the DuPont acquisition. So as you sort of look back, was that just maintenance CapEx basically, and now you're adding growth CapEx, right sequencing to think about as you go back to your comments about 6% CapEx to sales going forward?
A: Thanks for the question, very important. Let me start with the CapEx. So we now with the strategic clarity with the business units, the clarity of our strategies, we know we have to spend more on growth investments to realize our growth ambitions. But we also have some foundational investments that we need to make that we're under invested before in basic making sure that our plants are up to standards that we need to have them operate well reliably with high quality. And we have some ERP investments that we need to make and that are kind of in that are foundational. But on top of that, we
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
