Q4 2020 International Flavors & Fragrances Inc Earnings Call
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Balance sheet again it'd be net.
During your conference today, Please press the star of the route.
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This time I would like to welcome everyone to the I F F for quarter and full year of 2020 earnings conference call.
All participants will be in a listen only mode until the formal question and ask for a portion of the call.
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I would like to introduce Michael Deveau head of Investor Relations you may begin.
Thank you good morning, good afternoon, and good evening, everyone welcome to Iff's fourth quarter and full year 2020 conference call yesterday evening, we issued a press release announcing our financial results and outlook for 2021.
A copy of the release can be found on our IR website at IR Dot Iff's Dot com.
Please note that this call is being recorded live and will be available for replay.
I ask that you. Please take a moment to review our forward looking statements.
Turning the call, we're making forward looking statements about the company's performance, particularly with regard to our outlook for the first quarter and full year 2021. These statements are based on how we see things today and contain elements of uncertainty.
For additional information concerning the factors that could cause actual results to differ materially from our forward looking statements. Please refer to our cautionary statement and risk factors stated in yesterday's press release.
Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affects comparability a reconciliation of these non-GAAP financial measures to their respective GAAP measures is available on our website.
With me on the call today is our chairman and CEO, Andreas <unk>, and our executive Vice President and CFO gruesome Jill.
We will begin with prepared remarks, and then we'll take any questions that you may have.
With that I would now like to turn the call over to Andreas.
Thank you Mike and thank you all.
Joined us today as close to tiptoe on legacy.
And begin the new journey with the NMB, we will begin by sharing a detailed look into our fourth quarter and the full year 2020 of results and then Jim and I will highlight the go forward outlook and opportunity for the new UI, if that I'm really excited and proud to say that as of February 1st we have officially completed a merger of us.
Paul.
Our teams have hit the ground running establishing a new company as an innovation leader in the global value chain for consumer goods and commercial products.
For the close of the NMB transaction, we also on deals.
The new brand identity of purpose intended to unify the organization and best position all the divisions for success.
That's the purpose driven enterprise, we share of mission to build from strength and transformed the industry. We are now squarely focused on execution.
Building on recent performance to leverage the exciting capabilities and broader customer base of our new company.
Im confident that the direction that we are moving at the opportunities ahead of us will lead to accelerated growth and improved profitability as we generate strong value creation and total shareholder return.
Beginning on slide six I would like to recap what was truly a remarkable 2020.
Amidst an unprecedented pandemic the challenge for all global organization, we delivered solid financial results, while the embarking on a transformational journey to create a new industry leader together was to pull at MB.
I am pleased to report that we completed 2020 with positive momentum on a comparable basis and we have seen this trend continue in January of 2021 as the combined company.
In 2020, our portfolio, we've made resilient 20 evolving and incredible challenging global environment due to the ongoing COVID-19 pandemic.
<unk> generated price.
Quick $1 billion in sales for the full year 2020 about of 1% increase on a currency neutral basis from last year when excluding the 50 <unk> week of 2019.
This sales growth was primarily driven by strong performance in all of a cent division, which we believe is even better positioned to capture further market share in 2021.
We achieved an adjusted operating margin, excluding amortization of 18, 1% goofball of synergy efforts with Frutarom and pursuing additional productivity initiatives across the business.
As we reflect on the integration of Frutarom. We are pleased with what we have achieved as it relates to cost synergies from procurement manufacturing and administrative expenses.
Acknowledging the revenue challenges at <unk> over the past two years, we have restructured the business at going forward. It will be an integral part of all of our larger newer segments, including taste food and beverage segments. Now we have the combined combination with the NMB.
We really emphasized pre cash flow management throughout the year. This led to meaningful increases year over year as we continue to focus on managing our balance sheet through the pandemic.
We finished the year with an adjusted earnings per share excluding amortization of $5 70.
For the completion of our combination with viewpoint and B. We have also achieved the important milestone of completing the integration planning phase related to the merger we.
We are now focused on execution going forward as we are committed to realizing the meaningful synergies presented by the transaction.
The capture of the synergy opportunity, we are encouraging collaboration across divisions and closely aligning with the markets and regions. We serve to showcase the full breadth of Iff's new portfolio.
We'll provide further details regarding our integration that the initiatives a bit later.
On slide seven let's take a second look at the sales dynamic that we've seen across the business.
Reflecting on 2020, we were off to a very strong start growing 6% in Q1 2020 until the pandemic had a profound impact on society and ultimately our business.
Given the disruption of the year, we wanted to offer a bit more perspective on the trends we are seeing with within our business as we cover from the peak of the regulatory restrictions of the pandemic in the second quarter of 2020.
Our growth rates continue to improve in the fourth quarter up 2%, excluding the 50 <unk> week versus the 1% year on year growth seen in the third quarter of large part of this improvement came from fine fragrance, which returned to growth in the fourth quarter.
As we've noted before roughly 15% of our business was negatively impacted by COVID-19, and decreased by 16% of 2020, excluding the impact of the 50 <unk> week.
The vast majority of our portfolio, which includes foot average hygiene and disinfection type products is defensive in nature of benefitted from the pandemic.
It was roughly 85% of our pre pandemic sales and these grew approximately 4% for the full year, excluding the impact of the 50 <unk> week.
Our performance was strong with multinational customers, especially those who benefited from the pandemic. However, our exposure to local and regional players adversely impacted sales.
It's important to remember that while the smaller and regional customers were disproportionately impacted by COVID-19. They have historically been an important source of growth across our industry and we expect them to be important contributors in the recovery.
On the whole we are proud of the results achieved and resilience of our business in 2020. Some of our end markets have seen prolonged and significant negative impact that led to inevitable headwinds for certain segments. However, when you look at the whole of our portfolio, we see strong results with meaningful <unk>.
On the firm our central role of the consumer product good value chain.
That gives me great confidence as we begin to execute as the new <unk> with the <unk> business in 2021.
As we begin 2021 I am very pleased to say, we on a combined company basis had a strong performance and generate was approximately 3% currency neutral growth against a strong year ago comparison sent trends continue to be very strong taste of improved in the NMB continued to be pressured by COVID-19.
It is good to see that the business has had steady improvement since the pandemic loss.
I'd now like to pass the call over to wisdom, who will provide a more detailed review of our financial performance in the fourth quarter.
Thank you Andreas.
I will only cover the P&L high points on the slide and get into additional detail as we go through the following several slides.
In the fourth quarter <unk> generated $1 3 billion in sales.
Down 2% year over year on a currency neutral basis.
When excluding the roughly $50 million impact of two of 2000 1950 <unk> week.
Comparable currency neutral growth was plus 2% and as I'll explain on the next slide up approximately 4% accounting foreign exchange related price changes as the appears in many CPG as disclosed.
While the test performed at levels similar to Q3 2020, we did see a significant acceleration incident.
In the fourth quarter adjusted operating profit, excluding amortization decreased by 10% on a currency neutral basis on.
By 9%, including a one percentage point benefit of ethics with solid operating performance operational performance offset by a challenging year ago comparable in COVID-19 costs.
We delivered adjusted earnings per share, excluding amortization of $1.32, mostly as a result of lower operating profit in the quarter.
This was down 11% on the currency neutral basis, or 10%, including the one percentage point benefit of the FX.
It was good to finally see foreign Inc. Foreign currency, having a positive impact on sales operating profit and EPS in the quarter.
Now moving to slide nine.
I would like to focus on the emerging markets and currency impacts on our results both on the fourth quarter and the full year to provide better clarity regarding our currency neutral sales growth.
For the fourth quarter and for the full year the impact of FX related pricing was approximately two percentage points.
To be clear, if we simply looked at our revenue in the current period by local currency and the applied the average FX rates from the prior period for the current period, our currency neutral growth of 2% in the fourth quarter would have been up approximately 4% and our full year currency neutral growth of one.
The percent would go to approximately 3% all excluding the impact of the 50 <unk> week.
At the segment level sent would have grown 10% in Q4, 2020 and 7% in the flow.
The financial year.
While the taste would have been up 1% in both Q4 and the full year 2020 again, all excluding the impact of the 50 <unk> week.
Responding to feedback from our investors and after further review of what our competitors. The other CPG companies are doing.
<unk> in Q1, 2021, we will align our reporting with our peers methodology for.
For 2021, our plan is to provide the sort of consolidated basis and divisional level and before our next earnings call. We'll provide the historical restatement of growth by division for 2020.
Moving now to slide 10.
The breakdown of the key factors impacting our Q4 profitability I do want to go into more detail on this as the overall results hide some meaningful operational improvements that support our optimism and momentum heading into 2021.
A close look at the operating profit bridge shows that we were able to drive operational improvements of about 8% largely attained through fruit from synergy realization productivity initiatives and reformulation of activities mostly on.
Higher volumes ex the 50, <unk> week and disciplined cost management.
As expected and communicated earlier this year, there was a negative impact from our annual incentive compensation or our AIP program reset which was the direct result of weak Q for 2019 results.
Further negative offsets came from a challenging year to year comparable which included the 50, the week and the Brazilian and the indirect tax obviously of benefit that both occurred in 2019.
And.
And in 2020 incremental COVID-19 costs, which we expect will own the reduce in the second half of 2021.
Unfortunately, these combined items represent an 18 percentage point year over year headwind and were the primary driver of our 10% currency neutral the decline in operating profit.
Now on slide 11, I'd like to discuss our scent division results in more detail.
Another strong overall performance from St.
<unk> totaling $504 million were up 3% or 7% when excluding the 50 <unk> week comparison.
We've continued to see strong growth from our consumer fragrance business with the high single digit increase driven by strong performances in our home care and personal wash categories also the new call. This really recently gained access and consumer fragrance called throughout 2021 strategy grew more than 60% in the fourth quarter.
And represented more than one third of our consumer fragrance growth.
I'm also happy to share that we returned to growth in our fine fragrance business with the mid single digit increase as a result of several new wins in North America and Europe.
While this was a nice development in Q4 2020 of cautious and not extrapolating the trend for the first quarter of 2021.
In fragrance ingredients, we experienced the high single digits growth driven by double digit growth in cosmetic actives.
The overall defense Division achieved a 15, 9% profit margin on the 500 for millions of sales in the quarter.
Sure.
Our recent performance across the sales portfolio is encouraging and will remain a core piece of our growth story moving forward bolstered over time by expanded sales of opportunities from working together with them and be the.
<unk> has done a tremendous job delivering market leading growth adjusted for the reporting differences over the past three years, while improving since margin profile.
Turning now to slide 12.
I'd like to highlight the fourth quarter performance of our taste Division.
Our taste division with the exception of our foodservice business has remained resilient throughout the pandemic taste sales totaling $766 million declined 5% or 1% when excluding the 50 <unk> week comparison.
Foodservice was down roughly 17% on a similar basis.
The taste division achieved approximately 11, 8% profit margin with 19 million and segment profit. These numbers also include approximately 42 million in amortization of intangible assets. If you exclude the amortization of our Q4 margin would be 17, 2%.
<unk> continued to be pressured in the quarter declining mid single digits on the currency neutral basis as COVID-19 has disproportionately impacted foodservice and the end market performance of local and regional customers both of which represent a large portion of the fruit drums that any of those sales.
Looking at our performance by region on North American business remains, particularly strong outperforming other markets with mid single digit growth.
We have the experiences challenges for of experienced challenges in our flavors segment in Latin America, and greater Asia due to the ongoing pandemic Leila E. M. E performance was challenged by weakness in Savory solutions, specifically driven by the food services market.
So returning to profitable growth in our taste Division will remain a top priority in 2021, and we fully expect to deliver improved results in the and enhanced profitability as we emerge from the pandemic.
Now turning to slide 13, I'd like to spend some time on our cash flow.
ISS is always to be the strong generator of cash, but given the 2020, starting leverage and the fact that it didn't b was coming along in early 2021, bringing additional debt. It was even more critical that we focus on people on the importance of cash generation across the company.
So capex and working capital targets for both included in the annual incentives, we launched specific initiatives and we track the progress throughout the year.
As you will see operating cash flow for the full year was up from $699 million in 2019, the $714 million this year on.
The increase of 2%.
Net income was lower as a function of operating profit, but also higher year over year of transaction and integration related costs. However, this headwind was more than offset by lower incentive compensation payments in 2020 as the results of our 2019 performance as well as by the timing of payments on some integration related costs.
Core working capital was a modest the use of cash is driven primarily by timing related to accounts receivable, where Q4 2019 was favorably impacted by the 50 <unk> week.
Collections and that extra week ending in January helped 2019 as cash flow and this was always going to be very hard to fully offset the SKU for.
Overall, we are satisfied with the 2020 trajectory of our five quarter average cash conversion cycle, which improved six days year over year.
And this was despite holding additional inventory to avoid any customer disruption due to COVID-19 related supply chain issues.
We also reduced the capex of $3 eight per cent of sales versus four six percentage of sales in the prior year period, as we prioritize spending more than ever to manage and preserve cash throughout the balance through the pandemic.
And traveling on site work restrictions also help lower 2020 Capex all of this led to a significant 13% increase in free cash flow.
The compare to 2020 $522 million.
And we will be equally focused in 2021 and cash generation and on reducing our overall level of net debt.
Moving to slide 14.
I would like to address the key assumptions behind the full year 2021 expectations.
While we are certainly encouraged by our business trends in the fourth quarter and in January of 2020 of 2021.
We expect COVID-19 to have a similar impact in 2020 ones for staff as we've seen in 2020 two's second half.
While we expect improvement in fine fragrance food services, and our bio refinery business on a full year basis 2021 sales will likely remain below our 2019 levels.
Assumed the full year guidance as the euro to U S dollar exchange rates of $1.18, which.
<unk> approximately 25% of our combined sales.
We expect approximately 50 million of merger related cost synergies with Dupont's N N b most of the backend loaded this year with 45 million coming from cost synergies and the additional $5 million from the EBITDA contribution of revenue synergies.
Now we've also provided some additional inputs that should help you model of the business moving into 2021.
We expect total annual depreciation and amortization to be $1.165 billion, which includes the amortization of approximately $715 million.
Annual interest expense is expected to be around $315 million.
For our annual effective tax rate, we are still working through the details given that we just completed the acquisition on February 1st while we do of an estimate it's still being validated by the team. So my preference is to complete additional work before we communicate.
Lastly, we expect diluted shares outstanding for the pro forma company for EPS calculation purposes to be approximately 255 million shares and that's including the approximately 141 million shares from the transaction.
For Q1 2021, please do remember it's two months of actuals for N B and three months of Iff's when modeling.
And also please note that we'll continue to dig into these numbers post close, but we did want to share our thinking at this point in time. So we will update you accordingly should anything change.
Now turning to slide 15.
I'd like to detail our pro forma full year of 2021 financial guidance.
In line with the projections included in the December 22nd this for filing plus the synergy realization plan communicated of January 11th we expect to generate approximately 11 points of 5 billion in sales at an approximately 23, 2% adjusted EBITDA margin. Please.
Please note that this is the 12 month combined company pro forma estimates and includes approximately 507 million of N. N V sales that occurred in January 2021.
These metrics reflect our confidence in the combined company's ability to generate strong results from the complex global market.
Several of our business as I expected to see improvement throughout the year on.
On the pro forma basis sales are expected to grow nearly 4% and EBITDA margin to expand by approximately 100 basis points.
Should we shouldn't notes the had been moving towards reporting and guiding on an adjusted EBITDA basis as part of a broader effort for easier comparability with our peers, which includes our report sales growth as well we are redoubling, our efforts for more transparent and investor focused as a combined company and we think EBITDA is a key contributor.
So that's in our sector.
With an even stronger portfolio and enhanced capabilities in the U S. S to starting the year with the strong financial foundation from which to deliver strong results of 'twenty 'twenty one guidance reflects the strength of the finance platform.
Our expectation that the impact of the pandemic will have meaningfully subsided in the second half and the rigorous focus on execution at.
As such we expect to deliver 2021 results that are meaningfully better than 2000 twenty's.
I'd also like to comment on some of the underlying dynamics that we expect will continue into the first quarter of 2021.
As we face of strong first quarter comparison from both ISS that at 6% and an N. B of 3%. We would also continue to many of you also continue to manage through pandemic related headwinds.
While the majority of our portfolio of delivers essential products and solutions, we expect that foodservice bio refinery and microbial sales will continue to remain under pressure in the near term on until we lap of the COVID-19 related challenges.
We of course, we are closely monitoring trend improvements in our fine fragrances business and the cautious not to extrapolate our Q4 sales of Q4 trends in the first quarter as we believe some of the performance was due to the strong holiday period.
Building on what Andreas said earlier I'm pleased to say that we had solid pro forma results in January with approximately 3% currency neutral growth on on new disclosure basis in January of 'twenty 'twenty, one and then be finished with approximately $507 million in sales given the then be became part of Iff's business just iff's the state.
Is this days ago we're.
We're not providing quarterly guidance.
Just one reminder, for anyone extrapolating I was the January results for the quarter.
While this has no impact on our full year expected sales. Please remember that he moved away from our previous for four five reporting cycle of the calendar month reporting from January so.
So in Q1 2021, we will have two less working days for legacy ISS.
Therefore, perhaps a better metric for tracking progress as the average daily sales.
While we do not know where the pandemic will take us we're happy with that stopped the 'twenty 'twenty one.
We will continue to thoughtfully manage resources operating expenses and capital to ensure that our business is well positioned to deliver in an uncertain market.
We also want to note that since we closed the deal on February 1st we have been working on getting the investment community pro forma segmentation for our combined company.
It is our expectation that price, where first quarter 'twenty 'twenty one on the earnings release and me.
The share our 2020 pro forma sales and EBIT for each one of our force segments, Nourish scent health and Biosciences, and pharma solutions, including the quarterly and full year of details.
Now moving to slide 16, and before passing it back to Andreas Let me end by summarizing our go forward reporting and disclosure updates all aimed at being more investor friendly and more comparable to our peers.
Starting in Q1, 2021, we will align our currency neutral sales reporting to the more common methodology.
We then calculate the currency neutral sales growth by taking on a revenue in the current period in local currency and the planning average FX rates for the prior period to the current period.
We've shifted from a previous financial reporting calendar of for four five weeks to the more commonly used calendar month ends.
To eliminate the comparable issues related to the 53rd week.
We're also moving towards reporting and guiding on an adjusted EBITDA basis for easier comparability with our peers. This include this includes both of the consolidated level as well at the segment level.
And the there'll be eliminating our corporate expense line in our segment profit table by allocating corporate expenses accordingly to each division.
Prior to our first quarter 2021 earnings release in May with a share of 2020 pro forma sales and EBITDA for each of our for segments, including details by quarter as well as for the full year.
And now I'd like to turn it back to Andreas.
Thank you <unk> turning to slide 17, let's focus on 2021, and the new <unk> with the NMB business, our teams executed well on the tremendous integration planning for the transformation of combination despite working remotely due to COVID-19, this integration planning effort more than a year long.
As provided an opportunity to create the right team and operating model needed to secure our global leadership position. It has been driven by the lessons we have learned in past integrations across both organizations rounding our plans and practical experience that will enable the near term execution.
We said on an aggressive timeline in 2019 to close and complete the integration planning in 2020, a global pandemic only challenge for us even further but I am very pleased to say that our teams worked extraordinarily well together to complete every aspect of the integration planning.
Confident that the new iPad is ideally positioned to succeed with this planning complete we can entirely focused on execution delivering our commitments and realizing significant revenue of cost synergies, resulting in significant value creation for shareholders for the years to come.
Let's move to slide 18, and take it take the second and.
And we force on the value proposition of the new asset on.
On your company is poised to realize significant value for all of our stakeholders.
These two highly complementary companies for me.
The true innovation partner for all customers, the new Iff's will be a force in shaping the future of our industry. Our R&D investment will be one five times greater than our nearest peer we will have number one on in the two positions in core categories of nutrition cultures enzymes probiotics soy proteins flavors and.
Vincent this is coupled with the broadest and most diverse customer base on our industry more than 45000 in total and about 48 per cent of our annual sales from small medium of private label customers, we are well positioned to drive profitable growth for all of our shareholders.
It allows us to enhance the value, we can deliver to our customers and a very powerful way.
To deliver value to customers in every interaction from leading product offerings to significant benefits of speed to market and supply chain simplification as we deliver a market leading integrated solutions.
I think it is important to remember that while the NMB transaction.
Is the culminating in transformational move it is completely consistent how we have been evolving the portfolio over the past five years on.
Our strategy focused on positioning the company for where the industry is going not where it has been.
That's the requires more naturals more regional supply chains, reaching smaller customers and increasing technology and science innovation.
Actions like Frutarom, Lucas Meyer's ottens flavors and others were important foundational steps as we executed the strategy as we look ahead. We are pleased we of the most complete portfolio in the business, while our portfolio may change around the edges. It is complete and gives us the right base to grow.
And the right assets to drive the financial results you see from all of long term targets.
Put simply the new ISO will be the strongest part the two customers worldwide to colquitt essential solutions for on trend innovation.
Now to slide 19.
I would like to emphasize the long term value creation potential we have seen for effects on your company of substantial synergy opportunities that will drive growth and expand margins.
So all of our integration planning, we confirmed the run rate revenue synergy expectation at approximately 400 million U S. Dollars by 2020 for was the contribution of at least $145 million of EBITDA by that time. In addition, we expect to achieve meaningful cost savings, including the run rate costs.
So that's the expectation of $300 million by the end of 2020 suite, we expect that execution on our plan will unlock about $50 million of EBITDA contribution in 'twenty and 'twenty one.
I think it's important to say that any combination of its not just about synergies, but also to strong on bleeding based businesses are leaders across legacy life. After the.
The legacy N N V businesses commit.
Committed to running every part of this business both base business and combined to yield superior results. This requires the mindset of continuous improvement and operational excellence that we're embracing across the organization.
It is critical to underscore that we have a comprehensive structure in place to track our progress against the identified objectives.
At the center of our discussion will be synergy realization will be trek diligently, including the onetime cost in both expense and capital.
Our hope is to highlight on a continuous basis all of value creation levers to provide you was a critical component of our ability of patient story and India and while we are focused on synergy realization success will not be defined just as debt. It will be the cumulative result, where synergies are additive.
The base business performance for a strong on total P&L.
On slide 20, I want to highlight the actions that were immediately taken to begin the execution.
One of the most questions we get from investors is not what will you deliver but instead, the how will you actually do it.
As you can imagine synergy capture is all about the hull and.
And as we mentioned on January 11th the 85 separate initiatives behind the 300 million in cost savings the day in our plan on the cost side and the last several initiatives on the revenue side.
We tried to give you a flavor for the type of actions that are part of these initiatives.
In terms of revenue synergies, we are engaged with all the top global and regional customers to introduce joined portfolio on capabilities accelerated co development partnership with Gogo customers activate the cost division of innovation and collaboration of the R&D and launch combined commercial excellence and integrated solution teams.
At a high level I would characterize the cost actions as follows first.
Whether it's the application we elevate the deprecation you can imagine across two global companies. There's a lot of the application in the back office and admin functions second we look to align our cost structure was best in class peers, where it is comparable with undertake benchmarking cross functions like G&A, which gives us.
The tangible target for improvement Noteware organization of the identical so we use this as the goal rather than prescription share.
Whether it's the efficiency, we spread the benefits of dollar of spend across the larger base. Let me give you. An example force organization of the invest in R&D, we can now leverage across double the categories and customers. This powerful and this is powerful and shows you the benefit of global scale for supporting cutting edge science investments.
For us on what parts of the pulse centralized services, we've empowered regional business leaders will drive the P&L, but they have access to the best in class Global shared service centers in areas like HR finance and procurement, where there's a tangible benefit to scale and combined resources and finally.
We have set all of our incentive compensation metrics to reflect in the line was all base business and the integration objectives.
I really hope this gives you some flavor for the Hull, we now know the targets, we want to deliver and we have told you of our long term goals. So over the coming quarters focus will be very much on these actions.
Let's turn to slide 21, the new Ipass is set to deliver a best in class financial profile and maximize value for our shareholders. This slide summarizes all of long term outlook, which we introduced to investors at the beginning of this year.
From a revenue perspective, we expect currency neutral organic sales growth of approximately 4% to 5% over the next few years led by our unrivaled product.
<unk> portfolio, which is set of benefit from all of industry, leading R&D programs.
We also expect to see meaningful operating margin improvement for <unk>, including.
An estimated adjusted EBITDA margin of approximately 26% in 2023 up around 400 basis points from all of our 2020 pro forma.
The nuance of will.
We will continue to generate strong free cash flow is and we expect the significant increase to approximately $2 billion in 2023.
As we pursue further growth so on capital management and Delevering, we remain that will remain a core priority. We're targeting on those three times net debt to EBITDA ratio of 24 to 36 months post close and reaffirm our commitment to maintaining our investment grade rating.
Finishing on slide 22, I would like to thank you all again for joining our call across the world. Our teams have worked tirelessly throughout of difficult year to ensure <unk> continued to serve our customers and deliver strong business results, our full year financial results showcased the strength of our.
The portfolio and most importantly, our people.
Some of those challenging environment, we've made tremendous progress on our transformational journey.
The formation of the new Iff's together with the NMB has made us an even stronger company better positioned to deliver value for our share the poll of stakeholders.
For the pre integration process completed its now time to execute.
We have the team and structure in place to ensure that our newly combined company will meet our financial and operating goals in order to shape, the future of our industry and improve our world.
While global volatility is expected to persist.
Foundational commitment to our people customers communities and planet will remain unchanged as we look to strengthen on the redefined our role as the industry, leading ingredients and solutions partner.
I am really thrilled for Iff's ex exciting new chapter and hope that you will join us on our pursuit to revolutionize the industry and to deliver for our customers teams and shareholders.
So before opening for questions. Please note that all planned for Q&A today is to focus on our results on outlook and not to address questions of the bulk market rumors of that.
I would now like to open the call for questions. Thank you.
At this time each day with large asked a question. Please press the star and one on your Touchtone phone.
We draw on your question at any time for by pricing the pound key.
Once again to ask a question. Please press the star and one on you touched on Sally.
On the barbecue.
And we will take our first question from Mark Astrachan with Stifel. Please go ahead of your line is open.
Yeah, Thanks, and good morning, everyone.
I guess.
One question two parts on the long term the new long term target. So on the sales growth what gives confidence.
You can achieve 4% to 5% organic growth when.
You haven't achieved that level in recent years.
Good day, even both businesses, having achieved that kind of growth.
Years, you're guiding I think Russo said, 2% to 3% organic something like that in year one.
So how do you get there and I guess also to just.
Mechanically how much contribution from the change.
In the FX accounting would add to that and on.
On the same long term target EBITDA margins.
Why is the same confidence to achieve those margins when when either EBITDA margin has been essentially flat over the last couple of years, despite cost synergies leggett.
Legacy business productivity initiatives.
I get the the puts and takes in 2020, but the results have been below peers from an EBITDA growth standpoint to in recent years. So maybe if you could just touch on those I'd appreciate it the long question, but hopefully important.
Thank you. Thank you Mark a very important question.
Take the first piece and then I'll give it on the FX to tourists.
We are very confident that we are very much on track for the long term targets, let me explain why.
See the for example of center very important division of ours has turned around quite significantly already in the very tough year like 2020, and we see good science also early this year that this journey will continue so we are basically here on the very much on track. The second one is taste and paces.
Had the bit of a performance issue in the years 19, and then reaching into 'twenty, but we have seen some sequential improvement in the good start to two 'twenty 'twenty one as well we have done all of the actions we have to take the.
Bring this division back on track we have for.
Basically split the other.
European.
The region into a year of Western Europe Africa, Middle East to put more focus on the emerging markets and on the on the.
More mature markets.
The <unk> put a lot of let's say focus on integration of airports of the of the further on.
Organization, particularly in Europe last year for fully fully integrated and we have restructured our go to market strategy and it looks like that we're starting to perform well. So I think that's that's very confident on the on the legacy <unk> side on the NMB I think.
You have seen a lot of pieces of the portfolio, which had a good growth growth profile. We will continue and we should not underestimate the parts of the portfolio was also particularly the last year pressured by by Covid and that will help at least on the second half of this year to come have come out of debt.
And secondly, we have certainly we have seen.
Good customer response as well on their portfolio and in terms of in terms of recent the recent wins on top of it.
We have the the cross selling and integrated solutions, which will help us to to inquiries on our growth rate as well. So we are we are very confident that we can we can do it on the EBITDA margin, we took on legacy <unk>.
We took actions.
We started as I said was ascent division on just on sales, but on the EBITDA as well we see good improvement the same will happen on the on the taste side and actually I'm less worried about the NMB side, because they have done ex U.
Good EBITDA or let's say increase of margins in the last the last couple of years with that I'll hand, it over to <unk> to comment on FX days.
Thanks, Andreas Hi, Mark.
The guidance that we provided mark was in dollars right as we rolled out of you think back basically if you look at the S. Four and then and then when we talked about the synergies the additional revenue synergies that we expected so.
FX is very hard to call I mean, we basically ran out the FX rates that we that we had as of the.
As of the time, we provided all of those forward estimates.
The new way of the new methodology, which we've talked about in any particular period and as you look back.
It does give us a matter of on a growth rate it doesn't it doesn't change the overall actual dollars right.
Exactly yeah.
I think Andreas Covenant everything else on your question there.
Thank you Bruce.
And we'll take our next question from Gaza segment with Bernstein. Please go ahead. Your line is open.
Hi, Good morning, Andreas Good morning rest of the my Mike on.
That's almost emotional for me that you changed the reporting for the way that the European peers kind of organic sales growth that's sort of.
The Longfellow cash can I, just clarify on your 'twenty or 'twenty, one guidance what is the organic component and how much do you bake in for FX pricing I hear what you say rest of them about FX being difficult to predict but maybe if we break it down to what.
What is the volume expectation and what is the call it underlying pricing on the back of any cost inflation that you include in your 2021 guidance place and then I have a follow up as well.
So the high guns.
The underlying the pricing I mean, we do expect of the raw material costs during the period, the higher raw material costs.
And recovery of that is based into our pricing as well so maybe I'll address the FX part of it I mean, if you think about.
Weighted average basket of our currencies and we look at the biggest currencies for us the U S dollars of the biggest but the the euro.
And slash Danish kroner, because that's pretty much state of the euro that's the thing.
The biggest that's actually when you put in the Danish kroner, it's about 27%. Okay. Those are the two big ones and then the others I mean, you know the the.
Of the Japanese yen the.
Indian rupee or many others, if we looked at the weighted basket of those and if you looked at the what are the basic budget. This year versus 2020, net 21 versus 'twenty. It was about a 1% difference that's what we had.
And if you look at spot today, it's actually running better than that from our perspective on the revenue per us from revenue.
Our other expected 'twenty one growth rates remains about three 5% that sort of you put out there right with a small contribution from synergies and no change to this for all of the January of inductive and.
As you've seen from our January 'twenty, one preliminary sales growth of around 3%.
We've started we've started roughly in line with our expectations.
Great. Thanks, if I if I can just follow up on what.
But what can you talk us through the drive us positive or negative.
Right.
You see of 'twenty 'twenty, one as part of the guidance assumptions that you've made around Covid places.
The first half of the year, we've assumed that the we would remain more or less the same broad macro impact on us that's on fine fragrances food foodservice et cetera, as the second part of.
As the second part of the.
Of last year of 2020, and then we expect that we that we recovered from the second half should the should be better.
Yeah.
Yeah.
The next with Pfizer.
With Deutsche Bank. Please go ahead of your line is open.
That's good.
Alright.
As the either.
Can you maybe operating if you can go to the next question.
Yes, hi, Thank you good morning.
So I know there are some rumors in the market of which I know you can't comment.
Hello.
Yes Hello.
So yes, we can hear you speak just for you guys, yes, yes.
Yes, we can.
And the go ahead.
Faiza.
Hello.
Yes, now we hear you again.
Hello.
And welcome all of next with Matthew The Jan with Bank of America. Please go ahead of your line is open.
Good morning. So you had said foodservice was down double digits on the quarter and on the year can you be more specific.
And we've seen a lot of European locked down the headlines as well so as that decelerated in one Q and I guess more holistically.
Why didnt taste ex foodservice grow mid single digits or better what what is keeping us on.
What ex or excluding the the foodservice business is keeping growth in taste.
And maybe the 1% to 2% range versus closer to mid single digits, Yes, let's let's talk about the foodservice first and thank you for the for the question.
So foodservice in general on.
We'll come back certainly over the course of 'twenty or 'twenty, one pulling up to the level of 2019 that we will achieve next year, but we have seen actually on.
The better start into.
Into into January with it was down high single digits, which was much better than we have seen seen in the last year I think thats. Good despite the lockdowns in Europe. So it was driven by many of the other other regions as well while growth.
The impacting taste in general was probably also the customer structure, because we had probably more of smaller customers and mid sized customers compared to some of the competitors, but we've seen a good recovery in the better pipeline of new projects coming coming in and as we set the actually the start into the into.
'twenty one was what's the.
Very very promising.
I hope it helps.
It does.
And.
As we look at the scent business in 2021.
What do you expect.
Fine fragrance, obviously has some pretty easy comps as we move through the year, but.
The consumer scent business could move the other way.
And how much room is there left to run on the new business wins. It seems like you made some very good traction in the back yes 2020.
Yes.
<unk>.
As we see it for for now we triangulate that we are gaining market share here and that's the.
As to two effects one is as you touched on it it's certainly a COVID-19 volume effect on personal wash on hygiene products, which we are taking fully and which is helping us to of to fill the growth.
But we have made three new core wins.
<unk> also go on this call wings, we are winning and growing our business quite significantly double digit and these three accounts and this is now of critical mass of it gives us some tailwind into 2021. So the other question is will it stay a very strong business over the course of the year.
And what we see right now yes. It will we have started here of the year.
Very well very well as well so we believe we will have good growth in two.
<unk> 2002, as well on the consumer fragrance business driven by the demand volume demand, but also by all of <unk> cordless and debt that's very very promising.
We will take our next question from Faiza <unk> with Deutsche Bank. Please go ahead. Your line is open.
Hi, Thank you sorry about that the far I Hope you guys can hear me now.
We can very clear.
Great.
So unless there are some active as humans on the market, which I know you can't comment on but I was hoping you could reflect on your opinion of our CEO.
In the last few years on as that has underperformed pairs. So you know what do you think has driven that operating under performance.
Do you think you've been focused on the right customers on categories have you invested appropriately in R&D or maybe have you been too focused on on the M&A sort of is there anything you would've done differently over the last few years.
Very good thank you.
First of all when we started actually laying out.
Looking at our strategy in 2015, I think what went well we had a very clear strategy because the environment is changing on what's changing so we have different customer demands may be more integrated solutions more demands for naturals.
We have seen that the smaller customers have taken taking a bit of better bigger share and the adjacencies play a role not just for integrated solutions, but in general to move the business forward. So I believe on our strategy was very clear that worked on at very very very well and that has led the chi Wen.
Look at the company back in 2014 and was slightly below the $3 billion in sales.
The limited offering that point in time and now we are in the $11 billion company with a very broad offering and in many instances we are.
Number one of the number two in the defined categories, I think sort of strategy and our response to the changing market was very very good basic.
Basically positioned all of our cells really to to deliver very significant growth over the over the years to come if you look at things, which might have gone better.
We can touch on photo of them I think what went well as it was strategically the right move we are of good synergies on the on the cost side.
I would say top line was challenged for many reasons I think we learned our lesson on the on compliance certainly and we probably could have for <unk>.
Integrated foster the.
European organization, which is which is done done right now I think that force what's important and then in between we certainly had the the <unk>.
Prices in sense of supply.
And we have debt the turnaround the business here and I think that worked out very well. So the imbalance I think the right strategy. The right moves on the food side I think some areas on the top line.
Some of it is compliance.
Say related but we fixed it I think and we fix it fast maybe faster than the others would have done it.
And we finally have set of integrated the commercial structure as well so that's all of it.
I would look at the at the next at the last slide for years and I think we are tremendously good positioned for the next couple of couple of years right now and I can promise you. There are certainly more big acquisitions coming in the next couple of years, it's all focus of both execution and shareholder value Thats very clear because we of every.
We need.
The well move next with Jeff.
<unk> with J P. Morgan. Please go ahead of your line is open.
Thanks very much on.
In terms of.
The effects of Covid on the Dupont business in your business, you said that roughly 15% of your revenues were down 15%. So there is a 2.25% penalty.
Is the penalty for the Dupont business bigger or smaller.
And secondly, where you of customer of Dupont previous to the merger and a few where was the buy a lot and are the other flavor and fragrance companies customers of Dupont you shouldn't be in semis.
I can take the customer piece first and then maybe most of them you take the first part of it. So we had some customer relationships, but very very little.
The other on.
The other.
Flavors and fragrance companies had some business with legacy Dupont because legacy Dupont was buying some some flavors as well, but two of very very limited limited demand I think thats.
Not the big Big movement, but with some of if you could take the first piece of Jeff's question. Please.
It's roughly it's roughly about 20% as we as we're getting to the numbers of.
In NBS business was also impacted by <unk>.
By Covid, Jeff and it varied the impacts on the different areas led by our refineries microbial foodservice the weighted a little bit of that broad 15% reduction number I would think at this point out sales in the ballpark.
Our next question from Ghansham Panjabi with Baird. Please go ahead.
Hey, guys. Good morning, Thanks for putting me on.
The first off on Slide 14, where you listed on many of your 2021 assumptions.
I'm just hoping you can just kind of help us with the tax rate guidance for 2021 of the Capex as well on a pro forma basis and also the EPS weighting between the first half and second half just given your comments about you know the.
The first half being challenging relative to the.
The current Covid environment. Thanks, so much Bruce.
On the.
Ex rates I mean look we've got a sense of how of what the taxes or the one more time before we come out with debt right the tax rates because remember Dupont the NMB the carve out it's the carve outs coming out of Dupont and for a whole lot of whole lot of entities set up the.
At numbers.
Work to be done that tax rate is definitely higher than our tax rate which was.
In the year. It was 17, 5% range high effective tax rate of Dupont's is higher on we'll come back with more details there on that.
Regarding the.
Regarding the the your questions on the EPS, we've actually focused on EBITDA more as the as the as the metric that debt.
We'd like to thank gives us all of the best from.
Of all of those perspective, it gives us the most of the most the most transparent ways of looking at it sales and EBITDA performance of the business and because we haven't actually provided guidance on EBITDA for the first quarter.
Rather than up sort of on sort of the how the hubs breakout for you don't mind.
And Capex.
I think most of the question on Capex for the full year expectations. Just as you think of that could go from selling no change no change at all from what was in our <unk>.
It was an IRS for that we had out there I think of as they can the high for hundreds for 65 I think for 70 somewhere of about there. We have it we have we expected specifically $235 million from the.
And then b side, and the $230 million of hours, sorry, I missed that because of that one.
Well move next with Lauren Lieberman with Barclays. Please go ahead.
Great. Thanks, Good morning, Hey, Martin enrolling high Q2 questions. One was more of a technicality is just to understand on the long term target of 4% to 5% FX neutral.
Does that target need to change with the new methodology for revenue disclosure.
Because inherently youre, including some FX driven pricing in that so I just wanted to make sure I understand that.
On the second was just a longer term question on that revenue target and while I certainly appreciate taking a more conservative view and leaving room for delivery on synergies and so on kit to provide upside.
Just wondering what that implies about your view on market growth because.
With this transaction and with the objective of creating a different business model for the industry. Your long term revenue targets or sort of what they were before.
And I'm, just wondering how that relates to your view on market growth.
Because it just seems like a lot of work do you know just sort.
The grow at the same pace you were targeting before let me.
The loan I take the second piece and then I'll hand, it over to Theresa on the.
First piece.
The revenue target and we were discussing that internally a lot.
The issue right now for losses in this COVID-19 period, we have certainly for 'twenty one.
Let's say the planning for slower start because as with some said for the first half of half of the year of its still the Covid time was the lockdown in Europe. So we've taken a bit more careful here before we go for.
For.
For the full force.
We believe that the market growth will be impacted this year.
And particularly on the first the first six.
Six months of that makes.
It makes certainly on let's.
Let's say for slower for slower start, but looking looking further we are actually pretty bullish because if you take the average 4% to five 5% for the following years, we had 5% and Thats actually is for the two combined companies quite a nice and good target to go.
And its certainly above the average force organizations have done on the last two or three years. So I feel good about it and certainly it is the <unk>.
Of course of the of the execution, our very let's say.
Very good exposure to some of the <unk> of the growth markets and then certainly the the cross selling opportunities we are having and the integrated solution. As you were mentioning we're changing the business model. So that's that.
How we see it but more to come look at the end of the day in this volatile times, we have to move forward into a debt as fast as we can with some of you can take the first piece of the question of long term target yes.
Lauren we set we set our long term targets in dollars of using FX assumptions back at the time.
Actual dollars so the.
The the methodology that we use the doesn't actually seeing if the exact same situation of the plate over the last couple of years, our revenue dollars wouldn't of being any different but each of the currency neutral growth would have been higher rate, having said that and this is kind of.
Interesting. If you took this morning spot rates and assume that the extrapolated out for the entire year I mean, the Ara couple of percent higher than that weighted average debt to be talked about earlier.
The other question right that maybe up a percentage on the prior year. So you'll have another couple of percent of that would translate into reported growth for sure of the actual reported dollar numbers would be higher but I mean, you wouldn't see the currency neutral.
Digital is coming obviously, the complex kind of way of looking at it.
But the bigger point, if you're looking about the the way we came up with the actual numbers back then and this is the I just want to reinforce that we had in the out years of our business growth.
From the base business without synergies on anything like that growing at three 5% to 4% of that we think is realistic based on center taste business right. If I go back to that end and the NMB business was in that ballpark as well, Okay. We think thats realistic.
The numbers you put in the synergies, which are like the $140 million in 2022 revenue and 300 million in <unk>.
2023, our expectation and Thats, how you get up to the 5% debt numbers out there.
Thank you Robyn.
We will take our neck on the operating we'll take one more if that's okay.
We'll take our next question from P. J <unk> with Citi. Please go ahead.
Yes, hi, good morning, Thank you for.
I'm wondering if the collection.
Good good so I got a couple of related questions on margins.
Operating leverage in the business is not coming through and what I mean by that is if you take care of FX out on constant currency Incent. Your sales were up 3% profit was flat in test sales was down 5% net profit was down 10%.
So why isn't the bottom line growing faster than the top line.
That's my first question on in our quick second question.
Okay wisdom bottomed.
Bottom line actually is growing processing, if you looked at the at.
On a full year number in <unk>.
Sign that it's the ballpark of the full year number for us is ballpark of about 3% on the.
Revenue growth right, maybe you see where it goes and then much of that's on the profit. If you look at the if you look at <unk> in the quarter, we had a oh even quarter three for that matter. We have had very large increases coming through on debt. So we are seeing debt.
We have the I think what you're factoring in and this is an important point is on a full year basis and also particularly in the fourth quarter. We had a large increase from the AIP right. We had the AIB going quite of annual incentive plan because of 2019 was so bad.
That there was a credit in 2019 in the fourth quarter. There is the standard of of cost within that I think from memory was around $27 million just the swing.
Yes, I think that's important because that will not repeat actually in 'twenty. One. So that's the good thing, yes, sorry, what was the other the Gulf Coast.
Sorry.
The only other thing those numbers is in the year is COVID-19 COVID-19 costs not call. It the impact on revenue, which we've talked about AD nauseum, but COVID-19 the impact on cost I mean, the extra average cost of the express the freight cost of the extra personnel protective equipment for our people the working different shifts the paying extra compensation by the time you.
Factor all of those in it's probably about <unk> it was around $26 million of extra cost in the year as well.
Thank you for some.
Sure.
And we have reached our allotted time I would like to turn the floor back to Mr. Andreas for any closing remarks.
Thank you for the good question on we know we have a big lion's til for questions. We will continue with our one on 100 ones was really good to talk to all of you and the.
More to come over the next the next couple of weeks and months. Thank you for the bye bye. Thank you.
Hi, everyone.
This does conclude today's conference you may disconnect. Your line at any time and enjoy the rest of your day.
Yeah.
Yeah.
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